Burkina Faso - Third Structural Adjustment Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 21555 IMPLEMENTATION COMPLETION REPORT (IDA-32990) ONA CREDIT IN THE AMOUNT OF SDR 18 MILLION (US$ 25 MILLION EQUIVALENT) TO BURKINA FASO FOR STRUCTURAL ADJUSTMENT CREDIT III December 27, 2000 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 (Exchange Rate Effective Effective November 30, 2000) Currency Unit = CFA Francs (CFAF) CFAF 744 = US$ 1 US$ I = 1.2892 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ARTEL Azence de r6gulation des telecommunications CAS Country Assistance Strategv CET Common Extemal Tariff CFAA Country Financial Accountability Assessment CPAR Country Procurement Assessment Report ECOWAS Economic Community of West African States EMRSO Economic Management Reform Suowrt Operation ESAF Enhanced Structural Adiustment Facility GDP Gross Domestic Product HIPC Heavily Indebted Poor Countries IASC Intemational Accounting Standards Committee IFAC Intemational Federation of Accountants IMF Intemational Monetary Fund INTOSAI Intemational Organization of Supreme Audit Institutions MTEF Medium-Term Expenditure Framework OHADA Orpanisation pour I 'Harmonisation du Droit des Affaires en Afrique PCS Prelevement communautaire de solidarit (community solidarity levy) PER Public Expenditure Review PRGF Poverty Reduction and Growth Facility PRSC Poverty Reduction SuppOrt Credit PRSP Poverty Reduction Strategy Paper SAC Structural Adiustment Credit SDR Special Drawing Rights SYGASPE Svst6me Intjgre de (iestion Administrative et Salariale du Personnel de l'Etat TCI Taxe conioncturelle a l 'importation TDP Taxe de6ressive de protection TPC Taxe prferentielle communautaire TPCNA Taxe sur les produits communautaires non agrees TUPP Taxe uniaue sur les produits atgroliers (petroleum tax) VAT Value Added Tax WAEMU West African Economic and Monetary Union Vice President: Callisto Madavo Country Director: Hasan Tuluy Sector Manager: Charles Humphreys Task Team Leader: Ce1estin Monga  FOR OFFICIAL USE ONLY BURKINA FASO Burkina Faso - SAC m CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 4 5. Major Factors Affecting Implementation and Outcome 11 6. Sustainability 11 7. Bank and Borrower Performance 12 8. Lessons Learned 13 9. Partner Comments 15 10. Additional Information 26 Annex 1. Key Performance Indicators/Log Frame Matrix 27 Annex 2. Project Costs and Financing 28 Annex 3. Economic Costs and Benefits 29 Annex 4. Bank Inputs 30 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 31 Annex 6. Ratings of Bank and Borrower Perfornance 32 Annex 7. List of Supporting Documents 33 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.   Project ID: P069165 Project Name: Burkina Faso - SAC III Team Leader: Celestin Monga TL Unit: AFTM4 ICR Type: Core ICR Report Date: December 27, 2000 1. Project Data Name: Burkina Faso - SAC III LI/CTF Number: IDA-32990 Country/Department: BURKINA FASO Region: Africa Regional Office Sector/subsector: BB - Public Sector Management Adjustment KEY DATES Original Revised/Actual PCD: 08/15/1999 Effective: 12/16/2000 12/16/2000 Appraisal: 10/18/1999 MTR: Approval: 12/02/1999 Closing: 06/30/2000 06/30/2000 Borrower/Implementing Agency: GOVERNMENT OF BURKINA FASO/MINISTRY OF ECONOMY AND FINANCE Other Partners: STAFF Current At Appraisal Vice President: Callisto E. Madavo Jean-Louis Sarbib Country Manager: Hasan A. Tuluy Hasan A. Tuluy Sector Manager: Charles Humphreys Charles Humphreys Team Leader at ICR: Cdlestin Monga ICR Primary A uthor: Jean-Claude Tchatchouang; Siaka Coulibaly 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: SU Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: No  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: Rationale and Objective of Structural Adjustment Credit III (SAC III). The overall objective of the credit was to support a reform program aimed at: (i) enhancing the competitiveness of the Burkinabe economy to substantially raise growth rates over the medium term and alleviate poverty; (ii) improving public finance management, particularly with regard to tax policy and the use of public resources; and (iii) completing the third phase of the common external tariff (CET) adopted by the West African Economic and Monetary Union (WAEMU) on January 1, 2000. 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. With the aim of increasing per capita income and accelerating the development of human resources and productive potential, the Government had formulated a medium- and long-term strategy in the context of several important policy papers, including the 1995 Letter on Sustainable Human Development Policy and the 1999 Sources of Growth and Competitiveness study. To accelerate economic growth and generate employment, the strategy was to remove the constraints on economic activity and to foster the development of a dynamic and modern private sector, in particular by improving the business environment. To address these challenges, the authorities outlined a growth strategy focused on the following policy areas: * Reducing significantly marginal effective tax rates on the formal sector while broadening the tax base and improving public expenditure management; * Reducing infrastructure, input, and trnsaction costs to improve the competitiveness of the private sector; and encouraging private sector investments in low cost, high quality basic infrastructure projects; * Reforming the legal system to provide appropriate protection and incentives to private investors and to attract informal sector businesses into the formal economy; * Enhancing human capital by raising the efficiency of public expenditures in education and health sectors. Consistent with Bank policy governing adjustment lending (R96-55, R80-122) and with the 1996 Country Assistance strategy (CAS), the credit rationale was primarily to support one of the four pillars of the new policy framework, namely the necessary improvement in the overall public finance management system. It was recognized that a pre-requisite to the success of the accelerated growth strategy will be to maintain sound Government finances-notwithstanding the short-term loss of revenue that would result from the reduction of income tax rates on the fornal sector of the economy and the implementation of the final phase of the CET-and to improve the efficiency of public expenditures. The reforms supported by this operation, especially tax and trade reform, were described as essential to create an environment conducive to efficient private sector investment and growth. 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. By reallocating public funds toward priority activities in health and education, the reforms would further strengthen the country's growth potential while helping correct underlying factors that contribute to Burkina Faso's deep poverty. Design. SAC III followed up on the one-tranche Economic Management Reform Support Operation (EMRSO) which was approved by the Board in November 1998. The EMRSO supported the consolidation of the first phase of reforms in Burkina Faso and laid the foundations for a new generation of reformns in the areas of public finance and public expenditure management, privatization, and the transport, -2 -  telecommunications and energy sectors. SAC III was also designed as a one-tranche operation supporting a series of policy measures to be implemented prior to Board presentation: fi) Tax and Trade policv: * lowering the maximum tariff rate from 25 percent to 20 percent; * lowering the corporate income tax rate from 40 percent to 35 percent, and launching a study to further lower the tax rate to 30 percent or 25 percent by 2001; * introducing a withholding tax at customs and on purchases from wholesalers to be applied against the profit tax (I percent for basic consumption food and 2 percent for other merchandise); * removing the ban on hide exports; * ensuring that the two major tax offices (Kadiogo I and Houet I) are fully computerized and strengthened; (ii) Public expenditure management: * issuing the terms of reference and recruit consultants for the preparation of studies in the framework of the public expenditure review (education, health, financial decentralization, ancl public investment program); _ adopting a plan of action