Benin and the IMF

News Brief: IMF Completes Benin's Third Review Under the PRGF

Country's Policy Intentions Documents

Free Email Notification

Receive emails when we post new items of interest to you.

Subscribe or Modify your profile



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

Cotonou, June 27, 2002

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
Washington, D.C. 20431

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 for 2002. This memorandum describes the progress made during the first half of the second year 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 2002. The attached technical memorandum of understanding also specifies the definitions of benchmarks and criteria presented in Tables 1 and 2 of Appendix I and the reporting requirements.

2. As indicated in paragraph 4 of the memorandum, all the quantitative performance criteria for the period July-December 2001 were observed.

3. The government is convinced that the policies and measures set forth in the memorandum on economic and financial policies are adequate to achieve the objectives of its program. The government will provide the International Monetary Fund with information that it may request for purposes of monitoring progress in implementing its economic and financial policies.

4. The government proposes that the fifth loan under the arrangement, in an amount equivalent to SDR 4.04 million, be conditioned on the observance of end-September 2002 performance criteria (Table 2) and completion of the fourth review under the arrangement, which is expected by mid-December 2002. The fourth review will assess economic and financial developments from January to September 2002, the outlook for the remainder of 2002 and 2003, and the implementation of the poverty reduction strategy. The sixth and seventh loans, in amounts equivalent to SDR 2.69 million and SDR 1.35 million, would be conditioned on completion of the fifth and sixth reviews and on observance of end-March and end-September 2003 performance criteria; these performance criteria will be set in the context of the fourth and fifth reviews, respectively. The government requests an extension of the PRGF arrangement to March 31, 2004, in order to allow disbursement of the seventh and final loan under the arrangement.

5. The government of Benin requests an additional interim assistance of SDR 3.66 million under the HIPC Initiative to cover debt-service payments to the Fund falling due from the date of approval to June 30, 2003 on the basis of Benin's observance of all performance criteria for the fourth loan and all of the conditions for the second and the third reviews. In the meantime, it is taking steps to meet the completion point triggers before the end of 2002. As was the case in the past, the government consents to the Fund's publication of this letter, the memorandum of economic and financial policies for 2002, the technical memorandum of understanding, and the staff report for the 2002 Article IV consultation and the third review under the PRGF.

Sincerely yours,

/s/


GREGOIRE LAOUROU
Minister of Finance and Economy


BENIN

Memorandum on Economic and Financial Policies for 2002

June 27, 2002

I. Introduction

1. Discussions in the context of the arrangement under the Poverty Reduction and Growth Facility (PRGF) were held in Cotonou on March 11-22, 2002 and in Washington on April 22-25, 2002 between the government of Benin and a Fund mission, covering the third review of the medium-term program and the Article IV consultation. The discussions covered progress made in program implementation since July 2001, and the outlook and measures planned for the remainder of 2002, including key elements of the 2002 budget. The government of Benin reaffirms its commitment to implement all the policies presented in the present document, which supplements the memorandum on economic and financial policies prepared in October 2001.

II. Program Implementation, July to December 2001

2. The program for 2001 was prepared in the context of the medium-term strategy for 2001-04, which aims at achieving sustainable economic growth, reducing poverty, and maintaining financial viability by strengthening macroeconomic policies over the medium term and liberalizing the economy.

3. At the end of 2001, the economic situation was broadly in line with the program targets agreed during the second review in July-August 2001. Real GDP grew by an estimated 5.0 percent, a slightly lower rate than the target of 5.8 percent, mainly because lower-than-expected food production in certain regions of the country was only partly compensated for by the strong growth in the industrial, services, construction, and public works sectors. Inflation was contained at 4.0 percent, despite the midyear price increase of certain foodstuffs. The current account deficit, including current transfers, was equivalent to 6.7 percent of GDP in 2001, as projected in the program, largely because of the improvement in the terms of trade owing to the fall in the price of petroleum products. The worldwide recession and the fall in world cotton prices had no substantial effect on the current account balance since most of the export sales contracts for the 2000/01 cotton crop had been negotiated in mid-2001. The overall balance of payments was, however, in surplus, partly because the continued high level of disbursement of project and program loans enabled Benin to contribute CFAF 112 billion to the international reserves of the Central Bank of West African States (BCEAO).

