Journal Issue

Togo: Staff Report for the 2013 Article IV Consultation

International Monetary Fund. African Dept.
Published Date:
February 2014
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Recent Developments, The Outlook, and Risks

1. The ruling party recently won legislative elections, which gives the authorities a strong mandate to pursue growth-oriented policies. The long-delayed legislative elections held in July 2013 were peaceful, and the ruling party secured two-thirds of the seats. In a sign of policy continuity, the prime minister and most of the cabinet were reappointed. The electoral victory gives the authorities the mandate to pursue policies that, in the view of the public, would enhance economic growth and make it more inclusive. Thus, the authorities’ main policy challenges are to maintain fiscal sustainability, step up investment while maintaining debt sustainability, and meet the public’s strong expectations of sharing the fruits from higher economic growth.

2. Macroeconomic performance has improved from fifteen years of crisis (Figure 1 and Text Table 1). Real economic growth accelerated from almost 4½ in 2010–11 to 5.9 percent in 2012, reflecting dynamism in agriculture, mining, construction, and public works. The recent pace of economic growth reflects in part a recovery from the protracted political, social and economic crisis from the early 1990s through mid-2000s. Togo’s GDP per capita declined by about 17 percent during 1997–2002, and the recovery that started in earnest in 2009 has not yet fully made up for the lost ground. Poverty remains high, at about 60 percent of the population, and growth has not been inclusive, as income distribution worsened during 2006–11.1 Inflation eased to an average 2.6 percent in 2012, on account of rising staple food production and declining import prices following a pick-up in 2011 due to adjustments in energy prices. The current account deficit widened in 2011–12 to 11.8 percent of GDP, primarily as a result of higher imports of fuels and goods for public and private investment.

Figure 1.Togo: Historical Perspective, 1990–2011

During the last 20 years, tangible progress has been made towards improving MDG indicators, although several goals remain out of reach.
Togo: Millenium Development Goals, 1990–2012
Poverty headcount ratio at $1.25 a day (PPP) (% of population)38.728.2(2011)Halve
Literacy rate, youth female (% of females ages 15–24)63.667.974.6(2009)100
School enrollment, primary (% net)66.676.687.089.691.8(2008)100
Ratio of female to male primary enrollment (%)64.467.877.784.891.9(2012)100
Mortality rate, infant (per 1,000 live births)85.281.878.776.072.9(2011)28.4
Mortality rate, under-5 (per 1,000 live births)147.0136.9127.8119.7110.1(2011)49
Maternal mortality ratio (modeled estimate, per 100,000 live births)620.0540.0440.0370.0300.0(2010)155
Prevalence of HIV, total (% of population ages 15–49)
Improved water source (% of population with access)48.550.853.255.859.0(2011)74.25
Sources: Togolese authorities; World Bank; and IMF staff calculations and estimates.
Sources: Togolese authorities; World Bank; and IMF staff calculations and estimates.
Text Table 1.Togo: Selected Economic Indicators, 2010–14
(Percentage growth, unless otherwise indicated)
Real GDP4.
Consumer price index (average)
(Percent of GDP, unless otherwise indicated)
Overall fiscal balance (payment order basis)-2.1-3.4-6.6-5.4-4.6
Overall fiscal balance (cash basis)-4.3-3.5-7.2-6.3-5.3
Current account balance-6.3-9.1-11.8-10.6-10.9
Total public debt147.344.
Sources: Togolese authorities and IMF staff estimates and projections.

Includes arrears and state-owned enterprises external debt.

Sources: Togolese authorities and IMF staff estimates and projections.

Includes arrears and state-owned enterprises external debt.

3. Most of the staff advice in the context of the 2011 Article IV consultation remains relevant today (Box 1). Wide ranging structural reforms and fiscal conservatism were implemented up until the HIPC completion point in December 2010. Revenue and public financial management (PFM) reforms have slowed and debt management has weakened since then. The financial sector strategy was approved but its implementation remains limited. Only two out of four banks have been privatized and actions are needed to tackle vulnerabilities in other banks. Reforms in the mining, telecommunications, and energy sectors have progressed slowly under resistance from vested interests. More recently, the Ministry of Economy and Finance approved a public financial management (PFM) reform plan and its implementation has started to bear fruits.

Box 1.Main Recommendations from the 2011 Article IV Consultations

Staff emphasized the following areas as key to maintain macroeconomic stability, sustain growth, and reduce poverty in the medium term:

  • Adopt and implement the financial sector development strategy and speed up bank privatization.
  • Strengthen public financial management.
  • Improve debt management capacity and adopt a financing strategy relying on highly concessional loans and grants.
  • Reform the phosphate, telecommunication and energy sectors, where state-owned enterprises dominate. The World Bank plays a key support role in this area.1
  • Improve the business environment and boost investment in physical and human capital.
1 Since mid-2011, authorities took some steps to reform these sectors. In mining, Togo became a full member of the Extractive Industry Transparency Initiative (EITI) and the authorities are now trying to identify a consortium that could develop the new deposits of carbonated phosphates. In the telecom sector, a new Telecommunication Act was approved, opening the sector to more competition. In the electricity sector, a new Managing Director of the state-owned distribution company was selected following a competitive process in December 2011.

4. Economic growth is expected to soften to around 5½ in 2013. Even though growth has been supported by the agriculture, manufacturing, and construction sectors, economic activity was somewhat affected by irregular rains in mid-2013, lackluster transit trade (in part due to resumption of normal activity in other regional ports), and political uncertainties earlier in the year (Figure 2). The current account deficit would improve slightly to 10.6 percent of GDP, because of lower global import prices.

Figure 2.Togo: Recent Developments and Short-Term Projections, 2009–2013

Sources: Togolese authorities and IMF staff estimates and projections.

5. In the medium term, growth is expected to rebound to about 6 percent a year (Figure 3), under the impulse of regional growth and trade, more public and private investments in infrastructure, FDI in mining, and the impact of earlier reform in cash crop markets. The primary domestic fiscal balance would become positive to anchor reductions in the debt burden, and the overall fiscal balance would gradually be reduced to limit new debt accumulation. However, mainly reflecting imports of investments and intermediate goods, the current account deficit is projected to remain high, only narrowing to 9.2 percent of GDP by 2016.

Figure 3.Togo: Medium-Term Outlook, 2007–18

Sources: Togolese authorities; and IMF staff estimates.

6. While the main risks to the outlook are domestic, the Togolese economy is still vulnerable to a significant growth slowdown in its trading partners (Appendix I). Local and presidential elections in 2014 and 2015, respectively, could generate policy slippages; entrenched interests may resist reforms; and limited capacity may slow policy implementation. Without prompt corrective action to address emerging weaknesses in the financial sector, macroeconomic stability could be undermined. Continued policy inaction in the energy sector could negatively affect growth and the budget, while ill-conceived public-private partnerships could entail fiscal liabilities. Given its openness, the economy is vulnerable to shocks in export demand due to growth slowdown among its trading partners.

Policy Discussions

7. Discussions focused on policies required to restore fiscal discipline and move to a stronger, more sustainable and inclusive growth. There was agreement to reinvigorate in structural reforms that stalled after the HIPC completion point. Against this background, the discussions were organized around three main themes: (i) restoring fiscal policies to a more sustainable path; (ii) moving to stronger, more sustainable, and inclusive growth; and (iii) strengthening the financial sector and external stability. There was broad agreement between the authorities and staff on the issues facing Togo and the policies to address them, though views sometimes diverged on the pace and feasibility of needed actions. To assist them meet these challenges, the authorities requested Fund support in implementing their economic reform program.2

A. Restoring Fiscal Policy to a More Sustainable Path

Fiscal policy deteriorated since end-2010….

8. Fiscal deficits and public debt levels have increased in 2011 and 2012. The overall fiscal deficit more than doubled to 7.2 percent of GDP during 2012 largely on account of the adoption of an expansionary budget in the context of planned elections. At the same time, financing from privatization and budget support fell well short of budget plans and, as fuel subsidies rose to 2.1 percent of GDP, unpaid bills accumulated at end-2012. Meanwhile, the public debt-to-GDP ratio increased and is estimated at around 45 percent of GDP at end-2012, including on account of government recognition of old domestic liabilities of bankrupt public enterprises and arrears to pension funds.

9. The 2013 approved budget was also expansionary and subject to risks that eventually materialized. Unrealistically high capital spending, allocations for legislative and municipal elections and higher wages contributed to an overall balance deficit of almost 11 percent of GDP in the adopted budget. In addition, financing was predicated on unrealistically high privatization proceeds. Budget execution pressures built up immediately, as bank privatization did not yield the projected revenue, fuel subsidies over the first quarter absorbed almost the entire allocation for the year, and the anticipated external financing did not materialize. Meanwhile, additional outlays were required to fully finance election operations which saw cash flow pressures increase further by mid-2013.

…but the authorities’ now intend to follow a strong adjustment path

10. In the face of these challenges, the authorities adopted a revised 2013 budget and subsequently took further action to keep the fiscal deficit under control. The revised budget, adopted in consultation with Fund staff, is more realistic as it provides for lower capital expenditures, better aligned with execution capacity, higher allocations for fuel subsidies, and more realistic privatization revenue estimates.3 Staff advised the authorities that, since neighboring countries are adopting pricing policies yielding higher fuel prices and enforcement efforts have been strengthened, smuggling to Togo is now reduced which results in higher official imports and subsidy outlays. To curb the heavy subsidy bill, staff proposed a phased increased in fuel prices—except for kerosene, which is mostly consumed by the poor—by 5 percent in September 2013, and in January 2014, with accompanying targeted measures to protect the most vulnerable.4 The authorities are instead inclined to adopt temporary exemptions on income tax for transporters and on imports of selected essential foodstuff. They also plan to expand the school-feeding program. These measures will be finalized during consultations with domestic stakeholders.

11. Staff proposed that fiscal policies should aim at reducing debt distress vulnerabilities and be anchored by an improvement of the domestic primary fiscal balance. A return to positive territory would allow the authorities to generate the fiscal space to meet their infrastructure needs and implement their social policies, while reducing the debt burden. At the same time, the overall fiscal deficit should be carefully monitored, and overall debt policies guided by close adherence to a strengthened medium-term debt strategy (¶20) and a regular update of the debt sustainability analysis.

12. The authorities agreed with the approach proposed by staff to define their fiscal stance. Their current policies thus target a return to positive primary domestic fiscal balances and the reduction of the overall fiscal deficit in 2014 and the medium term. Their fiscal objective is to enhance fiscal sustainability by reducing the overall deficit to around 5¼ percent of GDP in 2014 and below 4 percent by 2016, while returning to a balanced primary domestic balance in 2014 and to a positive primary domestic balance slightly below 2 percent by 2016. To signal their commitment to fiscal prudence, the authorities chose to frontload fiscal adjustment, as the deficit reduction in 2013 accounts for one-third of the projected adjustment during 2013-16.

13. The projected fiscal adjustment is predicated on the implemention of the authorities’ policy objectives. The reduction in current spending reflects the objectives to cut back on oil subsidies during 2013–2015—as discussed above—and to limit the nominal growth of the wage bill to somewhat below the nominal growth of GDP in the medium-term. On the revenue side, the ongoing reforms in revenue administration are expected to usher a continuation of improvements in revenue collection (see below). However, the deficit levels for 2014 and beyond could still raise financing challenges. The possible adoption of a Fund-supported program could help catalyze development partners’ budget support, which, together with recourse to the regional financial market, would help close projected financing gaps. Staff emphasized that reconciling fiscal sustainability with developmental and social objectives will require significant improvements in public expenditure planning and efficiency, and continued efforts to enhance revenue collection.

