## cr1802

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---

### 1. Measuring Export Diversification — Structure of the Beninese Economy
- Real economic growth:
  - Rebounded to 4 percent in 2016 compared to 2015 (2.1 percent).
  - From 2006 to 2016, real GDP growth averaged 4.2 percent (maximum of 7.2 percent in 2013 and minimum of 2.1 percent in 2010 and 2015).
- Inflation and fiscal balances:
  - Inflation turned negative in 2016 after a moderate increase in 2015.
  - Fiscal deficit grew from -0.4 percent of GDP in 2012 to -6.2 percent of GDP in 2016, with a maximum of -8.0 percent of GDP in 2015.
  - External current account deficit dropped by 1.5 percentage points of GDP in 2016 compared to 2015.
- Demographics and poverty:
  - Population: 11 million; per capita income US$790 in 2015.
  - Rapid population growth averaging 3.5 percent per year.
  - Poverty: 36.2 percent in 2011 to 40.1 percent in 2015.
  - Informal sector contributes up to almost 60 percent of GDP and engages over 80 percent of the labor force.
  - Re-export to Nigeria contributes up to a quarter of the government’s revenue.
- Sectoral composition and employment:
  - Agriculture: accounts for a quarter of GDP and 51 percent of employment; cotton is the primary export commodity.
  - Sectoral contributions to real GDP growth:
    - 2000–2012: services 2.2 percent, industry 0.4 percent, agriculture 1.1 percent.
    - 2010–2016: primary sector 0.5 percent, secondary around 1 percent, tertiary 2.2 percent.
  - Output diversification is low and stagnant (Theil Index based measure).
- Poverty distribution (Text Table 1: Benin: National Poverty and Inequality Rates 2007–2015):
  - Urban poverty rates: 2007 = 28.0; 2009 = 29.8; 2011 = 31.3; 2015 = 35.8.
  - Rural poverty rates: 2007 = 36.0; 2009 = 38.4; 2011 = 39.7; 2015 = 43.6.
  - Benin Total poverty rates: 2007 = 33.0; 2009 = 35.2; 2011 = 36.2; 2015 = 40.1.
  - Male-headed households: 36.2, 38.0, 40.2.
  - Female-headed households: 30.4, 27.6, 39.7.
- Agriculture challenges:
  - Production relies on increases in cropped areas and family labor, limited use of improved inputs, methods, and equipment.
  - Exports concentrated on cotton, pineapple, cashews, soy and cottonseed.
  - Imports: horticultural products from neighboring countries, rice from Asia, wheat/frozen meat/milk from Europe, frozen poultry from Brazil.
  - Triple challenges: (i) diversifying exports (consolidate cotton, increase pineapple and cashew nut exports), (ii) increasing food production, (iii) sustainably increasing farm and post-harvest productivity.
  - Access to financing limited outside the cotton system; agricultural trade performance weak with a persistently negative agricultural trade balance.
- Industry and value-chain integration:
  - Manufacturing share fell from 22 percent to 12 percent during 2000–2012.
  - Asian peers: manufacturing increased from 10 percent to 16 percent between 1990 and 2012.
  - Agricultural sector share: average ~24 percent during 2000–2009 and ~22 percent during 2010–2016.
  - Depth of integration in global value chains aligned with the rest of Sub-Saharan Africa (REO measure, Average 2008–13).

### 1. Measuring Export Diversification — Growth and factor inputs; policy implications
- Growth decomposition:
  - Two thirds of growth over the past two decades attributed to labor accumulation.
  - Capital accumulation accounts for almost a third of growth.
  - Human capital and total factor productivity (TFP) are main constraints.
- Human capital and productivity gaps:
  - Basic education rates significantly lower compared to SSA and Asian benchmarks and more unequally distributed.
  - Index of Human Capital per Person and TFP levels are comparatively low.
- Business environment and public investment:
  - Public investment efficiency relatively low.
  - Business environment constraints: contract enforcement, access to credit, efficient electricity provision.
- Policy implications (targeting identified gaps):
  - Policies to improve access and quality of education.
  - Public financial management (PFM) reforms to improve efficiency of public investment.
  - Reforms in contract enforcement, access to credit, and electricity provision.

---

### Competitiveness and business climate
- International ranking:
  - Doing Business Indicators (DBI) 2016: Benin ranked 155th out of 189 countries.
- Key constraints:
  - Challenging business climate, low productivity, weak human capital.
- Social indicators:
  - Education, health, access to water, and infant mortality improved slowly; unlikely Benin achieved none of the MDGs in 2015.
- Labor market:
  - Growth accompanied by low job creation and widespread underemployment, especially among women and youth in urban areas.
  - Participation of women in services improved over the last decade.
- Foreign Direct Investment:
  - "FDI is keeping its pace with SSA but more investment is needed."
- Sectoral structure, exports and employment:
  - Benin maintained a steady sectoral share over last decade.
  - Post-2004 structural changes improved manufacturing and services share, "reaching 75 percent of GDP."
  - Exports per capita remain lower than most SSA countries but improved substantially.
- Export diversification and volatility impacts:
  - Benin has not diversified exports comparably to African benchmark countries that diversified strongly after 1990.
  - IMF (2014a) estimate: "a one standard deviation increase in LIC’s export diversification raises the growth rate by about 0.8 percentage points."
  - For Benin: estimated growth gain of "0.2 percentage point if export diversification was raised to levels observed in comparators like Vietnam."
- Growth volatility model (1992–2015, two-step GMM):
  - Volatility measure: standard deviation of GDP growth using five-year window.
  - Findings:
    - Export diversification helps reduce growth volatility.
    - Increases in the intensive margin of product diversification more effective in decreasing volatility.
    - Ceteris paribus, increasing product diversification could decrease volatility by about one fifth and a third, respectively.
- Export quality:
  - Export product quality for Benin remained "relatively mediocre overtime."
  - Theil Index decomposition used (between = extensive margin; within = intensive margin).

