Benin: Fifth Review Under the Extended Credit Facility Arrangement, Request for Extension, and Request for Modification of Performance Criteria—Press Release; and Staff Report
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International Monetary Fund. African Dept.
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Publication Date:
26 Dec 2019
eISBN:
9781513524696
Language:
English
Keywords:
ISCR; CR; IMF mission; deficit; objective; economic growth; Beninese bank; financial support; Beninese economy; debt ratio; Government debt management; Credit; Global
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Fifth Review under the Extended Credit Facility Arrangement, Request for Extension, and Request for Modification of Performance Criteria-Press Release

Abstract

Fifth Review under the Extended Credit Facility Arrangement, Request for Extension, and Request for Modification of Performance Criteria-Press Release

Background

1. The ECF-supported program is on track. On June 21, 2019, the Executive Board completed the fourth review under the three-year ECF arrangement. Directors welcomed the strong performance under the program. All semi-annual quantitative performance criteria (QPCs) and structural benchmarks (SBs) have been met since the beginning of this program.

2. In July 2019, the statistical institute INSAE published revised national accounts data. Past GDP levels were revised upward by about 37 percent (Annex I). This rebasing led to large downward revisions of all GDP ratios, including the debt, fiscal deficit, government revenue, and current account ratios.

3. Post-elections protests have abated. Social unrest followed the parliamentary election of April 2019, in which the opposition parties did not participate after the electoral commission assessed they had failed to comply with requirements of the new electoral code. Calm has now returned to the country. In October 2019, representatives of majority and opposition parties met to reignite the political dialogue and formulate crisis exit strategies. In November, Benin’s parliament adopted a revision of the constitution meant to modernize public institutions, including by improving gender balance in the public sector through the introduction of quotas, creating a court of auditors, and aligning the calendars of local, legislative and presidential elections.

4. At end-August 2019, Nigeria decided unilaterally to close the border with some neighboring countries, including Benin. The Nigerian authorities motivated their decision by the need to curb smuggling into Nigeria and spur local production. The closure was initially expected to last one month, but the border was still closed at the time of the drafting of the report (early November 2019). The Beninese authorities have made it a priority to resolve the issue promptly.

Recent Developments

Benin continued to display a strong macroeconomic and fiscal performance in the first half of 2019.

5. The growth momentum was strong in the first months of the year. Conjunctural indicators for the first semester suggest an acceleration of economic activity, in part driven by the agricultural sector and the port (Text Figure 1). Partly due to the high agriculture production and lower water utility prices, inflation has been on a declining trend, with the CPI falling by 1.7 percent in September relative to one year earlier.

Text Figure 1.
Text Figure 1.

Cotton Production and Port Activity

Citation: IMF Staff Country Reports 2019, 398; 10.5089/9781513524696.002.A001

Sources: Benin authorities

6. Fiscal outturns overperformed targets at end-June 2019. Over the first semester, the cumulative fiscal deficit including grants was contained at CFAF 30.4 billion (0.4 percent of annual GDP), significantly below the CFAF 71.7 billion initially foreseen under the program. Cumulative revenue overperformed by 0.2 percent of GDP (CFAF 522.8 billion, compared to a target of CFAF 505.5 billion), with both tax and nontax revenues exceeding expectations. Spending remained lower than budgeted, mainly due to the slow execution of externally-financed capital expenditure. Preliminary data for the third quarter shows a shortfall of customs revenue of about CFAF 10 billion due to the border closure.

7. The 2018 current account deficit has been revised down significantly both in nominal terms and in percent of GDP. Revised estimates of the balance of payments (BoP) show a smaller current account deficit than previously estimated, as a result of a better measurement of trade activities (informal re-exports and freight services). The 2018 deficit now accounts for 4.5 percent of GDP (compared to 6.0 percent of GDP in the previous report, using the rebased GDP). In addition, the new data reveals that the current account deteriorated by 0.3 percent of GDP in 2018 because of a surge in informal imports of fuel.1

8. Bank capitalization improved in the course of 2018. The aggregate capital adequacy ratio of banks increased from 7.6 percent at end-June 2018 to 8.2 percent at end-December 2018, while remaining below the regulatory threshold of 8.6 percent required for end-2018 (Table 10). Credit concentration declined from 103.3 percent at end-June 2018 to 90.4 percent at end-December 2018. However, credit and liquidity risks remain elevated. The ratio of gross NPLs to total loans increased from 18.9 percent at end-June 2018 to 21.6 percent at end-December 2018. Liquid assets as a share of total assets are at their lowest levels since 2005 (12.5 percent at end-December 2018).

Table 1.

Benin: Selected Economic and Financial Indicators, 2017–24

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Sources: Beninese authorities; IMF staff estimates and projections.

The comparison of GDP ratios across vintages should take into account the recent rebasing of National Accounts. To facilitate the comparison, the columns for EBS/19/203 are presented in both original and rebased GDPs.

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 arrears stock.

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

In 2024, the decline in the overall balance of payments reflects the first repayment of the 2019 eurobond.

Table 2.

Benin: Consolidated Central Government Operations, 2017–24

(Billions of CFA francs)

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Sources: Beninese authorities; IMF staff estimates and projections.

For 2019, arreas to suppliers of CFA 19.06 billions are included in expenditure and deficit relative to EBS/18/364. Arrears were accumulated before 2016 and recognized in 2019.

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 financing by Beninese banks.

Includes financing by regional banks.

Table 3.

Benin: Consolidated Central Government Operations, 2017–24

(percent of GDP)

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Sources: Beninese authorities; IMF staff estimates and projections.

The comparison of GDP ratios across vintages should take into account the recent rebasing of National Accounts. To facilitate the comparison, the columns for EBS/19/203 are presented in both original and rebased GDPs.

For 2019, arreas to suppliers of CFA 19.06 billions are included in expenditure and deficit relative to EBS/18/364. Arrears were accumulated before 2016 and recognized in 2019.

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 financing by Beninese banks .

Includes financing by regional banks.

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

Table 4.

Benin: Consolidated Central Government Operations, 2019–20

(Billions of CFA francs)

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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 billions are included in expenditure and deficit relative to EBS/18/364. Arrears were accumulated before 2016 and recognized in 2019.

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.

Table 5.

Benin: Balance of Payments, 2017–24

(Billions of CFA francs)

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Sources: Beninese authorities; IMF staff estimates and projections. Note: … = no t available.

The comparison of GDP ratios across vintages should take into account the recent rebasing of National Accounts. To facilitate the comparison, the columns for EBS/19/203 are presented in both original and rebased GDPs.

Excludes re-exports and imports for re-export.

In 2024, the decline in the financial account and overall balance of payments r eflects the first repayment of the 2019 eurobond.

Table 6.

Benin: Monetary Survey, 2017–20

(Billions of CFA francs)

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Sources: BCEAO; IMF staff estimates and projections.

Changes to the EBS/19/203 partly reflect a new structure of the monetary framework (“other items” were moved from M2 to net domestic assets, and their components were marginally changed) to align it with IFS presentation.

Including credit to the private sector and to other non-financial public sector.

Including deposits excluded from broad money, securities other than shares excluded from broad money, loans, financial derivatives, insurance technical reserves, and shares and other equity.

The comparison of GDP ratios across vintages should take into account the recent rebasing of National Accounts. To facilitate the comparison, the columns for EBS/19/203 are presented in the rebased GDP.

Table 7.

Benin: Schedule of Disbursements Under the ECF Arrangement

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Source: International Monetary Fund.
Table 8.

Benin: Indicators of Capacity to Repay the Fund, 2019–331

(In millions of SDRs; Reporting Year: January to December)

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Sources: IMF staff estimates and projections.

Data are projections

: “On May 24, 2019, the IMF Executive Board approved a modified interest rate setting mechanism which effectively sets interest rates to zero on ECF and SCF through June 2021 and possibly longer. The Board also decided to extend zero interest rate on ESF until end June 2021 while interest rate on RCF was set to zero in July 2015. Based on these decisions and current projections of the SDR rate, the following interest rates are assumed beyond June 2021: 0/0/0/0 percent per annum for the ECF, SCF, RCF and ESF, respectively. The Executive Board will review the interest rates on concessional lending by end-June 2021 and every two years thereafter.”

Total debt service includes IMF repurchases and repayments.

Table 9.

Benin: Gross External Requirement, 2018–21

(in billions of CFAF)

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Source: Beninese authorities; IMF staff estimates and projections. 1 Excluding grants
Table 10.

Benin: Financial Soundness Indicators, 2012–18

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Source: BCEAO. Note: … = not available.

The first year of data reporting in accordance with Basel II/III and Revised Chart of Accounts (Interim Data)

Identified sectors represent at least 80 percent of credit

Excluding taxes on banking operations.

Including savings accounts.

Outlook and Risks

9. The Beninese economy is expected to grow rapidly in 2019, notwithstanding the closure of the border with Nigeria. Cotton production and port activity continue to support growth this year. The border closure should affect the economy negatively through several channels, including a contraction of re-export activities and higher oil prices (Box 1). Staff assumes that the border will reopen before the end of 2019—an assumption shared by the authorities and the national BCEAO. Thus, 2019 GDP growth has been revised down to a still high 6.4 percent from 6.7 percent in IMF Country Report 19/203.2 Relatedly, the current account is projected to deteriorate from 4.5 percent of GDP in 2018 to 4.9 percent of GDP in 2019.

Trade Relations Between Benin and Nigeria

The Beninese economy is deeply interconnected with Nigeria, which is one of its largest trading partners. A number of commodities like rice, poultry, and used cars are imported in Benin and then re-exported to Nigeria. In 2018, informal re-exports accounted for almost a half of Beninese’ exports and represented 11 percent of GDP. In addition, Nigeria is the main source of imported fuel (kpayo), which represents more than half of total fuel consumption in Benin. Kpayo prices are relatively low compared to international prices given fuel subsidies provided in Nigeria.

Bilateral trade benefits both countries. For Benin, the fuel import business is an important source of income and employment for poor households (Golub and others 20191). Trade with Nigeria is also a key source of government revenues. On average, revenues raised at customs in Benin represented about 40 percent of tax revenue in 2018 or 4 percent of GDP, a third of which is related to imports for re-exports. With regard to Nigeria, there are also clear gains from greater intraregional trade in terms of income generation and poverty reduction (Cadot and others 20182).

1 Golub, S., A. A. Mbaye and C. A. Diop, 2019, “Benin’s Informal Trading with Nigeria,” Chapter 8 of Benin Institutional Diagnostic WP19/BID09. 2 Cadot, O., M. Ferrantino, J. Gourdon and D. Reyes, 2018, “Reforming Non-Tariff Measures: From Evidence to Policy Advice.” World Bank.

10. Medium-term prospects continue to be favorable. Cotton production, construction, and transport, which are the main drivers of economic growth, are expected to continue expanding vigorously next year. Under the assumption that the border with Nigeria reopens promptly, growth is assumed to remain at its potential, estimated above 6½ percent in IMF Country Report 19/203, in 2020 and beyond. In light of the international commodity price forecasts and inflation projections in the euro area, inflation is projected to remain below the WAEMU 3 percent ceiling over the medium term. Continued fiscal discipline should ensure that the budget deficit remains below the WAEMU criterion of 3 percent of GDP, placing public debt on a firm downward path. The current account balance is expected to improve, driven by strong exports and the public investment scaling-down from the 2017 peak level.

11. Risks to the outlook are tilted to the downside (Annex II). At the national level, uncertainty remains elevated, although political protests have abated. The local elections, planned for April 2020, may trigger a resurgence of social unrest, which could adversely affect the macroeconomic performance. In addition, a prolonged closure of the border with Nigeria would take a heavy toll on Benin’s exports, growth and fiscal revenues. The April 2021 presidential elections may generate public spending pressures next year. Unresolved banking sector vulnerabilities may also pose fiscal risks if not handled carefully and in timely manner. At the regional level, a contagion of security risks, which have intensified in neighboring countries, could generate budgetary costs related to security spending and revenue losses. At the global level, the main risks could originate from rising protectionism and weaker-than-expected global growth.

Policy Discussions

Discussions focused on (i) the main parameters of the 2020 budget and revenue mobilization efforts; (ii) the revised debt management strategy; (iii) the reform of the investor protection framework; and (iv) the soundness of the financial sector.

A. Creating Fiscal Space for Development Programs

12. The draft budget aims at bringing the fiscal deficit below 2 percent of GDP in 2020. The draft budget targets a fiscal deficit of 1.8 percent of rebased GDP and entails a fiscal adjustment of ¼ percent of GDP relative to 2019 (Text Table 1).3 The deficit target is within the WAEMU deficit ceiling and will place the debt ratio on a downward trajectory. The budget includes a revenue mobilization effort estimated at ¼ percent of GDP, essentially on domestic tax revenue; customs revenues are assumed to remain stable in percent of GDP given the uncertainties.4 On the spending side, the plan is to continue to rationalize the wage bill, while protecting social and capital spending.5

Text Table 1.

Benin: 2020 Draft Budget

(percent of GDP)

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Sources: Benin authorities and IMF staff estimates and projections. Note: Arrears to suppliers were accumulated before 2016 and recognized in 2019.

13. On the revenue side, the budget foresees an ambitious tax effort. With the rebasing of national accounts, the tax ratio was revised down to 11 percent of GDP—a low level in Sub-Saharan Africa and compared to the WAEMU convergence criterion of 20 percent of GDP. The authorities agreed to a revenue mobilization effort equivalent to ½ percent of GDP at end-2019 (new SB). The revenue package is based on durable tax measures, focused on income and real estate taxes (Text Table 2, and MEFP ¶41). To be prudent, the expected yield of this tax package is set at ¼ percent of GDP in the draft budget and the program. In case the new revenue measures yield more than ¼ percent of GDP, any in-year windfall could be reallocated to capital and social expenditure as part of a supplementary budget.

