Statement by Damian Ondo Mañe, Executive Director for Benin

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.

Introduction

Since 2000, Benin has been implementing a comprehensive program of macroeconomic and structural reforms with Fund support. Performance has been satisfactory and progress is being made towards macroeconomic stabilization, and in improving overall economic performance. Under the present arrangement, the determined implementation of the policy measures envisaged have enabled the country to achieve real GDP growth of 5.8 percent in 2002. Inflation has been brought down below 3 percent, and the fiscal deficit, on a payment order basis and excluding grants, was also reduced to 3.7 percent of GDP. Performance under the program remains satisfactory as all the quantitative performance criteria for end-September 2002 were met. The structural benchmarks were also met by year-end.

The establishment of a timetable for the privatization of the state-owned bank at end-December 2001 was the only unmet structural benchmark due to the lack of reaching an agreement on the agenda. This missing criterion was fulfilled in December 2002 as a more comprehensive structural benchmark covering the rehabilitation of the bank in line with the Regional Banking Commission, along with an establishment of a new timetable was agreed on its privatization. Overall, the large participatory process in Benin is a reality as evidenced by the first municipal elections in December 2002 that were a signal of the high interest of the population to the public issues and desire to promote ownership by beneficiaries.

Fiscal Policy

Fiscal performance in 2002 continues to show significant improvement. This was made possible by a sharp improvement in tax collection by the customs and internal tax directorates. Revenue increased to 17.1 percent of GDP in 2002 from 16.2 percent of GDP in 2001, exceeding slightly the program target, while expenditures at 20.7 percent of GDP were below the projection by 1 percentage point of GDP. There was improvement in budget management due partially to the implementation of the new computerized system (SIGFIP) which was one of the important measures taken recently by the authorities to strengthen budgetary execution. It allowed for the closing of a large number of public accounts which were found to be unnecessary, thus improving efficiency and accountability. My Beninese authorities remain committed to maintaining fiscal prudence in order to contain expenditures in line with the budget.

Money and Credit

Credits to the economy increased by 19.3 percent in the 12 months to September 2002, while the government’s net position continued to improve, in line with the new rule of the BCEAO that requests member countries to terminate financial assistance from the regional central bank to the government. The banking system also gained in financial soundness. Notably, four banks out of six met the criterion of the capital adequacy ratio set to a higher minimum of 8 percent. Two remaining banks that were put under financial recovery plan, also improved their position. Overall, the financial situation of the banking system continues to improve. In addition, all the primary convergence criteria with respect to the Regional Convergence, Stability, Growth, and Solidarity Pact were met.

The microfinance sector directed at helping the poor to get financing for their activities is growing. The activity of the network, including the Federation of Rural Savings and Loans Cooperatives, (FECECAM) has shown remarkable improvement with a reduction in delinquent claims. In order to keep the momentum and allow the microfinance to continue the expansion of its assistance to the poor, the Ministry of Finance has stepped up monitoring closely the sector.

Structural Reforms

Significant progress continues to be made in the area of structural reforms. In the cotton sector, the authorities have maintained their efforts to improve its productivity and competitiveness, with a view to improving the income of producers. The efforts have involved elimination of state monopoly in the cotton sector. Private companies are now allowed to gin and export cotton, and pricing is determined through negotiations among private sector operators. The privatization of the cotton enterprise, SONAPRA, is underway, and the responsibility for the marketing and collection of cotton seed has been transferred to the autonomous agency, CSPR that coordinates ginners, input distributors, and producers. These efforts are already yielding positive results. Furthermore, in January 2002, the Beninese authorities established the legal framework to split the postal and telecommunications company (OPT) into two separate companies. The authorities have also approved the strategy for the privatization of electricity production and for the private management of the Port of Cotonou. Moreover, importation and pricing of cement have been liberalized. Other important reforms undertaken by the authorities have involved the adoption of an anticorruption law, and civil service reforms. However, as regards civil service reform, the process is still underway pending the completion of negotiations with the labor unions.

Strategy for the Medium-Term and 2003

The authorities’ medium-term macroeconomic strategy is directed at achieving strong economic growth in order to reduce poverty. At the same time, the authorities are committed to maintaining financial stability by accelerating structural reforms, improving capacity building, and creating enabling environment for private sector development. They focus on agriculture and services as engines of growth, which account for almost 70 percent of GDP. Moreover, they are keen to pursue the public expenditure management reform, improve the execution and transparency of public spending and enhance the access of the poor to quality basic services. This strategy is in line with the PRSP which the authorities have finalized.

