Benin: Fourth Review Under the Poverty Reduction and Growth Facility

This paper assesses Benin’s Fourth Review Under The Poverty Reduction and Growth Facility (PRGF). Macroeconomic performance remained broadly in line with the objectives of the PRGF-supported program in 2002. All performance criteria for end-September 2002 were met, and the four structural benchmarks were observed by end-December 2002. However, spending on health and education remained below quantitative benchmarks, and the civil service reform continued to stall. The authorities finalized the poverty reduction strategy for 2003–05, which aims at achieving strong economic growth and reducing poverty, while maintaining financial stability.

Abstract

This paper assesses Benin’s Fourth Review Under The Poverty Reduction and Growth Facility (PRGF). Macroeconomic performance remained broadly in line with the objectives of the PRGF-supported program in 2002. All performance criteria for end-September 2002 were met, and the four structural benchmarks were observed by end-December 2002. However, spending on health and education remained below quantitative benchmarks, and the civil service reform continued to stall. The authorities finalized the poverty reduction strategy for 2003–05, which aims at achieving strong economic growth and reducing poverty, while maintaining financial stability.

I. Introduction

1. The Executive Board concluded the first review under the Poverty Reduction and Growth Facility (PRGF) arrangement on January 8, 2001 (EBS/00/288; 12/27/00).1 The second review under the PRGF arrangement was concluded and the second-year program presented to the Board on November 2, 2001 (EBS/01/176; 10/18/01). The third review under the PRGF arrangement was concluded on July 15, 2002 (EBS/02/119; 07/01/02). The fifth disbursement under the PRGF arrangement (SDR 4.04 million), which is contingent upon completion of the fourth review, will raise Benin’s outstanding use of Fund resources to 83.8 percent of quota at the end of June 2003 (Table 2).

2. In the attached memorandum on economic and financial policies (MEFP) (Appendix I, Annex I), the authorities review the performance under the program and describe the policies that will be implemented in the period ahead. The performance criteria and benchmarks for 2003 are set out in the technical memorandum of understanding (Appendix I, Annex II).

3. The World Bank has remained extensively involved in Benin. A World Bank mission was in Cotonou at the same time as the Fund mission to jointly review the budget for 2003, the poverty reduction strategy paper (PRSP), and other HIPC Initiative completion point conditions; the World Bank staff also followed up on the implementation of the public expenditure reforms agreed upon under the Public Expenditure Reform Adjustment Credit (PERAC) approved in March 2001 and the supplemental credit approved in October 2002. The World Bank is assisting the authorities in the reform of the cotton sector in the context of a sectoral project approved in January 2002. The World Bank has also initiated the preparation of a Poverty Reduction Support Credit (PRSC) to support policies laid out in the PRSP. Benin’s relations with the Fund and the World Bank are summarized in Appendices II and III, respectively.

4. Benin’s economic database is comprehensive but remains weak, particularly regarding national accounts and the balance of payments. Important methodological issues also remain to be addressed on poverty data (Appendix IV).

5. On the political front, President Kérékou was reelected for a second term in March 2001. The absence of a government majority in the National Assembly has resulted in delays in the adoption of economic reforms. Municipal elections took place in December 2002; they will pave the way for the implementation of a devolution policy. Legislative elections are scheduled for end-March 2003.

II. Recent Economic Performance

6. Benin’s macroeconomic performance under the PRGF-supported program remained broadly in line with the program objectives in 2002 (Table 3; and Figures 1 and 2). Real GDP is estimated to have grown by more than programmed (5.8 percent, compared with 5.3 percent), as cotton production increased by 23 percent relative to the previous crop season. Annual average inflation was contained at below 3 percent. The external current account deficit is estimated to have widened as programmed, because of a sharp drop in the world cotton price. The real effective exchange rate appreciated by about 4.5 percent during the first ten months of 2002, owing mainly to the strengthening of the euro against the U.S. dollar (Figure 3).2 The situation of the financial sector, including that of the cooperative and mutual credit institutions, improved.

Figure 1.
Figure 1.

Benin: Selected Economic and Financial Indicators, 1994-2005 1/

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2003, 120; 10.5089/9781451803433.002.A001

Source: Beninese authoities; and staff estimates and projections.1/ 2003-05 data are projections.
Figure 2.
Figure 2.

Benin: Selected External and Monetary Indicators 1/

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2003, 120; 10.5089/9781451803433.002.A001

Source: Beninese authoities; and staff estimates and projections.1/ 2003-05 data are projections.
Figure 3.
Figure 3.

Benin: Effective Exchange Rates and Terms of Trade, 1993-2002

(Index, 1990= 100)

Citation: IMF Staff Country Reports 2003, 120; 10.5089/9781451803433.002.A001

Source: IMF Information Notice System (INS); and staff estimates.

7. Regarding performance under the program (Table 15), all the quantitative performance criteria for end-September 2002 were met, reflecting a satisfactory overall fiscal performance. The four structural benchmarks were also met by end-December 2002. Spending on health and education, however, remained below the quantitative benchmark, owing to a lack of implementation capacity. The quantitative benchmark on the wage bill was also slightly exceeded in September, but it was met for the year as a whole.

A. Macroeconomic Policies and Budget Reform

8. Fiscal performance in 2002 was broadly satisfactory (Table 5). Boosted by the implementation of action plans to improve tax collection by the customs and internal tax administrations, total revenue, at 17.1 percent of GDP, exceeded program targets by ½ of 1 percentage point of GDP. Total expenditure, at 20.7 percent of GDP, was 1 percentage point of GDP lower than the projected level, reflecting the low level of investment outlays resulting from weaknesses in implementation capacity.3 Priority outlays for education and health remained below targets, while other current expenditure slightly exceeded program targets4 The overall fiscal deficit, on a payment order basis and excluding grants, was held to 3.7 percent of GDP (1½ percentage points below target). As a result, notwithstanding the smaller-than-expected disbursement of foreign assistance, domestic financing of the budget remained about nil, as targeted.5

9. The authorities took measures to strengthen budget execution. In particular, there were further improvements in the implementation of the new computerized budget management system (SIGFIP), which had encountered difficulties in 2001 that slowed budget execution and led the treasury to use exceptional procedures to pay urgent expenses. Following the completion of the evaluation of the operations of the cash advance accounts (comptes de régisseurs) and the adoption of an action plan to reduce the number of such accounts, 300 accounts, out of a total of 867, were closed by the end of 2002. The authorities also completed work to balance the accounts of the treasury and produce monthly treasury accounts within one month.