Text Table 2.

Benin: Expected Gains from Revenue Measures in 2020

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Taxes on vehicules (Taxe surles Vehicules a Moteur, TVM) Sources: Benin authorities and IMF staff estimates.

14. On the expenditure side, priority is given to protecting development spending. Until 2019, a large part of the fiscal adjustment under the program has relied on the reduction of the capital expenditure-to-GDP ratio. As discussed in IMF Country Report 19/203, a preferable strategy would be to achieve fiscal consolidation through greater domestic revenue mobilization. This strategy will be implemented next year: the tax effort and wage bill savings foreseen for 2020 will enable to maintain constant the ratios of capital and social expenditures to GDP.6 The nominal increase in capital spending seems feasible, given the progress made by the authorities in upgrading their investment management framework, as highlighted in the 2019 IMF Public Investment Management Assessment Update report. With regard to social expenditure, the authorities are phasing in their universal healthcare insurance system (ARCH). In 2019, they started a pilot phase in three regions, testing the system on the poorest. The insurance is expected to be progressively expanded to the rest of the population and become fully operational by 2022. For 2020, the extension will cover all extreme poor, accounting for 17 percent of the total population; its cost, estimated at 0.3 percent of GDP, is included in the draft budget.7

15. Should the border closure extend to 2020 and revenues fall short of expectations, the authorities stand ready to take offsetting measures in year. A prolonged border closure would require fiscal adjustment relative to the draft budget plan. The authorities, who are firmly committed to the 2020 deficit target, agreed to slow down the execution of capital expenditure in case revenues underperform in the first months of 2020 (MEFP ¶42). Nonetheless, fully compensating the revenue shortfall with spending cuts may not be feasible if the border closure extends beyond the first quarter of next year. Indeed, the loss of customs revenues could be very large—representing 1.3 percent of GDP on an annualized basis, more than a third of the domestically-financed capital expenditure budget (projected at 3.2 percent of GDP in 2020). In the event the border remains durably closed, the next review of the program in the spring 2020 will provide an opportunity to revisit the issue with the authorities.

B. Fostering Prudent Debt Management

16. The public debt-to-GDP ratio is expected to stabilize this year after five years of continued increase. This positive development results from a combination of factors, including the significant decline in the fiscal deficit, strong economic growth, and the absence of new guarantees delivered by the government in 2019. Ensuring that debt remains on a declining path afterwards will require strict adherence to medium-term fiscal discipline, in particular by keeping the fiscal deficit below 3 percent of GDP, in line with the WAEMU criterion.

17. The risk of debt distress remains moderate. The rebasing of the national accounts led to a sharp downward revision of the debt-to-GDP ratio. However, debt sustainability improved only modestly, because the liquidity indicators, which are expressed in percent of taxes or exports, have not been significantly affected by the rebasing (see updated Debt Sustainability Analysis (DSA)).8

18. The greater reliance on external financing has created new risks and operational challenges. Following the 2018 debt reprofiling operation and the 2019 issuance of a Eurobond, the composition of debt has changed significantly, with external debt accounting for nearly 60 percent of total debt in 2019, compared to 40 percent in 2017. Although external borrowing can help diversify the financing mix and improve debt terms, it creates new risks (e.g., exchange rate risk) or change their nature (e.g., rollover risk). Box 3 in IMF Country Report 19/203 describes a number of reforms of the debt management framework meant to better monitor and mitigate these vulnerabilities.

19. In response to these new challenges, the authorities are in the process of revising their medium-term debt management strategy (MTDS). The previous MTDS targeted a balanced composition between domestic and external debt. The new MTDS, covering the period 2020–24, will be published by end-2019. It will include a new target range of 55–60 percent for the share of external debt (MEFP¶46 and 47). The debt management agency has computed the target range using the IMF/WB Analytical Tool that assesses the costs and risks of alternative debt issuance strategies (Annex III). The composition target will be reflected in operational plans, prepared on an annual basis and attached to the draft budget.

20. Beyond the revision of the debt management strategy, the authorities are also introducing functional changes in the debt management office (MEFP¶16). At the organizational level, the agency has restructured its operations department to achieve a more rigorous monitoring and control of disbursements and repayments. Portfolio managers are now specialized by type of lender (domestic banks, foreign banks, donors) to enhance efficiency. Following the audit conducted by AFRITAC West in 2015, the agency has aligned its structure with the “front, middle and back office” model, consistent with international best practices. Second, efforts have been made to enhance capacity. The agency has recruited bilingual staff with qualifications in statistics and forecasting. Its staff receives regular training provided by technical partners and IMF technical assistance. Third, the agency website has been revamped and its information is updated regularly.

21. The impact of future infrastructure projects on debt sustainability will need to be carefully assessed, monitored, and managed. More than half of the Government Action Plan projects are expected to be financed by the private sector, partly through Public Private Partnerships (PPPs). A PPP law was enacted in 2016. As of end-2019, no PPP has been signed yet, although some infrastructure projects in the energy sector are at the feasibility study stage. Staff recognizes that some public support may be needed to attract private investors, but its implications on public debt and contingent liabilities should be carefully considered. The mission reiterated that future PPPs should be properly reflected in fiscal accounts, and their fiscal risks assessed.9

C. Enhancing Governance and Fighting Corruption

22. Despite recent progress, perceptions of governance weaknesses adversely impact Benin’s competitiveness and attractiveness for foreign investors.10 According to the 2018 Global Competitiveness Report, Benin’s index lies below the SSA average, and corruption is described as the second most problematic factor for doing business in the country, after constraints on access to financing. So far, no project has been initiated under the Compact with Africa sponsorship. Nonetheless, positive steps have been observed in recent years. The most recent survey of Transparency International—the Global Corruption Barometer Africa 2019—finds that public perception of corruption has improved significantly since 2015: 44 percent of the population in Benin think that the government is doing a good job at fighting corruption compared to 19 percent in 2015. Also, the 2020 Doing Business Report of the World Bank noted an improvement of four places of Benin’s overall ranking, mainly due to a progress in the areas of insolvency procedures, contract enforcement, property registration, and construction permits.

23. Enhancing the investor protection regime could contribute to changing these perceptions. Benin’s framework presents some weaknesses noted by international surveys, including a lack of transparency and insufficient safeguards against the misuse of funds by managers (Annex IV). The authorities are in the process of adopting a new investment code (currently at Parliament), which will address some of these issues (MEFP¶54). Further reforms could focus on (i) improving the dissemination of information (to be made available on the websites of national agencies in charge of promoting foreign investment in the country) in order to enable investors to better evaluate investment conditions in the country; (ii) strengthening the protection of minority shareholders to better involve them in major business decisions; and (iii) increasing scrutiny over management teams’ activities.

24. The authorities could also take measures to increase the effectiveness of their AML/CFT framework. The assessment report of Benin’s compliance with the AML/CFT standards by the Inter-Governmental Action Group against Money Laundering in West Africa (GIABA)—which highlights significant deficiencies in the AML/CFT framework—is expected to be approved in May 2020.11 The authorities have initiated a plan to address past GIABA’s recommendations, including by increasing financial support for the CENTIF, improving reporting of suspicious transactions, and establishing a national agency in charge of managing confiscated criminal assets. The authorities should step-up their efforts in improving the effective implementation of the AML/CFT framework and address the deficiencies identified in the recent draft GIABA report, including by enhancing the prevention and enforcement against money laundering and financial crimes.

25. Benin has progressively built an anti-corruption legal and institutional framework, but meaningful steps need to be taken to improve its implementation. In line with the IMF recommendations of June 2019, the anti-corruption strategy should be adopted, and resources should be mobilized for its implementation, including to enhance the prevention and enforcement against corruption offenses. The operational independence of the National Anti-Corruption Authority should be strengthened, and its activity reports published. Benin should also meet its obligations under the United Nations Convention against Corruption with respect to the upcoming implementation review.

26. Another priority area for governance is trade facilitation. The lack of clarity and automation of the formalities required for importers and exporters creates risks of negotiations and illegal payments between customs agents and individuals seeking to circumvent the rules. Accelerating the digitalization of trade procedures and simplifying them could reduce trade informality and increase customs revenue, by enhancing control and making formal transactions less burdensome.

27. Finally, fiscal governance reforms are key to fostering fiscal transparency and ensuring that public funds are spent efficiently. The mission followed up on the implementation of the recommendations made in IMF Country Report 19/203. With respect to revenue administration, the process of modernizing payment processes is ongoing, including the online submission of financial statements of companies. Regarding the consolidation of the treasury single account (TSA), an IMF Technical Assistance mission is scheduled to visit Benin in December in order to support the implementation and impact analysis of the TSA (March 2020 SB). Finally, in the area of public investment management, agents in charge of controlling public procurement have been appointed in all line ministries, public institutions, and local governments this spring.

D. Strengthening the Banking Sector

28. Important reforms are underway to address the weaknesses of the Beninese banking sector. As mentioned in previous reports, the banking sector is shallow and suffers from a structurally weak profitability, low liquidity, poor credit quality, and elevated credit concentration. Important reforms are phased in at the regional level, including the move to Basel II/III prudential standards and new bank accounting rules (IFRS 9). In the context of these reforms, Beninese banks have recently made considerable recapitalization efforts. The few small banks that are still noncompliant with the statutory minimum level of capital of CFAF 10 billion are undergoing restructuring. Regarding microfinance institutions (MFIs), the authorities continue their efforts to formalize unauthorized institutions and close nonviable ones. To obtain a better purview of the current state of the MFI sector, the authorities have conducted a 2019 census of the sector and are in the process of analyzing the collected data.

29. The formalization of real estate guarantees has started and could significantly improve banks’ profitability. In April 2019 the authorities adopted a decree facilitating the conversion of occupancy permits into real estate titles that are recognized as collateral by the regulator (MEFP¶ 34). As of end-October, about 600 guarantees have been formalized, corresponding to CFAF 72 billion (0.9 percent of GDP) of underlying collateral. This will allow banks to recover some provisions and repurpose them towards more profitable activities. In addition, given that the lack of adequate collateral is one of the main obstacles to lending to SMEs, this reform could also reduce credit concentration. Beninese banks are very supportive of this reform, but emphasized the need to improve the efficiency of notaries, who manage the formalization procedure.

30. To better channel savings towards development projects, the authorities are in the process of establishing a Caisse des Depots et Consignations (CDC). This type of institution, which exists in several francophone countries, manages a pool of dedicated savings (e.g. deposits associated with legal contracts, court-ordered consignments, and some public funds). Its mandate is to finance long-term investment and support public policies, mostly in the area of economic development. In the case of Benin, an added benefit of the CDC could be to lower the cost of term deposits in banks.12 The authorities have hired an international consulting firm to assist with the operationalization of the CDC, which will progressively start its activities in 2020 after the government validates its business model (MEFP¶31–33).

31. The authorities are assessing the best merger option for two public banks . As mentioned in the previous staff report, two small public banks, after having recorded repeated losses in 2015–17, are in the process of being merged. The aggregate capital shortfall for both banks at end-2018 (relative to the CFAF 10 billion norm) represents less than half a percent of GDP. The authorities have hired an international audit company to assess various merger options. The technical work is still ongoing and will be presented to IMF staff when finalized (MEFP ¶30). The mission reiterated that the selected option should be consistent with international best practices, including minimizing the cost for the state while preserving financial stability (see description of the principles in IMF Country Report 19/203).

Data Issues and Capacity Development

32. Conjunctural data. To facilitate effective economic surveillance, staff stressed the need to improve the availability, timeliness and comprehensiveness of high-frequency indicators. This is all the more important that the level of international investors’ scrutiny has increased following the Eurobond issuance. The authorities have started publishing a quarterly conjunctural note in English in the first half of 2019.

33. Extension of debt coverage to SOEs. Staff stressed the importance of extending the DSA coverage to SOEs (see updated DSA report). The authorities are assessing the scope for consolidating central government fiscal accounts with the financial statements of the SOEs (with the help of AFRITAC WEST), which they see as a prerequisite before incorporating SOE debt in total debt.

34. Capacity development (CD). Benin’s medium-term CD strategy focuses mainly on (i) enhancing domestic revenue mobilization (both revenue administration and tax policy), (ii) improving budgeting, public expenditure efficiency, and cash management, (iii) and upgrading real, government, and external sector statistics (see Annex IV and Annex V of IMF Country Report 19/203). In FY2019, several important diagnostic missions delivered a comprehensive assessment of the customs, tax administrations and tax policy, helping design the revenue mobilization strategy under the program. Technical assistance on national accounts was also provided to the INSAE to finalize the GDP rebasing. For FY2020, the authorities will receive a Fiscal Transparency Evaluation and a Medium-Term Revenue Strategy (MTRS) mission, with the aim of strengthening medium-term budgeting. The MTRS will help design a comprehensive reform plan that relies on consistent and realistic tax policy and revenue administration measures. This plan will take into account the country’s development needs as well as the gradual convergence of the tax ratio towards the WAEMU regional criterion of 20 percent of GDP.

Program Conditionality and Modalities

35. Performance under the program continues to be strong. All end-June 2019 QPCs and the indicative target for priority social spending have been met. The authorities also met the end-September SB on the diagnostic of obstacles to trade.

