Abstract
This 2015 Article IV Consultation highlights that for the third consecutive year, Benin is expected to reach solid economic growth in 2015 at about 5 percent, despite recent headwinds from the economic slowdown in Nigeria-Benin's major trading partner. In 2016, increased public investment is expected to keep real GDP growth at about 5.2 percent, with inflation to remain subdued. The medium-term outlook is also positive overall, but subject to significant risks, including a further slowdown in Nigeria and delays of structural reforms that could weaken growth dynamics. Low debt levels help accommodate the government's ambitious plans to further scale-up investment over the medium term.
On behalf on my Beninese authorities, I would like to thank Management and staff for the continued advice and technical assistance provided to them in their ongoing development efforts. They are particularly appreciative of the valuable contribution of the Fund in the organization of a conference in Cotonou in June 2014. The objective of the conference was to identify priority structural reforms that would boost growth over the medium-term in the context of their new national development plan rolled out in 2014.
The national development plan envisages, among others, a scaling-up of public investment between 2014 and 2018, in the context of a structural investment program, which focuses on upgrading physical infrastructure, notably in the energy and transport sectors and through PPPs. In this regard, the Beninese authorities organized in June 2014 a roundtable in Paris with donors and private investors to mobilize public and private financing for the implementation of the investment program. They secured a US$375-million financing from the Millenium Challenge Corporation in September 2015 to strengthen Benin’s national utility, attract private sector investment, and fund infrastructure investments in electric generation and distribution as well as off-grid electrification for poor and unserved households.
The present staff report gives a good account of the discussions held in Cotonou and of the authorities’ medium-term financial and economic policies. My Beninese authorities appreciate the focus of the Selected Issues Paper on the financial sector’s contribution to sustainable economic growth. They also welcome the policy recommendations of the systematic growth and fiscal analysis recently carried out by staff on ways to pursue the envisaged investment program without jeopardizing the country’s solid macroeconomic performance.
I. Recent Developments
Real GDP growth is slowing down in 2015 but is expected to remain high at more that 5 percent for the third consecutive year. The lower growth reflects the impact of bad weather conditions and the economic slowdown in Nigeria, Benin’s main trading partner. Growth was driven by the higher public investment. Inflation remained subdued despite a pickup in food prices due to adverse weather conditions.
The fiscal position deteriorated due to higher expenditures, notably investment spending, and lower financing. Revenues, however, are projected to remain stable but delays in the privatization of the telecom companies and in donor funding constrained the financing of the budget for 2015. My Beninese authorities reacted to these developments by slowing down the pace of public investment. Yet, total capital expenditures will be higher than in 2014. As staff noted, payment arrears increased despite cuts in spending. Public debt increased in 2014 and 2015 along with higher investment but Benin continues to face a low risk of debt distress as described in the DSA report.
To address the revenue shortfalls, my authorities are placing two bond issues in December 2015. The resources mobilized will be used, among others, to catch up delays in investment spending, clear payment arrears and finance part of the 2016 budget, notably the cost of the presidential election scheduled for March 2016. These actions will lay the ground for a meaningful reform of treasury processes that aim at reducing payment delays and help preserve the stability of the financial sector.
The implementation of the fiscal reforms continued although at slower than anticipated pace. Positive developments in this area include the introduction of electronic tax payments, the establishment of a one-stop window for business and tax registration for micro and small firms, and the upgrading of IT systems in the tax and customs administrations. In addition other reforms to strengthen tax policy and public financial management are advancing well. Following the uncovered fraud scheme in a donor-financed project, my authorities have strengthened the framework for combating corruption and improved transparency with notably the preparation of an anti-corruption action plan and the establishment of a Bureau of Auditor General. The improvement of the debt management framework has started with the issuance of a decree on public debt policy and debt management strategy, the delineation of debt management competences between the debt management agency (CAA) and the Treasury, and the reorganization of the CAA along front-middle-back office lines, in line with recent Fund technical assistance recommendations. The progress made in facilitating business registration and streamlining processes at the port and customs translated into an improved ranking in the last World Bank’s Doing Business report.
The financial sector remains broadly stable, although vulnerabilities increased, notably in the banking sector, according to the latest stress tests. The capital adequacy ratio remains above 8 percent and non-performing loans in the banking sector remained high at 21.9 percent in 2014 and 21.5 percent at end-June 2015. Good progress is being made to resolve the two banks in difficulties, in cooperation with the regional banking commission. The banks’ exposure to sovereign risks through holding of government bonds is rising as banks seek to benefit from the 3-percent interest margin between the sovereign bond rate and the central bank refinancing rate to improve their bottom line.
