Burkina Faso - Economic Management Reform Support Operation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-7266 BUR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ONA PROPOSED CREDIT OF SDR 11 MILLION TO THE REPUBLIC OF BURKINA FASO FOR AN ECONOMIC MANAGEMENT REFORM SUPPORT OPERATION October 14, 1998 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = CFA Franc US$1 = CFA 548 (as of 10/13/98) GOVERNMENT FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS AfDB African Development Bank BCEAO Banque Centrale des Etats de l'Afrique Centrale CAS Country Assistance Strategy CET Common External Tariff ECOWAS Economic Community of West African States EMRSO Economic Management Reform Support Operation ESAF Enhanced Structural Adjustment Facility EU European Union HIPC Heavily Indebted Poor Countries IBRD International Bank for Reconstruction and Development ICR Implementation Completion Report IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund MIGA Multilateral Investment Guarantee Agency MOF Minister of Economy and Finance MTEF Medium Term Expenditure Framework NGOs Non Governmental Organizations NPV Net Present Value PER Public Expenditure Review PFP Policy Framework Paper PID Public Institutional Development PIP Public Investment Program SAC Structural Adjustment Credit SSA Sub Saharan Africa TF Trust Fund UNDP United Nations Development Program WAEMU West African Economic and Monetary Union Vice-President Jean-Louis Sarbib Country Director Hasan Tuluy Sector Manager Charles Humphreys Task Team Leader Miguel Saponara Country Economist C_lestin Monga  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Page No. Credit and Program Summary ................................... ii 1. INTRODUCTION ................................... .1 2. BACKGROUND.1 A. OVERVIEW.1 B. MACROECONOMIC PERFORMANCE.2 C. RECENT REFORM EFFORTS.4 D. BURIKINA'S DEVELOPMENT CHALLENGES AND RE,GIONAL INTEGRATION.8 E. MEDIUM-TERM PROSPECTS AND EXTERNAL FINANCING REQUIREMENTS.9 F. BUDGETARY GAP AND FINANCING REQUIREMENTS.12 3. BANK GROUP OPERATIONS IN BURKTNA FASO AND COLLABORATION WITH 2DONOKR OUN ...............................................................................................................................................1 4. THE PROPOSED OPERATION 16 A. LINK WITH THE CAS AMN RATIONALE FOR THE CREDIT6 1 B. CREDIT COMPONENTS.16 C. SPECIFIC ACTIONS REQUIRED FOR THIS CREDIT.20 D. LOOKINGETD AAD21 5. C R EDIT FEATURES AND IMPLEMENTATION 22 6. RECOMMENDATION2 2 ANNEXES Annex A Income and Social Indicators Annex B Main Economic Indicators Annex C External Financing Requirements and Resources Annex D Status of Bank Group Operations Annex E Supplemental Credit Data Sheet Annex F Matrix of Policy Actions Annex G Country at a Glance Annex H Government Letter of Development Policy This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ii BURKINA FASO ECONOMIC MANAGEMENT REFORM SUPPORT OPERATION Credit and Program Summary Borrower: Burkina Faso Beneficiaries: Population of Burkina Faso Amount: IDA Credit: SDR 11 million ($15 million) Terms: IDA Credit: Standard with 40-year maturity Program Description: The proposed Economic Management Reform Support Operation (EMRSO) is an integral part of the Bank's strategy to help Burkina Faso maintain macroeconomic stability, achieve sustainable public finances, and increase international competitiveness. This one tranche operation would be the first in a series to provide budgetary support to the government while it carries out reforms in public finance, puts in place the common external tariff of the WAEMU (to be completed on January 1, 2000), and improves the functioning of its public administration. These reforms, especially tax and trade reform, are essential to create an environment conducive to efficient private sector investment and growth. And by reallocating public funds toward priority activities in health and education, the reforms will further strengthen the country's growth potential while helping correct underlying factors that contribute to Burkina's deep poverty. Benefits: Public finance reform and regional integration would benefit Burkina Faso's growth over the medium and long-term by: (i) improving the government's resource mobilization system; (ii) stimulating private investment flows and external trade; (iii) improving efficiency and productivity; and (iv) providing Burkina Faso's economic agents with free access to the significantly larger WAEMU market. Risks: Burkina's adjustment record since the 1996 CAS has been steady, but uneven. While the overall reform program over the past five years has been good, progress on privatization, trade liberalization, ciil service reform and decentralization has been rather slow. Also, the government's strategy in key sectors like agriculture and infrastructure is still under preparation. The reform agenda proposed could encounter some political resistance heightened by the presidential elections, scheduled for November 1998; however, the Government has reaffirmed its commitment to both the reform process and the regional integration; and to testify to its determination, the Government has  iii already taken a number of upfront actions and has already started implementing the reforms programmed for 1998-2000. There will be no disbursement until all actions underpinning this credit are taken. Rate of Return: Not Applicable Poverty Category: Not Applicable Appraisal Report: Not Applicable Estimated Disbursements: SDR 11 million would be released at credit effectiveness.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF BURKINA FASO FOR AN ECONOMIC MANAGEMENT REFORM SUPPORT OPERATION 1. INTRODUCTION 1. I submit for your approval the following report and recommendation on the proposed Economic Management Reform Support Operation (EMRSO) to the Republic of Burkina Faso for SDR 11 million, an amount equivalent to US$15 million, on standard IDA terms. The credit is proposed as the first of a series of one-tranche operations to support the government as it continues to implement the ongoing adjustment program. The Credit fits into the ongoing Country Assistance Strategy and is justified on the basis of significant up-front policy actions dealing largely with public finance management. In addition, it is expected to assist the Government's regional integration effort, consolidate the public enterprise reform program and underpin the modernization and rationalization of the public sector. 2. BACKGROUND A. OVERVIEW Historical and Political Background 2. Burkina Faso is a landlocked country, poorly endowed in natural resources, and with very limited rainfall - averaging 350mm in the North and 1000 mm in the South-West. The state emerged as the dominant actor in the economy during the Sankara period (1983-87) with heavy involvement in the productive sectors and generalized price and trade regulations. During this period, the role of the state as a caretaker of the economy and the provider of social services became deeply ingrained in the population, its leadership, and the civil servants. As a result, while systemic political changes were initiated as early as 1988, the shift toward a more selective role of the state and market based economic policies started only in 1991 and has been more gradual. 3. Burkina has enjoyed political stability since 1987 under the leadership of President Compaore. The country moved steadily toward political pluralism and has now organized several multi-party elections: presidential (1991), parliamentary (1992 and 1997), municipal (1995). While the upcoming presidential elections in November 1998 will be an important milestone in the consolidation of the new political system, the most significant socio-political changes are likely to come in 1999 and 2000 once the major decentralizatioi1 law recently adopted by the Parliament is enacted and the proposed increased delegation of authority and resources to the local level becomes effective.  2 The Economy 4. Burkina Faso is a member of the West African Economic and Monetary Union (WAE!q1) and shares a common currency, the CFA franc, and a central bank (BCEAO), with Benin, Cote d'Ivoire, Mali, Niger, Senegal, Togo, and Guinea-Bissau. The CFA franc has been pegged to the French franc since 1948; the fixed parity was altered only once, in January 1994, when the CFA franc was devalued by 50 percent in foreign currency terms from CFAF 50 to CFAF 100 per French franc. Given Burkina Faso's narrow tax base, a structural government budget deficit and pervasive, deep poverty, the country has traditionally benefited from important external aid flows (grants have represented 7.5 percent of GDP over the past five years). Such support is likely to continue. 