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

March 28, 2001

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

Dear Mr. Köhler:

1. After a period of relatively satisfactory performance with positive growth rates, the Togolese economy has been hit by a number of shocks that have caused poor performance. Weakened by the 1998 energy crisis, the economy was further affected by the social and political climate associated with the implementation of the democratic process and the suspension of financial support by Togo's main donors and creditors.

2. Since assuming office in October 2000, the new government announced a number of reform measures. At the core of these reforms are policies to restore the soundness of public finances and accelerate reforms in the financial sector, restructure public enterprises, and regularize relations with donors and creditors. Moreover, a consensus on the timing of new legislative elections has now been reached with all political parties, and new legislative elections will be held on October 14 and 28, respectively, for the first and second rounds.

3. The government is committed to the reform effort. The attached memorandum of economic and financial policies describes the macroeconomic objectives and structural measures that the government intends to carry out during the period April-September 2001. In support of these objectives, the government requests that IMF staff monitor and follow up on the execution of its program. To this end, the government will transmit to the IMF staff all the information needed to monitor its progress in implementing its economic and financial policies and the measures required to achieve the program objectives. A review of the SMP is planned to take place in June-July 2001.

4. We are hopeful that these elections will help resolve the present impasse in our relations with donors and thereby lead to the resumption of financial support. We intend to initiate discussions with the Fund as soon as possible on an economic program that could be supported under the Fund's Poverty Reduction and Growth Facility.

Sincerely yours;

/s/
Tankpadja Lalle
Minister of Economy, Finance, and Privatization

 

Attachment: Memorandum of Economic and Financial Policies

TOGO

Memorandum of Economic and Financial Policies

for the Period April to September 2001

I. Economic and Financial Situation in 1998-2000

1. After a period of relatively satisfactory performance, with positive growth rates, moderate inflation, and an improved external and fiscal position, the Togolese economy has been hit by a number of shocks that have caused poor performance. Weakened by the 1998 energy crisis, the economy was further affected by the social and political climate associated with the implementation of the democratic process and the suspension of financial support by Togo's main donors and creditors in 1998. In addition, the decline in tax receipts and the relaxation of fiscal discipline increased pressure on the government's cash flow, resulting in an accumulation of both domestic and foreign payment arrears. The delay in implementing key structural reforms further weakened the financial positions of the public enterprises and the banking system.

2. In 2000, economic activities linked to the Organization of African Unity (OAU) Summit of Heads of State and the acceleration of road-building projects helped limit the contraction of GDP to 0.5 percent. The cotton sector saw its total acreage decline, and many producers quit, demotivated by the price slump and the accumulation of arrears in crop payments and refunds by the state cotton company (SOTOCO). At the same time, the mining and manufacturing industries failed to support growth. In particular, underinvestment by the OTP (phosphates extraction) caused a significant decline in production capacity and a loss of market shares that could jeopardize the sector's recovery. Inflation stayed below 2 percent on average throughout the period.

3. The public finance situation in 1999 and 2000 was characterized by persistent pressure on the government's cash flow because of poor tax collection performance, inadequate expenditure control, and recourse to tax-offsetting measures between the state and several public enterprises. For 2000, the overall deficit on a payment order basis is estimated at 5.3 percent of GDP, as against 2.2 percent in 1999. In line with the low level of revenues and the large amounts of committed expenditure, the net accumulation of domestic payment arrears was CFAF 38 billion (4.3 percent of GDP) in 2000, including two months of wage bill arrears. The net accumulation of external arrears in 2000 is estimated at CFAF 13.8 billion in interest and CFAF 26 billion in principal.

4. In 2000, the money supply rose by 11 percent, a significantly higher rate than nominal GDP growth (1.3 percent). The government's net position improved somewhat. Seasonal crop credit declined significantly because banks' cash positions did not allow them to take an active part in the seasonal crop credit financing.

5. The situation of the banking system is still worrisome. At end-December 2000, banks' outstanding gross nonperforming loans amounted to CFAF 65.9 billion, or 42.0 percent of total credit and 7.4 percent of GDP. Three banks out of the seven account for more than 70 percent of total outstanding nonperforming loans. Lending to public enterprises is largely the cause of the significant deterioration in banks' portfolios in recent years, especially the stock of nonperforming loans to the OTP, which is estimated to be about CFAF 13 billion (or half of the OTP's commitments to the banking system). The risk-weighted capital adequacy ratio for the sector as a whole continued to deteriorate in 2000. At end-December 2000, three banks were in compliance with the liquidity ratio, while no bank achieved the portfolio structure ratio or the prudential ratios of the West African Economic and Monetary Union (WAEMU) Banking Commission.

