Public Information Notice No. 98/81

Public Information Notice: IMF Concludes Article IV Consultation with Benin

October 23, 1998

On July 6, 1998, the Executive Board concluded the Article IV consultation with Benin¹.

Background

The devaluation of the CFA franc in January 1994 added a critical dimension to the adjustment strategy initiated by Benin in 1989. Benin’s sustained efforts have been supported by the IMF, including most recently, in the context of a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF) and the corresponding first annual arrangement, which were approved on August 28, 1996. The implementation of the adjustment program has resulted in real income growth, a decline in inflation, and reductions in internal and external imbalances. Benin was granted a stock-of-debt operation on Naples terms by Paris Club creditors in October 1996 and is seeking debt relief from other official bilateral creditors on comparable terms. This should reduce the debt service burden to a sustainable level, provided that the country pursues appropriate economic and structural policies, and thus is able to benefit from a favorable international environment.

In 1997, Benin’s economic and financial performance was encouraging. It is estimated that real GDP increased by 5½ percent with strong growth in foodstuff production, construction, trade, and transportation. Consumer price inflation declined from 6.7 percent during 1996 to less than 3 percent during 1997. The external current account deficit stabilized at 4½ percent of GDP in 1997. Export growth slowed down, on account of lower cotton shipments, which accounted for 80 percent of domestic exports (excluding reexports).

The Beninese authorities pursued a prudent fiscal policy in 1997, and key fiscal targets were met with some margins. The overall budget deficit, on a payment order basis, narrowed by 1.3 percentage points of GDP to 4.2 percent, while the primary fiscal surplus was 3.2 percent of GDP. Measures to strengthen tax and customs administration, broaden the tax base, and improve compliance with tax law contributed to a revenue-to-GDP ratio of 14.6 percent. Total government spending relative to GDP declined to 18.8 percent, or 1.6 percentage points below the target, through the containment of the wage bill as well as the underutilization of budget appropriations. Nevertheless, spending on education and health services continued to rise relative to GDP from 4.3 percent in 1996 to 5.1 percent in 1997.

As Benin is a member of the West African Monetary Union, monetary policy is conducted at the regional level and has for its objective the defense of the CFA franc parity. The regional central bank (BCEAO) has continued its policy of lowering interest rates in line with the decline in inflation, while maintaining a positive spread between its intervention rates and those in France. In Benin, the net domestic assets of the banking system grew marginally in 1997, with the increase in credit to the nongovernment sector largely offset by a drop in bank net claims on the government.

On the structural front, the assets of the palm oil enterprise were sold in 1997, and in early 1998 a new private insurance company received a license to operate in Benin and took over the insurance portfolio of the state-owned insurance company, which was liquidated. However, the privatization of other public enterprises and the liberalization of the cotton sector fell behind schedule in 1997. Also, there were delays in implementing the reform of the public administration, and adopting a performance-based compensation system for the civil service.

It was initially expected that real GDP would grow by 5.2 percent in 1998, and the key economic objectives were to keep inflation below 3 percent, and contain the external current account deficit to 5 percent of GDP, in spite of stagnating cotton exports and the end of crude oil exports following the exhaustion of the only oil field. However, from March to June 1998, Benin suffered a severe shortage of electricity, as a result of a sharp drop in the production of hydro-electricity in Ghana—from which Benin obtains most of its electricity—because of a drought and technical difficulties. Hence, it is likely that real GDP growth will be lower than initially expected, whereas inflation may be temporarily higher and the external current account deficit wider. However, a small surplus is still likely to be recorded in the overall balance of payments, as additional imports of generators and fuel oil will largely be financed through external grants and loans. In spite of the energy crisis, fiscal consolidation is expected to continue, with a further strengthening of revenue collection and a greater utilization of budget appropriations through improved spending management.

Executive Board Assessment

Executive Directors noted that Benin’s economic performance under the 1996/97 program supported by the first annual arrangement under the ESAF was broadly satisfactory, as reflected by the increase in real GDP growth, the continued reduction in inflation, and thenarrowing of the external current account deficit. Moreover, key fiscal targets were met in 1996 and 1997. However, Directors regretted the persistent delays in implementing the reform of the compensation system for the civil service, the liberalization of the cotton sector, and the government divestiture program. In view of Benin’s fragile economic situation, Directors urged the authorities to strengthen public resource management, pursue a prudent wage policy, and accelerate the implementation of structural reforms so as to achieve sustainable growth and a reduction of poverty. Directors stressed that timely implementation of the policies and reform measures agreed in February 1998 would facilitate a resumption of discussions on a program that could be supported by a second-year arrangement under the ESAF.

Directors felt that the continued emphasis on resource mobilization and increased allocation for social spending was broadly appropriate. However, they stressed that, to attain the fiscal objectives for 1998, the authorities should stand ready to offset a possible shortfall in government revenue resulting from the energy crisis. To that end, they urged the authorities to continue to improve tax administration, in particular by enhancing coordination of the customs and tax offices, and to broaden the tax base, especially of the value-added tax, by reducing exemptions further.

On the expenditure side, Directors stressed the need to settle the problems resulting from the past salary freeze and to give priority to recruitment for education, health, and infrastructure, within the overall fiscal objectives. In that context, Directors welcomed the increase in budgetary resources in support of those sectors. However, they called on the authorities to strengthen expenditure management procedures so as to ensure that budget appropriations were fully utilized. In addition, they underscored the importance of eliminating domestic arrears.

Directors encouraged the authorities to intensify surveillance of the banking system, including the savings and loan associations, which have become important intermediaries in collecting savings and extending credit to small enterprises. Directors welcomed the implementation of a common external tariff over the next two years; meanwhile, they urged the authorities to take the necessary steps to limit any possible adverse effect on government revenue.

Directors urged the authorities to rigorously implement the envisaged structural reforms to strengthen public administration, liberalize the economy to promote private investment, strengthen the judicial system, and foster the diversification of the country’s productive base and exports. They stressed the need to reach quickly a consensus on a performance-based compensation system for the civil service. They also cautioned that the proposed devolution and decentralization policies should not result in higher government spending and a weakening of controls.

Noting the government’s continued involvement in productive activities, Directors called for intensified efforts to open all sectors to private investment. In particular, they stressed that liberalizing the cotton sector in a transparent manner was essential to raise the producers’ share of cotton sector earnings, and thus stimulate production. They also noted that the authorities should complete the liberalization of oil distribution. Directors were of the view that the scope of the government’s divestiture program should be broadened to include utilitycompanies so as to allow the private sector to participate in the resolution of the energy crisis and to strengthen the country’s growth prospects.

Directors noted that Benin’s debt position appeared sustainable, provided that macroeconomic and financial policies remained appropriate, the international economic environment was stable, and the country was granted debt relief by non-Paris Club bilateral creditors. They also urged the authorities to speed up the process of eliminating external arrears.

Directors encouraged the authorities to step up their efforts to improve the coverage, consistency, and availability of the core economic statistics.