Benin—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

Cotonou, August 25, 2003

The following item is a Letter of Intent of the government of Benin, which describes the policies that Benin intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Benin, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler:

1. On behalf of the government of Benin, I am pleased to send you the attached memorandum on economic and financial policies, which describes the progress made during the first half of 2003 in the implementation of the program that the Fund supports under an arrangement under the Poverty Reduction and Growth Facility (PRGF). The memorandum also indicates the policies and measures planned for the remainder of 2003 in order to achieve the objectives of the program for 2003, which was presented in the memorandum of January 29, 2003 and constitutes the first year of implementation of the poverty reduction strategy stated in the PRSP adopted by the government in December 2002. The attached technical memorandum of understanding specifies the definitions of benchmarks and criteria presented in Tables 1 and 2 of attachment I, and the reporting requirements.

2. As indicated in paragraphs 4, 5, and 6 of the memorandum, all the structural benchmarks for end-March 2003 were met. However, fiscal performance weakened during the first quarter of 2003, reflecting shortcomings in customs administration and expenditure overruns relating to the municipal and legislative elections. The government took measures during the second quarter of 2003 to strengthen customs administration and cut nonpriority expenditure, so as to meet the program targets for end-June. In view of the corrective actions taken to address the slippages in performance and meet the objectives of the program for 2003, and the progress achieved during the second quarter of 2003, the government requests waivers for the nonobservance of the performance criteria pertaining to the net bank credit to the government and the deficit of the government at end-March 2003. The government also requests the sixth disbursement under the arrangement, in an amount of SDR 2.69 million, upon completion of the fifth review.

3. The government believes that the policies set forth in the attached Memorandum of Economic and Financial Policies (MEFP) are adequate to achieve the objectives of its program, but it will take any further measures that may become appropriate for this purpose. Benin will consult with the Fund on the adoption of these measures, and in advance of revisions to the policies contained in the MEFP, in accordance with the Fund's policies on such consultations.

4. The government proposes that, in accordance with the PRGF arrangement, the seventh disbursement under the arrangement, in an amount of SDR 1.35 million, be conditioned on the observance of end-September 2003 performance criteria (Attachment I, Table 2) and completion of the sixth review under the arrangement, which is expected by mid-December 2003. The sixth review will assess economic and financial developments during the second half of 2003, the outlook for 2004, and the implementation of the poverty reduction strategy.

5. As was the case in the past, the government consents to the Fund's publication of this letter, the memorandum on economic and financial policies for 2003, the technical memorandum of understanding, and the staff report for the fifth review under the PRGF arrangement.

Sincerely yours,

BENIN

Memorandum on Economic and Financial Policies

August 25, 2003

I. Introduction

1. In the context of the arrangement under the Poverty Reduction and Growth Facility, the government of Benin held consultations with an International Monetary Fund mission in Cotonou on May 7-21, 2003. The discussions covered the fifth review of the medium-term program—in particular, progress made in program implementation during 2002 and the first quarter of 2003, and the outlook and measures planned for the remainder of 2003 and in the medium term within the framework of the government's poverty reduction strategy. The government of Benin reaffirms its commitment to implement all the policies described in the present document, which supplements the memorandum on economic and financial policies of January 29, 2003.

II. Performance Under the Program

2. Benin's economic performance in 2002 remained satisfactory despite the sharp decline in the terms of trade. Real GDP grew by 6.0 percent, mainly as a result of a particularly abundant cotton harvest; inflation was contained at 2.4 percent, despite an increase in public utility rates during the second quarter; the current account deficit, including current official transfers, reached 8.0 percent of GDP because of the marked decline in the price of cotton on the international markets; and the real exchange rate appreciated by some 6.3 percent, reflecting the appreciation of the euro—to which the CFA franc is fixed—against the dollar. The effects of the crisis in Côte d'Ivoire also remained limited.

3. The objectives of the 2003 program reflect the basic macroeconomic framework of the poverty reduction strategy paper (PRSP) adopted in December 2002 and remain the same as those presented in the memorandum on economic and financial policies (MEFP) of January 29, 2003. These objectives are an economic growth rate of close to 5.6 percent, an inflation rate of less than 3 percent, in accordance with the West African Economic and Monetary Union (WAEMU) convergence criterion, and a current account deficit, including current official transfers, of 7.5 percent. To achieve these objectives, the government's monetary and fiscal policy will seek to maintain financial stability. In this context, the overall government deficit (on a payment order basis, excluding grants) is programmed to remain fixed at 4.6 percent of GDP.

