Benin: 2019 Article IV Consultation, Fourth Review Under the Extended Credit Facility Arrangement, and Request for Modification of Performance Criteria—Press Release; Staff Report; and Statement by the Executive Director for Benin

2019 Article IV Consultation, Fourth Review under the Extended Credit Facility Arrangement, and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Benin

Abstract

2019 Article IV Consultation, Fourth Review under the Extended Credit Facility Arrangement, and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Benin

Background

1. Benin has very large development needs. At $829 in 2017, GDP per capita is well below the Sub-Saharan Africa (SSA) weighted average of $1,574. Benin is in the bottom quartile of the 2017 Human Development Index. Poverty remains elevated at about 40 percent of the population. Large development gaps exist in several key areas, as illustrated by low staffing in the health sector, limited access to sanitation and electricity, and low literacy rate. The recent costing exercise of the Sustainable Development Goals (SDGs) summarizes the scale of the challenge, with additional expenditure needs estimated at around 20 percent of GDP by 2030.1

2. Achieving development objectives will require a deep transformation of the Beninese economy. Growth should be more stable and inclusive to bring down poverty and generate the tax revenues needed to finance development projects. Economic diversification away from Benin’s traditional sectors would enhance the resilience of the economy. Finally, a stronger participation of the private sector, including foreign investors, could generate additional resources for infrastructure in a context of tighter public finances.

3. The authorities are committed to this agenda of economic development but are facing hurdles. Their strategy is embedded in the 2018–25 national development plan, which establishes strategic guidelines to achieve development objectives and support line ministries in formulating their sectoral programs. Within this framework, the 2016–21 Government Action Plan (GAP) identifies the main priorities and projects in infrastructure, agriculture, and tourism. In 2017, Benin became member of the Compact with Africa (CwA), with the aim of boosting the country’s attractiveness. However, despite Benin’s high growth potential and strong commitment to reform, progress is hampered by structural bottlenecks, such as the small size of the domestic market, high informality, and governance weaknesses.

4. Strong performance under the IMF program will support the authorities’ progress towards development goals. All end-June and end-December QPCs have been met since the beginning of the program in 2017.2 Implementation of past policy recommendations since the 2017 Article IV report has been broadly satisfactory (Annex I). Results have been especially encouraging in the fiscal area: the fiscal deficit is excepted to decline by half in two years (from 5.9 percent of GDP in 2017 to 3.0 percent of GDP in 2019) and the authorities have conducted important reforms to mobilize domestic revenue and improve the efficiency of public investment.

Recent Developments

The macroeconomic and fiscal performance continues to be strong, but signs of vulnerabilities in the financial sector have become more apparent.

5. The growth momentum does not show signs of slowing. 2018 growth is estimated at 6.7 percent (up from 5.8 percent in 2017), mainly driven by strong agriculture and port activity. Cotton production is expected to exceed 700,000 tons in 2018 compared to 598,000 tons in 2017. The volume of merchandise at the Port of Cotonou increased by over 8.5 percent in 2018 (Text Figure 1). Inflation stood at 1 percent last year.

Text Figure 1.
Text Figure 1.

Cotton and Port Activity Indicators (thousands of tons)

Citation: IMF Staff Country Reports 2019, 203; 10.5089/9781498323802.002.A001

Source: Beninese authorities.

6. The fiscal deficit narrowed significantly in 2018. The 2018 deficit is estimated at 4.0 percent of GDP, significantly lower than anticipated at the time of the third review (4.7 percent). The overperformance is mainly due to the under-execution of the investment budget. Revenues were on target. For the first time since the program inception, domestic tax revenues overperformed, and, combined with another overperformance of nontax revenues, offset a significant shortfall at customs.3 Spending on priority social sectors amounted to CFAF 202.4 billion, significantly above the end-December floor (CFAF 167.0 billion). Finally, data for the first quarter of 2019 suggest that revenue collection and the execution of the budget are on track.

7. Preliminary estimates point to a strong contraction of the current account deficit in 2018. After widening in 2017 due to higher food imports and the public investment scaling up, the current account deficit (including grants) declined from 10.0 percent of GDP in 2017 to 8.3 percent of GDP in 2018. The improvement was mainly driven by a significant increase in exports of cotton, and, to a lesser extent, cashew nuts. Reforms to strengthen the technical capacities of farmers, expand cultivable lands, and distribute higher-quality seeds led to a surge of agricultural production, which had also a dampening effect on food imports.

