Benin
2012 Article IV Consultation and Fourth Review Under the Extended Credit Facility Arrangement—Staff Report; Staff Supplements; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Benin
Author:
International Monetary Fund. African Dept.
Search for other papers by International Monetary Fund. African Dept. in
Current site
Google Scholar Close
Publication Date:
11 Jan 2013
eISBN:
9781475592917
Language:
English
Keywords:
ISCR; CR; debt; current account; real GDP; deficit; private sector; banking system; capital expenditure; broad money; Agricultural commodities; Capital spending; Current spending; Fiscal stance; Global; West Africa
Download PDF (1.4 MB)

Benin has made significant progress in consolidating macroeconomic stability under the IMF-supported program. Its prudent fiscal policy has kept fiscal deficits at manageable levels and is projected to yield a basic primary surplus in 2012. The Executive Board of the International Monetary Fund (IMF) suggested that the authorities hold current expenditures to provide space for infrastructure spending and meet medium-term fiscal objectives. Benin’s authorities are committed to maintain sound macroeconomic policies, pursue the implementation of critical structural reforms, and take further measure to achieve program objectives.

Abstract

Benin has made significant progress in consolidating macroeconomic stability under the IMF-supported program. Its prudent fiscal policy has kept fiscal deficits at manageable levels and is projected to yield a basic primary surplus in 2012. The Executive Board of the International Monetary Fund (IMF) suggested that the authorities hold current expenditures to provide space for infrastructure spending and meet medium-term fiscal objectives. Benin’s authorities are committed to maintain sound macroeconomic policies, pursue the implementation of critical structural reforms, and take further measure to achieve program objectives.

Robust Macroeconomic Performance, but a need for stronger growth

A. Background

1. Since the beginning of the Extended Credit Facility (ECF) arrangement, Benin has made significant progress in consolidating macroeconomic stability. Real growth has rebounded after the 2010 floods, and is projected at about 3½ percent in 2012, the same level as the year before (Figure 1). Prudent fiscal policy has kept fiscal deficits at manageable levels and has yielded basic primary surpluses during most of the period. This policy, combined with the benefits of the Highly Indebted Poor Countries and the Multilateral Debt Reduction Initiative, has kept public debt low, at about 32 percent of GDP. Appropriate monetary policy by the Central Bank of West African States (BCEAO) has helped keep inflation low at about 2½ percent in 2010-11. The external current account deficit has remained broadly stable, and the balance of payments deficit was about 5 percent in 2011.

Figure 1.
Figure 1.

Benin: Macroeconomic Performance Vis-à-Vis Peers, 2006–12

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A001

Sources: Beninese authorities; IMF staff estimates.1/ WAEMU does not include Côte d’Ivoire.2/ HIPC-eligible countries that had not concluded the HIPC and MDRI processes by 2006 were excluded from these averages.

2. Economic growth, however, has been insufficient to make a significant dent in poverty. Per capita income has remained stagnant for several years, over half of the population lives on less than one dollar a day, and Benin’s ranking in the Human Development Index is low.1 When compared to its peers in the West African Economic and Monetary Union (WAEMU) and in sub-Saharan Africa (SSA), Benin lags in per capita growth performance. Low public investment and the high cost of doing business, in a context of a high public wage bill share in government spending, have hampered progress in addressing Benin’s large infrastructure gap.

3. The economy remains vulnerable to shocks. Benin is a net importer of food and fuel, and as such, is exposed to shocks from the global and regional environment. This was demonstrated by the adverse impacts of the 2008 world food price crisis and the early 2012 fuel price hike emanating from Nigeria. Benin is also prone to recurrent flooding, of which the 2010 occurrence was particularly devastating. Furthermore, the country has a narrow export base—cotton represents 17 percent of total exports—which makes export performance sensitive to price fluctuations of a single commodity and global demand shocks.

4. Benin’s banking system is concentrated and shallow. There are 12 banks, with the four largest of them accounting for about 70 percent of deposits. Pan-African banking groups—who have been spared thus far from the effects of the sovereign debt crisis in the euro area—are the main players, along with one large French bank. There are also a large number of microfinance institutions, which account for about 9½ percent of total financial sector loans and supply financial services to households and microenterprises. The prevalence of information asymmetries, insufficient creditor rights, and a weak judiciary system hamper financial intermediation.

5. The microfinance sector is insufficiently supervised, and a number of microfinance institutions are troubled. While microfinance institutions are now subject to tighter regulation, following the Ponzi schemes that unraveled in 2009–10, only 30 percent of them are currently operating with a license. A number of microfinance institutions are insolvent or undermined by serious governance problems.

6. The Beninese economy is deeply interconnected with that of Nigeria (Box 1). This gives rise to vulnerabilities but also provides opportunities. Developments in Nigeria, including trade policy decisions (e.g., the list of prohibited imports, customs tariffs, fuel subsidies, and enforcement of border controls) have important fiscal and economic implications for Benin. It is estimated that almost 50 percent of imports moving through the port of Cotonou are destined for Nigeria. At the same time, Benin’s proximity with Nigeria provides the country with opportunities to foster new sources of exports and growth.

7. Much of Benin’s formal economy is oriented towards commerce and related services. The latter are associated with transit trade to Nigeria and other neighboring countries. Benin’s services sector is large when compared to those of other countries in the region and in SSA, and it absorbs a large share of commercial banks’ loan portfolios.

uA01fig01

Benin: Service Sector Share, 2011

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A001

Sources: Beninese authorities; IMF staffestimates.

8. Progress on the recommendations of the 2010 Article IV consultation focused on implementing the structural reform agenda and prudent macroeconomic policies. A considerable fiscal adjustment was needed to preserve fiscal sustainability (the overall fiscal deficit had more than doubled since 2008). Recommendations also emphasized the need to contain the wage bill, in order to safeguard fiscal space for priority spending, and to improve competitiveness. Since the 2010 consultation, fiscal sustainability has been largely restored, but the wage bill remains high, crowding out priority spending. The reform agenda has progressed, albeit much slower than expected. There have been no changes to Benin’s measures related to payments and transfers for current international transactions since the last Article IV consultation, including to those imposed solely for security reasons.

Benin-Nigeria Interrelations

Nigeria’s GDP is about 33 times larger than that of Benin. The interrelations between the two economies are asymmetrical and are critically important for Benin. Trade and financial relations between the two countries proceed through the following channels:

  • Fuel prices and subsidies. About 85 percent of the gasoline sold in Benin is smuggled from Nigeria, dwarfing the provision of gasoline in the formal market and drastically reducing the number of operating gas stations. Nigeria’s decision to cut fuel subsidies by half in early 2012 was immediately and fully passed through to the informal gasoline market in Benin, increasing average annual inflation from 1.8 percent in the last quarter of 2011 to 6.5 percent in the first quarter of 2012, and dampening domestic demand as households adjusted to higher fuel prices. The implicit subsidy provided by Nigeria to consumers in Benin through cheap fuel is unknown but deemed significant.

  • Trade. Estimates suggest that about half of imports going through the Port of Cotonou are destined for Nigeria. The top imports that move through the port include frozen poultry, used cars, and textiles.

    Nigeria’s main exports to Benin are construction materials, cosmetic products, alcoholic and soft beverages, and cocoa derivatives.

  • Fiscal revenue. Tax revenue on goods going to Nigeria was estimated at about 14 percent of total tax revenue (2.4 percent of GDP) in 2007, which highlights Benin’s fiscal dependency on policy decisions in Nigeria.1

  • Financial sector. Three large Nigerian banks operate in Benin. They hold about 20 percent of total deposits and provide a similar share of total credit. Banks in Benin derive significant fees from CFA franc/naira exchange operations, which fuel a largely cash-based informal trade.

  • Migration and remittances. Nigeria is an important destination for emigrants from Benin, and an important source of remittances, although data are not available.

1 Geourjon, Chambas, and Laporte, Benin: Modernization of the Fiscal System, IMF, Fiscal Affairs Department, 2008.

B. Recent Economic Developments

9. Economic activity is showing signs of improvement, but has been saddled with recurrent problems. Real growth in 2011 reached 3½ percent, despite elections early in the year and disruptions at the Port of Cotonou, because of resistance to customs reforms (Figure 2 and Letter of Intent—LOI—Appendix I, ¶7). Further increase in growth in 2012 has been stymied by higher fuel prices, and by renewed disruptions at the Port of Cotonou (Box 2). Staff projects real growth in 2012 at 3½ percent, but the authorities are more sanguine on account of their more optimistic outlook for the 2012/13 cotton harvest (Box 3 and Appendix II).

Figure 2.
Figure 2.

Benin: Recent Economic Developments, 2007–2012

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A001

Sources: Beninese authorities; IMF staff estimates.1/ Core Index excludes food products and transportation services, including fuel.

Suspension of the Import-Verification Program

In April 2012, the government suspended the import-verification program (IVP). The IVP was a component of a comprehensive customs reform program implemented in 2011, despite significant initial opposition, including from customs officers and private operators.

The authorities indicated that the IVP had been suspended because the Beninese company, which had won the contract on the basis of its partnership with a reputable international partner well versed in pre-shipment import valuation, was unable to maintain the technical partnership and thus was not able to fulfill the technical aspects of the program.

The authorities further noted that the company charged excessive fees for scanning and tracking services, making the Port of Cotonou uncompetitive. Importers complained about significant delays in container processing that, together with high storage fees, led to some containers being abandoned in the port. These difficulties led to a diversion of ships to other ports in the region, reducing activity at the Port of Cotonou. There were also governance issues, including difficulties in getting data and information from the company.

Since the suspension, customs have reverted to the practices used before the introduction of the IVP. In particular, pre-shipment inspection, scanning operations, and electronic monitoring of transit goods were suspended.

10. Some prices surged in early 2012, but inflationary pressures have abated since then (LOI ¶8). The elimination of fuel subsidies in Nigeria in January 2012 raised informal gasoline prices in Benin initially by more than 120 percent, but a few weeks later, after the subsidies elimination was partially reversed, the domestic price hike settled around 50 percent. It translated into a 6 percent increase in inflation (January-July, year-on-year) from less than 2 percent at end-2011, thus breaching the 3 percent regional convergence criterion. The increase in the price of informal fuel spread mostly to transportation and food prices. Excluding these items, there is, however, little evidence of persistent inflationary momentum in the rest of the consumer price index of this shock. Core inflation, which excludes fuel and transportation, was little affected owing to minimal second-round effects. The recent spike in international food prices has so far not had a notable impact in Benin given the country’s ability to supply basic staples with domestic production.

11. Banks have continued to increase their domestic assets, but financial intermediation has remained limited. They increased lending to the private sector, despite problems at the port, but also invested in sovereign bonds. Credit growth was about 11 percent (year-on-year) in June 2012. Banks also increased their purchases of WAEMU government bonds on the regional market. They have strong incentives to invest in sovereign bonds, which are easily refinanced at the BCEAO with a margin, and are statutorily classified as having “zero risk,” so they do not require capital provision. The BCEAO lowered its reserve requirement to 5 percent in March 2012 and its key policy rate to 3 percent in June 2012, which freed up funds that the larger banks used to increase their holdings of regional sovereign bonds. However, because banks are overly liquid and have incentives to buy sovereign bonds, these measures had little effect on credit volume and cost. Supplement 1 on the financial sector in Benin analyses these developments in detail.

Suspension of the Framework Governing the Cotton Sector

Over the past decade, Benin has taken steps to liberalize the cotton sector. Recent efforts, however, resulted in excessive concentration of a large portion of the sector, and declining cotton harvests.

