1. The ruling party recently won legislative elections, which gives the authorities a strong mandate to pursue growth-oriented policies. The long-delayed legislative elections held in July 2013 were peaceful, and the ruling party secured two-thirds of the seats. In a sign of policy continuity, the prime minister and most of the cabinet were reappointed. The electoral victory gives the authorities the mandate to pursue policies that, in the view of the public, would enhance economic growth and make it more inclusive. Thus, the authorities’ main policy challenges are to maintain fiscal sustainability, step up investment while maintaining debt sustainability, and meet the public’s strong expectations of sharing the fruits from higher economic growth.


1. The ruling party recently won legislative elections, which gives the authorities a strong mandate to pursue growth-oriented policies. The long-delayed legislative elections held in July 2013 were peaceful, and the ruling party secured two-thirds of the seats. In a sign of policy continuity, the prime minister and most of the cabinet were reappointed. The electoral victory gives the authorities the mandate to pursue policies that, in the view of the public, would enhance economic growth and make it more inclusive. Thus, the authorities’ main policy challenges are to maintain fiscal sustainability, step up investment while maintaining debt sustainability, and meet the public’s strong expectations of sharing the fruits from higher economic growth.

Recent Developments, The Outlook, and Risks

1. The ruling party recently won legislative elections, which gives the authorities a strong mandate to pursue growth-oriented policies. The long-delayed legislative elections held in July 2013 were peaceful, and the ruling party secured two-thirds of the seats. In a sign of policy continuity, the prime minister and most of the cabinet were reappointed. The electoral victory gives the authorities the mandate to pursue policies that, in the view of the public, would enhance economic growth and make it more inclusive. Thus, the authorities’ main policy challenges are to maintain fiscal sustainability, step up investment while maintaining debt sustainability, and meet the public’s strong expectations of sharing the fruits from higher economic growth.

2. Macroeconomic performance has improved from fifteen years of crisis (Figure 1 and Text Table 1). Real economic growth accelerated from almost 4½ in 2010–11 to 5.9 percent in 2012, reflecting dynamism in agriculture, mining, construction, and public works. The recent pace of economic growth reflects in part a recovery from the protracted political, social and economic crisis from the early 1990s through mid-2000s. Togo’s GDP per capita declined by about 17 percent during 1997–2002, and the recovery that started in earnest in 2009 has not yet fully made up for the lost ground. Poverty remains high, at about 60 percent of the population, and growth has not been inclusive, as income distribution worsened during 2006–11.1 Inflation eased to an average 2.6 percent in 2012, on account of rising staple food production and declining import prices following a pick-up in 2011 due to adjustments in energy prices. The current account deficit widened in 2011–12 to 11.8 percent of GDP, primarily as a result of higher imports of fuels and goods for public and private investment.

Figure 1.
Figure 1.

Togo: Historical Perspective, 1990–2011

During the last 20 years, tangible progress has been made towards improving MDG indicators, although several goals remain out of reach.

Citation: IMF Staff Country Reports 2014, 038; 10.5089/9781475574975.002.A001

Togo: Millenium Development Goals, 1990–2012

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Sources: Togolese authorities; World Bank; and IMF staff calculations and estimates.
Text Table 1.

Togo: Selected Economic Indicators, 2010–14

article image
Sources: Togolese authorities and IMF staff estimates and projections.

Includes arrears and state-owned enterprises external debt.

3. Most of the staff advice in the context of the 2011 Article IV consultation remains relevant today (Box 1). Wide ranging structural reforms and fiscal conservatism were implemented up until the HIPC completion point in December 2010. Revenue and public financial management (PFM) reforms have slowed and debt management has weakened since then. The financial sector strategy was approved but its implementation remains limited. Only two out of four banks have been privatized and actions are needed to tackle vulnerabilities in other banks. Reforms in the mining, telecommunications, and energy sectors have progressed slowly under resistance from vested interests. More recently, the Ministry of Economy and Finance approved a public financial management (PFM) reform plan and its implementation has started to bear fruits.

Main Recommendations from the 2011 Article IV Consultations

Staff emphasized the following areas as key to maintain macroeconomic stability, sustain growth, and reduce poverty in the medium term:

  • Adopt and implement the financial sector development strategy and speed up bank privatization.

  • Strengthen public financial management.

  • Improve debt management capacity and adopt a financing strategy relying on highly concessional loans and grants.

  • Reform the phosphate, telecommunication and energy sectors, where state-owned enterprises dominate. The World Bank plays a key support role in this area.1

  • Improve the business environment and boost investment in physical and human capital.

1 Since mid-2011, authorities took some steps to reform these sectors. In mining, Togo became a full member of the Extractive Industry Transparency Initiative (EITI) and the authorities are now trying to identify a consortium that could develop the new deposits of carbonated phosphates. In the telecom sector, a new Telecommunication Act was approved, opening the sector to more competition. In the electricity sector, a new Managing Director of the state-owned distribution company was selected following a competitive process in December 2011.

