Abstract
Togo has made significant progress in advancing economic and political reforms under the Staff-Monitored Program (SMP). Important fiscal governance reforms have boosted tax revenues and helped expenditure control. The I-PRSP is designed to preserve macroeconomic stability while reviving economic growth and reducing poverty. The Poverty Reduction Growth Facility (PRGF) helped to consolidate macroeconomic stability, achieve fiscal and debt sustainability and pave the way for HIPC/MDRI debt relief. On account of a strong performance under the SMP, a fast reviving economy and achieving fiscal and debt sustainability, Togo requested a three-year arrangement with the IMF under the PRGF.
On behalf of our Togolese authorities, we thank Management for the fruitful discussion held with President Faure Gnassingbé last November, and for the Fund support to Togo. Our authorities also appreciate the constructive dialogue held again recently with Management in the context of the 2008 Spring Meetings. We also thank Staff for their dedicated and relentless efforts in providing my authorities with pertinent advice and technical assistance throughout the past two years.
In recent years, our Togolese authorities have made important achievements in building governance institutions and advancing democracy. Following a global political agreement in 2006 involving all major political parties and the formation of a national unity government, free and fair legislative elections were organized in 2007 by an independent national electoral commission, which resulted in the appointment of a new government. The profound political and economic reforms Togo has embarked on have helped the country reengage with the international community—including the European Union, the country’s largest donor—and lay the ground for stronger economic growth and poverty reduction.
To achieve important strides in reducing poverty and make progress toward the Millennium Development Goals (MDGs), our Togolese authorities have, in collaboration with all stakeholders, prepared, in a broad participatory process, an Interim Poverty Reduction Strategy Paper (I-PRSP) which lays the groundwork for enhancing public policies and programs, including by addressing the country’s dire infrastructure and social service needs, especially in the education and health sectors. This endeavor will require considerable capacities and resources which are still lacking and which our authorities intend to garner through the combination of fiscal consolidation, alleviation of the heavy debt burden, external financial support, and intensified technical assistance. They are making improvements in fiscal management, have reached understandings on arrears clearance with the country’s multilateral creditors and obtained financing assurances from the Paris Club of bilateral creditors.
To sustain their economic policies and reforms aimed at maintaining macroeconomic stability and reviving growth, and pave the way for debt relief as soon as possible, our Togolese authorities request a three-year arrangement with the Fund under the PRGF for the period 2008-10. Based on Togo’s good implementation of the SMP, the design of an I-PRSP for which my authorities stand ready to improve gradually, and the country’s renewed commitment to sound policies and reforms as laid out in their Letter of Intent and Memorandum of Economic and Financial Policies (MEFP), our authorities request a three-year PRGF program for the period 2008-10. This program will enable our Togolese authorities to bolster their implementation of the sound macroeconomic and structural reform policies already underway, and to mobilize additional donor support so as to bring about rapid poverty reduction and attainment of the MDGs.
I- RECENT ECONOMIC DEVELOPMENTS AND PERFORMANCE UNDER THE SMP
Togo has emerged from a long socio-political crisis which made its economy vulnerable and contributed to deteriorating the country’s infrastructure and social services. Over the past two years, my authorities have started to tackle the daunting institutional and economic challenges facing the country, notably through committed efforts in strengthening public finance management and restructuring public enterprises, including by making their management more transparent. As a result of these endeavors, fiscal revenues have increased, expenditures are better controlled, and domestic arrears—including to civil servants and cotton farmers—have been reduced.
Macroeconomic performance has started to improve. Real GDP growth has averaged 2.5 percent over the period 2005-07, with a strong showing in 2006 (4.1 percent), owing to favorable weather conditions for agriculture, increasing regional trade, and a rebounding cotton sector. Economic growth would have been even more robust in the absence of localized flooding and frequent power outages stemming from severe region-wide electricity shortages. On the external front, higher remittances offset a widening trade gap to maintain the current account deficit around 6.0-6.5 percent of GDP. Despite strong broad money growth and rapid credit growth fuelled by remittances and trade-related capital inflows, inflation (CPI measure) has been brought down from nearly 7 percent in 2005 to 2.2 percent in 2006 and 1 percent last year. However, concerns have risen on this front in recent weeks due to the rising world food prices.
