Benin: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility

The staff report for the Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility highlights Benin’s economic developments and progress in structural reforms. Benin experienced a decade of good economic performance, but poverty reduction remains a concern. Policy discussions focused on immediate measures to stabilize and restore the fiscal situation and to obtain structural reforms. The structural reform program aims to make progress in implementing the reform agenda of the cotton sector.

Abstract

The staff report for the Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility highlights Benin’s economic developments and progress in structural reforms. Benin experienced a decade of good economic performance, but poverty reduction remains a concern. Policy discussions focused on immediate measures to stabilize and restore the fiscal situation and to obtain structural reforms. The structural reform program aims to make progress in implementing the reform agenda of the cotton sector.

I. Background

1. Despite some progress in consolidating macroeconomic stability under past Fund-supported programs, Benin’s economic and financial situation remains fragile and vulnerable to external shocks. Its vulnerability reflects the economy’s excessive dependence on the cotton sector and on trade with Nigeria, its main trade partner.1 In the 1990s, Benin recorded high rates of growth in the context of a stable macroeconomic environment. However, delays in the implementation of key structural reforms weakened Benin’s competitiveness and prevented it from establishing an environment conducive to private sector development and economic diversification. These developments have recently been exacerbated by declining international cotton prices and the intensification of trade restrictions imposed by Nigeria on imports from Benin, resulting in a deterioration of Benin’s overall economic and financial performance since 2002.

Benin: Key Indicators, 1995-2005

(In percent of GDP, unless otherwise indicated)

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Sources: Beninese authorities, and IMF staff estimates and projections.

Annual changes in percent.

Excluding official grants.

2. Moreover, as highlighted in the 2003 annual progress report (Country Report No. 05/283, 08/10/05) on the implementation of the poverty reduction strategy paper (PRSP), poverty remains an issue despite improvement in most poverty indicators since 1990 and Benin’s satisfactory economic performance up to 2002. One-third of the rural population and one-fourth of the urban population were classified as poor in 2000, and nearly half of Benin’s population was unable to satisfy a number of basic needs. The poverty reduction strategy, implemented since 2003, has been assessed a sound and appropriate one for poverty reduction in Benin.2

3. In the attached letter and memorandum of economic and financial policies (MEFP), Benin’s Minister of Finance requests Fund support, in an amount equivalent to SDR 6.19 million (10 percent of quota), for the authorities’ new economic and financial program for 2005-08 (Appendix I). The program, fully rooted in Benin’s poverty reduction strategy, aims to address the challenges facing Benin and takes into account the conclusions of the ex post assessment of performance under Fund-supported programs (EPA; Country Report No. 04/371, 11/24/04; Box 1). It will also contribute to regional integration in the context of the West African Economic and Monetary Union (WAEMU) by calling for greater compliance with the convergence criteria of the zone. The program objectives will be revisited when the poverty reduction strategy and its medium-term expenditure framework are revised at end-2006.

4. If the full amount of the arrangement—to be disbursed in six equal installments of SDR 0.88 million, and a final disbursement of SDR 0.91 million—is drawn, Benin’s outstanding disbursements will drop to SDR 25.35 million (41 percent of quota) at end-2008, compared with SDR 42.04 million at end-2004 (Tables 1 and 2, and Appendix II). A summary of relations with the World Bank and statistical issues are presented in Appendix III and Appendix IV, respectively.

II. Recent Economic Developments and Progress in Structural Reforms

A. Developments in 2004

5. Economic performance weakened in 2004, with real GDP growth decelerating to an estimated 3.1 percent, from 3.9 percent in 2003 (Table 3, Figures 1 and 2). This slowdown stemmed mainly from the weak performance of the cotton ginning sector and a decline in trade activities with Nigeria that also affected transport and port activities. Average inflation remained under control at about 1 percent, well below the WAEMU convergence ceiling of 3 percent.

Benin: Lessons from the Ex-Post Assessment of Performance Under Fund-Supported Programs

1. What has worked.

  • Past program design was broadly appropriate and program implementation under Fund-supported programs was mostly successful. Major progress in macroeconomic stabilization was achieved over the period 1993-2003.

