Togo
2009 Article IV Consultation and Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility: Staff Report; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Togo
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International Monetary Fund
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Publication Date:
23 Jun 2009
eISBN:
9781451836677
Language:
English
Keywords:
ISCR; CR; phosphate sector; fiscal policy; PRGF-supported program; plan; debt service; terms of trade; exchange rate; banking sector; arrears stock; Credit; Fiscal stance; Global; clearance strategy
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This 2009 Article IV Consultation discusses that a nascent recovery in Togo’s economy is expected to be offset in 2009 by the impact of the global recession. The authorities have reiterated their commitment to the Poverty Reduction and Growth Facility (PRGF)-supported program and aim to accelerate growth-enhancing structural reforms. Executive Directors have commended the Togolese authorities for their strong implementation of economic policy and reforms, despite the adverse global and domestic circumstances. They have also welcomed the authorities’ intention to continue to focus on targeted measures to mitigate the social impact of shocks.

Abstract

This 2009 Article IV Consultation discusses that a nascent recovery in Togo’s economy is expected to be offset in 2009 by the impact of the global recession. The authorities have reiterated their commitment to the Poverty Reduction and Growth Facility (PRGF)-supported program and aim to accelerate growth-enhancing structural reforms. Executive Directors have commended the Togolese authorities for their strong implementation of economic policy and reforms, despite the adverse global and domestic circumstances. They have also welcomed the authorities’ intention to continue to focus on targeted measures to mitigate the social impact of shocks.

I. Recent Economic Developments and PRGF Performance:

Sluggish Growth Despite Good Program Implementation

1. Togo’s success in remaining on track with its PRGF arrangement has been commendable, especially considering the severe flooding and global price shocks in 2008. The flooding severely damaged vital infrastructure and agriculture, leading to an abrupt slowdown in the latter part of the year and reducing estimated real GDP growth to 1.1 percent (Table 1, Figure 1). Surging world food and oil prices pushed inflation up to 15.8 percent (on a 12-month basis) in August 2008, although it dropped back to an estimated 8.4 percent (average) by year-end as oil and commodity prices fell. Money growth increased by 16 percent, comparable to other WAEMU countries, as delays in spending donor assistance for emergency repairs temporarily pushed up net foreign assets. Credit to the nongovernment sector fell slightly, however. Falling oil and food prices helped limit the deterioration of the terms of trade by year-end and contain the upsurge in the current account deficit to 6.6 percent (Tables 2 and 4).

Table 1.

Togo: Selected Economic and Financial Indicators, 2006–10

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

Percent of broad money at the beginning of the period.

Revenue minus expenditure, excluding grants, interest, and foreign-financed expenditure.

Figure 1.
Figure 1.

Togo: Recent Macroeconomic Developments

Citation: IMF Staff Country Reports 2009, 194; 10.5089/9781451836677.002.A001

Table 2.

Togo: Balance of Payments, 2007–14

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

The trade balance has been revised down from 2006 onwards, mostly by excluding from domestic imports imports in transit to neighboring countries

Assumes external debt and arrears rescheduling/relief in 2008–2010 in line with potential debt

Negative sign indicates increase.

Table 3.

Togo: Central Government Financial Operations, 2007–10

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

Includes, for 2009 a reduction of domestic arrears in cash to private suppliers (CFAF 12.6 bn). Additional reduction of arrears will take place in 2009, in exchange of government’s securities. The final amount will be decided during 2009.

Including, for 2008, bank recapitalization and offsetting government assumption of NPLs for CFAF 88 bn.

Includes health and education (including salaries), and pension transfers.

Table 4.

Togo: Monetary Survey, 2007–09

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Sources: Central Bank of West African States, and Fund staff estimates and projections.

Preliminary data for December 2008. Accounting of the securitization process is being revised by BCEAO staff.

2. In 2009 Togo’s recovery will be dampened by the impact of the global recession. Staff projects real GDP growth of about 1.7 percent in 2009, 1.3 percentage points lower than previously expected. The expected rebound in subsistence production after the flood damage and increased public investment (about 2 percentage points of GDP) are expected to be counterbalanced by the crisis’ impact on trade and remittances. However, the decline in global energy and food prices will reduce inflationary pressures, improve the terms of trade, and narrow the current account deficit.

A. Solid Fiscal Performance Tempered by Capacity Constraints

3. Fiscal performance was generally good in 2008, although overperformance on key targets is partly due to underspending on emergency infrastructure repairs. Collection of both taxes and customs revenues was higher than expected, reflecting improved management and computerization. Spending was below budget because capital spending was underexecuted while current spending was disciplined despite economic difficulties. In particular, complex and cumbersome procurement procedures hampered the expedited start-up of priority repair projects following flood damage. As a result, the domestic primary balance (a performance criterion) amounted to +0.4 percent of GDP, compared with the program floor of –0.5 percent. The target on net domestic financing (PC) was met by an ample margin (0.4 percent of GDP), with a corresponding accumulation of government deposits in the banking system. On the other hand, social and capital spending fell more than 1 percent of GDP short of the indicative target (Table 3).

4. The 2009 budget strengthens the focus on priority spending and promoting growth while preserving debt sustainability (Text Table 1). Even with some proposed relaxation (see below), the budget targets a domestic primary deficit of only 0.6 percent of GDP. Continued efforts to broaden the tax base and reduce tax rates are expected to be fiscally neutral. The government intends to further increase the share of priority spending on social and physical capital, in line with its poverty reduction strategy (PRS) objectives.

Text Table 1.

Togo: Spending by priority sectors, 2007–12

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Source: Togolese authorities; and IMF staff estimates and projections

5. The authorities have also acted in 2008 and in the 2009 budget to help protect vulnerable segments of the population. In 2008 they allowed full pass-through of rising international food prices and sought to mitigate the social impact through targeted measures, particularly subsidies for seeds and fertilizers to boost production; sales of food stocks; accelerated payment of pension arrears; and an increase in the minimum wage. For 2009 the budget increases the subsidies for agricultural inputs and cut personal and corporate taxes. For petroleum products, the authorities limited the pass-through of world oil prices in 2007 and 2008 to mitigate their impact on real incomes; by the terms of a previous agreement, the government incurred contingent liabilities equal to 1.5 percent of GDP to oil distributors as a result of their reduced margins. With current world and domestic prices, however, margins have become higher than normal, gradually reducing this contingent liability (LOI, ¶13).

6. Policy Response and Authorities’ Views: In light of past over-performance and the somber economic context both in Togo and globally, the authorities are determined to make the best use of the limited fiscal leeway available, with the priority on addressing slow project execution (LOI, ¶7). Delayed repair projects have prolonged the economic costs of the damage from the 2008 floods, most notably to bridges and roads critical to agriculture, transport, and related activities. Recognizing the role of increased investment spending in supporting growth, the authorities have drawn up an action plan, with staff assistance, to strengthen and streamline project execution and procurement processes, so that domestic and donor resources are used in accordance with PRS objectives. Priority projects will be expedited, a higher share of the annual budget will be available at the beginning of the fiscal year, overlapping controls in the spending chain will be reduced, and training will be provided for project execution. Staff welcomed these measures but noted the need for continued spending controls and the risks capacity constraints still pose to project budget execution.

