Fiscal drivers: The authorities are making considerable efforts to stabilise spending and reassure potential lenders

The National Development Plan (NDP) boosted public investment from 3% of GDP in 2011 to 9.7% by 2015, but headline spending is not the only notable aspect of Côte d’Ivoire’s fiscal policy. With donor support the authorities have also made headway on improving execution of spending and shifting funds to capital projects – even if recurrent spending still accounts for a larger share of the budget than in other West African Economic and Monetary Union (Union Economique et Monétaire Ouest-Africaine, UEMOA) states – while seeking ways of increasing revenue collection.

Returning to the regional bond market since 2012 and raising a landmark amount in 2014, the government also sought to tap the eurobond market in 2014. While it retains fiscal space to raise new debt, the government must also pay down the still significant domestic debt it holds as arrears to local contractors. Having started to pay down this debt since an audit in 2013, resolving these domestic arrears is pressing in order to unshackle the domestic private sector and support the development of domestic private investment.

Fiscal Expansion

Government spending recovered sharply from 2011, rising 38% in the 2012 budget, 11% in 2013 and 9% in 2014, to CFA4.25trn (€6.37bn), according to IMF figures. This increased total spending from 21.4% to 24.8% of GDP between 2011 and 2013. The rapid rise in 2012 was fuelled by recurrent expenditure, which accounts for 80% of budgeted spending, according to BNP Paribas.

A key driver of higher spending has been inflation in public wages, which already accounted for 44% of fiscal revenue in 2012, according to the African Development Bank (AfDB), higher than the UEMOA convergence criteria of 35%. This was driven by recruitment of ex-combatants as well as reconstruction efforts, including the payment of teachers in the central, northern and western zones most affected by the conflict.

From 2013, however, capital investments became the key driver of higher spending, with capital expenditure growing 116% in 2012, 65% in 2013 and 19% in 2014, reaching CFA1.206trn (€1.81bn). Public investments have risen from 3% of GDP in 2011 to 4.9% in 2012 and 7.9% in 2013, according to the Central Bank of West African States (Banque Centrale des États de l’Afrique de l'Ouest, BCEAO). Alongside the authorities’ efforts to constrain further wage bill increases, the rise in public investment should bring spending closer to UEMOA requirements in the medium term. Over the longer term the IMF expects authorities to curb further rapid spending rises, with primary expenditures, excluding interest payments on debt, to rise from 22.6% of GDP in 2013 to 25.7% at decade’s end.

Public revenue has not kept pace with spending; however the government is now working to expand its tax base, making efforts to improve collection and crack down on avoidance. By tightening collection the tax authority exceeded its target of CFA1.41trn (€2.1bn) in receipts for 2013 by CFA15.9bn (€23.9m). The 9% year-on-year rise in fiscal receipts followed a 48% increase in revenues in 2012, prompted by higher economic growth driving tax collection. Yet 2013 saw lower Customs receipts than expected, following the shift of administration from France’s Veritas to Swiss-based Webb Fontaine. The new administrator increased inspections to all incoming containers yet the switch caused delays in recovering duties, with the Customs department receiving only CFA1.13trn (€1.69bn) of the CFA1.18trn (€1.76bn) targeted for 2013.

Deficit

Higher fiscal spending has driven the annual deficit above the 1.8% of GDP recorded in 2011, though its growth has been curbed somewhat. Higher-than-expected revenues in 2012 caused the budget deficit to hit only 3.4% of GDP compared to a forecast 4.3%, while higher reliance on aid for financing the investment budget in 2013 – with donor financing rising by 1.1 percentage points of GDP – curbed the overall deficit to 2.6% of GDP, according to the BCEAO.

Having addressed the problems in Customs processing and enacted tax increases equal to 0.3% of GDP in the 2014 budget, including a new tax on telecoms operators and higher excise taxes, the government planned to bring the budget deficit down to 3.1% of GDP in 2014, only slightly above the UEMOA convergence criteria. “The administration has addressed the Customs duties collection challenges seen in 2013, and we have seen improved collection,” Pascal Yembiline, the AfDB’s chief country economist, told OBG.

