Burkina Faso - Third Structural Adjustment Credit Project

Document of THE WORLD BANK FOR OFFICIAL USE ONLY Report No: P 7344 BUR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED THIRD STRUCTURAL ADJUSTMENT CREDIT OF SDR 18 MILLION TO BURKINA FASO NOVEMBER 9,1999 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit CFA Franc US$1 CFA 624 (as of 11/08/1999) GOVERNMENT FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BCEAO Banque Centrale des Etats de l'Afrique Occidentale SGB Societe Generale des Banques BIB Banque Internationale du Burkina BND-B Banque Nationale de D6veloppement du Burkina CAS Country Assistance Strategy CET Common External Tariff CGP Caisse Generale de Perequation CNDP Comite National de la Dette Publique CNEA Caisse Nationale de l'Epar gne Agricole COMIKI Compagnie Miniere de Kiere CSPS Centre de Sante et de Promotion Sociale CSSPA Caisse de Stabilisation des Prix des Produits Agricoles EMRSO Economic Management Reform Support Operation ESAF Enhanced Structural Adjustment Facility HIPC Heavily Indebted Poor Countries ICR Implementation Completion Report IFC International Financial Corporation IMF International Monetary Fund INB Imprimerie Nationale du Burkina MIGA Multilateral Investment Guarantee Agency MTEF Medium Term Expenditure Framework ONATEL Office National des T6lecommunication ONAVET Office National des Intrants Zootechniques etVeterinaires PER Public Expenditure Review PFP Policy Framework Paper PID Public Institutional Development RNTCX9 Regie Nationale des Transports en Commun X9 SAC Structural Adjustrnent Credit SECAL Sectoral Adjustment Loan SGBB Societe Generale des Banques du Burkina SHG Soci6te des H6tels de la Gare SINAC Societ de l'Industrie de la Chaussure SLM Societe de Lo cation de Materiel SNTB Societe Nationale de Transit du Burkina SOBEMA Societe Burkinab6 d'Emaillerie SOCOGIB Societe de Construction et de Gestion Immobiliere du Burkina SOFITEX Societe des Fibres et Textiles du Burkina SOFIVAR Societe de Financement de la Vulgarisation de l'Arachide SONACAB Societe Nationale des Carreaux du Burkina SONACIB Societe Nationale du Cinema du Burkina SONACOR Soci6te Nationale de Decorticage et de Conditionnement du Riz SOPAL Societe de Production d'Alcool SOSUCO Societe Sucriere de la Comoe SYGASPE Systeme de Gestion des Agerits et du Personnel de l'Etat SYSCOA Systeme Comptable Ouest Af:ricain UNDP United Nations Development Program VAT Value Added Tax WAEMU West African Economic and Monetary Union WAMU West African Monetary Union Vice-President J ean-Louis Sarbib Country Director : Hasan Tuluy Resident Representative : Manga Kuoh Sector Manager : Charles P. Humphreys  BURKINA FASO THIRD STRUCTURAL ADJUSTMENT CREDIT TABLE OF CONTENTS Page No. CREDIT AND PROGRAM SUMMARY ........................I 1. INTRODUCTION ................ ,.1 2. BACKGROUND ................. .1 A. HISTORICAL AND POLITICAL BACKGROUND ......................................................... 1 B. THE ECONOMY .........................................................1 C. POVERTY AND LIVING STANDARDS .........................................................2 3. BURKINA FASO'S REFORM PROGRAM . ........................................................3 A. RECENT ECONOMIC DEVELOPMENTS .........................................................3 B. DEVELOPMENT CHALLENGES AND REGIONAL INTEGRATION ..............................5 C. MEDIUM-TERM PROSPECTS AND DEVELOPMENT STRATEGY ................................7 4. BANK GROUP OPERATIONS IN BURKINA FASQ ......................................................... 8 AND COLLABORATION WITHI DONORS ..........................................................8 5. THE PROPOSED OPERATION ......................................................... 10 A. LINKS WITH THE CAS AND RATIONALE FOR THE CREDIT . ......................................... 10 B. CREDIT COMPONENTS ........................................................ 12 C. SPECIFIC ACTIONS REQUIRED FOR THIS CREDIT ....................................................... 15 D. LOOKING AHEAD ......................................................... 16 6. CREDIT FEATURES AND IMPLEMENTATION ........................................................ 17 7. RECOMMENDATION ........................................................ 18 Annexes A. Income and Social Indicators B. Key Economic Indicators C. External Financing Requirements and Resources, 1996-2002 D. Operations Portfolio E. Supplemental Credit Data Sheet F. The Policy Matrix G. Burkina Faso at a Glance H. Letter of Development Policy   BURKINA FASO THIRD STRUCTURAL ADJUSMENT CREDIT Credit and Program Summary Borrower: Burkina F'aso Beneficiaries: Population of Burkina Faso Amount: IDA Credit: SDR 18 million ($25 mnillion) Terms: IDA Credit: Standard with 40-year maturity Program Description: The proposed Structural Adjustmnent Credit (SAC) is an integral part of the Bank's strategy to help Burkina Faso consolidate recent gains in macroeconomic management and to move beyond stabilization to deeper structural reforms and sustained economic growth. This one-tranche operation, which is fully consistent with the new Country Assistance Strategy under preparation, would be the second in a series of such operations to support a reform program aimed at: (i) enhancing the competitiveness of the 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. Benefits: The reforms supported by this operation, especially tax and trade reform, are 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. Risks: Burkina Faso's adjustmnent record since the 1996 CAS has been steady, but progress in some areas such as privatization, trade liberalization, civil service reform and decentralization has been  ii slow. Govemment commitment to economic reform and poverty reduction has increased over the past three years, as evidenced by the successful implementation of the ESAF and the pievious adjustment operation (EMRSO). However, there is a risk that the reform program could falter because of pressures from vested interests and persistent institutional weaknesses. To testify, to its determination, the Government has already taken a number of upfront actions and has already started implementing the reforms programmed for 1999-2002. There will be no Board discussion until all actions underpinning this credit are taken. Estimated Disbursements: SDR I 8 million would be released at credit effectiveness.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED THIRD STRUCTURAL ADJUSTMENT CREDIT TO BURKINA FASO 1. INTRODUCTION 1. I submit for your approval the following report and recommendation on the proposed Third Structural Adjustment Credit (SAC III) to Burkina Faso for SDR 18 million, an amount equivalent to US$25 million, on standard IDA terms. The credit is an integral part of the Bank's strategy to help Burkina Faso consolidate recent gains in macroeconomic management and to move beyond stabilization to deeper structural reforms and sustained economic growth. The credit is proposed as a second one-tranche operation to support a reform program aimed at: (i) enhancing the competitiveness of the 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. 2. BACKGROUND A. HISTORICAL AND POLiTICAL BACKGROUND 2. Burkina Faso is a poor landlocked country with a limited resource base, high vulnerability to external shocks, and acute social needs. T'he rainfall is limited-averaging 350mm in the North and 1000 mm in the South-West. In the mid-l 980s, the state became the dominant actor in the economy with heavy involvement in the productive sectors and generalized price and trade regulations. During this period, the role of the state as a caretaker of the economy and provider of social services became deeply ingrained in the population, its leadership, and the civil service. As a result, while systemic political changes were initiated as early as 1988, the shift toward a more selective role of the state and market-based policies started only in 1991 and has been gradual. 3. Burkina Faso has enjoyed political stability since 1987 under the leadership of PresidentBlaise Compaore. The country moved steadily toward political pluralism and has now organized several multi-party elections: presidential (1991 and 1998), parliamentary (1992 and 1997), municipal (1995). While last year's presidential election was an important step in the consolidation of the new political system, the most significant socio-political changes are likely to come when the decentralization and civil service reform laws adopted by Parliament in 1998 are fully implemented. B. THE ECONOMY 4. Burkina Faso's growth record over the past forty years has been uneven. After a steady growth in the 1960s and 1970s, GDP declined during the first half of the 1980s. Growth resumed in the second half of the 1980s, but fell short of population growth rates. The devaluation of the CFA Franc in January 1994 re-established the competitiveness of the economy and triggered strong growth. Economic growth has picked up since 1994 and was estimated at about 6.2% in 1998.  