Abstract
This Selected Issues Paper examines the main channels of transmission of the global financial crisis on Togo’s economy. This paper assesses its impact, focusing on 2009 and considering country-specific factors that may aggravate, mitigate, or offset its effects. The decrease in global demand has already brought down the prices of its main exports, phosphate and cotton, which already had problems. The increase in unemployment in Europe and the United States may also affect Togo through lower remittances, which have been a significant source of income.
I. Togo: Expected Impact of the Global Recession1
Summary
1. The current global recession is expected to have a significant impact on low-income countries (LICs), though with a lag relative to the impact in more advanced economies. The direct financial channel is as yet relatively limited for most LICs and varies between countries depending on their degree of integration with international finance, but the direct impact of declining global demand for exports and falling commodity prices is already being felt, however, and will likely persist or even deepen. Oil and food importers could benefit from lower international prices, but many commodity exporters will be seriously affected, especially if their budget is financed in large proportion by taxes on those exports. The ultimate impact may be serious as declining real activity in the rest of the world feeds through the LICs, which are already socially, politically, and economically very vulnerable and have little scope to put in place offsetting measures compared to more developed countries.
2. In the case of Togo, the impact of the global crisis, though evident, is expected to be moderate in 2009, given its low international financial integration and its already depressed exports. This paper examines the main channels of transmission of the global financial crisis on Togo’s economy and assesses its impact, focusing on 2009 and considering country-specific factors that may aggravate, mitigate or offset its effects. The decrease in global demand has already brought decreases in the prices of its main exports, phosphate and cotton, which already had problems. The increase in unemployment in Europe and the U.S. may also affect Togo through lower remittances, which have been a significant source of income (estimated at about 10 percent of GDP). Nonetheless, for 2009 increased public investment and a rebound in agricultural production may offset the impact of the crisis on trade and remittances.
3. The main risk for Togo—which is just emerging from a protracted sociopolitical crisis and long-term economic mismanagement—is that the global crisis may postpone its much-needed economic recovery and poverty reduction. After three years of major reforms the global recession may jeopardize economic revival. Given Togo’s heavy reliance both on commodity exports and on official and private inflows (e.g., remittances), significant reductions in such flows could have economic and social consequences, putting at risk its still fragile political and social stability. Close monitoring and coordination with regional and donor partners will be critical at this stage so that the reforms bear fruit despite the problems in the global economy.
A. Impact of Previous Crises on WAEMU and Togo
4. The economies of the West African Economic and Monetary Union (WAEMU) have been affected by global conditions in the past. Growth rates in the region show a significant correlation with world growth rates (Figure I.1). Rates of real per capita GDP growth in the WAEMU significantly declined in the early 1980s and 1990s during periods of global slowdown. Furthermore, the impact of earlier crises was usually more protracted and severe than in advanced economies, perhaps because of national economic and political factors in the region. Moreover, the growth correlation between WAEMU and the U.S. suggests that response to global economic conditions occurs with a lag of one year. However, the lag may have become shorter recently as the WAEMU has become more integrated into the world economy.
World Economy vs. WAEMU: Per Capita GDP Growth
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
World Economy vs. WAEMU: Per Capita GDP Growth
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
World Economy vs. WAEMU: Per Capita GDP Growth
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
5. Togo’s economic growth seems in general to track world growth not only with a lagged effect but also with higher volatility (Figure I.2). However, this can be explained by domestic factors: a long-lasting sociopolitical crisis began in Togo early in the 1990s and only came to a close in 2007 with parliamentary elections. The withdrawal of donor support in the interim took a toll on Togo’s economy, infrastructure, and institutions from which its economy has not yet fully recovered. Average annual economic growth since 1995 has been 2.2 percent, outpaced by population growth of about 3 percent. As a result, per capita GDP has declined by about 14 percent since 1995, with a consequent increase in poverty.
