Benin: Staff Report for the Second Review and the Second-Year Program Under the Poverty Reduction and Growth Facility

Benin’s economic and financial performance under the first-year program supported by the poverty reduction and growth facility was satisfactory. The resumption of structural reform implementation is essential for the authorities to improve resource allocation and meet their objective of accelerating growth to 7 percent over the medium term. To accelerate economic growth and improve service delivery, a broad consensus is emerging on the need to draw private expertise and capital into key public enterprises, either through privatization or different forms of public–private partnerships.

Abstract

Benin’s economic and financial performance under the first-year program supported by the poverty reduction and growth facility was satisfactory. The resumption of structural reform implementation is essential for the authorities to improve resource allocation and meet their objective of accelerating growth to 7 percent over the medium term. To accelerate economic growth and improve service delivery, a broad consensus is emerging on the need to draw private expertise and capital into key public enterprises, either through privatization or different forms of public–private partnerships.

I. Introduction

1. The discussions on the second review of the first-year program and the second-year program under the three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) were held in Cotonou during July 19-August 2, 2001, and in Washington during August 20–23, 2001.23 The second review has been delayed by three months at the request of the authorities who, after the presidential election in March 2001 and the formation of a new government in May 2001, wanted time to review outstanding economic issues and prepare their medium-term economic program.

2. The Executive Board concluded the first review under the PRGF arrangement and the 2000 Article IV consultation on January 8, 2001. At that time, Executive Directors noted the satisfactory macroeconomic performance. Looking ahead, they encouraged the government to develop a broad consensus on key policies, avoid slippages in implementing structural reforms, allocate a larger share of government expenditures to social sectors, and maintain a stable macroeconomic environment. They pointed to the need for a prudent wage policy. Directors also urged the authorities to prepare a comprehensive and coherent poverty-reduction strategy with the participation of civil society.

3. Fund and World Bank staffs have continued to cooperate closely on Benin. A World Bank team was in Cotonou at the same time as the Fund mission to jointly discuss the preparation of the poverty-reduction strategy paper (PRSP). Building on missions in April and June 2001, World Bank staff also followed up on implementation of the public expenditure reform adjustment credit (PERAC) approved by the World Bank’s Executive Board in March 2001 and took stock of progress achieved in preparing a medium-term expenditure framework (MTEF). Benin’s relations with the Fund and the World Bank Group are summarized in Appendices II and III, respectively.

4. President Kérékou was reelected in March 2001, and a new coalition government was formed in May 2001. The first local elections, which were to be held in 2000, were again postponed, probably until 2002. The search for a broad consensus on key economic and structural policies and the large number of political parties supporting the coalition government often make the decision-making process cumbersome and slow, resulting in long delays in the adoption and implementation of economic reforms. The absence of a government majority in the National Assembly has also made the task more difficult.

II. Background and Performance Under the 2000-01 Program

A. Recent Developments

5. The economic performance in 2000 and the first half of 2001 was in line with the program objectives. Real GDP growth continued to be sustained in 2000, rising to 5.8 percent, compared with an objective of 5.3 percent (Table 3 and Figure 2), on account of a rebound in the production of cotton and a higher-than-projected increase in foodstuff production. End-of-period inflation rose to 9.8 percent in December 2000 but fell back to 3.2 percent by end-August 2001. The external current account deficit, including current official transfers, widened from a revised 7.6 percent of GDP in 1999 to 8.0 percent in 2000, largely on account of delays in the disbursements of grants tied to the adjustment program. (Table 7). Excluding current official transfers, the current account deficit was close to the expected level. While the terms of trade improved slightly, the volume of exports declined, as cotton exports returned to trend after having sharply increased in 1999, when the public enterprise, SONAPRA, sold cotton stocks to strengthen its financial situation. In spite of a lower-than-expected level of current official grants, Benin continued to contribute to the international reserves of the Central Bank of West African States (BCEAO), given the high level of external assistance for investment projects and debt relief received by the country. The nominal effective exchange rate depreciated in 2000, resulting mostly from the appreciation of the U.S. dollar against the euro, to which the CFA franc is pegged; however, the real effective exchange rate appreciated on account of the large increase recorded in the consumer price index in Benin (Table 3).

Table 1.

Benin: Proposed Schedule of Disbursements Under the Remainder of the PRGF Arrangement, 2001-03

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Source: International Monetary Fund.

Other than the generally applicable conditions under the Poverty Reduction and Growth Facility (PRGF) arrangement, including the continuous performance criterion on nonaccumulation of arrears, and the performance clauses on the exchange and trade system.

The authorities will request an extension of the arrangement in the context of subsequent review under the program to allow disbursement of the final loan.

Table 2.