5. The primary sector (38 percent of GDP in 1997) is dominated by agriculture which accounts for almost 50 percent of value added in the primary sector, while livestock accounts for some 30 percent, and forestry andfishery for the remaining 20 percent. The secondary sector (18 percent of GDP) has experienced a remarkable growth of 11 percent in 1997, mostly because of a sharp expansion in cotton ginning. The energy sector (electricity, gas, and water) accounts for only 3 percent of the secondary sector value added, but it is estimated to have grown at an average rate of 8 percent a year over the last three years. In the mining sector, value added is estimated to have increased by about 10 percent in 1997, but modern production of gold remains significantly below the level of before 1994 due to delays in completing the rehabilitation of the country's largest mine, Poura, which used to produce some 3 tons per year. At present, the largest share of production comes from traditional gold panning. The tertiary sector (44 percent of GDP) grew steadily over the last years. Services, excluding Government services, increased by 6.6 percent in 1996 and 9.5 percent in 1997, driven by transport services and trade. Government services increased on average by 3 percent only, in line with the cautious public employment and wage policies. Poverty and Human Resource Base 6. With a population of 11 million growing at about 2.7 percent per annum, Burkina Faso's real GDP per capita was US$ 218 in 1997. By this measure of income as well as on the basis of UNDP's human poverty index, Burkina Faso is among the poorest countries in the world. About 45 percent of its population falls below the absolute poverty line while 28 percent of the population is considered extremely poor according to surveys conducted in 1995. 7. Social indicators of Burkina Faso (life expectancy of 50 years in 1996, infant mortality of 98 per thousand, literacy rate of 22 percent, and gross primary enrollment rate of 40 percent with female only 30 percent) are poor, even by sub-Saharan standards, and the low health status and education level of the population constitute major constraints to economic and social development. B. MACROECONOMIC PERFORMANCE 8. Since 1991, Burkina Faso has been implementing a wide range of economic reforms under a series of stabilization and structural adjustment programs supported by the Bank, the IMF and other donors. Overall, it has established a relatively positive track record associated with good macroeconomic performance. Burkina Faso's real GDP growth increased sharply following the 1994 CFA franc devaluation from an average of 0.8 percent a year in the period 1992-93 to an average of 4.2 percent in 1994-97. An important contribution to this growth was the good  3 performance of the cotton sector (seed production increased from 117,000 tons in 1994 to 334,000 tons in 1997), which led to corresponding increases in cotton processing, trade and transportation. In addition, cereal production expanded from 1.3 million tons in 1994 to about 2.4 million tons in 1997. Particularly since 1996, construction and public works also contributed importantly to GDP growth because of expenditures associated with infrastructure development and rehabilitation and with the implementation of projects in rural areas, health, and education. In 1997, performance continued to improve in the secondary and tertiary sectors, but real GDP growth slowed to 5.5 percent from 6.2 percent in 1996 because of the impact of insufficient rainfall on cereal production. 9. The Government's financial position improved significantly between 1995 and 1997. The primary current fiscal account moved steadily from a balanced position in 1994 to a surplus of 4 percent of GDP in 1997. The improvement in the primary balance (which excludes foreign-financed investment expenditure) was less pronounced, owing to a large increase in the domestic contribution to investment. Similarly, the overall fiscal deficit (commitment basis, excluding grants) dropped from 11 percent of GDP in 1994 to 8.9 percent of GDP in 1996, but it rose to 9.8 percent of GDP in 1997 as public investment surged. On the financing side, recourse to domestic bank credit was very modest in 1996 (CFAF 1 billion), but jumped to CFAF 21.9 billion (1.5 percent of GDP) in 1997 reflecting higher domestic contribution to investment, domestic arrears reduction and restructuring operations. Externalfinancing of the public investment budget, which averaged 80 percent in recent years, rose from 8.3 percent of GDP in 1995 to 9.7 percent in 1997. 10. The deficit on the current account of the balance of payments, excluding official transfers, widened in 1996 from 11.3 percent of GDP to 13.4 percent, on account of stagnating exports and an increase of imports, in particular of investment goods. In 1997, a strong recovery of exports, mainly cotton, resulted in only a marginal reduction in the current account deficit (13.3 percent of GDP) because of the continued growth of imports of goods and services. Consumer price inflation has been reduced sharply since the 1994 devaluation. The annual inflation rate dropped from 28 percent in 1994 to 8.8 percent in 1995, 6.2 percent in 1996, and 2.3 percent in 1997. This trend resulted from good cereal harvest, moderate wage increases, restrained monetary policy and low inflation worldwide, notably in the main trading partners. 11. Debt. In recent years, Burkina Faso has successfully negotiated debt relief arrangements with its creditors, avoided the accumulation of arrears, and maintained a prudent borrowing policy. Burkina Faso's 1996 stock-of-debt reduction was on Naples terms, with a 67 percent net present value (NPV) reduction of all eligible debt. The agreement applied to all outstanding principal as of June 20, 1996. The total debt stock was reduced by about CFAF 35.7 billion (US$69 million), or about 5.1 percent of the total debt stock as of mid-June 1996. Bilateral agreements were concluded with Paris Club creditors and some non-Paris Club creditors in the course of 1996 and 1997. At end- 1996, the ratio of NPV of debt to the average of exports of goods and nonfactor services in 1994-96 was estimated at 240 percent, while debt service as a proportion of exports of goods and nonfactor services stood at about 19 percent. In spite of the above, Burkina Faso's external debt service obligations will be difficult to sustain in the medium and long term. Balance of payments projections over the medium term indicate that the ratio of the NPV of Burkina Faso' s stock of debt to its exports of goods and nonfactor services will remain substantially above the 200 percent threshold for a number of years. Consequently, Burkina Faso has requested that it be considered eligible for exceptional debt reduction under the HIPC Initiative. Burkina's eligibility for debt relief  4 under the HIPC initiative was endorsed by the Board in November 1997, and the completion point has been set for April 2000. 12. While Burkina Faso's macroeconomic performance has been good since the 1994 CFA Franc devaluation, it is fragile and below what is needed to reduce poverty substantially. To accelerate economic growth, it is essential that more be done to foster the development of competitive private sector activities, in particular by improving the business environment. Institutional weaknesses, especially in the public sector, persist despite repeated reform efforts. Also, the government needs to accentuate its efforts to strengthen revenue mobilization and to ensure that public resources are allocated and spent in the most efficient and social-equity oriented way. C. RECENT REFORM EFFORTS 13. Burkina Faso has made significant headway in its transition to a market-oriented economy. Some progress has been achieved in implementing trade, fiscal and public enterprise reforms as well as in the areas of social policy and institutional development (see Table 1). Structural Reforms 14. Substantial external trade reforms began in 1993 with the consolidation of tariff rates into three categories (11, 14 and 37 percent). Regulations on profit margins for imported goods were removed; price controls on locally produced goods were eliminated and remain in effect only for rice, generic drugs, petroleum products, and utilities which are still entrusted to public monopolies. Government policy reforms have done much to correct the policy environment which had distorted incentives markedly in favor of urban areas. Following up on the reforms of the early nineties, a tax reform was drafted in 1997 in preparation for the gradual entry into force of the common external tariff of the WAEMU over the period July 1998-January 2000. The new customs tariff provides for a simplified structure of four rates (0, 5, 10, and 20 percent), plus a statistical tax of I percent. In accordance with the decision taken by the WAEMU Council of Ministers at end-November 1997, a transitory period of tariff adjustment started on July 1, 1998 when the maximum tariff rate (currently 31 percent, excluding the statistical tax) was reduced to 30 percent. 