The stock-taking on the structural measures also yields satisfactory results. As early as mid-2006, administrative reforms in the fiscal area were initiated to broaden the tax base and recover tax arrears. The SMP implemented by our authorities during the period October 2006 -June 2007 was geared mainly at addressing governance problems in the public finance, banking, cotton and phosphate sectors. They have met all quantitative targets at end-December 2006, end-March 2007 and end-June 2006 and completed nearly all structural benchmarks under this program. Regarding the two structural measures that are still being implemented, understandings have been reached on a strategy based on the regional Banking Commission and MCM recommendations for the restructuring of Banque Togolaise pour le Commerce International (BTCI) and Union Togolaise de Banque (UTB), and a comprehensive financial and strategic audit of the phosphate sector is being prepared, to be financed by a World Bank grant. Our authorities remain committed to finalizing these actions.
II- THE POVERTY REDUCTION STRATEGY
Togo is a low-income country where about 60 percent of the population living below the poverty line. The incidence of poverty is very high in rural areas (where three-quarters of households are poor) and high in urban areas (two-thirds of households poor); the rate of malnutrition is elevated; access to education, health, electricity and safe water is limited for poor people. The poverty diagnostic assessment conducted by the Togolese authorities shows that the major sources of poverty relate notably to the low levels of farmers’ income, the relatively poor levels of financing for education and health, the past long-standing social and political unrest, and constraints to the access to safe water.
The MDGs relating to the elimination of extreme poverty, the promotion of gender equality, the reduction of infant mortality rate, and ensuring a sustainable environment can only be achieved beyond 2015. However, those related to ensuring universal primary education, improving maternal health and combating HIV/AIDS are achievable by 2015. As the MDG situation is moderately critical in Togo, sustained efforts are needed in the areas of infrastructure, education, health and other social services. To this end, my authorities, in a broad participatory process involving notably the civil service, the civil society, NGOs, trade unions, religious denominations and the private sector and guided by the principle of dialogue, have designed a poverty reduction strategy described in their I-PRSP.
The strategy is centered around three strategic pillars: (i) achieving improvements in political and economic governance through building upon the actions that have been taken in this area since 2005; (ii) strengthening the process towards economic recovery and sustainable development, notably by pursuing structural reforms to revitalize the economy through stronger liberalization focused on regional integration and multilateralist policies; and (iii) enhancing the social sectors, human resources and employment through specific programs in education and training, health system and services, nutritional areas, access to safe water and to sanitation facilities, as well as gender equity, employment, social protection and grass-root community development.
The cost of implementing the interim poverty reduction strategy over the next three years amounts to CFAF 514 billion, which will be financed by domestic and external resources. We call on the international community of donors to provide the required resources to finance Togo’s poverty-reducing efforts.
III- MEDIUM-TERM ECONOMIC POLICIES AND REFORMS
Although considerable progress has been achieved during the past two years, much remains to be done to address the institutional and economic challenges facing Togo. These include the excessive public debt; the financial soundness of public enterprises, notably in the cotton and phosphate sectors; the functioning of the financial sector; the deteriorated infrastructure, especially in the transport and energy areas; the constrained institutional capacity; the quality of education and health services; and the business environment. To help tackle these challenges, our authorities have designed a comprehensive medium-term program of economic policies and reforms, which is articulated around the country’s poverty reduction strategy and centered on the objectives of maintaining macroeconomic stability and reviving economic growth.
Moreover, Togo’s economy has been recently hit by the high and rising world oil and food prices, which are having worrisome effects on the most vulnerable segments—that is the largest share—of the population. Despite the mounting social pressures, our Togolese authorities have resisted the temptation of using fiscal measures such as tax exemptions and price controls to contain the adverse social impact of the high food and commodity prices. They look forward to regional responses in the context of the Western African Economic and Monetary Union (WAEMU). They reiterate the call made to Fund management and staff to contribute actively and promptly to the efforts they are making to address this new challenge and help them preserve the gains achieved recently in macroeconomic stability, growth recovery and political peace.
