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Togo

Author(s):
International Monetary Fund
Published Date:
October 2008
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I. Recent Developments and PRGF Performance

1. Togo’s economy, already being among the hardest hit by the surge in global food and oil prices, has suffered severe disruption caused by heavy flooding in early August. The flooding displaced thousands, destroyed roads and bridges, paralyzed trade and transport, and damaged food crops, resulting in an estimated export loss of about 3 percent of GDP. This adds to the large balance of payments impact of the surge in world oil and food prices, estimated at nearly 6 percent of GDP in 2008, reflecting Togo’s high fuel imports, owing to its role as a regional transport hub and reliance on diesel-based electricity generation. While Togo is nearly self-sufficient in food production, surging food prices have created social tensions and severely eroded real incomes, particularly for urban dwellers without access to subsistence agriculture. Inflation rose to 8½ percent in July 2008 on a twelve-month basis, driven by a 24 percent food price surge.

2. The authorities have kept a tight lid on spending, exceeding the end-June 2008 primary fiscal balance target by a wide margin. Revenues were higher than projected, as strong customs and nontax revenues offset lower profit and value added tax receipts resulting from slower growth and higher input costs. Spending was extremely restrained, reflecting an emphasis on fiscal discipline (to retain room for maneuver in the second half of the year), sharply reduced recourse to accelerated spending procedures, and slow implementation of domestic investment projects (resulting in spending below the indicative floor for priority outlays). This resulted in a large primary fiscal surplus and a substantial accumulation of government deposits, while wage and pension arrears were reduced. All relevant performance criteria were met (Appendix I, Table 1).

3. Structural reforms have also progressed well (Appendix I, Table 2). A General Finance Inspectorate has been set up to monitor the use of public resources. A new mechanism for monthly monitoring of budget execution, designed with IMF technical support, has significantly shortened the time lag in analyzing fiscal data and allowed policymakers to make timely and informed spending decisions. The launch of a phosphate audit has been delayed somewhat, while the benchmark on introducing a framework for regular treasury bill auctions has been implemented three months early. The first treasury bill auction, held in September 2008, was almost three times oversubscribed. The authorities have also made substantial progress in preparing other reforms, including treasury reorganization, bank restructuring, domestic arrears clearance, and an audit of the energy sector.

4. Togo has made major strides in normalizing relations with external creditors. On May 29, 2008, the World Bank’s Board approved an exceptional IDA allocation of US$146 million to help clear all of Togo’s arrears as well as US$17.6 million in budget support. On June 12, 2008, the Paris Club agreed to reschedule Togolese debt on Naples terms, cancelling US$347 million of arrears and debt service due during the consolidation period and rescheduling US$392 million. The AfDB’s Board approved on July 22, 2008, the clearance of Togo’s arrears (US$24 million) through its Fragile States Facility, while also consolidating all 2008 debt service. The EU has committed part of its grant envelope to clear Togo’s arrears to the EIB, with all 2008 debt service consolidated into the operation. Togo is expected to reach the HIPC decision point later this year. In this context, the authorities expect to secure debt rescheduling and arrears clearance from a few remaining multilateral and non-Paris Club creditors.

5. The President appointed a new Prime Minister in early September. Mr. Gilbert Houngbo is a former UNDP Director for Africa. Economic policies are not expected to change.

II. Outlook and Policies for 2008-09

A. Macroeconomic Outlook

6. The price shocks and the flooding have brought economic growth to a near halt. Real GDP growth projections have been lowered from 3 percent to ¾ percent for 2008, and from 4 to 3 percent for 2009, reflecting: (i) the disruption of regional transport and damage to food crops caused by the flooding; (ii) the adverse impact of the global price shocks on the transport sector, industrial production, construction, the electricity sector, and consumer demand, and (iii) delays in rehabilitating the phosphate sector. Inflation is expected to peak in 2008, at 9 percent, reverting to 2 percent in 2009 as local food prices are expected to decline from their recent peak. Money and credit growth are projected to decelerate significantly, reflecting reduced trade financing, dissaving, and the recent increase in the BCEAO repo rate.

Real GDP growth has been revised down and remains well below regional averages.

Sources: National authorities and Fund staff estimates.

The global food price surge has pushed up inflation.

Sources: National authorities and Fund staff estimates.

7. The current account deficit is projected to widen to 11 percent of GDP in 2008, from 6½ percent in 2007, driven by higher oil prices and flood-related disruption of exports. The destruction of roads and bridges along Togo’s main traffic artery from the Port of Lomé to the landlocked countries in the north has severely disrupted exports and Togo’s vital transport sector. The recent surge of world phosphate prices will have only limited benefit for export revenues in the short run as production remains constrained by decrepit equipment. Gross international reserves are projected to fall from just over to well below three months of imports.

Text Table 1.Togo: Selected Economic and Financial Indicators, 2007–10
2007200820092010
Est.Program1Revised2Program1Revised2Program
(Percent of GDP, unless otherwise indicated)
Real GDP (percent change)1.93.00.84.03.04.0
CPI (annual average, percent change)1.04.19.13.81.92.5
Broad money (M2, percent change)18.210.06.010.0
Total revenue and grants18.719.518.421.221.121.8
Revenue17.017.216.617.517.317.6
Total expenditure and net lending20.621.921.322.923.723.8
Domestic primary expenditure16.717.217.216.917.317.0
Overall balance (payment order basis)-1.9-2.4-2.9-1.7-2.6-1.9
Primary balance0.20.0-0.60.60.00.6
Change in domestic arrears-0.80.0-0.2-0.4-0.5-0.7
Current account balance-6.4-7.9-10.9-6.7-9.2-7.1
Exports of Goods and Services41.944.440.445.343.644.8
Imports of Goods and Services62.568.067.569.470.669.8
External public debt379.264.257.760.853.630.2
Sources: Togolese authorities; and Fund staff estimates and projections.

Country Report No. 08/146.

Revised program reflects impact of global food and fuel shocks and recent flooding.

Assumes external debt/arrears relief in 2008-2010, in line with potential HIPC/MDRI debt relief.

Sources: Togolese authorities; and Fund staff estimates and projections.

Country Report No. 08/146.

Revised program reflects impact of global food and fuel shocks and recent flooding.

Assumes external debt/arrears relief in 2008-2010, in line with potential HIPC/MDRI debt relief.

B. Policy Response to Global Price Shocks

8. Togo’s policy response to the food price shock has been well balanced. The authorities have resisted tax exemptions, export bans, and price controls that have been introduced in other countries, and instead focused on mitigating the social impact and boosting food production over the medium term, specifically through: (i) social dialogue; (ii) sale of grain reserves; (iii) wage and pension arrears clearance to (mostly urban) public employees who often lack access to subsistence farming; (iv) sale of fertilizer and seeds at subsidized prices (keeping them at 2007 levels), (v) appeal for donor support and regional financing to raise productivity in agriculture. The government hopes to boost agricultural productivity through investment in rural infrastructure, better storage and distribution systems, and improved competition.

9. Retail prices for gasoline and diesel were raised by 18 percent in August, along with measures to limit the adverse impact on households and enterprises. The new price level ensures an adequate pass-through of world prices. The authorities agreed with the private oil companies (which import and sell all fuel products in Togo) on a new price-tax structure that keeps effective taxation and margins for enterprises broadly unchanged. Prices for kerosene were not raised, given its widespread use by poor households. To mitigate the impact of high consumer prices, the government introduced temporary lump-sum wage supplements to public sector employees and doubled the minimum wage, to around US$60 per month, comparable with other WAEMU countries. To mitigate the impact on enterprises, the government has decided to reduce Togo’s corporate tax rate, which is among the highest in the region, by 7 percentage points, with a new top rate of 33 percent.

C. Budget Policies

10. A moderate downward revision to the primary fiscal balance target for 2008 was agreed to reflect the impact of the price shocks and flooding. The shocks are projected to reduce tax revenues by about ½ percent of GDP in 2008 and require additional spending of about 1¾ of GDP, largely on account of emergency flood repairs, but also reflecting the fertilizer and seed subsidies, temporary wage supplements, fuel support to the electricity sector, and clearance of wage and pension arrears. This will be partly covered by contingency lines, with additional savings coming from the delay of local elections and projected delays in executing the domestic investment program. There was agreement on the need to execute the other budget allocations to the extent possible to counterbalance the economic downturn and safeguard essential social services. Overall, the primary fiscal balance objective for 2008 was revised down by ½ percent of GDP, while arrears clearance for wages and pensions was raised by ¼ percent of GDP to help mitigate the impact of the shocks on the population. The resulting modest fiscal loosening is unlikely to affect inflation significantly, as wages remain contained, spending is partly on imports, and economic activity is well below capacity.

