Ouagadougou, June 6, 2001

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1.  On behalf of the government of Burkina Faso and in the context of the third review of the program supported by an arrangement under the Poverty Reduction and Growth Facility (PRGF) approved by the Executive Board of the International Monetary Fund on September 10, 1999, I am pleased to send you the memorandum on economic and financial policies for 2001. The memorandum describes progress made in implementing the program at end-2000 and in the first quarter of 2001, updated targets for 2001, and the policies to be carried out to achieve these targets.

2.  The 2000 program was implemented in a difficult environment of drought that led to a decline in cotton and grain production, a sharp increase in petroleum product prices, a decline in workers' remittances, and the return of a large number of Burkinabè nationals living in neighboring countries. As a result, real GDP grew only by 2.2 percent, compared with an estimated increase of roughly 4 percent. The ensuing lower level of tax receipts, together with the government's determination to reduce the stock of unpaid expenditure commitments, caused the end-December 2000 quantitative performance criterion on net bank credit to the government to be missed. Hence, the government requests a waiver for nonobservance with this performance criterion at end-December 2000. Regarding the end-December 2000 quantitative benchmarks, the primary expenditure level indicator was observed, but wage and current expenditure levels were slightly exceeded. In contrast, all the structural performance criteria and benchmarks for end-December 2000 and end-March 2001 were met, as described in the memorandum.

3.  A special effort was made to achieve the end-March 2001 fiscal targets. Despite a marginally lower level of revenue than forecast, quantitative benchmarks for wages and current expenditure were met. However, the quantitative benchmark on net bank credit to the government was slightly exceeded because of delays in mobilizing the programmed budgetary assistance.

4.  Nevertheless, the government is committed to implementing the 2001 budget in line with the program, and it remains resolved to carry out the reforms and measures contained in the program. It considers that the policies and measures described in the memorandum are appropriate to achieve its program objectives, but is ready to take further measures that may prove necessary for this purpose.

5.  As described in the memorandum, debt-service relief obtained after the completion point was reached under the original Heavily Indebted Poor Countries (HIPC) Initiative, as well as the interim financing obtained under the enhanced HIPC Initiative, has been allocated to priority poverty reduction programs contained in the poverty reduction strategy paper (PRSP). These resources and the stepped-up efforts on the part of the government with respect to poverty reduction made it possible to meet all enhanced HIPC Initiative floating completion point conditionality by end-March 2001, as scheduled. With the active participation of civil society, the government has begun working on a progress report on the first year of implementation of its PRSP, to be completed by mid-2001.

6.  The government solicits the continued support of the International Monetary Fund to help it meet its program objectives, including through the conclusion of the third review under the PRGF. Also, the Fund will, together with the government of Burkina Faso, complete a fourth review of the PRGF-supported program at the latest by December 31, 2001, so as to monitor progress made in its implementation. As was the case in the past, the government consents to the Fund's publication of the staff report.

Sincerely yours,

/s/ Jean-Baptiste Compaoré Deputy Minister to the Prime Minister, in charge of Finances and the Budget Ministry of Economy and Finance Ouagadougou, Burkina Faso

Attachments: Memorandum on economic and financial policies for 2001 and technical memorandum of understanding

BURKINA FASO

Memorandum on Economic and Financial
Policies for 2001

June 6, 2001

I.  Implementation of the Program in 2000 and in the First Quarter of 2001

7.  In 2000, Burkina Faso's economy was buffeted by exogenous shocks and a poor cereals harvest, which lowered real growth and exacerbated poverty. Nonetheless, Burkina Faso resolutely pursued its program for 2000, supported by the Poverty Reduction and Growth Facility, as described in the memorandum on economic and financial policies of December 11, 2000. The government also launched its poverty reduction program, as contained in the poverty reduction strategy paper (PRSP); through the Supplementary Budget Law for 2000, it allocated to priority programs the savings on debt service obtained when Burkina Faso reached the completion point under the original Heavily Indebted Poor Countries (HIPC) Initiative and the interim financing received under the enhanced HIPC Initiative.

8.  As a result of a slight decline in revenue, combined with the government's determination to reduce the stock of unpaid expenditure commitments, the quantitative performance criterion on net bank credit to the government at end-December 2000 was missed, and the government requests a waiver for nonobservance of this performance criterion. The primary expenditure level indicator was observed, but the indicators on the levels of revenue, wages, and current expenditure slightly exceeded the quantitative benchmarks. Considerable progress was achieved on the structural side, and all structural performance criteria and benchmarks at end-December 2000 and at end-March 2001 were observed. These involve: (i) the structural benchmark on the recruitment of an investment bank to handle the tendering process for the privatization of the telecommunications company (ONATEL), originally scheduled for end-May 2000; (ii) the benchmark on the adoption by the Council of Ministers of the letter of development policy for the energy sector, which includes the regulatory framework for the electricity sector and the privatization plan for the electricity company (SONABEL); (iii) the performance criterion on the reform of taxation of petroleum products in line with West African Economic and Monetary Union (WAEMU) norms; (iv) the performance criterion on the adoption by end-March 2001 of an automatic domestic price-setting mechanism for petroleum products reflecting movements in international prices; and (v) the performance criterion on the government's adoption by end-March 2001 of the audited budget acts for the 1995-98 period.