These failings of the liberalization effort led the government to suspend the cotton sector framework temporarily in April 2012, while it develops a new framework that preserves competition and better serves farmers. The suspended agreement had entered in force in 2009 as the culmination of a decade-long reform effort to privatize cotton production and trade. During that period, the state progressively withdrew from organizing, buying, ginning, and trading cotton. By 2009, the role of the state was essentially reduced to providing subsidies for inputs (fertilizers, herbicides, and pesticides). The private sector’s control of the sector was centered on the Professional Association of Cotton (Association interprofessionnelle du coton, AIC), which grouped the country’s 18 gins, constituting the sector’s backbone. Members of the AIC used to borrow sizable “campaign loans” (crédit de campagne) from commercial banks to finance the production cycle. They provided farmers with inputs on credit at the beginning of the sowing season, bought the entire harvest at the nationwide official price, and, after processing it, sold it almost exclusively abroad.1 Cotton is mostly produced on small family plots, and is grown by farmers with little to no access to the financial system.

Cotton production steadily declined until the 2011/12 campaign, from an all-time high of 427,000 metric tons in 2004/05. The AIC invoked several factors to explain the decline, including inclement weather conditions (droughts and recurrent flooding), low international prices, and late payments to producers, all of which resulted in a growing disaffection of farmers for cotton. The government acknowledged these adverse factors, but considered them compounded by governance problems. It noted that the volume of production had declined in spite of increasing subsidies. It also noted that the privatization of the sector, rather than fostering competition, resulted in the vertical concentration of the sector in the hands of one group, leading to actual “private monopoly.” In light of the above developments, the authorities suspended the AIC and the framework agreement, and took over the organization of the 2012/13 campaign from end-to-end. The area cultivated has increased by some 60 percent compared to the previous campaign. Accordingly, and with favorable rainfall, at end-September the authorities assessed prospects for the forthcoming harvest favorably, in spite of some reported initial difficulties in the timely distribution of fertilizers and pesticides. They expect the new harvest will exceed the last one.

Authorities are considering implementing a zoning system modeled on Burkina Faso’s cotton sector and have solicited advice from development partners, including the World Bank. A well-designed framework needs to be carefully considered, thus authorities anticipate having it ready in time for the 2014/15 campaign. Appendix II discusses developments in the sector in more detail.

1Ginning produces cotton fiber and cotton seeds. Virtually all of the fiber is sold abroad, but some of the seeds are sold domestically for cotton oil production.

12. Overall, the banking system appears sound, but the regulatory prudential norms do not take full account of risks and two banks are troubled (LOI ¶17). Taken together, commercial banks’ capital-adequacy ratio was about 10½ percent (at end-2011), above the 8 percent regulatory threshold. When assessed individually, three smaller banks have failed to comply with regional capital requirements. Two banks have negative capital, and are under close surveillance by the monetary authorities. The third bank, which had been insolvent for several years, was closed in March 2012 and is being liquidated. In addition, banks’ overall loan portfolios deteriorated, with nonperforming loans (NPLs) amounting to 18.6 percent of total loans in July 2012. The concentration on a few large borrowers in loan portfolios is another source for concern.

13. In 2012, the external current account deficit is projected to narrow somewhat, reflecting, among others, higher official transfers. Despite lower international cotton prices, higher volume of cotton exports and a recovery of non-traditional exports should slightly improve export performance. This, together with moderate import growth and higher official transfers, is expected to reduce the current account deficit from 10 percent of GDP in 2011 to about 9½ percent of GDP in 2012. Higher foreign direct investments, project loans, and the expected repatriation of banks’ net foreign assets are projected to increase the financial account balance from 1.9 percent of GDP in 2011 to 5.6 percent of GDP in 2012. The overall balance of payments deficit is thus projected to contract from almost 5 percent of GDP in 2011 to about 1¾ percent in 2012.

14. The external stability assessment indicates a deterioration of external position and competitiveness, and a moderate real exchange rate misalignment. Empirical assessment of the external stability suggests that the current account deficit, in percentage of GDP, exceeds its medium-term equilibrium norm by about 4 to 6 percentage points. The real effective exchange rate (REER) is estimated to be overvalued by 15 percent on average. At the regional level, the REER remains, however, broadly in line with medium-term fundamentals.2 Survey-based structural indicators confirm these findings and reveal impediments to external competitiveness. Appendix III provides the details of the analyses.

15. Benin’s risk of debt distress remains low. External debt, mostly consisting of official concessional loans from multilateral creditors, has stabilized at about 17½ percent of GDP in 2012. Domestic debt has increased somewhat (from about 14 to 15½ percent of GDP) because of government debt issuance on the regional bond market. Benin’s debt burden compares favorably with that of comparable low-income countries.

uA01fig02

Benin: Debt-to-GDP Ratio, Selected LICs

(Percent)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A001

C. Strong Quantitative, Mixed Structural Program Implementation

16. All performance criteria and quantitative targets were met at end-March and end-June, 2012, sometimes with comfortable margins (Text Table 1 and LOI Table 1).

Text Table 1.

Benin: Performance Criteria and Indicative Targets, 2011–12

article image
Source: Beninese authorities.
Table 1.

Benin: Selected Economic and Financial Indicators, 2010–17

article image
Sources: Beninese authorities; 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.

  • During the first quarter, revenue continued to recover from the shortfall resulting from the opposition to customs reforms in 2011 (Figure 3). The sale of a 3G mobile phone license raised additional and un-programmed revenue (CFAF 44 billion, 6.2 percent of projected total revenue in 2012), providing a buffer for the rest of the year. Spending was kept broadly under control, and thus the performance criteria on the primary fiscal balance and net domestic financing were met at end-March (test date). The same trends continued during the second semester and the corresponding targets were also meet at end-June (not a test date).3

  • The indicative targets on priority social spending at end-March and end-June were met for the first time, thanks to the implementation of a better monitoring system.

  • On the downside, spending on investment was lower than programmed, both for domestically and for externally financed projects. The lagging behind in the implementation of the investment program has been a recurrent issue in the last few years.

Figure 3.
Figure 3.

Benin: Selected Fiscal Indicators, 2011–12

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A001

Sources: Beninese authorities; IMF staff estimates.
uA01fig03

Benin: Total Revenue, 2011–12

(Billions of CFA francs)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A001

Sources: Beninese authorities; IMF staff estimates.

17. Implementation of structural reforms was mixed (LOI Table 2). The authorities implemented 5 of the 11 structural measures programmed for the fourth review, while the other measures were delayed. Some of the measures were delayed in part because of delays in technical and financial assistance from donors. Other measures—including those to avoid tampering with customs declarations and to connect the IVP data to the one-stop window in the port—were in the process of being implemented, when the suspension of the IVP brought them to a halt. The liquidation of a failed bank (programmed for September 2012, LOI¶ 16), however, was carried out earlier than projected, with a liquidator appointed in March 2012. Two structural benchmarks relating to the Integrated Human Resource Management System (SIGRH) have been released since the last review and are being monitored by the World Bank.

Table 2a.

Benin: Consolidated Central Government Operations, 2010–17

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

IMF Country Report No. 12/99.

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.

Includes 44 billion from sale of telecommunications license.

Table 2b.

Benin: Consolidated Central Government Operations, 2010–13

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

IMF Country Report No. 12/99.

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.

Includes 44 billion from sale of telecommunications license.

D. Favorable Medium-Term Outlook, but with Vulnerabilities

18. Over the medium term, the average annual real growth rate is projected to increase to 4½ percent (Text Table 2). A projected improvement in the global economy starting in 2014, an expanding agricultural production, and medium- and long-term capital inflows for investment, along with higher revenue following a resolution of the current problems at the port, would strengthen growth and the fiscal balance. Inflation would return to lower trend levels, as the fuel shock phases out. It is expected to return to the 3 percent regional convergence criterion over the medium term. However, sustaining growth will require full and timely implementation of the structural reform agenda, including measures needed to strengthen customs administration and the resumption of the IVP.4

Text Table 2.

Benin: Medium-Term Macroeconomic Framework, 2010–171

article image
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.

19. The improved growth outlook is subject to risks from domestic, regional, and global developments (Risk Assessment Matrix, Appendix IV). On the domestic front, failure to resolve recent disputes in the management of customs and the cotton sector orderly would have a negative impact on growth and the fiscal accounts. Wage slippages and further delays in the structural reform agenda could also weaken program performance. On the regional front, developments in Nigeria, including easing of trade restrictions, more effective border controls, or a further reduction of fuel subsidies could significantly reduce revenue and weaken the fiscal outlook. On the international scene, a delayed recovery of the global economy would reduce exports, and could result in reduced public and private capital inflows.

20. The Debt Sustainability Analysis (DSA) update indicates a low risk of debt distress (Supplement II). The baseline and alternative stress test scenarios indicate that total debt positions present low vulnerabilities to shocks. It is noteworthy that the debt indicators have deteriorated moderately, compared to the 2011 DSA, because of weaker export projections and medium-term growth prospects, stemming from the continuing global crisis.

Policy Discussions

In the context of strengthened macroeconomic performance, discussions focused on emerging challenges: (i) the short-term macroeconomic risks stemming from the suspension of IVP and the government’s decision to intervene in the cotton sector; (ii) the soundness of the financial system and reforms to reduce its vulnerability; and (iii) the need to take advantage of achievements in macroeconomic stability to implement a reform strategy to achieve stronger growth.

A. Fiscal Policy: Good Performance Thus Far, but Risks Going Forward

Revenue

21. There was agreement on the importance of fully resuming customs reforms and restoring full activity at the Port of Cotonou. In 2011, the government implemented broad-based customs reforms to strengthen revenue collection, reduce corruption, streamline trade practices, and boost port activities. However, a partial reversal of the reforms—key imports were exempted from the new measures5—was followed in April 2012 by the suspension of the IVP (Box 2 and LOI ¶21). Notwithstanding these adverse developments, revenue performance remained in line with targets up to end-August.

  • Staff welcomed the good revenue performance during the first semester of 2012 in spite of the difficulties noted.

  • Staff expressed concern, however, about the potential backsliding of the reform effort with the suspension of the IVP and implications for revenue performance going forward. It urged the authorities to re-institute the IVP and to implement the associated reform package fully because re-instituting these is essential for increasing the port’s efficiency in a highly competitive environment and bringing its operations closer to international best practices.

  • Staff also urged the authorities to implement the recommendations of the December 2011 International Monetary Fund (IMF) Fiscal Affairs Department (FAD) and AFRITAC West technical assistance missions, and recommended maintaining the prohibition of direct import releases that circumvent regular customs procedures.

Authorities’ views

  • The authorities reiterated their commitment to a full implementation of customs reforms. They shared staff concerns about the stalling of customs reforms and the slowdown of port traffic, but they were confident that this would be resolved by the reduction of fees, measures to shorten the clearance time at the port, and the launch of a public information campaign to bring back importers and shippers in the region. They noted that the one-stop window introduced with the reforms continued to operate effectively. Going forward, they are committed to reinstate the IVP through a joint public-private partnership to manage the scanning operations. Accordingly, in mid-September, they announced that they had cancelled the IVP contract and that they were launching a bidding process to negotiate a new contract; this will be conducted by end-March 2013, allowing the IVP to be relaunched and the two related structural benchmarks to be implemented by end-June 2013 (LOI, ¶16, bullet 7). They also called for a regional discussion on customs reforms to avoid unhealthy competition between ports in the region.

  • The authorities also indicated that they were committed to implementing the recommendations of the December 2011 technical assistance mission, including the freezing of tax exemptions, broadening the value-added tax base in line with WAEMU directives, and establishing a unit within the Ministry of Economy and Finance to monitor tax exemptions and expenditures. They noted that revenue administration would be strengthened by streamlining and updating the taxpayers’ database for medium-size enterprises, with the assistance of AFRITAC West. They viewed these efforts as critical for widening the domestic tax base and reducing over-reliance on customs receipts, which are vulnerable to changes in Nigeria’s trade regime.

