On behalf of my Beninese authorities, I would like to thank the staff for the constructive policy discussions held in Cotonou and the well-written set of papers. My beninese authorities fully appreciate the continuous financial and technical assistance they have received from the Fund over the years.
Despite subdued economic performance in recent years, growth has been revived owing to a recovering cotton sector which contributed about 10 percent to total value added, employs a significant portion of Benin’s labor force and touches 40 percent of its population. The economic slump experienced by Benin in the recent past owes mostly to exogenous shocks associated with large terms of trade declines which stem from falling world cotton prices and escalating petroleum product prices. In spite of these adverse developments, the authorities are determined to adopt policy measures aimed at rebounding the economy, notably strengthening of macroeconomic stability through tightening the fiscal stance and reingovirating the structural reform agenda in the energy, telecommunications and cotton ginning sectors. The strength of the financial sector, which has grown and is made up of banks that meet key prudential norms, will be a key component of the growth and development strategy of the country. Over the period leading up to 2008, my authorities also envisage to rehabilitate economic and social infrastructure as well as improve the business climate through reforms of the judicial and land tenure systems and greater access to credit for small and medium-sized enterprises.
Thanks to appreciable good governance, the authorities of Benin will benefit from resources from the Millennium Challenge Account, which will help finance these important reforms. Another milestone in the country’s path to solid growth and development is the smooth political and social processes carried out since the early 1990s. Benin held successfully presidential elections earlier this year, confirming the progressive deepening of democratic institutions in this country. These efforts to strengthen democratic progress have absorbed significant financial resources, as has the support to the critical cotton sector.
Aware of the main challenges facing the Beninese economy, the newly elected administration has expressed a strong commitment to reforms, with great emphasis on fiscal discipline and privatization of state-owned companies. In this regard, my authorities have taken some remedial actions aimed at keeping the current PRGF program on track, notably reduction in customs exemptions to boost revenues, decisive government efforts to clear potential arrears in the first half of 2006, intensification of the audit of major taxes (including VAT and mobile telephone company royalties), streamlining of tax credit management, and efforts to enhance the effectiveness of the Directorate General of Customs and Indirect Taxes (DGDDI). On the expenditure front, corrective measures have also been undertaken, among which prohibition of ad hoc Treasury payment orders for extra budgetary spending, the setting of a treasury committee to track more closely revenue and expenditure and to match government resources with commitments. As a result of all these committed efforts, revenue should stabilize and expenditure contained to levels that make it possible to meet the primary fiscal deficit target.
My authorities recognize that Benin’s economic and financial situation remains fragile and vulnerable to external shocks, notably those stemming from its high dependence on cotton. However, with further support from international community and perseverance in their adjustment efforts, Benin should continue to make progress in reversing the decelerating trend of GDP recorded in recent years, while striving to meet the MDGs. As regards the issue of competitiveness, we take good note of the exchange rate appreciation since the 1994 devaluation. However, as we have oftentimes stated on regional issues, this problem should be looked at from a regional perspective. At the same time, the structural reforms already undertaken or envisaged by the authorities are aimed to underpin competitiveness, notably facilitation of access to land and to credit, improvement of the business environment, privatization of the utilities and cotton sectors, greater effectiveness of the autonomous Port of Cotonou especially through a larger range of activities at the management center for the one-stop shop, and preparation for the involvement of the private sector in the management of port facilities.
As regards program implementation, my authorities -despite the difficulties highlighted above and that stemmed from factors much beyond their control- have succeeded to meet five of seven quantitative performance criteria at end-June 2006, in addition to the two indicative target. The criterion related to the accumulation of domestic payments arrears was not met for the fiscal difficulties outlined above, but measures have been taken to avoid further arrears as noted above. Weak capacities and low delivery of financial and technical assistance delayed the implementation of structural reforms and resulted in the nonobservance of structural performance criteria and benchmarks. However, structural performance criteria and benchmarks have all been implemented as of today, albeit with the delays. Moreover, prior actions for the completion of this first review have all been implemented. These actions include the adoption by the Council of Ministers of the strategies and timetable for government disengagement from the cotton, electricity and telecommunications sectors; the selection of an auditing firm to assess the viability of outstanding domestic arrears and to develop an arrears clearance strategy; and the formal reaffirmation of the government’s commitment to neither guarantee nor contract nonconcessional loans. These actions as well as the proposed program conditionality for the rest of 2006 and 2007 demonstrate the authorities’ strong commitment in the areas of governance, accountability and reforms.