### Policy recommendations to promote structural transformation
- Mid- to long-term priorities:
  - Strengthen the business climate, address electricity shortages, increase human capital.
- Short-run productivity measures:
  - (i) Support large-scale adoption of improved technologies (production, post-harvest, processing and storage), including climate-smart systems.
  - (ii) Develop production and market infrastructure: efficient water management, reduction of post-harvest losses, better market access through warehouses and facilities.
  - (iii) Support value chain coordination and access to finance via sustainable use of financial management instruments set up under the original project.
  - (iv) Provide institutional support to the Ministry of Agriculture and stakeholders, focusing on capacity building.
- Additional points:
  - Improving education and productivity could significantly impact the informal economy, estimated "more than half of GDP."
  - Product diversification could yield higher growth rates.

---

### Informality, governance, and financial sector overview
- Informality by sector (Medina et al (2017) figure): Cotton 1.5, Services 11, Industry 18.5, Commerce 69.
- Informal economy estimated at more than half of GDP.
- Governance:
  - Ibrahim Index of African Governance shown for 2005–2015 comparisons (Benin, Other WAEMU, Sub‐Saharan Africa).
- Financial sector characterization:
  - "Shallow, segmented, and with limited financial inclusion."
  - As of end-2016: "15 commercial banks," with "4 banks holding about 80 percent of credits to the banking system."
  - Banks’ capital adequacy increased from "8.8 percent (end-June 2015) to 10.6 percent."
  - Provisioning ratio for NPLs: "12 percent of risk-weighted assets in 2014–15."
  - Liquidity ratio and profitability indicators lag WAEMU averages.
  - Ratio of NPLs remains high compared with WAEMU peers.

---

### Banking system stability and depth
- Overall characterization:
  - "Broadly sound but plays a limited role in financial inclusion."
- Access and depth indicators:
  - Deposit accounts relative to active population: around "5 percent."
  - Bank account ownership: "17 percent of the population had a bank account in 2015."
  - Broad money (M2) to GDP: rose from "34 percent in end-2012 to 40 percent at June 2017."
  - Banking system depth ranks "just below the average of its peers the WAEMU region (with private credit and domestic deposits at 21 and 30 percent of GDP, respectively)."
  - Interbank market: "no existent."
- Microfinance sector:
  - "721 MFIs, where only 226 are licensed."
  - Serves "4.5 million" rural population; lacks long-term lending capacity for SMEs.
  - Unauthorized MFIs ("deposit taken institutions") numerous; deposits collected by unauthorized MFIs about "½ percent of GDP."
  - Recommendation: "Annual on-site supervisions will strengthen the risk-based approach being adopted by the authorities, including enhance data collection, and enable technological innovations in this subsector."
- Other nonbank institutions:
  - "Insurance companies, pension funds and postal checking services."
  - Pension funds: "Fonds national de retraite du Bénin" for permanent civil servants; "Caisse nationale de sécurité sociale" for private sector and contractual civil servants.
  - Insurance: "15 insurance companies, including eight in damage-related insurance and six life insurers."

### Financial access, inclusion, mobile banking
- Access:
  - Number of bank branches increasing, particularly in rural areas.
  - High documentation requirements impede access ("participation costs").
  - Gender and education disparities: "Male reported higher access than females"; education level affects access.
- Mobile banking:
  - Benin holds "around 5 percent of the total volume of mobile transactions in the WAEMU region with a total number of subscription of 12 percent."
- Financial inclusion indicators (2015) described in source figures: "Having an Account," "Using Mobile Phone to make payments," "Borrowed or Saved from bank," "Borrowed or Saved informally."

### Selected financial soundness indicators (series and highlights)
- Regulatory capital to risk-weighted assets (2011–2017 June): "12.5   12.8   12.9  12.7   12.6  9.5  10.0"
- Core (Tier 1) capital to risk-weighted assets (2011–2017 June): "11.7   11.9   11.8  11.2   10.5  7.6  8.6"
- Provisions to risk-weighted assets (2011–2016): "10.7   10.8   10.3  10.7   11.7   15.6  19.8"
- Capital to total assets (2011–2016): "7.3    7.3    7.2  6.7    5.7  3.8  4.4"
- Total loans to total assets (2011–2016): "55.2   55.0   55.9  54.6   53.1   39.3  56.1"
- Credit concentration to 5 largest borrowers: "92.9   92.3   75.1  88.6  113.1  ...  487.0"
- Gross NPLs to Total loans (2011–2017 June): "15.9   16.0   15.5  14.4   14.4   21.4  20.3"
- Provisioning rate (2011–2016): "64.2   63.4   61.0  62.8   62.8   63.2  66.3"
- Net NPLs to total loans (2011–2017 June): "6.4    6.5    6.6  6.1    5.9  9.1  7.9"
- Net NPLs to capital (2011–2017 June): "47.8   48.8   51.1  50.0   54.9   95.2   100.8"
- Liquidity and deposit ratios (selected):
  - Liquid assets to total assets (2011–2015): "33.6   32.5   32.2  30.9   29.4  ......"
  - Total loans to total deposits (2011–2017 June): "84.3   86.2   90.0  89.5   87.0   68.4  71.8"
  - Total deposits to total liabilities (2011–2017 June): "72.9   71.1   68.5  63.4   67.1   57.4  78.0"
- Earnings and profitability (selected):
  - Average cost of borrowed funds series include: "2.4    2.5    2.8  2.4    2.4  ..."
  - Average interest rate on loans series include: "9.7    9.8   10.7  9.1    2.4  ..."
  - Average interest margin series include: "7.3    7.3    7.9  6.7    6.4  ..."
  - After-tax ROA series: "1.2    0.9    0.9  1.1    1.2  ..."
  - After-tax ROE series: "13.7   10.1   11.5  15.5   16.4  ..."
- Constraints on private investment finance:
  - Banks favor WAEMU sovereign borrowing due to yields of "6 to 7%".
  - Small formal sector and high branch costs in rural areas limit bank financing to private investment.
  - Microfinance lacks long-term funds to finance private investment.

### Financial sector policy recommendations and sequencing
- Emphasize institutional development early, then market development as income per capita rises.
- Recommended reforms:
  - Credit reporting bill to unify collateral registration.
  - Strengthen insolvency/bankruptcy procedures.
  - Improve land titling and contract enforcement.
  - Strengthen agency banking regulation.
  - Annual on-site supervision for MFIs; enhance data collection; enable technological innovations.
  - Continue development of insurance and pension systems to broaden investor base.