36. The program remains on track despite the nonobservance of some indicative targets (IT) in September 2019. Revenues exceeded their target at-end September, despite the border closure. The deviation from the IT on primary balance reflects a faster-than-anticipated execution of the domestically-financed capital budget in the third quarter, which is expected to be offset in the last months of the year. Finally, the concentration of debt repayments in the last quarter should ensure that the net domestic financing QPC is met at end-December.

37. Modified QPCs for end-December 2019. To account for the effect of the unexpected border closure with Nigeria, staff supports the authorities’ request for a modification of the end-December 2019 QPCs on revenue, basic primary balance, and net domestic financing in the form of temporary adjustors (Technical Memorandum of Understanding¶13, 17, and 21), calibrated to revise the QPCs in proportion to the number of months of closure over October-December 2019. Staff estimates that the border closure entails a loss of customs revenues of about CFAF 10 billion per month. The September 2019 revenue loss is not covered by the adjustor and will be compensated by the past overperformance of domestic taxes. However, a closure of two, three or four months (until the end of 2019) will require adjusting the QPCs through (i) a reduction in the floors on revenue and basic primary balance, and (ii) an equivalent increase in the domestic financing ceiling. Besides the adjustors, no change is proposed in the underlying targets relative to IMF Country Report 19/203.

38. Technical extension of the program. The current ECF arrangement will expire on April 6, 2020. The authorities’ letter of intent requests a four-month technical extension to provide sufficient time for the completion of the sixth and final review under the arrangement and the related disbursement.

39. The main parameters of the 2020 budget proposal are secured by a prior action and a new SB. Like in previous years, a prior action will ensure that the 2020 budget submitted to the parliamentary commission is consistent with the program. In addition, the adoption of the 2020 tax package will be subject to a SB (MEFP Table 2).

40. The program is consistent with regional policies. By ensuring that all first-order convergence criteria (deficit, debt, and inflation) are met, Benin’s Fund-supported program is aligned with economic policies at the WAEMU level. In particular, it is consistent with the strategy to strengthen reserves and, more generally, enhance regional external stability, as discussed in IMF Country Report 19/90.

41. Financing assurances are adequate. The program is fully financed until its end (April 2020). Benin has a track record of meeting its obligations to the Fund and has adequate capacity to repay it. At end-September 2019, outstanding Fund credit (including the GRA) was around 98.00 percent of quota or SDR 120.97 million. The debt service payments to the Fund will remain manageable, with obligations peaking in 2020 at 0.9 percent of government revenue.

42. Safeguards assessments. The updated safeguards assessment of the BCEAO completed in 2018 found that the central bank had maintained a strong control environment, audit arrangements were in broad conformity with international standards, and the financial statements were prepared in accordance with International Financial Reporting Standards (IFRS 9). The BCEAO has recently enhanced the oversight role of its audit committee in line with the recommendations of the assessment.

Staff Appraisal

43. Performance under the program continues to be very satisfactory. All QPCs at end-June 2019 and the September SB were met. The macroeconomic and structural policies outlined in the Memorandum of Economic and Financial Policies (MEFP) are adequate to pursue the program’s objectives.

44. Benin’s economic growth continues to be strong despite a less supportive external environment and the border closure with Nigeria. Real GDP is expected to slow down to 6.4 percent in 2019. However, growth should bounce back in 2020 and remain sustained over the medium term, buttressed by vigorous cotton production, construction, and port activity.

45. Maintaining the fiscal deficit below 3 percent of GDP in 2020 and beyond will put the debt ratio on a firm downward trajectory. Staff welcomes the authorities’ draft 2020 budget, which targets a fiscal deficit well below the WAEMU deficit criterion and entails a fiscal adjustment of ¼ percent of GDP relative to 2019. Medium-term fiscal discipline is essential to secure debt sustainability.

46. The 2020 budget places appropriate emphasis on revenue mobilization. The expected tax effort will generate resources to support development programs and strengthen the government’s ability to repay debt. On the expenditure side, the composition of the budget is broadly adequate, with the envelope dedicated to priority social spending and capital expenditure remaining stable in percent of GDP despite the fiscal adjustment.

47. Enhanced debt management is necessary to mitigate the risks associated with greater reliance on external financing. The significant increase in the share of external debt in total debt in the past two years warrants caution. The recent debt reprofiling operation and the Eurobond issuance have contributed to lowering borrowing costs, diversifying the financing structure, and extending debt maturity. However, they also create new vulnerabilities. Staff welcomed the authorities’ decision to update the medium-term debt strategy and pursue organizational reforms at the debt agency.

48. Staff supports the authorities’ request for completion of the fifth review of the ECF supported program. Staff also supports the request for a four-month technical extension of the program; the proposed modification of the end-December 2019 QPCs on revenue, primary balance, and domestic financing; as well as the addition of a prior action and a new SB.

Figure 1.
Figure 1.

Benin: Recent Developments, 2011–201

Citation: IMF Staff Country Reports 2019, 398; 10.5089/9781513524696.002.A001

Sources: Beninese authorities and IMF staff calculations.1 Projections start in 2018 for real and external data and in 2019 for fiscal data.
Figure 2.
Figure 2.

Benin: Fiscal Developments and Projections, 2011–201

Citation: IMF Staff Country Reports 2019, 398; 10.5089/9781513524696.002.A001

Sources: Beninese authorities and IMF staff calculations.1 Projections start in 2019.
Figure 3.
Figure 3.

Benin: Real and External Developments, 2006–191

Citation: IMF Staff Country Reports 2019, 398; 10.5089/9781513524696.002.A001

Sources: Beninese authorities and IMF staff calculations.1 Projections start in 2018.

Annex I. Rebasing of National Accounts

1. In 2019, the Beninese authorities rebased their national accounts. In addition to updating the base year from 2007 to 2015, the National Institute of Statistics and Economic Analysis (INSAE) implemented the System of National Accounts 2008. As such, the rebasing exercise relied on enhanced GDP compilation methods, which improved data quality and ensured its coherent methodological treatment. This allowed the authorities to better capture changes in the economy structure and consumption habits in recent years.

2. Following the rebasing, the GDP trajectory was revised upward by nearly 37 percent. The magnitude of the changes reflects a much higher agricultural output than previously captured, largely consumed by households, and to a lesser extent exported (subsistence consumption is mostly informal, and as such, is difficult to be captured in official statistics). As a result, sectoral contribution to GDP changed—primary, secondary and tertiary sectors now contributed 26.4, 16.4, and 49.2 percent in 2015, compared to 22.5, 20.6 and 45.7 percent under the previous base year. In addition, while GDP growth rates have remained identical for most past years, they have marginally accelerated in 2015, 2016 and 2018, but decelerated in 2017, when compared to the GDP growth rates prior to the rebasing exercise.

3. The GDP rebasing has significantly reduced the ratios of the macroeconomic framework (holding other factors constant1): (i) the 2019 public deficit was revised down from 3.0 percent of GDP (in IMF Country Report 19/203) to 2.2 percent; (ii) the tax ratio was updated from 14.9 percent of GDP to 10.7 percent in 2019, placing Benin within the third decile of low-income countries; (iii) public debt was revised down from 54.7 to 39.2 percent of GDP in 2019, positioning Benin below the average of low-income countries (45.0 percent of GDP); and (iv) the current account deficit in 2019 was revised down from 7.8 to 5.6 percent of GDP.

Annex II. Benin: Risk Assessment Matrix1

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Annex III. Setting a Prudent Anchor for the Composition of Government Debt

1. The authorities are in the process of updating their Medium-Term Debt Strategy (MTDS). The previous MTDS, which was prepared in 2017, covers the period 2017–21. It targets a balanced composition between domestic and external debt. However, the recent debt operations (debt reprofiling and Eurobond issuance) have significantly changed the debt composition, with the share of domestic debt falling from 60 percent of the total debt in 2017–18 to 40 percent today. In light of these developments and the newly acquired access to international markets, the authorities are preparing a new MTDS, which will cover the period 2020–24.

2. One of the main objectives of the exercise is to determine a new composition target for the public debt portfolio. According to the Revised Guidelines for Public Debt Management IMF/World Bank (2014)1, the main objective of a debt composition target is to ensure that the government’s financing needs and its payment obligations are met at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk. Therefore, the main criterion is to minimize the cost-risk tradeoff.

3. The calibration of the composition target needs to take into account a wide range of risks. Public debt portfolios face several types of risks, including refinancing, exchange rate, liquidity, and interest rate risks.2 The level of risk exposure is impacted by the portfolio composition, in particular the share of debt denominated in foreign vs. domestic currency, short-term relative to long-term debt, and variable vs. fixed interest rates.

4. The joint IMF/WB MTDS analytical tool can help debt managers tailor the debt composition to strike the right balance between costs and risks. This Excel-based tool, which is provided to country authorities in the context of IMF Technical Assistance, computes standard cost and risk indicators for different combinations of debt strategies and under various interest and exchange rates assumptions, with the aim to identifying the best debt composition.3 The inputs include existing debt, macroeconomic and market variables as well as data related to the financing and cash buffers. The output worksheets present key variables for debt stocks and flows, as well as risk indicators for each strategy.

5. The Beninese authorities have used the IMF/WB MTDS analytical tool to revise their medium-term debt composition target. The new MTDS 2020–24 will target a share of external debt to total debt in the range of 55 to 60 percent in the medium term. In 2024, the share of external debt is expected to decline below 55 percent as a result of the first repayment of the Eurobond.

6. The DSA framework also calls for caution regarding the growing weight of external debt. The DSA does not substitute for the use of the IMF/WB analytical tool, which is the main instrument to assess alternative debt issuance strategies. Nonetheless, the DSA can inform on the response of sustainability indicators to a change in debt composition—in particular the two indicators that are currently the closest to their thresholds (the external debt service-to-export ratio and the external debt service-to-revenue ratio). An illustrative scenario assuming that the share of external debt increases to 70 percent in 2020 (from nearly 60 percent in 2019) shows that excessive reliance on non-concessional external financing could possibly place Benin at high risk of debt distress, with the ratio of debt service-to-revenue exceeding its threshold under both the baseline and extreme shock scenarios.4

Annex IV. Upgrading the Investor Protection Framework in Benin

1. Investor protection frameworks shield investors against a wide range of risks. To simplify, risks can be grouped into three main categories. First, the protection of minority shareholders against majority shareholders measures the rights and legal protections of minority shareholders against unfair treatment afforded under the law that companies must abide by. Second, the protection of investors against directors describes safeguards against directors’ misuse of corporate assets for personal gain. Finally, the protection of investors against the state captures various types of risks related to government actions, including risks of expropriation, breach of government contractual payment obligations, or unexpected and frequent changes in laws and regulations.

A. Protection of Minority Shareholders

2. International experience shows that the protection of minority shareholders can be strengthened by complying with a few core principles. These include: (i) ensuring adequate shareholder rights and role in major corporate decisions; (ii) facilitating access to corporate documents; and (iii) requiring greater corporate transparency regarding activities and transactions and clarifying ownership and control structures.

3. In recent years, several countries have conducted successful reforms in this area. For instance, in 2019 Sudan gave minority shareholders a more prominent role in major corporate decisions such as large transactions, issuance of new shares and appointment of auditors (2019 WB Doing Business report). In 2019, P.R. China increases minority shareholder’s rights and role in major corporate decisions and mandated corporations to provide more information on control structures (2019 WB Doing Business report).

4. Benin has also made progress in the protection of minority investors. In 2015, with the introduction of the revised OHADA Uniform Act on commercial companies, Benin strengthened minority investor protections to introduce greater requirements for disclosure of related-party transactions to the board of directors. In addition, in 2017, Benin established two commercial courts to handle commercial complaints.

5. Nonetheless, the authorities could consider reviewing the legal framework applicable to companies (particularly public limited companies). These measures could include involving shareholders in major purchase or disposal of assets; providing a mandatory offer to remaining shareholders when a new entity acquires a controlling stake in the company; and requiring disclosure of direct and indirect beneficial ownership.1

B. Protection Against Directors

6. Legal reforms can strengthen the protection of investors against directors and managers. Best practices include: (i) requiring pre-approval safeguards for transactions with interested parties (e.g., shareholder consultation and review by an independent auditor), (ii) ensuring shareholders’ ability to sue and hold directors liable for self-dealing, (iii) ensuring that a court can set aside transactions upon a successful claim by shareholders, and (iv) providing disclosure of business activities in periodic filings (for example, through annual reports).

7. Some countries have made considerable strides in investor protection. In 2019, Djibouti strengthened investor protections by modifying its Code of Commerce as well as its Code of Civil Procedure—the amendments provide that related-party transactions must be approved by companies’ general assembly meeting excluding interested members, and that an interested director can be held liable when the transaction is unfair or prejudicial to the other shareholders (2019 WB Doing Business report). In 2018, Kenya passed a legislation that increased corporate transparency requirements. The law gives more agenda-setting power to shareholders and disclose board member activities in other companies, executive compensation and audit reports (2018 WB Doing Business report).

8. Benin has also achieved some progress in this area. Recent reforms described in the previous section (revised OHADA Uniform Act on commercial companies, and creation of commercial courts) have strengthened the protection of investors against managers—in addition to strengthening the rights of minority shareholders.

9. More can be done to protect investors against directors in Benin. Measures could include: introducing the concept of independent and non-executive board members; setting up an audit committee at the board of directors; and providing annual information on the primary employment of board members and their positions in other boards of directors.