11. The 2009 budget aims for a balanced primary fiscal position, supported by revenue measures and reallocation of spending to priority sectors, while implementing the domestic arrears clearance strategy. The envisaged primary fiscal adjustment of ½ percent of GDP would be a step toward a sustainable medium-term fiscal position in which domestic revenues broadly cover domestic spending and arrears clearance. The tax-GDP ratio is projected to increase by ¾ percent of GDP as corporate tax losses (resulting from the economic downturn and the reduction in the profit tax rate) are more than offset by ongoing administration reforms, reduction of exemptions, and increases in alcohol and tobacco excises. A reduction in untargeted nonwage spending will create room for higher social and flood-related infrastructure spending, bank and enterprise restructuring, and domestic arrears clearance. The draft budget includes higher foreign-financed project spending as Togo resumes full cooperation with development partners and implements the I-PRSP. It also includes contingencies for exogenous shocks, including possible shortfalls in external disbursements.

D. External Financing

12. The price shocks and flooding have created large financing gaps, for which the authorities are seeking external support, including a PRGF augmentation. Since the start of the PRGF-supported program, world oil and food prices have risen rapidly, adding substantially to import costs. In addition, the destruction caused by the flooding has severely disrupted exports of good and services. Even after netting out the projected fall in import demand, these shocks are projected to worsen the goods and services balance by 3¾ and 2¾ percent of GDP in 2008 and 2009 respectively. These financing gaps are expected to be covered by a drawdown in reserves, higher transfers, and additional external support from creditors and donors. The impact on the budget is projected at about 2 percent of GDP for both 2008 and 2009, reflecting revenue losses, emergency flood repairs, seed and fertilizer subsidies, fuel support to the electricity sector, wage supplements, and clearance of wage and pension arrears. These costs are expected to be covered primarily by domestic adjustment, including revenue efforts and domestic spending reallocation, with the remainder financed by additional external disbursements and debt relief.

Text Table 2.Togo: Impact of Price Shocks and Flooding 2008–091(Changes from Country Report No. 08/146, in percent of GDP)
20082009
Balance of Payments
Good and services balance deterioration3.72.7
Oil price increase1.72.5
Food price increase0.70.3
Flood impact on exports3.12.0
Other 2-1.7-2.1
Potential financing3.72.7
Transfers0.10.3
Additional external debt flow relief0.30.2
Reserves2.21.2
PRGF Augmentation0.50.5
Other, including new budget support0.60.6
Budget
Additional costs2.01.9
Revenue losses0.40.7
Fertilizers/seeds/food support0.50.3
Flood repairs0.80.9
Domestically financed0.80.4
Externally financed0.00.5
Wage arrears clearance and transfers0.40.1
Policy measures / Financing2.01.9
Revenue measures0.00.7
Domestic spending cuts1.20.4
Domestic financing0.0-0.3
Net increase in project support0.00.2
Additional external debt flow relief0.30.2
Additional budget support0.10.3
BCEAO credit (PRGF augmentation)0.50.5

Reflects upward revision of world oil and food prices relative to Country Report No. 08/146 and the impact of flooding. This is in addition to the oil price rise already projected at the time (with a net cost of 3 percent of GDP). The 2008 average oil price

Includes changes in exports of certain goods caused by other factors, and the reduction in import demand due to higher oil prices and lower real income (partly offset by new imports for reconstruction).

Reflects upward revision of world oil and food prices relative to Country Report No. 08/146 and the impact of flooding. This is in addition to the oil price rise already projected at the time (with a net cost of 3 percent of GDP). The 2008 average oil price

Includes changes in exports of certain goods caused by other factors, and the reduction in import demand due to higher oil prices and lower real income (partly offset by new imports for reconstruction).

13. An augmentation in amount equivalent to SDR 18.35 million (25 percent of quota) is proposed to help close the new financing gaps for 2008 and 2009, complementing Togo’s strong domestic adjustment efforts and additional donor support. The augmentation, which will ensure that the program is fully financed through mid-2009, is justified by a number of factors:

  • The augmentation is part of a concerted effort by development partners to address the recent shocks. Concessional financing from other sources through additional debt flow relief (recently granted by the Paris Club and two multilaterals), new project support for the food crisis and infrastructure rehabilitation, and additional budget support is projected at about 2¼ percent of GDP for 2008–09, and the augmentation would add 1 percent of GDP to help close the financing gaps for the two years.
  • Togo has a good policy track record since 2006 and has responded prudently to the price shocks, avoiding policies that cause large economic distortions and focusing instead on social impact mitigation and measures to boost food production.
  • The authorities’ revised economic program includes an appropriate domestic adjustment effort, including significant reallocation of domestic spending and strong efforts to compensate revenue losses, while allowing the pass-through of higher oil and food prices to the private sector.
  • With the augmentation, Togo’s contribution to the international reserves of the BCEAO would not fall too far below three months of the country’s imports.
  • Togo’s capacity to repay the Fund would remain strong, supported by the currency union arrangement and solid debt repayment indicators, see Table 7. The augmentation would not materially affect debt sustainability indicators, as the net present value of external public debt would increase from 21¾ to 22½ percent of GDP in 2010 (after HIPC and MDRI relief).

E. Structural Reforms

14. The authorities are committed to maintaining the positive momentum on fiscal governance reforms (see Table 2 of Appendix I), whose implementation will require continued technical assistance by the Fund and others. To broaden the tax base, the authorities intend to reduce tax exemptions and improve the control of the free economic zone. To help restore supplier confidence and liquidity, the authorities intend to regularize Togo’s large domestic arrears by issuing tradable bonds (and cash for small amounts) to suppliers whose claims have been verified by the recent external audit. In this context, it will be critical to strengthen the management and monitoring of domestic debt. Another priority will be to strengthen treasury and cash management by reorganizing and strengthening the treasury based on WAEMU directives and by introducing regular treasury bill auctions.

15. Preparations are underway to strengthen the financial position of Togo’s state-owned banks and attract strategic investors, supported by IMF and World Bank technical assistance. The authorities plan to securitize nonperforming loans (NPLs) held by three large undercapitalized public banks. The bonds are to be designed to be easily tradable so that the banks can manage their liquidity and rebalance their portfolios. The total amount of securities to be exchanged is projected at about 7 percent of GDP. They would have relatively long maturities to stretch out the budget cost (estimated at about 1 percent of GDP annually). The authorities also intend to set up a structure and mechanism for recovering, settling, and restructuring NPLs, and to support the development of a secondary market for securities. In parallel to the securitization, the authorities are seeking to attract strategic investors for all three state-owned banks.

16. Reforms of the phosphate and energy sectors will be vital for reviving economic growth. Decrepit mining equipment, the bankruptcy of the joint venture company, and power shortages have led to a worrisome decline in the extraction of Togo’s high-quality phosphate, to less than a quarter of potential capacity. Moreover, the company has not been able to ensure a stable supply and has therefore not fully benefited from the recent surge in world prices. The World Bank-financed phosphate audit will help the authorities to formulate a long-term reform strategy to boost investment and production, including by attracting a strategic investor. To overcome persistent energy shortages, the authorities are purchasing and rehabilitating equipment, preparing a performance contract with the local electricity company, and elaborating an energy sector development strategy in close consultation with the World Bank.

F. Program Monitoring and Risks

17. The December 2008 performance criterion on the primary fiscal balance was revised down moderately in response to the price shocks and flooding. The attached Letter of Intent (LOI), Appendix I, updates the authorities’ letter and accompanying Memorandum of Economic and Financial Policies dated March 28, 2008. Tables 1 and 2 of Appendix I show quantitative and structural conditionality through end-2009. An amended Technical Memorandum of Understanding is also attached. The disbursement schedule has been revised to reflect an augmentation of access, to be disbursed in equal tranches following the first and second reviews (Table 6).

18. The authorities have demonstrated strong policy commitment in the face of severe shocks, but significant risks still lie ahead. Political and social tensions could intensify in the current difficult environment characterized by consumer price shocks, flooding-induced damage, and a sharp economic downturn. Possible delays in implementing donor-financed projects and in rebuilding the infrastructure destroyed by the flooding could hamper the recovery and intensify social pressures. Delays in restructuring the large state-owned banks, accounting for more than half of system deposits, could jeopardize stability. Further exogenous shocks could deepen the economic downturn, such as: (i) deterioration of the terms of trade, including further oil and food price rises; (ii) a worsening energy crisis; and (iii) bad weather affecting agriculture.

