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BeninLetter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding
Cotonou, January 29, 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
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 2003. 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 2003. The attached technical memorandum of understanding also specifies the definitions of benchmarks and criteria presented in Table 1 and 2 of Appendix I, Annex I, and the reporting requirements.

2. As indicated in paragraph 4 of the memorandum, all the quantitative performance criteria for end-September 2002 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 sixth disbursement under the arrangement, in an amount equivalent to SDR 2.69 million, be conditioned on the observance of end-March 2003 performance criteria (Table 2) and completion of the fifth review under the arrangement, which is expected by mid-July 2003. The fifth review will assess economic and financial developments from September 2002 to June 2003, the outlook for the remainder of 2003, and the implementation of the poverty reduction strategy. The seventh disbursement, in amounts equivalent to SDR 1.35 million, would be conditioned on completion of the sixth review and on observance of end-September 2003 performance criteria.

5. 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 2003, the technical memorandum of understanding, and the staff report for the fourth review under the PRGF.

Sincerely yours,

/s/


GREGOIRE LAOUROU
Minister of Finance and Economy

Memorandum on Economic and Financial Policies for 2003

January 29, 2003

I. Introduction

1. Discussions in the context of the arrangement under the Poverty Reduction and Growth Facility (PRGF) were held in Cotonou, December 4-18, 2002 between the government of Benin and a Fund mission, covering the fourth review of the medium-term program--in particular, the progress made in program implementation in 2002 and the outlook and measures planned for 2003 and the medium term within the framework of the poverty reduction strategy adopted by the government--and the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative) completion point. The government of Benin reaffirms its commitment to implement all the policies described in this document, which supplements the June 2002 memorandum on economic and financial policies.

II. Program Implementation in 2002

2. The program for 2002 had been prepared in the context of a medium-term strategy for 2002-04 aimed at achieving sustainable economic growth, reducing poverty, and maintaining financial viability over the medium term by strengthening financial policies and liberalizing the economy.

3. Benin's economic performance in 2002 remained satisfactory despite the sharp deterioration in the terms of trade. The real GDP growth rate is estimated at 5.8 percent, compared with a target of 5.3 percent, mainly on account of a particularly abundant cotton harvest; inflation was contained at 2.3 percent despite the increase in public utility rates; the current account deficit (including current transfers) reached 8.3 percent of GDP in 2002, as projected, owing to the slump in cotton prices on international markets; and the real exchange rate appreciated by some 4.5 percent over the first ten months of 2002, as a result of the appreciation of the euro--to which the CFA franc is pegged--vis-à-vis the dollar. In addition, the impact of the crisis in Côte d'Ivoire remained negligible.

4. All the quantitative performance criteria for end-September 2002 were met. In particular, net bank credit to the government amounted to CFAF -74 billion, compared with an adjusted target of CFAF -48.3 billion. However, the quantitative benchmark with respect to the wage bill was exceeded slightly, and education and health expenditure remained below the benchmarks adopted.

5. The four structural benchmarks were met. The benchmarks consisted of (i) the adoption of a recovery plan for the state-controlled bank; (ii) the adoption of an action plan for collection of the customs duties in arrears and accrued dividends from the company distributing petroleum products; (iii) the adoption of a plan for restoring the financial viability of the electricity company (SBEE); and (iv) the completion of an evaluation of the operations of the cash advance accounts (comptes des régisseurs), including a plan to reduce their number and the decision to implement this plan on January 1, 2003.

A. Government Finance and Fiscal Reforms

6. Program performance in the area of government finance was generally satisfactory. During the first nine months of 2002, government revenue exceeded program targets by 7 percent, especially as a result of the implementation of action plans to improve tax collection by the customs and tax directorates. Expenditure remained within the program limits; however, its composition reflected delays in the execution of education and health expenditure (87 percent and 71 percent of the targets representing quantitative benchmarks, respectively) and investment (76 percent of the target), as well as overruns in some current expenditure, in particular expenditure on public utilities. There was also a slight overrun in the wage bill for the third quarter (3.1 percent above the September 2002 target, which represented a quantitative benchmark), but the target was observed at end-December 2002. Expenditure financed by enhanced HIPC Initiative resources represented only 48 percent of the end-September target but rose sharply during the fourth quarter as a result of education spending related to the start of the new school year in October. Net bank credit to the government remained below the end-September target despite delays in the disbursement of the expected budgetary financial assistance. For 2002 as a whole, the overall government deficit is estimated at 3.7 percent of GDP.

