## _cr05288 — IMF staff report (2005) ## Source details **Canonical URL:** [_cr05288 — IMF staff report (2005)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05288.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05288.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05288.pdf.json) --- ### Executive summary — program objectives and immediate priorities - Benin reached the completion point under the enhanced HIPC Initiative in March 2003, receiving total debt relief of U.S.$265 million in net present value (NPV) terms with a common reduction factor of 31.3 percent. - New PRGF arrangement (low access equivalent to SDR 6.19 million, 10 percent of quota) aims to: - implement an export-led development strategy to reduce vulnerability to external shocks and dependency on cotton and trade with Nigeria; - reinforce macroeconomic stability through prudent economic and financial policies and strengthened public finances via revenue mobilization and fiscal adjustment; - deepen structural reforms to foster private sector and trade development; - achieve progress in implementing Benin’s poverty reduction strategy. - Program focus for 2005: - stabilize and restore the fiscal situation; - advance structural reforms in the cotton sector and the Port of Cotonou; - re-launch privatization program and measures to promote trade; - strengthen public sector management, including fiscal management and civil service reform. - Fiscal stance for 2005: tightening through adjustment measures equivalent to 2.1 percent of GDP to limit deterioration of the narrow primary deficit to 0.9 percent of GDP. - Disbursement profile if fully drawn: six equal installments of SDR 0.88 million, and a final disbursement of SDR 0.91 million. - Risks highlighted: social resistance to reforms, particularly ahead of the presidential elections scheduled for March 2006. ### Background — vulnerability, poverty, and program request - Key vulnerabilities: - Dependence on cotton (about two-thirds of exports; about 5-5½ percent of GDP). - Dependence on trade with Nigeria (total exports and reexports to Nigeria estimated at 6½-7½ percent of GDP). - Cotton provides income to about 325,000 poor farmers; their families represent slightly more than one-third of Benin’s population. - Poverty indicators: - One-third of the rural population and one-fourth of the urban population were classified as poor in 2000; nearly half of the population unable to satisfy a number of basic needs. - PRSP implemented since 2003; assessed as a sound and appropriate strategy for poverty reduction. - Request for Fund support: - Benin’s Minister of Finance requests Fund support equivalent to SDR 6.19 million (10 percent of quota). - If fully drawn, outstanding disbursements would drop to SDR 25.35 million (41 percent of quota) at end-2008, compared with SDR 42.04 million at end-2004. ### Recent macroeconomic developments (2004) and 2005 projections - 2004 outcomes: - Real GDP growth decelerated to an estimated 3.1 percent in 2004, from 3.9 percent in 2003. - Average inflation remained about 1 percent by year-end 2004, below the WAEMU convergence ceiling of 3 percent. - External current account deficit (excluding official grants) deteriorated slightly to about 8⅔ percent of GDP in 2004. - Trade balance deficit remained stable at 11½ percent of GDP in 2004. - 2005 projections and near-term outlook: - Economic growth for 2005 is projected at 3.9 percent (preliminary projection also noted as possibly limited to 4 percent). - Inflation for 2005 projected at 2.5 percent. - External current account deficit (excluding grants) for 2005 projected around -8.7 percent of GDP (unchanged). - Nominal GDP (in billions of CFA francs): 2004 2,138; 2005 2,261 (selected table entries). ### Cotton sector — performance, problems, and program strategy - 2004 performance and problems: - Seed cotton production not boosted above 350,000 tons and ginned cotton above 150,000 tons (controlling for bumper crops in 2001 and 2004). - Transition from public monopoly to integrated private-operator framework not completed; absence of enforceable rules led to breakdown in cooperation among stakeholders. - Financial problems at the private-sector institution responsible for financing and payments delayed crop season starts; input supply problems due to distributors’ dissatisfaction with bidding allocation system. - International cotton price effects: projected further cotton price drop of 19 percent in CFA francs in 2005. - Government interventions: - Mid-November 2004: government established conditions for “transitional” arrangements for 2004/05, including setting input prices. - January 2005: government decided to protect farmers from social and poverty implications of the decline in cotton prices. - Privatization of SONAPRA (accounting for about 50 percent of ginning capacity) was postponed after initial progress that awarded its ginneries through bidding. - Program strategy and reforms: - Authorities agreed government should not subsidize the sector and conduct commercial activities. - Reforms to: (i) strengthen the sectoral institutional framework; (ii) introduce a flexible domestic price mechanism that reflects international prices and could be linked to a stabilization fund; (iii) increase productivity and competitiveness. - Prior actions include resuming transfer of SONAPRA’s ginneries and signing sales protocols committing to complete transfers by October 31, 2005. - AIC (Interprofessional Cotton Association) to hire independent consultant to audit bidding system and develop pricing formula for 2006-2007 crop. ### Fiscal policy — 2005 stance, measures, and key fiscal figures - 2005 fiscal adjustment: - Measures equivalent to 2.1 percent of GDP to partially offset past slippages and limit narrow primary deficit to 0.9 percent of GDP. - Revenue measures equivalent to 1.1 percent of GDP have been taken to increase revenue to 17.4 percent in 2005. - Ad hoc settlement of electricity parastatal obligations accounts for nearly half of this adjustment, increasing nontax revenue by 0.5 percent of GDP. - Government approved reductions of budget appropriations by 1 percent of GDP to limit increase in total expenditure to 22.6 percent of GDP in 2005. - Selected fiscal table highlights (percent of GDP, 2004 est. initial budget → 2005 adjusted → effects → revised budget): - Total revenue: 16.4 → 16.6 → -0.3 → 1.1 → 17.4. - Total expenditure: 20.1 → 21.8 → 1.8 → -1.0 → 22.6. - Narrow primary balance: 0.0 → -0.8 → -2.2 → 2.1 → -0.9. - Overall budget deficit (cash basis, excluding grants): -4.5 → -5.4 → -3.0 → 2.3 → -6.1. - Specific budgetary items for 2005 (CFAF, selected): - Total revenue (in billions of CFA francs): 2005: 392.8. - Total expenditure and net lending (in billions of CFA francs): 2005: 512.2. - Wage bill: 2005: CFAF 128.7 billion (5.7 percent of GDP targeted in some tables; elsewhere 7.0 percent cited in revised narrow primary numbers). - Government allocation for partial settlement of wage liabilities: about ½ of 1 percent of GDP (CFAF 10 billion) for 2005. ### Civil service arrears and pension reform - Background: civil service wages frozen between 1987 and 1991 with gradual restoration thereafter; gap between actual salary payments and grade-based salaries closed in 2004. - Early-2005 agreement: government agreed to compensate civil servants for loss of income from delay in aligning salaries since 1987. - Fiscal implications: - 2005 budget included allocation of about ½ of 1 percent of GDP for a partial settlement. - Medium term program for 2006-08 includes provisions for further settlement—program assumes annual payments equivalent to about ½ of 1 percent of GDP per year over the program period, pending verification of claims and a clearance plan. - Program includes reform of the pension fund for civil servants to ensure its financial viability. ### Port of Cotonou, trade with Nigeria, and trade facilitation - Nigeria measures and impact: - Nigeria’s August 2003 import ban on 44 items reduced total exports to Nigeria in 2004 by an estimated one-fourth to one-third, to the equivalent of about 5 percent of Benin’s GDP. - April 2005 bilateral trade agreement and May 2005 Joint Committee on Commerce (JCC): goods of Beninese origin banned earlier would be allowed in Nigeria; reexports remain banned. At end-May 2005, 12 enterprises granted export permits by JCC. - Port weaknesses: - Diversion of transit trade to more efficient regional seaports, pervasive corruption at customs, and increasing roadblocks for control/revenue collection. - Port reforms and prior actions: - Speed up implementation of centralized clearing and invoicing system; finish review of private sector participation conditions by end-2005. - Prior action: launched financial and physical audit of port activities with World Bank assistance; plan to open port merchandise handling to competition and restructure SOBEMAP with private participation. - Centralized clearing and invoicing center to be established by Cosmos under government contract and in operation by end-2005. ### Monetary and financial sector issues - Domestic credit and banking: - Domestic credit expansion: 8.8 percent in 2004; credit to nongovernment sector rose by 4.5 percent in 2004. - Banking system at end-2004: nine banks and two nonbank financial institutions; one bank under provisional receivership and two institutions under surveillance. - Government will begin to disengage from the Continental Bank (43 percent share) and propose sale before end-2006. - BCEAO operations and data issues: - Reserve requirement increased from 9 percent to 13 percent in March 2004. - BCEAO official statistics indicate currency in circulation in Benin declined from 12.2 percent of GDP at end-2001 to 1.6 percent of GDP at end-2004; BCEAO acknowledged difficulty estimating currency in circulation and net foreign assets and has not provided revised time series. - Monetary program targets: - Program aims for a 12 percent pickup in credit to the private sector in 2005. - Money supply growth could be about 6 percent in 2005; net domestic assets expected to increase by 19 percent in 2005. ### External sector, debt sustainability, and DSA findings - External accounts: - Trade balance (percent of GDP) and current account deficits remained sizable; current account (percent of GDP) around -8.7 percent in 2004. - Debt and DSA: - Stock of debt outstanding equivalent to 35 percent of GDP at end-2003. - Baseline DSA: NPV of debt-to-exports ratio would remain below 150 percent and decline over projection period; public debt as percent of GDP broadly constant at about 34 percent over 2005–07, declining thereafter to reach 24 percent by 2024. - Debt service projected sustainable; debt service to exports ratio about 6.3 percent during the period under review. - Sensitivity tests: less favorable financing or lower export growth could make debt path unsustainable; dependence on cotton raises risk. - Fund credit schedule (assuming access SDR 6.19 million): - Disbursement schedule: SDR 0.88 million on August 5, 2005; SDR 0.88 million on December 10, 2005; subsequent SDR 0.88 million installments semiannually; final SDR 0.91 million on June 10, 2008. - Outstanding Fund credit, end of period (SDR, in millions): 2004: 42.03; 2005: 37.83; 2006: 33.73; 2007: 30.12; 2008: 25.31 (selected series). ### Medium-term objectives and macro-fiscal targets (2005–08) - Macroeconomic objectives: - Achieve an average annual rate of growth of over 4½ percent. - Contain inflation to less than 3 percent a year. - Improve the external current account balance (excluding official grants) to 7½ percent of GDP by 2008. - Investment and saving: - Gross investment to increase by nearly 2½ percentage points of GDP from 2004 to about 21½ percent in 2008; more than two thirds of this increase from the public sector. - Gross domestic saving projected to increase to about 14 percent of GDP by 2008. - Fiscal projections: - Maintain debt sustainability with an NPV of debt to exports around 140 percent. - Eliminate the narrow fiscal primary deficit (0.9 percent of GDP in 2005) by 2008. - Projections include revenue increase from 17.4 percent to 17.8 percent of GDP over the period and a decline in current primary expenditure of 0.9 percent of GDP, partially offset by increase in domestically financed capital expenditure by 0.5 percent of GDP. - Provisions for settlement of government debt to civil servants: annual payments equivalent to about ½ of 1 percent of GDP per year over the program period. ### Structural reform priorities and privatizations - Priority reforms: - Complete cotton sector reform; privatize SONAPRA’s ginneries (transfers committed by end-October 2005). - Port of Cotonou reforms: centralized invoicing/clearing system and operational audit; open merchandise handling to competition; restructure SOBEMAP with private participation. - Privatization and