---

### Public investment efficiency: gaps, methods, and findings
- Infrastructure gap:
  - "Benin’s infrastructure gap is relative large" and identified as a growth bottleneck.
- Historical public investment performance:
  - Public investments as proportion of national budget: average "36.7 percent from 2010 to 2014."
  - Investment to GDP ratio: "dropping from 9.0 percent in 2009 to 5.1 percent in 2010."
  - Capital expenditure: "8.1 percent in 2015."
- Perception and quality:
  - Public capital stock has "continuously deteriorated recently."
  - Perception of infrastructure quality lower than SSA and WAEMU averages.
  - Access to infrastructure (electricity, treated water) scarcely improved and even decreased in health since the 1990’s.
- Government strategy:
  - PAG 2016–21 encourages innovative financing such as PPPs.
- Empirical approach:
  - DEA (output oriented) with variable returns to scale; two inputs–one outputs model; sample 2000–15.
  - Inputs: real public capital stock per capita; per capita GDP.
  - Outputs: physical indicator (roads, electricity, water, secondary teachers, hospital beds), qualitative indicator (WEF survey), hybrid indicator.
- Efficiency findings:
  - Benin could increase investment efficiency by 55 percent on average with the same investment.
  - Correlation between public capital per capita and perceptions of infrastructure quality is positive but weak.
  - Investment effectiveness in Benin weaker in generating growth than peers.
- Determinants (cross-country regressions 2000–15; sample 154 countries, 45 SSA):
  - Control of Corruption: 0.11783*** (t-statistic (4.588))
  - Regulatory Quality: 0.10568*** (t-statistic (4.148))
  - Official Development Assistance: 0.00000 (t-statistics (1.443) and (0.934))
  - Proportion of Urban Population: -0.00146** and -0.00159** (t-statistics (-2.066) and (-2.180))
  - Natural Resources Dependency: -0.02733 and -0.02801 (t-statistics (-0.748) and (-0.750))
  - Constant: 0.89319*** and 0.88955*** (t-statistics (19.280) and (18.940))
  - Observations: 103
  - Significance: *** p<0.01, ** p<0.05, * p<0.1
- Quantitative implication:
  - A 10 percent increase in the control of corruption index or the regulatory quality index could improve public investment efficiency by about 15 percent on average.
- PIM and PIMA:
  - PIMA evaluates 15 key institutions across planning, allocation, and implementation stages.
  - Recommendation: identify and strengthen PIM institutions to reduce efficiency gap.

---

### Revenue mobilization simulations (2 percent of GDP) — Methods and major findings
- Tax instrument comparisons (simulation of revenue equal to 2 percent of GDP):
  - VAT is the least distortive instrument on aggregate output (does not crowd out private investment; allows crowd-in effect).
  - CIT reduces the return on investment and leads to large decrease in economic activity.
  - PIT reduces disposable income of richer households, lowering aggregate savings and investment.
- Distributional impacts:
  - Urban areas: VAT reform results in higher income inequality (urban poor in informal non-tradable sector lose from price effects).
  - Rural areas: VAT reform leads to lower income inequality (decreased agricultural prices affect richest rural households more).
  - UBI reduces both consumption and income inequality (direct transfers and indirect price channel; 4 percent increase in the relative price of non-tradable goods produced by the poor illustrated).
- Scenarios simulated (base = benchmark equilibrium):
  - Scenario 1: VAT, revenue used in non-productive governmental expenditure.
  - Scenario 2: VAT, revenue used for uniform cash transfer.
  - Scenario 3: VAT, revenue used to finance infrastructure investment that boosts productivity by 1.74%.
  - Scenario 4: CIT, revenue used in non-productive governmental expenditure.
  - Scenario 5: PIT, revenue used in non-productive governmental expenditure.
- Policy implications:
  - Success of revenue mobilization depends on instrument choice and use of revenues.
  - VAT is least distortive for Benin and slightly progressive in simulation; raises revenue with smaller negative impact than PIT and CIT.
  - If revenues finance unproductive consumption, mobilization contracts economic activity.
  - If revenues finance efficient infrastructure investment (roads, electrification, irrigation, agricultural R&D and services), mobilization can boost growth.
  - Well-designed cash transfers (UBI) can offset negative VAT effects and make revenue mobilization more inclusive.
- CEQ and fiscal incidence context:
  - Poverty rate: 36.2 percent in 2011 to 40.1 percent in 2015 (INSAE).
  - Real GDP growth over 2013–15 averaged 5.2 percent.
  - Gini coefficient for disposable income: 0.43.
  - Fiscal revenue composition (percentage of GDP), selected values:
    - Tax revenues: 14.6 (2011–14* average), 14.5 (2015), 13.4 (2016), 13.5 (Proj. 2017)
    - Tax on international trade: 7.6 (2011–14*), 7.0 (2015), 6.0 (2016), 6.2 (Proj. 2017)
    - Direct and indirect taxes: 6.9 (2011–14*), 7.5 (2015), 7.4 (2016), 7.3 (Proj. 2017)
    - Non tax revenues: 2.3 (2011–14*), 2.2 (2015), 2.0 (2016), 1.9 (Proj. 2017)
    - Total revenues: 16.9 (2011–14*), 16.7 (2015), 15.4 (2016), 15.5 (Proj. 2017)
    - *average
  - Redistribution and social spending:
    - Health and education spending reduce poverty; health and educational benefits contribute approximately by four percent of individual income.
    - Primary education is the most progressively distributed in-kind benefit; tertiary education is regressively distributed.
    - Public education and healthcare benefits account for a large share of poorer households’ incomes; subsidies are less redistributive.
  - VAT incidence:
    - Upper-income households pay larger shares of total VAT collections.
    - VAT is equalizing in that VAT burden rises with income; concentration curve for VAT lies below the Lorenz curve.
    - Nevertheless, indirect taxes and insufficiently targeted transfers increase poverty headcount when indirect taxes are considered (consumable income poverty headcount rises from 40 percent to 43 percent when indirect taxes are subtracted).
- Final fiscal takeaway:
  - Fiscal policy has partially reduced inequality but increased poverty due to taxation without adequate targeted compensation.
  - Recommendation: target public spending and transfers (e.g., efficient infrastructure investment and well-designed cash transfers such as UBI) to make revenue mobilization less contractionary and more inclusive.