2 5. Burkina Faso is a member of the West African Economic and Monetary Union (WAEMIU) and shares a common currency, the CFA Franc, and a central bank (BCEAO), withBenin, C6te d'Ivoire, Mali, Niger, Senegal, Togo, and Guinea-Bissau. The CFA Franc has been pegged to the French franc since 1948; the fixed parity was altered only once, in January 1994, when the CFA Franc was devalued by 50 percent in foreign currency terms from CFAF 50 to CFAF 100 per French Franc. Given Burkina Faso's narrow tax base and a structural Government budget deficit, and also the good track record in managing public funds, the country has traditionally benefited from important external aid flows (grants received have represented about 7.5 percent of GDP over the past five years). 6. The primary sector (39 percent of GDP in 1998) has experienced a remarkable growth of 17 percent in 1998, in spite of lower than expected cotton production. It is dominated by agriculture which accounts for almost 50 percent of value added in the primary sector, while livestock accounts for some 30 percent, and forestry and fishery for the remaining 20 percent. The secondary sector (18 percent of GDP) increased only modestly in 1998 (1.4 percent). However, in the mining sector, value added is estimated to have increased by about 16 percent in 1998. The tertialy sector (43 percent of GDP) grew by 2.6 percent in 1998. C. POVERTY AND LIING STANDARDS 7. With a population of 1 1 million growing at about 2.8 percent per annum, Burkina Faso's real GNP per capita was US$ 240 in 1998. EBy this measure of income, as well as on the basis of UNDP's human poverty index, Burkina Faso is among the poorest countries in the world. Since 1994, real GDP has increased on an average by 5.5 percent per annum. Yet, the incidence of poverty increased by one percent (from 45 to 46 percent), while the poverty gap index' remained stable at 14 percent. Furthermore, the total nuinber of poor increased by nearly 14 percent. While the incidence of poverty in rural areas declined slightly between 1994 and 1998 (from 51 to 50 percent), and poverty remains very much a rural problem in Burkina Faso (accounting for over 95% of national poverty), urban areas registered a substantial increase (from 10 to 16 percent) during the same period. 8. The most recent social and welfare indicators of Burkina Faso point to important disparities in access to basic needs between regions and between poor and non poor. For instance, over 92 percent of household heads in the Centre Nord region have no education, and only 1 percent have completed primary education. Only 2.6 percent of the poor in Centre Nord have access to potable water (compared to 78 percent of urban population and 6 percent in rural areas at national level). 9. Social indicators of Burkina Faso are low, even by Sub-Saharan standards: life expectancy of 50 years, infant mortality of 98 per thousand, literacy rate of 22 percent, and gross primary enrollment rate of 40 percent, with female only 30 percent. The low health status and education level of the population constitute major constraints to economic and social development. 10. RV/AIDS has become one of Burkina Faso's most serious development challenges. Burkina Faso is currently one of the countries in WVest Africa most severely affected by HIV. Seroprevalence I Average distance between the consumption of the poor and the poverty line expressed as a percentage of the poverty line.  3 among the general population is estimated at 7 percent, while it reaches 13.1 percent among truck drivers, 8.5 percent among pregnant women, 29 percent among persons infected with tuberculosis and 23 percent among persons infected wi-th sexually transmitted diseases. The youth is particularly affected by the infection and the number of AIDS cases among young people has increased from 3 percent in 1987 to an estimated 7 percent today. Women are also being increasingly infected. In 1988 women represented 25 percent of AIDS cases. Their proportion has increased to some 40 percent. Three quarters of those hospitalized for AIDS are of age 15 to 40. 3. BURKINA ]FASO'S REFORM PROGRAM A. RECENT ECONOMIC DEVELOPMENTS Stabilization 11. Burkina Faso has established over the past eight years a satisfactory track record and achieved a good macroeconomic performance. In the real sector, the financial and structural measures that accompanied the 1994 devaluation of the CFA Franc helped to strengthen the foundations for economic expansion. In 1998, despite sorme decline in cotton production, from the record level of 1997, the rate of growth was 6.2 percent on account of a substantial increase in cereal production, which was helped by better rainfall conditions than in 1997, higher public investment and an expansion in private sector services. Inflationary trends were favorable during the period after the initial price adjustment following the 1994 devaluation: annual average inflation was 4.5 percent during 1996-98, slightly above the WAEMU average. 12. The performance of Govemment finance in 1998 was consistent with program targets, especially conceming revenue. Total revenue amounted to CFAF 199 billion (13.1 percent of GDP, compared with a program's objective of 13 percent of GDP). On the expenditure side, current expenditure remained in line with program projections. The overall fiscal deficit, on a commitment basis, excluding grants, was 9.8 percent of GDP in 1998, against a projected ratio of 10.3 percent. The current account deficit (excluding official transfers) improved slightly, but less than projected, declining from 13.9 percent of GDP in 1997 to 13.8 percent in 1998, compared to 10.9 percent in the program. Burkina Faso's deficits were financed with grants and concessional loans. On September 10, 1999, the IMF Board approved a three-year loan for Burkina Faso under the Enhanced Structural Adjustment Facility (ESAF) in a total amount equivalent to SDR 39.12 million (about US$53.79 million) to support the Government's 1999-2002 economic program. 13. The extemal debt policy has been prudent. The Government did not contract or guarantee on any new extemal borrowing on non-concessional terms (except for normal short-term credits and rescheduling loans). To this end, the Govemment has established the national public debt committee (CNDP) which examines all new financing requests, and recommends all necessary measures to avoid any accumulation of arrears. But despite the prudent debt management policy, the foreign debt service of the stock of past debt of Burkina Faso is hardly sustainable over the medium and long term. Indeed, balance of payment projections for the medium term indicate that the ratio of the net present value of Burkina Faso debt to exports of goods and non factor services is expected to remain significantly above the 200 percent benchmark for a number of years. For this reason, Burkina Faso had requested assistance within the fram,ework of the HIPC initiative. This request was accepted by the Board in November 1997 and the completion point has been set for April 2000. Burkina Faso is committed to respecting its obligations set within the HIPC agreement framework (see Table 1). The  4 authorities have announced that the resources gained from debt relief will be entirely allocated to social sectors. Structural reforms 14. Burkina Faso has made significant headway in its transition to a market-oriented economy, including in the areas of trade, fiscal and public enterprise reforms as well as in the areas of social policy and institutional development (see Table 2). 15. Substantial external trade reforms began in 1993 with the consolidation of tariff rates into three categories (11, 14 and 37 percent). Regulations on profit margins for imported goods were removed; most price controls on locally produced goods were eliminated and remain in effect only for rice, generic drugs, petroleum products, and utilities, which are still entrusted to public monopolies. Govemment policy reforms have done much to correct the policy environment which had distorted incentives markedly in favor of urban areas. Following up on the reforms of the early 1990s, a major tax reform was prepared in 1997 leading to the gradual entry into force of the common external tariff (CET) of the WAEMU over the period July 1998-January 2000. The new customs tariff provides for a simplified structure of four rates (0, 5, 10, and 20 percent) plus a statistical tax of 1 percent. 