Statement by Mr. Sembene, Executive Director for Togo, and Mrs. Boukpessi, Advisor to the Executive Director June 15, 2018

Second Review Under the Extended Credit Facility Arrangement and Request for Modification of Performance Criteria

Abstract

Second Review Under the Extended Credit Facility Arrangement and Request for Modification of Performance Criteria

1. The Togolese authorities appreciate the candid and constructive discussions held with Fund staff in the context of the Second Review under the Extended Credit Facility arrangement. They value Fund’s program engagement which has provided effective support for their reform and policy agenda.

2. Following a period of expansion driven by strong agricultural production and public investments, economic activity in Togo is estimated to have increased at a slower pace in 2017 amid recent social and political tensions. Going forward, this challenging domestic environment that could persist in the run-up to upcoming legislative and local elections is likely to continue weighing on the country growth’s prospects. The authorities are taking a proactive approach to addressing these tensions, including by holding a political dialogue with concerned domestic stakeholders, facilitated by some regional leaders.

3. The authorities are determined to implement their ambitious new National Development Plan (NDP) for 2018–2022. The NDP focuses on reinforcing macroeconomic stability, transforming the economy into a logistic hub and a regional financial center, and promoting inclusive growth and reduce unemployment and poverty. It is the authorities’ intention to build on the satisfactory performance under their Fund-supported program to make further inroads towards these NDP objectives.

Recent Economic Developments and Performance under the ECF Arrangement

4. Real GDP growth is estimated at 4.4 percent in 2017 compared to 5.1 percent in 2016 due largely to the impact of the current socio-political tensions on the tertiary sector, despite a solid performance in the primary sector. Notwithstanding the underperformance in revenue collection as a result of economic slowdown, the overall primary balance was significantly improved from a deficit of 7.2 percent in 2016 to a surplus of 1.5 percent in 2017 reflecting a strong commitment to fiscal consolidation and discipline. The current account deficit is estimated to have narrowed down from 9.3 percent of GDP in 2016 to 8.0 percent of GDP in 2017 thanks notably to the decrease in public investment projects. Inflation remained well below the WAEMU regional convergence criterion of 3 percent.

5. Program implementation under the ECF arrangement was broadly satisfactory. All the quantitative performance criteria (QPCs) set for end-December 2017 were met. Most notably (i) the domestic primarily balance exceeded the program target; (ii) no external arrears were accumulated; (iii) the net domestic financing was contained below the program ceiling; (iv) no new non-concessional debt was contracted and no guarantees for domestic suppliers and contractors were provided; and (v) no new prefinancing operations were initiated. As regard the indicative targets (IT), total fiscal revenue failed to meet the floor set under the program due to the activity slowdown while the priority social spending target was missed with a very small margin. On the structural front, all the benchmarks were met although the restructuring plan for the two public banks was completed with a minor delay.

Outlook and Policies for the remainder of 2018 and beyond

6. The Togolese authorities remain optimistic about the medium-term economic outlook. They are confident that sustained, high growth rates will be within reach once the socio-political environment improves. Moreover, recent public infrastructure investments are expected to enhance competitiveness and boost growth, notably by helping increase productivity and fostering stronger private sector activity.

7. The authorities reiterate their determination to keep the reform momentum with a view to preserving macroeconomic stability, improving social protection, safeguarding long-term debt sustainability, addressing remaining vulnerabilities in the financial sector and boosting the country’s growth potential. Through sound policies, they plan to sustain Togo’s positive contribution the West African Monetary Union (WAMU)’s external stability.

Pursuing fiscal consolidation and strengthening fiscal management and institutions

8. The authorities remain committed to the program objectives of reducing public debt and preserving fiscal sustainability. They agree with staff on the need to loosen the fiscal stance in 2018 amid the revenue-reducing turmoil in recent months, while securing prospects for timely progress toward the WAEMU convergence criteria related to the deficit. Against this background, the government adopted last month a revised 2018 budget that takes into account the adverse effects of the current social and political tensions on revenue mobilization. The revised budget includes a number of measures aimed at enhancing revenue collection for an amount equivalent to about 0.5 percent of GDP compared to the original budget and containing public expenditure.

