## 1. CEQ Income Concepts and Their Components ## Source details **Canonical URL:** [1. CEQ Income Concepts and Their Components](https://www.imf.org/-/media/files/publications/cr/2017/cr17128.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17128.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17128.pdf.json) --- ### A. Introduction - Objective: Assess redistributive impact of taxation and spending on household-level income inequality and poverty in Togo. - Key contextual indicators: - Human Development Index (HDI): rose from 0.436 in 2005 to 0.487 in 2015. - Head-count poverty rate: fell from 61.7 percent in 2006 to 55.1 percent in 2015. - Gini coefficient: worsened slightly from 0.36 to 0.38 over the same period. ### B. Social Spending and Taxation in Togo - Analysis scope: - Included: most social spending (social protection, education, healthcare); excluded defense, security, infrastructure. - Revenue included: personal income taxes, VAT, excise taxes, grants. - Revenue excluded: corporate income tax, corporate withholding tax, customs duties, nontax revenue. - Government expenditures included in the analysis, 2015 (CFAF (billions); Percent of GDP): - Total: 2,893; 4.80 - Social spending: 2,793; 4.60 - Social protection: 344; 0.60 - Social assistance: 84; 0.14 - Cash transfers: 84; 0.14 - Social insurance: 260; 0.40 - Education: 1,480; 2.40 - Primary: 750; 1.20 - Secondary: 528; 0.90 - Tertiary: 202; 0.30 - Health: 969; 1.60 - Subsidies: 100; 0.21 - Water: 91; 0.00 - Rural electrification: 9; 0.00 - Note: "Expenditures included in Togo’s CEQ Assessment may not be fully allocated within the QUIBB for various reasons." - Government revenue included in the analysis, 2015 (CFAF (billions); Percent of GDP): - Total Revenue and Grants: 5,952; 8.20 - Tax Revenue: 5,016; 11.60 - Direct taxes: 1,197; 3.90 - Personal Income Tax: 1,197; 1.90 - Indirect Taxes: 3,819; 7.60 - VAT: 2,353; 3.80 - Excise Taxes: 1,466; 2.40 - Grants: 936; 1.50 - Note: "Revenues included in Togo’s CEQ Assessment may not be fully allocated within the QUIBB for various reasons." ### C. Methodological Summary and Household Survey Data - Method: CEQ Assessment allocates fiscal policy elements to individuals/households from micro-level socio-economic survey and computes poverty, inequality, progressiveness, and redistribution effects. - Income concepts: - Comparison between pre-fiscal (market income) and post-fiscal (disposable, consumable, final) income concepts as presented in Figure 1 (components preserved in source figure). - Caveat: Pre-fiscal income estimates require pension receipts, pension contributions, direct taxes and direct transfers; these estimates are not yet available in Togo. ### D. Results — Inequality, Poverty, and Incidence - Overall redistributive effect: - Fiscal policy reduces income inequality. - Gini coefficient for disposable incomes: 0.38. - Disposable-income Gini is one percentage point higher than coefficient for final or market incomes. - Fiscal policy lowers inequality by one Gini percentage point in both urban and rural areas. - Poverty effects: - Combining indirect taxes and subsidies increases poverty rates. - Poverty headcount rises from 55 percent (disposable income) to 59 percent (consumable income after subsidies and indirect taxes). - Rural poverty: nearly 70 percent of rural population (higher baseline), with the adverse effect from taxes and spending being more muted in rural areas. - Electricity subsidies: - Regressive: higher-income households receive larger shares of total electricity subsidies. - Subsidies account for less than 0.5 percent of the pre-subsidy income even for upper-income households. - For poorest households many have no electricity consumption and thus receive little or no subsidy. - VAT incidence: - Upper-income households pay larger shares of total VAT collections. - VAT is equalizing in that VAT paid as share of pre-VAT income rises with income. - Despite progressivity on some measures, VAT reduces purchasing power and leads to increases in poverty among poor or near-poor households. - Education spending: - Education accounts for about half of all social spending. - Public education access and use are overall progressive. - Nearly 4 in 10 individuals in the lower 70 percent of the population participate in the public education system. - 3 in 10 individuals in the upper 10 percent are covered by the public-school system. - Assumptions used for per-student benefits: - Pre-primary per-student public education benefit = 75 percent of primary per-student benefit. - Secondary per-student public education benefit = 200 percent of primary per-student benefit. - Conclusion: Public education spending overall has a progressive effect driven by primary education; tertiary education is regressive. - Health spending: - Health accounts for about 13 percent of all social spending. - Frequency of illness is approximately constant across deciles (self-reported). - Upper-income households use total (public plus private) healthcare more frequently. - Upper-income households choose public hospital care more frequently; lower-income households use public clinic care more frequently. - Assumption: a visit to the public hospital is twice as expensive as a visit to the public clinic in terms of public spending. - Conclusion: Total public healthcare spending appears approximately neutral (proportionate to incomes). - Comparative incidence: - Social spending benefits (education and healthcare) account for a larger share of poorer households’ incomes than electricity subsidies. - Example magnitudes: - Electricity subsidies contribute less than 0.1 percent of pre-subsidy income for households in the lower decile. - Healthcare and education benefits contribute approximately 4 percent of individual income for poorer households. - For households in deciles 3 through 10, the VAT bill is typically larger than the education, health, and electricity subsidy benefits combined. ### E. Policy Implications and Conclusion - Summary of trade-offs: - Fiscal policy in Togo reduces inequality and is progressive on several measures. - However, the combination of indirect taxes and subsidies increases poverty rates because taxes paid by lower-income households outweigh transfers received. - Electricity subsidies are regressive despite being small in magnitude. - VAT imposes an economic burden on lower-income households even if VAT is progressive in distributional terms. - Policy recommendations emphasized: - Target public spending to address needs of lower-income households as authorities shift spending toward social expenditures. - Avoid regressive spending policies such as current electricity subsidies. - Effectively target social spending to mitigate VAT’s adverse impact on the poor while recognizing VAT’s role in raising fiscal resources for social programs and public goods. ### Key findings on the sovereign-bank nexus in Togo - Recent fiscal deficits in Togo have largely been financed by the domestic banking sector, which has in turn relied on refinancing provided by the central bank. - The overall fiscal deficit averaged 2.4 percent over 2005-10, and increased to an average of 7.0 percent over 2011-15. - Public debt increased to 80.8 percent of GDP in 2016 from 49.3 percent in 2011. - Budget deficits in the WAEMU deteriorated, on average, by 2.2 percentage points to 3.4 percent during the same period. - Sub-Saharan Africa went from an average budget balance over 2005-10 to an average deficit of 2.7 percent over 2011-15. - The Togolese banking sector (13 main banks) faces: - Undercapitalization: aggregate solvency ratio of 3.8 percent; WAEMU aggregate solvency ratio about 11 percent. Excluding the two state banks, Togo’s solvency ratio improves to 11 percent. Tier-1 leverage ratio in Togo stands at 1.4 percent, compared with a WAEMU average of 6 percent and a Basel III minimum requirement of 3 percent. Excluding state-owned banks brings Togo back in line with WAEMU average. - Underdiversification: credit to the retail sector makes up 35 percent of total loans; credit related to public works amounts to 22 percent (WAEMU average around 8 percent). Credit to five largest borrowers stands at 140 percent of capital in Togo, compared to 94 percent in the WAEMU. - Non-performing loans: approximately 20 percent of total loans are classified as non-performing (WAEMU average about 15 percent). - Large exposure to sovereign risk: government securities make up about 15 percent of commercial banks’ balance sheets (well below 5 percent in 2000). At the WAEMU level, holdings of government securities account for more than 20 percent of commercial bank assets. - An 8 percent haircut on banks’ government claims (which amount to 12 times the value of bank capital) would wipe out all capital currently present in the Togolese banking system. - 96.5 percent of the banking sector’s government securities are claims on WAEMU-countries; Togolese banks hold nearly 40 percent of their government claims on the Togolese government. Non-WAEMU sovereign bond holdings account for 3.5 percent of the portfolio. - Prefinanced loans (practice ended in late 2016) amounted to 7 percent of GDP at end-2016 and were not included in official public debt statistics until recently. - Banks increased reliance on BCEAO refinancing alongside increased holdings of government securities; banks with higher holdings of government securities tend to rely more heavily on BCEAO refinancing. This effectively means borrowing from the central bank to lend to the treasury, profiting from the interest-rate spread. - One-year T-bill rates across WAEMU countries typically stand within 100 basis points of each other and correlate weakly with debt-to-GDP and debt-service-to-GDP ratios (correlation coefficients of 0.09 and 0.17, respectively). - Risks of indirect central bank-financed deficits include: - Loading sovereign debt on bank balance sheets, reinforcing the “doom loop” between fiscal and banking