III. HIPC Process and PRSP

19. Executive Board consideration of the HIPC decision point is envisaged for later this year. A Bank-Fund HIPC DSA data reconciliation mission has confirmed that Togo meets the debt eligibility criterion under the fiscal window based on end-2007 data (see preliminary HIPC document).

20. The authorities plan to finalize Togo’s full PRSP by mid-2009, with broad stakeholder participation, identified donor support, and clear prioritization of reforms. Given Togo’s capacity and financing constraints, a critical challenge will be to identify specific development partners for priority reforms. The donor conference in Brussels on September 18–19, 2008, is an opportunity to advance these discussions.

IV. Staff Appraisal

  • The policy response to the global food and oil price shocks has rightly focused on social impact mitigation and support of agriculture, while avoiding administrative controls and tax exemptions.
  • The near-term challenge is to address the adverse economic effects of the price shocks and the recent devastating flooding, while safeguarding priority spending in 2008.
  • The draft 2009 budget is an important step toward a sustainable fiscal position, aiming at a balanced primary position and higher spending on health, education, and infrastructure, while starting to implement the domestic arrears clearance strategy.
  • In addition to maintaining the momentum on fiscal governance reforms, the authorities should continue their efforts to restructure state-owned banks and enterprises.
  • Resumption of financial and technical support and debt relief will be critical for program success; Togo is expected to reach the HIPC decision point later this year.
  • Program risks remain significant, but the authorities have demonstrated their ability and commitment to manage economic and social pressures.
  • Based on Togo’s good policy track record and the strength of the program, staff recommends the completion of the first review.
  • In light of the severe exogenous shocks, staff supports the augmentation of access to PRGF resources requested by the authorities.
Table 1.Togo: Selected Economic and Financial Indicators, 2005–10
200520062007200820092010
ActualEstim.Program 1
(Percent change, unless otherwise indicated)
National income, prices, and exchange rates
Real GDP1.23.91.90.83.04.0
Real GDP per capita-1.41.4-0.6-1.70.41.4
GDP deflator7.70.31.34.81.22.3
Consumer price index (annual average)6.82.21.09.11.92.5
GDP (CFAF billions)1,112.01,159.81,197.71,264.31,317.01,400.7
Exchange rate CFAF/US$ (annual average)526.9522.4478.5
Real effective exchange rate (annual average)2.5-1.40.5
Terms of trade (deterioration -)-3.76.26.7
Monetary survey
Net foreign assets 2-2.819.21.4-8.10.0
Credit to government 2-1.2-0.71.12.0-1.3
Credit to the nongovernment sector 26.60.414.94.48.4
Broad money (M2)1.422.118.26.010.0
Velocity (GDP/ end-of-period M2)3.53.02.62.62.4
(Percent of GDP, unless otherwise indicated)
Investment and savings
Gross domestic investment11.812.812.113.717.618.5
Government2.83.42.05.07.17.1
Nongovernment9.19.410.18.710.511.4
Gross national savings6.66.25.72.88.411.4
Government-0.7-0.40.12.14.65.1
Nongovernment7.26.65.60.73.86.3
Government budget
Total revenue and grants16.918.318.718.421.121.8
Revenue15.716.917.016.617.317.6
Total expenditure and net lending20.422.120.621.323.723.8
Domestic primary expenditure16.218.016.717.217.317.0
Overall balance (payment order basis)-3.5-3.8-1.9-2.9-2.6-1.9
Primary balance 3-0.5-1.10.2-0.60.00.6
Change in domestic arrears1.9-0.4-0.8-0.2-0.5-0.7
External sector
Current account balance-5.3-6.6-6.4-10.9-9.2-7.1
Exports (goods and services)40.342.341.940.443.644.8
Imports (goods and services)57.261.862.567.570.669.8
External public debt90.383.979.257.753.630.2
Of which: arrears28.629.531.40.00.00.0
External public debt service (percent of exports)10.69.29.16.14.94.4
Gross international reserves (months of imports)2.03.13.12.72.62.9
Sources: Togolese authorities; and Fund staff estimates and projections.

Revised from Country Report No. 08/146 to reflect impact of food and fuel shocks and recent flooding. Assumes external debt and arrears rescheduling/relief in 2008–2010 in line with potential debt relief under the HIPC initiative and MDRI.

Percent of broad money at the beginning of the period.

Revenue minus expenditure, excluding grants, interest, and foreign-financed expenditure.

Sources: Togolese authorities; and Fund staff estimates and projections.

Revised from Country Report No. 08/146 to reflect impact of food and fuel shocks and recent flooding. Assumes external debt and arrears rescheduling/relief in 2008–2010 in line with potential debt relief under the HIPC initiative and MDRI.

Percent of broad money at the beginning of the period.

Revenue minus expenditure, excluding grants, interest, and foreign-financed expenditure.

Table 2.Togo: Balance of Payments, 2006–10
20062007200820092010
Estim.Program 1Program 1Program 1
(Billions of CFA francs)
Current account balance-76.2-76.4-137.3-121.3-99.2
Trade balance-244.1-271.0-348.7-367.0-364.3
Exports339.8336.5353.9401.7441.0
Domestic exports238.0217.5194.1235.8275.8
Of which: Cotton15.612.012.110.010.2
Coffee4.55.46.26.56.7
Cocoa7.94.58.68.99.3
Phosphates16.618.043.869.082.0
Cement & clinker59.157.049.552.054.6
Reexports101.8119.0159.8165.9165.2
Imports, f.o.b.-583.9-607.5-702.7-768.7-805.2
Of which: Petroleum products-237.2-246.2-330.7-343.2-341.7
Services (net)17.425.37.112.314.9
Credit150.7165.8157.4173.1187.0
Debit-133.2-140.4-150.3-160.8-172.0
Income (net)-19.8-20.8-7.8-8.4-7.7
Current transfers (net)170.2190.0212.2241.8258.0
Private154.2169.6189.2191.8197.9
Public16.020.423.050.060.1
Capital and financial account96.164.154.875.585.5
Direct investment39.830.131.650.062.9
Portfolio investment, incl. bond33.73.2-8.20.01.8
Other investment22.630.831.425.420.8
General government-10.1-17.9-5.50.42.4
Disbursements9.52.018.020.022.4
Amortization-19.6-19.9-23.5-19.6-20.0
Banks, net foreign assets 3-2.213.410.00.00.0
Other capital, errors, and omissions34.935.326.925.118.4
Overall balance19.9-12.3-82.5-45.9-13.7
Financing-19.912.382.545.913.7
Central bank net foreign assets 3-59.4-18.927.50.0-28.0
Of which: Past use of Fund resources-3.6-3.2-0.70.00.0
Arrears, net change39.538.60.80.00.0
Flow rescheduling0.00.021.912.412.6
Clearance of debt/arrears0.07.4403.40.0267.2
Debt/arrears cancellation0.0-7.4-232.00.0-267.2
Debt and arrears rescheduling0.00.0-171.50.00.0
Exceptional financing0.00.032.328.021.6
PRGF financing15.312.412.4
PRGF augmentation6.56.50.0
Other committed financing10.59.29.2
Unidentified financing0.00.00.05.47.5
Memorandum items:(Percent of GDP, unless otherwise indicated)
Current account balance-6.6-6.4-10.9-9.2-7.1
Exports of goods and services42.341.940.443.644.8
Imports of goods and services61.862.567.570.669.8
Gross int. reserves (months of imports)3.13.12.72.62.9
Sources: Togolese authorities; and Fund staff estimates and projections.

Revised from Country Report No. 08/146 to reflect impact of food and fuel shocks and recent flooding. Assumes external debt and arrears rescheduling/relief in 2008–2010 in line with potential debt relief under the HIPC initiative and

Including late interest on arrears through 2007.

Negative sign indicates increase.

Sources: Togolese authorities; and Fund staff estimates and projections.

Revised from Country Report No. 08/146 to reflect impact of food and fuel shocks and recent flooding. Assumes external debt and arrears rescheduling/relief in 2008–2010 in line with potential debt relief under the HIPC initiative and

Including late interest on arrears through 2007.

Negative sign indicates increase.

