Benin
Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Nonobservance of Performance Criterion and Augmentation of Access: Staff Report; Staff Supplement; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Benin

This paper discusses key findings of the Sixth Review under Poverty Reduction and Growth Facility (PRGF) for Benin. The macroeconomic outlook is weaker for 2009–10, reflecting the impact of the crisis. Real GDP growth is expected to slow down to about 3–4 percent in 2009–10. The authorities’ policy response of allowing automatic fiscal stabilizers to work is appropriate. The implementation of structural reforms needs to be accelerated to enhance the competitiveness of Benin’s economy and increase its resilience to exogenous shocks.

Abstract

This paper discusses key findings of the Sixth Review under Poverty Reduction and Growth Facility (PRGF) for Benin. The macroeconomic outlook is weaker for 2009–10, reflecting the impact of the crisis. Real GDP growth is expected to slow down to about 3–4 percent in 2009–10. The authorities’ policy response of allowing automatic fiscal stabilizers to work is appropriate. The implementation of structural reforms needs to be accelerated to enhance the competitiveness of Benin’s economy and increase its resilience to exogenous shocks.

I. Executive Summary and Staff Appraisal

Performance in 2008 was strong, notwithstanding some slippages. Real GDP growth is estimated at 5 percent. Inflation averaged 8 percent, reflecting the full pass-through of higher international food and fuel prices since July 2008. The authorities met the basic primary fiscal target under the program with a strong domestic tax effort and a tight control on spending in the second half of 2008. The performance criterion on net domestic financing, however, was missed as the government provided lending to the state-owned electricity company in financial distress. Most structural benchmarks have been completed, some with delay.

The macroeconomic outlook is weaker for 2009–10 reflecting the impact of the crisis. Real GDP growth is expected to slow down to about 3-4 percent in 2009–10. The external current account deficit (excluding grants) is projected to widen to over 10 percent of GDP in 2009, reflecting weak demand for exports and lower transfers. Prudent policies and lower commodity prices should bring inflation down below 3 percent by 2010.

The authorities’ policy response of allowing automatic fiscal stabilizers to work is appropriate. For 2009, the overall spending envelope agreed under the program will be maintained, except for higher outlays on social safety nets. As a result, the basic primary balance will deteriorate to a deficit of 0.8 percent of GDP in line with revenue shortfalls. This is expected to produce a financing gap of CFAF 44.3 billion (1.4 percent of GDP) in 2009, which is expected to be covered by additional financing from the Fund, the European Union (EU), the World Bank, and other multilateral and bilateral donors.

The implementation of structural reforms needs to be accelerated to enhance the competitiveness of Benin’s economy and increase its resilience to exogenous shocks. The adoption of a comprehensive strategy for the cotton sector and the implementation of the public finance management (PFM) action plan are welcome steps. The authorities intend to privatize Benin Telecom, restructure the electricity company, streamline procedures and improve capacity at the Port, and strengthen the judicial system, land tenure, and financial services.

Staff supports the authorities’ request for: (i) the completion of the sixth PRGF review, (ii) the waiver for the nonobservance of the quantitative performance criterion, and (iii) the augmentation of access by 15 percent of the quota. The nonobservance of the quantitative performance criterion at end-December 2008 reflected the slippage already waived by the Executive Board at end-June 2008, a reduction of the float, and unforeseen net lending to the electricity company in response to high oil prices. The authorities have taken remedial actions by increasing electricity tariffs and undertaking a financial audit of the electricity company. The global economic crisis is putting pressure on treasury resources; the augmentation of access would cover part of the financing gap pending the mobilization of additional external concessional financing. A successor PRGF arrangement would support the authorities’ efforts to mitigate the impact of the global economic crisis in the short run, while accelerating structural reforms to reach higher sustainable growth over the medium term.

II. Recent Economic Developments

Benin remains one of the fastest growing economies in the WAEMU

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Sources: Country authorities and IMF staff estimates and projections.

Inflation was above the WAEMU convergence criterion of 3 percent

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Sources: Country authorities and IMF staff estimates and projections.

The level of gross official reserves remains the highest in the WAEMU region.

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in months of prospective imports of goods and services

Sources: Country authorities and IMF staff estimates and projections.

1. Growth continued to strengthen in 2008. Buoyant activity in the Port of Cotonou, high demand from neighboring Nigeria, and the revived momentum for reforms helped raise real GDP growth in 2008 to 5 percent, the highest level since 2005 (Figure 1).

Figure 1.
Figure 1.
Figure 1.
Figure 1.
Figure 1.

Benin: Macroeconomic Performance, 2005–08

Notwithstanding higher inflation, prompted by higher international food and fuel prices, real GDP growth reached the highest level since 2005‖

Citation: IMF Staff Country Reports 2009, 252; 10.5089/9781451803600.002.A001

Sources: Beninese authorities and Fund staff estimates.

