Statement by Laurean W. Rutayisire, Executive Director for Togo

The 2007 Article IV Consultation highlights Togo’s developments and performance under the Staff-Monitored Program (SMP). Togolese banks have the highest nonperforming loan (NPL) ratio in the West African Economic and Monetary Union (WAEMU) area, reflecting primarily past lending to loss-making enterprises in the cotton and phosphate sectors. Executive Directors commended the progress made in restoring fiscal discipline and strengthening governance, in particular the reforms to strengthen tax and customs administration and improve expenditure control.

Abstract

The 2007 Article IV Consultation highlights Togo’s developments and performance under the Staff-Monitored Program (SMP). Togolese banks have the highest nonperforming loan (NPL) ratio in the West African Economic and Monetary Union (WAEMU) area, reflecting primarily past lending to loss-making enterprises in the cotton and phosphate sectors. Executive Directors commended the progress made in restoring fiscal discipline and strengthening governance, in particular the reforms to strengthen tax and customs administration and improve expenditure control.

At the outset, I would like to express the appreciation of my Togolese authorities to the Executive Board, Management and Staff for their valuable support and advice since they embarked on implementing the current Staff Monitored Program. I also would like on behalf of my authorities to thank staff for the fruitful dialogue held during the recent discussions under the 2007 Article IV consultation and review of the SMP, as well as for the helpful set of papers which well documents Togo’s economic developments and performances.

Since October 2006, my authorities have within the framework of SMP embarked on macroeconomic and structural reforms designed to restore macroeconomic stability, and achieve sustained growth in order to make inroads in poverty reduction and achieving the MDGs. Despite the unfavorable economic environment due in particular to the increase in oil prices and difficult situation in the energy and cotton sectors, my Togolese authorities have maintained determined implementation of the SMP and as evidenced in the staff report have met all performance criteria.

Following the slump recorded in 2005, a 2 percent real GDP was achieved in 2006. Inflation was also significantly reduced as the consumer price index dropped from 6.8 percent in 2005 to 2.2 percent in 2006.

Fiscal performance has been strong. Revenues exceeded the end-2006 target, on account of reforms in tax and customs administration as well as the strong recovery of tax arrears, and expenditure control was tightened by curtailing off budget operations. Consequently, the domestic primary deficit for 2006 was contained at 1 percent of GDP, below the program target of 1.75 percent and domestic arrears were reduced for the first time in years. All structural benchmarks under the SMP through February were met. To help control spending in 2007, all spending commitments and payment authorizations under the 2006 budget were closed before December 31, 2006. In February 2007, the authorities adopted a decree establishing internal and external audit programs in the tax department. The principles of an arrears clearance strategy based on a draft audit were discussed with the IMF mission. The preliminary financial audit report on SOTOCO has been also issued. The authorities are implementing further reforms, including tax audits and customs’ computerization, in order to enhance revenue collection.

With regard to the external sector, the gross international reserves increased to 3.2 months of imports from 2.0 months in 2005. However, the adverse impact of higher oil prices and lower cotton exports led to the widening of the current account deficit to 6 percent of GDP.

On the political front, my authorities have also made important achievements in building governance institutions and democratization. In August 2006 a global political agreement involving all major political parties was signed followed by the formation of a national unity government in September 2006. Free and fair legislative elections will be organized before the end of 2007 by an independent national electoral commission established in October 2006.

In spite of these performances, the authorities still face daunting challenges in order to revive economic growth, reduce external imbalances and eradicate poverty after more than two decades of decline. In order to overcome these challenges and based on the policy implementation performances made under the SMP as well as their strong commitment to pursue sound policies and reforms, my Togolese authorities are requesting a PRGF arrangement in order to enable them to mobilize broader donor aid support and debt relief.

Program for 2007

In 2007, real GDP growth is projected at 3 percent, driven mainly by higher public investment, increase in cotton production and continued strong growth in services related to regional trade. A higher and sustainable economic growth is needed in order to make significant inroads in poverty reduction. To this end, the authorities are developing a comprehensive reform strategy based on the Interim PRSP. This reform strategy covers (i) political and economic governance, including political and legal reforms, and steps to strengthen public finances and budget execution; (ii) structural reforms with actions to improve business environment, restructure state-owned enterprises, raise agricultural productivity, build infrastructure and develop the financial sector and (iii) social reforms including wider access to education, health, and safe water.

Fiscal Policy and Reform

My Togolese authorities remain strongly committed to fiscal discipline and sound budgetary processes. To support the increase in revenue collection, they are planning a broad set of administrative reforms designed to strengthen tax administration and reduce fiscal risks. This reform includes computerization, improved audit procedures and simplified procedures for taxpayers. To restore confidence of local suppliers, the authorities intend to avoid new arrears and develop a repayment strategy for past arrears following the recent audit. They also envisage a gradual domestic fiscal adjustment based on a gradual increase in revenues and a reallocation of spending towards priority area, namely public infrastructure, education and health. In view of the heavy public debt burden, the authorities call on higher external assistance and comprehensive debt relief, in order to meet spending needs in the context of fiscal and debt sustainability. The lack of external support for more than a decade has significantly weakened the country’s institutional and human capacity and eroded its physical infrastructure, whose rehabilitation requires substantial financial support in addition to the domestic fiscal adjustment effort.

Monetary Policy and Banking Sector Reform

The current exchange rate regime has served the economy well, with significant benefits in terms of low inflation and access to regional markets. The Togolese banking sector remains fragile. The authorities are aware that this situation could jeopardize the macroeconomic stability. In their efforts to strengthen the sector, the authorities have significantly reduced the NPL ratio from 42 to 28 percent. The regional banking commission has made wide ranging recommendations to step up the authorities’ efforts to address the problems experienced by the Togolese banks. Good progress has been made in implementing many of Commission’ measures, and the authorities are committed to press ahead with further strengthening the banks’ governance and financial position.

Structural Reforms and Competitiveness

The authorities aim to make further progress in the structural reforms, with a view to boost higher growth and revive the external competitiveness of the economy. In this regard, the authorities intend to improve the broader business environment, including by strengthening governance and simplifying regulations to attract foreign direct investment. They will also speed up reforms of state-owned enterprises with the clearance of arrears to cotton farmers and audit of SOCOTO as well as seeking a strong strategic investor for the phosphate sector. In their efforts to address problems in the energy sector, the authorities plan to work with regional partners and private investors to alleviate the main constraints. To enhance financial intermediation and lower interest rates, the authorities intend to restructure and privatize the state-owned banks, develop microfinance to enhance access to financial services for the SMEs and households and increase the liquidity and depth of primary and secondary securities markets. Further steps will also be undertaken to improve the legal environment and the ability of banks to recover credit collaterals.

Regarding the urgent need to upgrade the country’s statistical capacity, my Togolese authorities call on the Fund for a technical assistance in the areas of the balance of payments, and national accounts as well as monetary and fiscal data.

Conclusion

My authorities fully share the staff’s analysis on debt sustainability which shows that Togo is in debt distress and highlights the need for increased external assistance coupled with benefiting from HIPC Initiative and MDRI.

My Togolese authorities remain determined to pursue steadfastly the implementation of good policies. Once again they would appreciate Directors support of their request for a PRGF arrangement, in order to back their efforts towards poverty alleviation and achieving the MDGs.

Togo: 2007 Article IV Consultation and First Staff Review of the Staff-Monitored Program: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Togo
Author: International Monetary Fund