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FY 1999: Cote d'Ivoire |
II. ECONOMIC TRENDS AND OUTLOOK 1. Major Trends and Outlook Since the colonial period, Cote d'Ivoire's economy has been based on the production and export of tropical products. Agriculture, forestry, and fisheries account for over one-third of GDP and two-thirds of exports. Cote d'Ivoire produces 35 to 40 percent of the world's cocoa crop every year, and is a major exporter of bananas, coffee, cotton, palm oil, pineapples, rubber, tropical wood products, and tuna. The 1994 devaluation of the CFA Franc and accompanying structural adjustment measures generally favored the agricultural sector by increasing competitiveness. However, reliance on raw cocoa and coffee exports, which account for 39 percent of total exports, exposes the economy to sharp price swings on world markets for these commodities. The government encourages export diversification and intermediate processing of cocoa beans to reduce this exposure. This policy has yielded results--processed cocoa exports were up 25 percent in 1997, with new processing plants coming on stream. Electricity exports to neighboring countries are also up sharply, and Cote d'Ivoire's oil refinery will soon expand its capacity to process (mostly Nigerian) crude oil for re-export. Since the January 12, 1994, devaluation of the CFA franc, Cote d'Ivoire has returned to the rapid economic growth it experienced in the 1960's and 1970's. The spur provided by the devaluation increased foreign aid and investment flows, rigorous macroeconomic policies, privatization of state companies, and fortuitous international commodity prices yielded strong GDP growth in both 1995, 1996, and 1997. By 1998, Cote d'Ivoire has succeeded in straightening out its daunting debt problem, a legacy of its economic problems of the 1980's. Though Cote d'Ivoire got back on track with its official creditors, both bilateral (Paris Club) and multilateral (IMF and World Bank), resolution of its outstanding commercial bank debt was not completed until 1998, when Cote d'Ivoire signed a new 3- year IMF program. This IMF program allowed not only the Commercial Bank deal (London Club) to go forward, but also opened the door to the April 1998 Paris Club rescheduling, and Cote d'Ivoire's inclusion in the IMF/World Bank debt forgiveness initiative for highly-indebted poor countries (the HIPC initiative). All of these events, particularly the London Club deal, have reduced Cote d'Ivoire's public sector external debt from USD 16.2 billion at year-end 1997 to an expected level of USD 12.0 billion at year-end 1998. If Cote d'Ivoire adheres to the ambitious reforms required by the new IMF program, the HIPC initiative will provide additional debt forgiveness in 2001 by the Paris Club and for the first time, the World Bank and IMF, thereby reducing the country's debt burden to about USD 9.1 billion. For the past three years, Cote d'Ivoire's economic performance has been impressive. Real GDP growth was 7.1 percent in 1995, 6.8 percent in 1996 and 7.0 percent in 1997. The country has been meeting its IMF targets for growth, inflation, government finance, and balance of payments. Traditional commodity exports were boosted both by the devaluation and by higher world prices for cocoa and coffee (though improved prices in local currency terms were only partially passed through to farmers). At the same time, the devaluation and the generally favorable business environment produced growth in non-traditional crops, local processing of commodities and expansion of the services sector. In 1996, according to government statistics, inflation fell to only 3.5 percent, as the government continued to keep a tight lid both on salary increases and on the size of the public sector work force. In 1997, the consumer price index edged up to 5.2 percent. (Source: Government statistics). Public sector finances are another bright spot: Government revenues are on a strong rising trend since 1993, rising from 847 billion CFA in 1994 to 1,348 billion CFA in 1997. The stronger revenue picture, when combined with restraint on the spending side, has resulted in four years of primary surpluses (i.e. receipts minus expenditure, excluding borrowings and debt service). Following a concerted government repayment effort, domestic arrears had been virtually eliminated by the end of 1996. But lapses in controls on spending during 1997 caused delays in IMF approval of the new three-year plan (ESAF) until February-March 1998. The outlook for the near and medium term in Cote d'Ivoire remains positive. The Government hopes to attain double-digit real GDP growth. This goal appears achievable only in a best-case scenario, including continued or enhanced investment flows, additional oil or mineral production, and no drop in world commodity prices. Short of this optimistic scenario, a continuation of 6 or 7 percent growth for 1998 and 1999 appears likely. Absent a sharp drop in cocoa or coffee prices, there are no looming threats to the country's current boom. It is important to bear in mind when considering these positive trends that Cote d'Ivoire remains a country confronted by a vast array of developmental problems and challenges: environmental, medical, demographic, educational and economic. Progress on all these fronts will depend on Cote d'Ivoire's staying the course on its adjustment policies. 