Benin
Second Review Under the Three-Year Arrangement Under the Extended Credit Facility and Request for a Waiver of the Nonobservances of a Continuous Performance Criterion: Staff Report; Staff Supplement; Press Release; and Statement by the Executive Director for Benin
Author: International Monetary Fund
Publication Date:
22 Sep 2011
eISBN:
9781463903626
ISBN:
9781463903626
Language:
English
Keywords:
ISCR; CR; debt; real GDP; program implementation; deficit; wage bill; debt service; debt ceiling; fiscal policy; Benin-Niger railway company; Fiscal stance
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Despite severe economic, political, and natural setbacks in Benin in 2010, its economic growth has accelerated in 2011. The Executive Board of the International Monetary Fund (IMF) has appreciated Benin’s economic performance under the program supported by the Extended Credit Facility (ECF). Based on the satisfactory performance and strong policy commitments, the Executive Board has granted a waiver for Benin. Directors have emphasized that a prudent fiscal policy is essential to preserve macroeconomic stability.

Abstract

Despite severe economic, political, and natural setbacks in Benin in 2010, its economic growth has accelerated in 2011. The Executive Board of the International Monetary Fund (IMF) has appreciated Benin’s economic performance under the program supported by the Extended Credit Facility (ECF). Based on the satisfactory performance and strong policy commitments, the Executive Board has granted a waiver for Benin. Directors have emphasized that a prudent fiscal policy is essential to preserve macroeconomic stability.

I. Recovery Strengthens Amid Challenges

1. Elections in the spring of 2011 reinforced the incumbent government. President Yayi was re-elected in March to a second five-year term and his alliance re-gained a majority in the National Assembly, providing a political window of opportunity for reform.

2. After severe economic, political, and natural setbacks in 2010, Benin’s economic growth is expected to accelerate in 2011. Weak domestic demand and exceptional flooding limited GDP growth to 2.6 percent in 2010 (Figure 1). Growth remained weak in early 2011, because investments were kept on hold ahead of the elections. With confidence ushered in by the outcome of the elections, growth is projected to bounce back to 3.8 percent in 2011, driven by stronger public investment (including post-flood reconstruction), higher agricultural production, and growth in Nigeria.

Figure 1.
Figure 1.

Benin: Macroeconomic Performance, 2006–10

Citation: IMF Staff Country Reports 2011, 243; 10.5089/9781463903626.002.A001

Sources: Beninese authorities; and IMF staff estimates.

3. The post-flood public reconstruction needs are estimated at some 2 percent of GDP (Text Table 1). They include the restoration of key public infrastructure, such as roads, irrigation systems, and public schools.1 Reconstruction costs have been incorporated in public investment plans in 2011.

Text Table 1.

Benin: Reconstruction Needs Following the 2010 Flooding

(Billions of CFA francs, unless otherwise indicated)

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Sources: Benin flooding, 2010: Post Disaster Needs Assessment, April 2011; and the World Bank.

4. Inflation has remained low. Average annual inflation was 2.1 percent in 2010. After shooting up in late 2010 because of high food prices driven by the loss of crops during the floods, inflation has subsided and is expected to decline in 2011 below the West African Economic and Monetary Union’s (WAEMU) 3 percent convergence criterion. Because Benin is normally self-sufficient in food, the impact of higher international food prices has so far been moderate. Administrative pump prices of petroleum products remained constant between January and May 2011. The electricity tariff has remained unchanged since April 2010, because domestically produced electricity has been replaced with cheaper imports.2

5. Tepid domestic demand and higher remittances improved the external current account balance in 2010. The current account deficit, excluding grants, sharply narrowed to 7.8 percent of GDP, as the increase in the cost of fuel imports was more than offset by a decline in imports of intermediate goods and a rebound in remittances. The overall balance of payments posted a small surplus at the end of 2010 (0.8 percent of GDP). Recovery in investment is projected to bring on a widening of the current account deficit in 2011 by about one percentage point of GDP and a small overall balance of payments deficit. Broad money grew by about 12 percent in 2010, supported by an increase in credit to the private sector and by an accumulation of net foreign assets by commercial banks.3 In the first quarter of 2011, domestic credit increase remained subdued, because an increase in credit to the government offset a decline in credit to the private sector ahead of the elections.