9.   The combined impact of the drought—which led to a sharp drop in agricultural production (particularly cottonseed and cereals)—a sharp increase in petroleum product prices, a decline in workers' remittances, and the return of a large number of Burkinabè nationals living in neighboring countries caused real GDP to grow by only 2.2 percent in 2000, compared with an estimated increase of roughly 4 percent. Reflecting the weakness in demand and the abundance of food supplies in the year following a strong cereals harvest, the average consumer price index declined slightly in 2000. However, the poor 2000 harvest drove up prices somewhat in the first quarter of 2001—by 6.7 percent—on a year-on-year basis at end-March 2001. According to preliminary data, the contraction in cotton exports and in workers' remittances, together with higher petroleum product prices and the continued high level of imports of foreign-financed capital goods, led to a deterioration of the external current account deficit (including current grants) to 14.4 percent of GDP in 2000, compared with the program projection of a deficit of about 10 percent of GDP.

10.  Tax receipts totaled CFAF 203 billion (12.8 percent of GDP) in 2000, or CFAF 6.2 billion (0.4 percent of GDP) below the program target. This shortfall is primarily attributable to a decrease in income and profit tax receipts, as well as in customs duties, because of the slowdown in growth and the worse-than-anticipated impact of implementing the WAEMU's common external tariff (CET). Primary expenditure was contained below the program target; current expenditure, however, was slightly above target, reflecting a slight overrun of wages and salaries and foreign interest costs above programmed levels, the latter attributable to exchange rate fluctuations. Capital expenditure was above target, owing to increased mobilization of project loans. The basic balance¹ was in deficit by CFAF 33 billion in 2000 (2.1 percent of GDP), as targeted. The overall fiscal deficit (on a commitment basis, including grants) was 4.2 percent of GDP, below the targeted 5.6 percent of GDP. However, the end-December 2000 performance criterion on net bank credit to the government was missed on account of a larger-than-programmed reduction in the stock of unpaid expenditure commitments.

11.  Despite a difficult cash-flow position, the portion of budgetary expenditure allocated to the social sectors continued to rise. Such expenditure made up roughly 20 percent of the total, or 5.6 percent of GDP. Furthermore, CFAF 7.2 billion (0.5 percent of GDP) was mobilized in 2000 in debt-service relief under the HIPC Initiative and allocated to the priority poverty reduction programs outlined in the PRSP. Approximately 35 percent went to the health sector, 40 percent to education, and the balance for building and rehabilitating rural roads. In all, including HIPC Initiative assistance, 22.5 percent of government expenditure, equivalent to 6.1 percent of GDP, was allocated to the social sectors.

12.  At end-March 2001, budget execution was generally within the program parameters. Tax receipts remained slightly below forecast. Current expenditure, including wages, remained below the program limits, resulting in a basic fiscal deficit of 1.2 percent of GDP, less than half of the program target. Also, the overall deficit was significantly smaller than projected. However, based on preliminary data, the end-March quantitative benchmark on net recourse to bank credit by the government was somewhat exceeded because of delays in mobilizing programmed external budget support.

13.  The money supply grew by 4.6 percent in 2000, which was slightly higher than projected. The expansion of credit to the economy remained strong, primarily because of the delay in the reimbursement of crop credits. Net credit to the government was also above target, as mentioned earlier, while the net foreign assets of the Central Bank of West African States (BCEAO) fell by CFAF 37.1 billion during the year.

14.  The banking sector in Burkina Faso continues to evolve, with heightened competition among financial institutions leading to a contraction of intermediation spreads. The level of doubtful and disputed claims remained low at 2.7 percent of total credit to the economy at end-December 2000, down from 3.2 percent at end-June 2000. However, the two main local banks are experiencing some difficulties. The first is beset social tensions, while the other has some unresolved management issues. With the exception of the latter bank, whose prudential ratios deteriorated after the additional provisions requested by the regional banking commission were constituted, other banking and financial institutions have on the whole continued to observe the main West African Monetary Union (WAMU) prudential ratios. Institutions that have yet to comply are taking the necessary steps to observe the 8 percent capital risk ratio by January 1, 2002. The microfinance systems (the network of credit unions and other local networks) continued to develop, with the creation of 35 new microfinance organizations in 2000.

