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• IMF Country Focus

IMF Survey: Côte d'Ivoire Poised for Comeback

July 30, 2008

• Côte d'Ivoire's economy recovers after years of socioeconomic crisis
• IMF assistance has been key to improving governance and pro-poor spending
• Fair elections and strengthening state institutions remain key challenges

Côte d'Ivoire is set for a comeback: GDP growth should double to 3 percent in 2008 and return to a 5-6 percent path in a few years.

Dock workers load cocoa beans, the country's main commodity, in the port of San Pédro in Côte d'Ivoire. (photo: Issouf Sanogo/AFP/Getty Images)

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FRAGILE STATES

Private sector confidence is returning as the country emerges from years of political instability that culminated in civil war in late 2002.

The seeds of the conflict had been planted by two decades of flawed economic management, immigration tensions and struggles over land, and a difficult transition to democracy. If Côte d'Ivoire succeeds in overcoming the conflict's damage, it could become once again a driving force of the region.

A star that lost its shine

For 20 years after independence in 1960, Côte d'Ivoire was an economic miracle. With growth rates of 7 percent per year anchored in a dominant position as a cocoa, coffee, and cotton producer, it was widely expected to be the first sub-Saharan African country to emerge as developed. Sudden losses in terms of trade combined with overly ambitious public investment and external borrowing abruptly collapsed this dream in the mid-1980s.

Efforts to put the economy back on its feet were considered too little, too late, until the CFA franc devaluation in January 1994. By then, just after the death of President Houphouet-Boigny, the country was struggling with the transition from autocracy to democracy, one element of which was that one-quarter of the population was of recent immigrant origin. Tensions over land ownership were exacerbated by high unemployment and gave rise to the concept of Ivoirité—a set of beliefs about who is a true Ivoirien and who is not. Its exploitation for political aims made ethnicity a new factor in Ivoirien politics.

The civil war broke out in September 2002 and, after a few months of fighting, the country split into two: the north was held by the rebel Forces Nouvelles and the south by the government headed by President Gbagbo. Despite intermediation by the international community, the next four years saw little progress toward reunification. A turning point came in March 2007 with the Ouagadougou Accord, which established a transition government and set a roadmap for disarmament, redeployment of public administration in the north, identification of the population, and elections in 2008 (see Box 1).

A lost decade

The years of conflict and instability exacted a high toll: almost a million persons were displaced, several millions were pushed into poverty, and social indicators plunged. Infrastructure, once well above regional standards, declined, especially in the north.

Between 2000 and 2007, per capita GDP fell sharply, although the economy showed some resilience, thanks to favorable cocoa and other commodity prices and a sharp increase in oil production from 2004 (see chart). Membership in the West African Economic and Monetary Union kept inflation low. However, Côte d'Ivoire was no longer the locomotive of the region, as trade and remittances were disrupted and investor confidence suffered. The port of Abidjan lost its preeminence as a regional hub.

With government revenue falling, donor funds drying up, and scarce fiscal resources being directed to the military, government investment and social spending fell, and domestic and external arrears mounted. Capital fled the country and private investment dropped.

Governance deteriorated and corruption flourished, as individuals took advantage of lawlessness and a dysfunctional judiciary. Military roadblocks and racketeering extorted payments from the population.

Reversing the downward spiral

The transition government that took office in April 2007 set out to restart the engine of growth and reverse the downward spiral of conflict and poverty. Among its first actions was to reengage with the international financial institutions and obtain assistance for its crisis-exit strategy. As the dialogue with the IMF had continued throughout the crisis (see Box 2), an economic program was quickly agreed on. It focused on four post-conflict priorities:

• restoring the role of the budget at the center of economic policies;

• substantially raising pro-poor and other crisis-exit spending;

• relaunching the pre-conflict reforms, with initial focus on transparency in public resource management; and

• rebuilding the business environment.

In support of this program, the IMF provided $128.4 million in Emergency Post-Conflict Assistance (EPCA) in two equal disbursements in August 2007 and April 2008.

Since the program's May 2007 launch, implementation has been generally on track. A modest primary basic surplus (defined as revenue minus total expenditure, excluding interest and foreign-financed investment) of ½ percent of GDP was achieved in 2007, and the 2008 budget aims for the same objective. However, the share of pro-poor and crisis-exit spending has remained below target, largely because of high sovereignty spending (by the presidency and the prime minister's office) and difficulties in reaching a consensus on reducing the military wage bill.

The authorities resumed debt service payments to the African Development Bank (AfDB) and the World Bank in mid-2007 and cleared, with the help of a World Bank grant, all arrears to the latter. They expect to clear AfDB arrears in July. Donors have pledged substantial assistance for crisis-exit programs, but disbursements have so far lagged.

Structural reforms have also progressed. The government adopted the 2008 budget on time and started publishing detailed budget execution statements. Electricity tariffs, unchanged since 2001, were raised and audits of the extractive, refining, and electricity sectors were launched. Preparation of a Poverty Reduction Strategy Paper resumed, for completion by September 2008. Repayment of domestic arrears, equivalent to 1½ percent of GDP in 2007, helped boost private sector confidence, as did progress in unifying the country, reopening trade routes, and redeploying public administration.

With progress on a broad policy front, the economy grew by 1½ percent in 2007; with domestic and foreign investment picking up, growth should double in 2008.

Restoring Côte d'Ivoire's luster

Unlike many other post-conflict countries, Côte d'Ivoire did not suffer wholesale destruction of its capital stock or of its policy and administrative capacity. In addition, reconstruction is taking place in a favorable environment of high energy and commodity prices. These factors raise hopes that speedy progress can be made toward erasing the damage of the crisis years and quickly achieving a peace dividend.

But key to attaining that goal will be free and fair elections, full reunification, and the strengthening of state institutions. The authorities must also step up efforts to mobilize resources—notably to strengthen and unify tax administration and collect adequate revenue from the petroleum and cocoa sectors, particularly in the former rebel zone. They should also direct a greater share of spending toward basic social needs and infrastructure rehabilitation, as well as fight corruption and improve the judicial system. Finally, deeper structural reforms are imperative to ensure more efficient public resource management.

If the EPCA program is successful, it could become a bridge toward a three-year program under the Poverty Reduction and Growth Facility. Such a program would also pave the way for Côte d'Ivoire's renewed participation in the Heavily Indebted Poor Countries Initiative and help restore its role as the economic motor of the region.

Lessons learned

What lessons can be drawn from Côte d'Ivoire's efforts to emerge from conflict?

• Early and continuous dialogue among the authorities and stakeholders, including the IMF, is critical. Such a dialogue helps foster a domestic consensus on sound economic policies and build relations with donors while the peace process is still evolving. This dialogue must include political parties and civil society.

• Good governance practices should be given high priority. To ensure the effective use of public resources for reconstruction and to regain donor and private sector confidence, an early emphasis on reinstating these practices is essential. Publication of relevant information, such as budgets and their outcomes, is key for restoring transparency and accountability.

• Capacity building should be resumed as early as possible. Even though technical capacity remained intact during the crisis, Côte d'Ivoire had not kept abreast of evolving best practices. Resuming technical assistance has thus been important to start returning to international standards and addressing corruption in public sector activities.

• Early, sustained, and concerted international support is key. EPCA aims to provide financial assistance to a post-conflict country—even before full political stability has been restored, as long as a transition government has sufficient legitimacy. Early IMF engagement can play a catalytic role by providing assurances to donors that policy planning and implementation and public financial management are improving.

Comments on this article should be sent to imfsurvey@imf.org