## STATE-OWNED BANKS, PRIVATIZATION, AND MACRO-FINANCIAL PERFORMANCE IN SUB-SAHARAN AFRICA

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### Theoretical rationale and pitfalls of SOFIs
- Rationale for state-owned financial institutions (SOFIs):
  - Development view: in the absence of developed capital markets, publicly-owned banks spur expansion of priority sectors or regions (Gerschenkron, 1962).
  - Social view: SOFIs overcome market failures and finance socially-desirable, welfare-enhancing investments (Atkinson and Stiglitz, 1980).
  - Macroeconomic view: public banks can be used countercyclically to smooth credit cycles, supporting lending in downturns but increasing balance sheet risks.
  - Crisis-management role: public banks can act as safe havens for depositors, acquirers for failing banks, or absorbers of bad loans and subsidies.
- Pitfalls and risks:
  - Political interference (loan guarantees, interest rate ceilings, contract savings schemes) conflicts with commercial viability and prudent credit risk management.
  - Mandated loss-making services without explicit subsidy recognition erode viability and generate fiscal and financial-stability externalities.
  - Government ownership creates agency conflicts, weak managerial incentives, resource misallocation, and governance weaknesses (Banerjee, 1997).
  - In weak supervisory settings, SOFIs underprice risks, accumulate NPLs, and impede competition and market development.
- Principles to mitigate risks where SOFIs remain:
  - Commercial viability as a governing principle.
  - Strong institutional infrastructure: macroeconomic stability; legal infrastructure for collateral and enforcement; accounting standards; appropriate safety net (lender-of-last-resort facilities, possibly deposit insurance).
  - Fiscal transparency and clear delineation of subsidy elements.
  - Governance structure insulating SOFIs from overt political influence (independent boards serving fixed terms).
  - Apply the same supervisory regime to SOFIs as to private banks and adopt codes of conduct on limits, internal control, audit, and reporting.

### Cross-country empirical evidence on SOFIs vs. private banks and SSA context
- Empirical findings:
  - In developing countries, public banks post significantly lower performance than private counterparts (Mian, 2005; Micco, Panizza, and Yañez, 2006).
  - SOFIs tend to have lower profitability and higher costs; performance differences often driven by political economy considerations (e.g., electoral cycle).
  - Corporate governance of SOFIs is generally weaker; unitary board structures can fail to check political control (Hallerberg and Markgraf, 2018).
  - Fiscal discipline effects associated with government participation in banking:
    - A one p.p. additional share of government-owned banking assets is associated with:
      - a decrease in the share of credit to the private sector of about 0.5 p.p.;
      - an increase in public debt of 0.2–0.3 percent of GDP;
      - an increase in overall public deficit of about 0.15 percent of GDP (Gonzalez-Garcia and Grigoli, 2013).
- SSA landscape and trends:
  - State participation declined after liberalization in the 1990s–early 2000s.
  - By 2010, SSA had the lowest median foreign bank share of assets (73 percent) and lowest median government bank share (8 percent) in the developing world.
  - Cross-country heterogeneity: at end-2017, Togo had government ownership of banks at 20.5 percent of total banking assets; state ownership exceeds 50 percent in Ethiopia and is between 30 to 50 percent in Burundi and Sierra Leone.
  - In 2018, several SSA countries (Togo, Kenya, Zimbabwe, D.R. Congo) announced privatization of some remaining public banks in financial difficulty.
- Privatization outcomes evidence:
  - Post-privatization performance tends to increase conditional on governance factors:
    - Continued government ownership after privatization tends to hinder restructuring and limit performance gains.
    - Share offerings produce lower performance gains than direct sales to strategic investors in weak institutional environments.
    - Foreign ownership associated with superior post-privatization performance and can improve domestic bank efficiency and reduce intermediation/service charges.
  - Examples of successful privatizations: Uganda Commercial Bank → Stanbic; Tanzania’s National Bank of Commerce → Rabobank.
  - A strong, independent regulatory agency is essential (WAMU Banking Commission credited with reducing bad loans in the 1990s).

### Togo — history, recapitalizations, restructuring, and privatization outcomes
- Historical context:
  - In the 1980s–90s, public banks dominated Togo’s banking sector, accounting for 55 percent of total banking assets, with volatile economic environments leading to widespread bank insolvencies.
  - The Togolese banking sector expanded since then with entry of several pan-African banking groups headquartered in Togo.
- Recapitalizations and fiscal costs:
  - Systematic recapitalizations without operational restructuring and failure to divest some SOFIs perpetuated difficulties and posed financial stability and fiscal risks.
  - During a mid-2000s crisis, some private banks (e.g., Banque Internationale pour l’Afrique, BIA) were bailed out and became public.
  - Public banks recapitalized several times; in 2004 funds equivalent to 4.4 percent of GDP were injected.
  - Additional resources injected in late 2008 to restore prudential ratios for BTCI, UTB, and BIA, and to remove NPLs to SOEs from Ecobank Togo’s balance sheet.
  - Securitization of NPLs required the government to issue bonds eligible for refinancing at the BCEAO equivalent to 6.2 percent of GDP.
  - The NPLs were to be recovered by the newly-established Société de Recouvrement du Togo (SRT), described as a temporary state-owned entity with weak powers to effectively collect the loans.
  - CNSS injected CFAF 4.3 billion in the public banks.
- Performance and governance of UTB and BTCI:
  - UTB: 2012 public tender failed; following 2008 recapitalization net income has been somewhat volatile but on average negative.
  - BTCI: more severe; early 2013 privatization aborted due to poor governance, lack of disclosure of actual losses, inadequate risk management; did not meet prudential requirements and was under provisional administration until September 2017 with no palpable improvement; net income mostly negative after 2008 recapitalization.
  - Despite difficulties, the two banks:
    - Expanded credit, opened branches, hired additional staff, and fulfilled public mandates.
    - Loan portfolio expanded at 14-15 percent per year during 2014-16.
    - Concentration risk, NPLs, and cost-to-income ratios have been systematically above the banking sector average.
  - Coordination problems between national authorities and WAMU Banking Commission (weak resolution powers, regulatory forbearance, conflicts of interest) complicated resolution.
- 2015 external shock and deterioration:
  - The 2015 external shock and end of prefinancing one year later found the two state-owned banks in a weak position: thin capital, high loan concentration and leverage, exposure to main export-oriented sectors (trade and manufacturing).
  - Togo’s widening fiscal deficits up to 2017 were partly financed by the banking sector.
  - The two banks were heavily involved in government prefinancing schemes (an unorthodox financing of public investments) that led to a steep increase in public debt and was discontinued in late 2016.
- Resolution strategies and merger (2016–17):
  - Over 2013–16, several strategies were considered.
  - In 2016, authorities retained a merger (bigger/better bank absorbing the weaker one) combined with thorough operational restructuring.
  - Moving ahead in 2017 with merger and restructuring:
    - Ended BTCI’s provisional administration.
    - Prompted internal reorganization and a more prudent strategy at the absorbing bank (UTB) with requirements for upgraded governance.

### Outcomes of specific privatizations (BTD, BIA) and process lessons
- BTD:
  - End-2012: Orabank bought 56 percent of BTD capital.
  - Privatization and subsequent merger yielded 0.6 percent of GDP.
  - New bank became the biggest Togolese bank, with 29 percent of loans and 23.5 percent of deposits in 2013.
  - Lending expanded rapidly; earnings and profitability improved; market share stabilized around 27 percent of total loans at end-2017.
  - Orabank’s NPL ratio has been lower or close to the banking sector average.
- BIA:
  - September 2013: State sold 55 percent of BIA to Attijarwafa banking group.
  - Privatization yielded 0.7 percent of GDP.
  - Lending expanded in 2014–15 but stalled thereafter.
  - BIA experienced profitability difficulties and declining market share.
  - Possible reasons: imperfect cost adjustments (average cost-to-income ratio after privatization of 0.66 for BIA versus 0.54 for BTD) and legacy high NPLs retained on its balance sheet pre-privatization.
  - Both banks have comfortable core capital cushions and satisfy the new Basel 2-3 regulations.
- Process and timing problems observed:
  - Privatization delays: commitments to progress by December 2009; call for expressions of interest only in July 2011.
  - Delays due to legal framework updates, obtaining financial information, and political hesitation; undermined data validity for bids.
  - Early 2013 privatization of BTCI was aborted; financing from privatization and budget support fell short and overall deficit more than doubled to 7 percent of GDP.
- Lessons from Togo’s first privatization round:
  - About half the public banking portfolio could be privatized; the other half was blocked by delays, conflicts of interest, and weak controls.
  - Need for strong political support, avoiding multiple privatization agencies, swift action, high-quality expert advice, realistic valuations, contingency plans for unsuccessful privatizations, and prompt corrective measures with strong resolution powers.
  - Financial restructuring must be accompanied by operational restructuring to ensure long-term viability and minimize State cost.
  - An efficient NPL collection mechanism is essential to minimize liquidation costs.