*Prepared by IMF staff; content extracted from cr1802 (PDF chapter/section).*

### 1. Measuring Export Diversification ____________________________________________________________ 13

### 1. Measuring Export Diversification

### The Structure of the Beninese Economy
- Recent macroeconomic performance and volatility:
  - Real economic growth rebounded to 4 percent in 2016 compared to 2015, where the growth rate slowed to 2.1 percent.
  - From 2006 to 2016, real GDP growth averaged 4.2 percent (maximum of 7.2 percent in 2013 and minimum of 2.1 percent in 2010 and 2015).
  - Inflation turned negative in 2016 after a moderate increase in 2015.
  - Fiscal deficit grew from -0.4 percent of GDP in 2012 to -6.2 percent of GDP in 2016, with a maximum of -8.0 percent of GDP in 2015.
  - External current account deficit dropped by 1.5 percentage points of GDP in 2016 compared to 2015.
- Poverty and demographics:
  - Benin is a low-income country with 11 million people and a per capita income of US$790 in 2015.
  - Rapid population growth averaging 3.5 percent per year.
  - Poverty levels grew from 36.2 percent in 2011 to 40.1 percent in 2015.
  - Informal sector (including subsistence agriculture) contributes up to almost 60 percent of GDP and engages over 80 percent of the labor force.
  - Re-export to Nigeria contributes up to a quarter of the government’s revenue.
- Sectoral composition and employment:
  - Agriculture accounts for a quarter of GDP and 51 percent of employment; cotton is the primary export commodity.
  - During 2000-2012, the service sector contributed 2.2 percent to real GDP growth, industry 0.4 percent, and agriculture 1.1 percent.
  - During 2010-2016, primary sector contributed 0.5 percent to real GDP growth, secondary around 1 percent, and tertiary 2.2 percent.
  - Output diversification is low and stagnant (Theil Index based measure).
- Poverty distribution (Text Table 1: Benin: National Poverty and Inequality Rates 2007–2015):
  - Urban poverty rates: 2007 = 28.0; 2009 = 29.8; 2011 = 31.3; 2015 = 35.8.
  - Rural poverty rates: 2007 = 36.0; 2009 = 38.4; 2011 = 39.7; 2015 = 43.6.
  - Benin Total poverty rates: 2007 = 33.0; 2009 = 35.2; 2011 = 36.2; 2015 = 40.1.
  - Male-headed households: 36.2, 38.0, 40.2 (years not explicitly matched in table text).
  - Female-headed households: 30.4, 27.6, 39.7 (years not explicitly matched in table text).
- Agriculture-specific challenges:
  - Agricultural production systems rely on increases in cropped areas and family labor, limited use of improved inputs, production methods, and farm equipment.
  - Agricultural exports concentrated on cotton, fruits (pineapple), and nuts (cashews) and oilseeds (soy and cottonseed).
  - Benin imports large shares of horticultural products from neighboring countries, rice from Asia, wheat/frozen meat/milk from Europe, and frozen poultry from Brazil.
  - Agricultural sector faces triple challenges: (i) diversifying exports (consolidating cotton and increasing pineapple and cashew nut exports), (ii) increasing food production, and (iii) sustainably increasing farm and post-harvest productivity.
  - Access to financing is limited outside the cotton system; agricultural trade performance is generally weak with a persistently negative agricultural trade balance.
- Industry and value-chain integration:
  - Manufacturing share of output fell from 22 percent to 12 percent in Benin during 2000–2012.
  - By contrast, Asian peer group manufacturing increased from 10 percent to 16 percent between 1990 and 2012.
  - Share of agricultural sector remained elevated in Benin: average ~24 percent during 2000–2009 and ~22 percent during 2010–2016.
  - Benin’s depth of integration in global value chains (share of foreign value added in exports) is aligned with the rest of Sub-Saharan Africa (REO measure, Average 2008–13).

### Growth and Factor Inputs
- Growth decomposition and drivers:
  - Two thirds of growth over the past two decades can be attributed to labor accumulation.
  - Capital accumulation accounts for almost a third of growth.
  - Human capital and total factor productivity (TFP) have been the main constraints on stronger growth; Benin lags most on these factors relative to other countries.
- Human capital and productivity gaps:
  - Basic education rates in Benin are significantly lower compared to SSA and Asian benchmark countries and are more unequally distributed.
  - Index of Human Capital per Person and TFP levels are comparatively low (see productivity figures showing low TFP and room for human capital improvement).
- Public investment and business environment:
  - Public investment efficiency remains relatively low.
  - Business environment constraints impede productive private sector activity, including contract enforcement, access to credit, and efficient electricity provision.
- Policy implications (derived from factor ‘gaps’ identified):
  - Policies should target access and quality of education.
  - Public financial management (PFM) reforms to improve the efficiency of public investment.
  - Reforms in key areas of the business environment: contract enforcement, access to credit, and efficient electricity provision.

*Prepared by a team led by Norbert Toé and comprised of Aissatou Diallo, Karim Barhoumi, Shirin Nikaein Towfighian, and Rodolfo Maino. November 28, 2017.*

### 9.      Benin’s competitiveness is impaired by structural bottlenecks and a challenging

### cr1802 - 9.      Benin’s competitiveness is impaired by structural bottlenecks and a challenging

### Competitiveness and business climate
- Benin is ranked 155th (out of 189 countries) in the 2016 Doing Business Indicators (DBI) report.
- Key constraints highlighted:
  - Challenging business climate.
  - Low productivity.
  - Weak human capital.
- Social indicators:
  - Indicators related to education, health, access to water, and infant mortality have improved in recent years but at a slow pace, making it unlikely that Benin will achieve none of the MDGs in 2015.
- Labor market:
  - Growth accompanied by a low level of job creation with widespread underemployment, especially affecting women and the youth in urban areas.
  - Participation of women in services has shown an improvement in the last decade.
- Foreign Direct Investment:
  - "FDI is keeping its pace with SSA but more investment is needed." (textual statement from source)

### Sectoral structure, employment, and productivity
- Sectoral shares:
  - Benin has maintained a steady sectoral share in the last decade.
  - Benin was lagging almost half of the SSA countries in terms of manufacturing and services as a share of GDP, but structural changes after 2004 improved the position.
  - Currently, the share of manufacturing and services is ahead of most SSA countries, "reaching 75 percent of GDP."
- Exports and per capita metrics:
  - Exports per capita remain lower than for most SSA countries but improved substantially during the ten-year period referenced.
- Employment by sector and gender (qualitative summary from figures):
  - Shares in employment by sector have been steady, with an increase in female participation in services.
  - Benin: Employment by sector (Services, Industry, Agriculture) and Sectoral Employment by Gender shown in source figures (ILO - Trends Econometric Models, October 2013).

