Benin
Third Review Under the Extended Credit Facility Arrangement

This papers discusses Benin’s third review under the Extended Credit Facility Arrangement. The re-election of the President and the regained majority in Parliament have provided a window of opportunity for reforms. All performance criteria and most quantitative targets have been met, but progress in implementing structural reforms was mixed. The introduction of critical customs reforms met with strong initial resistance, leading to a sharp fall in customs revenue in the second half of 2011. The financial system remains sound, but supervision needs to be strengthened.

Abstract

This papers discusses Benin’s third review under the Extended Credit Facility Arrangement. The re-election of the President and the regained majority in Parliament have provided a window of opportunity for reforms. All performance criteria and most quantitative targets have been met, but progress in implementing structural reforms was mixed. The introduction of critical customs reforms met with strong initial resistance, leading to a sharp fall in customs revenue in the second half of 2011. The financial system remains sound, but supervision needs to be strengthened.

SPILLOVER EFFECTS AND OUTLOOK

A. Twin External Shocks Hinder Economic Growth

1. In early 2011, presidential and legislative elections opened a window of opportunity for long-awaited reforms. The Government took advantage of its improved political position to implement critical reforms, including long-anticipated customs reforms, legislation on corruption, and reforms in labor laws limiting strikes by essential civil servants, including customs officials.

2. A slowdown in port activity and, more recently, lower fuel subsidies in Nigeria, have dampened growth. Real growth in 2011 is estimated at about 3 percent, reflecting sluggish performance of commerce and the financial sector—partly because of disruptions at the Port of Cotonou. In 2012, growth is now projected to increase moderately to 3½ percent, as agriculture completes its recovery from the 2010 flooding and port operations return to normalcy. However, growth will be hindered by the reduction of fuel subsidies in Nigeria and, to a lesser extent, by the crisis in Europe. Supplement I (Impacts of Twin External Shocks) provides an estimate of the impact of these twin shocks in 2012.1

A01ufig03

Benin: Real GDP Growth

(Percent)

Citation: IMF Staff Country Reports 2012, 099; 10.5089/9781475503258.002.A001

Sources: Beninese authorities; and IMF staff estimates.

3. Inflation declined in 2011 but is projected to increase sharply in 2012 following the reduction in fuel subsidies in Nigeria. After a spike in 2010, caused by post-flood food prices, inflation remained below the 3 percent convergence criterion of the regional central bank (Banque Centrale des États de l’Afrique de l’Ouest—BCEAO). The reduction in fuel subsidies in Nigeria in January 2012, however, raised gasoline prices by about 50 percent, a surge that was immediately and fully passed through to Benin. As a result, monthly inflation in January increased by 5 percent, and average annual inflation in 2012 is now expected to reach 7 percent.

A01ufig04

Benin: CPI Inflation

(Year-on-year percent)

Citation: IMF Staff Country Reports 2012, 099; 10.5089/9781475503258.002.A001

Sources: Beninese authorities; and IMF staff estimates.

4. The external current account deficit widened somewhat in 2011. Stronger nontraditional exports were insufficient to offset the impact of higher international fuel prices and lower official transfers (Figure 1). Revised data suggest that cotton exports are expected to increase substantially in 2012. The improved outlook for cotton, along with a rise in nontraditional exports, would reduce the current account deficit, including grants, to some 6 percent of GDP in 2012. As a result, the overall balance of payments is expected to shift from a small deficit in 2011 to a small surplus in 2012. The authorities have continued to implement a prudent external borrowing policy centered on the mobilization of concessional grants and loans. The sole exception, a CFAF 4.6 billion non concessional loan to finance a road, was in line with program conditionality.

Figure 1.
Figure 1.

Benin: External Developments, 2007–11

Citation: IMF Staff Country Reports 2012, 099; 10.5089/9781475503258.002.A001

Sources: Beninese authorities; and IMF staff estimates.

5. Credit to the private sector expanded less than expected in 2011, but is projected to rebound in 2012. After contracting ahead of the elections, credit to the private sector grew only slightly, mainly because of a slowdown in commercial activities. In 2012, however, it is projected to rebound in tandem with port operations. The ratio of private credit to GDP—although higher than in other countries of the West African Economic and Monetary Union (WAEMU)— remains low, signaling shallow financial intermediation.

