This paper discusses key findings of the First Review Under the Poverty Reduction and Growth Facility for Togo. All relevant performance criteria for the first review were met, some by wide margins. Implementation of the structural reform program was satisfactory. Good revenue collection and restrained spending resulted in a large primary surplus in the first half of 2008. A moderate revision to the end-2008 fiscal primary balance target is proposed to reflect the revenue losses and new expenditures resulting from the price shocks and flooding.

Abstract

This paper discusses key findings of the First Review Under the Poverty Reduction and Growth Facility for Togo. All relevant performance criteria for the first review were met, some by wide margins. Implementation of the structural reform program was satisfactory. Good revenue collection and restrained spending resulted in a large primary surplus in the first half of 2008. A moderate revision to the end-2008 fiscal primary balance target is proposed to reflect the revenue losses and new expenditures resulting from the price shocks and flooding.

On behalf of our Togolese authorities, we thank Management for the fruitful discussion held with President Faure Gnassingbé earlier this month during Mr. Portugal’s visit to Togo and for the Fund’s invaluable support to the country, especially in the wake of the severe exogenous shocks that have hit Togo. In particular, our authorities would like to reiterate their appreciation to the Fund for its prompt response following the catastrophic floods last July that have claimed a number of lives, caused a humanitarian crisis and adversely affected the country’s transportation infrastructure axis. Our appreciation also goes to Staff for their dedicated and relentless efforts in providing our authorities with pertinent advice and very useful technical assistance.

Since the approval of the PRGF-supported program last April, our Togolese authorities have made further significant achievements in building governance institutions, enhancing public financial management, consolidating fiscal discipline and putting in place strategies to advance structural reforms, notably in the restructuring of public enterprises and the financial sector. These actions have helped consolidate the deep political and economic reforms undertaken since 2006 and which allowed Togo to exit from a long sociopolitical crisis and renew its relations with the international community, although plain support from donors has yet to materialize.

Our authorities have implemented their program under the PRGF thus far with appreciable success. All quantitative performance criteria at end-June have been met, including those related to the domestic primary fiscal balance, the non accumulation of external arrears, the net domestic financing, and neither contracting nor guaranteeing of non concessional external debt by the central government. This accomplishment has been made in spite of the lack of sufficient grants and concessional loans to meet the country’s daunting infrastructure challenges and begin coping with the recent shocks. On the structural front, my authorities have also succeeded to implement the envisaged reforms: all structural conditionalities due to date has been met, and the implementation of those due at end-October or end-December 2008 is either complete or well advanced. Notable is the creation of the general financial inspection unit (Inspection Générale des Finances) to monitor on a regular basis the use of public funds and ensure that expenditures are executed in an efficient and transparent manner.

The PRGF-supported program has also helped Togo make progress in normalizing its relations with external donors, notably the World Bank, the African Development Bank (AfDB), the Paris Club, the European Union (EU) and China, which resulted in grants, partial debt relief and debt restructuring.

In light of these achievements and their renewed commitment to the program, my Togolese authorities are requesting the completion of the first review under the PRGF arrangement. They are also requesting the modification of performance criteria, including the structural benchmark on the audit of the phosphates sector which is to be realized with a two-month delay due to the World Bank’s request of a new public bid for the selection of the audit firm since only two firms had responded to the first tender.

While our Togolese authorities have endeavored to bring about the good performances reviewed, nevertheless adverse exogenous shocks have not spared Togo. In the last two years, Togo’s economy has been hit by a series of harsh exogenous shocks. First, following a nascent recovery in 2006, the Togolese economy has grown at a moderate pace due to region-wide electricity shortages. Indeed, starting in 2006, a severe energy crisis in the region led neighboring countries-from which Togo imports most of its electricity- to cut electricity exports to Togo resulting in frequent power outages which our authorities attempted to attenuate by importing thermal power plants, only to be confronted by yet another shock involving the surge in world oil prices. This energy shock has added to the structural challenges already dampening Togo’s growth potential. Since then, the country has been stricken by high world food price shock, followed in July 2008, by severe floods which have destroyed roads and bridges and resulted in the division of the country in halves, thereby preventing the circulation of goods from the Port de Lomé in the South to the North of Togo and to the landlocked neighboring countries.

The BoP implications stemming from these shocks have created significant financing gaps for the 2008 and 2009 program. Consequently, our Togolese authorities are also requesting a PRGF augmented access equivalent to 25 percent of Togo’s quotas in order to address the impact of the shocks.

Responses to shocks and other recent macroeconomic developments

To cope with the food price increases, our Togolese authorities have initiated a social dialogue and taken targeted measures to assist the vulnerable segments of the population and support local agriculture notably through: (i) distribution of fertilizers to farmers at the 2007 market prices; (ii) distribution of grain reserves in markets where shortages have caused excessive price increases; and (iii) repayment of public sector salary and pension arrears to reduce the social impact of price surges on public servants. It is also important to note that, in spite of the severity of the price shocks, our authorities have resisted pressures to set price controls, to use export restrictions, and to unilaterally grant tax or custom exemptions without concerting with other WAEMU members. Our authorities’ medium-term policy response consists of: (i) boosting productivity in the agriculture sector through infrastructure investments in rural areas; (ii) improving the storage and distribution capacities; (iii) encouraging competition; and (iv) reducing barriers to trade. Promoting the first two medium-term objectives in particular will require important donor support.