II.  Program Implementation Policy in 2001

15.  Following a mixed performance attributable to exogenous shocks in 2000, the government is firmly committed to rigorously implementing its economic program for the remainder of 2001. According to available data, the expected recovery in growth should materialize. The 2000/01 cotton crop yielded an increase of about 8 percent in cottonseed volume, and prices rose. A rebound in cereals production is expected after a large deficit in 2000. In all, agricultural production could grow by about 10 percent, which would have a positive leverage effect on the secondary and tertiary sectors. Real GDP growth could thus reach 6.3 percent. Regarding sources of GDP, a small decline in consumption is expected, combined with a modest increase in public investment because of the use of HIPC funds and a slight contraction, compared with 2000, in private investment. However, private investment is expected to rebound in the medium term. With gross domestic savings remaining constant, the investment-savings gap is expected to improve to 13.2 percent of GDP in 2001, compared with 14.4 percent in 2000. Sharply higher food prices in the first quarter should generate a slightly higher inflation rate than in 2000, although the rate is still not expected to surpass an annual average of 2 percent in 2001.

16.  However, to be prudent and to gain a better grasp of the vulnerability of the Burkinabè economy to exogenous shocks, the government has prepared a low-growth scenario for 2001 and the medium term, in the event of unfavorable developments. The less optimistic elements in this scenario are (i) a lackluster recovery in cotton harvests after the 2001/02 season; (ii) the continuation of minimal cereals production; (iii) fewer external resources mobilized for project assistance; and (iv) the continuing low repatriation of workers' remittances. With these assumptions, real GDP growth should be roughly 4.6 percent in 2001 and, on average, 4.4 percent for the period 2002-04. Given the decline in revenue, consumption as a share of GDP is expected to remain stable, leading to a contraction in private investment and to an increase in the investment-savings gap. Starting in 2002, lower cotton exports will result in a deterioration of the external current account. The fiscal impact consists of a worsening of budgetary balances and the appearance of large financing gaps (over CFAF 30 billion per year in the period 2002-04) that will have to be covered by expenditure cutbacks, given the absence of financing.

17.  As projected in the program, the balance of payments in the baseline scenario should be marked by a rebound in export receipts in 2001, mainly because of the strong results already observed in the cotton sector. On account of the assumption of continued lower petroleum prices, import growth should be moderate. The current account deficit, excluding grants, should, therefore, narrow to 16.8 percent of GDP in 2001 (13.2 percent, including grants), compared with 17.9 percent in 2000. Despite the expected continued low level of workers' remittances, significant external budgetary support will result in an increase in gross official reserves estimated at CFAF 11.3 billion. In the medium term, the external current account deficit should narrow, mainly owing to an expected rise in cotton production and exports and the anticipated upturn in cotton prices.

18.   The 2001 budgetary objective is to consolidate past achievements through increasing tax receipts and containing spending in order to start reducing indebtedness to the banking system. To that end, the cornerstone of the budget policy is to achieve program targets, particularly (including HIPC Initiative resources and their use totaling CFAF 22.3 billion, or 1.3 percent of GDP) a basic fiscal deficit of roughly CFAF 46 billion (2.7 percent of GDP), an overall fiscal deficit (on a commitment basis, including grants) of 5 percent of GDP, and a slight decline in indebtedness to the banking system. Therefore, the performance criterion on the change in net bank credit to the government for June 2001, the end-September benchmark, and the end-December 2001 projection remain unchanged in the program (Table 1). The government will take all necessary measures to attain these targets; if necessary, it will implement revenue measures and curtail spending during the year, particularly if cash-flow pressures worsen.

19.  Strengthened by tax administration measures and the new taxation of petroleum products, in line with the WAEMU guidelines adopted under the 2001 Budget Law, tax receipts are expected to total roughly CFAF 249 billion, or 14.5 percent of GDP. However, to ensure that the projected tax revenue is achieved, the government has decided to immediately begin implementing certain measures centered on improving tax administration:

• a comprehensive fiscal census launched in February 2001, which is already beginning to yield results;

• a full computerization of the large taxpayers' unit, enabling it to better track tax returns and payments, increase ex officio assessments and tax audits, and improve the control of tax exemptions; and

• specific actions to limit tax exemptions and better identify them through the system of issuance of treasury checks.

Furthermore, if tax receipts during the year turn out to be below projections and the assumption of lower petroleum products prices is confirmed, the government undertakes to increase the excise tax on petroleum products (TPP) for premium and regular gasoline and to apply the TPP to diesel, which has been exempt so far.

