Burkina Faso - Structural Adjustment Program Project (SAL I)

Dacwnm of The World Bank FOR OMfCLAL USE ONLY R(-pkttt Nu. F- 55C2, PUR Repor . P-5562-BUR INGIaIHAM. J..1 X214653 , AFPfiP5- REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 60 MILLION TO BURKINA FASO .FOR A STRUCTURAL ADJUSTMENT PROGRAM (SAL I) JUNE 4, 1991 This documeut has a resticted distibutIo Md =ay be u by redpleut ouly in the perfonma of tIeir ofci duties l coutns may not othewse be discsed withou World B&o* autoiatdon.  CURRENCY EOUIVALENTS Currency Unit CFA franc (CFAF) US$1.00 CFAF 260 CFAF 1 million - US$3,846 SYSTEM OF WEIGHTS AND MEASURE: METRIC FISCAL YEAR January 1 - December 31 This report is based on the findings of a World Bank mission consisting of Messrs. Joseph Ingram (Principal Country officer and Mission Leader), Cherif Azi, (Sr. Financial Analyst), Boubacar Traore, Salomon Samen, Gerard Boulch (Economists), and Rajen Soopramanien (Lawyer), who visited Burkina Faso in March 1991. Messrs. Sergio Ricca from ILO, Hank Roppen (Bank Consultant), and Franz Schwarzbeck from the German Government also provided support to the operation. Further assistance was provided by Messrs. Justin Barro (Economist at the Resident Mission), and three local Consultants, Pierre Minongo, Harouna Sawadogo and Fatti Traore. Ms. Olga Jonas (Country Economist) was primarily responsible for the drafting of the President's Report. Mr. Charles Humphreys was the Lead Advisor and Mr. Rashid Faruqee reviewed the program for the Chief Economiat's Office. Mrs. Katherine Marshall is the Department Director, Mr. Frangois Laporte, the Department Lead Economist and Mr. Jean-Louis Sarbib, the managing Division Chief. Secretarial support was provided by Mrs. Rathna Chiniah.  FOR OmCIAL USE ONLY ABBReVA5ION AND AM=X" AfDB s African Development Bank APDF I African Project Development Facility BCZAO Banque Centrale des Etats de V'Afrique de 1'Ouest B1CIA Banque Internationale pour le Commeorce, lIndustrie et l'Agriculture BIP s Banque Integr6e de Projets CARwO Caisse Autonome dos Retraites pour loe Fonctionnaires CBC Conseil Burkinaba des Chargeurs CC s Chamber of Commerce CEAO 3 Communaute Economique dos Etats de l'Afrique de l'Ouest CEDRES National Research and Development Center CSPPA Caisse de Stabilisation des prix des produits agricoles CNS8 National Social Security Fund CPAR s Country Procurement Assessment Report EC s European Community FIAS Foreign Invegtment Advisory Service IFC International Finance Corporation INSD Institut National do Statistiques et de Demographie ILO t International Labour Organization MIGA Multilateral Investment Guarantee Service OFNACER Office National des Cereales ONAC Office National du Commerce Exterieur ONPE Office National pour la promotion de l'Emploi PIP Public Investment Program SNTB Soci6t6 Nationals de Transit Burkinabb SIBP Service Informatique et de Suivi des Projets SITC Standard International lkrade Codes SPA Special Program of Assistance SOZABAY Soci6t6 Nationals Burkinabe des Hydrocarbures UNDP United Nations Development Programme UNIDO s United Nations Industrial Development Organization IMF International Monetary Fund PFP Policy Framework Paper SAL s Structural Adjustment Loan UMOA s Union Non6taire Ouest Africaine This document has a restricted distribution and may be used by recipients only in the por. vrmancl of their ofcial duties. Its contents may not otherwise be disclosed without World Bank aut  STRUCTURAL Aviv NNTCRZDXT (BALIt Table of Contents Credit and Summary . . . . . . . . . . . . . . . . . . . . . . . . . I I. COUNXRY POLICIES AND BANK GROUP'S ASSISTANCE STRKTEGY . . . . . 1 A. Background, . . . . . . . . . . . . . . . . . . 1 S. Central Development Issues and Government Economic Policies . . . . . . . . . . . . . 6 C. Growth Prospects and Economic Outlook . . . . . . . . . . 9 D. Bank Group's Assistance Strategy a . . . . . . . . . . . 11 XI. 8AL I PROGRAM 1991-1993 . . . . . . . . . . . . . . . . . . . . 15 A. Macroeconomic Framework . . . . . . . . . . . . . . . . . 15 B. Public Resource Management . . . . . ..* . . e * * * . * 17 C. Incentives for Private Sector Development . . . . . . . . 22 D. Human Resource Devolopment and Poverty Alleviation in Adjustment . . . . . . . . . . . . . . . . . . . . . . . 31 III. Til PROPOSED CREDIT . . . . . . . . . . . . . . . . . . . . . . 32 A. Credit History . . . . . . . . . . . . . . . . . . . . . 32 B. Financing and Management of the Program . . . . . . . . . 33 C. Monitorable Ae tions ..................... . 35 D. Benefits and Risks ................... 38 XV. RE00I4EM ATION 39 TetTable Table ls Key Social Xndicatore .. .... ..... ...... 