1. Our Togolese authorities thank Staff for the candid and constructive policy discussions held in the context of the 2019 Article IV Consultation and the Fourth Review under the Extended Credit Facility (ECF) arrangement. They also thank Management and the Executive Board for the support to their reform efforts. They highly value the Fund’s engagement and look forward to a continued close cooperation.
2. The fiscal consolidation and comprehensive reforms undertaken under the ECF program continue to help Togo making important strides in strengthening macroeconomic and financial stability, achieving debt reduction while promoting durable and more inclusive growth, despite a challenging domestic and external environment. The authorities are strongly committed to implementing their ambitious—Plan National de Développement, PND— launched officially in March 2019, with the aim to structurally transform the economy and achieve a stronger, more sustainable and inclusive growth, create jobs and improve social welfare.
3. The strong macroeconomic performance and structural reforms achieved by Togo since the last review is encouraging. Going forward, the authorities remain committed to their agenda. They request the completion of the 4th Review under the ECF arrangement; a waiver for non-observance of a performance criterion (PC) missed mainly due to a statistical recording problem and which does not affect the program objectives; as well as the modification of PCs to accommodate the correction of this recording problem and some urgent spending.
Recent Developments and Performance under the ECF Program
4. Economic performance in Togo strengthened in 2018 with real GDP estimated at 4.9 percent (against 4.4 percent in 2017), supported by strong phosphate extraction and cotton production as well as increased activity in the tertiary sector. Inflation was low at 0.9 percent on average in 2018, well below the regional ceiling of 3 percent. Fiscal performance continues to be overall solid, with Togo meeting WAEMU fiscal deficit criterion of 3 percent of GDP since 2017. The Public-debt-to GDP ratio (excluding state-owned enterprises, SOEs) reached 73.6 percent in 2018 compared to 72.3 percent in 2017, a slight increase due to an oversight in the recording of securities. The current account deficit widened moderately at 4.9 percent of GDP in 2018. Bank credit to the private sector was kept broadly unchanged but several vulnerabilities including high level of non-performing loans (NPLs), loan concentration, inadequate buffers, and excessive exposure to trade and manufacturing activities could pose challenges to financial stability.
5. Program implementation continues to be broadly satisfactory. Five out of six quantitative performance criteria (QPCs) at end-December 2018 were met, including the floor on the domestic primary balance. The net domestic financing target was not met due to an error in the recording of some 2018 revenues that were paid in 2019. The indicative target (IT) on domestic arrears clearance was also met. While ITs on revenue and domestic social expenditure were missed—by small margins—total revenue increased significantly in 2018 thanks to customs receipts and non-tax revenue, and social spending execution improved. On the structural front, five out of seven structural benchmarks (SBs) were met including the three SBs related to public expenditure management and one to the business environment. Due to the non-conclusion of negotiations between potential buyers and the government, the SB on the privatization of one of the public banks was not observed.
Outlook and Policies Priorities for 2019 and the Medium Term
6. Our authorities take positive note of staff’s growth projections of 5½ percent over the medium term. However, considering the recent public infrastructure investments (roads, port and airport) and the substantial steps undertaken in the context of the implementation of their PND, the authorities foresee higher growth rates over the medium-term. They agree with staff’s assessment of the downside risks, including those related to regional security and weather. Also cognizant of potential socio-political tensions, they are determined to ensure that the upcoming local and presidential elections take place in a peaceful and secure environment.
7. While its objectives remain unchanged, the program is being adjusted to take into account recent developments and needs. Beside the two PCs on domestic primary balance and net domestic financing, one SB related to the privatization of one of the two public banks is proposed for modification and six additional SBs on revenue administration, expenditure and investment management, and financial sector are being proposed.
Meeting Urgent Needs while Pursuing Fiscal Consolidation
8. The Togolese authorities remain committed to the fiscal objectives of the ECF-program. Enhancing permanent revenue collection, pursuing public expenditures restraint while accommodating infrastructure needs and protecting social spending will guide the authorities’ fiscal policy actions. However, against the background of the worsening regional environment and increased security issues which could compromise social and economic stability, the authorities will loosen the fiscal stance in 2019. A revised 2019 budget accommodating additional 1.5 percent of GDP for urgent spending and postponing 0.3 percent of GDP for less urgent spending to 2020, will be adopted. The overall fiscal deficit (commitment basis, grants included) is thus projected at 2.7 percent of GDP in 2019, still below the 3-percent threshold under the WAEMU convergence framework.
9. On the revenue side, the authorities will complement the recent tax policy measures and administrative reforms with (i) the introduction in the Tax Code of a property tax, a corporate tax, notably for telecom companies and a new tax on motor vehicle; and (ii) the setting of an import lump sum deposit for inactive importers with regard corporate taxation, the increase in the number of cross-check of taxpayers’ transactions; and a stricter valuation and collection of customs; (iii) further streamlining of tax exemptions; (iv) improving the monitoring of tax arrears collection by establishing the Revenue Collection and Receivables Recovery Unit; (v) reducing losses in VAT revenue by rolling-out cash registers and extending the VAT prepayment system to public entities, SOEs, and other large companies; and (vi) enhancing the customs software to make online submission of customs declarations possible. On the expenditure side, continued efforts will be pursued to contain domestically- financed capital expenditures while scaling up targeted social spending.