A01ufig05

Benin: Domestic Credit to Private Sector, 2010

(Percent of GDP)

Citation: IMF Staff Country Reports 2012, 099; 10.5089/9781475503258.002.A001

Sources: Beninese authorities; and IMF staff estimates.

6. Banks in Benin have been adversely affected by debt restructuring in Côte d’Ivoire. A restructuring of Côte d’Ivoire’s sovereign debt, with reduced yields, weakened the profitability of Benin’s commercial banks, which hold about 17 percent of Ivoirian government bonds. As long as the BCEAO accepts those bonds as collateral, however, liquidity should not be affected.

7. Over the medium term, growth is projected to recover and the fiscal outcome to strengthen (Text Table 1). Growth is expected to stabilize at about 4½–5 percent, driven by a robust performance at the Port of Cotonou, as reforms consolidate and ongoing investments yield results. Buttressed by the full implementation of reforms, customs revenue is projected to increase from its abnormally low level of 2011. Higher customs revenue will, in turn, improve the fiscal balance, leading to a basic primary surplus (excluding grants), while lower global oil prices will narrow the external current account deficit.

Text Table 1.

Benin: Medium-Term Macroeconomic Framework, 2010–17 1

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

The baseline scenario assumes oil subsidies in Nigeria remain at their current level over the medium term.

B. Program Performance Has Been Broadly Satisfactory

8. Resistance to reforms complicated program implementation. All performance criteria and all but two indicative targets for end-September 2011 were met (Text Table 2). A similar performance was achieved at end-December (Letter of Intent—LOI—Appendix I, ¶ 14-16). Reforms implemented in mid-2011 at the Port of Cotonou met with strong initial resistance, including strikes by customs officials and a diversion of trade toward other regional ports by importers (Figure 2). As a result, revenue fell sharply during August-November and the target on cumulative revenue was missed twice. Revenue collection recovered in December, and since then, monthly revenue targets have been met.2 In response to the revenue shortfall, the authorities reined in expenditure and thus the performance criterion on the basic primary deficit was met. However, domestically financed investment was lower than planned (an undesirable result), and the target on priority social spending was missed twice.

Text Table 2.

Benin: Performance Criteria and Indicative Targets, 2011

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Sources: Beninese authorities; and IMF staff estimates and projections.
Figure 2.
Figure 2.

Benin: Selected Fiscal Indicators, 2010–11

Citation: IMF Staff Country Reports 2012, 099; 10.5089/9781475503258.002.A001

Sources: Beninese authorities; and IMF staff estimates.
A01ufig06

Benin: Total Revenue, 2011-12

(Billions of CFA francs)

Citation: IMF Staff Country Reports 2012, 099; 10.5089/9781475503258.002.A001

Sources: Beninese authorities; and IMF staff estimates.

9. Implementation of structural reforms has continued to be slow (LOI ¶ 17 and LOI Table 2). Progress has been made in customs administration and import valuation with the reforms at the Port of Cotonou. Public financial management has been strengthened with the submission of a draft Organic Budget Law to the Supreme Court, the preparation of the 2010 budget execution accounts, the establishment of a joint customs-tax control unit, and steps to strengthen the regulatory framework for the energy sector. In January 2012, the authorities temporarily prohibited the inappropriate use of accelerated customs clearance procedures—this measure aims at closing a loophole in customs clearance procedures. However, the pace of reform has been slow in other areas, such as computerization in the customs and tax departments, and pension reform. The generalization of the taxpayer identification number is behind schedule. Civil service reform has continued to be beset by delays, as key studies were delayed and the setting up of a single computerized database for civil servants bogged down. In October, a World Bank mission provided a new road map for setting up the database and proposed a new approach, more aligned with the authorities’ absorptive capacity. The World Bank intends to become a driving force in this reform.

POLICY DISCUSSIONS

Discussions centered on how fiscal policy and the structural reform agenda may be strengthened to support the authorities’ development strategy. In particular, discussions focused on addressing customs revenue underperformance, containing the wage bill, unbridling priority social spending, and accelerating the pace of structural reforms. The authorities confirmed their commitment to the objectives of the program.

