Benin
2008 Article IV Consultation and Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Augmentation of Access — Staff Report; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Benin

This 2008 Article IV Consultation highlights that in the last two years, Benin has experienced a pickup in growth and low inflation supported by prudent fiscal policies and external debt relief. However, progress in addressing core economic vulnerabilities has fallen short of expectations, and the external environment has become less favorable with a strengthening CFA franc adding to competitiveness concerns and surging food and fuel prices accentuating a deterioration in the terms of trade. The surplus on the narrowly defined primary budget is projected to decline to 0.5 percent of GDP in 2008.

Abstract

This 2008 Article IV Consultation highlights that in the last two years, Benin has experienced a pickup in growth and low inflation supported by prudent fiscal policies and external debt relief. However, progress in addressing core economic vulnerabilities has fallen short of expectations, and the external environment has become less favorable with a strengthening CFA franc adding to competitiveness concerns and surging food and fuel prices accentuating a deterioration in the terms of trade. The surplus on the narrowly defined primary budget is projected to decline to 0.5 percent of GDP in 2008.

I. Background

1. Benin’s macroeconomic performance continues to improve, but progress in addressing core economic vulnerabilities has been slow. A much-publicized acceleration of the structural reform agenda has not materialized, and competitiveness has been undermined by a real appreciation of the effective exchange rate, deterioration in the terms of trade, and some weakening in the business environment. More recently, Benin has had to cope in addition with the surge in world food prices. In April’s local elections, President Boni Yayi had mixed success in strengthening his mandate to implement economic reforms.

II. Recent Economic Developments and Program Performance

2. Economic performance has been broadly satisfactory since the last Article IV report was issued in 2006, with growth continuing to recover from its 2001–05 slowdown (Figures 1 and 2). Preliminary data put real GDP growth at 4.6 percent in 2007, up from an annual average of 3.4 percent in 2005-06, underpinned by brisk activity in the port, transport and commerce sectors on the strength of enhanced Cotonou port competitiveness; and by a favorable food harvest. These factors countered the adverse impact of a regional energy crisis and lower-than-programmed cotton output.

Figure 1.
Figure 1.

Benin: Overview–Recent Economic Developments, 2003–08

Citation: IMF Staff Country Reports 2008, 230; 10.5089/9781451803556.002.A001

Source: Beninese authorities; and IMF staff estimates.
Figure 2.
Figure 2.

Benin: Constraints to Growth, 2003–08

Citation: IMF Staff Country Reports 2008, 230; 10.5089/9781451803556.002.A001

Source: Beninese authorities; and IMF staff estimates.

3. World food price inflation is sparking an uptick in consumer prices (Figure 4). As a result of good weather and comfortable local food availability in 2007, average inflation decelerated to 1.3 percent (3.8 in 2006), below the West African Economic and Monetary Union (WAEMU) threshold of 3 percent; this helped to moderate appreciation of the real effective exchange rate (REER). However, a spike in world food prices before the New Year’s celebrations prompted the authorities to impose price controls (Box 1). These did not prevent food prices surging by 8 percent in the first quarter of 2008.

Figure 4.
Figure 4.

Benin: Headline, Food, and Nonfood Inflation, 2003M1–2008M3

Citation: IMF Staff Country Reports 2008, 230; 10.5089/9781451803556.002.A001

Source: Beninese authorities; and IMF staff estimates.

4. The external current account deficit widened because of terms of trade deterioration and real currency appreciation. However, thanks to large inflows, mostly of official capital grants, the balance of payments recorded a sizable surplus, keeping official reserves at about 15 months of imports.

5. Fiscal performance exceeded expectations in several respects although public investment lagged. At 3 percent of GDP, the surplus on the narrowly defined primary fiscal balance was 2 percentage points above target. Key fiscal developments were:

Benin: Coping with Rising Food Prices

On December 8, 2007, the Government of Benin introduced fiscal measures to address rising food prices (see paragraph 19 below). The measures were initially intended to last through mid-March 2008; they have since been extended to July and are likely to remain in place through year-end. They consist of

  • Elimination of customs tariffs for pasta, tomato paste, and sweetened condensed milk; and

  • Reduction of customs fees—using below-market reference prices for taxation purposes—for refined sugar, rice, wheat and wheat powder, corn and maize, and soybeans.

