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Country Commercial Guides for FY 2000: Cote d'Ivoire Report prepared by U.S. Embassy Abidjan, released July 1999

CHAPTER II:   ECONOMIC TRENDS AND OUTLOOK

1.   Major Trends and Outlook

Since the colonial period, Côte 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. Côte 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 together accounted for 38 percent of total exports in 1998, 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 nearly doubled from 1996 to 1998, with new processing plants coming on stream. The government has only made incremental progress, however, in developing the energy, mining and industrial sectors.

Since the January 12, 1994, devaluation of the CFA franc, Côte 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 from 1995 through 1998.

In 1998, Côte d'Ivoire succeeded in straightening out its daunting debt problem, a legacy of the economic problems of the 1980's. Though the devaluation and the accompanying reforms got Côte d'Ivoire 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 Côte d'Ivoire signed a new 3-year IMF program. This IMF program allowed not only the Commercial Bank debt forgiveness and rescheduling deal (London Club) to go forward, but also opened the door to the April 1998 Paris Club rescheduling, and Côte 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 Côte d'Ivoire's public sector external debt from over 16 billion USD in 1996 to only 11.2 billion at year-end 1998. If Côte d'Ivoire adheres to the ambitious reforms required by the new IMF program, the HIPC initiative will provide additional debt forgiveness in 2001. In addition to official bilateral debt forgiveness from the Paris Club, for the first time, the World Bank and IMF will forgive debt, thereby reducing the country's debt burden to about USD 9.1 billion.

For the past four years, Côte d'Ivoire's economic performance has been impressive. According to Ivoirian government statistics, real GDP growth was 7.1 percent in 1995, 6.9 percent in 1996, 6.6 percent in 1997, and. 6.0 percent in 1998. The country has been meeting its IMF targets for growth, inflation, and balance of payments, and until 1998, for government finance. 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.

Inflation has been brought under control, with increases in the Consumer Price Index of only 3.5 percent in 1996, 5.2 percent in 1997 and 2.1 percent in 1998. Price increases for some local food staples in the first quarter of 1999 revived accusations that government statistics understate inflation, but the IMF and World Bank give the government good marks for controlling inflation. The government continued to keep a tight lid both on salary increases and on the size of the public sector work force.

Until 1998, public sector finances were improving steadily. Total government revenues grew from 847 billion CFA in 1994 to 1,328 billion CFA in 1997. In 1998, however, weaker than expected growth in tax revenues resulted in nearly flat growth of government revenues to only 1,388 billion CFA. The slowdown in the growth of revenue collection, was accompanied by a weakening of controls on the spending side. These were two of the major causes of the IMF's suspension of negotiations on a second annual Enhanced Structural Adjustment Facility (ESAF) in February 1999. The failure to meet revenue growth targets is attributed to a combination of weak customs enforcement, too many tax exemptions, reduced tariff rates as part of the economic reform program, and a late cocoa harvest. In spite of the disappointing 1998 public finance figures, Côte d'Ivoire continues to run a primary surplus, (i.e., receipts minus expenditure, excluding borrowings and debt service).

Côte d'Ivoire's post-devaluation boom shows signs of softening in 1999. In addition to weak growth in government revenues, the government has suffered from a cut-off of structural adjustment lending caused by the IMF's suspension of its ESAF negotiations. The broader economy has been hurt by significantly lower coffee, palm, rubber and, especially, cocoa prices. In spite of the probable slowing of the rate of economic growth in 1999, the outlook for the medium term in Côte 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 a resurgence in world commodity prices. Short of this optimistic scenario, Côte d'Ivoire has a good chance of returning to 6 or 7 percent growth in 2000 or 2001 after a period of slower growth in 1999, which might carry into 2000. If the country can sustain sharp falls in the prices of its principal export commodities with only a mild slowdown in growth Côte d'Ivoire will have demonstrated a newfound breadth to its economy auguring well for a return to its mid-1990's high-growth trend line.

It is important to bear in mind when considering these positive trends that Côte 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 Côte d'Ivoire's staying the course on its adjustment policies.

2.   Principal Growth Sectors

Thirty-three percent of Côte d'Ivoire's GDP originates in agriculture, forestry or fishing and 70 percent of exports are agricultural products. Petroleum is the only major 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 1998 export revenues), wood (7 percent) and, especially, cocoa (38 percent).

The government's strategy to diversify the economy has four components. Trying to garner more added value from agriculture by encouraging investment in secondary transformation of commodities is the cornerstone. The other parts of the strategy are: 2) to encourage crops other than coffee and cocoa, 3) to encourage extractive industries, and 4) to reinforce Côte d'Ivoire's already-developed services sector. These four components of the strategy are called the "Four Legs of the Elephant of Africa," Côte 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 from 1995 to 1998 there has been a wave of investment in local cocoa processing, resulting in a near doubling of processed cocoa production from 1996 to 1998.

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.

