Burkina Faso: Request for a Three-Year Arrangement Under the Extended Credit Facility—Debt Sustainability Analysis
Author: International Monetary Fund
Publication Date:
15 Mar 2018
eISBN:
9781484347362
Language:
English
Keywords:
ISCR; CR; debt; executive board discussion; financing; debt management; convergence criterion; baseline debt profile; creating flow; debt path; debt accumulation; Fiscal stance; West Africa
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Request for a Three-Year Arrangement Under the Extended Credit Facility - Press Release; Staff Report; and Statement by the Executive Director for Burkina Faso

Abstract

Request for a Three-Year Arrangement Under the Extended Credit Facility - Press Release; Staff Report; and Statement by the Executive Director for Burkina Faso

This joint World Bank/IMF Debt Sustainability Analysis (DSA) has been prepared in the context of a request for a program supported by the IMF’s Extended Credit Facility (ECF). It is based on end-2016 debt data. The CPIA rating has been updated since the last DSA of November 2016, and Burkina Faso remains in the medium-strength policies and institutions’ category. Public and external debt levels have increased during the last few years reflecting widening fiscal deficits. However, overall, Burkina Faso remains at moderate risk of debt distress, as planned fiscal consolidation to meet the WAEMU fiscal deficit convergence criterion of 3 percent of GDP by 2019 and robust domestic gold and cotton sectors contribute to a sustainable debt path.

Background and Underlying DSA Assumptions

1. Burkina Faso’s public and external debt levels have increased in the last few years following consecutive years of widening fiscal deficits (Text Table 1). The nominal stock of public debt as of end-2016 stood at 38.3 percent of GDP (1).1 As in previous DSAs, the composition of debt has continued to shift towards domestic debt, as the regional market has traditionally been willing to finance the fiscal deficit at competitive rates. External debt comprised 72 percent of the total debt stock at end-2016, down from 77 percent at end-2014.

Text Table 1.

Burkina Faso: Public Debt Stock, 2014–16

(percent of GDP)

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Sources: Burkinabe authorities; and IMF staff estimates.

2. While Burkina Faso’s CPIA rating improved marginally since the last DSA, it remains consistent with a classification of ‘medium’ strength of policies and institutions (Text Table 2).2 Prior to 2014, Burkina Faso had consistently been assessed as having strong policy and institutional frameworks but recent slippages have led to a decline in the CPIA rating to 3.63.

Text Table 2.

Burkina Faso: CPIA Rating, 2011–2016

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The DSA 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 are 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 with 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 and the current DSA. The more significant changes come from the larger overall fiscal deficits for 2017–2018, largely attributable to a sustained increase in current expenditures, and the authorities’ commitment to scale up domestically financed public investment to spur economic growth. Smaller deficits thereafter as Burkina Faso abides by the WAEMU convergence criterion consistent also with the authorities’ commitment in the new ECF-supported program. While gold price forecasts remain slightly below the estimates for the previous DSA, they maintain an upward path amid continued robust expansion in the domestic gold sector. Prospects for Burkina Faso’s other main commodity export, cotton, benefit from a slight increase in future prices and solid prospects for improved production and quality; the latter should allow eventually for a higher international price per ton of cotton exports.

Text Table 3.

Burkina Faso: Changes in Assumptions for Current DSA compared with December-2016 DSA

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Sources: IMF staff estimates and World Economic Outlook projections.

Macroeconomic Assumptions Underlying the DSA

Gold and cotton prices have remained relatively stable at levels profitable for Burkinabé exporters. WEO gold price projections have moderated slightly since the last DSA, but they remain well above their end-2015 lows. WEO cotton price projections have improved since the previous DSA, and price prospects for cotton exports are tilted to the upside as recent improvements in quality are eventually expected to translate into higher prices.

Gold production is expected to moderate in 2018 and 2019 before rising steadily over the medium term, as new mines complete the development stage and begin to export, and demand for new prospecting licenses remains strong. The coming on stream of new gold mines and upward revisions in estimated gold reserves anchor the outlook for the sector. Potential revisions by the national statistical agency (INSD) pertaining to ‘artisanal’ gold production could meaningfully improve exports and the current account balance.

GDP growth assumptions are somewhat lower than the baseline forecast of the last DSA, largely reflecting delays in growth-enhancing structural reforms and an anticipated upcoming fiscal consolidation.

The overall fiscal deficit (including grants) increased significantly in 2017 because of higher recurrent spending levels and a significant scaling up of domestically-financed public investment. In the context of the new 2018–2020 ECF program, the authorities have reiterated their commitment to the WAEMU convergence criteria and place importance on meeting the fiscal deficit and debt criteria. The authorities are also committed to improving domestic revenue mobilization, containing current spending, and to moderate investment, including by improving investment selection and execution, to narrow the fiscal deficit to the 3 percent of GDP target by 2019. This DSA assumes the authorities are successful in reaching the 3 percent fiscal deficit target by 2019 and maintaining it at that level thereafter.

