Burkina Faso - Economic Recovery Credit Project

Documcnut of The World Bank FOR OFFIClAL USI ONLY Report No. P-6296-BUR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS O(N A PROPOSED ECONOMIC RECOVERY CREDIT OF SDR 18.0 MILLION TO BLURKINA FASO MARCH 10, 1994 MI CROGRAPHI CS Report No: P- 6296 BUR Type: PR This document has a restricted distribution and may be used bY recipients only in the performance of their official duties. Its contents mav not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = CFA franc (CFAF) US$1.00 = CFAF 592 (January 31, 1994) CFAF 1 million = US$ 1,687 (January 31, 1994) SYSTEM OF WEIGHTS AND MEASURE: METRIC Metric U.S. Equiv I metr (m) = 3.28 fet (ft) 1 kilometer (man) = 0.62 miles (mi) 1 square kldometer (lan2) = 0.39 square mile (sq mi) I hectare (ha) = 2.47 acres (a) I metric ton (t) = 2,205 pounds (b) 1 kilogram g) = 2.2046 pounds (Ib) FISCAL YEAR January 1 - December 31  FOR OmCAL USE ONLY ABBREVIATIONS AND ACRONYMS BCEAO Banque Centrale des Etats de l'Afrique de l'Ouest BFW1 Banque pour le Financement du Commerce et de lindustrie BIB Banque Internationale du Burkina BND-B Banque Nationale de Developpement du Burkina BICIA Banque Internationale pour le Commerce, l'lndustrie et l'Agriculture BRCB Bureau de Recouvrement des Creances du Burkina CAMEG Centrale d'Achat des Medicaments Essentiels et Gen6riques CARFO Caisse Autonome de Retraite des Fonctionnaires CGP Caisse Generale de Perequation CNCA Caisse Nationale de Credit Agricole CSPA Caisse de Stabilisation des Prix des Produits Agricoles MEG Medicaments Essentiels et Gen6riques OFNACER Office National des Cer6ales ONATEL Office National des Telecommunications ONEA Office National de l'Eau et de l'Assainissement ONP Office National des Postes P1D: Public Institutional Development Project PIP Public Investment Program PNGT Programme Nationale de Gestion des Terroirs SCFB Societe des Chemins de Fer du Burkina SMIG Salaire Minimum Interprofessionnel Garanti SND Service National de Developpement SOFITEX Societe des Fibres Textiles SONABEL Societe Nationale Burkinabe d'Electricite SONACOR Societe Nationale de Collecte du Riz SONABHY Societe Nationale Burkinabe des Hydrocarbures TCI Taxe Conjoncturelle i l'Importation TDP Taxe Degressive de Protection TUPP Taxe Unique sur les Produits Ptroliers UREBA Union Revolutionnaire de Banques VAT Value-Added Tax WAMU West African Monetary Union WAEMU West African Economic and Monetary Union This document has a restricted distribution and may be used by recipients only in the performance of their oficial duties. 5ts contents may not otherwise be disclosed without World Bank authorization.  BURKI-NA FASO ECONOMIC RECOVERY CREDIT (ERC) Table of Contents Credit and Program Summary i PART I. THE GOVERNMENT'S ECONOMIC AND SOCIAL PROGRAM ....................................... I A. Recent Economic Developments and Reform Status ..........1. ....... B. Government Economic Policies for 1994-96 .................................5 C. The 1994 Economic Recovery Program .....................................6 Public Finance ....................................6 Monetary Policy .....................................9 Pricing and Wages Policy .....................................9 Structural Policies ............................................. 10 Priority Action Plan for Primary Education and Health ......... 11 D. Financing Requirements ...................................... 13 PART II. IDA'S STRATEGY AND OPERATIONS IN 1994 ..................... 14 A. Country Strategy and Priorities ............................................. 14 B. Follow-up Operations to the ERC in 1994 .................................. 15 PART III. THE PROPOSED ECONOMIC RECOVERY CREDIT ............ 16 A. Financing and Management of the Program . ................................ 16 B. Procurement and Disbursement ................................. 16 C. Environmental Aspects . ............................................. 17 D. Project Implementation ....................................... 17 E. Benefits and Risks ............................................. 19 PART IV. RECOMMENDATION ................... .......................... 19 ANNEXES Annex I Main Economic Indicators Annex II Status of Bank Group Operations Annex III Timetable of Key Processing Events Annex IV Government's Statement of Economic and Social Development Policies Annex V Matrix of ERC Actions for 1994  - i - BURKINA FASO ECONOMIC RECOVERY CREDIT (ERCI Credit and Program Summary Borrower: Burkina Faso Amounts: IDA Credit: SDR 18.0 million (US$25 million equivalent) Terms: IDA Credit: Standard with 40-year maturity Program Description: The African member countries of the Franc zone decided to devalue their currency, the CFA franc, effective January 12, 1994. The proposed credit would support the post-devaluation reform program as outlined in the Government's Statement of Economic and Social Policy whose main objectives are private sector led growth and the alleviation of poverty. Thle Government's program has also obtained the support of a second year arrangement under the IMF's Enhanced Structural Adjustment Facility (ESAF). By shoring up support for measures taken in the aftermath of the devaluation, the proposed operation is a crucial element in helping the Government deepen its adjustment strategy. Since 1991, adjustment in Burkina Faso has been supported by a Structural Adjustment Credit (SAL I) as well as a first year arrangement under the IMF's SAF and a first year arrangement under the IMF's ESAF. Implementation of SAL I has been satisfactory overall, and two tranches have been disbursed. The Government of Burkina Faso has already taken a series of key macroeconomic and structural measures to regain and consolidate competitiveness. The ERC is designed to support the implementation of these measures in 1994. The major measures are: (i) the devaluation of the CFA Franc from 50 to 100 CFAF/1 FP; (ii) increase in the producer price of prime quality cotton by 40%; (iii) a program of measures to attenuate the negative social effects of the devaluation; (iv) prudent demand management policies to reduce absorption by the public sector and limit wage increases; and (v) implementation of key measures to increase the coverage and quality of primary education and health services in the context of a priority Action Plan for 1994. Estimated Disbursements: Due to the urgent nature of the operation, the entire US$25 million would be disbursed in a single tranche shortly after effectiveness. There is no se.parate staff appraisal report.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDAI'ION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED ECONOMIC RECOVERY CREDIT TO BURKINA FASO 1. I submit for your approval the following report and recommendation on a proposed Economic Recovery Credit of SDR 18.0 million (US$25 million equivalent) to Burkina Faso. The credit is to help support the Government's reform efforts following the devaluation of the CFA franc on January 12, 1994. The Credit would be on standard IDA terms with a maturity of 40 years. 2. A third Policy Framework Paper, 1994-96, is being distributed to the Board for information in March 1994. A corresponding second-year ESAF arrangement for the equivalent of US$24.8 million is scheduled for consideration by the IMF Board on March 28, 1994. A Country Assistance Strategy (CAS) is under preparation and will be presented to the Board with the planned Population and AIDS project planned for Board presentation in May 1994. The last Board discussion of the Burkina CAS took place on February 4, 1992. PART I. THE GOVERNMENT'S ECONOMIC AND SOCIAL PROGRAM A. Recent Economic Developments and Reform Status 3. Since 1991 the Government of Burkina has imrlemented a wide range of economic and sectoral policy reforms under its structural adjustment program. A key objective of the reform program has been to improve the competitiveness of the economy, and lay the foundation for the sustained longer term growth needed to help raise standards of living and alleviate poverty. To this end, the policy agenda has emphasized: (i) restoring macroeconomic equilibria through greater fiscal and monetary discipline; (ii) improving efficiency in public sector resource allocation and use through containment of the public sector wage bill, and restructuring of expenditures in favor of the priority sectors of health and primary education, and operations and maintenance spending; and (iii) improving incentives for private sector development through trade, tax and regulatory reform, privatization of the public enterprises, banking sector restructuring and privatization, and the liberalization of domestic trade and prices. Major sectoral reforms have been launched in the transport and agriculture sectors. Good progress in implementing these reforms has allowed IDA to approve two sector adjustment credits in :992. In parallel to the reform program, the Goveiurnent has sought to strengthen institutional capacity, especially in public expenditure management. 4. Performance in maintaining a macroeconomic framework consistent with the objectives of the Program, as specified in h.e first and second Policy Framework Papers, 1P99-93 and 1993-95, respectively, has been satisfactory but uneven. Because of Burkina's membership in the West Africa Monetary Union, the program placed a particular emphasis on internal adjustment to achieve a depreciation of the real exchange rate and, in particular, on containment of the budget deficit. During  2 the first year, 1991, the Government successfully met all targets set for fiscal revenues and expenditures, and the overall fiscal deficit, excluding grants and exceptional expenditure, declined to 4.6% of GDP, from 7.5% in 1990. Notably, the nominal wage bill was reduced through a combination of early retirements, reduction in housing benefits, and foregoing of staff promotions with their attendant costs. Revenue performance improved through rigorous enforcement of tax collection, and revenues reached 14% of GDP, exceeding the target under the program. 5. In early 1992, however, Government's attention shifted to an increasingly charged agenda of a far-reaching political reform, with multiparty parliamentary elections in May. A budget for 1992 was adopted only in June following the elections and the establishment of a new government. Meanwhile, because of lagging revenues, which fell to 12.3% of GDP, the overall fiscal deficit, excluding grants and exceptional expenditure, widened to 7.2% of GDP, reversing most of the gain made by successful adjustment in 1991. The program adopted for 1993 and reflected in the 1993 budget included a series of structural measures aimed at containing the fiscal deficit in the medium-term. To that end, the salary scale was reduced by 10% as of January 1 in order to bring actual salary payments (which had been frozen and therefore did not reflect the effect of staff advancement into higher grades) in line with civil service regulations. A value-added tax was introduced, to replace turnover taxes and a new import tariff structure was adopted, providing for a simplified schedule and a reduced number of rate categories. The Government also courageously reduced the total allocation for university students' stipends by 27%. Adequate provisions were made in the budget to carry out the priority road maintenance program and to support the restructuring of the banking and cotton sectors. 6. While the Government successfully contained growth of the wage bill, fully in line with the agreed targets, by mid-1993 a serious revenue shortfall was evident. The principal reason was the irability of a weak tax administration to implement effectively the tax reforms, especially the new import tariff regime. The volume of imports passing through customs appears to have declined, both because of civil unrest in Togo, an important supply route for Burkina, and because of an increase of fraud. In addition, because of the crisis in the cotton sector, special import duty exemptions were granted for agricultural inputs. The Government also failed to take several revenue-enhancing measures foreseen to be put in place in early 1993 under the program, including variable import levies on rice and sugar and a temporary tariff surcharge to substitute for removed quantitative import restrictions. These measures were put in place in October 1993, after a detailed review of macroeconomic performance with Bank and IMF staff. The Government also transferred to the Treasury some parafiscal funds held by state enterprises to help compensate for the revenue shortfall. Because these measures were in place only during the last quarter c 1993, however, total revenues in 1993, estimated at CFAF 101 billion, were well below those projected for the 1993 program. Because of delays in implementation of reforms, there was also a shortfall in disbursements of aid in support of the adj-istmert program, including the second ttaiwhe of SAL X wiiih was iially ulecased in Fubruary 1994. Aldiough much of the expenditure linked to restructuring of the banking sector was delayed to 1994, this was not enough to compensate for the combined shortfall in revenue and in budgetary support, so, as a result, government payments arrears to domestic suppiiers as well as to external creditors increased, by an estimated CFAF 8.4 billion, during 1993. 7. While the overall fiscal situation became increasingly tenuous during 1992 and 1993, the Government sought to implement sit ambitious reform agenda in public expenditure management and in improving incentives to private sector investment and employment growth.  3 8. Public expenditure management. A containment of the civil service wage bill growth was achieved during the past three years, with the civil service wage bill declining gradually, as a proportion of current expenditure, from 61% in 1990, to 58% in 1991, 56% in 1992, and an estimated 50% in 1993.1 Higher education stipends growth was also arrested. These are commendable accomplishments, especially in a period of transition toward a more open and democratic regime. Implementation of systemic changes in the way expenditures are programmed and monitored has been much slower than anticipated, however, and the quality and timeliness of expenditure and revenue data have remained unsatisfactory. A re-organization of the Ministry of Finance and Planning which was a pre-requisite for the reforms in expenditure programming and control, was delayed by the political transition and ministerial changes. A Public Institutional Development project, supported by IDA under Cr. 2378-BUR approved by the Board in June 1992, has been launched to further the reforms in this area. 9. Since 1991, expenditures have been restructured to provide for a real increase in resources allocated to primary education, health, and infrastructure maintenance. In particular, 950 new primary school teachers were hired each year. There was little progress, however, withl the preparation of 'program budgets' in the primary education and health sectors, largely because of the weaknesses of the sectoral ministries and the difficulty of integrating development expenditure financed under projects. The ministries of health and primary education, which employ 40% of all civil service staff, were the first for which personnel files were reconciled with payroll files, generating for the first time information about the availability of different categories of personnel. 10. A public investment program was prepared by the Govermnent each year, following agreed criteria for project selection. With the exception of the paving of the Bobo-Orodara road, for which discussions on design standards and phasing have taken more than two years before being satisfactorily resolved, the program has remained free of large, low-return projects. Starting in 1992, the investment program was presented as part of the capital budget of the Government. The quality of the program in terms of coverage has improved continually. Monitoring of actual expenditures remains weak, however, largely because about 90% of the program is financed by donors and oversight over expenditures is dispersed. In addition, systematic identification of current expendituta that is financed under projects has only begin in 1993 in several ministries so the full integration of investment and current expenditure programming is not yet achieved; important steps have beeti taken in that direction, however. In parallel to preparation of the public investment program, the Government has started to establish a data bank, and sliding three-year programs, covering technical assistance, which accounts for as much as one third of external aid disbursements. 