2 Table 2: Selected Economic Indicators, 1986-90 . ..... . . . . 3 Table 3s Selected Public Finance and External Sector Xndicators * 5 Table 4: External Financing Require_ents .9.9.9.9.9.9...... . 10 Table 5s Composition of IDA Commitments, FY85-90 . . . . . . .. . 11 Table 6: The Structure of Current Expenditure . * . . . . . .. . 19 Table 7s Current Expenditure Requir emnts in Priority Sectors . . 21 AnMnx Annex X Economic Indicators. ........... 40 Annex II Govern3ent's Letter of Development Policies . . . . .. . 43 Annex IXI Poiicy lMtrix .7.. . ... .. ....... 71 Annex IV Supplementary Credit Data Sheet 9.99.9...9. 76 Annex V Status of Bank Group Operations ........... . 77 Annex VI Classification of Public Enterprises 78 X^t I8RD 20660  aTRUTURAL ADJUSTMENT CREDIT f SL i Cred '. and Proaran Summary sorrower SBurkina Faso Amounts - SDR 60 million (US$80 million equivalent) g2financing: European Community Loms IV ECU 25 million (US$30 million); African Development BSank UA 15 million (US$20 million); Canada CN$15 million (US$13 million), France FF 100 million (USS17 million); Germany DM 20 million (US$12 million). Termgt Standard IDA terms, with a maturity of 40 years Proarsm Descriottont The proposed SAL supports Burkina's overall adjustment program as outlined in the PFP for 1991-93 and focuses on implementation in two key areass public resource management and private sector incentives. The private sector incentives component addresses public enterprise sector restructuring, banking sector restructuring, and trade and regulatory ref%. cm. The public sector resource management component includes restructuring recurrent budget expenditure to support human resource development, preparation of a civil service management reform, and improved investment programming. Specific actions include elimination of quantitative restrictions on imports, simplification of import procedures, price liberalization, reform of the legal and regulatory framework for both the public and private enterprise sectors, reduction in labor market regulations, reduction in the relative size of the wage bill in the government budget, increased budget allocations for expenditure on health, education and routine road maintenance, and strengthening budgetary control and public investment programming. Benefit and Risket The proposed SAL is expected to contribute to the restoration of internal and external financial and economic equilibria through its impact on the Government budget and external trade. The proposed measures to improve economic incentives are also expected to have a positive impact on economic growth and employment creation in the private sector. The major risks are a potential attempt by vested interests who benefit from existing policies to defer or dilute implementation of adjustment polici a and delayed supply response due to a recurrence of *irought conditions. These risks are minimized by the Government' demonstratod strong resolve to implement reforms, and the heavy front loading of the program; the design of the program which focusses on a few major areas of reform, simplification of administrative .equirements, and the provision of technical assistance in key areas;and the introduction of increased flexibility in the economy to respond to external shocks, including drought, and accumulation of sufficient external reserves to maintain the level of imports during periods of poor weather.  (ii) XstJ.mated Ri.aur_mnats US$80 million equivalent of credit would be released in three tranches, with US$40 million constituting the first tranche and the remainder divlded equally betwee the second and third tranches. Tho first trancho would be released upon effectivenessa the second tranche would be released after completion of a specific list of core actions and a satisfactory perforzance review to be held within 1.2 months of effectiveness the third tranche would be released after completion of core actions and a second performance review to be held within 12 months of release of the second tranch. US$750,000 equivalent would reimburse PPF651-BUR used for preparation of the credit. Disburoement of the entire credit is expected to be completed within 24 months of certifying credit effectlveness. Mans IBRD 20660 There is no separate staff appraisal report.  mERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND -_CX 5DtDATION OF THE PRESIDENW TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO BURKINA PASO FOR A STRUCTURAL ADJUSTMENT PROGRAM 1. I submit the following report and recommendation on a proposed development credit of SDR 60.0 million (US$80 million equivalent) on standard IDA terms with a maturity of 40 years to Burkina Faso to help support the Government's structural adjustment program. The African Development Bank (AfDB), the European Community (EC), France, Canada and Germany have expressed interest in providing cofinancing or parallel financing. The UNDP, the IMP, and the Government of France are providing support for important institutional measures and technical assistance for implementation of Burkinas adjustment program. I. COUNTRY POLICIES AND BANK GROUP'S ASSISTANCE STRATEGY A. Backaround 2. Economic Structure. Burkina Faso is a landlocked country with a population of about 9 million, which is 90 percent rural. It lies in a transition zone between the Sudano-Guinean region and the Sahel, and its climate is characterized by wide rainfall variations. Soil, water, and biomass resources are limited and fragile. Resource degradation is accelerating because of overexploitation and population pressure. With a gross domestic product per capita of US$320 in 1990, Burkina ranks among the world's poorest countries. Basic social services are undeveloped, and life expectancy at birth (48 years) and primary school enrollment (31 percent) remain among the lowest in sub-Saharan Africa (Table 1). There has been substantial emigration to neighboring coastal countries, particularly Ghana and COte dl'voire, mainly by the youngest strata of the active population. 3. The economy is dominated by agriculture and the public sector. Agriculture and stock raising contribute about 30 percent to GDP and are the main source of income and employment. Cultivation of traditional food crops (millet and sorghum) is by far the most important farming activity while cotton is the major export crop. Services are the largest sector, accounting for an estimated 42 percent of GDP vhile manufacturing remains undeveloped and contributes only about 14 percent of GDP. Informal activities dominate in the services sector (about two-thirds of value added) and are also significant in the secondary sector (about 40 percent of value added). The modern sector is essentially limited to government services and to the parastatal sector which accounts for practically the whole of modern industry. Since 1988, the country has been gradually emerging from a period characterized by policies inspired by marxist and maoist revolutionary ideology, including central planning, tight controls on the private sector, and extensive direct state involvement in productive activities.  2 Table 1. Koy Social Indicators Sub SalisaT~rbcAst 1980 1989 1989 PODUI!tion (million) 8.6 8.8 481.6 % rban 8 12 38 Growth Rate (P...) 2.0 8.8 8.1 FertiIlity 7rude Birth Rate (por 10U 48 47 47 Total Fort. Rate 6.6 7.2 6.6 (8irths/Woman) Mortality Crude Death Rate (per 1000) 21 18 16 Infant Mortality (per 1000) 167 1s3 107 Life Expectancy at Birth (yre) 43 48 53 Medical Care Chirdrln Immunized (DPT) (U) 2 86 48 Education Primary Enrollment Ratio (X) 1S 31 67 Pupil/Teacher Ratio (primary) 64:1 S7:1 41:1 Secondary Enrollment Ratio (U) 8 6 29 4. Despite some success with exports of off-season vegetables to Europe and fruit to neighboring countries, Burkina's exports are dominated by three primary commodities--livestock (to the coastal countries), cotton and, since 1985, gold. The economy has depended on inflows of foreign assistance and of remittances from an estimated 3 million Burkinabb abroad to finance most investment and in some years a part of consumption expenditure. With a limited potential for near-term diversification, the economy remains highly vulnerable to climatic vagaries and adverse movements in international comnodity prices. Lacking the rich agricultural potential or extensive mineral resources of other countries in Sub-Saharan Africa, Burkina's growth prospects are modest. 5. Past Economic Growth. Burkina's economic performance is determined by its narrow resource base, variable climate, a low level of social and economic development, and a legacy of inappropriate policies. Despite these handicaps, growth in the 1980s was sufficient to slightly raise per capita incomes and consumption, as real GDP grew by 3.7 percent a year between 1982 and 1990 and population growth was estimated at 3.3 percent a year. 6. Until 1988, the economy enjoyed relatively good growtht. Much of the growth was, however, derived from two unsustainable sourcess (i) an expansion of public consumption and investment spending; and (ii) a high agricultural growth (6.1 percent per annum in 1982-88) due to good weather and to bringing of new land, recently freed of onchocerciasis, under cultivation. In contrast