Burkina Faso: Staff Report for the 2016 Article IV Consultation, Sixth Review Under the Extended Credit Facility Arrangement, and Requests for Modification of a Performance Criterion, Extension of the Arrangement and Augmentation of Access—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept.
Publication Date:
22 Dec 2016
eISBN:
9781475562576
Language:
English
Keywords:
ISCR; CR; government; consultation; Our Burkinabe; program; baseline debt profile; financing terms; DSA update; creating flow; debt-investment-growth nexus; Debt sustainability; Public and publicly-guaranteed external debt
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Growth is projected at 5.4 percent for 2016 and 6.1 percent for 2017, owing to higher gold production and a rebound in agriculture and services. The authorities have published their National Economic and Social Development Plan (PNDES), which envisages an ambitious scaling up of investment over the next 5 years. Given limited financing and absorption capacity, staff recommends a more gradual approach, consistent with medium-term debt sustainability.

Abstract

Growth is projected at 5.4 percent for 2016 and 6.1 percent for 2017, owing to higher gold production and a rebound in agriculture and services. The authorities have published their National Economic and Social Development Plan (PNDES), which envisages an ambitious scaling up of investment over the next 5 years. Given limited financing and absorption capacity, staff recommends a more gradual approach, consistent with medium-term debt sustainability.

This joint World Bank/IMF Debt Sustainability Analysis (DSA) has been prepared in the context of the 6th Review under the program supported by the IMF’s Extended Credit Facility (ECF). It is based on new end-2015 debt data. The major change since the last DSA update in June 2016 is the updated CPIA rating, which places Burkina Faso into the medium-strength policies and institutions category and results in lower debt sustainability thresholds. Nonetheless, Burkina Faso remains at moderate risk of debt distress, as higher WEO projections for gold and cotton prices and improved prospects for domestic gold production have improved the export and current account paths.1

Background and Underlying Dsa Assumptions

1. Burkina Faso’s nominal stock of debt as of end-2015 was 32.5 percent of GDP (Text Table 1). This is in line with the estimates from the 4th/5th ECF Review (32.2 percent) and the 2014 DSA (31.2 percent). The composition of debt has continued to shift slowly towards domestic debt as external support has not kept pace with GDP growth and there has been a pronounced increase in domestic borrowing during the period of political uncertainty. External debt still comprised approximately 73 percent of the total debt stock at end-2015, down slightly from 75 percent in 2013.

Text Table 1.

Burkina Faso: Public Debt Stock (2013-15)

(percent of GDP)

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Sources: Burkinabè authorities; and IMF staff estimates and projections.

2. The most important change since the June 2016 DSA update is the incorporation of updated CPIA ratings that now run until 2015.While Burkina Faso has consistently been assessed as having strong policy and institutional frameworks through 2013, the popular uprising and political transition in 2014 and 2015 have led to some deterioration in this overall assessment. The annual CPIA rating declined from 3.77 in 2013 to 3.61 in 2015, with the rolling three-year average declining from 3.77 at the time of the last joint DSA to 3.67 in the current DSA (Text Table 2). It must be noted that the transition authorities were able to maintain macroeconomic stability under difficult circumstances, and that the political transition ended successfully. Peaceful and fair elections were held in November 2015 and a new government was in place by early 2016, with political stability maintained since then. Against this background, policies and institutions are expected to improve, which should translate into higher CPIA ratings going forward.

Text Table 2.

Burkina Faso: CPIA Rating, 2010–2015

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*The DSF uses the CPIA index to classify countries into one of three policy performance categories according to the strength of their policies and institutions. Countries with a CPIA score less than or equal to 3.25 a re considered to have weak policies and institutions. Those with a CPIA score greater than 3.25 and less than 3.75 have medium policies and institutions. Countries wi th a CPIA score greater than or equal to 3.75 have strong policies and institutions.Source: World Bank.