14. While noting the considerable pressures they are facing from unions on wage increases, the authorities reiterated their intention to resist the pressure, except for those portions that can be accommodated within the current medium-term spending envelope. Once again at the beginning of the school year, the unions demanded wage, benefits, and employment increases. Staff emphasized the importance of moving away from ad-hoc yearly negotiations and instead adopting a comprehensive strategy of public sector employment and remuneration that is consistent with the authorities’ medium-term fiscal framework and sector strategies, particularly for education and health. Staff cautioned the authorities that, if wage demands were to be accommodated beyond the current allocations in the framework, the appropriate first-best policy adjustment would be to lower other budget expenditures.

15. The authorities concur with the staff that the progressive elimination of fuel subsidies would be a key driver of any fiscal adjustment. However, they are concerned that the current political and social situation is too tense for drastic changes. Staff pointed to the example of Ghana which has recently eliminated fuel subsidies by increasing prices and reestablishing an automatic adjustment mechanism that aligns future changes with the fluctuation of world oil prices and exchange rates. The Togolese authorities now expect to be in position to reduce fuel subsidies by about 1 percent of GDP in 2014, after they have reached an agreement with unions on pay packages. While staff agreed that fuel subsidies can be eliminated only gradually, it underscored the importance of strategically disseminating information to the public on their fiscal cost and regressive impact, as well as the opportunity cost in terms of foregone social and infrastructure spending.

16. There was some divergence of views regarding the pace of scaling up investment spending. The authorities’ concern is that the 1990s crisis has left a legacy of underinvestment in infrastructure that is holding back potential growth. They argued that the protracted and deep nature of the crisis has left them with a wider infrastructure gap than other countries in the region, and that only by significantly scaling up investment can they accelerate economic growth and development. Staff emphasized that prioritizing and effectively executing capital expenditures through enhanced planning and project implementation capacity is more important than increasing allocations for project spending. Therefore, it was prudent to create more fiscal space and progressively increase capital spending in line with improvements in the authorities’ capacity to plan and execute projects. Staff noted that the practice of issuing guarantees on the scheduled amortization of bank pre-financing of government contractors for infrastructure projects has reduced transparency and effectively tied down large portions of allocations for investment spending in future years, thus curtailing room to prioritize in future budgets.

17. The authorities intend to raise tax revenue further. In the short term, gains in revenue collections can be sustained by increased reliance on risk-based assessment of imports and tighter monitoring of entitlements to exemptions. The authorities’ plan to sustain their revenue effort in the medium term hinges on the successful launch of the revenue authority (Office Togolais des Recettes—OTR). Once established, the OTR should deliver efficiency gains by hiring new and more qualified personnel, shedding excess staff, and exploiting synergies among domestic- and import-related tax functions under a common strategic direction. Staff noted that pushing ahead with ongoing and programmed reforms in the tax and customs administrations remains important, notwithstanding the on-going creation of the OTR.

18. Better public financial management (PFM) should improve government efficiency and transparency. Implementation of the authorities’ medium-term expenditure framework will require careful alignment of policies with reform priorities. Staff noted that the execution of the authorities’ PFM reform plan is experiencing some delays related to both limited capacity and resistance from some administrative units. The authorities also noted that, in the low capacity environment of a fragile country, it is often difficult to reach consensus of reform priorities and align all government units to effectively implement them. Staff and the authorities discussed a number of measures to reinvigorate the PFM agenda. These include: (i) first steps towards establishing a single treasury account; (ii) a more effective cash projection and management system at the treasury; and (ii) better prioritization, execution and monitoring of investment projects.

19. The debt sustainability analysis (DSA) shows that Togo remains at moderate risk of debt distress (Supplement II). There has been considerable debt accumulation over the past two years as the fiscal situation deteriorated. The increase in external debt has been mainly driven by new loans from multilaterals and non-Paris Club bilateral creditors. In light of the projected increase in public investments, Togo’s external public debt is expected to increase in the near future, accumulating to around 22 percent of GDP by 2016. Under baseline assumptions, which are more favorable than historical trends, overall debt indicators are projected to remain below the relevant thresholds in the 20-year period. Nonetheless, there is need to closely monitor the trajectory of public debt, with increased focus on debt contracted from domestic sources, given the country’s low debt management capacity.

20. Strengthened debt management and policies are essential to ensure debt sustainability and reduce vulnerabilities. The authorities and staff discussed options to raise the functional profile and capacity of the Public Debt Directorate, including its human and physical resources. The authorities currently compile an annual debt strategy, but this should be strengthened to establish a medium-term strategy that is aligned with the budget process and the medium-term expenditure framework. Staff pointed out that under present circumstances, there were risks of losing control over debt management and new debt, unless the present deficiencies are addressed in a forceful manner. The authorities shared the view that debt management was in need of substantial improvements and asked for additional technical assistance.

21. In the staff’s view, Togo should continue to borrow on concessional terms until its debt management capacity has considerably improved, and closely monitor domestic debt dynamics. The DSA shows that Togo remains at moderate risk of debt distress, combined with low institutional capacity. At around 45 percent of GDP, its total public debt at end-2012 is above the average level for relevant comparator groups in Sub-Saharan Africa, i.e., fragile states that benefitted from HIPC (39.1 percent of GDP) and low-income countries (34.4 percent of GDP). The authorities emphasized that concessional financing is not available in amounts sufficient to meet their urgent development needs. Thus, they are exploring with potential lenders and development partners the possibility of contracting financing packages with a fully concessional grant element of 35 percent or higher that are also consistent with the currently projected DSA.

B. Moving to Stronger, More Sustainable, and Inclusive Growth

Growth has not been inclusive…

22. Poverty reduction requires sustained high growth but also implementation of specific policies to share its benefits more broadly. Poverty in Togo is high and its human development index remains low. While the recent acceleration of economic growth resulted in a reduction of about 3 percentage point in poverty incidence to about 60 percent during 2006–2011, income distribution worsened, as real consumption in the lowest four deciles actually declined (Appendix III and Text Figure 1.). Poverty has a strong geographical connotation, being highest in rural areas and the further one goes from the economically more vibrant coastal areas. In fact, poverty in rural areas increased during this period, while internal migration contributed to about a third of the total reduction in poverty. These findings suggest that policies to reduce poverty should focus on measures to enhance productivity in rural areas and market access, and targeted cash transfers. Also, given the importance of internal migration as a potential escape route from poverty, urban planning could take a more prominent role in the authorities’ poverty reduction strategy. Policies should focus on improving urban and peri-urban transportation, and the expansion of primary education and health services.

Text Figure 1.Togo: Growth Incidence Curve, 2006-11

…and faces significant bottlenecks

23. Growth is hampered by a number of major obstacles. Chief among these are infrastructure gaps (especially energy and roads), high telecommunication costs; and—more generally—a weak business environment. While investing in roads has been a budget priority since 2010, reforms to improve energy supply and telecommunication services have hardly gone beyond early planning stages. Electricity generation costs are high, utilities inefficiently run, and Togo largely depends on energy imports, exposing it to cut off risks (see below). Survey-based structural indicators suggest that addressing infrastructure bottlenecks and improving the business climate remain crucial to unlocking Togo’s growth potential (Appendix IV). Although the financial sector has deepened in the 2000s, concentration of the banking activity in Lomé prevents a wider reach of the sector to the Togolese society, especially in rural areas (Appendix II).

24. The new poverty reduction strategy paper (PRSP) aims at making growth stronger and more inclusive. The Strategy to Accelerate Growth and Promote Employment (Stratégie de Croissance Accélérée et de Promotion de l’Emploi—SCAPE—2013–2017) was adopted by the government in August 2013. It was finalized after extensive consultations with stakeholders.5 It builds on experience with the first PRSP (2009–11). Policies and reforms are envisaged around five strategic pillars: (i) developing sectors with high growth potential; (ii) strengthening economic infrastructure; (iii) developing human capital, social protection, and employment; (iv) strengthening governance; and (v) promoting participatory, inclusive, and durable development. The SCAPE includes plans to strengthen institutions for setting strategic priorities, and monitoring and evaluating programs.

Decisive action to raise growth will be required on a number of fronts…

25. So far, the authorities’ efforts have focused on improving road and transport infrastructure. Given Togo’s location as a regional hub, the authorities view investment in transportation infrastructure as critical to increase potential growth. A number of large projects are already advanced in transportation. In addition to large road investments, airport and port capacity will double by end-2014. The authorities have also recently established the Togo Invest Corporation (TIC)—a fully-owned state holding company with capital of CFAF 20 billion (0.9 percent of GDP)—to launch major rail and transportation projects along the North-South axis, mostly via public private partnerships. Staff cautioned the authorities that this carries the high fiscal risks typically associated to PPPs, as well as economic risks deriving from typically long gestation periods. In addition, the project carries administrative risks, as it is unclear how policy and operational responsibilities would be shared between ministries in charge of infrastructure development and TIC—thus undermining already limited ministerial capacities. Risks would be reduced if Togo could develop the institutions and legal framework to manage PPPs before the TIC starts operations. The authorities argued that in the short run risks will likely be limited given that TIC’s main activities in the coming year will be to conduct technical feasibility studies.

26. While staff agreed that transportation infrastructure should be a priority, it noted that economic growth should be supported more broadly, to include reforms in the telecommunications and energy sectors, and the business environment more generally. The cost of telecom services is among the highest in the world, and access is still limited and marred by frequent interruptions. It will be important to accelerate the implementation of the telecom strategy and to liberalize the sector by allowing more competition.

27. A comprehensive reform of the power sector to address a major bottleneck to growth is overdue. Staff emphasized that the electricity sector is facing a structural financial deficit and that it is already constraining economic growth. Given its limited domestic generation capacity, about 85 percent of Togo’s power is imported. On current investment plans, such shortfalls will only become larger and are likely to develop into the most important constraint to growth. High input costs compared to tariffs, operational inefficiencies, over-reliance on imports, and a lack of adequate strategic planning have led to supply shortfalls. Peak demand is met by expensive fuel oil-based generation supplied by an independent power producer. The sector is accumulating arrears to suppliers, mostly to other electricity companies in neighboring countries. This exposes Togo to the risk that these countries—which are themselves facing shortages—cut exports. At the same time, the largest payment backlog toward the distribution company is due by public sector entities.6

28. The authorities concurred with the staff analysis, but pointed out that there is no short-term solution. While staff understands that this is a complex sector, it also noted that several measures could be taken in the short-term and still have a positive impact. As a priority, staff argued that it is important to break the cycle of arrears accumulation. This can be achieved via a public information campaign aiming at making the public aware of the main financial and supply constraints in the sector, with emphasis on the need to eliminate payment and service backlogs, and by a sanctions policy allowing to cut off service to public sector entities. The authorities, fearing backlash in case essential public services are interrupted, preferred to devise a repayment plan after arrears are verified. It is thus crucial that the authorities make good on their intention to settle a portion of government arrears in 2014 and that more realistic budget allocations are made. A gradual move to cost-recovery level tariffs in the medium term is unavoidable, including to attract foreign investors, provided other areas are addressed concurrently.