6. In 2000, the current account deficit (excluding official transfers) deteriorated to 14.1 percent of GDP. This worsening reflects the significant increase in the trade deficit, as the export volume contracted and the terms of trade deteriorated, partly owing to the oil price increase. Despite an increase in project and nonproject loans, a slight downturn in the capital balance surplus to about CFAF 62 billion was estimated, attributable to an increase in foreign public debt-service repayments, combined with a slight decrease in private capital flows. Thus, the overall balance of payments deficit in 2000 widened to CFAF 35 billion, financed by an accumulation of about CFAF 40 billion in external arrears, while net foreign assets rose by CFAF 4.7 billion.

II. Program for April-September 2001

7. To ensure sustainable medium-term economic growth, the government is determined to address the public finance situation and to accelerate the implementation of key structural reforms. The program objective is to regain control over the budget execution by limiting spending to available cash resources, in order to avoid any accumulation of new domestic arrears and arrears on nonreschedulable external debt during the program period. At the same time, the government will accelerate the implementation of structural reforms in the financial sector and continue the restructuring of public enterprises. The government intends to use the staff-monitored program (SMP) to establish a track record of policy implementation that, if successful, and once the requisite financing is in place, could facilitate the negotiation of a program that could be supported under the Poverty Reduction and Growth Facility.

8. Despite the uncertainty about the resumption of normal relations with donors and lenders, economic activity is expected to pick up in 2001, with real GDP growth projected to increase by 3.6 percent. Inflation should remain moderate and stabilize at under 3 percent. The budget deficit, excluding grants (but including the onetime cost of elections), is projected at 5.1 percent of GDP in 2001. The SMP takes into account available financing and ensures that, aside from reschedulable bilateral debt, no new arrears will be accumulated. However, for the year as a whole, a financing gap of CFAF 99.7 billion (about US$142 million) will remain to be closed. This gap could be covered by a further accumulation of reschedulable debt to bilateral creditors, a postponement of the reimbursement of Central Bank of West African States (BCEAO) advances, and expected additional financing from multilateral and bilateral donors, if financial relations are restored following the successful holding of the October 2001 elections.

A. Public Finance

9. In the absence of foreign financial assistance, the consolidation of the public finances is central to any effort to revive the Togolese economy. Such a strategy means stopping the practice of ad hoc advances from public enterprises or any other Togolese institutions and reverting to rigorous and transparent management of public expenditure. In this context, the government has undertaken to stop using these exceptional procedures and to require public enterprises to comply fully with their tax obligations. Accordingly, and based on an exhaustive inventory of cross-debts between the state, public enterprises, and the social security fund (CNSS) through end-2000, the government and the agencies concerned will coordinate a strategy for settling the balance by end-March 2001 at the latest. This measure should take the pressure off the enterprises' balance sheets and set relations between the public enterprises and the treasury on a sound footing.

10. Regarding budgetary revenues, the government intends to take steps to increase excise taxes on a number of consumer products (tobacco products, alcoholic beverages, and cosmetic products). To deter smuggling, excise taxes have been levied at the customs level since January 2001, following the recommendations of the WAEMU. The combination of the increase in tax rate and improved collection procedures should bring in CFAF 1.4 billion over a full year. The authorities will also enforce the recommendations of a recent technical assistance report by the Fiscal Affairs Department of the IMF (February 2000), which suggests measures to reinforce the management of the large-taxpayer unit and measures to broaden the tax base (see box). Overall, total revenue could be increased by 9.1 percent in 2001 to reach CFAF 125.8 billion, or 14.4 percent of GDP.

11. Total budgetary spending is expected to rise by 3.7 percent to CFAF 173.1 billion. However, as a percentage of GDP, it should be about 18.6 percent of GDP. Given the large share of personnel expenditure in overall spending, the government decided in 1998 to freeze hiring and the financial impact of normal promotions. However, a decision needs to be adopted detailing the arrangements regarding the latter measure, in order to avoid any implicit buildup of wage arrears. In a context of fiscal retrenchment, curtailing personnel costs is central to controlling overall spending. With this in mind, the government has decided to maintain the freeze on hiring in all sectors, to leave all retirees' positions unfilled, except in the health and education sectors, and to avoid increasing personnel benefits. Nonwage current spending should also be controlled at all levels of the administration (including sovereignty expenditure), so as to be able to allocate resources to priority social spending, particularly in health and education.