In view of these strong actions and commitment, my authorities request waivers for nonobservance of missed performance criteria and the completion of the first review under the PRGF arrangement. As we note that external assistance has fallen short of expectations and is critically lacking despite the MDRI-related benefits, we call upon the international community to deliver on aid commitments and further increase financial assistance to Benin.
I. Recent economic developments
In recent years, the Beninese economy has on one hand been hit by exogenous factors involving sharp decline in international cotton prices and, consequently, falling cotton production, and the other hand faced internal factors including delays in structural reforms which affected the competitiveness of the economy. Consequently, real GDP growth rate is estimated to have reached 2.9 percent in 2005 against 3.1 percent in 2004, and 3.9 percent in 2003. However, a rebound of economic activities, following improvements in trade relations with Nigeria, along with an increase of traffic from the Port of Cotonou, has contributed to render the 2006 prospects more optimistic. The available data point to a projected growth rate of 4.5 percent in 2006. These favorable developments of economic activities are also due to the settlement of delayed debts to farmers, ginners and inputs suppliers in April 2006, which boosted the production of cotton in 2006. After an unusual surge of inflation in 2005 (3.7 percent), reflecting partly high oil prices, inflation is estimated to have been brought down to 2.5 percent in 2006.
Regarding the external sector, in spite of the loss of competitiveness, owing to the continued appreciation of Euro (to which CFA franc is pegged) against US dollar and, mostly, large terms of trade declines resulting from falling world cotton prices and escalating petroleum product prices, the current account deficit has been subdued in 2006 and Benin’s share of the BCEAO’s foreign exchange reserves reached 10 months of imports cover in 2006.
The regional central bank, the BCEAO, continues to prove its ability to ensure a relevant monetary policy. Indeed, in face of broad money and credit to private sector expansion, which increased respectively by over 22 percent and 20 percent in 2005, the BCEAO has tightened its monetary conditions by raising the reserve requirement ratio up to 15 percent, the highest level among the WAEMU member countries. As regard the financial system, it is worth noting that the sector has been steadily growing, that most banks meet key prudential norms, and that reforms to address governance and other portfolio weaknesses in two banks have been completed. The regional Banking Commission should be commended for its supervisory work.
On the fiscal front, as noted above, my authorities put in place in the second quarter of 2006 a set of corrective fiscal measures, including (i) the institution of treasury committee to monitor revenue collection, (ii) the strict respect of expenditure execution procedures; and (iii) a renewed commitment to not undertake extrabudgetary expenditures. Their efforts to improve revenue collection and contain expenditures cover a wide range of areas, including customs, tax administration, and expenditure management and monitoring.
II. Medium-term challenges and objectives
Down the road, as well documented in Staff Report, Benin faces at least four important challenges: (i) preserving or improving macroeconomic stability, (ii) reinvigorating growth by completing the reforms to revitalize the cotton sector, Port of Cotonou, and utility companies, (iii) improving the business climate, so as to strengthen the private sector, and (iv) accelerating poverty reduction. In this regard, my authorities remain committed to maintaining macroeconomic stability and accelerating structural reforms. My authorities also intend to raise the investment-to-GDP ratio from 20 percent in 2005 to 22.5 percent in 2008, in particular by using the fiscal space allowed by the debt relief and increased domestic revenue collection resulting from the positive effects of structural reforms palpable as early as 2006. As a result of these efforts, my authorities expect that over the three year period to 2008, the real GDP growth rate will average 4.5 – 5.5 percent, with inflation remaining within the WAEMU convergence ceiling of 3 percent.
As a translation of the above medium-term macroeconomic framework into fiscal objectives, my Beninese authorities envisage to eliminate the narrowly defined primary deficit by 2008.
On the revenue side, while they expect a gradual positive fiscal impact of ongoing reforms, the authorities have taken a set of measures focused on the improvement of tax and customs administration. To that end, they envisage to (i) improve the management of medium-and-large-taxpayers units’ activities, while computerizing tax assessment and collection operations; (ii) ensure a better customs control of imported goods; (iii) better exchange of taxpayers data between the General Tax Administration and Customs Directorates; (iv) modernize property tax ; and (v) introduce Unified Tax Identification Number. In order to reaffirm their commitment to implementing those measures, my authorities announced that in case of revenue shortfalls, they stand ready to take corrective measures, including expenditure cuts.
