Benin: 2006 Article IV Consultation, First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Request for Waiver of Nonobservance of Performance Criteria

This 2006 Article IV Consultation highlights that economic performance of Benin has been relatively subdued since 2003 after a decade of high growth. Slow economic growth has reflected limited progress in addressing core economic vulnerabilities and delays in implementing crucial growth-supporting structural reforms, against a backdrop of an appreciating real effective exchange rate and, more recently, a sizable deterioration in the terms of trade. Notwithstanding further delays in structural reforms, a turnaround in cotton production is helping to revive growth in 2006.

Abstract

This 2006 Article IV Consultation highlights that economic performance of Benin has been relatively subdued since 2003 after a decade of high growth. Slow economic growth has reflected limited progress in addressing core economic vulnerabilities and delays in implementing crucial growth-supporting structural reforms, against a backdrop of an appreciating real effective exchange rate and, more recently, a sizable deterioration in the terms of trade. Notwithstanding further delays in structural reforms, a turnaround in cotton production is helping to revive growth in 2006.

I. Introduction

1. In recent years, Benin has experienced a steady deceleration of real GDP growth owing to limited progress in addressing core economic vulnerabilities and delays in implementing crucial growth-supporting structural reforms. The weakening of growth has taken place against a backdrop of an appreciating real effective exchange rate and, more recently, a large deterioration in the terms of trade. In the structural area, privatization of the public utility and cotton companies is still pending. Only in the transport sector have steps been taken to begin improving the competitiveness of the Port of Cotonou (Box 1).

2. Against this background, Benin’s macroeconomic situation remains fragile. Dependent on cotton and reexport trade with Nigeria, the economy remains vulnerable to exogenous shocks. Wage pressures, the pension fund’s rising deficit, and the government’s debt to civil servants could further strain macroeconomic stability. Public administration reform is overdue.

3. The new government has stated its determination to address Benin’s economic vulnerabilities with Fund support. Proposed reforms focus on fostering an environment conducive to private sector-led growth and poverty reduction, with emphasis on strong revenue collection, prudent spending and wage policies in the post HIPC/MDRI-era, and resolute implementation of structural reforms. Initiatives in these areas constitute pivotal components of the economic program for 2006 and 2007.

4. Conclusion of the first PRGF review has been delayed due to lack of progress on cotton and public utility sectors reform in the run-up to the recent presidential election. All quantitative performance criteria for end-September 2005, the test date for the first review, and most benchmarks for end-September and end-December 2005 were met (MEFP, Tables 1 and 2).

Benin: Key 2004 Article IV Recommendations

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II. Economic and Program Developments

5. Economic performance has been subdued in recent years, but a turnaround in the cotton sector has helped revive growth. The cotton sector contributes an estimated 10 percent to total value added; it employs about 350,000 workers and touches an estimated 40 percent of Benin’s population. With cotton production declining sharply because of delayed disbursement of 2004-05 season payments to cotton farmers and fertilizer distributors, and uncertainties regarding the privatization program, real GDP growth decelerated to 2.9 percent in 2005 (compared with 4 percent under the program). Weak investment demand owing to election-related uncertainties, continued currency appreciation, and a large terms of trade decline also depressed economic activity (Figure 1 and Text table 1).1 The impact on growth was softened by a vigorous pick up in commerce as trade relations between neighboring Nigeria and Benin improved following tensions in 2004. As cotton production recovers, following settlement in April 2006 of debts to farmers and fertilizer distributors, and the trade and transportation sectors benefit from Port of Cotonou reforms and ongoing improvements in trade relations with Nigeria, growth is likely to rebound to 4.5 percent in 2006. Inflation is projected to ease to 2½ percent by end-2006, following a spike in prices in 2005 owing to strong food demand from crisis-afflicted Niger and high oil prices.

Figure 1.
Figure 1.

Benin: Sector Distribution of Real GDP Growth, 2000-05

Citation: IMF Staff Country Reports 2007, 006; 10.5089/9781451803488.002.A001

Source: Benin authorities; and Funf staff estimates.
Text Table 1.

Benin: Selected Macroeconomic Indicators, 1995-2006

(In percent of GDP; unless otherwise indicated)

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Sources: Benin authorities; and IMF staff estimates.

