Togo
Fourth Review Under the Three-Year Arrangement Under the Extended Credit Facility and Requests for Waivers of Performance Criteria and Augmentation of Access: Staff Report; Staff Statement; 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:
16 Jul 2010
eISBN:
9781455207596
Language:
English
Keywords:
ISCR; CR; staff appraisal; ECF arrangement; petroleum product; promissory note; authority; financing gap; arrears clearance; debt management; GDP deflator; TV broadcasting system
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Togo’s macroeconomic situation remains difficult, despite some modest improvements. Despite the impact of the global recession, program implementation has generally been satisfactory, although corrective actions are necessary for recent slippages. Debt management and monitoring are being strengthened. In light of the difficult macroeconomic conditions, a countercyclical fiscal policy stance is required. Sustainable fiscal policy requires a gradual consolidation, as global conditions improve further. Togo’s main economic challenges are continuing to strengthen public finances and completing structural reforms to enhance growth potential.

Abstract

Togo’s macroeconomic situation remains difficult, despite some modest improvements. Despite the impact of the global recession, program implementation has generally been satisfactory, although corrective actions are necessary for recent slippages. Debt management and monitoring are being strengthened. In light of the difficult macroeconomic conditions, a countercyclical fiscal policy stance is required. Sustainable fiscal policy requires a gradual consolidation, as global conditions improve further. Togo’s main economic challenges are continuing to strengthen public finances and completing structural reforms to enhance growth potential.

I. Recent Economic Developments and Program Performance

A. Growth below Potential Following Global Recession

1. Growth was low in 2009 at 3 percent, as countercyclical fiscal policies only partially offset the persistent effects of the global recession (Figures 1 and 2). This growth performance fell short of the 4 percent initially envisioned in the program, and the fiscal stance was consequently loosened considerably. While growth rose somewhat in 2009 over 2008 (when flood damage and global price shocks depressed output), the rise was attributable in large part to an abundant food harvest, which resulted from both favorable weather and input subsidies. Togo also made progress in addressing a number of constraints to growth from the legacy of 15 years of domestic social and political crisis, also contributing to the growth in 2009. Public investment reached nearly 6 percent of GDP (Box 1), a 20-year high, and domestic arrears clearance was launched (Box 2). Reforms advanced in fiscal governance, bank restructuring and SOE reform (Text Table 1).

Figure 1.
Figure 1.

Togo: Recent Macroeconomic Developments1

Citation: IMF Staff Country Reports 2010, 216; 10.5089/9781455207596.002.A001

Source: Togolese authorities and fund staff estimates and projections.1 Estimated data for 2009 and projected for 2010.
Figure 2.
Figure 2.

Togo: Moderate Negative Impact of Adverse External Environment

Citation: IMF Staff Country Reports 2010, 216; 10.5089/9781455207596.002.A001

Source: Togolese authorities and IMF staff estimates and projections.

2. Given the persistent effects of the global recession, Togo is experiencing heightened balance of payments pressures, worsening its protracted problems over the program period. The global slowdown had a clear if moderate impact on exports and remittances, which fell in 2009 rather than recovering as projected, while FDI also dropped. With weak external conditions and import demand supported by fiscal policy, the current account deficit was high at around 7 percent of GDP in 2009 (Tables 1 & 2; Figures 1 & 2).

Table 1.

Togo: Selected Economic and Financial Indicators, 2008–11 1

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Sources: Togolese authorities and IMF staff estimates and projections.

The macroeconomic framework assumes that Togo reaches the HIPC completion point in 2010.

The GDP deflator for 2008 has been revised upward causing a significant increase in nominal GDP compared to 3rd review estimates. This revision has implications for the GDP ratios and should be taken into account when comparisons are made between 3rd review and current estimates.

Change as a percentage of broad money at the beginning of the period. Impact of SDR allocation in 2009 is included.

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

Includes state owned enterprises debt.

Note: “…” = not available
Table 2.

Togo: Balance of Payments, 2008–11 1

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Sources: Togolese authorities and IMF staff estimates and projections.

The macroeconomic framework assumes that Togo reaches the HIPC completion point in 2010.

Negative sign indicates increase. Includes SDR allocation in 2009.

Note: “…” = not available

B. Economic Policy Broadly on Track despite Slippages

3. Public finances continued to strengthen in 2009, despite a countercyclical stance and some modest slippages. With an overall deficit of 4.4 percent of GDP (Table 3), the fiscal stance in 2009 provided some stimulus for social and countercyclical reasons, as well as to address post-crisis needs, particularly for public infrastructure. The slippages in budget execution led to missing the fiscal balance and domestic financing PCs for end-2009 by 0.2 percent and 0.7 percent of GDP, respectively. Overall revenues fell short by 0.2 percent of GDP, as exceptional nontax revenues did not materialize as expected (LOI ¶11). The authorities did not curtail expenditures, as previously planned if revenues fell short, since the shortfall came only in December and flexibility was limited by unexpected personnel costs related to social sectors and security for the presidential elections (LOI ¶12). As a result, the fiscal balance exceeded its target, which, in combination with larger clearance of validated domestic arrears (Box 2) and domestic debt servicing,1 also led to exceeding the domestic financing ceiling. Nevertheless, indicators of debt sustainability did not deteriorate despite the loosened fiscal stance (see DSA).

Table 3.

Togo: Central Government Financial Operations, 2008–11 1

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Sources: Togolese authorities and IMF staff estimates and projections.

The macroeconomic framework assumes that Togo reaches the HIPC completion point in 2010.

In 2009, expenditures include social and investment spending committed in January 2009 under the 2008 supplementary budget.

Includes the BCEAO credit for domestic arrears clearance. In 2010 domestic arrears include arrears of non central government administration to electricity company; this operation could be registered as transfer.

Bonds placed in domestic and regional markets.

Improving Togo’s Level of Public Investment

During Togo’s long domestic crisis, its level of public investment was very low (Figure 3). Following re-engagement with the donor community, limited administrative capacity has posed a constraint to ambitious investment plans, resulting in low execution rates. The Togolese authorities began to address this problem in 2008, improving project planning and execution, particularly through speeding up the steps in the expenditure chain.

As a result, total public investment increased considerably in 2009 over previous years. The level of both domestic and foreign-financed investment rose significantly, with a sharp improvement notably in the execution rate of the latter (Figure 4 below). Public investment is expected to increase to almost 7 percent of GDP in 2010.

Figure 3.
Figure 3.

WAEMU and Togo: Capital investment

(Percent of GDP)

Citation: IMF Staff Country Reports 2010, 216; 10.5089/9781455207596.002.A001

Source: Togolese authorities and Fund staff estimates.
Figure 4.
Figure 4.

Togo: Public Investment–Planned and Executed, 2007–2010

(Percent of GDP)

Citation: IMF Staff Country Reports 2010, 216; 10.5089/9781455207596.002.A001

Source: Togolese authorities and Fund staff estimates.

4. Monetary developments were favorable, with better than expected growth in deposits and credit to the economy (Table 4). This improvement was linked to the rehabilitation of the banking sector and the resulting increased confidence in the financial system. The SDR allocation contributed to an increase in gross foreign assets. Nevertheless, CPI inflation dropped sharply to 2 percent in 2009, largely owing to global price trends.

Table 4.

Togo: Monetary Survey, 2008–11

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

5. In February 2010, the authorities contracted an external supplier’s credit that led to nonobservance of the continuous performance criterion on nonconcessional external debt. Without knowing the implications of the financing for the program, the authorities contracted $32 million (1 percent of GDP) in financing over 3½ years to modernize Togo’s TV broadcasting system, which they consider to be in urgent need of repair to avoid breaking down. The authorities subsequently recognized that its financing was not consistent with their debt strategy and that it could complicate relations with external creditors, particularly as Togo was seeking significant debt relief.

6. The authorities have signed an agreement with the supplier to cancel the promissory notes that triggered nonobservance of the external debt PC. The steps needed to implement this agreement, including the restitution of the promissory notes, will be implemented shortly. They have also begun further strengthening debt management and reporting systems (LOI ¶34). Staff is of the view that the cancellation of the financing (once all the conditions of the agreement are met) is sufficient corrective action to justify the waiver. Moreover, the authorities cancelled the project and will pursue rehabilitation and modernization of the TV broadcasting system in collaboration with development partners.