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 mushroomed in the mid 1990's although depressed world prices for gold and nickel have put a damper on mineral exploration since 1997. Offshore oil production, which ceased in the late 1980's, resumed in April 1995 when a consortium led by Ocean Energy, (formerly United Meridian Corporation or UMIC) began production from its Lion field. In October 1995 Ocean Energy began producing natural gas as well, and pumping the gas to a thermal power plant onshore. In 1999, gas production is increasing as Apache Petroleum's Foxtrot field has come on stream to join Ocean Energy in supplying gas to a new thermal power plant at Azito. Crude oil exports declined in 1998 from 735 million tons to 463 million tons--the decline in dollar terms was even steeper due to the fall in world prices. Offshore exploration activity continued nevertheless. Ranger Oil of Canada is redeveloping the Espoir field and Shell, in partnership with Ocean Energy, plans to drill the first deepwater exploratory well in Côte d'Ivoire in the second half of 1999. Vanco Petroleum of the United States also signed an exploration and production sharing contract on deepwater blocs in western Cote d'Ivoire in April 1999. With all this exploration and development, and Apache's efforts to sell natural gas to Ghana, oil and gas are likely to assume an increased importance to the economy.

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 since 1997 by lower prices of gold and nickel, the two principal metals which have been discovered in Côte 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 a potential growth sector. Côte 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 and Australian "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 Côte 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) began operation in January 1999. Electricity exports may increase in the years to come as this additional capacity comes on stream and Côte 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 continue to invest in their networks. In January 1997, Côte 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, Côte 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 Côte 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 Ivoirians.

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 has withdrawn from productive or commercial activities, and liberalized almost all sectors of the economy. 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 54 had been privatized (i.e. the government no longer holds majority control) by the end of 1998. By the end of 1999, 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 Côte 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, Côte 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, Côte d'Ivoire's balance of payments and debt record might suggest a grave problem of currency availability and convertibility. Côte 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 Côte d'Ivoire's balance of payments situation which has persisted into 1998 and looks likely to continue over the near term. In 1994, the ftrst year after the devaluation, the trade surplus shot up from USD 734 million in 1993 to USD 1.26 billion in 1994. From 1995 through 1998, the trade surplus in dollar terms has been relatively constant at about 1.4 billion USD, but the lack of growth in the trade surplus masks growth in both exports and imports. According to government statistics, exports have grown steadily from USD 3.75 billion in 1994 to USD 4.34 billion in 1998, and the rise is even more pronounced in CFA terms. Exports have grown on the strength of strong harvests, especially for cocoa, and--until 1999--good world prices. There has also been modest but steady growth in exports of crops other than cocoa and coffee. The surge in exports has been matched by increased imports, brought on by the post-devaluation investment boom and increased food imports. Imports have risen from USD 1.6 billion in 1994 to an estimated USD 2.95 billion for 1998.

Because of debt service on Côte d'Ivoire's outstanding loans and rising shipping and insurance costs as trade boomed, the current account has been in deficit in recent years. Côte d'Ivoire had an estimated current account deficit of USD 450 million in 1997, according to IMF statistics, and a significant current account deficit is now projected to continue, at least in the near term. In 1998, Cote d'Ivoire finally reached agreement with all its external creditors, and obtained significant debt forgiveness from its commercial bank creditors. In the short run, however, this has increased the amount of debt service actually paid, since Côte d'Ivoire had not serviced its commercial bank debt since 1987. Nevertheless, the greatly improved debt picture, combined with potential boosts from oil, gas or electricity exports, as well as likely growth in non-traditional crops give Côte d'Ivoire an excellent chance to achieve improving current account balances, beginning in 2000 or 2001.

5.   Infrastructure

By developing country standards, Côte 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, a world class private hospital. There are active markets for office space for commercial, industrial, retail and residential use. Côte d'Ivoire's location and connections to neighboring countries make it an excellent platform from which to conduct West African operations. The city of Abidjan is one of the most modern and livable 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 schools based on the French system.

In recent years, the Ivorian government has promoted a series of projects which could increase the attractiveness of the country for business by putting most of the country's infrastructure under private management. The privatization program began in the early 1990's when both the water and electricity distribution companies were conceded to private companies. In 1994 a separate, private electricity production company was established and in 1997 a competing power production company was created on a Build-Own-Operate-Transfer (BOOT) basis. Also in 1997, Côte d'Ivoire completed its largest privatization by selling off majority control in the phone company, Cote d'Ivoire Telecom. Even roads and bridges are being put in private hands, with two new toll roads and a toll bridge to be constructed. In a 1996 concession, a private company was awarded the commercial operation of Abidjan's airport in return for committing to invest in a new terminal, resurfaced landing strip and new parking facilities.

By putting most of the country's key infrastructure into private hands, the Government has not only tapped much more capital investment than it would have been able to muster on its own, it has also positioned the country to run much less of a risk of "Y2K" disruptions. The privatized companies have invested in--and managed--significant equipment upgrades. The private buyers, in each case affiliates of major European companies, have been able to draw on their parent companies' expertise and financial wherewithal to make major investments in Y2K-compatible equipment.