This 2004 Article IV Consultation highlights that Benin’s economic performance over 2001–03 was strong. Real GDP growth averaged 5.3 percent, driven by growth in the cotton and services sectors. Inflation was low, averaging 2.6 percent per year. The external current deficit narrowed in 2003 as terms of trade improved. Progress in the structural area was mixed. However, macroeconomic performance since the beginning of 2004 has suffered from a poor cotton crop and the tightening of import restrictions by Nigeria.

Abstract

This 2004 Article IV Consultation highlights that Benin’s economic performance over 2001–03 was strong. Real GDP growth averaged 5.3 percent, driven by growth in the cotton and services sectors. Inflation was low, averaging 2.6 percent per year. The external current deficit narrowed in 2003 as terms of trade improved. Progress in the structural area was mixed. However, macroeconomic performance since the beginning of 2004 has suffered from a poor cotton crop and the tightening of import restrictions by Nigeria.

October 6, 2004

I thank the staff for the well-balanced Staff Report and Ex Post Assessment of Performance Under Fund-Supported Programs. I would also like to express the gratitude of my Beninese authorities for the continuous financial and technical assistance they have received from the Fund over the years. They fully appreciate the assessment made of their relations with the Fund over the last decade, and the lessons they have drawn from it. They would like to state that they have made in that time span considerable progress towards a market-based economy and have reduced a large number of rigidities that had constrained the efficient functioning of the economy. They would also like to state that more remains to be done to improve the efficiency of the economy further in the period ahead. Therefore, they would like to pursue their unfinished reform agenda through a new Fund-supported PRGF.

Developments during 2004

After registering a strong annual real GDP growth of about 5 percent in 2001-03, the Beninese economy suffered a setback in 2004 owing to a sharp fall in cotton production and to a restriction on her re-exports which have been subjected to an import restriction imposed by a neighboring country. The restrictions had a further adverse effect of leading to halving the projected GDP growth rate to 3 percent and to customs revenue being 17 percent lower than planned for the first quarter of the year. This decision also led to a 20 percent decline in port traffic in Cotonou (Benin) between January and April 2004 compared to the same period in 2003. During the 2003/04 season, cotton production was 17 percent lower than anticipated because of disruptions caused by some entities acting outside the main umbrella organization in charge of safeguarding relations between input importers, distributors, farmers and ginners. That umbrella organization represents the interests of all stakeholders and is in charge of selling the farmers’ output, collecting payments from ginners, using part of the proceeds to pay back input credit, and paying the remainder to the farmers. Its inability that year to collect from some farmers while it was still responsible for paying back input credit delayed the start of its normal season-related activities. The negative impact on output arising from this delay was compounded by the low yields resulting from the low quality of inputs purchased outside the regular system.

My Beninese authorities promptly implemented remedial actions to redress the weak economic activities in 2004 and revised their policies to achieve their medium-term objectives. In the event, they decided to raise the GDP growth rate gradually to 7 percent, a level set under the PRSP, over the medium term. This would be achieved through a rebound in cotton production, improved overall economic efficiency, and increase in investment together with an acceleration of the pace of structural reforms. For the immediate future, the authorities took strong fiscal actions to strengthen tax administration, cut total spending by 1.4 percent of GDP while protecting priority spending. In that connection, they adopted the quarterly fiscal indicative targets for 2004 shown in Table 15 of the staff report, which they have broadly adhered to. They expect these measures to be sufficiently strong to contain the fiscal deficit to 5.5 percent of GDP and have it financed mainly with concessional borrowing and with grants.

Monetary policy, carried out by the regional central bank, was cautious, and helped keep inflation low. The central bank has succeeded in containing private sector credit through an increase in reserve requirement. The financial sector in Benin continues to be relatively sound, and my authorities have committed to improving compliance with prudential ratios, fostering the supervision of micro-finance institutions and deepening financial intermediation. The divestiture of the only bank left in the government portfolio could not be completed, as the sale of minority shares was not attractive to investors. However, the authorities are determined to re-launch the bidding soon, combining government shares with those of the regional development bank.

The implementation of structural reforms has been invigorated in 2004 compared with the past. In the cotton sector, the authorities are taking measures to avoid the recurrence of the disturbances experienced in the 2003/04 season by strengthening the institutions in charge of seed cotton and input commercialization with the advice of the World Bank. They intend to prevent the reemergence of a parallel circuit for input provision and sale of cotton. They will also put in place before the 2004/05 harvest season a regulatory framework defining the role and responsibilities of the government and the shareholders, and replace the current system of administrative allocation of seed cotton with a system based on competition among ginners.

The divestiture of SONAPRA, which has been delayed in the past has gained momentum as the privatization of its four ginning mills has reached its final stage. The Government has recently accepted the highest offers received for three ginning mills through a competitive bidding process. Their transfer to qualifying bidders is envisaged to be completed by end-October 2004. Regarding the fourth ginning mill, some delays have been incurred because the highest bidder was unable to provide sufficient financing guarantees. However, the authorities expect to complete the sale of that mill in the coming weeks.