World vs. Togo: Real GDP Growth
(Annual percentage change)
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
World vs. Togo: Real GDP Growth
(Annual percentage change)
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
World vs. Togo: Real GDP Growth
(Annual percentage change)
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
B. Expected Channels of Transmission to Togo
6. The impact of the global crisis for Togo is expected to be moderate in 2009 (Table I.1). It may hit less through financial channels directly than through real channels, such as the protracted effect of declining global demand and prices of Togo’s commodities. Limited cross-border linkages in banking systems and limited integration with international finance explain the former. Other real transmission channels might be driven by unexpectedly low foreign direct investments due to investors’ lack of interest in engaging in such sectors as banking and phosphate, and lower remittances from abroad. Factors mitigating the crisis, such as a decline in food and oil importing prices, higher government spending, and favorable harvests may somewhat offset the impact (Box I.1).
Togo: Level of Sectoral Vulnerability to Global Recession - 2009
Togo: Level of Sectoral Vulnerability to Global Recession - 2009
| Financial Links | Global Demand | Trade Related Activities: Port + Transport | Remittances | FDI | Donor Support | Final Estimated Impact |
|---|---|---|---|---|---|---|
| Low / Moderate | High | Low / Moderate | High | High | Moderate | Moderate |
Togo: Level of Sectoral Vulnerability to Global Recession - 2009
| Financial Links | Global Demand | Trade Related Activities: Port + Transport | Remittances | FDI | Donor Support | Final Estimated Impact |
|---|---|---|---|---|---|---|
| Low / Moderate | High | Low / Moderate | High | High | Moderate | Moderate |
Financial channels are limited
7. Direct transmission to the financial system is expected to be low because Togo’s banks and businesses have few links to global capital markets. Banks are mostly state (50 percent of bank assets) or regionally owned (Figure I.3) The most active private regional bank, Ecobank, has its headquarters in Lomé. Publicly owned banks have been restructured and recently recapitalized with government securities, have remained under strict oversight of the regional banking authority, and are operating very conservatively. The risks of second-round effects of a slowdown in economic activity (such as an increase in nonperforming loans) are greatly reduced because the financial sector as a whole is not significantly exposed to private sector credit since financial intermediation is relatively low at 18 percent and large percentage of assets are in government securities, which minimizes the risk. Banks are therefore in a relatively healthy position to ride out adverse times.
Banking Assets Held by Foreign Banks with Majority Ownership, 2006
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Source: World Bank’s Global Development Finance, 2008Note: A bank is considered fotimesreign owned if 50 percent or more of its shares in a given year are held directly by foreign nationals. Banks owned by nationals of the WAEMU region are not considered foreign.Banking Assets Held by Foreign Banks with Majority Ownership, 2006
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Source: World Bank’s Global Development Finance, 2008Note: A bank is considered fotimesreign owned if 50 percent or more of its shares in a given year are held directly by foreign nationals. Banks owned by nationals of the WAEMU region are not considered foreign.Banking Assets Held by Foreign Banks with Majority Ownership, 2006
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Source: World Bank’s Global Development Finance, 2008Note: A bank is considered fotimesreign owned if 50 percent or more of its shares in a given year are held directly by foreign nationals. Banks owned by nationals of the WAEMU region are not considered foreign.Factors Mitigating and Offsetting the Crisis for Togo
Little international exposure of the financial sector
Togo’s financial system has little exposure to global financial markets; it is really limited to operations with correspondent banks. Its banks have not been exposed to complex financial instruments and operations; and the publicly owned banks are being restructured after the crisis in 1998. Microfinancial institutions, very locally oriented and very active among poor segments of the population, may also function as a shock absorber.
Public capital investment, financed mostly by foreign donors
Plans to boost public investments in 2009 will continue as projected. This is crucial to offset the negative impact of decreasing revenues from other sources, such as exports and remittances. Togo continues to be largely reliant on multilateral donors—the World Bank, the EU, and the AfDB—whose disbursements are more stable and which together have committed budget support of about 2 percent to help Togo meet its 2009 financing needs.
The effect of declining energy and food prices on inflation
The drop in oil and commodity prices in 2008 is benefiting oil and food importers like Togo by decreasing inflationary pressures, improving the terms of trade, and narrowing the current account deficit.