4. The first quarter of 2003 was marked by fiscal slippages. Regarding the objectives for end-March, fiscal operations resulted in a gap of about CFAF 7.6 billion in total revenue and primary expenditure overruns of some CFAF 2.5 billion. The low performance in total revenue stems mostly from lower customs receipts, owing to a less effective customs administration, which is deficient in three areas: (i) controlling customs value, (ii) combating fraud and corruption, and (iii) monitoring overdue obligations after customs clearance. The overruns at the level of primary expenditure were caused mainly by the higher-than-expected cost of municipal and legislative elections, which exceeded budgetary allocations by CFAF 4.5 billion, partly as a result of a higher-than-expected number of runoff elections in early 2003. Furthermore, the wage bill was slightly larger than expected as a result of the front-loaded impact of the civil servant salary adjustment to the grade scale reached in 2002. Consequently, the wage bill target for the whole year will not be affected. Morever, social spending on health and education was only 60 percent of the program target. Overall performance criteria at end-March for the ceiling on net domestic bank financing to the government and the ceiling on the overall government deficit were not observed. Net bank credit to the government amounted to CFAF -36.1 billion as opposed to an adjusted target of CFAF -44.7 billion. The overall government deficit amounted to CFAF -11.3 billion as opposed to an adjusted target of CFAF -5.8 billion.

5. The three structural benchmarks for end-March 2003 were met. At end-March 2003, the government adopted and started to implement action plans for the Directorate General of Taxes and the Directorate General of Customs, incorporating the recommendations of the IMF technical assistance mission of September 2002. Since March 2003, wages have been paid by using the single-reference database. Finally, an action plan was adopted for the SIGFIP, providing for integrating external debt service and externally financed capital expenditure into the system. In addition, in order to reduce expenditure that does not follow normal procedures of commitment and payment orders, the government closed 317 (of a total of 867) cash advance accounts (comptes des régisseurs) in January 2003. However, the considerable increase in emergency spending outside the SIGFIP system, especially election-related expenditure, made it impossible for the SIGFIP to function properly and excluded the possibility of establishing any consistency between budget and treasury operations in a timely manner for purposes of tracking budget execution.

6. During the second quarter, the government implemented a number of measures aimed at improving revenue and containing expenditure in order to meet the program objectives at end-June 2003. In terms of revenue, the government strengthened the Directorate General of Customs from end-March and began to implement the action plan to enhance the performance of the customs administration. These measures covered, in particular, (i) improvement of the system for recording merchandise, (ii) use of the transaction value on all imports, (iii) combating fraud and fiscal flight, including enhancing control of warehouses, monitoring transit to border countries, and combating illegal imports of petroleum products, (iv) provision of human and material resources to the customs administration, (v) reallocation of personnel to critical customs checkpoints, and (vi) reorganization of control services. In terms of expenditure, the government reduced budget allocations by CFAF 10 billion for nonpriority expenditure and accelerated the execution of priority expenditure, especially on health and education, for which the rate of execution increased from 59 percent at end-March to 86 percent at end-June.

7. The fiscal revenue and expenditure measures implemented made it possible to meet the end-June performance indicators. Net bank credit to the government stood at CFAF -53.9 billion, compared with an adjusted target of CFAF -44.1 billion. The overall government deficit reached CFAF -9.7 billion, compared with an adjusted target of CFAF -17.7 billion. The government also observed the performance indicators for end-June 2003 regarding the (i) nonaccumulation of new external payments arrears by the central government, (ii) ceiling on new nonconcessional foreign or guaranteed debt with a maturity of one year or more, and (iii) ceiling on new short-term external borrowing, except for normal import financing.

8. In light of the progress made in meeting the annual program objectives for 2003, after the slippages in the first quarter, the government requests from the Executive Board of the Fund waivers for its noncompliance with the two performance criteria for end-March 2003: (i) the ceiling on net domestic bank financing to the government, and (ii) the ceiling on the government deficit.

9. After three years of strong growth, the money supply declined slightly in 2002. Net domestic assets increased by 4.6 percent in terms of beginning-of-period broad money as a result of the government's use of bank credit and an annual increase in credit to the economy of 16 percent.

