Benin : Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Nonobservance of Performance Criterion and Augmentation of Access: Staff Report; Staff Supplement; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Benin

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Statement by Laurean Rutayisire, Executive Director for Benin

Author(s):
International Monetary Fund
Published Date:
11August 2009
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June 24, 2009

On behalf of my Beninese authorities, I would like to express my appreciation to staff for the constructive policy dialogue held in the context of the sixth review of the three year arrangement under the PRGF-supported program. I also wish to convey to management and Executive Board my authorities’ appreciation of their support to Fund’s continued involvement in Benin. Reflecting their broad agreement with the staff’s analysis and policy recommendations, my authorities have consented to the publication of the letter of intent, as well as the staff report.

Benin’s economic performance under the PRGF-supported program has been strong in 2008, confirming the satisfactory performance under the PRGF arrangement recorded over the last four years. All quantitative performance criteria were met, except one for which appropriate remedial actions have been taken. My authorities have also allowed full pass-through of international food and fuel prices on July 2008. Despite the rising effects of this policy decision on prices, average inflation, which was already one of the lowest in WAEMU region, remained below the program target. In line with their intention to make the country an emerging economy, my authorities have embarked since 2006 on a comprehensive reform agenda on various fronts, including public finance, public enterprises and business environment. They have, in this regard, put in place a comprehensive strategy for cotton sector and implemented the public finance management action plan. Moreover, most structural benchmark reforms have been completed, though some with delay. Furthermore, external current account deficit improved and the level of gross official reserves was the highest among the WAEMU member countries in 2008.

My authorities are well aware of the challenges ahead, in particular the need to design an appropriate policy response to the shocks stemming from global economic downturn. They are fully convinced that this global economic downswing impact could weaken the macroeconomic outlook over the medium-term. This is why; my authorities have put in place four-pronged strategies aiming at increasing the resilience of Beninese economy to exogenous shocks while putting it on the path of broad-based growth. First, they have allowed the use of automatic fiscal stabilizers with the view to sustain domestic demand given the downward economic cycle projected for 2009 and 2010. Secondly, they have focused their efforts on the improvement of Benin’s economy competitiveness. To that end, they intend to move forward with the privatization of Benin Telecom, the restructuring of Electricity Company, and the strengthening of judicial system, land tenure, financial services, and port capacity. Third, my authorities are requesting an augmentation of access of 15 percent of quota to help mitigate the impact of global economic crisis. At the same time, they are envisaging a successor PRGF program, which will be designed at the end of the current program to support the authorities’ efforts to cope with the negative effects of the current economic crisis. Finally, to mobilize additional resource aiming at covering the financing gap resulting from the fiscal response to mitigate the impact of these shocks, my authorities are strengthening their partnerships with development partners, including World Bank, European Union, and other multilateral donors.

In view of the overall satisfactory program performance and the commitments made for the period ahead, I request, on behalf of my Beninese authorities, the Board’s support for the completion of the sixth review under the PRGF, the waiver for nonobservance of the quantitative performance criteria, and the augmentation of access of 15 percent of the quota.

I. Recent Economic Developments

Although below the needed level to meet the MDGs requirements, the GDP growth rate rose to 5 percent in 2008, the highest level reached since 2001. This performance reflects a sustained demand emanated from neighboring Nigeria, an expansion of construction activities and a significant rebound of food production. The strong increase in agriculture production attests the success in implementing the authorities’ emergency food security program. At 1.3 percent in 2007, average inflation went up to 8 percent in 2008, far beyond the WAEMU convergence criterion of 3 percent. The decision taken by the authorities in July 2008 allowing the full pass-through of international food and fuel prices has contributed to anchor the inflation expectations in Benin. When the prices started to decline in the last quarter of 2008, this policy has been very effective in helping easing inflationary pressures.

Progress has been made on the external front. Owing to strong cotton exports, as well as the expansion of trade transit towards neighboring Nigeria, the current account deficit improved by 1.4 percent of GDP in 2008. Accordingly, foreign exchange reserves came up to 8 months of imports, the more comfortable level achieved since 2004.