  • In order to complete structural benchmarks that were delayed because of difficulties with donor financing, the authorities will fund them directly from the 2013 budget; this will allow the benchmarks to be implemented by end-March 2013 (LOI¶16, bullet 1).

Expenditure

22. Current expenditure was broadly on track, but investment expenditure continued to trail its targets. The authorities managed spending as agreed under the program, including on the wage bill and priority social expenditure. Spending on the investment program, however, was slower than planned, with about one-fourth of the projects behind schedule.

  • Staff commended the authorities for the overall careful execution of the budget.

  • Staff noted, however, that the repeated underperformance of the investment program could jeopardize the authorities’ growth strategy.

  • Going forward, staff emphasized the importance of keeping the wage bill within the program envelope, despite pressures that may arise in the months ahead, because of its already high share of current expenditure.

  • Staff inquired about the fiscal cost of the government’s involvement in the cotton sector, including the supply of inputs, the recruitment of some 850 new agricultural advisors, and the guaranteeing of a sizable syndicated loan to finance the campaign (possibly giving rise to contingent fiscal liabilities). Staff cautioned about cotton spending crowding out other spending, including priority social spending and capital investment. It urged the authorities to put in place a regulatory framework for the cotton sector that addresses the governance issues raised by the authorities and ensures that no single player concentrates significant market power, while minimizing fiscal costs.

Authorities’ views

  • The authorities indicated the careful monitoring of priority social spending would be maintained going forward, and that they were implementing measures to improve the execution of investment projects. They reiterated their commitment to keeping the wage bill within the program envelope.

  • They indicated that it was too early to assess the possible fiscal cost of increased government involvement in the cotton sector during the current campaign, but that a large portion of it would be provided by banks, under the leadership of the West-African Development Bank. This set up would not entail a direct fiscal cost, only a contingent cost, should their guarantee be called upon. They said they expected not spending more on subsidies than in previous years. Based on information at end-September, they hoped that, if the harvest was good, as they expected, and if the international cotton price remained unchanged, they could recoup the cost of financing the campaign. They confirmed they were planning to set up a new regulatory framework that would liberalize the sector, while maintaining key functions for the government (LOI ¶ 20). Looking ahead, they affirmed their intention to withdraw from managing the sector, keeping mostly to a supervisory role. For this, a new framework agreement needs to be negotiated with the private sector. The new agreement would involve adopting the management model of some countries in the region, whereby Benin would be divided into zones to foster competition. With the help of the World Bank, the authorities plan to have the new agreement in place by the beginning of the 2014/15 campaign.

2013 Budget

  • The authorities are committed to submitting a draft 2013 budget to parliament, consistent with the further consolidation of macroeconomic stability and with the fiscal framework of the program.

B. Raising Medium-Term Growth and Reducing Poverty

23. With the consolidation of macroeconomic stability on track, Benin is well placed to press ahead with reforms to boost growth and reduce poverty. The critical areas of intervention include completing reforms in customs and the cotton sector, simplifying the regulatory environment to reduce the cost of doing business, launching a program of second-generation reforms, and formulating a medium-term public sector investment strategy to address the country’s large infrastructure gap.

24. Normalizing operations at the Port of Cotonou and in the cotton sector. The Port and the cotton sector are key drivers of economic activity, so moving forward with reforms that allow them to operate at full potential is critical for enhancing growth. Regarding the port, reestablishment of the IVP and proceeding with related customs reforms—e.g., computerization and streamlining of customs operations—should help reduce transaction costs.

25. Reducing obstacles to doing business and facilitating the participation of the private sector in the economy will be crucial to improve the country’s competitiveness. As indicated in the external stability analysis (Appendix III, ¶14), improvements in competitiveness are needed to align the current account balance with its medium-term fundamentals. Benin’s weak performance regarding the “doing business” indicators, even within the region, seriously impairs efficiency of private sector activity.6 Needed reforms in this area include streamlining procedures for establishing new businesses and strengthening the capacity of judiciary system. Further enhancing the dialogue between the private sector and government, including during the annual reviews of the poverty reduction strategy, would promote synergies between the public and private sectors. There is also a need to improve the environment in which the private sector operates, as recommended by the 2011 Joint Staff Advisory Note (JSAN),7 to broaden opportunities for investment in infrastructure, thus contributing to economic growth beyond participation in a few large public projects.

26. Strengthening public investment to improve infrastructure and allow access to public services to a broader share of the population. The public investment program (PIP) has repeatedly under-performed, with the country’s large infrastructure gap—especially regarding the rail system and roads—remaining largely unaddressed. This has contributed to Benin’s high cost of doing business and limited access to public services by a large section the population, especially in rural areas. The capacity to implement projects as programmed needs to be strengthened, and at the same time, fiscal space should be created for capital investment.

27. Despite efforts, progress on poverty has been uneven. The authorities have implemented measures to foster inclusive growth. As a result, health indicators and literacy rates have improved (Table 8). At the same time, however, the share of the population living below the poverty remains high.

Table 3.

Benin: Consolidated Central Government Operations, 2010–17

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

IMF Country Report No. 12/99.

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.

Includes 44 billion from sale of telecommunications license.

Table 4.

Benin: Balance of Payments, 2010–17

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

Excludes re-exports and imports for re-export whose net balance is divided between services and public transfers.

Months of future imports of goods and services.

Table 5.

Benin: Monetary Survey, 2010–17

article image
Sources: BCEAO; IMF staff estimates and projections. Note: … = not available.
Table 6.

Benin: Schedule of Disbursements Under the ECF Arrangement, 2010–13

article image
Source: International Monetary Fund.
Table 7.

Benin: Indicators of Capacity to Repay the IMF, 2012–23

article image
Sources: IMF staff estimates and projections.

Data are actual through end-September 2011 and are projected after that.

Effective on January 7, 2010, interest on ECF credit outstanding would be zero in 2010 and 2011. On December 1, 2011, the IMF Board extended through December 31, 2012, the waiver of interest payments for concessional loans that was introduced on January 7, 2010. For 2013, interest rates will be 0 percent for ECF and RCF loans, and 0.25 percent per year for the SCF, ESF, and subsidized ENDA/EPCA. After 2013, projected interest charges are based on 0.25/0.25/0.5/0.25 percent per year for the ECF, RCF, SCF, and ESF, respectively. The IMF will review the interest rates for all PRGT facilities by end-2013 and every two years thereafter. Charges include net SDR charges and SDR assessments.

Total debt service includes IMF repurchases and repayments.

Table 8.

Benin: Millennium Development Goals, 1990–2015

article image
Sources: Beninese authorities and World Bank estimates and projections.

  • Staff welcomed the authorities’ intention to develop a public-private sector partnership framework, with World Bank assistance, to help advance investments in transportation infrastructure and energy.

  • Staff noted the urgent need to improve the planning and prioritization of the PIP; the establishment of a medium-term public sector investment program (PSIP), with assistance from development partners, that carefully prioritizes key infrastructure projects would be welcome. This PSIP would include carefully vetted large infrastructure projects to be financed with the support of donors, regional banks, and multilateral lenders on a concessional basis whenever possible. In particular, the PSIP could address the poor state of roads, which is a major obstacle to competitiveness, especially given the importance of trade with neighboring countries. It also limits the access to public services and markets for a large share of the population living outside of the main cities.

  • Staff stressed that higher capital investment will require creating fiscal space, including by mobilizing additional donor financing, raising more revenue and reducing the share of wages in public sector spending; it would also require a significant improvement in the government’s capacity to implement investment projects.

  • Staff welcomed the improvements in health and education indicators, but noted that significant poverty reduction will require reinforcing efforts in this area. In particular, strengthening poverty analysis and improving understanding of its determinants, as recommended by the 2011 JSAN, would be critical for this effort.

Authorities’ views

  • The authorities were in agreement with the need to spur growth by completing structural reforms, improving the business climate, and strengthening the quality and increasing the quantity of public investment.

  • The authorities noted that they intended to strengthen the business environment by addressing some of its weaknesses, namely by (i) simplifying the procedures and cutting the cost of starting a business and dealing with construction permits; (ii) improving the legal rights of investors; (iii) simplifying tax payment procedures; and (iv) reducing the difficulties of enforcing contracts by training judges to allow streamlined and negotiated agreements. They also noted that the one-stop window at the Port of Cotonou had helped reduce red tape in customs and that changes in the regulatory framework for the electricity sector had opened up greater space for private sector participation, in line with JSAN recommendations.

  • The authorities agreed on the importance of upgrading infrastructure and highlighted advanced plans for deepening the access to the harbor, to be able to receive larger ships, and rehabilitating and expanding the rail system. They noted that they had an action plan linked to the priorities outlined in their poverty-reduction strategy paper. They also acknowledged weaknesses in project implementation and indicated their commitment to work closely with development partners to address the weaknesses.

  • The authorities noted ongoing efforts to diversify the economy, including the establishments of food processing factories, which will provide opportunities to expand the export base and take advantage of the large Nigerian market.

  • The authorities agreed with staff on the need to reinforce implementation of their poverty-reduction strategy.

C. Strengthening Financial Sector Stability and its Contribution to Growth

28. Enhanced financial sector surveillance. An in-depth analysis of Benin’s financial sector and its implication in financial intermediation and the transmission of monetary policy was undertaken in the context of enhanced financial surveillance in low-income countries and in parallel with the consultation (Supplement 1).8 This pilot explored the connections between financial sector stability and financial sector development, and recommended policy frameworks to foster financial deepening without undue financial sector risks. The following paragraphs note some of the study’s key findings.

29. Further financial deepening is critical for accelerating growth. Benin’s financial sector is shallow and only about 10 percent of the population has an account at a formal financial institution. Access to financial services is limited by the lack of information on borrowers, difficulties in enforcing contracts through the judicial system, the absence of formalized property rights, and the high cost of extending banking services to non-urban areas. As noted earlier, the study found that banks had incentives to engage into purchasing sovereign bonds on the regional financial market rather than extending loans to the private sector. Microfinance institutions are hampered by their weak management and small size in providing much-needed credit to rural households and micro- and small enterprises. Addressing the above obstacles would help deepen financial sector intermediation, which in turn would contribute to economic growth.

30. The stability of the financial sector is also important for preserving a sound macroeconomic environment and minimizing fiscal contingent liabilities. The unraveling of a large Ponzi scheme in 2010 and forbearance vis-à-vis three banks that have failed to meet capital requirements over several years point to weaknesses in the supervision of financial institutions.9

  • Staff welcomed the liquidation of one of the troubled banks (structural benchmark in the program) and the initial steps taken by the authorities to deal with other two troubled banks, although staff noted that current conservatory measures would eventually raise the price of resolution; accordingly, staff called for the timely resolution of the two banks, because prospects for a successful recapitalization are remote. Bank resolution is being conducted in accordance with WAEMU regulations.

  • Staff welcomed the adoption of legislation on combating the financing of terrorism by Parliament in May 2012, but urged the authorities to press ahead with effective implementation of the AML/CFT regime, as it can help combat offenses, such as smuggling and corruption.

  • Staff expressed concern about the considerable lag of the information available on financial soundness indicators, including on NPLs, giving rise to concerns about the timely monitoring of the banking system and the possibility of having an early assessment of emerging risks. It pointed out that, while financial sector supervision is under the purview of regional institutions, the Beninese authorities can push for more resources for stronger supervision.