### Export diversification, quality, and growth/volatility implications
- Export diversification has not taken place: African benchmark countries diversified strongly after 1990; Benin has not achieved comparable diversification.
- Cross-country evidence and modeling:
  - Based on IMF (2014a) estimates, "a one standard deviation increase in LIC’s export diversification raises the growth rate by about 0.8 percentage points."
  - For Benin, this translates into estimated growth gains of "0.2 percentage point if export diversification was raised to levels observed in comparators like Vietnam."
- Growth volatility specification (following IMF 2014a):
  - Volatility measured: Vol_it denotes growth volatility, calculated as the standard deviation of GDP growth using a five-year window; Div_it denotes the diversification index (Total Theil, Herfindahl, extensive and intensive margins); open_it denotes trade openness (total exports and imports as a share of GDP); tot_it denotes controls (terms of trade volatility, inflation volatility, exchange rate volatility).
  - Data cover 1992-2015; regressions estimated using two-step GMM (Arellano and Bond (1991)) due to dynamic panel and lagged dependent variable.
- Regression findings (Table 1 summary):
  - Export diversification helps reduce growth volatility.
  - Decreases in volatility are more likely to be achieved through increasing the intensive margin of product diversification.
  - Ceteris paribus, estimates imply increasing product diversification could decrease volatility by about one fifth and a third, respectively (as stated in source text and illustrated in Figure 9).
- Export quality and diversification indices:
  - The export diversification index covers 187 countries and provides product diversification and quality information for 2000-2010.
  - Product quality for Benin exports has remained "relatively mediocre overtime."
  - Theil index measures used:
    - Theil Index decomposition into between (extensive margin: number of products/partners) and within (intensive margin: product shares).
  - Export partner diversification and product diversification trends illustrated in source figures.

### Policy recommendations and measures to promote structural transformation
- Mid- to long-term priorities:
  - Strengthen the business climate.
  - Address electricity shortages.
  - Increase human capital.
- Short-run measures to improve productivity (explicit list from source):
  - (i) Support the promotion of large-scale adoption of improved technologies (production, post-harvest, processing and storage), including climate-smart production systems, to reduce vulnerability of farming activities to climate change and weather vagaries.
  - (ii) Develop production and market infrastructure to enhance productivity through efficient water management, reduction of post-harvest losses and better access to market through warehouses and other facilities.
  - (iii) Support value chain coordination and access to finance through sustainable use of the financial management instruments set up under the original project.
  - (iv) Provide institutional support to the Ministry of Agriculture and other stakeholders in the sector (civil society and producers’ organizations) with a particular focus on capacity building.
- Additional policy points:
  - Measures to improve education and productivity could have significant impacts on the informal economy, which is estimated to be at "more than half of GDP."
  - Product diversification could yield higher growth rates.

### Informality, governance, and financial sector (selected points)
- Informality:
  - Informal activity by sector (percent) based on Medina et al (2017) (as shown in source figure): Cotton 1.5, Services 11, Industry 18.5, Commerce 69.
  - Informal economy estimated at more than half of GDP (textual statement).
- Governance:
  - Ibrahim Index of African Governance shown for 2005-2015 in source figure (Benin, Other WAEMU, Sub‐Saharan Africa comparison).
- Financial sector overview (beginning of Financial Inclusion section):
  - Benin’s financial sector described as "shallow, segmented, and with limited financial inclusion."
  - As of end-2016, there were "15 commercial banks," with "4 banks holding about 80 percent of credits to the banking system."
  - Banks’ capital adequacy increased from "8.8 percent (end-June 2015) to 10.6 percent," above the 8 percent minimum but still below the WAEMU and SSA averages.
  - Provisioning ratio for NPLs: "12 percent of risk-weighted assets in 2014–15."
  - Other indicators lagging WAEMU averages include the liquidity ratio and profitability indicators.
  - The ratio of non-performing loans (NPLs) remains high compared with peer countries in the WAEMU region.

*Source: World Bank and IMF staff; IMF staff analysis included in the provided chapter.*

### 2.      Although the banking system remains stable, its depth has not improved. The banking

### cr1802 - 2.      Although the banking system remains stable, its depth has not improved.

### Banking sector: stability and depth
- The banking sector is described as "broadly sound but plays a limited role in financial inclusion."
- Deposit accounts in commercial banks relative to the active population is around "5 percent."
- Only "17 percent of the population had a bank account in 2015."
- The ratio of broad money (M2) to GDP rose from "34 percent in end-2012 to 40 percent at June 2017."
- The depth of Benin’s banking system ranks "just below the average of its peers the WAEMU region (with private credit and domestic deposits at 21 and 30 percent of GDP, respectively)."
- Interbank market: "no existent."
- Banking services target high-income urban population; low population density and large informal sector limit access.
- Despite branch network development, access remains limited; access to finance is difficult for vulnerable groups and for small and medium-sized enterprises.

### Microfinance sector: structure and risks
- Number of MFIs: "721 MFIs, where only 226 are licensed."
- Role: provides financing to both sectors of the economy and rural population ("4.5 million") underserved by banks.
- Limitations: lacks long-term lending capacity to finance small and medium enterprises.
- Unauthorized MFIs ("deposit taken institutions") are numerous and represent high-risk exposure to the banking system.
- Size of deposits collected by unauthorized MFIs is "about ½ percent of GDP," implying a limited contingent fiscal liability but potential systemic risk if shocks occur.
- Recommendation in text: "Annual on-site supervisions will strengthen the risk-based approach being adopted by the authorities, including enhance data collection, and enable technological innovations in this subsector."