C. Satisfactory Progress on Structural Reforms but Challenges Remain

7. Structural reforms to strengthen fiscal governance and promote conditions for growth continued to advance satisfactorily. Concerning the structural benchmarks through the end of March 2010, the authorities launched the preparations for bank privatization on time; kept to the revised timetable for establishing an NPL recovery mechanism; adopted a reform strategy for the phosphate sector, albeit with a delay; and cleared a majority of domestic arrears—a remarkable achievement despite a delay relative to the ambitious end-March SB. (Text Table 1; LOI ¶16–18 and Table 2).

Text Table 1.

Togo: Status of Structural Reforms through 2009

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II. Outlook and Policies for 2010

A. Growth Still Modest in spite of Fiscal Measures

8. In 2010, the lingering effects of the global recession are expected to hold growth to 3.3 percent, even with countercyclical fiscal policies. Continuing weakness in exports, remittances and FDI is expected to keep growth low and the current account deficit high at 7½ percent of GDP. Inflation will remain stable at around 2 percent.

B. Continued Countercyclical Fiscal Stance for 2010

9. In this macroeconomic context, a relaxed fiscal stance continues to be warranted in 2010 for social and countercyclical purposes. The budget includes increased levels of domestically financed public investment and domestic arrears clearance (Text Table 2). With the overall deficit (on a cash basis, i.e., including arrears clearance), excluding grants, rising to 9.1 percent of GDP in 2010 from 5.5 percent in 2009, fiscal policy is supporting economic activity and helping address post-crisis needs. The net impact of the fiscal stance on debt levels is mitigated, however, by the large amounts of external grants and arrears clearance (which substitutes one liability for another)—the overall fiscal deficit including grants (on a payment order basis) is 2.9 percent of GDP and the domestic primary balance near zero.

Text Table 2.

Togo: Fiscal Stance 2008 – 2010

(In Percent of GDP)

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Source: Staff estimates

10. With support from partners, the authorities have identified adequate and affordable financing for the rest of the year 2010. They have reduced the financing gap from the third review by obtaining additional grants from the World Bank and the European Union. The authorities have also offset increased financing pressures from, increased domestic debt service, urgently needed arrears clearance to energy companies (LOI ¶27), and a higher-than-projected wage bill.2 To do so, the authorities dedicated all of the resources from higher revenue targets (based on the 2009 outturn) to closing the financing gap,3 identified savings in lower priority spending to offset fully the larger wage bill (LOI ¶24 and 25), and planned to raise financing in the regional market. To reflect these modifications, the fiscal deficit target for end-June 2010 has been reduced, while the domestic financing ceiling has been relaxed for end-June and end-December.

11. To complement these efforts, the authorities have asked the IMF and key donors to work together to fill a residual financing gap of 1 percent of GDP. The proposed augmentation of access under the ECF arrangement of SDR 11 million (15 percent of quota or ½ percent of GDP, Table 5)4 has contributed to mobilizing exceptional financing. Togo’s capacity to repay the Fund remains broadly unchanged, given the modest size of the augmentation and upward revisions to nominal GDP (Table 6). The World Bank has approved additional grants (0.1 percent of GDP) from its crisis facility and the European Union has determined on a preliminary basis that Togo is eligible for its Vulnerability FLEX facility and could provide assurances of additional grants (up to ½ percent of GDP) in the event EU members approve this assistance to Togo.

Table 5.

Togo: Actual and Proposed Schedule of Disbursement Under ECF Arrangement, 2008–11 1

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Projected disbursements assume the proposed ECF augmentation of 15 percent of quota (SDR 11 million).

Other than the generally applicable conditions for the Extended Credit Facility (ECF).

Table 6.

Togo: Indicators of Capacity to Repay the Fund, 2009–201

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Sources: IMF staff estimates and projections.

Including an ECF augmentation of 15 percent of quota (SDR 11 million), to be disbursed in two equal tranches following completion of the 4th and 5th reviews.

Reflecting temporary interest relief on PRGT interest obligations through end-2011 in the context of the reform of LIC facilities.

Total debt service includes IMF repurchases and repayments. Assumes the completion point at end 2010.

Includes state owned enterprises debt.

C. Pushing Structural Reforms to Fruition

12. Measures to restore sound public finances and enhance fiscal governance are advancing satisfactorily (Text Table 3; Appendix 1, Table 3). The domestic arrears clearance process needs to be completed for enterprises to benefit fully (Box 2). Following through on its action plan to improve public financial management, the government will reduce the number of its accounts by at least 30 percent (SB end-June 2010) and strengthen cash flow management and monitoring of budget execution, with technical support from staff (LOI ¶16 & 34). Furthermore, the authorities are enhancing the efficiency of budget execution, especially investment projects, by improving financial controls and eliminating redundant steps in the spending chain (SB June 2010) (LOI ¶16).

Text Table 3.

Togo: Structural Benchmarks for 2010

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The original strategy was revised, with an extended timetable, to incorporate the shift from clearance by securitization to payment in cash using the BCEAO credit line and the operation for cancelling cross debts involving unpaid taxes and NPLs assumed by the government as part of the bank restructuring (Box 2).

The timetable for the set up of the structure/mechanism for managing NPLs was extended due to the complexity of the process and complications in the procurement process for technical advisors.

Domestic Arrears Clearance Strategy Well Advanced

During its protracted domestic crisis (early 1990s to 2005), the government in Togo accumulated significant domestic payment arrears. Validated arrears to private suppliers amounted to US$127 million (4.6 percent of GDP) through December 2006, according to the accounting firm KPMG. Arrears to public sector suppliers were an additional 1.4 percent of GDP. This scale of arrears affected the intermediation capacity and liquidity conditions in the financial sector.

The process has advanced quickly since August 2009. With exceptional financing from the BCEAO, linked to the SDR allocation intended to counter the impact of the global recession, all claims by private suppliers can be paid in cash, which could boost private sector activity directly. At the end of December, the authorities were ahead of the program’s schedule for clearance, since they had begun clearing some medium-size claims early (while welcome, this acceleration contributed to exceeding the program’s domestic financing ceiling). At the end of March, about 1,600 creditors had been paid a total of $41 million (Text Table 4). Only a third of the potential small claimants have requested payment, perhaps in part because some claimants were not aware of the process, especially in rural areas. Of 470 medium and large creditors, almost half have been paid, including 21 of the largest 25 creditors. Completion has been delayed by negotiations with some firms regarding the cancelation of cross debts (unpaid taxes and NPLs now assumed by the government) and the discount applied to the value of arrears payment. Although the authorities did not meet their ambitious structural benchmark of completing the process by the end of March, they have achieved substantial progress in a complex process involving a large number of parties.

The clearance operation should be completed by June and will cost an estimated additional $43 million (LOI ¶16). The exceptional financing from the BCEAO should be sufficient.

Text Table 4.

Arrears Clearance to Private Suppliers: Paid and Pending Estimates as of March 2010

(In US$ million)

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Source: Togolese authorities and Fund staff estimates.

13. The authorities have strengthened their economic program through planning measures to alleviate fiscal risks and improve the efficiency of international trade. After paying off some liabilities (0.8 percent of GDP) to oil distribution companies that stemmed from price controls in 2007–08, the government aims to adopt a new automatic price adjustment mechanism for petroleum products, with a formula for smoothing volatility (enhanced SB October 2010; LOI ¶33). This mechanism is intended to limit fiscal risks, facilitate adjustment to international prices, and maintain incentives for distributors. In addition, the authorities will establish a “one-stop window” for trade at the port of Lomé, starting with the design of a roadmap with help from consultants financed by the World Bank (SB September 2010; LOI ¶32). This measure promises to facilitate international trade procedures and improve revenue mobilization.