Food production as shock absorber and alternative supplier of exports
Production of food, currently largely for domestic consumption (25 percent of GDP), may not only be an important shock absorber but may also evolve into a dynamic export sector. In recent years, export of its production surpluses (e.g., corn) was not allowed for food security reasons. It is expected that the bans may be relaxed as soon as domestic stocks build up. Since low world inventories of major food crops are a reality, Togo should seize this opportunity to boost production of foods to serve regional markets.
8. Nonetheless, the recent pick-up in household credit could reverse if regionally owned private banks—the most active in this market—cut back lending for reasons unrelated to Togo. There is no evidence so far of disruptions in international trade finance or the interbank market; banks have noted, however, that requirements from correspondent banks have become stricter. Microfinance institutions that provide about 15 percent of total credits are also getting less funding from international institutions.
9. However, financial and monetary indicators need to be closely monitored since second-round effects cannot be ruled out. A worse than expected economic decline could cause loan portfolios to deteriorate, and if the flow of funds to the region is drying up, some impact might be expected. Banks and authorities should be watching closely for signs of a credit crunch that might hurt the fragile economy. Liquidity injections by the BCEAO into the regional banking system increased in 2008, especially at the end of year (Figure I.4). This could indicate higher demand for liquidity in a region that has been characterized by excess liquidity in the recent past.
Liquidity Injections by BCEAO in 2008
in millions of F CFA
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Liquidity Injections by BCEAO in 2008
in millions of F CFA
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Liquidity Injections by BCEAO in 2008
in millions of F CFA
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Trade channels are highly vulnerable
10. The first and most visible impact of the crisis so far is a plunge in the prices of phosphate, cotton, and coffee (Figure I.5). Lower global growth is pushing down demand for these traditional exports and therefore their prices. This may reduce even more their share in total exports, which declined from about 50 percent at the end of the 1990s to just 18 percent in 2008 (Figure I.6).
Cotton and Phosphate Prices
(January 2003 - January 2009)
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Cotton and Phosphate Prices
(January 2003 - January 2009)
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Cotton and Phosphate Prices
(January 2003 - January 2009)
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Togo’s Main Exports by Product, 2008
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Source: IMF staff estimatesNote: The high level of others in total exports reflects trade data shortcomings. The authorities are, however, in a process of improving trade data quality.Togo’s Main Exports by Product, 2008
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Source: IMF staff estimatesNote: The high level of others in total exports reflects trade data shortcomings. The authorities are, however, in a process of improving trade data quality.Togo’s Main Exports by Product, 2008
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Source: IMF staff estimatesNote: The high level of others in total exports reflects trade data shortcomings. The authorities are, however, in a process of improving trade data quality.11. The global downturn will particularly hit phosphate and cotton exports, which are in the midst of reforms, but so far there is no evidence that it is affecting cement exports, which now represent 20 percent of total exports. Lower demand and lower prices for phosphate will make it even tougher to attract strategic investors, who are crucial to boosting production and exports, which are now at ¼ of potential. Phosphate production and exports increased in 2008 as international prices rose, which improved the financial position of the publicly owned company, but this could be interrupted. The cotton sector has not been able to recover from a protracted and failed restructuring, in particular of the state cotton company; declining output has reduced its share in total exports from 20 percent at the end of the 1990s to 5 percent in 2008.2 The cement and clinker industry which produces for domestic and regional markets has been more dynamic. Higher prices have stimulated production and exports in recent years. One of the companies, a European consortium, is expecting to increase exports in 2009 because of demand in the region, where most of its exports go.
12. Togo’s trading partners are relatively well diversified: 35 percent with the region; 36 percent with Europe (of which France is the most important single trading partner); 20 percent with Asia (of which half with China); and 8 percent with the US (Figure I.7). Though about half of Togo’s trade is with advanced economies severely affected by the crisis, other significant trading partners—such as the WAEMU region and China whose economies are still growing—may help limit the impact on Togo.
