Abstract
Requests for Disbursement Under the Rapid Credit Facility and Purchase Under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for Benin
Introduction
1. On behalf of our Beninese authorities, we would like to thank the Executive Board, Management and Staff for the Fund’s continued support, including through the augmentation of access in the context of the 6th and final review of their Extended Credit Facility (ECF)- supported program in May 2020. This has helped the government in its initial response to the health and socio-economic fallout of the COVID-19 pandemic and mobilize additional donor financing assistance. However, the larger than anticipated impact of the COVID-19 pandemic in Benin have created sizable fiscal and balance of payments financing needs, threatening the achievements made in fiscal consolidation, debt sustainability and structural reforms in recent years under the Government Action Program and the National Development Plan.
2. To cover part of the financing gap, the authorities are requesting a disbursement under the Rapid Credit Facility (RCF) and a purchase under the Rapid Financing Instrument (RFI) equivalent to 100 percent of Benin’s quota (SDR 123.8 million). This will be critical to sustain the government’ efforts and continued response to the pandemic. Going forward, cognizant of the uncertainty surrounding the global economic outlook, the Beninese authorities intend to maintain close engagement with the Fund to discuss appropriate policy measures, particularly in the event downside risks materialized.
Recent Economic Developments and Outlook
3. Since the completion of the 6th ECF review, macroeconomics conditions have worsened. The COVID-19 shock combined with the prolonged border closure with Nigeria is taking a heavy toll on the economy. Real GDP growth is expected to decelerate to 2 percent from 3.2 percent projected at the onset of the crisis and from 6.9 % in 2019. Year on year inflation increased due to higher food and transport prices. The fiscal and the current account deficits are expected to widen as a result of the implementation of the authorities’ response plan to the ongoing crisis, the strong decline in reexport activities, disruptions in import and value chains, drop in tourism receipts and remittances.
4. Despite these developments, Benin’s economic outlook remains strong. Real GDP growth in 2021 is expected to reach 5 percent and to return to the pre-pandemic trend at 6.5 percent over the medium-term. This projected fast recovery relies on a rebound in the tertiary sector activities, the end of the pandemic and a gradual global recovery including in Nigeria along with the reopening of the border which is now expected in early 2021. The authorities remain mindful of the downside risks stemming notably from the protracted COVID-19 pandemic and its second wave in West Africa, weak global demand, continued cross-border trade disruption with Nigeria and security threats in the region. They are committed to pursuing their efforts to mitigate risks under their control and will endeavor to continue building on the robust performance in recent years to safeguard notable macroeconomic gains, which will be essential for a speedy economic recovery once the effects of the pandemic abate.
Impact of the COVID-19 Pandemic and the Government’s Response
5. As of December 15, 2020, the total number of confirmed cases was at 3,090, with 2,972 recovered and 44 fatalities. The immediate response plan discussed at the time of the 6th ECF review in May 2020 has helped contain the spread of the virus and limit the impact on lives and livelihoods and support vulnerable businesses. However, the continued deterioration of the external environment and larger than anticipated impact of the pandemic crisis in Benin led to the revision of the initial measures and the introduction of additional measures including a multi-year new guarantee and interest subsidy mechanisms to provide access to finance for small and micro enterprises (SMEs) in the agricultural and nonagricultural sectors. All in all, the comprehensive package of fiscal measures amounts to CFAF 323 billion or 3.7 percent of GDP in 2020 and run until 2022. This package will be financed with committed donors support, concessional financing and grants, notably from the IMF (augmented access, resources freed thanks to the debt service relief under the Catastrophe Containment and Relief Trust, and RCF/RFI), other issuances on the domestic and regional markets notably COVID-19 T-Bill.
6. Consistent with the policy of temporarily easing fiscal rules to combat the effects of the COVID-19 pandemic set in the West African Economic and Monetary Union (WAEMU), the fiscal stance in 2020 has been loosened. In the 2020 supplementary budget law approved in October 2020, the fiscal deficit has been increased to 5.1 percent of GDP, compared to 3.5 percent at the time of the 6th ECF review in May 2020 and 1.8 percent pre-COVID-19 levels. It includes higher spending to support households and business affected by the crisis and increased social health-related outlays. Alongside, revenue collection is expected to underperform in 2020 due to lower port activity, the impact of the prolonged border closure with Nigeria and the temporary tax relief measures.