10. Following three years of strong expansion, broad money contracted by 7½ percent during the first nine months of 2002 (Table 6).6 This contraction was underpinned by a deterioration in the net foreign assets of the central bank, which reflected delays in cotton exports, as well as in the disbursement of foreign assistance to the government.7 Domestic credit stagnated during the first nine months of 2002, as the buildup of government deposits (at end-September 2002, net government deposits reached the equivalent of 13 percent of broad money) was compensated for by a moderate increase in credit to the nongovernment sector.8 Despite the easing in interest rates in industrialized countries, the regional central bank has kept its key nominal interest rates unchanged since June 2001.

B. Structural Reform Implementation

11. There was progress in the implementation of structural reforms in 2002. As mentioned above, the structural benchmarks for end-July, end-August, and end-September 2002 were completed, although with delays (Table 15).9 A national strategy to fight corruption was put in place in July. In the cotton sector, the reform process begun in the early 1990s with the support of the World Bank and bilateral donors proceeded satisfactorily (Box 1). A strategy for the privatization of the state-owned ginning company (SONAPRA) was adopted in May 2002. In early October, the producer price for the 2002/03 crop season was set at CFAF 190 per kilogram (CFAF 10 lower than last year), after the government gave a clear indication that it would not grant price subsidies.10 Actions were also taken regarding the divestiture program for the public utility enterprises (MEFP, para. 14).

12. However, civil service reform continued to stall, as the National Assembly did not vote on the legislation regarding the new compensation system for the civil service. In the circumstances, the authorities decided that, starting in January 2003, new recruitment to replace retiring civil servants would be based on fixed-term contracts, with a merit-based promotion system applied to these contractual employees (MEFP, para. 16).

13. The financial health of the banking sector improved in 2002. The government continued its efforts to ensure that banks met the Regional Banking Commission’s prudential ratios. Commercial banks were required, from January 1, 2002 onward, to comply with the new capital adequacy ratio of 8 percent, in line with international standards. As of end-September 2002, four of the six commercial banks, representing 81 percent of total bank loans, met the criteria. The two undercapitalized banks, including the Continental Bank, which is scheduled for privatization, are under close surveillance by the Regional Banking Commission. The divestiture strategy for the Continental Bank was adopted in December 2002, together with a recovery plan including enhanced efforts to collect delinquent claims. The plans to rehabilitate microfinance institutions were also pursued successfully.11

14. Benin continued to be one of the most compliant members of the West African Economic and Monetary Union (WAEMU) regarding the Regional Convergence, Stability, Growth, and Solidarity Pact.12 Benin met all the WAEMU primary convergence criteria in 2002 (Box 2). Regarding the external trade regime, the authorities took the necessary steps for compliance with the regional nomenclature in the context of the WAEMU common trade policy.13

III. Medium-Term Strategy

15. The authorities finalized the full PRSP covering the period 2003-05 and submitted it to the development partners in early January 2003 (Box 3). They have also met all the other completion point triggers.14 The PRSP was prepared via a broad participatory process involving the country’s various social groups and development partners. It provides a diagnosis of poverty in Benin and presents the national priorities and sectoral objectives and policies of the poverty reduction strategy (Box 4). The PRSP also presents a mechanism for monitoring and assessing implementation of the strategy, a medium-term expenditure framework (MTEF), and the measures and actions envisaged over the period 2003-05, with a timetable for their implementation. The authorities indicated that the PRSP will remain the only reference framework for national policies and the participation of development partners in the implementation of the poverty reduction strategy.

16. Benin’s medium-term macroeconomic strategy aims at achieving strong economic growth and reducing poverty, while maintaining financial stability. To this end, the authorities remain committed to accelerating structural reforms, strengthening the development of the country’s human capital and basic infrastructure, creating an enabling environment for private sector development, and promoting the various sectors that are engines of growth. The key sectors driving growth over the medium term will be agriculture and services, which together account for about 70 percent of GDP.15 Consistent with the PRSP, structural reforms for the period 2003-05 would include the acceleration and the strengthening of (i) the public expenditure management reform, to improve the execution and transparency of public spending, and enhance the access of the poor to quality basic services; (ii) the cotton sector reform, in order to increase the efficiency of the sector and thus raise the share of farmers in export revenues; (iii) the divestiture program of public utilities, to improve service delivery; and (iv) the implementation of the anticorruption strategy.

17. To achieve these objectives, the authorities would increase the level of priority expenditure, while improving the quality of public spending and maintaining financial viability. In this regard, the PRSP includes two budgetary scenarios for the period 2003-05: first, a baseline scenario consistent with the PRGF-supported program approved in July 2002, on the basis of which the authorities drafted the budget 2003; and second, an alternative, more ambitious scenario, with higher expenditure in priority sectors, that the authorities would start implementing only when concessional external financing consistent with the objective of debt sustainability has been obtained and the absorption capacity in social spending has improved. The PRSP also presents the MTEF, as well as the overall macroeconomic framework, consistent with each of the two budgetary scenarios.

18. The baseline overall macroeconomic framework, which is consistent with the baseline budgetary scenario, is aiming at GDP growth rates of 5.6 percent in 2003 and 6.5 percent in 2004 and in 2005.16 Meanwhile, inflation would be kept at 2½ percent over the period. The external current account deficit is expected to gradually decrease from 8.2 percent of GDP in 2002 to 6.3 percent in 2005 (Table 3). Achievement of these objectives will require the continuation of a prudent monetary policy at the regional level and an appropriate fiscal stance over the period.