Excluding grants.

Payment order basis.

Minus = depreciation

6. External competitiveness has steadily eroded since the 1994 devaluation of the CFA franc. The real effective exchange rate appreciated by another 2 percent in 2005, owing to unfavorable price developments.2 By year-end 2005, Benin had lost over 60 percent of the competitiveness it had gained from the 1994 devaluation—with the real effective appreciation higher than in most other WAEMU countries (Figure 2). Moreover, as world oil prices surged and the f.o.b. price for ginned cotton declined 35 percent, the terms of trade deteriorated by about 16 percent in 2005. Nonetheless, the current account deficit, excluding grants, continued to moderate, reflecting lower formal sector oil imports stemming from management weaknesses at SONACOP (Benin’s oil-importing monopoly) and weaker capital goods imports. Benin’s share of the BCEAO’s foreign exchange reserves is equivalent to over 10 months of imports, in part owing to comfortable donor support.

Figure 2.
Figure 2.

Benin: Real Effective Exchange Rate, 1990M1 - 2006M4

(Monthly average)

Citation: IMF Staff Country Reports 2007, 006; 10.5089/9781451803488.002.A001

Source: IMF, Information Notice System.1 Official rate. Although consistent data on parallel market rate is not available, it drives mostly the official rate trends.

Benin: Coping With Structural Bottlenecks and Higher Prices in the Domestic Petroleum Distribution Sector

Beset by severe governance problems since its privatization in 1999, SONACOP—in which the state maintains a 35 percent share—had been unable to secure a steady supply of petroleum products in Benin, causing a resurgence in informal sector oil imports. By the end of March 2006, such informal imports covered an estimated 75 percent of domestic demand.

In March 2006, the outgoing administration requisitioned for three months all of SONACOP’s assets, including storage facilities and gasoline stations, and named a new management team. The government established in April 2006 renewed the previous administration’s requisition and took steps to improve the company’s management, restoring the availability of petroleum products on the formal market at no cost to the budget. The authorities intend nevertheless to return SONACOP management to the private sector. In the meantime, in May 2006 the authorities, faced with escalating world oil prices, froze domestic retail prices by (i) suspending the automatic price-setting mechanism for oil products, and (ii) lowering the rate of the specific tax on petroleum products. As result, revenue from the VAT and special tax on petroleum products declined to CFAF 0.3 billion in May-July 2006, compared with CFAF 3.9 billion in the same period of 2005.

For the medium term, the authorities aim to raise the formal sector’s market share while mitigating the social impact of world oil price increases. This strategy would improve petroleum tax revenue collection and reduce the safety risks associated with informal sector oil distribution activities. Envisaged policy actions include (i) early return of SONACOP to private sector ownership; (ii) granting investment-promoting fiscal incentives to domestic oil distributors; (iii) reestablishing the suspended flexible-pricing mechanism, (iv) enhancing customs controls of petroleum imports from neighboring Nigeria; and (v) instituting fiscal measures to protect vulnerable social groups from large oil price increases. The authorities intend to seek development partners’ assistance in elaborating these measures in a medium-term reform strategy for the oil sector, including an expeditious implementation timetable.

7. Benin’s fiscal situation weakened in 2005 and in early 2006. In 2005, the narrowly defined primary budget deficit widened to 1.4 percent of GDP, ½ percent of GDP above the program target. Revenue stagnated at 16½ percent of GDP, as weaknesses in revenue administration, especially at the General Directorate of Taxes, were left unaddressed. The government’s cash flow came under severe pressure when the outgoing administration settled unprogrammed domestic arrears to suppliers (from 2004) equivalent to 1 percent of GDP. In early 2006, the underlying cash-flow situation deteriorated owing to the payment of bills held from FY 2005, wage arrears, and various restructuring expenditures. New domestic arrears equivalent to 1.5 percent of GDP were accumulated.

Figure 3.
Figure 3.

Benin: Selected Fiscal Indicators, 2000-06

(percent of GDP)

Citation: IMF Staff Country Reports 2007, 006; 10.5089/9781451803488.002.A001

Sources: Benin authorities; and Fund staff estimates.