Togo’s Main Trading Partners, 2008
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Source: IMF, INSTogo’s Main Trading Partners, 2008
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Source: IMF, INSTogo’s Main Trading Partners, 2008
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Source: IMF, INSTrade-related services: Port facilities and transportation should hold fairly steady
13. Activity at the Port of Lomé, one of the most important deep-water ports in West Africa, is not expected to decline much in 2009. The port and the related transport sector serve landlocked countries like Mali, Burkina Faso, and Niger (all WAEMU countries). The most important activity, transit and re-export of oil products, uses port facilities and the storage capacities of oil-importing companies in Togo. Since the port and transport sectors, which account for about 6 percent of GDP, are directly linked with economic activity in the region, any regional slowdown may have a negative impact on them. However, at the beginning of the year there was no evidence of a slowdown, perhaps because the WAEMU economies are estimated to increase growth on average by 3 percent in 2009, so no severe impact in this sector need be expected for the year as a whole.
Remittances are vulnerable to increasing unemployment in advanced economies
14. Togo—one of Africa’s top recipients of remittances, equivalent to about 10 percent of GDP—may be severely affected by a decline in those flows (Figure I.8). So far remittances have not dropped much, but a decline of 10 to 15 percent might be expected for 2009. More than 30 percent of remittances come from Europe, mainly France, and about 20 percent from the U.S. Rising unemployment in host countries should inevitably affect immigrants. However, about 15 percent of remittances come from within the WAEMU, where economic activity is expected to slow, but not so much as in advanced economies. In sum, a decline in remittances by 10 percent could lower GDP growth by about 1 percent, depending on the multiplier effect of remittances in domestic demand, especially internal trade and housing.3
Remittances in Selected SSA Countries, 2008
(In percent of GDP)
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Source: IMF, WEO October 2008Remittances in Selected SSA Countries, 2008
(In percent of GDP)
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Source: IMF, WEO October 2008Remittances in Selected SSA Countries, 2008
(In percent of GDP)
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Source: IMF, WEO October 2008Lower than expected foreign investment may create an opportunity cost for higher growth
15. Foreign direct investment, which is crucial to revitalize the banking and the phosphate sectors, is not likely to rebound soon. As investors rebuild balance sheets, private capital flows dry up and new investment projects are likely to be slashed. Injection of fresh private capital into the banking and phosphate sectors is needed for concluding their restructuring process, which got underway in 2008. There is a high probability that the interest of investors may fade, jeopardizing structural reforms, postponing the expected boost in direct investment—now at 2.4 percent of GDP, and therefore flattening prospects for higher growth.
Aid flows: Budget and project aid is not expected to decrease in 2009
16. In 2009 the global slowdown is not likely to affect donors’ commitments to Togo, but a protracted and deeper crisis would certainly jeopardize future flows. Togo already receives less international support than most neighboring countries at its income levels because of the economic and political crisis that lasted for more than a decade (Figure I.9). Reengagement with donors started a few years ago and since aid has been low—even by regional standards—a cut is not expected. In the case of Togo, the major part of aid for the next year or two is expected to come from multilateral agencies which have been more stable sources. It is likely, however, that the desired four-fold increase in aid, from an average of less than 1 percent of GDP between 2000 and 2008 to at least 4 percent, may not materialize in the medium term, particularly if the global recession worsens or persists.
Project grants received (in percent of GDP)
(2000 - 2008 average)
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Source: Fund staff estimates.Project grants received (in percent of GDP)
(2000 - 2008 average)
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Source: Fund staff estimates.Project grants received (in percent of GDP)
(2000 - 2008 average)
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
Source: Fund staff estimates.C. Quantitative Estimates of Spillovers
Projected Growth for 2009
17. Based on estimates of the impact of the various transmission channels, Togo’s growth rate for 2009 is now projected at about 1.7 percent, a slight increase from 2008’s lackluster growth but about 1.5 percent lower than previously projected. The growth projection for 2009 is based on Togo’s macro framework that reflects provisional estimates of real growth by sector (Table I.2). The two main transmission channels, the fall in global demand and remittances, together could decrease foreign exchange inflows by about 1.5 percent of GDP. Because this would depress local demand, it would have a significant impact on the nonexport sector. However, the anticipated increase in public investment of about 2 percent of GDP financed by the government and foreign donors would offset that fall in demand.