As for the port of Cotonou, the authorities are encouraging the unions to agree on a new agenda for the involvement of the private sector in its management. The company supplying water and electricity has recently been split, with different entities in charge of water and of electricity. Likewise, the post office and telecommunications have become separate entities.

Civil service reform, by contrast, has been very difficult to manage because of the long and difficult process of mustering consensus with unions and Parliament. Recently the government suffered a setback as the Constitutional Court rejected the draft law establishing a single statute for government employees covering both civil servants and contractuals, which is considered a prerequisite for implementing the reform. With the assistance of the World Bank, the authorities are preparing a new roadmap for civil service reform.

My Beninese authorities are mindful of the need to improve the business environment. To this end, they want to implement the strategy to fight corruption adopted in 2002 and at the same time strengthen the legal and judiciary system, with the support of the World Bank.

Furthermore, they plan to associate the private sector with a diagnostic study on the impediments to private sector development. With World Bank technical assistance, they also want to address the question of the lack of land titling, which limits access to credit.

The authorities’ medium term policy framework

As shown in Box 3 of the staff report, the improvement in Benin’s growth performance is driven by a higher contribution from capital accumulation, and a positive contribution from total factor productivity. This is the result of an improved environment for private sector investors, an increase in public investment sustained by inflows of external assistance, and progress in liberalizing the economy. Therefore, in order to achieve the PRSP growth rate of at least 7 percent over the medium term, the authorities are aware that they will need to further improve the business environment for domestic and external private sector investors, and accelerate implementation of the structural reform agenda.

Fiscal policy has a major role to play in the medium term context. My authorities will continue to combat tax evasion, collect tax arrears and simplify procedures in line with recent Fund technical assistance recommendations to strengthen tax and customs administration. They have just requested additional technical assistance to examine direct taxation policy and the tax exemption system.

The authorities plan to frame their expenditure strategy over the medium term, in line with PRSP priorities in budgetary allocations, while keeping total outlays stable in terms of GDP. The World Bank is helping update the medium-term expenditure framework, and this will serve as a vehicle for carrying out annual budgets, which will highlight priority poverty-reducing expenditures. In that medium-term framework, the authorities intend to keep the wage bill at 5 percent of GDP by containing wage increases, and to curb the growth in non-priority spending. Also with the assistance of the World Bank, they are completing the reform of public expenditure management in order to improve the monitoring of budget execution, enhance transparency and enhance the tracking of poverty reduction public outlays. My authorities have reiterated their resolve not to carry out the large infrastructure projects (port and airport) under the five year Government Action Program (2001-2006) without assessing their macroeconomic and financial impact, and without discussing the results with the IMF and World Bank staffs. The financing of fiscal deficits will be provided by donors as they see that the implementation of Benin’s PRSP continues to satisfy their conditionality.

The poverty reduction strategy, according to Benin’s PRSP, will hinge on high quality growth, reinforced macroeconomic stability, and transparent, efficient, and monitorable public spending, as mentioned above. The acceleration of structural reforms is key to raising productivity and improving public service delivery; encouraging private investment in order to foster economic growth and diversification, in particular through improved governance and judiciary system; and improving the level and quality of government outlays while curbing non-priority expenditures. Shortcomings in the PRSP as identified in the joint staff assessment (JSA) are being addressed. In parallel the authorities are assessing progress in implementing the poverty reduction strategy presented in the PRSP and evaluating the execution of poverty reducing outlays. As necessary, the targets and policies presented in the PRSP will be revised and will be mentioned in the first annual progress report of implementation of the PRSP scheduled for the end of this year.

My authorities have begun the difficult task of tackling the vulnerabilities of their economy. To this end, they are promoting the diversification away from cotton into such crops as cashew nuts, wood products, and staple agricultural products. This way, non-cotton exports have increased from 16 percent of total exports in 1994-99 to 29 percent on average during 2000-03. Nevertheless, they are aware that more needs to be done to reduce the vulnerability of the economy to external shocks. Hence they count very much on further Fund policy advice and that of specialized international institutions.

My authorities stress the destabilizing effects of market access and farm subsidy policies of large industrial counties, which both hinder welfare in low-income countries and reduce their chances of further diversification. It is for that reason that they have launched, with other West African countries, the Sectoral Initiative on Cotton calling for the elimination of cotton subsidies.

My authorities agree with the findings of the Ex Post Assessment. They also acknowledge the mixed records in the implementation of structural reforms in the past, which is due to the necessary but slow pace of building consensus over these issues so vital to the lives of the people. However, they point to a newly found determination to press ahead with these reforms as consensus-building takes hold. For these reasons, my authorities feel that the reform agenda is far from being finished. They would therefore like to secure Fund financial support for another PRGF with the expectation that the catalytic nature of Fund financing will strengthen the hand of government reformers to pursue their policy agenda, and give the right signal to the international community and markets to muster the necessary financing and policy advice to push forward the remaining reforms. The representatives of the international community present in Benin as well as the private sector share my authorities’ views.

Benin: Staff Report for the 2004 Article IV Consultation
Author: International Monetary Fund