to a rapid growth of construction, fueled in part by high public investment spending, and an expansion of trarsport and other services driven largely by the good performance of agriculture, manufacturing stagnated during the 1980s even though highly protected by import controls. The reasons were several. Structural factors such as poor technical skills, high energy and transport costs, high labor costs,  3 and rigid price and trade controls hurt competitiveness. The policy framework was complex and sometimes contradictory while special tax exemptions and protective measures deterred efficiency gains. In 1989 and 1990, real GDP growth slowed to -0.4 and 1.3 percent, respectively, largely because agricultural output fell with a recurrence of poor rainfall and because the public spending spree could not be sustained. Table 2. Selected Economic Indicators, 1986-9U 1086 1087 1988 1989 1990 National Income and Prices CDP at constant 1985 pric-es (X p.O.) 9.8 1.2 0.1 -0.4 1.8 Agriculture, Ilvestock and forestry (X p.a.) 10.8 -4.2 13.8 -2.9 -3.4 Cross domestic Investment (U of GDP) 22.9 20.0 22.2 22.8 19.9 Gross domestic savings (S of CDP) 8.8 4.1 8.2 8.0 6.2 CDP deflator (U p.a.) 0.0 S.t 8.0 1.2 3.0 Consumer price index (X p.a.) 1.9 1.8 1.9 2.0 8.0 7. Savings and Investment. Burkina is dependent on foreign assistance to finance most public investment and some consumption. In 1986-90, net disbursements of official capital grants and loans averaged US$126 million annually or 5 percent of GDP. An additional US$100 million annually on average was contributed by donors for technical assistance and food aid, and by non-Governmental organizations (NGOs). Thanks to four years of strong growth after the 1983-84 drought, domestic savings performance up until 1988 was good, and the domestic savings rate reached a respectable 8.2 percent of GDP in 1988. This record could not be sustained, however, with the economic slowdown in 1989 and 1990, and domestic savings fell sharply, to 5.2 percent of GDP, in 1990. Workers' remittances from abroad (averaging 6 percent of GDP in 1986-90) have made a significant contribution to national savings. 8. In the late 1980s, investment averaged 22 percent of GDP, largely because of large public investment. Much of the investment, however, went to major new infrastructure projects with low, or even negative, economic returns such as a railway extension, a large dam, new public office buildings, and a clinker crushing plant. Public housing projects were financed by forced lending from domestic banks, contributing to an increasingly precarious situation of the banking system. As for the private sector, it has invested primarily in housing, office buildings and informal sector activities. The legal and regulatory framework was not conducive to private investment in formal sector activities; moreover, private investors were crowded out by the privileged and, in some cases, formally monopolistic, positions of public sector firms in virtually all subsectors. The overall efficiency of investment has been relatively low, as reflected in an ICOR of 7.3 in 1985-90.  4 9. Fiscal and Monetary Perfopmance. The overall government deficit (excluding grants) averaged 12 percent of GDP in 1986-90 1/ (Table 3). The difficult financial situation was mainly due to three factors: (i) a large part of budgetary resources claimed by the wage bill; (ii) a weak revenue performance; and (iii) substantial parafiscal resources, especially those levied on imports of petroleum products, in special accounts of autonomous public agencies. 10. The rapid growth in the government wage bill, espec!ally for the military, has squeezed expenditures for supplies, operations and maintenance, local contributions to foreign-financed investment projects, and debt service. Tax revenues have been hindered by a narrow tax base, comprising primarily the modern sector whose growth performance has been disappointing. Moreover, a large volume of exemptions, especially on import duties, and weakness in the tax structure and collection process have reduced the Government's ability to mobilize fiscal resources. 11. Since government borrowing from the central bank is constrained by the rules of the West African Monetary Union (UMOA) of which Burkina is a member, a part of the deficit was financed through an accumulation of arrears. These began to accumulate especially rapidly in 1987 and reached an estimated CFAF 83.4 billion by the end of 1990, equivalent to one year's fiscal revenue. Arrears on external debt service, CFAF 49.4 billion of the total, compromised relations with donors while arrears on internal payments constrained business activit'. 