Burkina Faso - Economic Recovery Credit Project

Document or The World Bank FOR OFFICIAL USE ONLY Report No. 15263 IMPLEMENTATION COMPLETION REPORT BURKINA FASO ECONOMIC RECOVERY CREDIT (CREDIT 2590-BUR) FEBRUARY 15, 1996 Country Operations Division West Central Africa Department Africa Region 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 as of 09/30/95 Burkina Faso's currency is the CFA franc (CFAF), which is pegged to the French franc (FF). Until January 12, 1994, the parity of the CFAF to the FF was 50 to I - since then it has been at 100 to 1. Currency Unit CFA franc 1 CFA franc = US$ 0.02 US$1.00 = 495 CFA franc WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ERC - Economic Recovery Credit ESAF - Enhanced Structural Adjustment Facility ICR - Implementation Completion Report SAC - Structural Adjustment Credit SECAL - Sector Adjustment Loan SOFITEX - Societe des fibres textiles du Burkina Faso FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Preface Evaluation Summary PART I: Program Implementation Assessment A. Background ...........................I B. Statement of Evaluation of Objectives ........ .................. 1I C. Achievement of Major Objectives .2.........................2 D. Major Factors Affecting the Program ...........................3 E. Program Sustainability . . ..........................3 F. Bank Performance ..........................3 G. Borrower Performance ..........................3 H. Assessment of Outcome ...........................4 I. Future Operations ...........................4 J. Key Lessons Learned................. .......... 4 PART HI: Statistical Annexes n ....6 Appendices Appendix A: Mission's Aide-Memoire Appendix B: Borrower's contribution to the ICR 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 wiLhout World Bank authorization.   IMPLEMENTATION COMPLETION REPORT ECONOMIC RECOVERY CREDIT [CR. 2590-BUR] BURKINA FASO Preface This is the Implementation Completion Report (ICR) for the Economic Recovery Credit (ERC) in Burkina Faso, for which Credit 2590-BUR in the amount of SDR 18 million equivalent was approved on March 29, 1994 and made effective on June 24, 1995. The Credit was closed on June 30, 1995. The first and only tranche in the amount of SDR 18 million was released upon effectiveness. The credit was fully disbursed by July 29, 1994. A substantial part of the program under the ERC was incorporated in the Structural Adjustment Credit (Cr. 2281-BUR) as an additional condition for release of the final tranche. Both credits had the same closing date and the preparation of the ICRs for both credits was begun during the Bank's completion mission, April 17 to May 5, 1995. They are based on material in the project file, including the President's Report, the Letter of Development Policy and related documents. The borrower contributed to preparation of the ICRs by expressing views during the initial discussions as reflected in the mission's aide-m&noire and commenting on an earlier draft of the report. Because this report is issued simultaneously with the ICR for Cr.2281, and because of the formal linkage, cross references are made where appropriate. The borrower provided comments that are included as an appendix to the ICR. The ICR was prepared by Hans-Martin Boehmer, Country Operations Division, and reviewed by Ngozi Okonjo-Iweala, Country Operations Division Chief, and Franz Kaps, Operations Adviser, West Central Africa Departnent.   ECONOMIC RECOVERY CREDIT [CR. 2590-BURl BURKINA FASO EVALUATION SUMMARY Introduction 1. Immediately following the devaluation of the CFA franc on January 12, 1994, the Government of Burkina Faso put in place a comprehensive package of reform measures. At the same time, the Government updated and revised its medium-term program of structural reforms and began discussions with the World Bank for an Economic Recovery Credit that was aimed at supporting this program. The new country assistance strategy that was developed following the devaluation focused on: (i) human resource development, (ii) natural resource management, and (iii) public and private institutional development. Statement of Project Objectives 2. The main objective of the Economic Recovery Credit was to support Burkina's post-devaluation adjustment program as outlined in the Government's Statement of Economic and Social Policy, whose main objectives are private sector led growth and the alleviation of poverty. A second objective was to provide support for measures taken in the aftermath of the devaluation to deepen the Government's adjustment strategy. Given the historic nature of the devaluation, it was crucial to support the Government quickly to provide the financial means necessary to