My authorities are aware that the success of their strategy depends highly on strong implementation of policy measures consistent with the PRSP and are committed to these measures. To ensure the achievement of the economic objectives, and use the PRSP as the unique reference framework for the national policies, the authorities have decided updating documents annually and revising them each three years.

For the 2003 budget frame, the authorities intend to implement measures considered as step toward achieving the medium-term PRSP objectives. In the revenue area, efforts are underway to strengthen the tax and customs administrations and expand the tax base. As regards the expenditures, the 2003 budget provides for larger increases in poverty reduction spending than in other spending. As a result, the budget deficit, on payment order basis and including grants and HIPC Initiative resources, is projected to attain 1.1 percent of GDP. The authorities are confident to cover this deficit by domestic financing. Following the recent municipal elections, the government is prepared to launch the decentralization process. To this end, they are confident to complete by mid-March 2003 the studies on the financial costs and the consequences of fiscal and accounting changes from the central government to the local governments.

The Poverty Reduction Strategy Paper

As mentioned above, my authorities have prepared a full PRSP covering the period 2003-05. The PRSP document builds on the strategy of the I-PRSP. As a result of broad-based consultations, the PRSP document is the combination of thoughtful and constructive ideas gathered from numerous consultations and present the comprehensive diagnosis of poverty in Benin, while covering the objectives and priorities the government has set out to achieve and implement through appropriate policy measures. My Beninese authorities are committed to sharpening the poverty focus and making the strategy operational. They are well aware that poverty reduction is a long process and have adopted a forward-looking attitude with a view to making the strategy fully operational, and resolving in the end all the remaining shortcomings, including methodological weaknesses, and lack of detail indications regarding the government’s implementation plans. Overall, the authorities’ intention is to achieve a definitive analysis of key determinants of poverty, further develop a more coherent strategy for private-sector-led growth, and ensure that fiscal decentralization will permit to achieve a full public service delivery.

A broad-based participatory process was developed at the national and regional levels building on lessons learned from previous experiences, notably the numerous round tables like the 1992 Urgent Social Action Program, the 1994 strategy to address the social dimensions of adjustment, three-Year-Development Plan in 1998-2000. My Beninese authorities put a high priority on arousing public awareness through various workshops as regards the objectives of the PRSP. The process itself, and technical and thoughtful inputs from various participants of the civil society were highly productive. Other workshops, mainly the national thematic discussions have enabled to identify sectorial priorities at the regional level with a view to establishing poverty profiles essential for strategy building. Parliamentarians, staffs from the IMF and IDA, and other development institutions provided their inputs to the draft PRSP. The concerns and the perceptions of the poor were reflected during the regional workshops.

The program for 2003 and the DSA

In the light of the PRSP, the authorities have reassessed the main objective of their program for 2003. Consequently, the real GDP growth has been set at about 6.0 or 5.6 percent, while the consumer price will be contained at 2.4 percent and the current account deficit at 7 percent of GDP, close to the original projection. The 2003 budget seems appropriate as the revenue target consistent with the strong 2002 performance is attainable. The authorities are prepared to strengthening the tax and customs administrations, while containing the total government expenditure in 2003 at 21.7 percent of GDP.

In close collaboration with the Fund and World Bank staffs, my authorities have updated the debt sustainability analysis, which supports the completion point. The DSA is based on end-2001 debt data. The ratio of the NPV of debt to exports was previously determined at 148 percent at the decision point (including additional bilateral debt relief beyond enhanced HIPC Initiative assistance). However, it was adjusted tol55 percent at end-2001. The higher NPV ratio results from an unanticipated increase in the government borrowings but also from lower-than-projected export revenue due to lower international prices of cotton export as well as changes in the exchange rates. In order to avert increase recourse to borrowings which worsen the debt sustainability ratio, we would like to call for increase in the donors support to our authorities in form of grants. We should reiterate that presently all the completion point triggers are met. My authorities agree that concessional borrowing is essential to maintain the external debt on a sustainable path. To this end, they have moved forward to establishing a coordination committee in charge of monitoring debt policy and updating the DSA each year. Since then, they are prepared to maintain an appropriate balance between loans and grants.

Conclusion

My Beninese authorities have met the conditions for reaching the completion point under the enhanced HIPC Initiative in accordance with the decision point document. Despite the impressive efforts made, they recognize that maintaining external debt sustainability will require a prudent borrowing policy. Moreover, my authorities remain determined to implement further structural reforms which are crucial to the promotion of a private-sector-led- growth, and social policy that supports poverty reduction and achieve the Millennium Development Goals. However, the poverty remains unabated. In the circumstances, my authorities would like to count on continued support of the donor community in terms of technical and financial assistance in their fight against the pervasive poverty in Benin.