Statement by Damian Ondo Mañe, Executive Director for Benin August 5, 2005

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.

On behalf of my Beninese authorities, I would like to thank the staff for the constructive policy discussions with my authorities, and the well-written staff documents provided to the Board. The staff report on recent economic developments and the request for a new Three-Year PRGF Arrangement, due to the fact that outstanding challenges still remain, present a picture of the economic developments since our last Board discussions in October 2004. Also, the “Joint Staff Advisory Note on Poverty Reduction Strategy Paper- Annual progress Report” highlighted well the long way Benin has come over the last decade of cooperation with the Fund. Under this program my authorities seek to consolidate progress achieved so far under the previous PRGF programs.

In spite of progress made, Benin’s economic and financial situation remains fragile and vulnerable to external shocks due to the high dependence on cotton sector and trade with Nigeria, both of which were affected by external shocks. The persistence of unfavorable international environment affected Benin cotton sector and contributed to delay some structural reforms.

Over a decade through early 2002, Benin had made an impressive progress in economic performance aimed at strengthening the cotton sector, keeping the momentum of privatization process, and promoting export diversification. However, the last two years and half achievements have been rather less bright. Adverse external shocks caused by drop in the international prices for cotton, and restrictions on Beninese exports to Nigeria, have led to slowdown in economic growth and affected competitiveness. Economic growth in 2004 declined to about 3.1 percent from 3.9 percent in 2003, while inflation remained low at 2.6 percent. My authorities are however determined to address steadfastly the challenges facing the country, mainly through diversification of the economy and more resolute implementation of economic and social policies. For this effect, the Beninese authorities are keen to embark on a new Fund-supported PRGF program that will permit to carry out the needed economic reforms. A new PRGF arrangement with a low access would aim essentially at strengthening macroeconomic stability and implementing an export-led development strategy in order to reduce the vulnerability of the economy and achieve poverty reduction objectives.

Recent economic developments—2004 and the first half of 2005

In the fiscal area, economic slowdown resulted in a fall of revenue collection, while the wage bill has increased. Over the year 2004, Benin made continued progress in reforming the budget system and rationalizing expenditure management. The authorities have had to postpone some fiscal measures in the 2005 budget in order to take into account the optimistic forecasts of 2005 revenue, slippages in the wage bill that was inflated in view to diffuse teachers’ strike, subsidy to cotton producers, and costs of preparation of the 2006 presidential elections. Overall, these changes are likely to widen the budget deficit to 8.4 percent of GDP in 2005 from 5.2 percent in 2004.

Furthermore, the continued drop of cotton price has exacerbated the price slump that began in 1996. Against these developments, my Beninese authorities should be commended for their prompt response. Without delays the government set out input prices as a first step of a series of actions to preserve the producers incentive, followed by the maintaining of prices at the previous level with a view to protecting farmers. As a result, the privatization of the former public cotton sector monopoly, SONAPRA, was postponed.

Improvement in the cotton sector is taking time to materialize despite efforts made. The authorities are however prepared to privatize right away at least 10 ginning plants, pending to move to reform SONAPRA. For the government, SONAPRA plays a central role by assisting, not only cotton producers, but also the farmers in general. The government stands ready to eliminate uncertainties within the sector stemming from the nature of the relationship among the various shareholders and intends to sweep off the stress emerging from the transition from public monopoly to an integrated framework of multiple private operators. Due to the strong opposition of the trade unions, reform of the cotton sector as well as other public services was however delayed. These services include the electrical energy company as well as the post and telecommunications public enterprises.

Since 2003, the Port of Cotonou has continued to loose its competitiveness, causing the diversion of transit trade to more efficient and competitive regional ports. However, although major public finance administrations, mainly the customs and tax administrations were experiencing some difficulties, strong measures taken by the government have permitted goods and services to move freely.

