Press Release: IMF Executive Board Approves US$109 Million ECF for Benin
June 14, 2010Press Release No. 10/243
June 14, 2010
The Executive Board of the International Monetary Fund (IMF) today approved a new three-year arrangement under the Extended Credit Facility (ECF) for a total amount equivalent to SDR 74.28 million (about US$109 million). The approval will enable the first disbursement of an amount equivalent to SDR 10.62 million (about US$15.6 million).
The new arrangement is designed to support the authorities’ program to increase economic growth by boosting investment in infrastructure and implementing structural reforms aimed at increasing Benin’s economic competitiveness. The program will help create fiscal space for accelerated capital and social spending by broadening the tax base, containing non-priority spending, and raising public sector efficiency.
At the conclusion of the Executive Board discussion on Benin, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:
“The global economic crisis continues to have a negative impact on Benin’s economic performance, reducing growth by nearly half in 2009. The authorities’ fiscal stimulus could not be sustained, given the lack of financing, and the overall fiscal deficit more than doubled compared with 2008.
“Growth is likely to remain weak in 2010. But the medium-term outlook is more favorable, provided the authorities implement prudent macroeconomic policies and their structural reform agenda. Continued support from the international community will also be essential for Benin to make further progress toward the Millennium Development Goals.
“The authorities’ main macroeconomic challenge is to mitigate the impact of the crisis in the short term, while reaching higher sustainable growth over the medium term. While there is some scope for fiscal policy to support the economic recovery in 2010, a considerable fiscal adjustment will be needed over the medium term to maintain fiscal sustainability. In particular, the growth of the wage bill will need to be contained, with a view to safeguarding fiscal space for priority spending, reducing distortions in the labor market, and improving competitiveness.
“The authorities’ economic program responds to the challenges appropriately. Fiscal policy aims at maintaining fiscal and debt sustainability. The structural reform agenda will strengthen revenue collections and public financial management, support the authorities’ divestiture of state enterprises, and improving the business climate. The new ECF arrangement will provide essential financial support to cover the temporary imbalances associated with the implementation of the authorities’ economic program by catalyzing additional concessional assistance from donors,” Mr. Portugal added.
Recent Economic Developments
The global economic crisis reduced growth in Benin by half in 2009, more than in the other countries of the West African Economic and Monetary Union (WAEMU). Lower cotton prices, weaker demand for exports—notably from Nigeria—and lower inflows of foreign direct investment reduced real GDP growth from 5 percent in 2008 to 2.7 percent in 2009. The decline in international food and fuel prices contributed to easing inflationary pressures. Average CPI inflation declined from 8 percent in 2008 to 2.2 percent in 2009, reflecting lower food, transportation, and gasoline prices.
A sharp decline in transit trade and weaker cotton exports widened the current account deficit. The terms of trade were unchanged, because decline in international food and energy prices offset the fall in international cotton prices. These developments, accompanied by a decline in foreign direct investment and other flows turned the overall balance of payments into a deficit of 1.6 percent of GDP in 2009.
The authorities responded to the crisis by enforcing a strong fiscal stimulus in the first half of 2009, which needed to be reversed in the second half owing to the lack of financing. Fiscal policy was looser in 2009 compared to 2008. The overall fiscal deficit more than doubled to 7.3 percent in 2009. About two-thirds of the deficit was financed from external grants and concessional loans, including the counterpart of the SDR allocation.
Under the new ECF-supported program, the government aims to maintain macroeconomic stability and accelerate structural reforms to contain the negative impact of the global economic crisis on Benin in the short run and increase sustainable growth over the medium term. The macroeconomic objectives of the government program are to:
• Raise annual real GDP growth to 6 percent by 2013from 3.2 percent in 2010;
• Maintain inflation below the WAEMU convergence criterion of 3 percent;
• Reduce the external current account deficit (excluding grants) to 7.6 percent of GDP by 2013 from 10.8 percent in 2009;
• Increase the basic primary balance to a surplus of 1.5 percent of GDP by 2013, compared with a deficit of 3.8 percent of GDP in 2009.
The macroeconomic program will be complemented by structural reforms. In this context, the program will:
• Enhance the effectiveness of expenditure that induce growth by improving the selection and monitoring of projects, and strengthening transparency and accountability in public procurement contracts;
• Implement structural reforms to strengthen external competitiveness and improve the business climate. These reforms will improve revenue administration, the quality and delivery of public services, and enhance transparency and accountability in public financial management;
• Introduce “second generation” reforms to improve land registration and property rights and the financial and judiciary systems; strengthen microfinance supervision, and devote more resources to youth entrepreneurship.