Debt Financing

To support the public investment drive, the government is increasingly turning to regional and international commercial debt markets, having restructured its debt on the regional market into longer-maturity instruments and normalising relations with foreign bondholders after having defaulted on Brady bond payments in 2010 and 2011 (see overview).

With investor appetite for African sovereign bonds high, and its total debt stock falling from 74% of GDP in 2011 to 49% in 2012 and 43% in 2013, according to the IMF, Côte d’Ivoire has ample space to issue new debt alongside its existing sources of concessional funding. In March 2014 the Treasury launched the single largest sovereign bond issue on the regional exchange, aiming to raise CFA250bn (€375m) through an issue underwritten by BOA-CI and NSIA. Although they only raised CFA241.7bn (€363m) at 6.5% coupon over seven years, this revealed continued appetite by regional bondholders, particularly insurance firms and banks, despite their abundant holdings of restructured Ivorian debt left over from the crisis.

As part of its formulation of a medium-term debt strategy elaborated with IMF support, the Treasury is also seeking to diversify its investor base and lengthen the maturity of its debt profile. In April 2014 it contracted Citibank, Deutsche Bank and Standard Bank to underwrite its maiden eurobond issue. The 10-year bond, which was issued in July 2014, raised $750m at a rate of 5.625%, which was lower than a similar issue made by Kenya a month earlier.

Côte d’Ivoire has also raised three large concessional loans worth a combined $2.1bn to fund its energy and infrastructure projects, including a Chinese loan for the expansion of access to drinkable water and the extension of Abidjan Port. The IMF expects these to be disbursed over the next three years, with 1.8% of GDP in 2015, 1.6% of GDP in 2016 and 0.9% of GDP in 2017. The contribution of grants and budget aid is expected to decline from 1.7% of GDP in 2013 towards 0.5% of GDP by the end of the decade as per-capita income rises. New external commercial borrowing is projected to reach 2.6% of GDP on average by 2018 and 2.8% thereafter. Yet this growing reliance on market-rate debt has prompted calls for caution on the part of both the IMF and international banks. “The acute recourse to non-concessional financing in order to accelerate the infrastructure programme is an important risk,” BNP Paribas said in a January 2014 economic update.

Settling Arrears

While the government is gradually improving its fiscal position, it has had to tackle domestic arrears owed to local private contractors that had built up over the decade to 2011. Following a yearlong audit completed in October 2013, the state identified CFA153bn (€229m) of unpaid debts out of an initial total of CFA356bn (€534m) originally claimed by suppliers. “These domestic arrears have seriously affected SMEs’ ability to self finance,” Yembiline told OBG.

In December 2013 the government paid down CFA51.1bn (€77m) of this debt, financed through a CFA100bn (€150m) loan from Congo-Brazzaville. An additional CFA40bn (€60m) of the 2014 budget has been earmarked to further pay down the domestic arrears, which should be paid in full by 2015. “The government is striving to pay arrears and internal debt to unshackle private investment,” Amina Coulibaly, economist at the IMF, told OBG. “Although growth has been driven by public investments we started to see a small reaction from the private sector in 2013.”

As part of its tax administration reform, the government also revised the value-added tax (VAT) refund system to limit outstanding VAT credits to CFA10bn (€15m) from 2014 and now calculates VAT receipts net of refunds. This will help resolve the cash-flow issues resulting from monthly VAT payments (at the standard rate of 18%) to the government and should support plans to expand the government’s VAT receipts.

VAT receipts are already the lowest in UEMOA, with the IMF estimating the VAT gap reached 7.9% of GDP in 2012 based on its quantitative analysis of household consumption. With no new VAT refund arrears since 2012, the government aims to resolve all outstanding VAT credits due by end-2014.

The sanitising of public finances in 2014, particularly through paying arrears to domestic contractors, will be key to inducing more investment from Côte d’Ivoire’s private sector. As the government expands its balance sheet and directs spending towards development rather than the traditionally dominant recurrent spending, it will rely increasingly on private markets both regionally and offshore. While it retains significant fiscal space following debt relief in 2012, attracting private investment, particularly from foreign direct investors, will be crucial to attaining the goals of the NDP, and further easing of bottlenecks to investment will also be required.