20.  Current expenditure is projected at CFAF 232 billion (13.5 percent of GDP) in 2001. This represents an increase of CFAF 12 billion (0.7 percent of GDP) over the initial target on account of the new taxation mechanism for petroleum products, which explicitly budgets subsidies for "sensitive" products (given their social nature or their relation to the fight against desertification). The wage bill is projected at CFAF 92 billion, as in the original program. The redeployment of civil servants in the new salary grid is complete, and interconnections between the payroll and the civil service personnel databases will take effect in June 2001, as planned. Current transfers include a provision of CFAF 6.7 billion for value-added tax (VAT) refunds owed to the cotton company (SOFITEX) for previous years and for fiscal year 2001.² Capital expenditure is expected to be markedly higher than in 2000 because of an increase in domestically financed capital expenditure, the expected major mobilization of project grants and loans, and HIPC Initiative resources. Furthermore, on a commitment basis, the share of the government budget (excluding external financing and HIPC Initiative resources) allocated to the health and education sectors will slightly exceed program targets rising to 13.2 percent and 16 percent, respectively (Table 2).

21.  Regarding public expenditure management, the government has continued the work undertaken with the assistance of the World Bank and other donors, notably by completing studies on the use of public resources in the education and health sectors, on the decentralization of the budgetary system, and on institutional problems linked to the implementation of the public investment program. Also, a Country Procurement Assessment Report was completed by the World Bank in November 2000, and its main recommendations have been adopted by the government. During 2001, the government will focus particularly on the improvement of program budgets in priority sectors (health and education); preparation of a medium-term (2002-04) public expenditure framework; and the completion of public expenditure reviews in the rural development sector (agriculture and livestock) and in infrastructure. Also, in the wake of the Poverty Reduction Sector Credit (PRSC) currently being elaborated with the World Bank, an ambitious program of budgetary reforms is under preparation; it will benefit from the experience gained under the budget management systems program and the recommendations of the Country Financial Accountability Assessment that the World Bank is preparing in collaboration with other donors. Moreover, with the assistance of the Fund, the authorities have undertaken the fiscal module of the Report on the observance of Standards and Codes (ROSC), together with an assessment and an action plan to improve the capacity of the public expenditure management system to track and report on the uses of HIPC Initiative assistance, and on all poverty-reducing expenditures.

22.  The government will pursue its policy, initiated in 2000, of promptly paying its water, electricity, and telephone bills and will incur no further arrears in this area. To finalize the settlement of all remaining amounts owed by the government as broadly defined, particularly local governments, to these suppliers, the amounts owed to ONATEL and the water company (ONEA), totaling roughly CFAF 12 billion, have already been securitized. The amounts owed to SONABEL (approximately CFAF 10 billion) will be securitized before end-September 2001. The balance owed by the government to the postal authorities, SONAPOST (roughly CFAF 2.9 billion), was settled through the offsetting of cross debts. To improve the liquidity of the Postal Savings Bank (CNE) and allow for reentry of the Postal Checking Bank (CCP)/CNE into the clearinghouse, the government will securitize CNE deposits with the treasury (approximately CFAF 22 billion) by end-September 2001 at an interest rate consistent with program targets. This action constitutes a structural performance criterion under the program. Finally, the government will make a special effort to improve the cash flow management at the Treasury to ensure that the accounts deposited at the Treasury remain fully liquid. It will also strive to reduce the number of such accounts, following their sharp increase in recent years, placing a particular emphasis on the accounts of private depositors.

23.  In the framework of regional integration, the government submitted its 2001–03 convergence program to the WAEMU Commission. It will strive to observe the largest possible number of convergence criteria by end-2002 but indicated that some more time would be needed to observe the criteria pertaining to the tax receipts-GDP ratio and the external current account (excluding grants)-GDP ratio. The rate of the degressive protection tax (taxe dégressive de protection, TDP) in the framework of the common external tariff (CET) was reduced from 15 percent to 10 percent on January 1, 2001, as planned, and Burkina Faso adopted the regional regulations pertaining to customs valuation in line with World Trade Organization (WTO) norms. The government of Burkina Faso still does not avail itself of the temporary import levy (taxe conjonctionnelle à l'importation, TCI). The list of products subject to administratively set customs values was reviewed in June 2000 to bring them in line with regional directives, and the surtax on sugar was eliminated. Progress was also made with respect to WAEMU's five directives on tax administration: the draft Organic Budget Law was adopted by the Council of Ministers in April 2001 and submitted to parliament; the regulation on government accounting will be reviewed once the Organic Budget Law has been passed; minor amendments needed to harmonize the budgetary nomenclature will be made by year's end; the government chart of accounts introduced in 1999 is already consistent with community standards; and finally, the new presentation of the summary table of fiscal operations (TOFE) will be introduced from 2002 onward, and expansion of the scope of the TOFE will be completed by end-2002.

24.  The regional monetary policy of the BCEAO targets an increase of the union's international reserves and of the inflation rate in line with the euro. Therefore, the projected expansion of the money supply of approximately 5 percent in 2001 is slightly below nominal GDP growth, while credit to the economy will be compatible with the resumption of growth. Crop credits should follow a normal cycle. The government will try to find additional resources to eliminate statutory advances by end-2001, as provided for in WAMU directives, and from then on will finance budget operations through the issuance of treasury bills. Burkina Faso's contribution to the increase in foreign assets of the BCEAO is projected at approximately CFAF 11 billion. Moreover, the government will also seek to strengthen the banking system, ensure that banks continue to observe WAMU prudential ratios, and continue to promote the sound development of microfinance.