7. There was continued improvement in the functioning of the new computerized expenditure management system (SIGFIP). To maintain consistency between budget and treasury operations and limit the proportion of expenditure not following normal public expenditure execution procedures, the authorities completed their evaluation of the cash advance accounts (comptes des régisseurs), a structural benchmark of the program. An action plan to reduce the number of such accounts was adopted, and 300 accounts (out of a total of 867) were thus closed on January 1, 2003. The balances of these accounts at end-2002 were transferred in full to the treasury. The government also completed the audit of enhanced HIPC-Initiative-financed expenditure for 2000.

8. The government completed the work of clarifying and checking the account balances of the treasury at end-1999, end-2000, and end-2001. This work made it possible to produce a definitive starting balance for 2002 operations. The definitive treasury balance has been produced on a monthly basis since August 2002, with a lag of no more than a month.

B. Money and Credit Developments

9. After three years of strong expansion, growth of the money supply slowed considerably in 2002. Net domestic assets fell slightly during the first nine months of 2002; the government's net position continued to improve, while credit to the economy increased by some 19.3 percent in the 12 months to September 2002.

10. The financial health of the banking system improved overall in 2002. The new prudential arrangements came into effect on January 1, 2002, in particular the raising of the capital adequacy ratio to a minimum of 8 percent, a criterion met by four of the six banks as at September 30, 2002. There was a relative improvement in the position of the two banks placed under temporary receivership, including the Continental Bank, for which the authorities established a financial recovery plan calling for increased efforts to collect delinquent claims and adopted a divestment strategy consisting of the sale of its shares by September 30, 2003. The only existing nonbank financial institution under surveillance has not shown signs of significant improvement; however, it observes most of the prudential ratios and is pursuing its efforts to improve its information system, as requested by the West African Economic and Monetary Union (WAEMU) Regional Banking Commission.

11. In the microfinance sector, the recovery of the Federation of Rural Savings and Loans Cooperatives, FECECAM, which takes more than 90 percent of the total deposits made with institutions in the sector, deepened in 2002. The activity of the network strongly improved, and there was a substantial reduction in delinquent claims. At the end of September 2002, loans granted by the sector represented nearly 15 percent of bank credit to the economy. At the same time, the Microfinance Unit in the Ministry of Finance stepped up its supervision of the sector.

C. Structural Reforms

12. In the cotton sector, reforms were pursued. Since the 2000/01 crop year, responsibility for the marketing and collection of cottonseed has been transferred from the state cotton enterprise (SONAPRA) to the autonomous agency (CSPR) that coordinates ginners, input distributors, and producers. Owing to payments arrears of a private ginning mill to the CSPR during the 2000/01 crop year and to the late start of the 2001/02 harvest, delays in payments to cotton producers were eliminated only at end-2002.

13. For the 2002/03 crop year, cotton sector participants agreed on a producer price of CFAF 190 per kilogram, including CFAF 10 for the producer's share in expenditure for critical functions (compared with CFAF 200 per kilogram for the previous crop year), in light of the authorities' intention not to renew the exceptional subsidies granted during the previous year. The harvest officially started in December, after the agreed prices had been published.

14. Several important actions were undertaken in the government divestiture program. The strategy for the privatization of SONAPRA was adopted in May 2002. By decrees adopted on January 31, 2002, the government established the legal framework to split the postal and telecommunications company (OPT) into two branches: post office and telecommunications. The government also drew up a strategy in May 2002 for opening the electricity branch of the water and electricity distribution company (SBEE) to the private sector under a management contract. In November 2002, based on the findings of the study to identify options to involve the private sector in the management of the Port of Cotonou, the government adopted an approach to achieve this objective.

