Statement by Damian Ondo Mañe, Executive Director for Benin

This report reviews developments in Benin during 2003 in the context of the Sixth and Final Review Under the Poverty Reduction and Growth Facility (PRGF) arrangement. The report sets forth the policies and measures the government intends to implement during 2004 in the context of its poverty reduction strategy. It assesses the country’s economic and financial progress since 2000, when the current arrangement was approved by the IMF. The report highlights that Benin’s macroeconomic performance was broadly in line with the program objectives in 2003.

Abstract

This report reviews developments in Benin during 2003 in the context of the Sixth and Final Review Under the Poverty Reduction and Growth Facility (PRGF) arrangement. The report sets forth the policies and measures the government intends to implement during 2004 in the context of its poverty reduction strategy. It assesses the country’s economic and financial progress since 2000, when the current arrangement was approved by the IMF. The report highlights that Benin’s macroeconomic performance was broadly in line with the program objectives in 2003.

I would like to thank the staff for a well-focused and concise report on this sixth and final review of the PRGF-supported arrangement. I would also like to express my Beninese authorities' appreciation to the Fund for its continuous financial and technical support over the years.

Developments during 2003:

The economy of Benin has continued to perform well during 2003, and the authorities strengthened their commitment to the reform efforts. Real GDP growth was strong, inflation, measured by the consumer price index, was lower than programmed, and the current account deficit narrowed. Against this favorable economic background, the PRGF-supported program was carried, out successfully. All performance criteria for end-September 2003 and the corresponding targets for December 2003 were met. In addition, with the exception of one benchmark, the structural benchmarks for end-September 2003 and the prior actions for completing the final review were observed. The Beninese authorities for their continuous efforts in many macroeconomic areas.

In the fiscal front, the overall deficit, on the payments order basis, excluding grants, was lower than programmed. Revenue performance was somewhat weaker than programmed due to some shortcomings in customs administration during the first quarter of the year, but during the second quarter, the authorities took strong measures which yielded substantial revenue growth near the end of the year.

On the expenditure side, there were overruns on wages resulting mainly from recruitments in the education sector, and also from unplanned indemnities to teachers. While the increased outlays on recruitment in the education sector were welcome as they represented an acceleration of spending on priority sectors in line with the PRSP, the wage overruns were the result of strong pressures brought about by protracted primary school and university teacher strikes which were undermining the achievements of students during the year.

The shortcomings in revenue and expenditure mentioned above were compensated by a fall in investment outlays. This was explained in part by a move by the authorities to cut capital expenditures by CFAF 10 billion to offset overspending at the beginning of the year, and also to late initiation of investment outlays.

A notable achievement was the continued strengthening of expenditure management during the year, with the introduction of an expenditure management system (SIGFIP), which was a structural benchmark for September 2003

In the monetary and financial sectors, monetary policy was, as usual, carried out by the regional central bank and was prudent. It ensured that credit was sufficiently allocated to the non-government sector. At the same time, the financial health of the banking sector continued to improve, including compliance with the prudential ratios set by the regional bank supervision commission During the year, the government offered for sale its shares in the remaining state-owned bank.

With respect to structural reforms, the Beninese authorities intensified their efforts at reaching consensus with trade unions and the civil society around the need to accelerate civil service reform. This reform is intended to institute, among others, guidelines for recruitment and strengthen a merit-based policy.

In the cotton sector, delays were encountered in the privatization of the public ginning company (SONAPRA), a key element in the structural reform agenda. An investment bank was recruited with World Bank assistance in May 2003 through a competitive bidding process to help the authorities carry out the privatization in full transparency, but the prequalification process for selecting potential investors, launched in July was interrupted. This interruption was due to a lack of sufficient qualifying applicants. The process which resumed in early December 2003 is now expected to be completed by end-May 2004.

Economic and Financial prospects for 2004:

The policies adopted by my authorities for 2004 are intended to pursue stronger efforts to raise the GDP growth rate further, stabilize public finance while increasing significantly pro-poor outlays, improving the investment climate, and pursuing their divestiture agenda. Real GDP is expected to grow by 6 percent, slightly higher than in 2003, driven by a bumper crop in the cotton sector and a sharp increase in international prices for cotton; inflation is targeted to be in the order of 3 percent, and the external current account balance is expected to improve further.