10. Regarding the financial health of the banking system, banks' prudential ratios improved overall. By contrast, nonperforming loans increased from 4.3 percent of the bank portfolio at end-2001 to 4.8 percent in March 2003. In respect of problem banks, the financial situation of the Continental Bank improved, thereby allowing its temporary receivership to be ended; however, another establishment under supervision at end-2002 went into temporary receivership in April 2003. A new bank, Socíété générale de banques du Bénin began operations in January 2003.

11. The divestiture program of public enterprises experienced limited progress. With assistance from the World Bank, an investment bank was hired in May 2003 through competitive bidding to assist the government in privatizing the ginning company (SONAPRA). Concerning the electricity company (SBEE), the authorities established the framework for the reform of the electricity sector and the timetable for the privatization of the SBEE, with assistance from the World Bank in the context of the preparation of a sectoral project. The call for bids for the telecommunications company did not take place by end-June as planned. In November 2002, the government opted for private sector participation in the management of the Autonomous Port of Cotonou, but actual implementation was delayed, owing to opposition by the port labor unions with whom negotiations are being pursued.

12. The plan to restore the financial equilibrium of the SBEE was implemented satisfactorily in 2002. The SBEE produced a quarterly report on the execution of that plan. Action was taken to raise and restructure tariffs, reduce loss rates on the supply network, and strengthen the system of controls.

III. Planned Measures and Actions to Achieve Program Objectives for 2003

13. In the government's opinion, achieving the objectives of the 2003 program constitutes an important step in the implementation of the PRSP, and it remains determined to continue in the second half of the year to strengthen the implementation of measures and actions needed to achieve these objectives.

A. Government Finance and Fiscal Reforms

14. Meeting the objectives in this area will require reinforcement of the measures implemented to improve the performance of the tax and customs authorities and continuation of the measures intended to contain expenditure by ensuring that it is allocated in accordance with the priorities set in the budget voted by the National Assembly in 2002.

15. To attain the expected revenue level of 17.0 percent of GDP, the government intends to strengthen implementation of action plans to improve the performance of the tax and customs administrations. In customs administration, the focus will be particularly on implementation of the following measures: (i) the application of transaction values to all imports; (ii) the inclusion of foodstuffs as an area covered by the import verification company; (iii) the strengthening of supervision of warehouses and monitoring of transit to border countries; (iv) the collaboration between customs and the tax departments, and between customs and the import verification company; (v) the monitoring of unpaid obligations after customs clearance; and (vi) combating fraud and corruption in customs. In the tax administration, action will be taken primarily to improve the taxpayer database, to follow up on delinquent taxpayers, to improve tax collection, and to strengthen tax audits. An IMF technical assistance mission is planned for October 2003, to assist in monitoring the implementation of these action plans. The government will also continue to implement the necessary measures to boost collection of nontax revenue. To that end, the following measures will be taken: (i) to establish an inventory of dividends due by all companies to the government in order to accelerate their collection, and (ii) to enhance the collection of loans on-lent to public enterprises.

16. Regarding the wage bill, a 5 percent increase was granted at the beginning of the year to bring the wages of all civil servants in line with the grade scale reached in 2002. The wage bill will be kept within the limits set in the budget (CFAF 96.7 billion). Civil service trade unions have requested retroactive pay for promotions received by civil servants before 1987, as well as bonuses and indemnities for teachers. A commission comprising government and trade unions representatives is examining the demands. The government will consult the Fund staff before taking measures in this area.

17. Electricity and telephone use by the central government has sharply increased in the last three years. The government intends to implement measures needed to contain this expenditure in 2003 within the appropriations of CFAF 4.5 billion for electricity and CFAF 5.5 billion for telephone. As regards telephone use, a measure prohibiting calls to cellular phones has already been taken. Additional measures are being contemplated. Concerning electricity, the government will strengthen ongoing actions aimed at reducing its consumption.

18. The government will continue to implement measures to improve the quality and level of execution of priority expenditure. These measures include, in particular, the following: (i) incentives for autonomous agencies to systematically execute projects; (ii) training for the line ministries in new budget procedures; and (iii) close monitoring of budget execution. The government's policy will seek to control nonpriority spending in order to prevent any overruns of budget appropriations.