12. At the same time, significant parafiscal resources have not been available to finance public expenditure because they have gone into the special accounts of autonomous price stabilization funds and service agencies. Although some of these funds were used to provide capital for several public enterprise investments (e.g., a clinker grinding plant) and to build large headquarters buildings for public agencies, most have remained on deposit with domestic banks. As a result, the Government has been a substantial net creditor to the banking sector. In 1986-88, there was also a marked increase in net foreign assets due to good growth of exports and a relative stagnation of imports. This contributed to a rapid growth of the money supply, mostly in time and savings deposits. In 1989, the trends in credit were reversed as lending to the private sector exoanded, the net creditor position of the Government shrunk, and the overall balance of payments registered a large deficit for the first time since 1982. 13. The financial health of banks, which are all partly or wholly Government-owned, deteriorated throughout the period, with a marked worsening in the last two years. In 1990, nonperforming loans (net of bank provisions) increased by CFAF 8 billion, to CFAF 22 billion, equivalent to 15 percent of the banks' loan portfcio. Audits conducted by the central bank showed that three commercial banks urgently needed 1/ The GDP series used for the ratios of fiscal performance excludes the value added of the informal sector because it is hard to measure. In the late 1980s, the formal sector accounted for an estimated 72 percent of GDP.  S restructuring while the postal checking system and the national savings bank continued to experience liquidity problems. Table 8. Selected public finance and external sector lndlcators, 19-90 1986 1967 19S8 1M!O i PubiIc finance IndIcetors (% of tormal GDPI Govermnent Revenue 1.4 14.6 18.2 11.9 14.6 Current Expenditure 18.6 18.2 18.4 12.6 14.6 Capital Expenditure 12.4 16.1 11.8 90. 7.9 Consolidated budget deficit (a) 12.0 14.6 12.5 9.0 7.6 Government Wage Bill (X of Current Expenditure) 64.0 58.0 08.5 06.2 60.7 External Sector Export volumes (1985 U 1a1) 103.9 138.1 127.0 128.0 161.8 -- cotton 176.0 237.6 167.2 188.9 240.6 - go I 171.1 247.7 261.1 164.8 214.4 -- livestock 78.6 79.7 01.1 104.0 1W.2 Total exports of soods and NFS (USS m) 188.6 264.7 204.2 254.6 8U1.4 Total workers' remittances (US$ m) 191.6 178.4 174.8 147.8 108.9 Total imports of goods and NFS (US$ a) 694.7 680.2 695.1 710.2 U6.4 Merchandise Terms of trade (1986=100) (US8) 97.6 98.2 108.t 9B.6 08.6 Real effective exchange rate (1985 Z l6) 96.2 94.1 04.6 90.4 9098 Balance of payment lndicators (X of formal GOP) Current Account Balance (a) -15.8 -18.4 -12.8 -17.8 -14.6 Overall Balance 1.9 0.5 1.0 -7.1 -1.6 External Debt (LT+ST+IMF) Total debt disburse and outstanding (USSm)(DRS) 669.5 86.90 677.6 757.2 794.0 Total debt service paid (US$ million) (b) 67.8 61.8 54.4 821.9 51.9 Debt service paid/exports of goods and sves. (X) (b) 88.6 22.0 16.2 120.2 14.2 (a) Excluding grants, commitment basis. (b) Includes, in 1989, for official debt to France, debt relief of US118.6 million and capitalization of canceled debt of US8186.7 million. 14. Starting in 1989, the fiscal situation has begun to improve, initially due to a reduction in public investment expenditure as several large projects neared completion. More sustained improvement took place in 1990 in response to measures taken to reverse the adverse development in both current expenditures and revenues in the three preceding years. The government achieved a 15 percent growth in revenues thanks to reduced import duty exemptions, strengthened tax collection, and revision of standard values on which import duties are assessed. The last measure channelled to the budget a larger portion of the substantial parafiscal resources arising from the difference between import and domestic prices of petroleum products. Initial steps were also taken to contain the wage bill by limiting recruitment and freezing both salaries and the financial impact of promotions. 15. Given Burkina's membership in the West African Monetary Union and the fixed exchange rate parity between the CPA franc and the French  6 franc, anti inflationary measures are a necessary part of policies aimed at holding the price increases in Burkina below those of its competitors. Throughout the 1980s, the authorities have been successful in containing inflation and improving Burkir a's international competitiv2ness. With domestic price inflation, as measured by the consumer price index, lower than that of its recorded trading partners, Burkina Paso's real effective (trade-weighted) exchange rate depreciated 25 percent between 1980 and 1990 2!. Further progress is necessary, however, to improve the competitiveness of the economy. 