29. There is significant scope for further improvement in the business climate (Appendix IV). Despite progress made in a number of areas, e.g., creation of a one-stop shop for business registration (which considerably reduced the time required to complete this procedure to 24 hours), Togo still ranks poorly in the 2013 Doing Business survey (156th out of 185 countries). Reform efforts are especially needed in the areas where Togo is still lagging well behind comparator countries, such as protecting investors’ rights, enforcing contracts, and accessing financing. The authorities recently awarded a contract for the operation of a one-stop window for foreign trade. When fully operational, this is expected to facilitate the flow and transit of goods, and expedite customs and border controls.

…as well as to make growth more inclusive

30. Staff welcomed the authorities’ focus on inclusiveness under the new development strategy. However, staff noted that growth relying on capital-intensive natural resource projects is unlikely to create a lot of jobs and benefit the rest of the economy. Conversely, growth relying on higher farm productivity and broader rural job opportunities is likely to generate additional demand and to lead to faster poverty reduction. Financial sector stability and development and financial inclusion are also important elements of an inclusive growth strategy (see below).

31. The authorities are determined to alleviate poverty via economic growth and measures to foster employment and micro-productive activities. Their strategy to promote inclusive growth hinges on measures creating opportunities for gainful self-employment, and the gradual expansion of the pilot school feeding program. Staff noted that given the strong geographical and sectoral profile of poverty, expanding conditional cash transfers and the school feeding program would appear good ways to deliver assistance to the poor. School feeding programs, in particular, have the added advantage of improving forward and backward linkages within the rural economy. However, the authorities fear that cash-based social programs may be prone to abuse and could create a culture of dependency.

C. Strengthening the Financial Sector and External Sector Stability

Despite increased financial deepening and overall financial stability…

32. The financial sector in Togo has experienced considerable financial deepening, and Togo compares favorably to its WAEMU peers. Since 2007, credit- and deposits-to-GDP ratios indicate significant improvements, and more than a 100 bank branches have been opened. However, lack of wide access to credit in spite of this growth remains a challenge (Appendix II). From the deposit perspective, low level of savings is a major constraint. On the credit supply side, lack of competition among banks and concentrations around Lomé prevent financial services from reaching wider public, especially in rural areas. The microfinance sector plays an important role where traditional banking services do not function efficiently, but the sector is plagued by unregulated activity.

33. The microfinance sector has grown very rapidly. Between 2009 and 2012, deposits and loans increased by 70 percent and 80 percent, respectively, and the number of clients increased from about 0.7 to 1.2 million. At end-2012, the microfinance’s share of deposits was 16 percent of the financial system. The microfinance plays a critical role in financial inclusion especially among the poor and the rural population, covering a large number of households. Togo’s microfinance sector plays a relatively more important part in the domestic economy than those in neighboring countries, as evidenced by the higher financial deepening indicators and relatively higher proportion of population covered by the sector.

…actions are needed to tackle vulnerabilities in some banks

34. The overall situation of the banking system appears stable, but aggregate numbers hide the weaknesses of individual banks. While NPLs have declined significantly over the past five years and system-wide capital adequacy levels are strong, substantial differences among banks exist. Stress-tests conducted recently suggest the system is strong according to traditional metrics of liquidity and solvency, but they also show that it is imperative to give due weight to risks stemming from highly concentrated loans and deposits’ short-term bias.

35. The rehabilitation of the banking sector remains an unfinished business. Three major state-owned banks (BTCI, UTB and BIA-T) were recapitalized in 2008 through a securitization process. These institutions received about US$200 million in new government securities in exchange for non-performing loans which were to be recovered by an asset recovery company called Société de Recouvrement du Togo (SRT). Strengthening the recovery effort could result in important revenue for the government but, so far, only limited amounts have been recovered. As time passes, the recovery rate on the portfolio diminishes, reducing its value as a government asset7 The bank privatization process has led to the successful sale of two out of four banks, and an unsuccessful attempt in early 2013 to privatize BTCI.

There is need to improve the regulatory framework and institutions

36. There are considerable systemic weaknesses in the bank supervision framework in the WAEMU region. Banking supervision relies on a dual mandate between the authorities in the WAEMU and the Ministry of Finance. The WAEMU is responsible for supra-national supervision of banks and can recommend recapitalization or resolution of weak institutions but the final decision relies on the national Ministry of Finance.8 This structure can complicate the decision-making process and promote moral hazard. Furthermore, banking regulation in the WAEMU is relatively lax when compared to international standards. Non-performing loans are required to be provisioned only after 180 days whereas international norms prescribe 90 days, and banks in the WAEMU are allowed to often operate below the minimum capital requirements for extended time before they are intervened. Delays in policy implementation due to complex regulatory framework, combined with ex ante relatively loose financial regulation, result in a financial system prone to systemic risks. While agreeing with the staff views, the authorities noted that these issues should be addressed at a WAEMU-wide level.

37. Regulation of the microfinance sector needs to be improved. Prevalence of informal lending and institutional arrangements constrains effective supervision. There is a proliferation of small financial entities that operate without formal licenses or authorization. The supervisory infrastructure is ill-equipped to track and enforce licensing, and close illegal units. Currently there exist over 60 such microfinance entities. There is also need to rein in pyramid-type operations, which undermine financial and social sector stability.

38. The authorities and staff concurred that over the medium term policies should focus on enabling the financial sector to perform greater financial intermediation. Policies could include:

  • Adopting resolution strategies for problem banks. The authorities and staff agreed on the importance to take effective and swift corrective action to address the situation of institutions facing financial difficulties. There was agreement on the fact that the authorities would continue leading the financial sector towards an environment where the private sector increases participation through larger stockholding, and by carrying out the process of privatization of public banks.
  • Enhancing oversight and supervision of the micro-credit sector. The microfinance supervisor—the Cellule d’Appui et de Suivi des Institutions Mutualistes et de Coopératives d’Epargne et de Crédit (CAS-IMEC, a division of the MEF)—is grossly understaffed and needs significant institutional strengthening. An important first step would be to increase the staffing and enhance training in modern risk-based financial sector supervision. At the same time, it is important to close all unlicensed institutions, and take measures to prevent the establishment and development of pyramid-type structures. In the medium term, there will be need to promote the restructuring and consolidation of the microfinance sector.
  • Restructuring pension funds to become financially sustainable over the medium-term. Staff highlighted the importance of adopting one of the proposed options to eliminate the structural deficit of the public sector pension scheme (CRT) and to settle public sector arrears with both the CRT and the national social security fund (CNSS). The options for improving the financial situation of the CRT include: (i) raising the retirement age; (ii) progressively raising the contribution rate; and (iii) transferring social assistance payments (which have nothing to do with pensions) to the state budget. This would allow to reduce financial losses and to accommodate the increasing number of beneficiaries.

Improving external sector stability

39. An external sector stability assessment suggests that external sector risks are generally manageable (Appendix IV). Although export growth has accelerated significantly over the past five years, imports have grown even faster, mainly on account of investment goods for various infrastructure projects. Togo has had structural current account deficits for nearly two decades. Low savings relative to large investment needs imply continued deficits over the medium term, although they are expected to decline as new projects come on-stream. In the longer run, prospects are generally good for greater export growth given investment in mining-related activities and the large expansion of the port of Lomé. Inward FDI is expected to increase on account of improvements in infrastructure and the business climate. Remittances have remained an important contributor to the balance of payments.

40. Staff assessment of the real effective exchange rate (REER), using three standard methods, indicate that it is broadly in line with economic fundamentals. The REER has somewhat declined over the past three years (Text Figure 2.), largely reflecting the depreciation of the euro, to which the CFA franc is pegged. External reserves (pooled at the regional level) are ample, covering more than five months of imports. To reduce external vulnerabilities, Togo needs to implement prudent fiscal and borrowing policies, and increase non-price competitiveness. The authorities concurred with this assessment and noted that they are working with other development partners to address competitiveness issues. In particular, their reform efforts will focus on implementing the new investment code, supported by the adoption of implementing decrees, adopting a new mining code in line with EITI transparency standards, and developing a modern code for property titles.

Text Figure 2.Togo: REER and NEER, Jan.05-Aug.13 (2005 = 100)

Staff Appraisal

41. Growth has picked up over the past few years on the back of reforms initiated under the previous ECF-supported program. The past five years have seen a reversal of declining per capita GDP levels that had plagued Togo over the previous 15 years. Growth has generally been broad-based, with agriculture, cement and clinker manufacturing, construction, and other services showing good performance, but it has not been inclusive. The medium term growth outlook is good, and the challenge is to sustain the momentum and make growth more inclusive, taking advantage of Togo’s unique location in the midst of some of SSA’s biggest and most dynamic subregional economies. Inflation would remain moderate. The authorities need to reinvigorate much-needed structural reforms that had stalled over the past two years in order to set growth on a sustainable path.

42. Staff welcomes the authorities’ renewed determination to address emerging fiscal problems in 2013 in order to set Togo on a sustainable debt path. Fiscal deficits and debt ratios have increased in recent years, reducing room for fiscal maneuver and raising sustainability issues. Restoring fiscal space and keeping low the risk of debt distress require lower deficits. Debt sustainability considerations call for strengthening of debt management and for further reduction of the fiscal deficit in the medium term. Greater revenue mobilization is needed to facilitate high priority spending on infrastructure, health, education, and agriculture. The proposed OTR would help reinvigorate revenue mobilization. At the same time, operational reforms in revenue administration should be deepened.

43. Reducing the fiscal deficit while addressing the country’s social and development needs will require improving public spending efficiency. Beyond reducing the cost of running the government and streamlining of government agencies, rationalization of expenditure and more cost-effective support to the most vulnerable segments of the population will be needed. In this regard, staff welcomes the authorities’ intention to phase out costly and poorly-targeted fuel price subsidies and to broaden and improve social safety nets. This will require strong political leadership to overcome vested interests, a well-orchestrated public information campaign, as well as good administrative capacity. It remains important to systematically address pressures on the wage bill and size of the public sector by defining a structural wage and employment reform.

44. There is need to have a determined effort to improve debt management. Debt management has weakened considerably since the HIPC completion point at end-2010. At the same time, debt levels have increased in part due to the government’s recognition of old liabilities. Consequently, careful monitoring of existing debt and rigorous implementation of a medium-term debt strategy will be needed to control the accumulation of new debt and bring current debt levels progressively down. In particular, the authorities should seek only new concessional external loans until there is a decisive improvement in their debt management capacity. While PPPs have the potential to unlock much-needed financing for infrastructure, the authorities will need to adopt a robust legal framework and improve their institutional capacity to ensure maximum benefits from such arrangements while minimizing contingent liabilities for the government.

45. The main medium-term challenge for Togo is to move to higher, sustainable, and inclusive growth. To raise potential growth, there is need to address major bottlenecks, especially in infrastructure. Despite the pickup in growth over the past five years, overall poverty incidence has declined only slowly. Indeed, there are significant regional differences in poverty levels, with poverty in several rural regions actually increasing. Growth has not been inclusive, as the poorest 40 percent of the population has seen its incomes decline between 2006 and 2011. Consequently, creation of fiscal space to support implementation of policies that raise incomes of the poor, such as rural feeder roads, mini dams for irrigation, and off-grid energy alternatives will be needed to make growth more inclusive. At the same time, for the poorest segments of the population, progressively extending the pilot cash transfer and school feeding programs will begin to reduce the intergenerational transmission of poverty.