Benin: Fund Position During the Remainder of the PRGF Arrangement, July 2001-December 2003

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Source: IMF, Treasurer’s Department.
Table 3.

Benin: Main Economic Indicators, 1999-2004

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Sources: Beninese authorities; and staff estimates and projections.

In percent of broad money at the beginning of the period.

Including current official grants but excluding project grants.

Total revenue minus all expenditure, excluding interest.

Before all official grants.

Scheduled debt service in percent of fiscal revenue, including IMF debt and excluding debt to be paid by HIPC assistance.

In percent of current-year exports of goods and services, including IMF debt, and excluding debt to be paid by HIPC assistance.

For 2000, data for revised program assumed debt relief in the context of HIPC Initiative.

Figure 1.
Figure 1.

Benin: Selected Economic and Financial Indicators, 1993-2004 1/

Citation: IMF Staff Country Reports 2001, 208; 10.5089/9781451803341.002.A001

Sources: Beninese authorities; and staff estimates and projections.1/ Data for 2001-04 are projections.
Figure 2.
Figure 2.

Benin: Selected Economic and Financial Indicators, 1993-2004 1/

Citation: IMF Staff Country Reports 2001, 208; 10.5089/9781451803341.002.A001

Sources: Beninese authorities; and staff estimates and projections.1/ Data for 2001-04 are projections.

6. A narrowing of the private saving-investment gap in 2000 was more than offset by a widening of the gap for the government (Table 4). The gap for the private sector was reduced from 8.7 percent of GDP in 1999 to 6.6 percent of GDP in 2000, owing to an increase in domestic private saving and current transfers from abroad. By contrast, government saving declined by 1.1 percentage points of GDP to 6.3 percent, as expected, as a result of an increase in current expenditure and a drop in foreign grants; meanwhile, public investment increased by 1.3 percentage points of GDP to 7.6 percent.

Table 4.

Benin: Macroeconomic Indicators, 1999-2004

(In percent of GDP, unless otherwise indicated)

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Sources: Beninese authorities (Institute National de la Statistique et de I’Administration Economique (INSAE)); and staff estimates and projections.

7. All quantitative performance criteria for March 2001 were met (Table 14). The structural benchmark on the merging of the civil service databases in the ministry in charge of the civil service and the payroll unit in the Ministry of Finance was met in early September 2001, instead of March, because of technical problems. Spending on education and health was below the indicative targets stipulated in the program.

B. Macroeconomic Policies

8. The fiscal performance was satisfactory in 2000 (Table 5). The overall fiscal deficit, on a payment order basis and excluding grants,4 was held to the program target (3.5 percent of GDP) and was financed mainly by international assistance and nonbank domestic borrowing.5 Total revenue rose to 16.6 percent of GDP, or 0.7 percentage point more than expected, owing to a strengthening of tax administration. Based on preliminary data, total government expenditure rose to 20.1 percent of GDP, or 0.6 percentage point more than targeted, largely because of an acceleration of budgetary spending toward the end of the year.6 While total outlays for education and health rose at a slower pace than other outlays, their share in GDP remained stable (at 4.8 percent, Table 14).

Table 5.

Benin: Consolidated Government Operations 1999-2004

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Sources: Beninese authorities; and staff estimates and projections.

Including value-added taxes on imports,

Total revenue minus total expenditure, excluding interest payments and net lending

Includes confirmed interim HIPC assistance from Paris Club, ADB/AFDB, BOAD, OPEC, World Bank, and IMF

In billions of CFA francs.

9. In the first half of 2001, the overall fiscal position, excluding grants, was stronger (a surplus of 0.3 percent of GDP) than targeted (a deficit of 1.7 percent), because government expenditure was much lower than expected. Although spending for the presidential campaign was about 50 percent higher than the budget appropriations for both the presidential and local elections, there was a large shortfall in the implementation of other expenditures, mainly due to difficulties in operating a new expenditure management system. There was also a small revenue shortfall, because customs receipts were adversely affected by a tightening of controls by Nigeria at its border with Benin. With the overall fiscal surplus and a higher level of external financing than anticipated, the government increased its net deposits in the banking system by more than programmed.

10. Although the growth rate of broad money was much higher than earlier projected, it declined to 21.3 percent in 2000 from 35.0 percent in 1999 (Table 6). About half this monetary expansion was underpinned by an improvement in the banking system’s net foreign assets. At the same time, the growth rate of bank credit to the nongovernment sector was cut by one-half to 25.5 percent. These trends continued during the first semester of 2001. Broad money growth slowed further to 10.9 percent, and was driven entirely by a more substantial increase in net foreign assets. Net domestic assets of the banking system decreased because the government increased its net deposits in the banking system and the growth rate of bank credit to the nongovernment sector continued to decline. Following strengthened loan recovery efforts, the nonperforming loans of commercial banks fell from 5.4 percent of total credit at end-December 2000 to 4.7 percent at end-June 2001.7

Table 6.