### Preconditions, sequencing, and design of privatization
- Preconditions for successful privatization:
  - Adverse macroeconomic environment reduces benefits; fiscal discipline is important.
  - Regulatory framework and capacity are key; poor regulation reduces gains though improvements can still occur.
  - Institutional setup should be streamlined with a strong, centralized, transparent focal point.
  - Business environment matters: effective corporate governance, competition, openness to foreign direct investment, and reduced entry barriers enhance privatization benefits.
- Sequencing and restructuring design:
  - “As is” sale preferable for speed but usually infeasible for insolvent banks; financial restructuring often required.
  - Common model: “good bank–bad bank” split with dud assets left in the bad bank and government providing good assets to fill balance-sheet gaps; alternatives include asset management companies, equity subscription by government, or subordinated debt issuance.
  - Operational restructuring timing: brief, defensive pre-privatization actions recommended; major investments left to new owners.
  - Recommended staged recapitalization contingent on operational restructuring objectives (example: Indonesia post-Asian crisis).
- Quality of new owners and prudential review:
  - Performance improves when government fully relinquishes control, when privatized to strategic investors (not share issues), and when bidding is open to all, including foreign banks.
  - Regulator should ensure buyers are fit and proper, source of capital verified, management competent, and business plan viable; weak review capacity or political pressure risks failed privatizations (examples cited).

### Practical policy recommendations on SOFIs and privatization
- If government considers privatization:
  - Fully relinquish control where feasible.
  - Prefer strategic investors over broad share issues.
  - Ensure open, competitive bidding including foreign banks.
  - Create a supportive business environment: competition, governance, entry.
  - Transparent valuation and explicit handling of policy-related subsidy elements.
  - Strong prudential review and supervisory oversight post-privatization.
- If SOFIs remain public:
  - Define clear commercial mandates, ensure fiscal transparency, create insulated governance structures, and apply the same supervisory regime as for private banks.
  - Budget explicitly for any mandated loss-making services to avoid hidden fiscal and stability costs.
- Contingency and resolution:
  - Monitor liquidity for public banks during lengthy privatization processes and prepare contingency plans for unsuccessful privatizations.
  - Strengthen resolution powers to avoid protracted temporary administrations.

### Social spending, efficiency, and public finance developments (Togo)
- Fiscal consolidation and public finance:
  - Bold fiscal consolidation underway since end 2016 following a significant infrastructure upgrade through pre-financing.
  - IMF-supported program agreed in May 2017.
  - Domestic primary expenditure curtailed by 5 percentage points between 2016 and 2018.
  - Public debt-to-GDP reduced by 7 percentage points between 2016 and 2018, from 81.1 percent in 2016 to 74.1 percent in 2018.
  - This ratio is set to decline below the regional convergence criteria of 70 percent by end-2019.
- Social spending pressures and objectives:
  - Public social spending fell short of ECF program targets for 2017–18, mainly due to budget execution difficulties.
  - Objective: preserve and generate space for public social spending and implement targeted social spending.
- Definition and measurement for ECF:
  - Social spending measured as total (current and capital) domestically-financed social spending across wages, goods and services, transfers and subsidies, other, and domestically-financed capital accounts.
  - Focus on education and health due to data limitations.
- Stylized facts (2001–16 and 2015–16):
  - Social spending (health + education) grew from 5.4 percent of GDP in 2001 to 7.1 percent of GDP in 2016.
  - Share of public social spending declined from 33½ percent to 23½ percent of government budgetary expenses between 2001 and 2016.
  - Education averaged 20 percent of GG expenditure; health accounted for 9.2 percent.
  - Education outlays rose from 4.1 percent of GDP to 5.1 percent of GDP by 2016; health expenditure stagnated at around 2.0 percent of GDP since 2009.
  - In 2015 public funds accounted for 38.4 percent of total health expenditure in Togo; for education public share estimated at about 18 percent.
- Frontier (DEA) analysis — illustrative findings:
  - Health (2015 examples):
    - Togo allocated PPP$ 76.3 per capita on health with HALE of 52.3 years.
    - Guinea spends PPP$ 68.5 per capita with HALE of 51.7 years → potential savings PPP$ 7.8 per capita (input-efficiency about 10.2 percent).
    - Ethiopia spends PPP$ 73 per capita with HALE of 56.1 years → Togo could improve HALE by 3.3 years with similar spending (output-efficiency about 6.3 percent).
  - Education (2015 examples):
    - Togo allocated PPP$ 260.5 per capita with net enrollment of 95.4 percent; Sierra Leone devoted PPP$ 223.7 per capita with enrollment 99.1 percent → input-efficiency about 14.1 percent.
    - For primary completion: Togo PPP$ 260.5 per capita with primary completion rate 82.9 percent; Benin spends PPP$ 194 per capita with similar rate (81.1 percent) → potential savings PPP$ 66.5 per capita (input-efficiency 25.5 percent).
    - With current spending, Togo can improve net primary enrollment by 4.8 percent and primary completion by 9.6 percentage points (output-efficiency examples).
- Policy recommendations for social spending:
  - Finalize and implement the Unified Social Registry.
  - Expand unconditional cash transfer (UCT) programs to reach 40,000 households.
  - Expand the school feeding program to reach 50,000 students.
  - Reinforce implementation of PAPV and PUDC programs.
  - Health sector: focus on equity, affordability (expand generics and cost-sharing) while safeguarding against leakages.
  - Education sector: medium-term strategies toward universal primary education, limit out-of-pocket expenses, expand preschool and rural coverage.
  - Improve execution of budgeted social outlays and ensure sustainable financing (revenue mobilization or reallocation) or efficiency gains.