and timetable for the extension of the Medium-Term Expenditure Framework (MTEF) approach to all key Government ministries for the year 2001 budget; - completing and sending the year-end budget execution reports for the 1993 and 1994 budgets (lois de r, glement) to the Supreme Audit Institution (Chambre des Comptes de la Cour Supreme); (iii) Budgetarv procedures: * integrating the payroll management system (SYGASPE) into the Government's fmiancial management system (circuit de la depense); (iv) Regulatory framework: - establishing the regulatory authority for the telecommunications sector. The use of a single tranche operation was justified by Burkina Faso's good track record in implementing two Enhanced Structural Adjustment Facility (ESAF) programs and the previous adjustment operation (EMRSO). The main advantage of single-tranching with ex-ante conditionality was that it enhanced political acceptability of the reform program. It was expected that, after the successful implementation of SAC III, the Government would be able to formulate comprehensive medium-term programs in key sectors that could be supported by ordinary multi-tranche adjustment operations. To guard against the risk of launching a series of one-tranche operations with different focuses, which would eventually lead to a reforn process lacking coherence, the 1998 EMRSO had provided a clear indication of links with future adjustment operations. Policy areas to be covered in the follow-up credits (SAC III) were identified, and the progress benchmarks were identified. A medium-term policy matrix was attached to the Board document. While acknowledging that the details of the next credit were yet to be worked out with the Burkinabe authorities, the Memorandum of the President of SAC III indicated that the focus would remain on public finance reform, with an emphasis on efficiency, competitiveness and poverty reduction. In addition to the maintenance of satisfactory macroeconomic program and overall reform effort, the next structural adjustment credit would be triggered by substantial progress, in particular, in the following policy areas: - 3 -  * adoption of program budgets (budgets programmes) in the six key Government ministries identified in the April 1999 budget guidelines (i.e., ministries of Health, Economy and Finance, Territorial Administration, Defense, Basic Education, and Secondary/Higher education); these program budgets should be sent to Parliament with the fiscal year 2001 draft budget bill; * local recruitment for contractual positions in education; * implementation of the public enterprise reform and privatization program as of June 2000, according to the schedule in the Policy Framework Paper for 1999-2002; * preparation of a Poverty Reduction Strategy Paper in close collaboration with the Bank and the IMF; * completion and transmission to the Supreme Audit Institution (Chambre des Comptes de la Cour Supreme) of year-end budget execution reports (Lois de reglements) for 1995 and 1996 fiscal years. The operation was prepared over a seven-month period. The borrower's input was substantial, as the Government carried out several studies-most notably the May 1999 Sources of Growth and Competitiveness study-prior to the appraisal mission. The Bank also provided background analytical work on public finance management and the challenges and opportunities that the regional integration process would imply Burkina Faso. The main risk facing the program was identified as political: the reform program could falter because of pressures in some political circles and some institutional weaknesses. 3.2 Revised Objective: Project objectives remained unchanged and project design was not modified. 3.3 Original Components: The reform program associated with this credit had four major elements: (i) tax policy and its supply side effects, including the implementation of the last phase of the WAEMU's CET on January 1, 2000; (ii) efficiency of public expenditures; (iii) budgetary procedures to increase transparency; and (iv) regulatory framework to improve domestic competitiveness. 3.4 Revised Components: Components were not modified. 3.5 Quality at Entry: The quality at entry is rated satisfactory. The design and implementation arrangements incorporated key lessons from the EMRSO as well as the views of major stakeholders through a participatory preparatory process. While there existed some concerns about the capacity of the Government to implement some of the main features of the public expenditure components (i.e., the MTEF), overall the program's timing and content were satisfactory. The program's objectives and components were appropriate and consistent with enabling the Government to undertake an ambitious reform process. The project was closely coordinated with the financial and economic measures supported by the IMF's Poverty reduction and growth facility (PRGF). 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective. The program successfully achieved its specific objectives and has maintained them after the closing date (June 2000). For each policy objective, a set of policy measures were defined and the outcomes have been satisfactory (see Table 1). -4 -  Table 1: Summary of the main outcomes of SAC III Policy Objective Key Actions Taken Status Outcomes Improving public Reduce tax rates Completed The shortfall in fiscal revenue was smaller than finance management Adopt measures to modemize the main tax anticipated; offices Tax revenue increased from CFAF 199.5 billion in 1998 to 221 billion in 1999; in spite of the reduction in tax rates and the implementation of a new, lower extemal tariff regirne, tax revenue is estimated to reach CFA 209 billion in 2000 Adopt measures to rationalize expenditures - Public spending on education and health is up, and and reallocate funding to social sectors monitoring indicators are in place to assess its impact; Adopt measures to increase transparency Parliament and the Supreme audit institution are now involved in the auditing of Govemment accounts Opening up the Implement the CET Completed The Burkinabe economy is more liberalized and the economy regional integration process is moving forward Enhancing Create a regulatory authority Completed Telecommunications costs in Burkina have been competitiveness in reduced by 40 percent on average in a year the telecoms sector 4.2 Outputs by components: Tax policy. In the framework of the reform program supported by SAC III, the Burkinabe authorities took some decisive steps in 1999 and 2000 to reverse some features of fiscal policy that have had negative supply-side effects on the economy over the past decade. Since the beginning of the stabilization program in Burkina Faso, the main objective of tax policy had been to raise public revenue. While the upward trend was justified by the need to achieve fiscal sustainability and the rather low initial level of tax-to-GDP ratio in comparison to the country's acute needs for social infrastructures, various empiriical studies on fiscal policy concluded that increased taxation may have had negative supply side effects, thus undermining growth and the prospects of raising public revenues in a sustainable manner. Table 2: Tax policy conditions Policy Measures Status Lowering the maximum tariff rate from 25 percent to 20 percent ])one Lowering the corporate income tax rate from 40 percent to 35 Done percent Launching a study to further lower the tax rate to 30 percent or The study is ongoing and should be completed by 25 percent by 2001 March 2001 ; Policy recommendations from the study should be adopted by the Govemment in 2001 Introducing a withholding tax at customs and on purchases from Done wholesalers to be applied against the profit tax (I percent for basic consumption food and 2 percent for other merchandise) Removing the ban on hide exports Done Ensuring that the two major tax offices (Kadiogo I and Houct I) On going are fully computerized and strengthened The implementation of policy measures included in the tax policy component of SAC III led to several important outcomes. First, the reduction of corporate income tax from 40 percent in 1999 to 35 percent in - 5 -  2000 and the prospects for reducing the rate further over the next two years have contributed to