Benin: Monetary survey, 1999-2002

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Sources: BCEAO; and staff estimates and projections.

CCP=Comptes Cheques postaux

C. Structural Reform Implementation

11. Structural reform implementation has been mixed since September 2000, especially in the months leading up to the presidential election. In the cotton sector, the state enterprise (SONAPRA) lost its monopsony on the purchase of seed cotton from producers in June 2000, and sector participants created an autonomous agency (CSPR) for managing the marketing of seed cotton and settling bank credit that finances imports of fertilizers and pesticides. After some delays, the CSPR became fully operational in January 2001, which allowed the 2000/01 harvest to be completed on time. However, the CSPR was late in paying producers fully because of delays in receiving payments from SONAPRA and one private ginning enterprise. The CSPR has seized ginned cotton from the private enterprise and the issue is to be resolved by a judicial court. SONAPRA is expected to pay fully the CSPR by end-September 2001 from export proceeds. Discussions continue between the authorities and the World Bank on the strategy to privatize SONAPRA, the financial situation of which has weakened over the past two years. The privatization of other public enterprises, in particular those in the sectors of telecommunications, water and electricity distribution, and port management, have been at a standstill since the fall oJ 2000.

12. With respect to the civil service, the National Assembly has yet to amend the law relating to the new compensation system. The merging of the civil service databases was completed by September 2001, instead of March, as expected in the program. However, works continue for the payroll unit of the Ministry of Finance to have direct access to the merged database maintained at the Ministry in charge of the civil service. Implementation of the decentralization policy is awaiting the holding of local elections.

III. Medium-Term Strategy

13. The government unveiled an ambitious five-year action plan, covering the second term of President Kérékou, on August 1, 2001, Benin’s Independence Day. In view of the favorable macroeconomic developments over the past few years and the availability of highly concessional external financing, the authorities considered that there was room for more expansionary policies, so as to achieve higher growth and thereby reduce poverty more rapidly, In particular, as agreed during a seminar on policies to accelerate growth, the authorities indicated that their objective was to raise real GDP growth from 5.8 percent in 2000 to 7 percent by 2004. To that end, the government prepared a list of projects, especially to develop infrastructures, as well as measures to encourage private domestic investment and attract foreign investment. The main objectives and areas of government policy proposed in the action plan are summarized in the attached MEFP (paras. 14 and 15). Over the same period, the government considered that inflation would remain below 3 percent, while the external current account deficit would remain at about 7 percent of GDP.

14. While recognizing the importance of accelerating growth and raising social outlays, the staff noted that, over the past few years, the slow implementation of structural reforms, especially the divestiture program, had hindered growth, while government spending had been constrained by the country’s limited absorptive capacity. It cautioned the authorities against increasing public sector involvement in productive activities by providing incentives to specific sectors or enterprises. Instead, it urged the government to improve the quality of public spending, focusing on basic infrastructure, health, education, and other social sectors, while creating an even playing field for private enterprises. In particular, the staff stressed the need for streamlining and making more transparent the legal and regulatory framework for enterprises. In addition, the staff expressed concern about the government’s five-year action plan, which was prepared separately from the ongoing work on the PRSP and MTEF. In response, the authorities emphasized that they expect the PRSP, which would cover the first three years of the government’s action plan, to give a high priority to achieving strong growth and reducing poverty. They also indicated that, to achieve these objectives, they were firmly committed to macroeconomic policies and structural reforms under the PRGF-supported program.

IV. The Program for 2001/028

15. For 2001 and 2002, the staff and authorities projected somewhat higher real GDP growth (5.8 percent and 6 percent, respectively) than estimated previously. These growth projections were based on the expected expansion of food production and of activities in the construction, public works, commerce, and transport sectors. Inflation is targeted to be contained at less than 3 percent in 2001 and 2002. As regards the external current account, the improvement in the terms of trade in 2001 is likely to be short-lived because of a larger-than-expected drop in the export price of cotton. At the same time, cotton production is expected to stagnate, while the volume of imports is forecast to grow somewhat faster than earlier projected in the program. For these reasons, the external current account deficit is likely to widen from 6.6 percent of GDP in 2001 to 7.0 percent in 2002.

A. Fiscal Policy and Budget Reform

16. The staff agreed with the authorities that, in 2001, the overall fiscal deficit, on a payment order basis and excluding grants, was likely to be smaller (4.1 percent of GDP) than targeted (4.4 percent of GDP). Total government revenue should be ½ of 1 percentage point above the program target (16 percent of GDP), given the outcome in the first half of the year and the continued efforts to reduce tax fraud and corruption. While there has been a compression of expenditures in the first half of the year and appropriations for current nonsocial outlays will be reduced, total expenditure for the year has been revised slightly upward to 20.6 percent of GDP. This would cover an increase in spending in the health and education sectors,9 some transfers payments to WAEMU, and the purchase of an airplane for the President.10 The authorities also indicated that the expected debt relief under the HIPC Initiative and other external assistance would allow them to finance the fiscal deficit as well as make a modest net repayment of the domestic debt.

