Public Information Notice No. 98/38

Press Information Notice: IMF Concludes Article IV Consultation with Burkina Faso

June 12, 1998

The IMF Executive Board on May 18, 1998 concluded the Article IV consultation¹ with Burkina Faso.

Background

Burkina Faso’s sustained adjustment effort was supported by the IMF under successive programs since 1991, first, under the Structural Adjustment Facility (SAF), followed by a first three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF) approved on March 31, 1993. An additional three-year arrangement under the ESAF was approved on June 16, 1996. Under programs supported under these arrangements, the government of Burkina Faso implemented a broad range of macroeconomic and structural reforms which have succeeded in redirecting the economy from a centralized to a market-oriented one, with substantial improvement recorded in a number of areas, notably rising per capita GDP and the reduction of internal and external imbalances. In September/October 1997, the IMF and the World Bank approved a decision concerning the country’s eligibility under the Highly Indebted Poor Countries Initiative, under which external debt will be reduced by April 2000 to the equivalent of 205 percent of exports in net present value terms.

In 1997, economic and financial performance continued to be encouraging. GDP growth is estimated to have reached 5.5 percent, notwithstanding erratic rainfall in parts of the country, that adversely affected cereal production. In 1996, real GDP was robust at 6 percent. Growth was supported by strong activity in manufacturing and services, while the production of cotton, the largest export crop, rose by some 40 percent in volume for the second year in a row. Gross domestic investment is estimated to have increased to 26.2 percent of GDP in 1997 from 22.5 percent in 1995, owing to a high execution rate of public investment projects and sustained private investment.

Inflation continued to decline. The increase in the consumer price index (CPI) in Ouagadougou was negligible in the 12-month period to December 1997, reflecting largely the good cereal harvest in 1996/97, as well as moderate wage increases and continued prudent financial policies. On an annual average, the rise of the CPI slowed from 6.1 percent in 1996 to 2.3 percent in 1997. Some pressure on cereal prices emerged at year’s end and in early 1998, as a result of the poor 1997/98 harvest. The external current account deficit, excluding official transfers, widened to 13.3 percent of GDP in 1997, from 11.3 percent in 1995. A larger deficit occurred in the trade balance, notwithstanding the sharp increase in cotton exports, as imports rose substantially, in particular of investment goods.

The Burkinabè authorities continued their efforts to increase budgetary revenue and to contain non-priority current expenditure, with the result that the primary current budget surplus rose to 4.0 percent of GDP in 1997. The increase in revenue, to 13.0 percent of GDP from 12.3 percent in 1996, mainly reflected efforts to strengthen tax and customs administration, as well as higher corporate income tax; a decrease in the wage bill to 4.8 percent of GDP helped restrain current spending. Sustained outlays on investment and on restructuring operations, as well as large settlement of domestic arrears, resulted in a expansion of net bank credit to government at end-1997.

Monetary policy is conducted at the regional level by the Central Bank for West African States, and remained prudent; credit to the economy rose in 1997 by 41 percent, reflecting strong demand for crop credit in the second half of the year, which commercial banks financed through a reduction in their free reserve.

In 1997 and early 1998, the Burkinabè authorities further implemented structural reforms in a number of areas. The government finalized the first phase of the program to restructure and privatize public enterprises (involving 20 out of 80 existing public enterprises) and made significant progress in implementing the second phase, involving 19 companies. A number of actions were taken to further strengthen the banking system, including the liquidation of the development bank, the privatization of a commercial bank and the licensing of two new private banks. In the area of civil service reform, following wide discussion with trade unions, legislation introducing enhanced flexibility in personnel policies was adopted by the National Assembly in April 1998.

It is expected that GDP will increase by 6 percent in 1998, as climatic conditions return to normal. Inflation is expected to remain low. The external current account should improve by about half a percent of GDP. The budgetary position should further strengthen. Policies will continue to put emphasis on enhanced revenue collection and the provision of larger budgetary allocations to social sectors.

Executive Board Assessment

Executive Directors noted that Burkina Faso’s economy continued to benefit from the implementation of sound policies and structural reforms. In 1997, economic growth was sustained, inflation fell, and the main budgetary targets were met, owing to a strong revenue performance. Directors were encouraged by the significant progress achieved by the authorities in implementing their privatization program and adopting a reform plan for the civil service. Those measures were crucial to attract foreign investment and diversify the productive base, while improving government efficiency.

Nevertheless, Directors noted that the authorities continued to face difficult challenges, in particular to improve the very weak social indicators and to enhance the role of the private sector in economic activity. They urged the authorities to persist in their adjustment efforts, giving continued priority to fiscal consolidation in order to provide sustainable resources for poverty alleviation and development spending. Pointing to the recent deterioration in the external current account position, several Directors also stressed the role of structural reforms to promote export diversification and reduce the external vulnerability of the economy.

Directors noted that the 1998 government budget provided for a continued effort to increase the revenue/GDP ratio and to contain current expenditure, particularly the wage bill, while including larger allocations for the social sectors. They welcomed the effort to increase resources in support of education and health, and noted that some progress had been made in improving the social indicators. Some Directors expressed particular concern about the weak performance of the health sector and recommended that sector be given priority. Directors stressed the importance of enlarging further the revenue base and strengthening tax administration so as to offset the losses arising from the introduction over the next two years of the common external tariff of the West African Economic and Monetary Union (WAEMU). In that regard, Directors welcomed the authorities’ support for a new investment code in the WAEMU, which would curtail tax exemptions.

While welcoming the significant progress made in recent months under the privatization program, Directors were of the view that it was now important to address the restructuring and privatization of public utility companies. They noted the steps under way to strengthen the judicial system and to facilitate the creation of new enterprises. Those steps were considered essential to encourage private sector initiative.

Directors considered that the reform of the civil service, with the introduction of a more rigorous merit-based promotion system and more reliance on contractual workers, was an important step toward improved performance and flexibility in resource allocation. It was now crucial that those measures be implemented with determination.

Directors welcomed the strengthening of the banking system through privatizations and recapitalizations, and noted that surveillance should continue on the networks of mutual saving and loan institutions, which played an important role in financing small-scale productive activities. They encouraged the adoption of further measures in that area.

Directors noted that improving the quality of economic statistics should remain an important priority.