7. As regards regional monetary and financial policies, the regional central bank – Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO) has taken important measures to ease its monetary policy stance and limit the economic fallout on the financial sector. The measures aimed at (i) maintaining adequate liquidity in the banking system with notably the implementation of a special 3-month “COVID-19 T-Bills”, (ii) supporting the affected businesses with measures facilitating electronic payments and mobile banking to expand access to financial services and (iii) preserving financial stability.
Transparency of COVID-related Spending
8. The authorities commit to ensure transparency and accountability in the management of COVID-related expenditures. They have published the list of the main contracts, as well as the beneficial ownership information and the validation of delivery. They will pursue proper budgeting and execution of new spending in line with international transparency rules. The authorities have produced a memorandum of understanding, in which were clarified the timeline for the implementation of the multi-year credit support program, as well as the financial relationships between the government and the implementing public entities. In addition, an independent audit by the Accounting Chamber –Cour des Comptes– will be performed. The audit’s findings and recommendations will be published by end-June 2021.
Policies Going Forward
Fiscal policy and Debt Sustainability
9. The Beninese authorities put high value in maintaining fiscal sustainability and preserving fiscal discipline. They intend to bring back the budget deficit within the WAEMU convergence criteria of 3 percent of GDP by 2022, as the crisis recedes. The 2021 draft budget law submitted to the Parliament targets a deficit of 4.5 percent of GDP. Confident about a quick economic recovery and the reopening of the border with Nigeria, the authorities consider that the major tax policy and administrative measures undertaken since 2017 and developed in the context of their Medium-Term Revenue Strategy (MTRS) will pave the way for a strong performance in domestic revenue mobilization and sustain their efforts.
10. They will continue to strengthen public financial management. To this end, the Fiscal Transparency Evaluation started in February 2020 with technical assistance from IMF is about to be completed. A comprehensive assessment of fiscal risks will be also conducted by end-June 2021. Finally, the authorities intend to publish the legal framework of the management of public investment as well as the most recent medium-term public investment program.
11. Debt sustainability remains a high priority to the Beninese authorities. In this regard, they welcome the DSA conclusion that Benin’s external and overall debt is sustainable, and the country continues to be at moderate risk of debt distress. However, noting that risks to debt sustainability have increased, especially regarding the external debt service over the period 2024–2025, the authorities wish to reiterate their commitment to follow their Medium-Term Debt Strategy (MTDS) which relies on an appropriate mix of domestic and external financings at more favorable terms.
Structural Economic Transformation
12. Looking ahead, the Beninese authorities are committed to pursue their medium-term objectives which seek to safeguard macroeconomic stability, structurally transform the economy and achieve higher, sustained and inclusive growth. To make growth more inclusive, the authorities will make further inroads in poverty reduction, mainly with the implementation of a social protection system, the Assurance pour le Renforcement du Capital Humain—ARCH, which will provide in 2021 universal medical insurance, microcredit and pension system, for the entire population. To advance the transformation agenda, the authorities have developed specific policies for 2020–2024 notably the strengthening of the agriculture and fishing sectors; the development of high-potential sectors such as tourism and digital activities. They will further invest in roads, port and energy infrastructures as well as in human capital (public education and professional training). Continuous progress in improving the business environment ranks high in the authorities’ priorities given the expected role of the private sector in advancing the country’s economic transformation agenda. The authorities will press ahead with the needed reforms to tackle remaining structural challenges facing the economy.
Conclusion
13. Our Beninese authorities have swiftly acted to respond to the COVID-19 pandemic crisis with measures to contain the spread of the pandemic and an economic package to dampen the impact on the economy. They give assurance to maintain prudent macroeconomic policies needed to support a swift recovery and achieve sustained inclusive growth, once the pandemic abates. However, the protracted economic slowdown and cross-border activities have led to a deterioration of the country’s outlook and large fiscal financing gap and balance of payment needs. The authorities look forward to Executive Directors’ support for their requests for a disbursement under the RCF and a purchase under the RFI to cover partially their financing needs.