15. The government liberalized cement imports and prices as of August 1, 2002, after the establishment of a regulatory body made up of representatives of the government, private sector, and consumers. In this context, all cement imports are subject to normal tax treatment and to import duty. The mechanism introduced in 2000 for the quarterly adjustment of petroleum product prices to take account of changes in international prices functioned well in 2002. With regard to the electricity sector, the government raised average electricity rates by CFAF 14 per kilowatt-hour in June 2002, in order to pass on the increase in the prices of its supplier, the Electricity Community of Benin (CEB), from CFAF 38 to CFAF 50 per kilowatt-hour. In addition, a plan to restore the enterprise's financial viability was adopted, providing in particular for the raising and restructuring of rates and other services and an effort to reduce the rate of loss on the network and to collect on invoices.

16. Regarding the civil service reform, the government was unable to introduce the new compensation system, as the National Assembly did not examine the amendment of the pertinent law and the unions requested further discussions with the government and the Assembly in this regard. Meanwhile, the government has decided that the recruitment policy will be based on fixed-term contracts, starting in 2003.

17. In the context of its ongoing program to promote good governance, the government, after consultations with the various national players, adopted a national strategic anticorruption plan in July 2002. The plan focuses primarily on administrative reforms, increased anticorruption efforts, continued fiscal consolidation, and more ethical conduct by civil servants.

18. The government continues to participate actively in the initiatives aimed at strengthening regional integration within the WAEMU and the Economic Community of West African States (ECOWAS). At end-2002, Benin observed all the core criteria for macroeconomic convergence. On the tax side, Benin harmonized its customs nomenclature in 2002 and completed the harmonization of excise taxes on January 1, 2003.

III. Medium-Term Framework

19. The government has approved and submitted to the development partners the poverty reduction strategy paper (PRSP) covering the period 2003-05. This paper is based on a consultative, participatory approach involving the country's various social groups and the development partners. It provides a diagnosis of poverty in Benin and presents the national priorities and the main focuses of the poverty reduction strategy for 2003-05. The paper also presents the mechanism for monitoring and assessing implementation of the strategy and spells out the measures and actions envisaged for 2003-05, with a timetable for their implementation. This PRSP, which will be updated annually and renewed every three years, is considered by the government the unique reference framework for focusing national policies and the contributions of all the development partners on the objective of growth and poverty reduction.

20. The poverty reduction strategy adopted in the PRSP is based on an acceleration of economic growth that is more beneficial to the most vulnerable population groups. In this way, the government plans to strengthen the development of the country's human capital and basic infrastructures, create an institutional climate conducive to private sector development, and take the necessary steps for the promotion of the various sectors that constitute the engines of growth. Among these sectors, the government considers agro-industry, tourism and the hotel industry, new information and communications technologies, and transit activities as keys to growth acceleration. The strategy adopted in the PRSP is also aimed at involving the underprivileged social groups in the production process by promoting their access to microcredit, training, and land.

21. Implementation of the poverty reduction strategy should be based, in line with experience gained thus far, on a stable medium-term macroeconomic framework. To this end, the PRSP includes two fiscal scenarios: the first one is based on prudent financing assumptions, and the second one is more ambitious in terms of growth and poverty reduction, providing for investment higher than in the first scenario (the difference is equivalent to 1.9 percent of GDP on average), for which the government plans to seek financial assistance from the development partners. The PRSP includes the macroeconomic framework and a medium-term expenditure framework (MTEF)--prepared with the help of the World Bank--consistent with each of the fiscal scenarios.

22. The baseline macroeconomic framework, which is consistent with the first fiscal scenario, was prepared on the basis of the scenario described in the memorandum on economic and financial policies of June 27, 2002, taking into account recent developments in the national and international economic environment. Accordingly, the growth target for 2003 has been revised downward from 6 percent to 5.6 percent to take into account the expected fall in seed cotton production. The growth rate target projected for 2004 has been maintained at 6.5 percent, and the 2005 target has also been projected at 6.5 percent. The inflation target for the period 2003-05, at 2½ percent a year, is in conformity with the WAEMU convergence criterion. To reach these targets, the government plans to pursue monetary and fiscal policies aimed at maintaining financial stability. In this context, the overall government deficit (on a payment order basis, excluding grants) will be gradually reduced from 4.6 percent in 2003 to 4.2 percent in 2004 and 3.9 percent in 2005).