16. A comprehensive civil service reform was approved by Parliament in April 1998, including a new wage and salary scale for permanent civil servants and contractual personnel, which was introduced in January 1999. This new wage scale contains a larger number of steps, as well as a broader range of pay levels. Promotion between steps is to be based on performance. A large part of the civil service positions are to be held by staff under a contractual regime, except for those involving key policy and sovereignty functions; this should allow much larger flexibility in allocating staff, including on a regional basis, and improve overall efficiency. 17. In recent years, the banking system has been restructured, including (i) the privatization and recapitalization of all main banks, the bulk of which have come under the control of foreign banks; (ii) the entry into operation of two new banks; and (iii) the completion of the liquidation of the development bank BND-B. This restructuring has led to increased competition and a decline in interest rate spreads. 18. The implementation of the first two phases of the privatization program, launched respectively in 1991 and 1994, is now close to completion (see Table 3). During 1991-99, 27 enterprises were totally-or partially-privatized, representing a total turnover of 8 percent of GDP; total proceeds amounted to about CFAF 12 billion, equivalent to 0.8 percent of the 1998 GDP. In mid-1998 a new phase was formulated, focusing on public utilities and the cotton sector. Progress has been made in initiating this third phase. Parliament adopted in December 1998 a law liberalizing the telecommunications sector, which provides for selling part of the Government's shares in the telephone company (ONATEL), establishing a regulatory authority, and opening up the telecommunications sector to private investors. Steps have been taken to bring the shares to sale by end-November 1999 (see below). The Government also approved in December 1998 a law designed to open up the electricity sector to private investors. 19. In the rural sector, reforms under the first Agricultural Sector Adjustment Credit liberalized trade and prices of traditional cereals and livestock. Progress was made in recent years  5 in completing the liberalization ofthe sugar market, and in restructuring the cotton sector. In 1998, the Government decided to sell 30 percent of the cotton company's (SOFITEX) capital to the cotton producers' association (effective April 1999), and an interprofessional agreement was concluded between the Government and the producers' association, effective February 1999. Under this agreement, half of the company's profits are to be allocated to the farmers in the form of supplements to the cotton purchase price. However, the rice subsector is still subject to state intervention. B. DEVELOPMENT CHALLENGES AND REGIONAL INTEGRATION Four Constraints on the Economy 20. To meet the challenging objectives of reducing poverty and increasing per capita income in rural areas where most of the population live, the authorities need to tackle four major constraints oin the economy: (i) Large social deficit, low labor productivity, and high unemfloyment. Burkina Faso's population density is the highest in the Sahel (40 inhabitants per kmi), which contributes to the high incidence of poverty. With close to half the population under the age of 15, rapid population growth (2.8 percent) is not likely to diminish in the near term. Such high population growth rates will put a strain on extremely limited water resources, and already much of the population has no access to clean water. Moreover, Burkina Faso has among the lowest gross primary school enrollment rates in sub-Saharan Africa: 44 percent for boys and 28 percent for girls. Similarly, the health of the population is poor with life expectancy at birth reaching only 50 years and nearly 60 percent of the population not meeting the minimum health requirements. On the basis of UNDP's human development index, Burkina Faso ranks 172t among 174 developing countries and according to various growth accounting studies Burkina Faso's labor productivity is one of the lowest in West Africa. Estimates of the unemployment rates across the 45 provinces of the country are high-about 20 percent in Ouagadougou, the capital city. (ii) Poor economic infrastructure, high input costs, and limited size of the modern private sector. Competition for new export markets is especially dependent on access to an adequate supply of reliable and competitively priced infrastructure services. Yet, the relatively poor quality and high costs of infrastructure in Burkina Faso-including power, transport, telecommunication, and water- reduces the likelihood that private entrepreneurs, domestic and foreign, will increase their investment in response to policy reforms. Furthermore, the size of the modem private sector is limited. Burkina Faso has a large informal sector of some 90,000 micro-enterprises that contributes 32 percent of GDP and accounts for 70 percent of non-agricultural employment. The informal sector contributes more than 50 percent of value added in certain industries. The formal sector that contributes 40 percent of GDP only employs 2 percent of the workforce. It comprises a rather large number of very small enterprises (about 6,300 enterprises accounting for 25 percent of GDP) and only 42 enterprises- excluding the 37 public enterprises-wit]h more than 50 employees. More disturbing is the low public confidence in the equity and efficiency of the tax system: tax rates are high on the small modern sector, as illustrated by the importance of tax exemptions and tax evasion. (iii) Institutional capacity. As Burkina Faso embarked in economic reforms in the early 1990s, it became apparent that a number of institutional arrangements and the national capacities were not adequate to transform the state machinery to respond to the demands of a liberalized economic and political system. Burkina Faso institutional reforms have been supported by the donor community  6 including by the IDA-financed Public Institutional Development project (PID) approved in 1992. Major achievements in recent years have been in the area of public finance management with the adoption of a new budgetary framework and the effective implementation of a computerized public expenditure processing and monitoring system which covers current expenditures of all ministries except payroll and debt service. At the end of 1996 the Government launched a second phase of its institutional reform program with the preparation of two broad pieces of legislation: (a) the "comprehensive reforn of the state" which i) specifies the new role of the state and provides a delineation for its intervention in the economy; and ii) provides the framework for a major civil service reformn that seeks to introduce more flexibility in the status of state employees and to revise personnel management regulat:ions substantially; and (b) a decentralization law that defines the principles and orientations of decentralization in Burkina Faso. (iv) An economy with limited openness and exporting mostly labor. In spite of a strong export performance, particularly since the devaluation, the export rate has remained the lowest in the region (12 percent of GDP on average between 1990 and 1997) which explains Burkina Faso's structural trade deficit (-11.5 percent of GDP in 1998) and current account deficit (-9.4 percent of GDP in 1998). For the past decades, an important fraction of Burkina Faso's workforce has migrated to coastal neighboring countries-especially C6te d'Ivoire-to seize low wage job opportunities, an exodus which tends to leave behind lower productivity workers. Regional Integration, Competitiveness, and Productivi 21. Objectives. Following the 1994 CFAF devaluation, Burkina Faso and the other members of the BCEAO monetary zone have worked to create an economic union (the WAEMU) based on the pre- existing monetary union and focused initially on the establishment of a customs union, as well as continuing efforts to harmonize indirect tax policies and investment incentives, Government budgeting and accounting procedures, and statistics. Additional, longer term objectives include: (i) the freedom of movement of persons; (ii) macroeconomic policy convergence; and (iii) comrnmon sectoral policies. 22. Costs and Opportunities of Integration. Membership to the WAEMU customs union poses some short-term challenges to Burkina Faso. The decrease in external tariffs will initially lead to lower public revenues. Moreover, because Burkina Faso's productivity rates across the board are currently lower than its main competitors in the Union (see table 4), the Union will inevitably lead to significant economic restructuring, which should eventually lead to higher exports where Burkina Faso has a comparative advantage-especially in agriculture and some services. 