## _cr04368 ## Source details **Canonical URL:** [_cr04368](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04368.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04368.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04368.pdf.json) --- ### Executive Summary — Key Findings and Projections - Macroeconomic performance over 2001-03 was broadly satisfactory: - Real GDP grew on average by 5.3 percent a year. - Inflation was low. - Banking system financial indicators remained solid. - 2004 shocks and revised projections: - Real GDP growth is now projected at 3 percent in 2004. - External current account deficit expected to widen by ½ percentage points of GDP. - Tax revenue would be lower than previously anticipated. - Policy consensus and medium-term objectives: - Authorities decided on strong fiscal actions to compensate for the revenue shortfall and measures in the cotton sector to prevent recurrence of disturbances in 2004/05. - Continued discussions with Nigerian authorities on trade issues. - Authorities revised downward their path for economic growth; objective is to raise real GDP growth gradually to the 7 percent target set in the PRSP. - Fiscal policy to support PRSP while keeping overall deficit in line with debt sustainability objectives. - Revenue mobilization to be strengthened through enhancement of tax and customs administration. - Expenditure efforts to better reflect PRSP priorities while keeping total outlays stable in terms of GDP. - Structural reform agenda to be accelerated: cotton sector reform, divestiture program, new civil service reform. - Private sector promotion through fighting corruption and strengthening legal and judiciary systems. ### Institutional and Program Context - Mission contacts and composition: - Staff met with the President; the Minister of State in Charge of Planning; the Minister of Finance and Economy; the National Director of the BCEAO; other senior officials; private sector and donor representatives. - Mission team: Mr. Ewenczyk (head), Mr. Harmsen (Resident Representative), Mr. Nsengiyumva, Mr. Yulek, Ms. Babihuga (all AFR), and Ms. Kebet (Assistant, AFR). - Mission worked closely with World Bank staff. - Fund program status and relations: - Last three-year PRGF arrangement expired in March 2004, with the full amount drawn. - PRSP finalized early 2003; reached the completion point under the enhanced HIPC Initiative in March 2003. - Benin has accepted Article VIII, sections 2, 3, and 4 obligations and maintains an exchange system free of restrictions subject to approval under Article VIII. - Benin had three successive ESAF/PRGF arrangements since 1993; an ex post assessment (EPA) is a background paper. - Authorities, private sector, and donors concurred with EPA and indicated a further PRGF arrangement would help address core Fund-area challenges and facilitate donor mobilization. ### Recent Economic Performance — 2000–03 and 2004 Developments - Summary indicators (selected averages / levels as reported): - GDP at constant prices: 1995-2000 average 5.2; 2001-03 average 5.3. - Consumer price index (average): 1995-2000 5.6; 2001-03 2.6. - Investment: 1995-2000 18.1; 2001-03 18.4. - Public: 6.8 (1995-2000); 7.1 (2001-03). - Private: 11.3 (1995-2000); 11.3 (2001-03). - Real effective exchange rate (+ appreciation): 1995-2000 0.8; 2001-03 4.2. - External current account balance (percent of GDP): 1995-2000 -6.6; 2001-03 -8.1. - Debt-to-GDP ratio: end-2000 58.3; end-2003 35.8 (after HIPC completion point). - Developments and vulnerabilities: - External current account deficit rose in 2002 after an unexpected drop in world cotton prices. - Real effective exchange rate appreciated since end-2000; at end-2003 Benin had preserved about 25 percent of the external competitive gains from the 1994 devaluation. - Economy vulnerable to external shocks; limited progress in poverty reduction per the 2003 PRSP. - High export dependence on cotton and exports to Nigeria (cotton and exports to Nigeria together account for more than two-thirds of exports of goods and nonfactor services). - Fiscal and public expenditure developments (central government operations, selected series in percent of GDP): - Total revenue: 2000 16.6; 2001 16.2; 2002 16.9; 2003 17.0. - Total expenditure: 2000 20.1; 2001 20.3; 2002 20.4; 2003 21.6. - Current expenditure: 12.4; 12.5; 13.8; 13.9 (2000–03). - Wages: 4.7; 4.6; 4.8; 5.1 (2000–03). - Capital expenditure and net lending: 7.7; 7.8; 6.6; 7.1 (2000–03). - Overall fiscal deficit (payment order basis, excl. grants): 2000 -3.5; 2001 -4.2; 2002 -3.5; 2003 -4.6. - Excluding HIPC financed expenditures: -3.3; -3.2; -2.5; -3.7 (2000–03). - Domestic financing: 0.9; -2.8; 0.6; -0.2 (2000–03). - External financing (including debt relief): 4.6; 6.9; 4.0; 4.1 (2000–03). - Grants: 1.7; 2.6; 1.1; 2.0 (2000–03). - Loan disbursements: 3.1; 4.3; 2.9; 2.2 (2000–03). - Health and education expenditures (memo): 4.8; 6.2; 5.1; 5.7 (2000–03). - Monetary and financial sector developments: - Domestic credit expanded rapidly in 2002-03, driven by credit to the private sector. - BCEAO increased reserve requirement from 9 to 13 percent in February 2004. - Banking sector profitability improved; compliance with prudential ratios broadly satisfactory except concentration risk. ### Trade Policy, Exports to Nigeria, and Recent External Developments - Trade policy and environment: - WAEMU CET with four rates: 0, 5, 10, and 20 percent; internal barriers dismantled when CET implemented in 2000. - Benin’s simple average tariff rate is 14.6 percent (all rates ad valorem), lower than sub-Saharan African average 17.6 percent. - Fund rates Benin’s overall trade restrictiveness as 2 out of 10 (1 least restrictive); Benin has no formal nontariff barriers. - Customs procedures remain burdensome; issues with undervaluation, fraud, and exemptions persist. - Port of Cotonou is main gateway; port management reportedly started to improve following an action plan and new director appointment in early 2004. - Preferential access: U.S. GSP and EU Cotonou Convention; AGOA visa for clothing exports to the U.S. in early 2004, but domestic textile industry is small and uncompetitive. - Exports to Nigeria (components and fiscal importance): - Formal exports: less than 1 percent of GDP. - Formal reexports: equivalent to 7½ percent of GDP in 2002-03; generate about 2.5 percent of Benin’s total tax revenues. - Informal reexports: rough estimates about 6 percent of GDP; generate about one-third of customs revenues. - Recent developments with Nigeria: - End-2003 Nigeria introduced an import prohibition list of 44 items and strengthened border controls. - Port traffic fell 20 percent during January–April 2004 compared to the same period in 2003, mostly affecting textiles, poultry, and manufactured goods destined for reexport to Nigeria. - Since June 2004 Benin negotiated to remove prohibitions for locally produced items; prohibition list to stay in effect for products originally imported to Benin but not for those locally produced. - Comparative indicators: Nigeria’s average tariff rate 37.2 percent versus Benin 14.6 percent; Nigeria’s Fund trade restrictiveness index 8 versus 2 for Benin. ### PRSP Macro Objectives, Outlook, and Selected Projections - Near-term indicators: - Real GDP growth in 2004 projected at 3 percent. - Government revenue was 17 percent lower than expected for the first quarter of 2004. - CPI increased by 0.8 percent in the first half of 2004. - Selected PRSP macro objectives and projections (as presented in source table format): - 2005 2006 2007 - Initial New - proj.1/ proj. - GDP at constant price 2/6.03.05.06.06.5 - Consumer price index 2/2.62.63.03.02.5 - Investment 19.317.618.518.819.2 Public 8.37.47.57.47.6 Private 11.010.211.011.411.6 - Government revenue17.015.816.016.216.6 - Government expenditure21.721.321.221.221.3 - Overall fiscal deficit, excluding grants -4.7-5.5-5.2-5.0-4.7 - External current account balance (- deficit)-7.1-9.3-9.1-8.8-8.3 - Debt-to-GDP ratio (after debt relief)37.233.333.332.631.8 - 1/ As indicated in Country Report 04/118. - 2/ Annual change in percent. ### Fiscal Policy Actions, Objectives, and Measures - Immediate remedial fiscal actions for 2004: - Strengthen tax administration. - Cut total spending by 1.4 percent of GDP while protecting priority spending. - If implemented rapidly and forcefully, these measures would permit limiting the overall fiscal deficit to 5½ percent of GDP in 2004; further measures might be needed if revenue weaknesses persist. - Revenue-side medium-term focus: - Combat tax evasion, collect tax arrears, simplify procedures per Fund TA. - At customs: control exemptions, apply WTO valuation rules to all imports, fight smuggling, fraud, and corruption. - Aim to return revenues gradually to the 17 percent of GDP level reached in 2002-03. - Expenditure-side medium-term focus: - Reflect PRSP priorities while keeping total outlays stable in terms of GDP. - Annual budgets underpinned by an updated MTEF. - Wage bill targeted at 5 percent of GDP by containing wage increases. - Curb growth in nonpriority spending and limit wasteful spending on public utilities. - Complete public expenditure management reforms (SIGFIP, tracking poverty-reducing expenditure) to improve monitoring and transparency. - Financing and debt sustainability: - Authorities expect deficit financing to be covered by grants and highly concessional loans to preserve debt sustainability. - Fiscal deficit (excluding grants) envisaged to decline from 5½ percent of GDP in 2004 to 4.7 percent of GDP in 2007. - Authorities indicated existing donor commitments covered about 85 percent of the projected financing gap for 2005. ### Structural Reform Status and Sectoral Issues — Cotton, Divestiture, Civil Service - Cotton sector: - Reform moved sector from integrated state monopoly to substantial private participation; reform remains unfinished. - Allocation of seed cotton to ginners still decided administratively on installed capacity despite excess capacity. - CSPR (private institution) responsible for selling farmers’ output and repaying input credit experienced major operational and cash-flow problems; significant share of transactions occurred outside this system, delaying the crop season and reducing yields. - Privatization process for SONAPRA resumed in December 2003 but not completed by mid-June 2004. - Authorities plan measures: establish regulatory framework before 2004/05 season; individual zones of operation for input distributors; study to improve bidding for inputs; new process by year-end with World Bank and French Cooperation support; sanctions for operations outside procedures; transition to competitive allocation among ginners; PSIA scheduled to be completed by end-2004. - Divestiture/privatization: - Slow progress in divesting public utilities and Port of Cotonou; need for credible agenda. - Privatization of SONAPRA not completed by mid-June; government accepted highest offers for three mills with transfer envisaged by end-October 2004; fourth mill delayed due to financing guarantees. - Bidding for government shares in Continental Bank was unsuccessful; plan to relaunch combined with BOAD shares (together 52 percent). - Civil service reform: - Reform stalled due to opposition from unions and parliament. - Government used fixed-term recruitment since early 2003 to limit public employment expansion. - Supreme Court rejected the draft law establishing a single statute for government employees in April 2004; authorities considering next steps. - Staff recommended refraining from further wage increases until new system implemented and completing actuarial study for FNRB pension fund. ### Financial Sector Structure, Performance, and Risks - System structure and outreach: - Eight commercial banks (about 90 percent of total financial sector assets), two leasing companies, eight insurance companies, over 100 formal microfinance institutions, small postal bank, two state-run pension schemes. - Banking concentration: largest three banks account for over three fourths of total deposits and credits. - Bank deposits increased from 4 percent of GDP in 1989 to 20 percent of GDP in 2003. - Credit increased from 0.2 percent of GDP in 1989 to 14.5 percent of GDP in 2003. - Microfinance deposits rose from 0.7 percent of GDP in 1993 to 1.8 percent of GDP in 2003; microfinance credits rose to 3.3 percent of GDP in 2003. - Performance and prudential indicators: - Return on equity increased from 10.6 percent to 36.7 percent over 2000-03. - Return on assets rose from 0.4 percent to 2.1 percent over 2000-03. - Average operating efficiency about 50 percent; intermediation margins about 10 percent. - Nonperforming loans ratio: 5.4 percent (among lowest in region); increased to 6 percent at end-May 2004. - Prudential compliance snapshot (March 2004): Capital > CFAF 1 billion: 8/8 banks observing; Capital adequacy ratio > 8%: 6/8 observing; Coverage of medium-term liabilities > 75%: 7/8 observing; Connected lending / effective capital < 20%: 6/8 observing. - Policy priorities: - Improve compliance with prudential ratios; strengthen supervision of microfinance; deepen financial intermediation; diversify exposure to reduce cotton concentration risk. - Recent policy actions: growth of microfinance sector and establishment in 2004 of a housing bank (government minority share 10 percent; 2004 budget provision CFAF 1 billion). ### Debt Sustainability, External Position, and Risk Scenarios - DSA conclusion: - Under the baseline (authorities’ revised macroeconomic framework for 2004-07 and conservative assumptions), external debt remains on a sustainable path; NPV of