19. The overall macroeconomic framework consistent with the more ambitious fiscal scenario foresees higher growth rates. Government spending is projected to be 1.2 percentage points of GDP higher on average than in the baseline budgetary scenario and would focus on social and infrastructure investment. This increased spending is to be financed by greater external assistance. As a result, real GDP growth could reach 5.8 percent in 2003, 6.8 percent in 2004, and 7 percent in 2005. Although the annual inflation rate would be ½ of 1 percent higher than in the baseline macroeconomic framework, it would still remain consistent with the WAEMU convergence criteria, and external competitiveness would not significantly be affected. The external current account deficit would also be wider than in the baseline overall macroeconomic framework by 1.2 percent of GDP in 2003, 2.1 percent of GDP in 2004, and 1.5 percent of GDP in 2005.

20. Downside risks to the projected medium-term prospects would remain large because of the continued heavy dependence on cotton production and exports, and on trade with Nigeria. To alleviate the impact of these risks, reform efforts would aim at broadening the productive base and promoting private sector initiative and investment. In particular, the authorities would continue reorienting public expenditures toward the priority social sectors for human resource development and basic infrastructure, while accelerating structural reforms—especially the divestiture program and reform in the cotton sector—and strengthening financial institutions.

IV. The Program for 2003

21. The staff and the authorities reassessed the key program objectives for 2003 against the baseline macroeconomic framework of the PRSP. In view of the international environment and the prospects for cotton production, the real GDP growth target for 2003 was revised downward from 6.0 to 5.6 percent. The average consumer price inflation is expected to be contained at 2.4 percent, and the external current account deficit is likely to hover around 7 percent of GDP, in line with the level originally programmed, as the fall in the volume of cotton exports would be compensated for by a projected increase in the world cotton price.

A. Fiscal Policy and Budget Reform

22. The staff considers the 2003 budget recently adopted by the National Assembly as appropriate, as it corresponds to the baseline scenario for government financial operations in the PRSP and reflects the government’s poverty reduction objectives. The authorities intend to contain the overall fiscal deficit, on a commitment basis and excluding grants, at 4.6 percent of GDP, which is broadly in line with the originally programmed level of 4.5 percent. The overall financing gap is estimated at about 2 percent of GDP. This gap is expected to be covered by debt relief that will be obtained in the context of the enhanced HIPC Initiative (1.1 percent of GDP), Fund assistance (0.3 percent of GDP), and already secured external budgetary assistance (0.6 percent of GDP).17

23. The revenue target envisaged in the 2003 budget (17.1 percent of GDP) is attainable as it is in line with the strong revenue performance recorded in 2002, and the authorities are committed to stepping-up the strengthening of the tax and customs administrations. The authorities indicated that they will pursue the implementation of the existing action plans aimed at enhancing the performance of the tax and customs administrations and broadening the tax base. Furthermore, in consultation with Fund staff, they intend to adopt by end-March 2003 improved action plans incorporating the recommendations of the Fund’s September 2002 technical assistance mission on the reform of the tax and customs administrations (MEFP, para. 28). The authorities have also requested the Fund’s technical assistance to help in monitoring the implementation of these action plans. The staff and the authorities agreed that customs administration required further strengthening, particularly regarding customs valuation, audit coverage, the use of preshipment inspection, the monitoring of special regimes, the transparency of customs practices, and the fight against smuggling, fraud, and corruption. The staff urged the authorities to improve the collection of nontax revenue, particularly dividends and debt-service payments on external loans on-lent to public enterprises.

24. Total government expenditure in 2003 was set at 21.7 percent of GDP, which is 0.2 percentage point higher than programmed in the PRGF framework approved in July 2002. The additional expenditure includes transfers to local authorities to facilitate the implementation of the devolution policy, following the municipal elections in December 2002, as well as a higher level of expenditure for public utility services on account of the increase in electricity tariffs effected in mid-2002 (20 percent on average). In this regard, the authorities have begun to take the necessary steps to keep electricity and telephone expenditures within budget appropriations. Budgetary outlays for the education and health sectors, based on the MTEF, were raised by about 30 percent over their 2002 outturn, compared with a 13.3 percent increase for total expenditure. In parallel, the authorities are discussing with development partners measures to improve the execution of social expenditure. The wage bill has been maintained at 4.8 percent of GDP. It includes an automatic 5 percent increase to bring the wages of government employees in line with the wage scale grades reached in 2002. The authorities indicated that they would avoid the recurrence of salary increases higher than the inflation rate in the following years. Current expenditure also includes CFAF 6.5 billion (0.3 percent of GDP) to cover the cost of the legislative elections scheduled for March 2003. In accordance with the PRSP objectives, public investment was increased to 8.5 percent of GDP in 2003 from 6.7 percent in 2002.

25. The authorities confirmed their intention to prepare, later in the year, a supplementary budget for 2003 that would commit more expenditure for priority sectors, in line with the alternative budgetary scenario in the PRSP (MEFP, para. 27). The preparation of a supplementary budget will be launched only when concessional financing consistent with the objective of debt sustainability has been secured, taking into account the implementation of measures to improve absorption capacity in social spending.18The authorities will consult with Fund and World Bank staffs before starting the preparation of the supplementary budget.

26. The authorities intend to strengthen public expenditure management, in order to achieve the poverty reduction objective of the PRSP (MEFP, para. 29). The authorities intend to reinforce the measures taken in recent years, with World Bank support in the form of the PERAC, to improve the level of execution of priority current expenditure. In parallel, they will pursue their efforts to enhance transparency and the tracking of poverty-reducing public spending, taking into account the conclusions of the fiscal module of a Report on the Observance of Standards and Codes (ROSC) and the joint Fund-World Bank assessment of the capacity of the expenditure management system to track poverty-reducing outlays.19 In this regard, the authorities intend to further reduce the number of cash advance accounts (comptes des régisseurs), with a view to eliminating all of these accounts in the near future. The authorities also plan to make SIGFIP fully effective by channeling all expenditure through the system, including, in particular, external debt service and externally financed capital expenditure. To this end, an action plan will be adopted by end-March 2003; an audit of 2001 HIPC Initiative-financed expenditure will also be completed by end-June 2003.20

27. The staff discussed with the authorities the budgetary implications of the devolution process, which will follow the December 2002 municipal elections. The 2003 budget includes an allocation of CFAF 3.6 billion for local governments. The budget also includes CFAF 58 billion in appropriations that are currently administered centrally on behalf of the local governments. In order to facilitate the transfer of the management of these appropriations to local governments, the authorities completed studies on the modalities and the cost of transferring jurisdictions to the local governments, and adopted a fiscal and accounting framework for the local governments; moreover, they will provide training in budget management to local governments.