Under the arrangement, retail prices are derived by downwardly adjusting cost-based prices to reflect granted tax relief.

  • Better revenue mobilization, with tax revenue nearly reaching the WAEMU target of 17 percent of GDP for the first time and the authorities collecting 2.3 percent of GDP in one-off nontax receipts from cellular phone licenses.

  • Better control of spending on goods and services, including the wage bill; overruns on payments to state-owned energy companies to contain increases in electricity tariffs and petroleum product prices; and underspending on domestically funded capital projects (68 percent) due to limited absorptive capacity.

  • A hefty net increase in government deposits with the banking system (5.1 percent of GDP), reflecting limited use of investment funds raised in the WAEMU financial market1 and difficulties in translating fiscal space into more ambitious pro-growth spending.

  • Tightened governance in the revenue agencies and determined implementation of IMF Fiscal Affairs Department technical assistance (TA) recommendations on revenue management, mainly directed to tax and customs administration—especially at the large-taxpayer unit.

  • Concerted efforts to begin addressing problems in infrastructure and project management, including accelerated procurement and compression of time for contract preparation and award.

Figure 3.
Figure 3.

Benin: Fiscal and Monetary Developments, 2003–08

Citation: IMF Staff Country Reports 2008, 230; 10.5089/9781451803556.002.A001

Source: Beninese authorities; and IMF staff estimates.

6. Broad money rose by 18 percent, substantially above nominal GDP growth, driven mostly by donor-supported increases in net foreign assets. Consistent with the improved budgetary situation and related increases in Treasury deposits in the banking system, net bank credit to the government again contracted, permitting a 26 percent expansion of credit to the private sector, mostly for commerce, transportation, and telecommunications activities. The credit expansion prompted the authorities to keep the reserve ratio at 15 percent (the highest in the WAEMU) to insure against inflationary and capital flight repercussions.

7. Performance on the program was generally satisfactory (MEFP, Tables 1 and 2). All quantitative benchmarks for end-September and performance criteria for end-December 2007 were observed by large margins. However, only two of four structural benchmarks for the second half of 2007 were implemented, one with a delay. The single taxpayer identification number system was introduced and a study of the efficiency of customs completed before year-end, but audit of PFM information systems and a draft strategy for reforming the civil service pension fund were not completed by year-end. The authorities are taking steps to complete these measures before end-2008.

III. Policy Discussions

8. The Benin authorities have maintained macroeconomic stability but face major policy challenges in raising growth to address poverty. While revenue performance has improved markedly in these post-HIPC/MDRI years, capacity problems have limited the translation of higher fiscal space into more development spending; and a much-publicized acceleration of the structural reform agenda has not materialized. At the same time, a steady nominal effective appreciation of the euro-pegged CFA franc, deterioration in key areas of the business environment, and reemergence of heavy wage demands are raising competitiveness concerns.

9. With this in mind, discussions concentrated on three topics:

  • Medium-term macroeconomic prospects and objectives;

  • Fiscal policy and PFM reforms to support growth and poverty reduction while preserving external stability; and

  • Structural reforms, including second-generation initiatives, to nurture competitiveness and foster private sector development.

Staff also assessed conditions for completing the fourth PRGF review.

A. Medium-Term Macroeconomic Objectives

10. Benin’s medium-term economic prospects seem generally favorable, although growth is likely to continue to fall short of what is required to rapidly reduce poverty. The authorities concurred that growth will remain heavily dependent on performance in the port and cotton sectors, with a pickup in construction and public works supporting domestic demand as the government rebuilds the economic and social infrastructure. Cotton production and export growth are projected to remain below potential in view of slow progress in sector reform (see below); and imports of oil and capital goods would grow only moderately in real terms due to capacity limitations. Consistent with likely developments in world oil and staple food prices, the terms of trade are projected to deteriorate moderately. Absent a marked acceleration of structural reforms, the main elements of the medium-term macroeconomic framework are:

  • Annual average real GDP growth of 5½ percent through 2011; with average inflation at the top of the WAEMU ceiling of 3 percent.

  • A generally sound external position—a projected current account deficit of 6–7 percent of GDP seems sustainable given expected financing—and manageable debt service obligations (Box 3).

