IMF Approves $109 Million Loan to Back Benin Policy Agenda
By Joannes Mongardini
IMF African Department
June 14, 2010
- Benin’s open economy left it vulnerable to effects of global economic crisis
- Policy agenda includes prudent fiscal policy, ambitious structural reform plans
- IMF studies highlight importance of limiting growth of wage bill
The IMF Executive Board approved June 14 the request from the government of Benin for a new arrangement under the IMF’s Extended Credit Facility.
The new IMF arrangement will support the government’s economic and financial program over the next three years with policy advice, technical assistance, and financial support of about $109 million. At the same time, the Board concluded the discussions on Benin’s 2010 Article IV consultation, the economic health check that the IMF conducts regularly with all its 186 member countries.
Benin has always had significant economic linkages to the world economy. As a consequence, its economy has been negatively affected by the global economic crisis, including through a fall in the value of its main export commodity, cotton, a decline in transit trade and services to other African countries, and a fall in foreign direct investment. Real GDP growth fell to 2.7 percent in 2009, nearly half of the 5 percent level experienced in 2008.
The outlook for 2010 is slightly better. In line with a moderate recovery in the world economy, growth in Benin is expected to reach 3.2 percent. Accordingly, per capita income would rise only marginally to $770 per person, or about $2.1 a day. This represents only a small gain in the fight against poverty in Benin. Over the medium term, growth could accelerate to its full potential of 6 percent if the government implements its policy agenda. This could result in significant progress for Benin to make progress toward its Millennium Development Goals.
The government’s policy agenda
The government policy agenda includes a prudent fiscal policy and a commitment to highly concessional borrowing over the next three years in order to maintain a sustainable fiscal and debt situation. In support of this policy, the government is putting in place reforms aimed at collecting more revenues and improving the quality and composition of its spending to increase growth and reduce poverty.
On the structural side, the government is finalizing the opening up of capital to the private sector of the main telecommunications company, Benin Telecom, which should increase investment and improve efficiency in the sector.
The government intends to put in place a transparent regulatory framework for the electricity sector by June 2011, which will pave the way for the opening up of capital of the electricity distribution company. It also plans to adopt next year a comprehensive reform of the civil service to develop a more effective provision of public services, which will benefit economic development.
The Article IV consultation focused on policies to enhance growth prospects in Benin. In particular, the IMF provided the authorities with two background studies on the impact of the government’s wage policies on fiscal and debt sustainability, and economic development.
These studies highlight the importance of limiting the growth of the wage bill in order, on the one hand, to maintain the fiscal space for critical infrastructure spending which is essential for Benin’s growth; and, on the other hand, to avoid a distortion in the labor market, which can result in higher unemployment and poverty, and a loss of external competitiveness.
The main message in both these studies is that increasing government salaries alone does not increase growth and reduce poverty.