Burkina Faso - Economic Management Reform Support Operation Project

Report No. PID7083 Project Name Burkina Faso-Economic Management Reform... Support Operation Region Africa Sector Macroeconomic Project ID BFPE58282 Borrower Burkina Faso Implementing Agency Ministry of Economy and Finance Date PID Prepared September 15, 1998 Appraisal September 22-30, 1998 Board Date November 5, 1998 I. Country and Sector Background Since 1991 Burkina Faso has established a record of satisfactory adjustment under several IMF- and IDA-supported programs carried out with the assistance of the donor community. After a period of modest economic expansion and following the 1994 devaluation of the CFA franc, real GDP growth picked up, reaching 4 percent in 1995, 6.2 percent in 1996, and 5.5 percent in 1997. Inflation was contained to 2.5 percent in 1997, compared to 6.1 percent in 1996. 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 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. As results of its adjustment record, Burkina Faso benefited from a Paris Club stock-of-debt reduction operation in 1996, involving a 67 percent reduction in net present value of its eligible debt ($71.5 million). In September and November 1997, the World Bank and the IMF Boards voted that Burkina Faso was eligible and qualified for assistance under the Initiative for Heavily Indebted Poor Countries (HIPC), provided that the authorities move swiftly to complete the ambitious reform program underway. The completion point has been set for April 2000. A seventh Policy Framework Paper covering the period 1998- 2000 was finalized in August 1998. II. Project Objectives and Description The single tranche credit will underpin an expanded structural reform program and the regional integration effort. Given Burkina Faso's continued need for budget support foreseen in the 1996 Country Assistance Strategy (CAS), the 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 in revenues and expenditures restore relative fiscal stability. Thus, the 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 would not suffer from budgetary cuts during the transition period and to have a direct and positive impact on poverty alleviation. 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 Faso'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. Public Finance. 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. 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 6 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. 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; and strengthening tax administration through the computerization of six additional custom revenue collection offices before the end of 1998. Public Expenditure Management and Public Administration. 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 -2 -  the efficiency of public outlays. 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, requires 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 setting 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. Public Enterprise Reform.The Government is determined to: (i) deepening the reform by completely liquidating public enterprises identified for privatization in 1991 and 1994, for which buyers have not been found; (ii) putting up for sale enterprises already slated for privatization; and (iii), 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. 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: lowering the maximum tariff rate from 31 percent to 25 percent; abolishing the special intervention tax; finalizing the automation of the customs-clearance procedures for imports; finalizing the computerization of six additional border customs offices; issuing the list of public enterprises to be privatized or liquidated during the 1998-2000 period; issuing budget guidelines for the preparation of the 1999 budget, including specific sectoral targets for health and education; and strengthening public expenditure programming and management, in particular, through the adoption of program budgets in the social and basic infrastructure sectors. III. Financing The operation will be supported by an IDA credit of US$15 million, which will be released at credit effectiveness. This one tranche credit is justified on the basis of (i) significant up-front policy actions dealing with public finance; and (ii) the drop in fiscal revenue due to the introduction of the WAEMU's CET. -3-  IV. Poverty Category and Environmental Aspects Poverty category is B and environment category is C. V. Program Objective Categories (POC) The operation falls under the poverty reduction POC. VI. Contact Point: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending November 27, 1998. - 4 -