7. The authorities plan to increase domestic investment spending in 2009 by the amount of underspending on emergency repairs in 2008. They also concurred with staff that it should favor priority investments. The authorities plan to submit a supplementary budget to this effect. Due to stronger than expected revenue performance in 2008, the authorities are maintaining revenue projections for 2009 despite somewhat slower projected growth. As a result the floor on the 2009 fiscal balance falls relative to the previous 2009 fiscal framework by the amount of carried over investment spending—about ½ percent of GDP. Combined with rising foreign-financed investment, the resulting increase in public investment is affordable, helps Togo cope with the impact of the global crisis, and supports growth.

8. To increase liquidity for businesses, the authorities intend to increase the portion of domestic arrears clearance to be settled in cash. Domestic arrears verified by an audit conducted by KPMG1 amount to nearly 3 percent of GDP. The budget already provides for settling ½ percent of GDP in cash to smaller suppliers, based on a plan developed in consultation with Fund staff. The rest was to be settled by issuing medium-term securities directly to businesses, which would provide limited help for their pressing liquidity needs. Representatives of the private sector and other observers highlighted the constraints on growth posed by this shortage of liquidity for enterprises in an economy with anemic private sector credit and a large stock of outstanding domestic government arrears. To help jump-start private sector activity, the authorities prefer to increase the portion of settlements in cash, to be financed both by grants from donors and by domestic financing of ½ percent of GDP. Staff supports this measure, which is affordable and addresses pressing liquidity needs. The impact on public finances would be small. Increasing the 2009 arrears cash clearance will not have an impact on the primary balance, while the additional domestic financing required is limited to about 0.3 percent of GDP, compatible with the government’s available deposits.

9. Staff supported the authorities’ planned measures to help protect vulnerable segments of the population, consistent with the budget, especially the increase in subsidies for inputs for subsistence agriculture. The authorities also discussed options to help the cotton sector, which is struggling due to the liquidation of the former state cotton company and low world demand.2 Using resources in the budget, the government intends to absorb the projected net operating losses (less than 0.1 percent of GDP).3 The government also intends to help the new cotton company obtain financing (either a domestic loan guarantee or a direct loan) for fertilizer and seeds for the 2009/2010 season (projected at less than 0.2 percent of GDP). Staff supported these efforts as interim measures, provided they remain consistent with the program’s fiscal framework, but urged the authorities to draw up longer-term arrangements for the cotton sector that minimize the need to resort to public money. Regarding petroleum products, staff expressed serious concern about the current contingent liability and future risks. The government is committed to maintaining a margin for distributors that will eliminate the contingent liability within 20 months and to reviewing the pricing mechanism to avoid such large liabilities in the future.

B. Good Progress on Structural Reforms for 2008/09

10. The authorities have made good progress in achieving structural reforms, meeting nearly all program benchmarks on or ahead of schedule (Text Tables 2 and 3, as well as Appendix 1, Tables 2 and 3). There was a slight delay in initiating the strategic audit of the phosphate sector. In 2009 the focus of structural reforms will expand from reinforcing public finances and laying the groundwork for reform of state-owned banks and enterprises to measures with more direct impact on growth. The program’s structural reform agenda has four measures planned for completion before the next review; two structural benchmarks have already been completed (initiating restructuring of BTCI and reducing tax exemptions), and the other two measures concern reform of the Treasury (structural performance criterion4) and the preparation of development strategy for the phosphate sector (structural benchmark).

Text Table 2.

Togo: Status of Structural Reforms Through 2008

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Advances on reforms to strengthen fiscal policy implementation

11. After helping to restore fiscal discipline, public financial management reforms are starting to address such medium-term needs as accounting, tax policy, and debt management:

  • Treasury reform: Far-reaching reforms underway at the Treasury aim to strengthen its credibility, lay the groundwork for effective cash and debt management, and ensure accurate accounting of budget execution. The Treasury has been reorganized, and planned accounting reforms (PC for June 2009) are on track. A General Finance Inspectorate has been set up to monitor use of public resources. A framework for regular Treasury bill auctions was established in September 2008 (SB, met three months early).

  • Tax policy: The 2009 budget law has reduced tax exemptions and the fiscal administration has been given more authority to control the Free Economic Zone (FEZ) (SB for June 2009, met early).

  • Domestic arrears clearance and domestic debt: The government has established a mechanism to monitor domestic debt, adopted the principles for an arrears clearance strategy, and set up an intergovernmental committee to define concrete steps. The authorities plan to initiate settlement well before year-end, as discussed above (SB for end-2009).

Progress on bank restructuring and plans to accelerate it

12. Three state-owned banks, including BTCI, were fully recapitalized with government securities in December 2008 (March 2009 SB, met early) (LOI, ¶10). Drawing on technical assistance from the Fund and the World Bank, the authorities issued securities in exchange for the NPLs of three large undercapitalized public banks, representing about 27 percent of total loans (about 7 percent of GDP). This operation restored the banks’ compliance with the prudential indicators. The authorities intend, with the support of the World Bank, to set up a mechanism for recovering and settling the NPLs now in their possession; completion of the process has been postponed to December 2009 because of its complexity and the need to procure advisory services (revised SB for December 2009). With World Bank technical support, the authorities also plan to work with the BCEAO to help develop a secondary market for the securities.

13. Policy Response and Authorities’ Views: Concerned with tight private sector credit and liquidity, the authorities are determined to accelerate privatization of four state-owned banks. They hope to launch the initial call for bids much earlier than planned (SB for December 2009). Staff strongly supported this ambitious goal and hoped that signs of interest in the region hold up despite the global downturn. Staff also urged the authorities to expedite the transfer of the management of bad loans from banks to a separate agency so that the banks can focus on restarting the flow of credit to the economy.5

14. Staff underscored the importance of continuing strict management oversight of state-owned banks after recapitalization and before privatization. While stressing their preference for expeditious privatization, the authorities and the supervisory authorities committed to maintain heightened oversight until its completion. If privatization were delayed or unsuccessful, the banks would continue under state ownership but with this heightened management oversight.

15. Staff stressed that banking sector reform and the clearance of domestic arrears needs to proceed together expeditiously. The domestic arrears clearance strategy is based on the principle of cancellation of cross-obligations involving arrears of the government to private suppliers, NPLs (now owned by the government) and unpaid taxes. The government agreed on the need to closely coordinate the two operations (NPL recovery and arrears clearance) and to avoid delays in establishing an NPL recovery mechanism. Completion of the operations will re-establish normal financial relations among the government, banks, and enterprises, easing the flow of credit and payments (LOI, ¶9 and 17).

Restructuring of state-owned phosphate and electricity enterprises in process

16. SOE reforms have progressed but they need to continue until more concrete results are achieved (LOI, ¶11 and 21). In January 2009 the government selected a consulting company for the strategic audit of the phosphate sector (October 2008 SB, mildly delayed due to procurement difficulties). The report is expected to be completed in April 2009. Meanwhile, the government has begun to restructure the phosphate company’s operations. A draft report reviewing the finances and operations of CEET, the electric company, was submitted to the government and the World Bank for comments in December 2008 (SB). Launch of a strategic and financial audit, in consultation with the World Bank, is planned for May.