A. Strengthening Fiscal Policy

Revenue

10. There was an agreement that restoring customs revenue performance was critical for fiscal sustainability. Customs reforms were implemented to boost revenue by reducing fraud, and to better align procedures with international practices. They included (i) a one-stop window at the Port of Cotonou; (ii) an enhanced import-value-verification program; and (iii) a customs-valuation system based on actual transactional values (which replaced previous “consensual” values). However, as noted, reforms met with strong resistance, and as a result, severe congestion3 occurred in the Port of Cotonou, customs revenue declined, and the price of some basic staples increased. The authorities responded to the price increases by fully or partially reversing the move to transactional values for 14 products, that are a large share of total imports. Additional reforms included several tax policy and administration measures, and a reduction in tax exemptions, following the recommendations of IMF Fiscal Affairs Department (FAD) technical assistance.

  • Staff welcomed the reforms and commended the authorities for their resolve, despite resistance. Staff stressed that the reforms were essential for increasing revenue and modernizing operations at the Port of Cotonou. Staff also noted, however, that the reversion to consensual values weakened the impact of the reforms and recommended a progressive return to transactional values. Staff also urged the authorities to promptly proceed with the planned streamlining of exemptions.

Authorities’ views

  • The authorities opined that revenue would recover in 2012 and that the partial use of consensual values was temporary. They reconfirmed their commitment to see the reforms fully through and expected the initial implementation difficulties to be resolved by early 2012, leading to a recovery in customs revenue. They acknowledged that the suspension of transactional values had narrowed the tax base, but committed to a gradual return to transactional values, once reforms are fully operational.

Expenditure

11. The authorities reined in spending to meet performance criteria. Spending cuts included both current spending (wages, goods, services) and domestically financed capital spending. The elimination of a number of ghost employees, an audit of allowances and entitlements, and the postponement of some recruitment kept the wage bill below target (Box 1).

  • Staff commended the authorities for the spending restraint, which allowed offsetting the revenue shortfall and reaching program targets. Staff noted, however, the downsides of maintaining such a strategy over the medium-term, in particular regarding capital investment and inclusive growth.

  • Staff remained neutral in the dispute between the Government and civil service labor unions on the issue of teachers’ exclusion from the August 5, 2011 wage agreement. However, staff urged the authorities to ensure that the wage bill remains within the program envelope, irrespective of the outcome of this dispute, and highlighted the danger that further and broader wage increases could crowd-out priority spending. Staff urged vigilance to prevent inflationary pressures from higher gasoline prices feeding into higher wages, which would turn a one-time shock into a permanently higher wage bill.

  • Staff encouraged the authorities to move forward with the implementation of civil service reform. Staff emphasized the importance of this reform in underpinning a sustainable fiscal strategy to address the needs of the Beninese people by focusing on priority social spending and capital investment.

Authorities’ views

  • The authorities noted that teachers were excluded from the wage agreement because they had received a 25 percent salary increase on January 1, 2011, ahead of the remainder of the civil service, which was catching up through the August 5, 2011 wage agreement. The authorities reiterated their commitment to civil service reform. They noted that the new wage agreement will yield social peace for the next four years and is compatible with the wage bill planned under the program. They also emphasized their intention to move forward with civil service reform, with the support of the World Bank (LOI ¶ 17).

12. The indicative targets on priority social spending were missed in September and December. The authorities indicated that they had faced technical and administrative difficulties in the timely payment of those expenditures.

  • Staff noted that strengthened monitoring, including setting monthly targets, and better communication with line ministries would be critical to achieving the social spending targets.

Authorities’ views

  • The authorities concurred and undertook enhancing the Ministry of Finance’s enforcement capacity.

    The 2012 budget approved by the National Assembly is broadly consistent with the fiscal framework of the program. Staff welcomed the measures adopted in the budget, including the excise taxes on coffee and on higher-priced cars, and the elimination of full exemption on new enterprises. Staff noted, however, that several unwarranted exemptions remained and welcomed the authorities’ plans to review these exemptions to streamline them.