implement the ambitious post-devaluation reform program. Assessment of Outcomes 3. Based on the Bank's ex-post evaluation norms, the ERC is classified as 'highly satisfactory" This assessment is based on the following elements: (i) the program succeeded in restoring price stability quickly following the devaluation; (ii) substantial progress was made in the areas of education and, to a large extent, in health; and (iii) the price regime, which was temporarily controlled to limit the impact of the devaluation, was quickly liberalized in its aftermath. Key Lessons Learned 4. This credit was a successful operation largely because of its simple design. The Burkinabe economy had just experienced a major external shock in the form of the devaluation, and this credit helped the Government adapt to the new environment. Reform measures had, by and large, been implemented in advance, and as a result, the credit became effective soon after Board approval and was fully disbursed shortly thereafter. 5. 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. ERCs seem much less adequate to support reforms that must be implemented over an extended period of time, such as banking reform, privatization programs, and improvements in the public financial management system.   ECONOMIC RECOVERY CREDIT ICR. 2590-BURl BURKINA FASO PART I -- PROGRAM IMPLEMENTATION ASSESSMENT A. BACKGROUND (i) Macroeconomic Setting 1. Immediately following the devaluation of the CFA franc on January 12, 1994, the Govenmment of Burkina Faso put in place a comprehensive package of reform measures.' At the same time, the Government updated and revised its medium-term program of structural reforms in the third Policy Framework Paper for 1994-96, and began discussions with the World Bank for an Economic Recovery Credit that was aimed at supporting this program. (iii) Bank's Role 2. The Bank followed closely the move of the Government as well as the other partners of the franc zone towards the devaluation of the CFA franc and was therefore well positioned to provide immediate support in its aftermath. Preparations for this credit began in tandem with the devaluation and were aimed at ensuring the necessary conditions for a favorable supply response following the devaluation while continuing IDA support to human resource development. The new country assistance strategy that was developed following the devaluation focused therefore on: (i) human resource development, (ii) natural resource management, and (iii) public and private institutional development. B. STATEMENT AND EVALUATION OF OBJECTIVES (i) Project Objectives 3. The main objective of the Economic Recovery Credit was to support Burkina's post-devaluation adjustment program as outlined in the Government's Statement of Economic and Social Policy, whose main objectives are private sector led growth and the alleviation of poverty. A second objective was to provide support for measures taken in the aftermath of the devaluation to deepen the Government's adjustnent strategy. In addition to the devaluation of the CFA franc from 50 to 100 CFAF/1 FF, the major measures were: (i) increasing the producer price of prime cotton by 40 percent, (ii) a program of measures to attenuate the negative social effects of the devaluation, (iii) prudent demand management policies to reduce absorption by the public sector and limit wage increases, and (iv) implement key measures to increase the coverage and quality of primary education and health services in the context of a priority Action Plan for 1994. For developments prior to the devaluation on January 12, 1994, please refer to the ICR for the Structual Adjustment Credit (Cr. 2281-BUR).  2 4. The overall program was already supported through a combination of adjustment (both SAC and SECALs) and project lending, especially in human resource development and preservation of natural resources. In addition to the first structural adjustment credit, which provided general support to the Government's adjustment program since 1991, policy reforms in the agricultural sector were implemented under the Agricultural Sector Adjustment Credit (Cr. 2381 -BUR), the privatization program was supported by the Private Sector Assistance Project (Cr. 2472-BUR), public financial management reforms were deepened under the Public Institutional Development Project (Cr. 2378-BUR), and a better resource allocation in transport and education was achieved with support from the Transport Sector Adjustment Credit (Cr. 2332-BUR) and the Fourth Education Project (Cr. 2244-BUR). (ii) Evaluation of Objectives 5. Given the historic nature of the devaluation, it was crucial to support the Government quickly to provide the financial means necessary