4. All the quantitative performance criteria for the period July-December 2001 were met. Net bank credit to the government amounted to CFAF -60.1 billion, compared with an adjusted target of CFAF -50.8 billion.

5. Three of the four structural benchmarks were met:

  • The government submitted the amendments to the law on the new compensation system to a vote by the National Assembly; these amendments were, however, not examined by the National Assembly.

  • An inventory of civil servants' outstanding claims was finalized, and its results were discussed with the Fund mission.

  • The government reconciled the end-2000 account balances of the treasury and the budget directorates and the agencies included in the government's financial operations.

The structural benchmark that was not met was the one related to an agreement with the Fund staff on an action plan to privatize the remaining state-controlled bank.

A. Government Finance and Fiscal Reforms

6. The overall government finance program objectives were broadly met. In 2001, the overall fiscal balance, on a payment order basis and excluding grants, recorded a deficit equivalent to 4.2 percent of GDP, as programmed. Total revenue reached 16.2 percent of GDP, as against a target of 16.5 percent, owing primarily to a poorer-than-expected customs performance. Revenue performance from direct and indirect taxes and from nontax receipts was close to the level set in the program. The level of total expenditure remained within the program limits. In particular, the wage bill was kept below the program target of 4.6 percent of GDP. Finally, outlay targets for education and health were reached at 97 percent and 96 percent, respectively.

7. Despite the difficulties encountered in implementing a new computerized expenditure management system (SIGFIP), most of the expenditures financed from domestic resources were processed by SIGFIP. However, some difficulties persisted in reconciling the operations of the treasury and the budget departments in 2001, leading to the continued use of procedures for cash advances. However, the operations were reconciled and the balances of the cash advance accounts (comptes des régisseurs) were transferred to the treasury at year's end. The government continued to implement a series of actions recommended by an IMF Fiscal Affairs Department mission that aimed to make SIGFIP more operational overall. In particular, the government strengthened user training and made increased use of technical assistance to operate the system. In addition a computerized connection was established between the treasury computer system and SIGFIP.

B. Money and Credit Developments

8. Broad money expanded by 12.7 percent in 2001. This expansion resulted from a strong increase in the net foreign assets, mainly deriving from the continued repatriation of export receipts and from the conversion into domestic currency of French franc cash balances prior to the transition to the euro. Net domestic assets declined primarily because the government's net position strengthened, while credit to the private sector stagnated.

9. The financial health of the banking system improved overall in 2001. The situation of the two banks placed under temporary receivership and that of a third bank under close supervision improved somewhat. The new prudential ratios came into effect on January 1, 2002. In particular, the capital adequacy ratio was raised to a minimum of 8 percent, a criterion that is met by only three of the six banks, one of which started up in September 2001.

10. Of the three nonbank financial institutions, only one presented an acceptable statement of accounts to the banking commission. The government withdrew its approval from the other two institutions. In the microfinance sector, the implementation of the recovery and transformation plan of FECECAM, the country's largest microfinance bank, continued, producing encouraging results.

C. Structural Reforms

11. Significant progress was made in 2001 in cotton sector reforms. The responsibility for the marketing and collection of seed cotton and of the settlement of loans was transferred from the state cotton enterprise, SONAPRA (Société Nationale pour la Promotion Agricole), to the autonomous agency CSPR (Centrale de Sécurisation des Paiements et du Recouvrement), which comprises ginning enterprises, input distributors, and producers. Payments arrears of SONAPRA and of a private ginning mill to the CSPR caused delays in paying the cotton producers; however, SONAPRA settled its payment, and CSPR engaged in legal proceedings to obtain the payment it was owed by the private company. Moreover, in order to avoid a recurrence of payment problems during the 2001/02 crop year, CSPR required all ginning enterprises to comply with the system of advance deposits, equivalent to 40 percent of the value of the seed cotton allocation, and excluded debtor companies from seed cotton allocation.

12. The 2001/02 harvest started at a time of sharp decline in world cotton prices, and, therefore the producer price established between the sector participants at the end of the previous harvest failed to reflect the change in world prices. In this context, cotton sector participants (ginning enterprises, producers, input importers, etc.) and the government agreed to share the resulting loss and to maintain the producer price at CFAF 200 per kilogram. The government also decided to take over the producers' share. To fund the corresponding total subsidy, the government sought external financing and obtained, in principle, an agreement from the World Bank for partial financing of this subsidy.