debt-to-exports ratio would remain below the 150 percent threshold from 2005 onward. - Debt service projected sustainable, with debt service-to-exports ratio hovering around 6.5 percent in 2004-23. - Alternative stress scenarios: - B1 (new public sector loans on less favorable terms, 2004-23): NPV debt-to-GDP rises to 20.1 by 2008. - B2 (lower exports): NPV debt-to-GDP rises to 20.1 by 2008 and to about 21.0 under prolonged shock. - B3 (higher expenditures): NPV debt-to-GDP reaches 21.5 by 2010. - In each alternative scenario, NPV of debt-to-exports ratio would remain above 150 percent during a protracted period. - Staff advice: - Continue prudent external financing policy, enhance export diversification, contain public sector deficit, improve debt management, and strengthen monitoring through the debt committee established in 2003. ### PRSP Implementation, Social Services, and Poverty Monitoring - PRSP finalized December 2002; framework for aligning donor assistance. - Key PRSP requirements to achieve objectives: - Accelerate structural reforms to raise productivity and improve service delivery. - Encourage private investment via improved governance and judiciary. - Increase level and quality of government outlays while curbing nonpriority expenditures. - MDGs and service delivery challenges: slow progress in women's education, sanitation, child and maternal health. - PRSP monitoring and analytical work: - National household survey conducted. - PSIA of cotton sector reforms being prepared with World Bank assistance; to be completed in second half of 2004. - Monitoring and evaluation to be strengthened; first annual progress report scheduled late 2004 (to reflect weaker-than-expected activity and expenditure cuts in 2004). - Donor coordination: - Bank’s CAS (FY04–FY06) and PRSCs to support programmatic lending and donor alignment; CAS lending volume US$200 million; IDA financing US$85 million channeled through PRSCs. ### Statistical Issues, Technical Assistance, and Data Dissemination - Statistical database assessment: - Fairly comprehensive but needs strengthening in national accounts, balance of payments, public finance, monetary statistics, and social indicators. - Benin participates in the GDDS; plans to improve statistical database in consultation with Fund staff. - Specific compilation issues: - CPI: WAEMU harmonized CPI produced since January 1998; CPI increased by 1.1 percent in twelve months ending July 2004. - Government finance statistics compiled with one- to three-month lag; no final budget or treasury accounts published at fiscal year end; Benin does not report public finance data for IFS or GFSY. - Monetary statistics: BCEAO compiles and disseminates; difficulties estimating currency in circulation for individual countries; BCEAO intends to resolve by end-2004. - Balance of payments: compiled by BCEAO national agency; BPM5 transition completed; dissemination lags (BOP: seven-month lag; IIP: 18-month lag). - External debt: Caisse Autonome d'Amortissements (CAA) uses CS-DRMS; database fairly comprehensive for majority of creditors. - Technical assistance and capacity building: - Fund and donors providing TA: tax administration, balance of payments, monetary and financial statistics, fiscal transparency, HIPC monitoring. - AFRITAC West to provide continued TA in tax and customs administration, income taxation, public expenditure management, and statistics. ### Indicators, Targets, and Recent Program Performance (Selected) - Indicative targets for 2004 (cumulative amounts since end-December 2003, Table 1): - End-March: Net bank credit to government Target -34.8 / Actual -19.1. - End-March: Wage bill 1/: 28.4 / 29.5. - End-March: Poverty-reducing expenditure 1/: 20.4 / 6.8. - End-March: Total government revenue 1/ 2/: 92.2 / 76.2. - End-June: Net bank credit to government Target -9.5 / Actual -17.4. - End-June: Wage bill 1/: 58.8 / 60.2. - End-June: Poverty-reducing expenditure 1/: 17.8 / 27.8. - End-June: Total government revenue 1/ 2/: 156.3 / 162.8. - End-September: Wage bill 1/ Target 86.4 / Actual 114.0 (cumulative). - End-September: Total government revenue 1/ 2/ Target 244.3 / Actual 340.4 (cumulative). - Macroeconomic indicators (2000–03 selected annual figures): - Real GDP: 2000 5.8; 2001 5.0; 2002 6.0; 2003 4.8. - Consumer prices (average): 2000 4.2; 2001 4.0; 2002 2.4; 2003 1.5. - Current account balance: 2000 -8.0; 2001 -6.7; 2002 -9.0; 2003 -8.5. - Central government revenue: 2000 16.6; 2001 16.2; 2002 16.9; 2003 17.0. - Total expenditure and net lending: 2000 20.1; 2001 20.3; 2002 20.4; 2003 21.6. - Overall fiscal balance: 2000 -3.5; 2001 -4.2; 2002 -3.5; 2003 -4.6. ### Relations with the IMF, Safeguards, and Financing - IMF arrangements and holdings (Appendix II): - Membership: Joined July 10, 1963; Article VIII. - Quota: 61.90 (SDR million). - Fund holdings of currency: 59.72 (SDR million) = 96.48 percent of quota. - Outstanding ESAF/PRGF arrangements: 46.93 (SDR million) = 75.82 percent of quota. - Latest PRGF arrangement: Approval 07/17/2000 to 03/31/2004; Amount Approved 27.00 (SDR million); Amount Drawn 27.00 (SDR million). - Projected payments to the Fund (SDR million, Board-approved HIPC Assistance): - Principal: 2004 = 2.69; 2005 = 4.51; 2006 = 5.01; 2007 = 4.41; 2008 = 5.64. - Charges/interest: 2004 = 0.19; 2005 = 0.36; 2006 = 0.33; 2007 = 0.30; 2008 = 0.28. - Total: 2004 = 2.89; 2005 = 4.87; 2006 = 5.34; 2007 = 4.72; 2008 = 5.92. - HIPC Initiative: - Enhanced Commitment decision point: Jul 17, 2000. - Assistance committed (NPV, end-1998): Total assistance US$265.00; Fund assistance US$24.30 (SDR equivalent 18.40). - Completion point date: March 2003. - Fund disbursements: Amount disbursed 18.40 (SDR million); Interim assistance 11.04; Completion point 7.36; Additional disbursement of interest income 1.66; Total disbursement 20.06. - Safeguards and TA: - On-site safeguards assessment for BCEAO completed July 25, 2001; recommended remedies on financial reporting and internal controls. - BCEAO to align with IAS and publish full financial statements; progress noted and further changes planned with goal of graduate alignment by 2005. - Multiple FAD and STA missions on tax administration, BOP, monetary and financial statistics, and fiscal transparency. ### Board and Staff Appraisal — Key Messages and Recommendations - Staff appraisal: - 2001-03 performance broadly satisfactory: strong growth, low inflation, appropriate fiscal stance, but slow structural reform, deteriorating external competitiveness, and vulnerability to external shocks. - 2004: performance adversely affected by Nigeria import restrictions and poor cotton crop; growth projected 3 percent; tax revenue lower than anticipated; external current account deficit to widen moderately. - Directors’ recommendations and Fund engagement: - Implement forcefully planned fiscal adjustment measures; boost revenue collection; increase level and quality of poverty-reducing spending; curb nonpriority expenditure. - Accelerate structural reforms: credible divestiture agenda; civil service reform; strengthen cotton-sector institutions and transition to competitive ginning allocations. - Improve business environment: fight corruption, strengthen judiciary, improve customs transparency. - Continue prudent debt-management policy and ensure compliance with regional banking prudential ratios. - A further PRGF arrangement with low access could help address remaining challenges, mobilize concessional financing, and provide a policy-response framework for exogenous shocks; aim for eventual graduation from use of Fund resources. ### IMF Staff Representative (October 6, 2004) — Updates - General: New information does not alter the thrust of the staff appraisal. - End-June 2004 fiscal position: - All indicative targets for end-June 2004 were met, except the wage bill target, which was slightly exceeded (by 2 percent). - Both revenue and poverty-reducing outlays were higher than projected at the time of the consultation mission. - Monetary and banking (first five months of 2004): - Credit to nongovernment sector increased 12 percent on a 12-month basis at end-May 2004 compared to 33 percent at end-2003. - Nonperforming loans ratio increased from 5 percent at end-2003 to 6 percent at end-May 2004. - Fiscal consolidation measures for 2004: - Authorities implemented budgetary cuts totaling CFAF 30 billion, equivalent to 1.4 percent of GDP, to limit the fiscal deficit to 5½ percent of GDP. - Budgetary allocations reduced by CFAF 27.6 billion for domestically financed capital expenditure and by CFAF 2.4 billion for current spending. *Source: IMF country report content as provided in the supplied document excerpt.* ### 2004. The staff met with the President, the Minister of State in Charge of Planning, the ### _cr04368 - 2004. The staff met with the President, the Minister of State in Charge of Planning, the ### Executive Summary — Key Findings and Projections - Over 2001-03 macroeconomic performance was broadly satisfactory: - Real GDP grew strongly, on average by 5.3 percent a year. - Inflation was low. - Banking system financial indicators remained solid. - Economic activity in 2004 was adversely affected by a poor cotton crop and tightening of import restrictions by Nigeria: - Real GDP growth is now projected at 3 percent in 2004. - The external current account deficit is expected to widen by ½ percentage points of GDP. - Tax revenue would be lower than previously anticipated. - Policy consensus and medium-term objectives: - Authorities decided on strong fiscal actions to compensate for the revenue shortfall and measures in the cotton sector to prevent recurrence of disturbances in 2004/05. - Continued discussions with Nigerian authorities on trade issues. - Authorities revised downward their path for economic growth; objective is to raise real GDP growth gradually to the 7 percent target set in the PRSP. - Over the medium term, fiscal policy will support the poverty reduction strategy while keeping the overall deficit in line with debt sustainability objectives. - Revenue mobilization to be strengthened through enhancement of tax and customs administration. - Expenditure efforts will aim to better reflect PRSP priorities while keeping total outlays stable in terms of GDP. - Structural reform agenda to be accelerated: strengthening cotton sector reform, advancing divestiture program, introducing new civil service reform. - Private sector promotion through fighting corruption and strengthening legal and judiciary systems. ### Institutional and Program Context - Mission contacts and composition: - The staff met with the President, the Minister of State in Charge of Planning, the Minister of Finance and Economy, the National Director of the Central Bank of West African States (BCEAO), other senior officials, and representatives of the private sector and donor community. - The staff team comprised Mr. Ewenczyk (head), Mr. Harmsen (Resident Representative), Mr. Nsengiyumva, Mr. Yulek, Ms. Babihuga (all AFR), and Ms. Kebet (Assistant, AFR). - The mission worked closely with World Bank staff. - Fund program status and relations: - The last three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) expired in March 2004, with the full amount drawn. - Benin finalized its Poverty Reduction Strategy Paper (PRSP) in early 2003 and reached the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative in March 2003. - Benin has accepted the obligation of Article VIII, sections 2, 3, and 4, and maintains an exchange system free of restrictions subject to approval under Article VIII. - Benin has had three successive ESAF/PRGF arrangements since 1993. An ex post assessment is being issued as a background paper to this report. - The authorities, private sector, and donor representatives concurred with the thrust of the ex post assessment (EPA) and indicated that a further PRGF arrangement would help address challenges in Fund core areas and facilitate donor mobilization. ### Recent Economic Performance — 2000–03 and 2004 Developments - Summary indicators (annual averages or period comparisons shown in source): - GDP at constant prices: 1995-2000 average 5.2; 2001-03 average 5.3. - Consumer price index (average): 1995-2000 5.6; 2001-03 2.6. - Investment: 1995-2000 18.1; 2001-03 18.4. - Public: 6.8 (1995-2000); 7.1 (2001-03). - Private: 11.3 (1995-2000); 11.3 (2001-03). - Real effective exchange rate (+ appreciation): 1995-2000 0.8; 2001-03 4.2. - External current account balance (in percent of GDP): 1995-2000 -6.6; 2001-03 -8.1. - Debt-to-GDP ratio: end-2000 58.3; end-2003 35.8 (after the completion point of the Enhanced HIPC Initiative). - Developments and vulnerabilities: - Real GDP grew steadily and inflation was low (Figures 1 and 2 in source). - External current account deficit generally in line with program targets except 2002 when it increased due to an unexpected drop in the world price for cotton. - The real effective exchange rate appreciated since end-2000, largely because of the U.S. dollar decline against the euro to which the CFA franc is pegged; at end-2003 Benin had preserved about 25 percent of the external competitive gains from the 1994 devaluation. - Economy remained vulnerable to external shocks; limited progress in poverty reduction per the 2003 PRSP. - Slow progress toward Millennium Development Goals, notably in women's education, sanitation, and child and maternal health. - High export dependence on cotton production and exports to Nigeria (cotton and exports to Nigeria together account for more than two-thirds of exports of goods and nonfactor services). - Fiscal and public expenditure developments (central government