6. Bank capitalization has improved, but financial sector soundness indicators are mixed. Ten out of 13 commercial banks now comply with the new WAEMU capital requirements, but loan concentration and non-performing loans are high (around 19 percent), and compliance with other prudential regulations remains mixed. One commercial bank is under provisional administration and the authorities are exploring options. Reimbursements of depositors from recovered assets of last year’s failed “Ponzi” schemes have continued, albeit on a limited scale, because of challenges in recovering assets.4

7. After slippages in the first half of 2010, fiscal policy tightened. Although annual revenue performance improved, it was below program expectations in 2010 (Figure 2). To offset the shortfall, government reined in expenditure despite weak economic conditions (Figure 3). Accordingly, the target for the primary fiscal balance at the end of 2010 was met with a margin, but the target for net domestic financing was missed narrowly. The conservative policy stance continued during the first quarter of 2011 (see below).

Figure 2.
Figure 2.

Benin: Cumulative Revenue, 2009–11

(Billions of CFA francs)

Citation: IMF Staff Country Reports 2011, 243; 10.5089/9781463903626.002.A001

Sources: Beninese authorities; and IMF staff estimates and projections
Figure 3.
Figure 3.

Benin: Selected Fiscal Indicators, 2010–11

Citation: IMF Staff Country Reports 2011, 243; 10.5089/9781463903626.002.A001

Sources: Beninese authorities; and IMF staff estimates.

8. There has been a standoff between government and labor unions on wages in the public sector. After protracted strikes, a 25 percent base salary increase was granted to civil servants of the Ministry of Finance in April, with an understanding that it would be gradually extended to other ministries if revenue performance improved (Box 1). However, this decision was later nullified by the Constitutional Court and a new round of negotiations has started.

The Wage Bill

The public wage bill grew significantly in the recent past. In nominal terms, it increased by 83 percent over the last five years. In real terms, it increased by 55 percent (or by almost 2 percentage points of GDP) over the same period. In 2010, Benin’s wage bill stood at 7.3 percent of GDP—the highest in the West African Economic and Monetary Union (WAEMU; Box Figure 1). The average wage per civil servant was eight times higher than the nominal GDP per capita. The wage bill absorbed some 45 percent of total tax revenue, well above the WAEMU convergence criterion of 35 percent (Box Figure 2).

A01bx01ufig01

WAEMU: Wage Bill To GDP, 2010

(Percent)

Citation: IMF Staff Country Reports 2011, 243; 10.5089/9781463903626.002.A001

Sources: Beninese authorities; and IMF staff estimates.

The size of the public wage bill distorts expenditure composition. Benin has one of the highest levels of current expenditure as a share of GDP (15.5 percent), but capital expenditure is one of the lowest in the region (5.4 percent; Box Figure 3).

A01bx01ufig03

Benin: Composition of Expenditure, 2010

(Percent of GDP)

Citation: IMF Staff Country Reports 2011, 243; 10.5089/9781463903626.002.A001

Sources: Beninese authorities; and IMF staff estimates.

Continuation of rapid wage bill expansion could jeopardize fiscal sustainability. If the wage bill grew by 3 percent a year in real terms over the medium term, the fiscal balance would worsen by some 4 percent of GDP by 2015. If the wage bill grew at 15 percent a year in real terms (in line with the average of recent years), the fiscal balance would deteriorate by some 10 percent of GDP by 2015. If the basic salaries of all civil servants (i. e., excluding bonuses and other benefits) increased by 25 percent in nominal terms, as demanded by unions, the additional cost for the budget would amount to some CFAF 20-22 billion (equivalent to 0.6 percent of GDP), possibly compromising fiscal sustainability and crowding out priority spending. Thus, addressing the wage bill increase is critical to preserve program objectives and requires a comprehensive civil service reform.