  • A stability-oriented, narrowly defined annual primary fiscal surplus of 1 percent of GDP, which will accommodate a gradual increase in pro-growth spending.

2006 Article IV Recommendations

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Benin : Debt Status and Prospects

Debt relief from the HIPC Initiative in 2003 and MDRI in 2006 has greatly reduced Benin’s debt. The external public debt-to-GDP ratio fell to 12 percent in 2006 from about 59 percent in 2001. Domestic public debt is about 3.6 percent of GDP.

Benin’s risk of debt distress is moderate. All indicators in the 2007 DSA baseline scenario are far below policy-dependent thresholds. However, the NPV of debt-to-export threshold is breached in scenarios that incorporate lower growth, more volatile cotton production, and less generous financing terms. Fiscal sustainability analysis confirms these results and highlights concerns about the cost of heavy domestic borrowing at high interest rates and shorter maturities. The authorities could reduce risks and safeguard debt sustainability through determined efforts to continue structural reforms (including measures to spur private sector participation in development); address absorption constraints; and manage debt prudently (Country Report No. 08/19).

11. Within the medium-term framework the authorities see growth rising to 5.3 percent in 2008 despite the heightened risks of a difficult global environment. Among factors underpinning the modest growth acceleration are

  • Robust port-related service activities, based on expanded merchandise handling capacity as new cranes go into service; modern management practices facilitated by the recent recruitment of an external port expert and independent auditor; and streamlined operations as the port’s one-stop window is activated.

  • Favorable cotton prospects, in view of timely importation and distribution of fertilizers without government interference in the awarding of contracts.

  • Increased spending on infrastructure rehabilitation and activity in construction and public works—although this is being frustrated by supply bottlenecks, such as the limited availability of cement and other construction materials and a scarcity of skilled workers.

Continuing upward pressures on oil and food prices are expected to ratchet inflation up to the upper bound of the WAEMU target (possibly beyond in case of sustained world oil and food price increases). The supply of domestic foodstuffs is generally adequate.

Text Table 1.

Benin: Selected Macroeconomic Indicators, 2008–11

(Annual change, unless otherwise indicated)

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

Percent of GDP excluding grants.

Payment order basis.

For 2007–08, 2008–09, and 2009–10 seasons.

12. The authorities expressed concern that developments in the global economy were adding risks to Benin’s outlook, at least in the short term. They especially feared a possible further deterioration in the terms of trade and the impact on real domestic incomes, prices, and competitiveness—a concern amplified by continued strengthening of the CAF franc. Other risks identified were unsettled energy prospects, weather-related shocks to agriculture (including cotton production), uncertainties about relations with main trading partners, and limited absorptive and institutional capacity. They reiterated their commitment to growth-supporting reforms to insure against the risks. On the positive side, it was agreed that demand from Nigeria’s oil-based economy, which is expected to sustain activity in the port and transportation sectors as well as in agriculture and industry, would counterbalance some of the risks.

B. Medium-Term Fiscal Strategy

13. The mission discussed the outline of a pro-growth fiscal policy for the post-MDRI era. Envisaged policy actions aim at further expanding government domestic resources by raising the revenue ratio to 19.4 percent of GDP by 2011, and implementing more ambitious pro-growth and pro-poor spending programs without jeopardizing recent gains in economic stabilization.2 In pursuit of the latter objective, the authorities will continue to meet the WAEMU convergence criterion on the narrowly defined primary fiscal balance—containing the overall fiscal balance (excluding grants) to around 4 ½ percent of GDP and keeping demand-induced inflationary pressures in check. This would help limit total debt (domestic and external) to below 20 percent of GDP by 2011; 80 percent of identified government financing needs (averaging an estimated 2 percent of GDP) would be filled with grants and the rest with concessional loans, consistent with recommendations from the 2007 DSA.

Text Table 2.

WAEMU: Members Achievement of Convergence Criteria, 20071

(First-order Criteria)

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Sources: WAEMU, BCEAO, and IMF staff estimates.

Estimates.