4. Economic growth is expected to soften to around 5½ in 2013. Even though growth has been supported by the agriculture, manufacturing, and construction sectors, economic activity was somewhat affected by irregular rains in mid-2013, lackluster transit trade (in part due to resumption of normal activity in other regional ports), and political uncertainties earlier in the year (Figure 2). The current account deficit would improve slightly to 10.6 percent of GDP, because of lower global import prices.

Figure 2.
Figure 2.

Togo: Recent Developments and Short-Term Projections, 2009–2013

Citation: IMF Staff Country Reports 2014, 038; 10.5089/9781475574975.002.A001

Sources: Togolese authorities and IMF staff estimates and projections.

5. In the medium term, growth is expected to rebound to about 6 percent a year (Figure 3), under the impulse of regional growth and trade, more public and private investments in infrastructure, FDI in mining, and the impact of earlier reform in cash crop markets. The primary domestic fiscal balance would become positive to anchor reductions in the debt burden, and the overall fiscal balance would gradually be reduced to limit new debt accumulation. However, mainly reflecting imports of investments and intermediate goods, the current account deficit is projected to remain high, only narrowing to 9.2 percent of GDP by 2016.

Figure 3.
Figure 3.

Togo: Medium-Term Outlook, 2007–18

Citation: IMF Staff Country Reports 2014, 038; 10.5089/9781475574975.002.A001

Sources: Togolese authorities; and IMF staff estimates.

6. While the main risks to the outlook are domestic, the Togolese economy is still vulnerable to a significant growth slowdown in its trading partners (Appendix I). Local and presidential elections in 2014 and 2015, respectively, could generate policy slippages; entrenched interests may resist reforms; and limited capacity may slow policy implementation. Without prompt corrective action to address emerging weaknesses in the financial sector, macroeconomic stability could be undermined. Continued policy inaction in the energy sector could negatively affect growth and the budget, while ill-conceived public-private partnerships could entail fiscal liabilities. Given its openness, the economy is vulnerable to shocks in export demand due to growth slowdown among its trading partners.

Policy Discussions

7. Discussions focused on policies required to restore fiscal discipline and move to a stronger, more sustainable and inclusive growth. There was agreement to reinvigorate in structural reforms that stalled after the HIPC completion point. Against this background, the discussions were organized around three main themes: (i) restoring fiscal policies to a more sustainable path; (ii) moving to stronger, more sustainable, and inclusive growth; and (iii) strengthening the financial sector and external stability. There was broad agreement between the authorities and staff on the issues facing Togo and the policies to address them, though views sometimes diverged on the pace and feasibility of needed actions. To assist them meet these challenges, the authorities requested Fund support in implementing their economic reform program.2

A. Restoring Fiscal Policy to a More Sustainable Path

Fiscal policy deteriorated since end-2010….

8. Fiscal deficits and public debt levels have increased in 2011 and 2012. The overall fiscal deficit more than doubled to 7.2 percent of GDP during 2012 largely on account of the adoption of an expansionary budget in the context of planned elections. At the same time, financing from privatization and budget support fell well short of budget plans and, as fuel subsidies rose to 2.1 percent of GDP, unpaid bills accumulated at end-2012. Meanwhile, the public debt-to-GDP ratio increased and is estimated at around 45 percent of GDP at end-2012, including on account of government recognition of old domestic liabilities of bankrupt public enterprises and arrears to pension funds.

9. The 2013 approved budget was also expansionary and subject to risks that eventually materialized. Unrealistically high capital spending, allocations for legislative and municipal elections and higher wages contributed to an overall balance deficit of almost 11 percent of GDP in the adopted budget. In addition, financing was predicated on unrealistically high privatization proceeds. Budget execution pressures built up immediately, as bank privatization did not yield the projected revenue, fuel subsidies over the first quarter absorbed almost the entire allocation for the year, and the anticipated external financing did not materialize. Meanwhile, additional outlays were required to fully finance election operations which saw cash flow pressures increase further by mid-2013.

…but the authorities’ now intend to follow a strong adjustment path

10. In the face of these challenges, the authorities adopted a revised 2013 budget and subsequently took further action to keep the fiscal deficit under control. The revised budget, adopted in consultation with Fund staff, is more realistic as it provides for lower capital expenditures, better aligned with execution capacity, higher allocations for fuel subsidies, and more realistic privatization revenue estimates.3 Staff advised the authorities that, since neighboring countries are adopting pricing policies yielding higher fuel prices and enforcement efforts have been strengthened, smuggling to Togo is now reduced which results in higher official imports and subsidy outlays. To curb the heavy subsidy bill, staff proposed a phased increased in fuel prices—except for kerosene, which is mostly consumed by the poor—by 5 percent in September 2013, and in January 2014, with accompanying targeted measures to protect the most vulnerable.4 The authorities are instead inclined to adopt temporary exemptions on income tax for transporters and on imports of selected essential foodstuff. They also plan to expand the school-feeding program. These measures will be finalized during consultations with domestic stakeholders.