Table 3.Togo: Central Government Financial Operations, 2007–10
2007200820092010
ActualH1-Act.Prog.1Rev.2H1-Prog.Prog.1Rev.2Rev.2
(Billion of CFA francs)
Revenue and grants223.7111.1243.6232.8128.0281.2278.4306.0
Total revenue203.3109.6214.6209.8108.0232.1228.4245.9
Tax revenue195.9100.3203.5198.7103.0225.6215.4239.0
Tax administration (DGI)89.742.291.086.244.0105.797.5108.7
Customs administration (DGD)106.258.2112.5112.659.0119.9117.9130.3
Nontax revenue7.49.311.011.05.06.613.06.9
Grants (projects) 320.41.429.023.020.049.150.060.1
Expenditures and net lending246.590.5273.9269.3142.9303.3312.1333.3
Memo: Dom. primary expenditures200.581.1214.5217.3106.7224.2228.4237.5
Current expenditures222.483.1214.0205.9103.9220.3218.2234.1
Domestic primary current spending186.575.5190.6189.993.7197.7197.5209.6
Wages and salaries64.329.972.273.233.778.078.083.6
Goods and services53.619.554.453.727.559.756.060.5
Transfers and subsidies62.020.246.050.025.044.048.050.5
Other/unclassified2.71.01.01.00.00.00.00.0
Bank and SOE restructuring3.94.817.012.07.516.015.515.0
Foreign-financed current spending10.20.05.05.04.510.67.011.2
Interest25.77.618.411.05.712.113.713.3
Domestic debt2.93.63.83.22.04.05.35.6
External debt22.84.014.67.83.78.18.47.7
Public investment24.17.159.963.439.083.093.999.2
Domestically financed14.05.623.927.413.026.530.927.9
Foreign financed10.11.536.036.026.056.563.071.3
Net lending0.00.30.00.00.00.00.00.0
Domestic primary balance2.828.30.0-7.61.38.00.08.4
Overall balance, payment order basis-22.820.6-30.3-36.6-14.9-22.1-33.7-27.3
Domestic arrears and treasury float-9.3-3.10.0-3.1-3.0-5.3-6.0-9.8
External interest arrears20.70.38.70.30.00.00.00.0
Overall balance, cash basis-11.417.8-21.6-39.3-17.9-27.4-39.7-37.1
Financing12.2-29.5-3.17.0-0.13.76.38.0
Domestic financing (net)12.2-31.5-7.5-7.5-5.6-4.0-6.5-7.0
Banking system5.8-23.25.29.4-6.3-1.9-6.2-4.9
Nonbank financing6.4-8.3-12.7-16.90.8-2.1-0.3-2.1
External financing (net)0.01.94.514.65.47.612.815.0
Drawings 32.00.012.018.07.718.020.022.4
Amortization due-19.9-11.3-22.7-23.5-9.5-23.8-19.6-20.0
Arrears on amortization17.90.54.80.50.00.00.00.0
Contingency for debt service0.00.0-0.5-2.30.00.00.00.0
Debt flow relief (int. & amort.)12.710.921.97.213.512.412.6
Clearance of debt & arrears stocks-374.0-384.0-425.10.00.00.0-267.2
Debt/arrears stock rescheduling0.0163.7175.8193.20.00.00.00.0
Debt/arrears stock cancellation0.0210.3208.3232.00.00.00.0267.2
Exceptional financing0.016.424.732.318.020.328.021.6
PRGF-linked BCEAO credit0.09.115.921.712.712.718.812.4
Other identified financing 40.07.38.810.55.37.69.29.2
Residual/unidentified financing-0.8-4.70.00.00.03.55.47.5
(Percent of GDP)
Revenue and grants18.78.819.518.49.721.221.121.8
Total revenue17.08.717.216.68.217.517.317.6
Grants (projects) 31.70.12.31.81.53.73.84.3
Expenditures and net lending20.67.221.921.310.822.923.723.8
Memo: Dom. primary expenditures16.76.417.217.28.116.917.317.0
Current expenditures18.66.617.116.37.916.616.616.7
Domestic primary current spending15.66.015.215.07.114.915.015.0
Wages and salaries5.42.45.85.82.65.95.96.0
Goods and services4.51.54.44.22.14.54.34.3
Subsidies and transfers5.21.63.74.01.93.33.63.6
Other/unclassified0.20.10.10.00.00.00.0
Bank and SOE restructuring0.30.41.40.90.61.21.21.1
Foreign-financed current spending0.90.00.40.40.30.80.50.8
Interest2.10.61.50.90.40.91.01.0
Domestic debt0.20.30.30.30.20.30.40.4
External debt1.90.31.20.60.30.60.60.6
Public investment2.00.64.85.03.06.37.17.1
Domestically financed1.20.41.92.21.02.02.32.0
Foreign financed0.80.12.92.82.04.34.85.1
Domestic primary balance0.22.20.0-0.60.10.60.00.6
Overall balance, payment order basis-1.91.6-2.4-2.9-1.1-1.7-2.6-1.9
Domestic arrears and treasury float-0.8-0.20.0-0.2-0.2-0.4-0.5-0.7
External interest arrears1.70.00.70.00.00.00.00.0
Overall balance, cash basis-1.01.4-1.7-3.1-1.4-2.1-3.0-2.6
Financing1.0-2.3-0.20.60.00.30.50.6
Domestic financing (net)1.0-2.5-0.6-0.6-0.4-0.3-0.5-0.5
Banking system0.5-1.80.40.7-0.5-0.1-0.5-0.3
Nonbank financing0.5-0.7-1.0-1.30.1-0.20.0-0.1
External financing (net)0.00.20.41.20.40.61.01.1
Drawings 30.20.01.01.40.61.41.51.6
Amortization due-1.7-0.9-1.8-1.9-0.7-1.8-1.5-1.4
Arrears on amortization1.50.00.40.00.00.00.00.0
Contingency for debt service0.00.00.0-0.20.00.00.00.0
Debt flow relief (int. & amort.)1.00.91.70.51.00.90.9
Clearance of debt & arrears stocks-29.6-30.7-33.60.00.00.0-19.1
Debt/arrears stock rescheduling0.012.914.115.30.00.00.00.0
Debt/arrears stock cancellation0.016.616.718.30.00.00.019.1
Exceptional financing1.32.02.61.41.52.11.5
PRGF-linked BCEAO credit1.31.71.01.01.40.9
Other identified financing 40.70.80.41.00.70.7
Residual/unidentified financing-0.1-0.40.00.00.00.30.40.5
Memorandum items
Social spending 56.42.758.97.75.910.59.911.6
Investment and social spending 58.512.711.17.713.614.014.9
Of which: foreign financed2.25.53.62.05.75.76.5
Nominal GDP (CFAF billions)1,1981,2641,2501,2641,3171,3271,3171,401
Sources: Togolese authorities; and Fund staff estimates and projections.

Original program, see Country Report No. 08/146

Revised program. Revisions reflect the impact of the surge in world food and fuel prices and the recent flooding.

Includes project financing yet to be identified.

IDA grants, and other identified financing.

Includes health and education (including salaries), and pension transfers.

Sources: Togolese authorities; and Fund staff estimates and projections.

Original program, see Country Report No. 08/146

Revised program. Revisions reflect the impact of the surge in world food and fuel prices and the recent flooding.

Includes project financing yet to be identified.

IDA grants, and other identified financing.

Includes health and education (including salaries), and pension transfers.

Table 4.Togo: Monetary Survey, 2005–09
2006200720082009
Dec.Dec.MarchJuneDec.Dec
Prog.1Prog.1
(Billions of CFA francs)
Net foreign assets206.7212.2215.9240.8174.7174.7
BCEAO151.3170.2165.5172.6142.7142.7
Assets185.0193.0213.6233.8193.5203.5
Liabilities33.722.848.161.250.860.8
Commercial banks55.442.050.468.232.032.0
Assets91.385.9103.9116.065.465.4
Liabilities35.943.953.547.933.433.4
Net domestic assets186.1252.3274.3240.5317.7366.9
Credit to the government (net)9.814.010.03.423.417.2
BCEAO-13.6-7.8-19.9-25.81.6-4.6
Commercial banks23.421.829.829.221.821.8
Credit to the rest of the economy (1)196.2254.7251.6258.0275.1316.4
Other items (net)-19.9-16.412.7-20.919.233.3
Money supply (M2)392.8464.5490.3481.3492.4541.6
Currency in circulation100.1122.0112.9115.7129.3142.2
Bank deposits292.7342.5377.4365.6363.1399.4
(Annual change, percent of beginning-of-period broad money)
Net foreign assets19.21.40.86.2-8.10.0
BCEAO18.54.8-1.00.5-5.90.0
Commercial banks0.7-3.41.85.6-2.20.0
Net domestic assets2.916.94.7-2.514.110.0
Credit to the government (net)-0.71.1-0.9-2.32.0-1.3
Credit to the rest of the economy0.414.9-0.70.74.48.4
Other items (net)3.30.96.3-0.97.72.9
Money supply (M2)22.118.25.63.66.010.0
Currency in circulation11.55.6-2.0-1.31.62.6
Bank deposits10.612.77.55.04.47.4
Memorandum items
Velocity (GDP/ end-of-period M2)3.02.62.32.42.62.4
Sources: Central Bank of West African States, and Fund staff estimates and projections.