19. Regarding fiscal reforms, the government intends to strictly observe budget procedures and limit the level of emergency spending that does not follow normal procedures of commitment and payment authorization. Thus, the number of cash advance accounts will continue to be reduced, with a view to eliminating these accounts in the medium term. In particular, cash advance accounts for capital expenditure will be eliminated during 2003-04, and those for current spending will be restricted, before end-December 2003, to one account per administrative structure or department. The government will also implement an action plan to improve the operation of SIGFIP, with a view to ensuring that all expenditure is channeled through the system. In particular, the external debt service will be integrated by end-September 2003 and foreign-financed investment expenditures before end-February 2004. The government also intends to strengthen the steps taken in recent years with the support of the World Bank in the context of the Public Expenditure Reform Adjustment Credit (PERAC) to improve the transparency and tracking of poverty reduction expenditure. To that end, the government, in collaboration with World Bank and IMF staffs, has drawn up a list of expenditures directly related to poverty reduction, whose execution will be regularly monitored through SIGFIP. The government also completed an audit for expenditure financed with 2000 HIPC resources and began to implement its recommendations. The audit for expenditure financed with HIPC resources in 2001 will be completed by end-September 2003.

20. Regarding cross debts between state enterprises, the government is establishing the situation of outstanding debts for all public enterprises; this exercise will be completed in September 2003. It intends to audit these debts before end-December 2003 and adopt a plan for their settlement by end-February 2004. Bids for the audit will be launched by end-September 2003. Also, to avoid the accumulation of new cross debts, the following measures were taken: (i) strengthening of physical control of the central government's use of services provided by public enterprises; and (ii) verification and settlement of invoices for services provided by public enterprises to the government. Lastly, by end-December 2003, the government will establish the status of liabilities of public enterprises that have already been liquidated or are being privatized.

21. The government plans to build a new port and a new airport. As a first step, it will conduct a study to evaluate the technical, economic, and financial viability of such projects. As part of the consultation process, the government will relay to Fund and Bank staffs all the relevant information in order to evaluate with them the suitability of these projects and their impact on the macroeconomic framework described in the government's economic and financial program for 2003-05, as well as the fiscal implications of explicit or implicit commitments by the government to these large projects.

22. The government intends to implement the decentralization process after the municipal elections of December 2002. The budget for fiscal year 2003 provides an overall appropriation for local governments of CFAF 3.6 billion. The budget also includes appropriations of CFAF 58 billion for local government spending that will continue to be centrally managed. In order to facilitate the transfer of management of these appropriations, studies on the modalities and cost of transferring this authority to the local governments have been finalized. An action plan establishing how this authority is to be transferred to the local governments and indicating measures and a timetable for their implementation will be prepared and adopted by end-September 2003. The government adopted the budget and accounting framework of the local governments in August 2003. The government will continue to strengthen the fiscal management capacity of the local governments, so that the transfer of managerial authority for appropriations will not weaken government finance management.

B. Outlook for Money, Credit, and the Financial System

23. Monetary policy, which is conducted at the regional level by the regional central bank (BCEAO), will aim at achieving the objectives of price stability and an adequate level of foreign exchange reserves. In 2003, the money supply should grow at the same rate as nominal GDP, and net foreign assets of the banking system should increase. The government will continue to implement the recovery plan for the Continental Bank and will sell the state's shares by September 2003, which constitutes a structural benchmark of the program. The government will continue to encourage all credit institutions to observe the current banking regulations and prudential ratios. The government will also support the recovery efforts of the largest microfinance institution in the sector (FECECAM) and intensify supervision of the sector.

C. Other Structural Reforms

24. In the cotton sector, the Centrale de Sécurisation des Paiements et du Recouvrement (Payments Securitization and Collection Agency), which covers ginning mills, input distributors, and producers, continued to be responsible for the marketing and collection of cottonseed, as well as the securitization of payments for agricultural inputs by producers. But the 2002/03 crop year was disrupted by the emergence of a parallel circuit for marketing inputs and collecting cottonseed, that was started up by input distributors who were not selected in the bidding process organized by the producer cooperative CAGIA. These disruptions delayed payments to producers. With the support of the World Bank, operators in the sector intend to assess the functioning of institutions in the sector and input marketing circuits before the next crop season starts. For its part, the government will approve import exemptions for inputs only for those importers who have been selected in the competitive bidding process, in accordance with the reform implemented in collaboration with the donors. The government will also assist in implementing the recommendations of the study on the impact of past and future reforms in the cotton sector, conducted in conjunction with the World Bank and private operators in the sector.