Authorities’ views

  • The authorities reiterated their commitment to resolve the issues with the troubled banks, including liquidating one of them, appointing a provisional administrator for another, and approaching potential investors. They reaffirmed their commitment to recover assets collected by fraudulent financial schemes and to resolve the troubled licensed microfinance institutions.

  • They indicated that the unit in charge of preventing money laundering was set up at the Ministry of Finance by legislation approved in 2006. Since it began operating, it has followed over 130 cases, including 8 cases during the first quarter of 2012. The authorities noted that these efforts will be reinforced by the recent legislation on AML/CFT.

  • Regarding supervision of the financial sector and providing timely information, they indicated they were strengthening the committee supervising microfinance institutions and collaborating on this issue with the BCEAO and the regional banking commission.

  • The authorities welcomed the enhanced financial sector review pilot and expressed interest in the forthcoming discussion on regional policy implications in the context of discussions with the WAEMU team.

Staff Appraisal

31. Macroeconomic stability has improved in recent years. Growth is recovering from floods in 2010 and difficulties at the Port of Cotonou and in the cotton sector in 2011. Inflation increased in 2012 because of the reduction in fuel subsidies in Nigeria, but is projected to return to lower levels starting in 2013.

32. Program targets were met. All performance criteria and quantitative targets at end-March and end-June 2012 were met, in some cases with large margins. In particular, the priority social expenditure targets were achieved for the first time, thanks to improved monitoring.

33. The pace of structural reforms under the program remains disappointing. Only five of the program’s eleven structural benchmarks for the fourth ECF review were implemented, one with a delay. At the same time, policy suspensions occurred in the cotton sector and the IVP. Unless addressed, these suspensions pose risks to economic growth and revenue performance over the medium term. The authorities have identified corrective policies to bring the structural reform program back on track, and determined implementation will be needed.

34. The financial sector needs to be strengthened. Stronger supervision will improve the soundness of the financial system. Additional measures will be required to develop financial intermediation, to provide access to financial services to a larger segment of the population, and to enhance the sector’s contribution to growth.

35. Benin needs to boost growth to improve living standards and reduce poverty. A comprehensive growth strategy, which seeks to reduce obstacles to growth, increase private sector participation in the economy, and support a significantly larger and better PIP should be at the core of the authorities’ development strategy.

36. Staff supports the authorities’ request to complete the fourth review under the ECF and to disburse the corresponding financial support. Although the majority of structural benchmarks for the review were missed, completion of the review would reflect the authorities’ strong macroeconomic performance through end-August, measures being taken to fight corruption in the cotton and port sectors, corrective actions being taken to address delays in the structural benchmarks, and broader commitments to relaunching strengthened, more durable cotton and port sector reforms in consultation with the private sector and development partners.

37. Staff recommends that the next Article IV consultation take place on the 24- month consultation cycle.

Appendix I—Letter of Intent

REPUBLIC OF BENIN

MINISTRY OF ECONOMY AND FINANCE

To:

Ms. Christine Lagarde

Managing Director

International Monetary Fund

Washington, DC 20431, USA

The Minister

Cotonou, October 24, 2012

Dear Ms. Lagarde:

1. The Government of Benin continues to implement its economic and financial program under the Extended Credit Facility (ECF) in order to achieve its growth and poverty reduction objectives. We wish to take the opportunity of the fourth review to take stock of program implementation at end-June 2012 and to define the policies and reforms we plan to implement in the second half of 2012 and in 2013.

2. Despite a difficult international economic climate, the implementation of our program was satisfactory overall. All the quantitative performance criteria and indicative targets for end-March and end-June 2012 were met. The medium-term economic framework is largely unchanged, and the government reaffirms its resolve to implement the policies and reforms described herein. We hereby request conclusion of the fourth review under the ECF arrangement and the associated disbursement of Special Drawing Right (SDR) 10.61 million.

I. Recent Economic Developments and Program Implementation

A. Recent Economic Developments
Economic developments in 2011

3. The real GDP growth rate was 3.5 percent in 2011 compared to 2.6 percent in 2010. This recovery in economic activity was principally driven by: (i) the significant increase in agricultural production; (ii) increased cotton production; and (iii) the rebound in construction and public works activities, led by infrastructure construction. Inflation remained under control in 2011, standing at 2.7 percent on average, below the convergence criterion of the West African Economic and Monetary Union (WAEMU).

4. The current account deficit (excluding grants) widened in 2011, growing to 10.3 percent of GDP compared to 8.2 percent of GDP in 2010. In particular, the volume of cotton product exports and other exports dropped sharply. However, the improved balance of the capital account and sound behavior of foreign investment made it possible to limit the overall balance of payments deficit to 4.9 percent of GDP.

5. Money supply grew by 9.0 percent in 2011, driven by the foreign assets of the commercial banks and by credit to the private sector and to government following the rebound in economic activity. The net foreign assets of the banking system remained stable overall.

6. The Government continued its prudent external indebtedness policy. At end-2011, the total public debt was equivalent to 30 percent of GDP. The risk of a debt crisis remains low.

7. Measures aimed at reinforcing public finance were implemented throughout 2011, including notably the introduction of the one-stop window at the Port of Cotonou. However, revenue performance at end-2011 fell below expectations at CFAF 605.6 billion, or 17.6 percent of GDP, compared to an objective of CFAF 650.1 billion, owing to problems associated with the implementation of the new-generation import-verification program (IVP) and the resistance of some economic stakeholders. In order to maintain balanced public finances, the government had to contain expenditure to CFAF 754.7 billion, or 21.9 percent of GDP, compared to an objective of CFAF 801 billion. The overall fiscal deficit, on a cash basis and excluding grants, came to 4.9 percent of GDP, in line with the program targets. This deficit was financed as planned by external resources (grants and concessional borrowing) and issues of securities on the regional financial market.

Economic developments in the first quarter of 2012

8. The inflation rate rose sharply in early January 2012 following the partial elimination of fuel subsidies in Nigeria. Inflation came to 7.4 percent at end-March (year-on-year) up from an average of about 3.0 percent before.

9. There was continued strengthening of public finances in the first quarter of 2012. Total revenue was CFAF 211.6 billion, or 5.6 percent of GDP, surpassing the program target by CFAF 63.3 billion. Overall, expenditure was in keeping with program targets. Consequently, the overall fiscal balance exceeded its target.

10. Customs receipts at end-March 2012 amounted to CFAF 81.0 billion, or 2.2 percent of GDP, exceeding the program target of CFAF 69.6 billion. This performance was largely attributable to the impact of implementing the one-stop window at the Port of Cotonou. Domestic tax receipts amounted to CFAF 71.4 billion, or 1.9 percent of GDP, exceeding the program target. This performance reflects solid collections of the value-added tax (VAT) and property taxes, thanks to the intensification of collection efforts by the tax administration. Nontax revenue increased sharply to CFAF 59.2 billion, or 1.6 percent of GDP. This performance is explained by the additional revenue from the sale of a third-generation (3G) mobile telephone license of CFAF 44 billion, of which only CFAF 9 billion had been programmed.

11. Expenditure execution during the first quarter of 2012 was kept within the program target. Total expenditure and net lending (on a cash basis) came to CFAF 193.2 billion, or 5.1 percent of GDP, compared to a forecast of CFAF 186.6 billion. Primary current expenditure overall slightly exceeded the program target. Investment expenditure was slightly greater than the budgetary targets, largely reflecting the payment of some certified payments (décomptes). The indicative benchmark for priority social expenditure was observed, totaling CFAF 51.6 billion compared to a target of CFAF 46 billion thanks to rigorous monitoring.

12. Summing up, all the quantitative performance criteria were met at end-March 2012. The criterion relating to the basic primary balance was observed by a comfortable margin: performance of CFAF 39.0 billion, or 1.0 percent of GDP, compared to an objective of CFAF -20.5 billion. This reflects the solid performance of the tax and nontax collection agencies (régies financières), quite apart from the revenue associated with the sale of the 3G mobile telephony license. The criterion relating to net domestic financing was also largely observed: performance of CFAF -75.9 billion, or -2.0 percent of GDP, compared with a target of CFAF 43.5 billion (adjusted amount). The criteria relating to the external debt and arrears were observed as well.

Economic developments during the second quarter of 2012

13. Sound fiscal performance continued during the second quarter of 2012 despite the provisional suspension of the IVP in May (see below). Overall, revenue performance at end-June was satisfactory. Total revenue at end-June 2012 came to CFAF 380 billion, or 10.1 percent of GDP, compared to a target of CFAF 331.3 billion. Customs receipts amounted to CFAF 156.4 billion, or 4.2 percent of GDP, compared to a target of CFAF 154.3 billion, thanks to the surplus accumulated during the first quarter. Domestic tax receipts exceeded the program target, reaching CFAF 148.7 billion, or 4.0 percent of GDP, compared to the forecast of CFAF 145.7 billion. This solid performance is attributable to strengthened controls by the tax administration, in particular on the value-added tax (VAT), the tax on industrial and commercial profits, and the corporate tax. Nontax revenue came to CFAF 74.8 billion, or 2.0 percent of GDP, compared to a target of CFAF 31.3 billion. This performance is explained for the most part by the payment of 3G license fees and by the solid performance of other nontax revenue.

14. The control of expenditure commitments introduced at the start of the year was maintained during the second quarter. Total expenditure was below targeted levels at end-June 2012, amounting to CFAF 397.6 billion, or 10.6 percent of GDP, compared to a target of CFAF 437.0 billion. The wage bill reached CFAF 133.0 billion compared to a target of CFAF 134.1 billion. Similarly, investment expenditure was below targeted levels owing to delays in the implementation of some projects.

15. All in all, the basic primary balance exceeded its target of CFAF -39.8 billion, or -1.1 percent of GDP, and net domestic financing exceeded its target of CFAF 60.7 billion. The overall fiscal balance (cash basis excluding grants) came to CFAF 27.3 billion, or 0.7 percent of GDP, compared to a target of CFAF 124.4 billion. This deficit was financed largely by the disbursement under the ECF, World Bank support, and a drawing against the deposits of the central government, which were reconstituted in part by the issuance of Treasury bills. The benchmarks relating to the external debt and arrears were also observed.

B. Implementation of Structural Reforms in the First Half of 2012

16. The implementation of the structural reforms has had mixed results.

  • To address long-standing delays in obtaining development partner support for three tax reform initiatives, the government will fund these reforms out of its 2013 budget; on this basis, the government plans to meet the following three benchmarks by end-March 2013:

    • The start of the development of a complete and integrated information system at the Directorate-General of Taxes and Government Property (DGID), scheduled for March 2012; it may take up to three years to finalize.

    • The generalization of the taxpayer identification number (TIN) to all taxpayers and to all units of the tax and customs administrations, planned for December 2011.

    • The generalization of the systematic use of the TIN by the Directorate-General of Customs and Indirect Duties (DGDDI) and the cessation of the use of nonspecific numbers in the ASYCUDA++ system (Automated System for Customs Data), planned for end-December 2011.

  • Progress has been made with regard to the adoption of a civil service reform strategy by decision of the Council of Ministers, planned for May 2012: the provisional report on the last preparatory study was completed in July 2012 and validated on August 30, 2012; the results of the studies carried out will be used in drawing up the strategy, which is scheduled to be adopted by December 31, 2012.

  • The draft law governing pensions, based on the final report on the actuarial audit of the Benin National Retirement Fund (FNRB) and scheduled to be conveyed to the National Assembly in May 2012, was presented in September 2012 following the observations raised in the course of a first reading in the Council of Ministers.

  • The operationalization of the computerized transit module of ASYCUDA++ between the Port of Cotonou and all the land-based border customs units, planned for March 2012, has been completed; goods in transit have been tracked by this module since September 2012.