C. Protection Against Government Actions2

10. Investors need assurances that the institutional and policy framework will remain stable and predictable. Best practices in this area includes: (i) using national justice system to start the complaint (for example, through commercial courts); (ii) launching a claim procedure with the International Center for Settlements of Investment Disputes (ICSID)3 of the World Bank, and (iii) making use of World Bank guarantee products where available (for example, the IDA Partial Risk Guarantee (PRG) or MIGA guarantee).

11. Some countries strive to provide this type of stable and predictable environment. The 2014 investment code of the Kingdom of Jordan provides for dispute settlement provisions that give foreign investors access to arbitration in the event of a dispute with the authorities (for example, protection from expropriation and breach of contract), as well as a guarantee of free transfer of capital and profits.4 In addition, the 2015 investment code of Rwanda introduced provisions that any dispute arising between a foreign investor and one or more public organs in connection with a registered investment enterprise shall be amicably settled; when an amicable settlement cannot be reached, parties shall refer the dispute to an arbitration agency as agreed upon in a written agreement between both parties.5

12. The Beninese government is preparing a new investment code, currently at parliament. The previous investment code already included protections, including by providing compensation to investors in case of breach of contract with the government. The draft version of the new investment code is expected to (i) implement bilateral agreements with partner countries on investor protection, including those meant to achieve fair, equal and nondiscriminatory treatment of foreign investors, (ii) establish provisions for dispute settlements at the national, regional, and international level, and (iii) foresee sanctions in case of breach of the code. However, the use of World Bank guarantees (Partial Risk Guarantees) seems to be inexistent in Benin (according to the ICSID database). Also, information on these instruments is limited in the country (for instance, when looking at the websites of the commercial courts and the investment promotion agency APIEX).

13. The authorities should continue their efforts to lower risks for investors. Setting up an intuitional framework that support business climate and good governance is key. This could be done, in particular, by improving the efficiency of the bureaucracy, simplifying regulations and procedures, and enforcing the country’s international investment agreements.

Appendix I. Letter of Intent

THE MINISTER

Cotonou, November 26, 2019

TO

Madame Kristalina GEORGIEVA

Managing Director

International Monetary Fund

Washington, DC 20431, USA

Dear Madame Georgieva:

I am pleased to inform you that Benin has made significant progress in implementing the Government Action Program (GAP). Implementation of the GAP, along with the introduction of important structural reforms in the context of the economic and financial program (2016–2019) concluded with the International Monetary Fund (IMF), have led to sustained economic growth. This growth has been achieved in a context of low inflation, control of the budget deficit, and a favorable medium-term outlook for the current account balance.

The economic recovery that began in 2016 is ongoing. In 2018, it was essentially driven by cotton production, port activity, and public investment. Growth will remain robust in 2019, in part owing to strong performance in the agricultural, public constructions, and retail sectors. Inflation is expected to be negative in 2019 at -0.6 percent owing to a substantial increase in agricultural output and a decline in water utility prices.

The budget deficit (including grants) was held at 2.9 percent of GDP in 2018, well below the initially programmed level (4.7 percent of GDP), essentially reflecting a decrease in spending. In 2019, we expect the deficit to shrink further and fall to 2.3 percent of GDP. For 2020, the goal is to keep the deficit under 2 percent of GDP, in line with the West African Economic and Monetary Union (WAEMU) fiscal convergence criterion.

Finally, the current account deficit (including grants) deteriorated slightly in 2018 owing to better accounting of informal imports, which increased significantly. Exports continued their strong growth, driven mainly by agricultural production and an increase in exports of cashew nuts. Nevertheless, the current deficit remains fairly low at 4.5 percent of GDP.

The attached Memorandum of Economic and Financial Policies (MEFP) describes the progress made in the implementation of the economic and financial program supported by the Extended Credit Facility (ECF) arrangement and presents the additional measures that we expect to take to shore up our achievement of the main objectives for 2019 and 2020. In this context, we propose a prior action relating to the submission to the parliamentary commission of a 2020 budget that is consistent with the program’s objectives and a new structural benchmark related to the inclusion of fiscal measures to increase revenue by CFAF 45 million in the draft 2020 budget approved by the government.

Overall, the results of the economic and financial program are very satisfactory. All of the quantitative performance criteria for end-June 2019 and the continuous performance criteria have been met. The structural benchmark for September concerning the diagnostic assessment of barriers to trade was met on time.

The government is convinced that the measures and policies outlined in the attached MEFP are adequate to achieve the objectives of its program. It will take all additional measures that may be necessary to this end and will consult the IMF on the adoption of such measures and prior to any revision of the policies outlined in the attached MEFP, in accordance with the Fund’s policies concerning such consultations. The government will provide IMF staff with any information that may be needed to monitor implementation of the program and achievement of the program objectives, as set out in the attached Technical Memorandum of Understanding (TMU). The government authorizes the IMF to publish this letter and its attachments on its external website, as well as the IMF staff report, following approval by the IMF Executive Board of the fifth review under the ECF arrangement.

The government would therefore like to request the completion of the fifth review under the ECF arrangement and the disbursement of SDR 15.917 million (around $22.055 million). Finally, in view of the expiration of the ECF arrangement on April 6, 2020, we hereby request that the arrangement be extended until July 31, 2020. This extension is needed to provide enough time for the completion of the sixth and final review under the arrangement and the related disbursement. We remain committed to implementing sound macroeconomic policies.

Sincerely yours,

/s/

Romuald WADAGNI

Minister of Economy and Finance

Attachments (2):

1. Memorandum of Economic and Financial Policies

2. Technical Memorandum of Understanding

Attachment I. Memorandum of Economic and Financial Policies for 2019–2020

This report is an update of the Memorandum of Economic and Financial Policies (MEFP) of May 2019, attached to the staff report for the fourth review of the ECF-supported program. The document describes recent economic developments in Benin and sets out the policies that the government intends to implement in the second half of 2019 and in 2020. The aim of these policies is to facilitate the continuation of fiscal consolidation and domestic revenue mobilization efforts, as well as to strengthen domestic and external economic stability. Implementation of the quantitative performance criteria and structural benchmarks up to end-June 2019 will be assessed in this MEFP.

Recent Economic Developments

1. The Beninese economy is continuing to experience dynamic growth. In 2018, growth was driven by the record level of cotton and vegetable production and strong port activity. The tertiary sector (port activity in particular) and the primary sector (agriculture in particular) were the main contributors to growth, estimated at 6.7 percent. Economic activity continued to accelerate in the first half of 2019, driven by the agricultural, trade, and construction sectors. Inflation, affected by strong agricultural production and a decline in prices for public utilities, in particular water, followed a downward trend, dropping by 1.4 percent during the first nine months of 2019 compared to the same period in the previous year.

2. On August 20 Nigeria decided unilaterally to close the border with Benin.1 This closing of the border had a negative impact on customs revenues, and it is expected to result in a slight slowdown in growth in 2019, which is expected to reach 6.4 percent.

3. The quarterly trade data recently published by the National Institute of Statistics and Economic Analysis (INSAE) confirm that exports of goods grew in the second quarter of 2019, with an increase of 22.4 percent compared to the first quarter. They are driven mainly by sales of cotton, and to a lesser extent by higher sales of edible nuts, such as cashew nuts. Imports of goods declined in the second quarter of 2019, posting a drop of 32.1 percent compared to the first quarter. Reforms aimed at boosting the technical capacities of farmers, expanding farmland, and distributing higher-quality seeds resulted in an increase in agricultural output, which also led to a contraction in food imports. In the second half of the year, a slight downturn in informal exports to Nigeria is expected, which could lead to a deterioration in the current account in 2019.

4. The rebasing of the national accounts led to a reduction in the ratio of public debt to GDP. It is now estimated at 41.4 percent of GDP in 2019. This year is expected to mark a shift in the trajectory of public debt. After five years of upward movement, debt as a percentage of GDP is expected to stabilize in 2019 as a result of the fiscal consolidation and sustained economic growth. Benin’s risk of debt distress is considered to be moderate and remains unchanged from the results of the previous debt sustainability analysis (DSA) performed in May 2019.

5. In the banking sector, banks’ overall capital ratio improved in the second half of 2018 (from 7.6 percent in June 2018 to 8.2 percent at end-December 2018), while remaining below the regulatory threshold of 8.625 percent required for end-2018. The concentration of the banks’ loan portfolio (loans to the 5 largest borrowers/equity capital) declined considerably, falling from 103.3 percent at end-June 2018 to 90.4 percent at end-December 2018. Nevertheless, credit and liquidity risks remain high. The high level of nonperforming loans persists – its level rose from 18.9 percent at end-June 2018 to 21.6 percent at end-December 2018. The liquidity ratio (liquid assets as a percentage of total assets) is at the lowest level since 2005 (12.5 percent at end-December 2018).

Implementation of the 2019 Program

A. Program Performance

6. Program implementation is very satisfactory. The available data and information show that all the quantitative performance criteria (QPCs) at end-June 2019 were met. As far as the structural benchmarks are concerned, the only one set for end-September, regarding the diagnostic assessment of barriers to trade, was met. The status of the QPCs at end-June 2019 is as follows:

  • Net domestic financing (NDF) of the government, defined as the sum of net bank credit to the government and net nonbank financing of the government, amounted to CFAF -50.4 billion under a ceiling of CFAF -38 billion.

  • The basic primary fiscal balance, defined as the difference between total fiscal revenue and basic primary fiscal expenditures, amounted to CFAF 50.7 billon with a floor set at CFAF 44.5 billion.

  • Total government revenue, which includes tax and nontax revenue – but excludes foreign grants, the revenue of autonomous entities, and privatization proceeds – amounted to CFAF 522.8 billion, compared to a floor of CFAF 505.5 billion.

B. Rebasing of the National Accounts

7. We rebased our national accounts in 2019. In addition to updating the base year from 2007 to 2015, we also implemented the System of National Accounts 2008. As such, the rebasing exercise made use of improved GDP compilation methods, which strengthened the quality of data and ensured consistent methodological treatment. This allows for a better understanding of changes in the structure of national economic activity and changes in consumption behavior since 2015.

8. Following the rebasing exercise, the trajectory of Benin’s GDP was revised upward by almost 37 percent. The size of the change reflects higher agricultural output than before, which was largely consumed by households, and to a lesser extent, was exported.

C. Execution of the 2019 Budget and Expenditure and Revenue Program

9. Fiscal consolidation continued in the first half of 2019. The containment of expenditure and the improvement in domestic resource mobilization led to an estimated fiscal deficit (on a commitment basis, grants included) of CFAF 30.4 billion (0.4 percent of GDP in 2019). The sharp reduction in the fiscal deficit in the first half of 2019 can be explained primarily by the underperformance of externally financed public investment. The mobilized revenue at end-June 2019 amounted to CFAF 522.8 billion, compared to an initial program target of CFAF 505.5 billion. This strong revenue performance is explained by the very good performance of nontax revenue (CFAF 89.6 billion, compared to an initial target of CFAF 77.4 billion), and domestic tax revenue (direct and indirect), which made up for the shortfall in customs revenue.

10. The strong performance of domestic tax revenues is explained by the successful mobilization of revenues under the 2019 Budget Law. Tax expenditures are expected to decrease by an amount equivalent to 0.7 percent of GDP in 2019 and before end-November 2019 we will put into place a mechanism for the monitoring and verification of investments benefiting from exemptions. In addition, the budget provided for the adoption of other tax-related measures such as a withholding tax on hydrocarbon sales carried out in Benin by nonresidents, enlargement of the base of the visitors’ tax in hotels and similar establishments, as well as the transfer of responsibility for collection of the tax to the Directorate General of Taxes (DGI), and an increase in the rate of the tax on tobacco and cigarettes.

11. Reforms aimed at modernizing the financial authorities continue. At the DGI, the key reforms are focused on modernizing the procedures and means of payment in the first half of 2019, including:

  • The rollout of the tax management system (SIGTAS) at three Taxation Centers for Medium-Sized Enterprises (CIMEs), namely the Coastal 1, Coastal 2, and Borgou-Alibori CIMEs as of February 1, 2019 through the Project to Support the Growth of Domestic Revenue in Benin (PAARIB). This rollout marked the launch of the electronic filing system for tax returns. Electronic payment via the e-service platform has been added to the electronic filing capability, thus completing the electronic procedures available at these centers. This reform enables medium-sized enterprises to file and pay taxes electronically, thereby making tax procedures more flexible. It provides the DGI with access to a database of taxpayer returns and allows for limited contact between taxpayers and tax agents.

  • The launch of the “e-Balance Sheet” platform in June 2019 for the online filing of businesses’ financial statements. This reform is intended to: (i) allow for the collection and safekeeping of financial statements; (ii) provide for access to a reliable database; (iii) facilitate the handling of financial statements; (iv) reduce the cost of collecting taxes; and (v) improve user services and correct unequal treatment. The reform also offers a number of advantages for: (i) taxpayers (by reducing the stress of meeting filing deadlines as much as possible and speeding up filing procedures, reducing the cost of the production of financial statements, and obtaining an electronic filing certification online); and (ii) other partners of the DGI, including the Central Bank of West African States (BCEAO), INSAE, and the Commercial Court (through electronic collection of financial statements and easier use of data contained in these statements).

12. With regard to customs, progress was made in effective implementation of the one-stop foreign trade window (Guichet unique du commerce exterieur, GUCE), with the objective to minimize the use of paper documents in customs clearance operations. Since the first six months of 2018: (i) the GUCE portal is available; (ii) the interface between the GUCE and the goods tracking system to improve cargo monitoring is operational; and (iii) import intentions are now centralized in the GUCE, which, among other things, will help us improve our customs revenue forecasts. We intend to continue the serious efforts to improve the collection rate for customs revenues. Indeed, customs authorities collect only 5 percent of the duties resulting from the detection of infractions during the control process. We are committed to ensuring that the Directorate General of Customs (DGD) has an effective collection service and is vigorously pursuing the procedures and penalties provided for by law. In order to build the capacity of the customs service to assess and mitigate risks, we have decided to strengthen the statistical monitoring service by adding new statisticians to the staff (before end-December 2019).