17. For 2002, the authorities intend to contain the overall fiscal deficit at 4.2 percent of GDP, which is 0.3 percentage point more than expected under the medium-term program to accommodate higher capital spending. The overall financing gap is estimated at about 1.7 percent of GDP. This gap should be more than covered by debt relief to be obtained in the context of the HIPC Initiative (1 percent of GDP), Fund assistance (0.4 percent of GDP), and grants and loans tied to adjustment programs from the European Union (0.3 percent of GDP) and possibly from the World Bank and bilateral donors.

18. The staff and the authorities concurred that a further improvement in tax administration would be sufficient to raise total revenue from 16½ percent of GDP expected in 2001 to 16.7 percent in 2002. As recommended by past Fund technical assistance missions, the authorities intend to focus on strengthening the tax unit in charge of large enterprises, cross-checking customs declarations with information from the domestic tax department and an import preshipment inspection company, and combating fraud and corruption. Also, grants are expected to amount to the equivalent of 2.6 percent of GDP, bringing total revenue and grants to 19.3 percent of GDP.

19. Total government expenditure is expected to rise to 20.9 percent of GDP in 2002. The authorities agreed to keep the wage bill at 4½ percent of GDP but indicated that, in view of the low staff level in many ministries, they would replace all departing staff, instead of recruiting two new staff for three departures, as was done at present. In addition, contractual primary teachers and basic health employees would continue to be hired at the local level and financed through central government transfers with resources obtained in the context of the HIPC Initiative. As for the opportunity of a pay raise, the staffs position was that it should be considered only after the implementation of a new compensation system since, in both 2000 and 2001, salaries had been increased by an average of 8 percent with the understanding that the measure would be put in place. The authorities agreed to keep the pay raise within the wage bill ceiling, and to ask the National Assembly to vote on the required amendment to the law on the compensation system before end-2001, so that it could be implemented in early 2002. If the amendment were voted down, the authorities would consult with Fund and World Bank staffs before granting a pay raise. In addition, as salary increases have been larger in Benin than in other WAEMU member countries since the devaluation of the CFA franc in 1994, the staff emphasized the importance of limiting the pay raise so as to avoid weakening the country’s competitiveness. As regards public investment, the government indicated that it would rise to 8.5 percent in 2002 from 8 percent in 2001, partly by raising the execution rate of projects from 80 percent to 90 percent over that period. To do so, the authorities intended to increase the use of specialized autonomous agencies to execute projects.

20. The staff discussed measures to strengthen budget execution, which are described in the attached MEFP (paras. 7 and 25), and the conclusions of the Preliminary Report on the Observance of Standards and Codes (Box 1). In addition to improving the new expenditure management system, the government is preparing, with the assistance of World Bank and other donors, medium-term spending programs for the Ministries of Education, Health, Rural Development, Transportation, and Urban Development and Environment. The ministries are also preparing unified budgets that cover all current and capital expenditures of the government. These sectoral programs and budgets will be submitted to the National Assembly with the overall budget for 2002. As the objectives for capital spending have not been met in the past, the staff urged the authorities to strengthen project preparation and monitoring with the assistance of the World Bank and other donors, so as to attain the rate of project execution planned for 2002. Individual ministries will be managing and monitoring budget execution according to sector-specific indicators. Budget outturns will be audited by a Chamber of Accounts, which is to be strengthened through technical assistance from donors.

Benin: Preliminary Report on Fiscal Transparency and Tracking of Poverty-Reducing Public Expenditure

A mission of the Fiscal Affairs Department visited Cotonou in May 2001 to assist the authorities in preparing a fiscal module of a Report on the Observance of Standards and Codes (ROSC) and assessing the capacity of the public expenditure management system in tracking poverty-reducing outlays. The main conclusion was that important steps had been taken to improve fiscal transparency in Benin in recent years, but more should be done. It recommended the following:

  • improving the availability of public finance statistics to the public;

  • strengthening the preparation, execution, and management system of the budget;

  • improving the quality of budgetary data and ensuring their auditing by an independent agency; and

  • clarifying and strengthening the role and the responsibilities of the different government entities.

Concerning the capacity of the public expenditure management system to track poverty-reducing public expenditures, the mission recommended a three-year action plan in order to

  • establish a unified budget;

  • improve the availability of information on public expenditure financed by external grants;

  • establish a medium-term expenditure framework;

  • strengthen the internal audit system; and

  • accelerate the preparation of the final government accounts.