11. Staff proposed that fiscal policies should aim at reducing debt distress vulnerabilities and be anchored by an improvement of the domestic primary fiscal balance. A return to positive territory would allow the authorities to generate the fiscal space to meet their infrastructure needs and implement their social policies, while reducing the debt burden. At the same time, the overall fiscal deficit should be carefully monitored, and overall debt policies guided by close adherence to a strengthened medium-term debt strategy (¶20) and a regular update of the debt sustainability analysis.

12. The authorities agreed with the approach proposed by staff to define their fiscal stance. Their current policies thus target a return to positive primary domestic fiscal balances and the reduction of the overall fiscal deficit in 2014 and the medium term. Their fiscal objective is to enhance fiscal sustainability by reducing the overall deficit to around 5¼ percent of GDP in 2014 and below 4 percent by 2016, while returning to a balanced primary domestic balance in 2014 and to a positive primary domestic balance slightly below 2 percent by 2016. To signal their commitment to fiscal prudence, the authorities chose to frontload fiscal adjustment, as the deficit reduction in 2013 accounts for one-third of the projected adjustment during 2013-16.

13. The projected fiscal adjustment is predicated on the implemention of the authorities’ policy objectives. The reduction in current spending reflects the objectives to cut back on oil subsidies during 2013–2015—as discussed above—and to limit the nominal growth of the wage bill to somewhat below the nominal growth of GDP in the medium-term. On the revenue side, the ongoing reforms in revenue administration are expected to usher a continuation of improvements in revenue collection (see below). However, the deficit levels for 2014 and beyond could still raise financing challenges. The possible adoption of a Fund-supported program could help catalyze development partners’ budget support, which, together with recourse to the regional financial market, would help close projected financing gaps. Staff emphasized that reconciling fiscal sustainability with developmental and social objectives will require significant improvements in public expenditure planning and efficiency, and continued efforts to enhance revenue collection.

14. While noting the considerable pressures they are facing from unions on wage increases, the authorities reiterated their intention to resist the pressure, except for those portions that can be accommodated within the current medium-term spending envelope. Once again at the beginning of the school year, the unions demanded wage, benefits, and employment increases. Staff emphasized the importance of moving away from ad-hoc yearly negotiations and instead adopting a comprehensive strategy of public sector employment and remuneration that is consistent with the authorities’ medium-term fiscal framework and sector strategies, particularly for education and health. Staff cautioned the authorities that, if wage demands were to be accommodated beyond the current allocations in the framework, the appropriate first-best policy adjustment would be to lower other budget expenditures.

15. The authorities concur with the staff that the progressive elimination of fuel subsidies would be a key driver of any fiscal adjustment. However, they are concerned that the current political and social situation is too tense for drastic changes. Staff pointed to the example of Ghana which has recently eliminated fuel subsidies by increasing prices and reestablishing an automatic adjustment mechanism that aligns future changes with the fluctuation of world oil prices and exchange rates. The Togolese authorities now expect to be in position to reduce fuel subsidies by about 1 percent of GDP in 2014, after they have reached an agreement with unions on pay packages. While staff agreed that fuel subsidies can be eliminated only gradually, it underscored the importance of strategically disseminating information to the public on their fiscal cost and regressive impact, as well as the opportunity cost in terms of foregone social and infrastructure spending.

16. There was some divergence of views regarding the pace of scaling up investment spending. The authorities’ concern is that the 1990s crisis has left a legacy of underinvestment in infrastructure that is holding back potential growth. They argued that the protracted and deep nature of the crisis has left them with a wider infrastructure gap than other countries in the region, and that only by significantly scaling up investment can they accelerate economic growth and development. Staff emphasized that prioritizing and effectively executing capital expenditures through enhanced planning and project implementation capacity is more important than increasing allocations for project spending. Therefore, it was prudent to create more fiscal space and progressively increase capital spending in line with improvements in the authorities’ capacity to plan and execute projects. Staff noted that the practice of issuing guarantees on the scheduled amortization of bank pre-financing of government contractors for infrastructure projects has reduced transparency and effectively tied down large portions of allocations for investment spending in future years, thus curtailing room to prioritize in future budgets.