B. Regional Monetary Policy and the Financial Sector

28. Regional monetary policy in 2003 will remain consistent with the fixed peg regime and an increase in the net foreign assets of the BCEAO For Benin, broad money is projected to increase in line with nominal GDP (8 percent). Net domestic assets of the banking system are projected to rise by 4.2 percent in terms of beginning-of-period broad money, with net bank credit to government remaining virtually unchanged, while credit to the nongovernment sector could increase by about 13½ percent.

29. As regards the soundness of the banking system, the government will continue to encourage the banks to comply with the Regional Banking Commission’s prudential ratios to further the gains made in 2002 in this area. Regarding the state-controlled Continental Bank, the authorities are committed, as stated in the MEFP (paras. 10, 32, and 43), to implementing the rehabilitation plan that was adopted in December 2002 and divesting the government’s stake in the bank before end-September 2003. In the microfinance sector, the rehabilitation of the cooperative and mutual credit institutions will continue to be encouraged, and the supervision of the sector will be further strengthened.

C. Other Structural Reforms

30. The authorities are committed to accelerating the implementation of the structural reform program, as outlined in the MEFP (paras. 33-37), and in accordance with the PRSP. These reforms are essential to improve the quality of public expenditure and utility services, and to accelerate growth. Box 6 provides a summary of structural conditionality under the current and past Fund-supported programs and of the areas where the World Bank staff has taken the lead.

31. The divestiture program will be implemented with realistic timetables and a transparent process. With respect to the privatization of the telecommunications company, which was separated by ordinance from the post office in January 2002, a competitive bidding will be launched during the first half of 2003. In the electricity sector, the bidding process for the introduction of private sector management will be initiated by end-June 2003, with the assistance of the World Bank. In the meantime, the authorities intend to implement the action plan adopted in December 2002 to restore the financial situation of the electric utility. Regarding the Port of Cotonou, implementation of the selected option of private sector involvement in the port operations will also start in 2003.

32. In the cotton sector, the ongoing reform aims at increasing the efficiency of the sector and, thereby, the income of producers. As regards the implementation of the strategy for privatizing SONAPRA (Société Nationale pour la Promotion Agricole), the authorities, in cooperation with the World Bank, have launched the process of recruiting an investment bank that will help carry out this privatization in complete transparency. In parallel, the strengthening of the new private institutions managing the sector, as well as the producers’ associations, will be pursued with the support of the World Bank in the framework of the cotton sector reform project approved in early 2002. The authorities are also undertaking a study on the impact of past and future cotton sector reforms on poverty, in collaboration with sector participants and with the World Bank.

33. Regarding the civil service reform, the authorities will continue to call on the parliament to vote the legislation on the new compensation system. The vote, however, is not expected to take place before the next legislative elections scheduled for end-March 2003. In the event that the new Parliament does not pass the legislation promptly, the authorities intend to reexamine its civil service reform strategy. In this regard, it will benefit from the background studies on public administration reform and decentralization recently conducted by the World Bank (Appendix III). In the meantime, since the beginning of 2003, the authorities have been implementing a policy of recruitment based on fixed-term contracts to replace the retiring civil servants, with a merit-based system applied to these contractual employees. To facilitate the control of the wage bill and the implementation of the planned civil service reform, the authorities intend to make effective, by end-March 2003, the use of the single civil service database for the payments of wage.

34. Regarding the pension fund for the civil service (FNRB), the government completed a database of pensioners in September 2002 and finalized the terms of reference for an actuarial study to be used for the elaboration of a strategy to eliminate FNRB’s financial deficit and to restore its medium-term financial equilibrium. The authorities aim to complete the actuarial study by September 2003 and to finalize the strategy in the last quarter of 2003.

D. Governance

35. The authorities intend to ensure effective implementation of the national strategy, adopted in July 2002, to fight corruption. In particular, they will strengthen human resources in governmental audit departments, such as the Chamber of Accounts (Chambre des Comptes), the General Inspectorate of Finance (Inspection Générate des Finances) and the internal audit departments of line ministries. The authorities also reiterated their commitment to pursue vigorously all cases of corruption brought to their attention and prosecute the verified cases. Regarding the privatized distributor of petroleum products, SONACOP, the authorities will implement the action plan, adopted in October 2002, to recover the unpaid customs duties and dividends and will use all the prerogatives of the state to collect in the event of default. The authorities also reaffirmed their commitment to pursue, in parallel, the judicial actions taken against SONACOP.

V. The External Sector Outlook In the Context of Debt Relief Under the Enhanced HIPC Initiative and Capacity to Repay the Fund

36. The medium- and long-term balance of payments projections presented at the time of the third review of the program have been updated, based on the most recent available information and the latest projections of the World Economic Outlook (Tables 7 and 8).21 Benin’s external current account deficit is expected to narrow gradually from 8.2 percent of GDP in 2002 to 7.0 percent in 2003, 6.6 percent in 2004, and 6.3 percent in 2005.22 This trend will be driven mainly by the projected recovery of the world cotton price. The overall balance of payments is expected to remain close to the initial program targets in 2003-04. In the alternative macroeconomic scenario of the PRSP, the authorities estimate that the external current account deficit would be about 1.5 percentage points higher in average over the period 2003-05.

37. Over the period 2003-05, debt service to the Fund, expressed in percent of exports of goods and nonfactor services, would decrease from 3.6 percent to 1.6 percent (Table 12); the outstanding credit to the Fund would decrease from 15.3 percent to 8.9 percent over the same period. Benin has a very good record of servicing its debt 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.