improving prospects for private investment. Results of a business survey carried out in Ouagadougou in early 1999, indicate that the high level of taxation on the formal sector over the past decade had reduced the expected after-tax profit and also reduced the availability of investmnent finance. Furthermore, over the years, some ad hoc increases in tax rates were often relied upon for large consumption products like petroleum to achieve revenue targets adopted in the PRGF program, without prior analysis of the supply side effects. And the private sector was receiving little value for their taxes because of the weak administrative capacity in place and the ineffective mechanisms for public service delivery. By helping the Burkinabe authorities reverse those trends, the SAC III operation seems to have attracted very positive reactions from the business community. Several prominent members of the private sector-including the Chairman of the Chamber of Commerce-have publicly expressed satisfaction with the shift in Govermment tax policy. Although changes to improve the supply-side effects of fiscal policy always take a long time to yield results, one can already observe some positive developments. The objectives for government revenue, current budgetary expenditure, and current primary surplus for 1999 were met. Fiscal developments in 1999 were broadly favorable, in particular concerning revenue, which reached CFAF 238 billion (15 percent of GDP), exceeding the objective by about 0.7 percent of GDP. Current primary expenditure was consistent with program objectives (CFAF 165.9 billion, or 10.4 percent of GDP), but the budgetary contribution to investment slightly exceeded the program's projection. Overall, the current primary surplus and the primary surplus (the latter of which excludes externally financed capital expenditure) exceeded the objectives by 0.3 percent and 0.1 percent of GDP, respectively. The overrun of the revenue objective is the result of the good performances of the corporate income tax, the tax on property income, the value-added tax (VAT), and customs duties, which more than offset the introduction, in April 1999, of the common external tariff. This favorable outturn is attributable to an increase in the taxable profits of enterprises in 1998 and, at the same time, to the strengthening of the tax and customs administrations. Specifically, the monitoring of large enterprises by the General Directorate of Taxes was strengthened through an improvement in collection and management procedures (including the upgrading of software) and a more concerted staff training effort. Economic growth decelerated in 2000 on account of the political malaise in Burkina Faso and in C6te d'Ivoire, combined with adverse exogenous shocks, including a lower cotton crop, the rise in oil prices, and the events in C6te d'Ivoire that significantly reduced workers' remittances (the latter two adverse external shocks are estimated at around 2.5 percent of GDP). Real GDP growth for 2000 is now estimated to reach 4 percent against 5.7 percent programmed. These developments may result in a mixed budgetary performance in 2000. Significant progress was made in 1999-2000 in completing the last phase of the common extemal tariff (CET) of the West African Economic and Monetary Union (WAEMU), which was introduced in stages between July 1, 1998 and January 1, 2000 (see Table 3). The good results achieved at customs in spite of the CET (the program's objective was exceeded by 7 percent in 1999) were a consequence of (i) the strict application of the compensatory measures adopted to accompany the new classification of products under the CET; (ii) the computerization of new customs offices; (iii) the elimination of the remaining exemptions on public contracts; and (iv) the enhanced monitoring of foreign-financed projects for which the indirect taxes are paid by the Treasury. In particular, the introduction of the new classification of import products was accompanied by the elimination of special VAT payment procedures for importers of raw materials and for the enterprises registered under the Investment Code. - 6 -  Table 3: External Tariff Conditions Until June 1998 From July 1998 From January 1, From January 1, 1999 2000 Customs rates/categories 1 I1 111 1 11 111 I 11 111 1 11 . 1 External tariff rates Customsduty/Fiscalduty 5 9 31 5 9 25 5 10 25 5 10 20 Statistical tax 4 4 4 4 4 4 4 4 4 1 1 1 Special intervention tax 2 2 2 ... ... ... ... ... ... ... Total 11 15 37 9 13 29 9 14 29 6 11 21 Community solidarity levy (PCS) I 1 I 1 1 I 1 1 15 1.5 1.5 Intra WAEMU tariff rates Local primary products 0 0 0 0 Eligible industrial products of 60 percent 60 percent preference 80 percent preference 100 percent origin preference reference Non-eligible products of origin -5 percentage points -5 percentage points -5 percentage points -5 percentage points External Tariff Revenue 1997-2000 (In billions of CFA francs unless otherwise indicated) 1997 1998 1999 2000 Est Est Orig Prog Prog Est Prog Total extemal tariff revenue 49.9 49.7 44.7 39.4 43.2 34.9 as a percentage of GDP 3.6 3.2 2.7 2.4 2.7 2.0 Import duties 43.0 43.8 39.8 37.3 40.4 31.0 asapercentageofGDP 3.1 2.9 2.4 2.3 2.5 1.8 Customs duty/Fiscal duty 32.6 32.1 28.0 26.2 29.0 27.5 Statistical tax 10.4 11.7 11.8 11.1 11.4 3.5 Other import taxes 5.9 4.7 3.5 0.8 1.6 2.5 Special intervention tax 4.9 2.9 0.0 0.0 0.0 0.0 Special community tax (TPC + TCNA) 1 1.8 1.0 ... 1.0 0 TDP/TCI ... ... ... ... ... 1.5 Transfers from WAEMU 1/ ... ... 2.5 0.8 0.6 1.0 Other taxes on intemational trade 1.0 1.2 1.4 1.3 1.2 1.4 Contribution of livestock sector (on exports) 0.6 0.7 0.8 0.8 0.6 0.8 Penalties 0.4 0.5 0.6 0.5 0.6 0.6 Memorandum items: Nominal GDP 1390 1529 1645 1629 1589 1713 Transfers to WAEMU and CDEAO 0.9 2.4 2.4 2.4 2.3 2.3 (community solidarity levy) 1/ Single tax on petroleum products (TUPP) 9.4 8.3 12.9 12.9 11.7 12 VAT on imports 24.9 27.4 26.2 26.2 32.9 32.9 (as a ercentage of GDP) 1.8 1.8 1.6 1.6 2.1 1.9 11 The WAEMU and the ECOWAS collect a solidarity levy onextracommunity imports, respectively of I percent since January 1, 2000 and 0.5 percent of import value; the WAEMU transfers part of the receipts to member states to compensate for shortfalls in tariff revenue due to intercommunitv trade. In order to improve the environment for private sector development and sustained economic growth, tax policy adopted in 2000 in the framework of the 2001 budget bill builds on the above achievements to pursue reforms. For 2001, the original revenue target of 14.4 percent of GDP is expected to be achieved through the adoption of a number of revenue enhancing measures, including (i) improving on the tax withholding mechanism on imports and purchases from producers and wholesalers creditable against the corporate income tax; (ii) a reform of real estate taxation, and (iii) abolishing the differentiation in the taxation of cigarettes according to origin (domestically produced or imported) while increasing the average duty rate. The authorities will also implement an automatic monthly adjustment of petroleum product prices in line with movements in world prices as part of a reform in the taxation of petroleum products in line with regional guidelines. Rating: Achievement of the tax policy component of SAC III was fully satisfactory. - 7 -  Public expenditures. The Burkinabe authorities have greatly improved their budgeting and expenditure practices over the past five years. A comprehensive public expenditure review in 1995, and a public expenditure incidence analysis in the education, health, and water sectors in 1996 and 1997 contributed to the understanding of equity issues, although not of the rationale and efficiency of expenditures in those sectors. Following the adoption by the Boards of the Bank and the IMF of the HIPC Decision Point document of the original HPC Initiative in November 1997, the Government defined budgetary monitoring indicators; adopted a program for regular consultations between the Bank and the authorities on all budgetary issues; and established a multi-year program to enhance staff capabilities on PER-related matters. An interministerial committee was set up to coordinate the subsequent work on the public expenditure management. Table 