14. The restructuring of the financial sector is advancing on schedule (LOI ¶17). Preparations are on track for the final call for bids for privatization of four banks by September 2010 (SB). The authorities need to renew the legal framework for privatization, which should be accompanied by efforts to build broad political and public support. Regarding a mechanism for NPL recovery, a final feasibility study is expected in June, and a mechanism should be in place according to the revised schedule (SB December 2010; LOI ¶31). In May 2010, an MCM technical assistance mission also advised the authorities on the NPL recovery mechanism.

15. Reforms of key SOEs are also moving forward, with the twin goals of reducing fiscal risks and promoting growth. The strategy for the phosphate sector involves an ambitious investment plan; staff encouraged vigilance over any fiscal risks and consideration of a private sector role as early as reasonably possible. Reforms are also underway in the electricity, telecommunications and agricultural sectors (LOI ¶19, 20, 27 & 32). Given the growth potential of the telecommunications sector and its vital logistical role, staff stressed the importance of the strengthening the sectoral strategy.

D. Program Risks Merit Enhanced Monitoring

16. To monitor implementation of the ECF-supported program through end-2010, the authorities have established revised quantitative and structural indicators (Appendix I, Tables 1 and 3). Recent program slippages have highlighted the implementation risks, related in large part to capacity constraints. To help enhance monitoring, the authorities have fixed targets for the end of the third quarter. The peaceful presidential elections in March 2010 lessened political risks, and local elections are planned for late 2010/early 2011.

17. Concerning the safeguards of the BCEAO, the latest assessment was completed on March 1, 2010 and found that the BCEAO continues to have controls in place at the operational level. The overall governance framework should nonetheless be strengthened by the addition of an audit committee to ensure that the Board of Directors exercises appropriate oversight over the control structure, including the audit mechanisms and financial statements. The upcoming implementation (2010) of the Institutional Reform of the WAMU and the BCEAO should help correct that situation.

E. Good Progress toward HIPC Completion Point

18. Togo is still on track to qualify for the HIPC completion point as early as the end of 2010. The low-income country debt sustainability analysis (LIC DSA, Appendix II) shows that Togo is currently in debt distress. However, the authorities are on track to complete the measures required to fulfill the conditions for the HIPC completion point triggers as early as late 2010 (Table 7, LOI ¶35). With HIPC/MDRI debt relief, indicators for external and public debt sustainability will improve significantly in the near-term and thereafter stabilize based on a policy mix of a medium-term fiscal anchor of a primary budget balance of at least zero; a high degree of concessionality of external financing (at least 35 percent); and sustained growth of about 4 percent annually, supported by ongoing structural reforms.

Table 7.

Togo: Triggers for the Floating HIPC 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.

West African Economic and Monetary Union.

Extractive Industries Transparency Initiative.

III. Staff Appraisal

19. The program has generally continued to meet its goals, although there were deviations from program targets for the first time. The corrective actions underway are sufficient to compensate for deviations. The relatively tighter fiscal balance in 2010, compared to the last review, offsets the financing impact of missing the fiscal targets in 2009; even though the domestic primary deficit is consequently reduced, the fiscal stance in 2010 continues to be countercyclical, with an increased overall deficit (excluding grants). Budget execution is also being monitored more closely. The impact of the nonconcessional external borrowing contracted in February 2010 is also being reversed by canceling the financing, while debt management and monitoring are also being strengthened. As a result, public finances and debt sustainability continue to strengthen, while reforms of fiscal governance, the banking sector and SOEs are progressing as envisioned under the program.

20. In light of the difficult macroeconomic conditions, a countercyclical fiscal policy stance remains warranted in 2010. Increased investment spending and domestic arrears clearance in cash will support economic activity pending a full recovery in the external environment, while also helping address the legacy of the long domestic crisis. The authorities have redoubled efforts to mobilize resources, including domestic revenue. For the residual financing gap, they have also appealed to key partners for additional exceptional financing, including from the European Union and the World Bank, in addition to the request for a modest ECF augmentation. To support the request, they have strengthened fiscal and structural components of the program, notably for petroleum product pricing and the “one-stop window” for trade and customs procedures.

21. Togo’s main economic challenges are continuing to strengthen public finances and completing structural reforms to enhance growth potential. A return to the disciplined implementation seen earlier in the program is important for 2010, especially given the difficult financing situation and exceptional support from partners. Strong program implementation is also key to reaching the HIPC completion point by the end of the year, as hoped. Moreover, structural reforms underway need to reach completion to realize the bulk of their benefits. Finally, sustainable fiscal policy will require a gradual consolidation starting in 2011, as global conditions improve further.

22. In light of the authorities’ track record over the program period and their policy commitments, staff supports their requests for waivers, as justified by corrective actions, as well as the modest augmentation, and recommends completion of the fourth review.

Appendix I—Letter of Intent

Lomé

June 10, 2010

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Sir:

1. Further to our letter of October 30, 2009, the fourth program review is an opportunity for us to report on the progress made in implementing the financial program supported by the Extended Credit Facility (ECF). We have pursued the economic reforms outlined in the program, to mitigate the effects of the global recession and accelerate our economic recovery. We have broadly met our objectives in the program, although there have been some deviations from its performance criteria. We are resolutely committed to redoubling our efforts to ensure rigorous implementation of the program.

2. At the same time as these economic reforms are advancing, an equally important process of political reform has progressed considerably. The organization of presidential elections in a peaceful setting marked an important milestone in this process. The next step concerns the legislative elections expected later this year.

Background

3. Our ECF-supported program aims to raise the living standards of the population, through recovery from the country’s prolonged sociopolitical and economic crisis. The pursuit of our goals is guided by the implementation of our first full Poverty Reduction Strategy Paper (PRSP), adopted in June 2009. The ECF-supported program advances this strategy by promoting economic growth and stability, while increasing the resources devoted to priority sectors. Under this program, the Togolese government has also normalized relations with external creditors, re-engaged with development partners, and reached the decision point under the HIPC Initiative in November 2008. These accomplishments have enabled us to benefit from debt relief and considerable financial and technical support from our development partners.

4. On the economic front, our main objectives, embedded in our ECF-supported program, are strengthening public finances, consolidating macroeconomic stability, and boosting economic growth. Our economic recovery and program implementation have encountered considerable obstacles, however, including the global price shocks in 2007–08, damage from severe flooding in late 2008, and most recently the persistent impact of the global recession. While these shocks have delayed the recovery in growth, we have nevertheless achieved considerable progress in strengthening public finances and maintaining macroeconomic stability.

5. Since the launch of its ECF-supported program, Togo has continuously strengthened the health of its public finances. The government has re-established budget discipline and progressively improved public financial management. In addition, since the last program review in November, we have made significant progress in the clearance of domestic payment arrears to private sector suppliers that had accumulated over many years. The government has also advanced in its growth-enhancing structural reforms, in particular in the banking sector.

6. Indeed, the framework defined by the ECF-supported program has enabled us to mitigate the impact of the economic shocks, notably through counter-cyclical fiscal measures. However, the slow recovery and stagnating income per capita levels—even as the program approaches its third year—have increasingly focused our attention on meeting our growth and poverty reduction objectives. Nevertheless, we remain vigilant on our goals of macroeconomic stability and strengthened public finances, which we stress are necessary for a sustained recovery.

Recent economic developments

7. The recovery of the Togolese economy from the domestic socio-political crisis has continued to be slow, owing to the persistent impact of the global recession, yet macroeconomic stability continues to be preserved. Real GDP growth reached an estimated 3.1 percent in 2009, slightly exceeding the rate of population growth. This modest recovery relative to 2008 can be attributed to several factors, notably: an increase in food production owing in part to government support provided to the sector, such as the provision to farmers of supplies of fertilizers at subsidized prices; an increase in clinker production; an improvement in electric power supplies; and accelerated public investment in infrastructure. However, commercial activity, as well as the production and export of cotton and phosphate, have declined significantly. Furthermore, re-export and transit activities have declined following the impact of the global recession on the subregion. Inflation continued to fall in 2009 as a result of the combined effect of falling oil prices and lower domestic food prices after an abundant harvest. Inflation dropped to an average of 1.9 percent, which is in line with the WAEMU convergence criterion of 3 percent or less.