II. Program Targets Were Largely Met

9. All end-March 2011 quantitative targets were met, with one exception (Text Table 2). The performance criteria on the basic primary deficit and on net domestic financing were met with a margin because current expenditure (including on wages) was lower than projected, partly reflecting a slowdown in public administration ahead of the elections. Customs revenue was on target, and domestic tax revenue exceeded target, offsetting a small shortfall in non-tax revenue. The indicative target on priority social expenditure was missed by 20 percent, amid the above-noted restraint in expenditure.5

Text Table 2.

Benin: Quantitative Performance Criteria, 2011

(In billions of CFA francs)

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Sources: Beninese authorities, and IMF staff estimates.

10. Since March, the continuous performance criterion on the concessionality of external debt has been missed twice. The authorities contracted two external loans (totaling 0.6 percent of GDP) for infrastructure development, which narrowly missed the concessionality threshold, thereby missing twice the performance criterion on external loans with maturity of more than one year.6 They mistakenly thought that those loans, incorporated in financing packages, could be considered as concessional. The authorities reminded their staff in charge of debt negotiation to consult with Fund staff early in the process to avoid this happening again.

11. The implementation of structural reforms has been mixed. The one-stop window at the Port of Cotonou was launched at end-June as scheduled. The adoption by the Council of Ministers of a new regulatory framework for the electricity sector, including a new and transparent tariff-setting system, is on track. Other reforms, however, have proceeded with delays. The ASYCUDA ++ customs software will be extended to ten new border posts behind schedule owing to technical delays (Letter of Intent (LOI) ¶ 18). The extension of the single tax identification number (TIN) has also been delayed because of slower-than-expected donor support. Most notably, the adoption of the strategy to reform the civil service has continued to be beset by slippages in the bidding process for two supporting studies, which will now be completed by the end of 2011.

III. Policy Discussions

12. Discussions centered on the need to keep fiscal policy consistent with the macroeconomic framework and to strengthen the structural reform agenda to support the authorities’ growth and poverty reduction strategy (GPRS). In particular, discussions focused on the issue of revenue mobilization, the wage bill, and the pace of structural reforms. The authorities confirmed their commitment to the program and to speeding up structural reforms.

Macroeconomic Policies

13. The authorities plan to adhere to the program in 2011 as previously agreed. They concurred that revenue collection needed to be further strengthened to create fiscal space for priority spending, and that achieving the ambitious end-year target will require a marked improvement in customs revenue collection (LOI ¶ 11—13, 22, and 25). They expect the set up of a one-stop window at the Port of Cotonou and the introduction of a new import valuation program will yield significant revenue in the latter part of the year. They also intend to enhance tax and customs administration by improving risk-based controls, extending the use of the TIN, and better monitoring transit trade.

14. The authorities are committed to keeping the wage bill within the program envelope (LOI ¶ 23). They emphasized that the 2011 wage bill will be maintained in line with the program in spite of strong union demands for wage increases. In addition, they will maintain a prudent wage policy keeping in mind the objectives of the program in 2012. Staff emphasized, and authorities concurred, that addressing the wage bill adequately in the medium term requires a civil service reform strategy.

15. The draft 2012 budget will entail strong revenue mobilization and a rigorous prioritization of expenditure, consistent with the program (LOI ¶ 24—26). The budget will aim at improving the basic primary balance by 0.7 percentage point of GDP through raising tax revenue by 0.4 percentage point of GDP and reducing expenditure by 0.3 percentage point of GDP. Public investment would remain above 6 percent of GDP, largely financed with external concessional assistance.

16. The authorities intend to consolidate recent improvements in debt sustainability. The updated Debt Sustainability Analysis (DSA) indicates low risk of debt distress for Benin.7 This assessment hinges, however, on the timely implementation of the structural reform agenda and on continued external concessional assistance. The authorities concurred with this assessment, but requested increased flexibility in contracting external debt. They expressed disappointment that the program definition of external debt precluded the combination—in the form of integrated financing packages—of foreign currency denominated loans with CFA franc denominated highly concessional financing from WAEMU organizations to meet the concessionality requirement. Going forward, they requested that the debt ceiling on nonconcessional external loans with a maturity of more than one year and a grant element of more than 20 percent be raised to the equivalent of about 0.7 percent of the 2012 GDP. They argued that this would allow Benin to mobilize more resources to finance infrastructure projects in line with their GPRS while preserving debt sustainability.