### Governance, transparency, and anti-corruption priorities
- Governance overview and public trust:
  - World Governance Indicators indicate improvement; Togo now rated more like a LIC and average SSA in rule of law.
  - 2015 survey: 46 percent of respondents trusted core state institutions “a lot” or “somewhat” versus 57 percent for SSA and 65 percent for WAEMU.
  - Only 31 percent believed the government did well in fighting corruption versus WAEMU average 41 percent.
- Fiscal governance and transparency gaps:
  - Missing budget information: previous budget outcomes; complete debt stock; comprehensive financial assets; budget risks; analysis of budget impact from new initiatives and public investment.
  - Significant public revenue and spending excluded from the budget (autonomous public institutions, social security fund, pension fund); incomplete extrabudgetary unit activity data.
  - Recent transparency measures: estimates of all tax expenditures attached to the 2019 budget; 2020 budget to be presented by specific programs.
- Revenue mobilization:
  - Togolese Revenue Authority (OTR) established in 2014.
  - Tax revenues: 15.9 percent of GDP in 2013; 16.9 percent of GDP in 2016; 16.1 percent of GDP in 2017; 16.5 percent of GDP in 2018.
  - 2018 tax revenue performance: 16.5 percent of GDP (above SSA and WAEMU averages; about 1½ percent of GDP below estimated tax frontier).
  - Tax exemptions amounted to 3.5 percent of GDP in 2016.
  - Recommended measures: broaden tax base, reduce exemptions, strengthen tax fraud detection, increase recovery of tax arrears.
- Public investment and procurement weaknesses:
  - Defective cashflow plans triggered cashflow constraints and arrears; procurement deadlines often not respected.
  - PIMA 2016 ranked Togo at 0.3 (bottom quartile).
  - Multi-year program budgeting under preparation; PIP 2019-21 published as annex to 2019 Budget.
  - Procurement institutions: ARMP (est. 2009) and DNCMP; need stronger procurement capacity and electronic tender processes.
- Rule of law and anti-corruption framework:
  - Key laws: procurement law 2009-014; transparency in public financial management 2014-009; organic budget law 2014-013; new Criminal Code 2015 (punishments 5 to 10 years criminal imprisonment for corruption offenses).
  - Asset-declaration reform in preparation with proposals for comprehensive disclosure, publication, verification, and dissuasive sanctions.
  - Control organs and anti-corruption institutions include IGE, IGF, ARMP, DNCMP, Cour des Comptes, CSM, HAPLUCIA, CENTIF; HAPLUCIA became operational in 2017 and investigated first cases in late 2018.
- AML/CFT and illicit financial flows:
  - CENTIF launched a national money laundering and terrorism financing assessment in June 2018.
  - Togo’s 2018 AML/CFT law transposes the uniform WAEMU AML/CFT law into national law.
  - Scheduled mutual evaluation by GIABA; priorities include strengthening due diligence on domestic PEPs (including family and close associates), improving transparency of beneficial ownership, and bolstering AML supervision by the Banking Commission.
- Policy recommendations (summary):
  - Continue broad-based fiscal governance reforms: publish more transparent fiscal data; deepen revenue reforms; prioritize public investment using rigorous cost-benefit criteria; strengthen monitoring of public enterprises; establish systematic follow-up of audit reports.
  - Strengthen anticorruption measures: adopt asset declaration legislation with international good-practice features; establish procedures for recovery and management of illicitly acquired property; strengthen AML tools to support anticorruption.
  - Ensure fair and effective execution of laws and regulations: capacity building and avoidance of political interference to improve predictability and effectiveness of judiciary, anti-corruption institutions, and control organs.
  - Streamline border procedures and strengthen regulatory framework for delegated public projects to support Togo’s regional transportation ambitions via the Port of Lomé.

*Source: Content unit 1tgoea2019002 — IMF.*

### References _____________________________________________________________________________ 21

### STATE-OWNED BANKS, PRIVATIZATION, AND MACRO-FINANCIAL PERFORMANCE IN SUB-SAHARAN AFRICA

### Theoretical rationale and pitfalls of SOFIs
- SOFIs are typically established with a public interest and financial inclusion mandate and may be either specialized development financial institutions or commercial institutions with total or majority direct state ownership.
- Common rationales for SOFIs:
  - Development view: in the absence of developed capital markets, publicly-owned banks spur expansion of priority sectors or regions (Gerschenkron, 1962).
  - Social view: SOFIs overcome market failures and finance socially-desirable, welfare-enhancing investments (Atkinson and Stiglitz, 1980).
  - Macroeconomic view: public banks can be used countercyclically to smooth credit cycles, supporting lending in downturns but increasing balance sheet risks.
  - Crisis-management role: public banks can act as safe havens for depositors, acquirers for failing banks, or absorbers of bad loans and subsidies.
- Pitfalls and risks associated with SOFIs:
  - Political interference (loan guarantees, interest rate ceilings, contract savings schemes) can conflict with commercial viability and prudent credit risk management.
  - Mandated loss-making services without explicit subsidy recognition erode viability and generate fiscal and financial-stability externalities.
  - Government ownership creates agency conflicts, weak managerial incentives, resource misallocation, and governance weaknesses (Banerjee, 1997).
  - Market failures may be better addressed via regulation and subsidies rather than direct ownership (Shleifer and Vishny, 1994; La Porta et al., 2002).
  - In weak supervisory settings, SOFIs tend to underprice risks, accumulate NPLs, and impede competition and market development.
- Principles to mitigate risks where SOFIs remain:
  - Commercial viability as a governing principle.
  - Strong institutional infrastructure: macroeconomic stability; legal infrastructure for collateral and enforcement; accounting standards; appropriate safety net (lender-of-last-resort facilities, possibly deposit insurance).
  - Fiscal transparency and clear delineation of subsidy elements.
  - Governance structure insulating SOFIs from overt political influence (independent boards serving fixed terms).
  - Application of the same supervisory regime to SOFIs as to private banks, and adoption of codes of conduct on limits, internal control, audit, and reporting.

### Cross-country empirical evidence on SOFIs vs. private banks
- Empirical findings:
  - In developing countries, public banks post significantly lower performance than private counterparts (Mian, 2005; Micco, Panizza, and Yañez, 2006).
  - SOFIs tend to have lower profitability and higher costs, with performance differences driven by political economy considerations (e.g., electoral cycle).
  - Corporate governance of SOFIs is generally weaker; unitary board structures can fail to check political control (Hallerberg and Markgraf, 2018).
  - Countries with significant government participation in banking show weaker fiscal discipline:
    - A one p.p. additional share of government-owned banking assets is associated with:
      - a decrease in the share of credit to the private sector of about 0.5 p.p.;
      - an increase in public debt of 0.2–0.3 percent of GDP;
      - an increase in overall public deficit of about 0.15 percent of GDP (Gonzalez-Garcia and Grigoli, 2013).
- Observed delays and difficulties in restructuring and resolving SOFIs across SSA (examples: D.R. Congo, Ghana, Kenya, Zimbabwe, Tanzania).

### Togo’s experience with SOFIs, restructuring, and privatization
- Historical and structural points:
  - In the 1980s–90s, public banks dominated Togo’s banking sector, accounting for 55 percent of total banking assets, with volatile economic environments leading to widespread bank insolvencies.
  - The Togolese banking sector expanded since then with the entry of several pan-African banking groups headquartered in Togo.
- Recapitalizations, restructuring, and fiscal costs:
  - Systematic recapitalizations in the absence of operational restructuring, and failure to divest some SOFIs as planned, have perpetuated difficulties, posing financial stability and fiscal risks.
  - During a mid-2000s financial crisis, some private banks (e.g., Banque Internationale pour l’Afrique, BIA) were bailed out by the government and became public.
  - Public banks were recapitalized several times; for example, in 2004 funds equivalent to 4.4 percent of GDP were injected.
  - Additional resources were injected in late 2008 to restore prudential ratios for the three state-owned banks—Banque Togolaise pour le Commerce et l’Industrie (BTCI), Union Togolaise des Banques (UTB), and BIA—and to remove NPLs to SOEs from the balance sheet of a large private bank (Ecobank Togo).
  - Securitization of NPLs required that the government issue bonds eligible for refinancing at the BCEAO equivalent to 6.2 percent of GDP.
  - The NPLs were to be recovered by the newly-established Société de Recouvrement du Togo (SRT), described as a temporary state-owned entity with weak powers to effectively collect the loans.
- Conditions associated with better post-privatization performance (cross-country and Togo-relevant):
  - Government fully relinquishing control.
  - Privatization to strategic investors rather than through share issues.
  - Open bidding to all, including foreign banks.
  - Supportive business environment: competition, governance, and entry.
  - Appropriate valuation of banks and treatment of policy concerns.
  - Quality of owner’s prudential review.

### Practical implications and policy recommendations
- When the government considers privatization of SOFIs, key success factors include:
  - Complete relinquishment of control by the government where feasible.
  - Preference for strategic investors over broad share issues.
  - Open, competitive bidding including foreign banks.
  - Ensuring a business environment that supports competition, sound governance, and market entry.
  - Transparent valuation and explicit handling of policy-related subsidy elements.
  - Strong prudential review and supervisory oversight post-privatization.
- If SOFIs are to remain public, implement:
  - Clear commercial mandates, fiscal transparency, insulated governance structures, and application of the same supervisory regime as private banks.
  - Explicit budgeting for any mandated loss-making services to avoid hidden fiscal and stability costs.

