Recent developments

After two years of economic slowdown, activity in Benin accelerated in 2011 as growth reached 3.5% up from 2.6% in 2010. Economic growth was driven by a revival in agriculture, notably higher production of cotton, and in construction and public works activity. It is worth recalling that the economy experienced several shocks in 2011 that hindered the achievement of higher growth. Headline inflation rate remained under control at 2.7 percent below the 3-percent convergence criterion of the West African Economic and Monetary Union (WAEMU). The current account deficit widened in 2011, from 8.2 percent in 2010 to 10.3 percent in 2011 due to a sharp drop in cotton exports. Improved capital account balance and foreign investment contributed to limit the overall balance of payments deficit to 4.9 percent of GDP. At end-2011, the risk of a debt crisis remains low, as total public debt ratio stood at about 30 percent of GDP thanks to a prudent debt management policy.

Activity in 2012 has been adversely affected by the petroleum price shock in the informal sector in January 2012, following the reduction of petroleum subsidies in Nigeria. As staff explain, higher prices of informal fuel spread to transportation and food prices. Headline inflation shot up subsequently and stood at 6 percent in January-July 2012. It is expected to remain around that level through year-end. Growth projections for 2012 had to be revised downward to 3.5 percent from 4.3 percent initially.

My authorities have continued to maintain a strong fiscal discipline in 2012. Expenditures were kept within the program envelope. Furthermore, the social spending targets were met thanks to the implementation of a better monitoring system. Revenues largely exceeded targets thanks notably to improved tax and customs administration and the sale of a 3G mobile phone license. As a result, the basic primary balance in the first quarter and the first half largely exceeded their respective targets by more than 1.5 percentage point of GDP, thereby strengthening fiscal buffers. It is worth stressing that the primary balance targets were still met when receipts from the mobile phone license are excluded. My authorities reviewed all tax and customs exemptions and have adopted an action plan for implementing the recommendations of the review. There has been little progress on the modernization of the tax and customs administration due to delays in external assistance disbursements by donors. In order to avoid any further delays in the implementation of these reforms, the government will fund related costs out of its 2013 budget.

In the financial sector, the banking sector remains well-capitalized, with ten out of the 12 banks in Benin having complied with the regional decision to increase minimum capital. One of the noncompliant banks was placed under provisional administration and options are being explored regarding the handling of the other nonconforming bank. Earlier this year in March 2012, my authorities closed one bank that lost its license in 2009 and was under provisional administration since then. The regulation and supervision framework was strengthened with the adoption of the two legislations on the decentralized financial structures and banking regulation by the National Assembly in January 2012. As a result, all decentralized financial structures, notably microfinance institutions are now under the supervision of the central bank and the regional banking commission. My Beninese authorities will continue collaboration with regional institutions for the restructuring of two banks in financial distress and will monitor closely the microfinance institutions in difficulty.

The implementation of the reform agenda continued to advance. In particular, progress has been made toward the adoption of the civil service reform strategy with the completion of all the preparatory studies, notably that on the remuneration of civil servants in July 2012. The reform strategy is now expected to be adopted by year-end. Progress is being made with respect to public workforce management with the finalization of the pilot phase of database of civil servants. With the assistance of the World Bank, this database will be extended from the Ministry of Economy and Finance to the Ministry of Labor and Civil Service. As regards the pension reform, the related draft law was transmitted to the National Assembly in September 2012.

In monitoring and evaluating past reforms, my authorities took important decisions to address weaknesses identified in their implementations. In particular, they decided to suspend the framework agreement governing the cotton sector in March 2012 and took over the management of the sector for the 2012/2013 campaign. This decision was motivated by reports of operational failures in the implementation of this framework, which did little to promote the development of cotton production. My authorities intend, in consultation with the private sector, to develop by the beginning of the 2014/2015 campaign a new framework that will promote an integrated development of the cotton sector by production zone, with the objective of effective liberalization, enhanced competitiveness and greater governance transparency. An innovation will be the establishment of a regulatory authority to ensure the sector functions according to the principles set in the new framework. In this framework, the government will continue to provide critical services in areas such as organizing and providing support to producers, monitoring the provision of production inputs and gathering statistical information. It is worth indicating that there is no direct fiscal cost of the government’s involvement in the cotton sector, as the costs related to cotton campaign is financed through the banking system, whose loans are being repaid with the proceeds of the harvest.

My authorities also suspended in May 2012 the import-verification program (IVP) at the Port of Cotonou. As indicated in the Letter of Intent and explained in the report, the decision was driven by low technical performance, excessive fees for scanning and tracking services, and delays in container processing since the inception of this program; which led to a significant loss of competitiveness for the Port of Cotonou, as evidenced by the greater preference by shippers and importers to unload and process their cargo at neighboring ports. My authorities will adopt new modalities for implementing selected IVP services following consultations with the private sector in Benin and neighboring countries making use of the port. It is worth stressing that the one-stop window at the port introduced last year continues to operate effectively and revenue performance has not been affected by the suspension of the IVP.

Program for the remainder of 2012 and for 2013

My authorities will continue the implementation of their economic and financial program to achieve their macroeconomic stability and sustainable development objectives, consistent with the growth and poverty reduction strategy updated last year. They remain committed to the macroeconomic framework supported by the Extended Credit Facility arrangement.

As staff rightly recalls, Benin is a net food and fuel importer and cotton exports represent a large share of the country’s total exports, which makes it vulnerable to international commodity price volatility and global demand developments. In addition, Benin has a long and close trading relationship with Nigeria, which subjects its economy to major economic developments in its neighbor. Assuming an improved external environment and continued implementation of reforms envisaged in the program, growth rate is projected to accelerate slightly to 3.8 percent in 2013, and 4.5 percent over the medium-term driven by higher agricultural production and infrastructure construction. Inflation should drop below the regional convergence criterion and current account deficit in 2012 and 2013 should narrow as a result of higher volume of cotton exports.

My authorities will pursue a prudent fiscal policy with the objective of preserving fiscal sustainability and strengthening fiscal buffers. They will continue to maintain discipline with respect to current expenditure and the wage bill in particular while accelerating public investment execution. Priority social expenditure will be monitored closely to reach the related end-2012 program target. They will submit a draft 2013 budget that is consistent with the Fund-supported program. They are committed to implement the recommendations of the December 2011 IMF technical assistance mission. Progress in the modernization of IT systems at the customs and tax administrations together with strengthened cooperation between these two administrations are expected to yield higher revenues.

Next year should mark the completion of many of the abovementioned structural reforms. In addition, my authorities intend to pursue reforms to improve the business climate, upgrade infrastructure and diversify the economy. In order to further strengthen its financial system supervision framework, my authorities will also ensure the promulgation of three regional legislations on banking regulation, combating the financing of terrorism and sanctions for violations involving checks, bank cards and other electronic payment methods.

Conclusion

To conclude, performance under the ECF at end-March and end-June 2012 has been satisfactory. Going forward, my authorities remain committed to maintaining sound macroeconomic policies and pursuing the implementation of critical structural reforms. My authorities continue to count on donors’ support and technical and financial assistance in this regard. As in the past, my authorities will take any further measure that may become appropriate, in consultation with the Fund, for achieving program objectives. In light of the program performance and the continued commitment to the program, I will appreciate the Executive Board’s support of the completion of the fourth review under the ECF and Article IV consultations.