Ouagadougou,
April 16, 1999

Dear Mr. Camdessus:

1.  On September 15, 1998, the International Monetary Fund approved the third annual arrangement under the Second Enhanced Structural Adjustment Facility (ESAF) for Burkina Faso. In accordance with that arrangement, consultations with Fund staff were held on February 7–20, 1999 in the context of the midterm review of the program.

2.  During the period from July 1998 to January 1999, substantial progress was made in implementing the program for mid-1998 to mid-1999 as described in the memorandum on economic and financial policy for 1998–99 and the policy framework paper (PFP) of August 4, 1998. All the quantitative performance criteria and the structural performance criteria and benchmarks for end-December 1998 were met, except for the adoption by the Council of Ministers of legislation on a tax withholding system for the informal sector, which is being finalized with IMF assistance. The government is therefore requesting a waiver for the non-observance of this criterion. The objectives in terms of government revenue, current budget expenditure, and the current primary surplus for 1998 were achieved. The performance criterion for the change in net bank credit to the government between end-December 1997 and end-December 1998 was met. With regard to structural reforms, major progress was made, as described in detail below, in connection with the privatization program, the computerization of customs offices, the expansion of computerized expenditure-tracking procedures to encompass investment expenditures, the liberalization of the telecommuni cations sector, and the reform of the cotton sector and civil service.

3.  According to provisional data, real GDP grew by 6.2 percent in 1998, compared with 4.8 percent in 1997. The higher growth rate is attributable to a number of factors such as the upturn in production of cereals, which benefited from better rainfall than in 1997; higher cottonseed production and a sustained expansion in the secondary and tertiary sectors associated with the processing of cotton; and a sizable public and private investment program. Cottonseed production continued to expand, reaching 350,000 tons in 1998, on the basis of provisional estimates, compared with 338,000 tons in 1997, and 214,000 tons in 1996. As cottonseed yields were adversely affected by excessive rainfall, particularly in August 1998, the expansion in cottonseed reflected an increase in the areas under cultivation. The growth rate of the primary sector is estimated at 5.5 percent.

4.  The poor cereals harvest in 1997 created pressures on food prices in late 1997 continued during the first three quarters of 1998; prices eased during the fourth quarter of 1998, when the 1998/99 harvest arrived on the market. With continued implementation of prudent financial policies and the exchange rate as an anchor, the inflation rate on a year-on-year basis fell to 1 percent in December 1998. The GDP deflator is estimated to have increased in 1998 by 3.2 percent, owing to, inter alia, the improvement in the terms of trade resulting from the increase in cotton export prices.

5.  Exports in 1998 recorded a sizable increase in value terms (37 percent), as well as in volume terms, on account of the very sharp rise in cotton exports (62 percent in value and 57 percent in volume).1 Provisional data indicate that imports increased by 12 percent in value terms, a rate higher than envisaged in the program. Furthermore, imports of services exceeded the program projections, mainly because of expenditures connected with the Organization of African Unit (OAU) summit and OAU presidency. Workers' remittances remained stable. Thus, the current account deficit, excluding grants, amounted to 12.2 percent of GDP in 1998, compared with 13.9 percent of GDP in 1997 and a program projection of 10.9 percent. Export revenues had not been fully collected by end-1998, as the Asian crisis had caused delays in cotton shipments over the course of the year. Accordingly, commercial credits extended to cotton buyers amounted at end-1998 to CFAF 12 billion, compared with virtually nil at end-1997. The entire amount of export proceeds was collected and repatriated by end-February 1999. The delay in the collection of export revenues accounts for the decline in 1998 in Burkina Faso's contribution to the external reserves of the monetary union. According to provisional data, this decline is estimated at CFAF 8 billion, equivalent to 2 percent of the money supply at the start of the period.

6.  The performance of government finance in 1998 was favorable especially concerning revenue. Total revenue amounted to CFAF 199 billion (13.1 percent of GDP), exceeding the program's objective of 13 percent of GDP. In particular, the collection of taxes on goods and services exceeded the program's targets by 0.4 percent of GDP, attaining 5.4 percent of GDP; valued added tax receipts increased by 18 percent over 1997. Direct tax receipts fell, however, in relation to GDP, mainly as a result of the cash-flow problems facing SOFITEX; the company, on account of delays in collecting export proceeds, was unable to make an advance payment on its profit taxes during the year, as it had in 1997.