25.  There was considerable progress in the area of structural reforms. Regarding the privatization program, the sales of the national airline (Air Burkina) and the railroad hotel company (SHG) in Bobo-Dioulasso and Ouagadougou were finalized in early 2001. A consultant has begun working to facilitate the privatization of the management of the Ouagadougou and Bobo-Dioulasso airports. The national film company (SONACIB) was placed under provisional administration pending its liquidation. The privatization of the national agricultural equipment center (CNEA) will be taken up again. Also, the restructuring of the CCP/CNE continues: the postal authorities were separated from the treasury; the legal status of SONAPOST should be adopted by the Council of Ministers shortly; and its participation in the clearinghouse will be renewed after the securitization of CNE deposits at the treasury.

26.  Progress is under way in deregulating the telecommunications sector. The sector's regulatory agency (ARTEL) was established, and an investment bank to help the government privatize ONATEL was retained. The privatization of ONATEL should become effective in early 2002. The letter of development policy of the energy sector was adopted as planned in December 2000, an expanded sector study unit was established, and bills authorizing the privatization of SONABEL and opening up the capital of the petroleum distribution company (SONABHY) to private investors were forwarded to parliament. The interconnection of the electrical power grid with Côte d'Ivoire to supply the Bobo-Dioulasso area became operational in April 2001 and should shortly reduce the cost of electrical power. Also, in April 2001, the Council of Ministers approved the strategy for restructuring the government's remaining portfolio, the goal being for the government to divest itself of many of the enterprises still in its portfolio.

27.  Within the framework of the reform of the cotton sector, the 2000/01 season was successful, and SOFITEX posted satisfactory results. For the 2001/02 season, producer prices were increased from CFAF 170 to CFAF 200 per kilogram of cottonseed (including a bonus payment of CFAF 25 per kilogram), and, given the current keen interest of producers in this sector, the harvest could yield as much as 400,000 tons. Producers continue to assume an active role in the management of SOFITEX, and the possibility of transferring to them an even larger portion of the company's capital is under consideration. The eastern zone remains open to new producers, and, as soon as circumstances permit, SOFITEX will sell its ginning plant in this zone. The government also plans to open up to private operators the central-southern zone, where SOFITEX has two ginning plants. Moreover, SOFITEX announced that, starting in the 2002/03 season, it would no longer participate in the marketing of inputs.

28.  In the area of government finance, the payroll was fully computerized, and the government's integrated accounting system software (CIE) is operational. This makes it possible to track budgetary expenditure in real time and to manage outlays; process monthly wage payments and track personnel expenditure; process the production of payment entries and bookkeeping; and, thereby, appreciably enhance the efficiency and transparency of budgetary management. There were some malfunctions in the issuance of treasury checks to pay import duties and taxes on foreign-financed capital imports, but the government will endeavor to restore orthodoxy in this area, so as to restrict exemptions to the absolute minimum. The government will also make sure to enhance the operating capacity of the planning and cooperation offices, so as to enable them to provide regularly a rolling three-year investment program and a quarterly project implementation statement. The authorities are pursuing the implementation of the new private sector support program, particularly by establishing a competitiveness committee, starting up a business resource center, and, above all, by reducing time frames and simplifying procedures for investors and the creation of new enterprises. The government will also continue to pay particular attention to the prompt payment of its outstanding bills to the private sector.

29.  The implementation of the Good Governance National Plan is proceeding with the establishment of its components, and it is starting to support the legal and institutional reforms of government structures, civil society organizations, and private sector promotion. The audited budget acts for 1995-98 were adopted by the Council of Ministers in March and forwarded to the Audit Court. In March 2001, the government established a national commission against the proliferation of small arms. The military spending audit will be available by end-April 2001 (the forwarding of that audit is a prerequisite under the program). The authorities will continue to strengthen the judicial system so as to provide a more secure environment for investment and promote good governance, particularly by improving infrastructure and recruiting and training magistrates.

30.  The program will continue to be monitored on the basis of quarterly quantitative performance criteria, benchmarks, and indicators in Table 1 and in the Technical Memorandum of Understanding, and by end-June and end-September 2001 structural performance criteria and benchmarks, as indicated in Table 3. The key quantitative criterion/benchmark remains the cumulative change in net bank credit to government. Others include zero ceilings on new nonconcessional borrowing and on the accumulation of domestic and external payment arrears. The quantitative indicators comprise a cumulative floor on current government revenue and cumulative ceilings on expenditure on wages and salaries and on current expenditure. The finalization of the interconnection of the payroll and civil service databases constitutes a structural benchmark for end-June 2001, and the setting up of a centralized database to track social outlays and outcomes a structural performance criterion at the same date. The securitization of the deposits of the Postal Savings Bank (CNE) with the treasury constitutes a structural performance criterion at end-September 2001. The end-December 2001 quantitative and structural performance criteria, benchmarks, and indicators will be set during the fourth review under the PRGF arrangement, to be completed no later than December 2001.