15. In the rural sector, reforms under the first Agricultural Sector Adjustment Credit liberalized trade and prices of traditional cereals and livestock. However, incentive reforms are still incomplete. The rice subsector is still subject to state intervention. The booming cotton subsector remains a monopoly from product marketing to exports. To address the outstanding agricultural issues in a comprehensive manner, a national effort to formulate a rural development strategy is underway focusing on the following: (a) agriculture technology and transfer, mainly oriented towards improving the relevance of research and the efficiency of service delivery mechanisms; (b) priority investments in rural infrastructure (roads and irrigation) aiming at increasing agricultural productivity; (c) accelerating investments in human development (education, health, water and sanitation); (d) promoting a more rational use of natural resources, with special attention to soil fertility, water management and tree conservation; and (e) completing the policy and institutional reforms of agricultural services to ensure the consistency of support and advisory services provided to farmers.  5 Table 1. Burkina Faso: Main Structural Reforms under IDA and IMF SAF and ESAF-Supported Programs, 1991-98 Reforms Year (Actual) 1. Fiscal Reform Tax reform Introduction of value-added tax (VAT) on large enterprises and imports 1993 Revision of system of taxation for petroleum products, with introduction of VAT 1993 Increase in the rate of VAT from 15 to 18 percent 1996 Implementation of a single system of taxation in the informal sector & of small and medium-size enterprises 1993 Establishment of tax unit for large taxpayers 1994 Introduction of single tax identifying number 1995 Reduction in the rate of the corporate income tax from 45 to 40 percent 1996 Current expenditures restricted to 10.5% of GDP 1997-99 Implementation of the first phase of the WAEMU common external tariff 1998 Budgetary reform Strict enforcement of prior commitment authorization by Ministry of Finance 1995 Closure of expenditure commitments by November 20 of each year 1995 Preparation of a monthly status of expenditure by budget heading at the commitment, settlement & payment order stage 1995 Adoption of a unified budget nomenclature 1995 Adoption of a computerization plan for the Ministry of Finance and financial govemment agencies 1996 Launching of the harmonization program for budgetary & public accounting procedures in the context of the WAEMU 1997 Reduction of domestic arrears Repayment of debt of the postal saving system 1995-96 External debt Strengthening of the debt management unit 1997-98 2. Public enterprise privatization (initial 76 enterprises) First phase ofprivatization concerning 24 enterprises: 16 enterprises privatized; I transformed into an administrative unit of the 1991-96 ministry of Secondary and Higher Education; 3 liquidated; I being privatized; 3 maintained in the state companies' portfolio Second phase ofprivatization concerning 20 enterprises: 5 enterprises privatized; 5 liquidated; and 7 to be privatized and 3 to be 1994-99 liquidated A strategic study is currently underway for the remaining state companies' portfolio (32 enterprises) 1998-99 3. Banking sector reform Liquidation of BND-B Early 1997 Privatization of BFCI Early 1997 Privatization of BIB 1994 Reduction of bank debt due by Government 1995-98 Creation of two new banks (Ecobank-Burkina and Bank of Africa) 1997-98 4. Trade liberalization Elimination of most price controls 1991-94 Elimination of most export duties 1993 Elimination of import authorization and requirements 1993-95 Trade and price liberalization, including elimination of public marketing and stabilization schemes on traditional cereals, oil seeds, 1993 livestock Elimination of CGP (public enterprise) monopoly of rice imports 1996 Elimination of SOSUCO monopoly for sugar imports 1996 Reduction in the number of products whose imports are subject to quality controls 1996 Removal of export restrictions on hides and skins 1996 5. Liberalization of Labor Code 1993-94 6. Civil service reform Adoption of a new legal framework for civil service reform 1998  6 16. The first phase of the public enterprise reform was completed with the privatization/liquidation of 19 enterprises and the elimination of large budgetary subsidies. The second phase of the reform, approved by law on July 1, 1994, covers the privatization or liquidation of 20 public enterprises, and should be completed before end-1999. The financial sector has been strengthened and now comprises the national agency of the BCEAO, seven commercial banks, a postal savings bank (CNE), a postal checking agency (CCP), and several consumer credit and equipment leasing organizations. In addition, a number of savings and loan cooperatives and financial association networks operate at the urban and village level. Savings and loan cooperatives and mutual funds together hold some CFAF 6 billion of deposits and allocate about CFAF 5 billion in loans; they contribute to only 4 percent of total lending and deposits, but reach some 270,000 individuals (3 percent of the population). While Burkina has reliable financial institutions, the financial intermediation system needs to be deepened, including through the development of effective and decentralized micro-credit schemes. 17. As for the mining sector, after increasing steadily to reach 5.5 tons of gold in 1990, semi- industrial gold mining and traditional gold panning production started declining from 1991. To encourage mining investments, a new mining code was adopted in 1997 which redefines government prerogatives in granting and withholding licenses, limits government participation in mining ventures to 10 percent, abolishes state monopoly control over gold exports, and strengthens the security of tenure of artisanal miners. This policy has provided the right incentive and has started to pay off. In spite of a rather depressed international gold market (with prices declining from $380 per ounce in early 1997 to around $300 in the first six months of 1998), artisanal mining is prevalent at over 200 sites throughout the country and provides a livelihood for some 75,000 miners. Besides, some 20 international mining companies have become active in exploration, and important private investments can be expected in the sector over the next years when the gold market recovers. Social Sector Reforms 18. According to UNDP's human poverty index, which uses indicators of life expectancy, malnourishment of children, and access to basic education, health services, and safe water to measure some of the qualitative dimensions of deprivation, Burkina Faso ranks 76th among 78 developing countries, as about 58 percent of its population does not meet the minimum health requirements. Consequently, health and education sector reforms have been and remain at the top of the list of the Government policy agenda. 19. Health. The health status of the Burkinabe population is poor, with life expectancy at birth reaching only 50 years --compared to an average for Sub-Saharan Africa of 52 years. Low life expectancy is to a large extent the results of high infant mortality (98 per thousand in 1996, compared to an average of 90 per thousand for SSA of per thousand) which is caused by widespread contagious diseases like malaria, diphtheria, tetanus, measles, and meningitis, and unfavorable hygienic conditions. In addition, chronic malnutrition especially among childbearing women is a significant cause of mortality among women in the 20-49 year age group. HIV prevalence is estimated to be about 7 percent. 20. To address this situation, the Government has been pursuing health reforms following the guidelines of the Bamako Initiative since the mid-1990s. The main objectives of the Government's strategy are: to facilitate access to and increase the utilization rate of health centers; to  7 provide health centers with adequate resources and essential, low cost generic drugs (the number of operational districts will be increased from 22 at the beginning of 1998 to 35 in 1999); to reduce the maximum area covered by health and social promotion centers to 5 kilometers; to reduce malnutrition, particularly among children under five years of age, by providing caloric and micronutrient supplements; and to promote the prevention of major diseases that are likely to negatively affect labor productivity and economic growth (AIDS, malaria, and other major infectious diseases). The Government, with donor support, will continue the construction and equipment of health centers, promote the use of essential generic drugs, expand its immunization program, and encourage the involvement of local communities and the private sector in the design and management of health centers. To achieve these goals, the share of total expenditure on health in total budgetary outlays (including foreign-financed expenditures) has been increased from 7.4 percent in 1993 to 11.6 percent in 1997, or to an average of US$5 per capita, compared to US$15 recommended by Better Health in Africa. 