Good times on the horizon: the Notre Dame de la Paix basilica in Yamoussoukro, Côte d'Ivoire's capital city where hopes are high that the west African country's economy is on the up

The optimism over Côte d'Ivoire's economic prospects is well placed. Despite continued political instability, inflation is being kept in check, the economy is growing and the restructuring of the country's debt has been widely praised. Writer Nick Kochan

Côte d'Ivoire is beginning to enjoy the fruits of an economic policy characterised by single-mindedness and efficiency. After many setbacks arising from political instability, and this still persists, the economy is strengthening. The curbing of inflation, an upsurge in growth and the resolution of its external debt obligations provide the basis for a new confidence. 'The Elephant', as Côte d'Ivoire is popularly known, is stirring at last.

Key to the favourable economic environment is the government's firmness in setting ground rules for both private and public sector ethics and efficiency. Another factor is the trust felt by the markets both at home and abroad in the minister of economy and finance, Charles Koffi Diby. He has masterminded some vital agreements such as the Emergency Assistance for Post-Conflict Recovery programme and the International Monetary Fund (IMF)-backed three-year economic and financial programme supported by the Poverty Reduction and Growth Facility (PRGF).

It is no wonder that African Development Bank (ADB) members who come to their annual meetings in Abidjan in May will see a thriving city and strong country whose economy is based on private sector principles and self-reliance. "When 4000 people come to the country for the ADB meeting, they will be giving a vote of confidence to the government and the country," says Serge-Philippe Bailly, director-general of Standard Chartered Bank in Abidjan.

The other factor that will give the ADB, and indeed IMF representatives confidence is the political settlement which is now on the horizon between the government in Abidjan and the 'Forces Nouvelles' political coalition in the north of the country. The Ouagadougou Accord, reached in March 2007, points the way towards a shared and stable political structure.

However, international investors do not disguise their concern about the country's unwillingness to commit to holding elections. Jan Dehn, a director of Ashmore Group, says Côte d'Ivoire will need to resolve its outstanding political issues of the medium term, although this is not an immediate concern.

Rebuilding plan

The PRGF is a key pillar in the rebuilding of the Côte d'Ivoire economy, says finance minister Mr Diby. This provides for $567.7m between 2009 and 2011. Its objectives are to achieve an average real gross domestic product (GDP) growth rate of more than 4.2% a year, reduce inflation levels, maintain an annual budget deficit of about 2% of GDP and a basic primary surplus greater than 1%.

The facility will also enable the government to contain the current account deficit below 5% of GDP and raise the investment rate to 14.9%, from 10.1% of GDP in 2008. Resources released by the PRGF programme will help fund the Poverty Reduction Strategy (PRS) by CFA Fr17000bn ($34.4bn) for a period of five years.

The Côte d'Ivoire government has taken some important steps to apply the PRGF programme. For example, the use of cash advances by the Treasury will be restricted to specific budget lines, the automatic mechanism for managing public finances has been adopted and the financial audit of the Côte d'Ivoire National Petroleum Operations Company has been finalised.

The state has also accepted certain restraints. For example it has ruled out taking on additional budgetary expenditure, it has agreed not to use non-concessionary external borrowing and not to accumulate new external and internal arrears.

Reform agenda

Reforms are also being implemented across the entire public administration space to increase efficiency and transparency. In the financial and energy sectors as well as in the coffee and cocoa industries, stringent measures are being taken to ensure rigorous management and transparency of accounts and information.

While the government brings discipline to its own financial management, it is bringing a philosophy of transparency and accountability to private sector business. Its strategic action plan, produced last year, referred specifically to "strengthening the vitality of enterprises and improving the business environment". Mr Diby says the plan is aimed at "deepening the process of modernising economic and financial policy administration".

Guy M'Bengue, director-general of APEX-CI, the export promotion association of Côte d'Ivoire, says: 'The country is currently undergoing a real revolution. We are seeing the Treasury revenue, customs, Ministry of Economy and Finance putting in place all the necessary mechanisms for transparent management and, especially, a management aimed at performance and results. From now on, everyone, including administrative personnel, must be accountable, and this aspect of things testifies to an extraordinary cultural change. From this moment on, everything becomes possible. And there is open dialogue between the private sector and the government."

As part of the modernisation process, Côte d'Ivoire's government aims to optimise the collection of tax. Claude Beugré, a director at the Ministry of Economy and Finance, says: "People have got used to not paying all their taxes for cultural and historic reasons. But that is changing and there is a new drive to recoup tax owed both from companies and from individuals." The Ministry of Finance has also tightened up procedures to tackle value-added tax fraud. The number of tax inspectors has also been increased. Agnan Guy Diahoré, an adviser to the finance minister, says: "There has been a substantial increase in the number of tax collection agents. There has also been a substantial decentralisation of the tax collection system, so that you don't need to go to a very remote place to pay your tax. You're in your own place, you have everything there and there is a tax collector."

