On behalf of our Togolese authorities, we would like to express our appreciation to Management for its continued support to Togo, and to staff for the quality of their advice and collaboration. Encouraged by this support, our authorities continue to make progress towards consolidating macroeconomic stability, paving the way for stronger growth and reducing poverty. At this critical juncture characterized by an uncertain global environment, this support will carry even more weight in helping Togo meet the requirements for debt relief under the Enhanced HIPC Initiative and the MDRI.

Our authorities share the thrust of the staff appraisal regarding Togo’s performance under the PRGF-supported program since the first review; the vulnerabilities of the economy to exogenous shocks, including the current global recession; and the medium-term growth challenges facing the country. Since the last review under the program in September 2008, performance continues to be strong, with all quantitative and structural PCs and benchmarks having been met, with the exception of a missed indicative target on net domestic financing and a delay in initiating an audit of the phosphate sector, which were due, respectively, to capacity constraints and a factor out of the authorities’ control.

That said, a protracted global recession may deteriorate the country’s growth projections and debt profile, as they are sensitive to shocks, even though the HIPC Initiative would bring debt indicators to comfortable levels. Already, growth in 2008 has been lower than initially expected, reaching 1.1 percent. Other macroeconomic indicators have, however, behaved satisfactorily: inflationary pressures have receded, while the current account deficit has been contained, thanks to falling oil and food prices in the second half of the year.

Our authorities are fully aware that, over the medium term, they need to pursue fiscal and structural policies that are well-targeted, aimed at raising the level and improving the quality of public investment; boosting productivity; and creating conditions conducive to the development of the private sector. In the meantime, they will also pursue their policy and reform agenda set forth in their Letter of Intent, in the context of the PRGF-supported program.

Based on the assessment made by staff, the authorities’ continued track record of good policy performance, and their renewed commitments to sound policies and reforms going forward, we seek the support of the Executive Board for completing the Second Review of the PRGF program and for endorsing the modifications in the PRGF arrangement as laid out in the proposed decision.

Continuing track record of policy and reform implementation

The continuation of a prudent approach in macroeconomic policies, particularly fiscal policies, since the last review—albeit the initial effects of the global financial crisis—attests of the Togolese authorities’ strong commitment to sound policies and macroeconomic stability.

The maintaining of domestic primary balance of +0.4 percent of GDP, thanks to strong revenue collection and improved fiscal management, helped meet another performance criterion at end-December 2008—net domestic financing—with a wide margin. Moreover, supported by greater fiscal discipline, the Togolese government continues to refrain from accumulating any external arrears and from contracting or guaranteeing any external debt that would not meet the concessionality criterion. The only missed indicative target—floor on domestically-financed social and capital spending—was due to weak capacities in the execution of investment projects. Our authorities envisage to remedy this underexecution by reallocating the unspent capital budget of 2008 to 2009 through a supplementary budget, while strengthening in the short term their capacity for more rapid and effective project implementation.

The implementation of structural reforms under the program has also continued satisfactorily, with all structural PCs and benchmarks at end-December 2008 having been observed on time, with the exception of a delayed audit of the phosphate sector. Progress in this area since the last review includes: (i) enhancement of public financial management, with the adoption of a domestic arrears-clearing strategy, the creation of a national commission to this end, reduction of tax and customs exemptions, and improvements in the general tax code; (ii) continuing process of bank restructuring through securitization of NPLs owed by state-owned enterprises (SOEs), as a cornerstone to effective financial intermediation and increased growth potential; (iii) the adoption of an action plan for introducing regular Treasury bill auctions this year, with the agreement of the regional central bank; and (iv) reform of SOEs in the cotton sector (setting up of a new company following the liquidation of Sotoco) and in the electricity sector, with the view to improving their performance and ensuring their financial viability.

The sole delay among the planned structural measures (audit of the phosphate sector) was caused by the fact that an insufficient number of firms responded to the initial call for expressions of interest. Ultimately, the benchmark was observed as a second call was issued successfully and an audit firm selected in a competitive manner. The restructuring of this important sector of the Togolese economy, with the view to attracting a strategic investor, is now underway, with the support of the World Bank.

