Statement by Laurean Rutayisire, Executive Director for Benin

The goal of the last ECF arrangement (2005–09) was to support Benin’s strategy to achieve higher sustainable growth and reduce poverty while preserving macroeconomic stability and reducing vulnerabilities to external shocks. The program achieved most of its objectives. The main macroeconomic challenge ahead is to mitigate the impact of the crisis in the short term, while reaching higher sustainable growth over the medium term. The government’s economic program is geared properly to pursue these objectives. The structural reform agenda is appropriately ambitious.

Abstract

The goal of the last ECF arrangement (2005–09) was to support Benin’s strategy to achieve higher sustainable growth and reduce poverty while preserving macroeconomic stability and reducing vulnerabilities to external shocks. The program achieved most of its objectives. The main macroeconomic challenge ahead is to mitigate the impact of the crisis in the short term, while reaching higher sustainable growth over the medium term. The government’s economic program is geared properly to pursue these objectives. The structural reform agenda is appropriately ambitious.

On behalf of my Beninese authorities, I would like to express my appreciation to Management and staff for the constructive discussions with my authorities, including the President, over the past six months, both in Cotonou and Washington. These discussions contributed to refining my authorities’ medium-term economic and financial program in support of which a new arrangement is requested. The report before us today makes a good account of the contents of these exchanges and the elements of the program. I also wish to express my authorities’ appreciation of the presentations made during staff visit in Cotonou in March 2010, as they enabled useful exchanges on many issues of interest for the program. My authorities are particularly very appreciative of the additional assistance received last year from development and technical partners.

For a long period, Benin performed very well in terms of policy implementation, notably in the context of Fund-supported programs, including under the last arrangement that expired in June 2009. However, over the past few years, Benin has experienced a series of shocks, including the food and fuel crisis and the global economic and financial crisis, which has seriously complicated the implementation of their poverty reduction and growth program. Last year, as my authorities strived to mitigate the impact of those shocks on the population through supportive policies, the emergence of macroeconomic imbalances forced them to review their economic program, in order to preserve long-term macroeconomic stability.

Going forward, my authorities are still facing the challenges of mitigating the impact of the crisis, while laying the foundation for a strong, balanced growth to meet the MDGs. They count on continued external assistance to support their program aimed at addressing these challenges. In particular, they believe that a Fund’s involvement in Benin through an arrangement will be helpful in anchoring reforms and provide a framework for external assistance. Accordingly, my authorities are requesting an Extended Credit Facility arrangement for SDR 74.28 million (120 percent of the quota) for the period covering 2010–2013.

I - Recent Developments

The global economic and financial crisis, together with the floods in the south of the country in July 2009, affected economic activity in Benin last year. As a result, real GDP growth declined from 5 percent in 2008 to 2.7 percent in 2009. Lower external demand for cotton and transit trade due to economic slowdown in neighboring countries led to a widening of the current account. Subsequently, as capital flows also declined, the overall balance of payments ran into deficit for the first time in years.

Policy response to the crisis took the form of a strong fiscal stimulus in the first half of 2009, consisting of wage increases, and higher capital and social spending amid a sluggish economic environment affecting downward revenue performance. In light of the weak prospects for revenue and external funding at the time, my authorities decided to reverse its fiscal stance in the second half of 2009 through a reduction in nonessential expenditures, and a freezing of some expenditure commitments, including new bonuses to civil servants, and of capital spending. Those measures enabled the authorities to limit the widening of fiscal deficit to 7.3 percent of GDP in 2009, financed mainly from external grants, concessional loans, bond issuances in the regional market and the use of SDR allocation.

As already discussed at the meeting on the common policies in the West African Economic and Monetary Union a few months ago, the Banque Centrale des Etats de l’Afrique de I’Ouest (BCEAO), the regional central bank, responded to the crisis by conducting an accommodative monetary policy through liquidity injection, a cut in the intervention rate by 50 bps to 4.25 percent and a reduction in the reserve requirement ratio for Benin from 16 percent to 9 percent. Credit to the economy in Benin increased by 11 percent on account of higher domestic demand in the second half of 2009.

In the financial sector, banks’ asset quality improved as the rate of nonperforming loans declined and capital adequacy ratio remains above the prudential norm. Nevertheless, a few banks are under strict surveillance and one is under provisional administration for not complying with some prudential norms.

Despite the difficult economic environment, my authorities made significant progress in the implementation of structural reforms initiated during the previous arrangement, which aim at improving the competitiveness of the national economy and establishing the conditions for strong economic growth. In particular, aware of the country’s steady loss of competitiveness, as reported in various reports including the World Bank Doing Business report, the government established in early 2009 a steering committee tasked with promoting improvements in the regulatory framework with a view to simplifying the procedures for business creation, tax- and customs-related operations and commercial dispute resolution.