### Other nonbank financial institutions
- Sector composition: "insurance companies, pension funds and postal checking services."
- Pension funds: public entity "Fonds national de retraite du Bénin" for permanent civil servants; autonomous entity "Caisse nationale de sécurité sociale" for private sector employees and contractual civil servants.
- Insurance companies: "15 insurance companies, including eight in damage-related insurance and six life insurers."

### Financial access and development: barriers and policy measures
- Authorities’ objectives: enhance financial services delivery by addressing access, depth, and efficiency.
- Access:
  - Number of bank branches has been increasing, particularly in rural areas.
  - Regulatory strengthening of agency banking recommended.
  - High documentation requirements to open, maintain, and close accounts and for loan applications are identified as impediments to access ("participation costs").
- Depth:
  - Suggested measures: consider a credit reporting bill to unify the collateral registration system; strengthen insolvency/bankruptcy procedures; improve land titling; improve contract enforcement in the judiciary sector.
- Intermediation efficiency:
  - Efficiency linked to competition; reflected in interest spreads and banks’ overhead costs.
  - "Intermediation costs (i.e., high interest rates and fees) reflect asymmetries of information between borrowers and banks."

### Financial inclusion and mobile banking
- Comparative access: "Access to an account in Benin compares poorly with averages from low income countries."
- Gender and education: "Male reported higher access than females"; level of education affects access.
- Mobile banking:
  - Benin holds "around 5 percent of the total volume of mobile transactions in the WAEMU region with a total number of subscription of 12 percent."
- Financial inclusion indicators (2015): charts described for "Having an Account," "Using Mobile Phone to make payments," "Borrowed or Saved from bank," and "Borrowed or Saved informally" (values presented in figures in source).

### Financial soundness indicators (selected series and highlights)
- Regulatory capital to risk-weighted assets (2011–2017 June): "12.5   12.8   12.9  12.7   12.6  9.5  10.0"
- Core (Tier 1) capital to risk-weighted assets (2011–2017 June): "11.7   11.9   11.8  11.2   10.5  7.6  8.6"
- Provisions to risk-weighted assets (2011–2016): "10.7   10.8   10.3  10.7   11.7   15.6  19.8"
- Capital to total assets (2011–2016): "7.3    7.3    7.2  6.7    5.7  3.8  4.4"
- Total loans to total assets (2011–2016): "55.2   55.0   55.9  54.6   53.1   39.3  56.1"
- Concentration: Credit to the 5 largest borrowers (in terms of total capital): "92.9   92.3   75.1  88.6  113.1  ...  487.0"
- Gross NPLs to Total loans (2011–2017 June): "15.9   16.0   15.5  14.4   14.4   21.4  20.3"
- Provisioning rate (2011–2016): "64.2   63.4   61.0  62.8   62.8   63.2  66.3"
- Net NPLs to total loans (2011–2017 June): "6.4    6.5    6.6  6.1    5.9  9.1  7.9"
- Net NPLs to capital (2011–2017 June): "47.8   48.8   51.1  50.0   54.9   95.2   100.8"
- Liquidity and deposits:
  - Liquid assets to total assets (2011–2015): "33.6   32.5   32.2  30.9   29.4  ......"
  - Liquid assets to total deposits (2011–2015): "46.1   45.8   46.1  45.9   43.8  ......"
  - Total loans to total deposits (2011–2017 June): "84.3   86.2   90.0  89.5   87.0   68.4  71.8"
  - Total deposits to total liabilities (2011–2017 June): "72.9   71.1   68.5  63.4   67.1   57.4  78.0"
  - Demand deposits to total liabilities (2011–2017 June): "37.8   36.5   35.5  34.5   35.4   24.3  34.2"
  - Term deposits to total liabilities (2011–2017 June): "35.1   34.6   33.0  32.8   31.7   33.1  43.8"
- Earnings and profitability (selected):
  - Provisioned average interest and spreads series include: "Average cost of borrowed funds ... 2.4    2.5    2.8  2.4    2.4  ...", "Average interest rate on loans ... 9.7    9.8   10.7  9.1    2.4  ...", "Average interest margin ... 7.3    7.3    7.9  6.7    6.4  ...".
  - After-tax return on average assets (ROA) series: "1.2    0.9    0.9  1.1    1.2  ...".
  - After-tax return on average equity (ROE) series: "13.7   10.1   11.5  15.5   16.4  ...".
- Note: "..." indicates not available series in the source table.

### Contribution to private investment and constraints
- Banks do not significantly finance private investment because:
  - Institutional framework discourages commercial banks from taking risks; banks are "actively involved in WAEMU sovereign borrowing due to their high yield (6 to 7%)."
  - Limited scope for guaranteeing loans to small and medium enterprises.
  - Small size of the formal sector, particularly the manufacturing sector.
  - High cost of establishing bank branches in rural areas.
- Microfinance sector: limited in financing private investment due to "lack of long term funds."

### Policy recommendations and sequencing for financial development
- Emphasize institutional development at early stages, then market development as income per capita rises.
- Adapt regulation and infrastructure to:
  - Make private sector investment easier.
  - Allow private participants to hedge risks.
  - Enable capital to be efficiently channeled into investment projects.
- Continue development of insurance and pension systems to broaden investor base and improve capital market depth and breadth.
- Specific measures noted earlier: unify collateral registration via a credit reporting bill; strengthen insolvency/bankruptcy procedures; improve land titling; improve contract enforcement; strengthen agency banking regulation; annual on-site supervision for MFIs; enhance data collection; enable technological innovations in MFIs.

### Public investment efficiency: overview and findings
- Benin’s infrastructure gap: "Benin’s infrastructure gap is relative large" and identified as a growth bottleneck.
- Historical public investment performance:
  - Public investments as proportion of national budget: average annual rate "36.7 percent from 2010 to 2014."
  - Investment to GDP ratio: "dropping from 9.0 percent in 2009 to 5.1 percent in 2010."
  - Capital expenditure: "8.1 percent in 2015" (risen in recent years but remains below SSA average).
- Perception and quality:
  - Public capital stock has "continuously deteriorated recently."
  - Perception of infrastructure quality lower than SSA and WAEMU averages.
  - Access to infrastructure (electricity, treated water) has "scarcely improved and even decreased like in the health sector since the 1990’s."
- Government response:
  - Government’s Action Program (PAG), 2016–21 encourages innovative financing such as Public-Private Partnerships (PPPs) to ensure project implementation.
- Empirical approach in the note:
  - Uses efficiency frontier analysis and panel regressions to assess public investment efficiency and determinants.
  - Finding: "strong institutions can play a crucial role in fostering the efficiency of public investment."
- Caveats: data limitations—note does not separate public and private sector infrastructures and does not derive efficiency by type of infrastructure due to missing breakdown of data.

