Statement by Laurean W. Rutayisire, Executive Director for Togo and Kossi Assimaidou, Alternate Executive Director

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 – Introduction

We would like to express our Togolese authorities’ appreciation of the continued engagement of Fund staff with Togo and their quality policy advice, notably through the current ECF-supported program. We also thank the Executive Board and Management for maintaining a constructive dialogue with our authorities throughout the recent years of a challenging domestic and external environment. Our authorities share the thrust of the staff report.

Following the food and fuel price shocks in 2007–08 and the adverse impact of flood in 2008 which destroyed critical road and bridge infrastructure, the economy of Togo has been hit by the effect of the global economic recession in 2009, notably through decreased exports and remittances and lower-than-expected FDI. This has prevented growth from reaching its estimated potential, government revenues from reaching target, and thus leading to missing two performance criteria for end-December 2009 (fiscal balance and domestic financing). Weak administrative capacities contributed to the contracting of a loan that does not meet the concessionality requirement. Upon realizing this deficiency, our authorities have taken a corrective action after consulting with Fund staff. Moreover, the external financing needs identified earlier in the program still remain.

Despite the challenging circumstances facing the country, our authorities have broadly met the program objectives under the current review. All other performance criteria have been observed and all structural reforms through 2009 have been implemented while the ambitious structural benchmarks at end-March 2010, including the implementation of the domestic arrears clearance strategy, have been effectively satisfied.

Our Togolese authorities remain strongly committed to a rigorous implementation of the program. They also continue to see the HIPC completion point—toward which they continue to make progress—as a central milestone in their strategy to ensure stronger and sustainable growth and reduce poverty. Based on their good policy and reform implementation, despite difficult circumstances, and the corrective actions they have taken to remedy the missed criteria, our authorities request the completion of the Fourth Review under the ECF arrangement and waivers for the nonobservance of performance criteria. Furthermore, they have endeavored to close part of the financing gap through external budget support and the Food Facility instrument of the EU. Nevertheless, a residual financing gap remains, for which our authorities are requesting an augmentation of access under the ECF amounting to SDR 11 million and equivalent to 15 percent of quota.

II – Continued track record of policy and reform implementation

Since the last review under the current ECF arrangement, our authorities have pursued countercyclical macroeconomic policies—notably on the fiscal front—to mitigate the effects of the global recession, while maintaining the program objectives.

In this context, fiscal policy continues to strengthen notwithstanding difficult conditions. Although revenues at end 2009 fell short due to the economic slowdown and lower-than-expected exceptional nontax revenues, our authorities had to preserve planned expenditures and faced unexpected personnel costs related to the health and education sectors, and security for the March 2010 presidential elections. This led to exceeding the target for the domestic primary fiscal deficit by 0.2 percent of GDP and, combined with more successful-than-envisaged efforts in clearing domestic arrears vis-à-vis the private sector, contributed to exceeding the net domestic financing ceiling. Our authorities believe that the ongoing implementation of the domestic arrears clearance strategy will help rekindle private sector activity. They also continue to meet the PC regarding the non-accumulation of external arrears.

Concerning external borrowing, there has been a contracting of external credit early this year aimed at modernizing the TV broadcasting system, which did not meet the concessionality requirement under the program owing to insufficient capacities on the part of the authorities. After consultation with Fund staff, the authorities have since taken a forceful corrective action by cancelling the promissory notes by mutual agreement with the external supplier. Having also cancelled the related project, they are now seeking collaboration from development partners to implement a more suitable rehabilitation and extension project consistent with the country’s debt sustainability.

The implementation of structural reforms has continued satisfactorily, with all structural benchmarks and performance criteria through 2009 having been observed. These include the reduction in tax and customs exemptions and strengthening of tax and customs controls; the operationalization of new Treasury structures based on WAEMU directives; the restructuring/recapitalization of a bank, BTCI; the launching of a process to identify strategic investors for state-owned banks; and the preparation of a development strategy for the phosphates sector based on the results of the strategic audit. The latter measure was observed with delay due to the initial delay in the completion of the audit (insufficient number of firms responding to the initial tender) as noted during the second review under the program last year.