The mission also agreed with the authorities on a short-term action plan containing the following list of actions:

  • correct the problems with the new computerized expenditure management system (SIGFIP) and intensify the training for users;

  • integrate the operations of the external debt-management agency (CAA) into SIGFIP; and

  • strengthen the financial control units.

B. Regional Monetary Policy and the Financial Sector

21. Regional monetary policy in 2002 will remain consistent with the fixed peg regime and a further increase in the net foreign assets of the BCEAO For Benin, broad money is projected to expand at a slightly faster pace than nominal GDP growth. Net domestic assets of the banking system would increase by only 4.4 percent in terms of beginning-of-period broad money, with net credit to the government continuing to decline and bank credit to the nongovernment sector increasing by about 13.9 percent.

22. As regards the financial situation of the banking system, the government replaced the management of two banks in September 2001 in light of the financial problems and mismanagement that the regional banking commission’s audits had uncovered a year ago. Also, as one of the two banks is still state-owned, they indicated that an action plan to privatize it would be adopted by December 2001. The privatization may require the government to take over some of the bank’s nonperforming assets estimated at 0.2 percent of GDP.11 Meanwhile, the government would pursue efforts to have all banks meet the regional banking commission’s prudential ratios. In particular, by January 1, 2002, banks will be required to meet a capital adequacy ratio of 8 percent, in line with international standards. Already, all banks other than the two banks facing difficulties meet this ratio. As regards the financial health of the cooperative and mutual credit institutions, the authorities indicated that, with donors’ support, they would continue to strengthen the unit in charge of supervising these institutions, enforce the regional law and regulations concerning them, and provide training to their personnel. The authorities also intended to ensure that the largest cooperative and mutual credit institution, FECECAM,12 continued to carry out its rehabilitation plan with the assistance of foreign experts.

C. Other Structural Reforms

23. The government remains committed to implementing the structural reform program outlined in the MEFP (paras. 29-35). In particular, in addition to the budget and civil service reforms, it intends to implement its decentralization policy and pursue its divestiture program. The reforms are essential to improve the quality of public expenditure and accelerate growth.Box 2 provides a summary of structural conditionality under current and past Fund-supported programs and of the areas where the World Bank staff has taken the lead.

24. The reform of the public administration has received broad technical and financial support from donors over the past ten years, but progress has been limited. In addition to the implementation of a new compensation system for the civil service,13 the reform is to include a reorganization of ministries and the preparation of staffing plans. The latter is to take into account the decentralization reform, which will transfer responsibilities for primary education and basic health to newly created local governments to be headed by elected officials. While the decentralization laws were adopted, including their sources of funding for local government, their implementation is awaiting the holding of local elections. In addition, the reform of the civil service pension fund (FNRB) is awaiting the completion of an actuarial study that is to recommend measures to eliminate the deficit, which is currently covered by the budget and amounts to ½ of 1 percent of GDP.

Benin: Structural Conditionality

Coverage of structural conditionality in the 2000-03 program

The first-year program under the three-year PRGF arrangement contained two structural performance criteria on improving public expenditure management and tax administration that were observed, and one structural benchmark related to civil service reform that was observed late. The three measures had the objective of strengthening public resources management. The second-year program includes four structural benchmarks seeking to contain wage increases, and thereby maintain the country’s competitiveness, improve information on government spending and potential government liabilities, and strengthen the banking system.

To arrive at the completion point under the HIPC Initiative, Benin will have to satisfy four structural conditions: two in the area of government financial management, one on governance, and one on adopting a strategy for the privatization of the cotton monopsony.1/ In addition, five completion point conditions are related to outcomes in the health and education sectors.

Status of structural conditionality from earlier programs

During the first half of the second annual Enhanced Structural Adjustment Facility (ESAF)-supported program covering the period October 1998 March 1999, there were four structural benchmarks, with two related to the civil service reform, one to tax administration, and one to privatization of the public oil-distributing company. Three out of the four benchmarks were observed, but with delays. The second half of the 1998/99 program, covering the period April-September 1999, included six structural performance criteria, of which two were on the privatization of public enterprises,1/ two on civil service reform, one on tax administration, and one on petroleum price setting. Out of the six criteria, five were observed with delays, and one, related to the privatization of the water/electricity public utility, was not observed.