16. Balance of Payments. In the 1980s, balance of payments developments have been driven largely by four main factors: (i) revenuer from exports of labor to neighboring countries, which were almost as important as the revenues from exports of all goods; (ii) world market prices for cotton and gold; (iii) domestic production performance of cotton and gold; and (iv) imports linked to the public investment program. Between 1986 and 1988, the current account deficit decreased steadily, from 15.3 percent to 12.8 percent of GDP because of strong export performance and a slight improvement in the terms of trade. With grants and net official capital inflows averaging US$263 million annually, the overall balance of payments continued to record surpluses of about 1 percent of GDP each year. 3/ These trends were, however, dramatically reversed in 1989 when, for technical reasons, the volume of gold (a mine collapse) and cotton (problems with ginning capacity) exports decreased markedly. Workers' remittances also declined because of economic difficulties in the coastal countries. At the same time, imports, especially of capital goods for the public investment program, grew rapidly. The current account deficit tl as widened to an unprecedented .17.3 percent of GDP. 17. The deterioration, however, proved to be temporary, largely thanks to a sharp recovery in 1990 of gold and cotton export volumes and a deceleration of imports linked to the public investment program. The terms of trade improved and were not affected by the Gulf crisis in the latter half of the year since Burkina Paso had placed most of its orders for petroleum produL-s at prices prevailing before August 1990. Although the current account deficit thus narrowed to 14.5 percent of GDP, the improvement was not enough to prevent a further small loss of official reserves which declined to 4.5 months of imports by the end of 1990. B. Central Development Issues and Government Economic Policies 18. Burkina confronts three formidable constraints on growth and development in the long-term. Most important, slowing Donulation trowth is critical to securing sustainable growth because severe damage to the natural resource base is occurring, especially on the Mossi plateau which 2/ Measured as an index, the real effective exchange rate was 100 in 1980, 85 in 1985, 80 in 1988, and 75 in 1990. 3/ A part of the overall balance of payments deficit has in effect been "financed" by a continuous accumulation of arrears on official external debt service due to the fiscal resource constraint.  7 has the highest population density in the Sahel, and because fiscal resources would be already strained by maintaining the primary school enrollment ratio at its present low level. The Government must therefore build on its commitment to the promotion of family planning services and to an increased role for women. Second, Burkina's development prospects ultimately depend on labor productivity which can rise only with a concerted effort to develop the country's human resource potential. In the medium-term, progress in human resource development is a most serious challenge because of limited financial resources. In education, the Government must seek additional resources and lower the proportion of costs paid by the budget in order to raise primary school enrollment ratios. Part of the approach at both primary and secondary levels needs to be promotion of private education. In health, a more efficient delivery system, more wide-spread implementation of cost-recovery, and increased spending on maternal and child health are the critical needs. Third, there is a need to improve the management of natural resources. Population grewth, the single most important cause of soil, biomass, and water resource degradation, will decline in the long-term only, even if early gains are made in reducing fertility rates. Therefore, agricultural research must be sustained so as to develop less environmentally damaging farming methods. For their dissemination to farmers, the extension services need to be strengthened. Above all, however, clear responsibilities must be assigned and enforced for natural resource management at the village level. 