operations, 2000–03, in percent of GDP): - Total revenue: 2000 16.6; 2001 16.2; 2002 16.9; 2003 17.0. - Total expenditure: 2000 20.1; 2001 20.3; 2002 20.4; 2003 21.6. - Current expenditure: 12.4; 12.5; 13.8; 13.9 (2000–03). - Wages: 4.7; 4.6; 4.8; 5.1 (2000–03). - Capital expenditure and net lending: 7.7; 7.8; 6.6; 7.1 (2000–03). - Overall fiscal deficit (payment order basis, excl. grants): 2000 -3.5; 2001 -4.2; 2002 -3.5; 2003 -4.6. - Excluding HIPC financed expenditures: -3.3; -3.2; -2.5; -3.7 (2000–03). - Domestic financing: 0.9; -2.8; 0.6; -0.2 (2000–03). - External financing (including debt relief): 4.6; 6.9; 4.0; 4.1 (2000–03). - Grants: 1.7; 2.6; 1.1; 2.0 (2000–03). - Loan disbursements: 3.1; 4.3; 2.9; 2.2 (2000–03). - Health and education expenditures (memo): 4.8; 6.2; 5.1; 5.7 (2000–03). - Structural strengths and weaknesses: - Revenue collection strengthened, mostly from tax administration improvements; customs administration weaknesses persisted (customs valuation and fraud). - Spending for health, education, and government investment remained below targets; other expenditures exceeded targets due to unplanned wage increases (2002 and 2003), subsidies to cotton producers in 2002, and election-related overruns in 2003. - Reforms in public expenditure management: integrated computerized expenditure management system (SIGFIP) and mechanism for tracking poverty-reducing expenditure introduced. - Remaining weaknesses in internal controls, treasury accounting, and public procurement (as reported by Fund technical assistance mission in August 2003). - Public external debt-to-GDP declined from an average of 55 percent in 2000-02 to about 36 percent in 2003, in part due to HIPC completion-point debt relief. - Monetary and financial sector: - Domestic credit expanded rapidly in 2002-03, driven by credit to the private sector. - BCEAO increased reserve requirement from 9 to 13 percent in February 2004. - Banking sector financial health remained broadly sound; profitability improved and compliance with prudential ratios was broadly satisfactory except for concentration risk. ### Structural Reform Status and Sectoral Issues - Structural reform progress remained slow: - Civil service reform (designed with World Bank support in 1998) stalled due to strong opposition from trade unions and parliament. - To limit public sector employment expansion, government applied recruitment policy based on fixed-term contracts since early 2003 to replace retiring civil servants. - Divestiture program implementation (public utilities and Port of Cotonou) did not progress significantly. - Cotton sector specifics and reform challenges: - Reform moved cotton sector from integrated state monopoly to substantial private participation, but reform remains unfinished: - Allocation of seed cotton to ginners still decided administratively on installed capacity to ensure minimum activity across ginning companies (excess ginning capacity exists). - Current framework among stakeholders (input importers/distributors, farmers, ginners) under stress, adversely impacting 2003/2004 crop season. - CSPR (private institution representing stakeholders) responsible for selling farmers’ output, collecting payments from ginners, repaying input credit, and paying farmers; a significant share of transactions began occurring outside this regular system. - Resulted in CSPR financial problems because it remained liable for input credit repayments but could not collect from some farmers, delaying start of crop season. - Delayed start combined with low yields from low-quality inputs purchased outside the regular system negatively affected output. - Privatization process for public ginning company SONAPRA resumed in December 2003 but was not completed by mid-June 2004 as scheduled. ### Policy Recommendations and Authorities’ Response - Immediate remedial actions (agreed between staff and authorities): - Strong fiscal measures to offset revenue shortfalls in 2004. - Actions in the cotton sector to prevent recurrence of disturbances in 2004/05 crop season. - Pursue discussions with Nigerian authorities to address import restrictions. - Medium-term policy priorities: - Strengthen tax and customs administration to increase revenue mobilization. - Reorient budgetary allocations to better reflect PRSP priorities while keeping total outlays stable as a share of GDP. - Accelerate implementation of structural reforms: cotton sector stabilization, completion of divestiture program, launch of new civil service reform. - Promote private sector activity through anti-corruption measures and legal/judicial system strengthening. - Fund engagement: - Authorities and stakeholders indicated that a further PRGF arrangement would support addressing challenges in Fund core areas and help mobilize donor assistance. ### Additional Institutional and Analytical Notes - The report includes an ex post assessment (EPA) of Benin's performance under Fund-supported programs; the EPA and authorities’ actions in response to Executive Directors’ recommendations are summarized within the full report (Box 6). - Appendices in the full report cover Financial Sector Developments and Issues, Relations with the Fund, Relations with the World Bank Group, Statistical Issues, and a Public Information Notice (PIN). *Source: IMF country report content as provided in the supplied document excerpt.* ### 10. Together with the other countries of the WAEMU, Benin maintained a liberal trade ### _cr04368 - 10. Together with the other countries of the WAEMU, Benin maintained a liberal trade ### Trade policy and trade environment - The WAEMU common external tariff (CET) established four rates: 0, 5, 10, and 20 percent; internal tariff barriers within WAEMU were dismantled when the CET was implemented in 2000. - Benin’s simple average tariff rate is 14.6 percent (all rates applied are ad valorem), lower than the average for sub-Saharan African countries (17.6 percent). - Overall trade restrictiveness for Benin is rated 2 out of 10 (1 being the least restrictive) by the Fund; Benin does not have any formal nontariff barriers. - Customs procedures remain burdensome; implementation of the CET was associated with continued fraud and corruption, including undervaluation of imports. Actions have been taken to apply transaction values to all imports and fight smuggling in accordance with IMF technical assistance recommendations, but corruption and lack of control over exemptions remain major concerns. - Most external trade goes through the Port of Cotonou; port management had been poor but reportedly started to improve following an action plan and appointment of a new director in early 2004. - Preferential market access: Benin has preferential access to the USA market (U.S. Generalized System of Preferences) and to the European Union (Cotonou Convention, Everything-but-Arms Initiative). Benin received a visa for clothing exports to the U.S. in early 2004 under AGOA, but rapid near-term expansion of clothing exports is limited by a small, uncompetitive domestic textile industry. ### Exports to Nigeria and recent external developments - Components of exports from Benin to Nigeria: - Formal exports: less than 1 percent of GDP. - Formal reexports (goods destined for Nigeria imported through the Port of Cotonou): equivalent to 7½ percent of GDP in 2002-03; generate about 2.5 percent of Benin’s total tax revenues. - Informal reexports (goods imported for the domestic market and subsequently informally reexported to Nigeria): rough estimates suggest about 6 percent of GDP and generate about one-third of customs revenues. - Recent developments: - At end-2003 Nigeria introduced an import prohibition list of 44 items and strengthened border controls, intended to protect domestic industries and address sanitary concerns. This led to a significant drop in port traffic in early 2004: a 20 percent decline during January–April 2004 compared to the same period in 2003, mostly affecting textiles, poultry, and manufactured goods destined for reexport to Nigeria. - Since June 2004 Benin engaged in negotiations with Nigeria to remove the prohibition; current agreement status: the prohibition list will stay in effect for products originally imported to Benin but not for those locally produced. - Comparative indicators: - Nigeria’s average tariff rate is 37.2 percent against 14.6 percent for Benin. - Nigeria’s Fund trade restrictiveness index is 8 (scale 1-10, 10 most restrictive) versus 2 for Benin. ### Economic context, outlook, and key macroeconomic numbers - Context and shocks: - Slowdown in GDP growth and a shortfall in tax revenues resulted from intensified import restrictions from Nigeria and a poor cotton crop. - Cotton production was about 17 percent lower than anticipated due to poor functioning of new private institutions overseeing payment of seed cotton and inputs. - Nigeria increased import restrictions and strengthened customs controls in late 2003. - Near-term indicators: - Real GDP growth in 2004 is now projected at 3 percent. - Government revenue was 17 percent lower than expected for the first quarter of 2004. - Inflation remained subdued: the consumer price index increased by 0.8 percent in the first half of 2004. - Selected PRSP macro objectives and projections (preserve original table formatting and figures): - 2005 2006 2007 - Initial New - proj.1/ proj. - GDP at constant price 2/6.03.05.06.06.5 - Consumer price index 2/2.62.63.03.02.5 - Investment 19.317.618.518.819.2 Public 8.37.47.57.47.6 Private 11.010.211.011.411.6 - Government revenue17.015.816.016.216.6 - Government expenditure21.721.321.221.221.3 - Overall fiscal deficit, excluding grants -4.7-5.5-5.2-5.0-4.7 - External current account balance (- deficit)-7.1-9.3-9.1-8.8-8.3 - Debt-to-GDP ratio (after debt relief)37.233.333.332.631.8 - 1/ As indicated in Country Report 04/118. - 2/ Annual change in percent. - Benin: Key Macroeconomic Objectives of the PRSP, 2004-07 (In percent of GDP, unless otherwise indicated) - 2004 Proj - Authorities’ revised growth objective and staff view: - Authorities aim to raise real GDP growth gradually from a lower base in 2004 (3 percent, against 6 percent in the original PRSP) toward the 7 percent growth target set in the PRSP, via a rebound in cotton production, improved overall economic efficiency, and an increase in investment. - Inflation expected to remain at about 3 percent (the regional target). - External current account deficit expected to narrow to 8 percent of GDP after initially widening in 2004. - Staff stressed the need for prudent fiscal and monetary policies and acceleration of structural reforms to reach objectives. ### Fiscal policy actions, objectives, and measures - Immediate remedial fiscal actions for 2004: - Strengthen tax administration. - Cut total spending by 1.4 percent of GDP while protecting priority spending. - If implemented rapidly and forcefully, these measures would permit limiting the overall fiscal deficit to 5½ percent of GDP in 2004; further measures might be needed if revenue weaknesses persist. - Revenue-side medium-term focus: - Combat tax evasion, collect tax arrears, continue to simplify procedures in line with Fund technical assistance to strengthen tax and customs administrations. - At customs: control exemptions, apply WTO valuation rules to all imports, fight smuggling, fraud, and corruption. - Implementation of these measures should allow revenues to return gradually to the 17 percent of GDP level reached in 2002-03. - Expenditure-side medium-term focus: - Reflect PRSP priorities while keeping total outlays stable in terms of GDP. - Annual budgets underpinned by an updated Medium-Term Expenditure Framework (MTEF). - Wage bill targeted at 5 percent of GDP by containing wage increases. - Curb growth in nonpriority spending and limit wasteful spending on public utilities. - Complete public expenditure management reforms to improve monitoring of budget execution, transparency, and tracking of poverty-reducing outlays. - Financing and debt sustainability: - Authorities expect financing of the deficit to continue to be covered by grants and highly concessional loans to preserve debt sustainability. - Fiscal deficit (excluding grants) envisaged to decline from 5½ percent of GDP in 2004 to 4.7 percent of GDP in 2007. - Authorities indicated existing donor commitments covered about 85 percent of the projected financing gap for 2005; mobilizing required financing will require continued PRSP implementation to satisfy donors’ conditionality. - Fiscal governance and restraints: - Authorities must resist pressures for unplanned wage increases or extrabudgetary expenditures and improve monitoring/evaluation of priority expenditures. - Strengthen local government budget management capacity to avoid weakening expenditure control with planned transfers of fiscal competencies. - Large projects (port and airport) envisaged under the Government Action Program 2001-06 would be effected under BOT contracts; authorities will assess macroeconomic and fiscal impacts before proceeding and discuss results with IMF and World Bank staffs. ### Structural reforms and sectoral measures - Overall need and political context: - A new impetus in implementing the structural reform agenda is needed; current government majority in parliament offers an opportunity to advance pending reforms. - Main reform elements: cotton sector reform, divestiture (privatization) program, and civil service reform. - Cotton sector reforms: - Authorities plan to strengthen institutions in charge of seed cotton and input commercialization based on measures devised with World Bank support. - Immediate actions to