8. Expenditure and revenue measures introduced in the second quarter of 2006 have improved the budgetary situation and strengthened Benin’s short-term fiscal prospects. Fiscal measures included (i) the institution of a treasury committee to monitor more closely revenue collection and spending execution under the supervision of the finance minister, (ii) strict adherence to expenditure execution procedures, and (iii) renewed commitment not to undertake extrabudgetary expenditures. With technical assistance from the World Bank, the new administration has also initiated an audit of the new domestic payments arrears that came to light in 2006. The audit report and a plan to settle certified arrears are to be completed by end-2006. In the second quarter of 2006, with revenue about 5 percent above target and expenditure substantially below target, the narrowly defined primary budget balance recorded a surplus (1.0 percent of GDP), compared with a targeted deficit of 0.2 percent of GDP. Net bank credit to the government declined by an estimated CFAF 30 billion, compared with the CFAF 5 billion anticipated under the program. For 2006 as a whole, the narrowly defined primary budget deficit is projected to decline to the initial program target of 0.4 percent of GDP (0.9 percent, including MDRI-funded outlays).

9. Money and credit conditions are relatively easy. Broad money rose by over 22 percent in 2005, considerably more than nominal GDP (Figure 4 and Table 4). In response to rising inflation, a 20-percent expansion of credit to the private sector, and perceived capital flight risks ahead of the March 2006 presidential election, the BCEAO increased the reserve requirement ratio by 400 basis points, to 15 percent, in mid-2005, the highest level in the West African Economic and Monetary Union (WAEMU). Broad money and private sector credit growth has eased and is projected to slow to a pace closer to trend in 2006.

Figure 4.
Figure 4.

Benin: Monetary Development, 2000 - 06

(In billions of CFA francs)

Citation: IMF Staff Country Reports 2007, 006; 10.5089/9781451803488.002.A001

Source: Benin authorities; IMF staff estimates.
Table 1.

Benin: Main Economic and Financial Indicators, 2004-08

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

The 2006 projections incorporate the MDRI resources for the IMF, IDA and AfDF in stock operations.

Cotton production for T-1/T season. Production of cotton seed in crop year T-1/T affects agricultural production in year T-1, industry, services, and exports of ginned cotton in year T.

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

Total revenue minus all expenditure, excluding interest due.

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

Interest payment only.

After HIPC relief and before MDRI.

Table 2.

Benin: Consolidated Central Government Operations, 2004-08

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

The 2006 projections incorporate the MDRI resources for the IMF, IDA and AfDF in stock operations.

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

Table 3.

Benin: Balance of Payments, 2004-08

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

The 2006 projections incorporate the MDRI resources for the IMF, IDA and AfDF in stock operations.

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

Official capital grants from the United States (MCA) of about US $ 60 millions per annum for the period 2006-2011.

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

Table 4.

Benin: Monetary Survey, 2004-06

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Sources: BCEAO; and IMF staff estimates and projections.

Projections incorporate the effect of the cancellation of Fund credit under the MDRI

10. Performance under the program has been mixed. Two of the seven quantitative and structural performance criteria, as well as two quantitative indicative targets and six structural benchmarks, were not observed. The missed performance criteria were related to the outgoing administration’s guarantee of a nonconcessional loan to the state-owned telecommunications company (Benin Telecoms) and the accumulation of domestic payments arrears.3 More generally, progress in implementing the structural reform agenda has been slow. Privatization of the cotton, telephone, and electricity parastatals is still pending, and a comprehensive program to expand activities at the Port of Cotonou, including private sector involvement in management, has yet to be completed. Nevertheless, the installation of key components of the software for the port’s centralized clearing and invoicing management center was completed in November 2005, albeit with a two-week delay. This permitted the start in March 2006 of initial operations at the facility’s one-stop shop for customs and other administrative transactions (a delayed December 2005 performance criterion). Efforts to expand the scope of these operations are needed and are under way.