The regional trade shock is unsustainable for Benin since Nigeria is an important neighboring country and plays a crucial part in Benin’s exports. Benin’s exports to Nigeria comprise a large amount of informal reexports of about 7 percent of GDP. The introduction by Nigeria of a ban on 44 imported items from Benin in 2003 has led to a decline of total exports to Nigeria which has a substantial impact on Benin’s economy. The government was conscious of the seriousness of this development, and as early as April 2005 the authorities signed a trade agreement with their Nigerian partners that allows in Nigeria only goods of Beninese origin, while banning all reexports goods. The next month, a Joint Committee on Commerce was put in place to monitor and improve trade relations between the two countries.

Overall, the external current account deficit deteriorated somewhat as a reflection of lower volume of cotton exports, a higher oil bill, and decline in exports to Nigeria.

The program for the remainder of 2005

For the remainder of the year, my Beninese authorities will forcefully pursue their actions to get things right. As the 2005 budget, just after adoption, came under pressure, the authorities will need to take vigorous measures to increase revenue and to reduce expenditure in an amount equal to 1.1 percent of GDP. Particularly, they are working to contain the narrow primary fiscal deficit at 0.9 percent of GDP and the overall deficit at 5.3 percent of GDP.

Specifically, fiscal policy will be tightened to contain the budgetary pressures as well as the deteriorating primary deficit. The government is ready to take strict actions to increase revenue to at least 17.4 percent of GDP for the whole year 2005 that integrates the settlement receipt of the electricity company. It is also expected a significant improvement in customs and tax administration during the remaining of 2005. In parallel, a number of reforms in the fiscal area will accompany these measures, notably the introduction of a new taxpayer identification number, the improvement of the computerization of customs and the taxpayer unit, and a strengthening of monitoring and controls of tax exemptions.

For the year as a whole, total spending and net lending are expected to attain 22.7 percent of GDP as a result of measures designed to limit the increase in expenditures. Despite the number of budgetary restrictions, this budget will nonetheless contribute markedly to reducing poverty, while, at the same time, helping maintain macroeconomic stability and long-term fiscal viability.

For the rest of year 2005, the authorities will continue to address difficulties stemming from trade restrictions, and the postponement of some investment decisions regarding private sector.

Medium-Term challenges and objectives

Down the road, Benin faces at least three important challenges: maintaining and improving macroeconomic stabilization, reviving the cotton sector and coping with vulnerability caused by the drop in cotton price, and advancing poverty reduction. The new program seeks to address these challenges. Indeed, the PRGF–supported program’s goal is to keep the government fiscal deficit in line with the objectives of debt sustainability. At the same time, efforts are needed to improve the level and quality of poverty-reducing spending. The authorities are well aware that the gap between the MDG poverty line and the trend observed in Benin is still considerable, with respect to depth and gravity of poverty. As such, poverty remains an important issue despite improvement in most poverty indicators since 1990 and Benin’s satisfactory economic performance up to 2002. Indeed, dependence on cotton sector and fall in cotton prices affect the farmer’s incentive as regards the production.

The Beninese authorities are conscious that taking strong macroeconomic policy measures and adopting pro-poor policies are crucial to achieve higher sustainable growth that can translate into effective poverty reduction. They realize that during almost a decade, although the country has experienced a high growth rate of about 6 percent a year, poverty has not receded significantly. They have drawn the conclusion that high growth only without pro-poor measures may not be sufficient to help reduce poverty. To this end, they turn to develop a new strategy susceptible to integrate priorities pertaining to increase of expenditure on social and priority sectors. Also, they view that diversification and increased resilience of the economy to external shocks in the medium term are essential to ensuring the sustainability of growth.

In this respect, the authorities are determined to achieve, in the context of basic macroeconomic objectives for the next three years, an annual growth rate of more than 4 ½ percent, contain inflation at a very low level, and reduce significantly the external current account deficit to about 7 percent of GDP by 2008. The government intends to achieve within the three-year period a production of about 600,000 tons of raw cotton, and pursue discussions with the Nigerian government to ease exports conditions free from restrictions and boost trade-related activities which are beneficial to the whole economy. The government assures that two thirds of increase of investment will be directed to infrastructure and social sectors expenditures.