  • The detailed review of all existing tax and customs exemptions was submitted to the Council of Ministers on schedule in June 2012, including an action plan for implementing the recommendations.

  • The finalization of the pilot phase of “Sunkwè” (database of civil servants) was completed; the decision to extend it to the Ministry of Labor and Civil Service (MTFP) was reached on schedule in June 2012; this measure is being implemented with technical assistance from the World Bank.

  • Two customs sector reform benchmarks planned for implementation by end-June 2012 were missed owing to the suspension of the services contract related to the IVP: (i) the blocking of the ASYCUDA++ fields for the TIN, the inspection certification (AV) number, and the customs value corresponding to the AV; and (ii) the integration of IVP data into the one-stop window to systematize the reconciliation of the certification and attestation functions of the IVP during information processing. To ensure that these reforms can proceed, the government is committed to relaunching the IVP under a new contract. It intends to launch the re-bidding process and select the winner of the new IVP contract by end-March 2013, which would allow the IVP to be re-operational and the two related customs reforms benchmarks to be met by end-June 2013.

  • The bank that lost its license in 2009 and had been under provisional administration was placed in liquidation on March 6, 2012, before the planned date of September 2012.

17. The authorities have taken steps to strengthen the financial sector. Of the 12 banks doing business in Benin at end-June 2012, 10 had come into line with the decision of the WAEMU Council of Ministers on increasing minimum capital. One of the two banks whose capital and reserves were not in keeping with that decision has been placed in provisional administration. The authorities are exploring options for the second nonconforming bank. The Law of January 26, 2012 regulating decentralized financial structures in Benin and the law on banking regulation of June 4, 2012 have been passed by the National Assembly, giving the country modern instruments for rehabilitating the financial sector.

II. Economic, Financial, and Structural Policies for the Future

18. The government will continue the implementation of its economic and financial program to achieve its macroeconomic stability and sustainable development objectives. The government’s economic policy is aimed at supporting the economy’s return to strong and equitable growth led by the private sector. This choice will require a consolidation of the macroeconomic framework and strengthened structural measures.

A. Macroeconomic Framework

19. The prevailing uncertainties regarding the global economy, and those pertaining to the cotton sector and the IVP (see below), suggest we should be prudent and project growth of 3.5 percent for 2012. The growth rate may be expected to improve in 2013. We currently project a growth rate of 3.8 percent, but are continuing to monitor developments over the second half of 2012. The rebound in economic activity in 2013 would result from, among other things, the ongoing efforts to increase agricultural production and build the capacity of the Port of Cotonou while enhancing its competitiveness. Owing to the impact of the elimination of subsidies on fuel from Nigeria, average annual inflation in 2012 is expected to amount to about 7 percent. However, owing to the easing of price pressures, inflation in 2013 is expected to be close to the 3 percent ceiling adopted within the WAEMU multilateral surveillance framework.

20. The government decided to suspend the framework agreement governing the cotton sector in March 2012 and to organize the approach to crop year 2012/13. This decision was driven by the operational failures identified, in particular the poor governance of the sector, which did little to promote the development of cotton production. Nevertheless, it is projected that in the 2012/13 crop year production will exceed that of crop year 2011/12. In consultation with the private sector, the government will develop and implement a new framework agreement. This new agreement will aim at promoting the integrated development of the sector by production zone, with the objective of effective liberalization, enhanced competitiveness, and greater transparency in governance so as to impart new dynamism to the sector. A regulatory authority will be established to ensure that the sector functions in keeping with the principles set forth in the framework agreement. The state will continue to provide critical services in the areas in question, such as organizing and providing support to producers, monitoring the provision of production inputs, and gathering statistical information.

21. The government decided temporarily to suspend the contract for IVP services in May 2012 owing to the difficulties experienced with program implementation. Among the problems in question, the government noted the high costs of the services associated with this reform, disputes relating to the scanner inspection of goods for delivery to outlying countries, the spike in prices for mass consumer goods, and the gradual process of turning away from use of the Port of Cotonou as distinguished from other competing ports in the subregion. Given these issues, the government decided to reorient the modalities for implementing selected IVP services, in particular regarding the flexibility of the rates applied. In addition, the cost of user-borne services (other than customs clearance) will be reduced in order to improve the competitiveness of the port. These approaches will be supported by trade missions to other countries of the subregion making use of the port and by targeted measures aimed at reducing the time delays in releasing goods from the port platform itself.

22. The external current account deficit is expected to decline somewhat in 2012 and 2013, in response to the anticipated increase in cotton exports and external budgetary support. This deficit is expected in large measure to be financed by inflows of foreign capital.

B. Fiscal Policy

23. For the remainder of 2012, the government will undertake to limit the basic primary balance at end-December 2012 to CFAF 7.2 billion, or 0.2 percent of GDP. It intends to: (i) strengthen the one-stop window at the Port of Cotonou, ensuring coverage not only of the import side (already operational) but the export side as well; (ii) replace the preshipment inspection by an import control process that will provide information on value; and (iii) maintain discipline with respect to current expenditure, and the wage bill in particular, while speeding up public investment execution.

24. Strengthened controls will contribute to an increase in domestic revenues in 2012, to achieve the target at end-December 2012 of CFAF 710.0 billion, or 18.9 percent of GDP. The progress made regarding nontax revenue will make it possible to offset the projected shortfall in customs receipts resulting from the slowdown in port activities. The government will continue to accord special attention to priority to social expenditure to achieve the goal of CFAF 134.0 billion by end-December 2012.

25. The government’s fiscal policy in 2013 will aim at beginning to create fiscal space to address unanticipated economic developments. Total revenue should come to 19.1 percent of GDP while total expenditure should amount to 22.5 percent of GDP. The basic primary balance would be slightly positive at 0.4 percent of GDP.

26. Customs receipts in 2013 should come to CFAF 356.0 billion, or 8.8 percent of GDP. Supplementing the implementation of the new IVP orientations referred to above, the mobilization of resources at customs should benefit from progress made with computerization, in particular the expansion and operationalization of the ASYCUDA++ transit module. Domestic tax receipts should increase to CFAF 329.0 billion, or 8.6 percent of GDP. Customs receipts and taxes would be supported by, among other things, the efforts of the joint Customs-Taxes team. Nontax revenue should remain at a level comparable to that of the preceding year in terms of GDP (excluding the 3G license).

27. Total expenditure and net lending should amount to CFAF 905.0 billion, or 22.5 percent of GDP, in 2013. The breakdown of expenditure in terms of GDP should remain broadly unchanged from 2012. The wage bill will be limited to CFAF 298.9 billion, an unchanged level in terms of GDP. Investment expenditure of CFAF 272.9 billion, or 6.8 percent of GDP, will contribute to economic growth. The fiscal deficit will be financed by recourse to the regional securities market and the mobilization of grants and external concessional assistance.

C. Structural Reforms

28. While the following do not constitute structural benchmarks under the program, the government nevertheless intends to speed the implementation of the following measures:

  • Submission of the 2012 operating accounts to the Audit Office by June 30, 2013, at the latest;

  • Implementation of the recommendations made by the December 2011 mission from the IMF’s Fiscal Affairs Department;

  • Review of the operational framework of the cotton sector to correct for the failures identified and effectively deregulate the sector, this by the beginning of the 2014/15 crop season;

  • Implementation of the new orientations for the IVP;

  • Introduction of a harmonized database for management of the civil service; and

  • Organization of an UNCTAD study mission before December 2012 to replace ASYCUDA++ with ASYCUDA World, an improved version of the software.

29. At the financial sector level, the government will ensure the promulgation of the three pieces of regional legislation passed by the National Assembly, namely the framework law on banking regulation, the law on combating the financing of terrorism in the WAEMU member states, and the law on sanctions for violations involving checks, bank cards, and other electronic payment methods. The government will continue its collaboration with regional institutions for the restructuring of two Beninese banks in financial distress and will ensure regular monitoring of the microfinance institutions in difficulty.

III. Growth and Poverty Reduction Strategy

30. The third Growth and Poverty Reduction Strategy (GPRS III) for 2011-15 and its Priority Action Program (PAP) will remain the reference documents for the government’s actions in this area. The strategy is aimed at improving the population’s living standards and achieving the Millennium Development Goals (MDGs), particularly in the health, primary education, water, and sanitation sectors. The GPRS III identifies two growth scenarios: one scenario based on the macroeconomic framework supported by the ECF and a second more optimistic scenario. In view of recent developments and the outlook for the short and medium term, the first scenario is the one being implemented for the time being, in line with the 2011 JSAN recommendations. The authorities will continue to explore the measures necessary for moving toward the more optimistic scenario, including its financing.

31. The progress report on the GPRS III for 2011 was drawn up and used as the basis for the joint review with development partners in June 2012. It made it possible to highlight the progress made and formulate recommendations for improving implementation of the GPRS III in the years ahead. All in all, 48 percent of the indicators identified in the monitoring framework achieved the targets set, while 33 percent made progress without meeting the targets and 19 percent showed slippages.

32. The government will continue to devote special attention to the execution of priority social expenditure to protect vulnerable population groups and achieve the MDGs, in particular in the priority sectors mentioned earlier.

IV. Conclusion

33. The government is convinced that the measures and policies described in this letter are appropriate for achieving the program objectives, and it reaffirms its commitment to take any additional measures required. It therefore requests conclusion of the fourth review under the ECF arrangement and the associated disbursement. The fifth review of the program is expected to be completed by end-March 2013, based on the observance of performance criteria as at September 30, 2012. The sixth review of the program is expected to be completed by end-August 2013, based on the observance of performance criteria as of March 31, 2013.

34. Program monitoring will be based on the semiannual performance criteria, quantitative targets, and structural benchmarks defined in Tables 1 and 2 attached to this letter. To facilitate program monitoring, the government will regularly provide IMF staff with all the information required, as defined in the Technical Memorandum of Understanding (TMU), or any other additional information that it considers necessary or that the IMF staff requests.

Table 1.

Benin: Quantitative Performance Criteria and Indicative Targets, 2011–13

(Billions of CFA francs)

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

Technical Memorandum of Understanding of the Second Review.

The performance criterion on net domestic financing is automatically adjusted as indicated in Footnotes 4 and 5 (per Paragraph 8 of the Technical Memorandum of Understanding).

The performance criteria and indicative targets are cumulative from the beginning of the calendar year.

If the amount of disbursed external budgetary assistance net of external debt service obligations falls short of the program forecast, the ceiling on net domestic financing will be adjusted pro-tanto, subject to limits specified in the Technical Memorandum of Understanding (Paragraph 8).

If the amount of disbursed external budgetary assistance net of external debt service obligations exceeds the program forecast by more than CFAF 5 billion, the ceiling will be adjusted downward by the excess disbursement beyond CFAF 5 billion, unless it is used to absorb domestic arrears.

Gross disbursements, not adjusted for debt service obligations.

Debt is considered nonconcessional if the difference between the present value (PV) of the debt and its nominal value, as a percentage of the nominal value of the debt, is lower than 35 percent. The ceiling for this continuous performance criterion was raised with effect from the second program review.

Exceptional payment procedures: stock of payment orders issued since the beginning of the calendar year and not yet regularized at each test date.

Table 2

Benin: Structural Benchmarks for 2010–13

article image

35. Should it prove necessary, the government will take any further measures that may become appropriate for achieving program objectives. The government will consult with the IMF on the adoption of these measures, and in advance of any revisions to the policies contained in this letter, in accordance with the IMF’s policies on such consultation. The government authorizes the IMF to publish the staff report on the discussions of the fourth review of the program, and this letter of intent.

