Public Information Notice No. 01/9

Public Information Notice: IMF Concludes Article IV Consultation with Benin

February 2, 2001

On January 8, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Benin.¹

Background

Since 1994, Benin has been implementing reforms supported by the Fund through successive ESAF and PRGF arrangements. The current arrangement was approved in July 2000 in support of a program covering the period 2000-03.

Under those programs macroeconomic performance has remained satisfactory. In 1999, real GDP growth continued to be sustained, rising by ½ of 1 percent of GDP to 5 percent. The main factor was a broad recovery in production and services, following a slowdown in 1998 caused by a regional energy shortage. Inflation fell from 5.8 percent in 1998 to 0.3 percent in 1999, mainly on account of a decline in food prices. The external current account deficit was stable at 5.9 percent of GDP in 1999. The external terms of trade deteriorated by 16.5 percent, owing to a drop in cotton export prices; however, the impact on the current account was mostly offset by a 23.5 percent increase in the volume of exports as the state cotton enterprise (SONAPRA) sold a large stock of ginned cotton.

Fiscal performance remained strong in 1999, although low absorptive capacity continued to lead to an underutilization of spending appropriations. The overall fiscal balance, on a payment order basis and including grants, registered a surplus of 1.9 percent of GDP; excluding grants, the fiscal deficit is estimated at 1.6 percent of GDP. Total revenue increased by 0.6 percentage point of GDP to 16.1 percent as the authorities pursued their efforts to strengthen tax administration, streamline the tax system, and improve controls on tax exemptions. Total government spending amounted to 17.7 percent of GDP, with outlays for education and health rising by ½ of 1 percentage point of GDP to 4.8 percent.

Credit developments in 1999 were characterized by a sharp decline in net bank credit to the government and a rapid expansion of bank credit to the nongovernment sector. The net domestic assets of the banking system rose by 3.6 percent of beginning-of-period broad money mainly due to higher trade financing, loans to the cotton sector, and the financing of investment by public enterprises.

In the structural areas, the government made headway in opening public enterprises to private sector participation in 1999. The authorities sold a majority of the capital of the public enterprise distributing petroleum products (SONACOP) and implemented a flexible mechanism for adjusting retail prices of petroleum products. They adopted a strategy to split the Office of Post and Telecommunications (OPT) into two entities and privatize the telecommunications entity, and they agreed to private sector participation in the management of the water and electricity company (SBEE) and the Port of Cotonou.

In 2000, real GDP is estimated to have grown by 5.3 percent, reflecting mainly an increase in cotton output of 8 percent and higher manufacturing production. Inflation is estimated to have averaged 4 percent for the year, compared with the 3 percent expected under the program, on account of a 75 percent increase in the retail prices of petroleum products. As regards the external sector, the current account deficit is expected to have widened from 6 percent of GDP in 1999 to 7½ percent in 2000, broadly in line with the program. The external terms of trade are estimated to have deteriorated further, as a rebound in cotton prices is likely to have been offset by a sharp increase in petroleum product prices. At the same time, the volume of exports is estimated to have returned to trend after the sharp increase recorded in 1999 due to the sale of cotton stocks. In spite of the widening current account deficit, the overall balance of payments is expected to have recorded a surplus, as Benin continued to receive a high level of external financial assistance.

The fiscal objectives for 2000 have most likely been achieved. The overall fiscal position, on a payment order basis and including grants, is estimated to have been close to balance, or slightly better than initially expected. Excluding grants, the fiscal deficit is expected to have amounted to 3.5 percent of GDP. Total government revenue is estimated to have been close to 16 percent of GDP, while government spending is expected to have risen to 19.4 percent of GDP, or slightly above the program target. In particular, the authorities adopted a supplementary budget that includes additional outlays for health and education with the aim of utilizing the interim assistance under the enhanced HIPC Initiative. As a result total government spending on health and education is estimated to have risen from 4.8 percent in 1999 to 5.9 percent in 2000. The government has also decided to provide a subsidy on kerosene, in order to cushion the impact of the sharp increase in the international prices of petroleum products on the poorest sections of the population.

Structural reforms continued to be implemented in 2000, albeit with some delays. In 2000, the government ended SONAPRA's monopsony and began discussing strategies for private sector participation in the capital of this enterprise. However, the legal and regulatory frameworks for private sector participation in the telecommunications and energy sectors have yet to be adopted.

The economic outlook for 2001 was slightly revised, compared with the initial medium-term projections in the government program, mainly on account of an expected drop in cotton production and higher oil import prices. Hence, projections for real GDP growth were revised from 5.7 percent to 5.0 percent, and those for the external current deficit from 6.6 percent of GDP to 6.9 percent. Concerning inflation, the target was raised slightly from 2.5 percent to 3.0 percent to take account of the pass-through effects of higher petroleum product prices. The budget for 2001 is broadly in line with the medium-term program, with the overall fiscal position to remain balanced, after taking into account grants and financial assistance under the HIPC Initiative.

Executive Board Assessment

Executive Directors commended the authorities for Benin' s satisfactory macroeconomic performance in 1999 and 2000. Real GDP growth remained robust, inflation continued to be moderate, and fiscal performance was strong. Directors considered that the outlook for 2001 remains favorable. With the presidential election approaching, they encouraged the government to continue to seek a broad consensus on key policies, avoid slippages in reform implementation, and maintain a stable macroeconomic environment. Directors welcomed the authorities' commitments in this regard.

Directors stressed the need to prepare a comprehensive and coherent poverty reduction strategy. They encouraged the authorities to show strong leadership to guide the process and define the priorities and the content of the poverty reduction strategy with the participation of civil society. Directors also agreed with the authorities that maintaining macroeconomic stability and achieving high growth are necessary conditions for a sustained reduction in poverty, and they welcomed the renewed effort to increase outlays for health and education, financed by HIPC Initiative assistance.

Directors commended the authorities for the fiscal outcome in 2000 and considered that the fiscal stance for 2001 is appropriate. They stressed that expenditure will need to be monitored closely to ensure higher spending for the social sectors and investment, while keeping non-priority outlays under control. Also, Directors considered it essential that the new civil service compensation system and pay scale be implemented rapidly, so as to ensure the country' s long-term fiscal viability and competitiveness. They encouraged the authorities to continue to strengthen budget preparation and execution, and improve the utilization and efficiency of budget appropriations. In that context, Directors welcomed the efforts made to monitor closely the utilization of resources available under the HIPC Initiative. They supported the authorities' intention to strengthen tax administration to help them attain their revenue targets.

Directors urged the authorities to accelerate the implementation of structural reforms, particularly in light of the need for the diversification of production and exports. They noted that the opening of productive sectors to private investment is essential to achieve this objective, so as to promote high and sustainable economic growth and reduce poverty. Directors also noted that privatization procedures need to be strengthened to make the process fair and transparent and to ensure that private bidders meet all financial and technical requirements. In this regard, they welcomed the abolition of the state cotton monopoly over cotton producers, and urged the authorities to work with the World Bank and the affected parties to complete the privatization process. Directors also welcomed the divestiture of a large part of the petroleum company. They stressed the need to combat corruption, including by dealing promptly with any irregularities that might be uncovered.

Directors expressed concern about the financial condition of the banking system. They welcomed the steps taken by the regional banking commission to strengthen supervision, and urged the authorities to implement measures recommended by the regional banking commission, including the enforcement of prudential regulations to bolster the financial situation of the banking system.

Directors encouraged the authorities to continue to improve the quality, coverage, and timeliness of economic data.