  • Fiscal adjustment was the centerpiece of the stabilization strategy and benefited from substantial Fund technical assistance. Tax revenue increased from 7.2 percent of GDP in 1989 to 15.2 percent of GDP in 2003, primarily through substantial improvement in tax and customs administration. The wage bill-to-GDP ratio was reduced through a voluntary retirement program and attrition policy. Public expenditure management has improved since 2000.

  • The financial sector has strengthened considerably since its rehabilitation in the early 1990s.

2. What has not worked.

  • Program design underestimated the weaknesses in the authorities’ administrative and implementation capacity, as well as the weak internal consensus in favor of structural reforms.

  • Diversification of the economy has not been achieved, and the dependence on cotton and trade with Nigeria is high.

  • Effective poverty reduction remained elusive. The PRSP was finalized after considerable delays and started to be implemented in the 2004 budget.

  • Implementation of key structural measures was uneven. The second stage of civil service reform, including the introduction of a performance-based remuneration system, was stalled by strong labor union opposition. Divestiture from public utilities and the cotton sector was delayed.

  • Policy framework was limited in addressing external shocks, but the programs included contingencies for shortfall in aid flows and flexibility was shown by adjusting fiscal targets ex-post.

3. Lessons and challenges. Building on the lessons from the EPA, the new PRGF-supported program:

  • Will help the authorities prepare and implement the policies aimed at accelerating growth and reducing poverty. The program is aligned with PRSP objectives and provides a framework for sound policy response in the case of exogenous shocks.

  • Aims at keeping the government deficit in line with the objectives of debt sustainability through increasing the tax-to-GDP ratio toward the WAEMU target of 17 percent, while increasing the level and quality of poverty-reducing spending.

  • Gives a new impetus to the implementation of the uncompleted reform agenda to improve the overall efficiency of the economy and delivery of service to the population, and make the economy more competitive.

  • Mitigates risks facing Benin in achieving its PRSP objectives through significant up-front actions.

Figure 1.
Figure 1.

Benin: Real GDP Growth and Inflation 1995-2008

(Annual percent changes)

Citation: IMF Staff Country Reports 2005, 288; 10.5089/9781451803464.002.A001

Figure 2.
Figure 2.

Benin: GDP Growth and Contribution by Sectors 1995-2005

(Annual percentage change)

Citation: IMF Staff Country Reports 2005, 288; 10.5089/9781451803464.002.A001

Table 1.

Benin: Proposed Schedule of Disbursements Under the PRGF Arrangement, 2005-2008 1/

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Source: International Monetary Fund.

Assuming access equivalent to 10 percent of quota, or SDR 6.19 million.

Other than the generally applicable conditions under the Poverty Reduction and Growth Facility (PRGF) arrangement, including the performance clausde on the exchange and trade system.

Table 2.

Benin: Indicators of Fund Credit, 2004-15

(In millions of SDRs, unless otherwise specified) 1/

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Sources: IMF, Finance Department; and IMF staff estimates and projections.

Data for 2005-15 are projections.

Disbursements under PRGF arrangement minus debt service to the Fund.

Table 3.

Benin: Main Economic and Financial Indicators, 2002-08

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Sources: Beninese authorities; and IMF staff estimates and projections.

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

Total revenue minus all expenditures, excluding interest due.

Total revenue minus all expenditures, excluding foreign-financed capital expenditure and interest due.

6. Recent developments in the cotton sector contributed to the economic slowdown. Controlling for the favorable climatic conditions that led to bumper crops in 2001 and 2004, the reform of the cotton sector initiated at the end of the 1990s has not yet boosted the production of seed cotton and ginned cotton above 350,000 tons and 150,000 tons, respectively (Figure 3).

Figure 3.
Figure 3.