prevent re-emergence of a parallel circuit for input provision and seed cotton sales; establish, before the 2004/05 harvest season, a regulatory framework defining roles and responsibilities of government and stakeholders. - Authorities agreed individual zones of operation with input distributors to allow distribution to start without delays and launched a study to improve the bidding process for inputs, aiming to establish a new process by year-end with World Bank and French Cooperation support. - The new regulatory framework would establish sanctions against those operating outside normal procedures; allocating seed cotton through competition among ginners and enforcing payment of input credit by farmers would reduce incentives for “irregular” transactions. - Mission encouraged planning next steps for transition from administrative allocation of seed cotton to a competitive system among ginners; the poverty and social impact analysis (PSIA) of cotton sector reforms (supported by the World Bank) is scheduled to be completed by end-2004. - Divestiture/privatization program: - Authorities reiterated commitment to pursue divestiture; mission stressed need for a credible agenda. - Agenda for public utilities still lacking except for the electricity company (receives World Bank assistance). - Privatization of SONAPRA was not completed by mid-June as scheduled; authorities delayed to ensure transparency but expected completion in coming weeks. - Plan started to improve management of the Port of Cotonou to increase efficiency and competitiveness; mission encouraged rapid consensus with government and unions on private sector involvement. - Need to improve telecommunications regulatory framework to facilitate privatization of telecommunications company; strengthen divestiture procedures and the privatization unit to ensure timeliness and transparency, per World Bank recommendations. ### Sources of growth (growth accounting summary) - Growth accounting indicates Benin’s improved growth performance since the mid-1990s was mainly driven by a higher contribution from capital accumulation and a switch to a positive contribution from total factor productivity (TFP), reflecting an improved environment for private sector investment, increased public investment sustained by external assistance, and progress in liberalizing the economy. - Achieving the PRSP growth target of at least 7 percent in the medium term will require increasing investment and raising the average growth rate of TFP via an improved business environment and accelerated structural reform implementation. - Growth accounting contributions (preserve original figures): - Benin - 1980-88 2.1 1.7 1.3 -0.8 - 1989-93 2.5 0.9 1.5 0.0 - 1994-2003 5.1 2.3 1.7 1.0 - All CFA countries 2/ - 1981-90 2.4 1.2 1.5 -0.3 - 1991-2000 3.5 1.3 1.6 0.6 - Non-CFA countries 2/ - 1981-90 2.8 1.7 1.7 -0.5 - 1991-2000 1.7 1.4 1.6 -1.2 - 1/ In percentage points - Growth Labor Contribution from Physical capital Total factor productivity *Source: IMF staff report content provided in the supplied document.* ### 23. The authorities are preparing a new administrative and civil service ### 23. The authorities are preparing a new administrative and civil service ### Civil service management reform - Reform objectives: - (i) a revised performance-based promotion and remuneration system to improve the quality and efficiency of public services; and (ii) moderate salary increases. - Process and constraints: - The World Bank is assisting the authorities in preparing the reform. - Ongoing discussions with the unions bode well for achieving a consensus on the reform, but the government recently suffered a setback in establishing the needed legal framework. - Footnote: In April 2004, the Supreme Court rejected the draft law establishing a single statute for government employees covering both civil servants and contractual employees, a prerequisite for implementing the reform. The authorities are considering their next steps. - Staff recommendations and actions: - Staff encouraged the authorities to refrain from granting further wage increases before the implementation of the new compensation and promotion system. - Staff stressed the need to rapidly formulate a strategy regarding the medium-and long-term financial viability of the civil service pension fund (FNRB) and, as a first step, to complete the actuarial study for the FNRB. ### Business environment, governance, and legal/judicial reform - Authorities’ intentions: - Forceful implementation of the strategy to fight corruption adopted in 2002. - Strengthening of the legal and judiciary system, supported by the World Bank and other donors. - Carry out a diagnostic study of impediments to private sector development as a basis for a strategy to be adopted and implemented in close collaboration with the private sector. - Address lack of land titling—which limits access to credit—and request technical assistance from the World Bank to that effect. - Box 4 findings (selected indicators and initiatives): - Governance and business environment indicators are broadly at par with sub-Saharan African averages, but still far below best performers in the region. - Benin’s performance is strong regarding political stability and voice and accountability. - Benin: Comparative Investment Climate Indicators, 2003 (as reported) - Creditor rights index (0: weak; 4 :strong): 1 - Investor credit risk (0:highest; 100: lowest): 20.2 - Euro money country risk (0:highest; 100: lowest): 30.9 - S&P rating: B+ - Coface rating: B - Anti-corruption and legal sector actions: - National strategy to fight corruption adopted in July 2002; detailed procurement reports published since beginning of 2003. - Benin's first Governance and Corruption Survey underway and expected to be completed by the end of the year. - Ten-year program adopted in 2001 to strengthen the legal and judicial sector; first implementation plan covering 2005–07 prepared and to be reflected in the three-year program-budget under preparation. ### Monetary policy and financial sector issues - Monetary policy framework: - Staff agreed WAEMU's monetary policy arrangement has served Benin well, helping maintain confidence in the currency and keep inflation low. - Regional monetary policy will continue to aim at preserving the parity of the CFA franc vis-à-vis the euro by maintaining an adequate level of foreign reserves. - Benin is expected to contribute again positively to the buildup of foreign assets of the BCEAO, as the increase in credit to the private sector is contained and the government pursues a prudent fiscal policy. - Staff recommendations: - BCEAO should use open market operations as the main instrument of monetary policy and abandon the system of differential reserve requirements by country in favor of a unified system. - Authorities’ view and operational caveats: - Authorities stressed monetary policy must be tailored to the liquidity situation of each country as long as the region's financial markets were not integrated. - They argued the reserve requirement as defined by the BCEAO permitted control of undue expansion of short-term credit and transfer of funds abroad. - Financial sector soundness and reform priorities: - Mission concurred Benin's financial sector was generally sound, but recommended additional efforts to: - Improve compliance with prudential ratios. - Foster supervision of microfinance institutions. - Deepen financial intermediation, including through strengthening the legal and judicial system. - Divestiture update: - Bidding process for government shares in Continental Bank was unsuccessful (no bidders) because sale of minority shares was not attractive. - Authorities plan to relaunch bidding selling government shares jointly with BOAD’s shares, which together amount to 52 percent of total shares. ### Poverty Reduction Strategy (PRSP) and social services - Strategy objectives: - Reach a higher and sustained growth rate while reinforcing macroeconomic stability, improving efficiency and transparency of public spending, and making the economy less vulnerable to external shocks. - Staff concurrence on requirements to achieve objectives: - (i) Accelerating implementation of structural reforms to raise productivity and improve public service delivery. - (ii) Encouraging private investment through improved governance and judiciary system to foster growth and diversification. - (iii) Increasing level and quality of government outlays while curbing nonpriority expenditures. - Millennium Development Goals (MDGs) and service delivery: - Authorities recognized reaching the MDGs by 2015 will remain a significant challenge, particularly where progress has been slow. - Intended to strengthen policies to improve delivery, quality, and coverage of basic services: access to safe water in rural areas, basic health and education services, and agricultural services. - Sectoral programs to be designed to consider complementarity and potential synergies. - World Bank (via PRSC) and other donors committed to provide assistance. - Staff stressed structural reforms are critical to reduce poverty (improve farmers' revenue from cotton and service delivery for public utilities). - Progress on PRSP deficiencies: - National household survey on living conditions conducted. - PSIA of cotton sector reforms being prepared with World Bank assistance. - Monitoring and evaluation mechanism for PRSP implementation being strengthened with bilateral donor support. - Authorities will revise targets and policies in PRSP based on assessment and present in the first annual progress report scheduled to be finalized during the last quarter of 2004; report will take into account adverse impact of weaker-than-expected economic activity and government expenditure cuts in 2004. ### External sector and debt sustainability - Vulnerabilities and external shocks: - Even with strong policy implementation, Benin will remain highly vulnerable to external shocks in the short and medium term, including: - A drop in the price of cotton (which remains volatile). - Unfavorable changes in Nigerian trade policy. - Further appreciation of the euro vis-à-vis the U.S. dollar worsening competitiveness. - In 2003, Benin’s main export markets were Asian developing countries (67 percent of total exports), African countries (14 percent), and the European Union (10 percent). - Export diversification and trade policy: - Authorities plan to promote export diversification while maintaining a liberal trade and exchange system. - Share of noncotton products in total exports of goods increased from 16 percent in average during 1994-99 to 29 percent in average during 2000-03. - Authorities reiterated PRSP objective to create environment for a competitive industrial sector focused on agro-industry, including processing of cotton fiber into textile. - Trade policy compliance steps taken for common external tariff; Benin benefits from Cotonou Convention import duty exemptions with the EU and is eligible for AGOA with the US. - Authorities concerned by rising cotton subsidies in industrial countries; jointly launched Sectoral Initiative on Cotton to call for their elimination in WTO negotiations. - Competitiveness and structural reform: - External competitiveness deteriorated owing to real exchange rate appreciation and slow pace of reforms. - Recommended reforms to improve competitiveness: divestiture of public utilities, private sector management of Port of Cotonou, streamlining regulatory framework, strengthening judicial system, progress in civil service reform to maintain wage restraint. - Staff warned further strengthening of the euro may pose risks and stressed careful monitoring of competitiveness indicators. - Debt sustainability analysis (DSA) results: - The DSA update confirms that, based on policies underlying the medium-term scenario, Benin’s external debt would remain on a sustainable path. - Baseline scenario (reflecting authorities’ revised macroeconomic framework for 2004-07 and conservative macroeconomic assumptions beyond 2007) leads to the same conclusion as the completion point document that the NPV of debt-to-exports ratio would remain below the 150 percent threshold from 2005 onward (Table 8). - Debt service projected sustainable, with a debt service-to-exports ratio hovering around 6.5 percent in 2004-23. - Sensitivity analysis and risks: - Three major risk scenarios examined: - (i) a drop in exports (external shocks); - (ii) a lax fiscal policy (higher expenditure than baseline); - (iii) less favorable terms on new borrowings (difficulty mobilizing concessional support). - In each alternative scenario, the NPV of debt-to-exports ratio would remain above the 150 percent threshold during a protracted period (Table 9 and Figure 4). - Authorities’ responses: - Agreed on importance of enhancing export diversification, containing public sector deficit, and improving debt management to achieve and maintain external debt sustainability. - Monitoring of external debt to be strengthened through debt committee established in 2003 to avoid recurrence of larger-than-anticipated new borrowing experienced in 2000–02. - Authorities pursuing efforts to obtain debt relief from all non-Paris Club creditors under the enhanced HIPC Initiative. ### Statistical issues and technical assistance - Assessment of statistical database: - Benin’s statistical database is fairly comprehensive but needs strengthening in national accounts, balance of payments, public finance, monetary statistics, and social indicators. - Deficiencies do not hamper Fund staff’s ability to conduct effective surveillance. - Participation and assistance: - Benin participates