1. On behalf of the Burkinabe authorities, we thank the Executive Board, Management and Staff for the Fund’s continued support to Burkina Faso’s National Economic and Social Development Strategy (PNDES) in the context of the Extended Credit Facility. The authorities welcome the discussions held with staff in Ouagadougou and the reports before us, including the Selected Issues paper, which give a good account of those discussions.

2. Repeated deadly terrorist attacks – the last one taking place in the eastern part of the country in early December 2018 – together with civil service labor strikes and a food security crisis complicated the implementation of the PNDES and the ECF-supported program. Nevertheless, progress has been made in all three main areas of the authorities’ strategy – institutional reform and modernization of the administration; human capital development; and economic transformation – and performance under the ECF-supported program has been broadly satisfactory. Going forward, the Burkinabe authorities remain committed to the objectives of the program as reflected by the strong measures adopted recently, including the adoption of a new automatic mechanism for setting petroleum product prices, and the submission of a draft 2019 budget law, consistent with the program’s objectives. In light of this performance, the authorities request the completion of the first review under the ECF arrangement.

I. Recent Economic Developments

3. Despite the challenging environment, real GDP growth is expected to remain strong at 6.0 percent in 2018 (against 6.3 percent in 2017) with balanced contributions across all sectors. Inflation at end-June 2018 increased to 2.5 percent and is expected to remain within the West African Economic and Monetary Union’s (UEMOA) convergence criterion of 3 percent by the end of 2018. After deteriorating in 2017, the current account deficit is projected to narrow in 2018, thanks to higher exports, notably gold and cotton, and subdued import growth from the ongoing fiscal consolidation. With public debt around 40 percent of GDP, Burkina Faso remains at a moderate risk of debt distress according to the recent DSA.

4. Fiscal consolidation continued, as the fiscal deficit at end-June 2018 was better than projected. However, security issues and labor strikes in the administration, particularly in the Ministry of Finance, impacted budget execution. Those factors limited resource mobilization efforts and as a result revenue collection underperformed. At the same time expenditures increased owing mainly to high security spending and higher wage bill. This increase in security and wage bill was accommodated mainly through cuts in capital expenditures. In light of the unfavorable fiscal developments of the first half of 2018, the authorities adopted a revised 2018 budget law, which includes additional measures to achieve the fiscal deficit objective of 5 percent of GDP.

5. The authorities pressed ahead with measures to improve the mobilization of domestic resources and strengthen public financial management. They started to rationalize tax exemptions, stepped up efforts to collect tax arrears and accelerated the modernization of the tax and customs administrations. More recently, in order to reduce the increasing cost of energy subsidies, the authorities adjusted petroleum product prices by 13 percent and established an automatic petroleum price-setting mechanism in November 2018. Guidelines for project selection and appraisal have been elaborated to improve public investment efficiency. In addition, a cost-benefit analysis guide is being developed with technical assistance from AFRITAC West. A cost-benefit analysis of the major investment projects included in the 2019 budget was annexed to the draft 2019 budget law that was submitted to the National Assembly.

6. In addition, the authorities took steps to achieve long-term sustainability of the public sector’s wage bill. Measures to contain the wage bill growth include slowing the pace of civil service hiring and limiting new hiring to priority sectors. This approach will reduce hiring by roughly 40 percent in 2018. However, they recognize that more needs to be done to put the wage bill on a sustainable path over the long term and participation of all stakeholders will be essential to achieve this objective. To this end, they have launched the process to review the entire public sector’ compensation system with the organization in June 2018 of a national conference to discuss reform options. Consistent with the recommendations of that conference, the authorities are currently preparing an organic law to, among others, specify the basic principles governing the functioning of the public service, and revise salary and indemnity scale with the aim of ensuring compliance with the regional convergence criterion on the wage bill by 2021.

7. The banking system remains well-supervised and profitable and has expanded with two new banks including an agricultural bank. As stated in the staff report, systemic risks are contained but security risks have increased and the deterioration of the security situation at some borders has led some banks to reduce their operations in those areas.

8. Progress has been made in the implementation of policies to reduce poverty and combat the threat of terrorism, notably in the context of the Program to Support the Development of Local Economies (PADEL) and the Emergency Program for the Sahel (PUS-BF). The population’s access to energy and health is improving as investment in the needed infrastructure continues to grow. Similarly, progress has been made through various programs to improve the employability of young graduates, and to promote the socioeconomic empowerment of women.

9. Consistent with the PNDES, the authorities took several steps to ensure the development and increase the attractiveness of the agriculture sector, with a view to diversifying the economy. They adopted in May 2018 an investment code to improve the business environment in that sector which occupies a large share of the population. They have also stepped up their support to farmers notably through agricultural advisory services, provision of mechanical equipment and construction of facilities.

II. Program implementation

10. The implementation of the program during the period under review is broadly satisfactory. All quantitative performance criteria (PC) at end-June 2018, except the continuous criterion for pre-financing, and quantitative indicative targets at end-September 2018 were observed. The implementation of structural measures monitored under the program is also progressing well. Four out of six structural benchmarks were observed, the two others are well advanced and should be completed before end-2018.