Togo: Forecast for GDP by Sector in 2009
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
1 Only the part of exports for which data on international prices are available was considered. Total domestic exports amount, otherwise, to about 19 percent of GDP.Togo: Forecast for GDP by Sector in 2009
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
1 Only the part of exports for which data on international prices are available was considered. Total domestic exports amount, otherwise, to about 19 percent of GDP.Togo: Forecast for GDP by Sector in 2009
Citation: IMF Staff Country Reports 2009, 165; 10.5089/9781451836660.002.A001
1 Only the part of exports for which data on international prices are available was considered. Total domestic exports amount, otherwise, to about 19 percent of GDP.18. A planned significant increase in government spending in 2009, largely financed by an increase in donor project support, would be the main factor mitigating the decline in revenues. Donors’ project support projected at 2.8 percent of GDP in 2009 (1 percent more than in 2008) will be crucial for Togo’s economic revival and for poverty reduction. The government is also expected to increase its financing of public investment projects by 1 percent of GDP, of which about 0.5 percent consists of a shift of capital spending from 2008 to 2009.
19. As a result, growth in 2009 will be mainly driven by the nonexport sector, particularly by an increase in public investment and to a lesser extent by an increase in agriculture production for domestic consumption. The export sector is expected to contract due to the decline in global demand and prices, which will inevitably push planned production down. For the nonexport sector, the estimates are mainly based on the two offsetting effects of higher government spending and lower remittances and export revenues. Construction, an important source of growth in 2009, is expected to benefit more from the former effect than from the latter. Overall the nonexport sector is expected to grow at about 2 percent.
Correlations with Main Trading Partners
20. Togo’s growth rate is significantly correlated with the growth rates of France and the WAEMU, making them the most important external drivers of Togolese growth (Table I.3). A simple regression of Togo’s growth between 1972 and 2008 on growth rates in the WAEMU and France shows positive and statistically significant coefficients (Table I.3) 4. Nigeria’s economy, which affects Benin heavily, does not seem to have a major impact on Togo.
Togo: Growth Rate Correlations
Togo: Growth Rate Correlations
| Correlation | WAEMU | France | NGA | USA |
|---|---|---|---|---|
| Togo | 0.39 | 0.37 | 0.03 | 0.23 |
Togo: Growth Rate Correlations
| Correlation | WAEMU | France | NGA | USA |
|---|---|---|---|---|
| Togo | 0.39 | 0.37 | 0.03 | 0.23 |
21. Based on WEO growth projections for France and the WAEMU—setting aside country-specific factors, such as the expected fiscal expansion that will boost domestic demand—the regression predicts a growth rate of 0 percent for Togo in 2009 (Table I.4). This suggests that, due to the global financial crisis, external factors are not likely to contribute to positive growth in Togo in 2009. This result is similar to the one obtained in Section I, which predicts that export sector growth would be close to zero. Moreover, as also observed in Table I.2, the nonexport sector will be the sole driver of economic growth in 2009.