11. Private Sector Incentives Reforms. The Government has implemented a wide range of reforms in support of private sector development. Starting with a highly controlled economy with numerous public enterprises, state interference in banking decisions, a rigid labor code, quantitative import restrictions covering virtually all goods, an outdated investment code, and a proliferation of exonerations, the achievements of the program during the past three years are significant. Overall, these reforms have dramatically expanded the role of market forces in the economy and have encouraged private sector investment which is estimated to have grown by an average of 8% p.a. in real terms since 1991. ' In addition, some wage bill expenditure has been reclassified as Transfers (to reflect the financial autonomy granted to some entities) or as Materials (food and clothing for the Ministry of Defense personnel). Using the new classification, the wage bill is estimated to be only 44% of current expenditure in 1993.  4 12. Early on, the Government adopted modifications to the company law to induce greater efficiency in public enterpr1ses by placing their operations on commercial principles. The strategy was principally one of divestiture and of mobilization of private sector resources into activities formerly dominated by the state. A privatization commission has beer set up to oversee the disposal of enterprises. By the end of 1993, privatization was completed for 13 enterprises in the commercial and industrial sectors. A positive outcome of the program is that foreign investors have manifested a strong interest in taking over enterprises in association with private local investors; foreign capital is now present in 6 of the privatized companies. In addition, four enterprises have been liquidated, and a decision to liquida a fifth, OFNACER (grain mrarketing) has already been made. Negotiations to privatize four of the live major commercial banks are progressing satisfactorily2, while the fifth, BND-B, the development bank, will be liquidated. An agency established in mid-1991 to recover bad debts (BRCB) has been able to recover CFAF 4.5 billica by the end of November 1993, or slighltly more than the target established under the SAL I program. 13. The Government simplified and gradually removed priar import authorizations which initially covered nearly all imports. In January 1994, only three products (rice, sugar, and arms and explosives) were subject to any prior import authorization. In the last part of 1993, a declining protective tax was introduced on imports of 22 goods competing with those produced locally with the intent to substitute for the protection formerly accorded by quantitative import restrictions; initially set at 30% of c.i.f. value, it was intended to decline to 10% in two years and be abolished thereafter. In 1993, a new import tariff schedule was introduced, providing for only three tariff rate categories, with a much-reduced dispersion of rates. Several parastatal entities active in external trade have been reviewed; a re-formulation of their functions, to make them more responsive to private sector needs in a liberalized incentive environment, is being pursued under the Private Sector Assistance project (Cr. 2472-BUR) approved by the Board in March 1993. 14. Since 1991, price controls on both domestic and imported goods have been gradually eliminated so that, at the beginning of 1994, only utility tariffs, prices of petroleum products, wholesale prices of rice and sugar, and prices of medicine were subject to any government control. Price decontrol was fully accepted by both producers and consumers. Oter regulatory reforms have included adoption of a revised investment code in June 1992, providing for neutral and transparent incentives for investors. A Law Revision Committee has been established and is consolidating legal texWs, with follow-up training and other assistance under the Public Institutional Development project. The application of a revised labor code, adopted in December 1992, was made more conducive to employment generation by clarifications, published in November 1993, of the provisions of the code regarding the applicability and renewability of temporary labor contracts. 15. Since the mid-1980s, Burkina's economy was negatively affected by the economic decline in the CFAF zone as a whole, and particularly by lagging workers' remittances from the Cote d'lvoire where an estimated 3 million Burkinabe have emigrated. Since 1986, the thirteen CFA countries as a group have experienced a severe, prolonged recession that has cut real per capita incomes by some 40%. The downward deflationary spiral both impoverished the population of the zone and undermined its financial institutions. The internal adjustment programs pursued by the CFA zone countries have been unable to 2 These banks are: Banque International. flu turikia 031B), Banque Intemrationale pour le Commerce, l'lndustrie et I'Agriculture (BICIA), Cai.sse Natinale dc CriEdit '\grico1 (CNCA), and Banque pour le Financement du Commerce et de l'industrie (BFCI).  5 reverse the ongoing economic decline primarily because of the downward rigidity of wages and prices and the difficulty of making the requisite fiscal adjustments during a prolonged recession. The decline of world market cotton prices in the last two years aggravated the economic situation in Burkina as a reduction in producer prices, while insufficient to produce a profit for the cotton company, lead to a 16% fall in output in the 1993/94 crop year. Real GDP growth which averaged only about 3.3% between 1986 and 1991, or slightlv more than the increase in the population, dropped to an estimated 0.7% in 1992 and 0.4% in 1993. 16. Recognizing the limits on the effectiveness of internal policy instruments in restoring competitiveness to the economy, the Government of Burkina, after close consultation with other member countries of the CFA zone, decided to strengthen its adjustment strategy. Effective January 12, 1994 the fixed parity of the CFA franc was changed from 50 to 100 CFAF per French franc. This historic decision represented a major step to launch a broad development agenda in a region which had experienced serious economic decline. B. Government Economic Policies for 1994-96 17. Immediately after the re-alignment of the parity of the CFA franc, the Burkinabe Government has updated and revised its medium-term program of structural reforms in the third Policy Framewor.- Paper, 1994-96. The program includes measures to reduce the fiscal deficit and contain monetary growth as well as a continuation and deepening of structural reforms underway since 1991. The Government expects that implementation of this program will allow the Burkina economy to reach a higher growth path, averaging 5-6% p.a., in the late 1990s and make headway in reducing poverty, especially through an increase of access of the population to primary education and basic health care services. 18. Deriving the full benefit from the devaluation is a key objective of the Government's program in the 1994-96 period. It fully recognizes the critical importance of accompanying _ . r designed to ensure that the anticipated real depreciation benefits do materialize. Because the objective I % 4chieve and maintain a real depreciation of about 36% in foreign currency terms, the envisaged policies will ensure that the acceleration in inflation resulting from higher import prices is temporary and limited to permitting a re-alignment of relative prices sought by the change in the parity. The Government will therefore endeavor to contain increases in domestic costs, especially of wages. At the same time, it will pursue restrictive fiscal and monetary policies designed to contain inflation (as measured by the consumer price index); after an initial increase to 31% m 1994, inflation should decline substantially in 1995-96, to less than 5% in 1997. While real household consumption will fall by more than 2% in 1994, it is expected to recover in 1995 with the pickup of economic activity induced by the devaluation, and in 1996 it should reach a level more than 5% above that which would have obtained in the absence of comprehensive adjustment. The programmed substantial improvement in the fiscal situation (Government savings should exceed I % of GDP in 1996) along with increased incentives for private sector investment and production, will boost investment from 22% of GDP in 1993 to 27% in 1996, and domestic savings from 2% of GDP in 1993 to almost 9% in 1996. The external current account deficit (excluding official transfers) will be reduced from 16% of GDP in 1993 to 14.8% of GDP in 1996 thanks to a recovery in the growth of exports - in direct response to the devaluation - and a slowdown in the growth of imports to 1.6% per annum made possible by both the contractionary effect of the increase in their cost and expenditure switching to relatively less expensive domestic import-substitutes.  6 19. Improved competitiveness should provide the impetus for growtL in a number of secters of the Burkinabe economy. In agriculture, it will restore the financial viabi:ity of cotton production; silow local rice and sugar production to compete better with imports without recourse to distortionary trade tariffs; allow Burkinabe stockbreeders to cornpete more effectively against imports from the EEC and South America and to re-capture their share in the regional market; and promote further diversification into other high-value agricultural products and exports, notably .L `ts and vegetables. Enterprises in the export and import-substitution sectors (includirg gold, tires, bicycles, and textiles) will increase their profitability, which should stimulate investment and facilitate some of the planned privatizations. An important consequence of the re-alignment of relative prices will be a boost to real incomes in the rural areas, where close to 90% of the population lives. TIlis shift in income distribution is expected to slow migratory flows toward the urban centers and, because the rural population has a lower propensity to consume imported goods than urban dwellers, contribute to an improvement in the balance of payments. 20. The devaluation should also open a window of opportunity for accelerating human resource development through an expansion of access to primary education and health, for three reasons. First, the fiscal situation will improve (since the elasticity of tax revenue with respect to changes in the exchange rate is higher than that of current expenditure) giving the Government more room to manoeuvre in increasing the resource allocattion for these two priority s,..ors. Second, the reduction in real civil service wage rates will translate directly into lower unit costs3, allowing the Government to increase recruitrnent of primary school teachers and basic health personnel. 7hird, the devaluation provides an impetus to long-overdue referm of the pharmaceutical market, with the expected result that generic medicines, costing on average one third of their brand-name equivalents, will become available to a much larger proportion of the population. C. The 1994 Economic Recovery Program 21. In the context of the Government's medium term economic and social development strategy, the most pressing objectives for 1994 are to (i) mitigate the adverse impacts of the parity change while reducing aggregate demand so as to contain inflationary pressure; (ii) vontinue and deepen ongoing structural and sectoral reforms to ensure improved competitiveness and an economic environment conducive to private sector growth; and (iii) strengthen the delivery of essential social services. The Government will, in parallel, ensure that gains from earlier reforms, e.g. price liberalization, are not compromised in the effort to address the adverse short term consequences of the parity change. Public Finance 22. Public finance policy wiil aim at containing the overall deficit (on a commitment basis, excluding grants) to CFAF 171 billion (16.2% of GDP) while making the following exceptional expenditures (equivalent to 3.8% of GDP): settlement of domestic arrears (CFAF 11 billion out of an end-1993 stock estimated at CFAF 45 billion), repaying all arrears on external debt service (CFAF 6.6 billion), and making exceptional expenditure for banking sector and public enterprise restructuring (CFAF 20 billion and CFAF 2 billion, respectively). To contain the deficit, the Government's main objectives will therefore be to limit current expenditure to CFAF 144 billion, or 13.7% of GDP (down from 15.0% of 3 This link and its implications for the delivery of primary education and health services to a larger portion of the population were analyzed in the Public Expenditure Review, Report No. 11901-BUR, distributed to the Board in May 1993.  7 GDP in 1193), largely because wage increases will be well below projected inflation, and to achieve revenues of CFAF 122 billion, O0 11.6% of GDP. At the same time, the Government will aim to enhance the effectiveness of public expenditures and. by continuing a reform of the ta system, provide incentives to increased efficiency in the private sector. 23. Taxation and Revenues. Four broad objectives -- to simplify the tax system, expand the tax base, reduce tax (particularly customs) fraud, ;nd provide incentives to increased efficiency in the private sector - have guided the formulation of measures that art, being put in place in 1994. The Government will endervor to correct the slippage encountered in the implementation of the VAT and the new customs tariff, which were introduced in January 1993. In particular, when correctly implemented, the incentives provided by the new customs tariff will be fully in line with the objectives of the West African Economic and Monetary Union; there are only three tariff rate categories, with cumulative import taxation set at 11%, 15%, and 37%. In 1994, the Government will therefore put in place the following new measures to deepen the reforms launched , January 1993: (i) reduction of die number of VAT rates to a single rate of 15%; (ii) elimination of VAT exemptions on certain goods, including cement; (iii) replacement of specific taxes by ad valorem excise taxes, with the same rates applicable to both domestic and imported goods (except for cigarettes); (iv) elimination of the 4% statistical tax on exports; and (v) introduction of an import duty drawback for exporters. 24. In response to the devaluation, additional measures have been already implemented to mitigate the adverse impact of the devaluation. They are: (i) elimination of the temporary import tax on rice (13%) and sugar (19 %) because the need to protect domestic producers has been met by the devaluation; the price of rice is a particularly sensitive one in the urban areas, and this measure contributes to dampening the adverse impact of the devaluation; (ii) re-classification of fertilizer and insecticides into the lowest import tariff rate category to enhance the impact of the devaluation on incentives to increased agricultural production and conservation of fragile soil resources; (iii) reduction of taxation of petroleum products to an average of 62%, from 93% previously, so as to limit consumer price increases, provide better incentives to producers, and contain the cost-push effect in domestic industry; and (iv) reduction of import tariff rates on essential medicines, both to mitigate the adverse impact on consumers and to encourage pharmacists to increase the share of essential medicines (in contrast to nonessential ones) in their purchases.  8 Furthermore, by the end of June 1994, the Government will review the need for the declining protective tax (TDP), which was introduced on 22 products4 in late 1993 to compensate local producers for the protection they lost when quantitative import restrictio.is were removed. The objective is to reduce the applicable rate (30% during the first year) to at most 10% by January 1, 1995, at the latest, and to reduce the number of products on which any TDP is applied. The abolition of the TDP would both provide incentives to increased efficiency in local production and contribute to limiting consumer price increases. 