17. The authorities intend to raise tax revenue further. In the short term, gains in revenue collections can be sustained by increased reliance on risk-based assessment of imports and tighter monitoring of entitlements to exemptions. The authorities’ plan to sustain their revenue effort in the medium term hinges on the successful launch of the revenue authority (Office Togolais des Recettes—OTR). Once established, the OTR should deliver efficiency gains by hiring new and more qualified personnel, shedding excess staff, and exploiting synergies among domestic- and import-related tax functions under a common strategic direction. Staff noted that pushing ahead with ongoing and programmed reforms in the tax and customs administrations remains important, notwithstanding the on-going creation of the OTR.

18. Better public financial management (PFM) should improve government efficiency and transparency. Implementation of the authorities’ medium-term expenditure framework will require careful alignment of policies with reform priorities. Staff noted that the execution of the authorities’ PFM reform plan is experiencing some delays related to both limited capacity and resistance from some administrative units. The authorities also noted that, in the low capacity environment of a fragile country, it is often difficult to reach consensus of reform priorities and align all government units to effectively implement them. Staff and the authorities discussed a number of measures to reinvigorate the PFM agenda. These include: (i) first steps towards establishing a single treasury account; (ii) a more effective cash projection and management system at the treasury; and (ii) better prioritization, execution and monitoring of investment projects.

19. The debt sustainability analysis (DSA) shows that Togo remains at moderate risk of debt distress (Supplement II). There has been considerable debt accumulation over the past two years as the fiscal situation deteriorated. The increase in external debt has been mainly driven by new loans from multilaterals and non-Paris Club bilateral creditors. In light of the projected increase in public investments, Togo’s external public debt is expected to increase in the near future, accumulating to around 22 percent of GDP by 2016. Under baseline assumptions, which are more favorable than historical trends, overall debt indicators are projected to remain below the relevant thresholds in the 20-year period. Nonetheless, there is need to closely monitor the trajectory of public debt, with increased focus on debt contracted from domestic sources, given the country’s low debt management capacity.

20. Strengthened debt management and policies are essential to ensure debt sustainability and reduce vulnerabilities. The authorities and staff discussed options to raise the functional profile and capacity of the Public Debt Directorate, including its human and physical resources. The authorities currently compile an annual debt strategy, but this should be strengthened to establish a medium-term strategy that is aligned with the budget process and the medium-term expenditure framework. Staff pointed out that under present circumstances, there were risks of losing control over debt management and new debt, unless the present deficiencies are addressed in a forceful manner. The authorities shared the view that debt management was in need of substantial improvements and asked for additional technical assistance.

21. In the staff’s view, Togo should continue to borrow on concessional terms until its debt management capacity has considerably improved, and closely monitor domestic debt dynamics. The DSA shows that Togo remains at moderate risk of debt distress, combined with low institutional capacity. At around 45 percent of GDP, its total public debt at end-2012 is above the average level for relevant comparator groups in Sub-Saharan Africa, i.e., fragile states that benefitted from HIPC (39.1 percent of GDP) and low-income countries (34.4 percent of GDP). The authorities emphasized that concessional financing is not available in amounts sufficient to meet their urgent development needs. Thus, they are exploring with potential lenders and development partners the possibility of contracting financing packages with a fully concessional grant element of 35 percent or higher that are also consistent with the currently projected DSA.

B. Moving to Stronger, More Sustainable, and Inclusive Growth

Growth has not been inclusive…

22. Poverty reduction requires sustained high growth but also implementation of specific policies to share its benefits more broadly. Poverty in Togo is high and its human development index remains low. While the recent acceleration of economic growth resulted in a reduction of about 3 percentage point in poverty incidence to about 60 percent during 2006–2011, income distribution worsened, as real consumption in the lowest four deciles actually declined (Appendix III and Text Figure 1.). Poverty has a strong geographical connotation, being highest in rural areas and the further one goes from the economically more vibrant coastal areas. In fact, poverty in rural areas increased during this period, while internal migration contributed to about a third of the total reduction in poverty. These findings suggest that policies to reduce poverty should focus on measures to enhance productivity in rural areas and market access, and targeted cash transfers. Also, given the importance of internal migration as a potential escape route from poverty, urban planning could take a more prominent role in the authorities’ poverty reduction strategy. Policies should focus on improving urban and peri-urban transportation, and the expansion of primary education and health services.

Text Figure 1.
Text Figure 1.

Togo: Growth Incidence Curve, 2006-11

Citation: IMF Staff Country Reports 2014, 038; 10.5089/9781475574975.002.A001

…and faces significant bottlenecks

23. Growth is hampered by a number of major obstacles. Chief among these are infrastructure gaps (especially energy and roads), high telecommunication costs; and—more generally—a weak business environment. While investing in roads has been a budget priority since 2010, reforms to improve energy supply and telecommunication services have hardly gone beyond early planning stages. Electricity generation costs are high, utilities inefficiently run, and Togo largely depends on energy imports, exposing it to cut off risks (see below). Survey-based structural indicators suggest that addressing infrastructure bottlenecks and improving the business climate remain crucial to unlocking Togo’s growth potential (Appendix IV). Although the financial sector has deepened in the 2000s, concentration of the banking activity in Lomé prevents a wider reach of the sector to the Togolese society, especially in rural areas (Appendix II).

