Burkina Faso—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding
Ouagadougou, May 28, 2003

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19^th Street, N.W.
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler:

1. During the past three years, the Burkina Faso authorities implemented macroeconomic policies and structural reforms in the context of the poverty reduction strategy paper (PRSP) adopted by the country in early 2000. This PRSP and its first two progress reports served as a reference for financial support by donors and lenders, including the International Monetary Fund and the World Bank. To consolidate the progress achieved and intensify reform efforts, the government adopted an economic and financial reform program for 2003-06, the objectives of which are set forth in the PRSP adopted in 2000 and amended by the second progress report, which was discussed by the Executive Boards of the Fund and the World Bank in November 2002.

2. The attached memorandum of economic and financial policies (Annex I) sets out the government's economic objectives and policies for 2003-06, as well as the specific objectives and measures envisaged for the first year of the program, from April 2003 to March 2004. In support of these objectives and policies, the government requests a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) in an amount equivalent to SDR 24.08 million (40 percent of quota). The government is also counting on continued assistance from the Fund, the World Bank, and the international financial community in the context of the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative).

3. The government believes that the policies set forth in the attached memorandum will enable it to meet the objectives of its program, but it is ready to take all other measures that may prove necessary to this end. During the period of the proposed three-year arrangement, the authorities will consult with the Managing Director of the Fund on the adoption of any measures that may be appropriate, either at their own initiative or at the request of the Managing Director. Moreover, following the period of implementation of the arrangement, and as long as Burkina Faso has outstanding financial obligations to the Fund resulting from loans disbursed under the arrangement, the government will consult with the IMF, from time to time, on Burkina Faso's economic and financial policies, at its own initiative or at the request of the Managing Director.

4. The government will provide to the Fund any information that the Fund may request for the purpose of monitoring progress made in implementing the economic and financial policies and the measures needed to achieve the program objectives. A technical memorandum of understanding describing the quantitative performance criteria and benchmarks of the program is attached (Annex II). In addition, Burkina Faso will conduct two semiannual reviews of the program with the Fund during the first year, to be completed by end-December 2003 and by end-June 2004, respectively.

/s/

ANNEX I

Memorandum of Economic and Financial Policies for 2003–06

May 28, 2003

I. Introduction

1. During the past three years, the government of Burkina Faso implemented macroeconomic policies and structural reforms in the context of the poverty reduction strategy paper (PRSP) adopted by the country in 2000. Overall, these measures and reforms helped to achieve the macroeconomic objectives, particularly as regard consolidation, fiscal, control of inflation, and liberalization of the economy. During this period, the government's efforts were supported by technical and financial assistance from the International Monetary Fund, the World Bank, and several other multilateral and bilateral donors and lenders.

2. However, the economic and financial situation of the country remains fragile despite the progress achieved. Burkina Faso's economy and external position are dependent upon a very narrow economic base dominated by cotton exports, remittances from nationals of Burkina Faso living abroad, and foreign assistance. Per capita income is very low, and the high factor costs continue to constrain economic growth and the development of the private sector. Access to basic social services is limited, and the poverty rate is very high. Moreover, the crisis that erupted in Côte d'Ivoire in September 2002 has seriously disrupted transportation, trade, and production in Burkina Faso. In this context, the government is aware of the need to consolidate the advances made during 1999-2002, to intensify fiscal adjustment, and to accelerate structural reforms, with a view to diversifying the economy in the years ahead, to achieving sustainable growth, and to reducing poverty significantly, while maintaining domestic and external financial balances.

3. Accordingly, the government has adopted a program of economic reforms for 2003-06, based on the objectives set forth in the PRSP adopted in 2000 and updated in the second progress report discussed with the boards of the International Monetary Fund and the World Bank in November 2002. This memorandum of economic and financial policies analyzes the recent performance of the economy of Burkina Faso, and sets out the government's economic and financial objectives and policies for 2003-06, as well as the specific objectives and measures for the April 2003-March 2004 period.

II. Performance Under the 1999-2002 Program and Recent Economic Developments

4. Since 1993, Burkina Faso has satisfactorily implemented three three-year programs supported by Fund resources. In the context of these programs, and following the devaluation of the CFA franc in 1994, the real GDP growth rate increased overall despite several years of drought, the external current account deficit decreased, and the rate of inflation remained low. More recently, the government of Burkina Faso successfully implemented a medium-term program in 1999-2002 within the framework of its PRSP. This program enabled Burkina Faso to continue to reduce the inflation rate (as measured by the consumer price index) from over 5 percent in 1998 to 2.3 percent in 2002, on an annual average basis, and to reduce the external current account deficit (excluding official transfers) from 13.7 percent of GDP in 1998 to 12.9 percent of GDP in 2002. Real GDP growth averaged 4.2 percent for the 1999-2002 period (the same average rate as for the 1993-98 period).

5. With regard to public finances, the overall fiscal deficit (excluding grants) stood at 10.4 percent of GDP in 2002, compared with 9.0 percent of GDP in 1998, reflecting a downward trend in tax revenue collection. Total expenditure stabilized at about 22 percent of GDP during 1998-2002. Government expenditure, excluding foreign-financed investment, totaled 15.7 percent of GDP in 2002, compared with 13.6 percent of GDP in 1998. On the same basis, spending for education declined from 15.2 percent of total expenditure in 1998 (or 2 percent of GDP) to 12.4 percent in 2002 (or 1.9 percent of GDP), including Initiative for Heavily Indebted Poor Countries (HIPC Initiative) expenditure. Over the same period, spending for health also declined from 14.6 percent of expenditures (or 1.9 percent of GDP) to 11.2 percent (or 1.8 percent of GDP). Regarding government revenue, steps taken during the program period to improve tax administration have resulted in higher receipts from taxes on international trade in general. However, fuel oil subsidies granted to Burkina Faso's national electricity company, SONABEL, have continued to limit returns from customs duties and specific excises on petroleum products. Moreover, the collection of direct taxes and indirect domestic taxes has suffered from the weak control of the tax base and the informal sector.