11. The authorities note staff assessment that the performance criterion relating to the zero ceiling for new pre-financing of public investments was missed following the signature in September 2018 of a pre-financing agreement for a high-priority road project to improve transportation network around Ouagadougou. They stress that this outcome arose from a misunderstanding about the scope of their commitment under that PC during program negotiations. They were of the view that the PC covers only new projects and not that road project, which was significantly advanced well before the approval of the ECF arrangement in March 2018 – all the assessment of tenders, partner selection, and negotiation phases had been completed in November 2017 – and staff was informed accordingly. To demonstrate their strong resolve to adhere to the commitments made under the PC, the authorities adopted and published a ministerial order in November 2018 which formally prohibits the negotiation and signing of contracts including provisions for pre-financing. In light of this, the authorities are requesting a waiver for the nonobservance of the PC.

III. Policies for 2019

12. Burkina Faso’s medium-term economic outlook is positive, supported by continued implementation of critical PNDES investments, de-escalation of labor conflicts, and improvement in the security situation. In the short-term, growth should remain robust at 6.0 percent in 2019 driven primarily by the mining, services, and agricultural activities. Inflation is expected to remain within the WAEMU’s limit of 3 percent in 2019, reflecting good prospects for the 2018/2019 crop year. The current account deficit is expected to widen slightly to 8.0 percent of GDP.

13. The authorities remain determined to continue implementing sound economic and financial policies, and the necessary accompanying structural reforms, to achieve their development objectives, while fulfilling commitments made at the regional level. They recognize that an intensification of terrorist attacks remains a significant risk to the implementation of their program and therefore will devote all the resources needed to limit that risk. In particular, they will pursue the implementation of the PADEL and PUS-BF programs and strengthen their security operations as needed to help improve the social conditions and business climate in the regions affected by terrorist attacks. They are grateful to their development partners for the financial and material assistance they have received in their efforts to maintain security and look forward to receiving additional assistance in this area.

14. Fiscal consolidation will remain the cornerstone of the program, with a special emphasis on domestic revenue mobilization and wage bill sustainability. The authorities recognize the importance of pursing fiscal consolidation to strengthen fiscal sustainability while creating the fiscal space for priority social, infrastructure and security spending. They submitted a draft budget law for 2019 which targets an overall fiscal deficit of 3 percent of GDP, consistent with the Fund-supported program’ objectives. In this regard, the draft budget law includes measures to expand the tax base, levy new taxes, and raise the rates of a number of existing taxes. The tax legislation will also be aligned with regional directives on taxation. The authorities stress the importance of an adequate sequencing of tax reforms to mitigate their impact on economic activity. On the expenditure side, the authorities remain committed to continue streamlining non-essential expenditure and reduce the wage bill within the WAEMU’s limit of 35 percent of tax revenue by 2021. To this end, they will notably pursue the implementation of the conclusions of the national conference on the civil service compensation system and continue their efforts to reduce new civil service hiring. The wage bill is expected to peak in 2019 and should start to decline in 2020 as all these measures become fully effective.

15. Measures to improve public financial management, fiscal transparency and governance will continue. The modernization of management procedures and tools, which began in 2017 will be completed in 2019. The approval, implementation and monitoring of Public-Private Partnerships (PPPs) will be strengthened in line with recommendations of various technical assistance missions, with a view to limit potential for contingent liabilities. Publication of in-year budget documents will continue to improve transparency in budget execution. Likewise, efforts to streamline and increase transparency in public procurement procedures will be sustained. The authorities are pursuing their efforts to promote good governance and combat corruption initiated in 2015 with the publication of reports on the management of the government and the ongoing automation of asset declaration by the anti-corruption authority.

16. The authorities will pursue a prudent debt policy to maintain the country’s moderate risk of external debt distress. Their medium-term debt strategy aims to reduce the reliance on national and regional borrowing in favor of external sources offering more favorable terms. In the context of increased scarcity of concessional resources, the use of non-concessional financing will be limited to critical projects offering substantial guaranteed economic returns. They will pursue the strengthening of debt management capacities, drawing on the recommendations of technical assistance missions from specialized institutions.

17. The authorities will press ahead with the implementation of structural reforms to foster economic diversification and increase financial inclusion, which are top priorities in the PNDES. They agree with staff that the actual business models in the banking system is not supportive of economic diversification and that enhancing access to financial services will be essential to support private sector development and structural transformation. The newcreated agriculture bank is expected to help in this regard, by offering credit access, in line with best practices, to an agriculture sector currently underserved by the banking sector. The creation of this bank contributes to the ongoing efforts to promote financial inclusion which will be sustained over the medium term to increase the bank penetration rate to 35 percent by 2020, consistent with the PNDES. In this regard, a draft action plan for the implementation of the National Strategy for Inclusive Finance (SNFI) adopted in 2017 is being prepared and should be finalized by end-2018. The strategy will promote microfinance and capitalize on the expansion of the mobile technology to make further strides in this area. They authorities will sustain their efforts to further improve business environment by notably removing excessive red tape and pursuing the implementation of judicial centers specializing in economic and financial crimes and terrorist acts.

IV. Conclusion

Despite a difficult domestic environment marked by terrorist attacks and severe weather conditions, Burkina Faso’s performance under the ECF-supported program has been broadly satisfactory. They authorities remain committed to pursue policies and structural reforms to strengthen macroeconomic stability, consistent with their regional commitment, while creating the fiscal space needed to meet the developmental needs of the country, and they have taken strong measures recently in that regard. In light of this, we would appreciate Directors’ favorable consideration of the authorities’ request for the completion of the first review under the ECF.