Togo: Staff Report for the 2015 Article IV Consultation—Debt Sustainability Analysis

Economic growth has remained strong in recent years, averaging 5.4 percent in 2013-14, on the back of productivity gains in the agricultural sector and public investment in infrastructure. The pace of economic growth has contributed to improving human development indicators, though poverty remains high. The fast pace of public investment has laid the basis for higher growth but has also contributed to a pronounced increase in public debt and current account deficit.

Abstract

Economic growth has remained strong in recent years, averaging 5.4 percent in 2013-14, on the back of productivity gains in the agricultural sector and public investment in infrastructure. The pace of economic growth has contributed to improving human development indicators, though poverty remains high. The fast pace of public investment has laid the basis for higher growth but has also contributed to a pronounced increase in public debt and current account deficit.

Introduction

1. The debt sustainability analysis (DSA) of Togo’s public debt was prepared jointly by the International Monetary Fund (IMF) and the World Bank.1 It updates the 2013 DSA (IMF Country Report No. 14/38), based on the most recent external debt data from the authorities and the macroeconomic framework derived from the 2015 IMF Article IV consultation. Data are composed of external and domestic debt of the central government, as well as debt and guaranteed debt of public enterprises.

2. Togo’s public and publicly guaranteed (PPG) external debt is CFAF 614 billion at end-2014 while its composition has considerably changed since 2010 (Text Table 1). Togo reached the completion point of the HIPC Initiative in December 2010 and was granted debt relief from several multilateral and bilateral creditors. As a result, the ratio of PPG external debt to GDP dropped from 53.9 percent in 2009 to 19.9 percent in 2010. Since then, external debt stock has increased, reaching 26.9 percent of GDP at end-2014. Around 51 percent of this stock of debt is owed to multilateral creditors and the remainder to bilateral and commercial creditors. Between 2010 and 2014, central government borrowing from commercial banks has increased significantly, from around CFAF 31 billion to CFAF 201 billion. The debt from commercial banks is typically contracted at less favorable terms than from other creditors. Thus, the increase in the share of commercial bank borrowing to total borrowing from 10.1 percent in 2010 to 32.7 percent in 2014 has created additional pressure on Togo’s external debt position.

3. Public domestic debt has increased in recent years, amounting CFAF 717 billion at end-2014 from CFAF 473 billion at end-2010. After declining in 2011 by about 1½ percentage points to 28½ percent of GDP, the level of domestic debt has gradually increased to 31½ percent in 2014. A key driver to the increase in domestic debt has been the rise in recourse to the regional financial market, which has more than offset the decrease in domestic arrears. The stock of government securities on the regional market has increased from 9.2 percent of GDP in 2010 to 18.4 percent in 2014, with an increasing use of Treasury bills. Consequently, Togo had the highest level of domestic debt-to-GDP ratio within the WAEMU region at end-2014.2

Togo: Composition of Public Debt, 2010–14

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Sources: Country authorities and Staff calculations

Details for SOEs’ 2010 external debt have not been communicated by the authorities.

Baseline Assumptions

4. The baseline macroeconomic assumptions for the present DSA are the following:

  1. Real GDP growth is estimated at 5.4 percent in 2014 and would average about 5½ percent over 2015–18, supported by agricultural production, transportation services linked to international trade, and the impact of investments in transport infrastructure. In the long run, real GDP growth is estimated to settle down at 4.5 percent. The estimated potential growth rate exceeds historical rates, which were depressed by the dislocations caused by the protracted social, political, and economic crisis that the country experienced up to the mid-2000s. The main downside risks to growth projections are related to the country’s weak public financial management capacity and resistance to reform by entrenched groups. These may lower the efficiency of the planned public investments, which, together with private sector growth and investment, would be one of the drivers of growth over the medium term. Additionally, a binding constraint is the availability of reliable electricity supply, given that the growth of demand outstrips that of supply and that there are no obvious economical short-term solutions.