6. In spite of the overall fiscal deficit and owing to the mobilization of budgetary assistance from the main donors and lenders, as well as external public debt relief granted within the framework of the HIPC Initiative, the government eliminated all of its domestic arrears in 2002, and continued to remain current on the service of external debt to its multilateral and bilateral creditors. Nevertheless, efforts to improve the country's fiscal position were thwarted in the second half of 2002, in part owing to the negative impact of the crisis in Côte d'Ivoire. Tax collection weakened further, particularly with respect to the value-added tax (VAT) and income and profit taxes, resulting in a shortfall of CFAF 13 billion in revenue. Expenditure on humanitarian assistance and security that had not been included in the budget had to be made, while water, electricity, and telephone expenditure increased more rapidly than expected, resulting in excess current spending of CFAF 13 billion. In these circumstances, the government expanded its domestic debt by increasing the level of stock of expenditure committed and for which payment orders had not been issued, as well as of deposits with the treasury. However, investment spending financed by domestic resources remained considerably below forecast levels, reflecting the very low rate of absorption of HIPC Initiative resources.

7. On the financial side, the money supply increased by an annual average of 3.4 percent during the 1999-2002 period, or less than the nominal GDP growth rate, while the improvement in public finances limited the expansion of the banking system's net credit to the government. In these circumstances, the net foreign assets of the banking system continued to improve, and credit to the economy increased in real terms during the program period.

8. On the structural side, the government eliminated price controls and liberalized internal trade, including the marketing of agricultural commodities. The government also eliminated quantitative import restrictions, except for a minimum quantity of 1,000 tons per operator for sugar imports. In addition, it applied the common external tariff of the West African Economic and Monetary Union (WAEMU), although Burkina Faso continues to maintain a small number of reference valuations for customs while awaiting a decision from the World Trade Organization (WTO). The government also liberalized the pricing system, except for the prices of goods and services produced by public utilities, such as water and electricity. In 2001, the government introduced an automatic mechanism for adjusting prices of petroleum products as a function of world prices and local distribution costs. Since 2001, water rates have been adjusted annually. In the public sector, the government privatized or liquidated several state-owned enterprises in 1999-2002. However, there were delays in the implementation of the overall reform of public administration. With respect to governance, in 2001 the government published a decree establishing High Authority to fight Corruption and made the Auditor General Office operational in 2002. It also adopted an action plan for improving budget management (PRGB) in July 2002 that aims to ensure transparency and accountability in the fiscal sector.

III. Medium-Term Strategy and Objectives for 2003-06

9. The government is committed to consolidating the gains made in 1999-2002 and to strengthening macroeconomic policies and structural reforms in order to solve the economic and social problems of Burkina Faso, improve the medium-term economic growth prospects, reduce poverty, and raise the population's standard of living while continuing to reduce internal and external financial imbalances. The government has decided to take new steps within the framework of a medium-term program covering the 2003-06 period. The government's policy will center around four main themes: (a) pursuing of a prudent fiscal policy that aims to expand the tax base and grant priority to social sectors and infrastructure maintenance in the allocation of government spending; (b) contributing to the implementation of the regional monetary policy to contain inflation and to strengthen the international reserves position of the banking system while supporting the promotion of microfinance; (c) accelerating the implementation of structural reforms that aim to promote the development of the private sector and strengthen the foundations of sustainable economic growth; and (d) implementing an ambitious social program, particularly with regard to poverty reduction, focused on the education and health sectors. Special emphasis will be placed on strengthening good governance.

10. The 2003-06 adjustment strategy aims to (a) contain inflation at less than 3 percent by 2006; and (b) limit the current external deficit (excluding official transfers) to 11.7 percent of GDP in 2006, or 8.7 percent of GDP, including official transfers. The government will also work to (a) intensify its poverty reduction efforts; (b) support job creation by promoting the private sector; (c) develop human resources; and (d) strengthen environmental protection and implement a sustainable development strategy through a synergy resulting from the administration of the sector policies contained in the PRSP. The average annual real GDP growth rate is anticipated to be 5.2 percent in 2006, after dipping to 2.6 percent in 2003; this acceleration will allow an increase in per capita income of 2.7 percent. The balance of payments should continue to improve as a result of diversification efforts, particularly in agriculture, agribusiness, and livestock products. Private investment is expected to increase from 10.9 percent of GDP in 2002 to 12.5 percent of GDP in 2006, reflecting efforts to diversify and improve competitiveness, and gross national savings are expected to rise from 7.9 percent of GDP in 2002 to 12.8 percent of GDP in 2006.

11. To reach its medium-term adjustment strategy objectives, the government will focus its efforts on pursuing a prudent fiscal policy that aims to reduce the government's basic budget deficit from 3.8 percent of GDP in 2002 to 3.1 percent of GDP in 2006, while increasing budget allocations for the education and health sectors. The Central Bank of West African States (BCEAO) will also follow a prudent monetary policy that aims to contain inflation, improve the central bank's international reserves position, and support the parity of the CFA franc vis—vis the euro. The government will also expand its structural reforms, so as to promote diversification of the economy and development of the private sector through healthy competition, while improving public sector efficiency.

12. After broadly liberalizing the economy, the government adopted a letter of private sector development policy that set forth the priorities for actions to be taken to ensure effective promotion of private enterprise. In this regard, the government will strengthen the legal and regulatory framework, in order to make it more favorable to the development of private investment and to private foreign capital inflows, as well as to promote the private sector as an engine of economic growth. Moreover, the government will move to improve the operations of the judicial system, and it will implement the program to privatize public enterprises, with the assistance of the World Bank.