Sincerely yours,

/s/

Jonas A. Gbian

Minister of Economy and Finance

Attachment 1. Technical Memorandum of Understanding

October 15, 2012

1. This technical memorandum of understanding (“the Memorandum”) defines the quantitative performance criteria and benchmarks, and structural benchmarks for the Republic of Benin’s program supported by the Extended Credit Facility (ECF). It also sets out the frequency and deadlines for data reporting to the staff of the International Monetary Fund (IMF) for program monitoring purposes.

Definitions

2. Unless otherwise indicated, “government” is understood to mean the central administration of the Republic of Benin and does not include any political subdivisions (such as local governments), the central bank, or any other public or government-owned entity with autonomous legal personality not included in the government’s flow-of-funds table (Tableau des opérations financières de l’État, TOFE).

3. The definitions of “debt” and “concessional borrowing” for the purposes of this Memorandum are set out in point 9 of IMF Executive Board Decision No. 6230-(79/140), as subsequently amended, including by Executive Board Decision No. 14416-(09/91), effective December 1, 2009:

(a) For the purposes of this Memorandum, debt is understood to mean a current, that is, not contingent, liability, created under a contractual agreement through the provision of value in the form of assets (including currency) or services, which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows:

  • (i) loans, that is, advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

  • (ii) suppliers’ credits, that is, contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided;

  • (iii) leases, that is, arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains title to the property. For the purpose of this guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property; and

  • (iv) Treasury bills and bonds issued in Communauté Financière Africaine (CFA) francs on the West African Economic and Monetary Union’s (WAEMU) regional market, which are included in public debt for the purpose of this Memorandum.

  • Under the definition of debt set out above, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (for example, payment on delivery) will not give rise to debt.

(b) A loan is considered concessional if, on the date on which the contract became effective, the ratio of the present value of the loan, based on the reference interest rates, to the nominal value of the loan is less than 65 percent (that is, the grant element of the loan is at least equal to 35 percent of its nominal value). The present value of the loan will be calculated by discounting future payments of interest and principal using the commercial interest reference rates (CIRRs) established by the Organisation for Economic Cooperation and Development (OECD). Specifically, the ten-year average of CIRRs reported by the OECD will be used for loans with maturities of at least 15 years, while the six-month average of CIRRs will be used for loans with shorter maturities. To both the ten-year and six-month averages of the reference rate, the margin for different repayment periods will be added, as established by the OECD (0.75 percent for repayment periods of less than 15 years; 1.00 percent for repayment periods of 15-19 years; 1.15 percent for repayment periods of 20–29 years; and 1.25 percent for repayment periods of 30 years or more).

(c) “Domestic debt” is defined as debt denominated in CFA francs, while “external debt” is defined as debt denominated in any currency other than the CFA franc.

Quantitative Performance Criteria
A. Ceiling on Net Domestic Financing of the Government
Definitions

4. Net domestic financing of the government is defined as the sum of (i) net bank credit to the government, defined below; and (ii) net nonbank financing of the government, including the proceeds of the sale of government assets, which includes proceeds from the divestiture of parts of public enterprises, that is, privatizations, treasury bills, and other securitized obligations issued by the government and listed in CFA francs on the WAEMU regional financial market, and any Central Bank of West African States (Banque centrale des États de l’Afrique de l’Ouest, BCEAO) credit to the government, including any drawings on the CFA franc counterpart of the allocation of Special Drawing Rights (SDRs).

5. Net bank credit to the government is defined as the balance between the debts and claims of the government vis-à-vis the central bank and the national commercial banks. The scope of net credit to the government is that used by the BCEAO and is in keeping with general IMF practice in this area. It implies a definition of government that is broader than the one indicated in paragraph 2. Government claims include the CFA franc cash balance, postal checking accounts, customs duty bills, and all deposits with the BCEAO and commercial banks of government owned entities, with the exception of industrial or commercial public agencies (établissements publics à caractère industriel et commercial, EPICs) and government corporations, which are excluded from the calculation. Government debt to the banking system includes all debt to the central bank and the national commercial banks, including treasury bills and other securitized debt.

6. The figures deemed valid within the framework of the program will be the figures for net bank credit to the government and for the net amount of treasury bills and bonds issued in CFA francs on the WAEMU regional financial market calculated by the BCEAO and the figures for nonbank financing calculated by the Treasury of Benin.

7. Gross external budgetary assistance is defined as grants, loans, and debt relief operations (excluding project-related loans and grants, use of IMF resources, and debt relief under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiatives). Net external budgetary assistance is defined as the difference between gross external budgetary assistance and the sum of total debt service obligations on all external debt (defined, in turn, as the sum of interest payments and amortizations on all external loans, including interest payments and other charges to the IMF and on project-related loans, but excluding repayment obligations to the IMF), and all payments of external payments arrears.

Adjustments

8. The ceiling on net domestic financing (NDF) of the government will be adjusted if net external budgetary assistance exceeds or falls short of the program projections indicated in paragraph 9:

  • If, at the end of a quarter, net external budgetary assistance exceeds the total projected amounts (cumulative since January 1 of the same year) by over CFAF 5 billion, the NDF ceiling will be lowered by an amount equivalent to this excess minus CFAF 5 billion. However, if the excess is entirely or partly allocated to the settlement of domestic arrears above and beyond the program objective specified in paragraph 9, the NDF ceiling will be lowered by an amount equal to the excess net external budgetary assistance compared with program targets, minus the sum of (a) CFAF 5 billion and (b) the excess repayment of domestic arrears compared with program targets.

  • If at the end of a quarter, net external budgetary assistance falls short of the projected amounts (cumulative since January 1 of the same year), the NDF ceiling will be increased by an amount equivalent to this shortfall, within the following limits: the increase may not exceed CFAF 10 billion at end-June 2012; CFAF 20 billion at end-September 2012; CFAF 35 billion at end-December 2012; and CFAF 5 billion at end-March 2013.

9. For the purposes of calculating the adjustment to the NDF ceiling, the following amounts are projected in the program:

  • The amounts of gross external budgetary assistance (cumulative since January 1 of the same year) projected in the program are CFAF 14.6 billion at end-June 2012; CFAF 14.6 billion at end-September 2012; CFAF 20.9 billion at end-December 2012; and CFAF 2.7 billion at end-March 2013.

  • The amounts of external debt service obligations (cumulative since January 1 of the same year) projected in the program are CFAF 16.0 billion at end-June 2012; CFAF 23.9 billion at end-September 2012; CFAF 33.7 billion at end-December 2012; and CFAF 5.5 billion at end-March 2013.

  • The amounts of settlement of domestic payments arrears (cumulative since January 1 of the same year) projected in the program are CFAF 8.7 billion at end-June 2012; CFAF 13.1 billion at end-September 2012; CFAF 17.4 billion at end-December 2012; and CFAF 4.4 billion at end-March 2013.

  • The amounts of settlement of external payments arrears (cumulative since January 1 of the same year) projected in the program are: CFAF 0 billion at end-June 2012; CFAF 0 billion at end-September 2012; CFAF 0 billion at end-December 2012; and CFAF 0 billion at end-March 2013.

Performance criteria and indicative targets

10. The ceiling on net domestic financing of the government (cumulative since January 1 of the same year) is set as follows: CFAF 60.7 billion at end-June 2012; CFAF 48.6 billion at end-September 2012; CFAF 47.5 billion at end-December 2012; and CFAF 29.0 billion at end-March 2013. The ceiling is a performance criterion for end-September 2012 and end-March 2013, and an indicative target for end-December 2012.

B. Floor for Basic Primary Fiscal Balance
Definition

11. The basic primary fiscal balance is defined as being equal to the difference between total fiscal revenue (tax and nontax) and basic primary fiscal expenditure (on a payment-order basis). Basic primary fiscal expenditure is defined as fiscal (current plus capital) expenditure minus (a) the payments of interest on domestic and external debt; and (b) capital expenditure financed by external grants and loans. Grants are excluded from revenue and net government lending is excluded from fiscal expenditure.

Performance criteria and indicative targets

12. The floor on the basic primary fiscal balance (cumulative since January 1 of the same year) is a balance of not less than CFAF -39.8 billion at end-June 2012; CFAF -21.7 billion at end-September 2012; CFAF 7.2 billion at end-December 2012; and CFAF -18.7 billion at end-March 2013. The floor is a performance criterion for end-September 2012 and end-March 2013, and an indicative target for end-December 2012.

C. Non-accumulation of New Domestic Payments Arrears by the Government
Definition

13. Domestic payments arrears are defined as domestic payments due but not paid after a 90-day grace period, unless the obligation specifies a longer grace period. The National Amortization Fund (Caisse Autonome d’Amortissement, CAA) and the treasury record and update the data on the accumulation of domestic payments arrears, as well as their settlement. The definitions of debt provided in paragraph 3a, of domestic debt in paragraph 3c, and of government in paragraph 2 apply here.

Continuous performance criterion

14. The government undertakes not to accumulate any new domestic payments arrears. The nonaccumulation of new domestic payments arrears will be continuously monitored throughout the program.

D. Non-Accumulation of External Public Payments Arrears by the Government
Definition

15. External public payments arrears are defined as the sum of payments due, but not paid, by the government at the due date specified in the contract, taking into account any applicable grace period, on external debt of, or guaranteed by, the government. The definitions of debt provided in paragraph 3a, of external debt in paragraph 3c, and of government in paragraph 2 apply here.

Continuous performance criterion

16. The government undertakes not to accumulate any external public payments arrears, with the exception of arrears relating to debt that is the subject of renegotiation or rescheduling. The performance criterion on the non accumulation of external public payments arrears will be continuously monitored throughout the program.

E. Ceiling on the Contracting or Guaranteeing by the Government of New Non-concessional External Debt Maturing in a Year or More
Definition

17. This performance criterion applies not only to debt as defined in paragraph 3a, but also to commitments contracted or guaranteed by the government (as defined in paragraph 18) (including lease-purchase contracts) for which no value has been received. This criterion also applies to private sector debt guaranteed by the government, which constitutes a contingent liability of the government. As indicated in paragraph 3c, external debt excludes Treasury bills and bonds issued in CFA francs on the WAEMU regional market. The definition of nonconcessional debt in paragraph 3b applies here.

18. The concept of “government” used for this performance criterion and for the performance criterion on the contracting or guaranteeing by the government of new short-term external debt, includes the government, as defined in paragraph 2, local governments, and all public enterprises, including administrative public agencies (établissements publics à caractère administratif), scientific and technical public agencies, professional public agencies, and enterprises jointly owned by the Beninese government with the governments of other countries.

Continuous performance criterion

19. No nonconcessional external borrowing will be contracted or guaranteed by the government for the duration of the program, except for borrowing with a grant element of at least 20 percent and not exceeding a cumulative amount equivalent of CFAF 25 billion. Changes to this ceiling may be made (subject to approval by the IMF Executive Board) for specific investment projects whose financial viability and profitability have been evaluated and approved by a recognized institution, and on condition that the loan does not seriously exacerbate debt vulnerabilities according to the debt sustainability analysis prepared jointly by the staffs of the World Bank and the IMF.

20. The government also undertakes not to contract or guarantee any external debt during the implementation of the program without first having determined its concessionality with IMF staff.

F. Ceiling on the Contracting or Guaranteeing by the Government of New Non-concessional Short-Term External Debt
Definition

21. The definitions in paragraphs 17 and 18 also apply to this performance criterion.

22. Short-term external debt is debt with a contractual term of less than one year. Import-and export-related loans, treasury bills issued in CFA francs on the WAEMU regional market, normal short-term supplier credits, and debt relief operations are not covered by this performance criterion.

Performance criterion

23. The government undertakes not to contract or guarantee short-term nonconcessional external debt.

24. The government also undertakes not to contract or guarantee any short-term external debt during the implementation of the program without first having determined its concessionality with IMF staff.