*Prepared by Irina Bunda; content as presented in the referenced IMF chapter.*

### Box 1. Costs and Relative Performance of SOFIs (continued)

### Box 1. Costs and Relative Performance of SOFIs (continued)

### Recapitalization, divestiture, and initial restructuring efforts
- Authorities sought to offset the marked budgetary impact of recapitalization and improve governance by divesting three problem SOFIs and a fourth (Banque Togolaise de Development, BTD) which did not need financial restructuring in 2008.
- Financial intermediation deepened through measures to promote entry and regional integration, but:
  - Financial restructuring of the public banks was not accompanied by rigorous asset quality reviews.
  - Operational restructuring and privatization were consistently delayed.
  - Three SOFIs had to again raise funds at end-2010 to meet newly established minimum capital requirements.
- The publicly-owned social security fund (Caisse Nationale de Sécurité Sociale, CNSS) − shareholder in two large SOFIs and with financial and governance problems on its own − injected CFAF 4.3 billion in the public banks.

### Performance and governance problems of two public banks (UTB and BTCI)
- Two public banks (UTB, BTCI) could not be privatized and their financial situation steadily deteriorated.
  - UTB: the 2012 public tender to privatize failed on procedural grounds during bid selection and was not renewed soon afterwards. Following its 2008 recapitalization, net income has been somewhat volatile but on average negative.
  - BTCI: difficulties were more severe and long-lasting. Early 2013 privatization attempts were undermined by poor governance, lack of disclosure of actual losses, and inadequate risk management capacity.
    - BTCI did not meet most prudential requirements, including capital adequacy, liquidity, and borrower concentration, and was placed under several back-to-back provisional administration regimes until September 2017, with no palpable improvement.
    - Following its last recapitalization in 2008, net income has mostly been negative.
- Despite longstanding difficulties, the two public banks:
  - Expanded credit, opened branches, hired additional staff, and fulfilled public mandates.
  - Their loan portfolio expanded at 14-15 percent per year during 2014-16 despite BTCI’s provisional administrations and the Banking Commission’s close surveillance of UTB.
  - Concentration risk, NPLs, and cost-to-income ratios at the two banks have systematically been above the banking sector average.
- Coordination problems between national authorities and the WAMU Banking Commission complicated resolution:
  - Weak resolution powers (on the regulator’s side) and regulatory forbearance/conflicts of interest (on the authorities’ side) perpetuated the banks’ difficulties.

### 2015 external shock, prefinancing, and deterioration
- The 2015 external shock and the end of prefinancing one year later found the two state-owned banks in a weak position: thin capital, high loan concentration and leverage, exposure to the main export-oriented sectors (trade and manufacturing).
- Togo’s widening fiscal deficits up to 2017 had partly been financed by the banking sector.
- The two banks were heavily involved in government’s prefinancing schemes − an unorthodox way of financing public investments, which led to a steep increase in public debt and was discontinued in late 2016.
- After a period of excessive risk-taking, the two banks experienced a rise in dud loans and declining profitability.

### Resolution strategies, merger, and restructuring (2016–17)
- Over 2013–16, several strategies to resolve the two banks were considered.
- In 2016, given the balance of risks and following expert advice, authorities retained the merger of the two banks (the bigger and better one absorbing the weaker one) combined with thorough operational restructuring.
- Although the authorities later changed strategy to privatize the two banks separately, moving ahead with the merger and restructuring plans in 2017:
  - Allowed putting an end to BTCI’s provisional administration.
  - Led to a change in direction, on sounder bases, at the two banks.
  - Requirements for an upgraded governance system at the absorbing bank (UTB), in line with best principles, prompted internal reorganization and a more prudent strategy for the bank.

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### State-Owned Bank Privatization in SSA (context and evidence)

### Trends and country context
- State participation in the SSA financial system declined after liberalization in the 1990s–early 2000s.
- By 2010, the region had the lowest median foreign bank share of assets (73 percent) and lowest median government bank share (8 percent) in the developing world.
- Cross-country heterogeneity: at end-2017, Togo had the highest government ownership of banks in the WAEMU (20.5 percent of total banking assets). The state accounts for more than 50 percent in Ethiopia and between 30 to 50 percent in Burundi and Sierra Leone.
- In 2018, several SSA countries (Togo, Kenya, Zimbabwe, D.R. Congo) announced privatization of some remaining public banks in financial difficulty.

### Empirical findings on privatization outcomes
- Post-privatization performance tends to increase conditional on governance factors:
  - Ownership share retained by the government:
    - Continued government ownership in partially-privatized banks may hinder restructuring and limit performance gains.
    - Cases where the government retained majority control (or sizable minority stakes) showed few or no performance benefits.
  - Type of transaction:
    - Share offerings produce lower performance gains than direct sales to strategic investors in weak institutional environments.
  - Extent of foreign ownership:
    - Banks owned by local industrial groups and foreign owners exhibited higher economic efficiency in some studies.
    - Foreign ownership has been associated with superior business performance post-privatization, especially relative to “insider” ownership.
    - Foreign bank entry can force domestic banks to operate more efficiently, providing long-run benefits such as lower intermediation and service charges.
- Evidence of successful privatizations in SSA:
  - Uganda Commercial Bank sold to Stanbic: improvements in profitability and rate of credit growth compared to pre-privatization.
  - Tanzania’s National Bank of Commerce sold to Rabobank: improved profitability, reduced non-performing loans, and higher ratio of loans to total assets.
- Privatization tends to boost competition: privatization announcements led to abnormally negative returns for rival banks, consistent with enhanced competition.
- Even in inhospitable macro/regulatory environments, privatization can improve performance if the state fully withdraws from bank capital (evidence from Nigeria).
- A strong, independent regulatory agency is essential:
  - The establishment of the WAMU Banking Commission in 1990 was credited for reducing bad loans in the 1990s in the WAEMU region.

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### Box 2. Togo’s Experience with Bank Privatization

### Timeline, goals, and constraints
- Togo’s share of SOFIs declined since the mid-2000s following privatization initiatives but remains higher than the Sub-Saharan Africa average.
- Bank privatization efforts:
  - 2004: sale of smaller public bank SNI to Financial Bank (became Orabank in 2011).
  - 2008–11 ECF-supported program stepped up privatization of four remaining SOFIs to restore confidence, reduce macro risk from large loss-making banks (which accounted for 46 percent of total banking sector assets), and promote financial development.
- 2008 banking system: low financial intermediation, with the loan-to-deposit ratio below WAEMU, SSA, and LICs averages. In 2008, NPL ratios were 20 percent for SOFIs and 7 percent for private banks.
- Privatization process delays:
  - Despite commitments to progress by December 2009, the call for expressions of interest was issued only in July 2011.
  - Delays due to difficulties updating the legal framework, obtaining financial/balance-sheet information for some banks, and political hesitation.
  - Delays undermined the validity of financial data for bids; advisors were asked to rapidly update 2010 financial data.
  - Rising political tensions and social pressures further complicated the process; early 2013 privatization of BTCI was aborted, and financing from privatization and budget support fell short, with the overall deficit more than doubling to 7 percent of GDP.

### Outcomes of specific privatizations
- BTD:
  - End-2012: Orabank bought 56 percent of BTD capital.
  - Privatization and subsequent merger yielded 0.6 percent of GDP.
  - The new bank became the biggest Togolese bank, with 29 percent of loans and 23.5 percent of deposits in 2013.
  - Lending expanded rapidly; earnings and profitability continued to improve. Market share stabilized at around 27 percent of total loans at end-2017.
  - Orabank’s NPL ratio has been lower or close to the banking sector average.
- BIA:
  - September 2013: State sold 55 percent of BIA to Attijarwafa banking group.
  - Privatization yielded 0.7 percent of GDP.
  - Lending expanded immediately in 2014–15 but stalled thereafter.
  - BIA experienced profitability difficulties and declining market share.
  - Possible reasons: imperfect cost adjustments (average cost-to-income ratio after privatization of 0.66 for BIA versus 0.54 for BTD) and a legacy of high NPLs retained on its balance sheet from before privatization.
  - Both banks have comfortable core capital cushions and satisfy the new Basel 2-3 regulations.