13. With regard to the divestiture program, several reforms have been undertaken, albeit at differing speeds. For the telecommunications company (OPT), the government established through the ordinance of January 31, 2002 a legal framework enabling the separation of the two branches, the post office and telecommunications, and the establishment of the regulatory body. Moreover, a National Forum on Water and Electricity was organized in June 2001, following which a scheme for separating water and electricity activities was accepted, and the government set up a strategy for opening the electricity branch of the water and electricity distribution company (SBEE) to the private sector in the form of a management contract. With regard to the Autonomous Port of Cotonou (PAC), a study setting out the way to involve the private sector in the management of the port has been finalized.

14. The implementation of the devolution policy also suffered delays following the further postponement of the local elections to December 2002.

15. In the context of its ongoing action program to promote good governance, the government finalized a national strategic plan for combating corruption after consultation with the civil society at a seminar in October 2001. This plan is now the foundation for the anticorruption strategy in Benin. It is based on the authorities' political determination to fight corruption through the following strategies: (i) accelerating administrative and institutional reforms; (ii) establishing an efficient legal framework for fighting corruption; (iii) pursuing fiscal consolidation; (iv) promoting the rule of law and strengthening the role of the civil society; and (v) enforcing a code of ethics for civil servants and improving their incomes.

16. The government continues to participate actively in the initiatives aiming to strengthen regional integration within the West African Economic and Monetary Union (WAEMU) and the Economic Community of West African States (ECOWAS). At end-2001, Benin observed all the core criteria for macroeconomic convergence, except for the one on inflation, as the union target of 3 percent was exceeded very slightly.

III. Medium-Term Framework

17. The medium-term macroeconomic framework for 2002-04, as reflected in the memorandum of October 5, 2001, has been changed to take into account recent developments in the national and international economic environment. The growth target for 2002 has been revised downward from 6 percent to 5.3 percent, owing to the fall in the world price of cotton, which has, however, been offset by a record production of seed cotton and a lower-than-expected growth outlook in Nigeria. The projected growth rate has also been revised from 6.6 percent to 6.0 percent for 2003 and from 7.0 percent to 6.5 percent for 2004. The inflation targets remain close to the WAEMU convergence criterion (3.3 percent in 2002 and 3.0 percent in 2003 and 2004). The projected level of the external current account deficit has been revised upward from 7.0 percent to 8.3 percent of GDP in 2002 because of the deterioration in the terms of trade caused by the drop in the price of cotton on the world markets and the expected weakness in private sector capital transfers. The external current account deficits for 2003 and 2004 are projected to reach 7.1 percent and 6.3 percent of GDP, respectively. Nevertheless, Benin will continue to contribute positively to the BCEAO's net external reserves. In order to achieve these targets, the government intends to maintain fiscal and monetary policies aiming at financial stability. In this context, the overall deficit target (on a payment order basis and excluding grants) will decrease from 5.2 percent of GDP in 2002 to 4.6 percent in 2003, and to 4.4 percent in 2004.

18. The government is finalizing a poverty reduction strategy paper (PRSP), which will cover the period 2002-04, in broad consultation with various social groups in the country. This document will provide a diagnosis of poverty in Benin and will present national priorities and the main focal points of strategy for the 2002-04 period. The paper will also outline the medium-term macroeconomic framework for the strategy, as well as the medium-term expenditure framework (MTEF), prepared with the assistance of the World Bank. Finally the PRSP will establish the mechanism for monitoring and evaluating the strategy during its implementation. The government intends to modify the current macroeconomic framework once the PRSP has been finalized and the financing required to cover any new expenditures has been identified.

IV. Policies and Measures Planned for 2002

19. The year 2002 began in an international environment of weak world cotton prices. The situation has been further complicated, as the prolonged civil service strikes led the government to reach an agreement with the trade unions on a greater-than-expected increase in salaries and on commitments to pay wage arrears, for which an inventory had been made at end-2001. Moreover, the government has had to reexamine the timetable of structural reforms.