Benin: Cotton Production, 1995-2005

(in thousands of tons)

Citation: IMF Staff Country Reports 2005, 288; 10.5089/9781451803464.002.A001

  • The framework defining the relationship among the various stakeholders in the cotton sector came under stress, which resulted in market uncertainties that interfered with the 2003/04 and 2004/05 crop seasons. The transition from a framework based on a public monopoly to an integrated framework of multiple private operators was not completed. The absence of enforceable rules of conduct led to a breakdown of cooperation and discipline among stakeholders. Some operators started to circumvent the framework; the private sector institution in charge of financing activities and payments among stakeholders faced financial problems that delayed the start of the crop seasons; and input supply problems resulted from distributors’ dissatisfaction with the bidding system used to allocate import orders.

  • The domestic problems that contributed to managerial and institutional disarray in the sector were exacerbated by the slump in the international prices of cotton. Although the price drop over the period 1996-2002 was limited to 22 percent in CFA francs because of the appreciation of the U.S. dollar against the CFA franc, the slight recovery of international cotton prices since 2002 has been more than offset by the depreciation of the U.S. dollar, causing cotton prices, which had been relatively stable in 2003 and 2004, to drop by a projected 19 additional percent in CFA francs in 2005 (Figure 4).

  • In response to these developments, the government intervened in the sector to restore stability. In mid-November 2004, the government established the conditions for “transitional” arrangements in 2004/05, including its setting of input prices. In January 2005, the government also decided to protect farmers from the social and poverty implications of the decline in cotton prices.3 Moreover, the privatization of SONAPRA, the former cotton sector monopoly, which still accounts for about 50 percent of the country’s ginning capacity, was postponed after initial progress that led to the awarding of its ginneries through a bidding process.

Figure 4.
Figure 4.

Benin: Price of Cotton, 1995-2005

Citation: IMF Staff Country Reports 2005, 288; 10.5089/9781451803464.002.A001

7. Nigeria’s introduction in August 2003 of an import ban on 44 items regularly imported from Benin, effected through border closures and strengthened border controls, contributed to a decline of total exports to Nigeria by an estimated one-fourth to one-third in 2004, to the equivalent of about 5 percent of Benin’s GDP. The ban, which the Nigerian authorities imposed to curb the predominantly informal trade flows between Benin and Nigeria, was meant to protect Nigeria’s domestic industry and port activity, as well as address sanitary concerns about frozen meat. The reduction of Benin’s commercial activities with Nigeria curtailed transport and port activities, and lowered government revenue.

8. The activities of the Port of Cotonou were affected by other problems: the diversion of the international transit trade of neighboring countries to more efficient and competitive seaports in the region; pervasive corruption at customs; and the increasing number of roadblocks erected by police, customs, and local municipalities for control and revenue collection purposes (Figure 5). In late 2004, the government intervened to allow goods and services to move freely, and the port’s authorities initiated measures to regain market share and improve services.

Figure 5.
Figure 5.

Benin: Traffic at the Port of Cotonou

(in millions of tons)

Citation: IMF Staff Country Reports 2005, 288; 10.5089/9781451803464.002.A001

9. Although the terms of trade improved and savings in interest obligations resulted from the HIPC Initiative completion point, the external current account deficit (excluding official grants) deteriorated slightly to about 8⅔ percent of GDP in 2004 (Table 4). The trade balance deficit was stable at 11½ percent of GDP, despite a lower volume of cotton exports and a higher oil bill. However, lower interest obligations on public debt were more than offset by lower services and current transfers stemming from the decline in reexports to Nigeria.

Table 4.

Benin: Balance of Payments, 2002-08

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Sources: Beninese authorities; and IMF staff estimates and projections.

Excluding reexports amd imports for reexports whose net balance is allocated between services and public transfers.

The entry in 2003 is for the stock of debt operation at the HIPC Initiative completion point.

10. In response to wage pressures and declining revenue collection, the government cut expenditure to stabilize the overall fiscal deficit (excluding grants) at 3⅔ percent of GDP in 2004 (Table 5). Revenue collection fell by half a percentage point of GDP because of the economic slowdown. At the same time, the progressive aligning of wages to the current pay scale resulted in a 10 percent overrun in the wage bill. These negative factors were offset by reduced external interest obligations, a lower execution rate of the investment program, and measures that limited other expenditures while protecting, to the extent possible, priority sectors. The current fiscal surplus was reduced by ½ of 1 percent to 2½ percent of GDP, and the narrow primary surplus—the primary fiscal balance excluding externally financed capital expenditure—was eliminated.