25. The government intends to complete the public enterprise privatization program and has prepared a new timetable for this program. In the cotton sector, the process of selling SONAPRA's ginning mills will be completed by end-2003, in accordance with the timetable established with the investment bank advising the authorities in the privatization process, the call for bids having been submitted in July 2003. Regarding the electricity and water enterprise (SBEE), in keeping with the timetable drawn up with assistance from the World Bank, the National Water Company was established by decree in June 2003, meanwhile, the call for bids for a management contract of the electricity arm of the SBEE is to be issued in the first half of 2004, and the selection process is to be completed during the second half of 2004. Regarding the privatization of the telecommunications sector, a decree separating the sector from the post office will be adopted in September 2003, the call for bids for a strategic investor will be launched in August 2004, and the selection process will be completed by end-2004. The regulatory body for the sector will be established by decree in September 2003. In respect of the involvement of the private sector in the management of the Autonomous Port of Cotonou, the feasibility study to define the modalities for its implementation will be completed by end-2003. The selection of a private operator will begin in the first half of 2004 and will be completed by end-2004. The finalization of the discussions with the social partners should facilitate the timely implementation of these actions.

26. The government stresses its willingness to implement civil service reform, including a new compensation and merit-based promotion system, and it will define a new strategy to that effect by end-2003. In the meantime, the government will continue the hiring policy adopted at the beginning of 2003, of using employees on fixed-term contracts to replace retiring civil servants. In this connection, a new merit-based statute for contractual employees will be adopted in the first quarter of 2004.

27. Regarding the National Retirement Fund of Benin (FNRB), the actuarial study will be completed by end-December 2003. Based on the results of this study, the government will adopt in 2004 a strategy to eliminate the FNRB's financial deficit in the medium term.

28. With respect to good governance, the implementation of the national strategic plan to combat corruption adopted in 2002 will be continued. Actions have been taken to reinforce the state's control institutions, in particular the Audit Office, the General Finance Inspectorate, internal audit units in the ministries, and the Morality in Public Life Unit. Since the beginning of 2003, the government has regularly published the outcome of all government procurement contracts and will continue to do so. Regarding implementation of the action plan for collecting taxes and dividends due from the distributor of petroleum products (SONACOP), the actual collection of dividends owed to the state was completed in January 2003, and the remainder of import duties in arrears is being settled on schedule.

29. During this first year of implementation of the poverty reduction strategy, the government undertook a number of projects to (i) improve the diagnosis of poverty, particularly by correcting any methodological deficiencies; (ii) deepen the private sector development strategy; (iii) build capacity for execution of poverty-reducing expenditure; and (iv) improve the mechanism for monitoring and evaluation. The authorities decided to submit regular progress reports on PRSP implementation; the first progress report will be completed by end-September 2003. In addition, the annual update of the PRSP will be completed by end-March 2004.

IV. Debt Sustainability

30. In April 2003, Benin, having attained the completion point under the enhanced HIPC Initiative, reached a debt-reduction agreement with Paris Club creditors within the framework of that Initiative. In terms of net present value, the reduction of the debt by bilateral creditors who are members of the Paris Club amounts to US$48 million, not including the US$12 million already obtained during the interim period. Furthermore, most Paris Club creditors have agreed to grant an additional debt reduction. At end-July 2003, Benin had requested all bilateral and multilateral creditors to grant the debt reduction envisaged within the framework of the HIPC Initiative. The authorities will continue their efforts to obtain a debt reduction from all creditors.

31. The government will continue to strengthen debt management to maintain external debt sustainability. In this context, the government established a national debt committee (CNE), chaired by the Minister of Finance and Economy. The CNE is responsible for the drafting, implementation, and monitoring of the national debt policy, the analysis of Benin's debt sustainability and fiscal sustainability, the review of all requests for, and offers of, financing, and the formulation of recommendations to ensure a better match between financing and projects.

V. Monitoring the Program and Performance Criteria and Benchmarks

32. To ensure effective implementation of the program, the government has carried out as prior actions, the performance indicators for end-June 2003, as listed in the attached Table 1.