### Institutional and legal improvements for further privatization rounds
- During the current privatization round, authorities sought to avoid previous flaws:
  - A more recent law on state divestiture and privatization (2014) was further modified in September 2018 to allow the National Assembly to define the general legal framework of the procedures for the conduct of privatization operations — simplifying and making privatization operations for the two banks more transparent.
  - Unlike past practice where an ad-hoc Privatization Commission had total discretion, the authorities ensured stronger political support for the privatization process.

---

*Sources: BCEAO; Togolese authorities; and IMF staff estimates.*

### 25.      Several lessons can be learnt from Togo’s first privatization round. During that round,

### 25.      Several lessons can be learnt from Togo’s first privatization round. During that round,

### Key findings from Togo’s first privatization round
- About half of the public portfolio in the banking system could be privatized; for the other half, delays, inaction, conflict of interests, and weak controls prevented finalization of privatization transactions.
- Experience points to the need for:
  - Strong political support for the privatization process.
  - Avoiding a multiplication of privatization agencies with vested interests.
  - Swift action because political pressures are high and the financial situation of SOFIs quickly deteriorates.
  - High-quality expert advice and a realistic/up-to-date evaluation of the banks’ value.
  - Careful monitoring of liquidity situations for public banks engaged in lengthy privatization processes with significant execution risks.
  - Contingency plans for unsuccessful privatization, since the situation of SOFIs which fail privatization surely deteriorates.
  - Prompt corrective measures with strong resolution powers for the regulator, otherwise temporary administration may drag on for a very long period.
  - Not planning on and spending expected privatization proceeds as they may not materialize.
  - Financial restructuring to be accompanied by operational restructuring to ensure long-term financial viability and minimize cost for the State.
  - An efficient non-performing loans collection mechanism to minimize liquidation costs.

### Cross-country lessons and preconditions prior to privatization
- Privatization of SOFIs does not automatically lead to higher performance; several preconditions are required.
- Institutional infrastructure and macroeconomic environment shape privatization design and outcomes:
  - An adverse macroeconomic environment reduces benefits of privatization; fiscal discipline is important.
  - Examples: Nigeria’s distorted incentives and multiple exchange rates during 1990s privatizations undermined retail lending performance; transition economies (Bulgaria, Romania) saw state banks deteriorate until late 1990s requiring substantial recapitalization.
- Regulatory framework and capacity are key:
  - Poor regulation reduces gains from privatization though improvements can still occur.
  - Example: Nigerian share issue privatizations in the 1990s brought only limited performance improvement in a relatively weak institutional environment.
- Institutional setup should be streamlined:
  - Create a strong, lean, centralized, transparent focal point to privatize while keeping the process public and fair.
  - Example: Lesotho’s 1995 Privatization Act centralized responsibility in one privatization agency, reducing conflicting vested-interest roles.
- Business environment matters:
  - Privatization yields greater benefits in stronger business environments with effective corporate governance and market competition.
  - Policymakers must tackle barriers to new firm entry, legal quality for corporate governance, and openness to foreign direct investment.
  - Dominant loss-making rural networks in SSA public banks may require broader reforms to encourage competition and growth.

### Timely corrective actions and sequencing of reforms
- Key issues to manage: cost, sequencing of other reforms (e.g., business environment), and achieving political consensus.
- Avoid repeated recapitalizations or forbearance by implementing measures on regulation and supervision, clearly delineated mandate, and sound governance to make government ownership viable and pave the way for privatization.
- Example: Bank of Mauritius treats public-sector and private banks equivalently in auditor vetting, offsite surveillance, and onsite examinations.
- Governance reform, new professional management, and strengthened prudential regulation have stabilized state-banks in Central Europe and Latin America as part of privatization processes.

### Privatization process — preparing a bank for sale
- “As is” sale is preferable for speed but usually infeasible if the bank is insolvent; financial restructuring is frequently required to attract reputable investors.
- Design of financial restructuring:
  - Government must provide enough good-quality assets to equal liabilities to attract new equity investors.
  - Common model: “good bank-bad bank” split with nonperforming loans left in the bad bank and government providing the good bank with assets (e.g., bonds) to fill the balance sheet gap.
  - Variation: transfer dud assets to a specialized asset management company (used in Ghana, Tanzania, Uganda).
  - Other tools: government subscribing to new equity issues or issuing subordinated debt prior to privatization.
- Timing of operational restructuring:
  - New owners may require closures or lay-offs prior to privatization where political pressure is strong; however, pre-privatization restructuring should be brief and defensive (balance sheet and organizational changes), leaving technology changes and major investments to new owners.
- Risks in sequencing operational and financial restructuring:
  - Delayed financial restructuring (e.g., delayed recapitalization) increases losses and complicates operational restructuring because reorganizing requires additional liquidity.
  - An insolvent bank without new earning assets from recapitalization may not return to profitability regardless of operational changes, jeopardizing privatization.
  - Conversely, if recapitalized but operational restructuring fails and privatization is delayed, further recapitalization may be required.
  - Recommended solution: advance operational and financing restructuring progressively, providing recapitalization in stages contingent on meeting operational restructuring objectives (example: Indonesia after the Asian financial crisis).

### Quality of new owners and prudential review
- Performance improves more when government fully relinquishes control, when banks are privatized to strategic investors rather than share issues, and when bidding is open to all, including foreign banks.
- Transparency, fairness, and a level playing field are essential.
- Foreign ownership has been associated with superior post-privatization performance (examples: Madagascar, Tanzania).
- Prudential review of new owners:
  - The regulator should approve transactions only if buyers are fit and proper, management is competent and experienced, the source of capital is verified, and the business plan is viable.
  - Pressure to approve transactions despite prudential concerns, lack of review capacity, or proceeding without regulator involvement have led to interventions in failed privatizations (examples: Croatia, Czech Republic, Mozambique, Uganda).
  - Mozambique example: Banco Austral privatized in 1996 recorded heavy losses, leading to bidder withdrawal, intervention, restructuring, re-privatization, and sale to ABSA in 2002; Barclays acquired a 56 percent stake in ABSA in 2005.

### Policy concerns, financial inclusion, and fair valuation
- Policy concerns to manage ex ante include maintaining services in areas served by SOFIs (financial inclusion), servicing specific sectors, and preserving employment.
- New private owners often close unprofitable locations, eliminate policy-driven lending to state-owned enterprises, and retrench staff—improving efficiency but potentially harming inclusion.
- Large branch networks and staffing can be high-cost and loss-making; forced closures by new owners may have high inclusion costs.
- Privatization processes may impose conditions on buyers (e.g., maintain rural branches), but mobile banking may offer a better route to financial inclusion and these conditions should be balanced against privatization benefits.
- Fair valuation:
  - Expert advice is important; book value often differs from market value, especially for companies with poor track records and operational problems.
  - State assets have frequently been undervalued in practice (examples: Czech Republic, Russia) resulting in significant transfers of wealth at nominal or zero prices.

### Togo’s situation and available options
- Togo has several preconditions in place regarding business environment, competition and entry, and a general environment conducive to privatization and economic efficiency.
- Bank privatization follows the privatization of the main Telecom company; privatization of other SOEs has been envisaged, and the private sector is expected to play an increasing role as the engine of growth.
- If the direct sale of the first bank does not succeed, options available (each with costs and benefits) include:
  - (1) Equity sale (tender);
  - (2) Purchase & Assumptions with a tender set up for the “good bank” while the “bad bank” is transferred to a legal entity for liquidation;
  - (3) Merger and restructuring of the two public banks;
  - (4) Deposit payoff and liquidation.
- Immediate measures to prevent further deterioration can be put in place (e.g., prohibit accepting new deposit applications).

### Annex highlights (SOFIs’ privatizations in SSA)
- The annex lists numerous SSA SOFI privatizations by country and year (selected examples include: Standard Chartered Bank in Cameroon (1994); Caixa Econômica Cabo Verde (1999); Lesotho Bank IPO (1999); BNI-Crédit Lyonnais Madagascar (1991); Banco Austral tender (2002); Zambia National Commercial Bank (2007); Malawi Savings Bank Limited (2015); among others).