in the Fund’s General Data Dissemination System (GDDS) and, in consultation with Fund staff, has set out plans to improve its statistical database. - Authorities requested technical assistance from the Fund to improve balance of payments statistics; a mission scheduled for late 2004. - Benin will continue to receive technical assistance from West AFRITAC in tax and customs administration, income taxation, public expenditure management, and statistics. - Authorities implementing WAEMU rules harmonizing national accounts methodology and have started implementing action plan to address methodological weaknesses in compiling poverty data and other social indicators. *Source: _cr04368 - 23. The authorities are preparing a new administrative and civil service* ### 40. The authorities, as well as the representatives of the private sector and of the ### _cr04368 - 40. The authorities, as well as the representatives of the private sector and of the ### Authorities' and stakeholders' views; role of a successor PRGF arrangement - The authorities, private sector representatives, and donor community concurred with the ex post assessment (EPA) prepared by an interdepartmental team. - They stressed that a further PRGF arrangement with low access would: - help Benin in addressing the challenges in the Fund's core areas of responsibility, - facilitate the mobilization of concessional international financial support to finance its development agenda, - provide a framework for a sound policy response in case of exogenous shocks. - The successor arrangement should have as a key objective Benin's graduation from the use of Fund resources upon its completion. ### Staff appraisal — recent performance and 2004 outlook - Over 2001-03: - economic performance was broadly satisfactory, - Benin continued to display strong economic growth and low inflation, - the fiscal stance remained appropriate, - however, progress on the structural front has been slow, external competitiveness has deteriorated, and the economy remained vulnerable to external shocks. - 2004 developments: - economic performance in 2004 has been adversely affected by an intensification of import restrictions from Nigeria and a poor cotton crop, - real GDP growth is projected to slow down this year to 3 percent, - tax revenue would be lower than-anticipated, - the external current account deficit would widen moderately. ### Fiscal policy recommendations and medium-term fiscal objectives - The authorities need to implement forcefully planned adjustment measures in the fiscal area to contain the deterioration of the fiscal situation that started at the beginning of the year. - Further measures may be necessary to contain the deficit if weaknesses in revenue collection continue. - Achieving the revised medium-term fiscal objectives will require: - continued efforts to boost revenue collection, - increase the level and quality of poverty-reducing spending, - curb nonpriority expenditure. - Specific intended actions by the authorities: - implement forcefully the action plans aimed at improving the performance of tax and customs administrations, - ensure that budgetary allocations reflect PRSP priorities, - refrain from providing further wage increases before the implementation of a new compensation system, - complete reforms under way in public expenditure management to improve efficiency and transparency of public spending. ### Structural reforms, competitiveness, and private sector development - A new impetus is needed to implement the uncompleted reform agenda to make the economy more competitive and improve service delivery. - Key reform priorities: - establish a credible agenda for the divestiture program and implement it in a timely and transparent manner, - adopt and implement a new administrative and civil service management reform, - in the cotton sector, strengthen the new institutions in charge of seed cotton and input commercialization to avoid further disturbances and plan next steps of reform in parallel. - For private sector development, the authorities intend to improve the business environment by: - forcefully implementing the national strategy to fight corruption, - implementing the program to strengthen the legal and judiciary system, - improving governance and transparency at customs. - Adherence to these reforms is essential to strengthen competitiveness in the context of a fixed exchange rate. ### Findings from the Ex Post Assessment (Box 6) - Overview of performance 1993-2003: - program implementation was broadly successful, - real economic growth averaged 5 percent, - inflation remained subdued, - fiscal consolidation improved substantially as initial challenges from low revenue collection and high wage bill were addressed, - implementation of the regional common external tariff was reportedly associated with fraud and corruption. - Structural reform progress was mixed: - initial liberalization and cotton-sector reforms were significant, - further reforms, including divestiture program for public utilities and civil service reform, incurred protracted delays. - Program design shortcomings: - some challenges (notably governance problems in customs and slippage in civil service reform) were not addressed in a timely manner, - programs could have placed an earlier emphasis on strengthening debt management capacity, - Benin's mixed record indicated incomplete program ownership, lapses in coordination, and weak institutional and administrative capacity. - Conclusions and recommendations from the EPA: - main challenge: reach a higher and sustained growth and reduce poverty while preserving and reinforcing macroeconomic stability and making the economy less vulnerable to external shocks, - require continuation of fiscal consolidation while increasing poverty-reducing spending, and enhanced efforts to implement the uncompleted reform agenda, - a further PRGF arrangement with low access would help in Fund core areas, facilitate concessional financing, and provide a policy-response framework for exogenous shocks, - future programs should tackle ownership issues through improved transparency and consensus building, build in safeguards to minimize risks to structural reform implementation, and help improve policy response to external shocks. ### External position, financial sector, and debt management - Export diversification is expected to benefit from acceleration of reforms and the liberal trade and payments system. - Benin's external position would be further strengthened if: - high cotton subsidies from the world's major cotton-producing countries were discontinued, - import restrictions from Nigeria were discontinued. - Financial sector: - the authorities intend to continue to strengthen the financial sector, - while the health of the banking sector has been generally sound, it is important to remain vigilant to ensure all banks comply with the Regional Banking Commission's prudential ratios. - Debt sustainability: - the updated debt sustainability analysis stressed the need for Benin to continue to follow a very prudent debt-management policy to stay on a sustainable path and mitigate downside risks from potential shocks. ### PRSP implementation and monitoring - It would be important that the authorities complete the first annual assessment of the implementation of their poverty reduction strategy promptly. - In the meantime, authorities should continue addressing the shortcomings of the PRSP outlined in the JSA. *Source: IMF staff appraisal and Ex Post Assessment summary in the provided document.* ### 53. It is recommended that the next Article IV consultation be held on the standard ### _cr04368 - 53. It is recommended that the next Article IV consultation be held on the standard ### Article IV consultation timing - It is recommended that the next Article IV consultation be held on the standard 12-month consultation cycle. ### Macroeconomic outlook and key indicators (selected) - GDP and prices - GDP at current prices: 9.2 (multiple year entries shown as series in Table 1). - GDP at constant prices: 6.5 (latest projection entries in Table 1). - GDP deflator: examples include 3.0, 3.0, 2.5 (series entries). - Consumer price index (average and end of period) series include 3.0, 2.5, 3.0, 2.5 (Table 1). - Saving and investment (percent of GDP) - Gross investment: 18.9, 19.2, 17.8, 18.2, 17.6, 18.5, 18.8, 19.2 (series in Table 2). - Gross domestic saving: 6.0, 6.5, 4.7, 5.5, 5.8, 6.3, 6.9, 7.6 (series in Table 2). - External sector (percent of GDP) - Exports of goods and nonfactor services: example entries 15.2, 15.0, 13.8, 14.4, 13.7, 13.7, 13.7, 13.9 (Table 2). - Imports of goods and nonfactor services: example entries 28.1, 27.7, 26.9, 26.8, 25.9, 25.8, 25.6, 25.5 (Table 2). - Current account balance (percent of GDP): -8.0, -6.7, -9.0, -8.5, -6.5, -8.4, -9.1, -8.8, -8.3 (series in Table 1). - Public finances (percent of GDP) - Total revenue: 16.6, 16.2, 16.9, 17.0, 17.0, 15.8, 16.0, 16.2, 16.6 (series in Table 1 / Table 3). - Total expenditure and net lending: 20.1, 20.3, 20.4, 21.6, 21.7, 21.3, 21.2, 21.2, 21.3 (series in Table 1 / Table 3). - Overall fiscal deficit (payment order basis, excluding grants): -3.5, -4.2, -3.5, -4.6, -4.7, -5.5, -5.2, -5.0, -4.7 (series in Table 1). - Overall fiscal deficit (payment order basis, including grants): -1.8, -1.5, -2.4, -2.6, -1.5, -2.1, -2.9, -2.9, -2.7 (series in Table 1). - Primary balance (narrow definition): 2.8, 1.3, 1.1, -0.5, -0.1, -0.7, -0.5, -1.0, -0.8 (Table 3 memorandum). - Debt and reserves - Debt-to-GDP ratio (after debt relief): series includes 58.3, 57.3, 49.5, 35.8, 33.3, 33.3, 32.6, 31.8, 31.1 (Table 1). - Net present value of debt-to-exports ratio (after debt relief): series includes 203.9, 231.4, 243.8, 157.5, 158.4, 150.6, 143.6, 143.2, 143.9 (Table 1). - Debt-service ratio (after debt relief): 15.7, 9.9, 9.9, 6.6, 5.7, 5.9, 6.1, 5.7, 5.6 (Table 8 and Table 1). - Gross reserves (in months of imports of goods and services): series include 8.6, 10.8, 8.8, 7.9, 8.3, 7.2 (Table 1). ### Debt sustainability and scenarios - Baseline external debt indicators (selected) - NPV of debt-to-GDP ratio (percent): baseline examples include 18.4, 17.5, 18.0, 18.0, 18.0, 18.0, with projected decline to 10.3 by 2023 (Table 9 A, Baseline). - NPV of debt-to-exports ratio (percent): baseline examples include 157.5, 150.6, 143.6, 143.2, 142.7, 140.6, declining to 64.0 by 2023 (Table 9 A). - Debt service-to-exports ratio (percent): baseline 6.6, 5.7, 5.9, 6.1, 5.7, 5.6, with projections around 6.1 by 2023 (Table 9 A). - Alternative stress scenarios (selected projected impacts on NPV of debt-to-GDP) - B1 (new public sector loans on less favorable terms, 2004-23): NPV debt-to-GDP rises to 20.1 by 2008 and remains elevated relative to baseline (Table 9 B1). - B2 (lower exports): NPV debt-to-GDP rises to 20.1 by 2008 and to about 21.0 under prolonged shock (Table 9 B2). - B3 (higher expenditures): NPV debt-to-GDP reaches 21.5 by 2010 and remains higher than baseline (Table 9 B3). - Sensitivity and bound tests indicate vulnerability to shocks in export growth, U.S. dollar GDP deflator, real GDP growth, and net non-debt-creating flows (Table 9 C1–C5 series). ### Financial sector structure, performance, and issues - Structure and market concentration - The financial system comprises eight commercial banks (about 90 percent of total financial sector assets), two leasing companies, eight insurance companies, and over 100 formal microfinance institutions; a very small postal bank and two state-run pension schemes also exist (Appendix I). - The banking sector is concentrated: the largest three banks account for over three fourths of total deposits and credits. - Foreign ownership is prominent; all banks except one are privately owned, and the state's shares in the remaining bank are being sold (Appendix I). - Intermediation and outreach - Bank deposits increased from 4 percent of GDP in 1989 to 20 percent of GDP in 2003. - Credit increased from 0.2 percent of GDP in 1989 to 14.5 percent of GDP in 2003. - Microfinance: deposits collected rose from the equivalent of 3 percent of bank deposits in 1993 (0.7 percent of GDP) to 9 percent (1.8 percent of GDP) in 2003; microfinance credits rose from 5.5 percent of total bank credits (0.3 percent of GDP) to 22 percent (3.3 percent of GDP) over the same period (Appendix I). - Profitability, efficiency, and asset quality - Return on equity rose from 10.6 percent to 36.7 percent over 2000-03. - Return on assets rose from 0.4 percent to 2.1 percent over 2000-03. - Average operating efficiency about 50 percent; intermediation margins about 10 percent. - Ratio of nonperforming loans: 5.4 percent (among the lowest in the region). - Prudential supervision and weaknesses - Banking supervision is conducted by the regional Banking Commission; it performs regular on- and off-site inspections and can place banks under temporary administration; two banks are under temporary administration at present (Appendix I). - Compliance with prudential norms is broadly satisfactory for the largest banks, but many banks do not comply systematically with risk concentration norms due to high exposure to the cotton sector (Appendix I and prudential compliance table). - Prudential compliance snapshot (selected items, March 2004): - Capital > CFAF 1 billion: 8/8 banks observing. - Capital adequacy ratio > 8%: 6/8 banks observing. - Coverage of medium-term liabilities > 75%: 7/8 banks observing. - Connected lending / effective capital < 20%: 6/8 banks observing. - Insurance and pensions - Insurance premia tripled from 1995 to 2002 but remain less than 1 percent of GDP; market concentrated