III. Policy Discussions

11. The government’s ambition is to make Benin’s economy more resilient to external shocks, reinvigorate growth and facilitate progress toward the Millennium Development Goals (MDGs). The authorities are developing a five-pillar growth strategy that underscores (i) preservation of macroeconomic stability; (ii) promotion of growth-supporting sectors to facilitate economic diversification; (iii) enhanced efficiency of public administration (including through more rigorous monitoring of governance practices); (iv) deepening and acceleration of structural reforms; and (v) public participation in policy-making. These priorities are consistent with the country’s core commitments under the PRGF arrangement. In particular, the authorities concur that, in view of the fixed exchange rate regime, envisaged growth objectives require accelerated structural reforms and continued fiscal consolidation to preserve macroeconomic stability. Consistent with this understanding, discussions focused on the medium-term macroeconomic framework, especially fiscal policy options, as well as on structural reform priorities. The mission also reviewed recent and prospective performance under the PRGF-supported program.

A. Medium-Term Macroeconomic Framework: Realizing Higher Growth

12. A comprehensive strategy that raises both capital accumulation and total factor productivity (TFP) growth is needed to boost economic growth to rates consistent with achieving the MDGs. Econometric analysis of growth performance in 1965–20054 suggests that raising growth would require (i) fiscal policies that do not crowd out the private sector and which direct resources to higher public investment; (ii) completion of reforms to revitalize the important cotton sector and reform the port and utilities; and (iii) a better business environment. With the right mix of fiscal and structural policies, staff concurred that the longer-term growth rate could be raised to 6-7 percent, a level more consistent with achieving the MDGs.

13. Over the next few years, achievable growth rates are expected to be more moderate and to continue to be highly sensitive to cotton sector performance. Assuming a favorable external environment (i.e., continued global expansion, strong growth in Nigeria, and more stable cotton and oil prices), the agreed medium-term macroeconomic framework calls for annual real GDP growth of 4½-5½ percent in 2006–08, in line with performance before Benin’s recent slowdown (Text Table 2). It assumes a continuing recovery of cotton production, which even after the rebound in 2006 remains well below potential capacity,5 higher re-exports to Nigeria, and increased trade and transport activity as the port’s one-stop shop yields efficiency gains. Supported in part by fiscal space opened up for public investment by higher domestic revenue and debt relief, the investment/GDP ratio would rise to about 22½ percent in 2008, from about 20 percent in 2005. The assumptions are consistent with an inflation rate contained within the WAEMU limit of 3 percent, which would prevent further real exchange rate appreciation, and a narrowing of the external current account deficit to 6.5 percent of GDP by 2008.

Text Table 2.

Benin: Selected Macroeconomic Indicators, 2005-08

(In percent of GDP; unless otherwise indicated)

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Sources: Benin authorities; and Fund staff estimates.

Excluding grants.

Payment order basis.

Data for growing season 2005-06, 2006-07, 2007-08, and 2008-09.

14. The medium-term growth outlook faces downside risks. The factors that could dampen growth include a further slump in cotton production (owing to bad weather, inefficient management of the ginning companies, slower-than expected reform outcomes, or a further decline in world prices); a resurgence of oil prices; renewed trade tensions with main trading partners; weak absorptive and institutional capacity; and slower-than-expected disbursement of programmed aid flows. If world cotton prices do indeed drop, the authorities would reduce the producer price and/or effect a fiscal adjustment to accommodate a government subsidy. They are also committed to passing the bulk of future oil price increases on to consumers while establishing safety net measures to protect vulnerable groups. Failure to gain public support either for the privatization program or for structural reforms to improve the business climate (e.g., judiciary and land tenure reforms) pose longer-term risks. On the positive side, the rapid response of the trade and transport sectors to port reforms and better trade relations with Nigeria illustrates the potential for reforms to translate into economic growth.

B. Medium-Term Fiscal Strategy: Carving Space for Higher Pro-Poor Spending

15. Benin’s fiscal program seeks further fiscal consolidation while implementing the poverty reduction strategy in the post-MDRI era. The authorities underscored the urgent need to improve the poor’s access to basic services through higher and more efficient spending in priority sectors. Total government spending is set to increase by about 2 percentage points of GDP in 2006-2008, supported by revenue gains equivalent to 1½ percent of GDP, debt service savings freed through MDRI debt relief, and additional aid inflows (Text table 3). The envisaged medium-term fiscal program takes account of the deficit of the public pension fund and assumes the elimination of the narrowly defined primary deficit by 2008, consistent with the WAEMU’s fiscal convergence criteria.6

Text Table 3.