### Performance and efficiency note (from Selected Issues Paper excerpt)
- Togo’s social performances are below those of selected countries with similar development stage.
- With current spending levels, Togo can improve its health outcomes by 4.8 percent and education outcomes by 6.3 percent.
- Spending leakages could be reduced by about 10 percent in health and 14 percent in education to maximize impact.
- Achieving these efficiency gains requires structural reforms over the medium term in health and education sectors.

*Source: IMF staff compilation from the chapter “Several lessons can be learnt from Togo’s first privatization round” in 1tgoea2019002.*

### Introduction

### Introduction

### Fiscal consolidation and public finance developments
- Bold fiscal consolidation underway since end 2016 following a significant infrastructure upgrade through pre-financing.
- An IMF supported program agreed in May 2017.
- Public investment returned to prior pre-financing levels and recurrent expenditure was contained significantly.
- Domestic primary expenditure curtailed by 5 percentage points between 2016 and 2018.
- Togo’s public debt-to-GDP reduced by 7 percentage points between 2016 and 2018, from 81.1 percent in 2016 to 74.1 percent in 2018.
- This ratio is set to decline below the regional convergence criteria of 70 percent by end-2019.

### Social spending pressures and objectives
- The envelope for social benefits is increasingly under strains.
- Public social spending fell short of the targets set under the ECF program for 2017–18, mainly because of difficulties in budget execution.
- Key policy objective of Togo’s fiscal adjustment: preserve and generate space for public social spending and implement targeted social spending.
- Public social spending identified as a niche for longer-term human capital improvement; reducing inefficiencies in education and health outlays could substantially improve social services, human capital, medium-term growth, and productivity.

### Definition and measurement of social spending under the ECF
- General definition: public spending on education, health and social protection (contributory social insurance transfers and social assistance benefits).
- Due to low level of social safety nets and lack of comprehensive data, this SIP focuses on education and health sectors.
- Primary data source: World Bank’s World Development Indicators (WDI) on General Government expenditures.
- For the ECF program, social spending measured as total (current and capital) domestically-financed social spending summed across categories (wages, goods and services, transfers and subsidies, other) and capital accounts financed with domestic resources.
- In the national context, public social expenditure covers:
  - Ministry of Education;
  - Ministry of Health;
  - Ministry of Social Action, Advancement of Women, and Literacy;
  - Ministry of Grassroots Development, Crafts, Youth, and Youth Employment;
  - Ministry of Agriculture, Livestock, and Fisheries;
  - Ministry of Mines and Energy (rural electrification projects);
  - Emergency Program for Community Development (Programme d’Urgence de Développement Communautaire – PUDC);
  - Support Program for Vulnerable Populations (Programme d’Appui aux Populations Vulnérables – PAPV).
- Two social programs under implementation: PAPV (emergency initiative covering potable water, sanitation, electricity, education, health, housing, financial inclusion, youth employment) and PUDC (community development to improve living conditions in remote places).

### Stylized facts on social spending (2001–16 and 2015–16 snapshots)
- Rising spending:
  - Social spending (health + education) grew from 5.4 percent of GDP in 2001 to 7.1 percent of GDP in 2016.
  - Increase largely explained by demographic trends: rise in share of population below 15 and above 65.
- Shifting composition:
  - Average 2001–2016: social benefits accounted for about 29.1 percent of government budgetary expenses.
  - Share of public social spending declined from 33½ percent to 23½ percent between 2001 and 2016, related to large increase in public spending during pre-financing.
  - Composition skewed toward education: education sector averaged 20 percent of GG expenditure; health sector accounted for 9.2 percent.
  - Education outlays increased (education outlays rose from 4.1 percent of GDP to 5.1 percent of GDP by 2016); health expenditure declined and stagnated since 2009 at around 2.0 percent of GDP.
- Togo relative to SSA (2015–16):
  - Health and education expenditures in Togo roughly on par with SSA averages: around 2.1 percent (health) and 5.1 percent (education) of GDP in 2016.
  - In 2015 public funds accounted for 38.4 percent of total health expenditure in Togo—well below SSA average.
  - For education, public share estimated at about 18 percent.
  - Result: out-of-pocket expenses for health and education are high by SSA standard.

### Suboptimal social outcomes and cross-country comparisons
- Health sector:
  - Togo’s health performance slightly below SSA average while having a lower spending level.
  - Togo spends about 2.0 percent of GDP on health but achieves a HALE lower than some peers that spend less (e.g., Madagascar and Uganda spending between 1.5 and 1.8 percent of GDP achieve better HALE).
- Education sector:
  - Togo ranks among top performers for net enrollment rates in 2015 but at relatively higher cost.
  - Togo’s education spending estimated at 5.2 percent of GDP, while Benin and Rwanda spend between 3.6 and 4.4 percent for comparable outcomes.
- Cross-country comparisons indicate scope to strengthen efficiency in both sectors.

### Frontier analysis methodology (DEA) and interpretations
- Method: Data Envelopment Analysis (DEA) used to construct a “best practice frontier” from most efficient observations in SSA.
- Efficiency interpreted as:
  - Input efficiency: scope to produce the same output while reducing inputs (costs).
  - Output efficiency: scope to increase outputs with the same inputs.
- Efficiency scores range from 0 to 1 and measure conversion rate of input into output.
- Outcomes considered:
  - Health: Health Adjusted Life Expectancy (HALE).
  - Education: Net primary enrollment rate.

### Frontier analysis findings — Health sector (2015 examples)
- Input efficiency:
  - Togo allocated PPP$ 76.3 per capita on health with HALE of 52.3 years.
  - Guinea spends PPP$ 68.5 per capita with similar HALE (51.7 years).
  - Suggests Togo can save PPP$ 7.8 per capita to produce the same HALE — equivalent to an input-efficiency of about 10.2 percent.
- Output efficiency:
  - Ethiopia spends PPP$ 73 per capita with HALE of 56.1 years.
  - Comparison implies Togo can improve HALE by as much as 3.3 years with similar spending — representing an output-efficiency of about 6.3 percent.

### Frontier analysis findings — Education sector (2015 examples)
- Input efficiency:
  - Togo allocated PPP$ 260.5 per capita on education with net enrollment of 95.4 percent.
  - Sierra Leone devoted PPP$ 223.7 per capita to achieve enrolment rate of 99.1 percent.
  - Input-efficiency score estimated at about 14.1 percent.
  - With primary completion rate: Togo allocated PPP$ 260.5 per capita with primary completion rate of 82.9 percent; Benin spends PPP$ 194 per capita with similar primary completion rate (81.1 percent), suggesting potential savings of PPP$ 66.5 per capita — equivalent to an input-efficiency of 25.5 percent.
- Output efficiency:
  - Togo can improve net primary enrollment to 100 percent (per construction) with the same education spending, i.e., improve enrolment by 4.8 percent with current spending levels.
  - With primary completion rate, Togo can improve education outcome by 9.6 percentage points, tantamount to an output-efficiency of about 11.6 percent.

### Aggregate implication of frontier analysis
- The frontier analysis suggests Togo can achieve significantly better outcomes (or the same outcomes at lower cost) with current spending levels in health and education.

### Policy recommendations and options
- Immediate efforts (targeting principle):
  - Finalize and implement the Unified Social Registry for social protection programs to ensure better coordination.
  - Expand unconditional cash transfer (UCT) programs reaching 40,000 households.
  - Expand the school feeding program reaching 50,000 students.
  - Reinforce implementation of PAPV and PUDC programs.
- Sector governance and strategic priorities:
  - Health sector: focus on equity in access, affordability (expand prescription and use of generic drugs and cost-sharing mechanisms) while ensuring safeguards to prevent leakages.
  - Education sector: medium-term strategies to achieve universal primary education, limit out-of-pocket expenses, expand preschool coverage, and cover additional rural areas.
- Improve execution of budgeted social outlays:
  - Social sector allocations often characterized by low execution; insufficient execution may explain failure to meet indicative targets in the program.
- Financing protection for the most vulnerable:
  - Ensure sustainable financing sources (e.g., revenue mobilization or reallocation of spending) or improve efficiency of social spending.
  - Note: in most economies, there is ample room to improve efficiency of public spending, including social spending.