21. Education. Burkina Faso has one of the lowest primary school enrollment rates in Sub- Saharan Africa -- 40 percent gross enrollment ratio in 1997, compared to an estimated 75 percent for Sub-Saharan Africa. Large disparities exist, with urban areas recording higher enrollment rates while eight provinces in rural areas have registered enrollment rates under 20 percent. Quality indicators are also poor: the number of repeaters, for instance, is estimated at 18 percent, and only 20 percent of the students complete the primary cycle in four years. Because of insufficient infrastructure and inadequate organization of the academic year, it is estimated that students only received 660 hours of schooling in 1997, compared to an average of 850 hours in other countries of the region. Private and community participation in the primary education system is still very limited. Out of the 3,568 schools and 12,290 classrooms identified in 1996, 92 percent were part of the public system. 22. To reverse this situation, the Government has prepared a strategy to implement a 10-year plan aimed at addressing the issues of coverage, equity and quality of primary education in an integrated fashion. The strategy is designed to raise the gross enrollment ratio to 46 percent of the primary school-aged population by 2000, improve the quality of primary education, increase the enrollment of girls, and promote the cost-effective use of public education resources. The share of total expenditure on primary education in total budgetary outlays (including foreign-financed expenditures) has been increased from 8.8 percent in 1993 to 10.5 percent in 1997, an average of $4.6 per capita. The Government has also developed a program to increase the participation of the private sector in secondary education to free up resources for the expansion of public primary education, and improve quality and efficiency. In addition, a new program of school construction is under preparation, with particular emphasis on the provinces with the lowest enrollment rates. NGOs and private schools are also being encouraged to contribute on a greater scale to the expansion of primary education rolls; and efforts to increase adult literacy particularly with respect to women, are being stepped up. Institutional Reforms and Capacity Building 23. As Burkina embarked on economic reforms in the early nineties, it became apparent that a number of institutional arrangements and the national capacities were not adequate to transform the  8 state machinery to respond to the demands of a liberalized economic and political system. Burkina's institutional reforms have been supported by the donor community including by the IDA-financed Public Institutional Development (PID) project approved in 1992. Major achievements in recent years have taken place in public finance management with the adoption of a new budgetary framework and the effective implementation of a computerized public expenditure processing and monitoring system which covers all current expenditures of all ministries, except payroll and debt service. Although progress has been slower in other areas such as the civil service and judiciary reforms, there have been encouraging results including the cleaning of the civil service roster and the training of some 45 judges and lawyers between 1993 and 1996. 24. At the end of 1996 the Government launched a second phase of its institutional reform program with the preparation of two broad pieces of legislation that took time to mature because of a necessary, wide consultation process: (a) the "comprehensive reform of the state" which i) specifies the new role of the state and delineates its intervention in the economy; and ii) provides the framework for a major civil service reform that seeks to introduce more flexibility in the status of state employees and to revise personnel management regulations substantially; and (b) a decentralization law that defines the principles and orientations of decentralization in Burkina Faso. The implementation of these laws constitutes the major institutional challenge for Burkina Fasco in the coming years. Both call not only for sensitive decisions with political implications, but also for intensive capacity building within the administration. D. BURKINA FASO'S DEVELOPMENT CHALLENGES AND REGIONAL INTEGRATION 25. The long-term development prospects of Burkina Faso are limited, and it is likely that substantial donor transfers will need to continue well into the future. Foreign-financed government investment has amounted to 9.5 percent of GDP over the past five years. The Burkinabe Government is committed to realizing the objective of greater economic competitiveness, together with closer economic integration within the WAEMU and with the rest of the world; and to implementing reform programs aimed at addressing structural problems that may contribute to weaken the competitive position of Burkina Faso and limit its potential to gain both from closer regional integration and from the forces of globalization. Specifically, these reforms aim at: privatizing key public enterprises -- especially public utilities; achieving greater competition in the production and marketing of major agricultural products -- especially cotton, sugar and rice; restructuring the livestock sector; strengthening natural resource management; modernizing the public administration, including the judiciary; and improving the efficiency and effectiveness of public resources allocated to human resource development in general, and to health and education, in particular. 26. Following the 1994 CFAF devaluation, Burkina Faso and the other members of the BCEAO monetary zone have committed themselves to creating an economic union, starting with the establishment of a customs union, as well as substantial harmonization of tax policies and investment incentivesl. Over time, the integration is meant to include the harmonization of sectoral 1 The Council of Ministers of the WAEMU decided in December 1997 that a common external tariff (CET) will be introduced in a progressive manner over a transitory period, starting July 1, 1998. The CET will have to be implemented by all WAEMU countries by January 1, 2000, and will comprise four rates (0 percent, 5 percent, 10 percent, and 20 percent), and a statistical tax of I percent. The maximum import rate is to be reduced to 30 percent on July 1, 1998; 25 percent on January 1, 1999; and, 20 percent in January 1, 2000. See Box 1.  9 policies and strategies. While the potential economic gains are extremely difficult to quantify, the ambitious integration objectives would in the longer run assist a poor, landlocked and relatively arid country like Burkina Faso, whose major engine of growth will continue to be its participation in the larger economies on the coast, especially COte d'Ivoire, where over 3 million Burkinabe already live and work. Closer integration also gives Burkina Faso a larger regional market for goods in which it has a clear comparative advantage -- including livestock and garden produce, plus an opportunity to benefit from more efficient services and industries elsewhere in the zone, and thereby enhance its overall competitiveness. WAEMU itself offers some assurance that national policies will be both better designed and more likely to be implemented, as the need to harmonize policies across the Union will put a limit on the most distortionary policies in individual countries as well as provide a way of mutually locking in these policy commitments. 27. Realizing these gains has transitional costs: it will require focused public expenditures, especially to strengthen the quality of the Burkinabe workforce, as well as adopting policies that will both encourage and allow more competitive entry into key economic activities. These costs are likely to increase the financing requirements of the Government in the short run, given on the one hand the lower taxes on imports, and on the other hand, the need for assistance to businesses and workers that are dislocated in the process. As only a small portion of these costs are likely to be met through intra-WAEMU fiscal transfers, greater donor assistance will be needed. This additional support can be justified, however, only if the members of the Union adopt and implement appropriately competitive economic policies and only if they manage their public resources efficiently -- measures which are essential if the countries are to realize the longer term gains of regional economic integration. E. MEDIUM-TERM PROSPECTS AND DEVELOPMENT STRATEGY 28. Macroeconomic Objectives. As stated in its Policy Framework Paper (PFP) 1998-2000, poverty reduction is the Government's top priority. It is to be achieved through sustained economic growth in the context of accelerated development of the social sectors, supported by the benefits that are expected to accrue from greater integration of the Burkinabe economy into the region and the world at large. In order to raise the income levels of the population and foster the development of human resources and productive potential, the Government has formulated a medium- and long-term strategy. The major objectives may be summarized as follows: (i) increase per capita GDP by at least 3 percent a year; (ii) double the literacy rate from 20 percent at present to 40 percent in 2005; and (iii) raise life expectancy to 57 years during the next decade. The macroeconomic objectives for the period 1998-2000 are to: (i) maintain a real GDP growth rate of about 5.5 percent on average; (ii) limit inflation to 3 percent per annum; and (iii) reduce the external current account deficit, excluding grants, to 9 percent of GDP by 2000. 