25. On June 30, 2012, Benin had no short-term external debt.

Indicative Targets
A. Floor for Government Revenue
Definition

26. Total government revenue includes tax and nontax revenue as shown in the TOFE, but excludes external grants, revenue of autonomous agencies, and privatization receipts.

Indicative targets

27. The indicative targets for total government revenue (cumulative since January 1 of the same year) are set as follows: CFAF 331.3 billion at end-June 2012; CFAF 515.0 billion at end-September 2012; CFAF 710.0 billion at end-December 2012; and CFAF 172.0 billion at end-March 2013.

B. Ceiling on Exceptional Payment Procedures
Definition

28. Exceptional payment procedures (ordres de paiement hors de la chaîne de dépenses) are defined as expenditures of a budgetary nature that are not executed following the stages of expenditure commitment (engagement) and validation (liquidation) before the payment order (ordonnancement) is issued, and that have not been regularized on the test date.

Indicative targets

29. The government undertakes to limit total expenditures (cumulative since January 1 of the same year) effected by exceptional payment procedures to a ceiling of CFAF 4.6 billion at end-June 2012; CFAF 7.5 billion at end-September 2012; CFAF 10.6 billion at end-December 2012; and CFAF 2.5 billion at end-March 2013.

C. Floor for priority social expenditures

30. Priority social expenditures are determined in line with the priority programs identified in the Growth and Poverty Reduction Strategy for 2011–15 (GPRS III). These expenditures consist of selected (nonwage) expenditures inter alia in the following sectors: health; energy and water; agriculture; youth, sports and leisure; family and national solidarity; education, microfinance and employment; and culture, literacy, and the promotion of national languages. Their execution is monitored on a payment-order basis during the program, through the integrated fiscal management system (SIGFiP).

Definition

31. The indicative target for priority social expenditures is defined as the total amount (cumulative since January 1 of the same year) of the payment orders issued under the budget lines indicated in Table 1.

Table 1.

Priority Social Expenditure Categories

article image
Indicative targets

32. The indicative targets for priority social expenditures (cumulative since January 1 of the same year) are set as follows: CFAF 75.0 billion at end-June 2012; CFAF 104.0 billion at end-September 2012; CFAF 134.0 billion at end-December 2012; and CFAF 50.0 billion at end-March 2013.

Information for Program Monitoring
A. Data on Performance Criteria and Indicative Targets

33. To facilitate effective program monitoring, the government will provide IMF staff with the following data:

Every month:

  • copies of the contracts and data on any loan (terms and creditors) contracted or guaranteed by the government, in the first week after the end of the month;

  • monthly consumer price index, within two weeks of the end of the month;

  • the TOFE, including revenue, detailed data on net domestic financing of the government (bank and nonbank domestic financing, including the claims held by the nonbank private sector); and data on the basic primary fiscal balance, including data generated by the SIGFiP, within six weeks of the end of the month;

  • data on the balance, accumulation, amount (stock), and repayment of public domestic and external payments arrears, including in the event that these arrears amount to zero, within six weeks of the end of the month; and

  • the monetary survey, within eight weeks of the end of the month.

Every quarter:

  • data pertaining to the amount of exceptional payment procedures or other exceptional measures, within six weeks of the end of the quarter; and

  • data pertaining to priority social expenditures, within six weeks of the end of the quarter.

B. Other information

34. The government will provide Fund staff with the following data:

Every month:

  • banking and nonbanking supervision indicators for bank and nonbank financial institutions within eight weeks of the end of the month.

Every quarter:

  • data on the implementation of the public investment program, including detailed information on sources of financing, within four weeks of the end of the quarter; and

  • data on the stock of external debt, external debt service, the signing of external loans and disbursements of external loans, within twelve weeks of the end of the quarter.

On an ad hoc basis:

  • in the quarter when they become available: a copy of the budget law and its supplementary documents; a copy of the most recent budget execution law; as well as any decree or law pertaining to the budget or implementation of the IMF-supported program.

Appendix II—Benin: Developments in The Cotton Sector

Cotton has historically played a dominant role in Beninese exports and represented a large fraction of GDP. While its importance has declined significantly, it continues to occupy the attention of policy makers because of the large number of rural poor involved in the activity and hence the close relationship between the performance of the cotton sector and rural poverty and well-being. Following a disappointing harvest in 2011/12 and governance concerns, the authorities assumed operational control of input procurement and distribution in the cotton sector this year and will also control the post-harvest marketing and sales. Preliminary information at the time of the writing of this note suggests a significant improvement in production volume for the 2012/13 season. The authorities are considering a new framework agreement for the sector in order to return many of these functions to the private sector in time for the 2014/15 season.

Background

1. The cotton sector has historically accounted for a significant fraction of GDP and dominated formal exports in Benin, as in other West African states. Cotton production attracts the attention of policy makers for several reasons beyond its significant economic weight. Cotton farming involves a large number of rural workers who do not otherwise participate in the formal economy, and the government provides significant input subsidies (e.g., fertilizers, herbicides, and pesticides), which are distributed as part of support to the cotton sector, but also go to other widely grown crops. The banking sector is also heavily implicated, as it provides seasonal credit (crédit de campagne). Most importantly, the government has a critical role to play in alleviating significant market failures inherent to the production process, including input provision and access to credit.1

A. Trends in Cotton Production and Export

2. The economic importance of cotton has declined steadily over the last two decades. The final value of cotton for export, representing almost all of the total value of cotton products in Benin, declined from 77 percent of exports in 1995 to 17 percent in 2011, and from 8.4 percent of nominal GDP to 1.6 percent during the same period. Even if this year’s harvest equaled the largest harvest on record by volume, it would amount to only 2.3 percent of GDP in 2013. These trends may be explained by the long run decline in the real price of cotton, a history of payment delays to farmers, and stagnant yields per hectare compared to overall productivity growth.

uA01fig04

Cotton Production and Economic Activity

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A001

Sources: Beninese authorities; IMF staff estimates.Exports and GDP are compared to ginned cotton for export.
uA01fig05

World Cotton Price in CFA Francs

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A001

Sources: Cotton Outlook ‘A Index’, Middling 1-3/32 inch staple, CIF Liverpool; IMF staff calculations.

3. International cotton prices spiked dramatically in 2010 and 2011, peaking 250 percent above the average price between 2006 and 2009. They have since fallen precipitously, but remained 50 percent above the average as of July 2012. Much of Benin’s exported cotton is of high quality, because it is harvested manually and benefits from a favorable climate, especially in the north. However, the average sales price is typically slightly below the international price for mid-quality cotton, possibly because of a discount linked to selling forward the harvest to minimize price risk.

B. Policy Evolution

4. Over the last two decades, the cotton sector was slowly liberalized. By 2000, the parastatal ginner, Société Nationale de la Promotion de l’Agriculture (SONAPRA), coexisted with a number of private ginners, and saw many of its other traditional activies, such as input supply and export marketing, replaced with more competitive arrangements. Much of the coordinating of cotton production activities was taken on by the interprofessional cotton association (Association Interprofessionnelle du Coton, AIC), while financial matters were handled by a financial clearing house (Caisse de Stabilisation et de Régulation des Prix, CSRP). The privatisation of SONAPRA’s remaining gins was agreed to as part of the Highly Indebted Poor Countries (HIPC) debt-reduction initiative.

5. By the middle of the last decade (2000-10), poor management and ballooning losses in the midst of low world prices, which threatened Benin’s macroeconomic situation, brought forward the need to privatize. Several aborted attempts were made to put SONAPRA’s gins up for sale in four lots, but progress stalled. In 2008, under very tight time constraints, the gins were sold in a single block to a consortium headed by a Beninese businessman, who was already active in the sector with private ginning assets and in input supply. This significantly concentrated control of the sector in private hands.

Developments During the 2012/13 Season

C. Suspension of the Framework Agreement for Cotton

6. As discussed in Box 3, the government temporarily suspended the framework agreement for cotton (Accord-Cadre du Coton) in April of this year, that has governed the sector since 2009. The government cited final production outturn for the 2011/12 season, which was more than 30 percent below expectations, in spite of government charges of excess supply of state-subsidized fertilizers, relative to the area under cultivation. Based on alleged governance concerns arising from these results, the state assumed control of the management of the 2012/13 cotton campaign.

7. For the current season, the government is directly involved in most steps of input procurement and distribution and cotton delivery to gins and export sale of fiber. It initiated its own input procurement and delivery process, supplied inputs on credit to cotton producers’ associations, as well as advice and monitoring of the cultivation process. As harvesting begins, significant uncertainty remains about ginning, since the facilities remain in private hands. The authorities foresee a tolling model this year, in which the government retains ownership of the cotton and pays a fixed per metric ton fee for ginning. Existing ginning capacity is in excess of projected production, so partial participation by private ginners would likely be sufficient. Little to no cotton has been sold forward to date and thus price risks remain.

D. Production During the 2012/13 Campaign

8. The area under cultivation for this year’s crop is estimated to have has expanded dramatically, because of a historically high buying price for cotton farmers, a reduction in costs of subsidized inputs offered by the state, and concerted efforts to encourage cotton production by the authorities. Estimates suggest that there are between 340,000 and 360,000 hectares2 under cultivation, which under average historical yields of slightly more than 1.0 ton per hectare, would produce significantly more cotton than has been seen in the last eight seasons. Optimistic yield projections imply a return that would rank among the largest harvests on record.

9. There had been some concern early in the growing season that disruptions due to the change in management would cause problems in the delivery of necessary inputs. In some regions there were reports of delays in the delivery of fertilizer, which caused them to be applied outside their recommended time period. The belated provision of insecticides in some regions was a potentially even more serious concern. However, it would seem that these early disruptions were corrected in time, and pest incidence has remained moderate. Together with favorable rainfall, the increased area of cultivation has thus contributed to rising optimism about the next harvest.

Policy Going Forward

10. The Beninese authorities foresee a significant restructuring of the sector before it is returned to private control. A new framework agreement would likely include a zoning model in which farmers’ producer associations are grouped into zones and enter into an exclusive relationship with particular ginners. The zoning model is widely viewed as a success in Burkina Faso and is credited with greater farmer participation and increased production, although other arrangements which achieve similar ends while providing more competition have been tried in other countries. The authorities intend to remain involved in training, technical assistance to farmers, and production data collection.

11. The development of a zoning model will take time to develop. This change will need to be carefully designed. It is anticipated that the government will continue direct operation of the production process through the 2013/14 harvest, and implement the new model for the 2014/15 season, for which the input procurement process would begin in late 2013.

Appendix III—Benin: External Stability Assessment

The external stability assessment for Benin indicates a deterioration of the external position and a moderate real exchange rate overvaluation. Empirical assessments suggest that the current account deficit exceeds its medium-term equilibrium by about 4 to 6 percentage points of GDP, and the real effective exchange rate (REER) is overvalued by 15 percent, on average. These results differ moderately from the findings of the 2011 Article IV consultation with the West African Economic and Monetary Union (WAEMU), which concluded that the REER for the aggregate WAEMU group was broadly in line with fundamentals. The analysis of structural indicators based on survey data confirms the empirical findings and points to Benin’s low external competitiveness.

External Sector Developments and Assessment

1. Benin’s external current account deficit (excluding grants) widened over the past several years reflecting the weak performance of traditional exports and higher international import prices. In the years before 2007, the current account deficit remained moderate at about 6.5 percent of GDP. It widened sharply between 2007 and 2009, mainly reflecting higher world food prices. After a temporary improvement in 2010, the current account deficit widened again to 10.3 percent in 2011, because of the weak performance of cotton exports and a decline in investment income.1

1. Although the REER depreciated over the past two years, it has appreciated significantly over the period 1995-2008 (Figure 1). During 2009-11, the REER depreciated by about 7 percent, reflecting Benin’s lower inflation differential with trading partners and mirroring the evolution of the nominal effective exchange rate (NEER). Nevertheless, this depreciation did not offset the cumulative appreciation of about 20 percent over the period 1995-2008, suggesting an erosion of external price competitiveness.

