Benin: Staff Report for the 2017 Article IV Consultation and First Review Under the Extended Credit Facility Arrangement and Request for Modifications of Performance Criteria

2017 Article IV Consultation and First Review Under the Extended Credit Facility Arrangement and Request for Modifications of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Benin

Abstract

2017 Article IV Consultation and First Review Under the Extended Credit Facility Arrangement and Request for Modifications of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Benin

Background and Outlook: Strengthening the Pillars for a Structural Transformation of the Economy

1. Inclusive growth has been elusive. Following a decade of mediocre economic performance, growth over the last 3 years (2013–15) averaged 5.2 percent, closing the gap with the sub-Saharan Africa (SSA) average in per capita GDP growth (Box 1). However, this solid macroeconomic performance did not translate in a meaningful reduction in poverty, which remains a major challenge calling for a higher and more inclusive growth over the medium term (Text Figure 1). Low and stagnant productivity in the agriculture sector is the primary cause of the limited poverty reduction in rural areas.1

Text Figure 1.
Text Figure 1.

Benin: Poverty Rate, 2011–15

(percent of population)

Citation: IMF Staff Country Reports 2018, 001; 10.5089/9781484336533.002.A001

Source: Beninese authorities.

2. The government is committed to structurally transform Benin’s economy by scaling up investment and diversifying the economy. On April 7, the Board approved the authorities’ request for a three-year arrangement under the ECF. Executive Directors underscored the importance of adhering to policies that preserve macroeconomic stability and public debt sustainability. At the time of the 2017 IMF/World Bank Annual Meetings, Benin became a full participant in the G20 Compact with Africa (CWA) Initiative in the hope of bolstering private sector financing of the Government’s Action Program (GAP), 2016–21.2

3. The government’s reform agenda suffered some setback but the authorities remained committed to it. In April, a revision of the Constitution aimed at fostering transparency and accountability by public office holders did not pass. Also, little progress is being made with reforms of audit institutions. Nonetheless, the authorities are developing strategies to ensure that the reform program will continue unabated, reiterating their commitment to improve governance and transparency and strengthened accountability for public office holders.

4. Implementation of past policy recommendations was broadly satisfactory (Annex I). The authorities are making notable progress in consolidating the macroeconomic situation and advancing key structural reforms, including the need for improved fiscal policy management to broaden the fiscal space, preserve debt sustainability, and reduce macro-financial risks. However, the business environment continues to be challenging and financial deepening and inclusion are lagging.

Poverty

The evolution of household consumption between 2011 and 2015 shows that real per capita annual expenditure decreased from CFAF 226,440 to CFAF 223,402, a drop of, approximately, 1.3 percent. Growth in Benin has been the result of expanded acreages and increased labor effort rather than increases in productivity. The highly informal nature of the economy and low productivity—particularly, in the agricultural sector are the main causes of the lack of inclusiveness. Despite the drop of the overall non-monetary poverty in recent years, the data shows a high incidence of poverty in rural populations (north part of the country) compared with urban populations (concentrated in the south).

Benin: Spending per capita and poverty, 2011 vs.2015

(CFA francs)

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Spending per capita in 2015 deflated by 2011 prices

Source: INSAE

The survey and analysis conducted by the INSAE also found:

  • Overall, poverty indicators deteriorated from 36.2 percent of population in 2011 to 40.1 percent in 2015, mainly explained by the contraction of consumer spending.

  • Nonetheless, the proportion of people who consider themselves poor decreased across the board. In urban areas, it fell from 77 percent in 2011 to 66 percent in 2015 and in rural areas, the proportion was 67.2 percent in 2015 compared with 73 percent in 2011.

  • Per the 2016 report titled: ‘Human Development for Everyone,’ Benin ranked 167 out of 185 against 166 in 2015. At the regional level, Benin ranked 35th against 31th in 2015. Nonetheless, Benin’s level of development has remained virtually unchanged, as its Human Development Index has risen from 0.480 in 2015 to 0.485 in 2016 below the average of 0.497 for countries in the low human development group and below the average of 0.523 for countries in SSA.

  • Women experienced higher levels of (non-monetary) poverty than men. However, regarding monetary poverty, the analysis found that groups led by women are better off than those led by men (women heads of households generally enjoy sufficient economic autonomy, resulting in part from their marital status, household size and sectors of activity, and by the fact that women are benefiting from better access to credit). Individuals living in households headed by persons with at least primary education are less affected by monetary or non-monetary poverty.

  • While the persistence of non-monetary poverty is explained by the lack of basic infrastructure, the increase in monetary poverty is rooted in: (i) the fall in per capita incomes in rural areas linked to a fall in yields; (ii) the structural weaknesses of the agricultural sector (climatic hazards, non-control of water, poor access to good seeds, lack of or weak extension services), and (iii) the expansion of the informal sector.

Source: Note sur la pauvreté au Bénin en 2015, Institute of Statistics and Economic Analysis (INSAE).

Recent Developments

Economic growth is accelerating and inflation remains subdued. Budget execution is expected to be better than programmed while the current account would widen marginally on the back of import growth.

