Statement by Mr. Sembene, Executive Director for Burkina Faso, and Mr. Nguema-Affane, Senior Advisor to the Executive Director, March 14, 2018

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


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

The Burkinabè authorities appreciate continued support the implementation of their National Plan for Economic and Social Development (PNDES).

In the face of a challenging environment, the authorities remain committed to the implementation of the PNDES. Since the launch of the PNDES significant strides were made in improving access to basic social services, notably through critical infrastructure investment in the health, education and energy sectors. However, development challenges remain significant and are exacerbated by an increasingly difficult context brought about by security shocks including terrorist attacks that took place in Ouagadougou in the past few years. As noted in the staff report, military and security spending increased by 21 percent in 2017 and a further increase of 50 percent is expected in 2018, primarily as a result of higher military investment amid a deteriorating security situation. In light of the attacks that shook the capital earlier this month, security-related spending pressures are likely to increase further.

Against this backdrop, the authorities developed the 2017–2020 Emergency Program for the Sahel (Programme d’Urgence pour le Sahel), notably with a view to countering these destabilizing threats to peace, security, social cohesion and economic development. As these threats may have potentially damaging ramifications for the region and beyond, the authorities are working with their peers to mitigate their causes and symptoms in a prompt and decisive manner. In this endeavor, timely and sustained support from the country’s partners will be welcome.

In support of the policies implemented in the context of the PNDES and the PUS to safeguard macroeconomic stability and promote strong and inclusive growth, the authorities request a new 3-year arrangement under the Extended Credit Facility (ECF). To achieve these objectives, the authorities’ reform and policy agenda under the ECF-supported program will include efforts to create fiscal space for investment in priority sectors, strengthen public investment and financial management, and address structural impediments to growth and poverty reduction.

I. Recent Economic Developments and Outlook

The Burkinabè economy has continued to register growth amid difficult circumstances, with the authorities’ policies contributing to sustained macroeconomic stability. Growth rate is estimated to reach about 6.4 percent in 2017 driven by higher public demand and strong activity in the mining and construction sector. Inflation remains below the WAEMU convergence criterion of 3 percent. The current account deficit widened as higher public spending fuelled import demand amid stagnant exports. Credit to the private sector decelerated but the banking system remains profitable and well-capitalized.

Sustained domestic revenue mobilization efforts resulted in improved revenue performance, with tax revenue reaching 17 percent of GDP in 2017. Notwithstanding this positive outcome, the fiscal position deteriorated in 2017 due to increased public spending. In addition to security related spending, the increase in total expenditures was driven by the larger wage bill triggered by the incorporation of contractual workers in the civil service, transfers made for the clearance of cross-liabilities in the energy sector; and public investment expenditure. Significant resources were also allocated to a variety of social protection programs, including training, cash-transfer and health insurance schemes targeting primarily women, children and the elderly. As a result, the fiscal deficit widened and was financed primarily through the issuance of Treasury bills and securities on the regional market. Nevertheless, total public debt remains low at 38.3 percent.

The authorities took steps to strengthen public financial management. As noted in the staff report, Burkina Faso was the first country in the region to implement program budgeting in 2017. However, the implementation of the Single Treasury Account could not proceed due to unanticipated technical shortcomings.

Burkina Faso’s economic outlook is positive. Despite the projected fiscal adjustment during the program period, real GDP growth is forecast to top 6 percent over the medium term, driven by strong agricultural production and activity in the extractive industries as well as improved gold prices. Annual inflation is expected to be kept below the WAEMU convergence criterion. The authorities recognize that downside risks are significant, especially those related to terrorism and social tensions. In this regard, they are determined to continue taking actions to boost internal and border security and enhance the quality of the dialogue with domestic stakeholders.

