IMF Executive Board 2018 Article IV Consultation with Côte d’Ivoire
On June 18, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation and completed the third reviews under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements for the Republic of Côte d’Ivoire. Completion of this review enables the disbursement of SDR 96.786 million (about US$136.6 million).
The three-year ECF/EFF arrangements with a total access of SDR 650.4 million (about US$917.8 million or 100 percent of Côte d’Ivoire’s quota) were approved by the IMF Executive Board on December 12, 2016.
GDP growth is estimated at about 7¾ percent in 2017 despite the fall in cocoa prices. Inflation remained subdued at about 1 percent. The medium-term outlook is for continued strong economic activity with robust growth and low inflation. Risks to the forecast are broadly balanced.
The Ivoirian authorities have adopted a comprehensive program of economic reforms to achieve a sustainable balance of payments position, inclusive growth, and poverty reduction by investing in priority infrastructure and social projects.
These objectives are being supported by the IMF program arrangements. The program is anchored on the convergence of the budget deficit to the West African and Economic Monetary Union norm of 3 percent of GDP by 2019, to preserve public debt sustainability and support the regional international reserves pool. Fiscal discipline is underpinned by mobilizing revenue and spending prioritization in order to create fiscal space for priority infrastructure and social projects.
Implementing their program, the authorities have pursued structural reforms to further strengthen the revenue administration and public financial management and adopted measures for fiscal consolidation while protecting priority spending. They are also further strengthening the financial system.
Following the Executive Board discussion, Mr. Mitsuhiro Furusawa, deputy Managing Director and Acting Chair, made the following statement:
“Côte d’Ivoire’s performance under its Fund-supported program has been good. The authorities contained the budget deficit in 2017 and are committed to meeting the program budget deficit target in 2018 and reduce the fiscal gap to meet the WAEMU convergence criterion of 3 percent of GDP in 2019. The medium-term outlook remains robust, with growth projected to average around 7 percent over 2018-23.
“Further revenue mobilization is needed to achieve the fiscal objectives. Building on past implementation of fiscal structural reforms, measures to buttress revenue administration and public financial management should accelerate. Moreover, cautious debt and financial management is required to firmly anchor Côte d’Ivoire’s debt on a sustainable path. The authorities are taking steps to further consolidate the banking sector’s stability.
“Continued implementation of reforms that foster sustainable and inclusive growth would be needed. Further improvements in the business environment would help make private investment the main driver of growth.”
Recent Economic Developments and Program Performance
Strong net exports and resilient consumption sustained buoyant economic activity in 2017, despite external price shocks and social tensions. Real GDP growth is estimated at 7.8 percent, driven by exceptionally high cocoa exports and crops due to favorable climatic conditions. Domestic consumption was resilient, partly sustained by the government’s wage agreement with civil servants and soldiers.
Nonetheless, a sharp deterioration in cocoa export prices is estimated to have contributed to widening the current account deficit to 2.1 percent of GDP in 2017 (from 1.1 percent in 2016), although this was mitigated by a higher volume of key agriculture exports. Inflation remained subdued, at 1.1 percent (y/y) at end-2017, despite relatively more volatile food and beverage prices.
Outlook and Risks
The medium-term outlook is robust. Growth is expected to average around 7 percent over 2018-23. On the supply side, this projection is supported by a pick-up of the industry (particularly mining and energy production) and services (including telecommunications and construction) over the medium term. Concerning demand, key drivers of growth are projected to be a rebound of private consumption and investment in the near term and rising net exports in 2020 and beyond.
The current account deficit is expected to widen to around 3 percent of GDP in 2018-20 reflecting a decline in primary agriculture exports and an increase in imports of consumption and investment goods, and gradually narrow over the medium term, with industrial exports gathering strength and the services deficit stabilizing. Inflation is projected to remain below 2 percent, reflecting the projected low inflation in trading partners.
Risks to the baseline are broadly balanced. The outlook is subject to risks from tighter global financing conditions or a significant slowdown in foreign investor countries and related spillovers. Underperforming revenue mobilization and spending pressures from social tensions pose risks to the availability of adequate resources for infrastructure and other priority outlays. Tighter financing conditions in the regional sovereign debt market would raise borrowing costs.