13. The government is convinced that achieving sustainable economic growth will help reduce poverty. In order to increase life expectancy and improve the population's standard of living, the government intends to strengthen the fight against the major endemic diseases, particularly malaria and AIDS, expand access to primary health care, intensify the vaccination of children, increase enrollment and literacy rates, and improve housing, particularly for the most impoverished. Moreover, the government aims to reduce infant and child mortality rates and intensify its information, education, and communication campaigns with regard to health and family planning by conducting an outreach program among women, particularly in rural areas.

IV. The Program for 2003-04

14. In the context of the PRSP, the primary macroeconomic objectives of the program for the first year are to (a) contain the rate of inflation at 5 percent in 2003 and 3 percent in 2004, year-on-year; and (b) limit the external current account deficit (excluding official transfers) to 14.2 percent of GDP in 2003 and 12.6 percent of GDP in 2004. Real GDP growth is projected at 2.6 percent in 2003 and 4 percent in 2004, compared with 4.6 percent in 2002. With regard to government finance, the program aims to contain the basic government budget deficit at 4.5 percent of GDP in 2003 and to reduce it to 3.5 percent of GDP in 2004. To achieve these objectives, a set of measures will be implemented during 2003-04 in the areas of fiscal policy, monetary policy, the external sector, and structural reforms.

A. Macroeconomic Policies

Fiscal policy

15. Fiscal policy will aim to limit the fiscal deficit (on a commitment basis, including HIPC Initiative-related expenditure) to 11.0 percent of GDP in 2003, compared with 10.4 percent of GDP in 2002, and to reduce it to 9.9 percent in 2004; it will also aim to limit the basic deficit to 4.5 percent of GDP in 2003 and to reduce it to 3.5 percent of GDP in 2004, compared with 3.8 percent of GDP in 2002. The evolution at the basic budget deficit in 2003 reflects a forecast of a rise in social expenditure financed by HIPC Initiative resources from 1.3 percent of GDP in 2002 to 2.3 percent of GDP in 2003, owning, in turn, to the usage of existing funds carried over from 2002, as well as a loan equivalent to 0.6 percent of GDP that the government made to a company (SONATUR) in April 2003 to finance the Commercial and Administrative Zone Development Project (ZACA). The draft supplementary budget for 2003, which was submitted to the National Assembly in April 2003, and the budget proposal for 2004, which will be submitted to the National Assembly by end-September 2003, are and will be consistent with the program's objectives. The draft supplementary budget for 2003 is based on a set of administrative measures that aim to rationalize indirect domestic taxation, expand the tax base, and bring the growth of expenditure under control, while improving the capacity to absorb HIPC Initiative resources. In the event of tax revenue shortfall, the Minister of Finance will reduce spending commitments up to the extent of the revenue shortfall to meet the program objectives. In addition, on the occasion of the first review of the program, the government will revise the budget for 2004 to take account of revenue collection performance. The government of Burkina Faso remains current on its external payment obligations. The government has also decided to conduct an audit of domestic debt and will continue, through end-June 2003, to close deposit accounts opened with the treasury, keeping only the accounts of entities required to deposit their funds in a treasury account, in accordance with current regulations. In any event, by end-September 2003 the government will close all accounts of nonfinancial private enterprises that remain open with the treasury. The government will not accumulate domestic or external payment arrears during the program period. Moreover, the government will substantially reduce expenditure on a commitment basis for which payment orders have not yet been authorized. It established a monthly meeting of a committee for the control and follow-up of such expenditure in May 2003, with the participation of the Minister of Finance.

16. In the context of the action plan for improving budget management, and with a view to strengthening good governance, transparency, and staff accountability, in accordance with the objectives of the PRSP, the draft annual audited budget acts for 1995-2000 were reviewed by the Auditor General Office in late 2002; the government then submitted the budget acts to the National Assembly at end-March 2003. Following the same procedure of prior review by the Auditor General Office, the government will submit the draft annual audited budget act for 2001 to the National Assembly by end-September 2003, and the draft annual audited budget act for 2002 by end-March 2004. During the program period, the government, in accordance with the studies of the Country Financial Accountability Assessment (CFAA), the Report on the Observance of Standards and Codes (ROSC), and the Budget Management Improvement Action Plan (PRGB), will reach agreement with the Auditor General Office concerning an administrative audit of the individual accounts of the accountants (comptes de gestion) for the government's financial operations for the years prior to 2001, and it will produce these accounts regularly in future. The government will finalize the timetable for preparation of the comptes de gestion for 2001 and 2002 at the first program review. The government submitted the budget framework law, in accordance with West African Economic and Monetary Union (WAEMU) directives, to parliament, which approved it in January 2003. By September 2003, it will also adopt the WAEMU general rules of public accounting and its budget nomenclature, inserting specific codes to identify social expenditure and HIPC Initiative-related expenditure.

17. Revenues are expected to increase by 12.5 percent to CFAF 291.7 billion in 2003, and by 15.6 percent to CFAF 337.3 billion in 2004. To achieve this increase, the authorities will strengthen fiscal and customs administration, and intensify collection efforts during the 2003-04 period through a number of approaches. First, they will establish an inventory of all tax and customs exemptions by end-September 2003, with a view to strengthening controls of legal exemptions and increasing the tax base. Second, the authorities will strengthen tax audit departments at the Directorate General of Taxation and within the customs administration. The number of audit squads at the Directorate General of Taxation has been increased from five to seven, and the number of teams per squad has grown from three to five since November 2002 at the regional directorates in the center and west. In addition, four other squads are shared by the center-west, east, and north regional directorates and the Office of Investigation and Audit. Third, by end-October 2003 the authorities will bring on-line a computer system to monitor deposits and payments, and to track the collection of outstanding taxes in the large and medium-sized taxpayers' units of the regional tax directorates in the center (Ouagadougou) and west (Bobo-Dioulasso). These two divisions collect 85 percent and 10 percent, respectively, of domestic taxes. Fourth, the authorities will ensure the application of all tax and customs laws, particularly for the informal sector. Implementation of this set of measures should increase in government revenues from 11.1 percent of GDP in 2002 to 12.3 percent of GDP in 2004. In this regard, the government will take advantage of the recommendations of the March 2003 IMF technical assistance mission to develop an action plan to strengthen the collection of taxes and customs duties before the first review of the program.