regulatory reform of Benin Telecoms SA and SBEE: launch divestment strategies and international calls for bids (prior actions initiated). - Strengthen public sector management: resume civil service reform, settle past wage liabilities in a verified and budgeted manner, and strengthen public expenditure management systems (SIGFIP). - Structural conditionality (selected): - Completion of privatization of SONAPRA’s ginneries. - Implementation of single-invoicing software and operational centralized invoicing and clearing management center at Port of Cotonou. - Approval of a divestment strategy and launching of an international call for bids for Benin Telecoms SA and SBEE. - Evaluation of state liability vis-à-vis civil servants for promotions and advances suspended in 1987-91; submission to Audit Office of 2004 budget execution accounts; implementation of new methodology for public finance statistics. ### Program monitoring, conditionality, and review schedule - Monitoring: - Program monitored by quantitative performance criteria, prior actions, structural performance criteria, and benchmarks for 2005 (as detailed in MEFP and Technical Memorandum). - Quantitative targets include ceilings on net domestic financing, narrow primary balance, nonaccumulation of domestic and external arrears, and indicative floors on government revenue and ceilings on wage bill. - Review schedule: - First review scheduled no later than December 31, 2005, based on end-September 2005 test date. - Two program reviews: first by end-December 2005; second by end-June 2006. - Data and reporting requirements: - Monthly and quarterly reporting obligations specified for public finance, monetary, external, and real sector data; definitive data deadlines range from four to 12 weeks depending on series. ### Main risks to program implementation - Political and social risks: - Pressures from social partners and political resistance have delayed civil service reform and privatization. - Social and political pressures threatened fiscal stability (e.g., early 2005 wage concessions). - Risks may increase ahead of presidential elections (scheduled March 2006). - Economic risks: - High dependence on cotton and trade with Nigeria; vulnerability to international price shocks and Nigerian trade restrictions. - Downside DSA scenarios show risk of unsustainable debt path under less favorable financing or lower export growth. - Program reliance: - Success hinges on effective ownership, strong leadership, and donor support (AfDB, European Union, France indicated assistance intentions). *Source: IMF staff report (2005), Country Report _cr05288 — extracted content provided in the PDF chapter/section.* ### 2005. The staff team comprised Messrs. Maret (Head), Harmsen (Resident Representative), ### _cr05288 - 2005. The staff team comprised Messrs. Maret (Head), Harmsen (Resident Representative), ### Executive Summary — Program objectives and immediate priorities - Benin reached the completion point under the enhanced HIPC Initiative in March 2003, receiving total debt relief of U.S.$265 million in net present value (NPV) terms with a common reduction factor of 31.3 percent. - The last three-year arrangement under the PRGF expired on March 2004, with the full amount drawn. - Directors’ assessment (ex post assessment of performance under Fund-supported programs) urged implementation of structural reforms to: enhance competitiveness, strengthen the cotton sector, advance privatization, and promote export diversification. - New PRGF arrangement (low access equivalent to 10 percent of quota) aims to: - implement an export-led development strategy to reduce vulnerability to external shocks and dependency on cotton and trade with Nigeria; - reinforce macroeconomic stability through prudent economic and financial policies and strengthened public finances via revenue mobilization and fiscal adjustment; - deepen structural reforms to foster private sector and trade development; - achieve progress in implementing Benin’s poverty reduction strategy. - Program focus for 2005: - stabilize and restore the fiscal situation; - advance structural reforms in the cotton sector and the Port of Cotonou; - re-launch privatization program and measures to promote trade; - strengthen public sector management, including fiscal management and civil service reform. - Fiscal stance for 2005: tightening through adjustment measures equivalent to 2.1 percent of GDP to limit deterioration of the narrow primary deficit to 0.9 percent of GDP. - Risks highlighted: social resistance to reforms, particularly ahead of the presidential elections scheduled for March 2006. ### Background — vulnerability, poverty, and program request - Key vulnerabilities: - Dependence on cotton (about two-thirds of exports; about 5-5½ percent of GDP) and on trade with Nigeria (total exports and reexports to Nigeria estimated at 6½-7½ percent of GDP). - Cotton provides income to about 325,000 poor farmers, whose families represent slightly more than one-third of Benin’s population. - Poverty indicators: - One-third of the rural population and one-fourth of the urban population were classified as poor in 2000; nearly half of the population unable to satisfy a number of basic needs. - PRSP implemented since 2003; assessed as a sound and appropriate strategy for poverty reduction (JSAN reference). - Request for Fund support: - Benin’s Minister of Finance requests Fund support equivalent to SDR 6.19 million (10 percent of quota) for the 2005–08 program. - Disbursement profile if fully drawn: six equal installments of SDR 0.88 million, and a final disbursement of SDR 0.91 million. - If fully drawn, outstanding disbursements would drop to SDR 25.35 million (41 percent of quota) at end-2008, compared with SDR 42.04 million at end-2004. ### Recent Economic Developments and Progress in Structural Reforms — 2004 developments and cotton sector issues - Macroeconomic performance in 2004: - Real GDP growth decelerated to an estimated 3.1 percent in 2004, from 3.9 percent in 2003. - Average inflation remained about 1 percent by year-end 2004, below the WAEMU convergence ceiling of 3 percent. - Economic slowdown reflected weak cotton ginning and decline in trade activities with Nigeria, affecting transport and port activities. - Cotton sector performance and problems: - Reform of the cotton sector has not raised production above historical levels: seed cotton production not boosted above 350,000 tons and ginned cotton above 150,000 tons (controlling for favorable climatic bumper crops in 2001 and 2004). - Institutional and market stresses: - Transition from public monopoly to integrated private-operator framework not completed. - Absence of enforceable rules led to breakdown in cooperation among stakeholders. - Financial problems at the private-sector institution responsible for financing and payments delayed crop season starts. - Input supply problems due to distributors’ dissatisfaction with bidding allocation system. - International cotton price effects: - Price drop over 1996–2002 limited to 22 percent in CFA francs because of U.S. dollar appreciation against the CFA franc. - Projected further cotton price drop of 19 percent in CFA francs in 2005, as U.S. dollar depreciation more than offset the slight recovery in international cotton prices. - Government interventions: - Mid-November 2004: government established conditions for “transitional” arrangements for 2004/05, including setting input prices. - January 2005: government decided to protect farmers from social and poverty implications of the decline in cotton prices. - Privatization of SONAPRA (accounting for about 50 percent of ginning capacity) was postponed after initial progress that awarded its ginneries through bidding. ### Selected macroeconomic and fiscal indicators (as presented) - Benin: Key Indicators, 1995–2005 (selected lines as shown) - GDP at constant prices (annual changes): 1999 6.0, 2000 4.9, 2001 6.2, 2002 4.5, 2003 3.9, 2004 3.1, 2005 3.9. - Consumer price index (annual changes): 1999 14.5, 2000 4.2, 2001 4.0, 2002 2.4, 2003 1.5, 2004 0.9, 2005 2.5. - Investment (percent of GDP): 1999 22.2, 2000 19.5, 2001 20.3, 2002 17.2, 2003 19.6, 2004 19.0, 2005 20.3. - Public investment: 1999 7.2, 2000 7.3, 2001 7.4, 2002 6.1, 2003 6.8, 2004 6.1, 2005 7.4. - Private investment: 1999 14.9, 2000 12.2, 2001 12.9, 2002 11.1, 2003 12.8, 2004 12.8, 2005 12.9. - Overall fiscal deficit (payment-order basis, excluding official grants): 1999 -6.7, 2000 -3.4, 2001 -3.9, 2002 -3.3, 2003 -3.7, 2004 -3.7, 2005 -5.3. - Overall fiscal deficit (cash basis, excluding official grants): 1999 -8.3, 2000 -5.2, 2001 -3.9, 2002 -4.3, 2003 -3.7, 2004 -4.5, 2005 -6.1. - Current account balance (minus = deficit, excluding official grants): 1999 -7.4, 2000 -7.8, 2001 -7.5, 2002 -8.6, 2003 -8.5, 2004 -8.7, 2005 -8.7. - CFA francs per U.S. dollar (period average, annual change): 1999 -10.1, 2000 15.6, 2001 2.9, 2002 -5.2, 2003 -16.5, 2004 -9.0, 2005 -5.4. - Price of ginned cotton (U.S.$ per pound, annual change): 1999 23.3, 2000 11.1, 2001 -18.7, 2002 -3.6, 2003 37.1, 2004 -2.3, 2005 -14.5. - Production of cotton seed (in thousands of tons): 1999 350, 2000 337, 2001 401, 2002 338, 2003 333, 2004 425, 2005 417. - Nominal GDP (in billions of CFA francs): 1999 1,083; 2000 1,680; 2001 1,832; 2002 1,957; 2003 2,068; 2004 2,138; 2005 2,261. ### Lessons from the Ex-Post Assessment and Program design implications (Box 1 summary) - What worked: - Program design broadly appropriate; program implementation mostly successful. - Major progress in macroeconomic stabilization during 1993–2003. - Tax revenue increased from 7.2 percent of GDP in 1989 to 15.2 percent of GDP in 2003. - Wage bill-to-GDP ratio reduced via voluntary retirement and attrition; public expenditure management improved since 2000; financial sector strengthened. - What did not work: - Underestimated weaknesses in administrative/implementation capacity and weak internal consensus for structural reforms. - Lack of economic diversification; continued dependence on cotton and trade with Nigeria. - Delays and uneven implementation of key structural measures, including civil service reform and divestiture from public utilities and the cotton sector. - How the new PRGF responds: - Aligns with PRSP objectives and provides framework for responding to exogenous shocks. - Targets increasing tax-to-GDP ratio toward the WAEMU target of 17 percent while increasing level and quality of poverty-reducing spending. - Gives new impetus to incomplete reform agenda to improve efficiency and competitiveness. - Mitigates risks to PRSP objectives through significant up-front actions. ### Policy discussions and program monitoring (summary of emphasis) - Immediate policy emphasis: - Stabilize public finances through revenue mobilization and fiscal adjustment equivalent to 2.1 percent of GDP in 2005. - Use prior actions to validate fiscal program for 2005 and provide impetus to structural reforms. - Structural reform priorities: - Complete cotton sector reform and reorganize governance/market framework among stakeholders. - Advance privatization (including parastatals in telecommunications and electricity) and Port of Cotonou reforms. - Strengthen public sector management and resume civil service reform, including settlement of past wage liabilities. - Program monitoring: - Program includes quantitative performance criteria, prior actions, structural performance criteria, and benchmarks for 2005 (detailed in Appendix I: Letter of Intent and MEFP). *Source: IMF staff report (2005), Country Report _cr05288 — extracted content provided in the PDF chapter/section.