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    African Deparment

    Copyright © 2016

    International Monetary Fund

    Cataloging-in-Publication Data

    Names: Barhoumi, Karim. | Cui, Qiang, 1976- | Dieterich, Christine. | End, Nicolas. | Ghilardi, Matteo F. | Raabe, Alexander. | Sola, Sergio. | International Monetary Fund. | International Monetary Fund. African Department.

    Title: Make investment scaling-up work in Benin: a macro-fiscal analysis / a staff team comprising Karim Barhoumi, Qiang Cui, Christine Dieterich, Nicolas End, Matteo Ghilardi, Alexander Raabe, Sergio Sola.

    Description: Washington, DC: International Monetary Fund, 2016. | At head of title: The African Department. | Includes bibliographical references.

    Identifiers: ISBN 978-1-51357-147-8 (paper)

    Subjects: LCSH: Public investments – Benin. | Benin – Economic conditions. | Economic development – Benin.

    Classification: LCC HC1010.Z9 P83 2016

    ISBN: 978-1-51357-147-8 (paper)

    The African Departmental Paper Series presents research by IMF staff on issues of broad regional or cross-country interest. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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    Contents

    Acknowledgments

    The authors thank Domenico Fanizza for valuable comments and suggestions and assume responsibility for any remaining errors. Nadia Margevich provided excellent editorial assistance.

    Overview

    Benin has deepened macroeconomic stability and accelerated growth in recent years, but even higher, broader-based, and more sustainable growth is essential to substantially reduce poverty and bring prosperity. To accelerate growth, Benin’s government announced in 2014 a major increase in public investment, equivalent to about 12.5 percent of GDP, until 2019. This will be complemented by investments that could be financed by private sources, including public-private partnerships (PPPs), of about 20 percent of GDP. Investment will focus on energy and transportation infrastructure, which are considered the main bottlenecks to growth. This paper aims to conduct a systematic growth and fiscal analysis to answer two questions: (1) What is the growth potential of this ambitious scaling-up of investment? (2) How can the government generate the necessary fiscal space to increase investment without jeopardizing Benin’s solid macroeconomic performance?

    To address these questions, the paper first analyzes in Chapter 1 the growth gap and constraints in Benin; in particular, causes for low total factor productivity (TFP) growth. The analysis mainly compares Benin’s experience in the past decade with that of a group of fast-growing non-resource-rich sub-Saharan African (SSA) countries, using the diagnostic decision tree approach by Hausmann, Rodrik, and Velasco (HRV) (2005). Chapter 2 presents the findings of a dynamic stochastic general equilibrium (DSGE) model on how such a large scaling-up of investment would affect growth and macroeconomic stability going forward, including the debt dynamics under different financing scenarios. It underscores the importance of creating sufficient fiscal space for the expected salutary impact on growth and consumption to materialize without substantial risks to fiscal sustainability. Chapter 3 focuses on how the fiscal space can be created through revenue and expenditure channels. On the revenue channel, it examines unused tax potential at the aggregate level, but also tax by tax how additional revenues could be mobilized, taking into consideration the characteristics of the Beninese economy. Particular attention is given to the fact that Benin de facto taxes some consumption in Nigeria because of significant informal reexports that are subject to customs and value-added tax. On the expenditure channel, it explores the extent to which enhancing spending efficiency would create fiscal space, by comparing Benin’s health and education spending with those in a comparator country group. Finally, the paper presents conclusions and policy discussions.

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