23. The macroeconomic framework consistent with the more ambitious fiscal scenario is geared to achieve higher growth rates. The government believes that, as a result of higher investment levels, real GDP could grow by 5.8 percent in 2003, 6.8 percent in 2004, and 7 percent in 2005. However, the annual inflation rate could be ½ percent of 1 percent higher than in the baseline macroeconomic framework. The current account deficit is also expected to be wider than in the basic macroeconomic framework by 1.2 percent in 2003, 2.1 percent in 2004, and 1.5 percent in 2005.

IV. Policies and Measures Planned for 2003

24. Implementation of the poverty reduction strategy described in the PRSP will begin in 2003. The government believes that the policies and measures planned for 2003 represent an important step toward achieving the medium-term PRSP objectives within the framework aiming at prudent fiscal management, the implementation of monetary policy geared toward price stability, and the acceleration of structural reforms.

A. Fiscal Policy and Budget Reform

25. The 2003 budget adopted by the government is consistent with the baseline fiscal scenario described in the PRSP. This scenario reflects the government's commitment to the priority sectors and poverty reduction. In the 2003 budget, total revenue is maintained at a level equivalent to 17.1 percent of 2002 GDP, while efforts to strengthen the tax and customs administrations in order to expand the tax base are continuing. The 2003 budget provides for larger increases in poverty reduction spending than in other spending. Accordingly, budgetary expenditure on education and health sectors have been raised by about 30 percent over their 2002 levels, compared with 13.3 percent for total expenditure. The wage bill has been established at the same level as in 2002, representing 4.8 percent of GDP, and includes an automatic 5 percent increase to bring the wages of all government employees to the wage scale grades reached in 2002. The government plans to take the necessary steps in 2003 to prevent wage bill increases that exceed the inflation rate target during the period 2004-05. Current expenditure remains at about 12.4 percent of GDP, even though there will be no transfers to the cotton sector in 2003 because of additional expenditure on public utilities in mid-2002. Meanwhile, the government has taken the steps necessary to keep electricity and telephone expenditure within the budget. Current expenditure also includes CFAF 6.5 billion to cover the cost of the legislative elections scheduled for March 2003. Total investment increased considerably, in accordance with the PRSP objectives. The budget deficit, on payment order basis and including grants and HIPC Initiative resources, is expected to represent 1.1 percent of GDP. This deficit will be fully covered by domestic financing.

26. To facilitate control of the wage bill and implementation of the planned civil service reform, the government will start using the single reference database (FUR) for the preparation of monthly payroll by March 2003.

27. In conformity with the second fiscal scenario in the PRSP, the government plans to prepare a supplementary budget in 2003 that can facilitate the execution of expenditure in favor of the priority sectors; it will also commit itself to higher investment in the basic economic infrastructures and in the social sectors, when the concessional financing consistent with the objective of debt sustainability has been obtained and it is clear that the capacity is available for executing such expenditure. The government will consult with Fund and World Bank staff before starting preparation of the supplementary budget.