Benin: Fiscal Space for Pro-growth Spending, 2006-08

(In percent of GDP)

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Sources: Benin authorities; and Fund staff estimates.

Including debt service savings from MDRI debt relief.

16. Achievement of the targeted revenue increase hinges on measures that combat fiscal fraud, reduce tax evasion, and broaden the tax base. Given Benin’s relatively high taxation of the formal sector and its commitments under the WAEMU, there is limited scope for new tax policy measures. Under the authorities’ program, the bulk of revenue increases would stem from strengthened tax and customs administration, including (i) further improvements in the management of the medium- and large-taxpayer units (especially by revising the turnover threshold so as to refocus the large taxpayer unit (LTU)’s activities on the largest taxpayers and computerizing more tax assessment and collection operations); (ii) better customs control of imported goods through efficient operation of the one-stop shop at the Port of Cotonou; (iii) better exchanges of taxpayer data between the General Tax and Customs Directorates; (iv) modernization of the property tax; and (v) introduction of a Unified Taxpayer Identification Number. Other revenue measures could include moderate increases in excise tax rates based on recommendations from the Fund’s Fiscal Affairs Department.7 The authorities indicated readiness to address revenue shortfalls with appropriate corrective policy measures, including spending cuts, to ensure preservation of program budgetary targets.

17. Containment of the wage bill and an orderly settlement of outstanding wage arrears to civil servants would provide space for priority spending.8 By limiting recruitment to retrenched and retiring staff numbers, the authorities would both keep medium-term civil service employment broadly stable and hold the wage bill at about 5½ percent of GDP, bringing it within the WAEMU ceiling of 35 percent of tax revenue (from 39 percent at year-end 2005). In response to staff advice to avoid faster-than-programmed settlement of sizable wage arrears to civil servants (7.1 percent of 2006 GDP), the authorities said they would keep 2007–08 annual wages and wage arrears payments at 6.2 percent of GDP, the projected outturn for 2006.

Figure 5.
Figure 5.

Benin: Development Budget, 2005-08

(percent of GDP)

Citation: IMF Staff Country Reports 2007, 006; 10.5089/9781451803488.002.A001

Source: Benin authorities; and Fund staff estimates.

18. The mission discussed the scope for front-loading pro-growth and pro-poor outlays and accommodating additional aid inflows. MDRI debt relief from the IMF, the World Bank, and the African Development Bank—US$1,112 million (25 percent of 2005 GDP)—has reduced Benin’s total external public debt to about 13 percent of GDP (Text table 4). Cognizant of the potential new borrowing space, the authorities are considering an ambitious public works program to revamp Benin’s ailing economic and social infrastructure. The mission stressed the need to preserve debt sustainability and warned against wasteful borrowing. Although the risks to medium-term debt sustainability are estimated to be moderate, the staff strongly urged the authorities to assess future loans on a case-by-case basis, taking account of concessionality, cost-benefit analysis, absorption capacity considerations, and Benin’s commitments under the PRGF arrangement.9 The mission also encouraged the authorities to work closely with development partners to plan and cost the envisaged infrastructure rehabilitation program. In the meantime, the authorities agreed to limit use of resources freed through MDRI debt relief to debt-service savings (approximately ½ percent of GDP per year). These are to be allocated to priority sector spending (primarily education, health, and infrastructure projects). These debt relief resources would be topped up by a grant of US$307 million (7 percent of GDP) from the US Millennium Challenge Account (MCA) to be disbursed over a five-year period beginning in October 2006.10

Text Table 4.

Benin: External Debt Indicators, 2006-26

(In percent, post-MDRI unless otherwise indicated)

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Source: Benin authorities; and Fund staff estimates.

Simple average.

19. The authorities expressed strong commitment to the strict observance of expenditure execution procedures. In April 2006, the minister of finance formally prohibited the use of ad hoc Treasury Payments Orders (Ordres de Paiement Trésor), instruments that have boosted past extrabudgetary outlays. In 2007, as part of a medium-term strategy to enhance public expenditure management, the authorities will also begin implementing the recommendations of a recent FAD TA mission. Proposed measures include strengthening government expenditure tracking, securing the automatic generation of the summary table of government financial operations, and consolidating government accounts.