38. The authorities, in close collaboration with the Fund and World Bank staffs, have updated the debt sustainability analysis (DSA), which supports the completion point. This analysis, which is based on end-2001 debt data, has three main findings. First, at end-2001, the ratio of the net present value (NPV) of debt to exports was 155 percent (including additional bilateral debt relief beyond enhanced HIPC Initiative assistance)—174 percent excluding bilateral debt relief beyond enhanced HIPC Initiative assistance—while it was expected in the decision point document to amount to 148 percent (see Box 7). Second, the higher-than-expected ratio of NPV of debt to exports at end-2001 is mostly explained by the fact that new government borrowings were larger than anticipated at the decision point.23 Third, under the baseline overall macroeconomic scenario for 2003-05 and conservative assumptions for the period 2006-21, the ratio of the NPV of Benin’s external debt to exports (after bilateral debt relief beyond enhanced HIPC Initiative assistance) would remain over 150 percent through 2004 but decline steadily subsequently and remain well below 150 percent (Table 10).24 In view of these DSA results—showing that most of the cause of the debt deterioration was not beyond the control of the authorities and the debt is expected to be sustainable over the medium-term—it is the opinion of the staff that Benin’s situation does not call for a topping up.25

39. The staff and the authorities also discussed alternative scenarios reflecting the main risks faced by Benin, including (i) lower export prices for cotton; (ii) lower concessionality in external financing (less grants, compensated by more loans); and (iii) higher public expenditure, financed by loans and grants (Table 10).26 The sensitivity analysis underscores that Benin’s strong reliance on cotton exports constitutes a major source of vulnerability for the economy, as a 20 percent lower export price for cotton would postpone Benin’s descent below the 150 percent debt-to-exports ratio until 2012, instead of 2005 as projected in the baseline scenario. The effect of the other two scenarios is much less dramatic, as the debt-to-exports ratio would remain below 150 percent from 2005 onward; however, it underlines the importance of following prudent debt-management policies and avoiding a new buildup in debt.

40. The Fund and World Bank staffs discussed these results with the authorities, who concurred that a prudent policy as regards new borrowings was necessary to maintain the external debt on a sustainable path. In this regard, the authorities have established a debt committee that will be responsible for drafting and monitoring debt policy, and annually updating the debt sustainability analysis. To reflect their commitment to a cautious debt management, the authorities also agreed to set a cap on the overall government deficit (including grants) in the form of a performance criterion to keep the borrowing requirement of the government in line with the program budget. In parallel, the authorities indicated that, with the support of the World Bank, they will improve the selection of investment projects in order to meet the objectives of the PRSP and will increase reliance on grants and highly concessional loans for their financing.

VI. Statistical Issues

41. The national accounts statistics suffer from a lack of a comprehensive data collection system, which is reflected in the deficient data for the output of the informal sector, and in the weaknesses in measuring agricultural production for own consumption. The balance of payments data only partially capture informal regional trade (especially with Nigeria) and suffer from weaknesses in the reporting of foreign direct investment transactions. Important issues also remain to be addressed with respect to poverty data. Data deficiencies do not, however, hamper the ability of the staff to conduct an 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. Program Monitoring

42. The authorities have complied with the prior actions, and established quarterly quantitative performance criteria, indicative targets, and structural benchmarks for the period January 1-December 31, 2003 to ensure successful implementation of the 2003 program (MEFP, paras. 41-43 and Table 1). In light of the PRSP, structural benchmarks were chosen from measures to improve expenditure management, to strengthen government revenue collection and the banking system, and to improve the level of social expenditure. Progress under the program will be assessed in the context of the fifth review.

VIII. Staff Appraisal

43. The staff considers that economic and financial performance under the PRGF-supported program was broadly satisfactory. Benin continued to display rapid output growth with low inflation in 2002. All the quantitative performance criteria for end-September 2002 were met, and the four structural benchmarks were observed by end-December 2002. However, spending on health and education remained below the quantitative benchmarks, and the civil service reform continued to stall.

44. The authorities have finalized the poverty reduction strategy for 2003-05, which aims at achieving strong economic growth and reducing poverty, while maintaining financial stability. This strategy constitutes the reference framework for Benin’s policies, as well as for its development partners. The third-year program under the PRGF is coherent with the baseline scenario set out in the PRSP.

45. The fiscal stance for 2003 corresponds to the baseline scenario for government financial operations in the PRSP and reflects the government’s poverty reduction objectives. The achievement of the fiscal targets will, however, require strengthened implementation of the action plans aimed at improving the performance of the tax and customs administrations, as well as continued efforts to rein in nonpriority current spending. In parallel, the authorities are encouraged to continue their efforts to improve the level of execution of priority expenditure, and to enhance transparency and the tracking of poverty-reducing outlays, including through the strengthening of the new expenditure management system.

46. The authorities have indicated that they would seek additional external assistance to finance the more ambitious alternative scenario of the PRSP. A supplementary budget to that effect, which would commit higher capital expenditure to priority sectors, should be prepared only after concessional financing consistent with the objective of debt sustain ability has been secured and absorption capacity in social spending has improved.

47. Implementation of the structural reform agenda through a timely and transparent process is of critical importance for achieving the objectives of the PRSP.The realistic timetable established with donor’s assistance for the divestiture of public utilities and the state-owned bank, as well as for the privatization of the state-owned ginning enterprise, SONAPRA, should be strictly adhered to. It is also important that the long-delayed reform of the civil service compensation system be rapidly implemented, in order to improve civil service management.

48. To strengthen the financial sector, the authorities need to encourage all banks to comply with the Regional Banking Commission’s prudential ratios in order to further the gains made in 2002 in this area, and to continue the rehabilitation of the cooperative and mutual credit institutions.

49. The debt sustainability analysis prepared for the enhanced HIPC Initiative completion point has stressed the importance of following prudent external debt-management policies and avoiding a new buildup in external debt. The authorities are, therefore, encouraged, with the support of the new debt committee, to strictly adhere to the cap set on the overall government borrowing requirement and to increase reliance on grants and highly concessional loans.

