Press Release: IMF Approves New Three-Year Loan for Benin under ESAF
August 28, 1996
The International Monetary Fund (IMF) today approved a new three-year loan under the enhanced structural adjustment facility (ESAF)1 for Benin totaling the equivalent of SDR 27.18 million (about US$40 million) to support the Government's economic and financial reform program for 1996-99. The first annual loan for 1996-97, equivalent to SDR 9.06 million (about US$13 million), will be disbursed in two equal installments, the first of which is available immediately.
Benin has successfully implemented an economic reform program supported by the ESAF that expired in March 1996. Progress was made in strengthening public finances, enlarging the revenue base, improving competitiveness, expanding the export base, liberalizing the economy, and strengthening key infrastructure. Real GDP growth accelerated to nearly 5 percent in 1995, and the rate of inflation declined sharply to 3 percent at end-December 1995. However, the external current account deficit widened due to a temporary surge in imports related to infrastructure and other expenditures in connection with the francophone countries' summit held in Benin in 1995.
Medium-Term Strategy and the 1996-97 Program
The medium-term strategy aims at achieving sustained economic growth within a framework of financial stability by gradually reducing the dependence on external foreign assistance and maintaining external competitiveness. The strategy assigns high priority to increasing the income-earning opportunities and improving the provision of services to the poorest groups of the population. To these ends, the program will enhance economic diversification through more dynamic private sector development and increased public resources directed to the education and health sectors.
The medium-term economic program for 1996-99 aims at an annual real GDP growth rate of over 5 percent, an annual rate of inflation of about 3 percent, and a reduction in the external current account deficit (excluding grants) to about 5.5 percent of GDP by 1999. Within this medium-term framework, the 1996-97 program seeks to achieve a real GDP growth rate of 5.5 percent in 1996 and 5.8 percent in 1997, to limit the yearly inflation rate to about 3 percent by end-1997, and to gradually reduce the external current account deficit to 7.3 percent of GDP in 1996 and 6.4 percent in 1997, from 8.6 percent of GDP in 1995.
To achieve these objectives, the central focus of the program will be to strengthen public finances. The overall budget deficit (excluding grants) will be reduced to 6.6 percent of GDP in 1996 and 6.2 percent in 1997, down from 7 percent in 1995. Measures to increase revenues include a reduction of customs exemptions and an increase in the taxation of a number of products. On the expenditure side, wage policy will be reformed to ensure that wage increases are more closely related to merit and performance, and that they do not exceed productivity increases in the economy at large. Monetary policy, conducted within the framework of the West African Economic and Monetary Union (WAEMU), will seek to strengthen Benin's foreign reserve position through a cautious policy stance and use of indirect instruments of monetary policy.
Structural Reform Policies
Structural reforms under the ESAF program are aimed at reinforcing the role of the private sector and promoting the diversification of economic activity and exports, while ensuring that the potential of the cotton sector, which produces Benin's main export commodity, is fully exploited. The privatization and restructuring of public enterprises will continue, concentrating on certain agroprocessing plants and hotels. In addition, the transfer of the fire, accident, and other risks portfolio of the liquidated insurance company SONAR to private operators will be carried out. To encourage private sector development, the authorities are preparing a plan of action to streamline regulations, modernize business laws, create a more efficient judiciary system, and strengthen the financial sector. Producer prices for cotton were increased for the 1996-97 crop in order to boost incentives for production and improve farmers' remuneration. In addition, a development strategy for the cotton sector has recently been completed and an ensuing action plan will be adopted before the end of 1996.
Addressing Social Needs
Public expenditure policy in 1996 and 1997 will continue to give priority to current and capital outlays on education and health. Special attention will be given to the rehabilitation of schools, creation of vocational schools, provision of teaching materials, and establishment of regional health centers. The Government will also implement labor-intensive public works in urban and rural areas, reinforce the labor component of public investment projects, and improve social services for the most disadvantaged social groups.
The Challenge Ahead
Attainment of the program's objectives is subject to the evolution of the terms of trade. If necessary, additional measures might be needed to realize those objectives. While Benin's external debt indicators are relatively favorable, the debt outlook also remains highly vulnerable to terms of trade and other external shocks. Under these circumstances, it will be important to pursue an extremely prudent debt management strategy, continuing to rely on grants and highly concessional loans to finance investment projects.
Benin joined the IMF on July 10, 1963; its quota2 is SDR 45.3 million (about US$66 million); and its outstanding use of IMF credit currently totals SDR 65 million (about US$95 million).
Sources: The Beninese authorities; and IMF staff estimates.
1. The ESAF is a concessional IMF facility for assisting eligible members that are undertaking 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 allocation of SDRs.