*Source: Provided IMF content (cr1802).*

### 7.      The efficiency frontier assesses the relative efficiency of Benin in translating public

### 7.      The efficiency frontier assesses the relative efficiency of Benin in translating public

### Methodology and model specification
- Approach: Data Envelopment Analysis (DEA) methodology (output oriented), following IMF (2015), Grigoli and Kapsoli (2013), and Albino-War and others (2014).
- DEA variant: DEA with variable return to scale (to avoid the constant returns to scale assumption and compare each DMU only with peers of similar characteristics).
- Sample period for efficiency assessment: 2000–15.
- Model structure: two inputs–one outputs model.
  - Inputs:
    - real public capital stock per capita.
    - per capita GDP (proxy for private sector contributions to infrastructure services).
  - Outputs: three measures of infrastructure quality and access (following IMF (2015)):
    - physical indicator: combines length of road network, electricity production, access to water, number of secondary teachers, and hospital beds.
    - qualitative indicator: World Economic Forum’s survey of business leaders’ impressions of the quality of key infrastructure services.
    - hybrid indicator: synthetic index combining the physical and survey-based indicators into coverage and quality of infrastructure networks.

### Key empirical findings on efficiency
- Overall conclusion: Benin’s estimated efficiency scores indicate performance lags that of all comparator groups and there is substantial scope to improve efficiency.
- Magnitude of inefficiency: Under the three efficiency score indices, results indicate that Benin could increase investment efficiency by 55 percent in average with the same amount of investment.
- Correlation observations:
  - Relationship between real public capital stock per capita and perceptions of infrastructure quality is positive but relatively weak (Figure 5).
  - Correlation between real GDP growth and investment in 2015 has been weaker in Benin than in other SSA countries (Figure 6).
- Investment effectiveness: Investment in Benin appears to have been less effective in generating growth than in other peers; increase in investment rates over past decades has not been concomitant with improvement in growth performance throughout the region.

### Determinants of public investment efficiency (cross-country regressions 2000–15)
- Sample: 154 countries including 45 SSA countries.
- Explanatory variables included in regressions: (i) quality of institutions (WDI control of corruption and regulatory quality), (ii) Official Development Assistance (ODA), (iii) percentage of urban population, and (iv) natural resources dependency (dummy with 1 for LIC or LMIC rich in non-renewable natural resources).
- Main results (selected regression output for Dependent Variable: Quality Efficiency Score):
  - Control of Corruption: 0.11783*** (t-statistic (4.588))
  - Regulatory Quality: 0.10568*** (t-statistic (4.148))
  - Official Development Assistance: 0.00000 (t-statistics (1.443) and (0.934) in two specifications)
  - Proportion of Urban Population: -0.00146** and -0.00159** (t-statistics (-2.066) and (-2.180))
  - Natural Resources Dependency: -0.02733 and -0.02801 (t-statistics (-0.748) and (-0.750))
  - Constant: 0.89319*** and 0.88955*** (t-statistics (19.280) and (18.940))
  - Observations: 103
  - Significance notation: *** p<0.01, ** p<0.05, * p<0.1
- Robustness: Alternative empirical methodology (Tobit Model) and different indicators of institutional quality did not affect the qualitative results significantly; institutional quality impact on public investment efficiency remains significant under alternative measures.

### Policy-relevant quantitative elasticities and implications
- Institutional improvement impact: Based on various specifications, a 10 percent increase in the control of corruption index or the regulatory quality index could improve public investment efficiency in Benin by about 15 percent on average and could lead to a reduction in Benin’s efficiency gap.
- Policy implication: Benin should speed up institutional and anti-corruption reforms; these require significant legal and institutional changes, development of new skills and capacities, and time to deliver benefits.

### Public Investment Management (PIM) institutions and PIMA framework
- PIMA: IMF’s Public Investment Management Assessment (PIMA) framework evaluates 15 key institutions for planning, allocation, and implementation of public investment.
- PIM cycle stages shaped by these institutions:
  - Planning sustainable investment across the public sector;
  - Allocating investment to the right sectors and projects;
  - Implementing projects on time and on budget.
- Recommendation: Benin needs to identify key PIM institutions that could reduce the efficiency gap and evaluate the strength of PIM practices of institutions and agencies in charge of public investment.

### Macroeconomic context and tax-reform simulation (domestic resource mobilization)
- Macroeconomic background:
  - public debt-to-GDP ratio increased by 43 percentage points over three years, reaching 47 percent of GDP in 2016.
- Reform strategy (2017): centered on domestic revenue mobilization—boost tax revenues through an increase in the VAT rate and cut non-priority recurrent spending to contain accumulation of public debt.
- Simulation experiment:
  - Main simulation: increase in tax revenue equaling two percent of GDP through VAT.
  - Baseline simulated outcome when additional revenue is used in a non-productive way:
    - Direct negative impact on consumption and output.
    - Positive impact on investment via an increase in the relative price of saving to consumption (crowding in private savings channeled to capital used by firms).
  - If additional tax revenue is used for infrastructure investment that boosts productivity in all sectors, the negative impact on consumption and output can be mostly mitigated.

### Distributional considerations of VAT in LICs (qualitative channels)
- LIC features making VAT especially consequential:
  - dual-economy with large agricultural and informal sectors;
  - low level of capital accumulation;
  - large informal sector reduces effectiveness of labor income taxes;
  - low capital accumulation provides a small tax base for capital return taxes.
- VAT trade-offs:
  - VAT can be effective for revenue but may increase tax burdens on poor households who spend a large share of income on food.
  - Higher VATs can create wedges that distort resource allocation toward informal sectors and can exacerbate inequality unless revenues finance productive or redistributive uses (infrastructure, social transfers).