Revised from Country Report No. 08/146 to reflect impact of food and fuel shocks and recent flooding. Assumes external debt and arrears rescheduling/relief in 2008–2010 in line with potential debt relief under the HIPC initiative and MDRI.

Sources: Central Bank of West African States, and Fund staff estimates and projections.

Revised from Country Report No. 08/146 to reflect impact of food and fuel shocks and recent flooding. Assumes external debt and arrears rescheduling/relief in 2008–2010 in line with potential debt relief under the HIPC initiative and MDRI.

Table 5.Togo: Official External Debt, 2007–10
Debt service (proj.)3
2007200820092010
Nominal

Stock
Of which

arrears1
NPV of

Debt 2
Amort.InterestAmort.InterestAmort.Interest
(Millions of U.S. dollars)
Total2,204.8850.51,803.572.923.275.221.373.019.3
Multilateral1,124.1199.1783.239.910.739.59.839.58.9
Bilateral and Commercial1,080.7651.41,020.233.012.535.711.533.610.4
Bilateral1,048.1636.0988.825.912.328.211.433.110.3
Paris Club964.3634.9922.718.311.420.510.621.79.7
Other Official Bilateral83.81.166.17.60.97.70.811.40.6
Commercial32.615.431.47.10.17.50.10.40.1
(Billions of CFA Francs)
Total982.4379.0803.632.510.333.59.532.58.6
Multilateral500.988.7349.017.84.817.64.417.64.0
Bilateral and Commercial481.6290.3454.614.75.615.95.115.04.6
Bilateral467.0283.4440.611.55.512.65.114.84.6
Paris Club429.7282.9411.28.25.19.14.79.74.3
Other Official Bilateral37.40.529.43.40.43.40.45.10.3
Commercial14.56.914.03.20.13.30.10.20.1
(Percent of GDP)
Total82.031.667.12.60.82.50.72.30.6
Multilateral41.87.429.11.40.41.30.31.30.3
Bilateral and Commercial40.224.238.01.20.41.20.41.10.3
Bilateral39.023.736.80.90.41.00.41.10.3
Paris Club35.923.634.30.60.40.70.40.70.3
Other Official Bilateral3.10.02.50.30.00.30.00.40.0
Commercial1.20.61.20.20.00.30.00.00.0
(Percent of Revenue)
Total483.3186.4395.315.54.914.74.213.23.5
Multilateral246.443.6171.78.52.37.71.97.21.6
Bilateral and Commercial236.9142.8223.67.02.77.02.26.11.9
Bilateral229.7139.4216.75.52.65.52.26.01.9
Paris Club211.4139.2202.33.92.44.02.13.91.8
Other Official Bilateral18.40.214.51.60.21.50.22.10.1
Commercial7.13.46.91.50.01.50.00.10.0
Sources: Togolese authorities; and Fund and World Bank staff estimates.

Includes principal and interest in arrears as well as late interest before debt relief.

Includes arrears.

Excluding debt service on the augmentation of PRGF access.

Sources: Togolese authorities; and Fund and World Bank staff estimates.

Includes principal and interest in arrears as well as late interest before debt relief.

Includes arrears.

Excluding debt service on the augmentation of PRGF access.

Table 6.Togo: Proposed Schedule of Disbursement Under PRGF Arrangement, 2008-11
AmountDateCondition for Disbursement 1
TotalOriginal

program
Augmentation
SDR13,260,00013,260,000April 30, 2008Executive Board approval of the three-

year arrangement under the PRGF

arrangement (April 23, 2008)
SDR17,975,0008,800,0009,175,000September 22, 2008Observance of performance criteria for

end-June 2008 and other relevant

performance criteria, and completion of

the first review under the PRGF

arrangement
SDR17,975,0008,800,0009,175,000April 30, 2009Observance of performance criteria for

end-December 2008 and other relevant

performance criteria, and completion of

the second review under the PRGF

arrangement
SDR8,800,0008,800,000October 31, 2009Observance of performance criteria for

end-June 2009 and other relevant

performance criteria, and completion of

the third review under the PRGF

arrangement
SDR8,800,0008,800,000April 30, 2010Observance of performance criteria for

end-December 2009 and other relevant

performance criteria, and completion of

the fourth review under the PRGF

arrangement
SDR8,800,0008,800,000October 31, 2010Observance of performance criteria for

end-June 2010 and other relevant

performance criteria, and completion of

the fifth review under the PRGF

arrangement
SDR8,800,0008,800,000April 30, 2011Observance of performance criteria for

end-December 2010 and other relevant

performance criteria, and completion of

the sixth review under the PRGF

arrangement

Other than the generally applicable conditions for the Poverty Reduction and Growth Facility (PRGF).

Other than the generally applicable conditions for the Poverty Reduction and Growth Facility (PRGF).

Table 7.Togo: Indicators of Capacity to Repay the Fund, 2006-15 1/
2006200720082009201020112012201320142015
Projections
Fund obligations based on existing credit
(in millions of SDRs)
Principal4.34.31.1----1.32.72.7
Charges and interest0.40.50.40.40.40.40.40.40.40.4
Fund obligations based on existing and prospective credit
Principal4.34.31.1----1.38.012.5
Charges and interest0.40.50.40.60.70.70.80.80.70.7
Total obligations based on existing and prospective
In millions of SDRs4.84.81.50.60.70.70.82.18.813.2
In billions of CFAF3.73.51.10.40.50.50.51.56.19.2
In percent of government revenue1.91.70.50.20.20.20.20.51.92.7
In percent of exports of goods and services0.70.70.20.10.10.10.10.20.71.0
In percent of debt service 2/8.98.23.41.41.71.51.53.312.918.7
In percent of GDP0.30.30.10.00.00.00.00.10.30.5
In percent of quota6.56.52.00.70.91.01.02.811.917.9
Outstanding Fund credit 2/
In millions of SDRs5.41.131.258.075.684.484.483.175.062.6
In billions of CFAF4.20.822.141.153.459.459.258.352.643.9
In percent of government revenue2.10.410.618.021.722.020.719.216.312.8
In percent of exports of goods and services0.90.24.37.18.58.88.27.56.34.9
In percent of debt service 2/10.11.970.8146.3192.8171.9170.9132.6110.188.7
In percent of GDP0.40.11.83.13.84.03.83.53.02.3
In percent of quota7.41.542.679.0103.0115.0115.0113.2102.285.2
Net use of Fund credit (millions of SDRs)(4.3)(4.3)30.126.817.68.8-(1.3)(8.0)(12.5)
Disbursements--31.226.817.68.8----
Repayments and Repurchases4.34.31.1----1.38.012.5
Memorandum items:
Nominal GDP (in billions of CFAF)1,1601,1981,2641,3171,4011,4861,5761,6721,7741,881
Exports of goods and services (in billions of CF490502511575628675725780838900
Government revenue (in billions of CFAF)196203210228246270286304322342
Debt service (in billions of CFAF) 2/41433128283535444849
Sources: IMF staff estimates and projections.

Assumes a PRGF augmentation of SDR 18.35 million (25 percent of quota) to be disbursed in two equal disbursements after completion of the first and second review of the PRGF arrangement.

Total debt service includes IMF repurchases and repayments.

Sources: IMF staff estimates and projections.

Assumes a PRGF augmentation of SDR 18.35 million (25 percent of quota) to be disbursed in two equal disbursements after completion of the first and second review of the PRGF arrangement.

Total debt service includes IMF repurchases and repayments.

APPENDIX I. Letter of Intent

Lomé, Republic of Togo

September 12, 2008

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

U.S.A.

Dear Mr. Strauss-Kahn:

Further to my letter dated March 28, 2008, and the accompanying Memorandum of Economic and Financial policies (MEFP), I am pleased to report on the good progress the Togolese authorities have made in implementing our three-year economic program supported by the IMF’s Poverty Reduction and Growth Facility (PRGF), notwithstanding the severe shocks that have affected Togo’s economy this year. I would also like to set out our policy commitments for the remainder of this year and for 2009, including measures to address the surge in global food and fuel prices and the devastating flooding in late July/early August, for which we are seeking additional financial support from the IMF and other development partners.