A. Fiscal Policy and Budget Reform

20. The financial program for 2002 set forth in the previous memorandum (October 5, 2001) was revised to take into account the fall in customs revenue collected in 2001 and the additional expenditure resulting from the government's major decisions regarding salary increases and exceptional price subsidies for cotton producers. In this context, the government has taken the corrective measures necessary to ensure a return to the initial program targets. The government intends to contain the fiscal deficit, on a payment order basis and excluding grants, at 5.2 percent of GDP. The revenue target has been revised to 16.6 percent of GDP, or 0.4 percent of GDP higher than the 2001 outturn. To achieve this target, the government has decided to intensify the strengthening of the tax and customs administration in order to broaden the tax base. Moreover, it intends to limit budget appropriations for nonpriority expenditures on goods and services and current transfers, while maintaining as far as possible the budget allocated to expenditure for poverty reduction. Thus, primary expenditures will be capped at a level of CFAF 298.7 billion, or 16 percent of GDP, including a subsidy for the cotton sector of CFAF 18.0 billion. The 2002 program will also limit the wage bill to 4.8 percent of GDP and provide for a domestically financed investment outlay of 3.2 percent of GDP. The government has endorsed these decisions for expenditure reduction and notified the concerned ministries. Investment outlays include the purchase of an airplane for the presidency, an issue that has been discussed with Fund staff since 1998. The government will consult with the Fund staff before finalizing any transaction and will finance the purchase only from external resources that meet the concessionality conditions agreed in the program (loans with a grant element of at least 35 percent) and from appropriations already included in the Finance Law. The government also intends to pay CFAF 3.3 billion in wage arrears, which will be financed by a part of the allocations provided under the restructuring funds.

21. With regard to public finance management, the government plans to implement a package of measures to improve revenue collection and to avoid the problems encountered in 2001. It also intends to continue its efforts to strengthen the tax and customs administration. Furthermore, the government has drawn up an action plan to improve the performance of customs, relying particularly on the measures agreed with the preshipment inspection company. In particular, the government plans to (i) pursue the strengthening of the tax unit in charge of large enterprises; (ii) complete the computerization plan at the customs department and the computer link between the tax and customs departments; (iii) reduce customs fraud by strengthening the compulsory system for preshipment inspection and customs declaration, and strictly enforcing legal sanctions; (iv) intensify the monitoring of the valuation procedures at customs; and (v) intensify the monitoring of tax exemptions. In this context, the government has requested technical assistance from Fund staff. Moreover, the government will adopt, by the end of August 2002, an action plan to recover customs duty arrears amounting to CFAF 2.1 billion owed by the company distributing petroleum products, SONACOP, as well as CFAF 1.2 billion in dividends owed to the state for the first six months of 1999, prior to the privatization of SONACOP.

22. As regards expenditure, the social pressures felt since the beginning of the year have led the government to make payments of wage increase to the level corresponding to the grades that civil servants reached in 2000, in addition to paying the wage increases resulting from the application of grades reached in 1998. In this context, the government, in consultation with Fund staff, has reviewed its assessment of the wage bill and recruitment for the period of 2002-04 and reconfirmed its intention to pursue its effort to implement the civil service reform. This program limits the wage bill in 2003 and 2004 to 4.8 and 4.6 percent of GDP, respectively.

23. With regard to expenditure management, the government, with the assistance of the World Bank in the context of the public expenditure reform adjustment credit (PERAC), intends to reinforce measures taken in recent years to improve expenditure execution. In this context, the government intends before end-October 2002 to finalize and reconcile the account balances of the treasury and the budget departments for fiscal-year 2001. Moreover, in 2002, the government will ensure that budget procedures are strictly observed, so as to limit the proportion of expenditure that does not follow the regular commitment and payment order procedures. In this regard, the government intends to complete an assessment of the system of cash advance accounts (comptes de régisseurs) in consultation with Fund staff before the end of September 2002, with a view to significantly reducing their number by January 1, 2003. In addition, the remaining balance of those cash advance accounts as at the end of December 2002 will be compulsorily transferred back to the treasury, and expenditure already committed will be cancelled. Moreover, during 2002, the government will implement measures aiming to (i) deepen the budget reforms; (ii) make SIGFIP fully effective, with a view to channeling all expenditures through this system, including external debt and foreign-financed investment outlays; (iii) strengthen the financial and physical controls of investment outlays; and (iv) make more systematic use of autonomous agencies to execute such outlays. The government will also pursue its ongoing efforts to prepare economic and functional classifications of government expenditure. The steady expansion of the program budget approach will also facilitate the distinction between current and capital expenditures.