* ### 7. Nigeria’s introduction in August 2003 of an import ban on 44 items regularly ### 7. Nigeria’s introduction in August 2003 of an import ban on 44 items regularly imported from Benin, effected through border closures and strengthened border controls, contributed to a decline of total exports to Nigeria by an estimated one-fourth to one-third in 2004, to the equivalent of about 5 percent of Benin’s GDP ### Trade disruption with Nigeria and economic impact - The import ban (44 items) introduced by Nigeria in August 2003 reduced total exports to Nigeria in 2004 by an estimated one-fourth to one-third. - The decline in exports to Nigeria amounted to about 5 percent of Benin’s GDP. - Objectives cited for the Nigerian measures: protect Nigeria’s domestic industry and port activity, and address sanitary concerns about frozen meat. - Consequences for Benin: - Curtailment of commercial activities with Nigeria. - Curtailing of transport and port activities. - Lowered government revenue. ### Port of Cotonou, regional transit diversion, and operational problems - Factors affecting Port of Cotonou: - Diversion of international transit trade of neighboring countries to more efficient and competitive seaports in the region. - Pervasive corruption at customs. - Increasing number of roadblocks erected by police, customs, and local municipalities for control and revenue collection purposes. - Government intervention in late 2004: measures to allow goods and services to move freely. - Port authorities initiated measures to regain market share and improve services. ### External current account, trade balance, and HIPC impacts - Despite HIPC Initiative completion point benefits (improved terms of trade and savings in interest obligations), the external current account deficit (excluding official grants) deteriorated slightly to about 8⅔ percent of GDP in 2004. - Trade balance deficit remained stable at 11½ percent of GDP in 2004, despite: - Lower volume of cotton exports. - Higher oil bill. - Lower interest obligations on public debt were more than offset by lower services and current transfers due to the decline in reexports to Nigeria. ### Fiscal developments in 2004 and early 2005 - Government response to wage pressures and declining revenue collection: - Expenditure cuts to stabilize the overall fiscal deficit (excluding grants) at 3⅔ percent of GDP in 2004. - Revenue collection fell by one-half of one percentage point of GDP in 2004 because of the economic slowdown. - Progressive aligning of wages to the current pay scale resulted in a 10 percent overrun in the wage bill. - Offsetting factors: reduced external interest obligations, a lower execution rate of the investment program, and measures limiting other expenditures while protecting priority sectors. - Current fiscal surplus reduced by ½ of 1 percent to 2½ percent of GDP. - The narrow primary surplus—the primary fiscal balance excluding externally financed capital expenditure—was eliminated. ### Monetary developments, credit, and data issues - Domestic credit expansion: 8.8 percent in 2004. - Credit to the nongovernment sector rose by 4.5 percent in 2004. - Reserve requirement increased by BCEAO from 9 percent to 13 percent in March 2004. - BCEAO official statistics indicate currency in circulation in Benin declined from 12.2 percent of GDP at end-2001 to 1.6 percent of GDP at end-2004. - BCEAO acknowledged difficulty estimating currency in circulation and net foreign assets of member countries and had not yet provided revised time series for full analysis of monetary and balance of payments developments. ### Structural progress and setbacks in 2004 - Progress: - Further reform of the budget system and strengthening of expenditure management. - Separation of the electricity and water parastatal into SBEE (electrical energy company) and SONEB (water company) in early 2004. - Setbacks and delays: - Wavering commitment and opposition from labor unions delayed reform of the cotton sector and the privatization program. - No progress in privatizing SBEE and SONEB despite submission of a new electricity code to parliament. - No progress on restructuring OPT (post and telecommunications public enterprise) other than a decree to separate postal and telecommunications activities. - Trade union resistance blocked progress toward private sector involvement in Port of Cotonou management. ### Developments in early 2005: trade restoration and budgetary pressures - Steps to restore trade relations with Nigeria: - Bilateral trade agreement signed in April 2005. - Joint Committee on Commerce (JCC) set up in May 2005 to improve trade relations. - Agreement: goods of Beninese origin that had been banned would be allowed in Nigeria; goods manufactured outside of Benin (“reexports”) would continue to be banned. - At end-May 2005, 12 enterprises in the textile, edible oil, and construction materials sectors were granted export permits by the JCC. - 2005 budget and fiscal pressures: - 2005 budget approved by parliament aligned with projections from the last Article IV consultation. - Early-2005 budgetary pressures about 3 percent of GDP arose from: (i) optimistic forecasts of 2005 revenue, (ii) slippages in the 2004 wage bill carrying over to 2005 and wage concessions made in early 2005 to end a prolonged teachers’ strike, (iii) government decision to subsidize cotton producers, (iv) various other measures including increased allocations for public utilities to reflect actual consumption, preparation for upcoming presidential elections, and elimination of domestic payment arrears between the electricity parastatal and the general government. - Government decision in early 2005 to recognize and settle indebtedness to civil servants for automatic promotions suspended between 1987 and 1991 and gradually restored thereafter. - Without offsetting measures, overall budget deficit (excluding grants, on a cash basis) could have widened from 4.5 percent in 2004 to 8.4 percent of GDP in 2005. ### Settlement of past wage liabilities and civil service reform (Box 2) - Background: - Civil service wages frozen between 1987 and 1991; automatic promotions were not frozen, resulting in nonpayment of related benefits. - General salary increases and gradual restoration of promotion benefits took place; gap between actual salary payments and grade-based salaries was closed in 2004. - Early-2005 agreement with labor unions: government agreed to compensate civil servants for loss of income from the delay in aligning salaries to grade-based levels since 1987. - Fiscal implications: - Agreement likely to have a major medium-term impact on Benin’s fiscal position. - For 2005, authorities aim to obtain an accurate assessment of liabilities from this regularization. - 2005 budget included an allocation of about ½ of 1 percent of GDP for a partial settlement. - Medium term program for 2006-08 includes provisions for further settlement; program assumes annual payments equivalent to about ½ of 1 percent of GDP per year over the program period, pending verification of claims and a clearance plan. - Civil service reform priorities (World Bank lead): revamp civil service regulations, design an adequate recruitment policy, and introduce performance-based remuneration systems. ### Medium-term objectives, macroeconomic targets, and structural agenda (2005–08) - Macroeconomic objectives for the 2005-08 program: - Achieve an average annual rate of growth of over 4½ percent. - Contain inflation to less than 3 percent a year. - Improve the external current account balance (excluding official grants) to 7½ percent of GDP by 2008. - Supply-side and trade measures expected to support objectives: - Reforms of the cotton sector and state disengagement to initiate increase of cotton production toward its potential of about 600,000 tons of seed cotton. - Progressive easing of trade restrictions in Nigeria to restore and increase trade and trade-related activities. - Increased efficiency and restoration of competitiveness of the Port of Cotonou through reforms. - Privatization of telecommunications and energy parastatals to stimulate private investment and provide better services. - Behind-the-border reforms: facilitating access to land and financial services, strengthening the judiciary system, developing public infrastructure, and improving governance. - Investment and saving projections: - Gross investment to increase by nearly 2½ percentage points of GDP from 2004 to about 21½ percent in 2008. - More than two thirds of this increase will come from the public sector. - Gross domestic saving projected to increase to about 14 percent of GDP by 2008. - Fiscal strategy and targets: - Maintain debt sustainability with an NPV of debt to exports around 140 percent. - Eliminate the narrow fiscal primary deficit (0.9 percent of GDP in 2005) by 2008. - Projections include revenue increase from 17.4 percent to 17.8 percent of GDP over the period and a decline in current primary expenditure of 0.9 percent of GDP, partially offset by an increase in domestically financed capital expenditure by 0.5 percent of GDP. - Provisions for settlement of government debt to civil servants: annual payments equivalent to about ½ of 1 percent of GDP per year over the program period. - Revenue and expenditure measures: - Revenue focus: simplify tax system, widen tax base through reduction of exemptions, strengthen tax and customs administration. Tax revenue-to-GDP ratio projected to return to the 2003 level in 2005 and increase by one quarter of one percentage point of GDP per year thereafter to reach 16 percent by 2008. - Expenditure focus: stabilize current expenditure at 14½ percent of GDP and increase capital expenditure to nearly 8 percent of GDP. - Wage bill contained at about 5.7 percent of GDP. - Program provides for restructuring to increase expenditure on social and priority sectors beyond one-fourth of domestically financed expenditure. - WAEMU convergence: - Medium term fiscal stance will allow Benin to comply with six out of nine convergence criteria of the WAEMU by 2008, compared with four in 2004, and make good progress toward the remaining three criteria (narrow fiscal deficit, tax revenue, and external current account balance targets). ### Structural reform priorities and cotton sector strategy - Structural reform agenda focused on trade facilitation and “behind the border” reforms to address domestic trade bottlenecks (high transport costs, limited access to inputs like land, inadequate domestic regulations governing services, investment, and competition). - Priority reforms: - Complete reforms of the Port of Cotonou and of the telecommunications and energy sectors. - From 2006, implement additional trade promotion measures emerging from the diagnostic trade integration study (DTIS). - Cotton sector reforms: - Authorities agreed with staff that government should not subsidize the sector and conduct commercial activities; concerns about sectoral management and potential oligopolistic ginning structure were noted. - Reforms to: (i) strengthen the sectoral institutional framework, (ii) introduce a flexible domestic price mechanism that reflects international prices and could be linked to a stabilization fund, (iii) increase productivity in, and competitiveness of, the cotton sector. - Authorities agreed to abide by the memorandum of understanding with other stakeholders in the cotton sector that reaffirms the general framework and defines operational guidelines and responsibilities. *Source: _cr05288 - 7. Nigeria’s introduction in August 2003 of an import ban on 44 items regularly imported from Benin (IMF staff report excerpt).* ### 27. Finally, the program will provide new impetus to the administrative reform of ### _cr05288 - 27. Finally, the program will provide new impetus to the administrative reform of ### Administrative reform, civil service, and pensions - Program will provide new impetus to the administrative reform of the civil service and deepen reforms of budget and public finance management, including strengthening governance. - Under the leadership of the World Bank, civil service reform will focus on: - revamping civil service regulations (MEFP, paras. 9 and 15), - establishing a wage policy based on recognition of employee performance, - instituting an adequate recruitment policy. - Program includes a reform of the pension fund for civil servants that aims at ensuring its financial viability. ### Economic and Financial Program for 2005 — Real sector - Preliminary data suggest economic growth in 2005 may be limited to 4 percent because of: - lingering effects of trade restrictions imposed by Nigeria, - persistence of a difficult international environment, - likely postponement of some private sector investment decisions ahead of presidential elections. - Structural reforms to be implemented in 2005 will take time to impact economic activity and remove impediments to higher growth. - Inflation is expected to remain moderate. ### Fiscal policy — stance, measures, and composition - Fiscal stance in 2005 involves tightening fiscal policy to offset recent budgetary pressures and limit deterioration of the narrow fiscal primary deficit to 0.9 percent of GDP in 2005, as originally envisaged in the budget law. - Revenue measures equivalent to 1.1 percent of GDP have been taken to increase revenue to 17.4 percent in 2005. - The ad hoc settlement of the electricity parastatal’s obligations to the state (debt relief not passed through) accounts for nearly half of this adjustment and increased nontax revenue by 0.5 percent of GDP. - The additional settlement was used to cover the general government’s own payment arrears for its electricity and water consumption. - Revenue increases reflect mainly improvements in tax and customs administration; the tax measures introduced in the 2005 budget decreased revenue slightly. Tax measures included: - adjusting income tax thresholds to reflect minimum wage increases, - extending for another year existing exemptions on agricultural inputs and equipments and introducing a new exemption on seeds, - modifying various small taxes and clarifying tax legislation. - Administrative