29. The government intends to continue to pursue its macroeconomic and reform strategy, the main elements of which are the following: (i) maintaining macroeconomic stability and consolidating the recent competitiveness gains; (ii) improving the efficiency of the public sector by further strengthening tax and customs administration and budgetary procedures, and by stepping up the reform of the civil service and public enterprises; (iii) reforming the judicial system to ensure appropriate protection and incentives for private investors; (iv) further reducing the state's role in the  10 economy; and (v) improving human resource development. This strategy requires moderation of population growth, implementation of policies directed at promoting job creation and at providing women with a greater role in the development process, and greater access to social services, especially education, health, safe drinking water, and sanitation services. It also requires a better management of natural resources through enhanced security of land ownership and training of the general public in environmental protection techniques. 30. In order to meet the challenging objectives of reducing poverty and increasing per capita income, the authorities have stressed the need to: (a) develop and implement a rural development strategy; (b) develop the mining sector; (c) strengthen the country's human resources; and (d) accelerate the integration of Burkina into the regional and the world economy. The Bank will support the Government's development agenda, through lending, non-lending and portfolio management, to achieve macroeconomic stability, encourage private sector development and promote the social development of the population, especially of women and children. 31. Designing a Rural Development Strategy. Agriculture and the other primary sector activities will continue to be the main source of growth in Burkina Faso, as well as the main revenue- generating and job-creating activity, accounting for about 30 percent of GDP. Maintaining a competitive economy will facilitate development of the growth potential of exports such as cotton and livestock products, and promote the production of nontraditional exports such as fruits and vegetables. A comprehensive rural development strategy has to address the three root causes of poverty: (i) a deteriorating natural resource base which is exacerbated by increasing demographic pressures; (ii) an inadequate economic infrastructure which hinders the diversification of the rural economy into higher value added products, less dependent on the resource base; and (iii), a deficient social infrastructure. This is best done by a combination of policy changes to limit public sector interventions where they add value to private sector activities; of sector- and subsector- specific support programs which strengthen the delivery of technical and management messages to rural producers; and by improving the capacities of collectivities to plan and execute development actions to increase production and incomes, rehabilitate the productive base, and undertake social investments. 32. The first phase of the formulation of the rural development strategy which started in 1996, has been completed, with the definition of seven key strategic objectives which have been endorsed by a national workshop and by the Council of Ministers. These objectives are: (i) promoting the private sector in an open market economy; (ii) increasing monetization of the rural economy; (iii) addressing production constraints faced by farm producers; (iv) improving natural resource management; (v) supporting professional producer organizations; (vi) improving food security and fighting poverty; (vii) re-focusing the role of the State in line with a market-based economy and a decentralized state. Consistent with these key sectoral objectives, a number of priority programs are being identified or revised by working groups established at the Ministries of Agriculture and Livestock, with the view to formulating coherent sector public investment programs. These programs cover: technology transfer to agriculture and livestock producers; irrigation; rural infrastructure; mechanization; rural finance; land tenure and land development planning; natural resource management and soil fertility; and food security and market risk management.  11 33. A process of consultation with main stakeholders started with meetings held in various regions and will continue through a national workshop. This workshop will also constitute an opportunity to invite officials from other sectoral ministries and agencies concerned, in an effort to coordinate subsectoral programs to ensure complementarity and consistency. In parallel with the process of program formulation in the various sectoral and subsectoral areas, a national effort is underway to define a broad-based decentralized strategy of rural development, which will transfer the main responsibility for priority setting, project selection and their execution to the rural communities and other grassroots organizations. This second effort is supported by the National Decentralization Commission and involves a very large cross-section of state and non-state institutions. Indeed, Burkina's rural development strategy reflects the Government decision to decentralize a number of functions traditionnally performed by the state, including through the devolution of responsibilities for the planning and execution of local investment programs to the community and municipality level. It will cut across several sectors, including not only agriculture, livestock, and natural resource management, but also infrastructure and the social sectors. It will need to be supported by a sound policy and institutional support framework in each sector. 34. Developing the Mining Sector. At present, modern mining is underdeveloped in Burkina. Yet, after cotton, exports of gold represent the country's largest foreign exchange earner (8 percent of exports revenues in 1997). The country is well endowed with geological formations which, in other West African countries (e.g., Mali and Ghana), contain major gold deposits. Due to this geologic potential many international companies have invested in exploration. Good potential exists also for small-scale, locally owned mining operations. Given the strong interest in gold exploration and extraction, the mining sector is expected to expand when world prices recover from their current level. According to various estimates, when world prices recover to $325/ounce, gold output could increase by as much as fivefold in the next decade, from the current level of 1.5 metric tons a year. 35. The Government is aware of the need to maximize the contribution of the mining sector to the economy. In order to create an environment conducive to investments, significant reforms have been undertaken during the past three years. A comprehensive policy dialogue among various stakeholders was conducted and resulted in the adoption of a Letter of Sector Development Policy. Based on this letter, a new mining law, consistent with international best practices, was adopted in December 1997. This law redefines government prerogatives in granting and withholding licenses, limits government participation in mining ventures to 10 percent, and strengthens the security of tenure of artisanal miners. Following the creation of a Ministry of Energy and Mines in 1995, a comprehensive study of the roles and mandates of the Ministry and agencies reporting to it was conducted. Since then, the authorities have been pursuing a policy of attracting investment in the sector. Thus, the Bureau of Mines and Geology (BUMIGEB), the state agency previously responsible for all policy, administrative, and geology functions, was fully reorganized: its responsibilities are now limited to the provision of geological survey services. The gold purchase monopoly of the state-owned buying office, the Comptoir Burkinabe des Metaux Precieux (CBMP), was abolished. Finally, the state-owned gold mine (SOREMIB) was privatized. 36. It is now necessary for the Government to deepen and consolidate the reforms. Priorities include: (i) adopting precise mining and environmental regulations in conformity with the new mining law; (ii) increasing the performance and efficiency of sector institutions; (iii) developing  12 capacity for environmental management; and (iv) upgrading the availability and quality of earth science information. 