Press Release: IMF Approves Third Annual Loan for Benin Under the ESAF
May 23, 1995The International Monetary Fund (IMF) today approved the third annual loan for Benin under the enhanced structural adjustment facility (ESAF)1 is SDR 46.5 equivalent to SDR 18.12 million (about $28 million) in support of the Government's 1995 economic reform program. The loan will be disbursed in two equal semiannual installments, the first of which is available immediately.
When the CFA franc countries agreed in January 1994 to the devaluation of the CFA franc, Benin was virtually the only country among them whose pre-devaluation experience had been characterized by largely successful and sustained adjustment. In the five years prior to the devaluation, the authorities had managed significantly to improve the public finance situation, strengthen the external position, restore confidence in the banking system, and secure a steady growth rate for the economy. The devaluation was seen by the authorities as an opportunity to enhance competitiveness and the prospects and profitability of the export sector, and to encourage investment, which would thereby lead the economy to a higher growth path and accelerate the attainment of external viability. The measures taken following the exchange rate adjustment resulted in a growth of real GDP of 3.4 percent, despite the initial contraction of domestic demand, and there was a sharp improvement in the external current account and in foreign reserves, helped by the increase in the export price of cotton and capital repatriation. The real sector and external performance also benefited from a revival in export-oriented manufacturing, such as textiles, and from an increase in emigrant remittances. However, inflation reached 54 percent during 1994 before abating in early 1995.
The Medium Term and the 1995 Program
Against the backdrop of the generally encouraging performance of 1994, the authorities will consolidate the gains in competitiveness and strengthen further macroeconomic adjustment, with a view to attaining financial viability and sustainable growth. The basic objectives of the authorities over the 1995-97 period are to pursue policies that will raise economic growth to 5-6 percent over the medium term; bring down inflation rapidly, attain sustainable budgetary and balance of payments positions to reduce dependence on foreign assistance, help alleviate poverty and better protect vulnerable groups, and strengthen the social and physical infrastructure and promote human resource development.
The main aims of the program for 1995 are to: (i) achieve a real GDP growth rate in excess of 6 percent; (ii) contain inflation at 5 percent on a December-to-December basis; and (iii) hold the external current account deficit below 5 1/2 percent of GDP. To achieve these objectives, the authorities will strengthen public finances to achieve a primary budget surplus, excluding foreign-financed investments, of 1.9 percent of GDP and further restructure expenditure in favor of investment, education, and health. On the revenue side, total receipts are targeted to grow by 23 percent, to 12.6 percent of GDP, through revising the taxation of wages and salaries, restoring the value-added tax on sugar, further tightening tax and customs exemptions, and increasing efficiency in customs administration. On the expenditure side, the program calls for restraint in wage policy, while more resources are to be allocated to social and operating expenditure and to investment. Expenditures for education, health, and the special infrastructure rehabilitation program for these sectors will be increased. The budgetary contribution to investment will also be raised. In the area of monetary and credit policy, the authorities will maintain a prudent stance and keep interest rates at levels competitive with those abroad. It is expected that a further decline in net credit to government will provide adequate room to expand credit available to the private sector.
Benin's structural policies are designed to promote the expansion of the private sector by improving resource allocation and generating savings for investment. In this area, important progress is being made through (a) opening up of the agricultural processing sector; (b) liberalizing the distribution, storage, and transport of petroleum products; (c) modernizing of the judicial system and (d) the revision of the labor code. Privatization of public enterprises and management reforms will be accelerated. Major attention will be also paid to the improvement in education and health infrastructure, where efforts have lagged in the past.
Addressing Social Costs
The government's strategy in the social and environmental sectors aims at reducing poverty and improving the management of natural resources and the urban environment. A key element in the improvement of living standards of most social groups is the increased economic activity expected to result from the enhanced competitiveness of the economy and rising investment. Income in rural areas are already increasing rapidly as a result of higher producer prices, rising production, and crop diversification. The poverty alleviation strategy focuses on creating employment, especially in rural areas, through the promotion of community-based microprojects, food security projects, and labor-intensive public works programs. The strategy also includes actions designed to ensure greater access to credit by encouraging the growth of local savings and loan cooperatives.
The Challenge Ahead
It is essential that the progress achieved so far be consolidated. In particular, the utmost attention must be given to bringing inflation under control so as to protect the competitive gains that have been achieved thus far. Benin is expected to continue to receive considerable amounts of external assistance, but an exceptional financing requirement will nonetheless remain, and the successful implementation of the program remains vulnerable to such risks as delays in the disbursement of foreign aid or a deterioration in the terms of trade.
Benin joined the IMF on October 7, 1963, and its quota 2 is SDR 46.5 is SDR 45.30 million (about $70 million). Its outstanding use of IMF credit currently totals SDR 48.79 million (about $75 million).
Sources: Beninese authorities; and IMF estimates.
1. The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent and are repayable over 10 years, with a 5 1/2-year grace period.
2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.