17. Policy Response and Authorities’ Views: The authorities concurred with staff that lags in restructuring key economic sectors may jeopardize a recovery in growth. They reaffirmed their resolve to finalize the preparatory work and act on the strategies developed, while maintaining intensified oversight to avoid losses and mismanagement. Attracting the interest of strategic investors to the sectors is a top priority.

Text Table 3.

Togo: Status of Structural Reforms Through 2009

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C. Program Monitoring and Risks

18. The discussions culminated in understandings on revised quantitative and structural indicators to monitor PRGF-supported program implementation through 2009 (Appendix I, Tables 1 and 3). The earlier established end-June quantitative PCs were revised and understandings were reached on new PCs for end-December 2009. The performance criteria on the domestic primary balance and net domestic financing reflect a modest relaxation of the fiscal framework in 2009, as do the indicators for priority spending. The continuous PCs on nonaccumulation of domestic arrears and the central government not contracting or guaranteeing nonconcessional external debt are maintained. The structural PC and benchmarks for the period June-December 2009 on strengthening public financial management, the financial sector, and public enterprises remain unchanged except for the revised timing on NPLs.6

19. The main near-term program risks are related to the global financial crisis and the upcoming elections. If the financial crisis worsens or has more impact on Togo than expected, it would jeopardize revenue performance and generate new spending pressures to provide for vulnerable groups. Political uncertainty in the period leading up to presidential elections in the first quarter of 2010 could complicate program implementation or weaken economic confidence. Multiparty talks on organizing the elections have been contentious. The authorities nevertheless expressed a commitment to forceful program implementation throughout the electoral period.

D. HIPC Process

20. Progress toward meeting the HIPC floating completion point triggers is good, particularly with the completion of the final PRS by the end of April (Table 10). The government officially adopted the PRS paper after extensive discussions with civil society, representatives of the business community, development partners, and the National Assembly. The strategy provides a comprehensive description of poverty-reducing policies, their costing, and the expected domestic and external financing. Its macroeconomic framework is consistent with the PRGF-supported program.

Table 5.

Togo: Medium-Term outlook, 2007–14 1

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Sources: Togolese authorities and Fund staff estimates and projections.

Assumes structural reforms, fiscal adjustment, higher donor support, and external debt and arrears rescheduling/relief in 2009–14. Debt service projections are shown net of the impact of debt and arrears rescheduling/relief.

Table 6.

Togo: Official External Debt, 2007–10

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Sources: Togolese authorities; and IMF and World Bank staff estimates.

Includes principal and interest in arrears as well as late interest before debt relief.

Includes arrears.

Excluding debt service on the augmentation of PRGF access.

Table 7.

Togo: Proposed Schedule of Disbursement Under PRGF Arrangement, 2008–11

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Other than the generally applicable conditions for the Poverty Reduction and Growth Facility (PRGF).

Table 8.

Togo: Indicators of Capacity to Repay the Fund, 2006–16 1/

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Sources: IMF staff estimates and projections.

Including a PRGF augmentation of SDR 18.35 million (25 percent of quota) disbursed in two equal disbursements after completion of the first and second review of the PRGF arrangement.

Total debt service includes IMF repurchases and repayments.

Table 9.

Togo: Compliance with WAEMU Convergence Criteria, 2004–09

(Ratios in percent, unless otherwise indicated)

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Sources: Togolese authorities; and staff estimates and projections.
Table 10.

Togo: Triggers for the HIPC floating completion point 1

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The first two triggers (PRSP implementation and satisfactory macroeconomic performance) are requirements for reaching the completion point under the IMF PRGF-HIPC Trust Instrument.

21. Policy Response and Authorities’ Views: The government stressed its determination to fulfill the conditions for reaching the HIPC completion point as early as possible in 2010. In particular, the authorities noted that the Court of Auditors will begin operations in June 2009, the Procurement Regulatory Agency is planned to be set by end April 2009, and data on revenues received from and payments to the phosphate company are being published regularly.

II. Article IV Consultation Discussions

A. Macroeconomic Outlook and Vulnerabilities: Moderate Impact of the Global Crisis Expected; Vigilance Still Needed

22. The impact of the global crisis, though evident, is expected to be moderate in 2009 and 2010, given Togo’s limited international financial integration and its already depressed exports (Box 1)7. The first signs of the crisis are emerging in declining export prices and volumes (Figure 2). Country-specific factors are expected to mitigate the impact, such as the rebound in production after the flood damage, increased public investment, and a less internationally integrated banking system. Finally, the decline in energy and food prices is expected to reduce inflationary pressures, improve the terms of trade, and narrow the current account deficit.

Figure 2:
Figure 2:

Cotton and Phosphate Prices

(January 2003 - January 2009)

Citation: IMF Staff Country Reports 2009, 194; 10.5089/9781451836677.002.A001

Expected Transmission Channels of the Global Crisis to Togo1

The global crisis is having or may have the following spillover effects on Togo:

  • Lower demand and prices for exports: Lower global growth may adversely impact demand for traditional commodity exports, such as cotton and phosphate. Their share in total exports declined from 50 percent at the end of the 1990s to just 13 percent in 2008 and could fall further with the crisis. Cement exports, which represent about 20 percent of total exports, are expected to continue to increase, but declining regional demand should not be ruled out.

  • Decreasing trade-related activities: The activity of the Port of Lomé and the related transport sector may suffer from lower transit and re-export of goods to Burkina Faso, Niger, and Mali. Early in 2009 there was no sign of declining activity, but there may be a delayed impact.

  • Lower remittances: If economic conditions worsen in host countries, particularly in continental Europe, remittances, which make up 10 to 15 percent of GDP, could drop off sharply and jeopardize domestic demand (which is particularly important for construction). As of December 2008, no drop-off was evident, however.

  • Lack of interest of strategic investors: Togo is not highly dependent on private capital flows, but delays in attracting strategic investors, which are key to finalizing restructuring of the banking and phosphate sectors, would constitute lost opportunities to enhance growth. For example, low international demand for phosphate may delay investor interest, which is crucial to obtain fresh capital and raise output.

  • Lower aid flows: Togo is not heavily dependent on donors flows—its foreign-financed investment and social spending are among the lowest in the WAEMU—but it is expecting an increase to support economic revival.

  • Declining fiscal revenues: A greater than expected slowdown would likely reduce revenues below projections. The resulting financing gap would pose policy challenges.

Togo’s exposure to the crisis may, however, be mitigated by the following country-specific factors:

  • Low international exposure of the financial sector: The banking sector is mostly publicly and regionally owned, with low exposure to the most affected markets. Nonetheless, a recent pick-up in household credit could reverse, if regionally owned private banks—the most active in this market—cut back lending in Togo to rebalance their portfolios. While there is no evidence so far of disruptions in international trade finance or the interbank market, banks are seeing more strict requirements from correspondent banks. Microfinance institutions, which represent 15 percent of total credits, have experienced decreasing funding from international institutions, however. Second round effects (e.g., rising NPLs) are also expected to be moderate given the recent restructuring, but the authorities are committed to heightened oversight to minimize the risks.