8. In 2009, the external current account deficit is estimated to have remained high, at 7.0 percent of GDP, compared to 6.4 percent of GDP in 2008. Imports have increased, largely as a result of public infrastructure projects, even if the oil import bill was contracting under the impact of falling prices and volumes. A slight increase in direct exports was observed. This was largely accounted for by the rise in clinker exports, but was offset by the world recession which served to lower cotton and phosphate export prices and volumes, while worker remittances declined by 2.5 percent.

9. The monetary situation is characterized mainly by an increase in gross foreign assets, associated with the SDR allocation of September 2009. In fact, credit to the economy recorded an increase of 21.3 percent in 2009 in contrast to a 4.6 percent decline in 2008. The money supply has grown by 16.1 percent, notably due to an increase in deposits, which reflects increased confidence in the banking sector fostered by the state exchanging securities for the banks’ nonperforming loans in 2008 and ongoing restructuring efforts.

Implementation of the economic program

10. Despite the difficulties linked to the global recession and slow growth, the ECF-supported financial program has been implemented broadly in line with its objectives. Despite some modest deviations from program targets and timetables, the government has continued to further improve public finances and to advance on structural measures that will lay the foundations for strong and lasting growth. As explained below, the execution of the 2009 fiscal framework led to a primary domestic fiscal balance that was lower than the projected floor and resulted in an overshooting of the ceiling on net domestic financing, two important performance criteria for end-December 2009 (Table 1). Moreover, in February 2010, the government contracted some financing from a supplier that was not consistent with the continuous performance criterion (PC) on the minimum concessionality of external borrowing (see paragraph 14). The PC on the non-accumulation of external arrears was observed, as were indicative targets on domestic arrears clearance and domestically financed social and investment spending. The implementation of the four structural benchmarks for the second half of 2009 was broadly satisfactory even if delays were observed for certain benchmarks. We are determined to address these deviations from the ECF-supported program, as explained below.

Table 1.

Togo: Quantitative Performance Criteria and Indicative Targets December 31, 2009 – December 31, 2010

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Letter of Intent dated October 29, 2009

Letter of Intent dated June 10, 2010

Indicative target

Continuous performance criterion.

In 2010, this target is disaggregated for better tracking of the components.

11. Despite a good performance of tax revenue collection, total revenue did not achieve the objectives set in the program. Tax revenue collection did meet the ambitious targets in the program, reaching CFAF 229 billion at end-December (15.4 percent of GDP), instead of the CFAF 220 billion initially forecast. Customs collections benefitted from an improved system of verifying imports, computerization of the customs clearance procedure, and efforts to combat smuggling of oil products, which helped offset the impact of weak import growth. Tax revenue benefitted from enhanced collection efforts combined with a reduction in tax rates, which helped broaden the tax base and expand the formal sector. However, non-tax revenue collection did not meet the government’s ambitious targets. In particular, fees for licenses in the telecommunications sector and dividends from state-owned enterprises did not materialize as expected.

12. Concerning fiscal policy, expenditures stayed within the overall program envelope. At end-December 2009, current primary expenditure exceeded the budgeted level by CFAF 15.4 billion, i.e., 1.1 percent of GDP. The higher level of these current expenditures is largely attributable to the higher-than-expected increase in the wage bill. In fact, a substantial recruitment drive was implemented in 2009, in particular for the security forces in connection with the presidential election and for the social sectors—specifically, education and health. Furthermore, regarding education, the revision of the status of auxiliary teachers that were integrated into the civil service had a significant impact. Domestically financed investment spending fell short of the ambitious program targets, because of administrative capacity constraints. Moreover, government measures to speed up this investment spending were partly successful in the second half of the year. These efforts also yielded an improvement in the execution of foreign-financed investment spending, which virtually doubled compared to 2008 to reach 3.0 percent of GDP. The under-execution of domestically financed investment spending entirely offset the overshooting observed in the execution of current expenditure.

13. The domestic primary fiscal balance exceeded the PC in the program by CFAF 3 billion (equivalent to 0.2 percent of GDP) as a result of nontax receipts that were lower than anticipated. Moreover, financing needed for domestic arrears clearance and debt service exceeded projections in the program. Combined with the higher fiscal deficit, these factors led to net domestic financing exceeding the PC by CFAF 10 billion (equivalent to 0.7 percent of GDP). We note that the higher-than-expected settlement of arrears to the private sector, which is to be welcomed, means that the process is gathering speed and that it will help to reduce necessary payments in 2010, which will also have a neutralizing effect.

14. Concerning the nonobservance of the criterion regarding nonconcessional external debt, the Togolese government is committed to corrective action concerning the supplier’s credit, in the form of promissory notes, which did not respect the requirements of minimal concessionality under the program. Contracted in February 2010, the credit was intended to help finance a project for rehabilitating the infrastructure of the television network and extending television coverage to encompass the entire national territory, which we consider pressing due to government commitments to the public and the risks of the network breaking down. To remedy this situation, we have cancelled the promissory notes and the project by mutual agreement with the supplier. We now have a better understanding of the requirements of our commitments with our development partners. The rehabilitation and extension of the TV network will be undertaken in the future in cooperation with these partners.

Implementation of structural reforms in 2009 and 2010

15. Under our PRGF-supported program, we have continued to make considerable progress overall in implementing essential reforms to achieve program objectives. The progress achieved since the last program review in November is significant, even though observance of the timetables for structural benchmarks was mixed (Table 2).

Table 2.

Togo: Status of Structural Reforms through 2009

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16. Progress in the area of clearing domestic arrears and public financial management has been substantial:

  • The process of clearing domestic payment arrears, accumulated over several years, as we noted previously, has advanced significantly (structural benchmark for end-March 2010). At end-February 2010, more than 1,600 creditors (all categories taken together) had been paid for the sum of CFAF 18.7 billion. At this time, there are only 246 medium and large-scale unpaid creditors. Of the 25 largest creditors, 21 have been paid, the amount for which is estimated at CFAF 8.1 billion after discount. Discussions are in progress with the four others. With respect to small holders, 1,342 have been paid and approximately 4,000 creditors remain unpaid. For this group of creditors, the government intends to resume signing agreements—a process that had ended in December 2009—with the aim of settling the accounts on a permanent basis. With financing of CFAF 29 billion, the government expects to settle in full the commercial debt owed to the private sector in 2010 slightly behind the initial timetable envisaged for the structural benchmark, which is due to the slow pace at which claimants have come forward to participate in the process. This wide-ranging program has been partly financed by the credit granted by the BCEAO in the context of the additional SDR allocation by the IMF; the BCEAO’s lending terms are significantly more favorable than those prevailing on the regional financial market. The arrears clearance process has improved liquidity conditions for enterprises and thereby supported a recovery in production.

  • To improve treasury cash management, the government is also undertaking the measures necessary to move toward a single treasury account and reduce the number of accounts by 30 percent. When a survey of treasury accounts was completed in 2008, we identified around 801 accounts; of which 606 have already been closed. A new survey of treasury accounts was completed at the end of April 2010. We are currently closing at least 30 percent of the surveyed accounts, and this process will be completed by end-June 2010. We will thus achieve the structural benchmark.

  • We have strengthened our public spending capacity and its quality. We have also taken measures to enhance investment project execution by simplifying and reducing lag time in the public sector expenditure chain. Controls have been strengthened and the implementation of the SIGFIP software will help to reduce control periods from 7 weeks to a maximum of 5 weeks. Redundant control points, which result in an abnormally long public expenditure chain (as found by the July 2009 IMF TA report on government expenditure management), will be eliminated by end-June, thereby enabling us to meet the structural benchmark. All the priority ministries (health, education, infrastructure, finance and agriculture) prepared public procurement plans and commitment plans by end-January.

  • The newly established Audit Court (Cour des Comptes) has now become operational, with staff, resources, and materials. With the support of our development partners, we intend to support training activities to enhance the court’s effectiveness. The treasury accounts (comptes de gestion de la trésorerie) and budget review law (loi de réement) for 2007 were forwarded to the court on January 5, 2010. The draft budget-review law for 2008 was transmitted on April 23, 2010.