2. Principal Growth Sectors Thirty-three percent of Cote d'Ivoire's GDP originates in agriculture, forestry or fishing and 70 percent of exports are agricultural products. Petroleum is the only significant non- agricultural export and most petroleum exports are re-exports of product refined from imported crude oil. During the country's first 33 years of independence, agricultural development was the top priority, resulting in a relatively solid, yet cyclical, agriculturally-based economy. In spite of government efforts to diversify away from dependence on a small number of agricultural commodities, this sector (and agro-industry) will remain a major source of growth in the years to come. For now, half of the country's export revenues derive from three commodities: coffee (9 percent of 1997 export revenues), wood (7 percent) and, especially, cocoa (36 percent). The government's attempts to diversify the economy is four fold. A strategy of garnering more added value from agriculture by encouraging investment in secondary transformation of commodities is the cornerstone. Other strategic targets are 2) to encourage crops other than coffee and cocoa, 3) to encourage extractive industries, and 4) to reinforce Cote d'Ivoire's already-developed services sector. These four components of the strategy are called the "Four Legs of the Elephant of Africa," Cote d'Ivoire's blueprint for replicating the success of the Asian "tigers." The push for more local transformation of raw materials has been particularly successful with regard to cocoa. Similar to its projections for GDP growth, the government's long-term goal of processing 50 percent of its cocoa may be overreaching, but in 1995, 1996, and 1997 there has been a wave of investment in local cocoa processing, resulting in a doubling of capacity. Increased production of crops other than cocoa and coffee have yet to have a significant impact on the economy; however, cotton production is on a growth trend and entrepreneurs are investing in non-traditional exports like mangoes, cashews, flowers and silk. Cotton, sugar (mostly for domestic consumption), rubber and palm are also likely to benefit from increased investments as the state-owned companies that grow these crops have been privatized. The most dramatic efforts to diversify the export base, however, have come in extractive industries. New Mining and Petroleum Codes were enacted in 1995 and 1996, respectively, and exploration activity in both sectors has mushroomed. Offshore oil production, which ceased in the late 1980's, resumed in April 1995 when a consortium led by Ocean Energy, (OE) (former United Meridian Corporation UMIC) began production from its Lion field. In October 1995 (OE) began producing natural gas as well, and pumping the gas to a thermal power plant onshore. In 1999, gas production is likely to increase as Apache Petroleum's Foxtrot field comes on stream to assist OE in supplying gas to a new thermal power plant at Azito. Petroleum production approaches Cote d'Ivoire's domestic consumption, at about 17,000 barrels per day of oil. Offshore exploration activity has accelerated, with companies such as Santa Fe Petroleum, OE, Apache, and Seagull-CI of the U.S. and Ranger Oil of Canada holding exploration or production-sharing agreements. Shell, in partnership with Ocean Energy, has the first contract to explore in the deep water off Cote d'Ivoire, where the geology is more promising. With all this exploration, some redevelopment of old fields, and OE's bid to sell additional gas to Ghana, oil and gas are likely to emerge as significant exports. As with petroleum, mining exploration activity holds the potential for yet another new non-agricultural export sector. Hopes for significant expansion in mining, however, have been dampened in 1997 by lower prices of gold and nickel, the two principal metals which have been discovered in Cote d'Ivoire. Lower gold prices forced the closure of one of the country's two small gold mines in 1997. In spite of this short-term setback, over the long term, mining is likely to be a potential growth sector. Cote d'Ivoire's geology is similar to its much larger gold-producing neighbors, Ghana and Mali. Many exploration contracts were signed in 1995, 1996, and 1997, mostly with Canadian "juniors" and South African mining houses, which have focused primarily on gold. The one notable exception is a nickel project which a Canadian company, Falconbridge, has been preparing for several years in western Cote d'Ivoire, near Man. Infrastructure development, particularly in electricity and telecommunications, is also a growth sector. A third thermal power project, structured as a BOOT (Build, Own, Operate, Transfer) is under construction and will begin operation in 1999. Electricity exports may increase in the years to come as this additional capacity comes on stream and Cote d'Ivoire's grid is linked to Mali and Burkina-Faso (it is already linked to Ghana, Togo and Benin). In the Telecommunications sector, the three cellular telephone operators, two of which are US-affiliated, continue to invest in their networks. In January 1997, Cote d'Ivoire's largest privatization to date--a 51 percent share of the telecommunications monopoly CI-TELCOM--was sold to France Telecom. As part of the deal, France Telecom committed to invest CFA 250 billion (approximately USD 417 million) in the telecommunications network over five years. Other infrastructure investments include toll roads, port and airport improvements, and bridges. Increasingly these projects are designed--like the above-mentioned power project--on a private sector, self- financing basis. 