33. Program monitoring will be carried out on the basis of the technical memorandum of understanding accompanying this memorandum and the quarterly performance criteria, indicative targets, and structural benchmarks established for the period June 1-December 31, 2003, as well as through a program review. The performance criteria set for end-September 2003 remained unchanged. Observance of these criteria is a condition for drawing the seventh loans under the program. The performance criteria include (i) a ceiling on net domestic bank financing to the government; (ii) a ceiling on the government deficit; (iii) the nonaccumulation of new external payments arrears by the central Government (on a continuous basis); (iv) a ceiling on new nonconcessional foreign or guaranteed borrowings with a maturity of one year or more; and (v) a ceiling on new short-term foreign borrowing, except for regular import financing. The quarterly ceilings on net domestic bank credit to the government will be adjusted downward (or upward), up to the amount by which program grants and loans, excluding any debt relief, exceeds (or falls short of) program estimates, as indicated in Table 2 attached and in the technical memorandum of understanding. The quarterly ceiling on the government deficit will be adjusted downward by the amount of disbursements of budgetary grants or debt relief in excess of program estimates. The quarterly ceiling on the deficit will also be adjusted downward up to the amount of HIPC Initiative resources received and not spent in accordance with program estimates. The quarterly ceiling on the deficit will be adjusted upward for the amount by which disbursements of budgetary grants or debt relief fall short of program estimates. The five above-mentioned criteria constitute indicative targets for end-December 2003. Quantitative indicative targets also include the wage bill, expenditure on health and education, total revenue, and primary expenditure. The reduction of domestic payments arrears was not set as a performance criterion or quantitative indicator because all domestic arrears have been paid, with the exception of those currently in litigation.

34. The measures that will be used as structural benchmarks for end-September 2003 are (i) the offer for sale of state shares in the Continental Bank; (ii) the call for bids to audit the cross debts of public enterprises with the government; and (iii) the integration of external debt service in the SIGFIP.

Technical Memorandum of Understanding

(August 25, 2003)

1. This technical memorandum of understanding defines the quantitative and structural performance criteria and benchmarks for the program supported by the Poverty Reduction and Growth Facility (PRGF). It also sets out the frequency and deadlines for data reporting to the staff of the International Monetary Fund (IMF) for program-monitoring purposes.

I. Definitions

2. Unless otherwise indicated, the government is defined as the central government of the Republic of Benin and does not include local authorities, the central bank, or any other public entity with autonomous legal personality that is not included in the table of government financial operations (TOFE).

3. The definitions of "debt" and "concessional borrowing" for the purposes of this memorandum of understanding are as follows:

• As set out in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Borrowing (Executive Board Decision No. 6230-(79/140), amended by Executive Board Decision No. 12274-(00/85) (8/24/00), debt is understood to mean a current, that is, not contingent liability created under a contractual agreement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future points in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debt can take a number of forms, the primary ones being as follows: (i) loans, that is, advances of money to the obligor by the lender on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans, under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, that is, contracts where the supplier permits the obligor to defer payment until some time after the date on which the goods are delivered or services are provided; and (iii) leases, that is, arrangements under which property is provided that the lessee has the right to use for one or more specified period(s) of time, which are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of this guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the arrangement, excluding those payments that cover the operation, repair, or maintenance of the property. Under this definition of debt set out above, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.
  
  
• A loan is considered concessional if, on the date the contract is signed, the ratio of the present value of the loan, based on the reference interest rates, to the nominal value of the loan is less than 65 percent (i.e., a grant element exceeding 35 percent). The reference interest rates used in this assessment are the commercial interest reference rates (CIRRs) established by the Organization for Economic Cooperation and Development (OECD). For debts with a maturity exceeding 15 years, the ten-year reference interest rate published by the OECD is used to calculate the grant element. For shorter maturities, the six-month market reference rate is used.

II. Quantitative Performance Criteria

A. Net Bank Credit to the Government

Definition

4. Net bank credit to the government is defined as the balance between the liabilities and claims of the government vis-à-vis the central bank and commercial banks. The scope of net credit to the government is that used by the Central Bank of West African States (BCEAO) and is consistent with established Fund practice in this area. It implies a broader definition of government than that specified in paragraph 2. Claims of the government include the CFA franc cash balance, postal checking accounts, subordinated debt (obligations cautionnées), and all deposits with the BCEAO and commercial banks of public entities, with the exception of industrial or commercial public entities (EPIC) and public enterprises, which are excluded from the calculation. Government debt to the banking system includes all debt to these same financial institutions.

5. At end-December 2002, net bank credit to the government as defined above stood at CFAF -46.5 billion.

6. The ceilings on the net credit to the government vis-à-vis the banking system will be adjusted downward (upward) by the amount by which disbursements on budgetary assistance exceed (fall short of) the amount programmed. Budgetary assistance is defined as grants, loans, and debt relief (excluding project loans and grants, IMF resources, and debt relief under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative)). In the context of the program, cumulative (since end-December 2002) external budgetary assistance is expected to reach CFAF 11.3 billion at both end-September and end-December 2003.