25. Expenditures. Expenditure policy will place emphasis on improved resource allocation and use through ensuring adequate budgetary allocations for the social sectors and for operations and maintenance spending, while containing the wage bill and reducing non-essential current expenditures. Procedures for execution of expenditures will be strictly enforced in order to avoid the accumulation of domestic arrears. 26. Following the devaluation, the Government has formulated a revised budget and submitted it for the approval of the Parliament at its March session. Total expenditure and net lending will be limited to CFAF 293 billion, or 28% of GDP. Substantial provisions have been made for banking (CFAF 20 billion) and public enterprise restructuring (CFAF 2 billion). The revised budget is an appropriate response to the devaluation and provides, in particular, for the following: (i) the government wage bill will be limited to CFAF 58.1 billion (compared to CFAF 54.3 billion budgeted for 1994 before the devaluation). wages will be increased as of April 1, 1994, by 4% to 8% depending on the grade, with larger increases given to those nearer the bottom of the salary scale; this measure w-i; enhance the relative status of women both because they tend to hold lower-level jobs and because of sex discrimination in the assignment to salary grades; no other across-the-board increase will be granted in 1994 and recruitment will occur only in the health and education sectors; (ii) the allocation for routine road maintenance activities has been increased by 47% to CFAF 4.4 billion in the wake of the parity change to allow for execution of priority works, fully in line with the objectives adopted under the ongoing Transport Sector Adjustment Program-, (iii) the allocations for operations and maintenance (O&M) expenditures have been increased by 46% overall (to CFAF 23.2 billion), including an increase for the administration's consumption of water, electricity, and telephone (to CFAF 6.0 billion) and a 38% increase for materials and supplies spending in development-related services; the O&M allocation to defense has been kept constant in nominal terms at its pre-devaluation level of CFAF 3.3 billion; (iv) the allocation for secondary and higher education scholarships spending will be limited to CFAF 5.87 billion to reflect the doubling in domestic currency terms of transfers to students overseas and a 8% increase in the nominal value of transfers to be granted to 4 These products are: eggs, tiles, some bicycle parts, frozen seafood, carton paper, soap, polyethylene foil, corrugated metal sheets, plastic tubing, ethyl alcohol, edible oils, household insecticides, glue, foam mattresses, tires and tubes, radio batteries, bleached and dyed cloth, printed cloth, bleached and dyed thread, venetian blinds, polyethylene bags, wheat and wheat flour, and tomato paste.  9 domestic students as of April 1, 1994; the budgeted amount is only 13% higher in nominal terms than actual expenditure in 1993 because the initial 1994 budget fully met the Government's commitment to reduce the scholarship allocation by 6%; and (v) investnent spending is projected to amount to CFAF 128 billion (12.2% of GDP), a substantial real increase from 1993 when it is estimated to have been about 7.1% of GDP because project execution was hampered by inadequacy of local counterpart funds as well as by suspension of disbursements from several donors caused by a build-up of debt service payments arrears. The projected amount therefore reflects, in part, the completion of the 1993 program. Investment will be concentrated in the water supply, agriculture, infrastructure, and the social sectors. Emphasis will be placed on ensuring that counterpart funds are executed as budgeted. Monetary Policy 27. The central objective of monetary policy in 1994 is to limit growth in net credit to government, while allowing reasonable expansion in credit to the rest of the economy, especially to assure the financing of the 1994/95 agricultural crop season. Net credit to Government will not increase by more than 2.5% of beginning-of-period money stock, while increase in credit to the economy will be limited to 8.9%. The increase in money supply will be limited to 20.5%. Credit and financial intermediation policy will continue to benefit from the ongoing reform of monetary instruments being carried out by the BCEAO, notably the replacement of administrative credit controls with more indirect instruments, including a more flexible interest rate policy, the introduction of required reserve ratios, and the expansion of the role of the money market. The Central Banik discount rate has been increased to 14.5% from 10.5% immediately after the devaluation. Banks will continue to have access to the money market where interest rates will be determined by market forces. Pricing and Wages Policy 28. The Government's overridmg objective is to limit inflation to that needed to accomplish the change in relative prices expected from the devaluation. To dampen inflationary pressure and counter consumer panic, a wide range of price controls (fixed margins on most products and fixed prices for others) was put into place immediately after the devaluation. Since then, the Government has been gradually lifting these controls and allowing prices of more goods to reflect the change in the parity. At the same time, the Government recognizes that while the main instrument for containing inflation will be the effective pursuit of the public finance and monetary policies described above, a concerted effort to limit increases in local costs will also be necessary. The minimnum wage, which has been unchanged since 1988, will be increased by 10% (to the equivalent of US$0.23/hour) as of April 1, 1994. Of particular importance is the need to limit civil service wage increases to those compatible with the overall program. Hence, to diminish the likelihood that the powerful trade unions would obtain excessive wage increases and thus derail the program, the Government has decided to act on two fronts: (i) intensify the public information campaign to break speculative price behavior and organize a national forum (Assises) in mid-April to explain the benefits from a real depreciation of the exchange rate, and (ii) limit consumer price increases of a few key commodities (petroleum products, r ice, essential generic drugs, and school supplies) to less than those implied by the devaluation. 29. ne prices of petroleum products increased Lby 2540% after the devaluation. This limited increase was made possible by a reduction in taxation of these products (see para. 24 above). In the past,  10 the larger part of the levies had accrued to parafiscal funds (especially the CGP) which accumulated substantial resources while maintaining prices unchanged since 1982. Burkinabe consumers and producers have thus not benefited from the decline in world market prices since then; if taxation of petroleum products had not been reduced, the consume.r price of regular gasoline, for example, would have reached US$3.40/gallon. In view of the wide-spread use of kerosene by the population, and the benefit to the environment of providing incentives for its increased use in place of scarce firewood, the price of kerosene will be kept constant at its pre-devaluation level until July 1994. The consumer price of imported rice has been increased by 23% to CFAF 210/kg and will be maintained at that level for six months; the existing stock maintained by the CGP, along with the elimination of an import tax surcharge (para. 24), will make this possible. In addition, structural reform measures in the pharmaceutical market (para. 37 below) will increase the access of the population to affordable imported medications. 30. With the exceptions described in para. 29 above, the Government aims to allow the transmission of the full effect of the price increases implied by the devaluation to the economy. Therefore, tariffs for key utilities wili be revised during 1994 to pre-empt the need for direct subsidies5. Preliminary estimates show that the CPI has increased by about 25% since the devaluation. 31. The devaluation will shift the terms of trade in favor of the rural sector. The price of cotton, which is the major export crop, has been increased for the ongoing campaign by 40%, to CFAF 112/kg. At the previous producer price, the cotton sector would have suffered substantial losses; the producer price increase is the maximum one possible under current world market conditions and will permit the generation of a modest profit for the cotton company in 1994. The producer price increase will result in a significant improvement in the real incomes of farmers, both because they have already purchased imported inputs for the next campaign at pre-devaluation prices and because the prices for the goods consumed by the rural population are expected to increase less than the overall CPI. The prices of other agricultural cash crops such as fruits and vegetables, sesame, and sheanuts, are market-determined and will therefore come to reflect the full impact of the devaluation. An association of livestock exporters has already registered increased demand for Burkinabb livestock products from the CBte d'Ivoire market. Structural Policies 32. In 1994, the Government will continue to implement its program of structural reforms. An important priority will be to facilitate a private sector response. The banking sector reforms underway since 1991 (para. 12 above) will continue with the liquidation of the BND-B and the privatization and financial restructuring of the other commercial banks. Reforms in public enterprises will concentrate on sustaining and accelerating the privatization program; negotiations to privatize six companies are expected to be completed by the end of 1994, including SONACOR6, the national railway (SCFB), and the urban bus company (Regie X-9). The Privatization Commission will be strengthened, and the Government will seek from Parliament the authorization to offer for sale 18 additional enterprises; invitations to bid will be issued for at least six of these enterprises. The Government also plans to finalize the revision of the 5 In the medium-term, the Government also intends to reduce the indirect subsidies accorded, in particular, to the power company through exemptions from most import taxes on fuel. Action plans to reduce indirec-t subsidies to the power company (SONABEL) and the water supply utility (ONEA) will be adopted before the end of 1994. 6 Rice milling company, currently a subsidiary of the CGP; privatization is a condition of the release of the second tranche of the Agriculture SECAL.  11 mining code and of tax and other regulation of mining exploration, investment, and production so as to create conditions conducive to attracting increased interest from international investors while ensuring maximum benefits to the Burkinabe economy. The mining sector is expected to contribute significantly both to fiscal revenues and to exports in the late 1990s. 33. Regional Integration. During the Dakar meeting of January 10-11, 1994, the WAMU Heads of State signed the treaty converting the Monetary Union into an Economic and Monetary Union. This treaty provides for the setting up of mechanisms aimed at ensuring the convergence of national economic policies and their harmonization with the Union's monetary policy, and the standardization of taxation and foreign trade rules for the countries concerned. These mechanisms will join those that are already being used at the monetary level. Together, they will constitute an asset for complying with the restrictive fiscal and monetary policies that are necessary for the success of the adjustment program. The economic area will also make it possible to increase tha region's economic productions through the expansion of markets and economies of scale. This will enhance the growth of exports from the countries in the Union. WAEMU will also give greater weight to countries in the subregion in their economic relations with their partners. Priority Action Plan for Primary Education and Health in 1994 34. Primary education and health have been identified as the priority sectors in budget formulation and execution since 1991 (para. 9 above). The draft 1994 budget had been reviewed by the Bank and provided, in particular, for a 10% increase in the total budgeted amount for primary education and a 7.8% increase for health relative to estimated actual expenditure in 1993. This was fully in line with the action plan agreed with the Government under the ongoing SAL I program, and covered, in particular, the agreed improvement in the availability of materials in both sectors as well as the planned hiring of 950 new teachers for the 1994/95 school year. Following the devaluation, the Government therefore concentrated on formulating additional measures to strengthen the delivery of these services to a larger proportion of the population, taking advantage of the improved fiscal situation created by the parity change. The budgetary allocations for these two sectors have been increased so that the share of the operating budget earmarked for primary education has increased to 12.4% from 11.7% in the pre- devaluation budget, and that for health increased to 10.9% from 9.6%. Aside from a 38% increase in the allocations for materials and an increase in wage bill costs for existing and planned personnel, the Government decided to tackle several critical problems. Prinmay ducation 35. Under the ongoing program, the Government has been recruiting 950 teachers per year in order to reach its enrollment rate target of 40% in 1996/97.7 However, in the last two years, procedural difficulties have plagued the recruitment process, with the result that many new teachers were still not in classrooms as late as four months after the start of the school year. Moreover, about 12% of classrooms were slated to be taught by a revolving cohort of 1,100 young graduates performing their national service (SND) for one year; this service is managed by the Ministry of Defense whose procedures for the allocation of SND agents to schools resulted in much lost teaching time. Overall, at least three months of schooling have been lost for nearly one-fifth of primary school pupils. In addition, 300 classrooms are closed because of a lack of teachers; at the same time the school construction program 7 The current enrollment rate is estimated at 34%.  12 fell behind schedule because of weak works management capacity in the ministry of primary education. To eliminate the inefficiency introduced by the use of SND, by empty classrooms in some areas and insufficient infrastructure in others, and by the complex and time-consuming recruitment procedures, the Government has decided to take the following measures: (i) immediately recruit, from among those who passed the 1993 exam8, 300 teachers for empty classrooms so that an estimated 12,000 additional children could attend school for the remainder of the 1993/94 school year; (ii) formulate streamlined recruitment procedures and submit them to the World Bank by March 31, 1994, so that future recruitment could take place in a timely manner, putting teachers in classrooms at the start of the school year in October 1994; (iii) replace the stock 1,100 SND agents allocated to primary education with teachers starting in October 1994; and (iv) assign a large portion of the management of school construction and procurement of school equipment to the Faso Baara agency. 