measures to strengthen tax and customs administration: - introduction of a new taxpayer identification number, - strengthening monitoring and controls of exemptions, - additional personnel and equipment, - improved computerization of customs and the medium taxpayer unit of the tax department in Cotonou, - assessment and collection of fees from mobile telephone companies to increase nontax revenue. - Expenditure-side measures: - government approved reductions of budget appropriations by 1 percent of GDP to limit increase in total expenditure to 22.6 percent of GDP in 2005, - reductions primarily by postponing some domestically financed capital expenditures and cutting nonpriority current expenditures (MEFP, para. 20). - Prior agreement with IMF and World Bank staff on structure and quality of expenditure program. ### Benin: Fiscal Program, 2005 (selected entries; all figures in percent of GDP) - Total revenue: 16.4 (2004 est. initial budget) → 16.6 (2005 adjusted) → -0.3 (budgetary pressures) → 1.1 (adjustment measures) → 17.4 (revised budget) - Total expenditure: 20.1 → 21.8 → 1.8 → -1.0 → 22.6 - Narrow primary expenditure: 16.5 → 17.3 → 1.9 → -1.0 → 18.2 - Current primary expenditure: 13.6 → 13.6 → 1.9 → -0.5 → 15.0 - Wages and pensions: 6.8 → 6.5 → 0.5 → 0.0 → 7.0 - Other current primary expenditure: 6.8 → 7.1 → 1.4 → -0.5 → 8.0 - Domestically financed capital expenditure: 2.9 → 3.8 → 0.0 → -0.5 → 3.2 - Externally financed capital expenditure: 3.3 → 4.1 → 0.0 → 0.0 → 4.1 - Interest payments: 0.3 → 0.4 → -0.1 → 0.0 → 0.3 - Narrow primary balance: 0.0 → -0.8 → -2.2 → 2.1 → -0.9 - Overall budget deficit (payment-order basis): -3.7 → -5.3 → -2.1 → 2.1 → -5.3 - Payment arrears variation: -0.4 → -0.1 → -0.9 → 0.2 → -0.9 - Overall budget deficit (cash basis): -4.5 → -5.4 → -3.0 → 2.3 → -6.1 - Sources: Beninese authorities, and IMF staff estimates and projections. ### Financing, arrears, and public finance reforms - Taking into account reduction of domestic payment arrears and government liabilities, the financing requirement of the budget is equivalent to 6 percent of GDP and will be mostly covered by external financing. - Government’s recourse to domestic financing limited to 0.6 percent of GDP; reflects, in part, net negative cash flow from privatization and restructuring of SONAPRA. - 2005 program expected to be fully financed; AfDB, European Union, and France have expressed intent to offer further assistance to close financing gap. - Public finance reform program in 2005 aims to: - strengthen expenditure management, - address weaknesses identified by the country financial accountability assessment (CFAA), - reinstate automatic controls of the integrated computerized expenditure management system (SIGFIP), - strengthen link between budget and treasury, - substantially reduce treasury payments outside regular budgetary expenditure management process (MEFP, para. 27), - better control consumption of telephone services, water, and electricity to reduce spending and avoid accumulation of domestic payment arrears (MEFP, para. 25), - improve quality and reporting time of fiscal operations, accelerate audit of budget execution accounts, and complete budget settlement laws. ### Monetary and financial sector issues - BCEAO will continue to conduct monetary policy at the regional level. - Program aims for a 12 percent pickup in credit to the private sector. - Government expected to keep a positive net credit position despite a drawdown of its deposits in the banking system. - Financial system measures: - authorities, with the regional banking commission, will enforce measures to strengthen financial system, - banking system at end-2004 comprised nine banks and two nonbank financial institutions; one bank is under provisional receivership and two institutions under surveillance, - banking commission to continue close supervision and intervene promptly if necessary, - government will begin to disengage from the Continental Bank, in which it retains a 43 percent share, - government will reform the civil service pension fund to eliminate its structural deficits. ### External sector policies and trade - Program aims to foster trade opportunities and activities; authorities working with private sector to set up export-processing zones (EPZs); related legislation awaiting parliamentary approval. - IMF staff cautioned authorities about EPZ risks to government revenue and advised development of behind-the-border trade facilitation measures and incorporation of final DTIS recommendations in trade development strategy, including merging government institutions assisting private investors into a single window for investment and export promotion. ### Structural measures and privatizations - Authorities committed to giving new impetus to structural reforms; main elements for 2005: - implementation of a well-articulated reform program for the cotton sector, - progress in reforming the Port of Cotonou, - progress in privatizing electricity and telephone services and implementing improved regulatory frameworks. - Cotton sector: - government will disengage from direct intervention and committed to clear timetable, - as a prior action, government resumed transferring SONAPRA’s ginneries to the private sector and signed sales protocols committing to complete transfers by October 31, 2005, - authorities committed to strengthening institutional framework and introducing transparent and flexible price system potentially coupled with a privately managed stabilization fund. - Port of Cotonou: - speed up implementation of centralized clearing and invoicing system, - finish reviewing conditions for private sector participation in port management by end-2005, - as prior action, launched financial and physical audit of port activities with World Bank assistance to produce a program for improving competitiveness and developing activities, - taken steps to reduce costs, plan to open all port merchandise handling to competition, and restructure public handling enterprise SOBEMAP with private sector participation (MEFP, para. 32). - Telecommunications and electricity: - program aims for substantial progress in privatization by end-2005, - prior action: launched process of hiring a new investment bank (with World Bank assistance) to advise on privatizing Benin Telecoms and strengthening regulatory framework, - liberalization of telecommunications (four mobile licenses awarded) preceded regulatory framework; program seeks to correct deficiencies, - World Bank assisting authorities in bringing the electric power company to point of sale (MEFP, para. 33). ### Debt Sustainability Analysis (DSA) update - New DSA conducted jointly with World Bank; Beninese debt agency provided updated end-2003 data. - Stock of debt outstanding equivalent to 35 percent of GDP at end-2003. - Baseline scenario: - Benin would remain on a sustainable path despite less favorable environment, - some downside risks materialized: lower international price of cotton, slightly more expansionary fiscal stance (settlement of past wage liabilities), overall fiscal deficit on cash basis averaging 4.5 percent of GDP, - path of GDP growth revised downward; nominal GDP growth would gradually converge toward 8 percent over the medium run with inflation under control at 2.5 percent, - NPV of debt-to-exports ratio would remain below 150 percent and decline over projection period, - Public debt as percent of GDP should remain broadly constant at about 34 percent over 2005–07, and decline thereafter to reach 24 percent by 2024, - Debt service projected sustainable; debt service to exports ratio remaining about 6.3 percent during the period under review. - Sensitivity tests and downside risks: - less favorable terms on new public borrowing would increase NPV of debt-to-exports ratio beyond sustainable threshold in short and medium term, - lower export growth would put Benin on an unsustainable path for a prolonged period — risk heightened by dependence on cotton exports. - Tests highlight need to maintain prudent fiscal policy and diversify exports. ### Program monitoring - PRGF-supported program will be monitored on basis of quantitative performance criteria and indicators presented in Section IV and Table 1 of the MEFP. - Understandings reached on quantitative performance criteria for end-September 2005 and indicative targets for end-December 2005. - One structural performance criterion proposed for the third disbursement and a number of structural benchmarks for first year of program determined with World Bank (Section IV and Table 2 of MEFP; Box 3). - First review under proposed arrangement scheduled to be concluded no later than December 31, 2005, based on end-September 2005 test date. - Review will assess progress in privatizing SONAPRA and setting up centralized clearing and invoicing center at Port of Cotonou. ### Risks to the program - Success hinges on effective ownership of the program (including broader society) and strong leadership to prevent slippages. - Recent deterioration of economic conditions reflected slippages in fiscal policy and structural reforms, and lack of progress in poverty reduction. - Main risks illustrated by 2004–early 2005 developments: - pressures from social partners and political resistance have contributed to delays in civil service reform and privatization, - social and political pressures threatened fiscal stability (e.g., early 2005 wage concessions to end prolonged strike by teachers and social workers), - such pressures may increase ahead of presidential elections. - Authorities have shown determination to maintain momentum: - cabinet endorsement of program and revised 2005 budget, - signing of protocols for sale of cotton parastatal ginneries by end-October 2005, - publication of invitations to bid for advisor recruitment for privatization of telecommunications parastatal, - publication of invitations to bid for development plan for Port of Cotonou, - authorities view PRGF support as assisting them in managing the economy, particularly before presidential elections. ### Structural conditionality (Box 3) - Fund conditionality includes: - Cotton sector: completion of privatization of SONAPRA’s ginneries, including decision on contested remaining lot of ginneries, - Port of Cotonou: implementation of single-invoicing software, setup of operational centralized invoicing and clearing management center, and elaboration of development plan based on operational audit of port activities, - Benin Telecoms SA: approval of a divestment strategy and launching of an international call for bids for its divestment, - SBEE (electricity parastatal): launching of an international call for bids for its divestment, - Budget: evaluation of state liability vis-à-vis civil servants for promotions and advances suspended in 1987-91 and gradually restored; submission to Audit Office of 2004 budget execution accounts; implementation of a new methodology to collect, compile, and report public finance statistics. - Status of prior structural conditionality (2000–04 PRGF): - Positive achievements: annual verification of account balances of treasury, foreign-financed projects, and agencies; implementation of Fund advice in domestic taxes and customs; audit of cross-debts of public enterprises; initiation of privatization process. - Not implemented: civil service reform, cotton sector reform, privatization of SONAPRA, SBEE, OPT, and Port of Cotonou. - World Bank structural conditionality focuses on private sector development and regulatory reforms; privatization; improvement in agricultural services including cotton; improvement in public expenditure management; and governance. - PRSC-2 (approved June 2005) supports market transactions in agriculture, public expenditure management, and agricultural services including cotton. *Italic: Source — IMF staff report text (content unit: _cr05288 - 27.)