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

24. Monetary policy, which is conducted at the regional level by the BCEAO, will aim at achieving the objectives of preserving the exchange rate arrangement under the currency union and maintaining an adequate level of foreign exchange reserves. The government intends to support the efforts of the regional banking commission to improve the health of the Beninese financial system, so that it can play an active role in the process of development. In this context, it will ensure the implementation of the banking commission recommendations to improve the financial viability of the remaining state-controlled bank, and it will submit to the banking commission before end-July 2002 a recovery plan for the bank, with a timetable for selling the government's shares. In addition, it will encourage all the financial institutions to observe the current banking regulations and prudential ratios, especially those related to capital adequacy.

C. Other Structural Reforms

25. The government will pursue the reform of the cotton sector. This reform is supported by the World Bank in the context of the Cotton Sector Reform Project. This project aims at developing a strategy for increasing the efficiency of the sector and the income of producers. In 2002, as part of its poverty reduction strategy, the government will undertake an analysis of the impact of past and future reforms of the cotton sector on poverty.

26. The government has granted cotton producers a price subsidy for the 2001/02 crop year. Government financial intervention is, nevertheless, exceptional and does not call into question the free determination by the private sector alone of seed cotton prices. Based on current world prices, the government does not intend to grant a producer price subsidy in the course of the next crop year (2002/03). In the event of major changes to world prices, the government will consult with Fund and World Bank staff to discuss the actions that it would consider necessary to take. In addition, a price-setting mechanism that reflects the trend of world prices will be established before end-September 2002. The government will, by conducting an exhaustive verification of the financial terms of cotton fiber sales, make certain that the producer price subsidy paid in 2001/02 does not create a windfall profit for the ginning mills. A mechanism for reimbursement will be established if gains are made on the sales at a price in excess of the reference price.

27. With regard to the privatization of SONAPRA, the privatization strategy timetable that was to be drawn up before December 2001 has been delayed. The government adopted in May 2002 a strategy for privatizing separately each ginning mill; bidding will be launched at the latest by the end of July 2002, and the choice of the new owners made by November 2002 at the latest. The entire proceeds of the privatization will be transferred to the treasury.

28. The liberalization of cement imports and prices will be made effective by August 1, 2002, after the finalization of appropriate procedures by a regulatory body. With regard to the electricity sector, the government will take the necessary steps to ensure the financial viability of the SBEE. In particular, the government decided to raise electricity prices by CFAF 14 per kilowatt-hours, with effect from June 1, 2002, to pass through the price increase effected in April 2002 by its supplier, the Communauté Electrique du Bénin (CEB), from CFAF 38 to CFAF 52 per kilowatt-hours. In addition, a plan to restore the enterprise's financial viability will be adopted by end-September 2002, and an audit of its accounts will be completed by December 2002.

29. The authorities intend to accelerate the pace of the public sector divestiture program. The bidding for the telecommunications company will be launched at the latest by end-April 2003, and the government will choose the winning bidder by July 2003 at the latest. Concerning electricity, the government intends to establish a regulatory body in November 2002, to proceed with the launch of the bidding for the management contract by the end of March 2003, and to choose the new owner in May 2003 at the latest. For the PAC, the government has received the conclusions of the study that will help it to choose an option for the participation of the private sector in the management of the port by the end of August 2002 at the latest. It intends to launch a bidding for a feasibility study for the implementation of the option that will have been selected. The private sector will become involved in the management of the port in December 2003 at the latest, following the launch of the bidding during the second quarter of 2003.

30. The government reiterates its desire to implement the reform of the civil service as soon as possible; to this end, it has called on the National Assembly to vote quickly on the amendment of the law on the compensation system. Moreover, the payroll unit of the Ministry of Finance will operate using the merged database maintained at the Ministry in Charge of the Civil Service, starting in July 2002. In parallel, the government has decided to implement from January 2003 onward a policy of recruitment based on fixed-term contracts to replace civil servants entering retirement.

31. The Civil Service Pension Fund (FNRB) has a structural financial deficit, which is currently covered by budget subsidy, that amounts to CFAF 9.6 billion in 2002. The government will establish a database of retired personnel in September 2002 and will carry out an actuarial study of the fund, which will have to be completed before end-January 2003. This study will help the government to formulate a strategy by end-April 2003 to eliminate the FNRB's financial deficit and to ensure its viability over the medium term.

