Public Information Notice No. 01/42

Public Information Notice: IMF Concludes Article IV Consultation with Togo

May 3, 2001

On April 20, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Togo.¹

Background

After a period of relatively satisfactory performance, with positive growth rates, moderate inflation, and improved external and fiscal positions, the Togolese economy suffered a number of shocks. The 1998 energy crisis, as well as a difficult social and political environment, contributed to the deterioration of the economic situation; this was further exacerbated by the suspension of external support. In addition, the relaxation of fiscal discipline resulted in an accumulation of domestic and external arrears. Delays in implementing structural reforms further weakened the financial situation of the public enterprises and the banking sector.

In 2000, real GDP fell by 0.5 percent, the third consecutive year of low or negative growth. This contraction reflected not only the impact of irregular rainfall but also the loss of incentives for cotton producers caused by the decline in producer prices and delays in payments by SOTOCO (the monopolistic public enterprise in charge of cottonseed marketing). Moreover, the continued deterioration of the Togolese phosphate company's (OTP) financial situation resulted in a sharp decline in phosphate production. Annual average inflation remained moderate, rising to less than 2 percent. The real effective exchange rate depreciated further. Low tax revenue, unrestrained expenditure, and the suspension of external assistance led to slippages in fiscal performance. The overall deficit (on a payment order basis and excluding grants) continued to increase and reached the equivalent of 5.8 percent of GDP.

The expansion of broad money picked up to 11 percent (compared with a nominal GDP growth of 1.3 percent). To stem mounting inflationary pressures, the regional central bank of the West African Monetary Union (WAMU) raised its key intervention rate by 75 basis points to 6.5 percent and the repurchase rate to 6 percent in June 2000. The situation of the banking system continued to deteriorate. At end-2000, nonperforming loans (before provisions) amounted to 42 percent of total claims and 7.4 percent of GDP, of which about 20 percent were concentrated on the OTP.

The external current account deficit (excluding official transfers) widened to 14.1 percent of GDP—owing principally to a low 1999/2000 cotton crop; the continued decline in phosphate exports; and a 7.6 percent deterioration in the terms of trade. With the narrowing of the capital and financial account surplus, the overall balance of payments deficit increased to 4.1 percent of GDP.

On the structural front, progress in the implementation of the World Bank-supported privatization program was mixed. In 2000, the authorities signed a concession agreement with an international private group to take over the distribution and sales of electricity. This agreement is now operational. In addition, the authorities have recently taken steps to accelerate the privatization of the banking sector, and progress has been made in the reform of the telecommunications and postal services. However, the reform of the remaining key public enterprises has been slow, including of the OTP, the Railway Company, the Autonomous Port of Lomé, and SOTOCO.

Prospects for 2001

In 2001, real GDP is expected to recover by 3.6 percent mostly on account of agriculture. Favorable weather conditions are expected to lead to a significant increase in foodstuff and cotton production. Cotton production, in particular, should rise sharply in response to increases in producer prices during the current crop year and the repayments of arrears to farmers by SOTOCO. Inflation should continue to remain moderate. These are forecasts based on projected adjustment assumed in the program.

Executive Board Assessment

Executive Directors noted that, over the last three years, Togo's economic and financial situation had continued to deteriorate, reflecting mainly policy weaknesses and a difficult external environment. Real GDP growth registered low or negative rates over that period, while the fiscal and balance of payments imbalances increased substantially and the situation in the banking and public enterprise sectors deteriorated. They were concerned about the substantial accumulation of domestic and external arrears and the loss in private sector confidence.

Against this background, Directors welcomed the new government's determination to address the weak economic policies and performance and to accelerate structural reforms in 2001 under a program that will be monitored by the staff (SMP). They stressed that efforts to regain control over the execution of the budget, make concrete progress in restructuring the banking and public enterprise sectors, and to improve relations with external creditors would help lay the foundation for sustainable growth and poverty alleviation over the medium term.

Directors noted that the fiscal policy established under the SMP for 2001 would be a first step toward enhancing revenue performance, strengthening budgetary procedures, and improving expenditure control. They urged the authorities to persevere in their efforts to widen the tax base, to strengthen tax and customs administration, and to require public enterprises to comply fully with their tax obligations.

On the expenditure side, Directors urged the authorities to adhere to the treasury cash-flow plan, while underscoring the importance of spending restraint ahead of the October 2001 elections. Moreover, they encouraged the government to maintain critical levels of spending on health, education, and services for the poor, while strictly controlling personnel costs.

In light of serious weaknesses in accounting and financial controls at the treasury, Directors urged the authorities to ensure that accurate and timely information be provided on the operations of the public sector. Moreover, to promote good governance and fiscal transparency, budget procedures will need to be fully respected. Procedures for the periodic auditing of budget accounts and the exercise of parliamentary oversight should be in place in time for the preparation of the 2002 budget.

To redress the continued deterioration of Togo's balance of payments and the worsening external debt situation, Directors stressed the importance of addressing the root causes of the poor export performance in the cotton and phosphate sectors, and they urged the authorities to make every effort to remain current on their debt-service obligations and to begin settling the outstanding arrears to multilateral creditors, to speed up the resumption of external assistance.

In the area of banking and financial sector reform, Directors welcomed the recent efforts to disengage from the main state banks and from the SNI (National Investment Company) as a critical step toward improving the functioning of the financial sector and facilitating economic recovery. The planned creation of an asset recovery company that will take over the nonperforming loans of the banks and facilitate their rapid privatization will need to be accompanied by the restructuring of key public enterprises, particularly the phosphate company (OTP), and by a strengthening of the legal system in order to facilitate loan recovery and to avoid a resurgence of past problems with the banks.

Directors expressed concern over the substantial delays in the reform of important public enterprises, particularly the OTP, the Railway Company, the Autonomous Port of Lomé, and Togo-Telecom. They encouraged the authorities to implement the public enterprise restructuring action plan agreed with the World Bank. Directors also stressed the need to proceed expeditiously with the privatization of OTP.

Directors emphasized that establishing a credible track record of policy implementation will be critical for Togo to mobilize rapidly the financing assurances necessary for a program that could be supported by a PRGF arrangement.

Directors urged the authorities to press ahead with their efforts to overcome weaknesses in the compilation of economic and social statistics, particularly of public finance data, in order to eliminate the current difficulties for effective surveillance. The authorities' intention to participate in the General Data Dissemination System (GDDS) should help establish a framework for a broad-based improvement in Togo's statistical systems. In that context, Directors supported the provision of Fund technical assistance.