28. The government plans to implement a set of measures to improve fiscal performance, in accordance with the revenue targets in the budget. Accordingly, it intends to pursue the implementation of action plans aimed at improving the performance of the tax and customs administrations. Furthermore, in consultation with Fund staff, the government will include the recommendations of the September 2002 Fund technical assistance mission to Cotonou on the reform of the tax and customs administrations. The action plans, which will be adopted by end-March 2003, will include the following measures: (i) the reduction of customs fraud by strengthening detection, in particular through the use of compulsory preshipment inspection and customs declarations, and strict application of the legally established sanctions; (ii) the intensification of controls with respect to customs valuations and the application of transactional values, pursuant to the WAEMU regulations; (iii) intensified monitoring exemptions; (iv) the extension of the scope of import inspections to include consumer food products; (v) intensified control and monitoring of major importers who do not meet their postcustoms clearance obligations; and (vi) computerization of customs operations, with account taken of the goal of simplifying procedures and formalities. As for the tax administration, the government intends to include measures aimed at the following (i) developing staff capacities and preparing criteria for assessing their performance; (ii) strengthening taxpayer management, with special emphasis on the regular updating of the national database of taxpayers; (iii) improving the tracking (detection and dispatch of reminder notices) of delinquent taxpayers and collection actions; (iv) strengthening tax audits, in particular by improving their coverage, giving priority to surprise audits, and developing collaboration with the customs administration; and (v) completing the computer linkage between the tax and customs directorates. The government has requested a technical assistance (TA) mission from the Fund to monitor the implementation of these measures. In addition, the government will make every effort to collect nontax revenue, in particular dividends and repayments of on-lent loans outstanding from state enterprises. The government will also pursue implementation of the action plan for the collection of taxes and dividends owed by the petroleum distribution company (SONACOP) and will use all the prerogatives of the state for their collection in the event of default.

29. As regards expenditure management, the government intends to reinforce the measures taken in recent years with World Bank support in the form of the Public Expenditure Reform Adjustment Credit (PERAC) Project, to improve the quality and level of execution of priority current expenditure and of investment. In this context, the government plans to enforce strict observance of the budgetary procedures and to limit the proportion of expenditure that does not follow the regular commitment and payment order procedures. In this regard, and with a view to eliminating all cash advance accounts, the government will significantly reduce the number of these accounts in fiscal-year (FY) 2003. Moreover, the government plans to deepen the fiscal reforms by channeling all expenditure through SIGFIP, including, in particular, external debt service and externally financed investment. To this end, an action plan with a timetable will be adopted by end-March. The government is also looking at gradually generalizing the program budget approach. The government will also complete the audit of 2001 HIPC Initiative-financed expenditure by end-June 2003. The government has asked the Fund and the World Bank for a technical assistance mission to review all the ongoing fiscal reforms, with a view to improving the execution of priority expenditure.

30. With respect to the claims and debts between the public enterprises and the government and the government's contingent liabilities, the government has decided to systematize the actions undertaken, and in particular (i) to check and confirm existing claims; this task has already commenced for the SBEE and will eventually cover all public enterprises; (ii) to draw up a plan for the settlement of overdue claims; and (iii) to draw up a plan for measures to prevent the accumulation of further arrears. These measures relate, in particular, to government consumption and the related budget allocations, the financial viability of public enterprises, and the verification of invoices for provided services. The government will prepare a report on these various points by end-March 2003.

31. The government intends to launch the decentralization process following the December 2002 municipal elections. To this end, the authorities will complete the studies on the modalities and the cost of transferring jurisdiction to the local governments and will make the decisions concerning the fiscal and accounting framework of the local governments by mid-March 2003. The 2003 budget includes an overall allocation to the local governments of CFAF 3.6 billion (an increase of 20 percent, compared with the previous budget for the subprefectures). In addition, the budget includes CFAF 58 billion in expenditure for execution on behalf of the local governments but that will continue for the time being to be administered centrally; the government intends to provide the training necessary for the transfer of the management of this expenditure to the local level.

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

32. Monetary policy, which is conducted at the regional level by the Central Bank of West African States (BCEAO), is aimed at preserving the fixed exchange rate regime and maintaining an adequate level of foreign exchange reserves. In this regard, Benin's money supply is expected to grow at the same rate as nominal GDP in 2003. Net credit to the government should remain stable, while credit to the private sector could increase by some 13.5 percent. It is anticipated that the net foreign assets of the banking system will rise in 2003. The government will continue 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 development process. With this in mind, the government will continue to encourage all financial institutions to observe the current banking regulations and prudential ratios, especially those related to capital adequacy. In addition, the government will implement the recovery plan for The Continental Bank and will relinquish its shareholdings by end-September 2003. The ongoing efforts to rehabilitate and supervise microfinance institutions and to collect the claims of the liquidated banks will continue.