4: Measures to Improve the Efficiency of Public Spending Policy Measures Status Issuing the terms of reference and recruit consultants for the The four studies were actually carried out with Bank technical preparation of studies in the framework of the public expenditure asistance and their results were discussed during a seminar review (education, health, financial decentralization, and public involving other donors and civil society representatives; the investment program) key lessons were integrated in the preparation of the MTEF and the main Tecommendations of the studies should be included in the budget guidelines for 2002, to be released in May 2001. Adopting a plan of action and timetable for the extension of the The Govemment completed its first MTEF for 2001-2003 and MTEF approach to all key Govemment ministries for the year 2001 presented it to Parliament in October 2000 with the 2001 budget budget bill. Completing and sending the year-end budget execution reports for Done. The budget reports for the 1995-98 period are due in the 1993 and 1994 budgets (lois de reglemen) to the Supreme March 2001. Audit Institution (Chambre des Comptesde la Cour Supr6me); Progress was made in 2000 in improving the monitoring of public expenditure in health and education. Four studies carried out by the Burkinabe authorities with assistance from the Bank focused on health, education, public investment, and budget procedures for financial deconcentration. They were discussed in mid-2000 with civil society and representatives of the donor community, and were used to finalize the Government's Poverty reduction strategy paper (PRSP). As a result of these efforts, budget guidelines were significantly improved over the past three years: in conformity with the HIPC social targets, the share of actual public expenditure for health and education in the budget has increased. Table 5: Govemrment Resources Allocated to the Socia I Sectors (in percent) Policy Measures 1997 1998 1999 2000 Taraet Actual Target Actual Target Actual Target Increase share of budget 12.0 11.9 12.6 12.2 13.1 13.9 12.4 expenditure on health (*) Increase share of budget 14.6 14.5 14.3 15.8 13.0 14.2 15.0 expenditure on basic education(*) (*) Excluding foreign-finance investment and interest expenditures A shift to performance budgeting was made for six key ministries (Health, Finance, Interior, Defense, Basic Education, and Secondary/Technical education), with outcome indicators to monitor efficiency, and increased accountability for line managers. A medium-term expenditure framework for 2001-2003 was prepared in 2000 and presented to Parliament in October 2000 with the 2001 budget bill. The MTEF led to major improvements in the process of budget formulation. Designed as the linking framework that - 8 -  facilitates the management of tension between sectoral policies and financial constraints, it helped the Burkinabe authorities identify three phases of budget management: (i) a medium-term statement of fiscal policy goals with specific targets for the period 2001-2003; (ii) a statement of strategic priorities in terms of medium-term resources available-this provides a measure of budget predictability to line ministries and all spending agencies while respecting the fiscal discipline imperative; and (iii) the need for budget innovations to move towards output, or outcome-based budgeting. In addition to reinforcing fiscal discipline and improving strategic prioritization, the MTEF preparation process and the 2000 PER studies highlighted the need for further reforns that seek to improve operational efficiency. Service quality in the public sector is still low, unit costs high and outcomes disappointing, although improving slowly in the education and health sectors. Following the recommendations of the PER studies carried out in the framnework of SAC III and in conformity with the findings of the analytical work underpinning Ten-year programs in social sectors, the authorities have adopted action plans to improve the efficiency of public expenditure. These actions plans were found satisfactory by the Bank. The costing and funding of these plans are properly reflected in the MTEF. A Participatory Poverty Assessment under preparation with Bank support will also shed light on issues of expenditure efficiency from the beneficiaries' point of view. Rating: Achievement of the public expenditure component of SAC III was fully satisfactory. Budgetary procedures. In the framework of implementing the policy reform program underpinning the EMRSO and SAC III, Burkina Faso has made efforts over the past three years to simplify budgetary procedures, improve governance and reduce corruption. As a result of all these measures, including the decision to integrate the payroll management system (SYGASPE) into the financial management system in August 1999, the following improvements were observed: * The unified budget system has been completed and the implementation of a computerized expenditure management system (Circuit de la depense) was significantly advanced, which makes it possible to track the State's accounting and financial transactions (some ministries are currently decentralizing this facility). * Since 1998, the Govemment has carried out a systematic review of public expen(liture by a national team of experts under the supervision of an interministerial committee. O For any given financial year since 1998, budget guidelines were improved to reflect lessons from PER and progress in the policy dialogue with the Bank and other donors on budgetary matters. * Major improvements were observed in public procurement procedures, such as the periodic publication of bids received in public tenders. * Trade liberalization and tariff reform have also reduced rents and increased revenues from customs administration. * The privatization program has removed a large source of rents and patronage from the public sector. The restructuring of the financial sector and related reforms have greatly reduced the role of Government in credit allocation decisions (delinquent borrowers are prohibited from obtaining new bank loans and from bidding on public procurement contracts and privatization). The Government has also carried out a major overhaul of its business laws by adopting new business laws under the OHADA treaty. * In 1999 and for the first time in over a decade and thanks to the reform program supported by SAC III, budget execution reports laws (lois de reglements) for fiscal years 1993 and 1994 were enacted by the National Assembly; the Government is committed to completing reports for the 1995-98 period by March 2001. * An independent Supreme Audit Court was created in 2000. It will be given aL larger role in the preparation of audited budget laws. -9-  * An audit of military expenditures for fiscal year 1999 is currently being completed and will be transmitted to the Supreme Audit Institution and to Parliament. Rating: Achievement of the budgetary procedure component of SAC III was satisfactory. Regulatory framework The promulgation of the law no. 051/98/AN, establishing the regulatory authority for the telecommunications sector was one of the conditions for Board presentation of SAC III. Together with several important reforms measures in the telecommunications, the creation of the regulation authority ARTEL has led to the improvement of domestic competitiveness in Burkina Faso. Table 6 below indicates that the implementation of the reform program has already contributed to significant reductions in telecommunications costs in Burkina Faso. Table 6: Decreasing Costs of Telecommunications 1999 2000 Variation Telephone costs Domestic city to city phone FCFAF 320-400 280 -22% calls (201 to 400 km) per minute International calls Africa Zone AI (West) FCFAlmn 780 480 -39%/o Africa Zone A2 (other FCFAlmn 780-2560 750 -4% a -77% countries) Europe Zone I (EU) FCFA/mn 1100-1500 750 -32% A 60%/o Europe Zone B3 (Spain, FCFA/mn 1500 1200 -20% Italy, Holland, Sweden, Switzerland) Asia FCFAlmn 2260-2560 1200 -47% A -61% America Zone Dl (USA, FCFAJmn 1100-1260 750 -32 A -74% Canada) Source: Burkina Faso, Provisional Report on the Government's remainingz portfolio of public enterprises Rating: Achievement of the regulatory framework component of SAC III was fully satisfactory. 