Structural Policies

17. The authorities launched their third GPRS for 2011–15 in March 2011 (LOI ¶ 28). The strategy’s key objectives—improving living standards and placing Benin on the road to emerging market status—will be pursued by promoting private-sector activity to foster growth and employment. The strategy has two development scenarios, and is supported by a medium-term priority action program (PAP) and a system to monitor key indicators. The authorities shared the staff’s preliminary assessment that the “central” scenario is highly ambitious and that policies should be based, for the time being, on the less ambitious “alternative” scenario. They are preparing a new version of the PAP which is aligned with available financial resources. Against this backdrop, the authorities’ reform agenda focuses on tax and customs administration, public financial management, civil service reform, and the public and financial sectors.

18. The authorities agreed on the need to streamline tax exemptions. They will review existing tax exemptions by end-June 2012, and then develop an action plan to rationalize the number and types of tax exemptions (LOI ¶ 27).

19. Public financial management will be strengthened. Key reforms will improve budget preparation and execution and tighten external audit. In particular, the government will submit a draft organic budget law to the National Assembly and the public accounts of the 2010 budget to the budget audit office (“Chambre des comptes”) by end-December 2011 (LOI ¶ 27).

20. The authorities are committed to civil service reform. As a first step, they agreed to rekindle the implementation of an integrated civil service information management system, including the setting up of a computerized database for all civil servants in 2012. Earlier preparatory efforts will be brought to fruition by commissioning two studies, to be completed before year end. The implementation of the system may require external concessional financing (LOI, ¶ 27).

21. The authorities intend to increase the efficiency of public enterprises by enhancing the role of private partners. To re-launch the privatization of Bénin Télécoms, the authorities are developing a new strategy to attract investors. After delays because of elections in Niger, the management of the Benin-Niger railway company will be outsourced. Following financial and operational restructuring, the electricity company is expected to post a small profit in 2011. Accordingly, since the company receives no public subsidies, the authorities do not intend to raise the electricity tariff at this stage, but will closely monitor the financial operations of the electricity company. They are also planning to implement a new regulatory framework, including a regulatory authority and a transparent electricity tariff mechanism.8

22. To strengthen the financial system, asset quality should be improved, prudential regulations systematically enforced, and the supervision of deposit-taking microfinance institutions intensified. The authorities are taking measures to reduce non-performing loans and increase capitalization of three banks currently not complying with the new decision of the WAEMU Council of Ministers on capital requirements. They are also strengthening the regulation and supervision of microfinance institutions in the wake of the collapse of Ponzi schemes. A new law, which will strengthen the supervisory capacity of the Central Bank of West African States (BCEAO) and its intervention power over microfinance institutions with more than CFAF 2 billion (about US$4 million) in outstanding deposits or credits, has been forwarded to the National Assembly. Although some recommendations made in the September 2010 Monetary and Capital Markets (MCM) department’s technical assistance report have been pursued (e.g., the law noted above), others remain unaddressed (e.g., increasing sanctions on illegal deposit-taking institutions, exchanging information on money laundering).

23. The mission encouraged the authorities to reduce implicit subsidies to petroleum products. The mission pointed to the distortions that wide-scale informal imports of petroleum products introduced to the detriment of the formal sector and government revenue. It recommended to reduce the scope of this informal trade. The mission noted that, in the case of progress on this front, generalized subsidies on prices could be replaced by targeted support to vulnerable groups if needed. The authorities agreed in principle, but noted that wide availability of cheap petroleum products informally imported from Nigeria constrained their capacity to pass international price increases through to the domestic market and warranted implicit subsidies (i.e., lower customs valuation) to keep formal intermediaries operating. Previous attempts at reining in the informal petroleum sector had not succeeded. The authorities noted, however, that ongoing efforts to strengthen border controls would help limit informal imports, and called for a regional approach to pricing petroleum products.