32. With regard to governance, the government intends to implement effectively the national strategic plan for combating corruption, notably by strengthening the institutions set up for this effect. Concerning the case of SONACOP, in addition to the collection of customs duties and dividends in arrears (see para. 21), the government will pursue the legal actions taken to protect the state's interests.

V. Monitoring of the Program and Performance Criteria and Benchmarks

33. To ensure a successful implementation of the program, the government has already taken the following measures as prior actions for approval of the arrangement: (i) finalization of an action plan to strengthen customs administration; (ii) a decision by the Council of Ministers to limit budget appropriations in accordance with the TOFE (tableau des opérations financières de l'Etat) for 2002 agreed with Fund staff, and a notification of the corresponding cuts in budgetary allocations to the relevant ministries; (iii) an increase in the electricity tariff by the SBEE; and (iv) a notification to Fund staff that, based on current world prices, the government does not intend to grant a producer price subsidy during the 2002/03 crop year.

34. Program monitoring will be carried out on the basis of the technical memorandum of understanding accompanying this memorandum (Appendix I, Annex II), and of the quarterly quantitative criteria and benchmarks, indicators, and structural benchmarks established for the period March 1, 2002-June 30, 2003 (tables 1 and 2), as well as through a midterm review. The quantitative limits for end-June 2002, end-December 2002, end-March 2003, and end-June 2003 are benchmarks for program monitoring; those for end-September 2002 are program performance criteria, the observance of which is a condition for making the fifth disbursement under the program. The quantitative benchmarks and the performance criteria include (i) a ceiling on net bank credit to the government; (ii) the nonaccumulation of new external payments arrears by the central government (on a continuous basis); (iii) a ceiling on new nonconcessional foreign or guaranteed debt with a maturity of one year or more contracted or guaranteed by the central government; and (iv) a ceiling on new short-term external debt, except for regular trade financing. The quarterly ceilings on net domestic credit to the government will be adjusted downward (or upward) by the amount by which exceptional external assistance, excluding any debt relief, exceeds (or falls short of) program estimates, as indicated in Table 2 of this annex. The wage bill and health and education expenditure are also quantitative benchmarks. The reduction of domestic payments arrears has not been retained as a quantitative benchmark or a performance criterion because the government has settled outstanding amounts except for those still subject to dispute proceedings.

35. Four measures will serve as structural benchmarks:

  • for end-July 2002, the adoption of a recovery plan for the state-controlled bank in conformity with the recommendations of the banking commission (the plan will include a timetable for selling the state's shares);

  • for end-August 2002, the adoption of an action plan for the collection of customs duties in arrears and accrued dividends from the company distributing petroleum products, SONACOP;

  • for end-September 2002, the adoption of a plan to eliminate the financial deficit of the electricity company (SBEE); and

  • for end-September 2002, the finalization in consultation with Fund staff of an evaluation of the operations of the cash advance accounts (comptes de régisseurs), including an action plan to reduce their number, as well as the decision to implement this plan by January 1, 2003.

Table 1. Benin: Prior Actions and Structural Benchmarks for the 2002 Program
Measures   Timetable

Prior actions:    
Finalize an action plan to strengthen customs administration.   May 23, 2002
 
Decide in the Council of Ministers on the limit for budget appropriations in accordance with the TOFE (tableau des opérations financières de l'Etat) for 2002 agreed with Fund staff.   May 23, 2002
 
Notify the relevant ministries of the corresponding cuts in budgetary allocations.   June 15, 2002
 
Increase the tariff by CFAF 14 cents per kilowatt-hours of the electricity company (SBEE).   June 1, 2002
 
Notify Fund staff that, based on current world prices, the government does not intend to grant a producer price subsidy.   May 22, 2002
 
Structural benchmarks:    
Adopt a recovery plan for the state-controlled bank in conformity with the recommendations of the banking commission, including the timetable for selling the state's shares.   End-July 2002
 
Adopt a plan to eliminate the financial deficit of the SBEE.   End-September 2002
 
Adopt an action plan for the collection of customs duties in arrears and accrued dividends from the company distributing petroleum products, SONACOP.   End-August 2002
 
Finalize, in consultation with Fund staff, an evaluation of the operations of the cash advance accounts (comptes de régisseurs) including an action plan to reduce their number, as well as the decision to implement this plan by January 1, 2003.   End-September 2002

Table 2. Benin: Financial and Structural Benchmarks and Performance Criteria
Under the 2002/03 Program
 
(In millions of CFA Franc, unless otherwise indicated)
    2002
2003
      End-
March Est.
       