The profound political and economic reforms undertaken since 2006 have helped Togo overcome its long-lasting socio-political crisis and reengage with the international community, two critical preconditions for reviving the economy and improving the living conditions of our people. The important economic reforms we advanced in the context of the IMF’s Staff-Monitored Program helped stabilize the economy, restore fiscal discipline, raise transparency of economic management, and initiate the restructuring of state-owned banks and enterprises.

Building on these early successes, we have started implementing our PRGF-supported economic program rooted in Togo’s Interim Poverty Reduction Strategy Paper (I-PRSP). In the first half of this year, we have significantly strengthened the financial position of the state and advanced important structural reforms.

All quantitative performance criteria at end-June 2008 and all other relevant performance criteria were met (Table 1). The primary fiscal surplus far exceeded the program floor, reflecting good revenue collection, sharply reduced use of accelerated spending procedures, slow implementation of domestic investment projects, and fiscal prudence. As a result, we were able to clear wage arrears and accumulate substantial deposits. External debt service to multilaterals has been resumed, and the government has not contracted or guaranteed any nonconcessional external debt.

We have also made significant progress on structural reforms (Table 2). The structural performance criterion on setting up a General Inspectorate of Finance was met. This new institution will conduct regular ex-post inspections of all agencies handling public funds to ensure the efficiency and transparency of spending. The structural benchmark on implementing a new framework for monitoring budget execution was also met. This framework, based on a template and procedures developed with IMF technical support, allows us to monitor monthly budget execution with minimal lags and make well-founded policy decisions. The structural benchmark on initiating an audit of the phosphate sector is expected to be implemented about two months later than originally envisaged, as the World Bank, which is financing the audit, requested an additional call for expression of interest after only two companies responded initially. At the same time, we have implemented the benchmark on adopting an action plan for introducing regular treasury bill auctions more than three months early, and have already launched the first auction. Progress on preparing other structural reforms envisaged for December 2008 has been good: the comprehensive strategy for clearing Togo’s large domestic arrears, prepared in close cooperation with IMF staff, is nearly complete; an audit of our local electricity company CEET is underway; and preparations on the complex task of strengthening the financial position BTCI have advanced significantly, alongside similar plans for other state-owned banks.

The PRGF-supported program has also allowed us to make major progress in normalizing relations with external creditors. On May 29, 2008, the World Bank’s Board approved an exceptional IDA allocation of US$146 million to help clear all of Togo’s arrears as well as US$17.6 million in budget support. On June 12, 2008, the Paris Club agreed to reschedule Togolese debt on Naples terms, cancelling US$347 million of arrears and debt service due during the consolidation period and rescheduling US$392 million. The AfDB’s Board approved on July 22, 2008, the clearance of Togo’s arrears (US$24 million) through its Fragile States Facility, while also consolidating all 2008 debt service. The EU has committed to use part of its grant envelope to clear Togo’s arrears to the EIB, with all 2008 debt service consolidated into the operation. China has already delivered its share of HIPC relief through debt cancellation in 2007. We are continuing our discussions on arrears clearance and debt relief with other multilateral and non-Paris Club bilateral creditors in the context of the HIPC Initiative. We hope to reach the decision point later this year.

Unfortunately, the combination of the global food and oil price shocks and the recent severe flooding has taken a heavy toll on our economy and people this year. The surge in world oil prices has widened the current account deficit significantly and eroded the profitability of Togo’s vital transport sector. The food price shock has pushed up inflation and sharply reduced real incomes. The flooding displaced thousands, destroyed roads and bridges, paralyzed trade and transport, and damaged food crops. As a result of these shocks, economic growth has come to a halt this year and large new financing gaps have emerged in the balance of payments and the budget in 2008 and 2009. While we expect real GDP growth to recover to 3 percent in 2009, the large financing gaps in the balance of payments and budget will persist as world commodity prices remain high and the rebuilding of destroyed infrastructure will stretch out well into next year.

To address the global food price surge, we have taken a number of measures to help vulnerable segments of the population while promoting local production. These policies have been supported by a social dialogue initiated by the President of Togo. To support subsistence farmers, we also sold fertilizer and seeds at subsidized prices, effectively keeping prices at the 2007 level. We have also sold grain stocks to in some local markets where shortages led to excessive price surges. To mitigate the social impact, we have cleared wage and pension arrears to public sector workers, most of which live in urban areas where the food price shock has been particularly severe. We have avoided introducing price controls, export bans, and unilateral tax exemptions that are not coordinated with other WAEMU members. Over the medium run, our main objective is to boost productivity in local agriculture by investing in rural infrastructure, improving stock and distribution systems, enhancing competition, and reducing trade barriers.

The surge in world fuel prices made the existing retail price structure unsustainable, and we thus agreed with the private oil companies on a retail price increase for gasoline and diesel in August to a level comparable with neighboring countries. We maintained tax collection on fuel products at historical levels to avoid an even larger retail price increase. To mitigate the economic and social impact (for both the food and fuel price shocks), we introduced lump-sum transfers to civil servants for the last five months of 2008. This temporary measure will be replaced by a reduction in income taxes. Moreover, we raised the minimum wage on August 1, 2008. We also decided to reduce Togo’s corporate income tax rate by 7 percentage points, with a new top rate of 33 percent.

To address the devastation caused by the flooding, we have worked with donors to provide immediate emergency humanitarian relief. We are now making emergency repairs to roads and bridges to restore the vital transport links to the north, which is vital for Togo’s economy as these routes support both domestic and regional trade. We have also started discussions with our development partners on the reconstruction of major bridges and roads over the next year.

For 2008, we are reallocating spending to address the adverse impact of the price shocks and the flooding while limiting the deterioration of the primary fiscal balance to ½ percent of GDP. The shocks are projected to reduce tax revenues by about ½ percent of GDP in 2008. The total cost of fertilizer and seed subsidies, grain distribution, temporary lump-sum transfers to employees, wage and pension arrears clearance, fuel support to the electricity sector, and emergency flood repairs is expected at about 1¾ percent of GDP. The resulting increase in spending will be partly covered by contingency lines, including some that were originally earmarked for bank and enterprise restructuring. We will also be able to realize savings from the postponement of local elections and the relatively slow implementation of some domestic investment projects. We will seek to implement all other 2008 budget allocations to counterbalance the economic downturn and safeguard essential social services. We are requesting additional project financing and budget support to cover the remaining gap.

Our draft 2009 budget aims to restore a balanced domestic primary fiscal position, implying a primary fiscal adjustment of ½ percent of GDP. We are targeting an increase in the tax-GDP ratio by ¾ percent of GDP, supported by continued tax administration reforms and tax policy measures, including reduction of tax and customs exemptions as well as increases in alcohol and tobacco excises. These measures should more than offset the corporate tax losses resulting from the recent shocks and the reduction in the tax rate. We will reduce untargeted nonwage spending to create room for higher health and education spending, rehabilitation of infrastructure (especially reconstruction of vital roads and bridges), the implementation of the domestic arrears clearance strategy, and state-owned bank and enterprise restructuring. As Togo resumes full cooperation with development partners and implements the I-PRSP, we expect a significant increase in foreign-financed project spending. The budget will also include contingencies for exogenous shocks and shortfalls in projected external disbursements. We will submit the draft 2009 budget to parliament in November 2008.

We will press ahead with our structural reform efforts (Table 2). Strengthening of fiscal governance will remain a central goal. Following the steps that are already envisaged for 2008, we have elaborated a set of key reforms for next year. To strengthen revenue collection, we plan to eliminate several tax exemptions and give the tax and customs administrations the authority and means to conduct onsite inspections in the free economic zone. To regularize Togo’s large domestic arrears, we will implement the domestic arrears strategy by issuing tradable bonds (and cash for small amounts) to suppliers whose claims have been verified by the recent external audit and validated by the government. This will help restore supplier confidence and liquidity, while stretching the budget cost over several years. We will also introduce a mechanism for monitoring domestic debt. We will strengthen treasury and cash management by introducing regular short-term treasury bill auctions and by reorganizing and strengthening the treasury based on WAEMU directives. We are seeking technical assistance to support some of these reforms, in particular on debt and treasury management. As part of the ongoing WAEMU reforms, Togo will adopt a new organic budget law and a transparency code for public financial management.

Another high priority will be to continue our efforts to strengthen the financial position of Togo’s state-owned banks and attract strategic investors to ensure the health of the financial sector. Much progress has been made in preparing the exchange of nonperforming loans (NPLs) held by three state-owned banks for government securities. We will ensure that these securities are tradable so that the banks can manage their liquidity and gradually rebalance their portfolios. We intend to set up a structure and mechanism for recovering, settling, and restructuring NPLs, and to support the development of a secondary market for securities. We are aiming to attract strategic investors for all three banks and are confident that at least two should be identified next year. These reform efforts are being supported by IMF and World Bank technical assistance.