14. Revenue-enhancing measures will be directed to making tax and customs administration more efficient and rationalizing the tax system. Authorities noted that their implementation of FAD recommendations in revenue administration had yielded good results. The next areas of attention in revenue administration would be to

  • Effectively implement the new single taxpayer identification number system—which would enhance taxpayer data exchanges between the General Tax and Customs Directorates;

  • Further reinforce customs IT capacity in regional offices; and

  • Operate a one-stop window at the Port of Cotonou, which includes putting in place a consolidated electronic billing system for port services, with financial and technical support from the US-funded MCA-Benin.

15. The authorities intend, with FAD technical assistance, to review Benin’s domestic tax structure.3 In particular, they are seeking to address competitiveness difficulties arising from disparities in WAEMU domestic tax rates—e.g., Benin’s corporate income tax rate is 35 percent, Senegal’s is 25 percent—and substantially enhance domestic tax performance as economic partnership agreements (EPA) are negotiated with Europe at the regional level4 and preparations continue on expanding regional integration beyond the WAEMU. The envisaged overhaul of the tax system will be consistent with Benin’s fiscal harmonization obligations under the WAEMU.

16. The authorities concurred with staff that spending must continue to be prudent until PFM and project evaluation are improved. Total spending is projected to rise to 23.2 percent of GDP by 2011, from 22 percent in 2007, consistent with the medium-term revenue and fiscal balance objectives under the PRGF-supported program. However, while committed to keeping Benin’s debt sustainable, the authorities considered a less conservative spending target to accelerate their infrastructure rehabilitation program while external budget support continues and borrowing is readily available in the regional financial market. They agreed, however, that until Benin’s limited absorptive capacity is addressed, a cautious approach to spending growth is preferable in the short term, with reduced net credit to the government helping to improve borrowing prospects for the private sector.

17. Better management of public investment is key to successfully implementing more ambitious pro-growth expenditure programs. The rate of execution of domestically funded investment outlays (DFIOs) inched up to 68 percent in 2007 (from 57 percent in 2006) as project preparation and procurement activities were exceptionally accelerated late in the year under President Yayi’s direct supervision. The authorities attributed lackluster performance in this area to scarcity of working materials and domestic expertise, poor coordination of entities managing public investment, and to weak financial management systems. They are therefore beefing up operating resources at the disposal of spending ministries and units and intend bi-monthly cabinet consideration of reports on the execution of DFIOs, which would be posted on the Web site of the Office of the President of the Republic (MEFP, paragraph 28). Staff noted that public-private sector partnerships in infrastructure rehabilitation and building are virtually nonexistent in Benin. They encouraged the authorities to request World Bank TA on this and on drafting a comprehensive strategy to expand absorptive capacity.

18. The fiscal program for 2008 targets a moderate increase in spending to support growth and poverty reduction. Without the exceptional nontax payments received from cellular phone companies in 2007, and taking account of the impact of the price-moderating fiscal measures, revenue collection is projected to decline to 18.4 percent of GDP (20.6 percent in 2007). With total expenditure (excluding interest payments and foreign-financed investment) rising to 17.9 percent of GDP, the primary fiscal surplus would decline to ½ percent of GDP (from 3 percent in 2007); and the overall fiscal deficit (cash basis, excluding grants) would be contained at 4.4 percent of GDP. Beyond contributions from the European Union, the World Bank and the African Development Bank, the authorities have requested additional resources from the Fund (0.2 percent of GDP) to cover identified financing needs (Tables 1, 2 and 4, and paragraph 29). They are also discussing additional financing with other multilateral and bilateral donors.

Table 1.

Benin: Schedule of Disbursements under the PRGF Arrangement, 2005–09 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 PRGF arrangement, including the performance clause on the exchange and trade system.

Table 2.

Benin: Selected Economic and Financial Indicators, 2006–13

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

Cotton production for T-1/T season. Production of cotton seed in crop year T-1/T affects agricultural production in year T-1, while 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.

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

Table 4.