3. Text Table 3 and Box 1 summarize the main differences in macroeconomic assumptions between the previous full DSA (2014), the June 2016 DSA update for the 4th/5th ECF Review and the current DSA. The most significant changes come from the volatility in the international price of gold, Burkina Faso’s primary export. While gold price forecasts remain below the estimates for the 2014 DSA, they have meaningfully rebounded from their end-2015 lows and are on a higher trajectory than at the time of the 4th/5th ECF review. Real GDP growth is projected to remain broadly similar to previous projections and to converge to about 6 percent over the long term.

Text Table 3.

Burkina Faso: Changes in Assumptions for Current DSA compared with April 2014 and 4th/5th ECF Review DSAs

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Sources: IMF staff estimates and projections. World Economic Outlook, October, 2016.

Burkina Faso: Macroeconomic Assumptions Underlying the DSA

Gold and cotton prices have continued to recover since the last DSA. WEO gold price projections have rebounded 25 percent since their end-2015 lows and approximately 8 percent when compared to the previous DSA. Cotton price projections have also improved since the previous DSA, with 2016 prices about 28 percent higher in the current DSA.

Gold production is expected to rise steadily over the medium term as new mines start operating. The coming on stream of new gold mines and upward revisions in estimated gold reserves have led to an improved outlook for the sector. Nevertheless, mining revenues are inherently volatile and subject to uncertainties regarding both volume and prices.

A03ufig1

Gold, USD per troy ounce

Citation: IMF Staff Country Reports 2016, 390; 10.5089/9781475562576.002.A003

GDP growth assumptions are somewhat higher than the baseline forecast during the 4th/5th ECF review, largely resulting from an expected rebound in agricultural output, improved prospects in the gold sector, and a significant scaling up of public investment.

The overall fiscal deficit (including grants) has increased slightly in the near term and is based on relatively stable, but higher recurrent spending levels, but also a planned scaling up in domestically financed public investment to tackle high infrastructure needs. The authorities are committed to improve domestic revenue mobilization and to moderate recurrent spending to increase available fiscal space that can be devoted to more growth-friendly spending and investment. Domestic revenue is expected to reach about 20 percent of GDP in 2019, from 15.9 percent in 2015. This along with upwardly revised assumptions on gold revenue mitigate the increase in expenditures and lead to only moderately higher deficits through to 2020.

Debt composition: Domestic debt is assumed to continue to increase consistently throughout the forecast horizon, reflecting the authorities’ efforts to deepen the domestic financial market and to continue to tap into the regional market. The remainder of the deficit is financed via external debt, but on less generous terms to reflect some non-concessional financing and a cautious assumption about the availability of concessional financing going forward.

The current account deficit is forecast to continue shrinking from the unusually high level of 11.3 percent of GDP in 2013 and eventually stabilize around its long-run expected average of about 5-6 percent by 2022. Nevertheless, upside and downside risks to the current account are high and mainly relate to the evolution of international commodity, hydrocarbon, and mineral prices.

4. This DSA assumes continued modest use of non-concessional financing over the forecast horizon. Text Table 4 depicts the authorities’ non-concessional borrowing plan for 2016. If all the planned loan conventions are signed within the year, non-concessional borrowing should rise to close to the program ceiling of CFAF 230 million.

Text Table 4.

Burkina Faso: Planned Concessional and Non-Concessional Borrowing 2016

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*Concessionality based on 35 percent grant element threshold for being classified as concessional financing.

5. The DSA includes both already-contracted and anticipated borrowing on a disbursement basis. The authorities have reiterated their ongoing commitment to rely as much as possible on available concessional financing, but, in light of limited concessional resources, this DSA includes an assumption that nonconcessional borrowing will be continued, at modest levels, through the DSA horizon. Consistent with this and the conservative assumption of less concessional financing going forward, the grant element of new borrowing is assumed to decrease gradually over the forecast horizon. For 2017 it is assumed the authorities investment plans are constrained by a lack of available affordable financing, thereby reducing public investment, the government deficit, and gross borrowing requirements compared to the PNDES and the authorities draft 2017 budget.