Figure 1.
Figure 1.

Benin and WAEMU: Effective Exchange Rates, 1995–2011

(2000=100)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A001

Source: IMF staff estimates

2. External financing of the current account deficit, with the exception of current official transfers, remained relatively stable over the last decade. Foreign direct investment inflows averaged about 2 percent of GDP and represented 70 percent of total capital inflows. Short-term capital flows and medium- and long-term private loans were equivalent to 1 and 0.3 percent of GDP, respectively. Other capital flows, such as project loans, remained at 2 percent of GDP. Though stable in the past, external financing is heavily dependent on donor and market confidence in Beninese institutions and thus depends on continued progress with structural reforms and sustained prudent macroeconomic policies.

3. Foreign exchange reserves are adequate and debt risks remain contained. Gross external debt is relatively low (around 17 percent of GDP) and has been stable since Benin completed the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Reduction Initiative (MDRI) processes. The debt sustainability analysis (Supplement 2) indicates a low risk of debt distress. The level of foreign exchange reserves in the WAEMU system is adequate at over 6 months worth of imports of goods and services, covering 60 percent of broad money and 100 percent of short-term debt.

Model-Based Assessment

4. Empirical assessments suggest a deterioration of the external position and a moderate overvaluation of the REER. These assessments are based on the three complementary Consultative Group on Exchange Rate Issues (CGER) model-based approaches: (i) macroeconomic balance approach; (ii) equilibrium real exchange rate (ERER) approach; and (iii) external sustainability approach. They indicate the exchange rate is overvalued by 15 percent, on average.

A. Macroeconomic Balance Approach

5. The macroeconomic balance approach estimates the exchange rate adjustment necessary to close the gap between the equilibrium current account balance (the “norm”), based on economic fundamentals, and the underlying current account balance. The method consists of three steps. First, the equilibrium current account balance is estimated based on a set of macroeconomic fundamentals.2 Second, the underlying current account balance is calculated as an average of the: (i) five-year moving average of the actual current account balance; (ii) five-year World Economic Outlook (WEO) projections of the current account balance; (iii) smoothed actual current account balance; and (iv) observed 2011 current account balance (Text Table 1). Third, the exchange rate adjustment necessary to close the gap between the equilibrium and the underlying current accounts is computed using Benin-specific trade elasticity with respect to the real exchange rate.3

Text Table 1.

Benin: Estimates of the Underlying Current Account for 2011

(Percent of GDP)

article image
Source: IMF staff estimates.

6. The macroeconomic balance approach suggests the REER is moderately overvalued (Figure 2). The equilibrium and the underlying current account deficits are estimated at about 5½ percent and 10 percent of GDP, respectively. These estimates imply that a depreciation of about 18 percent percentage points would be necessary to close the gap between them.

Figure 2.
Figure 2.

Benin: Current Account Balance, Excl. Grants, 1990–2011

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A001

Source: IMF staff estimates.Note: For the computation of the underlying current account balance see Table 1.
B. Equilibrium Real Exchange Rate Approach

7. The ERER is estimated as a function of its medium-term fundamentals.4 The degree of exchange rate misalignment is then computed as the difference between the actual REER and its equilibrium value.

8. The ERER method indicates a moderate overvaluation of the exchange rate. The results show the overvaluation of the REER decreased from about 20 percent in 2009 to about 4 percent in 2011 (Figure 3).

Figure 3.
Figure 3.

Benin: Equilibrium and Real Effective Exchange Rates, 1990–2011

(2000=100)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A001

Source: IMF staff estimates.
C. External Sustainability Approach

9. The external sustainability method compares the actual current account balance with the balance that stabilizes the net foreign assets (NFA) at a certain benchmark level. The NFA-stabilizing current account balance (in percent of GDP) is derived using medium-term projections for real GDP growth and inflation, and NFA in percentage of GDP at the end of the prior year. The REER misalignment is then determined as in the macroeconomic balance approach.

10. Application of the external sustainability approach to Benin indicates that the REER is overvalued by about 20 percent in real effective terms. The magnitude of the misalignment ranges from 10 percent (in the case of high foreign direct investment) to 30 percent (in the case of low foreign direct investment).

D. Combining the Three Approaches

11. Taken together, the estimation results from the three approaches point to a moderate overvaluation of the REER of about 15 percent (Text Table 2). These results, however, have to be considered with caution. First, they are sensitive to a wide range of assumptions made in the construction of the baseline scenario. Second, they are sensitive to the assumed elasticity of the current account balance with respect to the real exchange rate.

Text Table 2.

Benin: Model-Based Approach Results

article image
Source: IMF staff estimates.

Survey-Based Assessment

12. Structural indicators based on survey data point to low external competitiveness. Three survey-based reports presented in this section are the: (i) Global Competitiveness Index; (ii) Doing Business Indicators; and (iii) Global Enabling Trade Index. They suggest that several institutional and policy factors provide serious impediments to external competitiveness.

A. Global Competitiveness Index

13. The World Economic Forum’s 2012-13 Global Competitiveness Index (GCI) ranks Benin 119th out of 144 countries, with an overall score of 3.6 out of 7 (Table 1). Benin’s score deteriorated over the last three years. Benin ranks higher than the sub-Saharan African (SSA) average on basic requirements (macroeconomic environment and health and primary education) and innovation and sophistication factors, but lower in efficiency enhancers (good market efficiency, financial sector development, technology readiness, and market size). Firms identify corruption, access to financing, inadequate infrastructure, and tax regulations as the major constraints to doing business in Benin (Figure 4).

Figure 4.
Figure 4.

Benin: The Most Problematic Factors for Doing Buisness

(Percent of responses)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A001

Source: World Economic Forum. The Global Competitiveness Report, 2012–13
Table 1.

Benin: Global Competitivenss Index 2012–13

article image
Source: World Economic Forum, The Global Competitiveness Report, 2012–13.
B. Doing Business Indicators

14. The World Bank’s 2012 Doing Business Indicators also reduced Benin’s ranking (Text Table 3). Benin moved down six places compared to 2009 and is ranked 175th out of 183 countries in terms of business climate, trailing most other WAEMU countries. Benin faces challenges in protecting investors’ rights, enforcing contracts, and paying taxes. Starting a business remains difficult, despite important reforms introduced in 2010-11 to facilitate access to credit (the Organization for the Harmonization of Business Law in Africa Act).

Text Table 3.

Benin: Doing Business in the WAEMU

article image
Source: World Bank, Doing Business Indicators.
C. Global Enabling Trade Index

15. The World Economic Forum’s 2012 Global Enabling Trade Index (ETI) ranks Benin 115th out of 132 countries with an overall score of 3.4 out of 7 (Table 2). Among the different sub-indicators of the ETI, Benin ranks lowest on domestic market access (121), availability and quality of transport infrastructure (115), availability and use of information and communication technologies (109), and efficiency of custom administration (113). Factors that have the highest negative impact on the ease of exporting and importing include access to trade finance, burdensome procedures, and tariff and non-tariff barriers (Figures 5 and 6).

Table 2.

Benin: Enabling Trade Index, 2012

article image
Source: World Economic Forum. The Global Enabling Trade Report, 2012.
Figure 5.
Figure 5.

Benin: Most Problematic Factors for Exporting

(Percent of responses)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A001

Source: World Economic Forum. The Global Enabling Trade Report, 2012.

Conclusion

16. Benin’s external position has deteriorated recently in association with a moderate misalignment of the real exchange rate and challenges with external competitiveness. Survey-based competiveness indicators point to the necessity of improving the country’s competitiveness and institutional capacity. Sustained capital and financial account inflows will depend on consolidating recent successes in macroeconomic management and reinforcing efforts toward structural reform.

Figure 6.
Figure 6.

Benin: Most Problematic Factors for Importing

(Percent of responses)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A001

Source: World Economic Forum. The Global Enabling Trade Report, 2012.

Appendix IV—Benin: Risk Assessment Matrix1

article image
1

Poverty declined from 37.2 percent in 2006 to 35.2 percent in 2009, but it is estimated to have risen to 36.2 percent in 2011 (2011-15 PRSP). Benin is ranked 167 out of 187 countries in the 2011 Human Development Index.

2

IMF Country Report No. 12/59.

3

The performance criteria and quantitative benchmarks would have been met with large margins even without the one-off mobile phone license sale.

4

Medium-term projections include assumptions on a return to a private-sector led cotton sector by the 2014/15 campaign and a resumption of the IVP in the near term.

5

IMF Country Report No. 12/99.

6

The key obstacles to doing business were enforcing contracts, paying taxes, and protecting investors.

7

Benin: Joint Staff Advisory Note on the Poverty Reduction Strategy Paper, IMF Country Report No. 11/312.

8

This endeavor initially involves conducting six pilot country studies, of which Benin is the first pilot.

9

Risks are mitigated by the small share of deposits held by these banks.

1

This annex was prepared by Kevin Wiseman.

2

A hectare equals 2.47 acres.

1

This appendix was prepared by Aleksandra Zdzienicka.

2

The equilibrium current account balance (CAB) is estimated using a fixed effects panel specification for a panel of 184 countries over the period 1973-2011. The preferred specification includes the following explanatory variables: growth per capita in relative terms; oil balance; fiscal balance; net foreign assets (NFA); and foreign aid inflows, all as a percentage of GDP. The model has been estimated using a generalized method of moments (GMM) estimator. Data are taken from the IMF’s WEO.

3

Benin’s trade elasticity is estimated at -0.231.

4

The model specification includes the following fundamentals: terms of trade; relative productivity computed as GDP per working population; remittance inflows as a percentage of GDP; and oil balance. The inclusion of remittances as an explanatory variable improves the overall fit of the model.

1

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path discussed in this report (which is the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding this baseline. The RAM reflects staff’s views on the source of risks and overall level of concerns as of the time of discussions with the authorities.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Benin: 2012 Article IV Consultation and Fourth Review Under the Extended Credit Facility Arrangement—Staff Report; Staff Supplements; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Benin
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2013: Issue 009
Publisher:
International Monetary Fund
ISBN:
9781475592917
ISSN:
1934-7685
Pages:
146
DOI:
https://doi.org/10.5089/9781475592917.002
Figure 1.

Benin: Macroeconomic Performance Vis-à-Vis Peers, 2006–12

Benin: Service Sector Share, 2011

(Percent of GDP)
Figure 2.

Benin: Recent Economic Developments, 2007–2012

Benin: Debt-to-GDP Ratio, Selected LICs

(Percent)
Figure 3.

Benin: Selected Fiscal Indicators, 2011–12

Benin: Total Revenue, 2011–12

(Billions of CFA francs)

Cotton Production and Economic Activity

World Cotton Price in CFA Francs
Figure 1.

Benin and WAEMU: Effective Exchange Rates, 1995–2011

(2000=100)
Figure 2.

Benin: Current Account Balance, Excl. Grants, 1990–2011

(Percent of GDP)
Figure 3.

Benin: Equilibrium and Real Effective Exchange Rates, 1990–2011

(2000=100)
Figure 4.

Benin: The Most Problematic Factors for Doing Buisness

(Percent of responses)
Figure 5.

Benin: Most Problematic Factors for Exporting

(Percent of responses)
Figure 6.

Benin: Most Problematic Factors for Importing

(Percent of responses)