Structural areas covered by World Bank lending and conditionality

The World Bank is assisting the authorities in public expenditure management through an expenditure reform adjustment credit approved in March 2001. Key actions that are supported by this credit in 2001 and benchmarks for subsequent adjustment credits are (i) formulation of a medium-term expenditure framework for 2002-04, based on the PRSP; (ii) strengthening of the formulation of sectoral spending strategies in five ministries; (iii) presentation of a 2002 budget to the National Assembly that is strongly oriented toward growth and poverty reduction; (iv) monitoring of the execution of the 2001 budget on a semiannual basis; (v) observance of performance criteria with respect to public procurement; and (vi) completion by the Chamber of Accounts of a performance audit for the 2000 budget. In addition, triggers for a poverty reduction support credit (PRSC) include completion of a satisfactory PRSP; progress in implementing the cotton sector reform program; tangible progress in the privatization of public enterprises1/ and in setting up appropriate regulatory frameworks in privatized sectors; and improved execution rates for development expenditure.

The World Bank is increasingly moving toward ex-post assessments of progress, and toward modulating its financial support to the pace of reform implementation. Consistent with the need for satisfactory sectoral strategies to underpin its investment lending, World Bank approval of proposed power projects requires agreement on the privatization of the management of the water and electricity company, SBEE.2/

Other areas relevant to the Fund program and in which the World Bank is assisting the authorities include (i) the decentralization process; (ii) governance; (iii) the privatization of public enterprises,1/ (iv) health; (v) education; and (vi) social indicators. The Bank does not have specific structural conditions in those areas, but does monitor progress as a basis of its assistance.

Other relevant structural conditions not included in current program

The privatization of public enterprises1/ outside the cotton and electricity sectors is an area of macroeconomic relevance, particularly for boosting growth, and is not covered by any conditionality.

1/ Privatization of a public enterprise involves the sale of its assets.2/ Privatization of the management of a public enterprise means that it would be managed by a private entity under a management contract.

25. To complete the reform in the cotton sector, the government intends to adopt, with the assistance of the World Bank, a strategy for the privatization of SONAPRA. As a first step, a study is underway to assess the possibility of selling the enterprise in several lots, so as to increase competition among ginning enterprises and thereby improve the sector’s efficiency and producers’ revenue. The adoption of a strategy to privatize SONAPRA is a condition for Benin to arrive at the completion point under the HIPC Initiative. In addition, to ensure the success of the reform, the World Bank staff is discussing a credit that will finance measures to strengthen the new institutions managing the sector, as well as the producers’ associations.

26. To accelerate economic growth and improve service delivery, a broad consensus is emerging on the need to draw private expertise and capital into key public enterprises, either through privatization or different forms of public-private partnerships. However, the opposition of the employees of public enterprises remains an obstacle to a rapid implementation. For the enterprise SBEE, distributing water and electricity, a seminar, in which representatives of the civil society participated, recommended that it be split into two entities, which will be managed by private firms. The authorities expect to complete the restructuring of the enterprise with the assistance of the World Bank before end-2002. In addition, the authorities will prepare a plan to strengthen the SBEE’s financial situation by end-October 2001, since the enterprise made losses over the past two years. As regards telecommunications, the National Assembly is expected to vote on the law separating the post office from the telecommunications entity in the coming months. This action would allow the government to privatize the telecommunications entity by July 2002. The authorities are expected to select an option for private sector participation in the management of the Port of Cotonou by mid-2002. The government also plans to select a strategy for the privatization of public enterprises in the textile industry during the coming year.

D. Governance

27. Good public and corporate governance remains one of the government’s priorities. To that end, a year ago a commission prepared a national strategy to fight corruption, after broad consultation with the civil society. The government expects to adopt the strategy by the end of the year after resolving legal issues, especially those that would ensure the autonomy of the implementing agency. The strategy, which is a condition to reach the completion point under the HIPC Initiative, seeks to strengthen the rule of law and public administration, including the legal framework and the judicial system, as well as financial administration and public procurement. In that context, the ongoing reform of the budget process and the strengthening of the Chamber of Accounts will improve public finance transparency and accountability.

28. In line with these efforts, the staff urged the authorities to pursue vigorously cases of corruption brought to their attention and prosecute any verified acts. As regards problems that had risen with the privatization of the enterprise distributing petroleum products, SONACOP, the authorities indicated that they would pursue the judicial actions taken to protect the state’s interest, and would recover from the enterprise arrears on tax payments before year’s end and on dividend payments by next year.

E. Poverty Alleviation and Preparation of the PRSP

29. On the basis of the interim PRSP and the poverty reduction programs to be supported with the resources obtained under the enhanced HIPC Initiative, the authorities have begun to focus on developing the basic education and health services. For education, the authorities have eliminated tuition fees for all schoolchildren, and allocated funds for rehabilitating classrooms and hiring teachers for the local communities. In the health sector, the authorities have increased budget appropriations for reproductive health, child immunization, and prevention of HIV/AIDS. These social expenditures were financed largely by HIPC Initiative resources, which amounted to CFAF 3.5 billion in 2000 and CFAF 18.7 billion in 2001. As a result, in 2001, total outlays for health and education would increase (20 percent) more sharply than total government expenditure (12 percent). Looking forward, the authorities intend to prepare a medium-term expenditure framework and improve the expenditure management system to facilitate the tracking of overall government spending benefiting the poor.