4.3 Net Present Value/Economic rate of return: Not applicable 4.4 Financial rate of return: Not applicable 4.5 Institutional development impact: The institutional development impact of SAC III is rated substantial, mostly because the Burkinabe authorities exceeded expectations by completing a full MTEF. The Bank strategy for institutional development consisted of using the SAC III operation as one of many instruments for developing consensus in favor of a larger reform agenda. The credit served as a vehicle for the articulation of a comprehensive action plan for the new economic policy framework and institutional reform, and as a rallying device to help push through the preparation of a first medium-term expenditure framework that were central to this framework. The credit lent impetus for the implementation of some important institutional measures (strengthening of tax administration through new equipment and changes in procedures, overhaul of the budget preparation process in key ministries, establishment of a task force in the Ministry of Economy and Finance to complete budget reports on a regular basis, modemization of the payroll management system - 10-  with the SYGASPE), some of which were subsequently endorsed in the Government's 1'RSP. The adoption of a full MTEF to be updated every year is an important step in budget management. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: SAC III was a one-tranche operation supporting policy measures that were all implemented prior to Board approval. However, the final outcome of the reform program implemented may be affected in the medium-term by the deterioration of external economic prospects. Given the heavy reliance of Burkina Faso's economy on cotton, gold, and livestock exports, the main factor that affected the outcome of SAC III was the depression of regional as well as global demand, which slowed export growth in 2000 and delayed implementation of the poverty reduction strategy. Burkina Faso's economic success will substantially depend on external factors (demand for cotton, world prices, the dollar/CFAF exchange rate). The medium-term balance of payment projections for Burkina Faso, which will strongly influence the country's rate of economic growth and public finance performance, are subject to substantial uncertainties regarding export volumes and prices for cotton and gold. 5.2 Factors generally subject to government control: Implementation of SAC III was not hindered by the deteriorating political climate in the country and in the West African region. However, the 1999-2000 period was marked by social tensions and growing political dissent, epitomized by student strikes that eventually led to the annulment of the university year, and boycott by the opposition parties of the September 2000 municipal elections. This led to the resignation of the Government in November 2000. These domestic political tensions did not delay the implementation of the SAC III program. However, they may eventually affect the new Government's determination to push ahead with the next phase of reforms (administrative and civil service reform, decentralization) and the final outcome of the broader reform program. 5.3 Factors generally subject to implementing agency control: Not applicable 5.4 Costs andfinancing: Not applicable 6. Sustainability 6.1 Rationale for sustainability rating: The sustainability of the reform program supported by SAC III is likely. There is a new Govermment since November 2000 and the intent seems to be to continue with the institutional reforms. Although there are questions about the pace of the desirable further reforms, particularly with respect to the decentralization of public finance management and some key reforms in the education sector, policy reversals on the specific reform measures that were supported by this SAC are unlikely. The dialogue with the Burkinabe authorities has been very good over the past three years, and Burkina Faso has successfully implemented two three-year ESAF/PRGF programs; the current third PRGF program is on track. Sustainability is enhanced by the fact that most reforms implemented in the framework of this operation are necessary for moving forward with the regional integration process, which is Government's overriding prioritv. 6.2 Transition arrangement to regular operations: Beside financing the gap created by the shortfall in fiscal revenue due to the implementation of the WAEMU's CET and supporting reforms to enhance the competitiveness of the Burkinabe economy, the SAC III operation, as well as the 1998 EMRSO, has built a foundation for further structural reforms to be carried out by the Government. The series of adjustment credits (SAC I, EMRSO, SAC III) have prepared - 11 -  the ground for momentum toward further restructuring programs and for Bank's future assistance to Burkina Faso. Since SAC III was approved in November 1999, the Bank has stepped up its work on public finance management in Burkina Faso, in close collaboration with the IMF and other development partners. Recent PER studies and other analytical work carried out during the preparation of the 2001-2003 MTEF indicate that full implementation of sectoral strategies already adopted or currently being finalized in priority sectors (education, health, rural development) will require major improvements in public sector management. The Country Assistance Evaluation noted that Bank projects in Burkina Faso, while quite comprehensive in coverage and broadly consistent with one another, have too often been conceived independently, with little explicit analysis of potential trade-offs among them. In order to address the country's weak institutional capacity and to ensure sustainability of the reform program, the newly adopted CAS envisages a shift from project lending towards program lending, which will imply a gradual change in lending instruments. The proposed Poverty Reduction Strategy Credit (PRSC) instrument would be consistent with the framework for programmatic adjustment lending. It would provide an adequate framework for comprehensive public finance reforms that require simultaneous actions at the level of the Ministry of Economy and Finance, and at the level of line ministries. Its flexibility would also provide a more effective mechanism to address sector-wide issues that cannot be dealt with under traditional, stand alone investment projects. The PRSC would also facilitate the dialogue on the Government's overall use of public resources, regardless of their source. Finally, by focusing directly on the four main pillars of the PRSP, the PRSC would help strengthen donor coordination and Government ownership of the reform program. 7. Bank and Borrower Performance Bank 7. 1 Lending: Bank performance from identification to completion was satisfactory. The reform program associated with SAC III was based on intensive analytical work carried out with the Government team. Lessons from previous lending operations were fully taken into account. The Bank has developed a close relationship with Burkinabe counterparts and now plays an effective supporting partner's role in the country. SAC III played an important role, in conjunction with other lending and non-lending operations, in helping Burkina Faso enhance domestic competitiveness and meet its commitment to deeper regional integration at a critical phase of WAEMU history. 7.2 Supervision: Bank staff visited Burkina Faso five times in 2000 to supervise program implementation, participate in public expenditure reviews and in the preparation of the 2001-2003 MTEF, and prepare the following adjustment lending operation. A key element of supervision was the seminar on the MTEF and the workshop on macro-modelling held in Ouagadougou in April-May 2000. The timing of these two events- just before the 2001 budget guidelines were released and just before the kick-off of the 2001 budget preparation process-helped create the momentum for finalizing the Government's PRSP, and reach agreement with the authorities on the next phase of public finance reform. An economist who had previously been involved in the preparation process of SAC III was recruited at the Resident Mission a few weeks after Board approval. This allowed for close monitoring of the progress in the implementation of other actions stated in the 1999 Letter of Development Policy. 