  • No major decrease in committed donor support: Public investment in 2009, financed in large part by donor support, is expected to pick up due to new commitments. Togo is largely reliant on multilateral donors—the World Bank, the EU, and the AfDB—whose disbursement is more stable and which together have committed budget support of about 2 percent of GDP to help Togo meet its 2009 financing needs.

  • Subsistence agriculture that accounts for about 25 percent of GDP might be an important shock absorber. Staff projects a rebound in subsistence production following the floods in 2008.

  • Declining energy and food prices are expected to reduce inflationary pressures, improve the terms of trade, and narrow the current account deficit in 2009.

1 For further details see Selected Issues Paper.

23. Given planned growth-enhancing reforms, the economy could achieve real GDP growth of about 4 percent annually by 2011, with the fiscal position gradually improving (Table 5). The main sources of medium-term growth are expected to be agricultural production (especially food); construction fueled by higher public investment; a recovery in phosphate production; the competitive cement industry; and a recovery in trade-related services capitalizing on Togo’s role as a regional hub. Protracted delay in structural reforms, especially restructuring state-owned banks and enterprises, would undermine this projection. The domestic primary balance is projected to reach to 1 percent of GDP by 2011, which is the medium-term target under the program and would be sustainable thanks to full HIPC relief. With stepped-up concessional official assistance in priority sectors, the average overall deficit (including grants) will rise to about 2.5 percent of GDP for 2009/11, before falling back to a medium-term average of 1 percent (or about 5 percent excluding grants)—which serves as a fiscal anchor consistent with debt sustainability. With increased donor support, this fiscal path allows for increasing growth-enhancing priority spending (Text Table 1). In particular, the envisaged fiscal loosening in 2009 is not expected to harm long-term debt indicators, given its modest size, temporary nature, and pro-growth focus. Inflationary pressures are projected to be moderate through the medium term.

24. The external current account deficit is expected to improve in 2010 and beyond as a result of export growth. An expected recovery in global demand, along with improved productive capacity in Togo, is expected to lead to an increase in 2010 in the volume and prices of main exports, such as phosphate and cement. Imports are also expected to grow in value in 2010 (although less so than exports), due to a modest economic recovery in Togo and higher prices for commodities such as oil and food. The terms of trade are expected to strengthen strongly in 2009, after which part of the gains are expected to reverse in 2010.

25. Policy Response and Authorities’ Views: The authorities expressed concern that major reforms were not translating into higher economic growth. Staff explained that 2009 and 2010 growth projections were prudent, given the uncertain but potentially large impact of the global financial crisis. In this context, a modest acceleration in growth could be considered a measure of success. Staff further noted that the global financial crisis posed serious downside risks. Staff acknowledged that the impact of many reforms on growth was still limited at this early stage and could be higher than projected in the future. Both staff and the authorities agreed that Togo has potential for higher growth, which could be attained—barring a deepening of the global crisis—by sustained economic stability and deeper structural reforms, supported by the international community.

26. An update of the DSA, including new data on domestic debt, indicated that sustainability depends on faster growth and prudent fiscal policies, even after full HIPC relief (Box 2). These conclusions are consistent with those from the LIC DSA conducted for the HIPC decision point in November 2008. The mission urged the authorities to keep debt sustainable by relying on concessional debt, limiting fiscal deficits to sustainable levels, and concentrating on boosting growth.8

The HIPC Initiative to Bring Debt Indicators to Comfortable Levels Even After Including Domestic Debt

The updated public debt indicators incorporated the revised macroeconomic framework and—for the first time—the impact of domestic debt, including the bank recapitalization and domestic arrears clearance.

The analysis confirmed the earlier finding of a substantial reduction of the NPV of total (external and domestic) debt over GDP to around 30 percent in the steady state. The PV of debt to revenue and the debt service-to-revenue ratio would also stabilize at comfortably low level.

Sensitivity analysis confirmed that Togo’s debt dynamics are particularly vulnerable to substantial reductions in official aid, the level of concessionality, and macroeconomic shocks, particularly a reduction in growth.

uA01fig01

Togo: NPV of Total Debt-to-GDP

Citation: IMF Staff Country Reports 2009, 194; 10.5089/9781451836677.002.A001

B. Strengthening Medium-Term Fiscal Policy: Crucial to Economic and Debt Sustainability

27. Continued efforts to increase project spending and reinforce public expenditure management will be critical to economic growth and stability, particularly given the global crisis. Because Togo is a member of the WAEMU, sound fiscal policies are a primary instrument for reinforcing growth and sustainability, both external and fiscal. Fiscal policy will target a moderate domestic primary balance, refocus domestic spending towards priority sectors, and increase overall outlays in health, education, and public infrastructure thanks to increased external support. Fiscal policy, supported by increased external assistance, can also be used temporarily to counter the decline in global demand and support long-term growth—so long as it is well-targeted, implemented by sound institutions, and consistent with debt sustainability.

Strengthening spending capacity and quality

28. Togo’s public capital spending is among the lowest in the WAEMU and sub-Saharan Africa (Figure 3). Even though earlier progress in public financial management contained spending pressures, staff emphasized fiscal policy needs to reallocate spending toward public infrastructure and priority social spending to underpin long-term growth and implement the government’s PRS. Togo’s progress toward the Millennium Development Goals has accordingly been slow (Table 11).

Figure 3.
Figure 3.

Capital investment in the WAEMU countries

(Percent of GDP - latest available data)

Citation: IMF Staff Country Reports 2009, 194; 10.5089/9781451836677.002.A001

Table 11.

Togo: Selected indicators on the Millennium Development Goals 1990-2007

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Source: World Development Indicators database

29. Policy Response and Authorities’ Views: The authorities agreed that public investment spending needs to be boosted, both for long-term development and to offset the expected impact of the global crisis. For at least the medium term this boost in capital and social spending is expected to be financed by higher external grants and highly concessional loans. To ensure that development objectives are reached while preserving a sustainable fiscal balance, the mission has encouraged the authorities to reduce the share of nonpriority current spending (such as untargeted transfers) and increase outlays on both public infrastructure and human capital (see below). The action plan discussed above to strengthen project execution is an important element in this effort.

More active cash and debt management

30. The Treasury is strengthening cash and debt management. It is implementing a new template to assess cash needs on an ongoing basis and is testing a new Integrated Budget Execution and Reporting System (SIGFIP) to track revenue and spending throughout budget execution. To build its capacity to manage cash, the Treasury issued short-term bills on the regional market for the first time in September 2008. Coordinated with the BCEAO, the issuance of 0.8 percent of GDP was well received by domestic banks. The government is planning additional issuances for 2009, in part to expedite clearance in cash of domestic arrears.9

31. Policy Response and Authorities’ Views: Better real-time budget accounting and oversight continues to be an agreed priority. Staff discussed steps to ensure better coordination between line ministers and the Treasury on tracking priority spending. While the introduction of SIGFID on a testing basis is welcome, staff noted that improvements will be needed before it can become fully operational. The mission commended the authorities on their plan to disseminate regular reports on budget execution in line with the GFS.