2. The decline in commodity prices helped ease inflationary pressures (Figure 2). The authorities’ decision in July to allow a full-pass-through of international food and fuel prices led to an initial increase in inflation, but also eased inflationary pressures when these prices started to decline after August. As a result, annual average inflation (8 percent) remained below the program target.

Figure 2.
Figure 2.
Figure 2.
Figure 2.
Figure 2.

Benin: Price Developments, 2005–08

(January 2000 = 100)

Citation: IMF Staff Country Reports 2009, 252; 10.5089/9781451803600.002.A001

Sources: Beninese authorities and Fund staff estimates.

3. Buoyant transit trade and higher cotton exports helped narrow the external current account deficit (excluding grants) to 9.2 percent of GDP (Figure 3). Donor assistance and FDI inflows helped finance the current account deficit. Cross-currency movements helped reverse part of the real exchange rate appreciation in the first half of 2008, limiting the annual appreciation to 4.2 percent.

Figure 3.
Figure 3.
Figure 3.
Figure 3.
Figure 3.

Benin: Selected Competitiveness Indicators, 2005–08

An improvement in the terms of trade led to a narrower current account deficit ‖

Citation: IMF Staff Country Reports 2009, 252; 10.5089/9781451803600.002.A001

Sources: Beninese authorities and Fund staff estimates.

The overall balance worsened more strongly than the WAEMU average, owing to a larger decline in revenue and an increase in expenditure.

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

Sources: Country authorities and IMF staff estimates and projections.

Broad money grew at the fastest rate in the WAEMU.

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Sources: Country authorities and IMF staff estimates and projections.

4. The primary surplus narrowed but remained positive. Strong domestic revenue collections partly offset the decline in nontax revenue from the exceptionally high level in 2007 (Figure 4). Expenditure and net lending increased by about 1 percent of GDP, prompted by a 28 percent increase in the wage bill, and large advances to the electricity company. Investment spending declined, reflecting lower external financing.

Figure 4.
Figure 4.
Figure 4.
Figure 4.

Benin: Selected Fiscal Indicators, 2005–08

Notwithstanding continued revenue improvements‖

Citation: IMF Staff Country Reports 2009, 252; 10.5089/9781451803600.002.A001

Sources: Beninese authorities and Fund staff estimates.

5. Strong growth in private sector credit and net claims on the government contributed to a large monetary expansion. Broad money grew by 29.3 percent in 2008. At the same time, the quality of commercial banks’ portfolios worsened somewhat, reflecting a rapid expansion of credit to consumers and the cotton sector: the share of nonperforming loans rose to 9.6 percent at end-2008, from 8.9 percent at end-2007.

III. Performance Under the Program

6. All quantitative performance criteria under the program at end-2008 were met, except one. A shortfall in donor assistance, the authorities’ efforts to reduce the float, and their decision to provide emergency financial assistance to the electricity company, led to a breach of the end-December 2008 quantitative performance criterion on net domestic financing by CFAF 113.8 billion (3.8 percent of GDP). This led to a corresponding reduction in government deposits with the banking system. As remedial actions, the authorities will be increasing electricity tariffs by an average of 13 percent in June 2009, and are undertaking a financial audit to inform future reforms (MEFP ¶ 34). The continuous performance criteria on the nonaccumulation of external arrears continue to be met. The indicative target on the wage bill was missed, as the authorities provided higher wages and bonuses to civil servants, partly in response to the food and fuel crisis

7. The structural reform agenda is moving forward with some delays. Three out of six structural reform benchmarks have now been completed, including the completion of a cotton reform strategy (MEFP ¶ 12-18). The strategy to reform the civil service pension system has been delayed by the completion of the audit of the pension system in April 2009. The authorities are in the process of extending the ASYCUDA system to regional customs offices and adopt a strategic information system at the income tax department. The authorities expect to complete these benchmarks by end-2009 at the latest.

8. During the last four years of the PRGF arrangement, performance has been relatively satisfactory (Box 1). On the macroeconomic side, the authorities have successfully increased GDP growth to 5 percent, supported by continued fiscal consolidation. On the structural side, however, there have been significant slippages, mainly arising from the authorities’ difficulty to muster the necessary domestic political consensus.