7.3 Overall Bank performance: Rating: Based on the above, the Bank's performance is rated satisfactory. Borrower - 12 -  7.4 Preparation: Government performance in the preparation of the operation was satisfactory. At the very early stage of the preparation process, the Government team visited the Bank to discuss possible areas of policy reforms to be supported by the credit. Background studies were then launched and funded by the Government. 7.5 Government implementation performance: The Government implementation of the program was satisfactory overall during a period of political tension and economic uncertainty due to losses in the terms of trade. Given the delicate nature of some of the policy issues covered in the SAC III program (i.e. the reduction in corporate income taxes), the Government was successful in seeking the engagement and assistance of other donors, including the IMF, in its efforts to maintain macro-stabilization while setting the stage for economic and institutional reforms aimed toward long-term sustainable growth. The Government performed well on all four components of the program-tax policy, public expenditure, budgetary procedures, and the regulatory framework-and confirmed its strong commitment to reforms. All the major policy measures specified in the Letter of Development Policy were implemented as planned. There was strong ownership from the Ministry of Economy and Finance and support by key sectoral ministries and all major donors (ADB, IMF, European Union, Denmark, Switzerland, and the Netherlands). The SAC III accounts should be audited in the framework of the preparation of the 1999 budget execution report. 7.6 Implementing Agency: Performance of the implementation units was adequate. The four major divisions in the Ministry of Economy and Finance in charge of SAC III (Secretariat Technique pour la Coordination des Programmes de Developpement Economique et Social, the Direction Gene'rale de Imp6t, Direction Generale des Douanes, and the Direction Generale du Budget) achieved their goals as stated in the program. They benefitted from their experience with the previous adjustment operation (EMRSO). 7.7 Overall Borrower performance: Rating: Overall, Borrower's performance is rated satisfactory. 8. Lessons Learned The main lessons learned from this operation are specific to the adjustment credit or related to the broader, unfinished agenda for public finance reforms. (i) Lessons from SAC III Design. A single-tranche operation can be an effective tool to address specific issues and provide limited budget support to the Government in the context of a difficult policy dialogue. Because of the important disagreements with the authorities on the content and pace of the reform program in the agricultural sector, the Bank decided in 1998 to cancel a large sectoral adjustment credit which had been under preparation for almost three years. The EMRSO and SAC III were designed as transitional arrangements to contribute to the financing of the budget gap while completing the analytical work to inform the debate about the development strategy. The positive results of these two one-tranche operations underline the importance of taking the time to build consensus on the reform agenda, and the need to avoid conditionality-driven operations (see above). Timing. External financial assistance is more effective when provided at the start of the Govermment's fiscal year, so that the support is known in advance to be available and can be used as a basis for making domestic budget management more predictable. SAC III was effective because it was tied to the budget cycle and provided compensatory financing for a reform program that was well defined in advance. The - 13 -  single tranche was released in late December 1999 and, although the credit was partly used to finance the end-of the year financial gap, a large fraction of the funds was available to the Government at the beginning of their fiscal year 2000 and included in budgetary planning. Focus. Because public resources are fungible and given the nature of adjustment lending, it is more appropriate to focus on the Government's overall use of resources than on its specific use of Bank funds. This points to the need for a sound knowledge of the country's public fnancial management arrangements. A Country Procurement Assessment Report (CPAR) was recently completed in Burkina Faso and the preparation of a Country Financial Accountability Assessment (CFAA) will start shortly. The adjustment instrument itself can be very effective in preparing the analytical work, in identifying the weaknesses in the system and in supporting the policy reforms and institutional changes needed to improve financial accountability. Long-Term Approach. The reforms supported by this operation, especially tax and trade reform, were described as essential to create an environment conducive to efficient private sector investment and growth, One needs to keep in mind, though, that transition to a more competitive economy is a long term process and there is a limit to what a single adjustment lending activity can achieve. This SAC was one of the initial efforts of the Bank to support a new paradigm-the accelerated growth strategy- in Burkina Faso and it was expected that the reform process would be supported with subsequent lending. Public finance reform and regional integration will benefit Burkina Faso's growth over the medium and long-term. (ii) Lessons Learned to be Applied to Remaining Agenda Challenges of Public Expenditures Management. Improved public expenditure management requires fundamental changes in the Government's range of commitments. Efforts based on attempts to control expenditures strictly from an administrative perspective will have limited success. As a result of SAC III, a MTEF is now recognized by the Burkinabe authorities as a necessary step for improving the overall effectiveness of budgetary management. However, one important lesson learned from the operation is that some practical difficulties will need to be addressed in the near future: (i) Opportunities for obtaining extra-budgetary resources must be controlled. This is not an easy task in a highly aid-dependent country like Burkina Faso, especially when aid coordination is sub-optimal; (ii) to achieve greater benefits of the MTEF and to ensure that it is welcomed by all line ministries, the process of financial decentralization and delegation of authority must move forward. Budget-driven policy changes will be sustainable only if resource allocations become more predictable as a result of the adoption of the MTEF. The credibility of the process will be undermined if the Ministry of Economy and Finance is unable to stick to its commitments; (iii) technical improvements to revenue and debt forecasting and measures to smooth the flow of foreign aid (especially grants) will constitute an important requirement for a rigorous MTEF. After Board approval of SAC III, the Bank supported a Burkinabe team working on the medium-term macroeconomic framework and modellisation issues. It is crucial that this task be carried out on a regular basis; and (iv) ensuring that program-costing is more accurate may take some time, as it requires a strong and reliable information basis for all key sector ministries--and the incentive for such efforts are not always there. Capacity building and Knowledge. Changes in Bank assistance to Burkina Faso over the next years--such as the progressive shift towards program support, debt relief through the HIPC initiative, increased lending to social sectors--will emphasize the importance of the effectiveness of Government institutions that manage these transactions, and will reduce the relative importance of tracking individual Government and Bank projects as a source of fiduciary assurance. Because Government institutions will play an increasingly important role in providing assurance on the use of Bank funds, the Bank should continue to - 14 -  support programs to build capacity to manage public finances. The Bank should therefore continuously improve its knowledge of Burkina Faso's public financial management arrangements through : (i) more systematic coverage and increased frequency of fiduciary analytical work ; and (ii) the use of information available from other international organizations-the IMF, IFAC, IASC, and 1NTOSAI-that issue standards, codes, and guidelines with respect to accounting, auditing, and financial management. Reporting and Auditing. The requirement to provide the Bank with ex-post informaticin on the Government annual accounts audited by the Supreme audit institution, and to transmit these budget reports to Parliament every year has proved to be very effective in improving transparency and in moving towards accountability in the use of public funds. Even though these audited accounts are not intended to provide assurance on the specific use to which Bank funds have been applied, they shed light on the overall financial management performance of Government institutions. It seems appropriate to keep this requirement-which is already embodied in Burkinabe laws-as a rule for future adjustment operations. 