Benin: Consolidated Central Government Operations, 2006-13

(Percent of GDP)

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

19. Rising food and oil prices pose some risk to fiscal targets and are causing a deterioration of the external position. The limited tax cuts and subsidies entail a revenue loss estimated at 1 percent of GDP and include CFAF 11 billion (0.4 percent of GDP) in transfers to public utilities to contain anticipated energy cost increases. If the measures are expanded or are not adequately implemented, the revenue loss could be much higher than currently anticipated, which would cause the program’s fiscal target to be missed. In the external sector, the current account deficit (excluding grants) is projected to widen to 7.5 percent of GDP, from 6.9 percent in 2007 (MEFP, paragraph 28). The authorities have stressed that beyond the initial safeguard measures, sustained price increases would require introduction of well-targeted social safety nets, with donor support if needed; they concurred that to avoid jeopardizing domestic supply of affected products, enhanced price flexibility would be needed in the medium to long term (MEFP, paragraph 13).

20. In 2008 revenue mobilization efforts will be geared at reinforcing tax and customs administration, and nonpriority expenditures will be rigorously monitored to ensure that fiscal targets are met. Targeted increases in tax receipts will be driven by governance improvements in the revenue agencies and by more effective tracking of taxpayers as the new identification number becomes operational. Efforts will be stepped up to control smuggling and better track exemptions. Domestically financed investment, focused on priority sectors and taking into account absorptive capacity constraints, is projected at CFAF 100.4 billion (3.5 percent of GDP, compared with 3.2 percent in 2007).

21. The authorities remain concerned about pressures on public sector wages. Under pressure from civil service trade unions, the government agreed a 25 percent increase in teacher base salaries, effective July 2008. As a result, the wage bill is projected to rise to 5.7 percent of GDP (from 5.4 percent in 2007). While personnel outlays would remain within the WAEMU target of 35 percent of tax revenue in 2008, and are projected to decline to an annual average of 5.6 percent of GDP during 2009-2011, the authorities reaffirmed their preference to keep for now a wage ceiling as program conditionality to manage wage demands from public sector unions. Staff stressed that improvements in payroll systems would be more effective, and encouraged the authorities to eliminate the ceiling as progress is made on wage management. It further noted in this context that finalizing the strategy for reforming the civil service pension fund and ensuring an early implementation of related recommendations will contribute to preserving medium-term budget viability; and urged the authorities to undertake this reform without delay.

C. Improving Competitiveness and Promoting the Private Sector

22. Staff argued that, as a small coastal economy with a fixed exchange rate, Benin must be especially ambitious in implementing structural reforms to preserve competitiveness. In this regard, staff analysis points to a poor competitiveness profile for the country5:

  • As of 2007 Benin’s REER had appreciated 37 percent since the 1994 devaluation of the CFA franc, more than any other WAEMU member. During the same period, relative productivity gains have been modest—per capita output rose 20 percent, not exceptional relative to the WAEMU countries and other trading partners.

  • Survey measures relevant to competitiveness rank Benin in the bottom 20 percent worldwide (although it is one of the most competitive countries in the WAEMU). It ranked 151 out of 178 in the World Bank’s 2008 Doing Business Indicators and 108 out of 131 in the World Economic Forum’s 2008 Global Competitiveness Index. Areas in need of urgent reform are contract enforcement, paying taxes, inadequacies in education, and infrastructure.

Figure 5.
Figure 5.

Benin: Competitiveness and Real Effective Exchange Rates

Citation: IMF Staff Country Reports 2008, 230; 10.5089/9781451803556.002.A001

23. However, a variety of macroeconomic analyses of the balance of payments and the REER suggest that Benin’s current account balance and exchange rate are on balance broadly in line with fundamentals:

  • The current account deficit is comfortably financed by inflows through the capital and financial accounts, in particular project grants and loans, private capital, and inflows to commercial banks, making Benin a net contributor to BCEAO reserves.

  • Econometric estimates of the fundamental effective exchange rate (FEER)6 suggest the REER is in line with fundamentals.

Figure 6.
Figure 6.

Benin: Estimates of the FEER

(Average of 2000 = 100)

Citation: IMF Staff Country Reports 2008, 230; 10.5089/9781451803556.002.A001

  • The macroeconomic balance approach suggests Benin’s current account deficit is in line with the norm for a low income African country with substantial aid inflows.

  • However, longer-run external considerations, based on sustainable levels of foreign direct investment as well as portfolio and debt flows, suggest that the current account deficit might need to decline to 3-5 percent of GDP, from its underlying level of 6 percent of GDP, which would require a real depreciation of 5-12 percent7.