Turning to the public finance, the authorities have continued to pursue fiscal consolidation in 2008. Efforts made by the authorities enabled to keep the expenditure below the target, while revenue collection was in line with the program objectives. While exerting a strict control over expenditure, my Beninese authorities have focused their efforts towards domestic tax revenue mobilization. As a result, the revenue collected was much higher than the program target.

The monetary situation posted an expansion of money supply, driven by foreign asset increases, and a strong growth of domestic credit. Most of the credit distributed to the economy went to private sector. As regards the deterioration of the quality of credit noted between 2007 and 2008, appropriate steps have been taken by the monetary authorities. Indeed, they have raised the central bank key rates, while maintaining reserve ratio at 15 percent, the highest level among WAEMU member countries.

II. Policy Discussions

1. Impact of the Global Economic Crisis and Policy Response

The global economic downturn hit Beninese economy through three main transmission channels identified by my authorities. First, a significant drop of Beninese main export, cotton, due to a sharp fall of international prices estimated at 32 percent between September 2008 and March 2009. The second negative effects were felt by custom administration, whose revenue collection efforts were constrained by a contraction of demand from neighboring Nigeria, also reached by global economic crisis. The revenue collected during the aforementioned period was 18.4 percent lower than projected. The last impact was reported by local banks stating that workers’ remittances transferred through banking system channel decreased by 30 percent in the first quarter of 2009. In terms of medium-term outlook, the real GDP is projected to decrease from 5 percent in 2008 to 3.8 percent in 2009 and 3 percent in 2010.

With continued efforts to improve the business climate, increase investments in infrastructures, and strengthen structural reforms, my authorities expect that real GDP growth could recover its potential of 6 percent by 2012. They intend to tackle the crisis by a combination of automatic fiscal stabilizers, and discretionary increases in social expenditures. My authorities will, in order to bridge the resulting financing gap, seek additional external assistance from various partners.

2. Fiscal Policy

The objective of fiscal policy for 2009 is to pursue fiscal consolidation in order to maintain macroeconomic stability. In particular, they envisage to put in place a set of measures, including streamlining of compliance controls on expenditure commitments, pursuit of reforms of public procurement system, and promotion of program approach to budget execution by the ministries. My authorities are also committed to pursue a prudent borrowing policy.

Measures aiming at combating fraud, expanding the domestic tax base, and implementing gradually single tax identification numbers will also be implemented in order to mobilize revenue. The authorities will also seek to increase revenues by reinforcing partnerships between private sector and the government and create new small and medium-sized enterprise tax centers. On the custom side, efforts will be directed towards simplification and expedition of customs declaration and clearance procedures and expansion of automated system of custom administration (ASYCUDA) to additional workstations in the regional customs directorates.

3. Structural Reforms

Accelerating structural reforms is one of the authorities’ strategies in their response to the global economic crisis. They intend to remove as soon as possible major impediments to growth and build a broad-based economy, less reliant on cotton production. The measures to be taken are focused on the improvement of land tenure, judicial systems, and access to financial services.

In the energy sector, priority will be given to the consolidation of the financial position of the company operating in the sector, the SBEE; notably reduction of production costs, improvement of service quality, and strengthening of SBEE’s capacity. Similar efforts to improve delivery of service and enhance the viability of other state-owned companies are also envisaged.

4. Monetary Policy and Financial Sector Reforms

Monetary policy will continue to be conducted at the regional level with the objective of containing inflation and maintaining adequate level of reserves. Credit to the economy is expected to grow rapidly by almost 9 percent in line with the authorities’ objective of building a broad- based economy.

In order to comply with the recommendations made by the Banking Commission, the authorities intend to enhance banking supervision by improving compliance with prudential ratios and encourage implementation of regulatory framework for microfinance sector. Particular emphasis will be placed on consolidating the sector.

III. Conclusion

Given the authorities’ successful implementation of the PRGF-supported program, despite exogenous shocks and negative spillovers from the global economic crisis, I will appreciate Board’s support for the completion of the sixth review under the PRGF, waiver for nonobservance of the quantitative performance criteria, and augmentation of access of 15 percent of the quota.