Table 5.

Benin: Consolidated Central Government Operations, 2002-08

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Sources: Beninese authorities; and IMF staff estimates and projections.

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

11. Domestic credit expansion reached 8.8 percent in 2004, with credit to the nongovernment sector rising by 4.5 percent (Table 6). In light of credit demand pressures and negative net transfers to the rest of the world at the beginning of 2004, the Central Bank of West African States (BCEAO) increased Benin’s reserve requirement from 9 percent to 13 percent in March of that year. Analysis of other developments in the monetary and balance of payments sectors has been hampered in the past few years by data problems. The BCEAO’s official statistics indicate that currency in circulation in Benin declined from 12.2 percent of GDP at end-2001 to 1.6 percent of GDP at end-2004. The BCEAO has acknowledged having difficulty estimating currency in circulation and net foreign assets of member countries, but it has not yet provided revised time series that would provide for a full analysis of monetary and balance of payments developments.4

Table 6.

Benin: Monetary Survey, 2000-05

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Sources: BCEAO; and IMF staff estimates and projections.

12. Progress on the structural front was uneven in 2004. On the one hand, Benin made further progress in reforming its budget system and, in particular, in strengthening expenditure management. On the other hand, wavering commitment in the face of opposition from labor unions delayed the reform of the cotton sector and the privatization program. The electricity and water parastatal was separated into an electrical energy company (SBEE) and a water company (SONEB) in early 2004, but no progress was made in privatizing these two entities although a new electricity code to establish a legal framework for private participation in the sector was submitted to the parliament. No progress was made on the restructuring of the post and telecommunications public enterprise (OPT), except for the publication of a decree to separate postal and telecommunications activities. Moreover, resistance from trade unions blocked progress toward involving the private sector in the management of the Port of Cotonou.

B. Developments During the First Half of 2005

13. The authorities have made progress in early 2005 in restoring trade relations with Nigeria. A bilateral trade agreement was signed in April 2005 and the Joint Committee on Commerce (JCC) set up in May 2005 to improve trade relations between the two countries. Under this agreement, goods of Beninese origin that had been banned would be allowed in Nigeria, but goods manufactured outside of Benin—, that is, “reexports”—would continue to be banned. At end-May, 12 enterprises in the textile, edible oil, and construction materials sectors were granted export permits by the JCC.

14. The 2005 budget approved by the parliament was in line with the projections discussed during the last Article IV consultation. However, important budgetary pressures, in an amount of about 3 percent of GDP, resulted in early 2005 from (i) optimistic forecasts of 2005 revenue, (ii) slippages in the 2004 wage bill carrying over to 2005 and wage concessions made in early 2005 to end a prolonged teachers’ strike; (iii) the government’s decision to subsidize cotton producers, and (iv) various other measures that included an increase in allocations for public utilities to reflect actual consumption, preparation for the upcoming presidential elections, and the elimination of domestic payment arrears between the electricity parastatal and the general government. In addition, the government decided in early 2005 to recognize and settle its indebtedness vis-à-vis civil servants for the financial incidence of automatic promotions whose payment had been suspended between 1987 and 1991 and gradually restored thereafter. If the government had not adopted offsetting measures, the overall budget deficit (excluding grants, on a cash basis) could have widened from 4.5 percent in 2004 to 8.4 percent of GDP in 2005.

Benin: Settlement of Past Wage Liabilities and Civil Service Reform

Facing severe financial difficulties in the late 1980s, Benin’s authorities froze civil service wages between 1987 and 1991 but not automatic promotions, which resulted in the nonpayment of the related financial benefits. Since then, general salary increases have been granted and the financial benefits of automatic promotions gradually restored, but the gap between actual salary payments and grade-based salaries was only closed in 2004.

Bowing to strong labor unions pressures, the government has agreed in early 2005 to compensate civil servants for the loss of income resulting from the delay in aligning salaries to their grade-based levels since the freeze of 1987. This agreement between the government and the labor unions is likely to have a major medium-term impact on Benin’s fiscal position.

