On behalf of my Beninese authorities, I would like to express my appreciation to Management and staff for the productive discussions with the authorities in Cotonou and Washington. The staff report reflects well the substance of those exchanges and the elements of the program going forward.
Benin held presidential and legislative elections in March and April 2011 respectively. The incumbent president was reelected for a second and last term, and his coalition obtained the majority at the National Assembly. As the President indicated to staff and management during meetings in Cotonou and Washington, the outcome of the elections is considered as a clear and strong mandate to pursue the reforms initiated during the first term and to make further inroads in the development of the country.
I. Recent developments and performance under the ECF
Last year was marked by a lower-than-expected output growth at 2.6 percent due mainly to exceptional flooding that occurred in the second half of 2010 and affected many sectors including agriculture. Economic activity was sluggish in the first quarter of 2011 before the elections. This was reflected in a contraction of credit to the private sector by 3.3 percent during that quarter. Inflation declined from the highs reached in the last quarter of 2010 in the wake of the flooding. The balance of payments improved in 2010 owing to an increase in remittances and a decline in imports of intermediate goods.
Fiscal consolidation continued in the first quarter of 2011. As a result, the fiscal deficit at end-March 2011 was below the program objective. On the one hand, this outcome reflected a better revenue performance due to an improvement in tax administration and a tightening of controls. On the other hand, expenditure was kept below the program target during the pre-election period.
Implementation of fiscal reforms, with the assistance of development partners, is also advancing well, albeit with some technical delays due to factors such as the events in Cote d’Ivoire and delays in external assistance disbursement. It is worth noting that the one-stop window at the Port of Cotonou was launched at end-June 2011 as planned and the import verification program started in July 2011. The audit of the tax administration computerized system and the adoption of an information technology master plan were also completed as scheduled at end-June 2011. The modernization and the extension of the customs administration is progressing well.
In the financial sector, bank capitalization has improved with 10 out of the 13 banks complying with the decision of the WAEMU Council of Ministers to raise capital requirements. Necessary steps were taken to bring the capital of all banks in line with existing regulation. In an effort to prevent the resurgence of Ponzi schemes in the microfinance sector, a draft law was submitted to the National Assembly to grant the Central Bank of West African States (BCEAO) the right to supervise and intervene in decentralized structures with deposits or credits larger than CFAF 2 billion.
As regard public enterprises, it is noteworthy that the financial situation of the electricity company, SBEE, has significantly improved thanks to better management of the company. The company is expected to post a small profit in 2011 without tariff adjustment. The outsourcing of the management of Benin-Niger railroad network has been lagging because of elections in Niger. The privatization of the telecom company, Benin Telecoms, could not be concluded as the financial offer received from the selected bidder was too low. Despite this setback, the privatization process has enabled the restoration of a sound bookkeeping and strengthened its management. They are preparing a new sectoral strategy with the support of the World Bank.
Overall, despite a more sluggish than expected economic activity, my authorities managed to keep the program on track and performance under the program was satisfactory with all quantitative performance criteria largely met at end-March 2011.
In order to finance development projects in the country, my authorities contracted from two international financial institutions two slightly non-concessional loans which they combined with financial assistance from regional organizations to meet the concessionality requirement under the program. However, as the assistance from the regional organizations is denominated in CFA francs, it was considered as domestic financing, and hence was excluded from the assessment of the concessionality of the two external financing packages. As a result, the continuous performance criterion on nonconcessional loans was not technically met. Measures have been taken to consult with Fund staff early in the negotiation process to avoid this from happening again. In light of these measures, my authorities are requesting a waiver for the nonobservances of the abovementioned performance criterion.
Given Benin’s low risk of debt distress, as shown in the debt sustainability analysis, and to increase flexibility in the financing of the public investment program in the medium term, my authorities request that the zero-ceiling on nonconcessional loans with maturity over one year and a grant element of at least 20 percent be raised, as specified in paragraph 19 of the Technical Memorandum of Understanding. Such a change will enable them to secure slightly non concessional loans in support of the implementation of the public investment program while preserving debt sustainability. Going forward, if the new ceiling on nonconcessional debt were to be reached, they will discuss the issue in future reviews.