Togo: Regression Results for Links to France and WAEMU Growth
Dependent Variable: TGO
Method: Least Squares
Togo: Regression Results for Links to France and WAEMU Growth
Dependent Variable: TGO
Method: Least Squares
| Coefficient | Sth. Error | t-Statistic | Prob. | |
|---|---|---|---|---|
| C | -0.04 | 0.02 | -2.39 | 0.02 |
| WAEMU | 0.82 | 0.29 | 2.79 | 0.01 |
| FRA | 1.49 | 0.56 | 2.65 | 0.01 |
| R-squared | 0.30 | F-Stat | 0.00242 | |
| TGO | FRA | WAEMU | ||
| ADF test | -5.77*** | -3.76*** | -4.35*** |
Togo: Regression Results for Links to France and WAEMU Growth
Dependent Variable: TGO
Method: Least Squares
| Coefficient | Sth. Error | t-Statistic | Prob. | |
|---|---|---|---|---|
| C | -0.04 | 0.02 | -2.39 | 0.02 |
| WAEMU | 0.82 | 0.29 | 2.79 | 0.01 |
| FRA | 1.49 | 0.56 | 2.65 | 0.01 |
| R-squared | 0.30 | F-Stat | 0.00242 | |
| TGO | FRA | WAEMU | ||
| ADF test | -5.77*** | -3.76*** | -4.35*** |
D. Possible Policy Responses
22. The general challenge for the authorities is to assess the scope for countercyclical policies. The impact of the crisis should be in particular focused on the more vulnerable segments of the population. Because the options will be limited by the financing available, adequate donor financing will be crucial for continuing investment in basic services and infrastructure. The expected 1.7 percent growth for 2009 depends heavily on public investment. Two factors are crucial to growing the economy: (i) continued donor confidence on the government’s program and capacity to implement reforms, so as to shore up donor support; and (ii) strengthening expenditure management to avoid the types of delays in capital investment that occurred in 2008.
23. The authorities should keep their medium-term goals in mind. They should continue working to stabilize the economy as they undertake to achieve broader development goals, such as continuing with structural reforms to improve competitiveness, increase sustainable growth, and reduce poverty. In particular, efforts to restructure the financial, phosphate, and cotton sectors should be pursued even if strategic investors are not identified.
24. The main sectoral policy challenges are in the fiscal and financial sectors. By rationalizing tax incentives and strengthening revenue administration, Togo can mobilize additional resources and create fiscal space to preserve priority spending in poverty-reducing areas. Spending capacity and efficiency should continue to increase, especially efforts to reduce unproductive expenditure. The government should accelerate providers’ arrears as well as current payments. The financial sector should be closely monitored so that vulnerabilities can be identified quickly.
25. The authorities should also regularly and closely monitor real activity. In cooperation with their development partners, they should track a few monthly indicators, such as remittances, trade activity, port activity, and phosphate and cement production and exports.
26. At a regional level, WAEMU institutions should consider measures to boost regional productivity and support activity. First, any deterioration in competitiveness would need to be addressed through structural reforms. For instance, boosting productivity through better regional infrastructure and basic services, such as electricity, must remain a priority of regional developing agencies. Second, the BCEAO should continue to support management of regional bank liquidity through regular, well-calibrated monetary operations. Depending on the monetary policy stance in the Euro area and conditions of the subregion’s economies, the BCEAO could usefully strengthen its liquidity support by expanding its direct liquidity injections.
27. The international community should consider how best to support fragile economies through the global financial crisis. Particularly worthy of support are those, like Togo, that have demonstrated a firm commitment to policy reforms and are beginning to recover from years of mismanagement and declining economic growth.
Prepared by Lorraine Ocampos and Jihad Dagher.
The cotton sector in Togo collapsed when, after years of arrears to banks, SOTOCO, the state-owned ginning company, was unable to pay more than 250, 000 farmers for their 2004/2005 crop. The company has been audited, farmers paid in cash, and the debt of the company securitized by government bonds in 2008. Reforms are now underway.
It is assumed that only ¾ of remittances are spent and a multiplier of 1.2.
Adding other external conditions (growth rates in other OECD countries, world commodity prices, and terms of trade) as exogenous variables to this regression does not significantly improve the adjusted R-squared.
ANNEX
Developing a Strategy for Debt Management
1. The principal components of sound debt management (DM) are: (i) clear debt management objectives, (ii) an effective institutional framework and proper coordination with monetary and fiscal policy; and (iii) a prudent and transparent strategy to manage the risks and achieve the stated objectives.
I. Objectives of DM
2. In most countries, the objectives of debt managers are stated in terms of expected cost and risk of issuing different forms of debt. The objective is often to ensure that the government financing needs and its payment obligations are met at the lowest possible cost over the medium and long run, consistent with an acceptable degree of risk. Sometimes, the development of domestic debt markets is also stated as an explicit objective. It is very important that these objectives be clearly stated and communicated as transparency plays a key role in reducing the cost and increasing the predictability of public debt.