      End-
June1
End-
September2
End-
December1
  End-
March1
End-
June1

Quantitative financial benchmarks              
  Net bank credit to the government2,3 -64.0 -63.1 -52.1 -51.3   -50.8 -48.3
  Nonaccumulation of new external payments
   arrears by the central government (cumulative
   since end-September 2001)2,4
0.0 0.0 0.0 0.0   0.0 0.0
  New nonconcessional external debt with a
   maturity of one year or more
contracted or
   guaranteed by the central government2,5,6
0.0 0.0 0.0 0.0   0.0 0.0
  Short-term external debt with a maturity of less
   than one year (stock) 2,6
0.0 0.0 0.0 0.0   0.0 0.0
  Wage bill (cumulative since end-December
   2001)1
18.5 42.0 64.2 89.5   112.5 136.8
  Health expenditure (cumulative since
   end-December 2001)1,7
2.6 13.3 22.7 32.7   39.5 50.0
  Education expenditure (cumulative since
   end-December 2001)1,7
10.4 29.4 50.2 72.5   83.8 115.7
                 
Memorandum items (cumulative amount since end-December 2001)              
  Total government revenue8 70.8 140.7 217.8 310.3   388.6 465.8
  Primary government expenditure 9 48.7 121.0 208.0 298.7   370.7 444.7
  Non-project-related external assistance,
   excluding debt relief
0 5.4 7.3 18.2   18.2 18.2
  Target for spending on projects financed by
   HIPC Initiative
--- 8.0 11.9 15.9   20.9 25.9

1Benchmarks.
2Performance criteria, excluding health and education expenditure and the wage bill.
3Program targets will be adjusted downward (upward) by the amount by which disbursements on non-project-related external assistance, excluding debt relief, exceed (fall short of) the amount programmed; the required correction in case of shortfall of external assistance will be limited to CFAF 4 billion at the end of June 2002, CFAF 10 billion at the end of September 2002, and CFAF 15 billion at the end of December 2002. Program targets will also be adjusted downward by the amount by which proceeds from privatization exceed the amount programmed for restructuring expenditure and by the amounts of newly issued treasury bonds held outside the banking sector. They will also be adjusted downward by the amount of undespending on projects financed by the HIPC Initiative.
4Excluding arrears on debt service to non-Paris Club creditors for which the authorities are making best efforts to reach agreement on terms at least comparable to those granted by the 1996 Paris Club agreement.
5This performance criterion applies not only to debt as defined in Point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), August 24, 2000), but also to commitments contracted or guaranteed for which value has not been received; it excludes loans contracted for debt rescheduling. The concessionality on the external debt is defined in the Fund's revised guidelines, approved on October 21, 1995, and is computed in compliance with the implementing guidelines of April 15, 1996.
6The term "debt" has the meaning set forth in Point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85) ,82400); it excludes normal trade financing.
7Total expenditures.
8Excluding grants.
9Total government expenditure minus interest payments, externally financed investment expenditure, and net lending.

 

Technical Memorandum of Understanding

(June 27, 2002)

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 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.

I. 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 2001, net bank credit to the government as defined above stood at CFAF -60.1 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; the required correction in case of shortfall of budgetary assistance will be limited to CFAF 4 billion at end-June 2002, CFAF 10 billion at end-September 2002, and CFAF 15 billion at end-December 2002. Budgetary assistance is defined as grants, loans, and debt relief (excluding project loans and grants, IMF resources, and debt relief under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative)). In the context of the program, cumulative (since end-December 2001) external budgetary assistance is expected to reach CFAF 5.4 billion at end-June 2002, CFAF 12.7 billion at end-September 2002, CFAF 18.2 billion at-end December 2002, and to remain at that level through end-June 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 2001) is expected to reach CFAF 4 billion at end-June 2002, CFAF 8 billion at end-September 2002, CFAF 10 billion at end-December 2002, CFAF 11.8 billion at end-March 2003, and CFAF 13.8 billion at end-June 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 2001) are CFAF 8 billion at end-June 2002, CFAF 11.9 billion at end-September 2002, CFAF 15.9 billion at end-December 2002, CFAF 20.9 billion at end-March 2003, and CFAF 25.9 billion at end-June 2003.