with three largest firms ~ two-thirds of market; supervision by a regional body (Appendix I). - Pension system: FNRB (public sector, pay-as-you-go) had deficits around 0.5 percent of GDP in 2003; OBSS (private sector, funded) has financial resources equivalent to 2 percent of GDP and annual benefit payments about 0.3 percent of GDP, with three quarters of OBSS resources in bank term deposits (Appendix I). - Development issues highlighted - Low financial intermediation: ratio of broad money to GDP averaged 29 percent in 2000-2003. - Underdeveloped securities markets hinder term finance provision and domestic placement of insurance and pension funds. - Need for diversification of the economy to reduce sectoral risk concentration in banks (cotton exposure). - Recent policy actions: growth of microfinance sector and establishment in 2004 of a housing bank (government minority share of 10 percent; 2004 budget provision CFAF 1 billion) supporting diversification (Appendix I). ### Relations with the IMF, Fund financing, and HIPC - IMF membership and arrangements - Membership: Joined July 10, 1963; Article VIII (Appendix II). - Quota: 61.90 (SDR million) representing 100.00 percent of quota (Appendix II). - Fund holdings of currency: 59.72 (SDR million) = 96.48 percent of quota; reserve position 2.19 (SDR million) = 3.53 percent (Appendix II). - Outstanding purchases and loans - Enhanced Structural Adjustment Facility (ESAF) and PRGF arrangements outstanding: 46.93 (SDR million) = 75.82 percent of quota (Appendix II). - Latest PRGF arrangement: Approval 07/17/2000 to 03/31/2004; Amount Approved 27.00 (SDR million); Amount Drawn 27.00 (SDR million) (Appendix II). - Projected payments to the Fund (with Board-approved HIPC Initiative Assistance) — (SDR million) - Principal: 2004 = 2.69; 2005 = 4.51; 2006 = 5.01; 2007 = 4.41; 2008 = 5.64 (Appendix II). - Charges/interest: 2004 = 0.19; 2005 = 0.36; 2006 = 0.33; 2007 = 0.30; 2008 = 0.28 (Appendix II). - Total: 2004 = 2.89; 2005 = 4.87; 2006 = 5.34; 2007 = 4.72; 2008 = 5.92 (Appendix II). - HIPC Initiative implementation - Enhanced Commitment decision point date: Jul 17, 2000. - Assistance committed (net present value terms, end-1998): Total assistance US$265.00; Fund assistance US$24.30 (SDR equivalent 18.40) (Appendix II). - Completion point date: March 2003. - Delivery of Fund assistance (SDR million): Amount disbursed 18.40; Interim assistance 11.04; Completion point 7.36; Additional disbursement of interest income 1.66; Total disbursement 20.06 (Appendix II). ### Fund safeguards, technical assistance, and transparency - Safeguards assessment for BCEAO and actions - On-site safeguards assessment completed July 25, 2001; recommended remedies on financial reporting and internal controls (Appendix II). - Financial reporting: BCEAO to strive for alignment with international accounting standards (IAS) and publish full financial statements; progress noted based on 2002 statements and further changes planned with goal of graduate alignment by 2005 (Appendix II). - Internal controls: agreement that external auditor would apprise the BCEAO Board on the state and quality of internal controls during annual reviews; external auditor apprised Board in June 2003 and 2002 financial statements were published on the BCEAO website (Appendix II). - Technical assistance (selected) - Multiple FAD and STA missions: tax administration advice (Sep 1998, Apr-May 2000, Sep 2002, Oct-Nov 2003); balance of payments questionnaires (Apr 2000); monetary and financial statistics improvements (May 2000); fiscal transparency and HIPC monitoring (May 2001; Aug-Sep 2003) (Appendix II). *Source: Beninese authorities; IMF staff estimates, projections, and appendices contained in the provided country report content.* ### 1. Benin’s poverty reduction strategy paper (PRSP), finalized in December 2002, was ### Benin’s poverty reduction strategy paper (PRSP), finalized in December 2002 ### Overview - The PRSP was finalized in December 2002 and discussed at the Bank and Fund Boards in March 2003. - The PRSP provides a framework for aligning donor assistance programs, including those of the Bank and the Fund, with the country’s poverty reduction efforts. ### IMF role and PRGF framework - The IMF led efforts to help Benin maintain macroeconomic stability. - A three-year Poverty Reduction and Growth Facility (PRGF) arrangement: - Approved in July 2000. - Expired in March 2004. - Addressed fiscal consolidation and structural reforms key to macroeconomic stability and growth. - Structural conditionality focused on: public expenditure management, tax administration, civil service reform, and the privatization program. ### World Bank role and programmatic focus - Public expenditure management reform has been an important focus of the Bank’s assistance program. - The Bank provided technical and financial assistance, working closely with the Fund and other donors. - The Bank led efforts to strengthen basic social services (education and health), pursue divestiture in utility and infrastructure sectors, and enhance cotton sector competitiveness. - The 2003 Country Assistance Strategy (CAS) signaled a strategic shift toward programmatic lending and an increased use of ex post assessment of progress; annual single-tranche PRSCs are envisaged as a key vehicle. - The CAS was discussed at the Bank’s Board on July 3, 2003. ### Areas in which the Bank leads - Divestiture program and private sector development: - Support provided through the Private Sector Development Project and the now-closed Transport Sector Project. - Remaining enterprises to be privatized include: SONAPRA; OPT; SBEE; Autonomous Port of Cotonou (PAC). - Energy Services Delivery Project approved by the Bank’s Board on July 6, 2004, supports privatization of the electricity branch of SBEE; successful completion of this privatization is a condition for moving to the second phase. - Privatization of SONAPRA’s ginning mills supported by the cotton sector project. - Transport Sector Project assisted in designing strategy to involve the private sector in PAC management. - The Fund is involved in policy dialogue given the divestiture program’s importance for macroeconomic stability and growth. - Social sector reforms: - Improving access to basic social services is one of four PRSP pillars; health and basic education received increased budget allocations in the MTEF. - Bank supported reform programs through investment projects closed in the past three years. - Poverty Reduction Support Credits (PRSCs) used for continued policy dialogue and financial and technical assistance; First PRSC presented to Bank’s Board in March 2004. - Key policy measures implemented as conditions for reaching the enhanced HIPC Initiative completion point in March 2003. - Bank leads multisector HIV/AIDS response based on government framework covering 2000-05 adopted in December 2000; Bank HIV/AIDS project approved in January 2002. - Poverty monitoring: - PRSP action plan to establish a reliable income poverty database in 2003 using a revised methodology. - Bank providing technical support for implementation and for poverty and social impact analysis (PSIA) of cotton sector reform and a Poverty Assessment (PA). - The PSIA will be completed in the second half of 2004. - The Poverty Assessment will be disseminated in conjunction with the PRSP and with Bank assistance by end-2004. - Bank advising on strengthening institutional arrangements for monitoring and evaluating poverty. - Cotton sector reforms: - Cotton accounted in recent years for around 80 percent of export earnings. - Comprehensive reforms since early 1990s: eliminated SONAPRA monopsony in marketing, liberalized input supply, opened sector to private ginners. - 2002 Bank Board approval of Cotton Sector Reform Project supporting consolidation, including privatization of SONAPRA and capacity strengthening for producers’ associations and new private institutions. - Bank helping define regulatory framework to be put in place by end-October 2004, before the 2004/05 cotton marketing season. - PRSP indicates apparent increase in rural poverty, including in cotton-producing areas, despite sustained growth. ### Areas in which the Bank and Fund share the lead - Public expenditure management reform: - PERAC and related Supplemental Credit (both now closed) led Bank assistance in launching reform in 2001. - PERAC objectives: (i) delegation of spending authority from Ministries of Finance and Planning to line ministries; (ii) move toward performance-based budgeting within an MTEF aligned with PRSP priorities. - Achievements: finalization of an MTEF based on the PRSP; completion of a performance-based budget cycle; effective delegation of spending authority; introduction of a computerized budget implementation system; improvements in reporting and auditing government accounts. - Fund supported reforms through financial and structural benchmarks in PRGF management. - Fiscal policy and fiduciary framework: - Fiscal consolidation was a key PRGF objective. - Bank focuses on inter- and intrasector allocations in priority sectors covered by PERAC and future PRSCs (education, health, water and sanitation, transportation, agriculture, forestry and environment). - These priority sectors represented about 55 percent of total expenditure, excluding debt service, in recent years. - Bank assisting to strengthen fiduciary framework via AAA: update of CPAR, CFAA, governance and anti-corruption survey. - PRSC-1 supports a comprehensive public procurement reform action plan addressing weaknesses from the 1999 CPAR. - Poverty reduction strategy: - Bank and Fund jointly assisted government in PRSP preparation; PRSP discussed at Bank and Fund Boards in March 2003 with a joint staff assessment. - Both institutions will advise on refinement, implementation, monitoring, and evaluation of the PRSP. - Bank and Fund staffs will help finalize the first annual progress report by November 2004. - Bank supported a detailed action plan for PRSP dissemination targeting line ministries, the National Assembly, civil society, and the private sector. - Debt sustainability: - Bank and Fund jointly supported reaching HIPC completion point in March 2003 and updated the debt sustainability analysis in collaboration with authorities. - To maintain sustainability after enhanced HIPC relief, authorities need a prudent external financing policy. - Bank and Fund will continue dialogue, including advice on strengthening domestic debt management capacities. - Civil service reform and devolution policy: - Bank provided major technical assistance for civil service promotion and compensation system design. - Fund included structural measures in ESAF and PRGF to implement reform. - Adoption of legislation on the new compensation system for civil servants has been stalled for several years. - Devolution policy gained momentum after municipal elections in December 2002; Fund monitoring fiscal implications. - Bank conducted two analytical works on public administration reform and decentralization. - Financial sector policy: - Fund supported efforts to ensure banks meet Regional Banking Commission prudential ratios. - Reform includes divestiture of state-owned Continental Bank and rehabilitation of microfinance institutions. - Bank supported two major microfinance institutions under the Private Sector Development Project. - A financial sector review was completed and released in July 2004. ### Areas in which the Fund leads - Macroeconomic stability: - Medium-term objective: achieve strong economic growth and reduce poverty while maintaining financial stability. - Fund support via macroeconomic policy dialogue, technical assistance, and PRGF framework until March 2004. - Tax and customs administration reforms: - Fund provided technical assistance to prepare and update action plans to improve tax and customs administrations and broaden the tax base. ### World Bank strategy, lending, and donor coordination - CAS priorities: - Reverse limited or no poverty reduction amid relatively robust growth. - Deepen cotton sector reforms; diversify the economy; progress in social sectors; build effective public institutions; promote gender equality; strengthen collaboration with private sector and civil society. - CAS aligned to the four PRSP pillars. - Shift toward programmatic lending to foster national leadership and enhance donor coordination; continued support for public sector management reforms required. - Donor alignment: - Donors (European Union, African Development Bank, Switzerland, Denmark, Netherlands) preparing budget support operations in close coordination with PRSC preparation. - Bank portfolio and lending volumes: - CAS determined lending volume for FY04 - FY06: US$200 million. - A large part of IDA financing (US$85 million) will be channeled through PRSCs. - As of July 13, 2003, Bank lending portfolio consisted of six operations with a net commitment of US$121.9 million and an undisbursed balance of US$64.2 million. - Project table (Effectiveness / Date / Original Principal (IDA) / Disbursed (IDA)): - First Decentralized Cities Management — 3/28/00 — 25.5 — 23.6 - Labor Force Development — 3/13/01 — 5.0 — 2.8 - Private Sector — 8/31/00 — 30.4 — 18.0 - Cotton Sector Reform — 9/12/02 — 18.0 — 4.0 - HIV/AIDS Multisector — 7/17/02 — 23.0 — 9.3 - PRSC-1 — 8/16/04 — 20.0 — 0 - Total — 121.9 — 57.7 ### Statistical issues (as of end-June, 2004) - Core statistical indicators generally provided to the Fund on a timely basis, but weaknesses exist in national accounts, public finance, monetary statistics, and balance of payments. - Benin adopted the General Data Dissemination System (GDDS) in January 2001; sectoral metadata were initially posted in September 2001 and are due for updating. - STA technical assistance (funded by the Japanese government) offered to WAEMU members to implement statistical improvement plans. - A Fund regional statistical advisor initiated assistance in government finance statistics, now managed by AFRITAC West. - A real sector statistics improvement program with AFRISTAT was initiated in May 2002; work includes developing a statistical register and an industrial production index and missions for 1993 SNA implementation. - In 2003, INSAE took steps to change the base year for agricultural output accounting and to include amortization in public administration accounts. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04368.pdf* ### 3. Starting with January 1998, Benin has been producing the WAEMU harmonized ### _cr04368 - 3. Starting with January 1998, Benin has been producing the WAEMU harmonized consumer price index (CPI), in compliance with WAEMU standards. ### Consumer price index - Starting with January 1998, Benin has been producing the WAEMU harmonized consumer price index (CPI), in compliance with WAEMU standards. - Inflation: consumer price index increased by 1.1 percent in the twelve-month period ending July 2004. ### Public finances - Monthly government finance statistics compilation: - Compiled by the Ministry of Finance with a one- to three-month lag. - Based on information from the budget, customs, tax, and treasury directorates. - Ministry of Finance prepares a monthly reconciliation of spending commitments (budget directorate) and payments (treasury). - No final budget or treasury accounts are published at the end of the fiscal year. - Benin does not report public finance data for publication in International Financial Statistics (IFS) or the Government Finance Statistics Yearbook (GFSY). ### Monetary statistics - Compiled and disseminated by the regional Central Bank of West African States (BCEAO). - Difficulties: - Estimating currency in circulation for individual member countries, partly because of delays in processing cash in BCEAO vaults. - Currency notes held in the vault are subtracted from currency in circulation, though vault holdings contain a large proportion of notes from other WAEMU countries. - Difficulties in sorting out currency notes have persisted. - BCEAO intends to resolve the issue by end-2004. - Technical assistance and engagement: - Monetary and financial statistics mission visited BCEAO headquarters in Dakar in May 2001. - STA participated in a BCEAO-sponsored seminar on monetary statistics in April 2003. - STA reviewed outstanding methodological issues and discussed BCEAO’s plans to adopt the Monetary and Financial Statistics Manual. ### Balance of payments - Since December 1998, responsibility for compiling and disseminating balance of payments statistics assigned to the BCEAO by area-wide legislation. - Roles: - BCEAO national agency in Cotonou compiles and disseminates Benin’s balance of payments statistics. - BCEAO headquarters in Dakar delineates methodology and calculates international reserves managed on behalf of participating countries. - Improvements: - Full transition to the Balance of Payments Manual, Fifth Edition (BPM5). - STA technical assistance (statistical advisor posted at BCEAO headquarters from July 1996 through July 1999) supported improved BPM5 reporting for 1996-2001. - Backward revision of data to 1988 created a consistent series. - Dissemination lags: - Balance of payments statistics disseminated with a seven-month lag, exceeding GDDS guidelines. - Annual international investment position data compiled and disseminated with an 18-month lag. - Trade data: - ASYCUDA customs computer system upgraded in 1999; installation in all main border customs houses being completed. - Expected improvements in monitoring import data and coverage of informal trade, especially with Nigeria. - Services and transfers: - Further improvement in data for services and transfers (especially workers’ remittances) depends on intensification of contacts with reporting bodies. - Authorities’ commitment to strengthen human and technical resources should be enhanced. - Financial account: - Foreign assets of the private nonbanking sector not well covered, especially assets of WAEMU residents obtained through partial surveys. - Organization of an annual, exhaustive survey for reporting foreign direct investment transactions in Benin is at a very preliminary stage. - BCEAO implemented a compilation system allowing commercial banks to report data on payments involving nonresidents; these data are used to assess existing information but not to produce annual balance of payments estimates. ### Poverty data - Major methodological weaknesses remain regarding poverty data (as explained in Country Report 03/111 of the PRSP joint staff assessment). - Specific concerns: - Treatment of the nonfood expenditure share in the calculation of the poverty line. - Division of Benin into 12 agro-ecological zones. - Comparability of poverty statistics across urban and rural areas and across time. - Authorities are implementing an action plan to address these methodological issues. ### External debt - Caisse Autonome d'Amortissements (CAA) responsibilities: - Signing international loan agreements. - Maintaining the debt database. - Servicing the government's external debt obligations. - Since 1995, CAA has used the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) to record and manage debt. - Database quality: - For the majority of creditors, the CAA's database is fairly comprehensive and up-to-date, contains accurate stock data and projected debt-service flows on a loan-by-loan basis. - For a small number of creditors, regular statements are not received. ### Core statistical indicators and data dissemination (selected operational details) - Frequency and timeliness: - Exchange rates: Daily; Date of latest observation: 03/04; Date received: Current; Frequency of reporting: Daily; Mode of reporting: Staff; Frequency of publication: Monthly. - International Reserves: Monthly; Date of latest observation: 03/04; Date received: 05/24/04; Frequency of reporting: Monthly; Source of update: BCEAO; Mode of reporting: Staff/e-mail; Confidentiality: 2/; Frequency of publication: Monthly. - Central Bank Balance Sheet: Monthly; Date of latest observation: 03/04; Date received: 05/24/04; Frequency of reporting: Monthly; Source of update: BCEAO; Mode of reporting: Staff/e-mail; Confidentiality: 2/; Frequency of publication: Monthly. - Reserve/Base Money: Monthly; Date of latest observation: 03/04; Date received: 05/24/04; Frequency of reporting: Monthly; Source of update: BCEAO; Mode of reporting: Staff/e-mail; Confidentiality: 2/; Frequency of publication: Monthly. - Broad Money: Monthly; Date of latest observation: 03/04; Date received: 05/24/04; Frequency of reporting: Monthly; Source of update: BCEAO; Mode of reporting: Staff/e-mail; Confidentiality: 2/; Frequency of publication: Monthly. - Interest Rates: Monthly; Date of latest observation: 03/04; Date received: 07/06/04; Frequency of reporting: Monthly; Source of update: BCEAO; Mode of reporting: Staff; Confidentiality: No; Frequency of publication: Monthly. - Consumer Price Index: Monthly; Date of latest observation: 06/04; Date received: 07/04; Frequency of reporting: Monthly; Source of update: Ministry of Planning; Mode of reporting: Staff; Confidentiality: No; Frequency of publication: Monthly. - Exports/Imports: Annually; Date of latest observation: 12/03; Date received: 06/04; Frequency of reporting: Quarterly; Source of update: Ministry of Planning; Mode of reporting: Staff; Confidentiality: 2/; Frequency of publication: Annually. - Current Account Balance: Annually; Date of latest observation: 12/03; Date received: 06/04; Frequency of reporting: Annually; Source of update: BCEAO; Mode of reporting: Staff; Confidentiality: 2/; Frequency of publication: Annually. - Overall Government Balance: Monthly; Date of latest observation: 03/04; Date received: 06/04; Frequency of reporting: Monthly; Source of update: Ministry of Finance; Mode of reporting: Staff; Confidentiality: 2/; Frequency of publication: Annually. - GDP/GNP: Annually; Date of latest observation: 2003; Date received: 06/04; Frequency of reporting: Annually; Source of update: Ministry of Finance; Mode of reporting: Staff; Confidentiality: 2/; Frequency of publication: Annually. - External Debt/Debt Service: Monthly; Date of latest observation: 2003; Date received: 06/04; Frequency of reporting: Monthly; Source of update: Ministry of Finance; Mode of reporting: Staff; Confidentiality: 2/; Frequency of publication: Monthly. - Notes: - 1/ EIS/FIN=IMF, Economic Information System, and Finance Department; BCEAO=Central Bank of West African States. - 2/ Preliminary data for staff use only; actual data unrestricted. ### IMF Staff Representative statement (October 6, 2004) — updates since the staff report - General: New information does not alter the thrust of the staff appraisal. - Fiscal position at end-June 2004: - All indicative targets for end-June 2004 were met, except the target for the wage bill, which was slightly exceeded (by 2 percent). - Both revenue and poverty-reducing outlays were higher than projected at the time of the consultation mission. - Monetary and banking developments (first five months of 2004): - Credit growth slowed: at end-May 2004, credit to the nongovernment sector had increased by 12 percent on a 12-month basis, compared to 33 percent at end-2003. - Nonperforming loans ratio increased from 5 percent at end-2003 to 6 percent at end-May 2004. - Fiscal consolidation measures for 2004: - Authorities started implementing budgetary cuts as planned: CFAF 30 billion, equivalent to 1.4 percent of GDP, to compensate for the shortfall in revenue and limit this year’s fiscal deficit to 5½ percent of GDP. - Internal government discussions on identification of the budget cuts were concluded in August. - Budgetary allocations reduced by CFAF 27.6 billion for domestically financed capital expenditure and by CFAF 2.4 billion for current spending. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 4. The privatization process of the four ginning mills of SONAPRA has reached its ### 4. The privatization process of the four ginning mills of SONAPRA has reached its ### Privatization status - The government has accepted the highest offers received for three mills through a competitive bidding process; the transfer of these mills to the qualified bidders is envisaged to be completed by end-October 2004. - For the fourth ginning mill, delays occurred because the highest bidder was unable to provide sufficient financing guarantees; authorities are confident that the sale of the mill could be completed in the coming weeks. ### Indicative targets for 2004 (Table 1: cumulative amounts since end-December 2003 where noted) - Table context: Benin: Indicative Targets for 2004 (In billions of CFA francs, unless otherwise indicated) - End-March: Target / Actual - Net bank credit to the government: -34.8 / -19.1 - Nonaccumulation of new external payments arrears by the central government: 0.0 / 0.0 - New nonconcessional external debt with a maturity of one year or more contracted or guaranteed by the central government: 0.0 / 0.0 - Short-term external debt with a maturity of less than one year (stock): 0.0 / 0.0 - Wage bill 1/: 28.4 / 29.5 - Poverty-reducing expenditure 1/: 20.4 / 6.8 - Total government revenue 1/ 2/: 92.2 / 76.2 - Primary government expenditure 1/ 3/: 88.5 / 64.4 - Program grants and loans 1/ (memorandum item): 0.0 / 0.0 - Target for spending on projects financed by enhanced HIPC Initiative 1/ (memorandum item): 4.8 / 0.4 - End-June: Target / Actual - Net bank credit to the government: -9.5 / -17.4 - Nonaccumulation of new external payments arrears by the central government: 0.0 / 0.0 - New nonconcessional external debt with a maturity of one year or more contracted or guaranteed by the central government: 0.0 / 0.0 - Short-term external debt with a maturity of less than one year (stock): 0.0 / 0.0 - Wage bill 1/: 58.8 / 60.2 - Poverty-reducing expenditure 1/: 17.8 / 27.8 - Total government revenue 1/ 2/: 156.3 / 162.8 - Primary government expenditure 1/ 3/: 148.8 / 148.7 - Program grants and loans 1/ (memorandum item): 0.0 / 0.0 - Target for spending on projects financed by enhanced HIPC Initiative 1/ (memorandum item): 3.4 / 2.0 - End-September / End-December: Target / Actual (cumulative through these dates) - End-September — Net bank credit to the government: -23.7 / -23.9 - End-September — Wage bill 1/: 86.4 / 114.0 - End-September — Poverty-reducing expenditure 1/: 59.9 / 102.0 - End-September — Total government revenue 1/ 2/: 244.3 / 340.4 - End-September — Primary government expenditure 1/ 3/: 250.9 / 354.4 - End-December — Program grants and loans 1/ (memorandum item): 31.7 / 40.0 - End-December — Target for spending on projects financed by enhanced HIPC Initiative 1/ (memorandum item): 11.2 / 19.1 - Footnotes: - 1/ Cumulative amounts since end-December 2003. - 2/ Excluding grants. - 3/ Total government expenditure minus interest payments, externally financed investment expenditure, and net lending. ### Macroeconomic background and 2001–03 performance - Real GDP growth averaged 5.3 percent over 2001-03, driven by cotton and services sectors. - Inflation averaged 2.6 percent per year. - Real effective exchange rate appreciated about 4 percent on average per year since end-2000. - Broad money: contracted in 2002 and remained stable in 2003. - BCEAO increased the reserve requirement in