Strengthening Debt Sustainability
10. The public-debt-to GDP ratio (excluding SOEs) is projected to continue declining and reach levels below the WAEMU debt convergence criterion of 70 percent of GDP starting in 2019 (2020 when including SOEs). The authorities will pursue a prudent borrowing strategy and continue strengthening the operational capacity of the recently-reorganized debt management office (Direction de la Dette Publique et du Financement). Moreover, the new handbook on procedures for debt management activities, which is in line with AFRITAC’s recommendations, is soon to be applied. The authorities count on enhanced technical assistance from the Fund and other development partners to further strengthen the capacity of the debt management office.
11. Furthermore, a debt reprofiling operation endorsed by a Policy-Based Guarantee from the World Bank is envisaged by end 2019. The operation will be conducted with the support from an international advisory firm and consist in contracting new external debt at more favorable maturity and rate terms to repay outstanding domestic or regional debt. This is expected to not alter Togo’s assessment of moderate risk of external debt distress.
Fostering Financial Stability and Development
12. As part of their efforts to implement their PND, the authorities will endeavor to position Togo as a first-class financial center in the sub-region with several sub-regional and regional banking institutions already having their headquarters in Lomé. They, therefore, attach great importance to addressing vulnerabilities in the banking and non-banking sectors and safeguarding financial stability, in close collaboration with the WAMU banking supervisory body (Commission bancaire).
13. Steps are underway to privatize the two remaining state-owned banks. While the privatization of one of the banks is ongoing accordingly to the plan agreed upon with Staff, the authorities encountered delays in the privatization process of the other one: an agreement between the negotiation committee set up in that regard and the potential buyers could not be reached by the end of May 2019 as previously planned. They are elaborating a revised strategy which includes the launch of a tender process by end-August 2019, with the aim to finalize the privatization by end-December 2019. Addressing other financial sector vulnerabilities rank high on the authorities’ agenda. The privatization of the two banks – which concentrate most of the NPLs– will reduce the high level of NPLs and improve the banking system’s overall soundness. In addition, important steps will be taken to operationalize the debt collection agency–Société de Recouvrement du Togo.
14. The authorities are also working on improving access to credit and fostering financial inclusion. Mobile money banking will be leveraged to make further inroads in that regard.
Promoting Sustainable inclusive growth and Governance
15. Sustainable growth will rest on the development of the private sector. To this end, the important strides made in recent years to improve the business climate are starting to pay off, with Togo being among the top reformers in the recent World Bank’s Doing Business. The authorities intend to further strengthen the business environment to attract private sector investment, and make Togo a regional transportation hub, financial center, and manufacturing and extractive industry base.
16. Transformation will require significant infrastructure and efficient investments. In this vein, emphasis is on accelerating the implementation of the last PIMA recommendations. Steps put forward include the recent cost-effectiveness methodology for future projects and the strengthening of the multi-year public investment program. To better link fiscal policy with the PND, the application of the WAEMU directive on program-based budget is well underway with the adoption of a new budget calendar and the upcoming production of a program-budget document for 2020–2022.
17. To reduce poverty, the authorities also continue to make efforts to strengthen safety nets. They are taking targeted social and inclusive policies to support vulnerable households and reduce poverty and inequality. A system to improve the monitoring of social expenditure will be put in place by end-September 2019.
18. Measures to foster good governance and fight corruption are also being implemented. Progress in these areas include the strengthening of the institutional and judicial frameworks through the Criminal Code and the 2018 law on anti-money laundering/combating the financing of terrorism (AML/CFT) in line with WAEMU requirements and the work of the anticorruption agency —Haute Autorité de Prévention et de Lutte contre la Corruption et les Infractions Assimilées (HAPLUCIA). Furthermore, a law to promote asset disclosure by all civil service agents and professionally and politically-exposed people has been prepared and should be adopted shortly, as is a framework law for the full implementation of the United Nations Convention on Corruption. The authorities are also looking forward to the conclusions of the recent national multisectoral money laundering/ financing of terrorism risk assessment with the support of the World bank and stand ready to implement an appropriate action plan aiming at addressing the vulnerabilities identified.
19. Our Togolese authorities are pressing ahead with the implementation of an ambitious consolidation and reform agenda. In support of this plan, they are fully committed to the objectives of the ECF program, to preserve macroeconomic stability, achieve debt reduction and meet growth and social objectives. On their behalf, we would appreciate the Executive Board’s completion of the Fourth Review under the ECF arrangement, approval of their requests for waivers of nonobservance and modification of performance criteria, and conclusion of the 2019 Article IV Consultation.