50. Risks to the medium-term program remain but are manageable. Benin’s strong reliance on cotton exports constitutes a major source of vulnerability. Diversification, through the promotion of private sector initiative and investment, as sought in the poverty reduction strategy, will be a key determinant of the long-term resilience of the economy. In the short run, the authorities will need to be prepared to strengthen their adjustment efforts should such a shock in the terms of trade occur. Also, to be able to achieve the objectives of the PRSP, the absorption capacity in poverty-reducing public expenditures will need to be improved.

51. In view of the satisfactory performance under the program and the authorities’ determination to achieve the program objectives in the macroeconomic, structural, and poverty alleviation areas, the staff recommends that the fourth review under the three-year PRGF arrangement be concluded.

Benin: Delivery of IMF Assistance Under the Enhanced HIPC Initiative, 2000-09 1/

(In millions of SDRs, unless otherwise indicated)

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Sources: Beninese authorities; and staff estimates and projections.

Total IMF assistance under the enhanced HITC initiative is SDR 13.4 million, calculated on the basis of data available at the decision point, reached on My 17. 2000, excluding interest earned on Benin’s account and on committed but undisbursed amounts, as described in footnotes 3 and 4.

July - December.

Forthcoming obligations estimated based on rates and principal schedules in effect as of end-June 2000. Interest obligations include net SDR charges and assessments.

A final disbursement of assistance in the amount of SDR 7.360 million plus accumulated interest income accrued during the interim period is to be disbursed into Benin’s account at the assumed completion point in March 2003.

Includes estimated interest earnings on (i) amounts held in Benin’s account and (ii)amounts committed but not yet disbursed up to the completion point. It is assumed that these amounts earn a rate of return of 5 percent in SDR terms; actual interest earnings may be higher or lower. Interest accrued on(i) during a calendar year will be used toward the first repayment obligation(s) failing due in the following calendar year except in the final year, when it will he used toward payment of the final obligation(s) falling due in that year. Interest accrued on (ii) during the interim period will be used toward the repayment of obligations failing due during the three years after the completion point

After traditional debt-relief mechanisms.

Refers to the entire year.

Benin: Reforms in the Cotton Sector

Cotton is the major cash crop in Benin, as well as the major source of export earnings. Almost 200,000 households are involved in cotton production in five of the country’s six agro-ecological zones. After a very rapid growth in the early 1990s, the cotton sector has continued to grow moderately, mainly as a result of cultivated area expansion. Production of seed cotton reached the historically high level of 411,491 tons in crop-year 2001/02 (2.5 times the output in 1992/93). A projected 15.4 percent drop in cotton production for the 2002/03 season comes as a consequence of the record low world prices in 2001/02, which led to reduced planting.

Benin: Performance of the Cotton Sector, 1997/98-2002/03

(In units indicated)

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Reforms. The reforms aimed at increasing the productivity and competitiveness of the Beninese cotton sector, in order to raise the producer’s share of export revenues and thus contribute to the reduction of rural poverty, have been continuing successfully. Since their start in 1995, Benin has moved away from the integrated monopoly that characterized the organization of cotton production and marketing of seed cotton in western and central Africa. Benin’s reform process is among the most advanced in the region; it has been supported by technical assistance from the World Bank and bilateral donors working closely with both the government and the private sector. The integrated filiére has been dismantled, putting an end to the state monopoly of the national cotton company, SONAPRA. Private companies have been granted licenses to gin and export cotton; prices and marketing decisions are negotiated among private sector operators (producers, ginning companies, and other market participants) at the national level. Privatization of SONAPRA, which controls about 50 percent of the country’s ginning capacity, is under way. The privatization strategy adopted by the government in cooperation with the World Bank foresees sales of ginning plants by lots in the course of 2003.

The sector’s critical commercial and technical functions, formerly managed by SONAPRA, are now entrusted to the Interprofessional Cotton Association (AIC), which regroups ginners, input suppliers and the cotton farmers’ association. The AIC has established a new credit input recovery system, the CSPR (Centrale de Securisation des Paiemcnts et des Recouvrements), that serves to insure both the payment of seed cotton to the producers and the recovery of input credit by ginners. Seed cotton quantities are allocated among ginning companies on the basis of installed ginning capacity. The CSPR requires an advance payment of 40 percent of the quota and uses it to repay the credit input to lending banks and make payments to producers. During its first year of operation (the 2000/01 crop season), the CSPR experienced some cash-flow problems, as some ginners did not pay for the received cotton, and payments to producers were delayed. To avoid a recurrence of payment problems, the CSPR strengthened its rules in 2001/02 banning the ginners in arrears from the allocation of cotton. For the 2002/03 season, six ginning companies made an initial 40 percent down payment of the quota in mid-November 2002.

In the context of the sharp fall in the world price of ginned cotton in 2001, the government decided to resort to an exceptional subsidy (CFAF 45 per kilogram) to cotton-producing farmers in order to keep the producer price in 2001/02 at the 2000/01 level of CFAF 200 per kilogram. For the 2002/03 season, however, the price was set after negotiations among the producers and the ginners, based on the world market price; it does not require a government subsidy. This price of CFAF 190 per kilogram includes a CFAF 10 contribution to the extension services that represent expenditures on roads and infrastructure.

Next steps. The reform aims at establishing a competitive system of contract farming that would allow for decentralized pricing, eliminate the administrative allocation of seed cotton, and encourage competition among ginning companies. This requires, however, organizational, technical, and commercial capacities on the part of producer organizations that currently are underdeveloped. Consequently, as the next step in the transition, measures have been identified to strengthen the new institutions managing the sector, as well as producers’ associations, with the support of a World Bank Cotton Sector Reform Project, approved in January 2002.

Reform Summary

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Benin: Compliance with WAEMU Convergence Criteria

(In percent, unless otherwise indicated)

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Sources: Beninese authorities; and staff estimates.

Basic fiscal balance is defined as total revenue minus total expenditure, excluding foreign-financed investment.

Basic fiscal balance, excluding the use of enhanced HIPC Initiative resources.

Include domestic and external debt.

In billions of CFA francs.