With respect to the fiscal sector, the authorities adopted a budget that was prepared with the support of major donors willing to provide higher levels of concessional financing and grants and reflected the PRSP priorities.

Government revenue, based on the strength of yield at the end of 2003 and continued implementation of the various action plans recommended by Fund technical assistance, is supposed to reach 17 percent of GDP. Customs administration will be strengthened further and will involve streamlining exemptions and exonerations and expanding pre-shipment inspections. The actions taken recently to ensure tax compliance will be enhanced in order to collect tax arrears; tax audits will be carried out as well. At the same time, the government and public enterprises, notably the utility sector, will settle cross-debts.

Regarding expenditures, the authorities intend to set a ceiling on primary expenditure, excluding externally-financed investment, at 17 percent of GDP in the context of a medium-term expenditure framework updated with the joint assistance of the World Bank and the African Development Bank. Within that ceiling, priority outlays will be accelerated in line with PRSP priorities. In that context, allocations for health and education have been increased by 15 percent and 25 percent, respectively, compared with 12 percent for total expenditure. The wage bill will remain at 5 percent of GDP, and will reflect both the general salary increase and the financial impacts of new recruitments in the social sectors. The government will tighten its spending on utilities, telephone and electricity in particular, and contain them within budgetary allocations.

Expenditure management will be strengthened further by, inter alia, making the expenditure management system (SIGFIP) fully operational by channeling through it all expenditures, including externally-financed public investments and commitments generated by procurement contracts; and improving the monitoring of budget execution, streamlining of budgetary procedures, and enhancing transparency and the tracking of poverty-reducing outlays.

My authorities are committed to following this expenditure framework strictly. Hence, the large infrastructure projects that are planned in the Government Action Plan for 2001–06, and which include a new port and a new airport, will not be undertaken without studies to evaluate technical, economic and financial viability, and without prior discussions with Fund and Bank staffs.

My authorities are also contemplating a possible supplementary budget for 2004 for the financing of a junior Africa Soccer Games event which Benin will host in 2005. They are committed to financing the related outlays only with grants and concessional loans, and to adopt such a supplementary budget only after they have sought and obtained the agreement of major donors on the magnitude and type of financing so as not to jeopardize external budgetary assistance during 2004.

In the banking and financial areas, monetary policy will continue to be set by the common central bank. For Benin, net foreign assets are targeted to increase, reflecting good external sector performance; and credit allocation to the non government sector will rise. The authorities will continue to require compliance with prudential ratios, and will complete the divestiture of the Continental Bank. In the microfinance sector, the government will continue to support the rehabilitation of the largest microfinance institution (FECECAM) and intensify the supervision of the sector

Regarding structural issues, the government plans to complete the privatization of the public ginning company (SONAPRA) by end-May 2004 with the assistance of the World Bank. The bidding process for the privatization of the electricity company will be launched in the second half of 2004 and will be completed in the first half of 2005. Likewise, the bidding process for the telecommunications company is scheduled to be launched in the first half of 2004. A feasibility study on the involvement of the private sector in the management of the port of Cotonou is also expected to be launched in the first half of 2004.

A number of other structural measures geared to poverty reduction embodied in the PRSP will be intensified. My authorities are actively involved in updating their PRSP, and the first full annual report of PRSP implementation for 2003 will be available in a very near future.

Regarding foreign financial assistance, my authorities are grateful for the generous international community support and they expect to complete negotiations with the remaining Paris Club creditors. Negotiations are ongoing with non Paris Club creditors.

The way forward:

The Beninese authorities have carried out their PRGF arrangement approved by the Fund in 2000 successfully. Macroeconomic performance has been strong despite large fluctuations in world market prices for cotton. Fiscal performance has been good and expenditure management has continued to be strengthened. The implementation of structural measures is being enhanced notably in the cotton, public utilities, banking and in other areas with the support of the World Bank and the international community.

Despite the efforts noted above, it would be difficult for Benin to reach the MDGs. Hence, increased donor support would be appreciated. Furthermore, my authorities count on continued Fund engagement in Benin in the areas of both financial and technical assistance.

Benin: Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility
Author: International Monetary Fund