31.   Statistical data. In light of the numerous existing weaknesses, the government will make every effort to improve the quality and regular production of the national accounts and other economic statistics. With a view to strengthening the statistical infrastructure, Burkina Faso adopted formally the General Data Dissemination Framework (GDDS) in January 2001 and during the regional workshop held in Bamako (March-April 2001) prepared the GDDS metadata, i.e., description of current statistical compilation and dissemination practices and planned improvements in these practices for five statistical sectors (real, financial, fiscal, external and socio-demographic). These metadata will be posted by July 20, 2001 on the IMF's website. After some delays, the final national accounts for 1994 through 1997 were completed in April 2001, and the final accounts for 1998 will be available by end-September 2001. The National Institute of Statistical and Demography (INSD) was made independent, and its human and material resources will be enhanced starting with the 2002 budget, supported by a call for foreign technical assistance. Efforts in the WAEMU framework to harmonize the industrial production index will be completed in 2002. This new index will take account of the results of the last industrial and commercial survey, which was conducted in March 1998.

III.  Poverty Reduction and Social Sectors

32.  The poverty reduction strategy contained in the poverty reduction strategy paper (PRSP) that was initiated in mid-June 2000 was strengthened at end-2000 by the allocation of additional funds to the priority sectors from the debt-service savings made after Burkina Faso had reached the completion point under the original HIPC Initiative, as well as by the interim financing received under the enhanced HIPC Initiative. These allocations helped the authorities to continue improving the social indicators and, at end-March 2001, to observe all the policy reform conditions for the floating completion point under the enhanced HIPC Initiative contained in Box 10 of the HIPC Initiative paper. In particular, the targets were exceeded concerning child vaccination rates, the percentage of social and health centers (CSPS) meeting staffing standards, and the rate of unavailability of 45 key medicines at the state pharmacies (CAMEG). In addition, the letter of educational policy was adopted by the Council of Ministers on March 28, 2001. It contains the action plan for recruiting new teachers in accordance with the provisions of the civil service reform and eliminates the automatic link between admission to the national school for primary education teachers (ENEP) and employment in the civil service; furthermore, it creates a new category of teachers to be recruited at the decentralized level and extends the community schools program. An action plan to increase the efficiency of the basic education system was drawn up and will be implemented from the 2001-02 school year onward. The plan is aimed at consolidating the system for promoting students from one grade to the next, reducing repetitions, and making the necessary improvements in teaching quality to ensure its success. Regarding the rural roads component, engineering studies on rehabilitating 442 kilometers of roads in seven provinces were conducted, and construction is under way of 267 kilometers of rural roads in four other provinces. For 2001, 367 kilometers of rural roads identified in ten provinces will be the subject of engineering studies, and 300 kilometers of roadwork will be carried out.

33.  The government is convinced of the need to strengthen state structures, in order to program and implement the PRSP efficiently and to monitor promptly the use of funds and the social outcomes. It has already set up a monitoring mechanism to provide all those involved with regular information on the implementation of the poverty reduction program. The mechanism includes three tiers: a ministerial committee for PRSP oversight, which is the decision-making body; an interministerial technical committee to monitor the PRSP, which reviews implementation of sectoral action plans and reports regularly to civil society; and sectoral groups to monitor the PRSP—these are the operational structures for on-site monitoring, in consultation with civil society and the development partners. To offset shortcomings in the social statistics required for monitoring, the government will set up by end-June 2001 a centralized database to track social outlays and outcomes, particularly emphasizing education and health. This action constitutes a structural performance criterion under the program.

34.  The resources generated by debt-service relief under the HIPC Initiative in 2001 are estimated at CFAF 22.3 billion (1.3 percent of GDP). These funds will be allocated to the priority programs in the PRSP, as provided in the 2001 Budget Law. Every step has been taken to allow for decentralized management of these funds by a system of credit delegation at the local level.

35.  Following the cereals deficit in early 2001, which was equivalent to roughly 9 percent of the population's needs, the government took immediate action through an emergency food assistance program. Food was supplied to vulnerable provinces in three phases: Phase I, in March–April 2001, involved the distribution of 4,083 tons of cereals to persons living in extreme poverty; Phase II, in April 2001, effected the distribution of 14,163 tons (mobilized from the national security inventory); and the implementation of Phase III, involving 47,039 tons, is expected to begin in May 2001.