23. While the potential economic gains are extremely difficult to quantify, the ambitious integration obj ectives would in the long rn assist a poor, landlocked and relatively arid country like Burkina Faso, whose major engine of growth will continue to be its participation in the stronger economies on the coast, especially C6te d'Ivoire, where over 3 millionBurkinabe already live and work. Closer integration also gives Burkina Faso a larger regional market for goods in which it has a clear comparative advantage-including livestock and garden produce, plus an opportunity to benefit from more efficient services and industries elsewhere in the zone and thereby enhance its overall competitiveness. WAEMU itself offers some assurance that national policies will be both better designed and implemented-as the need to harmonize policies across the Union should put a limit on the most distortionary policies in individual countries as well as provide a way of mutually locking in these policy commitments.  7 24. The Burkinabe Government has declared its commitment to realizing the objective of greater economic competitiveness, together with closer economic integration within the WAEMU and with the rest of the world. It is implementing reform programs aimed at alleviating underlying structural problems that may contribute to weaken the competitive position of Burkina Faso and limit its potential to gain from both closer regional integration and the forces of globalization. Specifically, these reforms aim at: privatizing key public enterprises, especially public utilities; achieving greater competition in the production and marketing of major agricultural products-especially cotton, sugar and rice; restructuring the livestock sector; modernizing the public administration including the judiciary; strengthening natural resource mianagement and improving the efficiency and effectiveness of public resources allocated to human resource development in general, and to health and education, in particular; integrating the transportation system through the joint operation, together with C6te d'Ivoire, of a private railway company; and exploring the possibilities of subregional air transport operations with several neighboring countries. 25. Realizing these gains has transitional costs: it will require focused public expenditures, especially to strengthen the quality of theBurkinabe workforce, as well as adopting policies that will both encourage and allow more competitive entry into key economic activities. These costs are likely to increase the financing requirements of the Government in the short run, given on one hand the lower taxes on imports and on the other, the need to increase public spending in education, health, and roads. As only a small portion of these costs are likely to be met through intra-WAEMU fiscal transfers, greater donor assistance will be needed. C. MEDIUM-TERM PROSPECTS AND DEVELOPMENT STRATEGY Rationale for an Accelerated Growth Strategy and Improved Competitiveness 26. 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. Burkina Faso has achieved a per capita real income growth of 1.6 percent per year over the past seven years-since the first ESAF program was adopted. At its current pace, it would take 44 years to double the country's real per capita income of $220 in 1998. 27. There is broad consensus in Burkina Faso on the country's longer-term developmental goals and medium-term strategy. A variety of documents-including the study on Growth Prospects and Competitiveness carried out by a Goveniment team in April 1999 and the recently finalized Policy Framework Paper 2000-2002-have been used to articulate the country's strategy for the next decade. The strategy consists of transforming Burkina Faso from one of the poorest countries in Sub- Saharan Africa into a middle-income one with a dynamic private sector open to the world economy. This development objective will be achieved through the implementation of a new policy framework based on an accelerated growth strategy. 28. With the aim of increasing per capita income and accelerating the development of human resources and productive potential, the Government has formulated a medium- and long-term strategy in the context of the Letter on Sustainable Human Development Policy and the new Policy Framework Paper. The primary objectives between now and 2005 can be summarized as follows: (i) a minimum annual increase of 3 percent in per capita GDP; (ii) a doubling of the literacy rate from 20 percent to 40 percent; (iii) a gain of some 10 years in life expectancy,  8 bringing it to 57 years. The achievement of a GDP growth rate of more than 6 percent will require the implementation of an ambitious reform agenda to promote exports, enhance competition and private sector development. 29. To accelerate economic growth and generate employment, it is essential that more be done to remove the constraints on economic activity and to foster the development of a dynamic and modem private sector, in particular by improvin,g the business environment. To address the above mentioned challenges, the authorities have 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 expenditu.re management; * Reducing infrastructure, input, and transaction costs to improve the competitiveness of the private sector; and encouraging private sector investments in low cost, high quality basic infrastructure projects; * Reforning 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. To this end, the Government has committed the financial resources expected from the HIPC Initiative to the funding of specific programs in social sectors aimed at poverty alleviation, according to the Strategy Note under preparation. In addition, the Government intends to introduce more flexibility in the labor market-this would increase factor mobility and the reallocation of resources that are expected to occur from an export-led growth strategy. 30. The Government is fully aware that the completion of such an ambitious agenda will be a major challenge. Investors' reaction could be slow. Progress will require substantial efforts to enhance local capacity of public and private actors, which the Bank strategy will continue to support through a range of instruments. 4. BANK GROUP OPERATIONS IN BURKINA FASO AND COLLABORATION WITH DONORS 31. Cumulative Bank Lending to Burkina Faso. The cumulative Bank Group's commitments to Burkina Faso as of June 30, 1999, amounted to about US$862 million equivalent for 56 operations, comprising 53 IDA credits totaling US$859 million and 3 IFC investments (US$2.7 million). The 53 IDA credits (42 closed and II active) include five adjustment operations (SAC I, Transport SECAL, Agricultural SECAL, Economic Recovery Credit, and Economic Management Reform Support Operation), twenty agriculture projects, five education projects, three health projects, eight infrastructure/transport proj ects, three telecommunications projects, four urban proj ects, two mining projects, one public institutional development project, one finance project, and one private sector assistance project. Two IFC investments provided support to two financial institutions (EcoBank- Burkina Faso, FY97; and SGBB, FY98) and one investment supported AEF Faso Mine. 32. Ongoing Lending Operations. Three ongoing operations support IDA's strategy in the agriculture sector. A Food Security project (US$7.5 million, FY93) aims at reducing Government's response time in reacting to national food emergencies, improving targeting of food security  9 programs, and strengthening household coping mechanisms. A second Agricultural Services project (US$41.3 million, FY98) aims at increasing agricultural productivity and farmers' revenues, improving natural resource management and promoting institutional development. A Private Irrigation project (US$5.2 million, FY99) supports the provision of demand-driven services necessary to develop an efficient, sustainable small irrigation sub-sector in Burkina Faso. 33. To support human resource development, three ongoing operations are being implemented. A Post-Primary Education project (US$26 million, FY97) supports the implementation of the Government's post-primary education strategy. In the health sector, a Health and Nutrition project (US$29.2 million, FY94) assists the Government in its efforts to improve the quality, coverage and utilization of basic health services, enhance the nutritional status of the population, and develop a national capacity for achieving sustainable control of endemic parasitic diseases. A Population and Aids Control project (US$26.3 million, FY94) aims at enhancing the onset of fertility decline by- increasing the prevalence of modem methods of contraception and slowing the spread of HIV infections by promoting behavioral change. In the urban sector, an Urban Environment project (US$ 37 million, FY95) aims at improving urban living conditions through priority urban works and urban services benefiting low income groups. 