### Governance and institutions (overview)
- Strength and quality of Togo’s public institutions are improving.
- Togo’s governance indicators that were comparable with a typical fragile SSA country 15 years ago are approaching SSA and WAEMU averages.
- Recent increased focus on institutional reform, mainly through efforts to improve fiscal governance.
- Recommendation: give more emphasis to enforcement of anti-corruption legislation by effective and independent institutions.

*Prepared by L. Kebalo, I. Sowou, and S. J. Tapsoba.*

### 1.      While improving, Togo’s general governance structures still seem somewhat

### 1tgoea2019002 - 1.      While improving, Togo’s general governance structures still seem somewhat

### Governance overview
- Starting from a position close to an average fragile SSA country 15 years ago, the World Governance Indicators are now rating Togo more like a low-income country (LIC) and in rule of law an average SSA country (Figure 1).
- Prevailing weaknesses in fiscal management and other governance challenges continue to constrain the delivery of public goods and services with a plausible negative impact on economic growth and poverty reduction.

### Public trust and perceptions
- A 2015 survey reported that 46 percent of respondents in Togo trusted the core state institutions “a lot” or “somewhat” compared with an average of 57 percent for SSA and 65 percent for WAEMU (Text Figure 1).
- In the 2015 survey, only 31 percent of Togo’s citizens responded that the government did well in fighting corruption compared with a WAEMU average of 41 percent (Text Figure 2).

### Institutional reform and anti-corruption efforts
- The government has become increasingly engaged in institutional reforms to strengthen governance and fight corruption.
- New anti-corruption legislation and several control and anti-corruption institutions have been established, including the anti-corruption agency HAPLUCIA that became operational in 2017.

### Fiscal governance
- The Worldwide Governance Indicator of government effectiveness over 2015-17 showed Togo’s score remained close to fragile and LIC SSA countries and below the average of SSA and WAEMU countries (Figure 1).
- WAEMU directives contain provisions on PFM including: better access to budget information, multi-year budgeting, results-oriented management, decentralized budget execution, and a new accounting and financial monitoring framework.
- The most recent PEFA Assessment published in 2016 showed that Togo was either the weakest or one of the weakest in most PFM categories when compared with neighboring WAEMU countries (Table 1).
- The authorities’ ECF supported program has given priority to an ambitious agenda of PFM reforms.

### Transparency of fiscal data
- Key information missing from current budget presentation: (i) the outcome of the previous budget; (ii) complete data on the debt stock; (iii) comprehensive data on financial assets; (iv) wide-ranging information on budget risks; and (v) a comprehensive analysis of the budget impact from new initiatives and public investment.
- Significant amounts of public revenue and spending are excluded from the budget, for example data covering: (i) autonomous public institutions; (ii) the social security fund; and (iii) the pension fund.
- Information about the activity of extrabudgetary units is incomplete.
- The budget document does not include sufficient information about the expected result and actual outcome of different activities and the data is too aggregated to track the allocation of fiscal spending.
- The public does not have access to several key documents, including regular reports on budget execution and audited financial statements.
- Recent measures to increase transparency include: (i) estimates of all tax expenditures were attached to the budget for 2019 and (ii) a decision that the budget for 2020 will be presented and adopted based on specific programs in line with the public finance reforms undertaken among WAEMU members.

### Revenue mobilization
- The Togolese Revenue Authority (OTR) was established in 2014, unifying tax and customs administrations.
- Tax revenues: 15.9 percent of GDP in 2013; 16.9 percent of GDP in 2016; 16.1 percent of GDP in 2017; 16.5 percent of GDP in 2018.
- 2018 tax revenue performance: 16.5 percent of GDP, which is above the SSA and WAEMU averages and about 1½ percent of GDP below the estimated tax frontier (Text Figure 3).
- Tax exemptions amounted to 3.5 percent of GDP in 2016.
- Revenue mobilization measures to be strengthened: (i) broadening the tax base and reducing tax exemptions; (ii) strengthening measures to identify tax fraud; and (iii) increasing the recovery of tax arrears.
- Administrative reforms: refining use of risk-based analysis and reconciliation of different data sources (e.g., reconciling Public Treasury procurement data with OTR turnover data).
- Online tax reporting mandatory for large companies; customs clearance procedures and related documentation will be gradually digitalized.
- Customs clearance will be prevented for merchandise of importers with outstanding tax arrears.

### Spending and public investment management
- Defective cashflow plans have triggered cashflow constraints and an increased risk of arrears; many public arrears have remained unresolved, pending agreements with creditors.
- In 2018 the Ministry of Economy and Finance started to prepare monthly procurement and commitment plans consistent with the approved budget.
- A major lasting problem for cashflow forecasts is non-respect of procurement and commitment plans; public procurement regulations impose maximum deadlines for contract validation that are not respected in practice.
- Challenges remain in converting the Treasury settlement account at the central bank (BCEAO) opened in 2018 into a functioning Treasury Single Account.
- Spending arrears will be cleared based on an audit of existing arrears in 2017 and an agreed schedule; authorities are putting in place a comprehensive system to prevent new arrears.
- Public Investment Management Assessment (PIMA) 2016 ranked Togo in the bottom quartile at 0.3 (scale 0-1).
- Collection of project data by line ministries has been generally poor with sporadic monitoring reports; projects have been selected based on insufficient technical and financial information.
- A multi-year program budgeting process is under preparation and the public investment program (PIP) covering 2019-21 was published as an annex to the 2019 Budget.
- A circular letter issued in December 2018 mandates future investment projects to be selected based on methodological guidance and to include in the PIP and the budget only those selected accordingly.
- At the end of each fiscal year, a report for all completed major projects, including ex-ante and ex-post assessments, will be prepared.

### Asset and debt management
- Fiscal reporting of public assets is weak and there is currently no administrative structure capable of monitoring public enterprises.
- A list of government participation in different companies exists, but monitoring authorities do not receive financial statements on a regular and systematic basis.
- Reporting by regional authorities and controls of guarantees are insufficient.
- Monitoring and management of public debt have improved: the debt management directorate has been reinforced with all debt management functions centralized in one entity; a procedures manual for debt management has been developed.
- The authorities have prepared a medium-term debt strategy that will be updated on a regular basis.
- The situation of Togo’s state-owned banks, which have been in repeated financial difficulties and required recapitalization, is discussed in another selected issues paper.

### Procurement
- WAEMU initiated extensive public procurement reforms in 2005; transparency in Togo reinforced by the law on government procurement and contract delegation in 2009.
- ARMP (Autorité de Régulation des Marché Publics), established in 2009, regulates public procurement and DNCMP (Direction Nationale du Contrôle des Marchés Publics) controls procurement procedures and issues non-objection notices.
- Calls for bids are published in newspapers and on the DNCMP website and generally include specifications, terms, and evaluation criteria.
- Companies guilty of violating procurement regulations are prohibited from participating in future bids and their names are published on the ARMP website.
- Ministries need stronger procurement capacity, including developing electronic management of tender processes and establishing procurement-compliant reviews and auditing mechanisms.

### Market regulation and trade facilitation
- The 2019 Doing Business report indicates Togo’s regulatory performance is comparable to other WAEMU and SSA countries in most areas (Text Figure 4).
- Togo performs better on getting electricity and is weaker than the SSA average in paying taxes and getting credit.
- Togo’s regulatory quality is scored significantly lower than other WAEMU countries by the Worldwide Governance Indicators in 2017 (Figure 1), possibly explained by recent regulatory reforms.
- Time needed to register property in Togo has dropped from 283 days two years ago to currently 84 days.
- OECD trade facilitation indicators (Text Figure 5) show Togo is far below best practice in all areas and particularly in: Automation; Advance rulings; Appeal procedures.
- Togo scored significantly better than other WAEMU countries in governance and impartiality as well as information availability.
- Border agencies have transparent structures and functions with effective sanctions against misconduct; information is available on the national customs website, duty rates are published, and required documentation is easily accessible for downloading.
- To ensure competitiveness of the Port of Lomé, authorities are advised to set ambitious targets and aim for border procedures close to best practice in as many categories as possible.