  • In November 2008, Togo reached the decision point under the HIPC Initiative, which seeks to reduce the stock of external debt. As part of that process, we contacted the majority of our creditors and are committed to contacting those that have not yet been reached, in order to obtain debt reduction agreements. During the negotiations, we will seek to obtain debt relief in line with the level calculated in the report for the HIPC Initiative decision point.

17. The restructuring of the banking sector is advancing and should enable it to play its role in financial intermediation and contribute to sustainable growth. This process is benefitting from intensive technical assistance from the World Bank and IMF.

  • In accordance with the reports of the privatization advisors, hired with the assistance of the World Bank, we launched the privatization process by publishing a public information notice in December 2009. We are completing prior actions, which should lead to publication of a call for expressions of interest as we had envisaged earlier in the process. Furthermore, we are working toward resolving the remaining legal issues regarding the completion of privatization process.

  • The advisers for recovery of nonperforming loans, also hired with assistance from the World Bank, are going to finish a feasibility study by mid-June. The study will provide recommendations on the most appropriate alternatives regarding the form of the structure/mechanism for collecting nonperforming loans.

18. As far as the phosphate sector is concerned, a strategic audit, conducted with support from the World Bank, was completed in September 2009, and its findings were validated in a workshop gathering the various stakeholders (the Togolese authorities, SNPT-Société Nouvelle des Phosphates du Togo staff, and World Bank experts, among others) in December 2009. Based on this report, the government has laid out a strategy for the long-term development of the sector, which will include the participation of a strategic partner in the years ahead. The Council of Ministers approved the strategy on March 30, 2010. Accordingly, the policy action under the structural benchmark was completed with a delay. However, the volume of production declined 13.9 percent in 2009. In light of the investments executed in the second half of last year, we expect a recovery in production volumes in 2010.

19. Efforts intended to promote food production have yielded good results with a plentiful harvest and a considerable surplus. Togo has pursued an incremental increase in food exports. However, recovery in the cotton sector continues to be hampered by world market conditions and structural problems, despite our efforts in terms of institutional reforms. We are considering different policy alternatives to restore adequate financing to small producers and to establish trust once again between producers and the NSCT (Nouvelle Société Cotonnié du Togo). We are currently reorganizing the sector with assistance from our development partners, in particular the World Bank, should help to improve the performance of the cotton sector.

20. The electricity sector has experienced a significant increase in production in 2009 and early 2010 compared to previous years. Electricity production at the independent power producer plant of Contour Global is expected to begin by end-June 2010, thereby alleviating supply constraints of the region.

Macroeconomic Outlook

A. Macroeconomic Framework

21. For the rest of 2010 and for 2011, government policy aims to mitigate the lingering effects of the global crisis on the Togolese economy and put the economy on the path to strong and sustained growth. To that end, the government intends to give priority to macroeconomic stability, to strengthen economic and social infrastructure by increasing investment spending, and to accelerate the implementation of structural reforms, with the aim, inter alia, of meeting the requirements for reaching the completion point under the HIPC initiative in 2010. Under these circumstances, short-run prospects for the Togolese economy continue to be of concern, with a projected real GDP growth rate of only 3.3 percent in 2010 and 3.5 percent for 2011. This level remains below potential and barely exceeds the population growth rate. However, the inflation rate should remain within the limits of WAEMU convergence criteria (3 percent).

22. The already sizeable current account deficit in 2009 should increase slightly in 2010, reaching 7.6 percent of GDP, as growth in exports and remittances remains subdued owing to global economic conditions and countercyclical fiscal measures support import demand. The current account deficit is expected to fall back somewhat to 6.7 percent of GDP by 2011. This improvement would reflect a partial recovery in the growth of exports and migrant workers’ remittances, as well as the effect of a modest tightening of the fiscal stance to ensure fiscal sustainability in the medium term.

23. The government is preoccupied by the risks facing the economy in 2010. In the short run, the weakness of the global economy will continue to have an impact on transit services, remittances, and on prices and demand for cotton and phosphate.

B. Fiscal Policy

24. In this difficult economic context, we are convinced that our spending plans for 2010 remain warranted, provided we can mobilize the necessary financial resources, both domestic and external, with the exceptional support of Togo’s development partners. The government is also taking steps that will enable it to increase both tax and non-tax revenues beyond original projections, helping to offset the slight underperformance in 2009 that limited the scope for using treasury deposits in 2010. Owing to strengthened spending controls, expenditures will be maintained within the budgetary envelope, particularly current primary spending. Given our efforts to mitigate the impact of the global recession and to mobilize domestic resources, we hope to benefit from additional exceptional financial assistance from our partners.

25. With the combination of improved tax collection already observed in 2009 and more effective mobilization of non-tax revenue, we now project that revenue collection will reach CFAF 267.7 billion (17.2 percent GDP), compared to CFAF 249 billion originally targeted. Projected tax revenue will increase to CFAF 234.8 billion (15.1 percent GDP), compared to CFAF 224.5 billion originally targeted. Collection of non-tax revenue has already reached 85 percent of the annual target, allowing us to raise the target—which was already ambitious by historical standards—to CFAF 32.8 billion (2.1 percent GDP).

26. Our spending plans in 2010 give priority to maintaining the increase in expenditures oriented toward growth and poverty reduction, consistent with the priorities defined in the Poverty Reduction Strategy Paper. Thus, the composition of spending is well adapted to offsetting the macroeconomic and social impacts of the global recession. In light of the overspending in some areas in 2009, we will heighten our vigilance in controlling spending levels, relying on the new measures outlined below; and if necessary, we will make expenditure savings in order to offset any overruns.

27. The revised plans for execution of the 2010 budget will yield a reduction in the domestic primary budget deficit to CFAF 1.8 billion (0.1 percent GDP), compared to CFAF 19.3 billion originally projected. This improvement will enable us to mitigate financing requirements. The overall budget deficit (on a commitments basis excluding grants) will also improve to 5.4 percent of GDP. Nonetheless, the policy of reducing arrears to the private sector (already included in the budget), to oil companies, and more recently in order to improve the financial situation of CEET, will raise the costs of arrears clearance to 3.7 percent GDP (compared to 2.3 percent initially targeted); these operations have required an increase in the net level of government securities issued of 1.1 percent GDP between January and April 2010. Arrears to the energy sector were handled by two issuances of government securities: (i) one involving the arrears of CEET and the former OTP vis-à-vis CEB in the amount of CFAF 17.1 billion; and (ii) the other operation focusing on the arrears of the central government, local governments and government agencies vis-à-vis CEET in the amount of CFAF 16.5 billion. Following an agreement between the government and CEET, the securities issued in the second operation were returned to the government as compensation for having taken over CEET’s debt in the first operation. This approach is dictated by the urgent need to improve the financial situation of CEET. This new revised fiscal framework has led us to propose revising the performance criteria previously established for end-June 2010, as well as the new performance criteria established for end-December 2010 (see Table 1). In order to strengthen the monitoring of the budget program, we have also decided on indicative targets for the third quarter of the year.

28. Our need for exceptional external financing remains unchanged from the original fiscal framework. The residual unidentified financing amounts to CFAF 15 billion (equivalent to 1 percent of GDP). In this context, the government appeals to the IMF and its other partners for additional exceptional assistance. On the understanding that the European Union, above and beyond the disbursement of the general budgetary assistance tranche of up to CFAF 5 billion, is also providing an additional CFAF 8 billion via the V-Flex instrument and CFAF 5 billion through the Food Facility instrument, we request an augmentation of the financing under the ECF by SDR 11 million, equivalent to CFAF 7 billion. This augmentation could be disbursed in two equal portions at the completion of the fourth and fifth reviews. If these resources were not to become available, we would be forced to cut lower-priority current spending and/or postpone some investment financed by domestic resources, to ensure financing for the government budget and to maintain the fiscal objectives of our program.