32. It is important to pursue the significant institutional reforms underway to consolidate debt management. Staff urged the authorities to improve and centralize debt data and explicitly define a debt strategy that is coordinated with cash flow needs and minimizes borrowing costs. Authority to contract debt on behalf of the government needs to be centralized.

Growth-friendly tax policy

33. A broad-based economic pick-up would benefit from a more business-friendly tax environment. The tax system is complex and costly to administer, even by regional standards, with an excessive number of rates and numerous exemptions.

34. Policy Response and Authorities’ Views: The authorities recognize the need to streamline the tax system and further reduce rates, particularly for corporate and income tax. They report that better management and computerization are reducing tax evasion, though there is still considerable scope for progress. They also discussed their plans to enhance communication with the business community.

C. Enhancing Productivity Growth and External Competitiveness: The Path to Higher and Sustainable Economic Growth

35. To sustain its economic revival, Togo will have to boost productivity and improve its external competitiveness. The policy priorities are to restructure state-owned banks and enterprises, invest in public infrastructure and human capital, and create a more favorable business environment.

Banking sector

36. Despite forceful first steps to restructure state-owned banks, financial intermediation needs to be deepened to contribute to growth. The high level of NPLs in Togo has hamstrung intermediation for decades (Figure 2), though the microfinance sector has partly compensated for this, particularly in rural areas. While securitization is a necessary step to restore the flow of credit, further steps must also be taken to resume sound lending to the private sector. In particular efforts are needed to tackle the structural impediments to expanding lending to small and medium enterprises and households. Togo’s considerable potential as a commercial hub and service provider cannot be fully realized if credit cannot reach small businesses in the trade sector.

37. Policy Response and Authorities’ Views: Staff has urged the authorities to complete implementation of the strategy for recovery of the banking sector and identify further steps to facilitate credit access. The agreed priorities are to (i) ensure that the recommendations of the regional banking commission on management and oversight are implemented; (ii) create a more predictable business environment; (iii) address bottlenecks to a well-developed collateral market, particularly impediments to land and real estate property rights; and (iv) improve creditor protection and credit information. Staff noted the continuing need for technical cooperation with Fund and Bank staff, including a possible FSAP once the restructuring process is complete.

SOEs: Electricity, water, telecommunications, and phosphate

38. The quality of services provided by SOEs operating in noncompetitive markets is low by regional standards, hampering growth and competitiveness. Leading examples are the lack of a reliable energy and water supply, the low level of telecommunication services, and poor indicators from business climate international surveys, such as those of the World Bank. The near-term constraints on growth imposed by electricity shortages were relaxed somewhat, by installing new generators in the past year, although shortages still jeopardize growth over the medium term.

39. Policy Response and Authorities’ Views: Staff encouraged the authorities to pursue aggressively ways to increase the coverage and quality of electricity, water, and telecommunication services. Staff welcomed the plans to increase the electricity supply in 2009 through an independent power producer. The authorities are also seeking to ensure other sources of energy, such as gas from Nigeria. Staff discussed the government plan to improve management of the CEET, whose rates are slightly below the cost of production and which has large payment arrears from both the private and the public sector. The government outlined ambitious plans to increase the supply of and access to electricity, as well as improve telecommunication and Internet services. Staff urged consideration of comprehensive strategies for these sectors that take full advantage of market-based approaches, such as private investment and increased competition; mobile phone services in particular might benefit from the entrant of a new provider to compete with the dominant state-owned provider.

40. To boost production of Togo’s high-quality phosphate—now at less than a quarter of potential capacity—the authorities plan to finalize a long-term reform strategy on the basis of the World Bank-financed audit. The strategy would define the financial and organizational conditions conducive to attracting strategic investors, which is crucial to complete the restructuring process. Achieving full capacity could increase GDP by as much as 2 percent.

41. Policy Response and Authorities’ Views: Staff urged the authorities to move quickly to rehabilitate the phosphate sector. Staff noted that the increase in phosphate production in 2008 and the improved managerial and financial situation of the SNPT are steps in the right direction. It encouraged the government to continue to closely monitor the finances and management of the phosphate company. The authorities intend to proceed rapidly once the strategic audit is complete.

D. Raising External Competitiveness

42. International comparisons highlight the importance of Togo’s priorities for boosting productivity and growth—infrastructure and human capital, financial intermediation, and a business friendly environment (Figure 4). Indicators of business climate and infrastructure endowment show that Togo is positioned below its main regional competitors. Surveys reflect perceptions that establishing a new company in Togo is complex and costly, the judicial system ineffective, and the administration inefficient. The authorities acknowledge these weaknesses and recognize that Togo’s relative positioning as a business space compared with the other countries in the subregion has deteriorated. They also recognize that increasing productivity in all sectors will require a substantial rehabilitation of public infrastructure and an education system more focused on technical skills. Progress in these areas will enable Togo to capitalize on its advantages as a regional hub with a well-educated but relatively cheap workforce.

Figure 4.
Figure 4.

Togo: Improving Competitiveness and Boosting Economic Growth

Citation: IMF Staff Country Reports 2009, 194; 10.5089/9781451836677.002.A001

43. A variety of macroeconomic analyses of the balance of payments and the real effective exchange rate (REER) suggest that Togo’s current account balance and exchange rate are on balance broadly in line with fundamentals:

  • The REER has largely mirrored WAEMU-wide trends since devaluation. Econometric estimates of the equilibrium real effective exchange rate (EREER) suggest that the real exchange rate is not seriously misaligned despite a recent trend toward overvaluation (Box 3).

  • The current account deficit is comfortably financed by inflows through the capital and financial account, in particular project grants and concessional loans (Tables 2 and 5).

  • The macroeconomic balance approach suggests Togo’s projected current account deficit would be in line with the norm for a low income African country that receives aid inflows. Nonetheless, Togo’s ability to sustain the projected current deficits (5-6 percent of GDP) over the medium-term depends on the expected increase in aid inflows (consistent with donor pledges) or other, non-debt-creating inflows such as FDI.

Togo’s REER: No Serious Misalignment Despite Recent Trend Toward Overvaluation

Togo’s real effective exchange rate (REER) has been on an upward trend since it plunged in 1994 following the devaluation of the F CFA (Figure 3). This appreciation has accelerated in recent years with the continued strength of the Euro.

The text figure compares the REER with the estimated equilibrium REER (EREER).1 The result of the estimation suggests that most of the long-term fluctuation has been explained by changes in fundamentals.

The results indicate a slight overvaluation of the REER since 2005 that intensified in 2008. The recent widening in the gap between the REER and the EREER is due to inflationary pressures in 2008 combined with the Euro appreciation against the dollar. However, with the recent deceleration in inflation in Togo, Euro depreciation, and terms of trade improvement, the REER is expected to revert toward its equilibrium.