Togo: Fiscal Measures to be Implemented in 2001


Strategy/Measures

Timetable/Deadline


The authorities will take the following actions in 2001:

Strengthening tax revenues and tax administration

 
  • Raise excise tax rates from 10 percent to 16 percent on alcoholic
    beverages, from 12 percent to 15 percent on tobacco products,
    and from 5 percent to 15 percent on cosmetics and perfumery.

March 2001

  • Conclude a negotiated arrangement on cross debts between the state
    and public enterprises.

March 2001

  • Ensure daily deposit of Tax Department (DGI) and Customs
    Department (DGD) receipts to the treasury account to the BCEAO.

Immediate

  • Rescind all exemptions granted in the context of OAU summit in cases where the work was not completed.

May 2001

  • Establish special audit team from the large taxpayers unit (IGE) and
    assign all cases of enterprises with turnover exceeding CFAF 
    30 million to the IGE.

April-September 2001

Strengthening public expenditure management

 
  • Produce a consolidated account for fiscal year 2000covering all
    government financial operations, including operations connected
    with the OAU summit.

Prior action

  • Take comprehensive inventory of advances by public enterprises to the government and the taxes due from these enterprises to the government. Negotiate settlement on this debt. Implementation of this agreement will
    be monitored under the program.

Prior action

  • Prepare a rolling cash-flow plan under the sole responsibility of the
    minister in charge of finance.

Immediate

  • Release appropriation authorizations in line with revenue identified
    in the cash-flow plan.

March-September 2001

  • Implement the recommendations made by the BCEAO in 2000 on reform
    of the treasury.

March-September 2001

  • Adopt a plan of action to make the audit office operational, so as to respond to the need for external auditing and to WAEMU directives.

By end-June 2001

  • Specify the provisions of the freeze on the financial implications of promotions.

April 2001

  • Establish an information technology (IT) committee as recommended
    by IMF mission.

April 2001

12. The 2001 budget will give priority to resources earmarked for the education and health sectors and to other poverty-reducing spending. In this context, efforts will be made to ensure that budget allocations for these sectors are protected from any across-the-board cuts, so as to maintain adequate levels of intervention. The government intends to approach its development partners, with a view to obtaining additional financial support for these sectors. The government will continue its work on preparing an interim PRSP (poverty reduction strategy paper), which will be necessary for any support under the PRGF.

13. Because of the severe budgetary constraints, the government intends to strengthen public investment planning and programming by strengthening coordination between investment spending and the other budget outlays, so as to improve the timing of the release of counterpart funds. To do this, the government intends to strengthen consultation procedures and normalize its relations with donors and lenders, so as to facilitate project disbursements in 2001. Investment expenditure will rise by only 6 percent in 2001, as against an initially estimated increase of 45 percent in the government budget. Counterpart funds for the year are estimated to amount to CFAF 2.1 billion.

14. The Togolese authorities will continue to seek the necessary external financing in the form of grants or loans on very favorable terms and will give a high priority to improving relations with financial partners, especially the World Bank. To facilitate discussions with its main donors and lenders, it will further strengthen external debt management, which has just been transferred to the Ministry of Finance, and it will produce a detailed inventory of the overall external debt situation, including payment arrears.

15. A treasury cash-flow plan will be put in place to improve fiscal management and ensure that monthly expenditure is limited to revenue collected to avoid any build up of arrears. Significant progress has been made in improving the efficiency of this tool with the strengthening of the Steering Committee which is in charge of the treasury cash-flow plan. During 2001, this committee will ensure that spending is executed in compliance with the cash-flow plan. To help monitor the execution of the treasury cash-flow plan, the authorities will transmit to the IMF monthly progress reports on the execution of the cash-flow plan, at the latest within two weeks after the end of the month concerned.