6. Strengthening debt management capacity will be essential to ensure that the planned investment scaling up remains consistent with medium-term debt sustainability. The capacity of the debt office to oversee the build up of external and domestic debt, as well as contingent liabilities related to public-private partnerships implied by the government’s investment program needs to be urgently strengthened. In particular, the authorities are invited to seek support to design and implement a comprehensive debt management strategy, and to provide additional resources to the debt office.

Dsa Results

A. External Debt

7. Compared with the previous DSA update, the DSA results are mainly affected by the use of lower thresholds, though Burkina Faso remains at moderate risk of debt distress. A less pessimistic external environment, in particular more favorable price projections for commodity exports, along with the prospects of increased gold production help offset the additional borrowing caused by a looser fiscal stance. Thus the baseline debt profile remains similar to that projected at the time of the 4th/5th ECF review, and remains below all risk thresholds. There are however several threshold breaches in the alternative scenarios caused by the move to the lower DSA thresholds.

8. In particular, under the standardized stress tests, the debt-to-exports ratio breaches the debt distress threshold in 2031 under the historical scenario and 2026 under the most extreme scenario. The breach is wider than that under the 2014 DSA as the risk threshold for the debt-to-exports ratio is revised from 200 to 150 percent under the current DSA, consistent with the change in Burkina Faso’s CPIA rating. The volatility and sensitivity of exports can be largely attributed to the volatility of gold prices in international markets, which is exacerbated by Burkina Faso’s narrow export base.

B. Total Public Debt DSA Results

9. The current DSA assumes continued increases in domestic financing, consistent with the desire to deepen the domestic financial market and further tapping regional markets. The region benefits from the ECB’s easy monetary stance and financing terms are historically fairly favorable. In addition, the authorities continue to extend the maturities of domestic and regional borrowing and are gradually working towards a goal of issuances of up to 6 years on regional bonds in 2017. However, the projected increase in domestic debt remains modest. Nonetheless, in the current environment of weak private sector credit growth, larger public debt issuances by the authorities could further limit the availability of loanable funds and thus hamper private sector development. The public debt-to-GDP ratio slowly rises over time and is estimated to peak at 50.9 percent of GDP in 2036.

C. An Alternative Scenario

Staff and the authorities collaborated to develop an alternative scenario that is more optimistic than the baseline, but still constrained by the level of available financing and implementation capacity (Text Table 5). The alternative scenario begins in 2017 with a more optimistic assumption on external financial support, which includes higher grants and concessional financing amounting to 1.9 percent of GDP. The increase is predicated on a successful December 7-8 round table in Paris and potentially higher commitments by development partners during 2017. Domestically-financed investment is increased to 9.2 percent of GDP, up from 7.3 percent in the baseline. GDP growth in 2017 rises to 6.8 percent, compared with 6.1 percent in the baseline, and over the medium term trends at 7 percent versus 6.5 percent in the baseline. Steps taken by the authorities to boost project execution in 2017, including streamlining and acceleration of procurement processes, as well as close monitoring of the largest infrastructure projects, are expected to facilitate the large increase in public investment.

Text Table 5.

Burkina Faso: Baseline and Alternative Scenarios (2016–19)

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Sources: Burkinabè authorities; and IMF staff estimates and projections.