stability. - Potential inflationary pressures (noted as fairly limited for Togo given public spending directed to infrastructure investment). - Liquidity risk from short-term BCEAO credit exposure to government and banks. - Crowding out of private lending; raw data are consistent with crowding-out in Togo (no such association in other WAEMU countries). For the post-2005 sample, the regression line for Togo is y = -0.7941x + 0.6293. ### Policy recommendations and options (sovereign-bank nexus) - Reduce fiscal deficits, noting the Togolese government debt-to-GDP ratio of 80.8 percent in 2016 (the highest ratio in the WAEMU-area). - Increase attention to possible “doom loops” by: - Raising banks’ capital requirements. - Imposing limits on holdings of domestic sovereign debt. - Capping holdings of domestic sovereign debt relative to bank capital as a single measure capturing both capital and exposure limits. - Re-evaluating the risk-weighting procedure applied to sovereign debt (current WAEMU regulation assigns a zero-risk weight to government securities irrespective of their rating). - Broadening the applicability of exposure limits to limit commercial bank exposure to a single sovereign. - Recognize that actions suggested (raising capital requirements, exposure limits, re-weighting sovereign debt) are primarily within the domain of the BCEAO; therefore fiscal consolidation is the main short-run mitigation strategy for Togo. - Under the Fund-supported program, the authorities are committed to reduce the overall fiscal deficit substantially and resolve existing financial sector weaknesses, especially in the two public banks. *Source: Togolese authorities and CEQ; IMF staff CEQ Assessment (April 27, 2017). International Monetary Fund — cr17128* ### 1. CEQ Income Concepts and Their Components ______________________________________ 6 ### 1. CEQ Income Concepts and Their Components ### A. Introduction - Objective: Assess redistributive impact of taxation and spending on household-level income inequality and poverty in Togo. - Key contextual indicators: - Human Development Index (HDI): rose from 0.436 in 2005 to 0.487 in 2015. - Head-count poverty rate: fell from 61.7 percent in 2006 to 55.1 percent in 2015. - Gini coefficient: worsened slightly from 0.36 to 0.38 over the same period. ### B. Social Spending and Taxation in Togo - Analysis scope: - Included: most social spending (social protection, education, healthcare); excluded defense, security, infrastructure. - Revenue included: personal income taxes, VAT, excise taxes, grants. - Revenue excluded: corporate income tax, corporate withholding tax, customs duties, nontax revenue. - Government expenditures included in the analysis, 2015 (CFAF (billions); Percent of GDP): - Total: 2,893; 4.80 - Social spending: 2,793; 4.60 - Social protection: 344; 0.60 - Social assistance: 84; 0.14 - Cash transfers: 84; 0.14 - Social insurance: 260; 0.40 - Education: 1,480; 2.40 - Primary: 750; 1.20 - Secondary: 528; 0.90 - Tertiary: 202; 0.30 - Health: 969; 1.60 - Subsidies: 100; 0.21 - Water: 91; 0.00 - Rural electrification: 9; 0.00 - Note: "Expenditures included in Togo’s CEQ Assessment may not be fully allocated within the QUIBB for various reasons." - Government revenue included in the analysis, 2015 (CFAF (billions); Percent of GDP): - Total Revenue and Grants: 5,952; 8.20 - Tax Revenue: 5,016; 11.60 - Direct taxes: 1,197; 3.90 - Personal Income Tax: 1,197; 1.90 - Indirect Taxes: 3,819; 7.60 - VAT: 2,353; 3.80 - Excise Taxes: 1,466; 2.40 - Grants: 936; 1.50 - Note: "Revenues included in Togo’s CEQ Assessment may not be fully allocated within the QUIBB for various reasons." ### C. Methodological Summary and Household Survey Data - Method: CEQ Assessment allocates fiscal policy elements to individuals/households from micro-level socio-economic survey and computes poverty, inequality, progressiveness, and redistribution effects. - Income concepts: comparison between pre-fiscal (market income) and post-fiscal (disposable, consumable, final) income concepts as presented in Figure 1 (components preserved in source figure). - Caveat: Pre-fiscal income estimates require pension receipts, pension contributions, direct taxes and direct transfers; these estimates are not yet available in Togo. ### D. Results — Inequality, Poverty, and Incidence - Overall redistributive effect: - Fiscal policy reduces income inequality. - Gini coefficient for disposable incomes: 0.38. - Disposable-income Gini is one percentage point higher than coefficient for final or market incomes. - Fiscal policy lowers inequality by one Gini percentage point in both urban and rural areas. - Poverty effects: - Combining indirect taxes and subsidies increases poverty rates. - Poverty headcount rises from 55 percent (disposable income) to 59 percent (consumable income after subsidies and indirect taxes). - Rural poverty: nearly 70 percent of rural population (higher baseline), with the adverse effect from taxes and spending being