In conclusion, the current account and real exchange rate appear reasonably sustainable. However, other indicators suggest that Benin needs to do more to boost competitiveness. As the nominal exchange rate is fixed, this will require greater efforts to address structural and institutional shortcomings.

The structural reform agenda

24. Cognizant of Benin’s tenuous competitiveness, the authorities renewed their commitment to structural reforms to improve the business environment and reinvigorate growth. Staff urged them to address continuing delays especially in the cotton, port, and public utilities sectors.

  • Cotton. After last year’s failed attempt to privatize state-owned ginning factories, the government has undertaken a review of economic and institutional constraints in the cotton sector with a view to drafting a new sector strategy. Beyond issues relating to state disengagement from commercial activities, the strategy is to (i) revisit the government’s role in determining producer prices and in the handling of contracts for the import and distribution of fertilizers and other inputs, and (ii) redefine accordingly the institutional framework governing relations between cotton-sector stakeholders. To enhance ownership, the strategy is being prepared in consultation with all key stakeholders; it is expected to be completed by year-end (a structural benchmark). The mission noted the lack of World Bank technical assistance in drafting the new framework and urged the authorities to secure it soon.

  • Port of Cotonou. The authorities reported the recent appointment of an independent auditor for port operations and progress in putting in place a near-concessioning arrangement involving a foreign partner of international repute in port management. The MCA assured staff that a resident port management expert would be posted shortly (end-June 2008 structural benchmark).

  • Public utilities reforms are suffering significant delays. Benin Telecoms is now slated to be brought to the point of sale in the second half of 2009; the initial deadline was January 2009. Also, the authorities plan to develop a strategy for state disengagement from the electricity parastatal (SBEE) only after the company’s restructuring is completed in December 2009. Consequently, bids for privatization cannot be issued until well after the January 2009 deadline. Staff underscored the competitiveness gains from public utilities reforms in terms of improved service quality and reliability, but also regarding their potential for attracting investments in other major economic sectors. It urged the authorities to ensure that these are accelerated with World Bank support.

25. Other measures planned to enhance competitiveness are initiation of a road-rehabilitation program, preparation of a strategy to diversify the economy, and reform of the land tenure and judicial systems. A new World Bank-supported economic diversification program is seeking to boost activity in export agriculture (based on traditional crops—bananas, palm oil, and pineapple); transportation and telecommunications; and tourism. The program also aims to raise local production and reduce imports of staple foodstuffs, such as manioc and livestock. Steady progress in preparing feasibility studies and sector strategies to address inefficiencies in the land tenure and judicial systems and to improve credit access for small- and medium-sized companies is being made.

26. The authorities are moving to improve commercial bank compliance with prudential indicators. Benin’s banking system features high concentration of credit, little portfolio diversification, and considerable maturity mismatch between demand for and supply of long-term financial resources. Moreover, four institutions bore 80 percent of non-performing loans accounting for 9 percent of total bank loans in 2007. BCEAO, the regional central bank, is phasing in an increase of commercial bank minimum capital from CFAF 1 billion to CFAF 10 billion. The staff noted that compliance with prudential requirements had deteriorated somewhat and urged the authorities to monitor the situation closely.

Text Table 3.

Benin: Banking and Financial Prudential Indicators: Number of Banks in Compliance

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Sources: BCEAO.

27. Benin’s local BCEAO management expressed firm support for enhanced financial sector surveillance at the regional level, as advised by a recent WAEMU FSAP mission. Finance ministry and national BCEAO officials are endeavoring to secure early implementation of recent regional agreements on transferring from finance ministries to the WAEMU Banking Commission the power to liquidate or place credit institutions under temporary administration—which should make banking supervision more effective; and making BCEAO the regulator for large microfinance institutions (MFIs). Parliament could ratify these initiatives by year-end.