46. While the overall Togolese financial system has developed significantly over the past decade and is sound, a number of individual banks have shown fragility. Financial depth has increased significantly over the past decade and Togo compares favorably to its WAEMU peers. The microfinance sector has greater reach in Togo than in other WAEMU countries. Actions will be needed to enhance weak banks, such as requiring banks to accumulate capital, where needed, through dividend suspensions or new capital injections. There is also need to significantly enhance the supervision, monitoring and control of the microfinance sector, which is plagued by structural weaknesses and unregulated activity.

47. The economy will remain exposed to substantial risks, mainly on the domestic side. The main domestic risks are delays in reforming the energy sector and difficulties modernizing state functions and reforming state owned enterprises, which would affect growth and fiscal sustainability. External vulnerabilities are generally manageable as Togo’s export destinations are relatively diversified. That said, concerted efforts to increase non-price competitiveness will help propel Togo into a major transport and logistics hub on the West African coast.

48. It is proposed that the next Article IV consultation take place on the standard 12-month cycle.

Table 1.Togo: Selected Economic and Financial Indicators, 2010–18
(Percentage growth, unless otherwise indicated)
National income, prices, and exchange rates
Real GDP4.
Real GDP per capita1.
GDP deflator1.
Consumer price index (average)
GDP (CFAF billions)1,5711,7721,9992,1542,3372,5392,7622,9953,239
Exchange rate CFAF/US$ (annual average level)494.4471.4510.0
Real effective exchange rate-6.00.7-4.0
Terms of trade (deterioration = –)-2.2-2.1-
(Annual change, percent of beginning-of-period broad money)
Monetary survey
Net foreign assets13.04.4-2.1-3.1-
Credit to government14.3-
Credit to nongovernment sector10.320.511.510.
Broad money (M2)16.315.98.915.
Velocity (GDP/end-of-period M2)
(Percent of GDP, unless otherwise indicated)
Investment and savings
Gross domestic investment18.918.619.120.321.121.922.121.620.9
Gross national savings12.
Government budget
Total revenue and grants20.420.419.822.723.023.523.723.523.3
Total expenditure and net lending22.523.826.428.127.627.126.525.725.1
Domestic primary expenditure16.718.920.320.019.418.918.318.017.9
Overall balance (payment order basis)-2.1-3.4-6.6-5.4-4.6-3.5-2.8-2.2-1.8
Overall balance (cash basis)-4.3-3.5-7.2-6.3-5.3-4.3-3.6-2.9-2.6
Domestic primary balance21.7-1.6-2.0-
External sector
Current account balance-6.3-9.1-11.8-10.6-10.9-9.9-9.0-8.4-8.4
Exports (goods and services)340.240.739.639.539.239.439.439.539.2
Imports (goods and services)3-57.3-61.4-61.1-62.2-62.5-62.0-60.4-58.8-56.5
External public debt417.215.618.118.919.620.821.522.022.4
External public debt service (percent of exports)
Total public debt447.344.
Sources: Togolese authorities and IMF staff estimates and projections.

Change as a percentage of broad money at the beginning of the period.

Revenue minus expenditure, excluding grants, interest, and foreign-financed expenditure.

Aggregate import and export figures, both for historical data and for projections, now include separately the imports and exports from the binational electricity generating company CEB, which were previously netted out when calculating aggregate numbers.

Includes arrears and state-owned enterprises external debt

Sources: Togolese authorities and IMF staff estimates and projections.

Change as a percentage of broad money at the beginning of the period.

Revenue minus expenditure, excluding grants, interest, and foreign-financed expenditure.

Aggregate import and export figures, both for historical data and for projections, now include separately the imports and exports from the binational electricity generating company CEB, which were previously netted out when calculating aggregate numbers.

Includes arrears and state-owned enterprises external debt

Table 2.Togo: Balance Payments, 2010–18
(Billions of CFA francs)
Current account balance-98.9-160.9-235.2-228.2-254.7-251.8-247.4-252.1-272.0
Trade balance-225.0-273.7-313.1-348.0-380.0-387.7-395.5-409.1-403.7
Of which : Cotton8.923.631.041.645.349.659.368.974.1
Cement & clinker73.481.492.9103.3116.1140.4154.5169.9181.8
Imports, f.o.b.-708.5-869.0-989.5-1093.1-1200.0-1298.3-1380.1-1452.0-1500.9
Of which : Imports for domestic use-651.4-827.3-942.0-1025.9-1111.0-1185.1-1260.1-1346.0-1409.2
Of which : Petroleum products-57.8-109.9-125.3-140.6-158.9-176.1-181.8-192.4-195.9
Services (net)-38.5-47.1-74.2-73.3-76.2-73.4-65.5-64.1-66.0
Income (net)-11.6-11.4-13.6-9.3-12.2-13.0-16.6-13.8-20.8
Current transfers (net)176.2171.3165.7202.3213.6222.3230.3235.0218.5
Of which : Remittances126.4126.9126.9128.2129.5130.8132.1136.0121.3
Capital and financial account77.4124.173.8175.9196.3198.1216.8235.4258.9
Direct investment24.130.731.937.058.463.569.174.981.0
Portfolio investment, incl. bonds-3.818.119.621.926.931.433.733.725.0
Other investment75.052.519.7106.4111.0103.2114.0121.0153.0
Errors and omissions-24.9-
Overall balance-46.4-92.8-157.8-52.3-58.4-53.7-30.7-16.6-13.0
Central bank net foreign assets1-31.7-6.8123.7-1.712.1-11.5-15.5-20.1-15.5
Arrears, net change0.00.0-
Flow rescheduling26.441.537.736.133.531.122.021.524.1
Clearance of debt/arrears642.
Debt/arrears cancellation-642.
Debt and arrears rescheduling0.
Finacing gap51.858.0-3.617.912.834.
Identified Financing41.146.116.317.912.
IMF financing11.
Donor financing30.128.916.317.912.
Residual financing gap10.311.9-
Memorandum items:
(Percent of GDP, unless otherwise indicated)
Current account balance-6.3-9.1-11.8-10.6-10.9-9.9-9.0-8.4-8.4
Trade balance-14.3-15.4-15.7-16.2-16.3-15.3-14.3-13.7-12.5
Exports of goods and services240.240.739.639.539.239.439.439.539.2
Imports of goods and services-57.3-61.4-61.1-62.2-62.5-62.0-60.4-58.8-56.5
Direct investment1.
Gross international reserves (imputed in billions of USD)
Gross international reserves (as a percentage of M2)49.247.824.
Gross international reserves of the WAEMU (months of next year’s imports)……
Sources: Togolese authorities and IMF staff estimates and projections.

Negative sign indicates increase.

Aggregate import and export figures, both for historical data and for projections, now include separately the imports and exports from the bi-national electricity generating company CEB, which were previously netted out when calculating aggregate numbers. Exports from CEB accounted for about 3 percent of GDP in 2009 and imports of CEB for about 4.4 percent of GDP.

Sources: Togolese authorities and IMF staff estimates and projections.

Negative sign indicates increase.

Aggregate import and export figures, both for historical data and for projections, now include separately the imports and exports from the bi-national electricity generating company CEB, which were previously netted out when calculating aggregate numbers. Exports from CEB accounted for about 3 percent of GDP in 2009 and imports of CEB for about 4.4 percent of GDP.

Table 3a.Togo: Central Government Financial Operations, 2010–18(In CFAF billion)
Act.Est.Approved BudgetRevised BudgetEst.Approved BudgetRevised BudgetProj.Proj.
(In billions of CFA Francs)
Revenue and grants321.3362.3411.4417.1396.4492.9496.3489.5536.9597.7653.4705.2755.4
Total revenue289.1306.6340.0376.0364.7411.5414.9415.3452.8506.2555.2606.2658.2
Tax revenue238.9281.4304.0332.6320.8363.9363.9364.3400.1448.3492.2537.9584.3
Tax administration (DGI)105.7118.5133.2148.2143.9158.8158.8159.1175.0198.7219.2240.4260.9
Customs administration (DGD)133.2162.9170.8184.4176.9205.1205.1205.3225.2249.6273.0297.5323.3
Nontax revenue50.
Grants (projects)32.255.871.441.131.781.481.474.184.191.598.299.097.2
Expenditure and net lending354.4422.0601.5573.7528.1702.7608.9606.2644.3686.8731.5770.2814.2
Of which: Dom. primary expenditures262.0334.4400.6416.7405.1425.0427.3431.3453.9479.3506.6540.3578.8
Of which: temporary social measures3.40.00.0……
Current expenditure230.8277.8311.3362.8352.8351.8378.5385.9395.9410.0430.4469.1509.8
Primary current spending215.7266.2294.0345.2334.2321.7348.4355.7362.1377.8396.1434.0468.2
Wages and salaries82.6104.7115.9116.7120.4125.3136.0136.0147.2159.8167.9179.6188.9
Goods and services59.563.781.8106.188.581.584.978.385.593.2102.3116.3127.6
Transfers and subsidies69.497.996.3122.4125.3114.9127.5141.4129.4121.8122.9135.2148.7
Of which: Oil prices support3.732.55.031.842.510.030.043.924.
Domestic debt10.19.5911.011.012.820.720.720.823.622.823.022.021.5
External debt5.01.926.
Public investment123.6144.2290.2210.9175.1350.9230.4220.3248.4276.7301.1301.0304.5
Domestically financed46.268.2106.671.470.9103.378.975.591.8101.5110.5106.3110.6
Foreign financed77.376.1183.5139.4104.2247.6151.5144.8156.6175.2190.6194.7193.9
Domestic primary balance27.2-27.9-60.6-40.7-40.4-13.5-12.4-15.9-1.126.948.665.979.4
Overall balance, payment order basis (incl. grants)-33.0-59.7-190.1-156.6-131.7-209.8-112.6-116.7-107.4-89.0-78.1-64.9-58.9
Excluding grants-65.2-115.4-261.5-197.8-163.4-291.2-194.0-190.9-191.5-180.5-176.3-163.9-156.1
Change in arrears1-35.2-2.4-17.0-14.0-11.7-23.0-24.4-19.6-15.8-19.7-21.4-23.2-25.1
Overall balance, cash basis
(incl.grants; incl.change in arrears)-68.2-62.1-207.1-170.6-143.2-232.8-137.0-136.3-123.2-108.7-99.5-88.2-84.0
Excluding grants-100.4-117.8-278.5-211.8-175.1-314.2-218.4-210.4-207.3-200.2-197.7-187.2-181.2
Domestic financing (net)-12.3-16.369.457.685.136.638.465.759.
Banking system5.4-31.8-4.6-3.534.4-8.8-8.818.
Nonbank financing-17.815.573.961.150.645.447.
Of which: Bank Privatization proceeds45.
External financing (net)29.220.3105.691.861.5148.952.852.751.161.465.766.973.1
Exceptional financing41.146.120.320.316.313.818.417.912.
ECF credit11.
Other identified financing (budget support)30.128.920.320.316.313.818.417.912.
Residual/unidentified financing ( + = financing needs)210.311.911.70.9-19.633.527.
Memorandum Item:
Tax exemptions recorded by DGI and DGD as revenue37.710.06.938.240.0
Sources: Togolese authorities and IMF staff estimates and projections.

Includes the BCEAO credit for domestic arrears clearance.

Identifies residual for past years (i.e. 2012) and financing gap for current and future years (i.e. 2013 onward). In keeping with practice under the previous ECF-supported program, unidentified financing from 2014 on is calculated without assuming any external budget support (i.e. exceptional financing).