  2. Public investment is projected to increase to 9.7 percent of GDP in 2015, continuing the upward trend of the recent past (8.3 percent in 2013 and 9.1 percent in 2014). Public investment is expected to stabilize in the medium term, at around 9.1 percent of GDP. About 50 percent of public investments will be financed domestically while the remaining will be via external financing. Public investment projects are expected to be mostly directed to infrastructure, with increasing portions dedicated to social spending, and, together with prudent fiscal policy and structural reforms, would lead GDP growth to increase above its long-term trend for these years.

  3. The projections for key commodity prices (oil, cotton, cocoa, and coffee) through 2020 are based on WEO projections of August 2015 and are assumed constant in real terms afterwards.

  4. Inflation was low in 2014 (0.2 percent) and is projected to increase in the medium term, reaching 2.5 percent in 2017 remaining stable afterwards, reflecting sound monetary policy at the regional level.

  5. The current account balance has strongly deteriorated in 2013 and 2014 (respectively -13.0 and -12.8 percent of GDP). The deficit is expected to remain at levels around 11 percent in the medium term, before converging back to below 10 percent in the long run. The underlying reasons for the recent deterioration of the current account balance are the large increase of imports in 2013, in particular intermediary goods and oil imports, and the relative underperformance of exports.

  6. The domestic primary fiscal balance is projected to improve marginally to -1.7 percent of GDP in 2015 compared to -1.8 percent in 2013. The projections for the long term point to a steady improvement of the domestic primary fiscal balance as it reaches -0.3 percent in 2020.3

  7. The overall fiscal balance is programmed to decline from -6.4 in 2014 to -5.4 percent in 2015 and to gradually revert back to around -5 percent, reflecting lower infrastructure investment needs in the medium to long term.

    h. FDI flows are expected to stay stable over the medium-term at around 5 percent of GDP. However, given Togo’s weak track record in governance, these flows, as well as grants, are subject to significant risks, which may, as a result, hinder the favorable debt dynamics.

  8. Initially, all new external financing is expected to be received at concessional terms. As Togo develops, concessional financing will become more scarce leading to a decrease in the grant element of new financing after 2018 (as shown in Figure 1). It is assumed that non-concessional new borrowing will amount to 1.5 percent of GDP in 2018 and gradually increase to 2.5 percent of GDP in 2035. The sources of concessional external financing are expected to consist of Togo’s traditional multilateral donors, as well as the recently-increased financing from non-Paris Club creditors (especially China and India), which are generally less concessional in nature.

Figure 1.
Figure 1.

Togo: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2015-2035 1/

Citation: IMF Staff Country Reports 2015, 309; 10.5089/9781513501017.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2025. In figure b. it corresponds to a Less Favorable Terms shock; in c. to a Exports shock; in d. to a Less Favorable Terms shock; in e. to a Exports shock and in figure f. to a Combination shock

External Debt Sustainability Analysis

Baseline

5. Under the baseline scenario, Togo’s external debt indicators remain below their indicative policy-relevant thresholds (Table 1a, Figure 1).4 The present value (PV) of public and publicly guaranteed (PPG) debt is projected at 19 percent of GDP in 2015 and remains below the 30 percent threshold until the end of the projection period. Furthermore, both the PV of external debt relative to revenues and exports stay relatively stable and below their respective indicative threshold until 2035. The share of concessional loans in new financing is projected to decline, which results in the concessionality of new loans to decrease from nearly 50 percent to around 23 percent over the period 2015 to 2035. The rate of debt accumulation is projected to increase from 0.9 to 1.8 percent in the same period.

Table 1a.