20. The authorities are pressing ahead with preparations for civil service reform, with help from the World Bank and other donors. They will implement an integrated information management system for the civil service over the next three years, subject to financing availability. Key reform measures for 2007 include consolidating deconcentrated personnel management in the education ministry and assessing other large ministries’ readiness to take over their human resources management, finalizing job descriptions and qualifications and skill requirements for high-level positions, and adopting a civil service Code of Ethics and Conduct. These steps are paving the way for new performance assessment and merit-based remuneration systems, expected to be introduced by 2008. The authorities are also seeking to restore the civil service pension fund’s medium-term financial viability, although no visible progress has been made thus far. The staff stressed the need to expedite the preparation and implementation of envisaged pension reforms.

C. Enhancing External Competitiveness Through Structural Reforms

21. Privatization of the utilities, port, and cotton sectors—an essential part of the authorities’ growth strategy—will take time. With World Bank staff taking the lead, the mission and the authorities reached agreement on a revised structural reform agenda that would (i) complete government withdrawal from commercial activities in the cotton sector by mid-2007; (ii) bring to point of sale the state-owned electricity company by the end of August 2007; and (iii) start operations of the consolidated electronic billing system at the centralized clearing and invoicing management center by the end of December 2006 (see MEFP, paras. 24-27). The authorities also plan to bring the telecommunications company to the point of sale before end-January 2009. This is slower than World Bank staff advised. However, the authorities were of the view that time was needed to put in place a new management team, prepare a diagnostic of the telecom parastatal, and restructure the company first. They also noted that the measures planned for the cotton and electricity sectors would stretch their implementation capacity. Staff strongly encouraged the authorities to expedite the timetable for the telecom privatization, originally planned for end-2005, in order not to lose the momentum for reform.

22. The government has also initiated second-generation economic reforms designed to eliminate critical structural impediments.11 The program aims to (i) improve access to markets; (ii) improve access to land (and thus increase investment in and the value of parcels); (iii) facilitate access to credit for micro-, small-, and medium-scale enterprises; and (iv) improve the business environment through judiciary reform. To enhance trade, besides continued port improvements, the staff urged the authorities to help dismantle the remaining intraregional trade barriers in the WAEMU.

23. Although Benin’s financial system is weak, most banks appear to meet key prudential norms (text table 5). The banking system has been steadily growing, with nominal bank deposits increasing by about 9 percent a year and credit to the private sector expanding from 4 percent to 19 percent of GDP during 1995–2005. At the end of July 2006, 12 banks and 2 leasing companies were licensed to operate; nonperforming loans were about 10 percent of total assets. Recent positive developments include the completion of reforms to address governance and other portfolio weaknesses in two banks previously overseen by the regional Banking Commission. However, in one of these banks, the capital ratio remains negative. The heavy concentration of loans in a limited number of sectors (and companies) is a potential source of vulnerability that must be closely monitored.

Text Table 5.

Benin: Banking and Financing Prudential Indicators

(as of end-June 2006)

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Source: BCEAO, National Agency of Benin

as of end-Dec 2005

As of end-June 2006, twelve banks and two financial institutions were licensed to conduct business in Benin. As the prudential ratios are calculated over a 12-month period, two banks are not included in the table.

D. Poverty Reduction Strategy Paper (PRSP) Issues

24. The authorities are revising the PRSP. Since the strategy’s approval in 2003, the government has issued two annual progress reports (APR), one in December 2004 and one in August 2005; a third APR is expected to be finalized before end-2006. For the ongoing revision, the authorities have completed a modular survey of household living conditions (EMICOV) to improve knowledge of the poverty profile, conducted broad participatory consultations, and developed a consensus on the strategic priorities for the update PRSP (PRSP II), including a renewed emphasis on private sector-led economic growth. PRSP II is to be completed in December 2006.