DGD started collecting data on tax exemptions on imports in 2013. The amount of these exemptions in 2013 is estimated at CFAF 28 bill (1.3 percent of GDP).

Sources: Togolese authorities and IMF staff estimates and projections.

Includes the BCEAO credit for domestic arrears clearance.

Identifies residual for past years (i.e. 2012) and financing gap for current and future years (i.e. 2013 onward). In keeping with practice under the previous ECF-supported program, unidentified financing from 2014 on is calculated without assuming any external budget support (i.e. exceptional financing).

DGD started collecting data on tax exemptions on imports in 2013. The amount of these exemptions in 2013 is estimated at CFAF 28 bill (1.3 percent of GDP).

Table 3b.Togo: Central Government Financial Operations, 2010–18(In percent of GDP)
Act.Est.Approved BudgetRevised BudgetEst.Approved BudgetRevised BudgetProj.Proj.
(Percent of GDP)
Revenue and grants20.420.423.422.219.822.923.222.723.023.523.723.523.3
Total revenue18.417.319.420.
Tax revenue15.215.917.317.716.016.917.016.917.117.717.818.018.0
Nontax revenue3.
Expenditures and net lending22.523.834.230.526.432.628.528.127.627.126.525.725.1
Of which: Dom. primary expenditures16.718.922.822.220.319.720.020.019.418.918.318.017.9
Of which: temporary social measures0.20.00.0
Current expenditures14.715.717.719.317.616.317.717.916.916.215.615.715.7
Primary current spending13.715.016.718.416.714.916.316.515.514.914.314.514.5
Wages and salaries5.
Goods and services3.
Transfers and subsidies4.
Of which: Oil prices support0.
Public investment7.98.116.511.28.816.310.810.210.610.910.910.19.4
Domestically financed2.
Foreign financed4.94.310.
Domestic primary balance1.7-1.6-3.5-2.2-2.0-0.6-0.6-
Overall balance, payment order basis (incl. grants)-2.1-3.4-10.8-8.3-6.6-9.7-5.3-5.4-4.6-3.5-2.8-2.2-1.8
Excluding grants-4.2-6.5-14.9-10.5-8.2-13.5-9.1-8.9-8.2-7.1-6.4-5.5-4.8
Change in arrears1-2.2-0.1-1.0-0.7-0.6-1.1-1.1-0.9-0.7-0.8-0.8-0.8-0.8
Overall balance, cash basis (incl.grants; incl.change in arrears)-4.3-3.5-11.8-9.1-7.2-10.8-6.4-6.3-5.3-4.3-3.6-2.9-2.6
Excluding grants-6.4-6.6-15.9-11.3-8.8-14.6-10.2-9.8-8.9-7.9-7.2-6.2-5.6
Domestic financing (net)-0.8-
Banking system0.3-1.8-0.3-0.21.7-0.4-
Nonbank financing-
Of which: Bank Privatization proceeds2.
External financing (net)
Exceptional financing2.
ECF credit1.
Other identified financing (budget support)
Residual/unidentified financing ( + = financing needs)
Memorandum Items:
Tax exemptions recorded by DGI and DGD as revenue30.
Nominal GDP (CFAF billions)1,5711,7721,7561,8791,9992,1542,1382,1542,3372,5392,7622,9953,239
Sources: Togolese authorities and IMF staff estimates and projections.

Includes the BCEAO credit for domestic arrears clearance.

Identifies residual for past years (i.e. 2012) and financing gap for current and future years (i.e. 2013 onward). In keeping with practice under the previous ECF-supported program, unidentified financing from 2014 on is calculated without assuming any external budget support (i.e. exceptional financing).

DGD started collecting data on tax exemptions on imports in 2013. The amount of these exemptions in 2013 is estimated at CFAF 28 bill (1.3 percent of GDP).

Sources: Togolese authorities and IMF staff estimates and projections.

Includes the BCEAO credit for domestic arrears clearance.

Identifies residual for past years (i.e. 2012) and financing gap for current and future years (i.e. 2013 onward). In keeping with practice under the previous ECF-supported program, unidentified financing from 2014 on is calculated without assuming any external budget support (i.e. exceptional financing).

DGD started collecting data on tax exemptions on imports in 2013. The amount of these exemptions in 2013 is estimated at CFAF 28 bill (1.3 percent of GDP).

Table 4.Togo: Monetary Survey, 2010–18
(Billions of CFA Francs)
Net foreign assets259.5291.1273.8245.9220.4239.6271.3309.2305.2
Commercial banks66.090.9197.2167.6154.2161.9178.1195.9176.3
Net domestic assets457.1540.6631.9803.7928.91015.31136.11220.11358.3
Credit to government (net)138.898.9129.7148.2155.1162.8169.2178.2196.4
Commercial banks76.627.655.575.887.094.7101.2110.1128.5
Credit to nongovernment sector358.5505.6601.7691.9761.1837.2937.71031.51134.6
Other items (net)-40.4-64.4-99.6-36.412.715.329.310.527.2
Money supply (M2)717.0831.3905.61049.61149.31254.91407.41529.41663.4
Currency in circulation183.3193.8161.5177.7191.0201.6228.6233.1237.8
Bank deposits533.7637.5744.0871.9958.21053.31178.91296.21425.6
(Annual change, as a percent of beginning-of-period broad money)
Net foreign assets3.04.4-2.1-3.1-
Commercial banks-2.23.512.8-3.3-
Net domestic assets13.211.611.
Credit to government (net)4.3-
Credit to nongovernment sector10.320.511.610.
Other items (net)-1.4-3.3-
Money supply (M2)16.315.98.915.
Currency in circulation7.01.5-
Bank deposits9.314.512.814.18.28.310.08.39.2
Memorandum items:
Velocity (GDP/end-of-period M2)
(In percent of GDP)
Net foreign assets16.516.413.711.
Commercial banks4.
Net domestic assets29.130.531.637.339.740.041.140.741.9
Credit to government (net)
Commercial banks4.
Credit to nongovernment sector22.828.530.132.132.633.033.934.435.0
Other items (net)-2.6-3.6-5.0-
Money supply (M2)45.646.945.348.749.249.451.051.151.4
Currency in circulation11.710.
Bank deposits34.
Sources: Central Bank of West African States and IMF staff estimates and projections.
Sources: Central Bank of West African States and IMF staff estimates and projections.
Table 5.Togo: Financial Soundness Indicators, 2009-June 2013(in percent, end ofperiod)
2009201020112012June (2013)
Capital Adequacy
Regulatory Capital / Risk-weighted Assets12.311.911.711.411.8
Base Capital / Risk-weighted Assets12.310.810.69.810.2
Asset Quality
NPLs / Gross Loans14.613.910.911.413.6
Return on Assetsn.a.
Return on Equity4.67.913.622.927.2
Liquid Assets / Total Assets27.330.033.444.642.6
Liquid Assets / Total Deposits36.642.646.465.762.2
Source: BCEAO and Fund staff calculations.
Source: BCEAO and Fund staff calculations.
Appendix I. Togo Risk Assessment Matrix1
Source of RiskLikelihoodExpected impact on economyNature of Impact
Short Term (1 year)
Sharp decline in growth in Togo’s regional partnersLowMediumTogo’s economy is relatively open, so a decline in external demand would reduce potential growth, although domestic factors, especially public and private investment, have played a significant role in recent growth performance.
Social unrestHighMediumGeneralized poverty in the country constitutes an environment prone to social unrest, which may generate demonstrations and major economic disruption, although public order and security are well established.
Delays in fiscal adjustmentMediumHiG2ghPolicy slippages may materialize to: (i) accelerate infrastructure investment too rapidly, in a context of low capacity at all stages of the investment cycle; (ii) yield to requests to settle all old debts without adequate checks; and (iii) rapidly increase public sector wages and employment. Under social and political pressure, the authorities may delay taking decisive action on PFM and OTR reforms.
Risks to financial sector stabilityHighHighSome public sector banks have been poorly managed. A lot needs to be done to improve supervision of microcredit institutions. Both sectors pose risks for financial sector stability and fiscal costs.
Medium- to Long-Term (2 to 4 years)2
Power supply shortfallsHighHighPlanning and regulatory inaction and poor operational management of utilities may lead to widespread power cuts. In the short term, this will result in budget costs.
Weather shock: flooding or droughtMediumMediumFlooding and drought are a recurring event in Togo, but their impact is typically short-lived and/or localized.
Protracted period of slower European growthHighLowTogo’s export base is diversified by country and product. Main source of remittances are Europe and WAEMU. Both channels have proven stable over recent years.
Lower-than-anticipated emerging market (EM) growth potentialMediumMediumTogo’s exports are diversified consisting mainly of primary commodities to emerging and developing countries, whose price is a function of global economic conditions. China is mainly a source of imports and loans for public works. A slowdown in EMs could actually lower import prices.
Policy slippages in connection with local (2014) and presidential (2015) electionsMediumMediumThe local elections are not likely to result in slippages. However, the presidential elections are likely to lim it the authorities’ ability to exercise fiscal discipline, pursue structural reforms, and share the fruits from growth more equally.
Resistance to reforms from entrenched interests affecting mining, infrastructure investment and business environment reformHighHighPolitical and private interests often overlap, and are essential to maintain the current stability. Reforms diminishing the control exercised by entrenched groups are likely to meet strong resistance. Delays in reforms would slow economic growth, increase inequality, and potentially lead to pressure for political change.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staffs subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities.

Some of these risks (e.g., weather related emergency) could materialize in the short-term as well.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staffs subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities.

Some of these risks (e.g., weather related emergency) could materialize in the short-term as well.

Appendix II. Financial Sector Profile

The financial sector in Togo experienced considerable deepening over the last decade. However, lack of broad access to credit in spite of this growth remains a challenge. Lack of competition among banks to reach new customers and concentration around Lomé (despite increases in the number of branches) prevent a wider reach, especially in rural areas. The microfinance sector plays an important role where traditional banking services do not function efficiently, but the sector is plagued by unregulated activity. At the broader level, while traditional risk metrics such as improving capital adequacy and NPLs suggest there is aggregate stability, there are individual banks that do not meet prudential requirements. The overall soundness of the system can thus be threatened by a further deterioration of these banks unless timely action is taken. Reinforcing this point, a stress test that was conducted recently suggests that the banking sector is vulnerable to insolvency and illiquidity crises in the face of shocks that can exploit systemic asset concentrations, underlining the fragility of aggregate stability.

A. Banking System

1. Indicators of depth and overall financial stability show encouraging signs.1 Indicators of financial depth have risen steadily, and compare favorably with the WAEMU average (Text Figures la and lb). The deposit-to-GDP ratio has more than doubled since 2000 to 38 percent, while for WAEMU, the same ratio stands at 25 percent.

Figure 1a:WAEMU Financial Deepening Indicators

(In percent of GDP)

Figure 1b:WAEMU Financial Deepening Indicators

(In percent of GDP)

2. Financial sector indicators (FSIs) suggest the system is well capitalized, although a couple of banks display substantial weaknesses. The gross NPL ratio appears to be stable near 11 percent, but caution is warranted. The loan composition of the portfolio indicates excessive concentration in some sectors. Over 70 percent of loans flow to commerce, manufacturing and transportation, exposing the banking sector to risk of loan concentration in the event of a common shock to these sectors’ profitability. Furthermore, loans allocated to the five largest enterprises account for over 70 percent of total capital, underlining exposure to a potentially correlated shock among important stakeholders in the system. Indeed, IMF (2013) shows that stress tests at the WAEMU level indicate that concentration of lending represents one of the main risks in the financial system.

