Statement by Mr. Sembene, Executive Director for Benin, Mr. Alle, Senior Advisor to the Executive Director and Mrs. Boukpessi, Advisor to the Executive Director December 1, 2017

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

1. The Beninese authorities appreciate the productive policy dialogue with staff held in the context of the 2017 Article IV Consultation and the first review under the Extended Credit Facility (ECF). They broadly agree with staff assessment and welcome the policy recommendations.

2. In recent years, the pace of economic growth in Benin remained significant on average, comparing favorably to that of many sub-Saharan African peers. Yet, poverty levels continued to be high amid improving economic performance. As part of the Government’s Action Program (GAP) for 2016–21, the authorities have therefore embarked on an agenda aimed at promoting structural transformation, good governance, and the rule of law, and making significant inroads in poverty reduction. In support for the GAP, the ECF-supported program provides a solid framework for safeguarding macroeconomic stability and advancing structural reforms.

Program Performance, and Outlook

3. Performance under the ECF was strong with all end-June 2017 quantitative performance criteria (QPCs) and indicative targets observed. Illustrating the authorities’ strong reform efforts, revenue mobilization exceeded program expectations as government total revenue exceeded the floor set at 386.1 billion FCFA to reach 443.9 billion CFAF. For 2017, total revenue is projected to be significantly larger than initially programmed under the program. Consequently, the overall fiscal deficit is expected to be around 6.1 percent of GDP in 2017, almost two percentage points of GDP lower than initial program projection. As a result of this better-than-expected performance, the Beninese authorities are requesting a modification of the following QPCs: (i) the floor on total government revenue; (ii) the ceiling on net domestic financing; and (iii) the floor on the basic primary balance. On the structural front, all benchmarks for end-June 2017 were also implemented, thus helping make important strides in public financial and investment management.

4. The authorities remain optimistic about the country’ s economic outlook. Real GDP growth is expected to stand at 6 percent in 2018 and remain high over the medium term, supported by continued dynamism in agricultural production, sustained public and private investments, and a rebound in the tertiary sector. The authorities’ fiscal consolidation efforts are poised to help reduce the deficit to 1.8 percent of GDP, below the WAEMU convergence criterion of 3 percent of GDP by 2019. Inflation is projected to be kept below 3 percent on average and the external position is expected to improve with the overall balance registering a surplus starting this year. Notwithstanding this broadly positive outlook, the authorities remain aware of the downside risks highlighted in the staff report, including potential difficulties to garner support for the reform agenda, unanticipated fiscal risks, and unfavorable external conditions. They have restated their commitment to GAP implementation with a view to strengthening the resilience of the economy and consolidating macroeconomic gains.

Policies for the remainder of 2017 and beyond

5. Looking ahead, the Beninese authorities remain committed to taking steps needed to sustain high and inclusive growth, while preserving macroeconomic stability and debt sustainability. Over the medium-term, their policies will focus on boosting domestic revenue mobilization, improving public expenditure and financial management, safeguarding debt sustainability, and improving the business environment.

Strengthening revenue mobilization, public expenditure and financial management

6. To create more fiscal space for GAP financing the authorities will pursue their efforts to further improve domestic revenue mobilization and public investment management. With the adoption of the Strategic Plan for the Tax Administration (POSAF) in February 2017, the seeds for improved cooperation between tax and customs administrations have been planted. Going forward, steps will be taken to secure this outcome, thereby expanding the tax base.

7. Ongoing tax policy reforms will be strengthened with new revenue measures included in the 2018 budget law, notably the strengthening of fiscal controls, the implementation of penalties for tax delays, and the cancellation of some VAT exemptions, and the expected non-renewal of tax exemptions on GSM licensing benefiting telecommunication companies. The authorities believe that these measures, together with tax and customs administration reforms should increase revenue by 1.5 percent of GDP compared to the original program for 2018. They are planning a comprehensive review of the tax expenditures, with the aim at streamlining them. This will help to identify and remove expenditures that are no longer justified from an economic and social standpoint or without legal basis.

8. Improving the efficiency of government spending ranks high on the authorities’ agenda, as demonstrated by recent measures aimed at improving the overall governance system and public financial management. The public expenditure review conducted with World Bank assistance also illustrates the authorities’ commitment to improve the quality of public expenditure. Going forward, the authorities will refine public investment management by making good use of the recommendations from Fund technical assistance on Benin’s Public Investment Management Assessment (PIMA). In particular, it is their intention to enhance coordination between investment planning and budget preparation, improve public procurement processes and infrastructure project selection, and enhance human capacity and the institutional framework.

9. The Beninese authorities are also committed to mobilizing private financing while monitoring fiscal risks to ensure fiscal sustainability. The private sector is called on to play a major role in the financing of the GAP. The authorities have prepared the ground work to facilitate recourse to Public-Private Partnerships (PPPs). The legal framework for PPPs established in October 2016 has been refined in June 2017. Two units have been created and tasked with providing technical support to PPPs projects (CAPPP) and assessing the fiscal risks related to PPPs respectively.