7.  On the expenditure side, current expenditure remained in line with program projections. However, an expenditure overrun of 0.4 percent of GDP was recorded with respect to investment outlays funded through the budget; this reflects the additional expenses related to the OAU summit, the elections, and the responsibilities associated with chairing the OAU. Transfer and interest expenditures were lower than envisaged in the program, while expenditures on goods and services and on wages were broadly in line with it. The reduction in domestic arrears was larger than envisaged in the program, as the government settled a number of wage arrears in an effort to bring the administrative position of civil servants up-to-date. All in all, the current primary surplus, at 3.6 percent of GDP, was in line with the program; however, the primary surplus (excluding externally financed investments) amounted to 0.5 percent of GDP, below the program target of 0.8 percent of GDP.

8.  The execution of the externally funded component of the public investment program was close to the program's projections; on the basis of provisional data, public investment was equivalent to 11.8 percent of GDP, compared with 12.6 percent in 1997. The expenditure objectives established under the HIPC Initiative (current and capital expenditure in the education and health sectors in relation to GDP) were in line with the targets for 1998. The other performance targets concerning the education and health sectors were also met. The disbursement of external assistance in support of the adjustment program exceeded program projections by CFAF 6 billion, mainly as a result of the faster-than-anticipated disbursement of the first tranche of the European Union's new adjustment facility.

9.  Credit to the economy grew by 10 percent in 1998, somewhat below program projections; crop credit was repaid more slowly than anticipated in the wake of delays in shipment of cotton exports, and by year's end the new crop credit was still not in place. These delays in the collection of export receipts let to a decline in the net foreign assets of the banking system during 1998. Net credit to government declined by CFAF 6.7 billion (or by 2 percent of the money supply at the start of the period), thereby exceeding the program's objectives. This decline takes into account significant domestic debt amortization to the commercial banks, including repayment of new debts assumed by the government in May 1998, related to payment for public works executed in 1996–97 and initially financed by the banks. Reflecting the decline in the net foreign assets of the banking system, the money supply is provisionally estimated to have risen by only about 2 percent during the year, less than the growth rate of nominal GDP.

10.   In the area of structural reforms, major progress was achieved in the second half of 1998 and early 1999, particularly in implementing the program for restructuring and privatizing public enterprises. The sale of SOSUCO (sugar) and SOPAL (alcoholic beverages) was completed by mid-1998. As envisaged in the program, calls for bids were issued for SNTB (transport), INB (printing), SLM (equipment leasing), and SOCOGIB (construction) prior to December 31, 1998; during the first quarter of 1999, the authorities intensified their efforts to complete the sales of FASOFANI (textiles), SAVANA (fruit juices), and SONACOR (rice husking), as no bidders had come forward at the auctions. Direct negotiations are in progress with possible buyers of these companies. With regard to SHG (hotels), steps are being taken to hire a consulting firm to assist the privatization commission in defining the privatization strategy. The law liberalizing the telecommunications sector was approved on in December 1998. This law provides for selling part of the government's shares in the telecommunications company ONATEL, establishing a regulatory authority, and opening up the telecommunications sector to private investors. The government has also approved a law designed to open up the electricity sector to private investors. With regard to the cotton sector, the government promulgated in June 1998 a decree authorizing the sale of 30 percent of SOFITEX's capital to the cotton producers' association. The interprofessional agreement with producer associations, already finalized in 1998, entered into effect in February 1999; this agreement governs, inter alia, the sharing of crop-year profits between SOFITEX and producers.

11.  The banking system was strengthened in 1998 with the entry into operation of two new private banks: Bank of Africa, and Société Générale des Banques du Burkina (SGBB), with the latter resulting from the privatization of the Banque pour le Financement du Commerce et de l'Industrie (BFCI). Commercial banks in operation in Burkina Faso are now seven in number, compared with six in 1997. Competition among banks has increased, leading to a narrowing of the spreads between borrowing and lending rates; in particular, interest rates on time deposits increased significantly in 1997 and 1998. The central bank, after increasing its intervention rates by 0.25 percentage point on August 31, 1998 to stem pressures on reserves, reduced these rates by 0.5 percentage points in January 1999, to 5.75 percent for the discount rate and 5.25 percent for the repurchase rate. The strength of the banking system has increased steadily; in particular, the capital adequacy ratio for most banks continued to improve during the year, and all banks meet with considerable margins the minimum capital adequacy ratios established by the Central Bank of Western African States, BCEAO.