18. On the expenditure side, control of government spending, exclusive of interest on public debt, will be pursued by controlling the wage bill. To achieve this, the government will continue implementation of its public administration reform program during the program period, in order to introduce increased flexibility in managing the civil service. In light of the objectives for inflation and civil service staffing levels, the government will by December 2003 implement the merit-based compensation and promotion system adopted in 2001. It will also continue to improve the integrated computer system for civil service and payroll management. In light of the outcomes expected in terms of revenue recovery, no general salary increase is planned for the 2003-04 period. Application of this salary policy will limit the increase in the wage bill to 8.1 percent in 2003 and 6 percent in 2004, reflecting mainly the planned integration of people on temporary contacts in the education and health sectors, and in the revenues collection agencies. This salary policy will also stabilize the ratio of government wage expenditure to GDP at 4.7 percent in 2003-04.

19. Other current expenditure for goods and services should stabilize at approximately 2.6 percent of GDP during the 2003-04 period, while reflecting the priority given to improving nonwage expenditure for the education, health, agriculture, and infrastructure maintenance sectors. This stabilization of expenditure for goods and services is due to savings measures that aim to reduce water, electricity, and telephone expenditure. Transfer expenditure will also stabilize at 3.2 percent of GDP in 2003-04, despite higher humanitarian assistance outlays triggered by the crisis in Côte d'Ivoire and price support for agricultural inputs in cotton-growing areas. The government will prepare sector development strategies and continue to conduct sector reviews of government expenditure, with the technical assistance of the World Bank. After the reviews of spending in the rural development and transportation infrastructure sectors, the government will review education spending (particularly secondary and higher education) and expenditure in the judicial system. The government will also deepen its public investment planning and medium-term expenditure framework (MTEF). The MTEF for 2004-06 will continue to reflect the priorities stated in the PRSP. Generally, the government will work to improve the monitoring of public investments, particularly externally funded investments, by integrating them into the computerized expenditure system (CID).

20. The government will increase the budgetary appropriation ceiling for health and education expenditure and for poverty reduction in general, in accordance with the PRSP. Total expenditure for education (excluding foreign-financed investment and including HIPC Initiative-related expenditure), which amounted to 12.4 percent of total expenditure in 2002 (1.9 percent of GDP), is forecast at 14.8 percent in 2003 (2.5 percent of GDP) and at 15.4 percent in 2004 (2.5 percent of GDP). The strong increase in the share of education in total spending in 2003 reflects the acceleration in the use of resources freed under the HIPC Initiative. The government may further increase its education expenditure in the context of the accelerated Education for All Initiative. In the health sector, spending (excluding foreign-financed investment) will increase from 11.2 percent of total expenditure in 2002 (1.8 percent of GDP) to 11.8 percent in 2003 (2 percent of GDP), and to 12.3 percent in 2004 (2 percent of GDP).

Monetary policy and the financial sector

21. The regional central bank will pursue a prudent monetary policy in 2003-04. It will aim to contain inflation, and to limit the decline in the net foreign assets of the banking system in 2003 to 0.5 percent of the end-December 2002 money supply, before increasing them in 2004 by 1.7 percent of the end-December 2003 money supply. The use of resources from the HIPC Initiative account of the treasury at the central bank will limit the contraction of net bank credit to the government in 2003 to 0.3 percent of the end-December 2002 money supply and in 2004 to 0.4 percent of the end-December 2003 money supply. In light of the decision by the WAEMU member countries to reduce BCEAO advances to governments, the treasury will issue bills and government paper to finance its operations, to lend funds to SONATUR and SONABEL, and to contribute to the development of a regional financial market. Credit to the private sector is expected to increase by 14.5 percent in 2003 and by 8.1 percent in 2004—a pace higher than inflation—reflecting the projected diversification of the economy and the development of financial intermediation. The money supply is expected in increase by 9.2 percent in 2003 and by 7.1 percent in 2004—the same pace as nominal GDP growth.

22. To strengthen the development of the financial sector in accordance with the PRSP, improve the mobilization of domestic savings, and promote its intermediation for financing the private sector, the government will pursue its judicial system reform program with the assistance of the World Bank, with a view to permitting foreclosure on collateral and improving loan collections. It will also encourage small and medium-sized enterprises to implement accounting standards, and it will continue its efforts to develop the microfinance sector, or as to increase the population's access to credit and financial services, particularly on the part of women and inhabitants of rural areas, and to reduce poverty. In the context of its PRSP, the government will by end-March 2004 prepare a sector strategy for the development of the financial sector, with the assistance of its lenders. The Banking Commission of the West African Monetary Union (WAMU) will further strengthen banking supervision to ensure that banks continue to observe prudential ratios.

B. Structural Policies

23. Private sector competitiveness and development. The government will design and implement an action plan to strengthen incentives for private sector activity and investment, with the assistance of the World Bank, particularly by strengthening the legislative and regulatory framework and the judicial system. In the context of this project, which will be implemented in July 2003, the government's aim is to ensure long-term economic development through a reduction in factor costs and an increase in productivity, in accordance with the PRSP. To achieve this objective, the government will (a) simplify the formalities involved in establishing an enterprise, (b) promote a private sector-government dialogue through regular meetings of a joint committee responsible for examining the obstacles to business development, (c) continue liberalization of the telecommunications sector, (d) work to reduce the production costs of electricity and expand access to energy infrastructure, including in rural areas, (e) strengthen arbitration for trade disputes, (f) continue the privatization program, and (g) set up a competition committee responsible for proposing solutions to problems that impede promotion of the private sector.