For 2005, the authorities aim to obtain a accurate assessment of the liabilities resulting from this regularization. On the basis of this assessment, they will define a strategy for the settlement of these unpaid benefits that will preserve fiscal and debt sustainability (MEFP, para. 25). They have included in the 2005 budget an allocation of about ½ of 1 percent of GDP for a partial settlement of this liability. Pending the assessment of the exact liabilities of the government and the adoption of an appropriate settlement strategy, the medium term program for 2006-08 includes provisions for the further settlement of this liability.

These developments underscore the importance of civil service reform. In this area, in which the World Bank has the lead, the focus is on revamping civil service regulations, designing an adequate recruitment policy, and introducing performance-base remuneration systems.

III. Policy Discussions

15. Policy discussions focused on immediate measures to stabilize and restore the fiscal situation and to get structural reforms back on track, particularly in the cotton sector and the Port of Cotonou (see part B on the 2005 program), while establishing a stronger policy framework to meet medium term objectives (see part A below). Discussions took place against the backdrop of heightened pressure on the government for social concessions that had contributed to delays in structural reforms and policy slippages. These slippages included a large increase in the 2004 civil service wage bill carried over into 2005 and the government’s decision to maintain cotton producer prices broadly unchanged despite the sharp drop in cotton international prices.

A. Development Challenges and Medium-Term Objectives

16. The key challenges facing Benin are to achieve higher sustainable growth in a stable macroeconomic environment and to ensure that pro-growth, pro-poor policies translate into effective poverty reduction. While recognizing that the continued implementation of the poverty reduction strategy and of prudent economic and financial policies was a prerequisite to address these challenges, the government focused its policy discussions on a development strategy driven by trade promotion and facilitation. The government’s objectives are to diversify the economy and increase its resilience to external shocks in the medium term while ensuring that key economic sectors are developed in the short term, particularly the cotton sector, and that trade activities with Nigeria are reestablished.

Macroeconomic framework

17. To implement this strategy, the Benin authorities have set the following basic macroeconomic objectives for the 2005-08 program (i) achieve an average annual rate of growth of over 4½ percent, (ii) contain inflation to less than 3 percent a year, and (iii) improve the external current account balance (excluding official grants) to 7½ percent of GDP by 2008. The envisaged reforms of the cotton sector and the disengagement of the state from the sector will initiate an increase of cotton production toward its potential of about 600,000 tons of seed cotton. The progressive easing of trade restrictions in Nigeria will also restore and allow for an increase of trade and trade-related activities in the short run. These developments will be accompanied by the increased efficiency and restoration of the competitiveness of the Port of Cotonou through reforms that are being implemented. Moreover, the privatization of the telecommunications and energy parastatals will gradually contribute to higher growth by stimulating private investment and providing better services. Additional behind-the-border reforms, such as facilitating access to land and financial services, strengthening the judiciary system, developing public infrastructure and improving governance, will promote economic activities and trade in general.

18. Benin’s attainment of these objectives and targets will be supported by an increase in gross investment by nearly 2½ percentage points of GDP from 2004 to about 21½ percent in 2008. More than two thirds of this increase will come from the public sector, in particular through expenditure in infrastructure and social sectors. Private sector investment will gradually increase as a result of the privatization and restructuring of key public enterprises and improvement in the business environment (Figure 6). Gross domestic saving is projected to increase to about 14 percent of GDP by 2008, reflecting improvements in the financial positions of both the government and nongovernment sectors.

Figure 6.
Figure 6.

Benin: Saving and Investment

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 288; 10.5089/9781451803464.002.A001

Sources: Benin authorities; and IMF staff estimates and projections.

19. Consistent with these objectives, the government’s strategy will focus on (i) strengthening public finances by mobilizing more revenue and restoring a narrow primary fiscal balance; (ii) maintaining a prudent monetary policy; (iii) deepening structural reforms to foster an environment conducive to private sector and trade development; and (iv) achieving progress in implementing the poverty reduction strategy.