Domestic debt is assumed to continue to increase consistently throughout the forecast horizon, reflecting the authorities’ large financing needs over the medium-term, as well as to support efforts to deepen the domestic financial market, especially the regional debt market. The remainder of the deficit (about one-third) is assumed to be financed via external debt, but on less generous terms to reflect additional non-concessional financing and conservative assumptions about the availability of concessional financing in future years.

The current account deficit is estimated to have peaked at close to 8½ percent of GDP in 2017 as public investment spending spurred import demand, but is then projected to converge to about 7 percent of GDP as new gold mines begin to export and public investment is rationalized to a sustainable level. Upside and downside risks to the current account include: volatility in key exports (e.g. gold, cotton) and imports (e.g. oil, fuel, machinery); upward statistical revisions to the balance of payments data to increase the production (and export) of artisanal gold; a deterioration in the security environment in the Sahel region.

4. This DSA assumes continued modest use of non-concessional financing over the forecast horizon. Text Table 4 lists the projects for which the authorities are seeking external loans in 2017. The actual amount of new loans contracted, particularly non-concessional loans, will fall well short of the targeted amounts, due to fiscal and implementation capacity weaknesses. The DSA includes both already-contracted and anticipated borrowing on a disbursement basis. The authorities have shown a willingness to exhaust all of their options for concessional financing before exploring more expensive commercial options. Nevertheless, since financing needs exeed the amount of expected available concessional financing, this DSA assumes that non-concessional borrowing will continue at modest levels through the DSA horizon. Consistent with this and the assumption of a shrinking concessional financing to GDP ratio going forward, the grant element of new borrowing is assumed to decrease gradually over the forecast horizon.

Text Table 4.

Burkina Faso: Planned Concessional and Non-Concessional Borrowing in 2017

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5. 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 potential public-private partnerships, needs to be strengthened considerably. The IMF and World Bank have worked with the Minsitry of Finance to assess performance of the Debt Management Office across a range of borrowing processes and methods in order to formulate a detailed reform plan and establish a medium term debt management strategy. As the financing environment grows more complex, and financing needs continue to rise, the Ministry would benefit from additional capacity-building efforts in this area to prepare for the additional workload and complexity going forward.

DSA Results

A. External Debt

6. Notwithstanding the significant increase in the fiscal deficit in 2017 to above 8 percent of GDP, when compared with the previous DSA, the results from the current analysis point to a slightly improved debt sustainability outlook over the longer term. This result depends critically on the revised path of fiscal deficits, which includes temporarily larger deficits in 2017–2018, but thereafter includes smaller deficits than the previous DSA as they are now assumed to be constrained by the WAEMU fiscal deficit convergence criterion of 3 percent of GDP by 2019 and beyond. The external environment remains benign, with relatively favorable projections for Burkina Faso’s commodity exports (e.g. gold and cotton), and planned fiscal consolidation over the medium term that should restrain debt accumulation. The baseline debt profile displays a slightly increasing path, but levels remain well below prescribed thresholds throughout the forecast period. One breach of the present-value of external public debt to GDP ratio is observed in the outer years, highlighting the need for fiscal prudence and a sustained effort to improve the economy’s export potential (Figure 1).

Figure 1.
Figure 1.

Burkina Faso: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2017–37 1/

Citation: IMF Staff Country Reports 2018, 081; 10.5089/9781484347362.002.A002

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 2027. In figure b. it corresponds to a Terms 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

B. Total Public Debt DSA Results

7. The current DSA assumes steady increases in domestic financing, consistent with Burkina Faso’s financing needs and the desire to deepen the domestic financial market. Bank liquidity in the region benefited from the BCEAO’s lowering of reserve requirements in March and Eurobond issuances by Côte d’Ivoire and Senegal in June 2017. While in recent years Burkina Faso has been able to access the regional market for its liquidity needs at affordable rates, there are reasons to be cautious going forward, especially given the large domestic rollover and financing of the country, which could become a source of risk to debt management (Text Table 5).

Text Table 5.

Burkina Faso: Gross Financing Needs, 2014–18

(In percent of GDP)

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Source: Burkinabè authorities and IMF staff calculations.