Benin: Poverty Reduction Strategy Paper

The authorities completed their full PRSP and submitted it to the Fund and the IDA in January 2003. The joint staff assessment (JSA) prepared by staffs of the Fund and IDA considers the PRSP as providing an adequate framework for reducing poverty and a sound basis for Fund and IDA concessional assistance.

Participatory process. The PRSP has been the result of an extensive consultative process that capitalized on lessons learned from previous initiatives. The process included three preparatory workshops with the civil society and the private sector to raise awareness on the PRSP and inform these groups about the inputs expected from them. Three thematic workshops were organized at the national level on strategic issues, while two rounds of workshops were conducted at the regional level to identify sectoral priorities and establish poverty profiles. The participatory process will continue to be used in the implementation, monitoring, and evaluation of the poverty reduction strategy, with a view to eliciting ownership of the strategy by the beneficiaries.

PRSP objectives and strategies. The PRSP poverty reduction strategy has four key objectives:

  • the strengthening of macroeconomic stability;

  • the Improvement of human capital and environmental management;

  • the strengthening of governance and institutional capacity; and

  • the promotion of sustainable employment opportunities and strengthening of the capacity of the poor to participate in the decision making.

The PRSP emphasizes the need for further consolidation of the macroeconomic framework through sound fiscal and monetary policies and a stronger growth performance, led by the private sector. To foster private sector activity, measures will be taken to improve the physical infrastructure and the judicial and regulatory framework. The PRSP identifies four priority sectors of growth: agro-industry, tourism, new information technologies, and transit activities. In the area of human capital development, the PRSP sets well-defined measures and performance targets in education and literacy, health, drinking water, housing, rural electrification and roads, and nutrition and food security. Regarding the strengthening of good governance and institutional capacity, major measures in the PRSP include (i) implementation of the anticorruption strategy that was adopted in 2002; (ii) continued implementation of public expenditure reforms including the acceleration of administrative reform and decentralization; and (iii) the strengthening of the judicial system and domestic social dialogue. The PRSP also calls for the improvement of employment and income-generation opportunities and better participation of poor and vulnerable groups in the decision-making processes through (i) promotion of small business; (ii) development of microfinance; (iii) community development; (iv) promotion of increased participation in economic activities; and (v) access to education for women.

PRSP scenarios. The PRSP presents two budget scenarios for the 2003-05 period, along with corresponding macroeconomic frameworks. The baseline scenario is consistent with the PRGF-supported program approved in July 2002 (EBS/02/119; 7/01/02), on the basis of which the authorities drafted the 2003 budget. The second scenario incorporates higher capital expenditure in priority sectors which will require additional donor support. The transition from the baseline scenario to the second scenario will be determined by the capacity to mobilize additional concessional assistance and the absorption capacity in social spending.

Monitoring and evaluation. The PRSP proposes a comprehensive monitoring and evaluation system with an intensive capacity-building program, supported by various donors,

Summary of Budgetary and Macroeconomic Scenarios Presented in the PRSP

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Source: PRSP, Annex 3, Table 1.

Poverty in Benin: Characteristics, Issues, and Policies 1/

Features of poverty in Benin include the following:

  • Overall, about one-third of the Beninese are poor in monetary terms. The poverty situation is even more pronounced in nonmonetary terms, with an incidence of nonmonetary poverty of 49 percent (not being poor in monetary terms does not necessarily mean that basic needs are satisfied).2/

  • The incidence of monetary poverty is higher in the rural areas (representing 65 percent of the population) than in the urban areas. In the course of the second half of the last decade, the poverty situation improved in the urban areas, with the incidence of poverty falling from 29 percent to 23 percent, but it worsened in the rural areas, where the incidence of poverty increased from 25 percent to 33 percent. The estimated poverty line rose much faster in urban areas (88 percent) than in rural areas~(22 percent) during the same period, implying that the disparity between the incomes of rural and urban populations has widened significantly. Moreover, the income distribution in the rural areas is substantially worse than in the urban areas.

  • The geographical distribution of poverty is also uneven, with a lower incidence in the central regions. Poverty incidence is highest in the rural areas of northern departments, while urban poverty is significant in some southern departments and one northern department.

  • The cotton zone in central Benin (the Zou and Borgou areas) presents one of the highest incidences of poverty, while the deepest poverty (as measured by the poverty gap index) can be found in the north (cotton-producing area in northern Borgou).

  • The disparity between the incidences of poverty in rural and urban regions is substantially more significant in terms of nonmonetary poverty than in terms of monetary poverty; the rural population has been hit more severely by limited access to basic goods and services than by lower income. The main sources of vulnerability are the lack of employment or income opportunities, poor rural infrastructure, inadequate water supply and sanitation, and insufficient access to health services and education.

  • As regards the disparity between genders, the incidence of monetary poverty is higher for female-headed households than for male-headed households.

  • The Beninese perceive the lack of food and money as the two primary dimensions of poverty. Malnutrition rates are high, and food insecurity is still widespread. Other social dimensions of poverty often mentioned are the lack of children or a family. This dimension is particularly often cited in rural areas, where children represent an addition to the workforce and support the elderly.

Comparative poverty-related social indicators:

  • Living standards in Benin are still comparatively low in spite of the steady progress made in the last three decades. The human development index of the United Nations Development Program (UNDP) ranked Benin 158th out of 173 countries in 2000. Table 14 presents some selected comparative social indicators.

  • Life expectancy is higher in Benin than in most other sub-Saharan Africa (SSAs) countries—53.4 years for Benin against 50.8 years for the SSAs. With reduced mortality rates, life expectancy rose by about two years during the last decade.

  • In the last decade, primary and secondary school enrollment and literacy rates rose steadily. However, literacy still remains well below sub-Saharan standards.

  • Gender disparities are significant; female gross primary school enrollment rates remain low. Benin has the widest male/female enrollment gap in west Africa as its gap has not narrowed in the last decade, contrary to the trend in most other West African countries.

Issues and policies:

  • Poverty is prevalent in the cotton-producing areas. The authorities and the World Bank will jointly conduct in 2003 a poverty and social impact analysis to better understand the impact of cotton sector reforms on the poor.