13. With a view to rationalizing public expenditure, since 2016 we have consolidated the wage bill. The key measures implemented to hold back the pace of wage bill increases have included: (i) the biometric census of civilian personnel, which identified 1,355 ghost workers; (ii) use of the banking system for bonuses and allowances not included on pay slips since 2017; and (iii) the repeal of several decrees and regulations that systematically granted benefits. The savings realized through these measures are being allocated in part to provide for the settlement of salary commitments of previous governments to civil servants.

14. We will continue to improve the effectiveness of public investment. A recent IMF technical assistance mission in February 2019 noted progress in the planning of public investment with: (i) the adoption of a decree aimed at formalizing the technical and organizational procedures for the management of public investment; (ii) the linking of various planning tools (the Government Action Program, the National Development Plan, the Growth for Sustainable Development Program, etc.); and (iii) the improved coordination between local government investment plans and those of the central administration. Progress was also noted in the allocation and execution of public investments. Nevertheless, there are still some weaknesses, including: (i) the procurement plans and statistics on public procurement are not comprehensive; (ii) the information systems are not coordinated and lack sufficient interfaces; and (iii) the ex-ante evaluation of projects is still inadequate. We will continue to carry out the recommendations contained in the follow-up report on evaluation of public investment management with a view to improving their effectiveness.

D. Public Debt Management

15. With a view to diversifying the sources of financing, in March 2019 we issued our first Eurobond, which was met with great success in the market. The amount of the issuance was 500 million euros (equivalent to 3.9 percent of GDP), with a weighted maturity of 6 years, an interest rate of 6 percent, and a 3-years repayment plan, over the period 2024–2026. The terms of the Eurobond are better than those of securities issued in the regional financial market during the same period, such as the 5-year bond issued by the Beninese government in the regional market at the beginning of March 2019 at an interest rate of 6.99 percent, for example. The Eurobond issuance did not result in an increase in overall debt, since it was offset entirely by a decline in domestic borrowing. Ultimately, the debt sustainability analysis confirms the moderate risk of debt distress, which has not changed since the conclusion of the May 2019 DSA.

16. With a view to providing for better management of public debt, the Caisse Autonome d’Amortissement (the Autonomous Amortization Fund, or CAA) has undertaken various reforms related to technical capacity building. This year, it undertook the recruitment of an Audit and Compliance director, as well as an Audit Service manager. The audit team worked on: (i) the drafting and adoption of an internal audit charter; (ii) the preparation of a risk map; and (iii) the operational risk management procedure. The CAA also undertook the creation of a project monitoring department responsible for disbursements, tracking the progress of projects, and the review of project portfolios by the lender and sectoral ministry. With regard to reporting, the CAA website has also been completely redesigned and information is updated regularly. Statistical bulletins and some public debt documents are published in English to make them accessible to international investors. A new monthly bulletin in English has been prepared for their use.

E. Public Enterprise Reform

17. Public enterprises continue to be a burden on the government budget owing to their weak economic and financial performance. New auditors have been appointed at the 189 public enterprises and government offices. The government has also validated the new draft law on public enterprises. This law, which has been submitted to the National Assembly but has not yet been adopted, covers the creation, organization, and operation of public enterprises and aims to improve their governance and thus their economic and financial performance. The future law calls for close government monitoring of the economic and financial position of public enterprises. Public enterprises will henceforth be required to transmit their financial statements – accompanied by audit reports – to the Ministry of Economy and Finance by the prescribed deadline. Moreover, a consolidated report on the economic and financial position of public enterprises will be attached to future budget laws once the law has been adopted.

18. To limit the impact of public enterprises on the budget, the government also plans to define a dividend policy for each enterprise in order to make them accountable for achieving results while ensuring financial management consistent with their development. The government has concluded performance contracts with the Autonomous Port of Cotonou and the Société Béninoise d’Énergie Électrique (SBEE) with support from the Millennium Challenge Corporation. We plan to expand this measure to other public enterprises once the new law has been passed.

F. Governance Reforms

19. In the area of public audit, important steps have been taken in the context of reforming the administrative control bodies. The objective of this reform is to facilitate the creation of a performance culture in the government and step up the fight against impunity by reorganizing the control bodies and implementing measures aimed at their professionalization, by: (i) making the Inspectorate General of Finance (IGF) the central body responsible for the operational coordination of the activities of the government’s internal audit units and for monitoring the actions taken by the various ministries in response to the main audit recommendations; (ii) putting the sectoral ministries back at the center of the ministries’ internal control system; (iii) finding a long-term solution to the shortage of quality human resources within the government’s internal audit bodies; (iv) reducing the vulnerability of audit institutions and increasing their contribution to the effectiveness of services; and (v) providing auditors with sufficient resources to perform their assignments. To that end, the government overhauled the regulatory framework with the issuance of three decrees. The new texts formalize a paradigm shift and provide for transitioning from the “inspection-verification” approach to the “internal audit” concept in all its forms. In addition, the aim of the new “internal audit” approach is to bring value added to managers, particularly through advisory assistance, with a view to attaining the strategic, operational, and regulatory objectives. The proposed texts will also enable Benin to adopt international standards and overcome the institutional and regulatory obstacles hindering the effectiveness of internal control and audit activities within the government of Benin.

20. In the judicial area, important reforms have been undertaken this year. Two commercial courts were created and then inaugurated in 2018 following: (i) the identification of buildings to house the Commercial Court of Cotonou and the Court of Commercial Appeals of Porto Novo; and (ii) the appointment of professional and consular judges, and the official installation of the courts in those two jurisdictions. In addition, the Court for the Suppression of Economic and Terrorism Crimes (CRIET), which was installed in August 2018, is now operational. Its objective is to curb terrorism-related and economic crimes, as provided for in the criminal legislation in force, as well as suppress drug trafficking and related crimes.

21. Within the context of strengthening the governance of public enterprises, in September 2019 we granted a delegated management contract to the Beninese Electricity Company (SBEE) in order to improve its management. In October 2019 we decided to place the Société Nationale de Commercialisation des Produits Pétroliers (the National Company for the Marketing of Petroleum Products, or SONACOP) under temporary management with the aim of resolving the difficulties related to its operations and financial losses. In order to reduce losses in the collection of electricity payments, this year we introduced a new electronic system for making electricity payments via MTN Mobile.

22. To combat corruption, efforts are underway thanks to the initiatives undertaken by the National Anti-Corruption Authority (ANLC) to implement the asset declaration regime laid out in the 2011 Anti-Corruption Law. In particular, the ANLC’s measures are intended, among other things, to: (i) ensure that penalties are imposed by responsible courts if the assets of individuals covered by the law are not declared or in case of false or misleading declarations; and (ii) allow the online declaration of assets. In February 2019, Parliament passed the Law on Strengthening Public Governance. This law allows the state to hold any official responsible who through his acts and actions misleads the government with a negative impact on public finances. We will strengthen the enforcement of the rule of law, the judicial system, and the general anti-corruption framework in order to improve governance. In particular, we will strengthen the National Anti-Corruption Authority by improving its human, technical, and logistical capacities, and by enhancing its independence and financial autonomy with a sufficient budget allocation. In July 2019 a committee composed of staff from the Ministry of Justice and the National Unit for the Handling of Financial Information (CENTIF) prepared a draft decree on the creation of the Beninese agency for the management and recovery of seized and confiscated assets.

23. Finally, with regard to the observance of international governance standards, Benin ratified the United Nations Convention against Corruption in 2005, followed by the African Union Convention against Corruption and the Economic Community of West African States (ECOWAS) anti-corruption protocol. The ANLC is also in the process of preparing an action plan for implementing the recommendations made following the assessment of the National Integrity System (SNI) carried out by Transparency International in 2016 with the support of the European Union. In addition, in June 2018 Parliament adopted the new law on combating money laundering and the financing of terrorism, which will enable Benin to harmonize and strengthen its national regulations in conformity with the new measures under way in the WAEMU, in order to fight financial crimes. Lastly, the evaluation by the Inter-Governmental Action Group against Money Laundering in West Africa (GIABA) is under way and will be finalized during the plenary session in December 2019. We are committed to continuing to strengthen our AML/CFT regime and to carrying out the recommendations from the GIABA evaluation, including those concerning politically exposed persons.

G. Business Environment

24. Improving the business environment is necessary in order to support the development of the private sector and to achieve stronger and more inclusive growth in Benin. To make Benin an attractive destination for investors, a new investment promotion mechanism was put in place in 2017, which streamlined the institutional and regulatory framework for investment promotion in Benin. At the strategic level, an Interministerial Investment Promotion Committee was created to improve government coordination on issues related to the business environment and to provide a coordinated response to the needs and expectations expressed by investors. At the operational level, the Agency for the Promotion of Investment and Exports (APIEX) has been restructured to become the sole gateway for investors and a showcase for the promotion of investments and exports in Benin. The APIEX is thus: (i) the one-stop window for business creation, making it possible to shorten the business creation time to three hours; (ii) the technical body responsible for reviewing applications for approval under the Investment Code; (iii) the Executive Secretariat of the Public-Private Partnership (PPP) Support Unit; (iv) the focal point for the implementation of the Doing Business reforms; (v) the administrative authority for the special economic zones; and (vi) the export information and facilitation center.

25. In the context of business creation, the two key measures that have been undertaken in 2019 are the simplification of the procedures for declaring the existence of a business and the elimination of the procedure for the physical verification that the business name is unique. The tax payment process has been improved by the establishment of an electronic payment procedure (which is also available to large and medium-sized enterprises), the strengthening of the provisions regarding the single business tax, and a reduction in the tax from CFAF 400,000 to CFAF 150,000 in 2019. We also introduced an income tax credit for businesses that use certified electronic cash registers.

26. In addition, in 2018 Parliament adopted a law on hiring that aims to promote job creation. This law has corrected a number of legal loopholes, particularly those relating to hiring for trial periods, which has long been unregulated, and the types of contracts, including fixed-term contracts, that can be renewed indefinitely. Moreover, the new law allows foreigners to work under open-ended contracts, whereas previously they had access only to fixed-term contracts. The law also eases the licensing conditions and sets a maximum limit of 9 months of compensation in the event of dismissal deemed abusive by the courts.

27. The reforms pertaining to cross-border trade involve an interconnection between the Nigerian and Beninese customs services, the introduction of an online system for making complaints, the creation of an informational website for users regarding customs clearance conditions, and the establishment of a working group responsible for defining customs clearance standards and streamlining customs procedures. With regard to the protection of minority investors, the time period for the handling of cases dropped from 750 days in 2017 to 57 days in 2018. We will facilitate access to commercial case law by making information concerning business law and judicial decisions available online.

28. In the area of protecting property titles, we made amendments and additions to the land code in 2017; this led to the adoption of Law 2017–15 of August 10, 2017. This new law provides for a reduction in the time required to obtain property titles and, in the case of foreign investors, the lifting of restrictions on the acquisition of real property. The National State Land and Land Tenure Agency (ANDF) has carried out a number of actions related to placing the Cotonou land-use registry online, the creation of separate online folders for notaries (which enable them to track progress in the handling of their applications), and the establishment of deadlines for the issuing of property transfer deeds by the ANDF. As part of the reforms of construction permits, a memorandum, intended for the Association of Architects, was issued to clarify the costs of providing certificates of membership. Likewise, Order 2017–131 of December 18, 2017, provides for a clarification of the minimum requirements that need to be met in order for construction permits to be issued. In addition, the Minister of Economy and Finance issued an order in June 2019 (1908) on the creation of a commission for the handling of complaints regarding the transfer of ownership. The establishment of this commission will allow for an improvement in Benin’s Doing Business ranking, among other things.

H. Financial Sector

29. The main components of the capital regulations according to Basel II/III became effective in January 2018, including the definition of tier 1 capital, tier 2 capital, and the capital conservation buffer. The Basel II/III provisions that were recently introduced are being implemented gradually, starting on January 1, 2018. The new prudential framework takes an incremental approach in order to absorb the new requirements with regard to the minimum capital, leverage, concentration requirements, etc. The framework specifies that the capital adequacy ratio in 2019 should not be below 8.625 percent. These standards are considered essential to safeguarding a sufficient buffer of high-quality capital, as well as strengthening banks’ balance sheets. A new banking chart of accounts and an accounting framework for loan loss provisioning in keeping with IFRS 9 were also introduced in January 2018. The standards on liquidity ratios aligned with the Basel II/III principles are being prepared at the regional level.

30. Two small public banks have reported repeated losses in recent years. The government has put into place a restructuring plan for these two banks. We are currently hoping to perform a merger of these two institutions with the aim of reaching a critical size in order to comply with the minimum capital requirement established in the WAEMU. The merger will also make it possible to take advantage of synergies, in particular by making use of the nationwide network of one of the banks. We have hired an international auditing firm to evaluate the various options and their cost to the public purse. We are in the process of selecting, in consultation with the IMF team, a type of merger that will enable the new bank to comply with prudential standards for capital and to regain its financial viability. We will ensure that the merger option that is chosen will be the least expensive in terms of public resources and that the merger will be in line with international best practices with regard to governance, financial reporting, risk management, control, operations, and strategy. We are then planning put into place a restructuring plan for the merged bank, which will be presented to the Banking Commission after it has been finalized.