29. The government remains committed to strengthening debt dynamics. Achieving debt reduction under the HIPC and MDRI initiatives would lead to a major improvement in the situation, and constitutes one of the highest priorities of economic policy. In addition to this debt reduction, the government is determined to maintain the ongoing improvement in debt dynamics through higher growth, relying on concessional external financing, and strengthening public finances. With respect to domestic debt, the government’s securities and bonds issue program is continuing in the context of the debt management process discussed with development partners. On the subject of arrears reduction, we intend to continue settling the outstanding arrears balance in a strategy planned and negotiated with our partners with due regard for our budgetary objectives and public debt sustainability criteria. Over the medium term, the government’s fiscal stance will be guided by a target of a domestic primary fiscal balance in equilibrium or better, yielding improved debt sustainability indicators. This fiscal stance will involve a gradual tightening of the fiscal balance starting in 2011 and continuing for the following three years.

Structural reforms for the rest of 2010

30. The government intends to pursue this ambitious structural reform program in order to support growth. Our updated and strengthened commitments are laid out below and in Table 3.

Table 3.

Togo: Structural Conditionality for 2010

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31. Recognizing the role that the financial sector needs to play in promoting growth, the government is committed to restoring confidence and dynamism in this sector by privatizing the state-owned banks. The government plans to clarify the legal framework for privatization in a transparent and expeditious manner and maintain the plans to publish a final call for bids by September 2010 (structural benchmark). Privatization revenue will be used to repay the debts incurred during the bank restructuring process, thereby yielding a potentially significant improvement in debt dynamics. In collaboration with the supervisory authorities, the government is also determined to maintain rigorous control of the management of these banks until the privatization process is completed. The government also remains committed to setting up the mechanism or structure and its operational support for managing and collecting the nonperforming loans of state-owned banks by end-December 2010 (structural benchmark). The mechanism or structure will enable the government to recoup some of the cost of restructuring the state-owned banks and resolve nonperforming loans, making way for a stronger revival in the flow of credit.

32. The government also intends to accelerate structural reforms in other sectors to enhance growth potential.

  • The strategy for the phosphates sector will be implemented in accordance with the strategic audit.

  • As far as the electricity sector is concerned, the government has decided to undertake a financial rehabilitation of CEET and to increase the supply of energy at an affordable cost. The government is mindful of the importance of ensuring the financial viability of CEET. Accordingly, the government is following the general principle whereby the pricing system should allow for full recovery of the costs of energy production and distribution. With these objectives, we have decided to adjust prices by 13 percent on average in July 2010, while minimizing the impact of this adjustment on the poorest households. Discussions are continuing among stakeholders (CEET, CEB, and the government of the Beninese Republic) on the study on the implementation of an automatic and periodic price adjustment mechanism. In addition, the government intends to mitigate any additional costs potentially incurred as a result of the launching of the new private producer (Contour Global), for example, by selling any production surpluses exceeding domestic demand to other countries in the subregion and to the CEB.

  • For the telecommunications sector, with the help of technical and financial partners, the government intends to strengthen the regulatory framework, following ECOWAS directives, to guarantee competition and economic efficiency. The third mobile telephony license will be awarded to a private operator with BOAD (West African Development Bank) support. With the help of technical and financial partners, including the World Bank, the government also aims to develop a medium-term strategy to maximize the sector’s contribution to growth. We also intend to enhance transparency in financial relations between the government and Togo Télécom, for example, by exploring the possibility for a study of relationships of transfers, debts, and advances on dividends between the two parties.

  • In order to promote Togo’s competitiveness as a trade hub, we intend to initiate the process of creating a one-stop window for foreign trade at the Autonomous Port of Lomé with assistance from the World Bank. In order to achieve this objective, the government intends to approve at the Council of Ministers before the end of the year a detailed roadmap based on a technical report that will indicate the roles of each government agency and the required measures. Consultants financed by the World Bank to draft the report will be recruited before the end of September 2010 (new structural benchmark). The one-stop window will facilitate all administrative procedures for exports and imports, including customs procedures, at one location.

33. The government also is working to resolve issues in the petroleum product sector, which accounts for 7 percent of GDP. Negotiations on the amount of the settlement of quasi-fiscal liabilities to petroleum product importers and distributors have advanced. The government has launched a review of the domestic petroleum product pricing mechanism that will benefit from FAD technical assistance. The review aims to establish a mechanism that minimizes fiscal risks of pricing policies by implementing automatic adjustment of retail prices, through the application of a pricing formula that fully passes through fluctuations in international prices over time while smoothing out the pass-through of volatility in the short term. This new mechanism will be approved by the Council of Ministers by end-November 2010 (revised structural benchmark).

34. Efforts to strengthen the public financial management reforms underway are intensifying in 2010:

  • Strengthen the implementation of the mechanism for managing cash flow and monitoring budget execution. Starting in June 2010, meetings are being held fortnightly to examine data on expenditures, revenue and financing needs, with minimum standards and lag times, and to propose necessary actions. These reports will include monitoring of the balance of outstanding payables to minimize these amounts. At the same time, a treasury cash flow plan will be prepared with regularly updated projections for each remaining month of the year. We are inviting IMF staff based in Lomé to attend all of these meetings.

  • Some measures taken in the 2009 budget law with respect to the free economic zone have raised questions among investors in Togo regarding adherence to established international practices. In consultation with stakeholders and development partners (including the World Bank and IMF), the government is drawing up a new investment code that will ensure consistency among the various existing legislative acts, including the free economic zone law. The code will simplify the system of incentives and make the entitlement to incentives automatic, while controlling the system’s fiscal costs.

  • Continue preparations to complete the financial and organizational audit of the Togo Retirement Fund (Caisse de Retraite du Togo--CRT) and begin an actuarial study of the institution by end-December 2010 (structural benchmark) that will help establish an overall strategy for repaying the government’s social debt. With assistance from the World Bank, the call for bids for the audit was launched in October 2009 and a contract should be signed by June 2010. A contract for the actuarial study should be signed by September 2010, thus meeting the structural benchmark early.

  • Improve debt management capacity and reporting systems, including the preparation of an annual plan indicating projected monthly debt service by creditor and monitoring debt to public enterprises. We intend to seek the advice of IMF staff in advance of all revisions to this plan, as well as any newly planned financing. In addition, we plan to implement capacity-building for personnel and management of public debt, as well as to put in place over the medium term an audit system for the management of public debt. In the meantime, we would like to request from the World Bank an update of the assessment of our debt management performance (DeMPA).

Conclusion

35. Togo appreciates the continuing and growing support of its development partners as it strives to cope with external shocks and revive the economy. Togo continues to need resources urgently (in the form of grants or concessional loans) to finance investment in economic infrastructure and social services, with the aim of reducing poverty and generally attaining the MDGs. In particular, we value the commitments by Togo’s partners in Brussels in September 2008 to mobilize increased resources within the principles of the Paris declaration and the program of action coming out of the Accra Forum. For its part, Togo is determined to fulfill the conditions for satisfying the floating completion point triggers under the HIPC initiative as soon as possible in 2010. The process of preparing the full PRSP was completed in June 2009. Implementation is proceeding, and we intend to submit the first Annual Progress Report in the third quarter of this year.

36. The progress of our ECF-supported program will be monitored on the basis of revised quantitative performance criteria for end-June 2010 and newly established quantitative performance criteria for end-December 2010. Moreover, we have established quantitative targets for end-September 2010 (Table 1). All these PCs and targets were developed in consultation and agreement with the IMF mission. We request that the fifth program review will be completed by end-November 2010, and we aim to fulfill the conditions for the floating completion triggers so that a decision on the HIPC completion point will also be possible at that time. We request that the sixth program review to be completed by end-April 2011.

37. As noted above, the ECF-supported program has continued to make resolute progress toward its goals, despite external shocks and administrative capacity constraints. Some deviations from program objectives occurred, and we are taking corrective actions. The government is convinced that the policies and corrective actions set out in this document will be sufficient to attain program objectives. Our macroeconomic and financial needs are particularly pressing this year, given the need to offset the persistent impact of the global recession. Accordingly, we request: waivers for the performance criteria for domestic primary fiscal balance and net domestic financing for end-December 2009; and a waiver for the continuous performance criteria for noncessional external financing for financing contracted in February 2010, which we have cancelled. If these waivers are granted, we request an augmentation of SDR 11 million in the amount of the arrangement; the completion of the fourth review; and the disbursement of the fifth tranche of the loan and the augmentation.