On the expenditure side, the authorities have clearly expressed the urgent need to improve the poor’s access to basic services through higher and more efficient spending in priority sectors. In this regard, they intend to devote most of freed resources through MDRI to finance priority spending sectors, including education, health, and infrastructure projects. My authorities pay due attention to the staff’s advice recommending to be cautious in contracting new loans in order to preserve debt sustainability, improved significantly after MDRI debt relief from Fund, World Bank and African Development Bank. The government, in collaboration with development partners, is considering a clearance plan to solve the long-standing problems of wage arrears. At the same time, my authorities are taking necessary actions to accelerate the preparation of civil service reform undertaken, with World Bank and other development partners’ assistance. The authorities are still exploring a new direction to restore in the medium-term the viability of the civil service pension fund and would appreciate Fund’s technical assistance.
My authorities have demonstrated their strong commitment to structural reforms by implementing the prior actions for the completion of this first review under the PRGF program and are resolved to implement the proposed conditionality for the remainder of this program. Indeed, in their strategy to maintain close collaboration with partners, an agreement on a revised structural agenda has been reached between the authorities, the World Bank and Fund’s staff. The objectives set out in this agreement invite the authorities to (i) to complete government withdrawal from commercial activities in the cotton sector by mid-2007; (ii) bring to the point of sale the electricity company by the end of August 2007; (iii) start operations of the consolidated electronic billing system at the centralized clearing and invoicing management center by end of December 2006. As for the telecommunications, the authorities have a slightly different point of view from the World Bank in the timing of privatization. As rightly underscored above, the authorities expect to break off with the recurrent discussions made on this issue in the past and require necessary time to make a relevant assessment of the company situation, put in place a new management team, prepare a diagnostic of the telecom parastatal, and restructure the company first. In this context, they suggest to bring the company to the point of sale by end-January 2009.
My authorities have taken note of slow progress in improving the business environment and the high costs of doing business in Benin. They intend to take the necessary measures to reverse this trend, notably by reducing the burdensome regulations, addressing the institutional weaknesses, and implementing the reforms as envisaged, including in the cotton sector. In order to ensure a full success of the reform agenda, they have elaborated second-generation reforms aimed at removing critical obstacles to the implementation of structural reforms. The program aims to improve access to land, markets, and business environment. Taking into account staff’s recommendations, my authorities are taking steps to create a favorable climate of business, conducive to the needed development of private sector.
Regarding the financial sector, despite progress made in this area, as evidenced by the Banking prudential indicators, my authorities are also aware of the need to monitor closely the high concentration of loans observed in a limited number of sectors (and companies) in Benin.
Important progress has been made in the implementation of the PRSP. Since the adoption of the document in 2003, two annual progress reports have been performed and the third one is projected to be achieved by December 2006. A revision for a PRSP II is underway and should be completed by end-December 2006. An emphasis on the development of the private sector and the role it can play in increasing growth has been included in the revised project.
Since 1990, Benin has embarked on far-reaching reforms, focused on the need to put in place an efficient market-based economy. Important efforts have also been made to stabilize and reduce the country’s vulnerability to exogenous shocks. Delays in implementing structural reforms have not been due to lack of ownership, but rather to limited capacity. My authorities recognize that further efforts are still needed to attain this objective. In particular, they recognize that the Beninese economic situation requires vigorous measures to enhance its diversification so as to render it more resilient to shocks. In this regard, my authorities have shown their commitment to move forward by taking critical measures to push ahead the reforms underway. They are, therefore, requesting the completion of the first review of the PRGF arrangement and waivers for the missed performance criteria, for which they have already taken the necessary steps to address.
My beninese authorities remain fully determined to preserve the country’s debt sustainability gained from debt relief under the HIPC and MDRI initiatives, and they are grateful to the international community for this assistance. However, there has not been additional assistance on the part of the donors to underpin their daunting efforts towards strong and sustained growth. The financial and technical assistance of the international community, including the Fund, remains critical to address these challenges. My authorities are hopeful that they will benefit from increased support from all development partners.