24. The government will continue to implement its privatization and public enterprise reform program during the program period, with the assistance of the World Bank, to increase the incentives to produce and invest. In the telecommunications sector, the government will by end-September 2003 issue invitations to bid for the privatization of the telecommunications company (ONATEL). It has already established a regulatory authority (ARTEL) and opened cellular telephony to competition. In the energy sector, the government will privatize SONABEL and the oil company (SONABHY) by end-2004. It will reexamine the structure of electricity production and distribution costs, in consultation with the World Bank, with a view to introducing savings measures. It will continue to apply the automatic adjustment mechanism for public water rates as a function of costs. The government will also continue to apply the automatic adjustment mechanism for retail pricing of petroleum products as a function of import and distribution costs. In the agricultural sector, the government will in May 2003 issue an invitation to bid in order to permit two new firms to become established in two cotton-producing areas still operated by the cotton development company (SOFITEX).

25. Good governance. The government is committed to following a consistent practice of transparency and good governance. In addition to moving toward greater transparency in the management of public affairs, as described above, the government will by end-June 2003 make operational the High Authority to Fight Corruption. It will fight and suppress any act of fraud or corruption brought to its attention. The high authority will work with the monitoring agencies (the State Inspector's Office and Inspectorate of Public Finances) and the Auditor General Office to investigate irregularities. The government will also continue the reform of the judicial system, with the assistance of donor or lender organizations.

26. Poverty reduction. Achieving sustainable per capita revenue growth will help reduce poverty in Burkina Faso. In particular, price subsidies for cotton producer inputs and the social safety net for the consumption of butane gas and domestic kerosene should help to raise the standard of living of the population, particularly in rural areas. However, structural measures, including the program to reform public enterprises, will affect the quality of life of salaried populations in urban areas. With lenders' support, and in consultation with civil society, the government will prepare by end-July 2003 the third annual progress report on its PRSP. It will also update the PRSP in December 2003.

27. The revised PRSP will make sector policies consistent and take environmental issues into account in the various sectors involved. Moreover, it will include highly targeted measures that aim, among other things, to raise further the enrollment and literacy rates; improve primary health care; increase the participation of women in development activities; and reduce rural-to-urban migration, particularly by promoting the employment of youth, controlling demographic growth, promoting social protection, and preserving natural resources (water, land, forests, and wildlife). The PRSP will continue to form the single reference for interventions of the government and development partners. To that end, one of the objectives of revising the PRSP will be to ensure that it provides a real strategy for sustainable development. To ensure the effective monitoring of progress achieved in reaching the social and poverty reduction objectives, a system of indicators will be established in consultation with partners. The authorities will report the annual figures relating to these indicators to the International Monetary Fund and the World Bank.

28. With regard to education, the government recognizes that enrollment and literacy rates are low with respect to the PRSP objectives. With lenders' support, the government will continue to implement its plan to develop basic education, with a view to accelerating Burkina Faso's progress toward the Millennium Development Goals (MDGs). The government is already proposing to build or rehabilitate 3,600 classrooms per year in primary schools, particularly in rural areas, and to recruit and train an average of 8,700 new teachers per year. In the health sector, vaccination rates have improved, and the level of staffing of health districts has risen and the price of medications has decreased, in accordance with the PRSP objectives. The government will hold a sector roundtable of lenders to examine the National Health Development Plan that it adopted in July 2001, and to seek financing for projects to support health districts.

29. Statistics. The government will redouble its efforts to improve the quality and timeliness of its statistical data. It will provide Fund staff with the basic data required in the context of the Article IV consultations, and will strengthen program control and monitoring. The government will conduct a new statistical household survey by end-December 2003 with the technical assistance of the World Bank, and it will prepare a series of social and poverty indicators to monitor in the context of its poverty reduction policy.

V. External Sector and Borrowing Requirements

30. In the external sector, the government will pursue its objective of reducing the external current account deficit by implementing the macroeconomic and structural adjustment policies described in this memorandum, without having recourse to restrictions on current transactions.

31. Overall, the external current account deficit (excluding official transfers) is projected at CFAF 336.8 billion in 2003, or 14.2 percent of GDP, and CFAF 321.5 billion in 2004, or 12.6 percent of GDP (compared with 12.9 percent of GDP in 2002). Given the amortization of the external public debt (CFAF 41.0 billion) and the projected negative contribution of Burkina Faso to the international reserves of the central bank (CFAF -6.9 billion), gross external financing requirements will amount to CFAF 370.8 billion in 2003. These financing requirements will be covered in part by grants and project and nonproject concessional lending from multilateral and bilateral donors and lenders, and by private capital flows. Residual borrowing requirements of CFAF 5.8 billion will remain, which the government intends to cover by applying disbursements from the arrangement requested under the PRGF in 2003. The government will provide program financing assurances for 2004 at the first review.

32. To cover its financing requirements, the government will continue to seek grants and highly concessional loans only. In this respect, it will not contract or guarantee new nonconcessional external loans (with a grant element of less than 35 percent) having terms of maturity of more than one year, except for treasury bills offered on the WAEMU capital market. Moreover, the government will not contract or guarantee external loans having an original maturity of less than one year. To regularize its relations with its main foreign creditors and donors, Burkina Faso will ensure current service of its external debt and will not accumulate domestic or external payment arrears during the program period. The Paris Club agreed to extend to end-September 2003 the deadline for signing the June 2002 bilateral agreements on the treatment of the stock of debt. The government will sign those bilateral agreements as soon as possible, before the new deadline. It will also seek the participation of all its multilateral creditors and its non-Paris Club bilateral creditors in providing assistance to Burkina Faso in the context of the HIPC Initiative.