36. The availability of affordable school supplies has become a larger concern after the devaluation, leading the Government to impose price controls (para. 28 above). A full price increase to reflect the substantial import content would have further reduced, particularly, school enrollment of girls and of children from poor families in general. The Government has therefore decided to accelerate the introduction of textbook lending programs, for which a supplementary allocation of CFAF 1.6 billion has been included in the revised 1994 budget. Additional subsidies aimed at poor children, also included in the revised 1994 budget, will be provided for school feeding programs and to cover a part of school fees in private primary schools. Health 37. The availability of essential generic drugs (MEG) in Burkina has been extremely limited to date. Over 90% of the market has been covered by private pharmacists who have stocked primarily brand-name supplies, in large part because the Government regulated prices by setting fixed margins, encouraging pharmacists to import high-priced items. Public health centers have been inadequately supplied, resulting in very low utilization rates and considerable inefficiency. According to a 1991 survey, three quarters of prescriptions, which patients had to fill in pharmacies, were for brand-name medicines, and the average cost of a prescription was CFAF 1,500, or the equivalent of a week's wages. This clearly placed medical care out of the reach of the vast majority of the population. Reforms to encourage increased supplies of generic equivalents have been formulated but the Government has not put them in place effectively; the initial orders of the first stock of the procurement agency for essential generic drugs (CAMEG) arrived in Burkina only at the beginning of 1994. The devaluation provided the impetus to accelerate the implementation of policies to favor the availability of essential generic drugs. In consultation with the Bank and other donors active in the health sector, the Government has decided to implement the following measures: 8 More than 10,000 candidates took the competitive exam in 1993.  13 (i) purchase additional MEG for CFAF 1.97 billion for the public and non-profit health system; these drugs will be sold at prices set on the national price list; the introduction of wider cost recovery will be carried out with the assistance of UNICEF; (ii) establish a national price list for MEG, providing for full cost recovery and incentives to private pharmacists to begin to stock and distribute MEG; this price list will be widely publicized both as a measure to mitigate the social impact of the devaluation (since prices of generic drugs will be lower than the pre-devaluation brand-name equivalents) and to increase the familiarity of medical personnel and of consumers with generic drugs; this price list will also be binding on private pharmacists as of May 1, 1994 when the profit margin system of price controls will have been abolished; and (iii) authorize pharmacists to substitute generic equivalents in filling subscriptions and to operate branch retail outlets. 38. Monitoring. The above measures are fully in line with the on-going SAL I, which already stipulates close monitoring of expenditures in priority sectors (including primary education and health) and they have been integrated in the revised 1994 budget. To simplify monitoring, and in view of the Government's limited capacity, implementation of the above measures will be monitored during supervision of the ongoing SAL I operation. To facilitate monitoring, the Government will, in particular, provide quarterly reports on the execution of the budgets of the primary education and health ministries, identifying expenditure on didactic materials, the textbook lending scheme, and implementation of the contract with UNICEF. Accelerated Human Resource Development 39. Implementation of the Priority Action Plan for Primary Education and Health should help the Government launch programs to accelerate human resource development. It is clear that sustained development and reduction of poverty are impossible in a country where two thirds of children receive no formal education. Nine out of ten adults are illiterate and the productivity of labor, especially of women, is thereby greatly constrained. In the education sector, workshops are planned in the middle of 1994 and will invite participation from both education and public finance officials and from a wide spectrum of Burkinabe citizens, including community representatives, women's groups, parents of both enrolled and unenrolled children, and private school principals. Critical issues need to be addressed, including the options available to increase the enrollment rate of girls and to reduce unit costs, and reallocation of excessive secondary school and university student subsidies (now 24% of the education operating budget) to spending on instruction. In parallel to the formulation of the Priority Action Plan for essential generic drugs, the Government has finalized a program of development and decentralization for the public health services, aiming to improve the coverage, quality, and utilization of primary care services; the Priority Action Plan includes the critical accompanying policy measures to ensure an effective implementation of this program. D. Financing Requirements 40. After taking into account commitments already made for project loans, use of IMF resources of CFAF 15 billion, debt rescheduling already obtained under the May 1993 Paris Club Agreement of CFAF 13 billion, and CFAF 2 billion of debt reduction recently announced by France, the external financing  14 requirements for 1994 will amount to about CFAF 106 billion (US$ 174 million). These requirements will be covered by exceptional financial assistance. CFAF 55 billion is expected to come th.ough credits from multilateral institutions; CFAr 18 billion in transfers from the European Union; and CFAF 38 billion in official bilateral assistance. PART II. IDA'S STRATEGY AND OPERATIONS IN 1994 A. Country Strategy and Priorities 41. A full Country Assistance Strategy is under preparation. The following paragraphs outline the guiding principles for future Bank interventions and provide a context for the present operation. 42. Country's potential. Over the medium term, agriculture will continue to be the mainstay of the Burkinabe economy. Full implementation of the reforms outlined in the third PFP, and supported by this operation, the ongoing SAL I and Transport and Agriculture SECALs should allow significant improvement in Burkina's international competitiveness. This, coupled with ongoing efforts towards greater regional integration, should allow fuller exploitation of the opportunities provided by relatively large areas suitable for rainfed agriculture, especially those recently freed of onchocerciasis. Production and export of traditional exports, notably cotton and livestock, can be expected to expand significantly, while incentives will improve for increased consumption of local cereals. The potential for further expansion of relatively new exports such as fresh and processed fruits and vegetables is also considerable. Burkina's ailing industrial sector could be strengthened through the expansion of industrial growth linked to the agriculture sector (textiles, hides, edible oils) and the growth of other light industrial manufacturing activity. In the mining sector, there is potential for increased gold production as well as start-up of new mi-nes for zinc and manganese. 43. Tackling Long-Term Issues. By creating conditions which maximize Burkina's chances to realize its full economic potential, the adjustment effort in 1994 marks a new beginning and the possibility to tackle long term issues in a sustainable manner. The following principles will therefore underpin the Bank's support to Burkina: (a) Human Resources: An Absolute Priority. Realizing Burkina's potential will require not only the pursuit of sound economic policies and the maintenance of a stable macroeconomic framework, but also strong follow-up action to the recent initiatives to improve the country's human resource base. The policies adopted in 1994 and described in para. 34-39 above, represent a promising start for launching a broad based human resource effort. Without significant improvement in its primary school enrollment ratio (more than one million children do not have access to primary education), access to primary health care (mortality and morbidity rates are among the highest in the world), and concerted effort to reduce population growth (estimated at 3.1 % and rising), and to improve the efficiency of education and health expenditures, the country is unlikely to make much progress. IDA's assistance is geared to help the Government make rapid progress in these areas which have received a great deal of attention in the design of the measures accompanying the devaluation in 1994. Performance on human resource development will be a weighty indicator in assessing the country's overall economic  15 performance and gauging the future level of IDA assistance. (b) Natural Resource Management. Land degradation is the most serious environmental problem faced by Burkina. This problem has been aggravated by inappropriate cultivation methods and increasing population pressure. Improved natural resources management is critical to Burkina's longer term agricultural and overall growth performance. Burkina is a leader in the Sahel in promoting improved resource management methods and in increasing community involvement. IDA should continue to assist in this area, through follow-up operations to encourage the development of private irrigation and wider adoption of soil and biomass conservation methods, such as those promoted under the ongoing Natural Resources Management Project (PNGT). A National Environmental Action Plan has already been prepared but a more limited focus on essential priorities, streamlining of Government agencies, and improved coordination among donors are needed. (c) Institutional Development: Public and Private. Institutional weaknesses are particularly evident in the difficulties which the Government encounters in implementing its reform program. Overlapping and unclear responsibilities, lack of accountability, a proliferation of donor-driven initiatives, and weak capacity in both the private and public sectors hamper improved competitiveness of the economy and overall longer-term development. Despite some progress made, much remains to be done both in the public sector and in institutions needed to promote private sector development (Chamber of Commerce, business law, trade courts, etc.). B. Follow-up Operations to the ERC in 1994 44. The proposed ERC represents an exceptional response to a historic decision. Its design and conditionality reflect the situation in Burkina in two ways: (i) the need to provide timely support for the 1994 program and the measures taken to accompany the devaluation (streamlined conditionality as in the ERCs proposed for other CFA countries); and (ii) the need to integrate the measures supported by the ERC into the ongoing SAL I program which supports reforms in a number of the areas covered by the ERC (priority sector expenditure, import tariff reform, price liberalization). The ERC is part of the response planned by IDA to ensure the necessary conditions for a favorable supply response following the devaluation while continuing IDA support to human resource development. This response includes a stepped-up effort to encourage implementation of ongoing sectoral adjustment programs (SAL I and the Transport and Agriculture SECALs) and to accelerate the implementation of ongoing investment projects. In addition, further adjustment operations are planned to provide the necessary financing in support of comprehensive and far-reaching reform efforts. In parallel, investment operations aimed at poverty alleviation and generating a strong supply response and employment creation would also be launched. 45. Two projects in the health sector, Population/AIDS and Health/Nutrition are expected to be ready for Board presentation be'iore the end of PY94 to make headway in critical areas of human resource development. Because the negative impact of the devaluation will be concentrated in urban areas, IDA plans to expand its support to urban private-sector employment generation for unskilled and semi-skilled laborers by building on the successful performance of the Faso Baara contracting agency. There may also be scope to expand the use of these contracting mechanisms to reaching vulnerable groups (e.g., widows with small children) and to nutrition programs, especially provision of nutritional supplements and feeding  16 of poor pregnant women and infants. Some of these actions could be implemented under existing projects, with additional resources from supplementary credits. 46. The first subsequent adjustment operation would support rationalization of regulations governing mining exploration and production. The aim is to adapt the regulatory framework to current international standards so as to attract foreign private investors on terms that would maximize the benefits of mine development to the Burkina economy. This operation is expected to be presented to the Board in the second half of 1994. Looking beyond, a strong performance in implementing the adjustment program described in this report would allow IDA to proceed with the preparation of a second SAL, to support further strengthening of incentives to private sector development and a concerted effort to bolster the position of women and support poverty alleviation through accelerated human resource development. PART III. THE PROPOSED ECONOMIC RECOVERY CREDIT A. Financing and Management of the Program 47. It is proposed that an Economic Recovery Credit in the equivalent of US$25 million be allocated to Burkina on standard IDA terms. The objectives of the credit are: (i) to support the Government's reform program, outlined in the Government's Statement of Economic and Social Development Policies, dated March 7, 1994; (ii) to provide the necessary financial assistance during the transition period in which follow-up operations are being prepared; and (iii) to deepen the policy dialogue between the Government and IDA. 48. Due to the urgent nature of the operation, it is proposed that the credit be disbursed in one tranche. The Government's ability to consolidate early gains from the devaluation and respect its financial program requires that budgetary support be made available rapidly. The full amount of the Economic Recovery Credit resources has therefore been programmed for disbursement by end-June 1994. B. Procurement and Disbursement 49. Procurement procedures have been designed to permit rapid use of funds while ensuring efficiency and accountability in the process. Simplified international competitive bidding ([CB) would be required for eligible imports by public agencies and by the private sector exceeding US$5 million. Procurement by public agencies for items costing below the threshold will follow standard government practices found to be acceptable in the past. Eligible imports below the threshold by private entities would be procured in accordance with normal commercial practices, and wherever possible, quotations from eligible suppliers from at least two countries would be sought. Single source purchasing would be permitted for proprietary equipment or where compatibility with existing equipment requires standardization. Contracts valued less than US$2,500 would not be eligible for financing under this credit. Procurement documentation will be maintained for ex-post review by the Bank. This documentation may consist of (i) a brief description of procurement procedures; (ii) an evaluation summary giving number of bids received; (iii) a comparative statement of prices received; (iv) dates of contract and payments; (v) a copy of the contract; (vi) copy of invoice; and (vii) any other documentation required by disbursements.  17 50. The proceeds of the credit would be used to reimburse 100% of the foreign exchange cost of eligible general imports. On an exceptional basis, to allow for timely disbursements, no limitation is placed on petrol or food imports. Public and private sector imports would be eligible, except for (i) a negative list and (ii) goods already financed by bilateral or multilateral credits and grants. 