E. Program Monitoring Issues and Capacity to Repay the Fund

25. In the attached Letter of Intent, the authorities request completion of the first review under the PRGF-supported program. They explained that the missed performance criterion on domestic arrears partly arose from pre-election spending pressures and inadequate spending controls that have now been addressed; they have initiated an audit of the arrears and would devise a plan for their resolution by year-end. The end-December 2005 start up of the centralized clearing and invoicing management center of the Port of Cotonou had been effected with a delay. But to signal their broader commitment to structural reform, in view of several missed structural benchmarks, the government would as a prior action for completing the review approve disengagement strategies from commercial activities in the cotton, telecommunications, and electricity sectors. Finally, the broken obligation to neither contract nor guarantee nonconcessional loans reflected a perceived urgent need by the previous government to secure finance for restructuring the telecommunications company, against the advice of Benin’s debt management committee. The new administration has underscored the unit’s crucial technical and advisory role, and agreed henceforth to neither contract nor guarantee nonconcessional loans.

26. The mission welcomed the actions to address missed performance criteria and structural benchmarks. It pointed out, however, that staff had advised the previous government against the guarantee of the nonconcessional loan to the telecommunications company; therefore, the new government’s strong commitment to avoid such guarantees or loans in the remainder of the program would be important. Prior actions (see paragraph 3 of the LOI and paragraph 29 of the MEFP) largely aimed at demonstrating the authorities’ commitment in the areas of missed program conditionality have been implemented.

27. Proposed program conditionality for 2006 and 2007 includes measures to resume stalled privatization of the state-owned cotton and electricity companies (MEFP, Table 2). While outside the core expertise of the Fund, reform in these sectors (as noted in the Ex-Post Assessment of Performance under Fund-Supported Programs—Country Report 04/371) is seen as macro-critical. Other structural conditionality encompasses efforts to improve accountability in budget management and deepen port reforms. The World Bank is playing a key role in supporting the authorities’ sectoral reforms.

28. The program is fully financed for 2006 and 2007. Financing needs are being met by donor assistance mostly from the World Bank, the African Development Bank, and the European Union. In consultation with staff, the authorities have realigned program monitoring with the budget cycle (calendar year), and established quarterly performance criteria and indicative targets to monitor program implementation (MEFP, Tables 1 and 2). The program continues to include adjusters on domestic financing for deviations from external programmed budget assistance.

29. Benin is expected to preserve its excellent record in meeting its Fund obligations. During the program period, the annual average repayment to the IMF would be SDR 0.021 million, only 0.006 percent of export of goods and services and 0.005 percent of government revenue by 2008.

F. Statistical and Other Issues and Disclosure

30. Despite some statistical weaknesses in the national accounts, monetary aggregates, and social indicators, Benin’s economic database is adequate for program monitoring purposes. Benin participates in the General Data Dissemination Standard, and posts its metadata on the Fund’s Dissemination Standards Bulletin Board. Fiscal data only covers the central government, and the reporting of such data needs strengthening; the authorities are currently receiving technical assistance in this area from both AFRITAC-West and FAD.

31. The mission sought civil society’s and the private sector’s views on the Fund’s policy dialogue with the government. Union leaders strongly opposed the privatization program, expressing concern over anticipated personnel retrenchments. Staff stressed the reform’s potential benefits, especially its positive impact on competitiveness, economic growth, and poverty alleviation. Representatives of the private sector largely agreed with Benin’s IMF-supported reform policies; they called for a strengthening of their dialogue with the government on economic policy issues.

IV. Staff Appraisal

32. Following a decade of strong and low inflationary growth, Benin’s economic performance has considerably weakened in the last few years because of slow progress in addressing core economic vulnerabilities. In 2005, per capita income growth fell to zero. Absent a considerable revival of growth, progress toward the millennium development goals (MDGs) will be limited.

33. To revitalize the economy, the new government is developing a comprehensive growth strategy that is broadly consistent with Benin’s core commitments under the PRGF-supported program. The strategy’s focus on macroeconomic stability, economic diversification, good governance, accelerated structural reforms, and more public involvement in policy-making processes is well-placed. Full implementation would help raise real GDP growth to 6-7 percent, the level needed to facilitate progress toward the MDGs.

34. However, reform efforts, even if implemented speedily, will take time to gestate, limiting growth potential over the next few years. The authorities can, nonetheless, minimize significant downside risks to the medium-term macroeconomic framework by ensuring an effective transfer of cotton-ginning factories to the private sector by mid-2007, creating fiscal space for more public investment, and continuing to address obstacles to doing business.