VI. Monitoring of Program Execution

33. To monitor the progress made in implementing the program, the government has established quantitative performance criteria and indicative targets for end-June, end-September, and end-December 2003, and for end-March 2004 (Table 1), as well as structural performance criteria and indicative targets (Table 2). The government will also provide the International Monetary Fund with the statistical data and information specified in the attached technical memorandum of understanding, on a monthly basis, as well as any information it deems necessary, or that the Fund staff requests for program-monitoring purposes. During the program period, the government will not impose or intensify restrictions on the making of payments and transfers on current international transactions without the approval of the International Monetary Fund, introduce or modify multiple currency practices, conclude bilateral payment agreements inconsistent with the Article VIII of the IMF's Articles of Agreement, or introduce or intensify import restrictions for balance of payments reasons.

34. The government will conduct two reviews of the program with the International Monetary Fund to evaluate the progress made during the first year. The first of these reviews will be held by end-December 2003, and the second by end-June 2004.

ANNEX II

Technical Memorandum of Understanding

Ouagadougou, May 28, 2003

1. This memorandum of understanding defines the quantitative performance criteria and indicative targets for the program supported by the Poverty Reduction and Growth Facility (PRGF) of the International Monetary Fund (IMF). It also sets the deadlines for reporting data to Fund staff to facilitate program monitoring.

I. Definitions

2. For the purposes of this memorandum, the following definitions of "debt," "government," "payments arrears," and "government obligations" will be used:

• As specified in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted by the Executive Board of the IMF on August 24, 2000,¹ debt will be understood to mean a current, that is, not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, that is, advances of money to obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, obligations, commercial loans, and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, that is, contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods have been delivered or the services provided; and (iii) leases, that is, arrangements under which property is provided that the lessee has the right to use for one or more specified periods of time, which are usually shorter than the total expected life of the property, while the lessor retains the title to the property. For the purpose of this guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement, excluding those payments that cover the operation, repair, or maintenance of the property. Treasury bills and bonds issued in CFA francs on the WAEMU (West African Economic and Monetary Union) regional market, are included in domestic debt for the purposes of this memorandum.
  
  
• Government is defined as the central government of Burkina Faso and does not include any political subdivision, government-owned entity, or central bank having a separate legal personality.
  
  
• External payments arrears are external payments due but unpaid. Domestic payments arrears under the 2003-04 program are domestic payments due (following the expiration of a 90-day grace period, except where the obligation provides for a specific grace period, in which case that grace period will apply) but unpaid.
  
  
• Government obligation is any financial obligation of the government accepted as such by the government (including any government debt).

II. Quantitative Performance Criteria

A. Cumulative Change in Net Domestic Financing to the Government

Definition

3. Under the 2003-04 program, net domestic financing of the government is defined as the sum of (i) net bank credit to the government, including both the net bank credit to the treasury as defined below, and other government claims and debts vis—vis national banking institutions; and (ii) the unredeemed stock of government bills and bonds held outside national commercial banks.

4. Net bank credit to the treasury is defined as the balance of the treasury's claims and debts vis—vis national banking institutions. Treasury claims include the cash holdings of the Burkinabè Treasury, deposits with the central bank, deposits with the commercial banks, secured obligations, and government deposits with the postal system (CCP). Treasury debt to the banking system includes funding from the central bank (including statutory advances, consolidated advances, IMF financing, and refinancing of secured obligations), government securities held by the central bank, funding from commercial banks (including government securities held by commercial banks), and CNE (Caisse Nationale d'Épargne Postale)/CCP securitized deposits.

5. Net bank credit to the government is calculated by the Central Bank of West African States (BCEAO), whose figures are deemed valid within the context of the program. The stock of treasury bills and other government debt is calculated by the Ministry of Finance.

6. As of December 31, 2002, net domestic financing of the government was CFAF ­23.8 billion, made up of CFAF ­43.8 billion in net bank credit to the government and CFAF 20 billion in unredeemed stock of government bills and bonds.

Quantitative performance criterion/indicative targets

7. The ceiling on the cumulative change (from January 1, 2003 onward) in net domestic financing of the government is set at CFAF 42.2 billion at June 30, 2003 and CFAF 33.8 billion at September 30, 2003. These ceilings represent an indicative target at end-June 2003 and a performance criterion at end-September 2003. The ceiling is projected at CFAF 23.4 billion at December 30, 2003 and CFAF 23.8 billion at March 31, 2004 (from January 1, 2004 onward). These figures will be re-examined and set as an indicative target at end-December 2003 and as a performance criterion at end-March 2004, when the first program review takes place.

Adjustment

8. The ceilings on the cumulative change in net domestic financing to the government will be subject to adjustment when program forecasts differ from actual disbursements of external budgetary assistance, excluding external debt relief (whether in the context of traditional mechanisms or under the Heavily Indebted Poor Countries (HIPC) Initiative). When disbursements exceed forecasts, the ceilings will be adjusted downward by the amount of excess disbursements. In contrast, when disbursements fall short of forecasts, the ceilings will be adjusted upward by the amount of the shortfall. However, upward adjustments of ceilings are limited to a maximum of CFAF 10 billion at end-June 2003, a maximum of CFAF 30 billion at end-September 2003, and a maximum of CFAF 60 billion at end-December 2003.

Reporting deadlines

9. Data on net bank credit to the government will be forwarded monthly to the IMF by BCEAO staff, and those on the stock of government bills and other government debt by the Ministry of Finance within six weeks following the end of each month.

B. Nonaccumulation of Domestic Payments Arrears

Definition

10. The government undertakes not to accumulate any new domestic payments arrears on government obligations. The treasury keeps records of domestic payments arrears on government obligations and records pertinent repayments.

Performance criterion

11. The government will not accumulate any domestic payments arrears on government obligations in 2003 and 2004. Said nonaccumulation of domestic payments arrears is a performance criterion, to be observed continuously.