Performance criteria and benchmarks

9. The ceiling on net credit to the government is established as follows: CFAF -63.1 billion as at end-June 2002, CFAF -52.1 billion at end-September 2002, CFAF -51.3 billion at end-December 2002, CFAF -50.8 billion at end-March 2003, and CFAF -48.3 billion at end-December 2003. The ceiling is a performance criterion as at end-September 2002, and a benchmark as at end-June 2002, end-December 2002, end-March 2003, and end-June 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. Nonaccumulation of External Public Payments Arrears

Definition

11. External payments arrears are defined as the sum of (i) external payments due, (ii) unpaid-for external liabilities of the government, and (iii) foreign debt held or guaranteed by the government. The definition of external debt provided in paragraph 3 applies here.

Performance criterion

12. 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.

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

Definitions

13. This performance criterion applies not only to debt as defined in Point 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 agreement) 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.

14. 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

15. Nonconcessional external borrowing will be zero throughout the 2002-03 program.

Reporting deadline

16. 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.

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

Definition

17. The definitions in paragraphs 13 and 14 also apply to this performance criterion.

18. 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

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

20. As of December 31, 2001, the government of Benin has no short-term external debt.

II. Quantitative Benchmarks

21. The quantitative benchmarks 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 2001) CFAF 13.3 billion for end-June 2002, CFAF 22.7 billion for end-September 2002, CFAF 32.7 billion for end-December 2002, CFAF 39.5 billion for end-March 2003, and CFAF 50.0 billion for end-June 2003. The floor for education expenditure is on an accumulated basis (since end-December 2001) CFAF 29.4 billion for end-June 2002, CFAF 50.2 billion for end-September 2002, CFAF 72.5 billion for end-December 2002, CFAF 83.8 billion for end-March 2003, and CFAF 115.7 billion for end-June 2003.

22. The quantitative benchmarks for the program also comprise 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.

23. The quantitative performance indicators for the wage bill are set at CFAF 42.0 billion at end-June 2002; CFAF 64.2 billion at end-September 2002, CFAF 89.5 billion at end-December 2002, CFAF 112.5 billion at end-March 2003, and CFAF 136.8 billion at end-December 2003 (cumulative since end-December 2001).

24. 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.

III. Quantitative Indicators

25. The program also includes indicators on total government revenues and the primary government expenditure.

A. Floor for Total Government Revenues

Definition

26. Government revenues are defined as those that appear in the government financial operations table (TOFE).

Indicators

27. Quantitative performance indicators for total government revenues are set at CFAF 140.7 billion at end-June 2002, CFAF 217.8 billion at end-September 2002, CFAF 310.3 at end-December 2002, CFAF 388.6 billion at end-March 2003, and CFAF 465.8 at end-June 2003 (cumulative since end-December 2001).

Reporting deadline

28. 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.

B. Floor for Primary Government Expenditure

Definition

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

Indicators

30. The floors for the performance indicators for primary government expenditure are set at CFAF 121 billion at end-June 2001, CFAF 208.0 billion at end-September 2002, CFAF 298.7 billion at end-December 2002, CFAF 370.7 billion at end-March 2003, and CFAF 444.7 billion at end-June 2003 (cumulative since end-December 2001).

Reporting deadline

31. 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

32. The following four measures will serve as structural benchmarks:

  • By July 31, 2002, the government will adopt a recovery plan for the state-controlled bank in conformity with the recommendations of the banking commission; the plan will include the timetable for selling the state's shares.

  • By August 31, 2002, the government will adopt an action plan for the collection of customs duties in arrears and accrued dividends from the company distributing petroleum products, SONACOP.

  • By September 30, 2002, the government will adopt a plan to eliminate the financial deficit of the electricity company (SBEE).

  • By September 30, 2002, the government will finalize, in consultation with Fund staff, an evaluation of the operations of the cash advance accounts (comptes de régisseurs), including an action plan to reduce their number, as well as the decision to implement this plan by January 1, 2003.

V. Other Data Requirements for Program Monitoring

A. Public Finance

33. 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

34. 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

35. 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

36. 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

37. 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.

-->