35. Staff welcomes the new government’s determination to expedite implementation of hitherto stalled structural reforms. Delays in implementing reforms are regrettable. However, the authorities are to be commended for decisive steps to resume, with technical support from World Bank staff, the long-delayed privatization of the cotton and electricity companies, and give new impetus to efforts to enhance the competitiveness of the Port of Cotonou. With the opening of the port’s centralized clearing and invoicing management center and the progressive development of its operations, port clearing operations are being facilitated, including through consolidating information supplied on numerous port service bills at a single window. Work will be needed in 2007 to continue developing functionality, including for direct bank settlement. The reform is reducing the incidence of customs corruption and should also help enhance the port’s competitiveness. Along with better trade relations with neighbors, the port’s one-stop shop is already having a positive impact on activity in the trade and transport sectors. While the staff recognizes the constraints imposed by limited implementation capacity, the two-year delay in the telecom privatization is regrettable. Strong steps will need to be taken to expedite the reform process with a view to ensuring an early state disengagement from the sector.

36. Second-generation reforms aimed at reducing impediments to private sector investment are an important next step. Such measures include improving Benin’s judicial and land tenure systems and facilitating credit access to more small- and medium-sized enterprises. Together with the ongoing privatization program, these initiatives will support private sector development and permit diversification of the production and export base, thus enhancing the economy’s resilience to external shocks. A resolute and timely implementation of the reforms is crucial especially considering the erosion of competitiveness since the 1994 devaluation, as reflected in a steady appreciation of the real effective exchange rate. In line with this strategy, staff urges the authorities to expedite reform of the domestic petroleum products distribution sector, including an early reestablishment of the flexible price fixing mechanism.

37. The government rightly underscores the need to preserve macroeconomic stability over the medium term. Consistent with this, the authorities need to focus on reversing recent lackluster revenue performance, and maintaining spending at levels compatible with continued fiscal viability. To protect poverty reducing expenditures, personnel outlays need to be closely monitored and contained at levels consistent with the relevant provisions of the WAEMU’s Growth and Stability Pact.

38. Scaling up of pro-growth outlays in the post-MDRI era must take account of existing capacity constraints while preserving the viability of Benin’s external position. The multilateral debt relief initiative has brought Benin’s debt burden to relatively low levels, and opened room for increases in pro-growth and pro-poor spending. Against a backdrop of a much improved debt outlook, the authorities have initiated preparations for an ambitious infrastructure rehabilitation program. Financing for the program should be obtained on terms that do not put debt sustainability at risk over time. All planned projects should undergo extensive cost-benefit analysis and be financed by highly concessional loans.

39. Staff recommends the completion of the first review under the PRGF arrangement. Benin’s macroeconomic performance remains broadly on track following efforts to address fiscal slippage in the early part of this year. Implementation of the structural program has been disappointing resulting in several benchmarks being missed. But the new administration has resumed long-delayed reforms, including the privatization program for key sectors. Given the recent approval of the government’s disengagement strategies for the cotton and electricity sectors, ownership appears strong, and the staff expects reform progress to improve. The new government has also begun to address unplanned domestic arrears and has said it will abstain from borrowing or guaranteeing loans on nonconcessional terms. The guaranteeing of a nonconcessional loan to Benin Telecoms by the previous government was ill-advised and the authorities will need to more closely heed their debt management committee’s recommendations in the future. That aside, on balance, staff supports the authorities’ request for waivers with regard to the missed performance criteria.

40. The main risk to the program pertains to possible policy reversals should the authorities fail to rally domestic support for the structural reform measures. Other risk factors include renewed tensions in trade with regional partners, a weakening of world cotton prices, and difficulties in raising revenue to program targets. To contain such risks, the authorities must deepen and expedite their reform agenda, including maintenance of spending at levels compatible with medium-term fiscal viability. Staff welcomes ongoing efforts in this direction and urges the government to stay the course.

41. It is proposed that the next Article IV consultation with Benin take place within 24 months subject to the provisions of the decision on consultation cycles in program countries.

Table 5.

Benin: Proposed Schedule of Disbursements Under the PRGF Arrangement, 2005-08 1/

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Source: International Monetary Fund.

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

The date of the last disbursement will be determined at a later time.

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

Table 6.

Benin: Millennium Development Goals

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Sources: Benin’s authorities and World Bank estimates.