31. To modernize the financial sector, we have also, by Law 2018–38 of September 2018, reactivated the Caisse de Dépôts et Consignations (Deposit and Consignment Fund, or CDC), which was created on August 31, 1973, by Order 073–60. A Steering Committee for the Operationalization of the CDC was established in January 2019 pursuant to an order issued by the Minister of Economy and Finance and a recruitment notice for its senior members was issued. In addition, we have signed a contract with an international consulting firm for the purpose of: identifying the resources of the CDC; drafting a business plan; defining an investment approach and risk management policy; and putting into place a governance framework and human resources management, as well as an information system. The gradual rollout of the CDC’s activities is planned for 2020.

32. The essential mission of the CDC is to receive, and conserve movable assets deposited with it and to return them to their rightful owners. It is thus responsible for administering deposits and consignments, providing services related to the cash and funds whose management is entrusted to it, and receiving administrative and court-ordered consignments and sureties. In general, the CDC has general interest missions in supporting the public policies of the central and local governments, particularly in the areas of economic and social development. To achieve them, the CDC pursues investment and risk management policies and strategies that should enable it to create jobs and generate yields above the average cost of government borrowing. To this end it is adopting prudential rules in line with best practices for investment and risk management.

33. At the practical level, in the context of modernizing the financial sector of Benin, the CDC will enable us to: (i) hold equity in companies that we wish to support or from which we wish to receive dividends, like any shareholder; (ii) work alongside the banking system by making deposits in banks at reduced costs; (iii) participate in the financing of social projects; and (iv) assist effectively in the financing of the economy by making public securities more attractive (proposed purchase of public securities at low rates by the CDC).

34. To strengthen the land reform and formalize the collateral used in lending activities, we created the National State Land and Land Tenure Agency in 2016, which, among other things, handles the conversion of occupancy permits into real estate titles. The initiative included in the 2016 Supplementary Budget Law to eliminate recording fees was successful, and the number of real estate titles recorded has grown. We will also work to advance the electronic recording of real estate titles – which has already been completed for the city of Cotonou – by extending the process to the entire country. In May 2019 we adopted a decree to facilitate the conversion of occupancy permits into real estate titles – which are recognized as collateral by the banking regulator. This should result in a steep decline in the level of banks’ provisions and an improvement in their financial condition. We also established a Trade and Personal Property Credit Register (RCCM) and are planning to provide electronic access to the register. In addition, the implementation of these measures will enable banks to reduce the level of provisions and ultimately increase their capacity to lend to the private sector.

35. Spurred by the BCEAO, a support mechanism has been put into place for the financing of small and medium-sized enterprises/small and medium-sized industries (PME/PMI), or a PME mechanism in the WAEMU. The establishment of such a mechanism was necessary owing to the important role played by PMEs in the economic fabric of the countries in the Union. According to the governments, these businesses account for between 80 percent and 95 percent of the enterprises surveyed, while most of the studies indicate that it is difficult for these businesses to gain access to financing, and to medium- and long-term credits in particular. The mechanism is focused on four main areas, including: (i) the promotion of PMEs; (ii) improvement of the management of these enterprises; (iii) the refinancing of bank loans to PMEs; and (iv) the diversification of financial instruments adapted for their financing. In this regard, it is expected that various actors will be involved in the implementation of a number of actions. For the governments, these include the adoption of measures aimed at providing incentives and simplified procedures to encourage the emergence of PMEs (setting aside a proportion of public procurement for PMEs, the development of subcontracting, etc.). The purpose of the support and oversight structures with regard to PMEs is to provide upstream assistance in meeting the eligibility conditions and to perform ex-post monitoring after financing has been obtained. They should then work downstream to ensure the proper use of bank credits, the smooth implementation of business plans, and compliance with deadlines, which will allow for a reduction in the risk of default on payment. As for the lending institutions, they will finance the PMEs, either directly or in collaboration with the support and oversight structures of these enterprises. For its part, the BCEAO will take action with regard to the terms of financing offered to PMEs, by making bank credits to these enterprises more attractive through appropriate refinancing (at a rate of 2.5 percent). In Benin, the official ceremony launching the mechanism took place in August 2018. Its operationalization is under way.

36. We believe that the microfinance sector is key to promoting access by small enterprises to the financial system. To preserve its viability and credibility, we have adopted a ministerial decision for microfinance institutions aimed at strengthening their supervision and the granting of authorizations. Progress has been made in closing unauthorized microfinance institutions (MFIs). In addition, the regional financial inclusion strategy is being implemented. Steps have also been taken to rehabilitate the microfinance sector, particularly by improving the quality of financial and accounting information through the implementation in 2016 of the centralized IT solution for monitoring decentralized financial systems (SICS-SFD). In operational terms and with regard to supervision of the sector, in the course of 2018, the National Decentralized Financial Systems Surveillance Agency (ANSSFD) continued implementing the microfinance sector rehabilitation strategy document, which is based on the following three pillars: (i) application of the law to all authorized decentralized financial systems; (ii) application of the law to all entities operating illegally; and (iii) continued strengthening of the stability and balanced operation of the decentralized finance sector with a view to ensuring its long-term sustainability. Between 2013 and 2019, a total of 240 unauthorized MFIs received formal authorization, while 17 unviable MFIs were closed.

37. To promote the sector, the National Microfinance Fund (FNM) has prepared a new strategic plan for 2017–2021, founded on the following three strategic pillars: (i) facilitating access to appropriate financial resources for microfinance institutions; (ii) building operational capacity and promoting social and technological interventions; and (iii) strengthening governance and the sustainability of FNM actions. In addition, the government, through the Ministry for Social Affairs and Microfinance (MASM), has begun preparing the FinScope survey, the first stage in the Making Access to Financial Service Possible (MAP) process, which is to culminate in the development of a national financial inclusion strategy in line with the regional financial inclusion strategy developed by the BCEAO. Finally, financial inclusion will be strengthened with the implementation in 2019 of the microfinance component of the Insurance to Build Human Capital (ARCH) project.

Program for 2020

38. The objective of the three-year program (2017–2020) signed by the IMF and the government of Benin is to lay the foundation for accelerated and inclusive growth while preserving macroeconomic stability and public debt sustainability. Implementation of the reforms is expected to: (i) create more fiscal space through the mobilization of additional domestic resources; (ii) enhance the efficiency of public expenditure, particularly investments; and (iii) improve governance and the business environment with a view to stimulating private sector activity.

39. Our macroeconomic framework envisages growth of 6.7 percent in 2020, supported essentially by the strong performance of the agricultural sector in general, and cotton production in particular, construction and port traffic activities. Inflation should remain moderate and well below the WAEMU target of 3.0 percent. In 2020 we are expecting an improvement in the current account deficit, projected at 4.7 percent of GDP. This improvement will be driven primarily by a significant increase in exports, due above all to higher cotton exports and lower growth in imports resulting from the scaling down of food imports.

A. 2020 Budget and Expenditure and Revenue Program

40. In December 2019, the National Assembly will pass the 2020 Budget Law in accordance with the draft submitted by the government and the program objectives. The fiscal deficit, on a commitment basis (grants included), is expected to reach 1.8 percent of GDP in 2020 compared to 2.3 percent in 2019 (2.0 percent when unpaid debt to suppliers identified during a recent audit is excluded). Consequently, the fiscal adjustment between 2019 and 2020 is estimated at 0.25 percent of GDP. Total government revenue (including grants) is expected to amount to 14.5 percent of GDP, while total expenditure would be contained at 16.3 percent of GDP.

41. The 2020 Budget Law is based on fiscal measures estimated at CFAF 45 billion. The key fiscal measures include: (i) raising the minimum flat tax of CFAF 50,000 applied to the corporate tax; (ii) elimination of the registration fee exemption for real estate transfers; and (iii) widespread rollout of electronic cash registers. All these tax policy measures, coupled with the pursuit of revenue agency reforms, are expected to result in the mobilization of CFAF 1,220.0 billion in government revenue in 2020. We will continue the mobilization of tax revenue with the aim of creating additional fiscal space to finance public investment and priority social spending.

42. Should the revenue generated by the tax reforms fall short of the budget forecasts, as a first step the government will slow down the execution of public investment. If, however, there is a significant shortfall in revenues collected – due to a prolonged closure of the border with Nigeria in 2020, for example – we will study, in consultation with the IMF, the possibility of increasing the fiscal deficit target in order to protect social spending and priority investments.

43. In the area of public expenditure, the reforms initiated with the aim of ensuring its rationalization will be continued in 2020. As for the management of the wage bill, the reforms include: (i) use of the banking system for the payment of salaries and bonuses to military personnel; (ii) the recall of all financial attachés from Benin’s diplomatic missions abroad; and (iii) cutting back on the number of diplomatic missions (closing/merging of posts, etc.).

44. In addition, a pilot phase of the insurance component of the government’s social protection project – Insurance to Build Human Capital (ARCH) – began in 2019, targeting extremely poor populations (300,000 people) and expanding to the general population between 2020 and 2022. The government will cover the entire insurance premium for those in extreme poverty and will provide a partial subsidy (up to 40 percent) for the premium paid by populations categorized as impoverished but not in extreme poverty. In 2020 the health insurance component will be expanded to include all people in extreme poverty and the National Social Protection Agency (ANPS) will be equipped and its information system will be rolled out. The budget cost of the ARCH program is estimated at 0.3 percent of GDP. The insurance system is based on an innovative mechanism for targeting poor populations and the establishment of a single social register in cooperation with the World Bank. The other components of the ARCH program are improvement of skills, access to credit, and underwriting of a retirement pensions for around 1.8 million people who are working primarily in the informal sector.

45. Several measures are under way in the implementation of the Treasury Single Account (TSA). They include: (i) the adoption of a regulatory framework for the TSA in 2015; (ii) the interconnection and modernization of the unit responsible for the management of correspondent accounts; and (iii) a partial inventory of public accounts in the books of commercial banks in 2017 and an update in 2018. Nevertheless, we are encountering technical and operational difficulties related to the interface of the Treasury’s computer system with the BCEAO system. In addition, we need to be sure that the effective implementation of the TSA will not have an impact on the banking system. To this end, we will conduct a study to evaluate the impact of the withdrawal of public funds from commercial banks and their placement in the TSA on the stability of the banking system (before end-March 2020). An AFRITAC West mission will visit Cotonou in December for the purpose of supporting us in the operational implementation of the TSA, and in particular in analyzing the impact of the movement of bank accounts to the TSA.

B. Public Debt Management

46. The Autonomous Amortization Fund is in the process of revising Benin’s medium-term debt strategy, which will be published before end-2019. It includes a new target for the composition of public debt that reflects recent debt operations (reprofiling and issuance of a Eurobond). The previous medium-term debt strategy, which covered the period 2017–2021, aimed at reaching a balance between the amount of domestic debt and external debt. External debt has now reached 60 percent of total debt, however, so there needs to be a strategy with a new optimal target for the composition of public debt. The new medium-term debt strategy (2020–2024) therefore targets a relatively stable level of external debt that will account for between 55 and 60 percent of total debt during the period 2020–2023 and between 50 and 55 percent in 2024.

47. The document is updated each year to better take into account the financing specificities of the current budget. Thus, an annual debt strategy for 2020 has been prepared and attached to the draft 2020 budget law. It shows how the government plans to choose between issues in the domestic market and those in the international market. In addition to the cost of financing, the structure of the portfolio takes into account the exposure to different kinds of risks, including exchange risk during this process.

48. In order to strengthen the monitoring of securities issued and developments in the international market, the CAA plans to acquire a Bloomberg terminal with a view to improving financial information. In addition, an investor communications and relations department will be created in early 2020 to analyze the markets. The market analysis unit will be responsible for the use of the Bloomberg terminal. It should be stressed that Benin is constantly working to improve its public debt management system. These various reforms and improvements earned Benin’s Ministry of Finance the Global Markets award for the top public debt management office in sub-Saharan Africa in 2019.

C. Infrastructure Projects and Public-Private Partnerships

49. Following the establishment of the legal and regulatory framework for public-private partnerships (PPP) by Law 2016–24 of June 28, 2017, the government adopted implementing decrees to take account of the new institutional framework for the promotion of investment in Benin. The institutional framework has entered into effect, thanks in particular to technical assistance from the World Bank. Analysis of the options for financing GAP projects has led to the compilation of a catalog of PPP projects. In accordance with international best practices, we will ensure that: (i) investments in PPPs are included in the budget documents and public finance statistics; and (ii) liabilities relating to PPPs are assessed and annexed to the budget law. We will analyze the fiscal risks relating to these PPP projects. Finally, in 2018 we established a unit within the Ministry of Economy and Finance for the management of fiscal risks related to PPPs. We are now working on capacity building in order to make the unit fully operational.

50. The government has entered into preliminary discussions with the People’s Republic of China on a future partnership to finance the construction of the Glodjigbé International Airport. At this stage, the financing packages and schedules of works have not yet been finalized. We are continuing with all of the preliminary analyses for the financing of the projects, and we will discuss them with the IMF teams when they have been finalized. We remain determined to take adequate measures to ensure that the financing of this project is reflected in the public accounts in accordance with international best practices, that the risks on public finances are minimized, and that public debt sustainability is not jeopardized.