The microfinance sector has experienced a strong growth, partly due to the expansion of unauthorized microfinance institutions (MFIs). To address financial stability concerns arising from high credits at risks in the authorized MFIs, my Beninese authorities have taken measures to enhance supervision of that sector through notably the assignment of supervision of largest MFIs to the WAEMU Banking Commission and the central bank (BCEAO). Moreover, they upgraded the Ministry of finance’s directorate responsible for supervising smaller MFIs into a new agency in 2015. In addition, they have set up an inter-ministerial committee to identify and shut down unauthorized MFIs.
II. Policies for the medium-term
My Beninese authorities remain committed to maintain prudent policies over the medium-term. Nevertheless, they recognize that sustaining the current level of growth over the medium term and make it more inclusive will be challenging especially as the country is still highly dependent on developments in Nigeria and weather conditions. In addition, poverty remains high despite the progress made in improving some social indicators in the past years. Going forward, my authorities intend to pursue the implementation of the investment program over the next few years. They remain convinced that a pickup in investment is needed to close the infrastructure gaps and remove bottlenecks to growth. They will use the fiscal space generated by prudent fiscal policy in the past to accommodate higher capital expenditures while preserving debt sustainability. They will pursue concomitantly the implementation of structural reforms aimed at strengthening public financial management and improving the business climate, in order for the planned incremental investment spending to yield the anticipated growth dividend.
My authorities remain committed to a sustainable fiscal policy. They agree with staff that achieving a successful investment surge, and reducing vulnerabilities stemming from Nigeria and further trade liberalization will require making greater strides in the implementation of fiscal reforms. In this regard, they will step up their efforts to increase domestic revenue mobilization through the strengthening of the cooperation between the tax and customs administrations to take full advantage of the unique tax identification number and the elimination of tax exemptions starting in 2016. They will also continue to address the weaknesses identified in the 2014 PEFA, including cash forecasting and management, public procurement, and audit.
My authorities will pursue a prudent debt management policy. Improved revenue performance and public financial management will help limit their recourse to the regional capital market for investment finance. As these reforms will take time to bear results, the authorities will continue, in the meantime, to seize the opportunity provided by the strong investor appetite for government bonds and low interest rates to raise financing for investment. In addition, they will take advantage of the increased demand for securities with long maturities to improve the maturity structure of government debt and will remain mindful of the impact of the debt strategy on the health of the domestic financial sector. That said, the government’s debt strategy gives priority to securing concessional financing when available. They will continue the debt management reforms initiated in 2015.
My authorities will continue to strengthen the financial sector. The strengthening of the financial sector regulatory and supervisory framework is the responsibility of regional institutions in the WAEMU region, including the WAEMU Commission and the BCEAO. As noted during the last Board meeting on WAEMU in April 2015, the regional authorities are taking steps to upgrade that framework to international standards. In particular, the regional deposit insurance scheme for both banks and MFIs has been developed and the deposit insurance agency is about to become operational. More recently, the WAEMU Council of Ministers adopted a few decisions including the development of a harmonized regional resolution framework and the BCEAO’s adherence to the Alliance for Financial Inclusion (AFI) which is a global network of financial policymakers from developing and emerging countries working together to increase access to appropriate financial services for the poor.
My authorities recognize that vulnerabilities in the financial sector have increased as evidenced by the recent stress tests. Policies going forward will be geared towards ensuring continued banks’ compliance with the regional regulations and directives while fostering greater financial inclusion. Specifically, they will continue to closely monitor banks and ensure that they meet the new (higher) minimum capital requirements, in accordance with the WAEMU directive. On the higher loan concentration, my authorities note that this is symptomatic of developing countries with shallow financial markets and a large informal sector. Nevertheless, they will ensure that related prudential norms are fully enforced. Efforts will be pursued to enforce regulations in the microfinance sector, following the division of supervisory powers between the BCEAO and the government’s new MFI agency. Likewise the implementation of the legislative and regulatory framework for AML/CFT will continue.
Structural reforms aimed at improving the business climate and enhancing financial sector’s support to private sector development will be pursued. In particular, further strides are being made to advance land titling throughout the country, notably through the use of electronic title registration. A draft legislation establishing a credit bureau that was prepared jointly with the BCEAO is expected to be adopted next year. Likewise, the judicial reform will be accelerated.
Under these envisaged policies, economic prospects for 2016 and the medium-term look positive. Growth is projected to remain high at more than 5 percent over the medium-term on the back of sustained high public investment and satisfactory progress in the implementation of the reform agenda. My authorities are cognizant of the risks to this outlook stemming from adverse developments in Nigeria, delays in the implementation of structural reforms and increasing vulnerabilities in the financial sector. They believe that their medium-term policies will contribute to reduce those risks.