7. The ceiling on net bank credit to the government will be adjusted downward by the amount by which proceeds from privatization exceed the amount programmed for restructuring expenditure and the amount of newly issued treasury bonds held by the nonbanking sector. In the context of the program, cumulative restructuring expenditure (since end-December 2002) is expected to reach CFAF 7.5 billion at end-September 2003 and CFAF 10 billion at end-December 2003.

8. The ceiling on net bank credit to the government will also be adjusted downward by the amount of underspending on projects financed by HIPC Initiative resources. Targets for cumulative spending on projects financed by the HIPC Initiative (since end-December 2002) are CFAF 14.8 billion at September 2002 and CFAF 10 billion at end-December 2003.

Performance criteria and benchmarks

9. The ceiling on net bank credit to the government is established as follows: CFAF - 43.4 billion at end-September 2003, and CFAF -46.8 billion at end-December 2003. The ceiling is a performance criterion as at end-September 2003, and an indicative target as at end-December 2003.

Reporting deadline

10. Provisional data on net credit to the government, including a detailed list of the bank account balances of other public entities, will be transmitted on a monthly basis within the four weeks following the end of the month. The definitive data will be provided within an additional four weeks after the provisional data have been reported.

B. Deficit of the Central Government

Definition

11. The deficit of the central government is defined as the opposite of the sum of net external financing (excluding grants and debt service relief) and domestic financing of the central government. Domestic financing includes bank and nonbank financing. Net external financing is the sum of external project financing and budgetary assistance, minus amortization due on public external debt.

12. The ceiling on the deficit (surplus) of the central government will be reduced (increased) by the amount by which disbursements on nonproject grants or debt service relief exceed the amount programmed. The ceiling on the deficit (surplus) of the central government will also be reduced (increased) by the amount of underspending on projects financed by HIPC Initiative resources. The ceiling on the deficit (surplus) of the central government will be increased (reduced) by the amount by which disbursements on budgetary assistance or debt-service relief fall short of the amount programmed.

13. In the context of the program, the deficit of the central government is expected to reach - 22.1 billion at end-September 2003 and CFAF -25.2 billion at end-December 2003. The ceiling is a performance criterion as at end-September 2003, and an indicative target as at end-December 2003.

Reporting deadline

14. Provisional data on the deficit of the central government, including the situation of all other elements of the table of government financial operations (TOFE), will be transmitted on a monthly basis within the four weeks following the end of the month. The definitive data will be provided within an additional four weeks after the provisional data have been reported.

C. Nonaccumulation of External Public Payments Arrears

Definition

15. External payments arrears are defined as the sum of external payments due and not paid on external liabilities of the government and on foreign debt held or guaranteed by the government. The definition of external debt provided in paragraph 3 applies here.

Performance criterion

16. Under the program, the government will not accumulate external payments arrears, with the exception of arrears arising from debt under renegotiation or being rescheduled. The performance criterion on the nonaccumulation of external payments arrears will be monitored on a continuous basis throughout the program period.

D. Ceiling on Nonconcessional External Debt with a Maturity of One-Year or More Newly Contracted or Guaranteed by the Government

Definition

17. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Borrowing (Executive Board Decision No. 6230-(79/140), amended by Executive Board Decision No. 12274-(00/85) (8/24/00), but also to commitments contracted or guaranteed (including lease-purchase agreements) for which no value has yet been received. The definition of external debt excludes bonds issued in the regional market and disbursements under the PRGF arrangement.

18. The concept of "government" for the purposes of this performance criterion includes government as defined in paragraph 2, public institutions of an administrative nature (EPA), public institutions of a scientific and/or technical nature, public institutions of a professional nature, and local governments.

Performance criterion

19. Nonconcessional external borrowing will be zero throughout the 2003 program.

Reporting deadline

20. Information on any borrowing (including terms of loans and creditors) contracted or guaranteed by the government shall be transmitted each month within four weeks following the end of the month.

E. Ceiling on Short-Term External Debt Newly Contracted
or Guaranteed by the Government

Definition

21. The definitions in paragraphs 17 and 18 also apply to this performance criterion.

22. Short-term external debt is debt with a contractual term of less than one year. Import-related loans and debt-relief operations are excluded from this performance criterion.

Performance criterion

23. In the context of the program, the government will not contract, guarantee, or secure short-term nonconcessional external debt.

