Public Information Notice No. 05/133

Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Burkina Faso

September 29, 2005

On September 8, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Burkina Faso.¹

Background

Over the past decade, Burkina Faso has maintained an average real GDP growth rate of over 6 percent annually, and inflation has been contained. Structural reforms and stability-oriented macroeconomic policies have strengthened the market-orientation of the economy and improved its flexibility. The gains from the economic reforms have resulted in improvements in social indicators, with household surveys indicating that the headcount poverty index declined by 8 percentage points between 1998 and 2003. Nevertheless, Burkina Faso continues to rank among the poorest countries in the world, and reaching the Millennium Development Goals poses major challenges.

Following a year of exceptional growth performance, GDP growth moderated to 4.6 percent in 2004. Despite an increase in cotton production, overall agricultural production fell due to a decline in cereal production from record highs in 2003. Average consumer prices decreased by 0.4 percent, but inflation has since picked up as food prices have rebounded from their five-year lows. Nonfood inflation has been contained, in spite of higher oil prices. Slow growth in money demand and rapid expansion of medium and long-term credit to the economy resulted in a decline of net foreign assets of the banking system. Credit expansion has continued at a strong pace during the first part of 2005 and net foreign assets of the banking system have declined further. Consequently, the regional central bank (BCEAO) has raised reserve requirements to stem the pace of credit expansion.

Revenue improvements of one-half percent of GDP and expenditures that were lower than projected helped contain the fiscal deficit (excluding grants) to 8.6 percent of GDP in 2004, which was lower-than-targeted in the authorities' program. The deficit was fully financed by external means, with grants accounting for over half of the deficit financing.

The external current account deficit (excluding transfers) exceeded 10 percent of GDP in 2004. Cotton exports, which account for about two-thirds of total exports, increased sharply as most of the crop was sold in early 2004 before world prices began to decline. This more than offset the impact of higher oil prices and the trade deficit narrowed in 2004. In the second half of the year, the external terms of trade deteriorated sharply to reach a 25-year low by year-end. Notwithstanding some recovery in cotton prices during the first half of 2005, the terms of trade remain near their historical low and the external trade and current account deficits are expected to widen significantly in 2005.

Ongoing structural reforms include steps to improve revenue performance, as revenues are still low by regional standards, with measures focused on broadening the tax base and improving tax compliance. Revenues performance is also benefiting from the computerization of the major customs offices and the introduction of a new single taxpayer identification number. In other areas, structural reforms are aimed at improving competitiveness. This includes public investments in rural roads and irrigation systems, which could facilitate agricultural diversification and reduce volatility in incomes and prices. The legal and regulatory framework of the power sector has been amended, and the authorities are preparing the energy and telecommunications sector for increased private sector participation.

Executive Board Assessment

Executive Directors commended the Burkinabè authorities for their long track record of implementing sound macroeconomic policies and structural reforms. These reforms have resulted in a more flexible and market-based economy that has helped achieve high rates of economic growth and reduce the incidence of poverty. Nevertheless, Directors noted that substantial challenges remain, especially in light of the decline in world cotton prices and the increase in world oil prices that have dampened economic growth prospects for 2005. Continued implementation of pro-growth macroeconomic policies, diversification of the economy, and structural reforms will be necessary to establish the conditions for a resumption of robust economic growth and to accelerate progress toward the Millennium Development Goals (MDGs).

Directors agreed that an easing of fiscal policy in 2004 and 2005 was appropriate in light of the need to smooth the adjustment to the adverse terms of trade shocks while continuing to make progress towards the MDGs. They considered that the fiscal targets for 2005 remain appropriate, and welcomed the continued orientation of expenditures toward key social services, notably health and education, as well as growth and productivity-enhancing capital investments.

Directors noted the importance of further increasing fiscal revenues over the medium term—a core WAEMU convergence requirement—as these remain low relative to GDP. They welcomed the advances made in tax administration that have already contributed to an increase in revenues by about half a percentage point of GDP annually since 2000. Directors noted the progress in implementing structural measures to broaden the tax base and improve tax compliance—including most recently the establishment of the large taxpayer division, the centralization of tax collection responsibilities, and the introduction of a new single taxpayer identification number—and looked forward to the completion of the taxpayer census and the creation of the joint tax-customs brigade to conduct comprehensive tax audits. They agreed that these measures would help establish the foundation for further improvement in revenue performance without increasing the burden on existing taxpayers. Directors urged the authorities to identify further measures to reach the WAEMU revenue convergence criterion before 2015.

Directors urged the authorities to proceed with their medium-term expenditure plans only if financing could be obtained on terms consistent with long-term debt sustainability, in order to ensure that the benefits of debt relief under the HIPC Initiative are not unwound by new unsustainable borrowing. In this context, Directors underscored the importance of obtaining external financing on highly concessional terms, preferably in the form of grants, and stressed the need for non-Paris Club bilateral creditors to offer HIPC debt relief to Burkina Faso. They welcomed the recent streamlining of budget support among development partners and measures to improve absorptive capacity.

Directors noted the importance of allowing domestic prices to reflect changes in world prices, and commended the authorities for implementing the automatic price adjustment mechanism for domestic petroleum products. They called for a move toward a cost-recovery-based electricity pricing mechanism to further enhance price flexibility and allow for a phasing out of the subsidy to the state-owned electricity utility. This would free up much needed resources for priority poverty-reducing expenditures. Directors also welcomed the policy of allowing the cotton sector, which is mostly private, to find its own solution to difficulties arising from low world cotton prices, while the government continues to implement structural reforms to enhance productivity in the sector.

Directors expressed some concern about overall competitiveness in light of the deterioration in the external terms of trade. They supported the emphasis on measures to diversify the economy, enhance productivity, and improve the business environment. In light of Burkina Faso's high dependence on agricultural production, Directors encouraged the authorities to push ahead with their land reform agenda. They welcomed the decision to maintain the fertilizer subsidy at its current level, and encouraged the authorities to phase out the subsidy as alternative supply routes are found and as the regional situation stabilizes. Directors also welcomed the decision to prepare the energy and telecommunications sectors for increased private sector participation, and encouraged the authorities to make the recent amendments to the legal and regulatory framework of the power sector operational. Directors agreed that increasing regional trade integration would help achieve the authorities' objectives of export diversification.

Directors observed that the banking system is generally sound. They welcomed the decline in non-performing loans in the banking sector in the first quarter of this year, but noted the mixed compliance with other prudential ratios, which calls for close monitoring of the sector. They commended the establishment of the agency to assist small and medium enterprises with accounting and administrative procedures, and urge the authorities to address delays surrounding the national strategy for microfinance. They agreed that the government should not assume an initial 100 percent share in the housing bank, as planned, but should move forward once partners are prepared to pay their respective shares.

Directors welcomed progress in improving fiscal transparency and governance, noting the improvement in the timeliness of submitting audited government accounts to the National Assembly and the follow up to the report of the High Authority on the Coordination of the Fight Against Corruption. They welcomed the approval of the national strategy for good governance and looked forward to the comprehensive strategy on combating corruption.

Directors commended the authorities for improving the monitoring of their poverty reduction strategy, implementation of which shows encouraging results. The authorities' management of donor coordination and harmonization is also an important step forward to strengthen aid efficiency.

Directors welcomed the plan to strengthen the National Institute of Statistics and Demographics and urged its speedy implementation to improve the timeliness and quality of economic and financial data. Directors also encouraged the authorities to improve the quality of external debt data, as these are a necessary component in evaluating the implications of fiscal policy.