1 To calculate the EREER the FEER approach was used with the following fundamentals: terms of trade, government spending, openness, and real GDP per capita—all variables that are significantly correlated with the REER and share a cointegrating relation.

44. Policy Response and Authorities’ Views: The mission supported the authorities’ plans to boost competitiveness and growth potential as embodied in the PRS. Their strategy appropriately focuses on three priorities: (i) rehabilitating transport infrastructure; (ii) providing quality education to more of the population (following the advice of the World Bank); and (iii) improving the business environment (through a new investment code, corporate tax reform, easier business registration, better allocation and recording of property rights, and—with the support of the EU—a more effective judicial system). Concerning competitiveness, the current account and real exchange rate appear sustainable, despite a recent trend toward real appreciation. Staff noted that Togo’s competitiveness benefits from its low wage levels, especially considering educational attainment, relative to other WAEMU countries (Figure 4). Staff advised out that membership in the WAEMU currency zone continues to serve Togo’s economic interests as an anchor of stability; the emphasis should be on the implementation of agreed fiscal and structural policies to promote growth and productivity.

APPENDIX I. Letter of Intent

Lomé, April 1, 2009

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

U.S.A.

Dear Mr. Managing Director:

1. Further to my letter dated September 12th, 2008, I wish to take the opportunity of the second review of the program to report on the progress made in implementing this financial program supported by the Poverty Reduction and Growth Facility (PRGF) arrangement. In spite of the external shocks suffered during the first year of the program, we have remained committed to pursuing economic reforms with a view to consolidating the results of the actions undertaken over the last few years. We have made considerable progress, enabling us to meet our objectives under the reform program and fulfill our commitments. We would also like to explain our policy plans and commitments as the reform program shifts to a new phase in an uncertain global environment.

Background

2. Launched in 2006 as part of the government’s strategy to overcome the prolonged social, political, and economic crisis, our economic recovery and poverty reduction program aims to restore macroeconomic stability, rationalize the public finances, and boost economic growth in order to raise living standards. Our major priority remains the implementation of our Interim Poverty Reduction Strategy Paper (I-PRSP) which underpins the program. The government’s program, supported by the PRGF arrangement, has achieved significant results for the first two objectives despite difficulties beyond its control, such as the steep rise in world food and oil prices and the severe flooding that took place in August 2008.

3. Indeed, the program’s framework contributed to mitigating the effects of these shocks on the public finances and to improving the macroeconomic situation. The government’s financial situation has improved significantly. The program has also enabled us to normalize relations with our external creditors and to reach the HIPC decision point in November 2008, thus opening the way for significant debt relief and financial and technical support. Further action and continuing vigilance remain necessary in pursuing these objectives. The program is entering a phase that places greater emphasis on accelerating growth and reducing poverty. Despite the efforts and sacrifices made in implementing the measures called for in the program, the results in terms of growth have been mixed as a result of the difficulties mentioned above. Moreover, the current global economic slowdown threatens to further delay the pickup in growth that was much expected by the population of Togo.

Recent economic developments

4. The Togolese economy and population were seriously affected by the global environment and the floods in 2008. The expected economic recovery did not materialize and the growth rate hovered around 1.1 percent, which is below the average for the last five years. This poor performance is mostly attributable to the damage caused by the floods and to the global hike in food and energy prices. In the wake of these shocks, inflation rose to a peak of 15.8 percent in August (year-on-year) before falling back to 8.4 percent at the end of the year with the reversal of global price rises. Reflecting the deterioration of the economy, household purchasing power has eroded.

5. The current account of the external balance of payments has worsened as a result of deteriorating terms of trade and the destruction caused by the floods. The current account deficit is projected at 6.6 percent of GDP in 2008, compared to 3.9 percent in 2007. The monetary situation has been characterized by an increase in foreign assets and slow growth in domestic credit due to stagnation in the economy. These developments have led to a slower expansion in the money supply, which rose by 16 percent.

Implementation of the PRGF-supported program

6. The strict implementation of the PRGF-supported program has provided a flexible and sound macroeconomic environment which has enabled Togo to deal with the impact of external shocks, while contributing to the achievement of the program’s objectives. Despite the difficulties, public finances improved during the year and structural reforms have remained on track. All performance criteria and quantitative indicators for end-December 2008 have been met, with the exception of the indicative target for the minimum level of domestically-financed social and capital spending (see Table 1). Similarly, all structural benchmarks were achieved on time, except for a three-month delay in the case of one benchmark (Table 2).

Table 1.

Togo: Quantitative Performance Criterion and Indicative Targets

June 30, 2008 - December 31, 2009

article image

Letter of Intent dated March 28, 2008.

Letter of Intent dated September 12, 2008.

Continuous performance criterion.

Table 2.

Structural Conditionality for 2008

article image

7. The government’s good financial performance is attributable to strong mobilization of domestic resources and solid control over recurrent expenditure. On the other hand, the rate of execution of capital expenditure has been low. Specifically, repairs to infrastructure damaged by the August floods were delayed by the country’s limited absorptive capacity. Revenue collection was bolstered by the strengthening of the tax and customs administrations and the progressive computerization of customs operations. As a result, the PRGF-supported program ceilings for the primary fiscal balance and domestic financing were met by a comfortable margin. The primary balance stands at 0.4 percent of GDP and the government’s net position with the banking system has improved. Greater fiscal discipline has prevented the accumulation of payment arrears and the government has neither issued nor guaranteed any external debt on non-concessional terms.

8. Significant progress has been made in implementing the structural reforms aimed at enhancing public financial management, repairing the damage to the financial sector caused by the prolonged social and political crisis, and creating the conditions for a return to financially viable and healthy banks and industries (see Table 2).

9. Significant progress has been made in public financial management reform:

  • A strategy for clearing Togo’s domestic arrears was adopted by the Council of Ministers in December 2008 (meeting a performance criterion) and a national commission to clear the country’s domestic debt has been set up. The clearance of arrears will be carried out on the basis of the budget resources allocated for that purpose. The combined impact of implementing the strategy and the financial sector reform will strengthen the financial position of the enterprise sector and boost economic activity.

  • With a view to limiting any distortions in economic incentives and broadening the tax base, we have included in the 2009 budget some important measures to reduce tax and customs exemptions in the Free Economic Zone, thus meeting a structural benchmark six months ahead of the program schedule. The General Tax Code is being updated to incorporate the amendments made in successive budget laws since 1998.

10. Continuing the process of bank restructuring is key to economic stability and to effective financial intermediation for raising growth potential:

  • In November and December, the government initiated a financial restructuring process through the securitization of non-performing loans (NPLs) extended by banks to state-owned entities as well as those made by state-owned banks to the private sector. To that end, a Memorandum of Understanding was signed between the government of Togo and the banking pool (BTCI, UTB, BIA-TOGO, and ECOBANK-TOGO) for securitizing NPLs validated as at December 31, 2007 (thereby meeting a structural benchmark), with a 35 percent discount on government loans. The bonds amount to 7 percent of GDP and has enabled the three banks to meet the 8 percent minimum coverage requirement for the risk-to-equity ratio. The bonds will be eligible for refinancing by the Central Bank (BCEAO) and will be reimbursed over a period of seven years, after a one-year grace period.