16. As part of the cash-flow management process, it is essential to put in place strict procedures for monitoring the state's monthly treasury cash flow. Efforts under way to improve the operations of the treasury should continue, so that reliable fiscal accounts can once again be produced. Also, the measures recommended by the IMF technical assistance mission must be implemented, including the daily transfer of tax receipts to the BCEAO treasury accounts, the freezing of correspondent accounts with the treasury, and the curtailment of exceptional budgetary procedures. Some of these measures are detailed in the box above. Finally, the release of budget appropriations must be made in line with the cash-flow plan, in order to eliminate a major source of the creation of arrears.

B. Structural Reforms

17. The government is determined to continue the liberalization of the economy by encouraging private sector activity and accelerating the implementation of the privatization program, supported by technical and financial assistance from the World Bank (PAREP). The privatization of the banking sector and of the OTP is the cornerstone of the program.

18. With regard to the banking system, pending receipt of the consultant's final report, the government has entrusted the Ministry of Finance with the task of concluding the privatization of three banks (the BTD, the UTB, and the BTCI). Bidding procedures will begin in April 2001, and the privatization process could be completed in the following months. The collection agency that will take over the nonperforming loans of the banks being privatized will be created by end-June 2001. The 2001 budget does not include the financial cost of restructuring and privatizing the banks. When these costs have been calculated, the authorities will have to include them in the budget and state what resources will be implemented to provide the financing. For the Société National d'Investissement (SNI), discussions are under way to find a buyer, and the decision to privatize may also be reached in the coming months.

19. The OTP's financial situation does not allow it to undertake the investment necessary to maintain production capacity, which has led to a steady decline in production since 1997. In January 2000, the government entrusted an international financial corporation with the task of identifying a strategic investor. Based on advice from this corporation, the government adopted a privatization strategy by which the OTP would be privatized after an interim period of 40 months. Many aspects of this strategy still need to be clarified, and the government will provide the World Bank with all the technical and financial information needed to assess this strategy.

20. With regard to the privatization of the other public enterprises, some significant progress was made in 2000, but delays have occurred in several major cases. The decree authorizing the privatization of the management of the electricity company (CEET) was adopted by the Council of Ministers in August 2000, and the successful bidder began operating the company on December 1, 2000. The privatization of Togo Télécom is well under way, and contract negotiations with the successful consortium in charge of advising the government on this operation are expected to start shortly. The regulatory authority for telecommunications has been established. Regarding the postal services, the preparatory work on the privatization process has been completed. In view of the strategic importance of cotton among the cash crops, SOTOCO's recent problems in keeping up with its commitments to producers and the latters' subsequent loss of motivation have made it necessary to activate the ad hoc technical committee in charge of studying the strategy to liberalize the cotton sector. Other cases (the Autonomous Port of Lomé, hotels, and railways) have met with major delays, and the government, having undertaken a case-by-case evaluation with the World Bank, has agreed on an action plan to process and ensure that these privatization operations can be under way efficiently and transparently.

21. The government is aware that the success of this program will be critical for reviving cooperation with the international financial community. It therefore undertakes to implement the measures described in this memorandum.

22. To help monitor performance under the program, the government has established monthly performance indicators for the period from April to September and indicative targets for the rest of the year for (i) revenue and domestically financed expenditure; (ii) nonconcessional external debt; and (iii) the nonaccumulation of domestic and external arrears with multilateral creditors, as specified in Table 1. Also, the government established structural benchmarks with respect to financial sector reforms, the OTP, and fiscal and structural reforms. The government undertakes to provide the IMF staff at the end of each month the cash-flow tables, detailed tables of commitments and payment orders in the form of a state flow-of-funds table drawn up by the Directorate of the Economy, the monetary survey, a statement of revenue payments by type of tax, and all of the customary data on economic and financial developments. A review of the SMP is planned in June-July 2001. This review will examine progress in improving the management of the budget situation and in accelerating the key structural aspects of this program.

Table 1. Togo: Quantitative and Structural Benchmarks Under the Staff-Monitored Program
April-September 2001


 

2001


 

Estimates

Projections

Program

Indicative





 

End-
Jan.

End-
Feb.

End-
Mar.
End-
Apr.
End-
May
End-
June
End-
July
End-
Aug.
End-
Sept.
End-
Oct.
End-
Nov.
End-
Dec.