51. The Government will establish a special account at the Central Bank (BCEAO) to facilitate disbursements. The authorized allocation for the special account would be CFAF 6 billion (US$10 million equivalent). This account would be replenished regularly on the basis of fully documented reimbursement applications in excess of US$2 million or on the basis of statements of expenditures (SOEs) for expenditures below that amount. The Borrower would indicate on the SOEs the nature and origin of the goods, as well as the payment date, and would maintain all relevant supporting documentation (invoices, evidence of shipment, customs declarations, evidence of payment) for review by Bank supervision missions. Expenditures under the IDA credit would be in accordance with normal IDA rules. The proposed date of eligibility would be set in light of the Government's adoption of a deepened austerity program in the second half of 1993. In order to permit timely disbursements in the amount needed to keep the program on track, the total amount of the credit would need to be eligible for use for retroactive financing. Given Burkina's disbursement patterns, the selection of August 2, 1993 (date of suspension of repurchase of CFA franc notes outside the CFA zone countries) as the cut-off date for retroactive financing would provide timely effective access to the credit proceeds. Exceptional retroactive financing would thus meet an essential objective of the operation, as would the exceptional authorization of a special account to be used should the Government be unable to gather in time the documentation required to take full advantage of retroactive financing. C. Environmental Aspects 52. The project would be consistent with IDA policy and would follow acceptable IDA procedures. In conformity with IDA policies for adjustment operations, no environmental rating has been assigned. The reduction of tariff rates on fertilizer imports is expected to have a positive effect on the quality of soil resources, and the reduction of taxation of kerosene should contribute to slowing of the rate of deforestation. D. Project Implementation 53. The Ministry of Finance and Planning is the Government's organization responsible for coordinating and implementing the proposed project. Bank staff will continue to coordinate closely with IMF staff to ensure adequate monitoring of key economic policies and indicators. In addition, regular reports will be submitted to the Bank on the status of the Priority Action Plan for Primary Education and Health (para. 35-38 above) whose implementation will be monitored during supervision of the ongoing SAL I program. The Government will arrange for an audit report by an auditor acceptable to IDA to be provided within four months after the end of each fiscal year of the Borrower.  18 54. The policy measures to be taken under the proposed credit are detailed in the Government's Statement of Economic and Social Development Policies (Annex IV). As conditions of negotiations, the Government has taken the following actions: (i) Realigned the exchange rate, fixed at 100 CFAF for 1 French franc, effective January 12, 1994 (ii) Increased producer price of prime quality cotton by 40% to CFAF 112/kg (iii) Suspended the variable protection tax on sugar and rice imports (iv) Reduced the number of VAT rates to a single rate of 15% (v) Reduced taxation on petroleum products to limit price increases stemming from the parity change within the range of 25 to 40% and to maintain the price of kerosene unchanged (vi) Limited increases in minimum wage rates to 10% in 1994 (vii) Limited increases in civil service salaries to 4-8% and in public sector pensions to 8% (viii) Set civil service wage bill ceiling in 1994 budget to CFAF 58.1 billion (ix) Increased the central bank discount rate from 10.5% to 14.5% (x) Increased non-salary social expenditure allocations fo,r ongoing programs in real terms (xi) Increased allocation to routine road maintenance to implement program of works agreed under the Transport SECAL (xii) Allocated resources in the revised 1994 budget for new measures in social sectors (textbook lending, essential generic drugs) (xiii) Allocated resources in the revised 1994 budget to hire primary school teachers: 300 teachers immediately, and 2,050 teachers at the start of the 1994/95 school year (xiv) Formulated streanil;ned recruitment procedures for primary school teachers (xv) Prepared a price list of essential generic drugs on the national list 55. Before effectiveness (expected by April 30, 1994), the Government would: (a) repeal all price controls established after January 12, 1994, with the exception of those referring to petroleum products, public utility rates, and school supplies; (b) abolish its system of margin controls for all drugs; and (c) set prices of essential generic drugs on the national list.  19 E. Benefits and Risks 56. Benerits. The proposed operation is expected to help the Government of Burkina implement appropriate policy changes to achieve a significant real depreciation of the exchange rate and improved competitiveness of the economy. Improved competitiveness will help boost growth and incomes, particularly in rural areas of Burkina, and thus contribute to a reduction of poverty. The Credit will also allow Government to meet the short term financing requirements of the parity change and support it in the implementation of the Priority Action Plan for Primary Education and Health which will enhance human resource development. 57. Risks. Short-term costs, particularly loss of employment and a decline in the urban standard of living, may put the Government in difficulty with vocal interest groups such as students, labor unions, and civil servants. However, the public information campaign on the benefits of the devaluation and selected remedial measures (reduction in tax and tariff rates to limit the price impact on key consumer items) have been put in place to help address these risks. The immediate and visible impact of employment creation in urban areas will also help mitigate some of the risks. 58. A second risk is that excessive inflation would come to erode much of the gain in competitiveness. International experience suggests, however, that devaluations in low-inflation countries can effectively bring about real depreciations as an increase in inflation is typically short-lived. The history of low inflation in the CFA zone, which is largely due to the supra-nationality of monetary policy - a unique situation in the world -- confers an important advantage and contributes to reducing this risk. PART IV. RECOMMENDATION 59. I am satisfied that the proposed credit would comply with the Articles of Agreement of the International Development Association and recommend that the Executive Directors approve it. Lewis T. Preston President Washington, DC March 10, 1994 Attachments  .. : ' . . ,: '5 I;!R;L;; j IA. ,:U(lI 1l) I(, \JT0 1 Mast S?eamx P fRiorvuscardw gRou 25-30 15-20 vec.WG sl bigh Uwi': of yes ycrar aof"e& Sahctan Lkns irwv I,IicaXaY rUee agao af4 (frweJ niwAe nRp I'OVEERTY Upp~ poveny line 1C0 Ufaur. Hecdwount twdex % of pop. LoWTe povertl 1= local CUT. Headcoun indx % of pop GNP per capita USS 70 110 290 350 350 1,610 SHORT TERM INCOME INDICA1TORS Urw2lled urban wages local cu.. .. .. Unailled nrual wages Ru-al tmm of trade Cot3uantf pime index 1987? 100 29 43 103 Lo Zr income Food .. 105 Urba .. .. ... Rural SOCLIL INDICATORS Public eNwnditte on basc social semceS % of GDP 10 ' 3 3 irmo1llne ratit3 Peim!ry %bool agepop. 12 16 36 70 113 100 'ale " 16 21 45 76 122 106 Female 8 12 28 60 106 98 MontaIity Infa monrality thou. live bi;bs 190 166 133 104 70 40 Under morality .. .. 199 177 98 53 1ninstnization MeasleS %a8aScUP .. .. 40 40 73 70 DPT .. .. 30 35 81 74 Cbild malmurition (undu-5) ,* *- 46 ifie eXcany Total years 38 42 48 51 63 67 Fan maletaes mtio 1.08 1.08 1.07 1.06 0.95 1.08 Toal festiiity rae bir;t per woman 6.4 6.5 6.5 6.4 3.7 3.5 Matenalmon ality ntC 100,000 fiveb;nh .. .. b10 Population growth rate Infant mortality rate Primary eurolimeat (P=rcent) (IhOU. of live birt) ( ) 6- 250 120+T 5 I 200 100 4 180 3 ~~~~~~~~~~~~~~~~~~~60- 100 o n _ L I LE-1-IL-1 2~~~~~~~~~~~~~~~~~~~~~~~2 aid 60s maid70s i60s mid 70 -lid 70} we L i-in Faw Low anvome  ANNEX I page 2 of 5 Table 1: BU'RKINA PASO: SOCIAL INDICATORS Momt Same resiovl~seltome gpoop Nest 23.30 13-20 recant SU&- higher U'nit of Yeun yea" esdmae SoJ, woe LoW. Lacow., Indicatr meAsure agO ag0 (five) Afrwc income gFoup HUMAIN RESOURCES Popaladon (mrt'1991) thousands 5.103 6,202 9,272 488,932 3,127,265 773.803 Age depandency ratio ratio 0.83 0.88 0.95 0.97 0.66 0.71 Urbati % ofpop. S.2 6.3 9.0 28.7 40.1 53.9 Population gowth rate, annual % 2.0 2.1 2.3 3.0 1.9 1.7 Urban 3.9 4.0 2.8 5.0 5.2 3.1 Labor force (1S-64) thwaunds 2,680 3,111 4,261 203,947 1,448,10 302,448 Agriculture % of labor force 89 87 . Industry ~ ~ ~~~~~~~~3 4 Fernale 49 48 46 37 33 32 Fernale per 1 00 mAles urban number ..94 . Rural ..110 . NATURAL RE-SOURCES Ame tho. sq. kmn 274 274 274 23,066 38,828 23,990 Deraity pop. per sq. kmn 19.0 23.0 32.0 20.0 77.0 31.0 Agricultural land % oflandsram 44.5 45.8 49.5 5 1.0 47.4 41.8 Chang in UicuIwil and annual % 0.1 0.7 0.0 0.0 0.0 0.0 Agricultual land u dprintion %0.0 0.1 0.1 5.5 13.7 12.6 Fmoret a woodland tho. sq. km 81 75 67 6,651 9,197 5.396 Deforestation (net) annual % -0.7 .08 0.9 INCOME Household income Share of top 20%/ of households % of uwonw. .. Sharm of bottom 40% of households . .. Share of bottom 20%/ of households . .. EXPENDITURE Food % of GDP ... 35.6 Staples ~ ~ ~ *.... 13.9 Meat, flab. milkc chees, Om... 14.6 ueaiinqioewa tho. metietaomst 15 26 145 7,838 36,008 44,41i Food aid in oemeak 28 44 2,677 6,669 4,047 Food prouon per capita 1979-81-100 125 106 128 94 122 101 Fartiizar coLaUncon kg4za 0.0 1.0 3.0 14.5 41.3 94.2 Shame of agricultue in GDP % of-DP 46.0 37.5 41.6 29.2 28.7 Homing %Of GDP 15.1 Avenge housebold size Fp moper household Urban .. . fixed investinat: housing % Of GDP ..34 Fuel VWd power % of GDP . . 11.6 Energyconurptionper capita, kgof oilequiv. 7 217 100 350 1,249 Hoaseholds with elecricity Urban % of hushods .... Rursi . .. Tiunsport and coanmunkcatlo % of GDP . . 14.9 Fixed invesniat: taraipost equipmeft . .1.9 Total roadlen0h Ion ... 11,231 INVESTMENT IN HUMAN CAPITAL Healt Accesato healt cam, % ofpop. . Populaton per physician persons 73,957 ,. 57,320 Population per nurs 4,145 3,999 1,682 Populton per hospital bad . . 3,392 1,328 1,048 509 Acoem to safe WatW %o opop. .. 23.0 67.0 36.7 70.6 uema . 50.0 43.0 74.3 79.3 Rural. 23.0 69.0 24.2 62.8 Oral reizydyrotion therpy (under-$) % ofcase .. IS3 35 32 Edmeadom Ores awoliint MOt Socoondasy %ofachoiw.pqop 1 2 7 18 44 54 Fanal I I 5 1 4 37 Pupill4eacher ratio: primaxy pupils per toeahe 47 47 57 39 39 25 PupiJ4eacber ratio: sewondary e36 23 30 ..20 Pupils roeahng Ssade4 %Of cohosi .. 72 72 69 Repewateri: primary % ofttatl toIl 18 7 1 7 Iliteascy %of pop. (ap 15) 9991 82 51 39 Feakal % offem (kV I+) . .9 1 62 52 NET2pR= circulation pe thou, pop. 0 5 Source: World Bank Intenational Eoonomics Departnsst April 1993  ANNEX I Table 2 Page 3 of 5 BUJRKINA FASO: KEY INDICATORS Actual Prelim. Estim. Projections .... .............................................................. .... ..... .... ..... ...... ............. ............ 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ~~~~~~~~~~~~~~~~~~~~~~~~...................................... .......................................................... ......... ....... ..... .... ..... ..... .. .... Ecorimic Irdicators (armaL X change) Real GDP 1.3 5.7 3.3 -0.0 6.0 0.7 0.4 3.3 6.4 7.7 Total real consowption per capita 2.8 1.3 -1.9 0.1 0.2 -2.2 -1.3 -12.3 4.0 4.6 ReaL exports of GNFS 19.7 -6.1 -8.4 32.2 -3.5 24.1 -2.8 9.0 12.1 13.2 Real inports of GNFS 2.2 1.4 -6.9 12.3 8.2 1.2 3.3 -2.1 2.6 4.8 Cur. Acct. Bal., before off.transfers (X of GDP) -12.1 -12.0 -12.3 -12.2 -14.1 -14.6 -16.0 -21.5 -17.6 -14.8 Consurer price irdex -2.7 4.0 -0.3 -0.8 5.1 -0.8 1.8 31.2 7.5 6.3 National Accounts GDP ac constant 1985 prices & exch. rate (US$ miLlion) 1328.4 1404.2 1450.9 1450.1 1537.3 1547.9 1554.6 1605.2 1707.1 1838.0 GDP at current prices t S million) 2022.8 2237.8 2174.7 2580.7 2752.5 2939.3 2781.8 1737.8 1973.4 2230.7 GDI/GDP (%) 19.1 21.6 21.2 19.1 22.7 21.4 22.1 31.9 28.8 26.7 Private rvestment/GMP (%) 11.2 9.6 11.1 11.2 11.6 14.5 15.3 19.9 19.5 19.0 GDS/GDP (%) -0.4 2.9 3.2 3.3 4.2 2.9 2.2 6.8 7.9 8.9 Private savings/GDP (X) -1.7 3.1 4.1 5.3 2.5 3.3 4.6 8.9 8.2 7.7 Public savings/GMP (%) 1.2 -0.2 -0.9 -1.9 1.7 -0.4 -2.4 -2.2 -0.3 1.2 External Debt Total debt outstanding (USS million) 827.8 845.3 71T.3 834.0 967.8 1128.7 1580.1 1487.6 1693.2 1824.7 Total debt service due (US$ miltion) 61.2 54.4 321.9 63.5 61.0 60.0 69.0 72.3 70.2 67.5 Debt outstardinr/GDP (X) 40.9 37.8 33.0 32.3 35.2 38.4 56.8 85.6 85.8 81.8 Debt service due/Exports goods & services C%) 22.0 18.8 126.8 17.3 17.2 17.2 20.8 20.2 16.2 13.2 Fiscal Ind.cators (% of GDP) Central goverrment revenue, excl. grants 13.0 11.8 11.5 13.2 14.0 12.3 12.6 11.6 11.6 11.5 Central goverrment expenditures & net lerding 24.0 21.1 19.2 20.8 21.5 19.6 21.8 27.9 22.2 18.0 Current expenditures 11.8 12.0 12.5 15.2 12.2 12.7 14.9 13.7 11.9 10.3 Capital expenditures 11.6 9.0 6.5 5.8 9.3 6.9 7.1 14.4 10.6 7.9 Other Population growth rate (%) 2.7 2.7 2.8 2.8 2.8 2.9 2.9 2.9 2.9 2.9 Sources: 1987-91: IMF, Recent Econanic Developments, various issues; 1992-96: IMF, PFP3 Working Tables, March 2, 1994.  ANNEK I Table 3 Pagc 4 of 5 BURKINA FASO: BALANCE OF PAYMENTS ............................. (in US$ mitlion) Actual Prelim. Estim. Projections 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Trade balance -245.4 -246.8 -257.0 -262.2 -318.7 -354.6 -362.4 -275.4 -249.7 -230.6 Merchandise exports, f.o.b. 229.8 240.1 184.6 280.6 283.2 287.7 273.5 295.0 357.0 421.7 Merchardise inports, f.o.b. 475.1 486.8 441.7 542.9 601.9 642.3 635.9 570.4 606.8 652.3 Non-factor services (net) -150.1 -173.2 -134.2 145.4 -190.7 -190.7 -191.1 -161.1 -162.0 -166.1 Credits 34.9 34.9 51.4 68.7 53.2 61.2 58.4 62.9 76.0 89.8 Debits 185.0 208.2 185.6 214.1 243.9 252.0 249.5 224.0 238.0 255.9 Factor services (net) -14.3 -13.1 -16.9 -11.8 -22.0 -28.0 -29.3 -27.0 -28.6 -28.4 Credits 14.0 14.1 17.9 17.6 18.1 0.0 0.0 0.0 0.0 0.0 Debits 28.3 27.2 34.8 29.4 40.1 28.0 29.3 27.0 28.6 28.4 of which: Interest die 28.3 27.2 28.5 23.5 29.4 18.7 24.5 26.4 26.7 26.7 Private transfers (net) 165.6 165.2 140.4 105.0 142.9 144.7 138.5 90.4 93.2 94.6 Current account balance, exct.officiat transfers -246.1 -267.9 -267.7 -314.4 -388.5 -428.6 -444.4 -373.1 -347.1 -330.5 Net official transfers (excludirn capital grants) 69.9 74.2 306.3 157.6 198.5 245.6 245.3 172.9 140.9 134.0 Curr. acct. baLance, inct. offic. non-capital transfers -174.3 -193.7 38.6 -156.8 -190.0 -183.0 -199.1 -200.2 -206.2 -196.5 Net LT capital 205.0 190.7 -149.8 126.0 215.6 205.9 196.5 268.3 229.9 199.6 CapitaL grants 123.1 127.6 50.5 67.9 100.7 86.1 83.8 107.2 90.5 84.0 Net direct foreign investrmnt 6.0 1.7 11.3 8.1 0.7 0.0 0.0 0.0 1.6 3.2 Net LT debt 75.9 61.4 -211.6 50.0 114.1 119.8 112.7 161.1 137.8 112.4 Dishursenents 108.8 88.6 81.8 90.0 145.7 151.5 152.5 206.2 179.3 151.1 Amortization due 32.9 27.2 293.4 40.0 31.5 31.7 39.8 45.1 41.5 38.7 Other capital flows -20.8 23.8 -19.4 -12.5 5.3 34.5 5.1 0.0 0.0 0.0 Net short-term capital 5.3 3.4 -13.5 4.0 4.3 -20.8 0.0 0.0 0.0 0.0 Monetary capitaL -23.3 -3.4 0.0 7.3 7.1 0.0 0.0 0.0 0.0 0.0 Errors & omissions -2.9 23.8 -6.0 -23.9 -6.0 55.3 5.1 0.0 0.0 0.0 OVERALL BALANCE (deficit -) 9.8 20.8 -130.7 -43.3 30.8 57.4 2.5 68.1 23.7 3.1 FINANCING -9.8 -20.8 130.7 43.3 -30.8 -57.4 -2.5 -68.1 -23.7 -3.1 Net foreign assets -32.2 -35.6 48.6 -6.2 -26.6 -54.7 -36.0 -50.0 -57.4 -45.2 Net use of Furd resources 0.0 0.0 0.0 0.0 8.5 9.1 12.2 24.6 24.4 -0.8 Purchases 0.0 0.0 0.0 0.0 8.5 9.1 12.2 24.6 24.4 0.0 Repurchases 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.8 Other char,e in reserves (increase -) -32.2 -35.6 48.6 -6.2 -35.1 -63.8 -48.2 -74.6 -81.8 -44.4 Change in arrears (increase +) 22.4 14.8 65.5 49.6 -139.3 -24.2 24.1 -44.2 0.0 0.0 Debt relief 0.0 0.0 16.6 0.0 135.1 21.5 9.4 26.1 8.7 0.0 ResidjaL financing gap 0.0 -0.0 0.0 0.0 -0.0 0.0 -0.0 -0,0 25.0 42.1 Sources: 1987-91: IMF, Recent Econanic Developuients, various issues; 1992-96: IMF, PFP3 Working Tables, March 2, 1994.  ANNEX I Table 4 Page 5 of 5 WRJKINA FASO: C4JSOLIDATED GOWRNMENT FINANCIAL OPEARTIONS (in billions of CFA francs) ActuaL Prelim. Estim. Projections ...... ........ .............. ............. ......---- .-..-------.-.-..------- 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ~~~. . .. .... ... .............. ........................ .......... ............... .... ..... .. ..... ..... . ... ---- --------------- Totat revenue 79.2 78.3 79.9 92.9 108.5 95.4 100.7 122.0 139.9 158.8 Current revenue 79.2 78.3 79.9 92.9 107.9 95.4 99.9 121.3 139.9 158.8 Of i.hich: tax reverue 65.1 69.7 66.9 76.4 83.2 78.7 73.7 110.0 125.0 141.7 Capital revenue 0.0 0.0 0.0 0.0 0.6 0.0 0.8 0.7 0.0 0.0 Total experditure 142.6 139.9 131.5 147.1 166.5 152.5 175.4 295.7 270.6 250.9 Current expenditure 71.8 79.9 86.4 106.6 94.6 98.5 119.1 144.0 143.3 142.4 Capital experditure 70.8 60.0 45.1 40.5 71.9 54.0 56.3 151.7 127.3 108.5 Net lerding 3.5 0.5 1.7 -1.3 0.3 0.2 -1.6 -3.1 -2.8 -2.5 OveralL fiscal balance (commitm. basis) -66.9 -62.1 -53.3 -52.9 -58.3 -57.3 -73.1 170.6 -127.9 -89.6 Change in arrears 6.0 5.1 1.5 11.9 -22.4 3.6 3.7 -17.3 -17.4 17.4 overall fiscal balance (cash basis) -60.9 -57.0 -51.8 -41.0 -80.7 -53.7 -69.4 -187.9 -145.3 -107.0 Firancing 60.9 57.0 51.8 41.0 80.7 53.6 69.4 187.9 145.3 107.0 Dacestic financire 1.7 15.2 18.1 3.0 19.1 -3.1 1.8 -9.9 -31.8 -27.4 Banking system 4.6 -0.6 1.7 1.8 -1.0 -0.6 2.4 -2.2 -23.8 -18.7 Other -2.9 15.8 16.4 1.2 20.1 -2.5 -0.6 -7.7 -8.0 -8.7 External financirg 59.2 41.8 33.7 38.0 61.6 56.7 67.6 197.8 177.1 134.4 Grants 40.3 26.3 76.3 20.0 37.0 34.3 39.3 103.0 74.6 62.0 Loan disbursenents 21.7 20.5 20.2 14.6 28.5 27.4 30.6 108.2 90.0 68.2 Amortization due 6.9 6.2 90.8 8.1 4.7 7.2 9.8 22.8 21.9 22.2 Anmrtization arrears 4.1 1.2 22.7 11.5 -37.4 -3.6 4.7 -20.1 0.0 0.0 Debt forgiveness 0.0 0.0 5.3 0.0 1.2 0.0 0.0 0.0 0.0 0.0 Debt reschedcl irg 0.0 0.0 0.0 0.0 37.0 5.8 2.8 14.7 4.0 0.0 Residual financirng gap -0.0 0.0 0.0 -0.0 0.0 -0.0 0.0 14.8 30.4 26.4 Sources: 1987-91: IMF, Recent Eccacsnic Developmnets, various issues; 1992-96: IMF, PFP3 Working Tables, March 2, 1994.  ANNEX II BURKINA FASO ECONOMIC RECOVERY CREDIT STATUS OF WORLD BANK OPERATIONS IN BURKINA FASO (As of March 3, 1994) Amount in US$ million (less cancellations) Fiscal Undis- Closing Credit No. Year Purpose IDA bursed Date Twenty nine (29) Credits closed 227.76 15980-BUR 1985 Education III 21.60 3.08 03/31/94 (R) 16070-BUTR 1985 Health 1 26.60 6.55 07/31/94 (R) 18960-BUR 1988 Ag. Research 17.90 7.27 03/31/95 (R) 19790-BUR 1989' Ag. Services 42.00 21.93 12/31/94 20670-BUR 1990 Urban 22.20 11.25 06/30/96 22290-BUR 1991 Environmental Mgmt. 16.50 13.19 12/31/98 22440-BUR 1991 Education IV 24.00 23.64 06/30/98 22810-BUR(s)1991 SAL I 80.00 41.35 06/30/94 (R) 22820-BUR 1991 Public Works & Emp. 20.00 3.57 06/30/95 23320-BUR(s)1992 Transport SECAL 66.00 50.80 12/31/96 23780-BUR 1992 Public Institutional 15.00 13.32 03/31/97 23810-BUR(s)1992 Ag. SECAL 28.00 20.32 12/31/94 24140-BUR 1993 Food Security 7.50 6.78 06/30/99 24720-BUR 1993 Private Sector Assis 7.00 7.03 12/31/97 25190-BUR 1993 Engineering Credit 4.25 4.13 06/30/96 TOTAL number of Credits = 15 398.55 234.22 TOTAL * * * 626.31 of which repaid 13.99 TOTAL held by IDA 612.32 TOTAL undisbursed 234.22 ***Total approved, repayments and outstanding balance represent both active and inactive credits. (s) indicates SAL/SECAL credits. (R) indicates formally revised closing date Closing dates are based upon the Loan Department official data and are not taken from the Task Budget file.  ANNE!X 111 BURKINA FASO ECONOMIC RECOVERY CREDIT TIMETABLE OF KEY PROCESSING EVENTS 1. Time taken to prepare program: Two months 2. Initial discussions with IDA: January 10-14, 1994 3. Appraisal mission': January 24 to February 4, 1994 4. Negotiations: March 10, 1994 5. Board presentation: March 31, 1994 6. Planned date of effectiveness: April 30, 1994 7. Expected project completion: June 30, 1995 1 This program was appraised by a Sahelian Department mission consisting of Messrs./Mmes. Olga Jonas (Sr. Economist and Mission Leader), Anne Doiz6 (Sr. Economist), Whitney Foster (Sr. Country Officer), Denis Broun (Pharmacuticals Specialist, PHN), Salomon Samen (rade Economist), Cadman Mills (Sr. Agricultural Economist), Albert Osei (Resident Representative), and Justin Baro and Korka Diallo (Consultants, Burkina Resident Mission). Mr. Djamalddine Rouag (Sr. Education Specialist) visited Burkina immediately before the appraisal mission to formulate measures in primary education. Mr. Yves Genevier (Public Health Specialist) helped negotiate measures in the health sector. This memorandum was written by Ms. Olga Jonas, with Ms. Felly Kaboyo assisting with the processing of the operation. Ms. Katherine Marshall and Mr. Jean-Louis Sarbib are the Department Director and the Managing Division Chief, respectively, for the operation, and Mr. Francois Laporte is the Lead Economist.  ANNEX IV Page 1 of 13 (Translationfrom French Onginal) BURKINA FASO MINISTRY OF FINANCE AND PLANNING Mr. Lewis T. Preston, President The World Bank Washington, DC March 7, 1994 Subject: Statement of Economic and Social Development Policies Dear Sir: 1. It is our honor to address to you this declaration of the economic and social development policies which the Government of Burkina Faso has undertaken to implement. We have recently prepared with the assistance of the staff of the Bretton Woods institutions our third Policy Framework Paper, 1994-96, setting out the medium-term objectives for our program of macroeconomic stabilization and structural reform. The objective of this letter is two-fold: (i) to set out our program of reforms to be undertaken in 1994 which is fully consistent with the objectives of the structural adjustment program supported by the World Bank under SAL I (Cr. 2281-BUR); and (ii) to summarize the policies underpinning the medium-term macroeconomic framework. We are convinced that a rigorous implementation of appropriate measures to accompany the change in the parity of the franc CFA is necessary for the resumption of more rapid economic growth and accelerated social and economic development. We appreciate the efforts of the World Bank to mobilize additional support for our program by explaining it to the donor community in the context of the Special Program of Assistance (SPA), and we propose that the program outlined below provide the framework for future World Bank assistance to the development efforts of the Government of Burkina Faso. I. Introduction and Program Implementation During 1993 2. In December 1992, the Government of Burkina Faso adopted a medium-term macroeconomic adjustment and structural reform program covering the period 1993-95. The principal objectives of this program were (i) to improve the competitiveness of the economy; (ii) to increase its growth rate to 3-4 percent so as to achieve a sustained improvement in per capita income; and (iii) to re-establish internal and external viability over the medium term. To this end, the Government's strategy was based on withdrawing from participation in the  ANNEX TV Page 2 of 13 industrial and commercial sectors and reallocating its limited resources towards human resource development, maintenance of infrastructure, and support for private sector development, especially in the key sectors of agriculture, livestock, and mining. Because of the critical importance of human resource development, the Government proposed to expand primary education by hiring 950 new teachers each year and to increase budgetary allocations for materials and other operating costs of the primary education and health sectors. At the same time, the Government sought to improve the incentives for private sector investment and employment growth by liberalizing pricing and internal trade, improving regulation of the labor market, and privatizing public enterprises, and restructuring the banking sector. To restore competitiveness of domestic production, the structural reforms were accompanied by internal adjustment measures, both to reduce costs in public enterprises, including in the cotton sector, and to contain demand, especially public consumption, so as to limit inflation to 2.5 percent. 3. To preserve the political consensus it had created in support of the adjustment progam, the Govemment was concerned with limiting, to the extent possible, the adverse transitory effects of the adjustment process, particularly on the most vulnerable segments of the population. To this end, it undertook a program of employment creation through contracting of public works to small labor-intensive enterprises by the Faso Baara agency. The program was to be financed through the savings arising from the planned reduction of the fiscal deficitl/ to 3 percent of GDP by 1995, down from 6 percent in 1992, and, more importantly, from significant financial assistance to be provided by the donor community. 4. The program adopted for 1993 and reflected in the 1993 budget included a series of structural measures aimed at containing the fiscal deficit in the medium-term. To that end, the salary scale was reduced by 10% as of January I in order to bring actual salary payments (which had been frozen and therefore did not reflect the effect of staff advancement into higher grades) in line with civil service regulations. Transfers to higher education students, which constitute an excessive proportion of the overall education budget, were reduced. A value- added tax was introduced to replace turnover taxes and a new import tariff structure was adopted, providing for a simplified schedule and a reduced number of rate categories. Adequate provisions were made in the budget to support the restructuring of the banldng and cotton sectors. 5. The overall outcome for 1993 was less favorable than expected. Real GDP growth was weak, due both to the deepening crisis in some neighboring countries (see para. 8) and to a 16 percent decline in cotton production in response to successive reductions in the producer price and the delays in paying farmers for their crop. The Government successfully contained growth of the wage bill, fully in line with the agreed targets. By mid-1993, however, a serious revenue shortfall was evident. Tax revenue for the year was 22 percent lower than programmed, largely due to difficulties in the implementation of the VAT and the new customs 1/ On a commitment basis and excluding grants.  AMI Page 3 of 13 tariff. The Government also did not take several revenue-enhancing measures foreseen to be put in place in early 1993 under the program, including variable import levies on rice and sugar (TSI) and a temporary tariff surcharge (TDP) to substitute for the elimination of quantitative import restrictions. These measures were put in place only after a detailed review of macroeconomic performance with Bank and IMF staff in October 1993. To compensate pardy for the revenue shortfall, the Government also transferred CFAF 5.7 billion to the Treasury from parafiscal funds held by state enterprises. Because of delays in the implementation of reforms, there was also a shortfall in disbursements of aid in support of the adjustment program. The combined shortfall in revenue and in external budgetary support could not be offset even after the postponement, to 1994, of much of the expenditures linked to banking sector restructuring so that government payments arrears to domestic suppliers as well as to external creditors increased during 1993. 6. In contrast to the lack of progress in the overall fiscal position, and especially in revenue mobilization, the Government was successful in implementing several key reforms in support of private sector investment and employment growth. External trade liberalization was further pursued with a reduction in the number of goods requiring special import authorization from 15 to 3, and the customs tariff was streamlined with the introduction of a new tariff schedule. The tax system and the registration procedures for new businesses were simplified, and the labor code was made more flexible. With support under the Agriculture SECAL, a reorganization of the cotton sector was launched under a performance contract with SOFITEX, and the role of OFNACER was limited to the management of the cereal security stocks, thereby halting the losses it was accumulating. In the banldng sector, audits were completed to establish the financial situation of banks slated for privafization, and initial steps were taken to liquidate the BND-B. The restructuring of public enterprises was advanced. By the end of 1993, thirteen enterprises had been privatized, six liquidated, and seven placed under receivership. Under the Transport SECAL, works for routine road maintenance were carried out, the liquidat'on of the airline Naganagani continued, and negotiations were initiated for the privatization of the railroad company (SCFB) and bids for the privatization of urban transport activities have been prepared. However, the study of the civil service retirement fund (CARFO) remains to be undertaken, and the Government has not as yet defined the future role of the CGP, the CSPPA, and SONABHY. 7. The Government also made an effort to improve basic social services, by expanding the provision of basic health care and education. An agency to import and distribute essential generic drugs (CAMEG) was created, and the preparation of a health sector restructuring and development program was undertaken. However, reforms needed to prepare program budgets for primary education and health were delayed, and the resulting difficulties in personnel management continued to hamper the expansion and quality of primary education, in particular. In the health sector, decisions to re-deploy staff to serve a wider range of the population were also delayed.  ANNLEXIV Page 4 of 13 II. The Devaluation of the CFA Franc and the 1994 Program 8. The Government is aware that the progress achieved so far under the economic reform program is fragile, given the still insufficient competitiveness of the economy, the narrow base for exports that are also affected by fluctuations in world market prices, and the weakness of public and private savings and investment. Since the mid-1980s, Burkina's economy was negatively affected by declining competitiveness of its exports and by the economic crisis in the CFAF zone as a whole. This manifested itself, in particular, by lagging workers' remittances from the Cote d'Ivoire where almost 3 million Burkinabe reside. The downward deflationary spiral both impoverished the population of the zone and undermined its financial institutions. The difficulties encountered in Burkina in 1993 brought to light the limits of a strategy based solely on internal adjustment. For this reason, the authorities decided, together with the other members of the West African Monetary Union (WAMU), to strengthen their medium-term adjustment program by adjusting the parity of the CFA franc from CFAF 50 to CFAF 100 per French franc, effective January 12, 1994. 9. The use of the exchange rate as an instrument of macroeconomic policy should be seen in the context of the Government's overall strategy. First, the Government remains determined to ensure competitiveness primarily through structural reforms and appropriate domestic macroeconomic policies. The change in parity of the CFA franc, therefore, is seen as an exceptional measure to enhance and accelerate the structural adjustment process, which remains the centerpiece of the Government's strategy. Second, the Government has decided to accelerate its initial reform program, and at the same time to implement additional measures which are deemed necessary to ensure the desired competitiveness. These measures concern budget, wage, price, and credit policies for 1994 and aim to ensure that the benefits of the change in parity will not be eroded by inflation. Immediately after the devaluation, the Government started to implement well-targeted measures that would shield the most vulnerable segments of the population from its short-term detrimental consequences. These measures focused on limiting the increase in consumer prices, which will occur primarily during the first six months of 1994. Third, taking advantage of the new macroeconomic framework put in place after the devaluation, the Government will implement reforms to foster an accelerated development of human resources by focussing, in particular, on key measures in primary education and in the provision of medicines in support of improvement and wider access to basic health services. A. The macroeconomic stabilization and structural reform program for 1994 10. The objectives of the program for 1994 are: (i) to increase real GDP growth to at least 3.3 percent; (ii) to limit inflation (as measured by the CPI) to around 31 percent; and (iii) to reduce the external current account deficit (excluding official grants) from US$445 million in 1993 to US$373 million in 1994. To achieve these objectives, the Government will implement the following measures in 1994:  ANNEX a Page 5 of 13 Government finances 11. In 1994 the Government will further structural reforms already in progress. To this end, the Government has decided to implement supplementary measures in a revised budget that is expected to be adopted in early March. On the basis of this budget, the overall deficit (on a commitment basis, excluding grants) would reach CFAF 171 billion. The revised budget for 1994 includes new measures designed to simplify the tax system, to correct the weaknesses encountered in the implementation of the tax reforms of 1993, and to increase tax recovery. These measures include: (i) reducing the number of VAT rates from two to a single rate of 15 percent; (ii) eliminating VAT exemptions for some goods, including cement; (iii) reducing the import duty rate for fertilizer, insecticides, and essential drugs; and (iv) replacing specific taxes by ad valorem excise taxes. In addition, administrative fees and levies will be adjusted for inflation during the year. Furthermore, the essential elements of the customs reform introduced in 1993 in the framework of the project for establishing the West African Economic and Monetary Union (WAEMU) will be maintained and implemented more decisively. At the Customs Directorate, the clearing of merchandise will be improved, the processing of customs declarations will be rationalized, customs control will be strengthened, the number of exemptions will be reduced, and additional resources (both personnel and material) will be put in place to ensure the efficiency of customs administration. The collection of direct taxes will be strengthened by the creation of a unit--in the Tax Directorate--in charge of assessing and collecting taxes owed by large enterprises, and by the effective use of a single taxpayer identification number. Moreover, the preparation of regular customs statements providing reliable data on imports, facilitated by the computerization of customs administration, will allow for a more rigorous tax compliance. 