Togo: External Debt Sustainability Framework, Baseline Scenario, 2012–2035 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Alternative Scenarios and Stress Tests

6. Togo’s external debt outlook remains vulnerable to shocks especially toward the end of the projection period (Table 1b, Figure 1). The policy thresholds for four key ratios are breached under alternative scenarios and stress tests. First, the PV of external debt to GDP ratio deteriorates under the scenario in which new loans are obtained on less favorable terms. In this case, the threshold is breached in 2022. Second, under the same scenario of less favorable terms, the PV of debt-to-revenue ratio breaches the 200 percent threshold in 2028. Further, the PV of debt service-to-revenue ratio surpasses the indicative thresholds at the end of the period under a combination of shocks on growth, exports, value of currency and non-debt creating flows. Finally, under the historical scenario, the three ratios above and the PV of debt-to-exports ratio breach their thresholds, although the latter is less relevant for Togo, which is a member of a currency union.

Table 1b.

Togo: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2015–2035

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the ł

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

7. In light of the results from the baseline and alternative scenarios as well as the stress tests, staff concludes that Togo remains at moderate risk of external debt distress.

Public Sector Debt Sustainability

8. The inclusion of Togo’s domestic public debt in the analysis emphasizes the vulnerability of the baseline scenario (Table 2a, Figure 2). Togo’s domestic debt burden reflects persistently high deficits, recognition as debt of accumulated liabilities, and weak public financial management, including very limited debt management capacity. The increase in domestic debt stemmed in particular from the government’s recognition of liabilities arising from liquidated loss-making SOEs and increasing use of domestic borrowing to finance the budget.

Table 2a.

Togo: Public Sector Debt Sustainability Framework, Baseline Scenario, 2012–2035

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Figure 2.
Figure 2.

Togo: Indicators of Public Debt Under Alternative Scenarios, 2015-2035 1/

Citation: IMF Staff Country Reports 2015, 309; 10.5089/9781513501017.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2025.2/ Revenues are defined inclusive of grants.

Baseline scenario

9. Under the baseline scenario, indicators of overall public debt burden (external plus domestic) show significant vulnerabilities. The PV of public debt to GDP breaches the benchmark level of 38 percent—above which the risk of debt distress is assumed to be heightened for countries with a low CPIA score—for most of the forecast period (Figure 2).5 The PV of debt-to-revenue ratio is projected to decline gradually into the long term, although its values are higher than in the previous DSA. The PV of debt service-to revenue ratio tends to increase over time. While the trend is similar to the previous DSA, the level is higher, reflecting increasing debt service vulnerabilities to variations in fiscal revenues.

Alternative Scenarios and Stress Tests

10. The evolution of the debt indicators would be highly sensitive to non-debt flows shocks and real depreciation shocks, which would increase the debt level and debt service over the long run. Total public debt dynamics are particularly vulnerable to both non-debt flows and real depreciation shocks6, highlighting the need to strengthen Togo’s external public debt (Table 2b, Figure 2). In addition, under the assumption of constant primary balance (i.e., assuming no fiscal adjustment), public debt ratios would increase steadily during the projection period, stressing the need for the authorities to improve the balance in the near future. For debt ratios to remain at a reasonable level over the long-run, an improvement in the macroeconomic outlook, a decrease of fiscal deficits, and a more cautious debt strategy are critical factors.

Table 2b.

Togo: Sensitivity Analysis for Key Indicators of Public Debt 2015–2035

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Conclusion

11. Togo remains at a moderate risk of external public debt distress but has a heightened risk of overall public debt distress, reflecting vulnerabilities in domestic debt. Under the baseline scenario, all external debt sustainability indicators are expected to remain below their indicative thresholds throughout the projection period (2015–35). However, four out of the five indicators breach their threshold under alternative scenarios and stress tests. Togo’s overall public debt dynamics present heightened vulnerabilities, with the debt-to-GDP ratio remaining above the indicative benchmark for most of the projection period. These dynamics highlight the vulnerability of the Togolese economy to macroeconomic and financing shocks (in particular less favorable terms on new financing and lower revenue performance), and stress the need for a prudent approach to new borrowing. This also underlines the importance of improving debt management capacity in Togo to have a realistic assessment of the risks posed by various sectors.