 

(In billions of CFA francs)

I- Quantitative Benchmarks

Total government revenue

8.5

9.2

8.8

9.8

10.5

9.8

13.2

11.9

11.4

11.3

10.9

10.6

                         

Ceiling on expenditures domestically
financed 1, 2

8.5

9.2

8.1

9.4

10.1

9.4

12.8

11.5

11.0

15.6

16.5

18.4

                         

Nonaccumulation of new domestic arrears

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

                         

No new external arrears to multilateral
creditors

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

                         

Phased reduction of arrears to multilateral
creditors 3

0.0

0.0

0.7

0.4

0.4

0.4

0.4

0.4

0.4

0.4

3.5

3.8

                         

Nonconcessional debt contracted or
guaranteed
by the central government

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

                         
Net central bank credit to the government
(stock) 4

22.6

22.6

22.8

22.8

22.8

23.3

23.3

23.3

23.3

23.3

23.3

23.3


II- Structural Benchmarks

OTP

         

  -Provide to the World Bank all information
   on the privatization strategy for evaluation

Apr.

   
Banking sector      

   -Adoption of the privatization strategy for
    UTB, BTCI and BTD by the Council of
   Ministers, including treatment of the OTP claim

Apr.

   

BTD

         

   -Begin consultation with interested buyers

Feb.

     

   -Finalize agreement with selected buyers

     

June

BTCI

         

   -Begin consultation with interested buyers

Feb.

     

   -Finalize agreement with selected buyers

     

June

UTB

         

   -Finalize privatization documents

     

May

 

   -Launch call for bids

       

June

SNI

         

   -Begin consultation and negotiation with
    interested buyers

 

Apr.

   

   -Reach agreement with potential buyers

     

June


1 Excluded expenditures related to the legislative elections and capital spending externally financed.
2 These ceilings represent the maximum of monthly expenditures. The actual expenditures level will be adjusted in line with the amount of revenue collected each month.
3 Includes interest and amortization. Total arrears to multilateral creditors is estimated at CFAF 11.3 billion at end-December 2000.
4 The stock of commercial bank net credit to the government should remain constant or decrease at the best.

    TOGO

    Technical Memorandum of Understanding

This memorandum sets out the understanding between the Togolese authorities and the IMF regarding the definition of the quantitative and structural benchmarks under the staff-monitored program (SMP) and the reporting system of monetary and financial data.

I. Quantitative benchmarks (Table 1 of the Memorandum of Economic and Financial Policies (MEFP))

A. Net Bank Credit to the Government

1. Net bank credit to the government is defined as the overall position of the main central government institutions vis-à-vis the banking system. Table 1 of the MEFP shows the ceilings on the net credit to the government for the period from end-April to end-September 2001 and indicative target for the rest of the year. Detailed data on net credit to the government will be transmitted on a monthly basis within six weeks of the end of each month.

B. Nonaccumulation of New Domestic Payment Arrears

2. As part of the program, the government will not accumulate any new domestic payment arrears. This will be monitored through the monthly execution of the cash-flow plan and the corresponding release of budget appropriation.

C. Phased Reduction of Arrears to Multilateral Institutions

3. Defined to include all nonreschedulable debt contracted by the public sector (defined to include the central government, publicly-owned public enterprises, and/or agency acting on behalf of the government) with multilateral institutions. Detailed settlement of arrears to multilateral institutions will be transmitted on a monthly basis within four weeks of the end of each month.

D. Nonconcessional External Borrowing Contracted or Guaranteed by the Central Government (Excluding Borrowing from the Fund)

4. Nonconcessional external borrowing (including lease-purchase agreements) is defined as loans with a grant element of less than 35 percent, calculated using currency-specific commercial interest reference rates. Debt rescheduling and debt reorganization are excluded from the limits on nonconcessional external borrowing. Nonconcessional external borrowing will be zero throughout 2001. Details of all new external borrowing, including central government guarantees indicating terms of loans and creditors, will be provided on a monthly basis within four weeks of the end of each month.

II. Other Data Requirements for Program Monitoring

  • Detailed report on the execution of the monthly cash-flow plan.
  • Detailed tables of commitments and payment orders.
  • Detailed data on revenues collected and deposited by the various tax-collecting agencies.
  • Detailed data on public enterprises transfer of taxes collected on behalf of the treasury.
  • Monthly data on domestic bank financing of the budget to 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.
  • Public sector external debt-service payments to multilateral institutions.
  • Information on the status of all structural reform measures undertaken by the government will be transmitted to the IMF's African Department within ten working days after the day of implementation.

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