more muted in rural areas. - Electricity subsidies: - Regessive: higher-income households receive larger shares of total electricity subsidies. - Subsidies account for less than 0.5 percent of the pre-subsidy income even for upper-income households. - For poorest households many have no electricity consumption and thus receive little or no subsidy. - VAT incidence: - Upper-income households pay larger shares of total VAT collections. - VAT is equalizing in that VAT paid as share of pre-VAT income rises with income. - Despite progressivity on some measures, VAT reduces purchasing power and leads to increases in poverty among poor or near-poor households. - Education spending: - Education accounts for about half of all social spending. - Public education access and use are overall progressive. - Nearly 4 in 10 individuals in the lower 70 percent of the population participate in the public education system. - 3 in 10 individuals in the upper 10 percent are covered by the public-school system. - Assumptions used for per-student benefits: - Pre-primary per-student public education benefit = 75 percent of primary per-student benefit. - Secondary per-student public education benefit = 200 percent of primary per-student benefit. - Conclusion: Public education spending overall has a progressive effect driven by primary education; tertiary education is regressive. - Health spending: - Health accounts for about 13 percent of all social spending. - Frequency of illness is approximately constant across deciles (self-reported). - Upper-income households use total (public plus private) healthcare more frequently. - Upper-income households choose public hospital care more frequently; lower-income households use public clinic care more frequently. - Assumption: a visit to the public hospital is twice as expensive as a visit to the public clinic in terms of public spending. - Conclusion: Total public healthcare spending appears approximately neutral (proportionate to incomes). - Comparative incidence: - Social spending benefits (education and healthcare) account for a larger share of poorer households’ incomes than electricity subsidies. - Example magnitudes: - Electricity subsidies contribute less than 0.1 percent of pre-subsidy income for households in the lower decile. - Healthcare and education benefits contribute approximately 4 percent of individual income for poorer households. - For households in deciles 3 through 10, the VAT bill is typically larger than the education, health, and electricity subsidy benefits combined. ### E. Policy Implications and Conclusion - Summary of trade-offs: - Fiscal policy in Togo reduces inequality and is progressive on several measures. - However, the combination of indirect taxes and subsidies increases poverty rates because taxes paid by lower-income households outweigh transfers received. - Electricity subsidies are regressive despite being small in magnitude. - VAT imposes an economic burden on lower-income households even if VAT is progressive in distributional terms. - Policy recommendations emphasized: - Target public spending to address needs of lower-income households as authorities shift spending toward social expenditures. - Avoid regressive spending policies such as current electricity subsidies. - Effectively target social spending to mitigate VAT’s adverse impact on the poor while recognizing VAT’s role in raising fiscal resources for social programs and public goods. *Source: Togolese authorities and CEQ; IMF staff CEQ Assessment (April 27, 2017).* ### References ### References ### Key findings on the sovereign-bank nexus in Togo - Recent fiscal deficits in Togo have largely been financed by the domestic banking sector, which has in turn relied on refinancing provided by the central bank. - The overall fiscal deficit averaged 2.4 percent over 2005-10, and increased to an average of 7.0 percent over 2011-15. - Public debt increased to 80.8 percent of GDP in 2016 from 49.3 percent in 2011. - Budget deficits in the WAEMU deteriorated, on average, by 2.2 percentage points to 3.4 percent during the same period. - Sub-Saharan Africa went from an average budget balance over 2005-10 to an average deficit of 2.7 percent over 2011-15. - The Togolese banking sector (13 main banks) faces: - Undercapitalization: aggregate solvency ratio of 3.8 percent; WAEMU aggregate solvency ratio about 11 percent. Excluding the two state banks, Togo’s solvency ratio improves to 11 percent. Tier-1 leverage ratio in Togo stands at 1.4 percent, compared with a WAEMU average of 6 percent and a Basel III minimum requirement of 3 percent. Excluding state-owned banks brings Togo back in line with WAEMU average. - Underdiversification: credit to the retail sector makes up 35 percent of total loans; credit related to public works amounts to 22 percent (WAEMU average around 8 percent). Credit to five largest borrowers stands at 140 percent of capital in Togo, compared to 94 percent in the WAEMU. - Non-performing loans: approximately 20 percent of total loans are classified as non-performing (WAEMU average about 15 percent). - Large exposure to sovereign risk: government securities make up about 15 percent of commercial banks’ balance sheets (well below 5 percent in 2000). At the WAEMU level, holdings of government securities account for more than 20 percent of commercial bank assets. - An 8 percent haircut on banks’ government claims (which amount to 12 times the value of bank capital) would wipe out all capital currently present in the Togolese banking system. - 96.5 percent of the banking sector’s government securities are claims on WAEMU-countries; Togolese banks hold nearly 40 percent of their government claims on the Togolese government. Non-WAEMU sovereign bond holdings account for 3.5 percent of the portfolio. - Prefinanced loans (practice ended in late 2016) amounted to 7 percent of GDP at end-2016 and were not included in official public debt statistics until recently. - Banks increased reliance on BCEAO refinancing alongside increased holdings of government securities; banks with higher holdings of government securities tend to rely more heavily on BCEAO refinancing. This effectively means borrowing from the central bank to lend to the treasury, profiting from the interest-rate spread. - One-year T-bill rates across WAEMU countries typically stand within 100 basis points of each other and correlate weakly with debt-to-GDP and debt-service-to-GDP ratios (correlation coefficients of 0.09 and 0.17, respectively). - Risks of indirect central bank-financed deficits include: - Loading sovereign debt on bank balance sheets, reinforcing the “doom loop” between fiscal and banking stability. - Potential inflationary pressures (noted as fairly limited for Togo given public spending directed to infrastructure investment). - Liquidity risk from short-term BCEAO credit exposure to government and banks. - Crowding out of private lending; raw data are consistent with crowding-out in Togo (no such association in other WAEMU countries). For the post-2005 sample, the regression line for Togo is y = -0.7941x + 0.6293. ### Policy recommendations and options - Reduce fiscal deficits, noting the Togolese government debt-to-GDP ratio of 80.8 percent in 2016 (the highest ratio in the WAEMU-area). - Increase attention to possible “doom loops” by: - Raising banks’ capital requirements. - Imposing limits on holdings of domestic sovereign debt. - Capping holdings of domestic sovereign debt relative to bank capital as a single measure capturing both capital and exposure limits. - Re-evaluating the risk-weighting procedure applied to sovereign debt (current WAEMU regulation assigns a zero-risk weight to government securities irrespective of their rating). - Broadening the applicability of exposure limits to limit commercial bank exposure to a single sovereign. - Recognize that actions suggested (raising capital requirements, exposure limits, re-weighting sovereign debt) are primarily within the domain of the BCEAO; therefore fiscal consolidation is the main short-run mitigation strategy for Togo. - Under the Fund-supported program, the authorities are committed to reduce the overall fiscal deficit substantially and resolve existing financial sector weaknesses, especially in the two public banks. ### References cited in the text - Bollinger, Christopher R. and Barry T. Hirsch, “Is Earnings Nonresponse Ignorable?” Review of Economics and Statistics, May 2013, 95(2): 407–416. - Bollinger, Christopher R. and Barry T. Hirsch. “Match Bias from Earnings Imputation in the Current Population Survey: The Case of Imperfect Matching,” Journal of Labor Economics, July 2006, 24, 483-519. - Nora Lustig, ed., Commitment to Equity Handbook: Estimating the Redistributive Impact of Fiscal Policy, The Brookings Institution and CEQ Institute/Tulane University, in progress. - Human Development Report 2016, UNDP, 2016. - Questionnaire des Indicateurs de Base du Bien-être (QUIBB) 2015, INSEED, April, 2016. - Brunnermeier, Markus K., Luis Garicano, Lane Philip R., Marco Pagano, Ricardo Reis, Tanos Santos, Stijn Van Nieuwerburgh, and Dimitri Vayanos (2016), “The Sovereign-Bank Diabolic Loop and ESBies”, American Economic Review, forthcoming. - De Grauwe, Paul (2012), “The Governance of a Fragile Eurozone”, Australian Economic Review, 45, pp. 255-268. - Fahri, Emmanuel and Jean Tirole (2015), “Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops”, Mimeo, Harvard University. - IMF (2015), “Developments in Central Bank Liquidity Provision: A Harbinger of Wider Macrofinancial Risks in the WAEMU?”, IMF Country Report No. 15/101, pp. 15-21. - Obstfeld, Maurice (2012), “Finance at Center Stage: Some Lessons of the Euro Crisis”, European Commission Economic Papers No. 493. - S&P (2016), “Undoing The Doom Loop: A Look at The Links Between European Banks And Sovereign Debt”. *International Monetary Fund — cr17128 - References* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17128.pdf_