24. The new poverty reduction strategy paper (PRSP) aims at making growth stronger and more inclusive. The Strategy to Accelerate Growth and Promote Employment (Stratégie de Croissance Accélérée et de Promotion de l’Emploi—SCAPE—2013–2017) was adopted by the government in August 2013. It was finalized after extensive consultations with stakeholders.5 It builds on experience with the first PRSP (2009–11). Policies and reforms are envisaged around five strategic pillars: (i) developing sectors with high growth potential; (ii) strengthening economic infrastructure; (iii) developing human capital, social protection, and employment; (iv) strengthening governance; and (v) promoting participatory, inclusive, and durable development. The SCAPE includes plans to strengthen institutions for setting strategic priorities, and monitoring and evaluating programs.

Decisive action to raise growth will be required on a number of fronts…

25. So far, the authorities’ efforts have focused on improving road and transport infrastructure. Given Togo’s location as a regional hub, the authorities view investment in transportation infrastructure as critical to increase potential growth. A number of large projects are already advanced in transportation. In addition to large road investments, airport and port capacity will double by end-2014. The authorities have also recently established the Togo Invest Corporation (TIC)—a fully-owned state holding company with capital of CFAF 20 billion (0.9 percent of GDP)—to launch major rail and transportation projects along the North-South axis, mostly via public private partnerships. Staff cautioned the authorities that this carries the high fiscal risks typically associated to PPPs, as well as economic risks deriving from typically long gestation periods. In addition, the project carries administrative risks, as it is unclear how policy and operational responsibilities would be shared between ministries in charge of infrastructure development and TIC—thus undermining already limited ministerial capacities. Risks would be reduced if Togo could develop the institutions and legal framework to manage PPPs before the TIC starts operations. The authorities argued that in the short run risks will likely be limited given that TIC’s main activities in the coming year will be to conduct technical feasibility studies.

26. While staff agreed that transportation infrastructure should be a priority, it noted that economic growth should be supported more broadly, to include reforms in the telecommunications and energy sectors, and the business environment more generally. The cost of telecom services is among the highest in the world, and access is still limited and marred by frequent interruptions. It will be important to accelerate the implementation of the telecom strategy and to liberalize the sector by allowing more competition.

27. A comprehensive reform of the power sector to address a major bottleneck to growth is overdue. Staff emphasized that the electricity sector is facing a structural financial deficit and that it is already constraining economic growth. Given its limited domestic generation capacity, about 85 percent of Togo’s power is imported. On current investment plans, such shortfalls will only become larger and are likely to develop into the most important constraint to growth. High input costs compared to tariffs, operational inefficiencies, over-reliance on imports, and a lack of adequate strategic planning have led to supply shortfalls. Peak demand is met by expensive fuel oil-based generation supplied by an independent power producer. The sector is accumulating arrears to suppliers, mostly to other electricity companies in neighboring countries. This exposes Togo to the risk that these countries—which are themselves facing shortages—cut exports. At the same time, the largest payment backlog toward the distribution company is due by public sector entities.6

28. The authorities concurred with the staff analysis, but pointed out that there is no short-term solution. While staff understands that this is a complex sector, it also noted that several measures could be taken in the short-term and still have a positive impact. As a priority, staff argued that it is important to break the cycle of arrears accumulation. This can be achieved via a public information campaign aiming at making the public aware of the main financial and supply constraints in the sector, with emphasis on the need to eliminate payment and service backlogs, and by a sanctions policy allowing to cut off service to public sector entities. The authorities, fearing backlash in case essential public services are interrupted, preferred to devise a repayment plan after arrears are verified. It is thus crucial that the authorities make good on their intention to settle a portion of government arrears in 2014 and that more realistic budget allocations are made. A gradual move to cost-recovery level tariffs in the medium term is unavoidable, including to attract foreign investors, provided other areas are addressed concurrently.

29. There is significant scope for further improvement in the business climate (Appendix IV). Despite progress made in a number of areas, e.g., creation of a one-stop shop for business registration (which considerably reduced the time required to complete this procedure to 24 hours), Togo still ranks poorly in the 2013 Doing Business survey (156th out of 185 countries). Reform efforts are especially needed in the areas where Togo is still lagging well behind comparator countries, such as protecting investors’ rights, enforcing contracts, and accessing financing. The authorities recently awarded a contract for the operation of a one-stop window for foreign trade. When fully operational, this is expected to facilitate the flow and transit of goods, and expedite customs and border controls.