51. In January 2019, Niger and Benin signed a bilateral agreement for the construction of an oil pipeline to transport crude oil from southeast Niger to the Port of Cotonou, covering a distance of 1,980 km. It will require a transit connection of around 1,980 km, 675 km of which will cross Benin. The construction of the pipeline is expected to take 24 months and the preliminary excavation work is expected to begin in January 2020 and last until end-2021. The pipeline is expected to go online in January 2022, with a projected service life of 22 years (2022–2043). The total cost of the project for the Beninese portion is estimated at US$1.05 billion (CFAF 608 billion) and it will be financed entirely by the West African Oil Pipeline (Benin) Company S.A. (WAPCO BENIN, a private company). WAPCO BENIN is expected to take out a bank loan to finance 80 percent of the total project cost, while the remaining 20 percent of the project cost will be financed using the company’s own funds. No financing will be provided by the Beninese government. We are planning to benefit from this project through: (i) transit fees, which are expected to total US$884.6 million (CFAF 680 billion) over the entire period of its operation; and (ii) tax revenues (VAT and other fees and taxes) in the amount of US$109 million (CFAF 535.2 billion).

D. Business Environment

52. Benin improved its ranking in the 2020 Doing Business report, reaching 149th out of 190 countries in terms of ease of doing business, compared to 153rd place (51.42 points) in the previous report, which means that it moved up four places. We are committed to continuing to strengthen the business environment to favor private companies. To this end, since 2018 we have elaborated an action plan to improve the business environment, which defines actions in the short-term, medium-term, and long-term.

53. The major reforms in 2020 concern the following:

  • Official registration of the creation of a business entirely online;

  • Integration of major public utilities into the information and credit platform;

  • Adoption of a decree on minimizing the use of paper documentation;

  • Minimizing the use of paper documents in the building permit process;

  • A draft decree on the regulation of building permits and demolition permits;

  • A draft decree on organization of the profession of engineer and consulting engineer and establishing a national order of civil engineers in Benin.

54. Under the new arrangement, a specific institutional framework for implementing the Doing Business reforms has been adopted, along with a matrix of annual actions to be implemented. Two draft laws designed to facilitate private investment have been finalized and submitted to Parliament for adoption. One draft law contains amendments to the investment code and the other focuses on the promotion and development of micro-, small- and medium-sized enterprises in Benin. The innovations introduced in the new Investment Code include:

  • simplification of the approval mechanisms (three mechanisms with clear and precise incentives during the startup and operating periods, two alternative mechanisms to further encourage investors interested in the priority sectors of the national economy);

  • professionalization of the processing of accreditation files, and time limit on the technical decision;

  • improvement of the investment monitoring system;

  • incorporation of international best practices for the preparation of investment codes and, in particular, the comments provided by the United Nations Conference on Trade and Development (UNCTAD) on the existing code;

  • structuring of incentives in such a way as to make Benin more competitive and ensure the consistency of its investment code provisions with the series of exemptions granted investors in the special economic zones, as well as with the specific government assistance initiatives designed to promote national entrepreneurship;

  • the establishment of a system for the promotion of private investment and the protection of investors’ rights at the national, regional, and international levels.

55. The reforms undertaken in the area of facilitating international trade aim at: (i) the establishment of a more rapid and less burdensome computerized process for the customs clearance of imports and exports; (ii) the integration of customs and control services at the Port of Cotonou (PAC); (iii) delegation of the management of the PAC to the Port of Antwerp; and (iv) implementation of the one-stop foreign trade window (GUCE).

E. Financial System

56. We also intend to continue building the capacity of the judges and courts to rule on financial matters. The new commercial tribunal in Cotonou is now operational. These courts will help to resolve business disputes. As in previous years, the BCEAO has, in the context of its training program for the judicial profession, undertaken to help build the capacity of judges and magistrates in matters relating to the WAEMU financial regulations.

57. To promote financial inclusion in Benin, the government plans to take measures such as the creation of permanent mechanisms for the mobilization of resources by microfinance institutions and improved promotion and coordination of the microfinance sector.

F. Quantitative Performance Criteria and Structural Benchmarks

58. The structural benchmarks for 2019 and 2020, as well as their macroeconomic justifications, are described in the table. The sixth program review is expected to be completed on or after March 23, 2020.

Table 1.

Benin: Status of Quantitative Performance Criteria and Indicative Targets, 20191

(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. To account for the temporary closure of the border with Nigeria, the end-December 2019 QPC will be adjusted, subject to limits specified in the TMU (with a reduction in the floor on revenue and basic primary balance, and an equivalent increase in the domestic financing ceiling).

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.

Table 2.

Benin: Structural Benchmarks for 2018–20

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The unpaid services to suppliers were inherited from the previous governments.

Attachment II. Technical Memorandum of Understanding

1. This Technical Memorandum of Understanding (the “Memorandum”) defines the performance criteria, quantitative benchmarks, and structural benchmarks of the Republic of Benin’s program supported by the Extended Credit Facility (ECF). It also specifies the frequency and deadlines for data reporting to the staff of the International Monetary Fund (IMF) for program monitoring purposes.

Program Assumptions

2. Exchange rates under the program. For the purposes of this Memorandum, the value of transactions denominated in foreign currencies will be converted into the domestic currency of Benin (the CFA franc, or CFAF), based on the exchange rates agreed upon for the program projections. The key exchange rates are presented below.1

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Definitions

3. Unless otherwise indicated, “government” is understood to mean the central government of the Republic of Benin and does not include any political subdivisions (such as local governments), the central bank, or any other public or government-owned entity with autonomous legal personality not included in the government’s flow-of-funds table (Tableau des opérations financières de l’État, TOFE).

4. The definitions of “debt” and borrowing for the purposes of this Memorandum are set out in point 8 of IMF Executive Board Decision No. 6230-(79/140), as subsequently amended on December 5, 2014 by Executive Board Decision No. 15688-(14/107):

  • a. Debt is understood to mean a current – as opposed to a contingent – liability, created under a contractual agreement for the provision of value in the form of assets (including currency) or services, which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) in time, and these payments will discharge the principal and/or interest liabilities incurred under the contract. Debt can take a number of forms; the primary ones being as follows:

    • i. loans, that is, advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the seller in the future (such as repurchase agreements and official swap arrangements);

    • ii. suppliers’ credits, that is, contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided;

    • iii. leases, that is, arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains title to the property. For the purpose of this guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement, excluding those payments that cover the operation, repair, or maintenance of the property; and

    • iv. Treasury bills and bonds issued in Communauté Financière Africaine (CFA) francs on the West African Economic and Monetary Union’s (WAEMU) regional market, which are included in public debt for the purpose of this Memorandum.

      Under the definition of debt set out above, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are also debt. Failure to make payment on an obligation that is not considered debt under this definition (for example, payment on delivery) will not give rise to debt.

  • b. The present value of the loan will be calculated using a single discount rate set at 5 percent.

  • c. For debts carrying a variable interest rate in the form of a benchmark interest rate plus a fixed spread, the PV of the debt would be calculated using a program reference rate plus the fixed spread (in basis points) specified in the debt contract. The program reference rate for the six-month USD LIBOR is 2.63 percent and will remain fixed for the duration of the program. The spread of six-month Euro LIBOR over six-month USD LIBOR is -294 basis points. The spread of six-month JPY LIBOR over six-month USD LIBOR is -260 basis points. The spread of six-month GBP LIBOR over six-month USD LIBOR is -197 basis points. For interest rates on currencies other than Euro, JPY, and GBP, the spread over six month USD LIBOR is -200 basis points.2 Where the variable rate is linked to a benchmark interest rate other than the six-month USD LIBOR, a spread reflecting the difference between the benchmark rate and the six-month USD LIBOR (rounded to the nearest 50 bps) will be added; and (d) Domestic debt is defined as debt denominated in CFA francs.

  • d. “External debt” is defined as debt denominated in any currency other than the CFA franc

Quantitative Performance Criteria

A. Ceiling on Net Domestic Financing of the Government

Definitions

5. Net domestic financing (NDF) of the government is defined as the sum of (i) net bank credit to the government, defined below; and (ii) net nonbank financing of the government, including the proceeds of the sale of government assets, which includes proceeds from the divestiture of shares of public enterprises, that is, privatizations, Treasury bills, and other securitized obligations issued by the government and listed in CFA francs on the WAEMU regional financial market, and any BCEAO credit to the government, including any drawings on the CFA franc counterpart of the Special Drawing Rights (SDR) allocation.

6. Net bank credit to the government is defined as the balance between the debts and claims of the government vis-à-vis the central bank and local commercial banks. The scope of net credit to the government is that used by the BCEAO and is in keeping with general IMF practice in this area. It implies a definition of government that is broader than the one indicated in paragraph 2. Government claims include the CFA franc cash balance, postal checking accounts, customs duty bills, and all deposits with the BCEAO and commercial banks of government-owned entities, except for industrial or commercial public agencies (EPIC) and government corporations, which are excluded from the calculation. Government debt to the banking system includes all debt to the central bank and local commercial banks, including Treasury bills and other securitized debt.

7. The data deemed valid within the framework of the program will be the figures for net bank credit to the government and for the net amount of Treasury bills and bonds issued in CFA francs on the WAEMU regional financial market, calculated by the BCEAO, and the figures for nonbank financing calculated by the Treasury of Benin.

8. Gross external budgetary assistance is defined as grants, loans, and non-earmarked debt relief operations (excluding project-related loans and grants, use of IMF resources, and debt relief under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief (MDRI) Initiatives. Net external budgetary assistance is defined as the difference between gross external budgetary assistance and the sum of total debt service obligations on all external debt (defined as the sum of interest payments and amortizations on all external loans, including interest payments and other charges to the IMF and on project-related loans, but excluding repayment obligations to the IMF), and all payments of external arrears.

Performance Criteria and Indicative Targets

9. The ceiling on net domestic financing of the government (cumulative since January 1 of the same year) is set as follows: CFAF 74.7 billion at end-March 2018; CFAF 190.9 billion at end-June 2018; CFAF 103,0 billion at end-September 2018; and CFAF 118.8 billion at end December 2018. These ceilings are performance criteria for end-June and end-December 2018, and an indicative target for end-September 2018.

10. The ceiling on net domestic financing of the government (cumulative since January 1 of the same year) is set as follows: CFAF 15 billion at end-March 2019; CFAF -38.0 billion at end-June 2019; CFAF -158.5 billion at end-September 2019; and CFAF – 289.0 billion at end December 2019. These ceilings are performance criteria for end-June and end-December 2019, and an indicative target for end-September 2019.

Adjustments

11. Net domestic financing of the government will be adjusted if net external budgetary assistance exceeds or falls short of the program projections indicated in paragraph 10:

  • If, at the end of a quarter, net external budgetary assistance exceeds the total projected amounts (cumulative since January 1 of the same year) by more than CFAF 5 billion, the NDF ceiling will be lowered by an amount equivalent to that excess, minus CFAF 5 billion.

  • If at the end of a quarter, net external budgetary assistance falls short of the projected amounts (cumulative since January 1 of the same year), the NDF ceiling will be increased by an amount equivalent to this shortfall, within the following limits: the increase may not exceed CFAF 15 billion at end-June 2018 and CFAF 25 billion at end-December 2018. The same rule applies for 2019.

12. For the purposes of calculating the adjustment to the NDF ceiling, the following amounts are projected in the program:

  • The amounts of gross external budgetary assistance (cumulative since January 1 of the same year) projected in the program are CFAF 22.6 billion at end-March 2018; CFAF 22.6 billion at end-June 2018; CFAF 39.6 billion at end-September 2018; and CFAF 55.4 billion at end-December 2018.

  • The amounts of gross external budgetary assistance (cumulative since January 1 of the same year) projected in the program are CFAF 0 billion at end-March 2019; CFAF 3.9 billion at end-June 2019; CFAF 10.1 billion at end-September 2019; and CFAF 45.4 billion at end-December 2019.

13. The ceiling on the net domestic financing will be increased by an amount equivalent to the shortfall in customs revenue compared to the program’s projections (CFAF 412 billion for 2019) in the event of a prolonged Benin/Nigeria border closure. The adjuster will be capped at CFAF 10 billion if the Benin/Nigeria border closure lasts until the end of October 2019, CFAF 20 billion if it lasts until the end of November 2019 and CFAF 30 billion if it lasts until the end of December 2019.

B. Floor of the Basic Primary Fiscal Balance

Definition

14. The basic primary fiscal balance is defined as the difference between total fiscal revenue (tax and nontax) and basic primary fiscal expenditure (on a commitment basis). Basic primary fiscal expenditure is defined as fiscal (current plus capital) expenditure minus (a) interest payments on domestic and external debt; and (b) capital expenditure financed by external grants and loans. Grants are excluded from revenue and net government lending is excluded from fiscal expenditure.

Performance Criteria and Indicative Targets

15. The floor of the basic primary fiscal balance (cumulative since January 1 of the same year) is a balance of not less than CFAF -69.7 billion at end-March 2018; CFAF -47.5 billion at end-June 2018; CFAF -20.3. billion at end-September 2018; and CFAF +3.9 billion at end-December 2018. The floors for end-June 2018 and end-December 2018 are performance criteria and the floor for end-September 2018 is an indicative target.

16. Similarly, the floor of the basic primary fiscal balance (cumulative since January 1 of the same year) is a balance of not less than CFAF +15.6 billion at end-March 2019; CFAF +44.5 billion at end-June 2019; CFAF 47.7 billion at end-September 2019; and CFAF 101.7 billion at end-December 2019. The floors for end-June 2019 and end-December 2019 are performance criteria and the floor for end-September 2019 is an indicative target.

