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Conclusion and Policy Discussions

Author(s):
Karim Barhoumi, Larry Cui, Christine Dieterich, Nicolas End, Matteo Ghilardi, Alexander Raabe, and Sergio Sola
Published Date:
January 2016
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This paper finds that the Benin authorities’ reform strategy of scaling up public investment addresses binding growth constraints, but to achieve maximum impact on growth, it should be complemented by improvements in the business environment. The growth diagnostic finds that both the infrastructure and business environments are binding growth constraints. As such, while the government strategy for scaling up public investment has strong potential to accelerate growth, the efforts need to be supported by further structural reforms to improve the business environment and boost private sector activities. In addition, the salutary impact of scaling up on growth and consumption depends on complementary fiscal measures to mitigate the risks to fiscal and debt sustainability. With limited scope for external, nonconcessional financing, enhanced domestic revenue mobilization will be important to support macroeconomic stability in the future. Enhancing spending efficiency is critical for delivering the expected results from infrastructure investment, but also for creating further fiscal space for scaling up investment or to achieve social objectives.

The strong potential to improve domestic revenue mobilization identified in this paper underlines the significant benefits from tax policy and administration reform. Benin achieves a good total tax collection in line with comparator countries, but relies heavily on trade taxes, which are vulnerable to spillovers from Nigeria, as evidenced in the recent slowdown in Nigeria after the decline in oil prices. Over the medium term, potential losses from regional trade liberalization initiatives could put these revenues under pressure. Cross-country econometric analysis suggests substantial room to improve domestic tax collection by up to 2 percent of GDP. This can be achieved by a combination of tax policy and tax administration reforms.

On the expenditure side, Benin has significant scope to improve the efficiency of its spending to increase fiscal space. Based on cross-country analysis focused on WAEMU countries, the potential savings in education and health spending are about 1–3 percent of GDP, which can be used to support the authorities’ efforts to deliver better results in these sectors. The 2014 Public Expenditure and Financial Accountability framework identifies several priority areas for improving public financial management and investment planning and management, including enhancing budget credibility, transparency, and audit. Spending efficiency can also be improved by strengthening the government’s investment expenditure chain, including (1) better monitoring of the different spending steps to timely identify problems that lead to arrears; (2) enhancing cash forecasting and management, including by introducing a treasury single account; and (3) developing multiyear project planning. Moreover, while the government also plans to PPPs in building infrastructure, a PPP regulatory framework is not yet in place and would warrant some priority actions.

Finally, in light of the needs of increased new borrowing, the authorities should enhance their capacity for integrated debt monitoring and management. These enhancements would require developing capacity and systems for integrated debt management, including a mechanism to assess and monitor fiscal risks from guarantees on infrastructure projects including PPPs. A medium-term debt strategy would be needed to specify objectives and a borrowing strategy to achieve the appropriate cost risk tradeoff. These measures would further ensure that the scaling-up of public investment for stronger growth stays on a sustainable path.

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