19. Since a change in Government in August 1983, the authorities pursued policies inspired by central planning, marxism, and maoism. The private sector was discouraged by confiscatory measures and political interference in the management of enterprises. Domestic and external trade were increasingly controlled. In 1984, the Government launched a program of development which aimed to mobilize rural and urban people to construct public infrastructure. This initiative was followed by an ambitious first five-year plan (1986-90) whichi included a number of large economically unviable projects. The interventionist policies contributed to lagging fiscal revenues which led the Government to implement, in 1985 a-d 1986, austerity budgets which included a 12 percent cut in civil servants' nominal wages. In the social sectors, the Government sought to improve the education and health status of the population by aggressive vaccination and literacy campaigns; these, however, could not be sustained because of a lack of resources and institutional weaknesses. The authorities also actively promoted environmental conservation and the role of women in development. Policy Framework Paper. 1991-93 20. Following a change in Government in late 1987, the authorities became increasingly conscious of the limits of their dirigiste approach to development. The dialogue on economic management issues with the Bank began during an economic mission in 1988. As the economic situation worsened dramatically in 1989, the Government accelerated the preparation of reforms and drafted a Policy Framework Paper (PFP). The authorities have assumed much of the initiative and responsibility for the formulation of the reform program. It was the subject of public debate at meetings in mid-1990, to which all political and economic groups were invited.  8 Because of the extensive consensus-building which the authorities chose to undertake, negotiations on the PFP were concluded only in December 1990. 21. The overriding objectives of the PFP are to raise the standard of living of the population through broad-based employment and income growth and to lay the foundation for sustainable economic and social development. The PFP includes action programs to alleviate the critical constraints on long-term developments slowing population growth, development of human resources, and improving natural resource management. 22. In the medium-term, the Government is aiming for economic growth of about 4 percent per annum while strengthening public finances and the balance of payments, in particular by promoting public and private savings. While there is some room for improved revenue performance, in the medium-term, Burkina will remain a poor country whose fiscal resources will not be adequate to provide essential public services such as primary education, basic health, and maintenance of public infrastructure. An effort is therefore being made to increase public sector efficiency through a restructuring of public expenditures. The program outlined in the PFP recognizes that irrespective of progress made in alleviating the key long-term constraints on sustainable growth and in improving public sector efficiency, implementation of policies to foster private initiative and investment will be the key determinant of growth performance in the medium-term. 23. To achieve the objectives set out in its PFP, the Government has adopted an appropriate fiscal policy stance, primarily by aiming to contain public consumption. At the same time, it will increase revenues through improved collection performance and expanded tax coverage. The Government will settle all of its external arrears in 1991, largely through debt-forgiveness and rescheduling on Toronto terms, and will resolve its internal arrears by 1993. Given Burkina Faso's exchange rate arrangement, containing domestic inflation will be essential for improved international competitiveness and better growth prospects in the long term. To limit its debt burden, the Government is pursuing a prudent external debt management policys it will contract or guarantee only concessional loans, with the exception of short-term trade credits and loans arising from Paris Club rescheduling. 24. Already in 1990, the Government made good progress on budgetary issues. The consolidated fiscal deficit (excluding grants) shrank to 7.6 percent of GDP in 1990, and the Government has adopted strong measures to effect a further decline, to 5.6 percent of GDP, in 1991. In the 1991 budget, military expenditures have been substantially reduced, personnel costs are smaller in nominal terms than in 1990, despite a substantial increase in the number of primary school teachers, and student stipends have been cut. The Government has also moved to improve the productivity of public investments and to encourage private sector development. Several public enterprises have been liquidated or sold, and a plan to accomplish substantial divestiture has been prepared. The banking system is being restructured. Price controls and trade regulations are being liberalized. These and other structural reforms constitute the basis for the present SAL I and are described in greater detail in Part II below.  