* ### 47. Appropriate macroeconomic policies helped sustain Benin’s robust economic ### Appropriate macroeconomic policies helped sustain Benin’s robust economic ### Macroeconomic performance and recent concerns - Appropriate macroeconomic policies helped sustain Benin’s robust economic growth and low inflation over the past decade to 2003. - Despite that, further reduction in poverty has remained a concern. - Recent slippages in fiscal policy and structural reforms, along with delays in implementing the 2002 PRSP, contributed to a slowdown in growth and highlighted the vulnerability and dependence of Benin’s economy on cotton and trade relations with Nigeria. - Staff welcome the authorities’ resolve, reflected in their reform program and recent policy actions, to reverse these slippages and establish a strong basis for growth and poverty reduction. ### 2005-08 program objectives - The 2005-08 program aims to: - Correct the recent policy slippages and restore sound public finances. - Build on the recommendations of the ex post assessment of performance under Fund-supported programs and the thrust of the poverty reduction strategy. - Program focus areas: - (i) Reinforcing macroeconomic stability by conducting prudent economic and financial policies and strengthening public finances through greater revenue mobilization and fiscal adjustment. - (ii) Implementing an export-led development strategy to reduce vulnerability to external shocks and dependency on cotton and trade with Nigeria. - (iii) Deepening structural reforms to foster an environment conducive to private sector and trade development. - (iv) Achieving progress in the implementation of Benin’s poverty reduction strategy. ### Fiscal and monetary policy guidance - Strengthening public finances is intended to ensure debt sustainability while implementing the poverty reduction strategy, which includes objectives to improve access to basic education, primary health care, and safe drinking water through restructuring and increased public expenditure. - Increasing the tax-revenue-to-GDP ratio through: - Simplification of the tax system. - Extension of the tax base. - Reinforcement of tax and customs administration. - Government must avoid budgetary slippages, including those related to interventions in the cotton sector. - Essential actions: - Achieve better control and prevent repeated overruns of the wage bill. - Monetary policy at the regional and country levels should keep inflation moderate. ### Civil service arrears and fiscal sustainability - The government seeks to settle outstanding obligations to civil servants that accrued over the period 1987-2004. - Staff view settling these obligations as a threat to medium term fiscal sustainability unless addressed carefully. - Priority actions: - Produce an accurate estimate of the government’s liability. - Develop a settlement strategy that (i) preserves debt and fiscal sustainability, and (ii) is linked to progress in the implementation of civil service reform, including streamlining the civil service to permit competitive compensation while containing the wage bill. - Staff urges the authorities to take early actions, agreed with the World Bank, to address these issues. ### Poverty reduction strategy (PRSP) and budget alignment - The revision of the poverty reduction strategy and its related medium term expenditure framework should be initiated without delay. - Revision should draw on recent experiences in implementation and put a stronger emphasis on improving delivery of services to the population. - Closer integration of PRSP monitoring and evaluation with the policy cycle will contribute to greater alignment of the budget with the medium term expenditure frameworks and the PRSP within an integrated framework. ### Statistical system improvements - Macroeconomic management would benefit from improving the statistical system. - Staff places significant weight on improvement in monetary statistics, particularly: - Estimation of currency in circulation to allow for better analysis of recent developments and provide more appropriate support for monetary policy decisions at the country level. - Strengthening public finance data collection and reporting will improve transparency and promote good governance. ### Export-led development strategy and structural reforms - Success depends on implementing structural reforms to restore external competitiveness, especially in the cotton sector, and to lay the groundwork for private sector investment. - Priority: behind-the-border policies to promote and remove impediments to trade. - Envisaged reforms include strengthening the cotton sector, programmed reforms of the Port of Cotonou, and privatization of telecommunications and energy parastatals. ### Cotton sector recommendations - Government should disengage from direct productive activities, respect the recent sectoral agreement signed by all stakeholders, and strengthen the institutional framework. - Given foreseeable market developments, critical actions: - Speedy privatization of all commercial activities in the cotton sector. - Rapid improvement in the effectiveness of extension services to maintain the viability of cotton production in Benin. - Government needs to create a level playing field for private participants, raise market confidence, and lay the groundwork for higher productivity. ### Trade facilitation, EPZs, and relations with Nigeria - Authorities should use recommendations of the integrated framework initiative to facilitate and promote trade. - Benin could serve as a hub for Nigeria and the main transit point for international trade of landlocked neighboring countries. - Trade and trade-related services, such as transportation, could contribute to the acceleration of growth needed to reduce poverty and meet the Millennium Development Goals (MDGs; Table 10). - Efforts to restore and further develop trade relations with Nigeria should be actively pursued. - Caution on EPZs: establishment of EPZs could add to Benin’s difficulties in fighting corruption in customs without significantly improving export performance, and should thus be strictly ring-fenced. ### Port of Cotonou reform - Reform of the Port of Cotonou is a key element of the development strategy. - Easing the bottleneck created by inefficient harbor activities is a prerequisite for increased trade. - Specific measures envisaged in 2005 would improve efficiency and competitiveness of harbor operations and lay the groundwork for further port development with a larger private sector role in management. ### Telecommunications, energy, and utilities reform - Reforms in telecommunications and energy sectors would help restore economic competitiveness, improve service delivery, and reduce business costs. - Privatization of telecommunications and electricity parastatals should be accompanied by strengthening of regulatory frameworks to ensure reform success. - Restructuring of water, power, and telephone companies, including private sector participation in management, should help accelerate development of infrastructures to make basic services accessible to the population. *Source: _cr05288 - 47. Appropriate macroeconomic policies helped sustain Benin’s robust economic* ### 58. The authorities’ program represents a renewed commitment to recover lost ground ### The authorities’ program represents a renewed commitment to recover lost ground ### Program intent and staff view - The authorities’ program is presented as a renewed commitment to recover lost ground and establish a solid foundation for sustainable growth and poverty reduction. - The program is to be supported by the proposed PRGF arrangement and reflects renewed commitment to change, including strong prior actions. - The program offers a formal framework for policy decisions, particularly to manage the economy in the period preceding the presidential elections. - Staff believe the authorities’ adjustment and reform efforts deserve to be supported under the PRGF. - Footnote: The implementation of those measures was a condition for circulating the request for a new arrangement to the Executive Board. ### Proposed schedule of PRGF disbursements, 2005-2008 (Table 1) - Assuming access equivalent to 10 percent of quota, or SDR 6.19 million. - Disbursement schedule (Amount | Available Date | Conditions Necessary For Disbursement): - SDR 0.88 million | August 5, 2005 | Executive Board approval of the three-year Arrangement. - SDR 0.88 million | December 10, 2005 | Observance of performance criteria for September 30, 2005, completion of the first review under the arrangement. - SDR 0.88 million | June 10, 2006 | Observance of performance criteria for March 31, 2006, completion of the second review under the arrangement. - SDR 0.88 million | December 10, 2006 | Observance of performance criteria for September 30, 2006, completion of the third review under the arrangement. - SDR 0.88 million | June 10, 2007 | Observance of performance criteria for March 31, 2007, completion of the fourth review under the arrangement. - SDR 0.88 million | December 10, 2007 | Observance of performance criteria for September 30, 2007, completion of the fifth review under the arrangement. - SDR 0.91 million | June 10, 2008 | Observance of performance criteria for March 31, 2008, completion of the sixth review under the arrangement. - Other than generally applicable PRGF conditions, including the performance clause on the exchange and trade system, no additional conditions are listed. ### Indicators of Fund credit, 2004-15 (Table 2) - Outstanding Fund credit, end of period (SDR, in millions): 2004: 42.03; 2005: 37.83; 2006: 33.73; 2007: 30.12; 2008: 25.31; 2009: 19.01; 2010: 13.5; 2011: 9.4; 2012: 6.2; 2013: 3.8; 2014: 2.5; 2015: 1.3. - Based on outstanding credit at end-2004 (SDR, in millions): 2004: 42.03; 2005: 36.13; 2006: 30.12; 2007: 24.81; 2008: 19.21; 2009: 12.8; 2010: 7.4; 2011: 3.8; 2012: 1.3; 2013: 0.1; 2014: 0.0; 2015: 0.0. - Based on new PRGF arrangement (SDR, in millions): 2004: 0.0; 2005: 0.1; 2006: 1.8; 2007: 3.5; 2008: 5.3; 2009: 6.2; 2010: 6.2; 2011: 6.1; 2012: 5.7; 2013: 4.9; 2014: 3.7; 2015: 2.5; 2015: 1.3 (note: table entries shown as sequence). - Change in Fund credit outstanding: -4.2, -4.2, -3.6, -4.8, -6.4, -5.5, -4.1, -3.2, -2.4, -1.4, -1.1 (years 2005-2015). - Disbursements under PRGF arrangement: 1.8, 1.8, 1.8, 0.9, 0.0,... (2005 onward). - Repayments: -5.2, -5.9, -5.3, -5.6, -6.4, -5.5, -4.1, -3.2, -2.4, -1.4, -1.1. - Total debt service due to the Fund (before HIPC Initiative): 5.6, 6.3, 5.7, 6.0, 6.7, 5.8, 4.3, 3.5, 2.6, 1.6, 1.2. - Principal and interest breakdowns provided for multiple series (see table for exact annual figures). - Approved HIPC Initiative assistance entries: -0.8, -0.9, -0.9, 0.0,... (specific years shown). - Total debt service due to the Fund after HIPC Initiative: 4.8, 5.4, 4.8, 6.0, 6.7, 5.8, 4.3, 3.5, 2.6, 1.6, 1.2. - Net use of Fund resources after HIPC Initiative 2/: -3.0, -3.6, -3.0, -5.1, -6.7, -5.8, -4.3, -3.5, -2.6, -1.6, -1.2. - Memorandum items (selected): - Debt service to the Fund as percent of total public external debt service: 40.2, 38.9, 31.4, 35.9, 35.6, 27.9, 19.8, 14.5, 9.9, 5.3, 3.7. - As percent of exports of goods and services: 2.5, 2.7, 2.2, 2.2, 2.3, 1.8, 1.2, 0.9, 0.6, 0.3, 0.2. - Fund credit outstanding (percent of quota): 67.9, 61.1, 54.4, 48.6, 41.0, 30.7, 21.8, 15.2, 10.0, 6.2, 4.0, 2.1. - Benin's quota in the Fund: 61.9, 61.9, 61.9, 61.9, 61.9, 61.9, 61.9, 61.9, 61.9, 61.9, 61.9, 61.9. - U.S. dollars / SDR (end of period): 1.54, 1.52, 1.52, 1.52, 1.52, 1.52, 1.52, 1.52, 1.52, 1.52, 1.52. ### Main economic and financial indicators, 2002-08 (Table 3) — selected items - GDP at current prices (annual change in percent): 2002: 6.8; 2003: 5.7; 2004: 3.4; 2005: 5.8; 2006: 6.5; 2007: 7.3; 2008: 8.1. - GDP at constant prices (annual change in percent): 2002: 4.5; 2003: 3.9; 2004: 3.1; 2005: 3.9; 2006: 4.4; 2007: 5.1; 2008: 5.5. - Consumer price index (average): 2002: 2.4; 2003: 1.5; 2004: 0.9; 2005: 2.5; 2006: 2.5; 2007: 2.5; 2008: 2.5. - Production of cotton (in '000 of tons): 2002: 400.7; 2003: 337.5; 2004: 333.1; 2005: 425.0; 2006: 416.5; 2007: 437.3; 2008: 463.6. - Central government revenue (percent of GDP): 2002: 13.2; 2003: 10.2; 2004: 0.2; 2005: 11.8; 2006: 5.6; 2007: 9.4; 2008: 9.6. - Expenditure and net lending (percent of GDP): 2002: 8.2; 2003: 11.6; 2004: 0.7; 2005: 19.2; 2006: 3.8; 2007: 7.7; 2008: 8.5. - Gross investment (percent of GDP): 2002: 17.2; 2003: 19.6; 2004: 19.0; 2005: 20.3; 2006: 20.6; 2007: 21.0; 2008: 21.3. - Gross domestic saving (percent of GDP): 2002: 3.3; 2003: 6.7; 2004: 6.2; 2005: 7.6; 2006: 8.1; 2007: 9.0; 2008: 9.9. - Revenue (percent of GDP, central government): 2002: 16.3; 2003: 17.0; 2004: 16.4; 2005: 17.4; 2006: 17.7; 2007: 17.5; 2008: 17.8. - Expenditure and net lending (percent of GDP, central government): 2002: 19.5; 2003: 20.6; 2004: 20.1; 2005: 22.6; 2006: 22.1; 2007: 22.2; 2008: 22.2. - Overall fiscal deficit (payment-order basis, excluding grants, percent of GDP): 2002: -3.3; 2003: -3.7; 2004: -3.7; 2005: -5.3; 2006: -4.9; 2007: -4.6; 2008: -4.5. - Current account balance (percent of GDP): 2002: -8.4; 2003: -8.3; 2004: -8.0; 2005: -8.2; 2006: -8.7; 2007: -8.0; 2008: -7.5. - Debt-to-GDP ratio 4/: 2002: 42.8; 2003: 34.7; 2004: 32.4; 2005: 34.1; 2006: 34.3; 2007: 34.1; 2008: 33.7. - Gross reserves in months of imports: 2002: 8.8; 2003: 7.9; 2004: 6.1; 2005: 5.1; 2006: 4.5; 2007: 4.2; 2008: 4.0. - Nominal GDP (in billions of CFA francs): 2002: 1,956.7; 2003: 2,067.9; 2004: 2,138.2; 2005: 2,261.5; 2006: 2,408.7; 2007: 2,585.7; 2008: 2,794.6. - Population (midyear, in millions): 2002: 6.8; 2003: 7.0; 2004: 7.2; 2005: 7.4; 2006: 7.6; 2007: 7.9; 2008: 8.1. ### Balance of payments, 2002-08 (Table 4) — selected items - Trade balance (in billions of CFA francs): 2002: -239.7; 2003: -232.8; 2004: -243.3; 2005: -255.0; 2006: -274.1; 