Under these circumstances, the authorities are confident that the program is endowed with all the necessary ingredients to provide new impetus to deepen the reforms of the budget and public finance management and to support the government reform of civil service.

In the fiscal sector, the authorities are working to maintain debt sustainability in the range of 140 percent. At the same time, they will implement the expenditure plan in line with the PRSP. The authorities’ objective is also to correct the budget from deteriorating and to restore public finances back on a sound path, to eliminate the fiscal primary deficit within 2008, while revenue will increase slightly. On the revenue side, the authorities’ strategy envisages to simplify the tax system and widen the tax base. At the same time, tax and customs administration will be strengthened with a view to enhancing the fiscal yield. Also importantly, tax exemptions will scale down dramatically. On the expenditure side, while current spending is projected to attain 14 ½ of GDP, the capital expenditure will stabilize around 8 percent of GDP. The strategy which anticipates the containment of the wage bill at 5.7 percent of GDP, will however make room for an increase in expenditure on social and priority sectors. All these objectives will be made possible in the context of on-going improvement in budgetary management.

The government is expecting budgetary support to attain 6 percent of GDP in the form of concessional loans and grants. Moreover, from the consolidated Central Government operations for 2005 it comes out a financial gap of CFAF13.9 billion that the authorities seek to finance from multilateral and bilateral sources, instead of domestic borrowing. There will be a reduced domestic contribution which will amount to only 0.6 percent of GDP. The authorities intend to further strengthen expenditure management through reactivation of automatic controls of expenditures, thanks to the integrated computerized management system (SIGFIP). They are determined to sharpen the quality and reporting time of fiscal operations as the reflection of their efforts to improve transparency and governance.

In the financial system, my Beninese authorities should be commended for their continued efforts to strengthen the financial system further. As a result, the financial institutions are quite sound and the banking commission will continue its close watch on the system.

With respect to structural reforms, it is worth noting that trade continues to play an important role in Benin’s economy, mainly facilitated by the proximity of the large market of the neighboring Nigeria, so that there appears essential that structural reform agenda needs to focus on implementation of policies to ease and promote trade. In order to take better advantage of trade, my Beninese authorities are prepared to eliminate the various domestic bottlenecks, including reducing high transportation costs, facilitate access to lands, improving domestic regulations governing services, and streamlining private sector environment. They are confident that these measures will likely help to bring back the full competitiveness of the economy. Last but not the least, the diversification of the economy should press ahead and add up to the various actions underway.

The government had attached and continues to attach a great importance to its disengagement from direct intervention in the cotton sector. It is therefore encouraging to note that the government has started transferring SONAPRA’ s ginneries to the private sector. They are also prepared to introduce a transparent and flexible price system in order to guarantee a better and easier management of the sector. Efforts are underway to strengthen the management of the Port of Cotonou, paving the way for private sector participation in the management of the port. In the same vein, the privatization of the telecommunications and electricity companies will be completed by end-2005. There is assurance that the Parliament will pass as soon as possible the export-processing zones (EPZ) legislation.

Conclusion

Benin has done much to achieve debt sustainability. The ratio of the NPV of the debt-to-exports ratio would remain below 150 percent and decline over the projection period, assuming that international environment for cotton sector and donor grants remain adequate. Moreover, public debt in terms of GDP is projected to be constant at about 34 percent over the three years of the new program. It is supposed to continue to decline over the time. However, there are anticipations that the country’s debt burden would worsen substantially, should an adverse macroeconomic shock emerge. A lower export growth could be one of its major causes, particularly since Benin’s dependence on cotton exports is high. Other challenges remain, as highlighted above. Benin belongs to the group of low-income countries that will benefit from the 100 percent multilateral debt cancellation decided by the G-8 countries. This constitutes an additional input that could further help Benin achieve the MDGs. My authorities, consequently, are requesting a three-year arrangement with the Fund under the PRGF, with low access. They call on the international community’ strong support to help them appropriately conduct the program towards the attainment of projected goals.