3. Government role in the Economy At independence, Cote d'Ivoire purposely chose to maintain close commercial ties with France, the former colonial power, and to promote the export of cash crops, mostly produced by small-scale private planters but supported heavily by government. Although Cote d'Ivoire prided itself on its pro-business approach to economic development, the government was deeply involved in almost every facet of the economy. The country built up a major parastatal sector, though majority shares in most parastatals have been sold off in the current privatization program. In most cases, however, the state has retained a voice through its minority share and the old French centrally directed tradition retains a hold on the thinking of Ivorians. The IMF and World Bank have actively encouraged the government to adjust outmoded structural and sectoral policies, many of them based on the state's involvement in the economy. Development of the private sector is at the heart of these reform efforts. The government is withdrawing from productive or commercial activities, and simplifying the regulatory framework. Sustained progress in these areas is key to the attainment of targeted high growth rates, and in some cases, to the continuation of assistance flows from the Bretton Woods institutions. The government announced an ambitious privatization program in 1990. It identified 60 enterprises, of which 44 had been privatized (i.e. the government no longer holds majority control) by May 1998. By the end of 1998, the government intends to sell down its share of the oil refinery (SIR) and the national airline, Air Ivoire. 4. Balance of Payments Situation In the late 1980's Cote d'Ivoire's balance of payments situation deteriorated sharply, overwhelmed by a combination of over borrowing and a precipitous drop in cocoa and coffee prices. The situation was exacerbated by the absence of policy reforms and the overvaluation of the CFA. Although the austerity measures of the early 1990's attempted to correct the situation they were insufficient in the absence of a currency devaluation. From 1989 through 1993, Cote d'Ivoire consistently ran current account deficits between 1.1 and 1.3 billion dollars. Total external debt grew to more than twice the size of the economy (GDP). Under other circumstances, Cote d'Ivoire's balance of payments and debt record might suggest a grave problem of currency availability and convertibility. Cote d'Ivoire, however, is a member of the West African Economic and Monetary Union (WAEMU, or UEMOA in French), whose currency, the CFA Franc, is guaranteed by the French Treasury and convertible at a fixed rate against the French Franc. The French Treasury, in turn, requires strict controls on the creation of new money (i.e. members cannot simply monetize their deficits). Under these circumstances, a poor balance of payments performance does not imply a convertibility risk for the CFA franc; it does suggest, however, that the government might not have sufficient local currency holdings with which to obtain the foreign exchange it needs to honor its obligations. In January 1994 the CFA was devalued from 50 CFA = 1 FF to 100 CFA = 1FF. This watershed event, the first change in the parity since the CFA was established in 1949, began the dramatic turnaround in Cote d'Ivoire's balance of payments situation which has persisted into 1997 and looks likely to continue over the near term. Since the devaluation, there has been strong growth in the trade surplus, which more than doubled in three years, from USD 734 million in 1993 to USD 1.86 billion in 1996 (fob basis). Preliminary data based on the first ten months of 1997 reflect a large trade surplus, as the country harvests its third consecutive bumper cocoa crop, in excess of one million tons. The 97-98 crop, in addition to being comparable in volume terms to the prior years, also benefited from strong world prices in reaction to burnt cocoa plantations in Indonesia, and a strong dollar, which increased the world price's local currency impact. The strengthening trade surplus has come about in spite of a surge in imports, brought on by the post-devaluation investment boom and the overall growth in the economy. Imports have risen from USD 1.5 billion in 1994 to an estimated USD 2.7 billion for 1997. Because of debt service on Cote d'Ivoire's outstanding debt burden and rising shipping and insurance costs as trade boomed, the current account has been in deficit in recent years. Cote d'Ivoire had a current account deficit of USD 204 million in 1996, the most recent year for which final data are available. For 1998, the World Bank expects a current account surplus. (excluding interest payments and capital grants) of USD 237 million, however this will be more than offset by interest payments. Cote d'Ivoire has finally reached agreement with all its external creditors, and obtained significant debt forgiveness from its commercial bank creditors. In the short run, however, this will increase the amount of debt service actually paid, since Cote d'Ivoire has not serviced its commercial bank debt since 1987. Nevertheless, the greatly improved debt picture, combined with potential boosts from oil, mining or electricity exports, as well as likely growth in non-traditional crops give Cote d'Ivoire an excellent chance to achieve improving current account balances over the next few years. 5. Infrastructure By developing country standards, Cote d'Ivoire has an outstanding infrastructure. There is an excellent network of over 8,000 miles of paved roads, good telecommunications services including cellular, paging, and Internet services; availability of car dealerships and rental services, diversity of airline companies and travel agencies, two international airports, two seaports, numerous international cuisine restaurants as well as ethnic restaurants, a world class private hospital. There are active markets for office space for commercial, industrial, retail and residential use. Cote d'Ivoire's location and easy, reliable connections to neighboring countries makes it an excellent platform from which to conduct West African operations. The city of Abidjan is one of the most modern and liveable cities in the region, its school system, is good by regional standards and includes an international school based on a U.S. curriculum and several excellent French-based schools. Over the last three years, the Ivorian government has promoted a series of projects which if completed, could increase the attractiveness of the country. New investments in petroleum, oil, gas, and mining, could be major factors which will support the sustained growth of the economy.
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