2007: -281.9; 2008: -293.2. - Exports, f.o.b. (in billions of CFA francs): 2002: 147.3; 2003: 168.1; 2004: 173.1; 2005: 185.7; 2006: 193.3; 2007: 212.9; 2008: 238.0. - Cotton and textiles: 2002: 99.3; 2003: 116.2; 2004: 114.2; 2005: 118.1; 2006: 115.0; 2007: 125.2; 2008: 139.8. - Other exports series listed (e.g., 48.0, 52.0, 58.9, 67.6, 78.3, 87.7, 98.1). - Imports, f.o.b. (in billions of CFA francs): 2002: -387.0; 2003: -400.9; 2004: -416.4; 2005: -440.8; 2006: -467.4; 2007: -494.8; 2008: -531.1. - Of which: petroleum products: -53.0; -61.9; -80.6; -95.3; -93.7; -92.2; -94.2 (2002-2008). - Services (net): -33.1; -32.9; -29.1; -30.9; -28.9; -27.0; -26.1. - Income (net): -18.1; -24.7; -22.0; -22.8; -25.7; -27.3; -28.2. - Interest due on government debt (component): -14.3; -11.3; -5.8; -5.0; -8.0; -9.1; -9.3. - Current transfers (net): 125.9; 117.7; 123.6; 124.3; 120.2; 129.0; 138.5. - Unrequited private transfers: 55.3; 50.8; 57.5; 58.7; 62.9; 67.4; 72.3. - Public current transfers: 70.6; 66.9; 66.1; 65.6; 57.2; 61.6; 66.3. - Of which: program grants: 3.7; 3.5; 14.8; 12.4; 0.0; 0.0; 0.0. - Current account balance (in billions of CFA francs): -165.0; -172.6; -170.9; -184.4; -208.5; -207.2; -208.9. - Capital account balance: 22.7; 103.2; 40.9; 53.2; 56.7; 60.8; 66.7. - Official project grants: 22.7; 35.6; 40.9; 53.2; 56.7; 60.8; 66.7. - Financial account (net): 71.5; -46.9; 76.3; 92.2; 91.9; 90.8; 99.8. - Overall balance (in billions of CFA francs): -70.9; -116.3; -53.6; -38.9; -60.0; -55.6; -42.4. - Financing gap: 0.00; 0.00; 0.01; 13.95; 0.15; 0.64; 7.4 (year-by-year entries shown). ### Consolidated central government operations, 2002-08 (Table 5) — selected items - Total revenue (in billions of CFA francs): 2002: 318.2; 2003: 350.7; 2004: 351.4; 2005: 392.8; 2006: 414.6; 2007: 453.6; 2008: 497.0. - Tax revenue: 282.5; 313.6; 311.4; 342.9; 369.9; 405.7; 445.4. - Tax on international trade: 145.9; 163.6; 155.9; 172.6; 185.8; 203.2; 222.8. - Direct and indirect taxes: 136.6; 150.0; 155.5; 170.3; 184.1; 202.5; 222.6. - Total expenditure and net lending: 382.1; 426.3; 429.5; 512.2; 531.8; 572.8; 621.6. - Current expenditures: 259.3; 287.2; 297.8; 345.8; 350.0; 374.3; 402.7. - Current primary expenditures: 243.7; 274.9; 290.8; 339.1; 341.8; 365.0; 393.3. - Wages: 90.1; 108.0; 118.3; 128.7; 136.4; 144.6; 154.8. - Pensions and scholarships: 21.5; 25.7; 26.7; 28.8; 30.9; 33.2; 35.9. - Interest: 15.5; 12.3; 7.0; 6.7; 8.2; 9.3; 9.4. - Capital expenditures and net lending (investment): 122.9; 139.1; 131.7; 166.4; 181.8; 198.5; 218.9. - Financed by domestic resources: 54.5; 71.8; 61.2; 73.1; 82.4; 91.9; 101.9. - Financed by external resources: 65.1; 69.3; 69.8; 93.3; 99.3; 106.6; 117.0. - Overall balance (payment order basis, excluding grants, in billions of CFA francs): -63.9; -75.7; -78.1; -119.4; -117.1; -119.2; -124.7. - Change in arrears: -6.7; -2.1; -8.5; -15.4; -15.0; -13.0; -13.0. - Overall balance (cash basis, excluding grants): -84.4; -76.4; -97.3; -138.8; -132.1; -131.7; -136.7. - Financing (total): 84.4; 76.5; 97.2; 124.9; 82.1; 81.1; 89.3. - Domestic financing: 11.4; -3.2; 2.4; 6.4; -7.7; -14.3; -16.6. - Net use of Fund resources: -6.8; -3.5; -2.8; -2.1; -2.7; -2.3; -3.6. - External financing: 73.1; 79.6; 94.8; 118.5; 89.8; 95.3; 105.9. - Project financing: 70.4; 69.3; 69.8; 93.3; 99.3; 106.6; 117.0. - Grants: 15.3; 31.9; 40.9; 53.2; 56.7; 60.8; 66.7. - Loans: 55.1; 37.4; 28.9; 40.1; 42.7; 45.8; 50.3. - Financing gap: 0.00; 0.00; 0.01; 13.95; 0.15; 0.64; 7.4. ### Monetary survey, 2000-05 (Table 6) — selected items - Net foreign assets (in billions of CFA francs): 2000: 352.7; 2001: 476.8; 2002: 426.7; 2003: 290.0; 2004: 244.2; 2005: 219.2. - BCEAO: 261.5; 371.2; 318.1; 218.8; 165.1; 140.1. - Banks: 91.2; 105.6; 108.6; 71.2; 79.1; 79.1. - Net domestic assets: 172.9; 115.7; 143.1; 207.3; 228.1; 280.3. - Domestic credit: 181.7; 133.4; 178.1; 251.0; 273.1; 325.3. - Net claims on central government: -12.3; -60.1; -46.5; -47.7; -38.8; -24.4. - Credit to nongovernment sector: 194.0; 193.5; 224.6; 298.7; 312.1; 349.8. - Broad money (M2) (in billions of CFA francs): 525.6; 592.5; 569.8; 497.3; 472.3; 499.5. - Currency: 211.2; 223.8; 170.9; 80.0; 35.0; 37.0. - Bank deposits: 308.3; 360.1; 391.9; 409.9; 429.2; 453.9. - Change in percent of beginning-of-period broad money: - Broad money (percentage change over beginning of period): 21.2; 12.7; -3.8; -12.7; -5.0; 5.8. - Velocity of broad money (GDP relative to average M2): 3.5; 3.3; 3.4; 3.9; 4.4; 4.7. - Nominal GDP (in billions of CFA francs): 1,679.7; 1,832.2; 1,956.7; 2,067.9; 2,138.2; 2,261.5. ### Compliance with WAEMU convergence criteria, 2001-08 (Table 7) — selected items - Basic fiscal balance (percent of GDP) primary criterion (≥ 0): 2001: 0.4; 2002: 0.1; 2003: -0.3; 2004: -0.4; 2005: -1.2; 2006: -0.7; 2007: -0.5; 2008: -0.3. - Inflation (annual average) (≤ 3.0 percent): 2001: 4.0; 2002: 2.4; 2003: 1.5; 2004: 0.9; 2005: 2.5; 2006: 2.5; 2007: 2.5; 2008: 2.5. - Total debt (percent of GDP) (≤ 70.0): 2001: 55.5; 2002: 42.8; 2003: 34.7; 2004: 32.4; 2005: 32.4; 2006: 34.1; 2007: 34.1; 2008: 33.7. - Nonaccumulation of domestic arrears (≤ 0.0, in billions of CFA francs): 2001: -6.7; 2002: -6.7; 2003: -2.1; 2004: -8.5; 2005: -15.4; 2006: -15.0; 2007: -13.0; 2008: -13.0. - Secondary criteria (selected): - Wage bill (percent of tax revenue) (≤ 35.0): 2001: 32.7; 2002: 31.9; 2003: 34.4; 2004: 38.0; 2005: 37.5; 2006: 36.9; 2007: 35.7; 2008: 34.7. - Domestically-financed investment (percent of tax revenue) (≥ 20.0): 2001: 22.4; 2002: 19.3; 2003: 22.9; 2004: 19.7; 2005: 21.3; 2006: 22.3; 2007: 22.6; 2008: 22.9. - External current account deficit excluding program grants (percent of GDP) (≤ 5.0): 2001: 6.4; 2002: 8.4; 2003: 8.3; 2004: 8.3; 2005: 8.0; 2006: 8.2; 2007: 8.7; 2008: 7.5. - Tax revenue (percent of GDP) (≥ 17.0): 2001: 13.5; 2002: 14.4; 2003: 15.2; 2004: 14.6; 2005: 15.2; 2006: 15.4; 2007: 15.7; 2008: 15.9. ### External debt sustainability framework and stress tests (Tables 8-9) — selected outcomes - Baseline external debt indicators (percent of GDP or exports) and alternative scenarios and bound tests are reported across 2004-24. - Selected baseline and alternative scenario highlights (excerpted values shown in tables): - Baseline NPV of debt-to-GDP and NPV of debt-to-exports series are provided for multiple years (see tables for year-by-year figures). - A2 (less favorable financing) shows higher debt ratios over 2004-23 versus baseline. - Bound tests include shocks: lower real GDP growth, lower export growth, adverse price/exchange rate changes, lower net non-debt-creating flows, combination shocks, and a one-time 30 percent nominal depreciation. - Memorandum item: Grant element assumed on residual financing 6/: 33 (applies to stress scenarios except A2). ### Millennium Development Goals performance (Table 10) — selected indicators - Goal 1: Eradicate extreme poverty and hunger - Population below US$ 1 a day (percent): 1990: 57.0; 2002: 43.0; 2015 Target: 28.0. - Prevalence of child malnutrition (percent of children under 5): 1990: 35.0; 1995: 29.2; 2001: 23.0; 2015 Target: 18.0. - Population below minimum level of dietary energy consumption (percent): 1990: 19.0; 2001: 13.0; 2015 Target: 10.0. - Goal 2: Achieve universal primary education - Net primary enrollment ratio (percent): 1990: 48.8; 1995: 59.7; 2001: 70.3; 2015 Target: 100.0. - Percentage of cohort reaching grade 5: 1990: 55.0; 1995: 60.9; 2001: 84.0. - Youth literacy rate (percent age 15-24): 1990: 40.4; 1995: 47.0; 2001: 54.3; 2002: 55.5. - Goal 3: Promote gender equality and empower women (targets unlikely) - Ratio of girls to boys in primary and secondary education (percent): 1990: 69.0; 2015 Target: 100.0. - Ratio of young literate females to males (percent ages 15-24): 1990: 43.6; 1995: 47.3; 2001: 52.0; 2015 Target: 52.9. - Proportion of seats held by women in national parliament (percent): 1990: 3.0; 1995: 7.0; 2001: 6.0; 2015 Target: 6.0. - Goal 4: Reduce child mortality (unlikely) - Under-five mortality rate (per 1,000): 1990: 185.0; 1995: 170.0; 2001: 158.0; 2015 Target: 61.7. - Infant mortality rate (per 1,000 live births): 1990: 111.0; 1995: 104.0; 2001: 94.0; 2002: 92.0. - Immunization against measles (percent of children under 12-months): 1990: 79.0; 1995: 65.0; 2001: 65.0. - Goal 5: Improve maternal health (unlikely) - Maternal mortality ratio (modeled estimate, per 100,000 live births): 1990: 547.0; 2001: 474.0; 2015 Target: 137.0. - Goal 6: Combat HIV/AIDS, malaria and other diseases - HIV/AIDS prevalence: 1990: 0.3; 1995: 3.2; 2001: 4.1; 2002: 1.9; 2015 Target: <6.0 (likelihood: Likely). - Prevalence of death associated with malaria (per 10,000): 1990: 21.0; 1995: 11.0; 2001: 6.8; 2002: 12.0. - Goal 7: Ensure environmental sustainability - Access to improved water source (percent of population): 1990: 54.0; 2002: 59.0; 2001: 61.0; 2015 Target: 27.0 (likelihood: Likely). - Likelihood of reaching specific targets is indicated in the table (e.g., Likely, Unlikely). *Source: International Monetary Fund staff report and associated tables in the provided document.* ### 1. The arrangement approved in July 2000 by the Executive Board of the International ### The arrangement approved in July 2000 by the Executive Board of the International ### Program expiry and new request - The arrangement approved in July 2000 by the Executive Board of the International Monetary Fund under the Poverty Reduction and Growth Facility (PRGF) in support of the economic reform policies of the government of the Republic of Benin expired on March 31, 2004. - The government of Benin requests a three-year arrangement under the PRGF in the amount of SDR 6.19 million. ### Principal challenges facing Benin - Ensuring sustainable, high economic growth by diversifying the economy and reviving the private sector. - Vulnerability to negative external shocks: - Significant drop in the international prices for cotton. - Nigeria’s intensification, from August 2003, of restrictions on trade with Benin. - Delays in implementation of structural reforms aimed at diversifying the economy and improving competitiveness. - Need for convincing results in the fight against poverty through higher growth and more resolute implementation of economic and social policies. - First annual report on progress made in 2003 in implementing the poverty reduction strategy (drawn up in September 2002) revealed a need for more strenuous efforts to stay on the path to the Millennium Development Goals by 2015. ### New program objectives and framework - The government drew up a new program of economic reforms for the three-year period beginning April 2005, aiming to restore sustainable, high growth in a stable macroeconomic environment and achieve tangible results in poverty reduction. - The principal components of the program are based on policies in the poverty reduction strategy paper (PRSP) of September 2002. - Memorandum on Economic and Financial Policies (MEFP) presents objectives and policies for the medium-term strategy and specifies objectives and measures for the first year of the program. - Government commits to provide IMF staff with required information and to consult with the IMF in accordance with Fund provisions and practices. ### Recent economic developments (2004) - Economic performance deteriorated in 2004: growth slowed, exports weakened, and fiscal revenues dropped forcing tighter fiscal policy. - Inflation: household consumer price index rising by about 1 percent on average. - Real GDP growth (preliminary estimate): 3.1 percent in 2004, compared with an average of 4.2 percent in the preceding two years and with the PRSP objective of about 6.5 percent. - Main causes of growth slowdown: - Drop in cotton fiber production linked to disorganization of the sector and failures to honor stakeholder provisions. - Border closings and intensification of trade restrictions imposed by Nigeria. - Loss of competitiveness of the port of Cotonou, and multiple roadblocks/highway controls deterring transit trade. - External current account deficit, excluding grants: deteriorated slightly to 8.7 percent of GDP in 2004. - Contributing factors: deterioration in trade balance (increased oil bill and stagnation of cotton exports) and minor reduction in public current transfers from reexportation activities. - Overall fiscal deficit (commitment basis, excluding grants): 3.7 percent of GDP, unchanged from 2003. - On a cash basis, the fiscal deficit worsened by 0.8 percent of GDP. - Government reduced other expenditures by about 0.3 percent of GDP while preserving priority poverty reduction spending. - Monetary aggregates: reporting difficulties due to technical problems estimating currency in circulation and BCEAO net foreign assets. - Money supply contracted by 5 percent in 2004 (per available data reflecting technical difficulties). - BCEAO net foreign assets contracted by CFAF 