Reporting deadlines

12. Data on outstanding balances, accumulation, and repayment of domestic arrears on government obligations will be reported monthly within four weeks following the end of each month.

C. Nonaccumulation of External Payments Arrears

Performance criterion

13. The government's external debt is the stock of debt owed or guaranteed by the government. External payments arrears are external payments due but unpaid on the due date. Under the program, the government undertakes not to accumulate external payment arrears on its debt, with the exception of external payments arrears arising from government debt being renegotiated with external creditors, including non-Paris Club member bilateral creditors and multilateral creditors participating under the enhanced HIPC Initiative. Nonaccumulation of external payments arrears is a performance criterion, to be observed continuously.

Reporting deadlines

14. Data on outstanding balances, accumulation, and repayment of external payment arrears will be forwarded monthly within four weeks following the end of each month.

D. Nonconcessional External Debt Contracted or Guaranteed by the
Government of Burkina Faso

Performance criterion

15. The government undertakes not to contract or guarantee any external debt maturing in one year or more with a grant element of less than 35 percent (calculated using the interest reference rate for borrowed foreign currencies provided by the IMF). This performance criterion applies not only to debt as defined in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted by the IMF's Executive Board on August 24, 2000,² but also to all commitments contracted or guaranteed for which value has not been received. However, this performance criterion does not apply to treasury bills and bonds issued in CFA francs on the WAEMU regional market. This commitment is a performance criterion, to be observed continuously.

Reporting deadlines

16. Details on any government loan (terms of the loan and creditors) must be reported monthly within four weeks of the end of each month. The same requirement applies to guarantees extended by the government.

E. Government Short-Term External Debt

17. The government undertakes not to accumulate or guarantee any new external debt with a contractual maturity of less than one year. This performance criterion applies not only to debt as defined in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted by the IMF's Executive Board on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. Excluded from this performance criterion are import- and export-related loans and treasury bills and bonds issued in CFA francs on the WAEMU regional market. This obligation is a performance criterion to be observed continuously. As of December 31, 2002, the government of Burkina Faso had no short-term external debt.

III. Other Quantitative Indicative Targets

18. The program also includes indicative targets on the basic balance of the government budget, total government revenue, current expenditure, the government's wage bill, and expenditure committed but not authorized.

Definitions

19. The basic balance of government financial operations is defined as the difference between total government revenue (excluding grants and the proceeds of privatization) and total government expenditure, excluding foreign-financed investment. It is valued according to the statement of government budgetary execution, which is established monthly in the central government's financial operations table prepared by the Permanent Secretariat for the Monitoring of Financial Policies and Programs (SP-PPF), in collaboration with the other directorates of the Ministry of Finance and Budget.

20. Total government revenue is valued on a cash basis. It includes all tax and nontax revenue collected by the Directorate General of Taxation, the Directorate General of Customs, the Burkinabè Treasury and the revenue collection units at ministries and institutions, and it includes revenue from treasury checks.

21. Expenditure is valued on a commitment basis, including expenditure financed from HIPC Initiative funds. It includes current expenditure and capital expenditure financed by the Treasury.

22. Current expenditure is defined as the difference between total expenditure (including expenditure financed from HIPC Initiative resources) and capital expenditure and net loans. It is made up of payroll, expenditure on goods and services, interest on the debt (domestic and foreign), transfers, subsidies, and other current expenditure.

23. The wage bill is defined as the entire government payroll (on a commitment basis), including wages and benefits for all permanent and temporary civilian and military personnel, and the wage bill paid out of HIPC Initiative funds.

24. Expenditure committed for which a payment orders have not been issued (DENMs) is defined as all expenditure proposed for commitment that has been certified by the financial comptroller (including HIPC Initiative expenditure) but for which the payment authorization (mandat) has not been issued and forwarded to the treasury. Its stock is valued according to the statement of government budgetary execution, which is established monthly in the central government's financial operations table prepared by the SP-PPF, in collaboration with the other directorates of the Ministry of Finance and Budget.

25. At end-December 2002, the basic deficit was valued at CFAF 83.4 billion, made up of CFAF 259.4 billion in revenue and CFAF 342.9 billion in expenditure, excluding foreign-financed investments. Total revenue was made up of the following:

• total revenue (customs, Directorate General of Taxation): CFAF 240.9 billion; and
  
  
• nontax revenue, including capital revenue: CFAF 18.5 billion.

Expenditure, excluding foreign-financed investment, was made up of the following:

Expenditure Category	Amount (In billions of CFA francs)
Current Expenditure	258.9
Payroll	103.0
Goods and services	62.5
Interest on debt (domestic and foreign)	16.8
Transfers and subsidies	71.6
Other	5.1
Capital expenditure financed by treasury	86.7
Capital expenditure financed from HIPC funds	17.2

26. The stock of DENMs was valued at CFAF 40.8 billion at end-December 2002.

Other quantitative indicative targets

27. The ceiling for the cumulative basic deficit (from January 1, 2003 onward) of government financial operations is established at CFAF 52.2 billion at June 30, 2003 and at CFAF 70 billion at September 30, 2003. These ceilings are end-June 2003 and end-September 2003 indicatives targets. The ceiling is projected at CFAF 106 billion at December 30, 2003 and at CFAF 25.9 billion at March 31, 2004 (from January 1, 2004 onward). These figures will be reexamined during the first program review.

28. The floor for total government revenue (cumulative from January 1, 2003 onward) is set at CFAF 136.3 billion at June 30, 2003 and at CFAF 209.2 billion at September 30, 2003. These floors are end-June 2003 and end-September 2003 indicatives targets. The floor is projected at CFAF 291.7 billion at December 30, 2003 and CFAF 69 billion at March 31, 2004 (cumulative from January 1, 2004 onward). These figures will be reexamined and established as indicative targets when the first program review takes place.