to implement the ambitious post-devaluation reform program. At the same time, given the on-going adjustment program that began in 1991 and was still supported by numerous IDA operations, reforms under the ERC had to build on the progress made earlier. With its focus on human resource development and private sector led growth, the ERC was fully consistent with the on-going reforms. Thus, both objectives were fully appropriate. C. ACHIEVEMENT OF MAJOR OBJECTIVES 6. As discussed below, the objectives of the ERC have been achieved. In particular, the main objective of the devaluation was to restore external competitiveness, which required that the expected initial surge in inflation would be brought under control effectively within a few months. This was achieved and the long-term sustainability of gains in external competitiveness seem assured. Other specific reforms were intended to reinforce the Govermment's commitment to the adjustment process begun under SAC I and were based on the overall program as described in the Policy Framework Paper for 1994-96. 7. Macroeconomic Objectives. The principal macroeconomic objectives of the program as outlined in the Statement of Economic and Social Development Policies was to: (i) increase real GDP growth to at least 3.3 percent; (ii) limit consumer price increases to 31 percent; and (iii) reduce the current account deficit by US$80 million to about US$370 million in 1994. Although the Government did not achieve its GDP growth objective, the macroeconomic performance in 1994 was solid and substantial progress was made in restoring macroeconomic balance.2 The reforms put in place during 1994 have thus built the foundation on which growth is expected to accelerate to around 5 percent per year over the medium term. 8. Social Policy Measures and Development of Human Resources. The devaluation provided a unique opportunity for the BurkinabW Government to recommit itself to the priority sectors of health and 2 More details on the macroeconomic performance in 1994, as well as during previous years, can be found in the ICR for the Structural Adjustment Credit (Cr. 2281 -BUR).  3 education. It did this in the form of a Priority Action Plan for Primary Education and Health.3 However, it was also anticipated that the devaluation would have a significant negative impact on the standards of living for the urban population. Thus, in tandem with the devaluation, the Government introduced: (i) temporary price controls on kerosene and school supplies, and (ii) limited increases in prices for certain basic consumer goods through lower taxation. Fully in line with the conditions for credit effectiveness, the Government removed all price controls prior to April 30, 1994, with the agreed exceptions of petroleum products, public utility rates and school supplies. In addition, the Government introduced, as anticipated, a national price list for essential and generic drugs. 9. As regards the agricultural sector, the price for rice remained regulated, which was agreed to by IDA in view of the reform measures anticipated to take place under the Agricultural Sector Adjustment Credit. In addition, to benefit local agricultural production, producer prices of cotton were raised by 40 percent from CFAF80/kg to CFAF112/kg, immediately following the devaluation. This resulted in a real producer price increase of just over 10 percent. Following a substantial improvement in the financial performance of the cotton parastatal (SOFITEX), during 1994/95, the Govermnent decided to increase the producer price further to 140 CFAF/kg, bringing the real price increase following the devaluation to about 40 percent. D. MAJOR FACTORS AFFECTING THE PROGRAM 10. There were no major factors affecting the prograrn, as it was a quickly executed program in response to a major shock to the economy. E. PROGRAM SUSTAINABILITY 11. The reforms introduced in the immediate aftermath of the January 1994 devaluation are likely to lead to a sustained improvement of Burkina Faso's external competitiveness. In the social sectors, Government commnitmnent remains strong-the objectives set out in the Priority Action Plan for Primary Education and Health have thus far been achieved-and the outlook for a continued successful implementation of the Action Plan are good. In agriculture, the sustainability of the reforms is not yet assured. Despite the price increases for cotton introduced following the devaluation, producer prices in Burkina Faso have remained relatively low compared with its neighboring countries. F. BANK PERFORMANCE 12. Preparation for this credit began in conjunction with the preparation of the devaluation of the CFA franc. Therefore, a well planned post-devaluation