9. On the revenue side, sustained efforts by the Revenue Authority to improve tax administration and policy will be pursued, building on the range of measures implemented in 2017, notably the introduction of mandatory online reporting made for larges companies, mobile payment options for some specific taxes, and the broader use of new technologies to facilitate tax collection procedures. In this regard, various initiatives are underway or being considered, notably with the aim of expanding the tax base, improving property tax collection, reducing tax expenditures, increasing non-tax revenue, expanding the scope of the e-service for online declaration and payments as well as mobile payments, and digitalizing customs clearance procedures. Work has also been initiated for the creation of the Urban Land Registry.

10. On the spending side, the restraint exercised by the authorities helped achieve fiscal targets notwithstanding the significant revenue underperformance. Going forward, an optimization exercise was initiated following a comprehensive review that was supported by an international consulting firm and aimed at identifying and streamlining non-priority expenditure. This exercise is expected to yield significant savings in 2018 and onwards.

11. To continue making inroads in clearing domestic arrears and avoid new accumulation, steps are being taken to strengthen the expenditure chain and cash management flows. In this connection, it is envisaged that monthly procurement and commitment plans will be developed from July 2018. The authorities will also carry out a cost-effectiveness analysis of public investment projects that is expected to enrich the 2019 budget.

Achieving debt reduction

12. Bringing public debt on a sustainable downward path continues to be a key priority for the authorities. While considerable progress has been made to this end, with Togo’s public debt-to-GDP ratio reduced from 78.2 percent of GDP in 2016 to 72.5 in 2017 (excluding debt from state-owned-enterprises SOEs), the authorities remain fully committed to their consolidation plans with a view to tackling the still high public debt level and meeting WAEMU requirements. They are determined to pursue a prudent borrowing strategy, and to continue strengthening the technical and operational capacities of the new debt management office.

13. As part of their efforts to ease the debt burden and improve the public debt profile, the authorities envision to carry out a reprofiling of a portion of their domestic debt. As such, they plan to contract new external debt at more favorable maturity and interest rates terms in order to repay the heavy and costly domestic debt service. Accordingly, the authorities would welcome a modification of the zero-ceiling on new non-concessional external borrowing that would not lead to a deterioration of Togo’s current debt rating.

Maintaining financial stability

14. Togo is making important strides in addressing the legacies of the two remaining public banks with a view to mitigating risks to the budget. Building on international best practices, a comprehensive restructuring plan was submitted to the Secretariat of WAEMU Banking Commission in April 2018. Upon its approval, the authorities expect that the legal transfer for the merger of the two banks will be promptly completed.

15. In the context of the NDP, the authorities aim to position Togo as a financial center hub in the sub-region. At the same time, they attach high value to safeguarding financial stability. They will address the remaining weaknesses in the financial system in close collaboration with the regional authorities. They plan to continue their efforts to improve access to credit, while taking steps to enhance the sector’s regulatory and supervisory framework.

Promoting economic transformation and advancing other structural reforms

16. The main objective of Togo’s NDP is to enable structural transformation of the economy with the view to achieving stronger and more inclusive growth, creating jobs, and improving living conditions. It is hoped that this will be achieved notably by setting up a modern and dynamic logistics hub and a premier sub-regional business and financial center and developing agricultural processing, manufacturing and extractive industries centers. In parallel, advancing reforms in the health and education sectors and creating jobs through agricultural clusters and industrial parks are among the key pillars of the authorities’ inclusive growth strategy.

17. Continuous progress in improving the business environment will be of paramount importance given the critical role of the private sector is expected to play in advancing the country’s economic transformation agenda. A business climate unit under the supervision of the Office of the President of the Republic was set up in September 2017. An action plan aiming at addressing impediments to a conducive business environment in Togo was adopted in January 2018 and various reforms notably in the electricity, construction and property sectors have since been initiated. Ongoing efforts focus inter alia on land reform, facilitating the issuance construction permits, fostering business creation, enforcing contracts and promoting trade with the country’s partners. The authorities also look forward to receiving adequate assistance from development partners in the areas of property registration, tax administration, and access to credit where the country still significant room for maneuver. They expect Togo’s participation in the G20 Compact with Africa Initiative (CwA) to help reform the business environment and attract foreign private investment.

Conclusion

18. The Togolese authorities would welcome the Executive Board’s support for the completion of the second ECF review based on the strong program performance amid a challenging environment and their continued commitment to their Fund-supported program. They also request the modification of performance criteria on domestic primary balance, net domestic financing, and non-concessional external borrowing. This will help to accommodate the revenue underperformance stemming from the socio-political situation and reduce the domestic debt service burden, while maintaining Togo at moderate risk of external debt distress. They look forward to Directors’ continued support and Fund’s valuable engagement in Togo.