II. Economic and Financial Program for 2018–2020

The key objectives of the medium-term program are to maintain macroeconomic stability over the medium term through fiscal consolidation and to strengthen the foundation for sustained, inclusive growth, in line with the objectives of the PNDES. To this end, the authorities plan to: (i) create fiscal space to boost public investment in priority sectors and accommodate security spending; (ii) improve the efficiency and execution of public investment; (iii) strengthen public financial management; (iv) improve energy sector performance; (v) enhance economic diversification and promote financial inclusion; (vi) reduce poverty and inequality; (vii) combat corruption; and (viii) improve macroeconomic statistics.

Fiscal consolidation will be the cornerstone of the program. Despite the challenging environment, the authorities remain determined to reduce gradually the fiscal deficit with a view to achieving the WAEMU convergence criterion in 2019. To this end, a particular focus will be placed on increasing mobilization of internal resources and containing spending to create sufficient fiscal space for financing public investment expenditure. To achieve the authorities’ ambitious fiscal objectives over the medium term, the implementation of fiscal reforms will be stepped up on both the revenue and expenditure sides, as outlined in the MEFP. Limiting subsidies, particularly to the energy sector, is another important element in creating and preserving fiscal space.

As a precautionary measure, the execution of some spending items in the 2018 budget identified jointly with the relevant ministries has been delayed and will proceed only if domestic revenues overperform relative to the program targets. In order to secure the quality of public investment spending, the legislations previously adopted in July 2017 to streamline procurement procedures were not renewed after they expired last January. Furthermore, the focus put on protecting priority spending will be maintained in the context of the ECF-supported program.

Reforms aimed at improving public investment management will continue. In this area, the implementation of fiscal reforms will be pursued consistent with WAEMU directives and the recommendations of recent technical assistance missions from the Fund, the World Bank and other development partners. In particular, the authorities will work toward containing the budgetary incidence and risks associated with PPPs. The legal and regulatory framework will be strengthened, while a database identifying the PPPs will be developed and regularly updated. The authorities will also continue to strengthen the public financial management procedures and systems, notably with a view to eliminating lengthy delays in the processing and payment of VAT refunds. They will pursue reforms in the energy sector to improve the performance of public enterprises and reduce fiscal risks.

In December 2017, a communication strategy was launched to raise public awareness about the importance of introducing flexibility in setting fuel prices in order to contain fiscal risks. It is also the authorities’ intention to learn from the experience of some peers in developing an automatic price adjustment mechanism. Moreover, studies will be carried out to explore ways to mitigate the potential impact of such mechanisms on the poorest and most vulnerable members of society. At the same time, the authorities are committed to keeping fuel subsidies within the budgeted amount for 2018. Furthermore, an audit of the national petroleum company SONABHY will be conducted to strengthen its management and profitability.

The authorities will pursue prudent debt management to contain debt vulnerabilities. To this end, they will monitor and contain the accumulation of contingent liabilities from public enterprises. In addition, to reduce fiscal risks, they will avoid some financing schemes that could deteriorate fiscal and debt sustainability, notably pre-financing agreements, including government guarantees of commercial bank loans to suppliers and contractors. Moreover, the authorities are determined to limit the use of PPPs.

The implementation of structural reforms to increase resilience and promote financial inclusion and diversification will continue. A special focus will continue to be placed on the modernization, expansion and financing of the agriculture sector. The financial inclusion strategy under preparation that aims at foster access to credit in rural areas should be available in 2018, and will take into account the regional financial inclusion strategy established by the BCEAO. The governance of the gold mining sector will be strengthened, notably with the planned creation of an agency responsible for coordinating, regulating, and supervising the activities of small-scale miners.

III. Conclusion

Burkina Faso continues to face significant policy challenges that are exacerbated by severe security shocks and strong social demands. Despite the challenging environment, the authorities are committed to taking necessary policy measures to maintain macroeconomic stability, while advancing their development agenda. In support of their economic and financial program, the authorities request a new three-year ECF arrangement for which Directors’ support would be welcome.