36.  To continue implementation of the other health measures in the PRSP, the government plans to extend the framework of the Health and Nutrition Development Project (PDSN). This project had an excellent impact on the health indicators and facilitated the provision of resources to all districts on the basis of a signed contract, with progress indicators defined in advance. Moreover, the government plans to revitalize the planning and studies directorates (DEP) in the social ministries in order to give them a pivotal role in implementing the PRSP. In the area of education, the plan for decentralizing school management is under way, together with the other teaching reforms contained in the PRSP. Finally, the rise in cottonseed prices from CFAF 170 to CFAF 200 per kilogram (17.7 percent)³ for the 2001/02 season will have a very positive effect on the income of cotton growers, who make up about 18 percent of the population.

BURKINA FASO

Technical Memorandum of Understanding

June 6, 2001

1.  This memorandum provides the definitions of the performance criteria and benchmarks of the program supported under the Poverty Reduction and Growth Facility (PRGF) of the International Monetary Fund (IMF). It also sets out the data-reporting requirements for monitoring the program.

I.  Definition of Terms

2.  For the purpose of this memorandum, the following definitions of "debt," "government," "payment arrears," and "government obligation" 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, debentures, 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 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 period(s) of time, which are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the 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. Under the definition set out above, debt includes arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

• Government is defined as the government of Burkina Faso and does not include any political subdivision or central bank or any government-owned entity with a separate legal personality.

• External payment arrears are external payments due but unpaid. Domestic payment arrears under the program for 2001 include domestic payments that are due on account of retroactive wages under the civil service reform (transition to a new wage structure) but unpaid. They also include domestic payments due (following the expiration of a grace period of 90 days, 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 recorded as such by the government (including any government debt).

II.  Quantitative Performance criteria

A.   Cumulative Change in Net Bank Credit to Government

Definition

3.   Net bank credit to the government for the purposes of the program is defined as the balance of the Burkinabè Treasury's claims and debts vis-à-vis national banking institutions. Treasury claims include the cash holdings of the Burkinabé Treasury, deposits with the central bank, deposits with commercial banks, secured obligations, and deposits with the postal system. Treasury debt to the banking system includes funding from the central bank (essentially 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 funding from the postal system (including deposits of the postal system with the treasury).

4.  Government securities held outside the Burkinabé banking system are not included in the net bank credit to the government.

5.  Net bank credit to the government is calculated by the Central Bank of West African States (BCEAO), whose figures are those deemed valid within the context of the program.

6.  As of December 31, 2000, the net government position thus defined was CFAF 113.8 billion. At that date, the cumulative change on net bank credit to government so defined was CFAF 19.8 billion, compared with the stock at end-December 1999.

Performance criterion/benchmark

7.  The ceiling on the cumulative change in net bank credit to the government is set at -CFAF 2.4 billion as of June 30, 2001 and at -CFAF 3.4 billion at September 30, 2001. This ceiling is a performance criterion at June 30, 2001, and a quantitative benchmark at September 30, 2001. The stock of net bank credit to the government is programmed at CFAF 111.4 billion at end-June 2001. The ceiling on the cumulative change in net bank credit to the government is projected at -CFAF 4.1 billion at December 31, 2001. This target will be set as a performance criterion for end-December 2001 during the fourth review under the arrangement.

Adjustments to performance criterion/benchmark

8.  This ceiling on the cumulative change in the net bank credit to the government position vis-à-vis the banking system will be subject to adjustments if disbursements of external budgetary assistance, including traditional debt relief—but excluding the assistance to be provided under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative)—exceed or fall short of program forecasts. In the event of excess disbursements at the end of each quarter (end-June 2001, end-September 2001, and end-December 2001), the ceiling will be adjusted downward pro tanto by the amount of the excess disbursements. In contrast, if at the end of each quarter disbursements are less than the programmed amounts, the ceiling will be raised pro tanto by the amount of the shortfalls up to the limits (on a noncumulative basis) of a maximum of CFAF 7 billion at end-June 2001, a maximum of CFAF 12 billion at end-September 2001, and a maximum of CFAF 20 billion at end-December 2001.

Reporting requirement

9.  Detailed data on the net government position will be provided monthly within seven weeks following the end of each month.

B.   Reduction of Domestic Payment Arrears on Government Obligations

Definition

10.   Domestic payment arrears on government obligations are reduced through the payment of these obligations as defined under paragraph 2 above. The government undertakes not to accumulate any new domestic payment arrears on government obligations on a net basis. The treasury keeps and updates the inventory of domestic payment arrears on government obligations and maintains records of their repayments.

Performance criterion

11.  The government will not accumulate any domestic payment arrears on government obligations in 2001. The nonaccumulation is a performance criterion for end-June 2001, and a benchmark for end-September 2001, and will be set as a performance criterion for end-December 2001 during the fourth review under the arrangement.

Reporting requirement

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

C.   Nonaccumulation of External Payment Arrears

Performance criterion

13.   Government debt is outstanding debt owed or guaranteed by the government. Under the program, the government undertakes not to accumulate external payment arrears on government debt, with the exception of external payment arrears arising from government debt being renegotiated with creditors, including Paris Club creditors. The nonaccumulation of external payment arrears on government debt is a performance criterion to be observed continuously.

