Impasse To Truncate Growth In Cote d' Ivoire

Until recently when Laurent Gbagbo refused to cede presidential power to the internationally recognised Alassane Ouattara, Cote d' Ivoire economic outlook showcased a continued recovery especially in 2009/2010, boosted by sustained strong cocoa prices, better than expected domestic revenue collection and significant rebound in construction activity.

Despite sporadic power outages and difficulties in the energy and oil refinery sectors, economic growth was pegged at about three per cent for 2010, complemented by a large current account surplus of about seven per cent of GDP (on account of cocoa receipts) and inflation that remained below two per cent.

The hopes for the continuity of these gains following 10 years of political uncertainty have however been dimmed by the current political impasse. Budget deficit which was pegged at 0.5 per cent in June 2010 is projected to reach over three per cent for 2010 fiscal year on account of slow or stalled structural reform implementation in critical areas such as public, energy and cocoa sectors.

Currently, most businesses are reported to be opened, but the movement of goods and people remains limited around the country. Intermittent shortages of key commodities (such as gasoline and food) have raised prices thereby increasing the disruptions to commercial and household activity.

2011 Growth
On cautious expectations that the political crisis will extend well into 2011, the infrastructure and economic reforms that Côte d’Ivoire needs in line with IMFcommitments now remains elusive. The economic shocks which will be similar to that of Kenya in 2008 will be compounded by a suspension of IMF’s US$566 million Extended Credit Facility agreed in 2009, if the crisis continues.

We expect sluggish growth to be anchored on distorted power supply, weak infrastructure development, unsustainable public wage bill and poor business environment, deduced from cloudy judicial due course. The crisis will also not make way for the cocoa and coffee sector reforms needed to reach the HIPC floating completion point that would lead to about US$3 billion in external debt relief.

Prior to the recent political crisis, we believed in the opinion that the country needed a rejuvenated rate of investment that is presently less than 10 per cent, mainly in energy and transportation sectors. Within debt sustainability limits therefore, Côte d’Ivoire needed a medium term borrowing model, both internationally and domestically. However, it is impossible to deploy any such strategy with no functioning government.

In such an environment, and with continuing infrastructure bottlenecks and inefficiencies, we project that real growth will continue to weaken to a one to two per cent range. We think that the fiscal deficit will extend to over four per cent of GDP in an environment of weak demand and as such fragile revenue generation, as against an unsustainable public wage outlay.

Based on our expectations for flat cocoa output and prices, current account surplus would be reduced to about two per cent of GDP in 2011. Inflation may be negatively impacted but we expect it to remain in single digits helped by the ongoing implementation of sound monetary policy by the BCEAO and by limited disruptions to food production or availability.

In the unlikely event that there is a quick move towards a stable political situation (which would entail Mr Ouattara being declared president), prospects could improve - the HIPC completion point could be reached and debt relief extended in 2011. Additionally, the price of Côte d’Ivoire’s US$2.3 billion Eurobond that is due in 2032 could rise. It dropped to a record low recently as the authorities missed coupon payments of nearly US$30 million on 31 December, amidst political unrests.

Cocoa sector
Côte d’Ivoire’s productivity capacity has gradually waned, compromised by stalled sector reforms that continue to encourage smuggling, black pod and swollen shoot disease and “over milked” cocoa trees.

The country’s share of global production has dropped from about 46 per cent in 1999/2000 to about 34 per cent in 2009/2010. Currently, it is estimated that Ivorian farmers produce 500kg/ha, compared to one tonne/ha in Ghana and two tonnes/ha in Indonesia.

The ICCO estimates that processing activity in Côte d’Ivoire fell by 4.4 per cent in 2009/10 to 400,000 tonnes, but it expects it to increase in 2010-11 following the opening of two new plants, one with annual capacity of 60,000 tonnes and the other 32,000 tonnes, which should lift total Ivorian capacity to 580,000 tonnes.

Côte d'Ivoire is currently the world's second-largest cocoa grinder, after the Netherlands. Given recent good weather, deliveries to ports continue at an acceptable rate notwithstanding the political situation.

Even during the civil war the trade season was not hugely affected and most beans made it to the coast, although smuggling to Ghana increased.

Some positive developments have also occurred in the past year. A new tax regime was introduced in October 2010, limiting the overall tax burden at 22 per cent of the international cif price, of which the export tax will account for 14.6 per cent.

The previous fixed-rate system reduced farmers’ profit margins at times of low prices and discouraged investment. The government has also introduced a new system to control the quality of Ivorian beans exported.

In addition, Nestlé has started to distribute 700,000 disease-resistant cocoa trees to Ivorian farmers as part of efforts to improve productivity.

However, farmer’s hopes of a better crop season in 2011 have been dashed by the current crisis and the sector’s outlook is generally weak. Overall, we forecast an output level of 1.31m tonnes in 2010/11 and 1.32m tonnes in 2011/12.

We expect a continued smuggling of cocoa beans as it remains unclear when Ouattara’s promise of 50 per cent auction price to farmers will be implemented.

Further, any immediate resolution to the stalled reforms of replacing the current six marketing boards established in 2000/2001 appears to be a mirage. If the political impasse continues, there will be no further progress with structural reforms.

The absolute priority is the creation of a new marketing board along the lines of the former Caistab, which can oversee massive investment in the sector and help farmers secure financing.

Ouattara is certain to push hard for reforms in the cocoa sector, but the stand-off with Gbagbo has so poisoned relations between the opposing camps that he might have to make major compromises when forming a government, and because of that, reforms could be watered down.

Investment on a far greater scale will also be needed to replace the country's three billion cocoa trees, many of which have passed their peak production age. But with the ongoing crisis, we cannot envisage a decisive political commitment to control swollen shoot and black pod diseases, whilst investment into new tree cultivation obviously is impossible under the current political situation.

Ecobank Research