3. There are indications of limited competition. The four largest banks account for over 60 percent of total assets, total deposits and total loans in 2012. While measures of industrial concentration are not always the best indicators for market dominance, lending policies and interest rates for loans paint a consistent picture, namely inertia to lower rates. The thin network of branches outside Lomé enhances the lack of competition by rendering transportation cost a non-trivial factor in the choice of bank. Furthermore, the ratio of non-interest income to total income provides an indication of the relative importance of bank commissions and fees in generating income. The ratio, although declining since 2004, was at 41 percent in 2011. A high ratio is a reflection of a business model characterized by lack of lending opportunities and hence concentrated in other financial services apart from providing loans.

4. Bank privatization has fallen short of expectations. Banks in Togo reached near-bankruptcy in mid-2000s mainly due to heavy exposure to NPLs of state-owned enterprises. Three major state-owned banks (BTCI, UTB and BIA-T) had to be recapitalized through a securitization process, and one private bank (Ecobank Togo) underwent restructuring. Bad loans were removed from their balance sheets in return for bonds, which are eligible for BCEAO refinancing. The authorities decided to recover the bad loans via an asset recovery company.2 In order to improve governance and compensate for the heavy budgetary impact of recapitalization (CFAF 88.1 billion, 6.2 percent of GDP), the authorities decided to privatize the three state-owned banks in addition to a fourth one, which did not need financial restructuring in 2008 (BTD). However, only two banks—BTD and BIA-T—were eventually privatized.

B. Risk Assessment

5. Stress-testing of the Togolese banking system reveals credit risks. The most important result of the stress-test is that, in the event of the default of the largest borrower in the system, the capital adequacy ratio (CAR) falls 70 percent for banks of all sizes. Specifically, the medium and large banks have the greatest insolvency risk due to a decline in their CARs relative to the baseline scenario. However, the smallest banks are at greatest risk of a run under simulated liquidity risks. Similarly, testing the concentration risk of loans to certain sectors (commerce, manufacturing and transportation) demonstrates that stagnation in each of these sectors would put primarily the medium and large banks at risk. This is a first order impact, and it should be viewed as a generous estimate. One would expect effects to pass into the remaining sectors, and feed back to the entire financial system, including smaller banks.

C. Microfinance Sector

6. The microfinance sector has been growing rapidly. Deposits and loans increased by 77 percent and 80 percent respectively, between 2008 and 2012. At end 2012, the level of savings in the sector stood at CFAF 116 billion, 16 percent of the financial system deposits whereas credit was at CFAF 103 billion, approximately 14 percent of overall financial sector credit.

7. The years 2010 and 2011 were characterized by a crisis of confidence among savers. One major institution, IDH, was put under temporary receivership in July 2010 after being declared bankrupt. However, its resolution has made limited progress since.3 In this context, the growth of NPLs in the sector from 3.2 percent in 2011 to 5 percent in 2012 is worrisome, and requires monitoring.

8. Insufficient technical capacity contributes to the problem of ineffective supervision. Currently, there are two institutions that supervise the sector, CASIMEC and WAEMU Banking Commission. Large networks fall under the responsibility of the WAEMU Banking Commission, while smaller operations are monitored by CASIMEC, an institution within the Ministry of Finance. However, there are currently significant capacity and technical issues. The supervisory infrastructure lacks the technical means to develop tracking systems to enforce licensing rules, and make decisions on dealing with the many small and decentralized entities it should supervise. Indeed, currently there are sixty-three illicit microfinance entities. A strategy still has to be devised to either incorporate these institutions into the regulatory system or to close them.

D. Policy Advice

9. In the short run, financial sector consolidation should be favored over broadening and deepening. A combination of banks, including new Pan-African banks, aggressively expanding into Togo’s financial sector, weak supervision, and conditions in microfinance are increasing financial vulnerability if unaddressed. The offer of banking services for Togo’s small economy—and the formal sector—appear sufficient, for the time being, in quantity. What is lacking is an offer that better responds to quality criteria and the development needs of the economy. Thus, the short term priority in sectoral reform should be to tighten multilateral surveillance through the Banking Commission and other financial sector supervisors, and harmonize coordination with national authorities, which license financial sector activity.

10. At the regional level the bank resolution framework should be revamped through greater executive powers for the Banking Commission, more effective recapitalization and bankruptcy proceedings to prevent contagion. Policies should include: (i) strengthening capacity and the means of microfinance supervision to allow it to execute its mandate and impose decisions; (ii) reducing the backlog of microfinance licensing, consolidating non-viable entities and closing illegitimate ones, and impeding the re-emergence of pyramidal schemes; and (iii) developing financial tools to assess and package risks, and broadening the basis of activity.

11. Medium-term objectives can then focus on increasing financial depth by enabling an efficiently functioning banking sector to rise to its full intermediary potential. This implies expanding financial access to a wider cross section of society while preserving the stability and the profitability of the banking system. To reach this goal (i) the legal framework should carefully design guarantees, property rights, and a viable insurance market, which are key elements to ease credit risk and collateral constraints, and hence would allow banks to lend at longer maturities, decrease loan rates, and diversify debt instruments to more effectively finance investment; (ii) there should be greater awareness of financial services, financial education and outreach, especially in rural areas; (iii) asymmetric information can be reduced by more transparency on potential borrowers through a functional credit registration system; (iv) existing modern technologies, including mobile phone-based ones, can facilitate payments when supported by appropriate regulatory infrastructure; and (v) business climate can improve by increasing the enforceability of contracts and ensuring more effective and consistent regulatory compliance.

Selected References

    Banque Africaine de Développement2012“Développement du Marché des Capitaux”Revue Economique MensuelleNovembre (Lomé : Banque Africaine de Développement).

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    Government of Togo2012République du Togo - Stratégie et Plan d’Actions pour le Développement du Secteur Financier20122017.

    International Monetary Fund2014WAEMU - Financial Sector Review (Washington: International Monetary Fund).

    Ministère de l’Economie et des Finances2012“Diagnostic et Stratégie du Secteur de la Microfinance au Togo ; rapport final (version nettoyée),”Document préparé dans le cadre de l’élaboration de la stratégie du secteur financier.

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Appendix III. Poverty Dynamics and Income Distribution: Recent Developments and Determinants

A comparison of the official poverty lines from the 2006 and 2011 household budget surveys indicates that poverty in Togo declined marginally and income distribution worsened. The growth incidence curve demonstrates that poverty declined because incomes from the fifth wealth decile and higher increased. Meanwhile, consumption for those in the bottom four wealth deciles declined or stagnated. Thus, equality indicators worsened and the wealthy got wealthier while the poor got poorer. Poverty has a strong geographical connotation, with its intensity being highest in rural areas and the farther north one goes. This pattern reflects the fact that economic growth is largely concentrated around Lomé. Implications of these findings for poverty reduction policies are discussed.

A. Introduction

1. The pace of economic growth accelerated during 2006–2011 in Togo, outstripping demographic growth. Real income per-capita also increased by 6 percent to CFAF 194,000 (US$412) (Text Figure 1.). These recent gains only partially compensate for the losses in real incomes observed since the early 1980s. Following political stabilization in the mid-2000s, regular relations with development partners and foreign investors resumed and economic policies improved. Real per capita GDP started a slow recovery which accelerated only after 2008, following a decline of 23 percent from 1982 to 2002.

Text Figure 1:Real GDP per capita, 1982–2012

(in thousands of CFA)

B. Poverty and Residence

Poverty incidence declined during 2006–2011, but not uniformly throughout the country

2. Notwithstanding a sizeable increase in GDP per capita, the rate of poverty incidence declined marginally from 61.7 percent of the population to 58.7 percent between 2006 and 2011.1 In fact, given population growth, the poverty headcount—i.e., the number of poor people—increased by 200,000 persons to 3.6 million. Poverty remains an eminently rural phenomenon, with more than 73 percent of rural residents classified as poor, compared to a poverty rate of 28 percent in Lomé and almost 45 percent in other urban areas (Text Figure 2.).2

Text Figure 2:Poverty Incidence by area of residence, 2006 and 2011.

Source:OUIBB 2006 et 2011

3. The declining poverty masks marked regional differences. Poverty declines were concentrated in the South, particularly in the Lomé metropolitan area (Lomé Métropole) and the Maritime region (Text Figure 3.), notwithstanding sizeable internal migration towards Lomé. Among the other regions, only Kara experienced some poverty decline. The poorest regions in 2006 (Central and Savannas), on the other hand, became poorer. Savannas, the region farthest away from the coast, remains the poorest in Togo, with about 90 percent of its population living in poverty.

Text Figure 3:Poverty Incidence by region, 2006 and 2011.

Source : QUIBB 2006 et 2011.

Which income groups benefitted from growth?

4. In the previous section, we explored poverty in its regional distribution. We can now approach from a different angle the initial question on who benefitted from growth. Which income group benefitted from growth? A growth incidence curve (GIC) shows the growth rate of real household consumption for different points in the distribution of consumption, after sorting the households according to their standard of living (Chen and Ravallion, 2003).

5. Real income growth over the past five years has not been inclusive. As can be seen from GIC at the national level, growth has generally benefited the wealthy more than the poor (Text Figure 4.).3 In fact, the growth rate of consumption is almost collinear with its level, i.e., the higher the level of consumption the higher has been its growth rate. Even more worrisome, the poorest three deciles actually witnessed declines in consumption varying between 10 percent and 18 percent, while the wealthiest two deciles recorded income growth of around 10 percent on average.

Text Figure 4.Togo: Growth Incidence Curve, 2006–11

6. A different situation emerges for Lomé. Here, consumption improved fairly equally across all income levels among residents, as the GIC is consistently above zero and relatively flat (Text Figure 5.). This suggests that the capital city offers more formal and informal opportunities for its resident—across all income levels—to benefit from economic growth.

Text Figure 5.Togo: Growth Incidence Curve, Lomé, 2006–11

7. In rural areas, the benefits from national economic growth have accrued even less to the poor. The poorest 65 percent of residents in rural areas actually saw their consumption decline (Text Figure 6.). This suggests that residents of rural areas are facing obstacles in partaking in the benefits of economic growth. Only the wealthiest 35 percent or residents experienced an increase in consumption. In these circumstances, not surprisingly, inequality—as measured by the Gini coefficient—increased between 2006 and 2011. The Gini coefficient rose from 0.361 in 2006 to 0.393 in 2011.4 Although at 0.393 the level of inequality is similar to that of countries in the sub-region, an increase of 3 percentage points over five years is significant.

Figure 6.Togo: Growth Incidence Curve, Rural, 2006–11

C. Food Insecurity and Migration

8. Food insecurity is pervasive and highly seasonal in rural areas. In the months of June and July up to 20 percent of households in rural areas face food shortages (Text Figure 7.). This drops to around 5 percent between September and December (after the main harvest) and then starts to increase again. In and around Lomé on the coast, food insecurity is low and constant throughout the year. In other urban areas, food security is also an issue but the degree it varies throughout the year suggests that consumption smoothing is less of a problem than consumption levels. Rural households have difficulty smoothing their consumption, probably due to limited or precarious monetary incomes to afford higher prices during off-seasons. These patterns point towards a potentially important area of policy intervention, that includes improving the functioning of rural markets, improving possibilities for storage and access to off-farm income earning opportunities (including cash for work or food for work) to allow households to purchase food during the lean season.