12. Special measures have been taken to cushion the impact of the devaluation on the cost of importing petroleum products and basic consumer goods, so as to alleviate the burden on the most vulnerable social groups. These measures will also facilitate streamlining customs regulations. They include the elimination of the temporary tax on imported rice and sugar (TCI), which was facilitated by the devaluation. The protection tax (TDP) will be maintained on a provisional basis during 1994. However, the Government is committed to reducing the rate of the TDP (currently at 30 percent) as of 1995, to a level that will not exceed the rate of 10 percent that was originally planned for the third year, so as to ensure that this tax does not adversely affect prices and the efficiency of domestic production. In addition, the introduction of a single aed valorem tax on petroleum products (TUPP)l lowers the effective taxation rate of these products by 33 percent. Revenue from petroleum products taxation previously earmarked for the CGP will now be included in the budget. Taxation of kerosene (an essential commodity) has been reduced so as to keep its retail price unchanged. The lower taxation of this item, together with the eliminstion of the TCI, would result in a revenue loss on the order of CFAF 3 billion; similarly, the elimination of the statistical tax on exports (4 percent) would offset to some degree higher revenues (estimated at CFAF 25 billion) resulting I The only tax on petroleum products apart from VAT and customs tariffs.  Page 6 of 13 from the change in parity and of the new single VAT rate (CFAF 1.6 billion). Taking into account also revenue growth due to accelerating economic activity, tax revenues will increase to CFAF 110 billion in 1994 (10.5 percent of GDP, compared with 9.3 percent in 1993). With respect to nontax revenues, they will no longer benefit from exceptional transfers of some 1 percent of GDP made in 1993, nor from the transfer of around CFAF 11 billion (1.3 percent of GDP) by CGP (part of which related to the transfer of extrabudgetary proceeds from petroleum products taxation to be collected from now on by the Treasury through the TUPP). Total budgetary revenue will reach CFAF 122 billion. 13. According to the revised budget, total expenditures and net lending in 1994 wil not exceed CFAF 293 billion, and their composition will reflect the Government's objective to shift resources away from consumption to investment, while maintaining adequate provisions for the effective operation of the administration. In particular, taking into account an increase in salaries ranging from 4 percent to 8 percent effective April 1, 1994, and a net recruitment only for the priority sectors not exceeding 3 percent of the wage bill, the wage bill will increase to CFAF 58.1 billion. It will be equivalent to 53 percent of tax revenues, down from more than two thirds during 1992-93.2 Budget allocations for materials available to the health and education sectors will go up by more than 20 percent in real terms,3 with smaller increases in allocation for other sectors. The revised budget also contains an allocation of CFAF 4 billion to meet the cost of exceptional subsidies aimed at protecting the most vulnerable segments of the population (mostly to contain increases in school fees and the prices of essential generic drugs, and to raise pensions of retired civil servants). 14. In contrast, SOFITEX will not receive any budgetary subsidies, in light of the expected improvement in its financial position as a result of the devaluation. Instead, the repayment by the Government of arrears to SOFrTEX on behalf of CSPPA, originally spread out over three years, will now take place in two years, thereby improving SOFITEX's liquidity position. The Government's investment expenditures are set to increase by almost 26 percent in real terms compared with the initial budget; this will require a significant increase in budgetary counterpart funds. Supplementary credits are allocated above all to labor-intensive public works directed toward maintaining infrastructure, in line with the programs agreed with the World Bank. Lastly, provisions are made in the revised budget for capital transfers (CFAF 19.9 billion and CFAF 2.0 billion, respectively) for bank and public enterprise restructuring, of which CFAF 6.5 billion is earmarked to accommodate in part the cost of liquidating the BND-B, pending completion of the ongoing assessment of the full cost of restructuring. Should there be delays in the restructuring operations, the amounts mobilized for this purpose will not be used for increasing other expenditures above the limits set in the revised budget. 2 During 1995-96, the nominal increase in the wage bill will not exceed 3 percent a year, and wil be devoted to the staffing needs of the priority sectors. This substantial increase (CFAF 1.6 bilion) reflects in part the budget allocations that are included in the budget for the purpose of mitigating the social cost of the devaluation (CFAF 0.6 billion).  A-EX IV Page 7 of 13 15. Budgetary procedures will be tightened so as to ensure that all government outlays are undertaken in strict conformity with existing regulations and are properly accounted for. In this respect, except for expenditures which the budget authorizes to be made without commitment, no outlay will be made without prior commitment and all payments by the Treasury for government operations will be duly recorded. In addition, to help achieve the objectives stated in the revised budget, a quarterly treasury budget will be developed to serve as a guiding instrument for the Government. The execution of this budget will be transmitted on a monthly basis to the staff of the IMF and the World Bank, with whom consultations will be undertaken whenever the results -- both in the area of revenues and of expenditures -- deviate from the established targets, with a view to agreeing on and implementing corrective measures that may be required to keep the program on track. Pricing policies 16. One of the Government's main concerns is to contain inflation in order to protect the gains in competitiveness. To this end, it has decided to keep domestic demand under control by limiting the increase in wages and salaries in the public sector to 4-8 percent, the minimum wage (SMIG) to 10 percent, and by urging the private sector to moderate wage increases. The Government also intends to limit as much as possible the impact of the increase in prices-of imported basic consumer goods on the cost of living. In this regard, to counter the panic that had taken hold of producers and consumers alike in the aftermath of the devaluation, the Government re-establis.ied the system of price controls, and froze the prices for several basic consumer goods at their pre-devaluation levels. Limited price increases for rice (23 percent) and petroleum products (25-40 percent, excluding kerosene) have been announced. Since then, price adjustments have been authorized for a number of goods, which reflect higher production or import cost. Price controls on milk, sugar, and cement will be lifted in March 1994. With the exception of essential generic drugs, rice, petroleum products, utility rates, and school supplies, all remaining price controls will be abolished by April 30, 1994 (condition of effectiveness of the Economic Recovery Credit). 17. To achieve its objective of moderating the increase in prices of basic consumer goods, the Governnient has decided to reduce the level of their taxation as well as the levies previously imposed by the price equalization fund (CGP). In this manner the price of kerosene, whose widespread use by the rural population has helped the campaign against deforestation, will remain unchanged for the next six months, while the cost of all other petroleum products will increase by less than the price change implied by the devaluation. The price of rice will not be raised any further during the first semester, taldng into account existing stocks; subsequently, it will be revised upward in line with world market prices. Public utility tariffs will also be increased in a manner that minimizes the impact on small users, while safeguarding the financial situation of the public utility companies (ONATEL, SONABEL, and ONEA); they will be periodically revised in line with costs, with due attention given to stimulating productivity gains and to gradually reducing the need for budgetary subsidies. The Government wil launch an aggressive public information campaign through  Page 8 of 13 the media to ensure that traders and consumers are aware of these measures, and that they will fully cooperate in order to achieve the Government's objective of moderating price increases. 18. World market prices for cotton are much higher in local currency terms due to the devaluation; this has enabled the authorities to raise the producer price for cotton to CFAF 112 per kg for the current crop season compared to CFAF 80 per kg which was previously announced. This increase corresponds to an improvement of at least 10 percent in the real net income of farmers, which should stimulate production as well as ensure the profitability of the sector. Part of the undistributed windfall profits--currently estimated at CFAF 1-2 billion--will finance a price stabilization fund for cotton as envisaged in the performance contract for SOFITEX. Further price increases are possible for the 1994/95 crop, and will be announced well before the start of the season, after consultation with the World Bank and taldng into account the financial situation of the cotton sector. In case the world market price for cotton is less favorable than expected, the producer prices will be appropriately adjusted, and SOFITEX will also reduce other production costs. The price of paddy, which was increased by 10 percent after the devaluation, will no longer be set through administrative decisions. The price of other agricultural products will continue to be determined by the market. Monetary and credit policy 19. The Government's main monetary policy objective in 1994 will be to control inflation, while at the same time ensuring that adequate credit is provided to the productive sectors to finance crops as well as investment and imports. The Cental Bank will therefore implement a cautious credit policy consistent with the balance of payments objectives, relying primarily on recently introduced indirect monetary policy instruments, based on money market auctions and reserve requirements. It will no longer set credit ceilings for individual banks, nor will it interfere with banks' credit allocation. Banks will continue to have access to the money market where interest rates will be determined by market forces. In the framework of the common monetary policy, the rediscount and minimum savings deposit rates were increased, respectively, from 10.5 percent to 14.5 percent, and from 4.5 percent to 8 percent, immediately following the devaluation; these rates will be adjusted according to price and international reserve developments in the WAMU region. All other rates will be market- determined. Structural reforms in support of private sector development 20. The structural reforms envisaged are described in detail in the Policy Framework Paper and are designed to ensure that the change in parity will have the most favorable impact on the economy, particularly those pertaining to the liberalization of trade and of the regulatory framework, so that the private sector will benefit from favorable conditions for its development. Exporters in the mining, livestock, and agriculture sectors are expected to respond to improved incentives provided by the devaluation, resulting in 9 percent growth in the volume of exports in 1994. To improve the basis for sustained private sector growth, commercial laws will be updated, as proposed under the ongoing SAL I operation, and the  ANNEX IV Page 9 of 13 mining code will be revised with a view to promote investment and production in that sector. With regards to the banking sector reform, also supported by the ongoing SAL I operation, the Government will pursue ongoing negotiations for privatization of four banks and the final liquidation of the BND-B. At the same time, special measures will be implemented. The Government commits itself to offer for sale through public tenders in 1994 at least six enterprises selected from a list of about 18 enterprises that will be submitted for approval to the National Assembly as agreed under the World Bank-financed Private Sector Support Project (Cr. 24720-BUR). The privatization of SONACOR will be completed, as proposed under the Agriculture SECAL. The Government will define before September 15, 1994, the role it intends for CGP to play, now that the CGP is no longer supporting the rice sector nor managing the price equalization system for petroleum products. The Government will also decide, before July 31, 1994, the fate of CSPPA, and prepare before November 30, 1994 an action program to implement this decision. In order to control costs and thus sustain the expected improvement in competitiveness, the Government has abolished the statistical tax on exports, and has introduced a drawback mechanism for imported inputs used in the production of export goods. Also, it will ensure that salary increases in public enterprises will not exceed those in the civil service. Moreover, the reorganization and financial rehabilitation of key public enterprises will be furthered. B. Social policy measures and development of human resources 21. The program adopted by Burkina Faso should, over the medium term, increase employment opportunities and real income of large segments of the population, and reduce poverty. However, the devaluation will lead to some deterioration in the standard of living in 1994, especially in urban areas. To protect the most disadvantaged social groups from this decline, the Government adopted the following transitory measures: (1) a 6-month freeze of the retail prices of kerosene and school supplies; (2) a limited increase in prices for certain basic consumer goods through lower taxation (rice and petroleum products other than kerosene); (3) the revision of utility rates (water and electricity) in such a way as to reflect increased costs, while mitigating the impact on small users; (4) the stabilization of school fees and the extension of the lending scheme for school books in primary schools; (5) the expansion of labor-intensive public works and rehabilitation of infrastructure (construction of health centers, schools, sewers, highway maintenance, etc.); and (6) the increased delivery of health and basic education services made possible by substantially higher budget allocations for these sectors. Except for the price freeze on kerosene, the cost of which will be absorbed by lower proceeds from the single tax on petroleum products (rUPP), and the expansion of public works, which will receive financial assistance from the World Bank and bilateral donors, these measures will be financed either by correspondingly higher budget allocations for the social sectors or by a reduction in the customs duties applicable to these products. Finally, the minimum wage, which applies to the poorest unskdlled workers, will be increased by 10 percent on April 1, 1994.  