Risk drivers and outlook

Burkina Faso is a small and fragile economy with a generally stable outlook. Growth projections became more favourable since political stability was attained following a turbulent process of democratisation. The government’s adherence to prudent macroeconomic policies helped contain a maintainable external financial position. Gold exports are rebounding while low international oil prices moderate import costs. Moreover, Burkina Faso’s agricultural output is expected to continue to rise; cotton in particular. However, the sector is vulnerable to adverse weather conditions which could quickly derail progress. Terms-of-trade shocks could also easily destabilise projections of a manageable twin deficit, especially lower gold prices or higher oil prices could elevate the vulnerable current account and fiscal deficits. Nevertheless, the foremost risks threatening the small West African country are related to regional insecurity, being confronted with spreading jihadist activity. Violent attacks, especially in the capital Ouagadougou, could deter future investments (FDI) and derive public spending away from development investments towards security. Lack of progress in poverty reduction and bad living conditions could moreover spur social tensions, risking political instability.

Due to vulnerable macro-economic indicators, Credendo classifies Burkina Faso in medium-/long-term risk category 6/7. CFA-zone members are moreover exposed to tighter regional liquidity, while a possible devaluation of the CFA franc would cause macroeconomic instability in the short term. Consequently, the country’s short-term political risk is classified in category 5/7, while a very difficult business environment, political interference in justice and corruption issues motivate the systemic commercial risk in C.

Facts & figures

Pros

  • Political stabilisation
  • Strong donor relations
  • Low external debt stock
  • Rising gold production

Cons

  • High security risks
  • Exposed to terms-of-trade and climate shocks
  • ‘Least developed country’
  • Infrastructure gaps (especially electricity)

President

  • Roch Marc Christian Kaboré

Prime Minister

  • Paul Kaba Thiéba

Description of electoral system

  • Parliamentary and presidential elections: latest November 2015, next November 2020

Population

  • 18.6 million

Income per capita

  • USD 640

Income group

  • Low income

Main export products

  • Gold (48.8% of current account receipts), cotton (9.6%), private transfers (6.5%)

Country risk assessment

A present-day beacon of democratisation in Africa

Burkina Faso recently experienced a historic popular revolt, awarded by the country’s first peaceful power transfer since independence from France in 1960. In 2014, protesters ousted Blaise Compaoré, the authoritarian president who ruled the country for 27 years. The following transition period was marked by pro-Compaoré elite guards trying to derail progress by staging coup attempts. However, in November 2015 the nation chose Christian Kaboré (former Prime Minister) as their new President and elected a new parliament. Kaboré adopted a reconciliatory approach towards opponents and immediately focussed on cracking down on pervasive corruption. While democracy in Africa is going through difficult times with worrying signs of backsliding in a substantial number of countries, Burkina Faso’s democratic transition stands out as a beacon. Nevertheless, in order to safeguard the newly obtained political stability, progress with critical issues like restructuring the military, improving the justice system and upgrading public services will be vital. Moreover, poverty remains rife and the government is struggling to appease empowered unions and civil society groups.

…yet security risks are on the rise

Security risks have increased on different fields over the past two years. During the political transition period a private self-defence militia called Koglwéogo sprung up, claiming to restore order in rural areas. Instead, the heavily armed group became a great security threat as they are reported to use extortion and torture to enrich themselves. On the other hand, security forces are struggling to deal with increasing Islamist militancy following the creation of a home-grown jihadist group, Ansar ul-Islam in December 2016. Insurgent attacks on military posts and villages were witnessed in the border region with Mali and in retaliation for French and United Nations (UN) military operations in the region, also western interests are being targeted. In August 2017, jihadist militants attacked a restaurant popular with expats in the capital Ouagadougou, killing 18 people. Following the G5 Sahel summit in June 2017, Burkina Faso (among others) failed to attract UN anti-terrorism funding while financial constraints already restrict the government to substantially increase police deployment. Consequently, the risk of attacks on foreigners and soft targets in the capital and the border region with Mali has increased significantly.

Ambitious public investments and recovering gold revenues benefit economy

Burkina Faso is a ‘least developed country’ with a small agricultural economy reliant on returns coming from gold and cotton exports, while it is highly dependent on donor aid and multilateral support for financing its import costs. The government’s ambitious National Economic and Social Development Plan (PNDES) runs from 2016 to 2020, aiming at growth acceleration and poverty reduction, inter alia through improving electricity supply and transportation infrastructure. Indeed, after two years of weak performance during the political transition, the 2016 GDP growth performance was strong (5.9%). Driven by the substantial upscaling of public investments under the PNDES, higher agricultural output (especially cotton) and rising gold mining activity, growth projections are to stabilise around a solid 6.5% over the next four years. Consequently, Burkinabe growth projections are higher than the Sub-Saharan African regional average projections.
 
 

Gold makes up for almost half of Burkina Faso’s total export revenues, exposing the country to adverse price shocks. Gold prices peaked in 2012 (almost USD 60/gram) and plummeted the years after. Since early 2016, gold prices have been recovering somewhat (to around USD 40/gram) and – together with low international oil prices (fuel importer) – helped soften the current account deficit. However, Burkina Faso’s current account deficit will remain structural and rather deep, anticipated to balance around 7% of GDP (including official transfers) over the coming years. Gold revenues are growing at a strong pace thanks to new mines coming on stream, and cotton exports are also gradually rising yet on the other hand, investments are driving up imports as well. Substantial project loans, international donor support and rising foreign direct investments (FDIs) will supply sufficient funds for financing the country’s current accounts deficits. Consequently, external debt creation is expected to be manageable and largely concessional over the coming years. Indeed, since recent democratisation, donor relations have been reinforced and investor confidence enhanced.

As a member of the WAEMU (West African Economic and Monetary Union), Burkina Faso’s gross foreign exchange reserves are pooled at the regional central bank while the joint monetary policy promotes monetary stability (2% inflation). However, given the recent crisis (particularly in CEMAC member states) Burkina Faso, too, is exposed to risks related to a possible devaluation of the CFA franc.

Public finances in check, despite tight budget

Weak public revenue collection capacity is an important vulnerability, yet the strengthening gold sector will help raise public revenues from 15.9% of GDP in 2015 to an expected 18.1% in 2017 and even a possible 20.6% by 2020. Nonetheless, due to large public investment spending together with a high wage bill, the fiscal deficit is expected to temporarily widen in 2017 and 2018 to approximately 5.4% and 4.5% of GDP (coming from 3.1% in 2016). Financing will be provided by concessional loans and grants, supplemented by tapping the regional debt market. Still, about 64% of the government’s debt stock is held externally and is largely concessional, keeping the burden of public debt services in check. As of 2019, the fiscal balance is targeted to reach the WAEMU deficit criterion of 3% of GDP again, provided structural reforms and enhanced policymaking are sufficiently pursued. Satisfying performance under IMF programme guidance helped confine the Burkinabe fiscal deficits over the years and kept public debt ratios noticeably lower than the WAEMU regional average, 15 years after it received HIPC debt relief. Even though the public debt stock is expected to rise somewhat to 38.2% of GDP by 2018, it should start falling again the years after, keeping public indebtedness sustainable.