Reporting requirement

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

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

Performance criterion

15.  Under the program, the avoidance of nonconcessional external debt contracted in guaranteed by the government is a continuous performance criterion. Nonconcessional external debt is defined as all debt with a concessionality level of less than 35 percent. To calculate the level of concessionality for loans with a maturity of at least 15 years, the discount rate to be used is the 10-year average "Commercial Interest Reference Rate"(CIRR) calculated by the IMF, based on the rates published by the OECD; for loans of less than 15 years, the six-month average CIRR is used. 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 on August 24, 2000,² but also to commitments contracted or guaranteed for which value has not been received. However, this performance criterion does not apply to financing provided by the Fund.

Reporting requirement

16.  Details on any external government debt will be provided monthly within four weeks following the end of each month. The same requirement applies to guarantees extended by the central government.

E.   Short-Term External Debt of the Central Government

Performance criterion

17.   The government will not contract or guarantee external debt with an original maturity of less than one year. The avoidance of external debt with an original maturity of less than one year contracted or guaranteed by the government is a continuous performance criterion. 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 on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. Excluded from this performance criterion are short-term, import-related trade credits. As of March 31, 2001, the government of Burkina Faso had no short-term external debt obligations.

III.  Structural Performance Criteria

Performance criteria

18.  The setup of a centralized database to track social outlays and outcomes, in particular for health and education, will be implemented by June 30, 2001.

19.  The deposits of the Postal Savings Bank (CNE) at the treasury will be securitized by September 30, 2001.

Reporting requirement

20.  The information concerning the implementation of these three structural performance criteria will be communicated to the IMF within two weeks following their scheduled implementation dates.

IV.  Quantitative Benchmarks

21.  The program also includes quantitative benchmarks on current government revenue, the civil service wage bill, and total current expenditure.

22.  Current government revenue is defined as tax revenue, plus nontax revenue, excluding the revenue collected through treasury checks.

23.  Total current expenditure is defined as the difference between total budgetary expenditure, on one hand, and total capital expenditure and net lending, one the other. Capital expenditure is defined as the sum of investment spending identified as such in the national budget and foreign-financed investment outlays.

24.  This information will be provided to the IMF monthly within four weeks following the end of each month.

V.  Structural Benchmarks

25.  The program also includes a structural benchmark: the finalization of the interconnection between the payroll and civil service databases is a benchmark at end-June 2001.

VI.  Additional Information for Program-Monitoring Purposes

A.  Public Finances

26.  The government will report to IMF staff the following:

• a monthly table of government financial operations (TOFE) and the 13 customary appendix tables, to be provided monthly within three weeks (provisional version) and within six weeks (final version) following the end of each month; if the data on actual public investment financed by external grants and loans are not available in time, a linear estimate based on the annual projection will be adopted;

• complete monthly data on domestic budgetary financing, to be provided within six weeks following the end of each month;

• quarterly data on implementation of the public investment program, including details on financing sources, to be provided quarterly within six weeks following the end of each quarter;

• monthly data on debt service, to be provided within four weeks following the end of each month;

• monthly data on the taxation of the petroleum sector, including (i) the price structure prevailing during the month; (ii) the detailed calculation of the price structure, going from the FOB-MED price to the retail price; (iii) the volumes purchased and supplied to the domestic market 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 monthly within four weeks following the end of each month;

• monthly data on the resources and use of the treasury's special account created for the use of the resources from the debt-service savings under the HIPC Initiative, to be provided monthly within six weeks following the end of each month; and

• the status of all the deposit accounts at the treasury classified by major category (administrative services, state enterprises, mixed enterprises, public administrative enterprises, international organizations, private depositors, and others), to be provided within four weeks following the end of each month.

B.  Monetary Sector

27.  The government will provide the following information within eight weeks following the end of each month:

• the consolidated balance sheet of monetary institutions and, if the need arises, details pertaining to individual banks;

• the monetary survey, seven weeks after the end of each month for provisional data, and ten weeks after the end of each month for final data;

• borrowing and lending interest rates; and

• customary banking supervision indicators for bank and nonbank financial institutions—as needed, indicators for individual institutions may also be provided.

C.  Balance of Payments

28.  The government will provide the following information:

• any revision to balance of payments data (including services, private transfers, official transfers, and capital transactions) whenever they occur; and

• preliminary annual balance of payments data, within nine months following the end of the year concerned.

D.  Real Sector

29.  The government will provide the following information:

• disaggregated monthly consumer price indices, monthly within two weeks following the end of each month;

• provisional national accounts, no later than six months after the end of the year; and

• any revision in the national accounts.

E.  Structural Reforms and Other Data

30.  The government will provide 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.  Summary of Main Data Requirements