IV. Fourth PRGF Review, Capacity to Repay the IMF, and Program Monitoring

28. Conditions for completing the fourth PRGF review have generally been met. In the last two years the authorities have achieved measurable improvements in the public finances and presided over a rebound in growth despite a difficult international context and vocal social demands—though economic activity has been less than the program expected. Fiscal performance through March 2008 has been broadly satisfactory, and budgetary prospects for the remainder of 2008 are consistent with understandings the mission reached with the authorities on quantitative performance criteria for end-June and end-December 2008, in line with the 2008 budget (MEFP, Tables 1 and 2; Staff Report, Tables 2, 3, and 4).8 On the structural front, the authorities are taking steps to ensure finalization by year-end of two benchmarks that were not observed (completion of an audit of public expenditure management IT systems and of a reform strategy for the civil service pension fund), along with preparation of a strategy to improve PEM—a missed end-March 2008 structural benchmark. The authorities attributed delays to difficulties in mobilizing needed donor support, and stressed that a recent EU decision to provide technical and financial assistance would facilitate progress going forward (MEFP, paragraph 27).

Table 3.

Benin: Consolidated Central Government Operations, 2006–13

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

Payment orders curried over to the following fiscal year.

For 2008, adequate financing has been identified from bilateral and multilateral partners.

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

29. Benin’s capacity to repay the Fund is sound and staff supports the authorities’ request for an augmentation of access under the PRGF. The proposed augmentation of access of SDR 9.29 million (15 percent of quota) would increase the total access under the program to 25 percent of quota. It takes into account the country’s current indebtedness to the Fund and its excellent debt servicing record (Table 7). During the remainder of the program period (2008-09), the annual average debt service to the Fund would be SDR 0.33 million, or 0.06 percent of export of goods and services and 0.04 percent of government revenue. The request is justified on the basis of a weakening external current account, with the import bill projected to increase by CFAF 65.2 billion in 2008 (2.3 percent of 2008 GDP) notably as a result of the shock from rising oil and energy prices. The augmented resources would be made available in one tranche (see Table 1) upon completion of this review.

Table 7.

Benin: Indicators of Capacity to Repay the Fund, 2007-17 1/

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Sources: IMF staff estimates and projections.

Assumes a PRGF augmentation of 15 percent of quota (SDR 9.285 million).

Total debt service includes IMF repurchases and repayments.

30. The program will be monitored quarterly, consistent with agreed quantitative and structural performance criteria and benchmarks for specified test dates (MEFP, Tables 1 and 2). On this basis, the fifth PRGF review is to be completed no later than December 2008.

V. PRSP, Outreach, and Other Issues

31. The authorities have articulated ambitious growth objectives in the updated (2007-09) Growth Strategy for Poverty Reduction Paper (GSPRP), which they issued in June 2007. The GSPRP targets an annual real GDP growth of 7–8 percent in the medium term. Like the PRGF-supported program, the GSPRP highlights efforts to enhance economic stability, promote private sector development, and accelerate economic and export diversification. It assumes improved absorptive capacity and is premised on more external financial assistance to facilitate achievement of the MDGs, and aims to foster regional integration. The authorities concurred that, in addition to increased aid, more rigorous structural and sectoral reforms would be needed to reach the ambitious GSPR growth targets. They also agreed that the GSPR’s growth objectives are unlikely to be attained without a substantial improvement in PFM for a better use of fiscal space and acceleration of reforms to improve competitiveness.

32. The first full Annual Progress Report (APR) on implementation of the GSPRP is due out in the second half of 2008. In January 2008 the authorities completed an APR on implementation of the poverty reduction strategy in 2006 and the first quarter of 2007 (the APR and related JSAN are attached). They are finalizing a new APR that assesses progress in implementing the GSPR over the 12-month period through June 2008.

33. Progress toward the MDGs has been slow, and poverty is disappointingly high. In 2006 37 percent of the population (39 percent in rural areas) lived below the national poverty line of CFAF 82,224, up from 28 percent in 2002. On the other hand, access to basic health and education services has improved.

34. Benin is one of 10 countries for which increased international support is being planned as part of a United Nations push to facilitate progress toward the MDGs. Working with UNDP counterparts, staff discussed modalities for implementing the initiative in Benin, including a medium-term budgetary framework that assumes a doubling of budget support to the equivalent of US$85 per person by 2010, and a consequent scaling-up of pro-growth and pro-poor spending. Under the initiative, increased resources would be used to tackle capacity constraints that could hamper effective management of scaled-up budget support. Staff is gauging the macroeconomic implications of anticipated higher external assistance; the assessment is to be completed later in 2008.