Performance Under the Current PRGF Arrangement

Supported by prudent fiscal policies, Benin has experienced moderate inflation and a pick-up in economic growth under the current PRGF arrangement, thus reversing the declining trend in growth in the first half of this decade. Benin continued, under the PRGF–supported program, to make significant progress in macroeconomic stabilization (Text Table 1). The authorities implemented sound macroeconomic policies, including a strong fiscal consolidation, aided by debt relief received under the enhanced HIPC Initiative and MDRI (Text Table 2). As a result, growth accelerated steadily since 2006. The implementation of the reform agenda, however, has been mixed, notwithstanding an acceleration in the second half of 2008. The main reforms that remain to be implemented concern: (i) the restructuring of public utilities (especially electricity and telecommunications), in order to expand service capacity, reduce production costs, and improve competitiveness; (ii) the implementation of the new medium-term strategy of public financial management, in order to strengthen administrative capacity and effectively use the available fiscal space to sustain growth and alleviate poverty; and (iii) a comprehensive reform of the civil service, in order to improve the functioning of public services, contain the public wage bill, and preserve the financial viability of the civil service pension fund.

Table 1.

Benin: Macroeconomic Performance Under the Program, 2005–08

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Table 2.

Benin: Performance Under the Program, 2005–09

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Sources: Country authorities and IMF staff estimates and projections

IV. Policy Discussions

9. The policy challenges for Benin are to:

  • Minimize the adverse impact of the global economic crisis over the next two years; and

  • Accelerate structural reforms to lay the foundation for higher growth in the medium term.

A. Impact of the Global Economic Crisis

10. The crisis has already reached Benin.1 Between September 2008 and March 2009, international prices of Benin’s main export, cotton, fell by 32 percent in dollar terms (Figure 5). Banks reported that workers’ remittances were down 30 percent in the first quarter of 2009. During the same period, customs revenue collections were 18.4 percent lower than programmed, reflecting the slowdown of activity in Nigeria and the depreciation of the naira in late 2008. As a result, the government was forced to reduce its deposits at commercial banks by CFAF 60 billion (1.9 percent of GDP), further straining liquidity in the banking system. In turn, commercial banks continued to make significant use of the weekly liquidity window at the regional central bank. Lack of liquidity could potentially compromise the government’s capacity to issue domestic debt on the regional debt market at nonconcessional terms.

Figure 5.
Figure 5.

International Cotton Prices, 1/08 - 3/09

(Cents per pound)

Citation: IMF Staff Country Reports 2009, 252; 10.5089/9781451803600.002.A001

Source: Bloomberg.

11. Growth and fiscal revenue will continue to come under pressure (Figure 6). Real GDP growth is projected to drop to 3.8 and 3.0 percent in 2009 and 2010, respectively, as global demand for Benin’s exports declines, trade relations with Nigeria weaken, and inflows of workers’ remittances and foreign direct investment fall, widening the external current account deficit. Lower food and commodity prices will reduce customs revenue, while the slowdown in economic activity will reduce direct and indirect taxation.

Figure 6.
Figure 6.
Figure 6.
Figure 6.
Figure 6.
Figure 6.
Figure 6.

Benin: Impact of the Crisis and Medium -Term Outlook

In 2009-10, the global crisis will weaken export demand and cotton prices, reduce inflows of remittances and FDI‖

Citation: IMF Staff Country Reports 2009, 252; 10.5089/9781451803600.002.A001

Sources: Beninese authorities and Fund staff estimates and projections.

12. The impact of the crisis is expected to be temporary. With the expected recovery in the global economy in the second half of 2010, and prompted by continued structural reforms to improve competitiveness, investments in infrastructure, and a more efficient public administration, real GDP growth could recover to its potential of 6 percent by 2012. Inflation would remain below 3 percent, and the current account deficit (excluding grants) would narrow to 7.1 percent of GDP by 2014, reflecting increasing exports and remittances. Ongoing inflows of public and private capital would help keep reserves above 5 months of imports of goods and services.

B. Policy Response

13. The authorities intend to tackle the crisis by allowing automatic fiscal stabilizers to work and increasing social safety nets (MEFP ¶ 22–26). For 2009, this implies keeping to the overall spending envelope agreed under the program, except for additional discretionary outlays on social safety nets amounting to 0.7 percent of GDP. These outlays would: (i) provide access to basic health services for targeted segments of the population, (ii) increase resources for labor intensive public projects, and (iii) give transfers to small farmers to transition from cotton to more profitable crops.2 Additional fiscal easing would be applied in 2010. Given the expected shortfall in revenues, the basic primary balance would turn into deficit in 2009 and 2010, and the overall fiscal deficit (excluding grants) would widen to 5.9 percent of GDP in 2009 and 6.1 percent of GDP in 2010 (Figure 7). With limited absorptive and administrative capacity, a larger fiscal expansion could compromise macroeconomic stability and fiscal and debt sustainability, with only limited benefits for growth.

Figure 7.
Figure 7.

Benin: Basic Primary Fiscal Balance and Overall Fiscal Deficit, 2008–14

(Percent of GDP)

Citation: IMF Staff Country Reports 2009, 252; 10.5089/9781451803600.002.A001

Sources: Beninese authorities and Fund staff estimates and projections.