8. Financial vulnerabilities have become more apparent. The aggregate capital adequacy ratio (CAR) of the banking sector declined sharply in the first half of 2018 (from 11.9 percent at end-2017 to 7.6 percent at end-June 2018), with 5 out of 12 banks falling below the regulatory threshold of 8.6 percent. The low CAR is partly the result of the structurally-low profitability of the banking sector, which recorded aggregated losses for three consecutive years in 2015–17 (Selected Issues Paper IV). However, most of the decline in the first half of 2018 was due to the ongoing regulatory Basel II/III reform, which has redefined the scope of bank capital.4 Other financial soundness indicators point to a slight decline in the level of non-performing loans (NPLs) (from 19.4 percent of total loans in 2017 to 18.9 in June 2018) and an increase in loan concentration, with credit to the five largest borrowers rising from 91.6 percent of banks’ capital at end-2017 to 103.3 percent in June 2018 (Table 10).

Table 1.

Benin: Selected Economic and Financial Indicators, 2017–24

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Sources: Beninese authorities; IMF staff estimates and projections.

Total revenue (excluding grants) minus current primary expenditure, capital expenditure, and net lending.

Total revenue (excluding grants) minus current primary expenditure and capital expenditure financed by domestic resources.

Includes arreas stock.

Data include central government debt, government guarantees, and domestic arrears.

Table 2.

Benin: Consolidated Central Government Operations, 2017–24

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Sources: Beninese authorities; IMF staff estimates and projections.

For 2019, arreas to suppliers of 0.3 percent of GDP are included in expenditure and deficit relative to EBS/18/364.

Total revenue (excluding grants) minus current primary expenditure, capital expenditure, and net lending.

Total revenue (excluding grants) minus current primary expenditure and capital expenditure financed by domestic resources.

Compared to EBS/18/364, the recomposition of the financing reflects the issuance of the eurobond and the related reduction in domestic borrowing.

Includes financing by Beninese banks.

Includes financing by regional banks.

The Eurobond of FCFA 325 billion is used for budget financing. Domestic financing is adjusted downward relative to EBS/18/364 by the same amount.

Table 3.

Benin: Consolidated Central Government Operations, 2017–24

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Sources: Beninese authorities; IMF staff estimates and projections.

For 2019, arreas to suppliers of 0.3 percent of GDP are included in expenditure and deficit relative to EBS/18/364.

Total revenue (excluding grants) minus current primary expenditure, capital expenditure, and net lending.

Total revenue (excluding grants) minus current primary expenditure and capital expenditure financed by domestic resources.

Compared to EBS/18/364, the recomposition of the financing reflects the issuance of the eurobond and the related reduction in domestic borrowing.

Includes financing by Beninese banks.

Includes financing by regional banks.

The Eurobond of FCFA 325 billion is used for budget financing. Domestic financing is adjusted downward

Data include central government debt, government guarantees, and arrears.

Table 4.

Benin: Consolidated Central Government Operations, 2018–19

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Sources: Beninese authorities; IMF staff estimates and projections.

Data are computed on a cumulative basis

For 2019, arreas to suppliers of FCFA 19.6 billion are included in expenditure and deficit relative to EBS/18/364.

Total revenue (excluding grants) minus current primary expenditure, capital expenditure, and net lending.

Total revenue (excluding grants) minus current primary expenditure and capital expenditure financed by domestic resources.

Compared to EBS/18/364, the recomposition of the financing reflects the issuance of the eurobond and the related reduction in domestic borrowing.

Includes financing by Beninese banks.

Includes financing by regional banks.

The Eurobond of FCFA 325 billion is used for budget financing as follow: 80 billion in Q2, 160 billion in Q3, and 85 billion in Q4. Domestic financing is adjusted downward relative to EBS/18/364 by the same amount.

Table 5.

Benin: Balance of Payments, 2017–24

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Sources: Beninese authorities; IMF staff estimates and projections.Note: … = not available.

Excludes re-exports and imports for re-export.

Projections for short-term capital include estimates to adjust for the trend in errors and omissions.

The upward revision in 2019 relative to EBS/18/364 is due partly to the Eurobond issuance.