  • In addition, the government is exploring, in consultation with the World Bank, the possibility of creating a structure and mechanism to recover the banks’ NPLs on behalf of the government.

11. We have made significant progress in reforming the state-owned enterprise sector to restore the conditions for sustainable operations:

  • A strategic audit of the phosphate sector (structural benchmark) was launched with the World Bank support in January 2009, three months later than originally planned. This delay was due to the fact that only two firms responded to the initial call for expressions of interest, and a second call had to be issued. The final report could be available by the end of April 2009. The strategic audit will help determine the overall restructuring of the sector and facilitate the search for a strategic partner.

  • In December 2008 the review of CEET’s financial situation to establish the projected budget allocations was completed, and a performance-based contract between the government and CEET was signed (meeting a structural benchmark). The strategic and financial audit of CEET will begin in consultation with the World Bank.

  • For the cotton sector, pursuant to the recommendations from the strategic audit, SOTOCO was liquidated, and a new cotton company was set up and will be rescaled to ensure its financial viability. In addition, the recommended establishment of a mechanism for indexing cottonseed producer prices to world prices has been endorsed by the cotton sector and will be operational during the 2009/10 crop season.

12. The measures taken by the government to alleviate economic hardship in 2008 remained consistent with program objectives. Despite rising prices for consumer goods, no controls were placed on their domestic levels or on international trade in such goods. However, in order to protect the most vulnerable segments of the society, the government sought to mitigate the price impact through targeted measures, including subsidies on seeds and fertilizers, swift payment of retirement pension arrears, and the sale of security stockpiles of foodstuffs in the most affected areas. The government intends to refrain from any interference with the prices of staple consumer goods. Lacking a social security system, the government intends to mitigate international price fluctuations by stressing programs to promote the domestic production and supply of consumer goods, especially staple foods. The government also took fiscal steps to raise household purchasing power by issuing lump-sum grants to civil servants for the last five months of 2008. That temporary step has been replaced in the 2009 budget by a cut in the personal income tax (IRPP). In addition, the Guaranteed Minimum Wage (SMIG, SMAG) was raised as of August 1, 2008. We have also reduced the corporate tax rate by seven percentage points, and the maximum rate is 33 percent as of January 2009.

13. Retail fuel prices did not keep pace with rising world oil prices. A price adjustment mechanism was in place between the government and the oil companies in order to keep prices at the pump stable. By comparing the import price with the benchmark price range (changes exceeding plus or minus 5 percent), surpluses or shortfalls are calculated vis-à-vis the oil companies’ operating margin, which is set at 35 CFA francs per liter. Generally speaking, at a time of rising world oil prices, the oil companies suffer a shortfall, while in the case of falling prices they realize a surplus. The mechanism of surpluses or shortfalls allows pump prices to be kept unchanged, but requires compensation between the government and the oil companies. Faced with rising inflation, and in order to avoid social unrest, the government had kept retail fuel prices at their November 2006 level. As a result, the accumulated shortfall to the oil distributors due to this mechanism has increased considerably. The government commissioned an audit of the sector, which calculated that the net shortfalls incurred by fuel importers totaled 1.5 percent of GDP. Despite the recent turnaround in global oil prices, the government has decided to keep the retail price above world levels. The resulting surpluses will be used to clear the deficit to the oil companies within 20 months, in consultation with the companies. The government intends to review the mechanism for setting the pump prices for oil products in order to avoid creating a contingent liability for the government.

Macroeconomic outlook

14. Togo’s growth in 2009 will be sluggish owing to the global economic slowdown. Economic growth is projected at 1.7 percent. The crisis is expected to lead to a reduction in migrants’ remittances, a decline in the demand for transit and warehousing services, and a drop in phosphate, cement, and clinker exports. We are seeing the early signs of the crisis through the fall in the value of our exports (cotton, phosphate, and clinker). We are closely monitoring trends in development assistance and private transfers for possible declines. This unfavorable development will be offset by an improvement in the terms of trade, renewed confidence following the government’s reform measures, and a substantial boost in public capital spending. In addition, the recent easing of externally induced inflationary pressures, especially on fuel and food prices, should help bring the inflation rate below the 3 percent threshold set in the WAEMU pact on convergence, stability, growth, and solidarity. A significant improvement in the terms of trade will contribute to reducing the current account deficit to about 6.1 percent of GDP, despite the sharp rise in capital spending.

Implementation of the PRGF-supported program in 2009

15. In spite of these risks and difficulties, the government is determined to continue and even accelerate its planned reforms under the PRGF-supported program in order to lay the foundation for strong and sustained growth. We would also like to register our concern about the vulnerability of our economy to external shocks and describe the actions we intend to take to alleviate their adverse economic impact.

16. The fiscal policy objective for 2009 is to preserve our achievements in macroeconomic stabilization, improve the absorptive capacity of the economy, and support economic recovery. In that context, government revenues are projected to be comparable to last year at 16.9 percent of GDP, as a result of continued fiscal reforms, mainly the broadening of the tax base (including in the Free Economic Zone) and administrative capacity building. However, the global crisis remains a downside risk to revenue projections. In view of this, the government will continue to monitor growth and revenue trends closely.

17. Expenditures are projected at 22.2 percent of GDP, i.e., up by 2.5 percentage points from 2008. Despite the additional cost of loan securitization, recurrent expenditure will be contained. The level and share of social expenditures will increase substantially and the food production support program will continue. Investment spending financed both domestically and externally will be boosted by one percentage point of GDP each. Part of this increase will come from a supplementary budget (collectif budgétaire) that we plan to enact in the second quarter to increase spending authority by the amount of the remaining emergency spending from 2008, which will be used exclusively for funding priority infrastructure projects. As a result, the primary fiscal balance should remain at a level equivalent to −0.6 percent of GDP. We also plan an increase from 0.5 to 1.0 percent of GDP in the amount of arrears to be settled in cash. In addition, we have approached our development partners to explore the possibility of additional budget support to increase this amount. The deficit will be financed by budget support expected from our partners, including the European Union (EU), the World Bank, the African Development Bank, France, China, and other bilateral partners. In order to accelerate the implementation of emergency repairs to infrastructure and of the clearance of domestic arrears, we plan to issue in the first half of the year a six-month T-bill for about 1.3 percent of GDP.

18. The reforms envisioned in our program for the rest of 2009 aim to safeguard macroeconomic stability, strengthen public finances and—increasingly—build the foundation for stronger growth, and we are determined to implement and in some cases strengthen them (Table 3).

Table 3.

Structural Conditionality for 2009

article image

19. Key fiscal reforms will be focused on the following points:

  • Before the end of June 2009, the government will make operational the new Treasury structure consistent with WAEMU directives (structural performance criterion). In July 2008, a start was made to reorganizing the Directorate General of Treasury and Public Accounting, with the adoption of legislation creating three main central offices and regional offices of the Treasury, and appointments to the relevant positions were made in December. This new structure will strengthen the Treasury’s capacity to effect better controls and provide more reliable information on revenues, expenditures, and government cash management as well as avoid the accumulation of payment arrears. The Treasury will complete the validation of entry items in the Treasury balance sheet, and will start producing monthly treasury balances with a lag of one month, as of April.