IV. Risks to the Program

24. Program implementation could be hampered by fiscal risks. Labor union demands for a sizable general increase in civil service wages pose a serious risk to program implementation. Accommodating these demands would erode the fiscal space for priority spending and widen the fiscal deficit. Another risk could arise from inability to deliver the contemplated improvement in revenue collection. The first risk would be lessened by the timely adoption of a civil service reform strategy, which could generate social consensus. Strong government leadership and decisive implementation of the program would mitigate the second risk.

V. Staff Appraisal

25. After sluggish growth in 2010, the economic outlook has improved. Growth in 2011 is expected to accelerate, supported by a rebound in agriculture, reconstruction after the floods, and growth in the region. Inflation should remain low, below the regional convergence criterion.

26. Performance under the program has been broadly satisfactory, but maintaining a prudent fiscal policy stance remains critical. Moving forward, revenue performance needs to be strengthened. Although the end-March revenue objective was met, the targeted revenue performance in the second half of the year calls for increased effort. Recently introduced measures, if properly implemented, can provide an important contribution, but additional improvements in tax and customs administration and a rationalization of tax exemptions are essential. Any future general wage increase in the public sector should be framed within a civil service reform strategy and kept consistent with financial resources.

27. The government should take advantage of the window of opportunity provided by its parliamentary majority to accelerate the implementation of critical structural reforms. These include modernizing the civil service, reforming public financial management in line with WAEMU directives, and strengthening public enterprises.

28. The soundness of the financial system should be further strengthened. Improving assets quality by increasing provisioning for nonperforming loans and reducing credit concentration are important. Strengthening the supervisory and intervention powers of the BCEAO is critical to prevent a re-emergence of illegal financial entities (e.g., Ponzi schemes).

29. Program implementation could be hampered by a fast-growing public service wage bill and a shortfall in revenue collection. The authorities’ strong commitment to the program should mitigate these risks.

30. Staff supports the authorities’ requests for a waiver for nonobservances of a performance criterion in two instances and completion of the second review under the ECF. Staff is of the opinion that the two nonconcessional loans contracted for infrastructure development represent only a minor deviation from the program because they add only a minimal increase to the outstanding external debt stock (0.4 percent), miss only narrowly the concessionality threshold, and resulted in corrective action among staff involved in debt negotiation. Staff also supports the authorities’ request to raise the nonconcessional debt ceiling to about 0.7 percent of the 2012 GDP because the impact on the additional burden would be limited in an environment of low debt-distress risk; such debt would allow to finance additional priority infrastructure projects in line with the GPRS; and the safeguards noted in the LOI (¶ 17).

Table 1.

Benin: Selected Economic and Financial Indicators, 2008–16

article image
Sources: Beninese authorities; and IMF staff estimates and projections.Note: … = not available.

Change in percent of beginning-of-period broad money.

Total revenue minus current primary expenditure, capital expenditure, and net lending.

Total revenue minus current primary expenditure and capital expenditure financed by domestic resources.

Table 2a.

Benin: Consolidated Central Government Operations, 2008–16

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

Total revenue minus current primary expenditure, capital expenditure, and net lending.

Total revenue minus current primary expenditure and capital expenditure financed by domestic resources.

Net change in the stock of payment orders whose payment has been postponed to the following period, and balance of custodian accounts.

Table 2b.

Benin: Consolidated Central Government Operations, 2010–12

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

Total revenue minus current primary expenditure, capital expenditure, and net lending.

Total revenue minus current primary expenditure and capital expenditure financed by domestic resources.

Net change in the stock of payment orders whose payment has been postponed to the following period, and balance of custodian accounts.

Table 3.

Benin: Consolidated Central Government Operations, 2008–16

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

Total revenue minus current primary expenditure, capital expenditure, and net lending.

Total revenue minus current primary expenditure and capital expenditure financed by domestic resources.

Net change in the stock of payment orders whose payment has been postponed to the following period, and balance of custodian accounts.