34. With respect to private sector development, the Private Sector Assistance project (US$7 million, FY93) provides institutional assistance to private entrepreneurs, and supports the implementation of the privatization program and the financial sector reform. The nmining sector is also expected to expand, given the recent renewed interest in gold exploration and extraction. A Mining Sector Capacity Building and Environmental Management project (US$21.4 million, FY97) supports regulatory reform and trainirng, institutional strengthening and resource management, environmental management and small-scale artisanal mining. 35. The Public Institutional Developiment project (US$15 million, FY92) aims at reinforcing the major public institutions charged with economic and sector management. Finally, a Transport Sector Adjustrnent Credit (US$66 million, FY92) assists the Government in rehabilitating and maintaining essential transport infrastructure and in improving sectoral efficiency, including the strengthening of existing institutions, the adoption of sound policy and regulatory measures and the restructuring of sector parastatals. 36. Future lending operations. The lending program for the period FYOO-01 would include a Water Supply project (FY00), a Public Works and Decentralization project (FY01), a Basic Education'project (FY01) and a Community-based Rural Development project (FY01). This lending program will be reviewed with Government in the next few months in the context of the preparation of the next CAS. 37. Aid Coordination. Donor activities are effectively coordinated in a number of operations under supervision, especially in the transport and health sectors. Close coordination is needed in the preparation of the Water Supply project (Ziga operation) for which financing is sought from more than ten donors. The last roundtable took place in October 1995 in Geneva and the main themes were implementation of structural adjustment programs, the impact of the CFA devaluation and medium-term development objectives for Burkina Faso. Another area of focus for coherent aid coordination is the decentralization process, which is currently being supported by various donors under different approaches. The recently approved decentralization law should provide a framework for harmonization of external assistance in that area.  10 38. Following the SPA meeting in 1996, Burkina Faso was selected as one of the pilot countries for testing new ways of formulating conditionalities associated with structural adjustment. The Bank has been working closely with Government and other donors in developing performance indicators as well as monitoring arrangements. The evaluation of the test on reformulatedconditionality will take place by the end of 1999 and a decision will be made as to its applicability. 39. Lessons learned. The main objective of the first Structural Adjustment credit was to improve public resource management and create incentives for private sector growth. The Implementation Completion Report (ICR) concluded that the adjustment program succeeded in restoring significant but fragile economic growth. But the program was too broad-based and lacked coherence. One lesson identified in the report was to identify innovative approaches for the design of future adjustment operations, which would prevent unexpected difficulties in specific reform areas from slowing down the whole reform process. It also noted that strong Government commitment to- privatization was a key factor for private sector development. 40. The main objective of the Economic Recovery Credit was to support Burkina Faso's post- devaluation adjustment program aiming at private sector-led growth and poverty alleviation. The ICR rated this project as satisfactory and indicated that the success of the operation was due in large part to its simple design. It noted that emergency recovery credits, and one-tranche operations in general, lend themselves well to support policy reforms that depend on concrete policy decisions where implementation is not a long process involving a large number of ministries and implementing agencies. 41. The ICR for the EMRSO is currently under preparation and will be presented to the Board shortly. The Government has already provided the Bank with its own Project Implementation Assessment, which concludes that the operation was fully satisfactory. 5. THE PROPOSED OPERATION A. LINKS WITH THE CAS AND RATIONALE FOR THE CREDIT SAC m and the Growth Strategy 42. The ongoing Burkina Faso CAS was discussed by the Executive Directors on July 11, 1996. A significant part of the Bank's lending and non-lending services has supported the Government's stabilization and structural adjustment effort including, those aimed at regional integration. A new CAS is under preparation and will be p:resented to the Board in March-April 2000. The policy framework of the new CAS envisages significant competitiveness gains through fundamental changes in tax policy, reduction of input and transaction costs, and enhanced human capital. The overall objective of the strategy is to reduce poverty. The approach to reach this objective centers on three axes: (i) increasing income opportunities and productive capacity; (ii) developing the social sectors through more efficient use and better targeting of public expenditure; and (iii) strengthening the role of the private sector. The proposed single tranche credit would underpin an expanded structural reform program and the regional integration effort. 43. The proposed credit is an integral part of the Bank's strategy to assist Burkina Faso in maintaining macroeconomic stability and financial sustainability, in gaining competitiveness, in  11 stimulating resource mobilization, private investment flows, external trade, and in improving efficiency. The proposed measures are essential to the enhancement of Burkina Faso's growth prospects. When fully implemented, the reform program could result in improved allocative efficiency that could raise real growth to more than 6 percent per annum, and as a result of faster growth and improved delivery of social services, bring about a substantial decline in poverty.Also, by focusing on revenue mobilization and the efficient reallocation of public resources towards priority areas, namely education, health, anid poverty reduction programs, the operation is expected to ensure that these key sectors would not suffer from budgetary cuts during the transition period. 44. The proposed operation will support. one of the focus areas pillars of the new policy framework outlined by Government (see para. 29), namely the necessary improvement in the overall public finance management system. It is 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 formal sector of the economy and the implementation of the final phase of the CET-and to improve the efficiency of public expenditures. Budgetary Gap and Financing Requirements 45. The reduction of tax rates and the implementation of the final step of the CET-which are the key measures supported by this credit-could reduce receipts by about 1 percent of GDP in 2000. Thus, Government revenue as a percentage of GDP is projected to decline from 14.3 percent in 1999 to 13.5 percent in 2000. According to the most recent projections, expenditures and net lending (excluding proceeds of privatization) are expected to amount CFAF 396.1 billion for 1999, compared with projected fiscal revenues and grants of CFAF 321.2 billion. This would lead to an overall budget deficit of CFAF 74.9 billion. Adding to that amount 6.3 billion of domestic arrears repayment yields a budget deficit (cash basis) to be financed of 81.1 billion, of which CFAF 46.9 billion would be covered by expected financing. Taking into account the ESAF program targets for primary surplus and net credit to Government, the remaining budgetary gap will amount to about CFAF 34 billion ($55 million, equivalent to 2.1 percent of GDP), and is expected to be fully covered by identified bilateral and multilateral assistance-including resources from the proposed structural adjustment operation. 46. The targeted economic growth of more than 6 percent will be sustainable only if it is supported by an increase in saving and investment. For this reason, the Government's fiscal policy will seek to increase domestic public saving; this, combined with the expected inflow of external assistance, will permit to finance an adequate level of investment which, in turn, needs to be effectively allocated. The overall investment ratio is expected to remain at about 27 percent of GDP during the 1999-2002 period.2 Progress in the Implementation of the Previous Adjustment Operation 47. The proposed SAC III follows up on the one-tranche Economic Management Reform Support Operation (EMRSO) which was approved by the Board in November 1998. The EMRSO supported 2In the framework of the public expenditure review, a study is currently being conducted on the public investment program. This may lead to a reassessment of the current investment-to-GDP ratio which seems overstated.  