5. GDP growth is recovering based on agriculture. Benin achieved an economic growth rate of 4.0 percent in 2016; up from 2.1 percent in 2015 (Table 3 and Text Figure 2). Strong GDP growth in 2016 is mainly due to favorable weather conditions and better access to agricultural inputs. By contrast, the depreciation of the naira, coupled with the decline in 2016 of the activities related to cotton ginning, negatively impacted the secondary sector (2.6 percent growth in 2016 vs. 10.1 percent in 2015). Despite a difficult sub-regional context, the tertiary sector showed a 3.4 percent increase in value added compared to an initial forecast of 2.7 percent. Inflation turned negative in 2016 (-0.8 percent) after a moderate increase in 2015. Indicators of industrial and electricity production show a pickup in economic activity in recent months (Text Figure 2). As a result, growth for 2017 is expected to reach 5.6 percent with inflation turning positive at 0.6 percent.

Table 1.

Benin: Status of Quantitative Performance Criteria and Indicative Targets and Proposed Modifications, 20171

(Billions of CFA francs)

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Sources: Beninese authorities; IMF staff estimates and projections.

The terms in this table are defined in the Technical Memorandum of Understanding (TMU).

The performance criteria and indicative targets are cumulative from the beginning of the calendar year.

The performance criterion on net domestic financing is automatically adjusted as indicated in the TMU.

If the amount of disbursed external budgetary assistance net of external debt service obligations falls short of the program forecast, the ceiling on net domestic financing will be adjusted pro-tanto, subject to limits specified in the TMU.

If the amount of disbursed external budgetary assistance net of external debt service obligations exceeds the program forecast, the ceiling will be adjusted downward by the excess disbursement unless it is used to reduce domestic payment arrears.

Gross disbursements, not adjusted for debt service obligations.

Table 2.

Benin: Status of Structural Benchmarks for 2017*

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Including prior actions for the approval of the ECF arrangement.

Table 3.

Benin: Selected Economic and Financial Indicators, 2014–22

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Sources: Beninese authorities; IMF staff estimates and projections.

Including off-budget investment implemented by non-financial public enterprises.

Total revenue minus current primary expenditure, capital expenditure, and net lending.

Total revenue minus current primary expenditure and capital expenditure financed by domestic resources.

Data include projected central government debt and new non-financial public sector borrowing for infrastructure from 2016 onward as well as the nominal amount of government guarantees.

Text Figure 2.
Text Figure 2.

Benin: Real GDP Growth and Economic Activity

Citation: IMF Staff Country Reports 2018, 001; 10.5089/9781484336533.002.A001

Sources: Beninese authorities and IMF staff calculations.

6. The fiscal outturn at end-June 2017 is in line with the program. Total revenues amounted to CFAF 443.9 billion at end-June 2017, slightly above the target of CFAF 386.1 billion while the basic primary deficit was limited to CFAF 33.1 billion, well below the floor of CFAF 73.1 billion targeted under the program. Regarding priority social sectors, expenditure commitments were estimated at CFAF 55.6 billion, significantly below the target set for end-June (CFAF 85.0 billion). Similarly, investment spending was lagging, reflecting delays in validating sectorial ministries’ annual work plans consistent with the GAP and the ECF-supported program. The stronger domestic revenue performance is expected to result in a lower-than-programmed fiscal deficit (including grants) of 6.1 percent of GDP in 2017 against a program projection of 7.9 percent.

7. The current account deficit (including grants) is expected to remain elevated in 2017. After a brief improvement in 2016, it is projected to reach 9.1 percent of GDP, reflecting the investment scaling up in 2017 with imports of goods and services increasing by about 19 percent.

8. Debt vulnerabilities remain moderate but need to be monitored closely. Benin’s updated debt sustainability analysis confirmed a moderate risk of debt distress (Annex VI)3. Total public debt increased in 2016, reflecting the government’s strategy of using domestic financing for capital investment projects. Approximately 90 percent of public domestic liabilities consist of government securities issued on the regional financial market. Staff has recommended to the authorities to continue working with potential donors to mobilize more concessional financing.

9. The financial sector is stable but vulnerability has intensified. Although the capitalization of banks has increased, the persistently high level of non-performing loans indicates structural problems, limiting the role of commercial banks in financing the private sector (Table 11). The regulatory capital to risk-weighted assets of the banking system reached 10.0 percent at end-June 2017. The liquidity ratio (total loans/total deposits) is maintained at 78 percent. However, the high concentration of banks’ loan portfolio is a source of concern. Non-performing loans to total loans stands at 20.3 percent of total credits at end-June 2017. The microfinance sector showed growth in loans and deposits, but progress in the closure of non-approved microfinance institutions remained limited.

Table 4.

Benin: Consolidated Central Government Operations, 2014–22

(Billions of CFA francs)

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Sources: Beninese authorities; IMF staff estimates and projections.

Data include executed pre-financed projects.

Total revenue minus current primary expenditure, capital expenditure, and net lending.

Total revenue minus current primary expenditure and capital expenditure financed by domestic resources.

As presented in the authorities’ 2016 supplementary budget as of June 10, 2016.

Table 5.

Benin: Consolidated Central Government Operations, 2014–22

(Percent of GDP)

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Sources: Beninese authorities; IMF staff estimates and projections.

Total revenue minus current primary expenditure, capital expenditure, and net lending.

Total revenue minus current primary expenditure and capital expenditure financed by domestic resources.

Net change in the stock of payment orders whose payment has been postponed to the following period.

Data include projected central government debt and new non-financial public sector borrowing for infrastructure from 2016 onward as well as the nominal amount of government

As presented in the authorities’ revised 2016 budget as of June 10, 2016.

Table 6.

Benin: Consolidated Central Government Operations, 2016–18

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Sources: Beninese authorities; IMF staff estimates and projections.

Total revenue minus current primary expenditure, capital expenditure, and net lending.

Total revenue minus current primary expenditure and capital expenditure financed by domestic resources.