II. Policies for the remainder of 2011 and for 2012
My authorities will continue to implement prudent policies aimed at supporting the return to strong and sustained private sector-led growth, through notably the consolidation of the macroeconomic framework and the implementation of structural reforms. This will be undertaken consistently with the updated growth and poverty reduction strategy for 2011-2015, which aims at improving the population’s living standards and achieving the Millennium Development Goals (MDGs), and gives greater consideration to such critical development issues as the employment of youth and women, opening up agricultural production zones, and fostering rural economic growth. My authorities welcome staff’s comments on the strategy and the risks to its successful implementation. They agree that, given the actual resources constraints, the alternative scenario, which is aligned with the ECF, should be used as the main reference for policy decisions and the Priority Action Program (PAP), which is supporting the strategy, should be adjusted accordingly.
Looking forward, Benin’s outlook is favorable. Now that the elections are over in Benin and neighboring countries, my authorities expect economic activity to rebound in the second half of 2011. Output growth is projected to reach 3.8 percent in 2011 and 4.2 percent in 2012 driven by stronger public investment including post-flood reconstruction, higher agricultural production, and increased capacity at the Port of Cotonou following the completion of infrastructural and operational reforms. The external current account deficit is projected to widen as imports would increase with the economic rebound.
The regional central bank will continue to monitor closely inflationary trends and conduct a monetary policy consistent with the objective of price stability. Although inflation is projected to pick up somewhat in 2011, it would remain below the 3-percent convergence criterion of the West African Economic and Monetary Union (WAEMU). Money supply growth is expected to accelerate by end-2011, in line with the projected increase in the credit to private sector.
My authorities will continue fiscal consolidation efforts as committed, in order to preserve fiscal and debt sustainability and achieve the program objectives. On the revenue side, revenue collection is expected to improve further by end-2011, following the establishment of the one-stop window at the Port of Cotonou and the launching of new import verification program. On the expenditure side, following the Constitutional Court’s ruling in May 2011 to nullify a wage increase to civil servants of the Ministry of Finance on the ground that it was discriminatory to the other civil servants, my authorities are resolved to keep the wage bill within the program envelope in 2011 and 2012, while pursuing negotiations with the labor unions on a sustainable wage policy.
My authorities will conduct this process within the framework of a comprehensive civil service reform for which a strategy will be developed following the completion of the preparatory work which includes (i) the finalization of two studies on the remuneration system and the reform of the civil service, (ii) the preparation of the terms of reference and the document project for the Integrated Human Resources Management System (SIGRH); and (iii) the completion of an organizational and institutional audit of the Ministry in charge of the Civil Service. This work is undertaken with the assistance from Denmark and The Netherlands.
As a complement to the fiscal reforms underway that are scheduled to be completed by mid-2012, my authorities will establish a joint Customs-Tax Control Unit all before year-end. In addition, a detailed review of all existing tax and customs exemptions aimed to rationalizing them will be carried out by June 30, 2012. Public financial management will continue to be strengthened with the submission to the Supreme Court of the draft Organic Budget Law and the submission to the budget audit office of the 2010 budget execution accounts by year-end.
On petroleum prices, as clearly explained in the staff report, a full pass-through of the international petroleum prices to domestic markets is constrained by the wide availability of cheap petroleum products informally imported from Nigeria. My authorities have taken measures to strengthen border controls to limit illegal imports. However, as this phenomenon is spreading to other countries, they are of the view that a regional approach is needed for its resolution.
Structural reforms in the public enterprise, telecoms and energy sector will be pursued. In particular, a regulatory framework for the energy sector, prepared with the assistance of the French Development Agency (AFD), that will permit the establishment of a regulatory authority and a transparent price-setting mechanism has been finalized and should be adopted by the Council of Ministers in the coming weeks.
Performance under the ECF at end-March 2011 has been satisfactory despite difficult circumstances. Going forward, my authorities remain committed to pursuing the implementation of sound macroeconomic policies and structural reforms aimed at achieving the objectives of the program. Continued support from donors will be determinant to the success of the program. In light of the program performance and the continued commitment to the program, I would appreciate the Executive Board’s support for the completion of the second review under the ECF and the request for a waiver of non-observance of a PC.