III –Policies for the remainder of 2010 and for 2011

In pursuing efforts to boost the economy, our Togolese authorities remain determined to enhance fiscal governance; maintain macroeconomic stability and program objectives; pursue prudent debt management through external financing based on grants and highly concessional loans; and advance structural reforms in key growth-oriented sectors, notably banks, cotton, phosphates and telecommunications. They understand the importance of revitalizing these sectors, both for fiscal sustainability and growth purposes.

Fiscal policy and debt management

In the difficult economic environment still dominated by the effects of the global crisis, fiscal policy will continue to be geared towards supporting economic activity notably through higher investment and poverty reducing expenditure, building on improvements in the execution of public investment and priorities defined in the country’s PRSP. Motivated by the continuing impact of the global crisis on Togo’s exports and remittances, this policy stance will require the mobilization of adequate financial resources. In this vein, our authorities hope that they can count on additional financial assistance from development partners. On their part, the authorities have revised upward their domestic revenue objectives, based on additional efforts in tax collection and increased effectiveness in nontax revenue mobilization. All these efforts will be supported by continuing public financial management reforms, notably in the implementation of the mechanism for managing cash flows and monitoring budget execution and the completion of the financial and organizational audit of Caisse de Retraite du Togo (Togo’s retirement fund).

Over the medium-term, the fiscal policy stance will be guided by a tighter target of domestic primary balance which will involve a gradual adjustment starting in 2011.

Our authorities remain committed to strengthening debt management through improved public finances, reliance on concessional external financing, the pursuit of securities and bonds issue program, and improvement in debt management capacity with Fund assistance. At the same time, they intend to continue settling the outstanding domestic arrears balance.

Financial sector reform

Our Togolese authorities remain committed to restructuring and privatizing the four state-owned banks, with the aim of restoring confidence and vivacity in the sector while at the same time improving debt dynamics with debt repayment using privatization revenues. To this end, they plan to publish a call for bids by September 2010. In the meantime, they will maintain, in collaboration with the regional banking commission, a close oversight of the banks’ management throughout the restructuring process. The government will also set up a mechanism for managing and collecting the NPLs of state-owned banks by end-December 2010.

Other structural reforms

Reforms of state-owned enterprises will also be pursued as scheduled, with a view to restoring their financial health and promote production and productivity gains. In the phosphates sector, the strategy will proceed in accordance with the strategic audit. In the electricity sector, the government is adopting a cost-recovery approach and a price adjustment mechanism. In the telecommunications sector, the authorities intend to strengthen the regulatory framework with the assistance of partners, following regional directives, with the view to ensure competition and economic efficiency. They also aim at developing a medium-term strategy to increase the sector’s contribution to growth. Regarding the Port Autonome de Lomé, the authorities seek to take advantage of its regional position to promote it as a trade hub by creating a one-stop window for foreign trade to facilitate all administrative procedures for exports and imports at one location.

Regarding the petroleum sector, the Togolese government has undertaken a restructuring of the domestic pricing mechanism, with the view to limiting fiscal risks by institutionalizing automatic adjustments of petroleum product prices. In this vein, an FAD mission is currently visiting Lomé to provide advice and technical assistance. Already, the authorities have increased domestic petroleum prices in recent days.

IV – Poverty Reduction Strategy and HIPC Process

As our authorities have emphasized, Togo is determined to fulfill all the conditions for meeting the HIPC completion point triggers as early as end-2010. The process of preparing the full PRSP in a large participatory setting involving all segments of society, including the government, the civil society, the business community, development partners and the National Assembly, was completed a year ago and implementation is proceeding.

Other requirements for the HIPC completion point are also advancing well. Among the completion point triggers, the decree on the Procurement Regulatory Agency was adopted in November 2009 and the amounts of approved contracts are being published; the Cour des Comptes has been made operational with regular Treasury Balances and the Loi de Règlement for 2007 and 2008 prepared and transmitted; and an annual report on the revenues from, and payments to, the phosphate company, in line with the EITI criteria, will be published.

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

V – Conclusion

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

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

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