  • The authorities seek to implement policies aimed at reducing poverty in the framework of the PRSP. The PRSP emphasizes agricultural policies, as agriculture represents one-third of the GDP and is the most important source of livelihood in the rural areas. The authorities are committed to pursuing reforms in the cotton sector in order to improve producers’ revenues. The PRSP identifies factors that constrain the development of the agricultural sector and includes actions to promote agricultural development and diversification. For the rest of the economy, the PRSP envisages a private sector-led growth, including through the privatization of public utility enterprises, which should improve the efficiency of these services.

  • The PRSP identifies priorities in social sectors, including health, education, sanitation and drinking water, rural roads, and electrification, and intends to increase public expenditures in these sectors. Improvement of access levels to these services are expected to have a significant effect on poverty reduction, as the surveys have shown that in Benin inadequate access to basic services has a more significant adverse impact on the poverty situation than does low revenue.

1/ The discussion in this box is based on the results reported in the PRSP.2/ Monetary poverty is determined on the basis of the revenue of a household relative to the poverty threshold. Nonmonetary poverty is determined on the basis of access to basic services, such as health, education, nutrition, and drinking water.

Benin: Implementation Status of Actions to Strengthen Tracking of Poverty-Reducing Public Spending

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S=short-term action; M=medium-term action.

Fitfully implemented; U=implementation initiated; NS=not started.

Benin: Structural Conditionality

Coverage of structural conditionality in the PRGF-supported program for 2000-03

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 with delays. The three measures had the objective of strengthening public resource management. The first half of the second-year program included four structural benchmarks on civil service reform, the banking system, and expenditure management. They were all observed, except that relating to the banking system. The second half of the second-year program contained four structural benchmarks, designed to strengthen the financial viability of the electricity company, to collect tax and dividend arrears, to strengthen public expenditure management, and to strengthen the banking system. All were observed, although with delays. Benin has also satisfied all the structural conditions for the completion point under the HIPC Initiative: two in the area of government financial management, one on governance, one on adopting a strategy for the privatization of the cotton monopsony (SONAPRA), and five related to outcomes in the health and education sectors,

The proposed structural benchmarks for the 2003 program, set in accordance with the PRSP, aim at improving expenditure management, and strengthening government revenue collection and-the banking system.

Structural areas covered by World Bank lending and conditionality

The World Bank has assisted the authorities in public expenditure management through an expenditure reform adjustment credit (PERAC) approved in March 2001 and a related Supplemental Credit approved in October 2002. This credit has supported the following key actions: (i) formulation of a medium-term expenditure framework for 2002-04; (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. Significant progress has been achieved in all of these areas and the World Bank intends to help consolidate this progress through a Poverty Reduction Support Credit (PRSC). Triggers for the Bank to approve the PRSC include completion of a satisfactory PRSP, progress in implementing the cotton sector reform program, tangible progress in the privatization and in setting up appropriate regulatory frameworks in privatized sectors and improving execution rates for social expenditure. As outlined in its Interim Country Assistance Strategy (I-CAS) of 2001, the World Bank is undergoing a strategic shift toward providing a large share of IDA financing to Benin in the form of consolidated programmatic lending. This shift would also imply that the World Bank moved increasingly toward making ex post assessments of progress, and toward modulating its financial support to the pace of reform implementation.

The World Bank is also assisting the authorities in the cotton sector and the privatization of the state-owned ginning enterprise, SONAPRA, for which it has approved a sectoral credit in January 2002. The Bank is also preparing an Energy Services Project that will, inter alia, support the privatization of the Benin Electricity and Water Company (SBEE).

Other areas relevant to the Fund-supported program and in which the World Bank is assisting the authorities include: (i) the public administration reform; (ii) the privatization of public enterprises; (iii) health; (iv) education; (v) social indicators; and (vi) governance. The World Bank does not have specific structural conditions in those areas but does monitor progress as a basis of its assistance. In the area of public administration reform, the World Bank helped design the reform of the civil service promotion and compensation system; in addition, it has recently conducted new analysis of public administration reform and decentralization, as a basis for policy dialogue.

Other relevant structural conditions not included in current program

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

Benin: Decomposition of Projected vs. Actual Debt-to-Exports Ratio as of end-2001

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Sources: Beninese authorities; and Bank/Fund staff estimate and projections.
Table 1.

Benin: Proposed Schedule of Disbursements Under the Remainder of the PRGF Arrangement, 2003-04

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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.

Table 2.

Benin: Fund Position During the Remainder of the PRGF Arrangement, January 2003-December 2005

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Source; IMF, Treasurer’s Department.

Before enhanced HIPC debt relief

Table 3.

Benin: Main Economic Indicators, 1999-2005

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Sources Beninese authorities; and staff estimates and projections.

As indicated in EBS/02/119 (07/15/02), except for the net present value of debt-to-exports ratios, which is based on current-year exports of goods and nonfactor services (see footnote 8 below).

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 Initiative assistance.

For 2000-02, debt service after debt relief is [he difference between the amount of debt service due and the amount of debt relief affectively received.

Net present value of total debt beyond enhanced HIPC Initiative assistance, in percent of a backward-looking three-year average of exports of goeds and nonfactor services.

Table 4.

Benin: Macroeconomic Indicators, 1999-2005

(In percent of GDP, unless otherwise indicated)

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

As indicated in EBS/02/119 (07/01/02).

Table 5.

Benin: Consolidated Government Operations, 1999-2005

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Sources: Beninese aiilnoniies; and staff estimates and projections.

As indicated in EBS/02/119 (07/01/02).

Including value-added taxes on imports.

Total revenue minus total expenditure, excluding investment financed from abroad, interest payments and net lending.

In 1003, a provision of CFAF 1,2 billions was made in the budget to cover potencial payments for debt in litigation.

Includes confirmed interim HIPC Initiative assistance from Paris Club members, the African Development Bank/Fund, the West African Development Bank, the World Bank, the European Union, the Inlernalional Monetary Fund, and China.

Comprises health and education expenditures (see Table 13). The government is in the process of broadening the classification to all poverty-related expenditures.M