Text Figure 7.Togo: Percent of households facing food shortages by location (2011)

9. Rural-urban migration has been a driver of poverty reduction. Higher levels of welfare in urban areas attract migrants from other areas. To establish how migration contributes to poverty reduction, changes in poverty incidence between 2006 and 2011 have been decomposed into how much of the total poverty reduction is due to reductions when households stayed within urban or rural areas, and how much is due to rural-urban migration (a third term establishes the interaction between the two). Applying this decomposition shows that of the total drop in poverty incidence of 3 percentage points, about one third (1.1 percent) is attributable to internal migration. Migration is thus an important contributor to poverty reduction.

D. Policy Implications

10. Rising inequality and poverty patterns suggest different policies for different wealth groups. Poor households, largely found in rural areas, would benefit from policies that raise agricultural productivity and lower barriers to participate in markets. With urban food markets set to continue to grow, opportunities for farmers to sell their surplus staples would increase. Therefore, more policy attention should be devoted to feeder roads, local transportation, increased agricultural extension, improved price incentives (e.g., passing on to farmers a greater proportion of international agricultural commodity prices as has been done for cotton), better storage facilities and the provision of agricultural inputs in an efficient and cost effective manner (World Bank, 2013a).

11. Social safety nets targeted towards the poorest would help alleviate the high and seasonal levels of food insecurity. Cash transfers and school feeding programs, especially if they are conditional, are typically inexpensive fiscally and quite effective socially (Arze del Granado and Adenauer, 2011). The strong geographical and seasonal connotation of food insecurity provides an opportunity to implement geographically targeted and seasonal income support programs. The current cash transfer and school feeding programs, currently implemented on a pilot basis, have the potential to provide income relief to the poorest, and create forward and backward linkages within the rural economy.

12. Although migration brings the risk of urban gridlock and inefficiency, if managed well, it could contribute to higher total factor productivity and incomes. Urban planning should thus take a more prominent role in the authorities’ poverty reduction strategy and emphasize public urban and peri-urban transportation in a context of an economically vibrant capital region. Also, policies that build human capital across the nation (universal access to quality education, nutrition policies, access to health care) that enhance the capacity of (potential) migrants should be emphasized.

13. Two characteristics of developments in SSA are relevant to chart poverty-reduction policies in Togo, given its context of internal migration. First, there is increasing evidence of the importance of the development of secondary towns for poverty and inequality reduction (World Bank, 2013a). In this context, market-friendly public policies—fostering availability of banking and other tertiary services, investing in local roads and transportation networks, education and health services—are likely to have a more positive and permanent impact than the regional fiscal incentives (i.e., policies based on tax exemptions and free enterprise zones) preferred by the authorities. Second, the informal sector is the new normal in SSA and is leading in employment creation. To support its development, tax compliance regulations, accounting, and regulatory policies should be simplified for enterprises below fairly high turnover thresholds.

Selected References

    Arze del Granado Javier and Isabell Adenauer2011“Burkina Faso—Policies to Protect the Poor from the Impact of Food and Energy Price IncreasesIMF Working Paper 11/202 (Washington: International Monetary Fund).

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    Chen Shaohua and Martin Ravallion2003“Measuring Pro-Poor Growth,”Economic Letters78 pp.9399.

    Coulombe Harold and Chata Male2012Togo: Poverty Profile 2006–2011 (Lomé: National Directorate of Statistic and National Accounts).

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    GarciaMarito andCharity M. T. Moore2012The Cash Dividend: The Rise of Cash Transfer Programs in Sub-Saharan Africa. (Washington: World Bank).

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    IMF2011“How Inclusive Has Africa’s Recent High Growth EpisodeBeenT’Sub-Saharan Africa—Regional Economic Outlook, Fall (Washington: International Monetary Fund).

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    MasonNicoleWilliamBurkeArthurShipekesa andT.S. Jayne2011The 2011 Surplus in Smallholder Maize Production and Zambia: Drivers Beneficiaries and Implication for Agricultural and Poverty Reduction Policies Food Security Research Project Working Paper no. 58.

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    National Directorate of Statistic and National Accounts2011Questionnaire on Core Welfare Indicators (QUIBB 2011) ( Lomé: Ministry of Economic Planning, Development and Territorial Management).

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    National Directorate of Statistic and National Accounts2012Mapping poverty in Togo in 2011 (Lomé: Ministry of Economic Planning, Development and Territorial Management).

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    World Bank2011“Les Filets Sociaux au Togo”Draft Report (Washington: World Bank).

    World Bank2013aAfrica PulseVolume 7 pp. 2025April (Washington: World Bank).

    World Bank2013b“Maintaining the Momentum - With a Special Focus on Rwanda’s Pathway out of Poverty”Rwanda Economic Update: Fourth Edition. (Washington: World Bank).

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Appendix IV. External Sector Stability Assessment and Matrix

This note aims to assess external stability of the Togolese economy. Togo recorded continuous current account deficit since 2000, financed mainly by official aid flows. The current account deficit increased in 2011 to 9.1 percent driven by higher food and oil prices. In 2012, there was further deterioration of the deficit to 11.8 percent on account of higher imports for public and private investments. The current account deficit is expected to remain in the 9–10 percent range until 2016, and improve afterwards upon the completion of the ongoing investment projects. The deterioration in the current account deficit is expected to be financed by a pick-up in inward FDI as well as project loans. The real exchange rate is broadly in line with economic fundamentals. Improving Togo’s competitiveness rests on implementing structural measures to improve the business environment. The external position assessment matrix (Text Table 4) provides a summary of Togo’s external sector stability.

A. Balance Payment Assessment

1. Over the past decade, Togo recorded persistent current account deficits, which are expected to remain high over the next four years. During 2000–11, Togo had an average deficit of about 8.2 percent. This has been mainly financed by official grants and concessional financing, which has been making Togo susceptible to changes in donor support. In 2011, owing to the surge in oil and food prices, the deficit increased to 9.1 percent. In 2012, as capital imports grew—notably due to higher level of public and private investments—the current account deficit increased to 11.8 percent. These include the expansion of the international airport and the port of Lomé, and construction of a new clinker factory. In light of the ongoing investments, the deficit is expected to remain at around 10 percent until 2015. Upon completion of these infrastructure investments, Togo’s production, and thus, export capacity is projected to improve while project-linked capital imports should decrease.

Text Table 1:Balance of Payments: Selected items
(in percentage of GDP)
Current account balance (including grants)-8.9-8.8-8.9-9.3-10.0-8.6-8.7-6.7-6.8-6.6-6.3-9.1-11.8
Current account balance (excluding grants)-9.1-9.0-8.3-9.9-10.8-8.7-9.8-8.1-8.3-8.2-8.3-11.4-13.6
Private flows6.
Capital and financial account7.
Foreign direct investment3.
Errors and omissions-1.1-0.8-0.11.0-0.9-
Overall balance-2.5-3.5-3.0-5.6-1.5-
Source: Country authorities and IMF staff calculations
Source: Country authorities and IMF staff calculations

2. The widening of the current account deficit has been financed mostly through aid, and is expected to remain so over the projection period. However, aid decreased in 2012 in the absence of an IMF-supported program.

3. Since 2010, Togo’s exports have been around 40 percent of GDP, and are expected to remain at this level until 2017. However, during 2000–10, the country’s exports fluctuated notably, averaging around 32 percent of GDP per annum. This can be attributed to the fluctuations in phosphate and cotton exports. Between 2013 and 2016, the export revenue from these products as a percentage of GDP is projected to remain stable. From 2017 onwards, the planned public investments are expected to result in higher export capacity.

4. Cotton, phosphates, cement and clinker, cocoa and coffee have been Togo’s main exports, and still constitute more than 40 percent of total exports (Text Figure 1.). The most notable decrease was observed for cement and clinker exports. The ongoing public and private investment projects are expected to result in higher export capacity of these goods. However, the country can still benefit from further diversification of its export portfolio.

Text Figure 1:Togo’s main exports

5. In terms of openness, Togo’s share in total world exports of goods and services increased from 0.004 percent in 2000 to 0.007 percent in 2012, documenting an improvement over the past decade (Text Figure 2.).

Text Figure 2:Exports: World and Togo

Text Figure 3:FDI and Remittances

6. Foreign direct investment has been and is expected to remain a stable source of financing in Togo. While FDI slowed down from an average of 3.8 percent in the first half of the 2000s to around 1.5 percent in the second half, it is expected to increase in accordance with the ongoing public and private investments over the projection period. Moreover, improvement in infrastructure is expected to attract higher levels of FDI.

7. Workers’ remittances have been an increasing source of foreign exchange, and constituted around 7 percent of GDP in 2012. Since 2000, they have been on an upward trend and are expected to remain high. When compared with the FDI flows, remittances provided a larger amount of financing over the past decade.

B. Exchange Rate Assessment

8. The real effective exchange rate (REER) depreciated slightly over the last two years, mainly reflecting weakness of the euro (to which the CFA franc is pegged), reversing an upward trend since 2000. The REER appreciation of about 17 percent during 2000–2009 has been partially offset in the last three years with the REER depreciating by almost 11 percent. While Togo’s exports have benefited, since 2010 imports have been increasing at a faster pace, leading to a widening current account deficit. As shown in the exchange rate assessment section below, Togo’s low level of competitiveness can be attributed to structural issues rather than exchange rate misalignment.

Text Figure 4.Togo. REER and NEER, Jan.05–Aug.13 (2005=100)

Text Figure 5.Togo and WAEMU: Effective Exchange Rates, 1995-2012 (2000=100)

9. The exchange rate assessment finds that Togo’s real effective exchange rate (REER) was broadly in line with economic fundamentals in 2012. The overall findings of this analysis are consistent with the latest WAEMU exchange rate assessment, which finds no significant exchange rate misalignment and documents a depreciation of about 1 percent in 2012. The three CGER methods—macroeconomic balance (MB), equilibrium exchange rate (ERER) and external sustainability (ES) approaches—all suggest that REER was broadly in line with fundamentals in 2012.

Text Table 2.Togo: Real Effective Exchange Rate Assessment
Ext. Sustainability-3.0-3.40.4

“-” indicates undervaluation

Source: IMF staff estimates.

“-” indicates undervaluation

Source: IMF staff estimates.

10. The ERER method indicates a moderate undervaluation of the exchange rate, by about 3.8 percent. This compares to a 4.4 percent overvaluation in 2010, assessed at the time of the last Article IV consultation.

11. The MB approach indicates that the REER is slightly overvalued by 0.6 percent. The MB approach estimates the exchange rate adjustment necessary to close the gap between the equilibrium current account balance (the “norm”), based on economic fundamentals, and the underlying current account balance. For Togo, the equilibrium and the underlying current account deficits are estimated at about 2.8 percent and 3.6 percent of GDP, respectively. These results indicate that 0.6 percent depreciation in the REER would be needed to close the gap

12. Application of the ES approach to Togo indicates that the REER is slightly overvalued by about 0.4 percent, not a significant deviation from the equilibrium. The ES method compares the actual current account balance with the balance that stabilizes the net foreign assets (NFA) at a certain benchmark level. The underlying NFA-to-GDP ratio is -41 percent.