Côte d'Ivoire's inflation story is a tribute to the strong economic management. The average annual inflation rate has decelerated steadily from 6.3% in late December 2008, through to 2.1% in late July 2009 and it had fallen to 1% by 2010. The balance of trade is in surplus of CFA Fr825.8bn, against CFA Fr638.9bn a year earlier. Exports exceed imports by 165%. The country says that GDP will grow at 5%, far outstripping its 3.2% population growth. Kablan Yao-Sahi, an adviser to the finance minister, says that lower construction rates as a result of global recession have adversely affected its timber exporters.

The public finances look equally buoyant. Revenues and grants have increased by CFA Fr190.7bn. They are CFA Fr1452.6bn against CFA Fr1261.9bn a year earlier. Tax revenues have benefited from a firmer collection regime, especially in the coffee, oil and cocoa sectors. According to one officer in the Ministry of Economy and Finance: "While the 'African Elephant' still has a long way to go in terms of recovering from the difficulties which beset it, the country can start to enjoy, to some extent, the fruits of an economic and financial policy appreciated by the international community for its determination, relevance and effectiveness."

IMF involvement

Côte d'Ivoire's process in participating in the Heavily Indebted Poor Countries Initiative (HIPC) gives further comfort for its policy-makers seeking to deal with its debt exposure. The scheme aims at the total cancellation of debt for eligible countries reaching the HIPC 'completion point'. Côte d'Ivoire had to show that it had carried out the PRGF programme, that it had implemented key reforms and that it had run the PRS for at least a year.

The benefits to the country of attaining the HIPC decision point are considerable, says ministerial adviser Kablan Yao-Sahi: "We are using about one-third of the national income to service the debt. So if we can alleviate that and use this amount to invest in social sectors such as road building, it may help to boost economic growth.

"Creditors will grant an almost total cancellation of their debt, which is estimated at CFA Fr4000bn. This is double the current state budget. The remaining CFA Fr240bn will be rescheduled over 40 years. Obtaining the completion point will also allow the country to dispose of HIPC resources of about CFA Fr500bn per year for several years," he adds. Côte d'Ivoire reached the critical HIPC decision point on March 31, 2009.

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Making strides: Côte d'Ivoire president Laurent Gbagbo (right) greets IMF president Dominique Strauss-Khan. The IMF has praised the country's economic progress

Broader benefits

Many other economic benefits have flowed from the normalisation of relations with the IMF and the World Bank. For instance, the old portfolio of World Bank projects, worth almost $224m, has been reactivated. New projects worth almost $180bn have also been approved, promising a major refurbishment of the country's infrastructure. To add to that, Abidjan has received an arrears pre-clearance donation of $120m.

Two other projects, currently under preparation, will soon be submitted for approval by the World Bank's board of directors, aiming to boost private sector recovery and complete the Abidjan-Lagos corridor. In addition to infrastructure, the World Bank is expected to contribute to the country's requirements under the PRS.

The country's progress in moving towards reform has been acknowledged by the IMF, whose head of delegation wrote to the finance minister in the following encouraging terms: "Despite the global financial crisis, Ivorian economic activity during the first semester was maintained at a good level and the objective of 3.7% growth in 2009 could be achieved. Agricultural production benefited from good rainfall, hydrocarbons and mining extraction are on the increase, industrial production has grown and the services sector has continued to expand. The drop in oil and food prices has engendered lower prices since the beginning of the year, which in turn has brought inflation in line with the community rate of 3%. The country's economic prospects remain favourable.

"The 2009 budget execution is globally satisfactory and the annual objectives should be reached. Revenue has exceeded expectations thanks to the good tax and oil receipts. The mission also noted with satisfaction the efforts made to increase expenditure in favour of the poor. The remarkable progress made in structural reforms must continue. Reforms of public finances management has shown progress in the fields of public enterprise, transparency in the management of expenditure and budgetary discipline."

Dealing with debt history

The story of Côte d'Ivoire's debt obligations is particularly complex and at times traumatic. The completion of complex negotiations with the London and Paris clubs indicate that there is light at the end of the tunnel. The most pressing need of the government has been to finance the three-year period from the decision point to the completion point of the HIPC initiative. The funds required were CFA Fr2761bn in 2009, CFA Fr364bn in 2010 and CFA Fr374bn in 2011.

Côte d'Ivoire external debt stock, as of the end of 2008, amounted to CFA Fr6449.8bn. This split between CFA Fr3977.4bn of outstanding principal due and CFA Fr2472.4bn in arrears. Multilateral debt accounted for 24% of the stock (CFA Fr1554bn); Paris club bilateral debt - 52.4% (CFA Fr3383bn); debt from other bilateral creditors outside the Paris club - 0.6% (CFA Fr42.5bn); and trade debt - 23% (CFA Fr1470bn). Major creditors within the Paris club were, in order of size: France (with 63% of the stock), Germany (8%), and the US and Spain (6%).

