Togo: Staff Report for the 2016 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept.
Publication Date:
17 May 2017
eISBN:
9781484300916
Language:
English
Keywords:
ISCR; CR; debt service; debt; spending; investment; GDP deflator; creating flow; debt-service-to-revenue ratio; sustainability indicator; public and publicly guaranteed; Debt sustainability analysis; Public and publicly-guaranteed external debt; Domestic debt
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2016 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility

Abstract

2016 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility

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Togo’s risk of external debt distress continues to be moderate with heightened overall risk of debt distress—unchanged from the previous Debt Sustainability Analysis (DSA) published in October 2015. A return to historical levels of growth and fiscal deficits would lead to a rapid accumulation of debt. Though less extreme, a shock to growth combined with a reduction in FDI and capital transfers would push Togo above the external debt-distress threshold for the PV of debt-to-GDP. Togo’s overall public debt dynamics also highlight heightened vulnerabilities, with the debt-to-GDP ratio remaining above the indicative benchmark for a significant part of the projection period. The analysis highlights the need for sustained fiscal consolidation, improved debt management, and macroeconomic policies to reduce the level of public debt to prudent levels over the medium term.

Introduction

1. The debt sustainability analysis (DSA) for Togo’s public debt is the result of collaborative efforts of the International Monetary Fund (IMF) and the World Bank.2 It updates the 2015 DSA (IMF Country Report No. 15/309), based on the most recent external debt data from the authorities, and the macroeconomic framework derived from the 2017 discussions on a program supported by the IMF’s Extended Credit Facility (ECF). It uses the latest template of the debt sustainability analysis for low-income countries. Debt data includes external and domestic debts of the central government, as well as external debt of public enterprises and government guaranteed debt. Domestic debt is defined as debt denominated in franc de la Communauté financière d’Afrique (FCFA).

2. The previous DSA assessed the level of Togo’s risk of external debt distress to be moderate owing to the large increase in government debt to finance infrastructure projects following the HIPC completion point. (Text Table 1). Togo’s public and publicly guaranteed (PPG) external debt dropped from 52.6 percent of GDP in 2009 to 18 percent in 2010 as the country reached the completion point of the enhanced HIPC Initiative in December 2010. Since then, the external debt stock has remained broadly the same, reaching 19.7 percent of GDP at end–2016. The composition of the central government external debt has, however, changed significantly between 2010 and 2016: the share of multilateral debt fell to 32 percent (from 65 percent) while the share of bilateral debt rose to 65 percent (from 34 percent). This reflects recent large borrowing from China and India Exim-Banks to finance development projects, including the extension of the Port and the Lomé airport.

Text Table 1.

Togo: Composition of Public Debt, 2010-2016

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Sources: Togolese authorities and Staff calculations.

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

3. Public domestic debt has continuously increased, sustained by large issuance of securities (Text Table 1). Between 2010 and 2016, domestic debt nearly doubled reaching 61 percent of GDP, as its share in total public debt increased by 13 percentage points to 76 percent of public debt. A key driver of the increase in domestic debt has been the extended recourse to the regional financial market and direct borrowing from the banking system. The stock of government securities on the regional market has increased from 9.7 percent of GDP to 29.1 percent of GDP between 2010 and 2016, with an increasing use of both Treasury bills and bonds. Consequently, Togo had the highest levels of domestic debt-to-GDP and total debt-to-GDP ratios within the WAEMU at end–2016.3

4. The government’s infrastructure financing tools had directly increased the stock of domestic debt by about 7½ percent of GDP by end-2016, further deteriorating the fiscal situation and weakening the stability of the financial sector. Beginning in 2013, the government of Togo initiated a new financing tool that consists of private sector contractors prefinancing public infrastructure development through domestic commercial bank loans to be repaid by the government. The capital spending reported in the budget and in the fiscal accounts consisted mostly of payment of debt service of prefinancing loans to banks rather than the execution of the investment involved. Furthermore, the debt obligations inherent in prefinancing arrangements were not included in public debt. The size and the scope of the pre-financing contracts, generally obtained through direct negotiations (not through competitive bids), averaged 7 percent of GDP annually over 2013-16, peaking at 10½ percent in 2015. This added pressure to the already weak fiscal prospects and banks’ exposure to public borrowing. The government has now discontinued this problematic public financial management practice.

5. Togo is considered a weak policy performer for the purpose of determining the debt burden thresholds under the DSA framework. Togo’s rating on the World Bank’s Country Policy and Institutional Assessment (CPIA) averaged 2.98 from 2013 to 2015, classifying the country as a weak policy performer for purposes of this DSA analysis. The relevant external public debt burden thresholds are as shown in Text Table 2.

Text Table 2.

Togo: External Debt Burden Threshold1

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Source: DSA template.

With remittances being low in Togo, the scenario with remittances will not be considered.

Baseline Assumptions

6. The baseline macroeconomic assumptions for the present DSA are as follows:

a. Real GDP growth is expected to increase from 5.2 percent in 2014-16 to 5.6 percent by 2021. In the long-run, real GDP growth is estimated to settle at 5 percent, slightly above the historical average of 4.5 percent, which was depressed by dislocations caused by protracted social, political, and economic crisis that the country experienced up to the mid-2000s. The main downside risks to growth include capacity constraints in implementation of structural reforms, resistance to reform from interest groups, and further slowdown in Togo’s main regional trading partners. Additionally, severe weather conditions and failure to address the energy gap will add to the downside risks.

b. Public investment reached 13 percent of GDP in 2015 and is estimated to have reached 14 percent of GDP in 2016. It is expected to decline in 2017 and 2018 before stabilizing at around 8 percent by 2019-21. Public investment financing is expected to tilt toward external concessional sources, as external financing remains around current levels. Public investment projects are expected to be mostly directed to infrastructure, with increasing portions dedicated to social spending.