C. Other Structural Reforms

33. The government will pursue the reform of the cotton sector, with a view to increasing the efficiency of the sector and the income of producers and helping to reduce poverty. As regards the implementation of the strategy for privatizing SONAPRA, for which the decision was taken to sell ginning mills by lots, the government, in cooperation with the World Bank, is using a call for bids to recruit an investment bank that will help the authorities carry out this privatization as soon as possible and in all transparency. Within the framework of the new timetable established, it is anticipated that the call for bids will be issued by the end of the first half of 2003. To prevent the recurrence of payment problems, the CSPR will enforce compliance with the system of compulsory advance deposits equivalent to 40 percent of the value of the cottonseed allocation, and with the exclusion of debtor companies from cottonseed allocations. Moreover, the government will continue to promote private sector implementation of the producer price-setting mechanism, which reflects trends in world prices. To ensure that the exceptional subsidy granted during the 2001/02 crop year is properly used, an exhaustive independent audit of the financial terms of cotton fiber sales will be conducted as soon as the shipments of the 2001/02 harvest have been completed. Finally, the authorities, in collaboration with sector participants, will undertake a joint study with the World Bank in 2003 on the impact of past and future cotton sector reforms on poverty.

34. The government intends to privatize public enterprises with transparency and in accordance with a realistic timetable, and to ascertain the fiscal impact of these operations. As regards the timetable, the call for bids for the telecommunications company will be issued in the first half of 2003. In the electricity sector, the government has established, with the help of the World Bank in the context of preparation of a sectoral project, the sector reform framework and the timetable for the privatization of the SBEE. In particular, the call for bids for a management contract in the electricity sector is to be issued by end-June 2003. For the Autonomous Port of Cotonou (PAC), the government will call for bids to conduct a feasibility study and define the modalities for implementing the selected option. This study will be completed by end-June 2003, and the selection of private operators will begin in the second half of 2003.

35. The government intends to implement the civil service reform as soon as possible. To this end, it will again call on the National Assembly to vote on the amendment of the law on the new compensation system. Measures to supplement those mentioned in paragraph 16 above will be considered, with the help of the World Bank, with a view to improving civil service performance in 2003.

36. The National Pension Fund of Benin (FNRB) for civil servants runs a structural financial deficit, currently covered by the government budget, for which a budget subsidy of CFAF 9.6 billion was allocated in 2002. The government established a database of retired personnel in September 2002 and plans to carry out an actuarial study of the FNRB to help it define a strategy for covering the financial deficit of the fund and ensuring its stability over the medium term. The terms of reference of the study--which incorporate the comments of World Bank staff--were finalized in December 2002; the study will be completed by end-September 2003, and on this basis the strategy will be prepared in the last quarter of 2003.

37. In the area of good governance, the government plans to ensure the effective implementation of the national strategic anticorruption plan, in particular by strengthening government regulatory bodies, such as the Chamber of Accounts, the General Inspectorate of Finance, the inspection and verification directorates in the ministries, and the Unit for Ethical Values in Public Life.

V. Debt Sustainability and HIPC Initiative Completion Point

38. Benin reached the HIPC Initiative decision point in July 2000. The government has since prepared and adopted a PRSP and made efforts to meet the other prerequisites for reaching the completion point by the end of the first quarter of 2003. Meanwhile, Benin has received interim assistance under this Initiative.

39. A debt sustainability analysis for the period 2001-21 was prepared in collaboration with Fund and World Bank staff. This analysis, which was based on the external debt position at end-2001, produced a number of findings. First, the ratio of the net present value of the external debt to exports of goods and nonfactor services at end-2001 exceeded 150 percent, contrary to decision point forecasts. The overrun observed is attributable mainly to the fact that drawings on external loans during the period 1999-01 were larger than anticipated in the decision point data. However, based on conservative assumptions concerning developments in the macroeconomic framework during the period 2002-21, the ratio of the net present value of the external debt to exports of goods and nonfactor services is expected to remain above 150 percent only until end-2004 and decline gradually in subsequent years.