14. The fiscal expansion would generate a financing gap of CFAF 44.3 billion (1.4 percent of GDP) in 2009. The authorities are confident that they will be able to mobilize the additional external assistance from the Fund, the EU, the World Bank, and other donors to close the financing gap. Pending availability of additional financing and to reduce the risk that the tight treasury situation might force the re-emergence of domestic payments arrears, the authorities are delaying 2–3 percent of GDP in nonpriority spending to the second half of 2009. If the additional external financing falls short of the estimated financing gap, the authorities would be forced to cancel or postpone outlays.

15. Although the risk of debt distress remains moderate, the authorities should continue to pursue a prudent borrowing policy. According to the updated Joint IMF-World Bank DSA, all debt indicators remain below the indicative policy-dependent thresholds under the baseline scenario. Benin, however, remains vulnerable to adverse economic developments and external shocks. In particular, lower growth over the medium-to long-term could jeopardize debt sustainability. The authorities therefore intend to accelerate structural reforms and contract new external financing only in the form of grants and highly concessional loans (MEFP ¶ 32).

16. A more accommodating monetary policy and stronger banking supervision could help mitigate the crisis. While monetary policy is conducted at the regional level, staff raised the option of easing the reserve requirements for Benin, which at 15 percent are the highest in the region. The financial sector also needs to be strengthened by improving adherence to prudential regulations and more effective banking supervision (MEFP ¶ 27–30), especially as the economic crisis is likely to worsen the quality of the loan portfolio. Staff encouraged the authorities to undertake a national FSAP.

C. Structural Reforms

17. Accelerating structural reforms will be essential to limit the impact of the crisis and speed up the recovery. The authorities intend to implement: (i) further improvements in tax administration (MEFP ¶ 23–25) and expenditure management (MEFP ¶ 26, 33), and (ii) a comprehensive reform of the civil service. This will be critical to increase revenue, contain further increases in the wage bill, improve the provision of public services, and ensure the financial sustainability of the pension system. State-owned utilities (electricity, telecommunications) and the port will also be restructured and divested in order to improve the delivery of service and enhance their financial viability (MEFP ¶ 34–35). Other reforms will improve land tenure, judicial systems, and access to higher quality financial services.

D. Augmentation of Access and New PRGF

18. The authorities are requesting an augmentation of access for SDR 9.29 million (15 percent of the quota) to help alleviate the current financing shortfall.3 The augmentation is justified by the adverse impact of the global economic crisis, which is putting pressure on public finances and could result in a protracted balance of payments need. The augmentation would cover 17 percent of the total financing gap of CFAF 44.3 billion in 2009. There are indications that the remainder could be covered by additional financial assistance from a new PRGF arrangement in the second half of 2009, the World Bank, the European Union, and multilateral and bilateral donors.

19. Benin’s capacity to repay the Fund is sound. Under the proposed augmented access, debt service to the Fund would rise to SDR 5.08 million in 2015, equivalent to 0.5 percent of exports of goods and services and 0.3 percent of annual government revenue.

20. The authorities have reiterated their intention to request a new PRGF arrangement in the second half of 2009, in support of their efforts to mitigate the fallout of the global financial crisis and lay the foundations for higher sustainable growth. The arrangement, that would cover the period 2009-12, would aim at a recovery of growth to 6 percent by the end of the arrangement, limit inflation below 3 percent, maintain fiscal and debt sustainability, and implement structural reforms to enhance competitiveness. The program is also expected to facilitate the mobilization of concessional external financing, which would help mitigate the impact of the crisis.

E. Risks to the Program

21. Risks to the program are moderate and mainly stem from the global economic crisis. A stronger or more prolonged global downturn, or adverse economic developments in Nigeria, could result in lower growth and additional strains on public finances. A slowdown in structural reform implementation could also postpone the recovery. Delays or shortfalls in the provision of external concessional assistance from donors could also hurt investment and growth, and result in the re-emergence of domestic arrears. The relatively good performance under the current PRGF arrangement confirms the authorities’ commitment to prudent macroeconomic policies. The run-up the 2011 general elections will challenge government perseverance of this policy stance.

Table 1.

Benin: Selected Economic and Financial Indicators, 2006–14

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

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

In percent of broad money at the beginning of the period.

Total revenue minus all expenditure, excluding interest due.

Total revenue minus all expenditure, excluding foreign-financed capital expenditure and interest due.

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

Months of prospective import of goods and services.

Table 2.

Benin: Consolidated Central Government Operations, 2006–14

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

Total revenue minus all expenditure, excluding foreign-financed capital expenditure and interest due.

Payment orders carried over to the following fiscal year.