…as well as to make growth more inclusive

30. Staff welcomed the authorities’ focus on inclusiveness under the new development strategy. However, staff noted that growth relying on capital-intensive natural resource projects is unlikely to create a lot of jobs and benefit the rest of the economy. Conversely, growth relying on higher farm productivity and broader rural job opportunities is likely to generate additional demand and to lead to faster poverty reduction. Financial sector stability and development and financial inclusion are also important elements of an inclusive growth strategy (see below).

31. The authorities are determined to alleviate poverty via economic growth and measures to foster employment and micro-productive activities. Their strategy to promote inclusive growth hinges on measures creating opportunities for gainful self-employment, and the gradual expansion of the pilot school feeding program. Staff noted that given the strong geographical and sectoral profile of poverty, expanding conditional cash transfers and the school feeding program would appear good ways to deliver assistance to the poor. School feeding programs, in particular, have the added advantage of improving forward and backward linkages within the rural economy. However, the authorities fear that cash-based social programs may be prone to abuse and could create a culture of dependency.

C. Strengthening the Financial Sector and External Sector Stability

Despite increased financial deepening and overall financial stability…

32. The financial sector in Togo has experienced considerable financial deepening, and Togo compares favorably to its WAEMU peers. Since 2007, credit- and deposits-to-GDP ratios indicate significant improvements, and more than a 100 bank branches have been opened. However, lack of wide access to credit in spite of this growth remains a challenge (Appendix II). From the deposit perspective, low level of savings is a major constraint. On the credit supply side, lack of competition among banks and concentrations around Lomé prevent financial services from reaching wider public, especially in rural areas. The microfinance sector plays an important role where traditional banking services do not function efficiently, but the sector is plagued by unregulated activity.

33. The microfinance sector has grown very rapidly. Between 2009 and 2012, deposits and loans increased by 70 percent and 80 percent, respectively, and the number of clients increased from about 0.7 to 1.2 million. At end-2012, the microfinance’s share of deposits was 16 percent of the financial system. The microfinance plays a critical role in financial inclusion especially among the poor and the rural population, covering a large number of households. Togo’s microfinance sector plays a relatively more important part in the domestic economy than those in neighboring countries, as evidenced by the higher financial deepening indicators and relatively higher proportion of population covered by the sector.

…actions are needed to tackle vulnerabilities in some banks

34. The overall situation of the banking system appears stable, but aggregate numbers hide the weaknesses of individual banks. While NPLs have declined significantly over the past five years and system-wide capital adequacy levels are strong, substantial differences among banks exist. Stress-tests conducted recently suggest the system is strong according to traditional metrics of liquidity and solvency, but they also show that it is imperative to give due weight to risks stemming from highly concentrated loans and deposits’ short-term bias.

35. The rehabilitation of the banking sector remains an unfinished business. Three major state-owned banks (BTCI, UTB and BIA-T) were recapitalized in 2008 through a securitization process. These institutions received about US$200 million in new government securities in exchange for non-performing loans which were to be recovered by an asset recovery company called Société de Recouvrement du Togo (SRT). Strengthening the recovery effort could result in important revenue for the government but, so far, only limited amounts have been recovered. As time passes, the recovery rate on the portfolio diminishes, reducing its value as a government asset7 The bank privatization process has led to the successful sale of two out of four banks, and an unsuccessful attempt in early 2013 to privatize BTCI.

There is need to improve the regulatory framework and institutions

36. There are considerable systemic weaknesses in the bank supervision framework in the WAEMU region. Banking supervision relies on a dual mandate between the authorities in the WAEMU and the Ministry of Finance. The WAEMU is responsible for supra-national supervision of banks and can recommend recapitalization or resolution of weak institutions but the final decision relies on the national Ministry of Finance.8 This structure can complicate the decision-making process and promote moral hazard. Furthermore, banking regulation in the WAEMU is relatively lax when compared to international standards. Non-performing loans are required to be provisioned only after 180 days whereas international norms prescribe 90 days, and banks in the WAEMU are allowed to often operate below the minimum capital requirements for extended time before they are intervened. Delays in policy implementation due to complex regulatory framework, combined with ex ante relatively loose financial regulation, result in a financial system prone to systemic risks. While agreeing with the staff views, the authorities noted that these issues should be addressed at a WAEMU-wide level.

37. Regulation of the microfinance sector needs to be improved. Prevalence of informal lending and institutional arrangements constrains effective supervision. There is a proliferation of small financial entities that operate without formal licenses or authorization. The supervisory infrastructure is ill-equipped to track and enforce licensing, and close illegal units. Currently there exist over 60 such microfinance entities. There is also need to rein in pyramid-type operations, which undermine financial and social sector stability.