40. The government is, therefore, determined to conduct a prudent debt policy that gives priority to obtaining grants, so that the external debt can remain on a sustainable track. In this regard, the government has established a coordination structure that will be responsible for drafting, implementing, and monitoring policy, and annually updating the debt sustainability analysis.

VI. Monitoring of the Program and Performance Criteria and Benchmarks

41. To ensure successful implementation of the program, the government, as a prior action, has complied with all of the structural benchmarks initially established for the period July-September 2002, as shown in Table 1.

42. The program will be monitored on the basis of the technical memorandum of understanding accompanying this memorandum, and of the quantitative performance criteria, indicative targets, and structural benchmarks established for the period January 1-December 31, 2003, along with a fifth review. The performance criteria are set for end-March and end-September 2003. Their observance is a condition for the disbursement under the program. The performance criteria include (i) a ceiling on net domestic bank credit to the government; (ii) ceiling on the deficit of the central government; (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 debt with a maturity of one year or more; and (v) a ceiling on new short-term foreign borrowing, except for the regular financing of imports. The quarterly ceilings on net domestic bank credit to the government will be adjusted downward (upward), by the amount by which disbursements on non-project related external assistance, excluding any external debt relief, exceeds (falls short of) program estimates, as indicated in Table 2 attached. The quarterly ceiling on the deficit (surplus) of the central government will be reduced (increased) by the amount by which disbursements on non-project grants or debt service relief exceed the amount programmed. The quarterly ceiling of the deficit (surplus) will also be reduced (increased) by the amount of underspending on projects financed by HIPC Initiative resources. The ceiling on the deficit (surplus) will be increased (reduced) by the amount by which disbursements on budgetary assistance or debt-service relief fall short of the amount programmed. The five criteria mentioned above are indicative targets for end-June 2003 and end-December 2003. The indicative targets also include the wage bill, health and education expenditures, total government revenue, and primary government expenditure. The reduction of domestic payments arrears has not been adopted as a quantitative benchmark or performance criterion because all domestic arrears have been paid, except for those still subject to dispute proceedings.

43. The following measures will serve as structural benchmarks: (i) the adoption and implementation, by March 31, 2003, of action plans for the General Directorate of Taxes and the General Directorate of Customs incorporating the recommendations of the Fund's September 2002 technical assistance mission; (ii) the use by the Payroll Unit of the single reference database for the payment of wages, effective March 31, 2003; (iii) the adoption of an action plan for SIGFIP, providing for the integration of external debt service and externally financed projects into the system by March 31, 2003; and (iv) the opening of the bidding for the government's shares in the Continental Bank by September 30, 2003.

Table 1. Benin: Prior Actions and Structural Benchmarks for the 2003 Program
 Measures TimetableStatus of Implementation

Prior actions

   
  • Adopt a recovery plan for the state-controlled bank in conformity with the recommendations of the Regional Banking Commission, including the timetable for selling the state's shares. End-July 2002Implemented in Dec. 2002
  • Adopt an action plan for the collection of customs duties in arrears and accrued dividends from the company distributing petroleum products, SONACOP. End-Aug. 2002Implemented in Oct. 2002
  • Adopt a plan to eliminate the financial deficit of the electricity and water company (SBEE). End-Sep. 2002Implemented in Dec. 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-Sep. 2002Implemented in Dec. 2002
        

    Structural benchmarks

       
  • Adopt and implement action plans for the General Directorate of Taxes and the General Directorate of Customs, incorporating the recommendations of the Fund's September 2002 technical assistance missions. End-March 2003 
  • Ensure use by the Payroll Unit of the single reference database for the payment of wages. End-March 2003 
  • Adopt an action plan for the computerized budget management system (SIGFIP), providing for the integration of external debt service and externally financed projects into the system. End-March 2003 
  • Offer for sale the government's shares in the Continental Bank. End-Sep. 2003 

      Table 2. Benin: Financial and Structural Benchmarks and Performance Criteria Under the 2003 Program
    (In millions of CFA francs, unless otherwise indicated)
       