30. Following the preparation of an interim PRSP in June 2000, work on the full PRSP progressed slowly before the presidential election held in March 2001. Nevertheless, since then, as indicated in the authorities’ progress report on the preparation of the PRSP and the joint staff assessment, sufficient progress has been made for the authorities to expect completing the first draft of the PRSP by October 2001, and the final draft to be validated through broad consultations before year’s end.

31. The authorities consider critical the integration of social impact analysis in their antipoverty strategy. Preliminary indications show that poverty in Benin remains widespread, and poverty indicators are close to the sub-Saharan average (Table 13). As part of the PRSP preparation, the authorities have carried out a study to assess the impact on poverty reduction of the economic and structural policies undertaken over the past decade. The study, which is based on household surveys, concludes that the proportion of the population below the poverty line increased during the 1990s. However, the staff suggested that further analysis be conducted in order to explain how and why poverty had increased, while social indicators and real per capita GDP had improved.14

32. The authorities expect that the structural reforms planned under the program would not only improve the efficiency of the economy but also benefit the poor over the medium term. In particular, the privatization of the SBEE will rapidly upgrade services and possibly reduce costs to consumers. At the same time, investment in the distribution of water and energy in rural areas will most likely remain under the government’s responsibilities as the profitability of such investment is uncertain. The liberalization of the cotton sector and the strengthening of producer associations are expected to give producers a larger share of revenue generated by the sector, while providing greater flexibility in managing the impact of external shocks. The reform of the compensation system of the civil service will help contain pay raises and keep the wage bill at a sustainable level. It will thereby provide additional resources for hiring in health and education. Also, reducing the deficit of the civil service retirement fund will free government resources for social programs.

33. In spite of the benefits expected from structural reforms in the medium term, the authorities recognized that, in the short run, some of the reforms might have a negative impact on the poor. Hence, in the context of the preparation of the MTEF and the budget programs for ministries, the authorities intend to assess the social impact of key reforms with the assistance of World Bank staff and other donors. In particular, they will seek to cushion the potential negative impact on low-income households of the divestiture program and possible adjustments in utility tariffs. The measures would be discussed with Fund and World Bank staffs and their costs covered by using part of a provision of CFAF 10 billion allocated in the budget for spending related to the restructuring of the economy. The government is to use the rest of the provision for reimbursing the private sector for deposits that were frozen when state-owned banks were liquidated in the late 1980s.

V. Medium-Term Balance of Payments Outlook, and Capacity to Repay the Fund

34. The medium- and long-term balance of payments projections presented at the time of the first review of the program have been updated based on the most recent available information and the latest projections of the World Economic Outlook (Box 3). Benin’s external current account deficit is expected to narrow from 8 percent of GDP in 2000 to 6.6 percent in 2001 and 7.0 percent in 2002. In spite of a larger external current account deficit than originally programmed, the overall balance of payments is expected to register surpluses over the period on account of a high level of external assistance and direct investment in the context of the privatization program. Benin may also continue to benefit from large short-term capital inflows, since financial and political stability has made the country a safe haven for private capital from the region. Benin has a very good record of servicing its debt-service obligations, and, in view of its satisfactory balance of payments and fiscal positions, it is expected to discharge its future obligations to the Fund in a timely manner.

35. The main risk to the forecast concerns the international price of cotton, which the World Economic Outlook currently projects to fall from 59 U.S. cents per pound in 2000 to 51.8 cents in 2001 and 2002, before recovering slowly thereafter. An alternative scenario was prepared using, for 2002, the price of the March 2002 future contract for cotton at end-August 2001 (41 cents per pound) and, for the following years, the same trend as the one projected in the World Economic Outlook. Under such a scenario, and assuming that everything else remains the same, the current account deficit would widen by 1.5 percentage points of GDP in 2002 and 1.3 percentage points of GDP in 2003. Hence, the overall balance of payments would probably record small deficits, which Benin should be able to finance by drawing on its international reserves. Nevertheless, an important risk is that, at the low projected price, growing cotton may become unprofitable for a majority of producers. This development would have a negative impact on economic growth, poverty, and, potentially, on Benin’s fiscal situation over the medium term. Even though the cotton sector contributes marginally to government revenue, the authorities may need to provide a safety net to producers, perhaps as high as ¾ of 1 percent of GDP. Moreover, such a drop in the price of cotton may affect the banking system as total exposure to the cotton sector (loans and off-balance sheet items) amounted to the equivalent of 2.7 percent of GDP at the end of August 2001, including 1.7 percent for SONAPRA. Finally, further delays in implementing the much-needed key structural reforms in the public sector could undermine the fiscal position and growth prospects.