II. The Framework of DM
Institutional framework of DM
3. A clear legal framework should be in place to clarify the authority to borrow and issue debt, and to invest government assets. As stated in the Guidelines for Public Debt Management8 for an effective governance structure, the organizational framework for debt management should be well specified and ensure that mandates and roles are well articulated. Countries sometimes differ on the institutional arrangements for locating the sovereign debt management functions across one or more agencies. However the key element is to ensure a well specified organizational framework and that there is sufficient coordination and sharing of information.
Coordination with the monetary and fiscal authorities.
4. Given the interdependencies between their different policy instruments, debt managers, fiscal policy advisors, and central bankers should share an understanding of the objectives of debt management. Lowering the risk premia, for example, on medium and long term government bonds can only be achieved with prudent debt management, fiscal, and monetary policies. The interaction between debt and liquidity management is essential to avoid large swings in commercial banks’ liquidity.
DM Strategy
5. A full debt management strategy needs to encompass the following elements: (i) Debt sustainability analysis (DSA): The capacity to conduct regular DSAs is an important element in the elaboration of a debt strategy as it involves debt and debt service projections as well as projections of key macroeconomic variables. Debt managers should monitor the sustainability of the stock of debt and discuss the risks with the fiscal authorities.
(ii) Identifying risks: One of the important tasks of a debt manager is to identify and manage the trade-offs between expected cost and risks in the government portfolio. There are many risks involved with sovereign borrowing due to the size and the complexity of the government debt portfolio. Box 1 lists some of the risks that could be important for LIC and emerging economies. To assess the importance of these risks the debt manager can conduct stress tests of the debt portfolio to evaluate the impact of potential economic and financial shocks.
(iii) Choices facing debt managers: A debt management strategy also consists of choosing between different forms of debt (T-bills, Bonds, Loans), issuance techniques (auction, syndication, underwriting) and frequency of issuance. Typically, in most developed markets, the government borrows on a regular basis tapping the market on a constant frequency. Often, T-bills are issued on a weekly basis and sold in an auction, while bonds are auctioned on a less frequent basis (varies from monthly to quarterly basis). However what works for the more advanced economies is not necessarily what is best for low-income countries (LICs). In terms of the maturity, most LIC usually face a very steep yield curve that makes it prohibitory expensive to borrow long-term. That is why debt managers in LIC should aim toward minimizing this cost by trying to improve the rating of government debt through a better and more transparent management. Meanwhile, issuing shorter term bonds and T-bills could be optimal for these countries, even if it exposes them to larger rollover risks. As for the issuance technique, auctions have become predominant in both developed and developing countries as they have proved to be more cost effective and more transparent than other methods. The timetable for auctions, on the other hand, is a function of debt management decision and desire to promote a secondary market. Having a regular issuance calendar has the advantage of improving transparency on the market and benefiting the development of a secondary market. However, too frequent auctions may lead to small auctions volumes and less meaningful price information which would not necessarily spur the development of secondary markets.
Prepared by Jihad Dagher and Samuele Rosa.
In this note, domestic debt includes T-bills and government bonds, as well as direct loans, issued in local currency.
This figure is provided for illustrative purposes and does not represent an actual yield curve since high frequency data for multiple maturities are not available.
Togo: Enhanced Initiative for Heavily Indebted Poor Countries—Decision Point Document - Country Report No. 08/370.
In the current system, only the Minister of Finance can actually sign borrowing agreements with third parties. However, the practice is that other line ministers can initiate discussions and sign technical memorandum of understanding without associating the DPD. When the government finally approves the loan through the signature of the Minister of Finance, the DPD normally has not provided an evaluation regarding the debt sustainability implication of the new loan.
This reference limit is commensurate with the expected domestic primary surplus and corresponds to the domestic debt service under program, with the goal of maintaining a balance between overall domestic resources and spending, without running arrears.
“Guidelines for Public Debt Management”, IMF and World Bank Publication, 2000. [http://www.imf.org/external/np/mae/pdebt/2000/eng/index.htm].