Adjustments

17. The floor of the primary budget balance will be adjusted downwards by an amount equivalent to the customs revenue deficit compared to the program projections (CFAF 412 billion for 2019) in the event of a prolonged Benin/Nigeria border closure. The adjuster will be capped at CFAF 10 billion if the Benin/Nigeria border closure lasts until the end of October 2019, CFAF 20 billion if it lasts until the end of November 2019 and CFAF 30 billion if it lasts until the end of December 2019.

C. Floor of Total Government Revenue

Definition

18. Total government revenue includes tax and nontax revenue, as shown in the TOFE, but excludes external grants, revenue of autonomous agencies, and privatization receipts.

Performance Criteria and Indicative Targets

19. The floor on total government revenue (cumulative since January 1 of the same year) is set at an amount that is not less than CFAF 204.8 billion at end-March 2018; CFAF 445.5 billion at end-June 2018; CFAF 701.1 billion at end-September 2018; and CFAF 1021.6 billion at end-December 2018. The floors for end-June and end-December 2018 are performance criteria and the floor for end-September 2018 is an indicative target.

20. The floor on total government revenue (cumulative since January 1 of the same year) is set at an amount that is not less than CFAF 235.1 billion at end-March 2019; CFAF 505.5 billion at end-June 2019; CFAF 762.5 billion at end-September 2019; and CFAF 1112.4 billion at end-December 2019. The floors for end-June and end-December 2019 are performance criteria and the floor for end-September 2019 is an indicative target.

Adjustments

21. The government revenue floor will be adjusted downward by an amount equivalent to the shortfall in customs revenue compared to the program projections (CFAF 412 billion for 2019) in the event of a prolonged Benin/Nigeria border closure. The adjuster will be capped at CFAF 10 billion if the Benin/Nigeria border closure lasts until the end of October 2019, CFAF 20 billion if it lasts until the end of November 2019 and CFAF 30 billion if it lasts until the end of December 2019.

D. Non-Accumulation of New Domestic Payments Arrears by the Government

Definition

22. Domestic payments arrears are defined as domestic payments due but not paid by the government after a 90-day grace period, unless the payment arrangements specify a longer repayment period. The Autonomous Amortization Fund (CAA) and the Treasury record and update the data on the accumulation and reduction of domestic payments arrears. The definitions of debt given in paragraph 4a, of domestic debt in paragraph 4d, and of the government in paragraph 3 apply here.

Continuous Performance Criteria

23. The government undertakes not to accumulate any new domestic payments arrears. The non-accumulation of new domestic payments arrears will be continuously monitored throughout the program.

E. Non-Accumulation of External Payments Arrears by the Government

Definition

24. External public payments arrears are defined as payments due but not paid by the government as of the due date specified in the contract, taking into account any applicable grace periods, on the external debt of the government or external debt guaranteed by the government. The definitions of debt given in paragraph 4a, of external debt in paragraph 4e, and of the government in paragraph 3 apply here.

Continuous Performance Criterion

25. The government undertakes not to accumulate any external public payments arrears, with the exception of arrears related to debt that is the subject of renegotiation or rescheduling. The performance criterion on the non-accumulation of external public payments arrears will be continuously monitored throughout the program.

F. Ceiling on the Present Value of New External Debt Contracted or Guaranteed by the Government with a Maturity of One Year or More

Definition

26. This performance criterion applies not only to debt as defined in paragraph 4a, but also to commitments contracted or guaranteed by the government (including lease-purchase contracts) for which no value has been received. This criterion also applies to private sector debt guaranteed by the government, which constitutes a contingent liability of the government. As indicated in paragraph 4e, external debt excludes Treasury bills and bonds issued in CFA francs on the WAEMU regional market.

27. The term “government” used for this performance criterion and for the performance criterion on the contracting or guaranteeing by the government of new external debt, includes the government, as defined in paragraph 3, local governments, and all public enterprises, including administrative public agencies (EPA), scientific and technical public agencies, professional public agencies, and enterprises jointly owned by the Beninese government with the governments of other countries.

Continuous Performance Criterion

28. The present value of new external borrowing contracted or guaranteed by the government in 2019 will not exceed a cumulative amount of CFAF 797 billion. Changes to this ceiling may be made (subject to approval by the IMF Executive Board) based on the results of the public debt sustainability analysis prepared jointly by the staffs of the World Bank and the IMF.

G. Ceiling on Pre-Financing Contracts for Public Investments

Definition

29. Pre-financing contracts are defined as contracts pursuant to which the following steps are taken concurrently: (i) the government entrusts a private entity with the responsibility for executing public works, financed by a loan to the entity from a domestic commercial bank or group of commercial banks; (ii) the Minister of Finance guarantees this loan and signs an unconditional and irrevocable agreement to replace the private entity to honor the full amount of principal and interest of the loan, which are automatically paid from the Treasury’s account at the BCEAO. The concept of government used for this performance criterion is the one defined in paragraph 3.

Continuous Performance Criterion

30. The government undertakes not to enter into any pre-financing contracts during the program. This performance criterion on pre-financing contracts for public investments will be continuously monitored throughout the program.

Indicative Targets

H. Floor for Priority Social Expenditures

31. Priority social expenditures are determined in line with the priority programs identified in the GAP. These expenditures consist of selected (nonwage) expenditures in the following sectors, inter alia: health; energy, water, and mines; agriculture; livestock and fisheries; social affairs; education; and living standards. The execution of these expenditures is monitored on a payment order basis during the program through the Integrated Government Finance Management System (SIGFIP).

Definition

32. The indicative target for priority social expenditures is defined as the total amount (cumulative since January 1 of the same year) of the payment orders issued under the budget lines indicated in Table 1 below.

Table 1.

Priority Social Expenditure Categories

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Indicative Target

33. The indicative target for priority social expenditures (cumulative since January 1 of the same year) is set as follows: CFAF 15.0 billion at end-March 2018, CFAF 50.0 billion at end-June 2018; CFAF 101.0 billion at end-September 2018; and CFAF 167.0 billion at end-December 2018.

34. The indicative target for priority social expenditures (cumulative since January 1 of the same year) is set as follows: CFAF 37.2 billion at end-March 2019, CFAF 82.5 billion at end-June 2019; CFAF 140.7 billion at end-September 2019; and CFAF 180.0 billion at end-December 2019.

Information for Program Monitoring

I. Data on Performance Criteria and Indicative Targets

35. To facilitate effective program monitoring, the authorities will provide IMF staff with the following data:

Every month:

  • Data on any loan (terms and creditors) contracted or guaranteed by the government, in the first week after the end of the month;

  • Monthly consumer price index, within two weeks of the end of the month;

  • The TOFE, including revenue, detailed data on net domestic financing of the government (bank and nonbank domestic financing, including claims held by the nonbank private sector); and data on the basic primary fiscal balance, including data generated by SIGFIP, within six weeks of the end of the month;

  • Data on the balance, accumulation, amount (stock), and repayment of public domestic and external payments arrears, including in the event that these arrears amount to zero, within six weeks of the end of the month;

  • The monetary survey, within eight weeks of the end of the month. Every quarter:

  • Data pertaining to the amount of exceptional payment orders or other exceptional measures, within six weeks of the end of the quarter; and

  • Data pertaining to priority social expenditures, within six weeks of the end of the quarter.

J. Other Information

36. The authorities will provide IMF staff with the following data: Every month:

  • Bank supervision indicators for bank and nonbank financial institutions within eight weeks of the end of the month.

Every quarter:

  • Data on the implementation of the public investment program, including detailed information on sources of financing, within four weeks of the end of the quarter; and

  • Data on the stock of external debt, external debt service, the signing of external loan agreements and disbursements of external loans, within twelve weeks of the end of the quarter.

On an ad hoc basis:

  • In the quarter when they become available: a copy of the budget law and its supplementary documents; a copy of the most recent budget review law; as well as any decree or law pertaining to the budget or the implementation.
1

After cracking down on fuel smuggling in 2017, the authorities shifted gears in 2018 by taxing the sale of informal fuel. The new approach coincided with a rebound in informal fuel imports.

2

Staff projections assume a three month-border closure (until end-November 2019), which is estimated to lower 2019 GDP growth by half a percent, all else being equal. Compared to IMF Country Report 19/203, growth is revised down by 0.3 percent, because some positive factors partly offset the negative effect of the border closure, including changes in sector weights following the GDP rebasing and a better measurement of the value added of the public sector.

3

Excluding the statistical recognition of arrears, the 2019 deficit is estimated at 2.0 percent of the rebased GDP.

4

In the first half of 2019, customs revenues were broadly on target. For 2020, staff’s central scenario assumes a constant ratio of customs revenue to GDP. Next year’s forecasts are subject to both downside risks (e.g., if the border closure is prolonged or if corrective measures are taken to reduce informality) and upside risks (e.g., if there is a “catch-up effect” after the border reopens and customs revenue pick up).

5

The wage bill ratio is expected to decline by 0.3 percent of GDP in 2020 as a result of (i) the effect of the measures taken in the 2019 budget (see IMF Country Report 18/364); (ii) the extension of the “bancarization” of payments (through wire rather than paid cash at the counter) to military personnel; and (iii) the rationalization of the diplomatic service (MEFP ¶43).

6

Beyond 2020, baseline fiscal projections assume that fiscal consolidation will rely on the reduction of the ratio of public investment to GDP over 2021–24. This is because the medium-term tax projections are based on the conservative assumption of constant tax ratio and unchanged tax policy. However, like in 2020, a more desirable approach would be to focus on greater revenue mobilization.

7

As discussed in IMF Country Report 19/203, the insurance system is expected to be self-financed, except for the extremely poor population who will benefit from a public subsidy to cover their insurance premium. Therefore, no additional budgetary cost (beyond 0.3 percent of GDP) is expected in subsequent years.

8

The GDP rebasing was mostly reflected in an upward revision of private consumption, not exports.

9

The construction of a pipeline carrying crude oil from Niger to Benin’s Cotonou port is expected to take place in 2020–21, with a start of operations scheduled in 2022. The construction cost for the Beninese portion is estimated at about USD $1 billion. The project will be managed and financed entirely by a private company owned by international shareholders. The Beninese government is not involved financially in the project and is not liable in case the project does not advance according to plan (MEFP ¶51).

10

International competitiveness and doing business indicators as well as the Global Corruption Barometer Africa should be interpreted with caution since their methodology generates margins of error for each governance estimate and they are based on surveys of perceptions by enterprises, citizens, and experts. Estimates reflect the relative, not the absolute, performance of a country.

11

The draft report was discussed during GIABA November 2019 Plenary, but its adoption was postponed until May 2020 in order to improve its quality.

12

The CDC will manage some of the funds of the social security fund, thereby reducing its market power with banks. At the same time, if the CDC withdraws some deposits from commercial banks to reallocate funds to infrastructure projects, this may pressure banks’ liquidity position in the short term.

1

To isolate the pure effect of the GDP rebasing, the comparison between pre- and post-rebasing ratios uses, for the numerator of the ratio, the nominal values of the variables projected in IMF Country Report 19/203 and, for the nominal GDP denominator, the deflator growth and real GDP growth forecasts done in the same report.

1

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term (ST)” and “medium term (MT)” are meant to indicate that the risk could materialize within 1 and 3 years, respectively.

1

IMF Policy Paper, available at http://www.imf.org/external/pp/ppindex.aspx.

2

Refinancing risk refers to the risk that debt will have to be refinanced at higher-than-expected cost or, in extreme cases, cannot be refinanced at all. Exchange rate risk refers to the risk of increases in the cost of debt arising from changes in exchange rates. Liquidity risk refers to the risk that the volume of liquid assets decreases quickly following an unanticipated cash flow obligation and/or a possible difficulty in raising cash through borrowing in a short period of time. Interest rate risk refers to a situation where the increase in the cost of debt is triggered by changes in interest rates.

3

The effective use of the tool is conditioned on basing its projections on realistic macroeconomic and financial assumptions. The tool is as good as its underlying assumptions. In particular, assumptions on the interest, exchange and GDP growth rates, as well as the scope of the gross financing needs (e.g., below-the-line operations) have a significant impact on the results.

4

The scenario assumes an increase in external borrowing by $500 million in 2020 at unchanged level of total public debt (meaning that domestic borrowing decreases accordingly), relative to the baseline. The additional external borrowing is assumed to be incurred at non-concessional terms with an interest rate of 6 percent and a maturity of 7 years.

1

These recommendations should be adopted at the OHADA level.

2

Obligations apply to both parties, with investors also expected to comply with their obligations to the state. For instance, articles 67 and 68 of the Beninese’s investment code foresees sanctions related to breaches of the tax or customs codes.

3

The ICSID Convention entered into force in Benin in 1966.

4

See Article 43 of the investment code available at http://www.atwanlaw.com/library/99.pdf

5

See Article 9 of the investment code available at http://rdb.rw › publications › Investment Promotion Law 2015.

1

This measure affects not just Benin, but also Niger, Chad, and Cameroon.

1

Exchange rates as of August, 19, 2017.

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Cover IMF Staff Country Reports
Benin: Fifth Review under the Extended Credit Facility Arrangement, Request for Extension, and Request for Modification of Performance Criteria-Press Release; and Staff Report
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2019: Issue 398
Publisher:
International Monetary Fund
ISBN:
9781513524696
ISSN:
1934-7685
Pages:
93
DOI:
https://doi.org/10.5089/9781513524696.002
Text Figure 1.

Cotton Production and Port Activity
Figure 1.

Benin: Recent Developments, 2011–201
Figure 2.

Benin: Fiscal Developments and Projections, 2011–201
Figure 3.

Benin: Real and External Developments, 2006–191