20. The fiscal strategy will be to maintain debt sustainability (with a ratio of the net present value of debt to exports around 140 percent), while implementing the expenditure plans in the PRSP. The program targets a fiscal adjustment that also aims to correct for the projected deterioration of the budget outcomes in 2005 and to restore public finances on a sound path. The narrow fiscal primary deficit equivalent to 0.9 percent of GDP in 2005 is targeted to be eliminated by 2008 (Figure 7). This outcome is predicated on a revenue increase from 17.4 percent to 17.8 percent of GDP over the period and a decline in current primary expenditure of 0.9 percent of GDP—broadly the impact of the 2005 cotton subsidy—partially offset by an increase in domestically financed capital expenditure by 0.5 percent of GDP. The medium term fiscal framework also incorporates provisions for the settlement of government debt to civil servants. The program assumes that annual payments will be equivalent to about ½ of 1 percent of GDP per year over the program period. These projections will be revised when the verification of claims by civil servants is completed, and a clearance plan has been established.

Figure 7.
Figure 7.

Benin: Selected Fiscal Indicators, 1995-2008 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 288; 10.5089/9781451803464.002.A001

Source: Beninese authorities; and IMF staff estimates and projections.1/ Data for 2005-08 are projections.2/ Total revenue minus total expenditure, excluding foreign-financed investment and net lending.

21. On the revenue side, the effort will focus on simplifying the tax system and widening the tax base through a reduction of exemptions, as well as further strengthening in tax and customs administration to enhance the system’s buoyancy and elasticity. The authorities have requested additional Fund technical assistance to achieve that objective. The tax revenue-to-GDP ratio is projected to return to the 2003 level in 2005, and increase steadily by one quarter of one percentage point of GDP per year thereafter to reach 16 percent by 2008.

22. On the expenditure side, the program aims to stabilize current expenditure at 14½ percent of GDP and increase capital expenditure to nearly 8 percent of GDP. Pending the 2006 update of the poverty reduction strategy and its medium term expenditure framework, the program reflects the priorities of the strategy in 2005 and provides for a restructuring of expenditure that will allow for an increase of expenditure on social and priority sectors beyond one-fourth of domestically financed expenditure. The wage bill will be contained at about 5.7 percent of GDP. Improvements in budgetary management will also contribute to increasing the quality of expenditure.

23. The medium term fiscal stance will allow Benin to comply with six out of nine convergence criteria of the WAEMU by 2008, compared with four in 2004 (Table 7), and to make good progress toward the achievement of the remaining three criteria (narrow fiscal deficit, tax revenue, and external current account balance targets).

Table 7.

Benin: Compliance with Convergence Criteria of the West African Economic and Monetary Union, 2001-08

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Sources: Beninese authorities; and IMF staff estimates.

The 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.

Includes domestic and external debt.

In billions of CFA francs.

Structural reforms

24. In light of Benin’s limited domestic market but advantageous location, the authorities concurred with the staff on the need to develop a trade-based growth strategy. As Benin maintains a liberal trade and payments system, the discussions focused on the implementation of “behind the border” trade policies. These policies refer to institutional, regulatory, and structural reforms intended to support trade and investment liberalization by addressing domestic trade bottlenecks, such as high transport costs, limited access to inputs like land, and inadequate domestic regulations governing services, investment, and competition. Export development has, indeed, been hindered not only by the recent erosion of the competitive gains of the 1994 devaluation, but also by the lack of such policies (Figure 8).5 The recommendations of a recent diagnostic trade integration study (DTIS) should help the authorities identify trade policy reforms with a view to including them in their development strategy as a complement to their structural reform agenda.

Figure 8.
Figure 8.

Benin: Exchange Rate Indices, June 1993-April 2005

Citation: IMF Staff Country Reports 2005, 288; 10.5089/9781451803464.002.A001

Sources: IMF, Information Notice System, and International Financial Statistics, various issues.

25. The structural reform agenda will thus focus on the implementation of policies to facilitate and promote trade. A priority of the program will be to complete the reforms of the Port of Cotonou and of the telecommunications and energy sectors. These reforms will be complemented, starting in 2006, by additional trade promotion measures that will emerge from the DTIS.