In attempt to cope with the effects of the high oil prices, Our Togolese authorities have consulted with oil product companies, to adjust the prices of gasoline and fuel at the pump upward while keeping constant taxes on oil products to prevent an excessive increase in consumer prices. With the view to mitigate the economic and social impact of both oil and food price surges, the authorities have: (i) granted temporary indemnities to public servants for the last 5 months of 2008 in awaiting a personal income tax reduction; (ii) increased the minimum wage as of August 1st 2008; and (iii) reduced the business tax rate by 7 percentage points, with a maximum rate at 33 percent.

In the case of the disastrous floods of last July, the authorities have provided emergency assistance to the affected populations. They are also repairing the roads and bridges destroyed in view of restoring the transport towards the North of the country, which is vital to its economy and those of neighboring countries. Here again, the endeavor will require the strong financial and technical assistance from donors. On their part, given the urgency of the situation, our Togolese authorities are reallocating budget expenditures from current spending and some amounts initially allocated to the restructuring of public enterprises and banks while limiting the domestic primary budget balance to - 0.6 percent of GDP against an initial projected surplus of 2.2 percent of GDP. Savings will also be achieved from delays in local elections and the relatively slower execution of some investment projects.

Regarding structural reforms, actions are also underway. In the financial management area, the authorities have: (i) put in place a new framework for the monthly monitoring of budget execution, and communicated the April-to-June data according to the new template; (ii) created, within the ministry of finance, the Inspection Générale des Finances; (iii) prepared, in cooperation with Fund staff, a draft project on a new strategy and timeframe for the clearance of domestic arrears. In the financial sector, our authorities have changed the management and control bodies of the bank BTCI in line with the terms of reference prepared in coordination with the regional banking commission. They have also agreed with the BCEAO on a framework for the regular issuance of treasury bills in 2009 following a first issuance in September 2008. As regards reforms of public enterprises, progress is also being made, notably with the audit of the phosphates sector and the review o the financial situation of the electricity company, CEET.

Policies and reforms going forward

Amid the current difficult situation facing Togo, our authorities—including at the highest level—have reiterated their strong commitment to the policies and reforms laid out in their Letter of intent and Memorandum of Economic and Financial Policies of March 2008, which have been strengthened in their letter of intent of September 2008. Those actions will continue to center on the country’s I-PRSP. In the meantime, the country is preparing a full PRSP which should be finalized in early 2009.

Near-term policies

To help the economy weather the difficult near-term outlook, our authorities will endeavor by the end of 2008 to counterbalance the slowing down of economic activity and to safeguard the basic social services through support to civil servants, farmers and the most vulnerable segments of the population. They will however strive to remain within the program quantitative targets regarding the fiscal, debt, financing and inflation objectives.

Medium-term agenda

Over the medium-term (2009–10), our authorities intend to execute in 2009 a budget aiming at reestablishing domestic primary budget balance notably through the pursuit of the tax administration reforms and fiscal measures such as the reduction of fiscal exemptions, the increase in excise taxes on alcohol and tobacco, and on-site inspections of public enterprises by the fiscal and customs administrations. At the same time, they will reduce untargeted non wage spending with the view to make space for increasing health and education outlays, rehabilitate infrastructures, and restructuring banks and public enterprises.

In order to clear the domestic debt arrears, our authorities will issue negotiable notes to the government’s creditors. Cash flow management will be strengthened through regular issuing of treasury bills and enhancing of the treasury services in line with the WAEMU requirements. Public financial management will also be reinforced in the next few months with a new Budget Organic Law and a transparency code.

Regarding the banking sector, efforts will be geared at strengthening the financial soundness of public banks and attracting strategic investors with the view to ensuring sustainability of the financial sector. These efforts are supported with the technical assistance of the Fund and the World Bank.

In order to boost economic growth, the authorities understand the critical importance of revitalizing the hard-hit phosphates sector. They are seeking a strategic partner for the concessional financing of new equipments. The audit of the sector, which is financed by the World Bank, will allow to elaborate a long-term reform strategy. More broadly, the revival of stronger growth will be pursued through the simplification of regulations and procedures, and the improvement of the business environment.

Conclusion

The challenges facing Togo remain daunting. Our Togolese authorities remain committed to implementing their ambitious program of fiscal and structural reforms geared at boosting revenues, enhancing the efficiency of social services, rebuilding infrastructure, and improving the functioning of the financial sector. Support from international community is critical to complementing their efforts, and Our Togolese authorities would appreciate Board approval of their requests for the completion of the first review under the PRGF arrangement, modification of performance criteria and augmented access to deal with the adverse impact of the exogenous shocks.

Togo: First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Modification of Performance Criteria and Augmentation of Access: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Togo
Author: International Monetary Fund