  • The government will start implementing the strategy to clear domestic arrears by the amount provided in the budget and the supplementary budget, and securitize the arrears to suppliers validated by the KPMG audit by December 2009 (structural benchmark).

  • In order to preserve public debt sustainability, the government will ensure that its financing needs are met through grants or highly concessional loans and are committed to maintaining sustainable levels of debt. In this regard, a National Public Debt Committee has been set up to develop, coordinate, and monitor the national policy for the assumption and management of public debt (contributing thereby to achieving a structural benchmark).

  • A plan of action has been launched to strengthen the capacity for quick and effective project implementation in the short run, with a view to enhancing aid absorptive capacity for implementation of the Emergency Program especially to repair flood damage. We will ensure that these measures will be accompanied by reforms to strengthen the cash management so as to ensure that resources are available.

  • In addition, public expenditure control will be enhanced by further reform of government procurement, for which a new law will be passed in June 2009. This reform is essential for guaranteeing the efficiency of public investment outlays.

  • Steps have been taken to complete the remaining structural reforms for June 2009, including the enactment of the new law on the Court of Auditors, the appointment of judges to this body, the preparation of the 2007 management accounts and the Loi de règlement (budget reconciliation law) for 2007. These actions will also move Togo toward the HIPC completion point.

20. Further bank restructuring will enable Togo’s economy to improve quickly the financial intermediation needed to support economic activity:

  • The initial call for proposals for strategic investors in the four major state-owned banks will be completed before the end of the year, as planned (structural benchmark). With support from the World Bank, the government intends to engage the services of one or more investment banks for that purpose. In cooperation with the supervisory authorities, the government will maintain close oversight of banks’ management through to the end of the process.

  • By December, the government will set up a structure and mechanism for managing NPLs that have been exchanged against government bonds (revised structural benchmark). Given the complexity of this operation, which benefits from technical assistance from the World Bank, the timetable has been extended by four months. The mechanism will allow the government to recover some of the cost of recapitalizing the banks and reduce the large stock of cross-debts, which will help revitalize credit channels.

21. Maintaining sound public finances and reviving growth will require reforms to state-owned enterprises so as to restore their financial health, guard against future losses, and promote gains in production and productivity:

  • The government intends to assist the new cotton company to obtain the credit necessary to complete its operations in its first year, but that assistance will remain consistent with the current fiscal framework.

  • The government will prepare a development strategy for the phosphate sector based on the strategic audit, no later than September 2009 (structural benchmark), as planned. The final report could be available by the end of April 2009. The strategic audit will help shape the overall restructuring of the sector and facilitate the search for a strategic partner.

22. In order to address external shocks and ensure economic recovery, we will need the continued support of the development partners who agreed in Brussels in September 2008 to mobilize resources in the context of the resumption of international cooperation and in accordance with the principles of the Paris Declaration and the Accra Agenda for Action. Beyond the resources required for the clearance of arrears and debt servicing, Togo needs immediate new resources (in the form of grants or concessional loans) to finance the investments that are essential to improve economic infrastructure, deliver social services, reduce poverty, and more generally, to achieve the MDGs. We welcome our partners’ decision to increase the level of aid and to ensure maximum flexibility in their procedures. For its part, Togo is determined to meet its floating completion point triggers under the HIPC initiative as early as possible in 2010.

23. Work on preparing the full Poverty Reduction Strategy Paper is far advanced. At the heart of the process is the government’s will and commitment to a participatory approach involving all segments of society. This participatory approach has allowed all the stakeholders from the public and private sectors to take ownership of the PRSP process. Thematic studies have been conducted with input from civil society organizations through consultations that led to the production of a preliminary draft of the F-PRSP. Regional consultations on this draft have been held and the document will be sent to the National Assembly for consideration before submission for national validation and adoption by the Council of Ministers, no later than April 30, 2009.

24. Progress under our PRGF-supported program will be monitored against the revised end-June PC and end-December 2009 quantitative PCs understandings on which have been reached with the mission. We would like for the fourth review under the arrangement to be completed by the end of April, 2010.

25. To support our policies and in view of the remarkable progress achieved in implementing the PRGF-supported program, we are requesting the completion of the second review. We also request disbursement of the third loan, including the augmentation approved by the IMF Board during the first PRGF review.

26. The government is convinced that the measures and policies set out in this Letter of Intent are sufficient to achieve the program’s objectives. It stands ready to take any additional steps needed to achieve them. The government will consult with the IMF, at its own initiative or at that of the Managing Director, in advance of any additional measure or revisions to the policies set out in this Letter of Intent.

27. The government authorizes the IMF to publish its staff report and the Letter of Intent related to the discussions on the second review of the program.

Sincerely yours,

/s/

Adji Otèth AYASSOR

Minister of Economy and Finance
1

A discount of 20 percent will be applied to the verified domestic arrears. Amounts not cleared in cash will be settled with government securities with a maturity of 5 to 7 years at below-market interest rates.

2

The former publicly owned cotton ginning company, SOTOCO, was liquidated in 2008 after it was unable to pay more than 250.000 farmers for their 2004/2005 crop. After the company was audited, farmers were paid off in cash and its debt to domestic banks was securitized by government bonds. A new cotton ginning company, NSCT (New Cotton Company of Togo) has been created as part of the reforms to the sector.

3

The net loss assumes the sale of the stock of unsold cotton, worth about 0.2 percent of GDP.

4

In the context of the transition to review-based structural conditionality decided by the Board, the Togolese authorities chose to maintain the sole existing structural performance criterion on Treasury reform, to be completed by the end of June 2009.

5

The size of potential privatization receipts and their inclusion as revenue will have to be assessed as the process is closer to the privatization stage (they are not included in 2009).

6

The Technical Memorandum of Understanding remains unchanged.

7

See also the Selected Issues Paper.

8

The DSA update was an interim partial update conducted by the staff. A full DSA will be prepared with Bank staff towards end of 2009.

9

See Selected Issues Paper on the principles for the design and implementation of a domestic debt management strategy for Togo.

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Cover IMF Staff Country Reports
Togo: 2009 Article IV Consultation and Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility: Staff Report; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Togo
Author:
International Monetary Fund
Volume/Issue:
Volume 2009: Issue 194
Publisher:
International Monetary Fund
ISBN:
9781451836677
ISSN:
1934-7685
Pages:
76
DOI:
https://doi.org/10.5089/9781451836677.002
Figure 1.

Togo: Recent Macroeconomic Developments
Figure 2:

Cotton and Phosphate Prices

(January 2003 - January 2009)

Togo: NPV of Total Debt-to-GDP
Figure 3.

Capital investment in the WAEMU countries

(Percent of GDP - latest available data)
Figure 4.

Togo: Improving Competitiveness and Boosting Economic Growth