37. Improving Human Capital. Another key aspect of the Government's economic strategy over the next decade will be to increase labor productivity through the development of human resources and the creation of an environment conducive to greater private sector development and job creation. The greater mobility of labor and investment within the WAEMU countries, in light of ongoing trade liberalization and economic integration, will put pressure on Burkina Faso to upgrade its human resources. In a more open sub-regional economic environment, the country will need to increase its supply of skilled workers both for the domestic economy and to capitalize on employment opportunities that will develop mainly in the coastal economies of the region. Because Burkina's literacy and gross enrollment rates are still low by Sub-Saharan African standards, greater effort will be needed to improve the quality and access of primary education and to train adequate technical and vocational personnel to meet the demands of the emerging industrial sector in the region. Also, the Government will pursue an ambitious reform program to improve Burkina's poor health indicators. The strategy over the next years will focus on the implementation of health and education policies described more fully in paras. 18-22. 38. Integrating into the Regional and World Economy. In light of the decisions adopted at the WAEMU level, the Burkinabe authorities are committed to strengthening economic links with countries of the sub-region. They understand that deriving the benefits of greater regional integration and taking advantage of labor market flexibility within the union would require improving domestic and external competitiveness and promoting private sector development. Over the next decade, Burkina could attract export-oriented firms because of its labor cost competitiveness, which, in spite of its relatively low productivity, compares favorably with other WAEMU countries (private sector wages are lower in Burkina). In order to improve competitiveness, the Government needs to deal much faster with Burkina's high cost of utilities --that is, to accelerate the pace of its sector reform and privatization program in this area-- and remove the remaining administrative barriers to investment. The main policy and regulatory constraints that impede foreign investment are currently under review by the Government in the framework of the Bank-supported private sector assistance project. 39. The implementation of the CET according to the WAEMU schedule (see Box 1) will have a short-term negative impact on international trade and fiscal revenues in Burkina. To offset these losses, the authorites are committed to: (i) reducing exonerations and exemptions by tightening the import procedures for foreign-financed projects, for which duties are paid by the Government, that in the past had given rise to abuses; (ii) improving tax assessment and collection through coordinated computerized procedures, linking information from customs and domestic tax offices; (iii) improving taxation of the informal sector; and (iv) accelerating the collection of urban development fees. F. BUDGETARY GAP AND FINANCING REQUIREMENTS 40. A prerequisite to the success of the medium-term strategy will be to maintain sound government finances, notwithstanding the loss of revenue that would result from the implementation  13 of the CET. Also, the targeted economic growth will be sustainable only if it is supported by an increase in savings and investment. For this reason, the government's fiscal policy will seek to increase domestic savings; this, combined with the expected inflow of external assistance, will permit financing an adequate level of investment which, in turn, need to be effectively allocated. The overall investment ratio is expected to remain at about 25 percent of GDP during the 1998-2000 period. 41. According to the most recent estimates available, fiscal revenues for 1998 are expected to amount to CFA 198 billion, compared with projected expenditures and net lending (excluding proceeds of privatization) of CFA 354 billion resulting in an overall budget deficit of CFA 156 billion on a commitment basis, excluding grants. Adding to that amount CFA 3.5 billion of domestic arrears repayment and subtracting CFA 99 billion for expected grants, yields a budget deficit (cash basis) to be financed of CFA 61 billion. Externally-financed projects are expected to contribute CFA 29.5 billion. Taking into account the ESAF program targets for primary surplus and net credit to government, the remaining budgetary gap will amount to about CFA 15.5 billion ($28 billion). Exceptional external financial assistance from the European Union, Switzerland, the Netherlands, Denmark, and IDA through the proposed $15 million adjustment credit are expected to cover the gap. 3. BANK GROUP OPERATIONS IN BURKINA FASO AND COLLABORATION WITH DONORS 42. Overall Strategy and Linkages. The main elements of the Government development strategy are to (i) maintain macroeconomic stability, (ii) improve human resources development, (iii) improve the efficiency of the public sector by further strengthening tax and customs administration and budgetary procedures and by stepping up the reformn of the civil service and public enterprises, (iv) ensure appropriate protection and incentives for private investors and reform of the judicial system. This strategy requires implementation of policies directed at promoting job creation and income growth, and providing greater access to social services, especially in education, health and sanitation. Agriculture and the rest of the primary sector will most likely continue to be the main source of growth in Burkina Faso, as well as the main revenue-generating and job-creating activity, accounting for about 38 percent of GDP. Future Bank support will therefore continue to emphasize economic management, human resource development and agriculture. 43. Cumulative Bank Lending to Burkina. The cumulative Bank Group's commitments to Burkina as of July 30, 1998, amounted to about US$808 million equivalent for 54 operations, comprising 52 IDA credits totaling US$807 million and 2 IFC investments (US$0.6 million). The 52 IDA credits (40 closed and 12 active) include four adjustment operations (SAC I, Transport SECAL, Agricultural SECAL and Economic Recovery Credit), twenty agriculture projects, five education projects, three health projects, eight infrastructure/transport projects, three telecommunications projects, four urban projects, two mining projects, one public institutional development project, one financial sector project, and one private sector assistance project. The two  14 IFC investments provided support to two financial institutions (EcoBank-Burkina, FY97; and SGBB, FY98). 44. Ongoing Lending Operations. Three ongoing operations support IDA's strategy in the agriculture sector. An Environmental Management project (US$16.5 million, FY91) supports increased local capacity for natural resource management. A Food Security project (US$7.5 million, FY93) aims at reducing Government's response time for reacting to national food emergencies, improving targeting of food security programs, and improving household coping mechanisms. A second Agricultural Services project (US$41.3 million, FY98) aims at increasing agricultural productivity and farmers' revenues, improving natural resource management and promoting institutional development. 45. To support human resource development, four ongoing operations are being implemented. An Education IV project (US$24 million, FY91) assists Government in further improving the quality of primary and general secondary education, increasing primary school enrollments and strengthening key sectoral institutions. A Post-Primary Education project (US$26 million, FY97) supports the implementation of the Government's post-primary education strategy (PPES). In the health sector, a Health and Nutrition project (US$29.2 million, FY94) assists the Government in its efforts to improve the quality, coverage and utilization of basic health services, enhance the nutritional status of the population, develop a national capacity for achieving sustainable control of endemic parasitic diseases. A Population and Aids Control project (US$26.3 million, FY94) aims at enhancing the onset of fertility decline by increasing the prevalence of modern methods of contraception and slowing the spread of HIV infections by promoting behavioral change and treating STDs. In the urban sector, An Urban Environment project (US$ 37 million, FY95) aims at improving urban living conditions in executing priority urban works and developing urban services benefiting low income groups. 46. With respect to private sector development, the Private Sector Assistance project (US$7 million, FY93) provides institutional assistance to three structures supporting private entrepreneurs, supports the implementation of the privatization program and the financial sector reform. Given the recent renewed interest in gold exploration and extraction, the mining sector is expected to expand when there is a recovery in world prices. A Mining Sector Capacity Building and Environmental Management project (US$21.4 million, FY97) supports regulatory framework and training, institutional strengthening and resource management, environmental management and small-scale artisanal mining. 