12 the consolidation of the first phase of reforms in Burkina Faso and laid the foundations for the next generation of reforms in the areas of public finance and public expenditure management, privatization, and the transport, telecommunications and energy sectors. The Government has made substantial progress in implementing the EMRSO reform agenda, including in the four policy areas identified as triggers for proceeding with further adjustment support: * a medium-term expenditure framework (MTEF) for six key ministries identified in the 1999 budget guidelines is being completed, and a thorough public expenditure review is underway in education and health; the MTEF reform is conceived as a shift to performance budgeting, with clear objectives for the key sectors, multi-year financial programming, outcomes indicators, transparency in the use of funds, and accountability; * the newly adopted "reform of the state" consistent with the MTEF approach (especially its provisions on local recruitment for contractual positions in education and health, and merit-based promotion system at the national level) is being implemented at a satisfactory pace; a Government-led study is underway to explore ways of delegating spending authority; * a rural development strategy has been developed with a view to enhancing both the growth prospects of the sector and the living standards of farmers following the 1998 Strategic Orientation Document for the agriculture and livestock sectors. In addition, an action plan was approved in October 1999 by the Cabinet; it identifies five priority areas (soil fertility, food security, modernization of agriculture, Government support to farmers and producer associations, and institutional supervision); * the privatization program as of Deceimber 1998 was implemented, according to the schedule in the Policy Framework Paper for 1998-2000. Invitations to bid for the sale of SLM (leasing of construction equipment), SOCOGIB (construction), INB (printing), SNTB (transportation), SHG (hotels) were launched according to schedule, while SOFIVAR, ONAVET (veterinary products), COMIKI (mining), FASO YAAR (retail trade), CSSPA (price stabilization), and SINAC (shoes) were liquidated. The liquidation of FASO FANI (textiles), SONACOR (rice ginning), and SAVANA (fruit juices) is also underway. 48. Building on the on-going reform momentum, the proposed program underpinning the Credit seeks to consolidate recent gains in restoring macroeconomic stability and support the implementation of important reforms in public finance and public expenditure management. B. CREDIT COMPONENTS 49. The reform programn associated with this credit has four major elements: (i) tax policy and its supply side effects; (ii) efficiency of public expenditures; (iii) budgetary procedures to increase transparency; and (iv) regulatory framework to improve domestic competitiveness (see matrix in Annex F). Establishing A Tax-Friendly Business Environment 50. Since the early 1990s, Burkina Faso's tax system has been gradually rationalized with the introduction of a value-added tax in 1993, the improved monitoring of the largest taxpayers, and the steps taken to bring the informal sector under the tax net. In addition, the phased introduction of the  13 CET of the WAEMU started in July 1998. The procedures for controlling tax payments on externally-financed projects were strengthened with the introduction in 1998 of a new mechanism to manage the treasury checks through which tax due by contractors under externally-financed Government projects is paid. Most customs operations were computerized in 1996-98, and the domestic tax administration was strengthened, notably the administration of the VAT; tax revenue from that source rose from 3 percent of GDP in 1995 to 3.9 percent of GDP in 1998. The ratio of public revenue to GDP has indeed increased steadily from 8.7 percent of GDP in 1992 to 13.1 percent of GDP in 1998, in spite of the gradual introduction of the CET, which lowered external tariffs. 51. Despite the progress made in improving revenue collection, Burkina Faso continues to be faced with an inefficient taxation structure. Revenue collected through regular and discretionary measures, excluding grants, are still too low, compared with total expenditure and net lending (on a commitment basis, excluding grants) of 22.4 percent of GDP. 52. Since the beginning of the stabilization program in Burkina Faso, the main objective of tax policy has been to raise public revenue. While the upward trend is justified by the rather low initial level in comparison to the country's acute needs for social infrastructures, preliminary studies on fiscal policy conclude that iincreased taxation may have had negative supply side effects, thus undernining growth and the prospects of raising public revenues in a sustainable manner. According to the results of a recent business survey, the high level of taxation on the formal sector reduces the expected after-tax profit and also reduces the availability of investment 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, without prior analysis of the supply side effects. Finally, the private sector receives little value for their taxes because of the weak administrative capacity in place and the ineffective mechanisms for public service delivery. 53. Burkina Faso's tax system is still heavily dependent on trade taxes (26 percent) and income and profit taxes (22 percent). Furthermore, the tax system is inequitable, with the burden falling mainly on the small modern business sector. It is estimated that only 1,600 enterprises support the fiscal burden. Burkina Faso has a large informal sector of some 90,000 micro- enterprises which contributes 32 percent of GDP, accounts for 70 percent of non-agricultural employment, but continues to escape taxation. Since 1995, the informal sector has increased in urban areas. This sector now contributes more than 50 percent of value added in certain industries (food industry 69 percent, textile 81.9 percent, and carpentry 68.5 percent). 54. While Burkina Faso's current level of public revenue is still low, even by West African standards, rapidly increasing taxation on the formal modern sector may deter private investment, especially since the formal enterprise sector represents a small share of output but a high proportion of the effective tax base. Also, because access to credit is limited, particularly for smaller firms, most private investment by domestic investors is financed by personal savings and profits. Thus, from a business perspective, Burkina Faso appears to be a more highly taxed environment compared with its neighboring countries, particularly C6te d'Ivoire and Ghana. 55. To remove this constraint to private investment and growth, the authorities are committed to substantially reducing the corporate income tax rate, and to fully implementing the CET that provides  14 for lower external tariffs. The Governmant will also use the marginal effective tax rate technique to carry out a quantitative analysis of the tax burden incurred by firms and its overall cost of production across various industries, and to reassess the tax instnrments that are used for investment promotion. Public Expenditure Management 56. While current expenditure as a share of GDP has declined from 12.7 percent of GDP in 1994 to 10 percent in 1998, investment spending in the health, education and infrastructure sectors has risen markedly. Preliminary findings of the Public Expenditure Review (PER) underway suggest that the Government needs to restructure significantly its public expenditures to ensure adequate funding of priority sectors while containing overall recurrent expenditure and enhancing the efficiency of public outlays. 57. The Government recognizes that 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 IHPC 1997 objectives, 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. Under the MTEF, sectoral policy decisions will be integrated within a three- year rolling macroeconomic and public expenditure framework. The Government has started to implement the MTEF for the health and education sectors in 1999, and its objective is to do the same for the infrastructure sector in 2000 and for all sectors in 2001. 