54 billion, or more than 2.5 percent of GDP. - Credit to the economy rose by 4.5 percent in 2004, against a 33 percent expansion in 2003. - Government’s credit position toward the banking sector continued to contract. - Banking system and prudential indicators: - Non-performing loans increased from 4.7 percent to 7.2 percent of private sector credit, reflecting problems at SONAPRA. - Continental Bank: government retains a 43 percent share and it continues to experience financial difficulties. - In 2004, two new banks were licensed; two institutions lost operating licenses and are in liquidation. - At end-December 2004: the national banking system consisted of nine banks and two nonbank financial institutions. - One bank remained under provisional receivership ordered by the Minister of Finance and the Economy. - Number of institutions subject to surveillance by the Banking Commission reduced from four to two. - Structural reforms and administration: - Sale of SONAPRA’s ginning plants was not completed though lots were awarded by bid. - Privatization of Bénin Télécoms S.A. (resulting from splitting OPT) continued to be delayed. - Strategy for privatizing SBEE was not adopted. - Action plan for enhancing competitiveness of the port of Cotonou (including creation of a “centralized clearing and invoicing center” and private sector participation) and its implementation calendar were not finalized. - Modernization of administration and civil service reform, including merit-based compensation, did not advance meaningfully in 2004. - Responsibility for managing personnel administration shifted from the Ministry of the Civil Service to the ministries in charge of education; a technical commission was created to integrate and coordinate administrative reforms. - Government continued to seek cooperation of social partners and World Bank support for wide-ranging reforms necessary for program budget functioning and management by objectives. ### Medium-term (2005-08) objectives - Program forms part of the PRSP adopted in September 2002; PRSP scheduled to be updated and a new PRSP prepared in 2006. - Program aims to: - Maintain a stable macroeconomic environment through prudent policies and fiscal consolidation. - Ensure economic recovery by improving competitiveness via wide-ranging structural reforms. - Gradually increase resilience to external shocks and expand the export base through diversification and export promotion. - Government targets: - Gradual resumption of growth with a target of 5.5 percent in real terms by 2008. - Keep inflation below 3 percent on average. - Contain the external current account deficit, excluding grants, to 7.4 percent of GDP by 2008. - Gradually reduce the burden of foreign debt as a percentage of GDP. - Prudent regional monetary policy should limit inflation to about 2.5 percent annually. ### Fiscal policy stance and targets - Fiscal policy aims: - Fiscal consolidation, increased support for PRS implementation, and a positive contribution to economic recovery. - Fiscal consolidation specifics: - Ensure fiscal policy and external public debt policy are sustainable and improve compliance with WAEMU fiscal convergence criteria. - Reduce the overall fiscal deficit to 4.5 percent of GDP and achieve a primary surplus (excluding externally financed investment expenditure) by 2008. - Intensify revenue mobilization by reforming the tax system and strengthening DGID and DGDDI. - Target tax effort of 17.8 percent of GDP by 2008. - Maintain overall expenditures at 22.2 percent of GDP by 2008. - Keep primary expenditures at 17.7 percent of GDP over the period 2006-08. - Financing gaps over 2006-08 projected to be about 2 percent of GDP, taking into account fiscal consolidation and strengthened government net credit position vis-à-vis the banking system. - Civil service obligations: - Government will assume responsibility for the financial impact of automatic promotions and advances of civil servants (payments suspended between 1987 and 1991 then gradually restored after 1992); obligations are being assessed and a strategy to eliminate them will be drawn up, taking financing constraints and poverty reduction strategy into account. - Medium-term budget program priorities: - Streamline expenditures and improve quality; implement PRS priorities. - Strengthen institutional capacity for budget preparation and programming; improve MTEF integration into government budget. - Budgetary expenditure program will favor priority sectors, notably social sectors. - Contain the wage bill at 5.6 percent of GDP. - Concentrate public investments on public services, basic infrastructure, education quality, access to primary health care, and effectiveness of the legal system. - Governance and anti-corruption: - Improve governance and intensify fight against corruption. - Strengthen public financial agencies, reform government contracting, modernize and manage civil service to improve transparency and governance. - Initiate tax system reform in 2006 to simplify and broaden the tax base, contributing to revenue objectives and private sector development; government seeks assistance from development partners, particularly the IMF. ### Structural reforms, competitiveness, and diversification strategy - Strengthen competitiveness of existing activities and implement economic diversification through expanded regional and international trade. - Focus areas: - Conclude structural reforms in the cotton sector. - Ensure lasting development of formal trade with Nigeria. - Complete reforms of transportation (including port of Cotonou), telecommunications, and energy sectors to improve competitiveness. - Strategy actions: - Identify growth sectors and implement an effective development strategy based on foreign trade; from 2005, strategy development will benefit from studies on competitiveness and integrating Benin into international trade. - Eliminate internal barriers to full participation in world trade by strengthening reforms (e.g., legal system reform). - Bolster reforms with a strengthened banking and financial sector, especially microfinance. - Anchor growth in sectors of competitive advantage; strengthen trade development strategy in light of prospects for accelerated integration into WAEMU and, gradually, ECOWAS. - Enhance competitiveness of the port of Cotonou via effective operation of the centralized clearing and invoicing center and expansion of activities. - Seek technical and financial assistance to modernize legal and regulatory environment for investment, transportation, trade, and other services to attract private investment and ensure accelerated economic growth. *Source: Memorandum on Economic and Financial Policies for 2005-2008 (Benin), July 21, 2005.* ### 15. The government believes that performance-based management requires appropriate ### _cr05288 - 15. The government believes that performance-based management requires appropriate ### Performance-based management and civil service reform - Government intends administrative reform focused on revamping civil service personnel regulations and developing performance-based compensation. - Seeks cooperation of all social partners to introduce performance-based management methods. - 2005 actions: - Adopt an action plan for 2005-07 consisting of a sustainable framework for a staff turnover strategy. - Finalize new civil service personnel regulations that introduce elements of performance-based management. ### Strengthening institutional capacity and statistics - Medium-term program objectives: - Strengthen government institutional capacity for development and monitoring of economic and financial policy and to ensure implementation of the poverty reduction strategy. - Enhance capacity of sector ministries to monitor and assess policy implementation. - Improve statistical systems for collecting and processing data to ensure availability of reliable and timely statistics for decision-making. ### Macroeconomic projections for 2005 (PRGF first year: April 1, 2005–March 31, 2006) - Economic growth for 2005 is projected at 3.9 percent. - Inflation for 2005 is projected at 2.5 percent. - External current account deficit (excluding grants) for 2005 is unchanged at 8.7 percent of GDP. - Factors influencing projections: - Buoyancy in secondary sector linked to strong rebound of cotton production. - Improved relations with Nigeria. - Gradual restoration of competitiveness of the port of Cotonou. - Recovery in construction, public works, telecommunications, trade, and transportation. - Expected stabilization of petroleum product prices and normal rains aiding food production. - Despite surpluses in financial and capital accounts, official reserves are expected to decline further in 2005. ### Public finance and fiscal reform - 2005 budget priorities aligned with poverty reduction strategy: increase use of program and unified budget approaches; improve revenue collection; prioritize social sectors and economic infrastructure; strengthen capacity for management and absorption of resources. - Budget pressures from: - Less favorable economic outlook. - Government decisions to protect cotton producers from price drops. - Increased compensation for some personnel. - Consolidation of public finances (clearance of utilities and telephone bills; recognition of debts from suspended promotions and advancements between 1987 and 1991). - Required measures: increase revenue and reduce expenditures by an amount equal to 1.1 percent of GDP to contain: - Narrow primary fiscal deficit at 0.9 percent of GDP. - Overall deficit (commitment basis, excluding grants) at 5.3 percent of GDP. - Adjustments adopted by the Council of Ministers on June 6, 2005. Revenue measures and administrative reforms: - 2005 budget law tax measures limited: extension of customs exemptions to farming equipment and machinery; downward revision of tax on wages and salaries. - Increase in total budget revenues to 17.4 percent of GDP, driven by strengthened tax administration and inclusion of exceptional revenues from settlement of cross debts with the water and electricity company. - Administrative measures to strengthen revenue collection: - Continue to strengthen the DGID, particularly the large enterprises directorate (DGE). - Expand computerization of medium-size enterprise centers (CMEs). - Introduce a new tax identification number and improve data sharing between DGDDI and DGID. - Tighten customs valuation controls and track exemptions by computer. - Step up calendar for establishing centralized clearing and invoicing center at the port of Cotonou. - Collect provider licensing fee of CFAF 5 billion each from mobile telephone companies, with payment spread over six years, and collect user fees and royalties for bandwidths and frequencies. Expenditure and fiscal figures for 2005: - Total expenditure and net lending expected to reach CFAF 512 billion, or 22.7 percent of GDP. - Wage bill allowed to reach CFAF 128.7 billion, or 5.7 percent of GDP. - Takes into account additional benefits to teachers and health personnel, new recruitment in social sectors, and wage adjustments to align civil servants with administrative positions. - Additional teachers and health care personnel to be recruited locally, using a portion of Heavily Indebted Poor Countries Initiative transfers. - Current expenditures excluding wage bill and educational grants/allowances will be nearly 25 percent higher than in 2004. - Transfers will increase by 31 percent in 2005, mainly because of subsidies to cotton producers. - Government assistance to cotton industry creates a charge of about CFAF 26 billion (1.2 percent of GDP), comprising: - A subsidy of about CFAF 19 billion to soften external price shocks and maintain producer prices. - A CFAF 6 billion subsidy to cover SONAPRA’s operating deficit for the 2004-05 crop year in the context of planned privatization of its ginning units by end-2005. - Other current transfers and expenditures will increase by 12 percent compared with 2004. - Domestically financed capital expenditure increase (including Administrative Services Capital Budget) limited to 9 percent. Wage arrears and controls: - 2005 budget incorporates allocation of CFAF 10 billion (about ½ of 1 percent of GDP) to allow payment this year of part of verified claims by regular government employees (active and retired). - Objective: liquidate obligations of less than CFAF 500,000 to each employee, or make partial payment of CFAF 500,000 to eligible employees whose back pay will exceed that amount. - Conditions on subsequent payments include: - Completion of assessment of government overdue wage debt. - Development of a plan to bring commitments in line with financial capacities. - Progress in implementing administrative reforms. - Ministry of Finance and Economy signed contract with audit firm to reconcile invoices of water, electricity, and telecommunications companies