12. Maintaining a robust external and public debt outlook will depend on a sustained improvement in macroeconomic performance, as well as prudent debt management and solid fiscal performance. While public investment is expected to lead to sustained growth if coupled with reforms facilitating private sector investment and growth, Togo’s weak public investment management capacity may impose risks on the underlying public investment-growth nexus. In this context, it is essential that the Togolese authorities ensure efforts to strengthen public financial management and debt management, restructure the banking system and promote financial development, reform state-owned enterprises, and improve the investment climate, hence laying the foundation for accelerating growth prospects.

13. There are downside risks and a caveat to this conclusion. First, given that growth projections are predicated on high public investment and good fiscal and debt management, delays in structural reforms to enhance expenditure efficiency and the monitoring of debt, and limited fiscal consolidation could dampen these prospects. Second, given Togo’s exposure international economic developments, uncertainty in the availability of external financing, especially from non-traditional donors, could hamper the country’s financing strategies. Lastly, a caveat to this analysis is the availability and quality of data, an area in which Togo could benefit from enhanced capacity development.

Authorities’ views

14. The authorities have a different perspective on Togo’s debt sustainability risks. In particular, they do not see any risks associated with rising debt levels as long as they are below the WAEMU threshold of 70 percent (compared to 58 percent as at end-2014).7 Furthermore, the authorities do not consider the levels and dynamics of domestic debt as posing any liquidity or rollover risks, given the high demand for Togolese government securities so far shown by the regional financial market players. The authorities also consider that the baseline macroeconomic assumptions underlying this DSA are too conservative, particularly those related to growth and external current account developments. They, however, agreed on the need to restructure and enhance the capacity of debt management to enable it to effectively carry out its functions.

1

The DSA follows the IMF and World Bank Staff Guidance Note on the Application of the Joint IMF-World Bank Debt Sustainability Framework for Low-Income Countries, dated November 7, 2013 (SM/13/292).

2

See the most recent IMF Staff Report on WAEMU common policies: http://www.imf.org/external/pubs/ft/scr/2015/cr15100.pdf

3

The domestic primary fiscal balance is the authorities’ primary tool for short term fiscal policy, given interest payments and multi-year infrastructure investment plans.

4

Togo’s quality of policies and institutions, as measured by the average World Bank’s Country Policy and Institutional Assessment (CPIA) for the period 2011–13 (2.98), places it as a “weak performer”. The corresponding indicative thresholds for the external debt indicators are 30 percent for the NPV of debt-to-GDP ratio, 100 percent of the debt-to-exports ratio, 200 percent for NPV of debt-to-revenue ratio, 15 percent for the debt service-to-exports ratio, and 18 percent for the debt service-to-revenue ratio. The corresponding indicative benchmark for total public debt to GDP ratio is 38 percent.

5

The public debt benchmark was introduced in the DSA framework in the 2013 review of the Debt Sustainability Framework. Similar to the thresholds for PPG external debt, this benchmark varies depending on a country’s CPIA score and designates levels above which the risk of public debt distress is heightened.

6

The non-debt-creating flows shock is a one-time increase in other debt-creating flows amounting to 10 percent of GDP in the second year of the projection period. The real depreciation shock is a one-time 30 percent nominal depreciation of the domestic currency in the first year of the projection period.

7

Staff and the authorities discussed the differences between the WAEMU convergence criterion of debt-to-GDP ratio and the sustainability indicators under the LIC-DSA framework. Specifically, the 70 percent debt-to-GDP ratio criterion for WAEMU convergence is not directly comparable to the debt-to-GDP ratio debt burden indicator in the LIC-DSA. The former is measured in nominal terms, while the latter is measured in present value terms. Also, apart from the debt-to-GDP ratio, assessment of debt sustainability under the LIC-DSA takes into account other debt burden indicators, such as debt-to-revenue and debt-to-exports ratios, a country’s specific policy and institutional environment, and country-specific risks.