To revive economic growth, it will be critical to rehabilitate the phosphate sector. Decrepit mining equipment, the bankruptcy of the joint venture company OTP/IFG, and power shortages have led to a worrisome decline in the extraction of Togo’s high-quality phosphate, to less than a quarter of potential capacity. Moreover, the company has not been able to ensure a stable supply and its negotiated export prices have been well below world market prices. More recently, the implementation of a new commercial policy has allowed Togo to benefit from the recent surge in world phosphate prices. Investment in new equipment, for which we are seeking a strategic partner that can provide concessional financing, will be critical for economic growth, exports, and fiscal revenues. The World Bank-financed phosphate audit will help us formulate a long-term reform strategy. To support an economic recovery, we have taken measures to address the energy crisis by purchasing and rehabilitating generators, transmission lines, and transformers. We are preparing a performance contract with CEET, to become effective in 2009, and we intend to elaborate an energy sector development strategy. To improve the business environment, we intend to streamline regulations and procedures for the private sector.

Strong cooperation with our development partners will be critical for implementing these reforms, revive economic growth, and reduce poverty. In the September 2008 donor conference in Brussels, we will request additional financial and technical support from all our partners to help us implement our economic reform strategy, in particular by supporting priority sectors such as health, education, vital infrastructure (transport and energy), and agriculture. We are also in the process of preparing the full PRSP, which should be ready in early 2009.

To support our policies and in view of the good progress on implementing the PRGF-supported program, we request the completion of the first review and an augmentation of access to PRGF resources by an amount equivalent to SDR18.35 million (equivalent to 25 percent of quota), which will help us mitigate the adverse impact of the price shocks and the flooding on the balance of payments in 2008 and 2009. We request that the augmentation be disbursed in two equal amounts with the completion of the first and second reviews by the Executive Board of the IMF.

To monitor progress under our PRGF-supported economic program, we have specified performance criteria, indicative targets, and benchmarks through the end of 2009 in Tables 1 and 2 below. This includes a modification of the end-December 2008 performance criterion on the primary fiscal balance to reflect the impact of the recent shocks. The first review is now scheduled to be completed by September 22, 2008, instead of October 31, 2008. The second and third reviews planned for April 30 and October 31, 2009, would be based on performance relative to these targets. To that end, Togo will provide the Fund with all data required to monitor the program on a timely basis, in line with IMF policy and the Technical Memorandum of Understanding (TMU) dated March 28, 2008. Updates and amendments to this TMU are attached below.

The government considers these policies and actions sufficient to achieve the program objectives, and stands ready to take other steps as needed. Togo will continue to consult closely with the IMF staff on the adoption of such steps, and in advance of any revisions to the policies discussed here and in the March 2008 MEFP. To keep the public informed, the government will publish this letter of intent and will regularly report on its progress under the program.

We are determined to see these efforts through, in collaboration with the IMF and our other partners, and bring about a much hoped-for economic revival and improvement in the livelihoods of our people.

Sincerely yours,

/s/

Adji Otèth AYASSOR

Minister of Economy and Finance

Table 1.Togo: Quantitative Performance Criteria and Indicative Targets December 31, 2007–December 31, 2009
20082009
JuneSep.Dec.Mar.JuneDec.
Prog.1Adj.2Act.Rev.3Prog.1Rev.3Prog.
(Billion CFA francs, cumulative from end of preceding year)
Performance criteria (for end-June and end-December 2008, and

end-June 2009; indicative targets otherwise)
Domestic primary fiscal balance (floor)-4.5-4.528.319.70.0-7.69.61.30.0
Nonaccumulation of external arrears 4
Net domestic financing (ceiling) 21.9-3.1-31.5-18.9-7.5-7.5-4.3-5.6-6.5
Central government contracting or guaranteeing of
nonconcessional external debt (ceiling) 40.00.00.00.00.00.00.00.00.0
Indicative Targets
Total revenue (floor)103.6103.6109.6160.7214.6209.851.5108.0228.4
Domestic payments arrears, changes in stock (ceiling)0.00.0-3.1-3.10.0-3.1-1.5-3.0-6.0
Domestically financed social and capital spending (floor)48.948.934.765.097.899.723.747.4114.9
Projected program financing9.616.416.424.732.30.018.033.4

Letter of Intent dated March 28, 2008.

The ceiling on net domestic financing is adjusted to reflect deviations from projected external program financing, subject to a cap of CF AF 5 billion.

Reflects the impact of the oil and food price surges and the recent flooding com pared with the original program (Country Report No. 08/146).

Continuous performance criterion.

Letter of Intent dated March 28, 2008.

The ceiling on net domestic financing is adjusted to reflect deviations from projected external program financing, subject to a cap of CF AF 5 billion.

Reflects the impact of the oil and food price surges and the recent flooding com pared with the original program (Country Report No. 08/146).

Continuous performance criterion.

Table 2:Structural Conditionality for 2008
MeasuresDateMacroeconomicRationale Status
Fiscal governance
Submit 2008 budget law to parliament in line with understandings with the mission.Prior action for PRGF approvalTo provide the basis for a transparent and consistent fiscal policy that aims for a balanced primary position, avoidance of new arrears, and higher growth-oriented and social spending.Done: December 2007.
Implement a new framework for monthly monitoring of budget execution, and report data for April–June 2008 based on a new template.Benchmark August 2008To provide policymakers with a tool for making timely and informed spending decisions as they seek to achieve the budget objectives and mitigate the risk of fiscal slippages.Done: July 2007.
Create a General Inspectorate of Finance under the responsibility of the Minister of Finance.Performance criterion August 2008To strengthen fiscal governance by introducing oversight, control, and transparency for all units handling public resources.Done. Decree adopted on July 23. The Inspector General was appointed on August 29.
Adopt a strategy and time table for clearing domestic arrears.Performance criterion December 2008To restore supplier confidence, facilitate the return to regular spending procedures, and allow a gradual reduction in the government’s large stock of domestic arrears.On track. The authorities have prepared a draft in close cooperation with IMF staff.
Financial sector
Change management and oversight of BTCI based on terms of reference prepared in consultation with the WAMU Banking Commission.Prior action for PRGF approvalTo prevent further erosion of BTCI’s capital and liquidity, to restore confidence in Togo’s largest bank, and in the financial sector more broadly.Done: February 2008.
Adopt an action plan for introducing regular Treasury bill auctions in 2009.Benchmark December 2008To develop the domestic securities market, promote financial sector development, improve treasury management, and avoid new budgetary arrears.Done. The Treasury has agreed with the BCEAO on a framework for issuing t-bills on a regular basis in 2009, following one initial issue this year.
Public enterprises
Initiate an audit of the phosphate sector, based on the competitive selection of an audit company, in consultation with the World Bank.Benchmark October 2008 (revised from August)To prepare the restructuring of Togo’s traditionally largest export sector (currently operating at only one third of capacity), including by providing options for attracting a strategic investor.A minor delay occurred after only two firms responded to the initial call for expression of interest. At the request of the World Bank, which is financing the audit, an additional call for expressions of interest was issued, and firms were asked to submit proposals in September.
Prepare a review of the finances of the national electricity company (CEET), in consultation with the World Bank.Benchmark December 2008To provide the information necessary for preparing energy sector reforms and deciding on 2009 budget allocations, as rising oil prices and regionwide electricity shortages have dampened economic growth and led to increasing demands for budget support to the energy sector.On track. The auditor has started the review and a draft report is expected in September.
Fiscal governance
Reduce tax and customs exemptions and strengthen tax and customs control, including in the Free Economic Zone.Benchmark June 2009To limit leakage of tax-exempt goods into the domestic economy, which distorts economic incentives and reduces fiscal revenues.New measure.
Make operational a new Treasury structure based on WAEMU directives.Performance criterion June 2009To create a functioning Treasury that has adequate control and information over revenues, spending, and cash management to ensure timely payments, avoid of arrears, and provide for real-time consistent budget execution data.New measure.
Start implementing the domestic arrears clearance strategy by securitizing validated arrears to suppliers and setting up a mechanism for monitoring domestic debt.Benchmark December 2009To move toward a sustainable debt position and prevent new arrears, as Togo regularizes its large stock of domestic arrears, starts servicing long-term regional bonds, and initiates short-term treasury bill auctions.New measure.
Financial sector
Initiate restructuring of BTCI, including by raising its capital through issuance of government securities.Benchmark March 2009 (revised from December 2008)To support the financial rehabilitation of Togo’s largest bank, prepare it for privatization, and set the conditions for sound financial sector development.Significant progress has been made in preparing the exchange of BTCI’s NPLs against government securities as part of a broader multi-bank scheme. Given the complexity of the operation, which is being supported by IMF and World Bank technical assistance, the time table has been extended by three months.
Set up a structure and mechanism for managing the NPLs that have been exchanged against government securities in the bank restructuring process.Benchmark August 2009To recover part of the budgetary cost of securitizing of NPLs and reduce the large stock of enterprise arrears and cross-debts.New measure.
Initiate the process of identifying strategic investors for state-owned banks.Benchmark December 2009To reduce risks to macroeconomic stability caused by Togo’s large loss-making state-owned banks and support expansion of financial intermediation.New measure.
Public enterprises
Phosphate sector: Prepare a development strategy based on the results of the strategic audit.Benchmark September 2009To promote transparency in the restructuring of the phosphate sector, which could generate additional exports of up to 10 percent of GDP at current world prices.New measure.