February 2004 from 9 to 13 percent. - Financial health of the banking sector: described as continued to be sound. ### Performance and policy actions in 2004 - Macroeconomic performance since the beginning of 2004 suffered from a poor cotton crop and tightening of import restrictions by Nigeria. - Growth target for 2004 revised from 6 percent (original PRSP) to 3 percent. - External current account deficit expected to widen by ½ percentage points of GDP, owing mostly to lower-than-expected export of cotton and re-export to Nigeria. - Authorities’ fiscal response to shortfall in 2004: - Strengthen tax and customs administrations. - Cut total expenditure by 1.4 percent of GDP while protecting priority spending where possible. ### Structural reforms: progress and constraints - Cotton sector liberalization pursued: privatization of SONAPRA and assistance to establish CSPR for commercialization of seed cotton and settling input credit. - Privatization of SONAPRA incurred delays and was not completed by mid-June 2004 as scheduled. - CSPR experienced cash flow problems due to sales of inputs conducted outside the legal framework. - Slow progress in divestiture program of public utilities and the Port of Cotonou. - Civil service reform stalled due to opposition from trade unions and parliament. ### Executive Board assessment — key messages and recommendations - Commendation: considerable progress toward macroeconomic stabilization over the past decade; sustained robust economic growth and low inflation. - Concerns: - Need to reverse decline in external competitiveness and lower vulnerability to external shocks. - Continued weaknesses in customs administration and revenue shortfalls in 2004. - Slow implementation of divestiture program for public utilities and civil service reform. - Recommended policy emphases: - More determined implementation of structural reforms: cotton sector, privatization and private sector development, civil service, and governance. - Strengthen institutions in charge of seed cotton and input commercialization; pursue discussions with Nigeria to resolve trade issues. - Boost revenue collection and increase level and quality of poverty-reducing spending while curbing nonpriority expenditure. - Step up implementation of action plans to improve tax and customs administrations. - Ensure budgetary allocations reflect PRSP priorities; refrain from granting further wage increases before a new compensation system; limit wasteful spending on public utilities. - Strengthen public expenditure management: improve monitoring of budget execution, streamline budget procedures, enhance transparency and tracking of poverty-reducing outlays. - Continue and deepen decentralization while ensuring it does not weaken central government accounts and that local expenditure management is strengthened. - Establish a credible agenda for the divestiture of public utilities; adopt and implement a new administrative and civil service management reform; rapidly involve the private sector in management of the Port of Cotonou. - Prepare next steps of cotton sector reform to ensure transparent and successful transition to a fully competitive system. - Improve the business environment: implement strategy to fight corruption; strengthen the judiciary; enhance governance and transparency at the customs department. - Pursue export diversification while maintaining a liberal trade and exchange system. - Maintain prudent debt-management policy to keep external debt on a sustainable path. - Continue efforts to ensure compliance with regional banking commission’s prudential ratios; deepen financial intermediation; strengthen legal and judicial system and address land titling issues. - Support rehabilitation of microfinance institutions and intensify supervision of the sector. ### Directors’ view on Fund engagement and program design - Directors welcomed the ex post assessment (EPA) and agreed Fund involvement helped build capacity, particularly in tax administration, and mobilize concessional resources. - Noted limited progress in poverty reduction despite reforms. - Recommended that a further PRGF arrangement with low access could help Benin address remaining challenges, secure concessional financial support, and provide a framework for policy response to external shocks. - Any such program should: - Incorporate lessons from the EPA. - Set clear structural objectives. - Integrate the PRSP into a sound multi-year macroeconomic framework. - Aim for Benin eventually to exit use of Fund resources. ### Selected economic indicators, 2000–03 - Income and prices (Annual changes in percent) - Real GDP: 2000: 5.8; 2001: 5.0; 2002: 6.0; 2003: 4.8 - Consumer prices (average): 2000: 4.2; 2001: 4.0; 2002: 2.4; 2003: 1.5 - Real effective exchange rate: 2000: -4.2; 2001: 3.2; 2002: 4.8; 2003: 4.6 - Terms of trade: 2000: 2.9; 2001: 15.3; 2002: -16.0; 2003: 7.0 - Money and credit (Annual change in percent of beginning-of-period broad money) - Net foreign assets: 2000: 10.7; 2001: 23.6; 2002: -8.5; 2003: -10.7 - Broad money: 2000: 21.2; 2001: 12.7; 2002: -3.8; 2003: 0.2 - Credit to the nongovernment sector: 2000: 25.5; 2001: -0.3; 2002: 16.1; 2003: 33.0 - Net credit to central government: 2000: 0.3; 2001: -9.1; 2002: 2.3; 2003: -0.2 - Investment and saving (In percent of GDP) - Gross domestic investment: 2000: 18.9; 2001: 19.2; 2002: 17.8; 2003: 18.2 - Gross national saving: 2000: 10.9; 2001: 12.5; 2002: 8.9; 2003: 9.7 - External sector - Current account balance: 2000: -8.0; 2001: -6.7; 2002: -9.0; 2003: -8.5 - Overall balance of payments: 2000: 3.2; 2001: 5.4; 2002: -3.8; 2003: -2.0 - NPV of debt to export of goods and nonfactor services: 2000: 203.9; 2001: 231.4; 2002: 243.8; 2003: 157.5 - Central government finance (In percent of GDP) - Central government revenue: 2000: 16.6; 2001: 16.2; 2002: 16.9; 2003: 17.0 - Total expenditure and net lending: 2000: 20.1; 2001: 20.3; 2002: 20.4; 2003: 21.6 - Primary fiscal balance: 2000: -2.6; 2001: -3.3; 2002: -2.6; 2003: -4.0 - Overall fiscal balance: 2000: -3.5; 2001: -4.2; 2002: -3.5; 2003: -4.6 *Source: IMF staff report and PIN material as presented in the supplied content.* ### 1.4 percent of GDP while protecting priority spending. In that connection, they adopted the ### 1.4 percent of GDP while protecting priority spending. In that connection, they adopted the ### Fiscal stance and financing - Authorities implemented measures to contain the fiscal deficit to 5.5 percent of GDP. - Financing is expected to be provided mainly with concessional borrowing and with grants. - Quarterly fiscal indicative targets for 2004 (shown in Table 15 of the staff report) were adopted and broadly adhered to. - The authorities plan to keep total outlays stable in terms of GDP over the medium term. - The authorities intend to keep the wage bill at 5 percent of GDP by containing wage increases. - The financing of fiscal deficits will be provided by donors as they see that the implementation of Benin’s PRSP continues to satisfy their conditionality. ### Monetary and financial sector developments - Monetary policy, carried out by the regional central bank, was cautious and helped keep inflation low. - The central bank contained private sector credit through an increase in reserve requirement. - The financial sector in Benin continues to be relatively sound. - Authorities committed to: - improving compliance with prudential ratios; - fostering the supervision of micro-finance institutions; - deepening financial intermediation. - Divestiture of the only bank left in the government portfolio could not be completed because the sale of minority shares was not attractive to investors; authorities plan to re-launch bidding combining government shares with those of the regional development bank. ### Structural reforms and privatization - Implementation of structural reforms was invigorated in 2004 compared with the past. - Cotton sector reforms: - Measures to avoid recurrence of disturbances experienced in the 2003/04 season. - Strengthening institutions in charge of seed cotton and input commercialization with World Bank advice. - Prevent reemergence of a parallel circuit for input provision and sale of cotton. - Put in place before the 2004/05 harvest season a regulatory framework defining the role and responsibilities of the government and the shareholders. - Replace administrative allocation of seed cotton with a system based on competition among ginners. - Divestiture of SONAPRA: - Privatization of its four ginning mills has reached its final stage. - Government accepted the highest offers received for three ginning mills through competitive bidding; transfer to qualifying bidders envisaged to be completed by end-October 2004. - Fourth ginning mill experienced delays because the highest bidder could not provide sufficient financing guarantees; authorities expect to complete the sale of that mill in the coming weeks. - Port of Cotonou: - Authorities are encouraging unions to agree on a new agenda for private sector involvement in management. - Utilities and communications: - Company supplying water and electricity has been split into different entities for water and for electricity. - The post office and telecommunications have become separate entities. ### Civil service reform and governance - Civil service reform has been very difficult due to the long process of mustering consensus with unions and Parliament. - Constitutional Court rejected the draft law establishing a single statute for government employees covering both civil servants and contractuals, which was considered a prerequisite for implementing the reform. - With World Bank assistance, authorities are preparing a new roadmap for civil service reform. - Authorities intend to implement the strategy to fight corruption adopted in 2002 and strengthen the legal and judiciary system with World Bank support. - Plan to associate the private sector with a diagnostic study on impediments to private sector development. - With World Bank technical assistance, authorities will address lack of land titling that limits access to credit. ### Medium-term growth and PRSP priorities - Growth improvement driven by a higher contribution from capital accumulation and a positive contribution from total factor productivity (Box 3 of the staff report). - Factors supporting growth: improved environment for private sector investors, increase in public investment sustained by external assistance, progress in liberalizing the economy. - To achieve the PRSP growth rate of at least 7 percent over the medium term, authorities recognize the need to: - further improve the business environment for domestic and external private sector investors; - accelerate implementation of the structural reform agenda. - Fiscal policy actions over the medium term: - combat tax evasion; - collect tax arrears; - simplify procedures in line with recent Fund technical assistance recommendations to strengthen tax and customs administration. - Authorities requested additional technical assistance to examine direct taxation policy and the tax exemption system. - World Bank assistance to update the medium-term expenditure framework to highlight priority poverty-reducing expenditures. - Authorities reiterated resolve not to carry out large infrastructure projects (port and airport) under the five year Government Action Program (2001-2006) without assessing their macroeconomic and financial impact and without discussing results with IMF and World Bank staffs. ### Poverty reduction and diversification - PRSP will hinge on high quality growth, reinforced macroeconomic stability, and transparent, efficient, and monitorable public spending. - Acceleration of structural reforms is key to: - raising productivity and improving public service delivery; - encouraging private investment to foster economic growth and diversification, in particular through improved governance and judiciary system; - improving level and quality of government outlays while curbing non-priority expenditures. - Shortcomings in the PRSP identified in the joint staff assessment (JSA) are being addressed. - Authorities are assessing progress and evaluating execution of poverty reducing outlays; targets and policies in the PRSP will be revised as necessary and mentioned in the first annual progress report scheduled for the end of this year. - Diversification away from cotton into cashew nuts, wood products, and staple agricultural products: - Non-cotton exports increased from 16 percent of total exports in 1994-99 to 29 percent on average during 2000-03. - Authorities emphasize the destabilizing effects of market access and farm subsidy policies of large industrial countries and have launched, with other West African countries, the Sectoral Initiative on Cotton calling for the elimination of cotton subsidies. ### Assessment, reform momentum, and financing request - Authorities agree with the findings of the Ex Post Assessment and acknowledge mixed records in structural reform implementation due to the slow pace of building consensus. - Authorities report a newly found determination to press ahead with reforms as consensus-building takes hold. - Authorities seek Fund financial support for another PRGF expecting that Fund financing will have a catalytic effect to strengthen government reformers and signal the international community and markets to provide necessary financing and policy advice. - Representatives of the international community present in Benin as well as the private sector share the authorities’ views. *Source: IMF staff report excerpt provided in the content unit.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04368.pdf_