58. As part of this program, guidelines for the preparation of the 1999 and 2000 budgets were issued indicating both the overall level of expenditure consistent with the Policy Framework Paper 1999-2002; and the indicative sectoral targets for health and education. In addition, to further strengthen public expenditure management, the Ministry of Finance is already implementing an integrated monitoring system of recurrent non-salary public expenditure and developing a new public accounting system as well as a comprelLensive monitoring of public expenditures, including debt service, investment and salaries. Budgetary Procedures and Transparency 59. The budget execution cycle in Burkina Faso is divided into the stages usually found in systems based on the French model; i.e. commitmnent (engagement), verification (liquidation), Ministry-to- Treasury payment orders (ordonnancemerats), and actual payment (paiement). In principle, ministries are supposed to keep their own sets of accounts and payment orders, but the quality of these records is often unreliable. Until recently, reconciliation of the accounting entries recorded by the central agencies (i.e. the Contr6le Financier, the Directorate General of Budget, and the Directorate General of Treasury), and the exchange of information among them, was inadequate. 60. Furthermore, records of the civil service salary bill and expenditures made from external sources of financing were not entered in the Treasury's accounts. Reports on budget execution were exclusively based on data provided by the Ministry of Finance. In the absence of a reliable information system, these procedures are cumbersome. Ministries settle expenditures and prepare payment orders, but payment authority itself is formally vested in Financial Control Division of the Mfinistry of Finance. The multiplicity of stages requiring prior approval and verification for each operation led to delays, inefficiency, and errors at all levels.  15 61. The Government adopted in 1996 a new financial information management system(circuit de la depense) which could provide a computerized and reliable monitoring tool. The system is being extended to integrate all stages and files of the public spending process-especially a single reference file for the wage bill. The authorities are also committed to submitting Government accounts at the end of each fiscal year to thle Supreme Audit Institution (Chambredes Comptes of the Supreme Court) and to Parliament. Regulatory Framework 62. Over the first years of the stabilization program in Burkina Faso, emphasis was placed almost exclusively on privatizing public assets. There were, and there remain, some instances were Government regulation, rather than enhancing the market performance, contributed to economic inefficiency. A well-designed privatization, where a good regulatory framework already exists, can raise enornous revenue as it increases services and lowers prices. 63. In redesigning the regulatory framework, the Burkinabe authorities decided to start with the telecommunications sector. The Government initiated a reform program in 1998 and is currently in the process of establishing the legal and regulatory framework to allow competition. The Government also recently adopted a sector policy declaration which confirms the liberalization option set out in the December 1998 telecommunications Law and outlines a number of quantitative objectives for the sector in terms of number of new lines. It has also agreed to privatize the incumbent operator. The authorities are also committed to incorporating in the regulatory framework measures to extend service to the poor both in rural and urban areas. C. SPECIFIC ACTIONS REQUIRED FOR THIS CREDIT 66. The stage for this operation has been set by a number of important decisions already takenor currently being taken and that will be fully implemented prior to Board approval to demonstrate the Government's determination to move forward with its medium-term development agenda. These decisions concem the following actions: (i) Tax and Trade policy: * 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 (1 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, and public investment program);  16 * adopting a plan of action and timetable for the extension of the 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 reglement) to the Supreme Audit Institution (Chambre des Comptes de la Cour Supreme); (iii) Budgetary procedures * integrating the payroll managemenrt system (SYGASPE) into the Government's financial management system (circuit de la depense); (iv) Regulatory framework * establishing the regulatory authority iFor the telecommunications sector; D. LOOKING AHEAD 67. Monitoring and Likely Triggers for the next SAC. The Burkinabe authorities have designed a development strategy that will require broad domestic participation and strong external support. The main objective of the IDA assistance strategy in Burkina Faso will continue to be to support the country achieve sustainable development and poverty reduction through accelerated economic growth. In addition to the progress benchmarks listed in column six of the attached matrix, the monitoring of the overall reform program will be carried out in the context of public expenditure reviews and reviews of the ESAF programa. 68. While the details of the next credit are yet to be worked out with theBurkinabe authorities, the focus would remain on public finance reform, with an emphasis on efficiency, competitiveness and poverty reduction. The Bank will also continue to work closely with Burkina Faso's development partners to ensure a coordinated dialogue and funding efforts for the implementation of the necessary reforms. In addition to the maintenance of satisfactory macroeconomic program and overall reform effort, the next structural adjustment crecit would be triggered by substantial progress, in particular, in the following policy areas: 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 St;rategy Paper in close collaboration with the Bank and the IMF).  17 completion and transmission to the Supreme Audit Institution (Chambredes Comptes de la Cour Supreme) of year-end budget execution reports (Lois de reglements) for 1995 and 1996 fiscal years. 6. CREDIT FEATURES AND IMPLEMENTATION 69. Credit Amount and Financing. The Borrower will be the Government of Burkina Faso. The proposed amount of IDA financing is US$25 million equivalent. This amount is considered necessary to support the momentum of policy reforms in the Burkinabe economy. 70. Tranching. The Credit will be disbursed in one tranche of SDR 18 million (about US$ 25 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 mostly with public finance; and (ii) the drop in fiscal revenue due to the implementation of the third phase of theWAEMU's CET and the reduction of the corporate income tax rate. 71. Disbursements. The Borrower will open an account in its Central Bank. Upon notification of release for the tranche, proceeds of the Credit will be deposited by the Association in this account at the request of the Borrower. If after deposit in this account, the proceeds of the Credit are used for ineligible purposes (i.e., to finance goods or services in the standard negative list), the Association will require the Borrower to refund the amount to the Credit Account. 72. Auditing. The Association reserves the right to seek an audit of the account. 73. Implementation and Monitoring. The reform program under this Credit will be implemented by the Ministry of Economy and Finance. Because this is a one-tranche operation, implementation of the overall program as well as macro-economic performance, will be monitored in the context of preparing the following credit, as well as jointly with the IMF through the Policy Framework Paper, the Poverty Reduction Strategy Paper, and bi-annual reviews. 74. Agreements Reached and Conditionalities. The Government has fully met the conditions referred to in para. 66. 75. Benefits and Risks. The proposed Credit is an integral part of the Bank's strategy to assist Burkina Faso in maintaining macroeconomic stability and financial sustainability, and in gaining competitiveness. The proposed measures enhance Burkina Faso's growth prospects. The reforns help create an environment conducive to private sector-led economic growth, job creation, and poverty reduction. Also, by focusing on the efficiency of public expenditures and the reallocation of public resources towards two priority areas, namely education and health, the operation helps protect budgetary spending in these two key sectors, which would have a direct and positive impact on poverty alleviation. 76. Both the implementation of the proposed policy measures and the regional integration process would benefit Burkina Faso's growth over the medium and long-term by creating a more favorable business environment, stimulating private investment and exports, and also by improving efficiency and productivity of public expenditures.  18 77. Burkina Faso's adjustment record since the 1996 CAS has been steady, but progress in some areas such as privatization, trade liberalization, civil service reform and decentralization has been slow. Government commitment to economic reform and poverty reduction has increased over the past three years, as evidenced by the successful implementation of the ESAF and the previous adjustment operation (EMRSO). However, there is a risk that the reform program could falter because of pressures from vested interests and persistent institutional weaknesses. To testify to its determination, the Government has already taken a number of upfront actions and has already started implementing the reforms programmed :for 1999-2002. There will be no Board discussion until all actions underpinning this credit are takenl. 