13. The 2012 budget aims at promoting private sector-led growth, strengthening revenue, and prioritizing spending, according to program goals (LOI ¶ 21). The objectives include a significant increase in the revenue-to-GDP ratio to create fiscal space for public investment and social spending.

B. Reducing the Vulnerability of the Financial System

14. Although the financial sector is broadly stable, the loan portfolio is weak and some small banks are in a fragile position. Prudential indicators show that the banking sector has an overall capital-adequacy ratio above the prudential threshold of 8 percent, but 3 of the 13 commercial banks do not comply with minimum capital requirements (LOI ¶ 6). Loan concentration is high and non-performing loans represent 17 percent of total loans.4

  • Staff emphasized the need to quickly resolve the situation of the banks that have not complied with capital requirements for a long period.

  • Staff expressed concern about the high level of non-performing loans, which made the banking system vulnerable. To address the risks posed by the weak loan portfolio, staff recommended closer and more frequent supervision over risk management practices, lending standards, and taking appropriate measures to address emerging risks. Timely collection of prudential data and overall strengthening of supervision—including on-site inspections—to ensure compliance with regional norms are critical, as current practices suggest weak supervision.

Authorities’ views

  • The authorities noted that financial sector legislation was strengthened with the approval of a law granting the BCEAO the powers to intervene in financial institutions with loans or assets over CFAF 2 billion (about US$4 million)—this was in line with an earlier IMF Monetary and Capital Markets Department (MCM) recommendation. They indicated that most banks had increased their capital following strengthened WAEMU guidelines.

  • The authorities pointed out that the three distressed banks represented a small share (3 percent) of the banking system’s assets, and therefore did not represent a systemic risk. They were considering steps to resolve the situation of a failed bank.5

  • Staff welcomed these measures, while urging the authorities to intensify the supervision of the financial sector.6 Staff underscored that this was critical given the turbulences in the euro area and possible financial ramifications in Benin.

Benin: Civil Service Wage Agreement

On August 5, 2011, the Government reached an agreement with labor unions on an increase in the basic salaries of civil servants. This agreement was reached within the new national negotiation framework. The agreement plans no other wage increases before 2015. The authorities believe this agreement reduces the risk of an unsustainable spiraling of the wage bill. Its multi-year horizon will help eliminate labor disputes in the next few years.

The agreement provides a 25 percent nominal increase in the index (from its 2010 level) used to determine the basic salary of civil servants. In turn, the increase in basic salary will be reflected in a number of wage-related payments, such as pension contributions, housing and location allowances, and performance bonuses. This increase is retroactive to January 1, 2011, but its implementation is spread over four years. Ministry of Finance (MOF) staff received the full 25 percent increase in 2011 as an incentive to bolster revenue collection. Staff in other ministries, excluding teachers who had received an increase earlier, will receive salary increases as follows: 5 percent in 2012 and 2013, and 10 percent in 2014 (Box Table). The agreement also provides a 5 percent increase in 2011, but the timing of the payment of this increase remains to be determined through further negotiations.

The authorities estimate that the increase is consistent with program projections for the wage bill. In 2011, the additional cost (limited to MOF staff) was offset by administrative savings and the postponement of some recruitment. Indeed, the wage bill in 2011 was 6 percent below the program target.

Benin: Wage Bill, 2011–14

(In billions of CFA francs, unless otherwise indicated)

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

Equivalent to the sum of the increase in the base salary plus the impact of the change in the index on a variety of payments and allowances (pensions, housing allowance, location allowance, performance bonuses). Excludes teachers.

The timing and modalities for paying the increase in 2011 will be determined through additional negotiations. MOF staff received the full 25 percent increase in 2011.

C. Accelerating the Structural Reform Agenda

15. Staff welcomed long-awaited customs reforms, but noted that other areas of the reform agenda were lagging. Important structural measures behind schedule included the computerization of customs offices and of the civil service. Staff noted that civil service reform had now been incorporated into the World Bank’s program with Benin. Staff also discussed new fiscal and financial sector structural measures going forward (LOI ¶ 26).

Authorities’ views

  • While acknowledging delays in structural reforms, the authorities noted that the delays were often linked to securing required technical or financial support from donors, and that some measures would require more time than initially thought.