The reform of public enterprises is proceeding well, which has enabled a greater participation of the private sector in several sectors including agriculture, cement, forestry and hotel. In the energy sector, the debt of the electricity company (SBEE) was restructured in March 2010 thanks to the government and all electricity rates were increased by 10 CFAF per kWh on average in April 2010 to improve its financial situation and reduce its burden on public finances. The privatization program will reach another milestone with the sale of a majority stake in the capital of Benin Telecom before the end of this year.

Also noteworthy is the steady progress made in the implementation of the MCA-supported reform program aimed at improving physical and institutional infrastructure in Benin. An important element of that program is the improvement of the Port of Cotonou, with the ongoing construction of a new container terminal consisting of two accommodation berths and the attribution of the terminal management to an international company. A call for bids for the establishment of a one-stop window for port operations at the Port de Cotonou was launched in May 2010.

II - Policies for 2010 and the medium-term

My authorities are committed to pursuing implementation of their economic program with the objective to support economic recovery in the short term, and place the country on the road to a sustained growth in the medium term. These objectives of the financial program are consistent with the new poverty reduction strategy being prepared for 2010-14, which will be a framework for technical and financial support from Benin’s development partners. The macroeconomic objectives of the program is to increase growth rate from a projected 3.2 percent in 2009 to 6 percent in 2013, contain inflation below the WAEMU convergence criterion of 3 percent, and reduce the external current account deficit to 7 percent of GDP by 2013. My authorities will adopt any other measures needed to achieve the objectives of the program.

Fiscal consolidation initiated in the second half of 2009 is the cornerstone of the program. It will be pursued over the period of the arrangement, with the objective to preserving fiscal and debt sustainability, while creating fiscal space for needed to strengthen the social safety nets and support other priority social spending. This will be achieved through greater revenue mobilization and reduction in recurrent expenditures. The fiscal deficit is expected to decline from 7.3 percent in 2009 to 5.9 percent of GDP in 2010, as revenue is projected to rebound following improvements in tax and customs administration. This deficit is expected to decline further to 3.3 percent of GDP in 2013. It will be financed primarily with external concessional budget support from both multilateral and bilateral donors. My authorities will continue their prudent borrowing strategy of securing grants or highly concessional loans to finance the deficit.

Strengthening the public financial management will remain a priority in the fiscal program. In particular, my authorities will pursue the reform and modernization of the tax and customs administrations, with the expectation that this will translate in greater revenue performance. Important steps in the near term in that area will be the submission to the National Assembly in October 2010 of a legislation introducing the personal income tax, and the computerization of all customs offices by end-2010. In addition, the implementing decrees of Public Procurement Code will be adopted by end-September 2010. My authorities will also improve budget preparation and execution procedures, in order to better monitor expenditures and reduce recourse to exceptional payment procedures.

My authorities are cognizant of the need to undertake reforms of the wage policy and pension fund in the civil service, in order to make them more sustainable and ensure long-term fiscal and debt sustainability. Regarding the compensation system, the government has commissioned a study of the civil service remuneration system and has decided not to grant new bonuses, allowances, or other benefits to civil servants until that study is completed. The recommendations will form the basis for developing a civil service reform strategy to be adopted by June 2011. In addition, recognizing that achieving separate salary agreements with various segments of the civil service is inefficient, the government established a committee of representatives of the government, labor unions, and social partners to act as a single negotiating framework for achieving multiyear salary agreements that take into account government’s financial capacity and its economic and social policy priorities. In the same vein, the government intends to make further progress in its reform of the civil service pension fund, in order to make it more viable. In this regard, they are preparing a draft law to implement a new strategy based on the recommendations of an actuarial audit concluded in September 2009. This draft law will be discussed between all parties concerned before it is submitted to the Parliament by end-2011.

The regional central bank will continue to monitor closely inflationary trends and conduct a monetary policy consistent with the objective of price stability. Likewise, the WAMU Banking Commission will continue to monitor the financial system. My authorities have asked for a FSAP mission in 2010 and are committed to implement any resulting recommendations. In the meantime, they will continue to enhance banking supervision to improve compliance with the prudential ratios and strengthen the application of the regulatory framework of the microfinance sector.

My authorities are determined to advance the implementation of its reform agenda during the program period, as evidenced by the recent actions (electricity tariff increases and call for bid for a one-stop window in for port operations) taken prior to this meeting. As indicated in the MEFP and partially mentioned above, benchmarks for progress during the program include critical actions in the reforms of the fiscal, agriculture, energy, telecommunications and transportation sectors. Further progress is also expected in the implementation of the second-generation reforms (justice, land tenure, and financial services) with the support of the MCC.

Conclusion

My authorities are requesting a new three-year ECF arrangement in support of their economic and financial program aimed at mitigating the effects of the global and financial crisis in the near term, while ensuring sustained growth over the medium-term and making further strides in reducing poverty. They have demonstrated a strong ownership of their program with a steady implementation of structural reforms after the expiration of the last arrangement, despite difficult domestic environment. In light of the strength of the program and the prior actions taken, I will appreciate Board’s support for my Beninese authorities’ request.

Benin: 2010 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility: Staff Report; Staff Supplements and Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Benin.
Author: International Monetary Fund