38. The government remains committed to taking any additional measures that might be necessary toward these goals. The Togolese authorities will consult with the IMF about these possible additional measures or before proceeding to revise the measures set out in this document. To facilitate program monitoring and evaluation, the government will regularly report all information to IMF staff within the required time frames stated in the Technical Memorandum of Understanding (TMU).

39. Finally, the government consents to the publication of this Letter of Intent and the IMF Staff Report on the fourth review.

Sincerely yours,

/s/

Adji Otèth AYASSOR

Minister of Economy and Finance

Appendix II—Lic Debt Sustainability Analysis

INTERNATIONAL MONETARY FUND

TOGO

Debt Sustainability Analysis Under the Debt Sustainability Framework for Low-Income Countries

Approved by Michael Atingi Ego and Thomas Dorsey

May 24, 2010

In line with the joint World Bank-Fund low income country debt sustainability analysis (LIC DSA) produced with the third review of the Extended Credit Facility (ECF), this update of LIC DSA shows that Togo is in debt distress, demonstrating the need for reaching the completion point of the HIPC Initiative debt relief.1 An upward revision in growth, mainly due to strong agricultural production, is slightly improving the debt indicators, which offsets the impact of an ECF augmentation requested by the authorities. However, the key debt sustainability indicators are still above the relevant indicative thresholds for the next few years. An alternative scenario illustrating the impact of additional HIPC, MDRI and beyond-HIPC debt relief at the completion point suggests strong improvements in debt burden indicators. The inclusion of Togo’s large domestic public debt in the analysis generally reinforces the conclusions of the external DSA.

A. Background

1. The last DSA for Togo prepared in 2009 concluded that Togo was in debt distress. The outcome of this analysis is consistent with the previous DSAs finding improvement in debt dynamics as a consequence of expected enhancements in the macroeconomic policy framework, notably greater fiscal consolidation and solid implementation of growth-promoting structural reforms, large domestic arrears clearance operations and the HIPC initiative interim debt relief. The key indicative ratios for the current DSA are slightly better than in the 2009 DSA, mostly because the revised real GDP growth estimates from 2008 onward are stronger than projected during the previous exercise, mainly because of strong agricultural results2.

2. Since November 2008, Togo has been in the interim period of the HIPC Initiative. Upon reaching the decision point, Togo was granted Cologne terms debt relief3 by the Paris Club and negotiated a rescheduling agreement with several multilateral and non Paris Club creditors. Togo has signed bilateral agreements with most of its Paris Club creditors and has contacted the other non Paris Club creditors to seek comparable treatment as the one granted by the Paris Club. Also, the nominal debt stock fell from US$2.2 billion at end-2007 to US$1.7 billion at end-2008, reflecting the arrears clearance operations.

B. Baseline Assumptions

3. Including a revision in growth rates, the baseline scenario stays consistent with the three-year ECF arrangement. It is based on a continuation of steady growth averaging 3.7 percent from 2009 to 2019 and 4 percent from 2020 to 2029. The revised real GDP growth figures are higher from 2008 to 2012 (chart 1). The revision is due essentially to better-than-expected agricultural production (particularly in food production) and faster growth of the secondary sector (extractive industries, especially clinker). In addition, revisions to the GDP deflator for 2008 have caused a significant increase in nominal GDP compared to 3rd review estimates4. Under the assumptions of a stable political and social situation, growth will be driven by several factors: donor-financed public investment, an improved investment climate, growing regional integration thanks to Togo’s strategic geographical location and the role of the port of Lomé, a rebound in cotton and phosphate production following the restructuring of these sectors, and deeper financial intermediation after the ongoing restructuring of the banking sector.

Chart 1:
Chart 1:

Real GDP Growth

Citation: IMF Staff Country Reports 2010, 216; 10.5089/9781455207596.002.A001

4. Macroeconomic stability will come from a prudent fiscal policy and structural reforms. The domestic primary deficit is assumed to stay close to zero during the projected period. While the tax revenues are expected to increase with a broadening of the tax base, the resources freed up by HIPC and MDRI relief will be allocated to priority sectors such as health, education, and infrastructure.

Togo-Macroeconomic Assumptions

The baseline macroeconomic framework assumes a stable political and social situation and that important structural reforms in the financial and real sector are brought to fruition, accelerating output growth to the estimated potential and attracting additional foreign direct investment over the medium-term.

  • Real GDP growth is projected to reach its estimated potential of 4 percent by 2013 and then vary around that level. Growth will be driven by the rehabilitation of the phosphate and cotton sectors, an improved investment climate, increased financial intermediation; additional FDI and foreign aid; and growing regional integration, thanks to Togo’s strategic geographical location and the role of the port of Lomé.

  • The projections for key commodity prices (oil, cotton, cocoa, and coffee) through 2015 are based on WEO projections of end May 2010 and are assumed constant in real terms afterwards.

  • Inflation over the long term is projected to remain stable at 2 percent, reflecting sound monetary policy at the regional level.

  • The current account deficit will remain roughly stable over the medium term, with higher exports of phosphates, cement and clinker being insufficient to compensate for a strong growth in imports as foreign aid is absorbed and foreign investment increases.

  • The domestic primary fiscal deficit is assumed to stay close to zero during the projected period providing a fiscal anchor to ensure fiscal sustainability over the long term.

  • FDI and donor flows are expected to increase over the medium term, reflecting improvements in the investment climate and overall governance.

5. Under the assumption that FDI and donor flows increase over the medium term, the external position is projected to remain sustainable. Togo’s current account deficit is not expected to improve over the medium term. While exports are projected to pick up, largely on account of higher phosphate exports following the restructuring of the sector as well as continued growth in cement and clinker exports, imports are also expected to increase at a fast pace as foreign aid is absorbed and foreign investment increases. Sustained export growth will require enhancing competitiveness through reforms to improve the business environment.

6. The baseline scenario reflects the multilateral arrears clearance operations completed in 2008 and assumes full delivery of traditional debt relief as well as interim HIPC assistance.5 Consistent with the DSF guidelines, the baseline does not reflect the delivery of HIPC, MDRI and bilateral or multilateral beyond-HIPC assistance after the completion point.6

C. External Debt Sustainability Analysis

Baseline

7. Under the baseline scenario, Togo’s external debt indicators remain above their relevant indicative thresholds demonstrating that the country is in debt distress (Table 1a, Figure 1). The present value (PV) of public and publicly guaranteed (PPG) debt equals 41 percent of GDP in 2009 and remains above the 30 percent threshold until 2016. Both the PV of external debt relative to revenues and exports exceed their respective indicative threshold in 2014 emphasizing the need to reach the completion point and keeping a high degree of concessionality of Togo’s future debt. However, the higher than projected level of agricultural and clinker production and the higher level of GDP compared to the third review, entail a higher level of exports, bringing the debt service ratios below their respective indicative thresholds for the whole projection period.

Table 1a.:

External Debt Sustainability Framework, Baseline Scenario, 2006–2029 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt, does not include the US$ 32 million supplier credit signed in [ ].

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. The large amount in 2008 reflects the arrears clearance operation.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concess ional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Figure 1.
Figure 1.

Togo: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2009–2029 1/

Citation: IMF Staff Country Reports 2010, 216; 10.5089/9781455207596.002.A001

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2019. In figure b. it corresponds to a With HIPC, MDRI, beyond-HIPC assistance shock; in c. to a With HIPC, MDRI, beyond-HIPC assistance shock; in d. to a With HIPC, MDRI, beyond-HIPC assistance shock; in e. to a With HIPC, MDRI, beyond-HIPC assistance shock and in figure f. to a With HIPC, MDRI, beyond-HIPC assistance shock
Alternative Scenarios and Stress Tests

8. Togo’s external debt outlook remains vulnerable to numerous shocks (Table 1b, Figure 1). The PV of external debt to revenue and exports indicators deteriorate significantly under a variety of shocks, in particular shocks that assume a depreciation of the exchange rate and lower export growth.