16. The authorities reiterated their commitment to their 2011–15 growth and poverty reduction strategy. They noted that they had adopted procedures to fully execute the priority social spending measures included therein, which are consistent with the 2012 budget. Such measures aim at improving living standards and progressing toward the Millennium Development Goals, particularly in health, primary education, and water provision.

RISKS TO THE PROGRAM

Program implementation is confronted with serious domestic and external risks. The program’s ambitious fiscal target for 2012 could be derailed by continued weaknesses in revenue collection. The rise in the price of informally imported gasoline from Nigeria and a possible global downturn could drain Benin’s already strained resources.

17. Program implementation could be jeopardized by fiscal slippages. Continued resistance to reforms at customs would prolong revenue underperformance and endanger program implementation. Successful labor union demands for further wage increases or the extension of the coverage of the wage agreement in the civil service would threaten priority social spending and capital investment, and jeopardize fiscal sustainability. Additional delays in structural reforms would undermine the program and would put economic recovery at risk. Conversely, timely implementation of civil service reform would reduce the risk of program slippages. A wide diffusion of the benefits of higher customs revenue and of a broader fiscal space, underpinned by strong government leadership and decisive implementation of the reform program, would play a key role in mitigating risks.

18. Risks to the medium-term outlook are on the downside. Policy decisions in Nigeria on fuel subsidies and trade relations with Benin could imperil economic recovery. A weaker global environment would lower exports and remittances, and lead to a reduction in aid as donors confront fiscal constraints.

STAFF APPRAISAL

Although program implementation has been broadly on track, it has been beset by serious shortcomings, namely a significant underperformance in revenue collection and persistent delays in the implementation of structural reforms.

19. Growth is projected to continue on a modest upward trend in 2012, but will be buffeted by the spillover effects of twin external shocks. Growth is expected to rebound moderately, as agriculture fully recovers and operations at the Port of Cotonou normalize. However, the recovery will be stunted by higher gasoline prices, which will dampen domestic demand, and, to a lesser extent, by the ongoing global crisis.

20. Inflation in 2012 is expected to shoot up, but the WAEMU convergence criterion in the medium-term may still be within reach, if second-round inflationary pressures are contained. Because the full pass-through of higher fuel prices in Nigeria spurred inflation in Benin, the authorities need to remain vigilant to minimize subsequent inflationary pressures, in particular regarding wage increases, which could threaten priority social spending and capital investment.

21. Performance under the program has been broadly satisfactory, but the planned increase in revenue is critical for successful program implementation. Although the end-September performance criteria were met, the customs revenue underperformance must be addressed, and valuation at customs needs to gradually return to transactional values. The indicative targets on priority social spending were missed every quarter since their introduction last year. Meeting the program’s future social spending goals will require careful monitoring and strong commitment. Decisions regarding wage policy should be adopted in the context of civil service reform, with the wage bill remaining within the planned envelope.

22. The authorities should accelerate the implementation of the structural reform agenda. When fully implemented, the structural measures included in the reform agenda will enhance revenue collection and fiscal sustainability, and foster greater private sector involvement in the energy sector—all underpinning higher growth.

23. The financial sector has been resilient, but supervision needs to be intensified and failing banks resolved. The high level of non-performing loans and banks failing to meet capital requirements are sources of concern. These concerns are compounded by the lack of up-to-date financial sector information and weak supervision at a time of greater risks for financial institutions. Authorities need to push for greater vigilance by the supervisory body to strengthen the soundness of banks.

24. Looking forward, program performance is vulnerable to weak customs revenue, wage slippages, and continued delays in the structural agenda. The authorities’ steadfast commitment to following through with reforms, including strong reforms at customs and the Port of Cotonou, will be critical for economic success.

25. Staff supports the authorities’ request to complete the third review under the Extended Credit Facility and to disburse the corresponding financial support.

Table 1.

Benin: Selected Economic and Financial Indicators, 2009–17

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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, 2009–17

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

Country Report No. 11/243.

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.

Country Report No. 11/243.

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, 2009–17

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

Country Report No. 11/243.

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.