ANEX IV Page 10 of 13 22. At the same time, the Government has decided to increase the access of the population to basic health services, especially to essential medicines and to primary education. To this end, it will implement the following Priority Action Plan for Primary Education and Health: Pdior*y Action Plan for 1994 Dates Objective: Promote pdmary education access and quality (a) Provision of increased budgetary allocations to the Ministry of Primary Education Revised 1994 budget -for materials for ongoing programs (CFAF 824 million) March 1994 -for textbook lending scheme, fee subsidy to poor cbildren and feeding program (CFAF 1,860 million) -for 1,400 additional teachers as specified in (c)(i)-(ii) (CFAF 203 million) (b) Agreement with the World Bank on procedures for hiring new teachers March 1994 (c) Hiring of 2,350 new primary school teachers: (i) for 300 classes presently closed for lack of teachers March 1994 (ii) to replace 1,100 national service agents currently teaching October 1994 (iii) 950 teachers planned under the ongoing program October 1994 (d) Contract with Faso Bau for school construction and procurement of equipment March 1994 (e) Workshops to reflect on how to accelerate expansion of primary education April and June 1994 (0 Preparation of the opening of the 1994/95 school year May 1994 (g) Application of eligibility criteria and the adjustment of the level of scholarships for higher education with a view toward reducing public expenditure on scholarships in favor of expenditure on education 1994 Objective: Improve primary health care and increase availabiity of 4/forfabke essenal drugs (MEG) (a) Increase budgetary allocations of the Ministry of Health Revised 1994 budget - for materials for ongoing programs (CFAF 2,800 million) - for the initial stock of essential generic drugs (CFAF 1,970 million) - for training and implementation of cost recovery associated with the introduction of MEG (CFAF 240 million already earmarked plus an estimated 740 million to complete the implementation of the UNICEF contract as defined in (b)) (b) Implement contract with UNICEF for supply of services necessauy for Starfing in April implementation and management of a system for distribution ard 1994 cost recovery of drugs in health facilities (c) Establishment and publication of national price list for essential generic drugs March 1994 (d) Signature of ministerial ordinances: (i) allowing pharmacists to operate branches March 1994 and (ii) allowing pharmacists to substitute MEG for brand name drug prescriptions (e) Requirement that private phanmacists observe the above price list As of May 1, 1994 (0 Abolition of profit margin system for medicines April 30, 1994  ANNEX TV Page 11 of 13 C. Program monitoring 23. Performance in implementing the program described in paras. 8 to 22 will be evaluated together with the World Bank during the review carried out for the release of the third tranche of the ongoing SAL I operation, with the actions outlined in the Priority Action Plan (para. 22) constituting key measures for this review. Monthly updates on the status of implementation of the measures in the Prionity Action Plan will be submitted to the World Bank. Should unforeseen difficulties arise, information will be transmitted to the World Bank and consultation will take place to define appropriate corrective measures. A quarterly report on program execution will also be transmitted. It will include a report on budget execution, identifying expenditure for personnel, materials and current transfers for the ministries of primary education and health, and will identify expenditure on didactic materials for primary education, the textbook lending scheme, and the implementation of training associated with the Bamako Initiative. M. Macroeconomic Objectiy an! Structural Adjustment PoU_cies fo 1994-96 24. The Government's objectives for the period 1994-96 are: (i) to achieve an average annual growth rate of real GDP of 5 percent; (ii) to return to an annual rate of inflation of 4-5 percent by 1997, after an initial sharp increase in 1994 caused by the devaluation; and (iii) to reduce the external current account deficit of the balance of payments (excluding official transfers) from 16 percent of GDP in 1993 to 14.8 percent in 1996. This reduction would be made possible by an average annual growth in the volume of exports--more competitive as a result of the devaluation--of 10 percent, and a slowdown in the growth of import volume to 1.6 percent per annum, which is expected to be the net result of the combination of the contractionary effect of an increase in their cost and the expansionary effect due to a rebound of economic activity and investment. After a decrease of 2.1 percent in 1994 owing to the anticipated reduction in domestic demand in real terms and the increase in import substitutes, imports (particularly of consumption goods) will pick up as soon as the induced growth effect dominates, without canceling the advantages of the substitution effect on local production. 25. The strengthening of the structural adjustment process will result not only from the endogenous effects of the devaluation, but, more important, from the vigorous implementation of the accompanying measures described in Part II above. In particular, the competitiveness of the economy (as measured by the depreciation of the real effective exchange rate, of the order of 36 percent over the period 1994-96) will improve significantly, while protection through the import tariff will be reduced. In the cotton sector, the devaluation will allow for both an increase in the producer price--restoring the production incentives that had been substantially eroded by the reduction initiated during the 1991/92 crop season--and an  ANNEX IV Page 12 of 13 improved financial outlook for SOFlTEX, thereby accelerating its rehabilitation. 4 Furthermore, Burkinabe stockbreeders, whose exports to traditional markets have been hurt by competition from cheaper imports, will improve their competitiveness and recapture markets for their meat and leather production. More generally, enterprises in the export and import-substitution sectors (gold, vegetables, fruits, tires, bicycles, and textiles) will increase their profitability, which should stimulate investment and facilitate some of the planned privatizations. In addition, the change in relative prices is expected to boost real income in rural areas, where the propensity to import is lower than in cities, thereby slowing down migratory flows towards urban areas as well as contributing to an improvement in the balance of payments. 26. The Govemment is determined to pursue and strengthen its financial and structural policies. Government savings--negative in 1994--will exceed 1 percent of GDP in 1996. because the elasticity of tax revenues with respect to changes in the exchange rate exceeds that of current expenditures. Moreover, an increased inflow of foreign financing will allow for significant increases in real government investment, especially in human capital, and accelerate repayment of domestic debt. This will give the Government some room for responding to the needs of the priority sectors, through increasing the share of total expenditure devoted to human and physical investment. In addition, domestic arrears will be eliminated, leading to a restoration of the financial position of domestic suppliers, which in turn should result in a larger share of credit being directed toward production. This development, in combination with an increase in private savings made possible by the devaluation, and the rapid restructuring of the banldng system to be facilitated by large capital transfers by the Government, will permit a more sustained level of private sector investment. 27. The change in parity and implementation of accompanying measures wil have a favorable impact on growth in the medium term. First, real GDP growth (on the order of 5 percent per annum during 1994-96) would exceed significantly the objective of 3-4 percent growth retained in the initial program, owing to an acceleration of structural reforms. This will translate into higher employment growth, mainly in rural areas, and better opportunities to reduce poverty. Growth will be fostered by higher capacity utilization by small enterprises in the agricultural, food-processing, livestock, crafts, and textile sectors. Subsequently, better incentives and higher private savings--made possible by the demand-reducing measures envisaged--will stimulate investment and also contribute to growth. Investment and domestic savings relative to GDP, then, will increase from 22 and 2 percent in 1993 to 27 and almost 9 percent in 1996, respectively. 28. The envisaged policies will also ensure that the acceleration in inflation resulting from higher import prices is temporary and limited to permitting a re-alignment of relative prices sought by the change in the parity in the CFA franc. The Government is aware that increases 4An improvement in the financial situation of SOFITEX would eliminate the need for the budget to subsidize the operations of the cotton sector as from the current crop year 1993/94.  Page 13 of 13 in domestic costs, especially of wages, must therefore be contained. The Government's decisions to grant a limited increase in nominal salaries and to implement a restrictive financial policy will keep inflation (as measured by the consumer price index) in check: after an initial sharp increase in 1994, inflation will decline substantially during 1995-96, to again reach a moderate level in 1997. The decline in real wages will lead to a fall in real household consumption in 1994 of over 2 percent; however, real consumption should recover by 1995, with the pickup of activity induced by the devaluation, and by 1996 it should reach a level that would be more than 5 percent above that foreseen in the absence of adjustment. 29. During the Dakar meeting of January 10-11, 1994, the WAMU Heads of State signed the treaty converting the Monetary Union into an Economic and Monetary Union. This treaty provided for the setting up of mechanisms aimed at ensuring the convergence of national economic policies and their harmonization with the Union's monetary policy, and the standardization of taxation and foreign trade rules for the countries concerned. These mechanisms will join those that are already being used at the monetary level. Together, they will constitute an asset for complying with the restrictive fiscal and monetary policies that are necessary for the success of the adjustment program. The WAEMU economic area will also make it possible to increase the region's economic productions through the expansion of markets and economies of scale. This will enhance the growth of exports from the countries in the Union. WAEMU will also give greater weight to countries in the subregion in their economic relations with their partners. Signed by The Minister of Finance and Planning Ousmane Ouedraogo  ANNEX V Page 1 of 2 BURKINA FASO ECONOMIC RECOVERY CREDIT ACTION MATRIX FOR 1994 L MACROECONOMIC POLICIES Realignment of the exchange rate, fixed at 100 CFA francs for 1 French franc January 12, 1994 PUBLIC FINANCE TAXATION AND REVENUES Set target for 1994 budgetary revenues at CFAF 122 billion March 2, 1994 Reduce number of VAT rates to a single rate of 15% 1994 Eliminate VAT exemptions on certain goods, including cement 1994 Replace specific taxes by ad valorem excise taxes 1994 Eliminate the statistical tax on exports 1994 Eliminate temporary import taxes on rice and on sugar January 17, 1994 Propose reduction in declining protective tax (TDP) Before June 30, 1994 Reclassify fertilizer and insecticides into lowest import tariff category 1994 Introduce import duty drawback for exporters April 1994 PUBLIC EXPENDITURE Set limit for expenditure on the government wage bill at CFAF 58.1 billion March 2, 1994 Increase civil service salaries by 4% to 8% depending on grade As of April 1, 1994 Limit spending on secondary and higher education scholarships to CFAF 5.87 billion 1994 Provide adequate allocations for primary education and health March 2, 1994 Eliminate entire stock of external arrears of CFAF 6.6 billion 1994 Reduce domestic arrears by at least CFAF 11 billion 1994 Carry out routine road maintenance program with allocation of CFAF 4.4 billion 1994 Adequate provision of local counterpart funds for projects 1994 Formulate a 3-year public investment program for 1995-97 November 1994 MONETARY POLICY Limit net increase in credit to Government to 2.4% of beginning of period money stock 1994 Limit increase in credit to the economy to 8.5% 1994 Increase the Central Bank discount rate from 10.5% to 14.5% January 18, 1994 PRICING AND WAGE POLICY Set inflation target for 1994 at 31% (as measured by the CPI) Febnrary 28, 1994 Limit increase in the minimum wage rate to 10% As of April 1, 1994 Increase tariffs to restore financial viability of public utilities 1994 Abolish price controls put in place after the January 12, 1994, devaluation April 30, 1994 Increase the producer price of cotton by 40% to CFAF 112/kg January 18, 1994 Increase petroleum product prices by 25% -40% (except for kerosene) January 18, 1994  ANNEX V Page 2 of 2 I. STRUCTURAL POLICIES Liquidation of the BND-B 1994 Privatization of 4 commercial banks 1994 Complete privatization of six enterprises, including SONACOR, SCFB, and Regie X-9 1994 Proposal to Parliament to authorize divestiture from 18 public enterprises March 1994 Revision of mining code and related legislation 1994 Revision of tasks of CBMP 1994 Decision on the future role of CGP Before Sept. 15, 1994 Decision on the future of CSPPA Before JulY 31, 1994 Complete liquidation of OFNACER 1994 Implement performance contract with SOFITEX 1994 Operational reforms and financial restructuring of Air Burkina 1994 Complete liquidation of Naganagani 1994 III. PRIORITY ACTION PLAN FOR PRIMARY EDUCATION AND HEALTH Provision of increased budgetary allocations to the Ministry of Primary Education March 2, 1994 -for materials for ongoing programs (CFAF 824 million) -for textbook lending scheme, fee subsidy to poor children and feeding program (CFAF 1,860 million) -for 1,400 additional teachers (CFAF 203 million) Formulation of streamlined recruitment procedures for hiring new teachers March 1994 Hiring of 2,350 new primary school teachers: - for 300 classes presently closed for lack of teachers March 1994 - to replace 1,100 national service agents currently teaching October 1994 - 950 teachers planned under the ongoing program. October 1994 Contract with Faso Baara for school construction and procurement of school equipment March 1994 Workshops to reflect on how to accelerate expansion of primary education April and June 1994 Finalization of preparation of the opening of the 1994/95 school year May 1994 Application of eligibility criteria and the adjustment of the level of scholarships for higher education with a view toward reducing public expenditure on scholarships in favor of expenditure on education 1994 Increase budgetary allocations of the Ministry of Health March 2, 1994 -for materials for ongoing programs (CFAF 2,800 million) - for the initial stock of essential generic drugs (CFAF 1,970 million) - for training and implementation of cost recovery associated with the introduction of MEG (CFAF 240 million already earmarked plus an estimated 740 million to complete the implementation of the UNICEF contract) August 1994 Implement contract with UNICEF for supply of services necessary for implementation and management of a system for distribution and cost recovery of drugs in health facilities From April 1994 Establishment and publication of national price list for essential generic drugs March 1994 Signature of ministerial ordinances: (i) allowing pharmacists to operate branches and (ii) allowing pharmacists to substitute generics for brand name drug prescriptions March 1994 Requirement that private pharmacists observe the above price list As of May 1, 1994 Abolition of profit margin system for medicines April 30, 1994