Table 1b.

Togo: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2009–2029

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

9. Alternative scenarios assume additional delivery of debt relief at the completion point, which would significantly improve Togo’s debt sustainability outlook (Figure 2). Debt relief under the HIPC Initiative, MDRI and possible bilateral and multilateral beyond-HIPC assistance would significantly improve Togo’s external debt outlook. Reaching the completion point, which is assumed to occur in 2010, and the resulting irrevocable debt relief would reduce all external debt indicators to levels below the relevant indicative thresholds.

Figure 2.
Figure 2.

Togo: Indicators of Public Debt Under Alternative Scenarios, 2009–2029 1/

Citation: IMF Staff Country Reports 2010, 216; 10.5089/9781455207596.002.A001

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2019.2/ Revenues are defined inclusive of grants.

D. Public Sector Debt Sustainability

Baseline

10. The inclusion of Togo’s large domestic public debt in the analysis emphasizes the vulnerability of the baseline scenario (Table 2a, Figure 2). Togo’s domestic debt burden is comparatively large, reflecting years of weak fiscal management and domestic arrears accumulation, as well as the need to recapitalize ailing banks. In addition, inclusion of the recent BCEAO credit linked to the SDR allocation worsens the key indicative ratios. However, this financing substitutes for planned issuance of securities which were not yet included and would have carried a higher debt service cost. The PV of total public debt is projected to remain relatively high during the next five year, hovering around 200 percent of revenues. Given the assumed improvement in the macroeconomic outlook and the projected high degree of concessionality of financing in the baseline scenario, debt ratios would nevertheless fall steadily over the long run.

Table 2a.

Togo: Public Sector Debt Sustainability Framework, Baseline Scenario, 2006–2029

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Covers public and publicly guaranteed debt including state-owned enterprises debt. Does not include the US$ 32 million supplier credit signed in [ ].

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Alternative scenarios and stress tests

11. The evolution of the debt indicators would be sensitive to a variety of shocks, which would increase the debt level and debt service over the long run. Total public debt dynamics are particularly vulnerable to a growth shock and to a lesser extent to a real depreciation (Table 2b, Figure 2). This highlights the importance of a reform agenda that improves the business environment to support foreign investment and growth.

Table 2b.

Togo: Sensitivity Analysis for Key Indicators of Public Debt 2009–2029

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

12. Full delivery of HIPC relief, MDRI, and beyond-HIPC relief at the assumed completion point reduces these vulnerabilities as shown in the alternative scenario. All three PV-based indicators would be substantially lower than under the baseline and would decline further over the projection period.

E. Conclusion

13. The DSA shows that Togo remains in debt distress, despite significant debt relief already achieved under the HIPC initiative. The authorities shared our view on the analysis and the conclusions of the rating. The debt reduction associated with the recent external arrears clearance and by reaching the decision point of the HIPC Initiative does not suffice to allow a sustainable path of debt accumulation. Under the baseline scenario, the PV-based indicators remain well above their indicative thresholds for most of the projection period, emphasizing the importance for additional debt relief, which is expected upon reaching the completion point. Debt reduction upon reaching the HIPC completion point dramatically improves Togo’s external debt outlook.

14. Achieving a robust external debt outlook will depend on a sustained pick-up of real GDP growth, exports and foreign direct investment, as well as prudent debt management and solid fiscal performance. Alternative scenarios and bound tests highlight the vulnerability of Togo’s current external debt outlook. The inclusion of Togo’s large domestic debt in the analysis reinforces the conclusions of the external DSA and emphasizes the risks to Togo’s debt prospects. In this context, it is essential that the Togolese authorities continue current efforts to strengthen public finance management, restructure the banking system and promote financial development, reform state-owned enterprises, and improve the investment climate, laying the foundation for accelerating growth prospects.

Appendix III—Togo: Joint Management Action Plan on Bank-Fund Collaboration (JMAP)

Updated on March 25, 2010

article image
Note: A long-term strategy paper for and an audit for the phosphate sector financed by a LICUS Trust Fund was completed in September 2009 and validated by stakeholders in a workshop in November. The approval of this strategy by the Council of Ministers is part of the IMF program’s conditionality.
1

The higher-than-programmed debt service largely reflects weaknesses in the debt tracking system, in particular for domestic debt.

2

The revised wage bill for 2010 is higher than projected in the third review, due to the 2009 outturn, but nevertheless reflects a reduction compared to 2009 both in absolute terms and as a percent of GDP.

3

Total revenue collection is improving gradually as a percent of GDP. Tax revenue targets for 2010 are slightly lower than 2009 outturns relative to GDP, since marginal tax rates are being reduced for the second year in a row as part of a medium-term plan to broaden the base. Non tax revenue collection is expected to improve in 2010 (LOI ¶25).

4

This augmentation would bring total access under the arrangement to 130 percent of quota, slightly above the norm. It would be disbursed in two equal tranches following the fourth and fifth reviews.

1

This is a Fund staff update to the joint World Bank/IMF DSA presented with the report for the third review of the ECF (Country Report No. 09/173). See “Applying the Debt Sustainability Framework for Low-Income Countries Post Debt Relief” (IDA/SecM2006-0564, 8/11/06). Togo’s quality of policies and institutions, as measured by the average World Bank’s Country Policy and Institutional Assessment (CPIA) for the period 2006–08 (2.6), places it as a “weak performer”. The corresponding indicative thresholds for the external debt indicators are 30 percent for the NPV of debt-to-GDP ratio, 100 percent of the debt-to-export ratio, 200 percent for NPV of debt-to-revenue ratio, 15 percent for the debt service-to-exports ratio and 25 percent for the debt service-to-revenue ratio.

2

Agricultural production was particularly strong in 2009 (over 9 percent of real growth) partially because of favorable weather conditions and government policies to stimulate the sector such as the distribution of fertilizer at subsidized prices. Food production performed especially well. Among export crops, the increase in coffee production is notable.

3

Cologne terms represent a 90 percent reduction of debt service falling due during the interim period and the remaining 10 percent is rescheduled with 6 year-grace period and 23 years of maturity for non ODA debt and 16 year-grace period and 40 years of maturity for ODA debt.

4

The 2008 deflator was revised upwards relative to third review estimates. In particular, food prices and agricultural products prices increases (40 percent) were substantially higher compared to previous estimates, hence reflecting more fully the global food price increases observed for that year. Price increases for phosphate and clinker (18 percent) were also much higher than initially estimated.

5

Arrears to IDA and the AfDB were cleared in 2008. Togo has reached an agreement on arrears clearance with IFAD, OPEC and EIB. Togo is negotiating with BADEA. The IsDB has agreed in principle to provide relief but the modalities have not been defined yet. Togo has contacted FEGECE to ask for HIPC relief.

6

See “Staff Guidance Note on the Application of the Joint Bank-Fund Debt Sustainability Framework for Low-Income Countries” (www.imf.org and IDA/SECM2007/0226, 03/05/2007).

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Cover IMF Staff Country Reports
Togo: Fourth Review Under the Three-Year Arrangement Under the Extended Credit Facility and Requests for Waivers of Performance Criteria and Augmentation of Access: Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Togo
Author:
International Monetary Fund
Volume/Issue:
Volume 2010: Issue 216
Publisher:
International Monetary Fund
ISBN:
9781455207596
ISSN:
1934-7685
Pages:
65
DOI:
https://doi.org/10.5089/9781455207596.002
Figure 1.

Togo: Recent Macroeconomic Developments1
Figure 2.

Togo: Moderate Negative Impact of Adverse External Environment
Figure 3.

WAEMU and Togo: Capital investment

(Percent of GDP)
Figure 4.

Togo: Public Investment–Planned and Executed, 2007–2010

(Percent of GDP)
Chart 1:

Real GDP Growth
Figure 1.

Togo: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2009–2029 1/
Figure 2.

Togo: Indicators of Public Debt Under Alternative Scenarios, 2009–2029 1/