    2003


       End-
    March
    End-June End-
    September
    End-
    December

    Performance criteria1         
      Net bank credit to the government2 -49.7 -48.8 -43.4 46.8 
      Deficit of central government, including grants
       and debt relief (cumulative, since end-
       December 2002)34
     -7.6 -13.0 -22.1 -25.2 
      Nonaccumulation of new external payments
       arrears by the central government
       (cumulative, since end-December 2002)5
     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 government
     0.0 0.0 0.0 0.0 
      Short-term external debt with a maturity of less
        than one year (stock)
     0.0 0.0 0.0 0.0 
               
    Indicative targets (cumulative since
          end-December 2002)
     
            
      Wage bill  22.9 49.4 76.9 96.7 
      Health expenditure  8.9 17.8 26.7 35.6 
      Education expenditure  19.6 39.1 58.7 78.2 
      Total government revenue6 80.2 162.8 253.8 346.0 
      Primary government expenditure7 72.8 155.2 242.8 326.5 
               
    Memorandum items (cumulative since
       end-December 2002):
             
    Program grants and loans  6.6 11.3 11.3 11.3 
    Target for spending on projects financed by
       enhanced HIPC Initiative
     2.7 7.7 11.8 19.4 

    1Performance criteria for end-March and end-September 2003; and indicative targets for end-June and end-December 2003.
    2Program 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. 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 underspending on projects financed by the HIPC Initiative.
    3The deficit of the central government is defined as the opposite of the sum of the net external financing (excluding grants and enhanced HIPC Initiative assistance) and domestic financing of the central government.
    4The ceiling on the deficit (surplus) of the central government will be reduced (increased) by the amount by which disbursements on non-project grants or debt service relief exceed the amount programmed. The ceiling on the deficit (surplus) will be reduced (increased) by the amount of underspending on projects financed by HIPC Initiative resources. The ceiling on the deficit (surplus) will also be increased (reduced) by the amount by which disbursements on budgetary assistance or debt-service relief fall short of the amount programmed.
    5Excluding arrears on debt obtained from non-Paris Club creditors for which the authorities are negotiating for conditions comparable to those agreed by Paris Club members in October 1996.
    6Excluding grants.
    7Total government expenditure minus interest payments, externally financed investment expenditure, and net lending.


     
    Technical Memorandum of Understanding

    (January 29, 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 -48.0 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 6.6 billion at end-March 2003 and CFAF 11.3 billion at end-June 2003, and to remain at that level through 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 2.5 billion at end-March 2003, CFAF 5 billion at end-June 2003, 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 4.9 billion at end-March 2002, CFAF 9.9 billion at end-June 2002, 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 -49.7 billion as at end-March 2003, CFAF -48.8 billion at end-June 2003, 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-March and end-September 2003, and an indicative target as at end-June 2003 and end-December 2003.

    Reporting deadline

    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.10.

    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 non-project 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 CFAF -7.6 billion at end-March 2003, CFAF -13.0 billion at end-June 2003, CFAF -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-March and end-September 2003, and an indicative target as at end-June 2003 and 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 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.

    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 2002-03 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 December 31, 2002, 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 8.9 billion for end-March 2003, CFAF 17.8 billion for end-June 2003, 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 19.6 billion for end-March 2003, CFAF 39.1 billion for end-June 2003, 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 22.9 billion at end-March 2003, CFAF 49.4 billion at end-June 2003, 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 80.2 billion at end-March 2003, CFAF 162.8 billion at end-June 2003, CFAF 253.8 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 72.8 billion at end-March 2003, CFAF 155.2 billion at end-June 2003, 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 four measures will serve as structural benchmarks:

    • By March 31, 2003, the government will adopt and implement action plans for the General Directorate of Taxes and the General Directorate of Customs, incorporating the recommendations of the Fund's September 2002 technical assistance mission.

    • By March 31, 2003, the Payroll Unit will use the single reference database for the payment of wages.

    • By March 31, 2003, the government will adopt an action plan for SIGFIP, providing for the integration of external debt service and externally financed projects into the system.

    • 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.


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