The 2008-10 macroeconomic framework
The medium-term macroeconomic framework for the economic program is predicated upon realistic assumptions: (i) an annual growth rate of 3 percent this year and 4 percent in 2009 and 2010, driven in the short run by donor-financed public investment, improved business confidence, expanding regional trade and rebound of the cotton and phosphate sectors, and in the medium term by higher FDI, greater financial intermediation and upgraded public infrastructure; (ii) inflation, which is anchored in the WAEMU currency union, will be contained between 3.5 and 4.1 percent as the national authorities and the central bank, BCEAO, stand ready to take actions if the monetary expansion starts to fuel high inflation; and (iii) the external conditions will remain challenging, characterized by terms of trade shocks from high oil and food prices, adverse competitiveness, and FDI-driven imports.
Fiscal policy
Our authorities intend to keep domestic spending within the domestic resource envelope, making this a guiding principle for fiscal policy. On the revenue front, they aim at bringing revenue collection to 17¾ percent of GDP and the primary domestic fiscal surplus to about 1 percent of GDP over the three-year period span of the program. They stand ready to make contingency spending cuts, which they have already identified, in case revenue or financing fall short of expectations. Expenditures will be mostly geared at improving social services and supporting higher economic growth by scaling up spending on health, education and vital energy and transport infrastructure. This will be achieved by reallocating domestic expenditures and raising foreign financing.
The envisaged fiscal consolidation, combined with efforts to reduce domestic debt and obtain debt relief under the HIPC process and the MDRI, will help bring public debt to a sustainable level. Concessional financial assistance from donors will be critical to this end and to the objectives of boosting growth and reducing poverty.
Structural reforms
The Togolese authorities have designed an ambitious structural reform agenda, in line with the objectives specified in the I-PRSP. Priority reforms will center on the three broad domains of fiscal governance, financial sector development, and the restructuring of state-owned enterprises and enhancement of the business environment. The ambitious calendar includes the implementation of a large number of measures in 2008 and mostly in 2009–10 while taking into account the difficult capacity constraints facing the country.
The impressive set of measures envisaged in the fiscal governance area encompasses enhancing revenue administration; better monitoring budget execution; strengthening expenditure management; improving public debt and treasury management; tightening internal controls; and advancing budget preparation, monitoring and accounting.
In the financial sector, the authorities will further strengthen the monitoring of banks and pursue the restructuring of the BTCI and the UTB towards turning the former bank over to private management and starting the privatization process of the latter institution. Actions are also envisaged to improve treasury cash management and create more tradable financial instruments through the introduction of T-bill auctions. In consultation with the BCEAO, our authorities will remain vigilant in monitoring money and credit development and mitigating possible risks stemming from rapid credit growth, including through changes in reserve requirements. Over the medium term, they will prepare a financial sector strategy based on the findings of a future FSAP, and strengthen the supervision of microfinance institutions.
As regards public enterprises, our authorities will build on their initial measures to (i) further improve financial controls, pricing and productivity in the cotton sector; (ii) review options for reform of the phosphate sector, including for attracting a strategic investor; (iii) pursue the rehabilitation of generation capacity in the energy sector; and (iv) finalize the review of options for investment and reforms in the areas of roads, the port, and telecommunications. Specific actions taken in these areas will include notably partial ownership of the cotton company by cotton farmers and an audit of the phosphate sector in consultation with the World Bank. All these actions, combined with improved infrastructure and public finance management, including avoiding new arrears to suppliers, will contribute to enhancin6g Togo’s business environment. So will the reforms envisaged by the authorities to improve business registration, secure property rights, and prepare a new investment code.
IV- CONCLUSION
The infrastructure and poverty-related challenges facing Togo are daunting. Our authorities have embarked on an ambitious program of fiscal policy and structural reforms geared at boosting revenues, enhancing the efficiency of social services, rebuilding infrastructure, and improving the functioning of the financial sector. This should help create conditions conducive to sustained private sector-led growth and significant poverty reduction. As Togo’s debt situation remains difficult, external financing is critical in complementing domestic efforts, and the donor community is called on to provide the necessary grants and concessional loans to finance Togo’s medium-term economic program and poverty-reducing efforts. The observed improvements in the country’s relations with its multilateral and bilateral creditors bode well for ensuring adequate financing.
A PRGF arrangement with the Fund is highly needed to allow the country to move as smoothly as possible towards the HIPC decision and completion points and benefit from debt relief under this initiative and the MDRI. Based on their demonstrated good track record under the SMP and completion of the I-PRSP, our Togolese authorities will appreciate Board approval of their request for a PRGF-supported program. Our authorities have consented to the publication of the staff report and the I-PRSP.