ATTACHMENT: Amendments to Technical Memorandum of Understandings

Paragraphs 1, 3, 5, 11, 13, and 22 of the Technical Memorandum of Understanding dated March 28, 2008 have been modified to reflect the new test dates for the quantitative performance criteria and indicative targets through end-2009 shown in Table 1 above. Paragraph 24 has been expanded with definitions for the new structural benchmarks and performance criteria shown in Table 2 above. These changes are incorporated below.

1. This Technical Memorandum of Understanding (TMU) defines the quantitative and structural benchmarks and performance criteria a three-year arrangement under the Poverty Reduction and Growth Facility covering the period January 1, 2008 to December 31, 2010. Table 1 of the above Letter of Intent shows quantitative performance criteria and indicative targets for end-September 2008 and end-December 2008 (based on cumulative changes from January 1, 2008), and for end-March 2009, end-June 2009, and end-December 2009 (based on cumulative changes from January 1, 2009). Table 2 above shows structural performance criteria and benchmarks for 2008 and 2009. This TMU also sets out the data reporting requirements for program-monitoring purposes.

3. The domestic primary fiscal balance is defined as the difference between (i) the government’s fiscal revenue and (ii) total fiscal expenditure, net of interest and current and capital expenditure financed by donors. The balances in the periods from end-December 2007 to end-September 2008 (indicative target) and end-December 2008 (performance criteria), and in the periods from end-December 2008 to end-March 2009 (indicative target), end-June 2009 (performance criteria), and end-December 2009 (indicative target) respectively, should be equal to or higher than the amounts shown in Table 1 above. The source of the data is the fiscal reporting table (TOFE) prepared monthly by the Economic Directorate of the Ministry of Finance. The data provided by the Economic Directorate will be considered authoritative in the context of the program.

5. Net domestic financing of the government is defined as the sum of (i) net banking sector credit to the government and (ii) net nonbank domestic financing of the government. Net domestic financing in the periods from end-December 2007 end-September 2008 (indicative target) and end-December 2008 (performance criteria), and in the periods from end-December 2008 to end-March 2009 (indicative target), end-June 2009 (performance criteria), and end-December 2009 (indicative target) respectively, should be equal to or lower than the amounts shown in Table 1 above. The ceiling on net domestic financing will be adjusted to offset deviations from projected external program financing as shown in Table 1 above, subject to a cap of CFAF 5 billion.

11. The collection of revenue in the periods from end-December 2007 to end-September 2008 (indicative target) and end-December 2008 (indicative target), and in the periods from end-December 2008 to end-March 2009 (indicative target), end-June 2009 (indicative target), and end-December 2009 (indicative target) respectively, should be equal to or higher than the amounts shown in Table 1 above. The floor on revenue will be an indicative target throughout the program period.

13. Domestic payments arrears includes (i) the Treasury float (payment authorizations (ordonnancements) issued to the Treasury but not yet settled); (ii) utility invoices for which the payment order has not yet been issued; (iii) arrears on wages and pensions for which the payment authorization has not yet been issued; and (iv) any arrears on domestic government debt, including bonds issued in CFA franc on the WAEMU regional market. The net accumulation of domestic payments arrears for the periods from end-December 2007 to end-September 2008 (indicative target) and end-December 2008 (indicative target), and in the periods from end-December 2008 to end-March 2009 (indicative target), end-June 2009 (indicative target), and end-December 2009 (indicative target) respectively, should be equal to or lower than the amounts shown in Table 1 above. The source of the data on domestic payments arrears is the Treasury for the Treasury float and the Economic Directorate for other arrears. Data on the change in arrears will be reported in the TOFE prepared monthly by the Economic Directorate of the Ministry of Finance. The ceiling on net accumulation of domestic payments arrears is an indicative target throughout the program period.

22. Total domestically financed social spending, for the periods from end-December 2007 to end-September 2008 (indicative target) and end-December 2008 (indicative target), and in the periods from end-December 2008 to end-March 2009 (indicative target), end-June 2009 (indicative target), and end-December 2009 (indicative target) respectively, should be equal to or higher than the amounts shown in Table 1 above. The data provided by the Economic Directorate will be considered authoritative in the context of the program. The floor on domestically financed social spending is an indicative target throughout the program period.

24. This section elaborates on the structural benchmarks shown in Table 2 above.

  • h. Make operational a new Treasury structure based on WAEMU directives. Following the adoption of the decree that sets up the new treasury structure, this performance criterion includes (i) the appointment of the general treasury managers in line with WAEMU directives (Agent Comptable Central du Trésor, Receveur Général du Trésor, Payeur Général du Trésor), and (ii) the production of the final monthly treasury balances for the months of April, May, and June 2009, including the validated entry balance for 2009, within five weeks after the end of the reference month.
  • i. Reduce tax and customs exemptions and strengthen tax and customs control, including in the Free Economic Zone. The benchmark includes the specification in the 2009 budget law of tax exemptions that are eliminated and the adoption of a decree that reduces customs exemptions. The benchmark also includes a revision of the laws and regulations governing the Free Economic Zone (FEZ) in order to ensure regular data provision by the companies established under the FEZ and to secure the legal basis for conducting onsite inspections by the tax and customs administrations.
  • j. Start implementing the domestic arrears clearance strategy by securitizing validated arrears to suppliers and setting up a mechanism for monitoring domestic debt. Under this benchmark, arrears to suppliers verified by the KPMG audit and validated by the government should be regularized through securitization and other methods (such as cash payments for smaller amounts). The regularization of arrears should include a discount and the securities should pay an interest rate that reflects market conditions. To monitor domestic debt, the Directorate of Public Debt should (i) obtain the necessary information on an ongoing basis (e.g. loan contracts, copies of creditors’ invoices, data from the treasury and BCEAO, information from audits) to be able to report past debt service and project future debt service and have up-to-date outstanding stock and arrears figures, (ii) integrate all domestic debt information into an electronic database and update it on a monthly basis (including with information on new loan contracts), and (iii) produce monthly reports on paid and projected debt service, as well as outstanding stock and arrears by creditor category. The reports should include a description on any new loan, restructuring, or cancellation agreements when applicable.
  • k. Set up a structure and mechanism for managing the NPLs that have been exchanged against government securities in the bank restructuring process. The benchmark includes the establishment of a structure and mechanism for recovering, settling, and restructuring nonperforming loans. While not required for the completion of the benchmark, the structure should ideally: (i) have a steering committee with representatives of the Treasury, the BCEAO and the Justice Ministry for monitoring its operations, (ii) be designed based on the results of a feasibility study, prepared in consultation with the IMF and World Bank, (iii) establish a deadline to finalize the recovery, settling, and restructuring process, (iv) recruit a few qualified professionals in charge of the operation, and (v) have the specific power of the treasury to recover claims.
  • l. Initiate the process of identifying strategic investors for state-owned banks. This benchmark includes: (i) the issuance of a call for expression of interest for all state-owned banks included in the securitization process, (ii) the support of a privatization expert, and (iii) the preparation of a prospectus and a data room for the selected investors. While not required for the benchmark, these actions could be supported by World Bank technical assistance.
  • m. Phosphate sector: Prepare a development strategy based on the results of the strategic audit. The benchmark includes the preparation of a strategy in consultation with World Bank and IMF staff and its adoption by the Council of Ministers. While not required for the benchmark, the strategy should include specific actions aimed at improving investment levels, as well as managerial, marketing, and technical capacity. The strategy should also include specific deadlines for implementation, with the ultimate objective of bringing phosphate production and exports close to their potential levels. The strategy should also discuss options for attracting strategic investors.

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