47. The Public Institutional Development project (US$15 million, FY92) aims at reinforcing the major public institutions charged with economic and sector management. Finally, a Transport Sector Adjustment Credit (US$66 million, FY92) assists the Government in rehabilitating and maintaining essential transport infrastructure and in improving sectoral efficiency, including the strengthening of existing institutions, the adoption of sound policy and regulatory measures and the restructuring of sector parastatals. 48. Future lending operations. Based on the Country Assistance Strategy's (CAS) approved in FY96, IDA's proposed lending program for the period FY99-00 consists of six operations totaling about US$137 million. The proposed program includes a second Structural Adjustment Credit  15 (FY99), a Private Irrigation project (FY99), a Water Supply project (FY99), a Public Works and Decentralization project (FY99), a Basic Education project (FY00) and a Community-based Rural Development project (FY00). The lending program for the year 2000 and beyond, including future adjustment operations, will be reviewed with Government in the next few months in the context of the preparation of the next CAS. 49. Aid Coordination. Donor activities are coordinated effectively in a number of operations under supervision, among others Transport, Health and Nutrition. Close coordination will need to be maintained in the preparation of the Water Supply project (Ziga operation) for which financing is sought from more than ten donors. In terms of broader coordination, the last UNDP-organized roundtable took place in October 1995 in Geneva and the main themes were implementation of structural adjustment programs, the impact of the CFA devaluation and medium-term development objectives for Burkina. A social sector roundtable is scheduled for 1999 in Ouagadougou. Another area of focus for coherent aid coordination will be the decentralization process which is currently being supported by various donors under different approaches. The recently approved decentralization law should provide a framework for harmonization of external assistance in that area. 50. Following the SPA meeting in 1996, Burkina Faso was selected as one of the pilot countries for testing new ways of formulating conditionalities associated with structural adjustment lending. The purpose of the test is to find ways of improving the predictability of resource transfers through the harmonization of conditionalities set by the donor community. The Bank has been working closely with Govemment and other donors in developing performance indicators as well as monitoring arrangements. The evaluation of the test will take place in the second half of 1999. 51. Lessons learned. The main objective of the first Structural Adjustment project (approved in June 1991, closed in June 1995) was to improve public resource management and create incentives for private sector growth. The ICR found that the adjustment program succeeded in restoring significant but fragile economic growth. The program was found to be too comprehensive and thereby to lack coherence. One lesson identified in the report concerns the importance of innovative approaches to the design of future adjustment operations which would prevent unexpected difficulties in specific reform areas from slowing down the whole reform process. The ICR also noted that the private sector can only become the driving force behind Burkina Faso's development if the Government is fully committed to the privatization program. 52. The main objective of the Economic Recovery Credit (1994) was to support Burkina's post- devaluation adjustment program aiming at private sector led growth and poverty alleviation. The ICR rated this credit as satisfactory and indicated that the success of the operation was due in large part to its simple design. It noted that in Burkina Faso emergency recovery credits and one tranche operations in general lend themselves well to support policy reforms that depend on concrete policy decisions where implementation is not a long process involving a large number of ministries and implementing agencies.  16 4. THE PROPOSED OPERATION A. LINK WITH THE CAS AND RATIONALE FOR THE CREDIT 53. The Burkina Faso CAS was discussed by the Executive Directors on July 11, 1996. The overall objective of the strategy is reducing poverty. The approach to reach this objective centers on three axes: (i) increasing income opportunities and productive capacity; (ii) developing the social sectors through more efficient use and better targeting of public expenditure; and (iii) strengthening the role of the private sector. A significant part of the Bank's lending and non-lending services has supported the Government's stabilization and structural adjustment efforts, including those aimed at regional integration, which is one of the areas where the CAS placed particular importance. The proposed single tranche credit would underpin an expanded structural reform program and the regional integration effort. 54. Given Burkina Faso's continued need for budget support foreseen in the CAS, the proposed credit will help Burkina Faso to partially offset the reduction of revenue resulting from the implementation of the WAEMU's new CET regime, while other reforms concerning revenues and expenditures restore relative fiscal stability. Thus, the proposed credit is an integral part of the Bank's strategy to assist Burkina Faso in maintaining macroeconomic stability and financial sustainability, and in gaining competitiveness. The proposed measures are essential to the enhancement of Burkina Faso's growth prospects. The reforms supported by the operation are, furthermore, necessary to create an environment conducive to private sector-led economic growth while helping to ensure an orderly transition toward greater regional and global integration. Also, by focusing on revenue mobilization and the reallocation of public resources towards two priority areas, namely education and health, the operation is expected to ensure that these two key sectors will not suffer from budgetary cuts during the transition period and have a direct and positive impact on poverty alleviation. B. CREDIT COMPONENTS 55. The reform program associated with this credit has three major elements: (i) public finance reform, including progress towards the WAEMU convergence to a CET, and Burkina's full integration into the regional customs union to be completed on January 1, 2000; (ii) rationalization of public expenditure management and strengthening of public administration; and (iii), continued implementation of public enterprise reform. The credit is proposed as both a one-tranche operation and the first of a series of such operations related to up-front policy reforms that will have been implemented prior to Board presentation. 56. As stated in the PFP 1998-2000, the Government has defined a coherent medium-term reform program aiming at enhancing human resource development, private sector investment and economic growth within a stable macroeconomic framework conducive to poverty reduction. The Government's economic reform program is on track and in 1998 is supported by a (second) annual arrangement under the IMF's Enhanced Structural Adjustment Facility (ESAF), aiming at consolidating and deepening the stabilization program initiated in 1994. The proposed operation is based primarily on several specific measures in the areas of taxes, public expenditure management,  17 public enterprise reform and capacity building (see Annex I -- Matrix of Policy Actions). Reforms in other areas are being implemented or planned with Bank and donor support under other operations. (I) Public Finance 57. Despite recent improvements in revenue collection, Burkina Faso continues to be faced with an inadequate tax structure. Fiscal revenue is highly dependent on a relatively high level of tariffs which discriminates against exports and undermines the efficiency in the allocation of public resources. At end-1997, taxes on trade accounted for about 51 percent of total fiscal revenue, taxes on goods and services for 25 percent, and profit taxes for 20 percent. Tax administration suffers from some shortcomings related to tax collection, taxpayers ID number and other irregularities that need to be addressed so as to ensure that tax collection is achieved in an adequate and timely manner. 