Benin: Balance of payments, 1999–2004

(In billions of CFA francs, unless otherwise indicated)

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Sources: Beninese authorities; and staff estimates and projections.

36. Benin reached the decision point under the HIPC Initiative in July 2000 and is expected to reach the floating completion point by early 2002, once a full PRSP has been prepared and the authorities have met all other conditions. In the interim, Benin has benefited from assistance granted from the Fund, the World Bank, the African Development Bank, the European Union, the Organization of Petroleum Exporting Countries (OPEC), the West African Bank of Development (BO AD), and Paris Club creditors amounting to CFAF 5.6 billion (0.3 percent of GDP) in 2000 and CFAF 18.7 billion (1.0 percent of GDP) in 2001. China and the BCEAO also indicated that they would provide debt relief after the completion point.

VI. Statistical Issues

37. The national accounts statistics suffer from the lack of a comprehensive data collection system, which is reflected, for example, in the deficient data on private savings and investment, in accounting for the output of the informal sector, and in measuring agricultural production for own consumption. The balance of payments data only partially capture informal regional trade (especially with Nigeria), while the financial accounts suffer from limited coverage with regard to the foreign assets of the private nonbank sector and weaknesses in the reporting of foreign direct investment transactions. The data deficiencies do not, however, hamper the ability of staff to conduct effective surveillance of economic policies. The authorities have been regularly providing core data for surveillance to the Fund and are continuing their efforts to improve their quality, coverage, and timeliness. The government also participates in a regional project to harmonize and improve macroeconomic data (Appendix IV).

VII. Staff Appraisal

38. The staff considers the economic and financial performance during the 2000–01 program to have been broadly satisfactory. All quantitative performance criteria were observed, and the structural benchmark on the creation of a unified database for the civil service was implemented, albeit late. Nevertheless, there were delays in the implementation of structural reform and in preparing a full PRSP, especially during the months leading up to the presidential elections held in March 2001. Therefore, the government needs to move forcefully in implementing measures that are essential for improving the economy’s efficiency and attaining the ambitious growth objectives set for the medium term.

39. The fiscal stance remains appropriate in 2001 and in the preliminary budget for 2002. Nevertheless, the government needs to improve the level and the quality of government expenditure and ensure that the 2002 budget is strongly oriented toward growth and poverty reduction. In this context, it is essential to first resolve problems encountered early this year in the expenditure management system and, second, to pursue the reform undertaken with the support of the international community aimed at strengthening budget preparation and execution, and measuring outcomes against a clear set of indicators. Particular attention should be paid to improving the preparation of investment projects, so that they can be executed efficiently and in a timely manner.

40. The authorities need to accelerate structural reform implementation. In particular, the opening of all productive sectors to private investment, including through privatization, and the streamlining of the legal and regulatory frameworks are essential to broaden and strengthen the economic base, promote high and sustainable economic growth, and reduce poverty. It is also important that the long-delayed reform of the civil service compensation system be rapidly implemented, since it would reduce pressures to increase salaries, which represent a serious risk to the country’s long-term fiscal viability and competitiveness. In addition, such a reform would improve civil service management and help meeting staffing requirements.

41. The staff welcomes the implementation of the regional banking commission’s recommendations for dealing with the two banks experiencing difficulties This action and efforts to ensure that banks observe all prudential ratios are key measures needed to strengthen the financial sector.

42. The authorities have made good progress toward the preparation of a comprehensive poverty reduction strategy, which should be available before the end of the year.

43. Benin’s economic database is comprehensive but remains weak. The authorities have been regularly providing core data for surveillance to the Fund and are urged to continue their efforts to improve their quality, coverage, and timeliness. They are also encouraged to continue working closely with other countries in the WAEMU to implement a common statistical methodology in key economic and financial areas.

44. in view of the satisfactory developments under the program and the policies being implemented in 2001, the staff recommends that the second review under the three-year PRGF arrangement be completed.

Figure 3.
Figure 3.

Benin: Effective Exchange Rates, Janaury 1993-2001 1/

(Index, 1990-100)

Citation: IMF Staff Country Reports 2001, 208; 10.5089/9781451803341.002.A001

Source: IMF, Information Notice System (INS).1/ A rise in the exchange rate variables indicates an appreciation of the domestic currency.
Table 7.

Benin: Balance of Payments, 1999-2004

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Sources: Beninese authorities; and staff estimates and projections.

Includes confirmed interim HIPC assistance from Paris Club, African Development Bank/Fund, BOAD, OPEC, World Bank, and IMF.

HIPC assistance after completion point assumed to be in January 2002.