38. The authorities and staff concurred that over the medium term policies should focus on enabling the financial sector to perform greater financial intermediation. Policies could include:

  • Adopting resolution strategies for problem banks. The authorities and staff agreed on the importance to take effective and swift corrective action to address the situation of institutions facing financial difficulties. There was agreement on the fact that the authorities would continue leading the financial sector towards an environment where the private sector increases participation through larger stockholding, and by carrying out the process of privatization of public banks.

  • Enhancing oversight and supervision of the micro-credit sector. The microfinance supervisor—the Cellule d’Appui et de Suivi des Institutions Mutualistes et de Coopératives d’Epargne et de Crédit (CAS-IMEC, a division of the MEF)—is grossly understaffed and needs significant institutional strengthening. An important first step would be to increase the staffing and enhance training in modern risk-based financial sector supervision. At the same time, it is important to close all unlicensed institutions, and take measures to prevent the establishment and development of pyramid-type structures. In the medium term, there will be need to promote the restructuring and consolidation of the microfinance sector.

  • Restructuring pension funds to become financially sustainable over the medium-term. Staff highlighted the importance of adopting one of the proposed options to eliminate the structural deficit of the public sector pension scheme (CRT) and to settle public sector arrears with both the CRT and the national social security fund (CNSS). The options for improving the financial situation of the CRT include: (i) raising the retirement age; (ii) progressively raising the contribution rate; and (iii) transferring social assistance payments (which have nothing to do with pensions) to the state budget. This would allow to reduce financial losses and to accommodate the increasing number of beneficiaries.

Improving external sector stability

39. An external sector stability assessment suggests that external sector risks are generally manageable (Appendix IV). Although export growth has accelerated significantly over the past five years, imports have grown even faster, mainly on account of investment goods for various infrastructure projects. Togo has had structural current account deficits for nearly two decades. Low savings relative to large investment needs imply continued deficits over the medium term, although they are expected to decline as new projects come on-stream. In the longer run, prospects are generally good for greater export growth given investment in mining-related activities and the large expansion of the port of Lomé. Inward FDI is expected to increase on account of improvements in infrastructure and the business climate. Remittances have remained an important contributor to the balance of payments.

40. Staff assessment of the real effective exchange rate (REER), using three standard methods, indicate that it is broadly in line with economic fundamentals. The REER has somewhat declined over the past three years (Text Figure 2.), largely reflecting the depreciation of the euro, to which the CFA franc is pegged. External reserves (pooled at the regional level) are ample, covering more than five months of imports. To reduce external vulnerabilities, Togo needs to implement prudent fiscal and borrowing policies, and increase non-price competitiveness. The authorities concurred with this assessment and noted that they are working with other development partners to address competitiveness issues. In particular, their reform efforts will focus on implementing the new investment code, supported by the adoption of implementing decrees, adopting a new mining code in line with EITI transparency standards, and developing a modern code for property titles.

Text Figure 2.
Text Figure 2.

Togo: REER and NEER, Jan.05-Aug.13 (2005 = 100)

Citation: IMF Staff Country Reports 2014, 038; 10.5089/9781475574975.002.A001

Staff Appraisal

41. Growth has picked up over the past few years on the back of reforms initiated under the previous ECF-supported program. The past five years have seen a reversal of declining per capita GDP levels that had plagued Togo over the previous 15 years. Growth has generally been broad-based, with agriculture, cement and clinker manufacturing, construction, and other services showing good performance, but it has not been inclusive. The medium term growth outlook is good, and the challenge is to sustain the momentum and make growth more inclusive, taking advantage of Togo’s unique location in the midst of some of SSA’s biggest and most dynamic subregional economies. Inflation would remain moderate. The authorities need to reinvigorate much-needed structural reforms that had stalled over the past two years in order to set growth on a sustainable path.

42. Staff welcomes the authorities’ renewed determination to address emerging fiscal problems in 2013 in order to set Togo on a sustainable debt path. Fiscal deficits and debt ratios have increased in recent years, reducing room for fiscal maneuver and raising sustainability issues. Restoring fiscal space and keeping low the risk of debt distress require lower deficits. Debt sustainability considerations call for strengthening of debt management and for further reduction of the fiscal deficit in the medium term. Greater revenue mobilization is needed to facilitate high priority spending on infrastructure, health, education, and agriculture. The proposed OTR would help reinvigorate revenue mobilization. At the same time, operational reforms in revenue administration should be deepened.

43. Reducing the fiscal deficit while addressing the country’s social and development needs will require improving public spending efficiency. Beyond reducing the cost of running the government and streamlining of government agencies, rationalization of expenditure and more cost-effective support to the most vulnerable segments of the population will be needed. In this regard, staff welcomes the authorities’ intention to phase out costly and poorly-targeted fuel price subsidies and to broaden and improve social safety nets. This will require strong political leadership to overcome vested interests, a well-orchestrated public information campaign, as well as good administrative capacity. It remains important to systematically address pressures on the wage bill and size of the public sector by defining a structural wage and employment reform.

