News Brief No. 02/68

News Brief: IMF Completes Benin's Third Review Under the PRGF, Extends Arrangement Period for One-Year, and Approves US$5 Million in Additional Interim HIPC Assistance

July 15, 2002

The Executive Board of the International Monetary Fund (IMF) today completed the third review of Benin's performance under the three-year SDR 27 million (about US$36 million) Poverty Reduction and Growth Facility (PRGF) arrangement. This decision will entitle Benin to the release of SDR 4 million (about US$5.3 million), which will bring total disbursements under the program to SDR 19 million (about US$25 million) (see Press Release No. 00/43). In addition, the Executive Board approved an eight-month extension of the PRGF arrangement through March 31, 2004 to allow the country access to the disbursement of the final loan.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½-year grace period on principal payments.

Benin was also granted SDR 3.7 million (about US$5 million) in additional interim assistance under the Heavily Indebted Poor Countries (HIPC) Initiative to cover debt service payments falling due to the Fund through June 30, 2003. Benin reached the decision point under the HIPC Initiative in July 2000 and is expected to reach the floating completion point by the end of 2002, once a full PRSP has been finalized and the authorities have met the completion point conditions.

After the Executive Board's discussion, Anne Krueger, First Deputy Managing Director and Acting Chair, stated:

"Benin's macroeconomic performance in 2001 continued to be strong. Real GDP growth was in line with program targets, inflation decelerated, and fiscal performance remained satisfactory. All the performance criteria under the PRGF-supported program for end-December 2001 were met; but progress on the structural front was uneven.

"The authorities' economic program for 2002 aims at maintaining strong output growth and reducing poverty, while maintaining macroeconomic stability. Real GDP growth is expected to pick up moderately. Fiscal policy will focus on containing the deficit following the expenditure overruns in the first half of the year that resulted from the decision to subsidize cotton producers during the 2001/02 crop season, and to grant an unplanned wage increase to civil servants. Meeting the fiscal target will require the determined implementation of the action plan to boost revenue collection, as well as a more effective control over spending on nonpriority outlays through the new expenditure management system.

"The full and timely implementation of the structural reform agenda is of critical importance to the efforts to accelerate growth, strengthen Benin's competitive position, and reduce poverty. The main priorities in the agenda are the timely divestiture of public utilities and the privatization of the state-owned cotton company (SONAPRA); a review of the civil service pension fund, aimed at ensuring its viability; and the implementation of the reform of the civil service compensation system—in order to reduce pressures to increase wages, and to improve civil service management. It will also be important to maintain a prudent public sector borrowing strategy and a sustainable debt path. In the banking sector, the authorities need to ensure that appropriate prudential ratios—in particular, those related to minimum capital requirements—are observed, and proceed with the sale of the government's share in the state-controlled bank.

"Progress in alleviating poverty has been slow, and the authorities are encouraged to shift public expenditure toward basic social services, and to improve the quality of social expenditure. Moreover, it is essential that the authorities finalize the preparation of the PRSP—taking into account the outcome of their broad consultations with civil society and the donor community—and meet the conditions for the completion point under the HIPC Initiative.

"Benin's economy remains vulnerable to external shocks because of the continued heavy dependence on cotton exports, and on trade with Nigeria. It will therefore continue to face risks, including those arising from the subsidy policies in its main trading partners that could impair the successful and timely implementation of its program. In the face of these challenges, the authorities will need to stand ready to strengthen their adjustment and reform efforts," Ms. Krueger said.