35. The quality and availability of statistical data for program monitoring are adequate and improving. The coverage of fiscal data is currently limited to the central government; FAD TA through Afritac-West is helping improve standardized reporting of government financial operations.

36. The mission met with representatives of trade unions, NGOs, and donors to discuss Fund involvement in efforts to boost economic growth and reduce poverty in Benin. Members of civil society and the trade unions underscored the need for enhanced dialogue with government on policy issues; they considered the participatory PRSP process to be a step in the right direction. Donors were concerned about the slow progress in implementing structural reforms.

VI. Staff Appraisal

37. After several years of declining growth, Benin is experiencing a modest economic revival. The challenge will be to build on the progress and raise growth to a rate more consistent with rapid poverty reduction. This will require a more flexible and competitive economy and infrastructure investment. In the short term, Benin will need to weather the strains, including on the balance of payments, of rapid world food and fuel price inflation.

38. Preserving macroeconomic stability is a primary medium-term government objective. The authorities are appropriately consolidating recent gains in revenue mobilization while keeping spending at levels compatible with fiscal viability. They are making determined efforts to make the revenue agencies more efficient, and are scrutinizing spending—especially personnel outlays—to ensure that pro-growth and pro-poor outlays are protected.

39. The authorities have understandably reacted to the food and fuel price shocks which are having a significant impact on vulnerable groups. However, the tax cuts and subsidy measures are likely to be an inefficient and costly way to limit the impact on the poor and should be replaced by more targeted support measures. Staff supports the authorities’ plans to move in that direction.

40. The authorities also intend to consolidate recent gains in debt sustainability and to begin addressing Benin’s severe absorptive capacity constraints. The MDRI has significantly lowered the debt burden and made space for substantial increases in pro-growth and pro-poor spending, including through additional borrowing. New financing should be obtained on terms that do not jeopardize debt sustainability and planned infrastructure projects routinely be subjected to cost-benefit analysis. Staff encourages the authorities to seek donor support to fill domestic capacity gaps in project design, implementation, and monitoring. It urges timely completion of both the audit of PEM information systems and the reform strategy for improving PEM; and calls for expeditious implementation of recommendations from the latter.

41. Slow progress in reforming the parastatals and cotton sectors is disappointing. Accelerated restructuring of the telecommunications and electricity companies would enable them, along with the port of Cotonou, to enhance competitiveness. In the cotton sector the government’s recent decision not to interfere with the awarding of contracts for importation and distribution of fertilizers and other inputs is commendable. It needs to be complemented by long-awaited substantive reforms, especially state disengagement from ginning activities, once the new sector reform strategy is completed in December.

42. Reforms to strengthen the judicial and land tenure systems and facilitate access to credit for more small- and medium-sized enterprises are needed. They would support private sector development and allow for diversification of the production and export base, making the economy more resilient to external shocks. There has been continuing progress in preparing feasibility studies and strategies; what is now needed is expeditious implementation of these second-generation and other structural reforms in the cotton and public utilities sectors. The more so because while the real exchange rate appears to be broadly in line with fundamentals, broadly defined competitiveness is far from adequate.

43. Staff recommends completion of the fourth review of the PRGF arrangement. Program performance is broadly on track, and government is working to strengthen revenue mobilization and consolidate spending discipline. However, if the structural reform agenda continues to lag, the lack of progress will compromise the country’s growth and poverty reduction prospects. Although implementation remains disappointing to date, the administration has reiterated its readiness to rekindle all areas of the structural reform program. In light of the above considerations, the staff recommends Board approval of the authorities’ request for completion of the review and augmentation of the access under the PRGF arrangement. The authorities are encouraged to expedite discussions with donors to secure additional financing to ease the adjustment to high oil and food prices.

44. Failure of the authorities to rally domestic support for structural reforms is a key risk to the program along with external factors. High world oil and food prices and the related deterioration in the terms of trade and persistent real currency appreciation are immediate challenges. The authorities concur that greater resilience to shocks can only be built through deepening and expediting the reform agenda.

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

Table 5.

Benin: Central Government Operations, Quarterly , 2007-09

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

Total expenditure minus interest obligations.

Total revenue minus primary expenditure.