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

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.