### Conclusion and main findings
- There is substantial room to improve public investment efficiency in Benin; Benin’s public investment efficiency is weak relative to best performers in SSA based on efficiency frontiers.
- Regression analysis points to stronger institutions as a key channel to reduce Benin’s public investment efficiency gap.
- Improving public investment efficiency could help boost growth and accelerate progress toward the development agenda; evaluating and strengthening PIM practices is therefore recommended.

*International Monetary Fund — cr1802 (PDF chapter/section content provided)*

### 6.      A comparison of simulation results of revenue mobilizations equaling 2 percent GDP

### 6.      A comparison of simulation results of revenue mobilizations equaling 2 percent GDP

### Major simulation findings: tax instrument comparisons
- VAT is the least distortive in terms of aggregate output because it does not crowd out private investment; it leaves the return to investment neutral, allowing a crowd-in effect of private investment (Box 3, lower-left panel).
- Corporate income tax (CIT) reduces the return of investment and leads to a large decrease in economic activity.
- Personal income tax (PIT) reduces disposable income of richer households, lowering aggregate savings and consequently investment and economic activity.
- Conclusion: due to its neutral impact on investment, VAT is the least distortive tax for this economy.

### Distributional impacts by area and instrument
- Urban areas:
  - VAT reform results in higher income inequality.
  - Mechanism: poor households work in the informal non-tradable sector; VAT reduces aggregate demand and prices of non-tradable goods, reducing urban poor income.
  - Urban rich observe income increases from higher investment and relatively higher manufacturing wages (Box 2, upper-left panel).
- Rural areas:
  - VAT reform leads to lower income inequality.
  - Mechanism: decreased aggregate demand reduces agricultural prices; richest rural households (who sell a larger share of production) are affected more, lowering inequality (Box 2, upper-left panel).
- Universal basic income (UBI):
  - Implementation of UBI reduces both consumption inequality and income inequality.
  - Channels:
    - Direct: transfers represent a larger share of poor households’ income.
    - Indirect: a 4 percent increase in the relative price of non-tradable goods produced by the poor (Box 2, lower-right panel).

### Scenarios simulated (base = benchmark equilibrium)
- Scenario 1: Additional tax revenue equaling 2 percent of GDP by VAT, additional tax revenues used in non-productive governmental expenditure.
- Scenario 2: Additional tax revenue equaling 2 percent of GDP by VAT, additional tax revenues used for uniform cash transfer.
- Scenario 3: Additional tax revenue equaling 2 percent of GDP by VAT, additional tax revenues used to finance infrastructure investment that boosts overall productivity by 1.74%.
- Scenario 4: Additional tax revenue equaling 2 percent of GDP by CIT, additional tax revenues used in non-productive governmental expenditure.
- Scenario 5: Additional tax revenue equaling 2 percent of GDP by PIT, additional tax revenues used in non-productive governmental expenditure.

### Policy implications from the model and simulations
- Success of Benin’s revenue mobilization reform depends highly on:
  - the tax instrument chosen (VAT vs PIT vs CIT), and
  - how government revenue is used.
- Specific implications:
  - For Benin, VAT is the least distortive instrument to raise revenue compared to PIT and CIT.
  - Model simulations indicate increasing the VAT rate would be slightly progressive and would raise revenue with a smaller negative impact on economic activity than PIT and CIT hikes.
  - If government revenues are used for unproductive government consumption, revenue mobilization will lead to a contraction in economic activity.
  - If revenues finance efficient infrastructure investment (high return and efficient), revenue mobilization can boost economic growth. Examples of productive investments: roads, electrification, irrigation, agricultural research and development, and agricultural services.
  - Implementation of UBI reduces the negative impact of revenue mobilization on economic activity and reduces inequality and poverty in both rural and urban areas; increased consumption by poor households offsets some negative VAT output effects, making cash transfers desirable for inclusive growth.

### CEQ assessment and fiscal incidence summary (Benin)
- Poverty and inequality context:
  - Poverty rate deteriorated from 36.2 percent of population in 2011 to 40.1 percent in 2015 (INSAE).
  - Real GDP growth over 2013–15 averaged 5.2 percent.
  - Gini coefficient for disposable income is 0.43, one Gini point higher than the coefficient for final incomes (i.e., disposable income minus indirect taxes plus in-kind health and education benefits).
- Fiscal revenue composition (percentage of GDP), text table excerpt:
  - Tax revenues: 14.6 (2011–14* average), 14.5 (2015), 13.4 (2016), 13.5 (Proj. 2017)
  - Tax on international trade: 7.6 (2011–14*), 7.0 (2015), 6.0 (2016), 6.2 (Proj. 2017)
  - Direct and indirect taxes: 6.9 (2011–14*), 7.5 (2015), 7.4 (2016), 7.3 (Proj. 2017)
  - Non tax revenues: 2.3 (2011–14*), 2.2 (2015), 2.0 (2016), 1.9 (Proj. 2017)
  - Total revenues: 16.9 (2011–14*), 16.7 (2015), 15.4 (2016), 15.5 (Proj. 2017)
  - *average
- Redistribution and social spending:
  - Health and education spending reduce poverty; health and educational benefits contribute approximately by four percent of individual income.
  - Primary education is the most progressively distributed in-kind benefit; tertiary education is regressively distributed.
  - Public education and healthcare benefits account for a large share of poorer households’ incomes, while subsidies are less redistributive.
- VAT incidence and progressivity:
  - Upper-income households pay larger shares of total VAT collections in Benin.
  - VAT is equalizing as the VAT burden (share of pre-VAT income) rises with income; the concentration curve for VAT lies below the Lorenz curve for Income/Consumption.
  - Despite VAT’s progressivity in distribution of payments, indirect taxes and insufficiently targeted transfers lead to an increase in the poverty headcount when indirect taxes are subtracted from disposable income (consumable income poverty headcount rises from 40 percent to 43 percent when indirect taxes are considered).

### Final policy takeaway
- Fiscal policy in Benin has partially reduced inequality but increased poverty because many households face taxation without adequate compensation from targeted subsidies or direct transfers.
- Policy recommendation: target public spending and transfers to compensate lower-income households (e.g., efficient infrastructure investment and well-designed cash transfers such as UBI) to make revenue mobilization less contractionary and more inclusive.

*Source: IMF staff analysis and CEQ assessment content in the provided chapter.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1802.pdf_