Program for 1999

13.  As regards the balance of payments, export revenues are projected to drop by 4 percent in 1999, as cotton exports may fall by 9 percent in value terms because of the anticipated decline of export prices from an average of CFAF 870 per kilogram to about CFAF 760 per kilogram in 1999. Imports are expected to increase by about 7 percent in value terms, reflecting the sustained volume of public investment. As a result, the external current account deficit, excluding grants, may reach 13.6 percent of GDP in 1999, as against 12.2 percent of GDP in 1998. In the medium term, the external current account deficit is expected to decrease gradually, as cotton prices are expected to recover and gold production is forecast to increase as a result of more intensive gold-prospecting activity.

14.  Concerning monetary and credit developments in 1999, credit to the economy is projected to rise by 14 percent, while net bank credit to the government is expected to rise by the equivalent of 1 percent of the money supply at the beginning of the period. The money supply is projected to increase by about 9 percent. At the regional level, the BCEAO policy will continue to focus on strengthening the external reserves of the WAEMU, and on keeping the inflation rate in line with inflation in Burkina Faso's partner countries. The targets for end-March and end-June 1999 for net bank credit to the government and the net domestic assets of the banking system are shown in Table 1.

15.   The budget for 1999. The budget approved on November 20, 1998 provides for increasing current expenditure to the equivalent of 11 percent of GDP, up from 10.4 percent of GDP in 1998; capital expenditure funded with domestic resources is expected to decline from 3.1 percent of GDP in 1998 to 2.8 percent of GDP in 1999. In particular, larger allocations were made for upgrading the facilities of health districts, as well as for constructing housing for teachers and medical personnel, and building new classrooms, and health centers. In addition, a new wage and salary scale, as well as new rules to govern promotion were introduced (see infra). On the revenue side, the authorities aim at bringing revenue to the level of CFAF 215 billion, equivalent to 13 percent of GDP, compared with 12.5 percent of GDP originally envisaged in the program. The current primary surplus is expected to reach 3.2 percent of GDP, in line with the original program (versus 3.6 percent in 1998), while the primary surplus (excluding externally financed investments) should reach 0.4 percent of GDP, as against 0.5 percent in the original program and in 1998.

16.  The new wage and salary scales for the civil servants and the contractual personnel, introduced in January 1999, contain a larger number of steps than in the previous one, as well as a broader range of pay levels. For civil servants, the steps are now grouped together into three categories. Promotions between categories and between steps will be awarded on the basis of performance assessment. These measures are designed to enhance staff motivation and performance. The shift of individual positions from the old to the new wage and salary scales was conducted so as to ensure an average pay increase on the order of 5 percent. According to the law that pertains to the legal status of the civil service staff, all civil service positions will be held by agents under contract, except for those involving key policy and sovereignty functions.

17.  On the revenue side, the budget is based on continuing the progress already achieved in the area of revenue collection (particularly as regards the VAT), and on taking additional measures to improve the efficiency of the tax and customs administrations, including through enhanced tax audits (see below).

18.  The government will continue to pursue the implementation of the WAEMU common external tariff (CET), which began on July 1, 1998, with the reduction of the maximum import duty to 25 percent (i.e., a reduction of 6 percentage points), as well as the abolition of the 2 percent special intervention tax. In the course of the first semester of 1999, the government will introduce the new common tariff categorization for imported products adopted by the Council of Ministers of the WAEMU. With regard to the additional temporary protection measures in preparation at the WAEMU level-the compensatory import levy (taxe conjonctionnelle à l'importation, TCI) and the temporary protection surtax (taxe dégressive de protection, TDP)-the authorities will ensure that such measures are kept within reasonable limits so as not to interfere with the trade liberalization effort.

19.  On the financial side, program assistance is expected to reach CFAF 33 billion, so as to cover the financing gap. This amount comprises CFAF 23 billion from multilateral organizations (World Bank, European Union) and CFAF 10 billion from bilateral donors. Net credit to the government is expected to increase by CFAF 4 billion.

