Côte d'Ivoire government aims to reduce deficits

After five years of strong economic growth and relative political calm, frustrations have been mounting at the slow pace of improvement in living conditions in certain segments of the population. Those with the most leverage, such as security forces and public servants, have pressured the government with demands for increased spending. At the same time, external macroeconomic developments have caused growth and tax revenue to underperform against expectations. Together, this has seen the public deficit spike to an estimated 4.5% of GDP for 2017. While the state has committed to bringing the deficit to 3% by 2019, this will require new policy measures to boost revenue and curtail spending.

Tax Revenue

Falling cocoa prices and rising oil prices contributed to a tax shortfall of 0.8% of GDP for 2016, while receipts were weaker than projected under value-added, excise and income tax. In the absence of policy adjustments, trends in commodity prices were set to cause another tax shortfall of 1.6% in 2017, of which 1% came from cocoa. In response to falling revenues, the government cut the national budget for 2017 by 9% in mid-May to CFA6.44trn (€9.8bn), further revising the 10% reduction announced a month earlier.

Following the electoral cycle in late 2016, social tensions reappeared in early 2017. Most notably, some military groups mutinied in January and again in May, demanding payment of what they perceive as unpaid bonuses dating back to the country’s period of civil strife in 2011. The government reached a deal with the soldiers on the payment of bonuses, which was expected to increase public spending by 0.6% of GDP for 2017. Furthermore, civil servants went on general strike in January, leading the government to meet demands for higher pension and social payments equating to 0.1% of GDP in both 2017 and 2018. Negotiations could give rise to further demands following alleged wage arrears equating to a further 1% of GDP.

Spike In Deficit

The combination of tax revenue coming in below expectations and increases in current spending has not been fully offset by the slowdown in public capital investment or other fiscal adjustment measures. This resulted in a spike in the fiscal deficit, which widened from 2.9% of GDP in 2015 to a projected 4.5% in 2017. According to the IMF, the deficit would have reached 6% in the absence of fiscal adjustments to reduce spending and raise revenues.

Medium-Term Improvement

While the government agreed to raise the 2017 deficit target from 3.7% to 4.5% under the IMF programme, the goal for 2019 remains 3%, as per the requirement for all economies in UEMOA. This means that Côte d’Ivoire faces external constraints from both the IMF – on which it depends for a portion of its funding – and UEMOA. However, there is a clear path to mitigating the deficit over the medium term. According to the IMF, meeting the 3% of GDP deficit target for 2019 will require further tax and spendings equating to 0.5% of GDP for both 2018 and 2019. More significant measures will be necessary if deficit targets for 2017 or 2018 are not met.

Sectoral Impact

To meet the deficit target for the year, the government reduced the guaranteed cocoa price for farmers by 36.4% in April 2017 to CFA700,000 (€1050) per tonne, reflecting global prices and upholding the commitment that farmers receive around 60% of world prices. While essential to prevent the deficit from ballooning, this cut the incomes of the one-third of the population that depends on the cocoa industry. Similarly, the 4% increase in gasoline prices in May 2017 had a widespread impact on the population, with the agricultural sector facing particular challenges.

In 2016 the government cut expenditure equivalent to 0.9% of GDP to meet the deficit target. According to the IMF, about two-thirds of this adjustment was achieved through the under-execution of foreign-financed investment projects. A further 0.6% of GDP reduction in capital spending was foreseen for 2017. Further postponement of funding for capital projects is likely to remain the political path of least resistance.