On November 27, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Benin.1
Economic performance has been relatively subdued since 2003 after a decade of high growth. Slow economic growth has reflected limited progress in addressing core economic vulnerabilities and delays in implementing crucial growth-supporting structural reforms, against a backdrop of an appreciating real effective exchange rate and, more recently, a sizable deterioration in the terms of trade. Real GDP growth fell to 2.9 percent in 2005 largely because of weakness in the cotton sector, which contributes an estimated 10 percent to total value added, and because investment demand was affected by election-related uncertainties. Inflation spiked upwards owing to strong food demand from crisis-afflicted Niger and high oil prices.
Benin has lost over 60 percent of competitiveness gains from the 1994 devaluation of the CFA franc—more than in most other West African Economic and Monetary Union (WAEMU) countries. The real effective exchange rate appreciated by another 2 percent in 2005 due to unfavorable price developments. Moreover, as world oil prices surged and the f.o.b. price for ginned cotton declined 35 percent, the terms of trade deteriorated by about 16 percent in 2005. Nonetheless, the current account deficit, excluding grants, continued to moderate, reflecting lower formal sector oil imports stemming from management weaknesses at SONACOP (Benin’s oil-importing monopoly) and weaker capital goods imports.
Notwithstanding further delays in structural reforms, a turnaround in cotton production is helping to revive growth in 2006. Growth is also benefiting from Port of Cotonou reforms and ongoing improvements in trade relations with Nigeria. Real GDP growth is expected to rebound to 4.5 percent in 2006. Inflation is projected to ease to 2½ percent by end-2006 and the current account deficit (excluding official grants) is expected to decline further to 7 percent of GDP.
The narrowly defined primary budget deficit is projected to meet the program target of 0.4 percent of GDP (0.9 percent, including Multilateral Debt Relief Initiative-funded outlays) in 2006. Fiscal prospects have benefited from expenditure and revenue measures introduced in the second quarter of 2006. These measures include the institution of a treasury committee to monitor more closely revenue collection and spending execution under the supervision of the finance minister, and strict adherence to expenditure execution procedures. With technical assistance from the World Bank, the new administration has initiated an audit of the new domestic payments arrears that came to light in 2006; the audit report and a plan to settle certified arrears are to be completed by end-2006.
Broad money rose by over 22 percent in 2005, considerably more than nominal GDP. In response, the BCEAO increased the reserve requirement ratio in Benin by 400 basis points, to 15 percent, in mid-2005, the highest level in the WAEMU. Broad money and private sector credit growth has subsequently eased and is projected to slow to a pace closer to trend in 2006.
In 2006, Benin received debt relief of US$1.112 billion (25 percent of 2005 GDP) under the Multilateral Debt Relief Initiative; this has reduced the country’s total external public debt to about 13 percent of GDP. The assistance will partly be allocated to priority sector spending in education, health, and infrastructure.
Over the medium term, the government’s economic policies aim to accelerate growth while keeping inflation low. Assuming a favorable external environment and a continuing recovery of cotton production, the medium-term macroeconomic framework calls for annual real GDP growth of 4½-5½ percent in 2006–08, in line with performance before Benin’s recent slowdown. Inflation is expected to be contained within the WAEMU limit of 3 percent, which would prevent further real exchange rate appreciation, while the external current account deficit narrows to 6.5 percent of GDP by 2008. The narrowly defined primary budget deficit (including MDRI-funded outlays) would be eliminated in 2008.
A key element of the authorities’ structural reform agenda is to reinvigorate stalled privatization of the utilities, port, and cotton sectors. Under the cabinet-approved disengagement strategies, the government would: (i) complete its withdrawal from commercial activities in the cotton sector by mid-2007; (ii) bring to point of sale the state-owned electricity company by the end of August 2007; and (iii) start operations of the consolidated electronic billing system at the Port of Cotonou’s centralized clearing and invoicing management center by the end of December 2006. The authorities also intend to bring the telecommunications company to the point of sale before end-January 2009. A revised Poverty Reduction Strategy Paper (PRSP) that places a renewed emphasis on private sector-led economic growth is to be completed in December 2006.