When negotiations with the Paris club of creditors opened in spring 2009, post-deadline arrears had reached what the government calls "the alarming figure" of CFA Fr1011bn. A further CFA Fr201.2bn needs to be added to this to include the current maturity of this same debt for the period 2009 to 2011. The government says: "After 17 hours of intense negotiations, discussions ended with outstanding results which can only be described as historic for Côte d'Ivoire." The deal was complex but critical to the normalisation of country's finances. It included the following two facets.

Arrears and maturities of trade debt were largely cancelled. The residual stock was rescheduled over 23 years, including a six-year grace period. Public development aid debt arrears and maturities were fully rescheduled over 40 years, with a 16-year grace period.

The government also agreed that arrears would be paid each semester, from September 30, 2009 to March 31, 2017. This represents an eight-year rescheduled clearance plan. The current maturities for the period 2009 to 2011 were deferred over 10 years, including a three-year grace period. Default interest on consolidated maturities has been rescheduled over 10 years, with a three-year grace period. The interest on default interest resulting from the debt consolidation was paid in September 2009.

One local observer says: "This agreement with the Paris club is a great achievement for the country's economy, since the early repayment of the rescheduled debt will begin after April 2012. That is after the economic and financial programme, of which the Ivorian authorities have high expectations, has been completed."

The debt stock has been reduced by 23.8% to CFA Fr439.9bn. Consolidated debt has been reduced by 76.2%. The amount that Côte d'Ivoire has to service between April 1, 2009 and March 31, 2012, has been reduced as a result of the Paris club negotiations from CFA Fr2255bn to only CFA Fr1494bn during the same period.

London club negotiations

Negotiation with the London club of creditors were equally satisfactory. Outstanding debts stood at CFA Fr1435bn as of the end of 2008. But by the end of September 2009 when the negotiations were concluded, the creditors, who held six Brady bonds created during a restructuring plan in 1998, had agreed a preliminary plan to reduce the stock by 23%, or CFA Fr287bn. The agreement provided for the issuing of a bond, denominated in dollars, in the amount of the residual debt stock. Lasting 23 years, including a six-year grace period, this new bond is intended to replace the Brady bonds and the holders were invited by the Republic of Côte d'Ivoire to exchange them for the new bond no later than March 31, 2010.

The bond will have a fixed and low interest rate of 2.5% a year during the deferral period, a rate that will increase gradually up to 5.75% in the long term. Finance minister Mr Diby says: "This is perfectly compatible with the low payment capacity of the country, this agreement comfortably complements the agreement reached with the Paris club." In the wake of the London and Paris club agreements, multilateral and private creditors reached debt-rescheduling agreements with the government. These included the European Investment Bank and the Organisation of the Petroleum Exporting Countries Fund.

The market outlook for the bond is quite positive, says Mr Dehn of Ashmore Group: "There is a slew of people who will have to come in and buy this new bond. I would not be surprised if it does quite well." The bond will account for 0.75% of the $400bn Emerging Market Bond Index (EMBI) and many emerging market investors tracking that index will buy into the Côte d'Ivoire issue. "Everybody who has measured their performance against this index is going to have to buy this bond, unless they really hate Côte d'Ivoire. Some people who have more understanding of the Côte d'Ivoire and are bullish, will buy more than 0.75%," says Mr Dehn.

Victor Lopes, an analyst with Standard Chartered Bank, is also optimistic about the bond's immediate reception by investors: "The new Eurobond is expected to attract a huge amount of investors. It will probably be included in the EMBI and will stimulate the liquidity of the bond market. It will attract real-money investors who wouldn't normally be interested in a bond issued by a country without a rating. It will probably be included in a global index and that will facilitate the bond and attract investors." Mr Lopes adds that the Côte d'Ivoire bond will exceed the aggregate value of all other African bonds to date.

While the country has been active on the international stage, dealing with its historical debt legacy, it has also been active in issuing debt on the domestic market. Lami Ble, deputy director-general at the Treasury, says that Côte d'Ivoire had a bold policy of fundraising between 2007 and 2009: "So far, Côte d'Ivoire is the only West African Economic and Monetary Union country to have issued Treasury bonds by auction with one-month maturities. These Treasury operations raised CFA Fr260.67bn during the course of 2009 alone." Mr Ble says that this is part of a total of CFA Fr1486.9bn, which was split between CFA Fr591bn-worth of obligation bonds and CFA Fr895.9bn-worth of Treasury bonds. Between 1999 and 2009, the Treasury launched 37 issues on the regional market. Nine of these were for issuing obligation bonds and 28 Treasury bonds.

According to Mr Ble: "The spectacular success rate of Côte d'Ivoire's obligation and Treasury bills is testimony to the quality of the Ivorian 'brand', which has remained strong in spite of spite of the dramatic events and difficulties it has experienced since September 2002."

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