Public Information Notice: IMF Concludes Article IV Consultation with Togo
July 7, 1999
|Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.|
On May 21, 1999, the IMF Executive Board concluded the 1999 Article IV consultation with Togo.1
Following the devaluation of the CFA franc in January 1994, Togo adopted a comprehensive adjustment strategy, which was supported by the IMF for a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF), aimed at achieving sustained economic growth and financial viability over the medium term. The macroeconomic and structural policies implemented by Togo under the program have led to significant improvements in a number of areas, including per capita GDP growth, the decline in inflation, and the reduction of internal and external imbalances.
After three consecutive years of strong growth, real GDP is estimated to have contracted by 1 percent in 1998 (after expanding by 4.3 percent in 1997). This contraction reflected the adverse impact of poor weather conditions during the last half of 1998 on food crop production, as well as the effects of the February-May energy crisis on activity in the secondary and tertiary sectors. Phosphate production dropped by almost 15 percent owing to technical difficulties and the lower mineral content of the mines presently under exploitation. Average inflation dropped from 5.3 percent in 1997 to 1 percent in 1998. The external current account deficit (excluding official transfers) remained stable at 7.3 percent in 1998.
Following a period of consolidation in 1997, the public finance situation deteriorated in 1998, as the revenue shortfalls associated with the impact of the energy crisis were compounded by the relaxation of expenditure controls in the run up to the presidential elections in June. There continued to be spending outside normal budgetary procedures, and there were election-related extrabudgetary outlays, both of which reflected persistent weaknesses in treasury management. The overall government deficit (on a payment order basis and excluding grants) thus widened to 6.7 percent, compared with 3.5 percent in 1997. The widening fiscal deficit was financed by the net accumulation of domestic and external arrears, and recourse to domestic bank financing and transfers from public enterprises.
Broad money rose by 0.7 percent in 1998, although deposits in the banking system declined by 3 percent, reflecting the contraction of economic activity, as well as the loss of private sector confidence. Credit to the private sector rose by 4.8 percent relative to end-December 1997, while net bank credit to the government increased by over 19 percent. However, the resulting increase in the net domestic assets of the banking system was partly compensated by a sharp decline in the net foreign assets of the banking system, resulting primarily from lower export receipts and external financing. The overall health of the Togolese commercial banks worsened sharply in 1998 after showing signs of improvement in 1997. The liquidity crunch resulting from the expansion of credit and simultaneous loss of deposits deepened into a crisis of confidence in the banking sector; there was a considerable deterioration in the overall quality of the loan portfolio, particularly in the claims on some of the public enterprises, and bank profitability declined. At end-1998, only one of the seven commercial banks was in full compliance with the prudential ratios established by the regional banking commission.
Progress in structural reform slowed in 1998. There has been some progress in the post and telecommunication component, particularly in the regulatory aspect, and in the area of public enterprise restructuring, with the preparation of performance contracts for the PAL (Port of Lom_) and the CNSS (social security). In the financial sector, strategies for divesting from the financial institutions have been defined, and considerable progress has been made in the area of microfinance. However, the privatization process of the OTP-the largest state-owned enterprise-could not be completed due to bidders' default.
Prospects for 1999
The authorities project real GDP growth to rebound to 6.7 percent in 1999, as food crops are expected to recover from the poor harvest in 1998, based on the assumption of no further accumulation of domestic arrears, a stabilization of the banking system, and the maintenance of the public investment program. Consumer price inflation is projected to remain modest, averaging 2.5 percent, and the current account deficit, excluding official transfers, is projected to widen by ½ of 1 percentage point to the equivalent of 7.8 percent of GDP in 1999. The primary fiscal deficit is projected to increase marginally from 1.3 percent of GDP in 1998 to 1.4 percent in 1999, while the overall fiscal deficit (excluding official transfers) is expected to narrow from 6.7 percent of GDP in 1998 to 6.5 percent in 1999.
Executive Board Assessment
Executive Directors expressed concern about the turn of economic and financial developments over the last year. Following a period of considerable progress, developments in 1998 had brought a weakening of public finances and of the commercial banking system, a loss of momentum in structural reform, and a deterioration in relations with Togo's external creditors. Directors regretted that discussions on a successor three-year ESAF Arrangement had not been initiated following the completion of the previous arrangement in June 1998. Directors observed that, while exogenous factors had adversely affected economic activity, their effects had been exacerbated by domestic political uncertainties associated with elections, and by inappropriate policies. They considered that forceful measures were needed to establish the conditions for sustained growth, notably by promoting confidence on the part of the domestic private sector and Togo's external partners. Directors encouraged the authorities to work with the staff on a program that could be supported by a new ESAF Arrangement as soon as possible. Strong and credible policy commitments by the authorities would be critical in this regard, as would the normalization of relations with external creditors. Directors noted the favorable catalytic effects that agreement on a successor ESAF Arrangement would have.