Executive Board Assessment
Executive Directors welcomed the rebound in growth in 2006, which in part reflects a recovery in cotton output. Directors commended the adoption of a growth strategy by Benin’s authorities that aims at strengthening the fiscal position and rekindling structural reforms. They stressed the importance of addressing core economic vulnerabilities to accelerate growth, reduce poverty, and help achieve Benin’s Millennium Development Goals. Structural reforms will also be essential to counter the long-term decline in competitiveness and overcome absorptive and institutional capacity constraints. Directors also encouraged the authorities to seek concessional financing from development partners for their economic program.
Directors stressed that long-term fiscal sustainability is crucial to sustained economic growth and poverty reduction. They commended the authorities for measures taken to reverse recent fiscal slippages and emphasized the importance of adherence to the convergence criteria under the Growth and Stability Pact in the West African Economic and Monetary Union.
Looking ahead, Directors were encouraged by the government’s commitment to improving revenue and expenditure administration, which they considered essential to achieving fiscal consolidation and providing space for increased pro-poor spending. They underscored the need to strengthen revenue performance through improved tax and customs administration and urged the authorities to implement the recommendations of recent Fund technical assistance on revenue management. Directors underscored the need for strict observance of expenditure execution procedures. They also noted the envisaged orderly settlement of overdue obligations to civil servants and stressed that this, together with appropriate containment of the wage bill, was essential to provide space for priority spending. Directors took note of the authorities’ efforts to restore the medium-term financial viability of the civil service pension fund, but regretted the lack of visible progress so far. They commended the authorities for their implementation of the April 2006 ban on the use of ad-hoc Treasury Payments Orders, which had boosted extra-budgetary outlays in the past, and encouraged the authorities to enhance public expenditure management, especially as regards expenditure tracking.
Directors noted that Benin’s financial system appears mostly sound and welcomed the completion of reforms to address governance and portfolio weaknesses in some banks. However, they recommended continued efforts to reduce nonperforming loans and vigilance to avoid the risks related to the substantial loan concentration in a limited number of sectors and companies.
Directors cautioned against a borrowing policy that would put external debt sustainability at risk in the post-MDRI era. Directors advised that, as new borrowing space opens up, particular attention be given to the concessionality of new loans, cost-benefit analyses of envisaged investment projects, and appropriate assessment of the absorptive capacity of the economy. In this context, Directors regretted that the outgoing administration had gone against the advice of its debt committee and guaranteed a non-concessional loan to the state-owned telephone company.
Directors welcomed the authorities’ renewed commitment to enhancing external competitiveness through reforms in the parastatal sectors. They emphasized the crucial importance of bolstering the viability of Benin’s cotton sector, and welcomed the announced government withdrawal from industrial and commercial activities in the sector by mid-2007. Directors stressed the need for an adequate regulatory framework in the energy sector to encourage private sector involvement. They expressed concern about the slow pace of reforms in the telecommunications sector, and welcomed the announced strategic assessment of the telecom parastatal in preparation for its privatization.
Directors strongly encouraged the authorities to pursue reforms aimed at addressing weaknesses in the judicial system, modernizing land tenure, and facilitating access to credit for small and medium sized enterprises.
Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
|(Annual changes in percent)|
|Income and prices|
|Consumer prices (average)||1.5||0.9||5.4||3.0|
|Real effective exchange rate||8.4||2.4||2.2||…|
|Terms of trade||3.4||21.2||-15.9||4.1|
|(Annual change in percent of beginning-of-period broad money)|
|Money and credit|
|Net foreign assets||-4.7||-10.8||7.3||2.5|
|Credit to the nongovernmental sector||33.0||4.5||20.2||6.2|
|Net credit to central government||-0.2||1.5||3.2||-5.5|
|(In percent of GDP, unless otherwise indicated)|
|Investment and saving|
|Gross domestic investment||19.6||19.0||19.6||21.0|
|Gross national saving||11.2||11.7||12.8||13.9|
|Current account balance||-8.3||-7.2||-6.8||-7.0|
|Overall balance of payments||-0.4||-3.2||2.8||-1.3|
|NPV of debt to export of goods and nonfactor services||147.1||132.1||75.1||86.3|
|Central government finance|
|Central government revenue||17.0||16.4||16.5||16.5|
|Total expenditure and net lending||20.6||20.1||21.1||21.5|
|Primary fiscal balance||-3.1||-3.3||-4.3||-4.8|
|Overall fiscal balance||-3.7||-3.7||-4.6||-5.0|
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.