9 25. PolitiCal Reforms. In parallel to its economic adjustment program, the Government has launched political reforms, aimed at democratizing the government process. Radical groups inspired by marxism and maoism, which previously dominated both political discourse and economic policy-making, were further marginalized during the public debate on the PFP. The new constitution adopted by referendum in early June, provides for political pluralism and representative government. In 1991, political reforms will continue with presidential elections in November, and multi-party legislative elections in December. C. Growth Prospects and Economic Outlook 26. The formidable constraints to development are not amenable to rapid change in a medium-term perspectives improved soil, water, and biomass resource management can affect agricultural output only gradually; reduction of population growth can only occur in the longer term if the Government's population policy is effectively implemented; only gradual progress can be made in increasing human capital, and hence labor productivity of the working population. Moreover, the economy is highly vulnerable to drought and to economic conditions in C6te d'Ivoire and Ghana because of the importance of workers' remittances. 27. Nevertheless, several factors favor growth in the medium terms a hard-working and disciplined population; a domestic market approaching 10 million people; unexploited mineral deposits (gold, zinc, copper); mmaufacturing opportunities (e.g., construction materials, garments, agro- processing) for local and regional markets; and room for expansion in both traditional and market-oriented agriculture (cotton, oil seeds, fruits, and vegetables), and in services such as repair facilities and tourism. In the longer-term, in addition to a continuing exploitation of these opportunities, faster growth would derive from an increasingly sound basis because the Government is a leader in the Sahel in addressing environmental degradation, the role of women in development, and population growth. 28. Economic projections of the most likely development scenario in 1991-1999 -- involving normal weather; more efficient investment, in part due to a rapid improvement in the private business climate; a continuous growth of exports (including, after 1993, exploitation of zinc deposits); a slow recovery in workers' remittances; a relative decrease in public consumption; a containment of imports through gradual import- substitution; debt relief; and an increase in external capital flows in response to the implementation of the adjustment program -- show GDP growth of about 4 percent per annum for the rest of the decade, slightly above the population growth rate estimated at 3.3 percent. The achievement of this target depends on the capacity of the economy to generate resources for rehabilitation and new investment. The growth of industry and services and, to a lesser extent, of agriculture, is based on a revival of private sector activity in response to improved incentives. 29. The current account deficit would decrease to about 10 percent of GDP by the end of the decade. After taking account of disbursements on existing and expected project-related commitments, the external financing needs average US$96 million per annum during the period of the first PFP  10 (1991-93). About US$10 million annually would be financed by Burkina's access to the IMF SAF, and a further US$43 million annually through IDA support for the s4justment program, of which the present SAL would be the first operation. If external resources are mobilized to cover the residual financing gap during the 1991-93 period, the net per capita disbursements to Burkina of Official Development Assistance (ODA) projected for 1993 (US$44) would still be less, in nominal terms, than the net per capita disbursements of ODA to other Sahelian countries in 1987 (US$59). A growth rate in external aid flows of about 6.8 percent per annum in US dollar nominal terms, which would be adequate to cover Burkina's financing needs in 1994-99, is therefore realistic if the Government continues to maintain an appropriate macroeconomic framework and implement structural policy reforms.