C. Non-Price Competitiveness

13. Survey-based indicators point to low non-price competitiveness. While Togo is not included in the World Economic Forum’s Competitiveness Index, the World Bank’s Doing Business Report 2013 ranks Togo as the 156th out of 185 countries. While Togo ranks at the same level as the average WAEMU country, it still faces particular challenges in protecting investors’ rights, enforcing contracts, starting a business, and accessing financing. Supply of infrastructure remains inadequate and procedures for paying taxes and registering propriety continue to be cumbersome (Panel chart 1).

14. The quality of governance, which has been historically weak, deteriorated since 2000 according to World Governance Indicators. These rankings are based on government effectiveness, regulatory quality, rule of law, control of corruption. Togo ranks below the average for sub-Saharan Africa (Panel chart 1).

15. In terms of political stability, Togo ranks lower than both its SSA and LIC peers. This highlights the need for improving political stability to ensure a more sustainable business environment (Figure 1).

Figure 1.Togo : Business Environment and Governance

Sources: Doing Business, 2012; World Bank’s Governance Indicators, 2011, (average of control of corruption, government effectiveness, rule of law, regulatory quality, political stability and voiceand accountability); Eco no mist Inte 11 ige nee Unit (EIU) ; and IMS staff calculations.

SSA= Sub-Saharan Africa; LIC= Low-income country; HIC= High-income countries; UMIC= Upper-middle income country; LMIC= Low-middle-income country; OIL= Oil producers; RR= Resource-rich countries; = ;WBI= World Bank Indicators.

Text Table 3.WAEMU “Doing Business Indicators”/1
Burkina Faso147151150153
Côte d’Ivoire168170167177
Source: World Bank, Doing Business Indicators

Years correspond to the Doing Business Report, ie 2013 stands for results published in Doing Business Report 2013, which is based on 2011/12 survey results.

Source: World Bank, Doing Business Indicators

Years correspond to the Doing Business Report, ie 2013 stands for results published in Doing Business Report 2013, which is based on 2011/12 survey results.

Text Table 4:External Position Assessment Matrix
Current accountBackground: The domestic saving rate is low, while the investment needs are high and costly. These have been mostly covered by official aid flows. The deficit has increased notably in the last two years as a result of both exogenous factors and high public and private investment.

Assessment: The deficit is expected to remain high until 2016–17, reflecting the planned large-scale public and private investment projects to be undertaken. In 2013, a slight improvement in the deficit is foreseen due to the decrease in global commodity prices, which initially drove up the deficit in 2011. The financing for these investments are expected to be provided by official flows, concessional financing from both traditional and non-Paris Club lenders. In 2012, there was a notable increase in financing from non-traditional lenders, while multilateral financing decreased.
Overall assessment: The external position has been weakening significantly since 2011, and is expected to remain so until 2016/17 due to high amount of public and private infrastructure investments. Concurrently, the external debt position is expected to deteriorate.

Potential policy responses: Fiscal consolidation and prudent borrowing should help reduce external vulnerabilities. The investment plans are expected to lead to higher production (export) capacity and lower current account deficit in the medium term. Togo is still facing challenges on competitiveness, which signals to a need of improved business environment.
Real exchange rateBackground: Togo is part of the WAEMU. The CFA franc is pegged to the euro, which depreciated significantly in recent years.

Assessment: The three CGER methods do not suggest a significant misalignment. These findings are in line with those for the WAEMU. The underlying reasons for Togo’s low competitiveness is more on the non-price and business environment competitiveness side
Capital account: flows and measuresBackground: Togo reached the HIPC completion point in 2010 and received debt relief. While remittances and FDI constitute a major portion of external inflows, the overall balance of payments has been reporting a deficit.

Assessment: In 2012, project loans increased significantly and are expected to remain elevated. In line with large private investment projects, FDI is expected to increase over the next few years. The sustainability of capital account flows depends on forceful fiscal consolidation and additional bilateral and multilateral assistance that it could catalyze.
Foreign exchange intervention and reservesBackground: At the WAEMU level, reserves amount to over 5 months of imports, 60 percent of broad money and 100 percent of short-term debt. Common reserves can be used to finance the needs of individual WAEMU countries.

Assessment: The level of foreign exchange reserves of the WAEMU is adequate.
Foreign asset and liability positionBackground: Togo had a major improvement in its external debt indicators thanks to the 2010 HIPC debt relief it received. Gross external debt was around 18 percent in 2012. It consists of mainly of concessional loans from both official and commercial creditors.

Assessment: Togo’s external debt is expected to increase to about 22 percent over the next four years. The DSA indicates moderate debt distress risk.
Appendix V. Central Government Financial Operations on GFSM-01 Basis
Table 1a.Togo: Statement of Operations of Budgetary Central Government, 2011–16
(In billions of CFA Francs)
Public enterprises24.329.129.933.138.542.7
Other direct taxes35.234.441.946.152.357.8
Import taxes162.9176.9205.3225.2249.6273.0
Other indirect taxes58.980.487.295.8107.9118.7
Other revenue25.143.951.052.657.963.0
Compensation of employees104.7120.4136.0147.2159.8167.9
Use of goods and services63.788.578.385.593.2102.3
Domestic interest9.612.820.823.622.823.0
Foreign interest1.95.89.410.29.511.3
Grants, social benefits and other expense77.895.6110.1117.9129.4138.5
Net acquisition of nonfinancial assets144.2175.1220.3248.4276.7301.1
Domestically financed68.270.975.591.8101.5110.5
Foreign financed76.1104.2144.8156.6175.2190.6
Gross Operating Balance272.230.890.9128.4175.1210.4
Net lending (+)/borrowing (–) (fiscal balance)3-72.1-144.3-129.3-120.0-101.6-90.7
Discrepancy (Non-financial vs financial accounts)8.115.1-0.5-1.0-11.5-11.1
Change in net financial worth due to transactions (fiscal balance)-80.1-159.4-128.8-119.0-90.1-79.6
Net acquisition of financial assets26.9-16.6-14.44.310.511.1
Currency and deposits34.
Equity and investment fund shares0.0-3.0-
Other accounts receivable-8.1-
Net incurrence of liabilities95.1162.4114.4123.366.566.5
Debt securities24.725.343.663.927.627.0
Other accounts payable3.
Other accounts payable0.
Residual/unidentified financing-11.919.60.00.0-34.1-24.2
Memorandum items:
Primary balance-60.6-125.7-99.2-86.2-69.4-56.4
NLB (overall balance) excluding grants-127.8-176.0-203.5-204.1-193.1-188.9
CG Domesitc Debt and Arrears503.5541.2541.7576.8559.7548.5
Sources: Togolese authorities and IMF staff estimates and projections.

Includes Fuel Subsdies.

Revenue minus Current Expense (includes reimbursement of bonds for bank restructuration in Other Expense).

Revenue minus Total Expenditure (includes reimbursement of bonds for bank restructuration in Other Expense).

Sources: Togolese authorities and IMF staff estimates and projections.

Includes Fuel Subsdies.

Revenue minus Current Expense (includes reimbursement of bonds for bank restructuration in Other Expense).

Revenue minus Total Expenditure (includes reimbursement of bonds for bank restructuration in Other Expense).

Table 1b.Togo: Statement of Operations of Budgetary Central Government, 2011–16
(In billions of CFA Francs)
Public enterprises1.
Other direct taxes2.
Import taxes9.
Other indirect taxes3.
Other revenue1.
Compensation of employees5.
Use of goods and services3.
Domestic interest0.
Foreign interest0.
Grants, social benefits and other expense4.
Net acquisition of nonfinancial assets8.18.810.210.610.910.9
Domestically financed3.
Foreign financed4.
Gross Operating Balance24.
Net lending (+)/borrowing (–) (fiscal balance) 3-4.1-7.2-6.0-5.1-4.0-3.3
Discrepancy (Non-financial vs financial accounts)
Change in net financial worth due to transactions (fiscal balance)-4.5-8.0-6.0-5.1-3.6-2.9
Net acquisition of financial assets1.5-0.8-
Currency and deposits2.
Equity and investment fund shares0.0-0.2-
Other accounts receivable-0.5-
Net incurrence of liabilities5.
Debt securities1.
Other accounts payable0.
Other accounts payable0.
Residual/unidentified financing-
Memorandum items:
Primary balance-3.4-6.3-4.6-3.7-2.7-2.0
NLB (overall balance) excluding grants-7.2-8.8-9.4-8.7-7.6-6.8
CG Domesitc Debt and Arrears28.427.125.224.722.019.9
Nominal GDP (CFAF billions)1,7721,9992,1542,3372,5392,762
Sources: Togolese authorities and IMF staff estimates and projections.

Includes Soutien Politique Pétrolier.

Revenue minus Current Expense (includes reimbursement of bonds for bank restructuration in Other Expense).

Revenue minus Total Expenditure (includes reimbursement of bonds for bank restructuration in Other Expense).

Sources: Togolese authorities and IMF staff estimates and projections.

Includes Soutien Politique Pétrolier.

Revenue minus Current Expense (includes reimbursement of bonds for bank restructuration in Other Expense).

Revenue minus Total Expenditure (includes reimbursement of bonds for bank restructuration in Other Expense).

1During this period, the Gini coefficient—a measure of inequality—rose from 0.361 to 0.393 (Appendix II)
2A staff-level agreement was reached in early September 2013. However, presentation of the authorities’ request to the IMF Executive Board has been delayed to allow them to complete agreed prior actions.
3The authorities report tax revenue inclusive of tax exemptions. Staff’s presentation of Togo’s fiscal accounts excludes such tax exemptions from revenue. To enhance transparency, the recorded tax exemptions are reported as a memorandum item.
4A phased increase would give time to assess smugglers’ reaction to a higher price differential with Nigeria and Ghana, sources of smuggled fuel. Volumes consumed on the official domestic markets tend to decline the higher the price differentials.
5The English translation will be circulated to the Executive Board, together with the related joint staff advisory note (JSAN), as soon as possible.
6While the collection rate on private sector accounts is above 95 percent, collection on central government (31 percent) and municipalities (18 percent) is very poor. Overall arrears amount to 1.1 percent of GDP.
7As long as the operational costs of the SRT are not larger than the recovered amounts, the recovery of outstanding loans should not generate liabilities for the government.
8International Monetary Fund, 2008, “Financial Sector Assessment Program for the West African Economic and Monetary Union (WAEMU),” June.
1Abiding by Basel I standards prevents use of proper risk-based approaches to evaluate the stability of banks in Togo. For instance, bank holdings of sovereign debt are given zero risk weighting in calculating prudential ratios. Similarly, claims on financial institutions are given a risk-weight of 20 percent regardless of actual creditworthiness of the institution. Thus, these standards may overestimate solvency ratios for banks that actively pursue transactions in government securities.
2The launch of the Société de Recouvrement du Togo (SRT) has suffered extensive delays. It became operational only in early 2013, but its operational strategy is not yet approved, and it has recovered a limited volume of assets.
3A new pyramid scheme emerged over the past year, but there has been a slow response in closing it down.
1Poverty incidence (sometime referred to as rate of poverty or poverty rate) is defined as the ratio between the number of people below the poverty line and the total population.
2During the same 5-year period, rural population declined by 3 percentage point 2 I population share increase by 2V2 percentage points to 23½ percent. Other urban by ½ percentage points to 14½ percent.
3The steeper the GIC, the greater the differences in consumption growth rates an.
4A Gini coefficient of 1 implies that inequality is at the maximum level. A Gini coefficient of zero implies that everybody’s income is the same.

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