8. A risk arises from uncertainties regarding the willingness of the regional market to absorb a higher amount of debt issued by Burkina Faso, since the liquidity conditions on the market are directly affected by the monetary policy decisions of the BCEAO as well as the borrowing plans of other WAEMU members, particularly its larger members. Also, increasing regional market interest rates and potential direct borrowing of the government from domestic financial institutions could crowd out private sector credit growth, which is already experiencing sluggish gains. These conditions could lead to a heightening of roll-over risks. An analysis of total public debt illustrates the necessity to improve domestic revenue mobilization and maintain a sustainable primary balance to avoid accelerated accumulation of total debt (Figure 2). The total public debt-to-GDP ratio slowly rises over time and is estimated to peak at 44.2 percent of GDP in 2037.

Figure 2.
Figure 2.

Burkina Faso: Indicators of Public Debt Under Alternative Scenarios, 2017–371

Citation: IMF Staff Country Reports 2018, 081; 10.5089/9781484347362.002.A002

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 2027.2/ Revenues are defined inclusive of grants.

Conclusion

9. The DSA results indicate that Burkina Faso’s risk of debt distress remains “moderate”, assuming it achieves the planned fiscal consolidation in the medium-term and adheres to the WAEMU fiscal deficit convergence criteria. The baseline scenario shows no breach of debt distress thresholds for any of the indicators, while there is a breach for the present-value of public external debt to GDP under one of the stress tests. There are also vulnerabilities relating to large domestic debt rollover needs. This, taken together with other risks to debt sustainability, form the basis for maintaining a debt distress rating of ‘moderate’.

10. With respect to fiscal risks, aside from the traditional possibility of fiscal slippages, Burkina has an increased risk of a negative debt shock arising from (present and future) contingent liabilities associated with state-owned enterprises and potential PPPs. The proposed benchmark in the ECF program to develop a database of sovereign guarantees and PPPs is an important first step in building capacity to analyze the risks emanating from these types of projects. While the debt management division has many strengths, the authorities desire to diversify financing sources outside the regional market and traditional (largely concessional) borrowing, including issuance of Sukuk bonds and a Eurobond, will require significant capacity building, particularly the ‘middle-office’ analysis functions and ability to develop a robust medium-term debt strategy (MTDS). Finally, market risk is a source of concern given the high dependence Burkina Faso has on the regional debt market combined with the short-term maturity structure of its regional debt. Together, these make Burkina Faso sensitive to interest-rate and rollover risks on the regional debt market. Going forward, structural reforms and capacity improvements in debt management should focus on improving the analytical capacity of the debt management unit, on analyzing tradeoffs of different debt instruments and the fiscal risks of PPPs, and to integrate this analysis into a robust medium-term debt strategy.

11. Risks to the outlook are tilted to the downside and emanate from external (narrow export base) and internal (SOEs and potential contingent liabilities) factors:

  • In terms of external risks, Burkina Faso is particularly susceptible to terms of trade shocks given the price volatility in its major export commodities and large volume of fuel imports. A negative shock to gold and oil prices also effects the fiscal position as lower gold revenues and a higher import bill for the state-owned oil company would put pressure on the deficit. While Burkina Faso currently benefits from a strong reputation and access to the regional debt market, a shock to investor confidence or notable change in the liquidity conditions and interest rates on the regional market could jeopardize the ability to issue debt at volumes or prices that are currently enjoyed. A deterioration in security conditions in the Sahel region could also weigh on Burkina Faso’s external and fiscal positions and negatively impact economic growth. Insecurity discourage domestic and foreign investment, could hold back tourism, trade and government revenue, and increase government security-related spending.

  • In terms of domestic risks, delays in fiscal consolidation would negatively affect the debt path and Burkina Faso’s debt sustainability. The current DSA reflects the authorities’ commitment to the WAEMU convergence criteria, most notably the deficit and debt criteria. The assumption that Burkina Faso achieves a deficit of 3 percent of GDP in 2019 (and thereafter) is a major factor that influences the outcome of the DSA. Furthermore, the materialization of fiscal costs related to contingent liabilities associated with PPP arrangements could crystallize into sovereign debt. Finally, the Sahel region is very susceptible to weather shocks, both droughts and floods, which could affect agricultural and cotton output. Such an agricultural drought, besides the income shock to farmers who continue to be a substantial portion of the population, would have secondary effects on the current account as food imports rise and cotton exports decline.

Authorities’ Views

12. The authorities generally concurred with the DSA results. Given the elevated 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 reiterated their commitment to maintaining prudent debt levels and keep their assessed level of debt distress at a ‘moderate’ rating.

Table 1.

Burkina Faso: External Debt Sustainability Framework, Baseline Scenario, 2014–371

(In 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(l+g)]/(l+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, 2014–2037

(In 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.

Table 3.

Burkina Faso: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2017–37

(Percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 4.

Burkina Faso: Sensitivity Analysis for Key Indicators of Public Debt, 2017–37

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.