Preserving debt sustainability

10. The authorities take good note of staff assessment that the updated 2017 September DSA confirms a moderate risk of debt distress for Benin despite the increase in domestic debt over the past years. They will work with development partners to secure timely disbursement of budget support with a view to reducing reliance on domestic and regional financing and thus containing pressures on domestic debt.

11. Going forward, they would like to reiterate their commitment to a prudent borrowing strategy. Part of their borrowing strategy will consist in seeking longer maturity obligations when tapping the regional financial market. Building on the significant progress made in strengthening debt management at the Treasury and the debt management agency (CAA), the authorities will focus on strengthening the medium-term debt strategy (MTDS), notably through the incorporation of a public debt ceiling in line with the budget framework law. Finally, contingent liabilities from SOEs an PPPs will be fully assessed and incorporated in the MTDS for a complete monitoring.

Fostering economic transformation

12. Bolstering economic transformation to sustain long-term growth is one of the main pillars of the authorities’ action plan. They have identified value-addition in the agricultural and the tourism sectors as a source of future growth. In this regard, the convergence of views between the authorities and staff is welcomed, as evidenced during the staffs presentation of the related Selected Issues Paper in Cotonou. To advance this transformation agenda, the authorities have developed specific policies in the targeted sectors as well as cross-cutting policies aimed at boosting the economy.

13. In the agricultural sector, seven regional poles for agricultural development have been created and policies aim at promoting high value-added crops and enhancing the processing industry through technological innovations. In the tourism sector, investment projects have been planned around the country’s specific tourist advantages including Voodoo art, and the historic city of Ouidah, which is set to become the flagship destination of memorial tourism in Africa. The business environment, the financial sector and human capital sector make the bulk of cross-cutting policies.

14. The authorities are cognizant that creating an enabling environment for the business sector will be key given the expected role of the private sector in the economic transformation agenda. They have initiated various reforms in that regard and progress thus far include a fast-track process to create a business and an improved access to credit. Ongoing efforts focus on accelerating reform of audit institutions, creating a more competitive procurement system, improving access to electricity, and combatting corruption. In this connection, strengthening the anti-corruption/money laundering and combatting the financing of terrorism (AML/CFT) framework is of particular importance for the authorities. A new bill on the fight against terrorism was submitted to the National Assembly earlier this month. These initiatives will be pursued together with the ongoing measures taken by the National Anti-Corruption Authority (ANLC) to strengthen the asset declaration framework.

15. The authorities are committed to making quick and significant progress on these fronts with the view to promoting private sector development, as envisaged under the GAP. Moreover, the reform of the judicial system accompanied by the setting-up of two commercial courts in 2017, will help further improve economic governance and transparency together with the capacity building on commercial regulation and the strengthening of the audit function and the procurement system. The authorities welcome Benin’s participation in the G20 Compact with Africa Initiative, which is expected to help step up these reforms, stimulate private investment, and improve the economy’s overall competitiveness.

16. The authorities are also taking steps to swiftly proceed to the structural reforms in the financial sector for more financial deepening and inclusion. Those include the implementation of the legal framework required to launch the activities of the Credit Bureau and the extension of the electronic registration of land titles to the entire country. They acknowledge that the stability and soundness of the financial sector—including the microfinance sector—is key to promoting financial inclusion and sending strong signals to domestic and foreign investors. To this end, they are working with the regional central bank (BCEAO) to strengthen the enforcement of the regulation, notably by harmonizing the regional resolution framework, strengthening the supervisory body and regularizing unauthorized microfinance institutions. It is also noteworthy that BCEAO is proceeding with the implementation of risk-based supervision.

Advancing other structural reforms

17. The authorities acknowledge the importance of reducing inequality and poverty by making growth more inclusive. In this regard, they will continue to invest in health, education, and other pro-poor sectors in line with the GAP priorities. They are in the process of refining the country’s social protection and facilitating access of the poorest segments of the population to basic public services. In this endeavor, the recommendations made by staff in the Selected Issues Paper will provide valuable insights.

18. To help enhance policy decisions and address data gaps, the authorities will continue to improve the timeliness, quality and consistency of national accounts. Work is underway to rebase the national accounts and implement the 2008 System of National Accounts (SNA). In this endeavor, they welcome technical support provided by the Fund and other partners.

Conclusion

19. Benin continues to implement steadfastly its economic and financial program with encouraging results. Growth has rebounded, while macroeconomic stability has been strengthened. The Beninese authorities are committed to stepping up efforts for addressing the challenges still facing the economy. They are confident that their GAP appropriately emphasizes the need to foster economic transformation, improve governance and make further inroads in poverty reduction. The ECF-supported program provides an additional framework to implement the policies needed to move towards the government’s development goals.

20. Based on the good performance under the program and the authorities’ commitment to pursue their reform efforts, we would appreciate Directors’ support for the completion of the first review under the ECF arrangement and for the authorities’ request for the modification of performance criteria.

Benin: 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
Author: International Monetary Fund. African Dept.