Directors observed that the deterioration in the overall fiscal position in 1998 had resulted from a combination of poor revenue performance and weak expenditure control. While the energy crisis was partly responsible for the revenue shortfalls, the outturns had also been affected by weaknesses in the tax structure. Directors encouraged the authorities to widen the tax base, strengthen tax administration, eliminate tax exemptions, and bring the informal sector more effectively into the tax net.
Directors stressed the vital importance of bringing public expenditure under better control and improving its composition. They urged the authorities to avoid ad hoc measures and instead to recast their expenditure plans on the basis of clear priorities and realistic revenue expectations, starting with a revision of the 1999 budget. Directors attached special importance to reducing the government wage bill. Although its growth had been controlled, the wage bill accounted for an excessive share of total expenditures. Directors considered that civil service reform was essential if outlays on wages were to be reduced and scope created for expanding expenditure on poverty reduction and other high priority items. They also urged the authorities to examine the scope for further reductions in unproductive nonwage expenditure. Directors regretted that the action plan to strengthen treasury procedures and budget monitoring established in May 1998 had not been fully implemented, and that expenditure control had been relaxed in the face of revenue shortfalls, leading to a renewed accumulation of domestic and external payments arrears. They urged the authorities to act promptly to improve treasury management, ensure effective management of the cash-flow situation, eliminate domestic and external payments arrears as rapidly as possible, and ensure that arrears did not reemerge in the future.
Directors were concerned about the deterioration of the commercial banking sector, associated for the most part with an increase in lending to finance both the budget deficit and some key public enterprises whose financial situation was weak. Directors urged the authorities to implement fully the recommendations of the regional banking commission to put the banks on a sound financial footing, to disengage from intervention in running the state-owned banks, and to work toward their early privatization. They stressed the importance of reaching early agreement on the financial sector restructuring program with the World Bank.
Directors noted with disappointment that the structural reform agenda had stalled after initial progress in the areas of public enterprise restructuring. They encouraged the authorities to proceed expeditiously with the new phase of the privatization program, notably the partial sale of the Office Togolais des Phosphates (OTP) and divestiture of financial institutions. Directors took note of the ongoing analysis of the administrative structure and the adoption of a law on decentralization, and urged the authorities to move ahead with a well-sequenced reform of the civil service. Noting the efforts to implement the provisions of the Organization for the Harmonization of Business Law in Africa (OHADA) Treaty, Directors underscored the need to strengthen the judicial framework as an essential element in establishing a transparent regulatory environment that was conducive to private sector development and investment.
Directors regretted the lack of progress toward regularization of relations with partners in the European Union, noting that this would complicate the attainment of the external financing assurances needed to support an eventual successor ESAF Arrangement. Directors emphasized the importance of normalizing relations with external creditors.
While noting the progress made in recent years, Directors stressed the need to improve further the availability, quality, and timeliness of some core economic and financial data, and the provision of data to the Fund for effective surveillance.
|Togo: Selected Economic Indicators|
|(Annual percentage of change)|
|Change in real GDP||16.8||6.8||9.7||4.3||-1.0|
|Change in consumer prices (end of period)||48.5||6.4||4.9||3.0||-1.3|
|(In percent of GDP) 2|
|Gross fixed investment||15.1||16.1||16.3||14.9||14.2|
|Gross domestic savings||11.4||11.9||8.4||8.4||7.5|
|Gross national savings||8.6||11.3||8.8||9.1||8.3|
|(In millions of U.S. dollars) 2|
|Current account balance||-56.2||-54.3||-104.5||-74.5||-74.2|
|Capital account balance||-50.4||-10.2||56.6||93.3||16.0|
|Gross official reserves||94.5||130.4||88.6||118.8||117.7|
|Current account balance (in percent of GDP)||-8.1||-6.7||-7.1||-5.0||-4.9|
|Change in real effective exchange rate (in percent) 3||-33.5||15.9||2.6||2.8||9.3|
|External public debt (in percent of GDP)||131.5||108.7||98.4||90.0||88.8|
|Public debt service (in percent of GDP)||11.8||7.7||6.3||4.8||5.1|
|(In percent of GDP) 2|
|Government expenditure and net lending||25.1||22.5||20.9||18.2||21.1|
|Primary fiscal balance||-5.9||-2.1||-1.4||0.5||-1.3|
|General government balance||-13.1||-7.8||-6.3||-3.5||-6.7|
|Change in broad money (in percent)||32.3||16.8||-9.9||8.1||0.7|
|Interest rate (in percent) 4||12.1||8.4||7.3||6.0||6.2|
Sources: Togolese authorities; and IMF staff estimates.
|1 IMF staff estimates.|
|2 Unless otherwise noted.|
|3 (+) = appreciation.|
|4 12-month rediscount rate.|
1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.