24. As of June 30, 2003, the government of Benin has no short-term external debt.

III. Indicative Targets

25. The indicative targets for the program comprise quarterly minimum spending targets for health and education. These include both current capital and expenditures, including foreign-financed investments. The floor for health expenditure is on an accumulated basis (since end-December 2002) CFAF 26.7 billion for end-September 2003 and CFAF 35.6 billion for end-December 2003. The floor for education expenditure is on an accumulated basis (since end-December 2002) CFAF 58.7 billion for end-September 2003 and CFAF 78.2 billion for end-December 2003.

26. The indicative targets for the program also contain the civil service wage bill. The wage bill includes all public expenditure on wages, bonuses, and other benefits or allowances granted civil servants employed by the government, the military, and other security forces, and it includes all similar expenditure with respect to special contracts and other permanent or temporary employment with the government. The wage bill excludes, however, wages paid under externally funded projects and transfers to local communities for the payment of salaries of teachers and health personnel.

27. The indicative targets for the wage bill are set at CFAF 76.9 billion at end-September 2003 and CFAF 96.7 billion at end-December 2003 (cumulative since end-December 2002).

28. The government shall report each month's wage bill to IMF staff, in the context of the TOFE, before the end of the following month.

29. The program also includes indicative targets on total government revenues and the primary government expenditure.

30. Government revenues are defined as those that appear in the TOFE.

31. Indicative targets for total government revenues are set at CFAF 253.8 billion at end-September 2003 and CFAF 346.0 billion at end-December 2003 (cumulative since end-December 2002).

32. The government shall report its revenues to IMF staff each month in the context of the TOFE and before the end of the following month.

33. Primary government expenditure is defined as total government expenditure minus interest payments, externally financed investment expenditure, and net lending.

34. The floors for the indicative targets for primary government expenditure are set at CFAF 242.8 billion at end-September 2003 and CFAF 326.5 billion at end-December 2003 (cumulative since end-December 2002).

35. The authorities will report to IMF staff, in the context of the TOFE, monthly data on primary government expenditure. Data for each month will be provided no later than six weeks after the end of that month.

IV. Structural Benchmarks

36. The following three measures will serve as structural benchmarks:

• By September 30, 2003, the government will launch a call for bids to audit the cross debts of public enterprises with the government.
  
  
• By September 30, 2003, the government will integrate external debt service in the computerized expenditure management system (SIGFIP).
  
  
• By September 2003, the government will offer for sale its shares in the Continental Bank.

V. Other Data Requirements for Program Monitoring

A. Public Finance

37. The government will provide to the Fund the following:

• detailed monthly revenue and expenditure estimates, including social expenditures, payments on arrears, and HIPC Initiative-related expenditure;
  
  
• monthly data on domestic financing (bank and nonbank) of the budget (including government bonds held by the nonbank public), which will be transmitted on a monthly basis within four weeks of the end of each month;
  
  
• data on the implementation of the development budget, with detailed information on the sources of financing, which will be transmitted on a quarterly basis within 12 weeks of the end of each quarter; and
  
  
• public sector external and domestic scheduled debt service and payments, and relief obtained under the HIPC Initiative (these data will be transmitted on a monthly basis within four weeks of the end of each month).

B. Monetary Sector

38. The following data will be transmitted on a monthly basis or, as specified below, within eight weeks of the end of the month:

• the consolidated balance sheets of deposit money banks, and the individual bank balance sheet, as needed;
  
  
• the monetary survey;
  
  
• lending and deposit rates; and
  
  
• the standard bank supervision indicators for banks, as well as those for nonbank financial institutions and for individual institutions, as needed.

C. External Sector

39. External sector data requirements are as follows:

• Export and import data, including volumes and prices, will be transmitted on a quarterly basis within 12 weeks of the end of each quarter.
  
  
• Other balance of payments data, including data on services, private transfers, official transfers, and capital account transactions, will be transmitted on a quarterly basis within 12 weeks of the end of each quarter.

D. Real Sector

40. The following requirements will apply to real sector data:

• Monthly disaggregated consumer price indices will be transmitted on a monthly basis within two weeks of the end of each month.
  
  
• Any revisions to the national accounts data will be transmitted within eight weeks of the date of revision.

E. Structural Reforms and Other Data Requirements

41. Documentation of all measures undertaken by the government will be transmitted to the IMF's African Department within ten working days after the day of implementation. Any official studies pertaining to the economy of Benin will be submitted within two weeks of publication.