44. There is need to have a determined effort to improve debt management. Debt management has weakened considerably since the HIPC completion point at end-2010. At the same time, debt levels have increased in part due to the government’s recognition of old liabilities. Consequently, careful monitoring of existing debt and rigorous implementation of a medium-term debt strategy will be needed to control the accumulation of new debt and bring current debt levels progressively down. In particular, the authorities should seek only new concessional external loans until there is a decisive improvement in their debt management capacity. While PPPs have the potential to unlock much-needed financing for infrastructure, the authorities will need to adopt a robust legal framework and improve their institutional capacity to ensure maximum benefits from such arrangements while minimizing contingent liabilities for the government.

45. The main medium-term challenge for Togo is to move to higher, sustainable, and inclusive growth. To raise potential growth, there is need to address major bottlenecks, especially in infrastructure. Despite the pickup in growth over the past five years, overall poverty incidence has declined only slowly. Indeed, there are significant regional differences in poverty levels, with poverty in several rural regions actually increasing. Growth has not been inclusive, as the poorest 40 percent of the population has seen its incomes decline between 2006 and 2011. Consequently, creation of fiscal space to support implementation of policies that raise incomes of the poor, such as rural feeder roads, mini dams for irrigation, and off-grid energy alternatives will be needed to make growth more inclusive. At the same time, for the poorest segments of the population, progressively extending the pilot cash transfer and school feeding programs will begin to reduce the intergenerational transmission of poverty.

46. While the overall Togolese financial system has developed significantly over the past decade and is sound, a number of individual banks have shown fragility. Financial depth has increased significantly over the past decade and Togo compares favorably to its WAEMU peers. The microfinance sector has greater reach in Togo than in other WAEMU countries. Actions will be needed to enhance weak banks, such as requiring banks to accumulate capital, where needed, through dividend suspensions or new capital injections. There is also need to significantly enhance the supervision, monitoring and control of the microfinance sector, which is plagued by structural weaknesses and unregulated activity.

47. The economy will remain exposed to substantial risks, mainly on the domestic side. The main domestic risks are delays in reforming the energy sector and difficulties modernizing state functions and reforming state owned enterprises, which would affect growth and fiscal sustainability. External vulnerabilities are generally manageable as Togo’s export destinations are relatively diversified. That said, concerted efforts to increase non-price competitiveness will help propel Togo into a major transport and logistics hub on the West African coast.

48. It is proposed that the next Article IV consultation take place on the standard 12-month cycle.

Table 1.

Togo: Selected Economic and Financial Indicators, 2010–18

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Sources: Togolese authorities and IMF staff estimates and projections.

Change as a percentage of broad money at the beginning of the period.

Revenue minus expenditure, excluding grants, interest, and foreign-financed expenditure.

Aggregate import and export figures, both for historical data and for projections, now include separately the imports and exports from the binational electricity generating company CEB, which were previously netted out when calculating aggregate numbers.

Includes arrears and state-owned enterprises external debt

Table 2.

Togo: Balance Payments, 2010–18

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Sources: Togolese authorities and IMF staff estimates and projections.

Negative sign indicates increase.

Aggregate import and export figures, both for historical data and for projections, now include separately the imports and exports from the bi-national electricity generating company CEB, which were previously netted out when calculating aggregate numbers. Exports from CEB accounted for about 3 percent of GDP in 2009 and imports of CEB for about 4.4 percent of GDP.

Table 3a.

Togo: Central Government Financial Operations, 2010–18

(In CFAF billion)

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Sources: Togolese authorities and IMF staff estimates and projections.

Includes the BCEAO credit for domestic arrears clearance.

Identifies residual for past years (i.e. 2012) and financing gap for current and future years (i.e. 2013 onward). In keeping with practice under the previous ECF-supported program, unidentified financing from 2014 on is calculated without assuming any external budget support (i.e. exceptional financing).

DGD started collecting data on tax exemptions on imports in 2013. The amount of these exemptions in 2013 is estimated at CFAF 28 bill (1.3 percent of GDP).

Table 3b.

Togo: Central Government Financial Operations, 2010–18

(In percent of GDP)

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Sources: Togolese authorities and IMF staff estimates and projections.

Includes the BCEAO credit for domestic arrears clearance.

Identifies residual for past years (i.e. 2012) and financing gap for current and future years (i.e. 2013 onward). In keeping with practice under the previous ECF-supported program, unidentified financing from 2014 on is calculated without assuming any external budget support (i.e. exceptional financing).

DGD started collecting data on tax exemptions on imports in 2013. The amount of these exemptions in 2013 is estimated at CFAF 28 bill (1.3 percent of GDP).

Table 4.

Togo: Monetary Survey, 2010–18

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Sources: Central Bank of West African States and IMF staff estimates and projections.