### Rule of law
- The constitution provides that the judicial branch is independent from the legislative and executive branches. Togo is one of the few francophone countries in Africa where the president does not chair the high judicial council or an equivalent entity.
- The Worldwide Governance Indicator of rule of law improved over time and was close to the average of other WAEMU countries and SSA over 2015-17 (Figure 1).
- Survey data from 2015: only 37 percent of respondents in Togo trusted the judicial courts “a lot” or “somewhat” while the correspondent averages were 53 percent for SSA and 58 percent for WAEMU (Text Figure 6).
- The cost of contract enforcement in Togo is 48 percent of the claim value according to Doing Business 2019 (slightly less than the WAEMU average at 51 percent of the claim value) (Text Figure 7).
- The government decided to create two commercial courts focused on business conflicts.
- New land registration procedures: the tax authority (OTR) has taken over responsibility for the land register, computerized land titles, and launched a nation-wide land census.
- Cost of land registration decreased from previously about 9 percent of the property value to currently just under 6 percent.

### Control of corruption
- The Worldwide Governance Indicator of control of corruption signals that Togo’s control of corruption has improved and is better than in SSA fragile and LIC countries, but other WAEMU countries are on average slightly ahead of Togo (Figure 1).
- A 2015 survey reported that 26 percent of the Togolese paid a bribe in contacts with public services compared with on average 22 percent for SSA and 18 percent for WAEMU (Text Figure 8).
- Bribes were most common in contacts with the police, courts, utility companies, and when asking for permits or other documents; bribes were less common in contacts with schools and health services.
- When asked if they thought that judges were corrupt, 48 percent responded “all” or “most” in Togo, while the corresponding averages were 34 percent for SSA and 37 percent for WAEMU (Text Figure 9).

*Prepared by Lars Engstrom; Afrobarometer (2016); Transparency International (2015); PEFA (2016); IMF (2016a); World Bank Doing Business Report 2019; OECD Trade Facilitation Indicators Simulator.*

### 20.      Appropriate criminalization of acts of corruption is essential to strengthen

### 20.      Appropriate criminalization of acts of corruption is essential to strengthen

### Legal and institutional framework
- Constitutional and international commitments:
  - Corruption prohibited in article 46 of the Constitution (Loi fondamentale).
  - Togo ratified the UN Anti-Corruption Convention (UNCAC) in 2005 and the African Union Anti-Corruption Convention in 2009.
- Key governance-related laws and codes (as adopted/dated in the source):
  - Law on government procurement and contract delegation adopted in 2009 (2009-014).
  - Law on transparency in public financial management adopted in 2014 (2014-009).
  - Organic budget law adopted in 2014 (2014-013).
  - New Criminal Code (Code pénale) adopted in 2015:
    - Clarifies passive and active corruption and existing offenses considered as corruption.
    - Introduces bribery offenses of foreign public officials and international civil servants; general offense of bribery in the private sector; abuse of office; illicit enrichment.
    - Defines influence trading and illegal taking of interests.
    - Punishes these acts of corruption from 5 to 10 years of criminal imprisonment.
- Asset-declaration reform in preparation:
  - Togo is preparing legislation requiring all civil servants who are professionally or politically exposed to corruption risks to declare assets.
  - The legislation should: clearly identify assets to be declared (including assets beneficially owned), liabilities and interests of high-level officials; establish a mechanism for publication and verification of declarations; provide a framework for dissuasive sanctions.
- Recovery and management of illicitly acquired property:
  - Togo would benefit from establishing clear procedures for recovery and management of property acquired through illicit activities related to corruption, money laundering, and organized international crime.

### Corruption reporting and perceptions
- Underreporting and fear:
  - In SSA (2015 survey) about 85 percent of respondents who had been requested to pay a bribe did not report the incident to the authorities.
  - Primary reasons for not reporting (SSA averages from the survey):
    - 34 percent did not report because of fear of retaliation or other negative consequences.
    - 14 percent believed reporting was meaningless—nothing would be done.
  - In Togo, fear of the consequences of reporting corruption plays an especially large role: 61 percent (Text Figure 10).
- Perception indicators referenced:
  - Transparency International (2015) and Afrobarometer (2017a, 2017b) used for bribery rates and perceptions of judicial corruption.
- Institutional weaknesses and recent developments:
  - Established control organs and anti-corruption agencies (listed in Box 2) include: Inspection Générale d'Etat (IGE), Inspection Générale des Finances (IGF), Autorité de Régulation des Marché Publics (ARMP), Direction Nationale du Contrôle des Marchés Publics (DNCMP), Cour des Comptes (CC), Conseil Supérieur de la Magistrature (CSM), Haute Autorité de Prévention et de Lutte contre la Corruption et les Infractions Assimilées (HAPLUCIA), Cellule Nationale de Traitement des Informations Financières (CENTIF).
  - HAPLUCIA became operational in 2017 and started investigating the first corruption cases in late 2018 following a corruption awareness campaign launched in September 2018.
  - Existing institutional weaknesses: insufficient follow-up of audits by IGE, IGF, and ARMP; lack of systematic follow-up of reports by the Auditor General (Cour des Comptes).
  - The central challenge: make institutions fully operational and address fear of retaliation or negative consequences.

### Anti-Money Laundering (AML) and illicit financial flows
- Vulnerabilities and assessments:
  - Togo’s porous borders, susceptibility to corruption, and large informal sector create vulnerabilities to money laundering.
  - CENTIF launched a national money laundering and terrorism financing assessment in June 2018 to gather comprehensive understanding of threats and vulnerabilities.
- Legal and supervisory framework:
  - Strengthening the AML regime would support anti-corruption efforts by detecting and tracing laundering of proceeds of corruption and assisting investigation and prosecution of bribery (FATF guidance referenced).
  - Relevant AML/CFT elements highlighted:
    - Implementation of enhanced due diligence requirements for domestic politically-exposed persons (PEPs), including identification of PEPs who are beneficial owners behind legal persons.
    - Reporting by financial institutions of transactions when they suspect or have reason to suspect funds are proceeds of criminal activity, including corruption.
  - Togo’s 2018 AML/CFT law transposes the uniform WAEMU AML/CFT law into national law.
  - Togo’s AML/CFT regime is scheduled to undergo a mutual evaluation by the Inter-Governmental Action Group against Money Laundering in West Africa (GIABA) next year; authorities should address remaining technical deficiencies and ensure AML/CFT effectiveness.
  - Specific priorities: strengthen due diligence on domestic PEPs (including family members and close associates); improve transparency of beneficial ownership structure to better identify PEPs; bolster banking sector AML supervision by the Banking Commission to ensure preventive measures are effectively implemented.

### Policy recommendations and summary findings
- From the chapter’s summary (paragraph 26) the authorities would be well advised to focus on:
  - Continuing broad-based fiscal governance reforms:
    - Publish more transparent fiscal data.
    - Deepen revenue reforms and increase the use of risk-based analysis.
    - Ensure public investment projects are prioritized based on rigorous cost-benefit criteria.
    - Strengthen monitoring of public enterprises.
    - Establish procedures for systematic follow-up of audit reports by the Auditor General (Cour des Comptes) and other control organs.
  - Strengthening anticorruption measures:
    - Adopt asset declaration legislation for politically exposed civil servants with international good-practice features: comprehensive disclosure, publication, verification.
    - Establish clear procedures for recovery and management of property acquired through illicit activities.
    - Strengthen AML tools that support anticorruption measures: improve transparency of legal entities, establish preventive measures for domestic PEPs, ensure implementation through effective supervision.
  - Ensuring fair and effective execution of existing laws and regulations:
    - Require capacity building and avoidance of political interference that undermines predictability and effectiveness of the judiciary, anti-corruption institutions, and control organs.
    - Improve predictability to support a favorable investment climate.
  - Streamlining border procedures and strengthening regulatory framework for public projects delegated to private-sector providers to support Togo’s ambitions as a regional transportation hub based on goods shipped through the Port of Lomé.

*Source: Content unit 1tgoea2019002 — IMF.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1tgoea2019002.pdf_