While our Togolese authorities have taken in 2008 targeted measures to protect the most vulnerable segments of the society amid the economic hardship caused by exogenous shocks, they remain committed to not interfering with the prices of basic consumer goods. Instead, they intend to mitigate world price fluctuations by promoting domestic production and supply of basic consumer goods. As for the oil bill, the government envisages to review the current pump price mechanism (based on constant prices that generate surpluses or shortfalls for the government vis-à-vis oil companies), in order to prevent the build-up of contingent public liabilities.

Program agenda for 2009

In pursuing efforts to revive the economy, amid an unfavorable external environment, our Togolese authorities remain determined to enhance fiscal soundness; continue prudent debt management through external financing based on grants and highly concessional loans; and advance structural reforms in key growth-oriented sectors, notably banks, cotton and phosphates. They understand the critical importance of revitalizing these sectors.

The fiscal policy objective this year is to improve the absorptive capacity of the economy and support the recovery, while preserving the gains achieved in macroeconomic stabilization. As the global crisis is expected to have a greater toll on the domestic economy, our authorities will continue to monitor growth and revenue trends carefully. Six-month T-bills will be issued, amounting to about 1.3 percent of GDP, in order to accelerate the implementation of emergency infrastructure repairs and the clearance of domestic arrears. Other key fiscal reforms will aim at: (i) making operational the new Treasury structure, in conformity with the WAEMU directives; (ii) enhancing the efficiency of investment outlays and, more broadly, public financial management by further reform of government procurement; and (iii) making operational the Cour des Comptes.

Regarding bank restructuring, efforts will be geared at completing the proposals for strategic investors in the four major state-owned banks, while maintaining close oversight of their management throughout the process. The government will also set up, with the technical assistance of the World Bank and the Fund, a mechanism for managing the NPLs that have been exchanged against government bonds.

Reforms of SOEs will also be pursued as scheduled, with a view to restore their financial health and promote production and productivity gains. In the cotton sector, assistance will be provided to the new company in obtaining credit to complete operations in its first year, and in the phosphate sector, a development strategy, based on the strategic audit, will be prepared.

Poverty reduction strategy and HIPC processes

Togo is refining its poverty reduction strategy. The full PRSP is being prepared in a large participatory process involving all segments of society, including the government, the civil society, the business community, development partners and the National Assembly. It is expected to be submitted for national validation and adoption by the Council of Ministers by the end of this month.

Other requirements for the HIPC completion point are also advancing well. Among the completion point triggers, the Procurement Regulatory Agency should be set by the end of April 2009; the Cour des Comptes will be operational in June 2009 as hinted earlier; and an annual report on the revenues from, and payments to, the phosphate company, in line with the EITI criteria, will be published. These transactions are already being published regularly.

Medium term challenges

Our Togolese authorities fully understand that the attainment of greater growth rates in the medium run is predicated on their capacity to close the country’s infrastructure gaps; to boost productivity by taking advantage of moderate wages and a competitive, well-educated labor force; and to create a business-friendly environment. They acknowledge the weaknesses in these areas, and agree with the recommendations of Fund staff. In fact, their approach, embodied in the PRS, focuses on three pillars: (i) rehabilitating infrastructure; (ii) improving the quality of education and making it more accessible; and (iii) addressing the factors that impede a good business environment, notably the investment code, the corporate tax system, the business registration, property rights, and the judicial system.

Conclusion

Togo continues to face capacity and infrastructural challenges. Nevertheless, our Togolese authorities will do their utmost to meet soon the HIPC completion point requirements. These include continuing a good implementation of the PRGF program, putting in place the full poverty reduction strategy and meeting the trigger points under the enhanced HIPC Initiative. They will do so while promoting a climate of political and social stability, and peace. All the efforts made and committed by the authorities, especially in the context of an unfavorable environment, will require the continued support of the international community. Fresh resources to finance investments and reforms are critically needed to achieve the objectives laid out in the PRGF-supported program and the country’s PRSP.

Based on our authorities’ continued good track record and their renewed determination to pursue sound policies and reforms going forward, we call on the Executive Board to support the proposed decision.