26. Because the diversification of economic activities is likely to take time, another priority of the authorities’ growth strategy will be to strengthen the competitiveness of existing activities, such as those in the cotton sector, and ensure the conditions for their development. While expressing satisfaction with their decision to intervene in the sector and postpone the privatization of SONAPRA in 2004, the authorities agreed with the staff that it was not in the best interest of the country for the government to subsidize the sector and conduct commercial activities. They also expressed concerns about the sector’s ability to manage itself, the possible emergence of an oligopolistic structure for ginning activities, and the need to protect farmers. The authorities thus supported the need to implement further reforms to (i) strengthen the sectoral institutional framework, (ii) introduce a flexible domestic price mechanism that would reflect international prices and could be linked to a stabilization fund, and (iii) increase productivity in, and the competitiveness of, the cotton sector. Finally, the authorities agreed to abide by the rules of the memorandum of understanding that they signed with the other stakeholders in the cotton sector and that reaffirms the general framework and defines clear operational guidelines and responsibilities within the sector.

27. Finally, the program will provide new impetus to the administrative reform of the civil service and deepen the reforms of the budget and public finance management, including the strengthening of governance. Under the leadership of the World Bank, the reform of the civil service will focus on a revamping of civil service regulations and the establishment of a wage policy based on recognition of employee performance and an adequate recruitment policy (MEFP, paras. 9 and 15). Finally, the program also includes a reform of the pension fund for civil servants that aims at ensuring its financial viability.

B. Economic and Financial Program for 2005

Real sector

28. Preliminary data suggest that economic growth in 2005 may be limited to 4 percent because of the lingering effects of the trade restrictions imposed by Nigeria, the persistence of a difficult international environment, and the likely postponement of some private sector investment decisions in the period leading to the presidential elections. Moreover, the structural reforms to be implemented in 2005 will take some time to have an impact on economic activities and to remove impediments to higher growth. Inflation is expected to remain moderate.

Fiscal policy

29. The fiscal stance in 2005 involves a tightening of fiscal policy to offset recent budgetary pressures and limit the deterioration of the narrow fiscal primary deficit to 0.9 percent of GDP in 2005, as originally envisaged in the budget law. On the revenue side, measures equivalent to 1.1 percent of GDP have been taken to increase revenue to 17.4 percent in 2005. The ad hoc settlement of the electricity parastatal’s obligations to the state—which arose because debt relief was not passed through—accounts for nearly half of this adjustment and increased nontax revenue by 0.5 percent of GDP.6 The additional increase in revenue reflects mainly improvements in tax and customs administration, because the tax measures introduced in the 2005 budget decreased revenue slightly. These tax measures consisted mainly in (i) adjusting income tax thresholds to reflect minimum wage increases, (ii) extending for another year existing exemptions on agricultural inputs and equipments and introducing a new exemption on seeds, and (iii) modifying various small taxes and clarifying the tax legislation. The administrative measures taken to strengthen the tax and customs administration include the introduction of a new taxpayer identification number, a strengthening of monitoring and controls of exemptions, and additional personnel and equipment. At the same time, the computerization of customs and the medium taxpayer unit of the tax department in Cotonou were improved. Nontax revenue will also be increased through the assessment and collection of fees from mobile telephone companies.

Benin: Fiscal Program, 2005

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Sources: Beninese authorities, and IMF staff estimates and projections.

30. On the expenditure side, the government approved reductions of budget appropriations by 1 percent of GDP to limit the increase in total expenditure to 22.6 percent of GDP in 2005. It will reduce spending primarily by postponing some domestically financed capital expenditures and, secondarily, by cutting nonpriority current expenditures (MEFP, para. 20). Before the government adopted the measures—which represented a prior action designed to strengthen its ownership—it agreed with the IMF and World Bank staff on the structure and quality of the expenditure program.

31. Taking into account the reduction of domestic payment arrears and government liabilities, the financing requirement of the budget is equivalent to 6 percent of GDP