20.  Regarding budget execution, the government will focus on strengthening coordination between the Ministry of Finance and the ministries responsible for the social sectors, ensuring that priority expenditures in these sectors are committed expeditiously, and achieving the targets for improving key social indicators. A revolving public expenditure program encompassing health and education will be finalized in cooperation with the World Bank and other donors during the second quarter of 1999; the results of this work will lead to a new three-year program that will be incorporated in the budget for the year 2000.

21.  The government is determined to pursue the ongoing efforts within the tax and customs administrations to harmonize and strengthen the procedures concerning revenue collection. They will focus in particular on rehabilitating in 1999 the computerized taxpayers data base at the Directorate General of Taxes (DGI). Furthermore, the entire DGI' computer system is being restructured, with a view to putting in place an efficient database that will make it possible, inter alia, to monitor tax collection activities, outstanding tax claims, and enforcement proceedings for taxpayers in default. The existing software applications will be rehabilitated by end-March 1999. A new, improved system will be developed during the year 1999 that will be fully Y2K compatible.

22.  With respect to the investment code, the government supports the principles underlying the reform that is prepared within the WAEMU, to eliminate all exemptions in respect of indirect taxes, particularly VAT and customs duties, for businesses registered under the code. The government intends to introduce the provisions of the new code into national law as soon as it is approved by the WAEMU Council of Ministers.

23.  A new mechanism was set up in 1998 in connection with the treasury check procedure for externally funded projects that introduced a special department (régie d'avance) to handle the issuance and processing of treasury checks. In order to evaluate the efficiency of this mechanism, the government will conduct, before end-April 1999, an assessment of its implementation, with a view to improving it further.

24.  To enhance the informal sector's contribution to the tax effort, the authorities have decided to introduce a withholding system at the level of customs and of wholesale purchases. This measure is being examined by Fund experts and is expected to come into force at end-1999. The government will be increasing the threshold of taxation for the simplified taxation regimes, in accordance with WAEMU guidelines, thereby making it possible to strengthen the monitoring of major taxpayers.

25.   Restructuring the cotton sector. In 1998, the government decided to sell 30 percent of SOFITEX's capital to producers. To this end, the value of SOFITEX's share will be assessed so as to complete by end-June 1999 the divestiture of the capital. By the same date, the government will also take the steps necessary to implement the decision to open up the new cotton-growing regions to private sector operators, subject to specific terms and conditions.

26.   Restructuring of public enterprises. To facilitate the sale of the shares of the state-owned telephone company, ONATEL, the government will introduce by July 1, 1999 a new regulatory framework to govern the entire telecommunications system, including pricing. In addition, by end-June 1999, it will select a technical partner to complete the evaluation of ONATEL and define the strategy of privatization, with a view to bringing the shares to sale by end-November 1999.

27.   Debt management. The government is aware of the need to update speedily at the end of each year the data on the outstanding external debt and on annual disbursements. To this end, the data on the stock of debt at end-1997 were reconciled with the creditors' during 1998; the reconciliation of the data for 1998 is currently under way. Steps were taken to complete the renegotiation of the debt on concessional terms with a number of bilateral donors and lenders. The minutes of the negotiation with Libya have been initialed, and the rescheduling agreement will be concluded within a few months during the next bilateral consultations. An agreement with Russia is being finalized, in accordance with agreements concluded under the aegis of the Paris Club; rescheduling proposals are being discussed with Côto d'Ivoire. Saudi Arabia and Kuwait have indicated their willingness to make concessional reschedulings on terms comparable to those of the Paris Club.

28.   Statistical data. The government is determined to improve the quality and timeliness of production of the national accounts and other economic statistics. The national accounts for the years 1994–97 will be established during 1999. The index of industrial production will be reviewed in 1999, in the framework of a harmonized program of action within the WAEMU. This new index will take into account the results of the latest industrial and commercial census realized in March 1998. With respect to international trade, the most recent version of the Customs Computer System SYDONIA (2.7) has been introduced, which is Y2K compatible.

29.  The government believes that the reforms and measures described in this document, which supplements the document of August 4, 1998, will make it possible to attain the 1998–99 program objectives. The government stands ready to adopt further measures should these become necessary to attain these objectives.