7. RECOMMENDATION 78. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and I recommend that the Executive Directors approve it. James D. Wolfensohn President by Shengman Zhang Washington, D.C. November 8, 1999  19 _______ ~Table 1. HIPC Targets and Social Development Performance Indicators, 1996-2002 Objectives and Policies Indicators Targets Health Improve primary health care 1996 1998 1999 2000 2001 Quality and coverage Est. Target Est. Target Target Prelimin ary Target Increase public expenditure on Share of budget expenditure Health onhealth 1/2/ 11.4 11.0 11.2 12.0 12.0 13.0 Reallocate budgetary spending Health budgets established to health districts at district level By 1998 Provide adequate staffing of Share of CSPS meeting minimal local health centers (CSPS) staffing norms (three agents) 1/ ... ... ... ... 100 Provide regular supplies of Share of CSPS with essential essential and generic drugs to and general drugs 1/ 60 80 77 100 100 100 CSPS Increase utilization rates in CSPS New cases/inhabitants 0.2 ... ... Urban 0.4 0.5 ... 0.6 ... ... Rural 0.2 0.3 ... 0.4 ... ... Strengthen child vaccination Share of infants (0-24 months) Programs vaccinated 1/ BCG 3/ 67 80 73 85 ... DCT/polio 4/ 50 70 63 75 Measles/yellow fever 57 75 47 80 Education Improve coverage, equity, and 1996/97 1998/99 1999/2000 2000 2001 quality of basic education Est. Target Est. Target Target Prelimin ary Target Increase public spending on Share of budget expenditure on basic education basic education 2/5/ 9.4 11.5 11.5 13.0 13.0 14.0 Expand capacity of primary Gross enrollment ratio 1/ 40 45 42 46 48 ... school system New admissions in fli-st grade (in thousands) 140 229 153 270 ... Recruit primary school teachers Local recruitment plan ready In August 1998 Locally Pilot implementation and continuing evaluation October 1998-2001 Promnote girls' education Girls' primary school gross enrollment ratio 1/ 32 35 35 38 39 ... Reduce regional disparities in Spread in provincial primary Access to primary education school enrollment ratios 75 71 ... 69 ... ... Improve quality and efficiency Repetition rate 1/ 18 16 17 14 10 ... Of primary education Book-pupil ratio (French and At least one book for two pupils for 1999/2000; math) at least one book for every student by 2001J02 1/ In percent. 2/ The targets for 2001-2002 take into account preliminary estimates of additional resources released by the HIPC Initiative. 3/ Tubercolosis. 4/ Diptheria, cholera and tetanus/polio. 5/ Budget year is the first of the two years indicated in the statistics.  20 Table 2. Burkina Faso: Main Structural Reforms under IDA and IMF SAF and ESAF-Supported Programs, 1991-99 Reforms Year (Actual) 1. Fiscal Reform Tax reform Introduction of value-added tax (VAT) on large enterprises and imports 1993 Revision of system of taxation for petroleum products, with introduction of VAT 1993 Increase in the rate of VAT from 15 to 18 percent 1996 Implementation of a single system of taxation in the informal sector & of small and medium-size enterprises 1993 Establishment of tax unit for large taxpayers 1994 Introduction of single tax identifying number 1995 Reduction in the rate of the corporate income tax from 45 to 40 percent 1996 Curren t expenditures restricted to 10.5% of GDP 1997-99 Implementation of the first two phases of the WAEMU common external tariff 1998-99- Computerization of customs operations 1996-98 Adoption of a computerized system recording the entire spending cycle 1996-99 Adoption of new procedures for controlling tax paym-ents of externally financed projects 1996-99 Budgetary reform Strict enforcement of prior comnmiitment authorization by Ministry of Finance 1995 Closure of expenditure commitments by November 20 of each year 1995 Preparation of a monthly status of expenditure by budget heading at the commitment, settlement & payment order stage 1995 Adoption of a unified budget nomenclature 1995 Adoption of a computerization plan for the Ministry of Finance and financial Govenunent agencies 1996 Launching of the hannonization program for budgetary & public accounting procedures in the context of the WAEMU 1997 Reduction of domestic arrears Repayment of debt of the postal saving system 1995-96 External debt Strengthening of the debt management unit 1997-98 2. Public enterprise privatization First phase concerning 22 enterprises: 20 enterprises privatized or liquidated; 2 transformed into administrative units of 1991-96 the ministry of Secondary and Higher Education; Second phase concerning 19 enterprises: 8 enterprises privatized or liquidated; 7 currently under liquidation; 4 being 1994-99 privatized TBird phase: 4 enterprises being privatized, including the teleconununications and the electricity companies 1998-00 A strategic study is currently underway for the remaining state companies' portfolio 1998-99 3. Banking sector reform Liquidation of BND-B Early 1997 Privatization of BFCI Early 1997 Privatization of B1I3 1994 Reduction of bank debt 1995-96 Creation of two new banks (Ecobank-Burkina and Bank of Africa) 1997-98 4. Trade liberalization Elimination of most price controls 1991-94 Elimination of most export duties 1993 Elimination of import authorization and requirements 1993-95 Trade and price liberalization, including elimination ofpublic marketing and stabilization schemes on traditional cereals, 1993 oil seeds, livestock Elimination of CGP (public enterprise) monopoly of rice imports 1996 Elimination of SOSUCO monopoly for sugar imports 1996 Reduction in the number of products whose imports are subject to quality controls 1996 Removal of export restrictions on hides and skins 1999 5. Lbera2Lvation of Labor Code 1993-94 6. Clvii strvice reform Adoptio'n of a new legal framework for civil service reform 1998 Implementation of the new merit-based system 1999  21 Table 3. Status of ]Privatization Program, June 1999 Enterprise Sector Tumover Employment Status/Remarks (In millions (Number) of 1996 CFA Francs) Phase 1 (privatization law of 1991) involves 22 companies, of which 20 have already been privatized or liquidated. Two companies remain to be privatized: SOCOGIB Construction 400 50 GOVERNMENT SIIARE TO BE SOLD BEFORE MID-2000. CNEA Agricultural equipment ... ... Merger with state enterprise APICOMA adopted by Council of Ministers in January 1999, bids launched in June 1999. Phase 2 (privatization law of 1994) involves 19 companies, of which 2 have been liquidated and 6 already privatized, I/ including SOSUCO (sugar) and SOPAL (alcohol), whose sales were completed in the first semester of 1998, with proceeds of CFAF 4.4 billion | and CFAF 0.7 billion respectively. For two companies, direct ongoing negotiations with prospective buyers are expected to be completed in 1999: FASO FANI Textiles 4,900 676 Competitive bidding unsuccessful; bilateral negotiations so far unsuccessful. SAVANA Fruit juices 474 72 Competitive bidding unsuccessful, bilateral negotiations under way with two potential investors. For one company, bids were launched in 1998, and sale contract is in final stage: SLM Leasing of 550 114 Assets sold to various bidders. construction equipment For seven companies, liquidation is to be finalized in 1999: SONACOR Rice ginning ... 52 Liquidation under way SOFIVAR Groundnuts 45 69 Liquidation under way. SONACAB Tiles 56 42 Liquidation under way. SONACIB Cinema 655 215 Liquidated assets taken over by private sector infirst half of 1999. SOBEMA Enamel ... ... Liquidation under way. COMIKI Mining ... ... Liquidation under way. SINAC Shoes ... ... Liquidation under way. Phase 3 involves the residual portfolio of companies (privatization laws of 1998). Four companies have already been selected for total or partial privatization: SHG Hotels ... ... Privatization strategy under study. ONATEL Telecommunications 18,000 1,250 Privatization and sector liberalization approved by parliament in December 1998. Bids to be launched by June 2000. SOFITEX Cotton ginnery 40,000 ... Sale of 30 percent share to cotton producers completed by end-April 1999. Air Burkina Airline ... Privatization strategy adopted; call for bids to be launched by end-March 2000. 1/ Two companies liquidated: FASO YAAR (distribution) and CSSP (price stabilization). Six companies already sold: RNTCX9 (urbanization) BURKINA and SHELL (petroleum distribution), SOSUCO (sugar), SOPAL (alcohol), SNTB (transport), and INB (printing).  v. 58; wgl gd e e &Construction cost for a square meter o, -l ol Si c in the capital (land) .. .. . , . . .__~~~~... . .. ..... ...... ,.. ~ 80 < wS3] re o S Construction cost for a square meter 1 S 8 S in the capital (office building) o Water (over 100 m3) a 1