More positively, higher prices for agriculture exports could boost fiscal revenues from these commodities. Moreover, rising investor confidence spurred by the successful Eurobond placement, successful structural reforms and initiatives related to the G20 Compact with Africa may result in additional private investment. Finally, downside risks could be compounded by new social demands from various groups.
Article IV Policy Discussions: Fostering sustained and inclusive growth
The post-2011 strong recovery was enabled by productivity rebound, sustained infrastructure development, pent-up domestic demand, and reform implementation. To sustain growth and boost inclusiveness, Côte d’Ivoire needs to continue deepening its reforms.
Structural reforms to improve the investment climate and growth sustainability and inclusiveness
The post-2012 productivity boost is tapering off and would continue to decline without further improvements in the business climate. The growth accounting of per capita real GDP shows that the contribution of the productivity residual to growth has been steadily declining, including with the tapering of the catch-up from the political normalization on economic recovery. Productivity is being replaced by capital as a main driver of growth. Private and public investments are expected to boost capital stock in 2018-23. However, investment is bounded by the availability of funding resources. Improvements in productivity are critical to sustain medium-term growth at the pace of 2012-17. While upgrading public infrastructure is an important step, further improvements in the business climate will help the private sector take full advantage of better infrastructure and shift the economy further towards private sector-led growth.
Côte d’Ivoire should focus on improving the business climate where it lags other sub-Saharan African frontier market countries. The country has made significant progress in reducing processing time for building permits, but still lags sub-Saharan Africa frontier markets and the WAEMU for paying taxes, including because the index does not yet reflect the new system for electronic payment of taxes. While Côte d’Ivoire recently instituted a credit bureau, there is scope for improving credit access by strengthening legal rights for borrowers and creditors, extending the coverage of the credit bureau and deepening credit information on borrowers.
The pace of reforms to improve governance needs to be sustained. Since 2012, the authorities have strengthened the regulatory environment and set up anti-corruption entities. They adopted the 2013 anti-corruption decree and launched the High Authority for Good Governance (2014) and the Anti-Racketeering Unit (2014). Reflecting progress, the 2017 Transparency International Corruption Perception score improved to 36 in 2017 from 34 percent in 2016.
Improving the business and regulatory environment for agriculture is critical to sustain growth, make it more inclusive, and fight poverty. Agriculture contributed directly to about ⅟4 of the growth in 2017 and employs almost half of the total workforce, of which about three-fourths comes from the rural population, over 40 percent are women, and about 60 percent are unschooled. About 60 percent of families headed by someone employed in agriculture are poor.
To further develop the agriculture sector, the government aims to improve market access for crops by upgrading transportation infrastructure and provide electricity to all the country’s municipalities. It is also developing strategies, with World Bank assistance, to improve the cocoa and cashew sectors and enhance their value added. Moreover, the government aims to further develop the subsistence agriculture sector, an important employer of women, and improve the regulatory framework. While regulations for transportation and finance are relatively sound, regulations pertaining to trade, plant protection and producer organizations as well as the water distribution system are relatively less efficient. Better distribution of water use permits would benefit farmers by ensuring access to water amid competing demands and strained resources.
National and regional policy consistency
Economic policies at the WAEMU level and in Côte d’Ivoire are mutually reinforcing to meet the objectives of maintaining fiscal sustainability and contributing to regional external viability. To ensure monetary stability, the regional central bank, BCEAO, tightened monetary policy in late 2016, which raised the cost of funds in the regional market and stabilized regional FX reserves. These actions contributed to Côte d’Ivoire’s decision to issue Eurobonds for debt financing in 2017 and 2018. More recently, renewed liquidity pressures have pushed up the interbank market rate, and staff has recommended that the BCEAO stand ready to further tighten monetary policy if pressures on the money market or FX reserves persist. Along with other WAEMU members (except Niger), Côte d’Ivoire is expected to contribute to the regional stability by converging to the WAEMU fiscal deficit norm of 3 percent of GDP by 2019. Moreover, its 2018 Eurobond issuances is helping rebuild regional FX reserves