29. The respective ceilings for current expenditure and the wage bill (cumulative from January 1, 2003 onward) are established at CFAF 140.3 billion and CFAF 55.3 billion at June 30, 2003, and at CFAF 205.4 billion and CFAF 84.1 billion at September 30, 2003. These ceilings are end-June 2003 and end-September 2003 indicatives targets. They are projected, respectively, at CFAF 269.8 billion and CFAF 111.4 billion at December 30, 2003, and at CFAF 69.3 billion and CFAF 28.3 billion at March 31, 2004 (cumulative from January 1, 2004 onward). These figures will be reexamined and established as indicative targets when the first program review takes place.

30. The ceiling for the cumulative increase (from January 1, 2003 onward) in the stock of DENMs is set at CFAF 12 billion at end-June 2003 and CFAF 15 billion at end-September 2003. These ceilings are indicatives targets. The floor for the cumulative reduction of the stock of DENMs is projected at CFAF 15 billion at end-December 2003 and at zero at March 31, 2004 (from January 1, 2004 onward). These figures will be reexamined and established as indicative targets at end-December 2003 and at end-March 2004, when the first program review takes place.

Reporting deadlines

31. Details on the basic balance of the government budget, total revenue, current expenditure, the wage bill, and the DENMs will be sent monthly to IMF staff by the SP-PPF of the Ministry of Finance and Budget within six weeks following the end of each month.

IV. Additional Information for Program-Monitoring Purposes

A. Public Finance

32. The government will report the following to Fund staff:

• a monthly government flow-of-funds table (TOFE) and the 13 customary appendix tables, to be forwarded monthly within six weeks following the end of each month; if the data on actual investment financed by external grants and loans are not available in time, a linear implementation estimate based on the annual projections will be adopted;
  
  
• complete monthly data on domestic budgetary financing (net bank credit to the government and stock of unredeemed treasury bonds and bills), to be provided monthly within six weeks following the end of each month;
  
  
• quarterly data on implementation of the public investment program, including details on financing sources (these data will be sent quarterly within six weeks following the end of each quarter);
  
  
• monthly data on foreign debt stock and service, to be sent within four weeks following the end of each month;
  
  
• monthly data on prices and the taxation of petroleum products, including (i) the price structure prevailing during the month; (ii) the detailed calculation of the price structure, going from the f.o.b.-MED price to the retail price; (iii) the volumes purchased and made available for consumption by the petroleum distributor (SONABHY); and (iv) the breakdown of receipts from the taxation of petroleum products—customs duties, tax on petroleum products (TPP), and value-added tax (VAT)—and of subsidies, to be provided within four weeks following the end of each month; and
  
  
• the status of accounts with the treasury, classified by major category (administrative services, state enterprises, mixed enterprises, public administrative enterprises, international organizations, private depositors, and others), and to be provided monthly within four weeks following the end of each month.

B. Monetary Sector

33. The government will provide monthly the following information within six weeks following the end of each month:

• the consolidated balance sheet of monetary institutions;
  
  
• the monetary survey, within six weeks following the end of each month for provisional data, and ten weeks following the end of each month for final data;
  
  
• borrowing and lending interest rates; and
  
  
• customary banking supervision indicators for bank and nonbank financial institutions, if necessary.

C. Balance of Payments

34. The government will report the following to Fund staff:

• any revision of balance of payments data (including services, private transfers, official transfers, and capital transactions), whenever they occur;
  
  
• foreign trade statistics compiled by the National Statistics Institute, within three months following the end of the month concerned; and
  
  
• preliminary annual balance of payments data, within nine months following the end of the year concerned.

D. Real Sector

35. The government will report the following to Fund staff:

• disaggregated monthly consumer price indices, within two weeks following the end of each month;
  
  
• provisional national accounts, within six months after the end of the year; and
  
  
• any revision of the national accounts.

E. Structural Reforms and Other Data

36. The government will report the following information:

• any study or official report on Burkina Faso's economy, within two weeks following its publication; and
  
  
• any decision, order, law, decree, ordinance, or circular with economic or financial implications, upon its publication or, at the latest, when it enters into force.

F. HIPC Initiative

37. The government will report monthly, within three weeks following the end of each month, monthly data on resources, uses, and balances in the special account established at the BCEAO for the use of resources generated by a reduced debt burden under the HIPC Initiative.

G. Summary of Data Requirements

Type of Data	Tables	Frequency	Reporting Deadline
Real sector	Provisional national accounts	Annual	Year's end + six months
	Revisions of national accounts	Variable	End of revision + eight weeks
	Disaggregated consumer price index	Monthly	Month's end + two weeks
Public finance	Net treasury and government position at the BCEAO and details of nonbank financing, including the stock of treasury bills and bonds	Monthly	Month's end + six weeks
	Government flow-of-funds table (TOFE) and the 13 customary appendix tables	Monthly	Month's end + six weeks
	Execution of capital budget	Quarterly	End of quarter +six weeks
	Petroleum product pricing formula, tax receipts on petroleum products, and subsidies paid	Monthly	Month's end + four weeks
	Status of the deposit accounts with the public treasury, classified by major category	Monthly	Month's end + four weeks
Monetary and financial data	Monetary survey	Monthly	Month's end +six weeks
	Consolidated balance sheet of monetary institutions	Monthly	Month's end + six weeks
	Borrowing and lending interest rates	Monthly	Month's end + six weeks
	Banking supervision ratios	Quarterly	End of quarter + eight weeks
Balance of payments	Balance of payments	Annual	End of year + nine months
	Revised balance of payments data	Variable	When revisions occur
External debt	Outstanding external arrears and repayments (if applicable)	Monthly	Month's end + four weeks
	Details of all new external borrowing	Monthly	Month's end + four weeks
HIPC Initiative	Statement of special account at the BCEAO, that receives resources generated by the HIPC Initiative and tracks their use	Monthly	Month's end + three weeks