9. Partner Comments (a) Borrower/implementing agency: Below is an implementation completion report received from the Ministry of Economy and Finance in December 2000. Burkina Faso has been engaged since 1991 in a vast program of economic reforms supported by the Bretton Woods institutions and the development community. Three successive triennial programs, supported by agreements under the IMF's Enhanced Structural Adjustment Facility and by structural adjustment (SAC 1, EMRSO and SAC III) and sectoral adjustment credits (PASA, PASEC-T) from the World Bank, have also been implemented. These programs were aimed at laying the groundwork for a liberal economy functioning according to market principles and in which the private sector would be the main engine of growth, and they led to profound alterations in the institutional and economic environment. The country has, especially since the 1994 devaluation, resumed sustained growth (5,5 percent on average between 1994 and 1999), accompanied in particular by the adjustment of public finances, the modernization of the economic administration, the restructuring of the banking and public enterprise sectors, and the modernization and development of financial institutions. The present document was produced by the Burkinabe authorities to report on the final status of the third Structural Adjustment Credit (SAC III) in the amount of 18 million SDRs (US$ 25 million excluding fees and taxes) granted by the World Bank during the 1999 fiscal year. The first section reiterates the objectives of SAC III, the second relates the main results obtained, and the third states the main lessons to be learned from the operation. Project objectives The SAC III is part of the World Bank's strategy to help Burkina Faso consolidate recent progress in macroeconomic management and to move from the stabilization phase on to a phase of enhanced structural reforms and sustained economic growth. Its purpose is to support a reform program intended to: - enhance the economy's competitiveness so as to achieve significant acceleration of the medium term growth rate and a perceptible reduction in poverty in the country; - improve the management of public finances, and particularly tax policy and the use of public resources; - accompany implementation of the new phase of the common external tariff (CET) adopted by the - 15 -  West African Economic and Monetary Union (WAEMU), which went into effect on January 1, 2000. Achievement of the main objectives Macroeconomic objectives Restoration of GDP growth The overall macro-economic objectives were achieved over the 1997-1999 period. GDP in constant prices increased at an annual rate of 4.5 percent between 1985 and 1999, rising from CFAF 663.1 billion to CFAF 1,120.1 billion. Between 1985 and 1990/91 GDP trends were characterized by a series of growth and recession phases. The economy was strongly dependent upon the primary sector, and mainly on agriculture. Climatic conditions were unstable during this period, however, affecting agricultural yields and production in such a way that the sector's performance had a strong impact on overall GDP growth. From 1990 to 1994, the annual growth rate was 2.4 percent. Although this situation could be seen as due to a sluggish international economy and unfavorable world prices for raw materials, the causes were deeper and specific to the economy of Burkina Faso: the terms of trade deteriorated steadily over the period, reflecting the economy's loss of competitiveness; implementation of reforms under the Structural Adjustment Program forced the economy to "adapt"; and, in particular, the rumors and expectations, in 1993, of a CFAF devaluation prevented an investment-friendly climate of confidence from establishing itself. Following the 1994 devaluation, GDP (in real terms) fell by 1.2 percent, due to a decline in activity in the secondary and tertiary sectors of 2.4 percent and 2.7 percent, respectively. This drop is explained essentially by the contraction of domestic demand resulting from the loss of purchasing power on the part of households and the wait-and-see attitude adopted by economic operators. On the other hand, GDP seems to be on the upswing since the devaluation: it increased by 4.1 percent in 1995, 6.2 percent in 1996, 5.5 percent in 1997, 5.7 percent in 1998 and 5.8 percent in 1999. Although the primary sector continues to drive economic growth, the two other sectors are also showing a respectable level of activity. Price trends After the price hike that occurred in 1994 due to the devaluation, the consumer price index continued to rise, but less quickly. Prices have been more or less under control since then: the inflation rate, which was 6.1 percent in 1996, 7.3 percent in 1997, and 4.9 percent in 1998, stabilized at -1.1 percent in 1999. This last result is explained by an increase in cereals production in 1998 and 1999 (16.8 percent and 1.6 percent, respectively) following two consecutive years of good rainfall, which resulted in a decline in the price of agricultural products. Public finances Improvements to the budget system since -1994, combined with the introduction of tools and instruments for budgetary management, have led to a definite improvement in the public finance situation. The situation remains fragile, however, and the progress made needs to be solidified. Since 1994, public fnances have improved as a result of improved budget revenues and firm control over public expenditures. Over the 1997-1999 period, current revenues increased by 18 percent, and the share represented by tax revenues averaged 92.6 percent . Despite these favorable results, the tax/GDP ratio, although it increased in relation to what it was in 1990, stagnated at 12 percent between 1990 and 1995 before rising to about 13 percent - 16 -  or 14 percent in 1999. The revenue/GDP ration also evolved in the same direction over the entire period. However, a change has been occurring since 1996 in the structure of tax revenues, since taxes on goods and services rose from CFAF 37.9 billion to CFAF 51.3 billion between 1997 and 1999, for an increase of 35.4 percent, whereas import revenues (i.e., taxes on external trade) have only increased by an average of 1.6 percent over those two years (with, in addition, a deviation, since they declines by 7.1 percent between 1997 and 1998, but then increased by 9.4 percent between 1998 and 1999). Thus, the share of import revenues within tax revenues went from 51.2 percent to 44.2 percent between 1997 and 1999. Grants increase most significantly during 1999, although their level has always been relatively high (on average 30 percent of total resources over the 1985-1996 period, excepting 1989). They represented 39.8 percent of total resources in 1999, compared to 30.1 percent in 1997; the observed increase consists of project-related grants which involved 83.3 percent of the grant total in 1999, comipared to 32.1 percent in 1998. Budget ratios 1996 1997 1998 1999 Total revenues (excluding 12.3% 13.1% 13.1% 15.0% privatization)/GDP Tax revenues as share of GDP 11.5% 12.0% 12.0% 14.0% Cunent expenditures as share of GDP 10.4% 10.1% 10.4% 11.3% Investnents as share of equity/GDP 1.2% 2.7% 3.1% 2.6% Projects under extemal financing/GDP 9.6% 