58. The phasing in of the CET is likely to lead --between mid-1998 and 2000-- to significant revenue losses caused by the cut in the maximum tariff from 31 percent to 20 percent and in the statistical tax from 4 percent to 1 percent. According to preliminary studies that simply apply the proposed tariff rate structure to the existing composition of imports without regard to trade creation from lower external tariffs or trade diversion from the elimination of internal tariffs, these losses may amount to 3.4 billion FCFA (1.5 percent of the 1997 budget revenues) in 1998; 14 billion FCFA (6 percent of the 1997 budget revenues) in 1999; and 25 billion FCFA (10.7 percent of the 1997 budget revenue) in 2000. Over the transition period -and after allowing for compensatory measures- the external tariff cuts would lower budgetary revenue from an estimated 13 percent of GDP in 1998 to an estimated 12 percent of GDP in 2000. 59. To offset some of the above losses, the authorities are committed to adopting a series of measures aimed at shifting fiscal resource away from trade and strengthening tax administration by broadening the tax base through curtailing tax and customs duty exemptions in accordance with the policy being prepared by the WAEMU, in particular in relation to the envisaged regional harmonization of the investment code (see Box 1), and strengthening tax administration through the computerization of six additional custom revenue collection offices before the end of 1998.  18 Box 1. Burkina Faso: External Tariff Reform and New Tax Measures Tariff Structure Tariff Structure Tariff Structure Tariff Structure Until June 30, From July 1998 From January 1, From January 1, 1998 (in percent) 1999 2000 (in percent) (in percent) (in percent)_ Customs rates/categories I II III I II III I II III I II III External tariff rates _ a. Customs duty 5 5 5 5 5 5 5 10 25 5 10 20 b. Fiscalduty 0 4 26 0 4 20 -- -- -- -- -- . c. Statisticaltax 4 4 4 4 4 4 4 4 4 1 1 1 d. Special intervention tax 2 2 2 -- -- -- -- -- -- -- -- Inter-WAEMU tariff rates Local agricultural 0 0 0 0 products Eligible industrial 60 percent 60 percent 80 percent 100 percent products of origin preference preference preference preference Non-eligible industrial -5 percentage -5 percentage -5 percentage products of origin points points points Total external tariff 1997 1998 1999 2000 revenue In billions of CFA francs 49.9 50.1 39.9 32.6 In percent of GDP 3.6 3.3 2.4 1.8 Estimated Losses due to 1997 1998 1999 2000 CET In billions of CFA francs 3.4 14 25 In percent of 1997 total 1.5 6.0 10.7 revenue NEW TAX MEASURES Impact (Timing and expected impact) Increase excise taxes on petroleum products (July 1998) 0.2 percent of GDP Widening taxation of informal sector, with introduction of withholding tax 0.2 percent of GDP at customs and at wholesalers (1998-99) Tightening tax benefits under investment code, in particular concerning To be assessed in early the VAT (1998-99) 1999; possibly 0.2 percent of GDP Tightening procedures for tax payments under foreign-financed To be assessed at end government contracts (effective June 1998) 1998 Accelerate collection of urban development fees and introduction of road 0.3 percent of GDP tolls (effective May 1998) (ii) Public Expenditure Management and Public Administration 60. While current expenditure as a share of GDP has declined from 12.7 percent of GDP in 1994 to 10 percent in 1997, investment spending in the health, education and infrastructure sectors has risen markedly. However, the Government needs to continue to restructure its public expenditures to ensure adequate funding of priority sectors while containing overall recurrent expenditure and enhancing the efficiency of public outlays.  19 61. The Government recognizes the importance of improving public expenditure planning, management and execution. Enhancing public expenditure efficiency and increasing resource allocations for the social sectors, in line with policy priorities agreed under the HIPC Final Document, require new instruments. To strengthen programming and management of public expenditure, the Government has been developing a Medium Term Expenditure Framework (MTEF), which will be used as a tool to integrate the process of sectoral decision making and budget allocations according to Government's priorities. Eventually, under the MTEF, sectoral policy decisions will be integrated within a three-year rolling macroeconomic and public expenditure framework. The aim of the Government is to implement the MTEF for the health and education sectors in 1999, for the infrastructure sector in 2000 and for all sectors in 2001. 62. As part of this program, guidelines for the preparation of the 1999 budget have been issued indicating both the overall level of expenditure consistent with the PFP 1998-2000 and the indicative sectoral targets for health and education. In addition, to further strengthen public expenditure management, the Ministry of Finance (MOF) is already implementing an integrated monitoring system of recurrent non-salary public expenditure and developing a new public accounting system as well as a comprehensive monitoring of public expenditures, including debt service, investment and salaries. 63. The Government is committed to reforming and modernizing its public administration. To this end, the National Assembly approved in April 1998 the laws providing for a comprehensive civil service reform, including those concerning the distribution of responsibilities between the Central Government and other decentralized levels of Government; the norms for the creation, organization and management of civil service structures; and the legal regime applicable to civil servants. In addition, the Ministry of Finance (MOF) will be reorganized to ensure clear responsibilities for macro-economic management, including improvement of the statistical capacity. The reform of public administration has been initiated, with new laws passed. This reform will be first implemented in the Ministry of Fonction Publique (Civil Service) together with a substantial program of management and personnel training. The results of this pilot experience would form the basis for implementing the restructuring and re-staffing of the ministries of Health, Education and Commerce and later on of all public agencies. Also, the introduction of a single reference file system for salaries and staff is well on its way and should be completed by end-1999. (iii) Public Enterprise Reform 64. Important progress has been made in the privatization of public enterprises (22 enterprises have been privatized, eight liquidated, and ten more are to be privatized or liquidated before mid- 1999), which is now entering a new phase. The Government is determined to deepen the reform by completely liquidating public enterprises for which buyers have not been found; putting up for sale enterprises already slated for privatization; and rehabilitating public utilities companies by periodically adjusting tariff rates to reflect the cost and efficiency gains of producing these goods and services. In addition, the Government plans to prepare a comprehensive inventory of its equity holdings and a strategic analysis of its portfolio with a view to opening up to competition the sectors reserved to the state until now. In this context, the Government will open up to the private sector the telecommunications sector by no later than April 1999, and it has also initiated the privatization of Air-Burkina.  20 C. SPECIFIC ACTIONS REQUIRED FOR THIS CREDIT 65. The stage for this operation has been set by a number of important decisions already taken or currently being taken and that will be fully implemented prior to Board presentation to demonstrate the Government's determination to maintain and consolidate fiscal stability. These decisions concern the following actions: * promulgating the Presidential Order (Ordonnance Presidentielle) Mo. 98-001/PRES (i) reducing the Maximum Tariff from 31% to 25%, thereby implementing the first step toward adoption of the WAEMU common external tariff; and (ii) eliminating the Taxe Speciale dI'ntervention (TSI); * promulgating the VAT act, increasing the VAT rate from 15 to 18%; * establishing a single tax identification numbering system for all taxpayers to monitor taxpayer compliance with various taxes as specified in the Borrower's relevant tax legislation; * increasing the domestic primary budget surplus by 1.1% of GDP in Fiscal Year 1997, through expenditure restraints; * completing the automation of the customs clearing procedures for imports in the six principal customs offices; * promulgating Law No. 038/98/AN, tightening tax collection procedures; * (a) adopting a budgetary reform program, including budget guidelines for the preparation of the FY 1999 budget and sectoral ceilings for health (12%) and education (13%), and (b) strengthening its public expenditure programming and management systems, through the adoption of budgets for the social and basic infrastructure sectors for each fiscal year, linked to specific programs in such sectors; * adopting macroeconomic forecasts for FY 1998-2000, to ensure coherence between such forecasts and the FY 1998-2000 budgets; * establishing a national committee for the preparation of the MTEF and introducing a three year- rolling PIP covering FY 1998 to 2000; 3 implementing a program in FY 1998 to assure the coherence between the PIP and sectoral priorities and strategies;