Text Table 3.

Togo: Key Macroeconomic Assumptions

(DSA 2017 vs DSA 2015)

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Sources: Togo authorities; and IMF staff estimate.

Total revenue, including grants.

c. Key commodity price projections (i.e., for oil, phosphates, cotton, cocoa, and coffee) through 2021 are sourced from the WEO prepared in January 2017, and are assumed to remain constant in real terms for the remainder of the forecast period.

d. Inflation declined to 0.9 percent in 2016 from 1.8 percent in 2015, owing to the fact that domestic oil prices partly followed international oil price movements. Inflation is projected to increase slightly to 1.5 percent in 2017 and remain stable afterwards at 2 percent, below the WAEMU convergence criteria.

e. Total revenue reached 21.7 percent of GDP in 2016 and is projected to reach 26 percent by 2037, higher than assumed in the previous DSA due to the recent improvement in revenue collection, which is carried through the projection period as well as a higher level of grants.

f. The domestic primary fiscal deficit is expected to improve to 3.5 percent of GDP in 2017 from 4.5 percent of GDP in 2016. The overall primary balance (cash basis, including grants) is expected to reach 2 percent of GDP by 2019, an improvement of 9.2 percentage points from 2016.

g. The current account deficit is projected to narrow from 9.8 percent in 2016 to 7.3 percent by 2019, this predicated upon an increase in private sector-led growth which will boost Togo’s exports. At the same time, imports would be contained following slowdown in public sector investment and improvements in agricultural production. The other components of the current account (i.e., services, primary and secondary income) are expected to remain around their current levels.

h. Foreign direct investment (FDI) flows are very volatile in Togo with an alternation of net inflows and outflows. FDI is expected to stabilize around an inflow of about 4.7 percent of GDP per year in the long run. 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, alter the debt dynamics assumed in the baseline.

External Debt Sustainability Analysis

Baseline

7. Under the baseline scenario, Togo’s external debt indicators remain below their indicative policy-relevant thresholds (Table 1a, Figure 1). The present value (PV) of public and publicly guaranteed (PPG) debt is projected at 15.1 percent of GDP in 2016 and will increase to 21.9 by 2037 owing to higher external borrowing. However, aided by an absence of non-concessional financing through 2019, the ratio will remain below the 30 percent threshold under the baseline throughout the projection period, with a moderate increase in evidence over the forecast period. Both ratios of the PV of external debt relative to revenues and to exports remain relatively stable and below their respective indicative thresholds through the end of the projection period. Similarly, debt service measures remain well below thresholds and on a broadly downward trend. Improvements in debt-management practices envisaged in the authorities’ ECF-supported program will give further resilience to shocks affected debt service needs (Figure 1).

Table 1a.

Togo: External Debt Sustainability Framework, Baseline Scenario, 2014-2037 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)

Table 1a.

Togo: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2017-2037 (continued)

(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 baseline.

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.

Figure 1.
Figure 1.

Togo: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2017-2037 1/

Citation: IMF Staff Country Reports 2017, 127; 10.5089/9781484300916.002.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 2027. In figure b. it corresponds to a Combination shock; in c. to a Exports shock; in d. to a Combination shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock

Alternative Scenarios and Stress Tests

8. Alternative scenarios reveal multiple breaches of relevant thresholds (Figure 1). Under the most extreme shock scenario, the present value (PV) of debt-to-GDP ratio breaches the relevant thresholds, however other debt indicators remain under their relevant thresholds. Under the historical scenario, which sets key macroeconomic parameters to their historical values, the three PV debt ratios breach their relevant policy dependent thresholds while the debt service-to-exports and the debt-service-to-revenue ratios remain broadly below their relevant policy dependent thresholds. This highlights the importance for Togo to improve macroeconomic policies. On the stress tests, the results are the following:

  • The most extreme shock that affects the PV of external debt-to-GDP ratio (Figure 1, Table 1b) is a combination shock of low growth and large reduction in non-debt creating flows (FDI and public transfers, both set at historical average minus one standard deviation for 2017 and 18). In this case the ratio will breach the threshold in 2019 and remain above for about a decade before declining below the threshold. This indicator is mostly vulnerable to non-debt creating flows, and highlights the importance of FDI and the need for stability in such flows to maintain a stable profile for Togo’s debt;

  • The most extreme shock that affects the PV of external debt-to-export ratio (Figure 1, Table 1b) is an export shock. This ratio is also vulnerable to a non-debt creating flow shock and to a combined growth and non-debt creating flow shock;

  • Finally, under the most extreme shock, the debt service ratios remain under their policy relevant thresholds.

Public Sector Debt Sustainability

9. 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 from liquidated loss-making SOEs, and weak public financial management, including very limited debt management capacity. Domestic debt is projected to decline to 58.4 percent of GDP in 2017 from a record high of 61 percent of GDP in 2016. By 2037, repayment of arrears coupled with significant fiscal consolidation is expected to significantly reduce domestic debt and total public and publicly guaranteed debt.

Table 2a.

Togo: Public Sector Debt Sustainability Framework, Baseline Scenario, 2014 – 2037

(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.

Table 2b.

Togo: Sensitivity Analysis for Key Indicators of Public Debt 2017-2037

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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.