9.7% 9.9% 12.1% Source: TOFE, STC/PDES Regarding expenditures, it was only in 1994 that a clear improvement was noted: from 1990 to 1994 total expenditures increased by 73.4 percent , current expenditures by 54 percent (despite containment of the wage bill) and capital expenditures by 111 percent. Starting in 1995, budget ratios for public expenditures improved: in 1999 the wage bill had declined to only 46.1 percent of current expenditures (although this level is still above the 40 percent maximum set by WAEMU as a convergence criterion), and current expenditures rose from an average of 10 percent of GDP between 1996 and 1998 to 11.6 percent of GDP in 1999 (which was the level reached in 1995). Over the 1997-1999 period, considerable effort was made with regard to capital expenditures financed out of equity: their amount rose from CFAF 32.8 billion to CFAF 41.2 billion, for an increase of 125.6 percent. In relation to total investment expenditures, capital expenditures financed out of equity went from 22.1 percent to 17.5 percent between 1997 and 1999, for an increase of 159 percent in total investment expenditures over the same period, and the percentage of GDP went from 3.3 percent to 3.7 percent. This result is attributable to marked progress in the area of budget savings. Budget savings eroded steadily over the 1985-1994 period, dropping from CFAF 14.2 billion to CFAF -22.3 billion (or 2.2 percent of GDP). On the other hand, between 1995 and 1999 the share of budget savings in GDP went from 0.6 percent to 3.1 percent. As for the baseline cash deficit between 1997 and 1999 (which grew from 40 billion CFAF to CFAF 70.5 billion), the increase is due to the explosive growth of capital expenditures, especially those associated with grant-related projects, and to growing investment efforts financed out of equity -- +10.8 percent in 1998 and +43.6 percent in 1999 -- as well as to - 17 -  continued efforts to reduce payment arrears. Budget indicators 1996 1997 1998 1999 Budget savings (") 26.87 42.58 41.20 58.70 as %ofGDP 2.1% 3.1% 2.7% 3.7% Primary surplus(**) 21.49 14.84 6.34 5.11 as % of GDP 1.7% 1.1% 0.4% 0.3% Overall balance of commitments (**) 9.99 3.12 -6.39 -8.61 as % of GDP 0.8% 0.2% -0.4% -0.5% Overall baseline cash balance, excl.grants -133.61 -143.46 -165.59 -210.02 (*) current revenues, minus operating costs including net interest payments on debt and loans (*): current revenues, minus net expenditures and loans, excluding restructuring, extemally financed projects and debt interest (***): excluding grants, restructuring costs and extemally financed investments Sources: TOFE STC/PDES Public debt Outstanding debt has increased steadily since 1985, and although it decreased in 1998 by 2.5 percent, it still stands at 52.4 percent of GDP, i.e., at CFAF 793.1 billion (as against CFAF 178 billion in 1985), for an average annual growth rate of outstanding debt of over 12 percent. Burkina has, however, benefited from important debt cancellations: CFAF 60.2 billion in 1989 in connection with the Dakar Initiative, and CFAF 70 billion after the devaluation (Dakar II Initiative). Over the 1995-1998 period, the average annual growth rate was 4.1 percent for external debt, and 7.5 percent for internal debt. Outstanding debt 1985 1990 1995 1996 1997 1998 1999 Public debt 178.0 223.8 699.5 728.7 813.3 845.9 930.5 as %ofGDP 26.8% 28.8% 61.1% 59.3% 59.1% 57.4% 60.3% Public extemal debt 165.5 208.6 667.5 692.6 768.2 799.5 888.2 as % of total debt 93.0% 93.2% 95.4% 95.0% 94.5% 94.5% 95.5% Public intemal debt 12.5 15.3 32.0 36.1 45.1 46.3 42.3 Debt service and arrears Despite trend fluctuations linked to various debt arrangements, this indicator increased on average by 14.6 percent per year between 1985 and 1999, i.e., at a pace lower than that of outstanding debt. Lending conditions evolved towards more concessional loans. In relation to GDP, debt service did not exceed 3 percent, except in 1994 and 1995 (prior to the Dakar II Initiative) and in 1999 (when it was 3.4 percent of GDP). As a percentage of current revenues, the average over the 1995-1998 period was 22.1 percent . - 18 -  Although these levels are still "acceptable", they still require close surveillance, since budget revenues are still relatively unstable and debt service weighs heavily on the Government budget. Debt service 1996 1997 1998 1999 Public internal debt 14.16 8.33 8.98 17.07 as %ofthe total 37.5% 25.0% 25.2% 34.5% Interest 2.60 3.02 3.23 3.36 Principal 11.57 5.31 5.75 13.72 Public external debt 23.64 25.03 26.71 32.35 as % of exports 19.9% 18.7% 14.0% 20.7% Interest 8.90 8.70 9.50 10.36 Principal 14.74 16.32 17.20 21.99 Public debt service 37.81 33.35 35.69 49.42 as % of GDP 2.9% 2.4% 2.3% 3.1% Interest 11.50 11.72 12.73 13.72 Principal 26.31 21.63 22.96 35.70 Here again, although external debt service outweighs internal debt service, the differential is less great compared to the earlier situation. This trend is attributable to more restrictive and less concessional lending terms. However, the ratio of external debt service to exports has tended to improve since 1995, rising from 21.2 percent to 24.5 percent in 1999. This trend can be explained by the 17.8 percent drop in the volume of exports in 1999, whereas external debt service rose by 24.1 percent. Regarding arrears, those having to do with external debt have been entirely cleared since 1996, with the exception of an unspent balance on loans granted by Libya and the former Soviet Union, which amount to less than CFAF 5 billion. As for internal debt arrears, the situation has improved here also: since 1997 they have been stable at 16 billion CFAF. - 19-  Structural reform measures Reform in tax policy Impact of WAEMU Burkina Faso is committed to the process of integration into WAEMU which began in 1994. A major step in this process was the creation of a customs union in 2000. Burkina Faso is in agreement with all the outlined prospects, namely the temporary preferential trade regime and the timetable for establishment of the common external tariff which involved some intermediate steps. Thus, as of July 1, 1996, the Government adopted the 30 percent reduction in entry fees for industrial products of approved origin; exoneration of all fees and taxes for entry into member states for products originating in member countries and traditional handicrafts; and a 5 percent reduction in entry fees for non-approved products. In addition, as of July 1, 1997, the exemption for approved industrial products was increased to 60 percent. It was raised to 80 percent as of July 1, 1999. Since January 1, 2000, all arrangement have been made to implement the common external tariff. The fiscal system now has 4 categories of products and 4 customs duty rates: 0, 5, 10 and 20 percent. The maximum rate was reduced to 20 percent and the statistical tax to 1 percent. The adoption and implementation of these various measures has caused fiscal revenues to decline. Simulations have shown that the loss of revenue is about 1 percent of GDP for the first two years of implementation of the TEC, and 2 percent for the third year. The impact of the new customs tariff was appreciable over the 1998-2000 period, even after the reduction in debt service under the HIPC initiative. 1996 1997 1998 1999 2000 2001 2002 Actuals FASR Program 1999-2003 Taxes on international trade 45.8 50.9 51.6 45.6 38.3 40.4 43.4 As % of GDP 3.5% 3.7% 3.4% 2.9% 2.2% 2.1% 2.1% Of which, external trade fees 45.4 48.6 45.7 42.1 34.0 36.2 39.0 As % of GDP 3.5% 3.5% 3.0% 2.6% 2.0% 1.9% 1.9% Current GDP 1298.3 1390.6 1524.0 1591.5 1712.0 1897.0 2060.0 Estimated revenues excluding TEC (3% of projected GDP) 47.7 51.4 56.9 61.8 Over the 2000-2002 period, the effect will continue to be felt. Revenue forecasts from international trade fees in the PRGF program indicate losses estimated at CFAF 17.4 billion in 2000, 20.7 billion in 2001 and 22.8 billion in 2001. Enlargement of the tax base Taking into account the anticipated impact of the common external tariff on budget resources, and in order to avoid increasing the tax burden on economic operators, the Government has undertaken an policy of enlarging the tax base. Measures have been taken to strengthen tax collection and to combat tax fraud more effectively (Law N