program of immediate actions was already available prior to first formal discussions of the ERC. As a result, internal processing of this credit proceeded unusually quickly, taking a mere two months to Board approval. The rapid processing, however, was the result of a recognition of the historical importance of the devaluation, which allowed similar credits for most CFA franc zone countries to be prepared and presented to the Board virtually at the same time. Because of the quick disbursing nature of this credit, and the timely implementation of agreed measure, no supervision mission took place. However, a joint Bank/Fund mission supervised key components of the 3 The implementation of measures under the Priority Action Plan was integrated as an additional condition for the release of the third tranche of SAC I (Cr. 2281-BUR) and is review in the corresponding ICR.  4 post-devaluation program in May 1994 during which the implementation of the program was found to be broadly satisfactory. G. BORROWER PERFORMANCE 13. The borrower performed well under the program. Policy actions were taken as planned and the program experienced no significant delays in its execution. All legal covenant were complied with. H. ASSESSMENT OF OUTCOME 14. Based on the Bank's ex-post evaluation norms, the ERC is classified as "highly satisfactory". This assessment is based on the following elements: (i) the program succeeded in restoring price stability quickly following the devaluation; (ii) substantial progress was made in the areas of education and, to a large extent, in health; and (iii) the price regime, which was temporarily controlled to limit the impact of the devaluation, was quickly liberalized in its aftermath. 1. FUTURE OPERATIONS 15. Future operations are the key to the sustainability of the adjustment program. While basic macroeconomic performance is monitored under the Fund's ESAF program, sectoral achievements hinge on the conclusion of existing projects as well as the next generation of projects. The reform agenda is clearly not finished in Burkina. This is particularly the case for the agricultural sector where reforms are still continued under the first sectoral adjustment credit, but will be deepened under a proposed second operation which will focus on eliminating remaining barriers in rice, sugar, and cotton, to stimulate a strong supply response. 16. Most importantly, the private sector still has to become the engine of economic growth. A first step will be the a proposed FY96 mining sector project. It will further improve the incentive framework for foreign investment in the mining sector, which holds the promise of substantially boosting Burkina's mining production. Ultimately, however, the private sector can only become the driving force behind Burkina's development if the Government is fully committed to privatization of state enterprises and a strong private banking sector, while substantially improving the management of the public finances to provide adequate support to the activities of the private sector. These areas of reform would be the focal points of a proposed FY97 second structural adjustment credit. J. KEY LESSONS LEARNED 16. This credit was a successful operation to a large extent because of the simple nature of its design. The Burkinabe economy had just experienced a major external shock in the form of the devaluation, and this credit was purely designed to help the Government adapt to the new environment. Reform measures had, by and large, been implemented in advance as they had been prepared in conjunction with the devaluation. As a result, the credit became effective soon after Board approval and was fully disbursed shortly thereafter. 17. 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 longer process. ERCs seem much less adequate to support reforms that must be implemented over a extended  S period of time, such as banking reform, privatization programs, and improvements in the public financial management system.   ECONOMIC RECOVERY CREDIT [CR. 2590-BURl BURKINA FASO PART II -- STATISTICAL ANNEXES Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not applicable Macro Policies 0 0 0 0 Sector Policies 0El 0] Financial Objectives E] a ] 0 Institutional Development [l [] aE Physical Objectives [l [ [ E3 Poverty Reduction [] El 0 Gender Issues [] [ [l Other Social Objectives [] IA [l [ Environmental Objectives E a E 0 Public Sector Management E ] 0 0 Private Sector Development n [J o] Other D E E 0 B. Project Sustainability Likely Unlikely Uncertain (V) (V) (1) 0 _E __ OE  8 (Continued) Hi2hlv C. Bank Performance satisfactorv Satisfactory Deficient (0) (1) (1) Identification 0 E a Preparation Assistance 0 E D Appraisal 0