Public Information Notice No. 02/79

Public Information Notice: IMF Concludes 2002 Article IV Consultation with Benin

August 5, 2002

On July 15, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Benin.¹

Background

Macroeconomic performance has remained satisfactory under the current PRGF arrangement. In 2001, real GDP is estimated to have increased by 5 percent, driven by strong growth in the construction, public works, services, and industrial sectors. End-of-period inflation decelerated from 9.8 percent in 2000 to 2.3 percent in 2001. The external current account deficit, excluding current official transfers, declined from 8.0 percent in 2000 to 6.7 percent of GDP in 2001, owing to more favorable terms of trade. The real effective exchange rate appreciated somewhat as a result of a slightly higher inflation rate than that of Benin's trading partners and a small decline of the U.S. dollar against the euro, to which the CFA franc is pegged. The sharp decrease in the world price of cotton during the second half of 2001 had limited effect on Benin's economy in 2001 because exports in the major cotton sector had been realized in the first half of the year.

In 2001, total revenue reached 16.2 percent of GDP (from 16.6 percent in 2000), despite the adverse effect on customs of the tightening of controls by Nigeria on the border with Benin and some weaknesses in customs administration. Total expenditure was kept at 20.3 percent of GDP, as the authorities contained nonwage current expenditure below budgetary allocations. Priority outlays for education and health rose at a higher pace than other outlays. The overall fiscal deficit, on a payment order basis and excluding grants, was held to the program target at 4.2 percent of GDP.

Monetary policy, conducted at the regional level by the Central Bank for West African States, was prudent. Monetary expansion abated (broad money grew by 12.7 percent in 2001, compared to 21.2 percent in 2000), while the banking system's net foreign assets improved significantly, reflecting (i) intensified efforts to repatriate export proceeds previously held abroad; (ii) the conversion into CFA francs of French francs held outside the banking system prior to the transition to the euro; and (iii) an increase in foreign assistance to the government. Domestic credit declined by 26.6 percent as a result of the buildup of government deposits. At the same time, credit to the nongovernmental sector stagnated, as some ginning enterprises benefited from increased prefinancing credit from their foreign customers.

On the structural front, further key reforms were implemented in the cotton sector, and there was some progress in the divestiture of public utilities. However, the adoption of a strategy to privatize the public enterprise in the cotton sector (SONAPRA) encountered delay. Furthermore, the reform of the civil service stalled.

Prospects for 2002

For 2002, the authorities have projected lower real GDP growth (5.3 percent) than estimated previously (6.0 percent) in view of the global economic downturn and the sharp decrease in the world price of cotton. Annual average inflation is targeted to be contained at 3.3 percent. The external current account deficit is expected to widen to 8.3 percent of GDP as exports earnings and current transfers are projected to decrease.

Executive Board Assessment

Directors agreed with the thrust of the staff appraisal. They commended the authorities for the sound macroeconomic performance achieved in 2001, noting Benin's strong output growth, low inflation, and prudent budget policy—and more broadly, its observance of the targets under the Convergence, Stability, Growth, and Solidarity Pact of the West African Economic and Monetary Union. Directors observed, however, that progress on the structural front has been uneven, while fiscal policy weakened in the first half of 2002, reflecting an unplanned wage increase for civil servants and subsidies to cotton producers in the context of a weak world price.

Directors emphasized the importance of maintaining sound fiscal policy and accelerating the pace of structural reforms in order to increase the potential growth of the economy and reduce poverty. Such policies are also necessary in the context of Benin's monetary and exchange arrangements—and in light of the risks to which the economy remains exposed.

Directors therefore welcomed the authorities' decision to adopt measures to address the fiscal deficit in 2002. They stressed the need to strengthen tax administration, broaden the tax base, and control more effectively spending in nonpriority areas, in order to make room for higher and better targeted expenditures on basic social services. In particular, Directors urged restraint in wage settlements and in any further extension of subsidies to the cotton industry. They underscored also the importance of prudent management of government borrowing in order to achieve a sustainable external debt path.

Directors emphasized that maintaining a sound fiscal position—as well as broadening the productive base and promoting private sector investment—requires stronger efforts to implement public sector reforms. They welcomed the authorities' commitment to divest the public utilities, beginning with the energy and telecommunications companies, and the cotton processing company, and noted the importance of carrying out the divestment program under transparent rules. Further action is also needed to complete a thorough review of the civil service pension fund, aimed at ensuring its viability, and implement the long-delayed reform of the civil service compensation system. In the area of governance, Directors encouraged the authorities to press ahead with efforts to enhance fiscal transparency, based on the recommendations of the Fiscal ROSC, and to implement the strategic plan for combating corruption.

Directors noted that poverty indicators have not improved significantly, despite high rates of growth and low inflation, and called for a closer look at the targeting of poverty programs, as well as more frequent social impact assessments. Most Directors referred also to the impact of subsidies in large cotton producing countries—which raised production and thus reduced world prices. Directors encouraged the authorities to press ahead strongly with efforts to diversify the economy, and to exercise continued vigilance in domestic policies to ensure that external competitiveness is maintained. A few Directors suggested a more proactive approach to diversification by promoting small-scale enterprises and microfinance. Directors looked forward to the completion of the PRSP, incorporating fully the views of civil society and the donor community.

Directors noted that the regional monetary and exchange arrangement of the BCEAO continues to serve Benin well. They welcomed the authorities' commitment to strengthen the financial position of the banking sector and to improve the health of the cooperative and mutual credit institutions. In this regard, Directors urged the authorities to adopt a recovery plan for the state-controlled bank, including a timetable for selling the government's share. They also stressed the need to ensure that the banks observe the regional banking commission's prudential ratios—in particular, those related to minimum capital requirements. Directors commended the authorities for their prompt support and leadership of regional efforts against money laundering and the financing of terrorism.

Directors encouraged the authorities to continue improving the quality, timeliness, and frequency of reporting of key data, notably on the national accounts and the balance of payments. They welcomed the fact that Benin has begun publishing its General Data Dissemination System metadata on the IMF's website.