10. Under the alternative scenario, Burkina Faso’s debt sustainability improves slightly as increases in GDP, revenues, and exports offset additional borrowing over the medium term. The additional external support is assumed to consist mostly of grants and highly concessional borrowing, resulting in a very moderate impact on the present value of debt. The alternative scenario maintains the same assumptions as in the baseline regarding investment efficiency and growth multipliers, taking into account the authorities’ efforts to improve investment execution and prioritization. Furthermore, PNDES priority investments are heavily tilted towards filling key physical infrastructure gaps, in particular in the energy sector, and are thus anticipated to have a positive growth impact. Figure 1b plots the evolution of key debt sustainability indicators under the alternative scenario. A caveat on the analysis remains that changes to key assumptions on the terms and volume of additional financing, as well as the execution capacity during a scaling up of public investment, can alter the results. In this regard other tools are better equipped to investigate the long-term fiscal and debt sustainability implications of investment scaling up episodes, in particular the debt-investment-growth nexus. The analysis in the Selected Issues Paper on scaling up public investment makes use of the DIGNAR2 model to better capture the impact of higher capital spending on growth, execution efficiency, fiscal space and debt sustainability.

Conclusion

11. The DSA results indicate that Burkina Faso’s risk of debt distress remains “moderate.” The baseline scenario shows no breach of debt distress thresholds for any of the indicators, despite a reduction in the thresholds compared to the last DSA due to a change in Burkina Faso’s CPIA categorization, but there are meaningful and sustained breaches under shock scenarios, which, taken together, form the basis of maintaining a debt distress rating of ‘moderate’. Going forward, the return to political stability ought to lead to improvements in the CPIA ratings. Nonetheless, even in staff’s relatively conservative baseline scenario, there are risks associated with steadily rising external and public debt levels. A reversal of the favorable external conditions including domestic and regional financing terms and availability would raise the costs of domestic debt, and a terms of trade shock would affect the current account and fiscal deficits. Other shocks (weather, security) could lead growth or revenue collection to underperform and would lead to a more rapid debt accumulation.

Authorities’ Views

12. The authorities generally concurred with the DSA results and noted that the change in CPIA score, and associated DSA thresholds, comes at an inopportune time given their ambitious medium-term development strategy. The authorities felt that the deterioration in Burkina Faso’s CPIA score was a result of the political transition of 2014-15. Going forward, they noted that the return to political stability in a fair and free election, together with their comprehensive structural reform agenda ought to lead to fairly rapid improvements in their CPIA ratings. The authorities also emphasized their strong track record of macroeconomic management, with prudent deficits and a relatively low level of indebtedness. Given the high expectations from the population for swift reforms, the authorities saw the necessity to utilize some fiscal space to finance public investment and catalyze sustainable economic growth. They nevertheless reiterated their commitment to maintaining prudent debt levels and keep their assessed level of debt distress at a ‘moderate’ rating. The authorities maintained that the more optimistic alternative scenario better reflects the likely path of the economy and have an expectation that this can even be exceeded, provided additional external support, along with improvements in public investment execution, in line with the PNDES’ objectives.

Figure 1a.
Figure 1a.

Burkina Faso: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2016–361

(Baseline Scenario)

Citation: IMF Staff Country Reports 2016, 390; 10.5089/9781475562576.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2026. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a Exports shock; in e. to a Exports shock and in figure f. to a Exports shock
Figure 1b.
Figure 1b.

Burkina Faso: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2016-361 (Alternative Scenario)

Sources: Country authorities; and staff estimates and projections.

Citation: IMF Staff Country Reports 2016, 390; 10.5089/9781475562576.002.A003

1/ The most extreme stress test is the test that yields the highest ratio on or before 2026. In figure b. it corresponds to a Combination shock; in c. to a Exports shock; in d. to a Exports shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock
Figure 2.
Figure 2.

Burkina Faso: Indicators of Public Debt Under Alternative Scenarios, 2016–361

Citation: IMF Staff Country Reports 2016, 390; 10.5089/9781475562576.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2026.2/ Revenues are defined inclusive of grants.
Table 1.

Burkina Faso: External Debt Sustainability Framework, Baseline Scenario, 2013–361

(Percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2.

Burkina Faso: Public Sector Debt Sustainability Framework, Baseline Scenario, 2013–36

(Percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Central Government Gross Debt.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.