with actual government department consumption to contain expenditures. Financing gap and external support: - Government awaits concessional loans and grants to contain financing gap of CFAF 14 billion from consolidation operations. - Seeking CFAF 13 billion from the African Development Fund. - Budgetary assistance from France expected to provide CFAF 1 billion. Measures to strengthen fiscal management: - 2005 measures to: - Deepen budgetary reforms, particularly government procurement. - Extend coverage of SIGFIP (integrated budget management system) to externally financed expenditures and restore automatic expenditure control mechanisms. - Tighten control of financial and physical execution of infrastructure expenditures. - Controls over expenditures: - Expenditures without prior payment authorization must not exceed 10 percent of current appropriations for equipment, supplies, and transfers. - National Pension Fund (FNRB): - Expand actuarial study and decide on key measures to restore long-term financial equilibrium before December 2005. - Public accounts and audits: - Complete preparation of 2004 budget accounts and forward them to the audit office prior to end-2005. - Submit budget review laws for 2001 and 2002 to the National Assembly by end-December 2005. - Secretariat of the National Commission for Development and the Fight against Poverty (CNDLP): - Formalize methodology for collecting, processing, and presenting government finance statistics, including government financial operations table. - Assign three newly recruited professional staff to implement the methodology. ### Monetary policy and financial system - Monetary policy (BCEAO regional responsibility) aims to strengthen official reserves and maintain price stability. - Money supply growth could be about 6 percent in 2005. - Net domestic assets expected to increase by 19 percent in 2005, reflecting: - 12 percent increase in credit to the private sector. - Further steep decline in government deposits with the banking system equal to 37 percent, or 3 percent of the beginning money stock. - Financial sector strengthening: - Government to strengthen management of financing institutions per Banking Commission of WAEMU recommendations. - Closely monitor Continental Bank and propose a plan to sell government shares before end-2006. - Banking Commission to monitor observance of prudential ratios, especially equity capital. - For microfinance institutions, government to strengthen unit responsible for prudential oversight by end-2005 to improve monitoring of FECECAM and FENACREP. ### Structural reforms: privatization, port, and telecommunications - Reenergize structural reforms to restore conditions for strong, sustainable growth and significant poverty reduction; accelerate privatizations and promote private sector investment. - Port of Cotonou: - Government supporting improvements in port productivity and development strategy. - Centralized clearing and invoicing center to be established by Cosmos company under government contract; in operation by end-2005; will allow single invoicing for all port services. - Management of center to consist of general directorate accountable to a committee including representatives of all port operators. - Measures to reduce costs charged by public operators (PAC and SOBEMAP). - Autonomous port to request technical assistance from a port with recognized international reputation to improve competitiveness and develop expansion plan; terms of reference developed with World Bank technical assistance. - Proposal for program to develop port activities and boost productivity to be communicated to IMF staff before end of first PRGF review discussions. - Handling activities already open to private sector for containers will be completely deregulated by year’s end. - Government will draw up plan to strengthen SOBEMAP’s competitiveness. - Telecommunications: - Liberalization began with four mobile licenses without adequate regulatory framework. - Government did not renew contract with previous investment bank; requested World Bank technical assistance to hire new consultant to prepare regulatory and institutional framework. - World Bank assisted in short listing investment banks and drafting terms of reference. - Draft legislation and decrees governing sector to be adopted by Council of Ministers before October 31, 2005; draft legislation to be submitted to National Assembly for end-year session. - New regulatory framework expected to be in place before end-2005. - Bid documents for privatization of Benin’s Télécoms S.A. to be ready before end-2005; bidding begins in December 2005; bidder to be selected by June 2006 at the latest. - Telecommunications infrastructure development program designed to improve national coverage; work scheduled to align with entry of private operators into Bénin Télécoms S.A. capital in 2006. *Source: _cr05288 - 15. The government believes that performance-based management requires appropriate* ### 34. A plan to revive the financial activities of the postal service will be drawn up to ### _cr05288 - 34. A plan to revive the financial activities of the postal service will be drawn up to ### Postal service financial revival - A plan will be drawn up to revive the financial activities of the postal service to enable it to play its part fully in financial intermediation across the nation. ### Water, electricity, and SBEE privatization - With the help of the World Bank, the government will: - continue to strengthen the institutional and regulatory framework for water and electricity; - accelerate the privatization process. - With World Bank technical and financial assistance, the government intends: - to prepare for its withdrawal from the management of the SBEE; and - to launch an international call for bids for a strategic partner prior to end-2005. ### Privatization of cotton ginning plants (SONAPRA lots) - The government: - sent a letter to the successful bidders of the three lots of ginneries inviting them to resume privatization; - obtained confirmation of bidder interest and agreement to the terms of the specifications; - signed sales agreements committing the parties to completing the transfer of the cotton ginning facilities by October 31, 2005. - Sale price and adjustments: - The transaction will be concluded at the price agreed when the bids were awarded, adjusted for any depreciation of equipment and losses observed in the course of the joint inspection. - If a disagreement arises about the sale price, parties agreed to appeal to an independent expert and accept their estimate of the sale price. - Personnel and social plan: - Transfer of personnel will take place in accordance with the specifications accompanying the sale contracts. - The government has resumed negotiation of a social and reintegration plan for the remaining staff; Benin has asked its development partners to finance a portion of this plan. - Use of revenues from asset transfers (in order of priority): - (i) pay off the bridge loan of CFAF 20 billion that was not honored by SONAPRA and for which a government guarantee was activated; - (ii) settle SONAPRA’s obligations, in particular its 2005 operating deficit; - (iii) contribute to the social plan being negotiated. - Residual revenues will be used within the framework of the fiscal consolidation program, drawn up in consultation with the staff of the International Monetary Fund. ### Lot #3 (final lot) and 2005/06 cotton ginning - The government showed due diligence to resolve the legal dispute impeding lot #3 of the ginning plants managed by SONAPRA. - The government will decide before September 30, 2005, on its strategy for transferring these assets to the private sector. - In any event, the ginning of the 2005/06 cotton crop will be undertaken entirely by the private sector. ### Cotton sector reforms and Interprofessional Cotton Association (AIC) measures - Government objective: - Restore and maintain the integrated nature of the cotton sector in a context of private management. - For 2005/06 crop year aims: - Return accountability to industry players; - Guide return to the idea that the cotton sector should be independently managed; - Self-management implies abiding by the framework agreement signed at end-2004, contingent on industry principals: - (i) confirming the government’s policy of nonintervention; and - (ii) taking action to strengthen the industry’s institutional framework and operating efficiency. - AIC actions to strengthen sector management: - (i) strengthening the industry’s organizational structures; and - (ii) setting producer prices, with confirmation by the government. - Audit and pricing formula: - An audit of the bidding system for supplying sector inputs will be conducted; - A pricing formula (to be applied to the 2006-2007 crop) will be drawn up based on international prices (cotton fiber and seed cakes) using a mechanism that distributes gains and losses of overall industry operations among all participants. - The AIC will hire an independent consultant to conduct an audit of the operation of the bidding system for crop years 2003/04 and 2004/05. - The results of this audit will be communicated to the staff of the IMF before end-September 2005. - The AIC has requested technical assistance in developing the pricing formula. - Price stabilization mechanism: - The AIC and the government have appealed to Benin’s development partners for help in creating a price stabilization mechanism based on a jointly managed fund. - Initial financial support could be mobilized by the government from among its development partners. - Fund financing for operations will come from levies imposed on members when international prices exceed a certain threshold. - Established uses of funds will be rebates offered to producers when international prices fall below an agreed threshold. ### Governance and anti-corruption measures - The government prepared, in consultation with national stakeholders, a draft national strategy for the fight against corruption. - The government has adopted regulations for the organization of relations between government departments and users procedural manuals for government agencies. ### Prior actions for PRGF request circulation and program monitoring - Prior actions required for circulation of Benin’s PRGF request to the IMF Executive Board included: - (i) approval by the Council of Ministers of this memorandum of economic and financial policies; - (ii) approval by the Council of Ministers of budgetary restrictions supporting the budget program for 2005; - (iii) signing of a memorandum of understanding including a commitment to transfer ownership of SONAPRA’s ginning plants before October 31, 2005, between the government and each of the successful bidders on lots 1, 2, and 4; - (iv) launching of a limited competition to recruit an investment bank to handle the privatization of Bénin Télécoms S.A. and draw up of a regulatory framework for telecommunications, with the assistance of the World Bank; - (v) launching of a limited competition for the preparation of a development program to improve the productivity of the port of Cotonou, in consultation with the World Bank. - Status as of July 21, 2005: all these actions have been completed. - Program monitoring and reviews: - The government agreed with IMF staff on quantitative performance criteria and benchmarks (Table 1) and structural performance criteria and benchmarks (Table 2). - On a monthly basis, the government will provide the IMF with the statistical data and information listed in the attached technical memorandum of understanding. - During the program period, the government will not: - introduce restrictions on payments and transfers on current international transactions, or tighten any such restrictions, without the approval of the Fund; - introduce or modify multiple currency practices, conclude bilateral payments agreements not compatible with Article VIII of the IMF’s Articles of Agreement; - introduce or intensify restrictions on imports for the purpose of balance of payments. - Two program reviews with the Fund: - First review to be completed by end-December 2005; - Second review by end-June 2006. - The first review will reassess and establish quantitative and structural performance criteria and benchmarks for end-December 2005 and the remainder of the first year of the program. ### Quantitative performance criteria and indicative targets (Table 1 highlights) - Table 1 headings: Benin: Quantitative Performance Criteria and Indicative Targets for the period June 2005-December 2005 (In billions of CFA francs) - Selected values (cumulative from December 31, 2004): - Net domestic financing of the government 1/ 2/: End-December 2004 Actual: 11.0 ; End-September 2005 Program: 6.5 - Primary fiscal balance (excluding grants): End-December 2004 Actual: -12.5 ; End-September 2005 Program: -19.5 - Accumulation of domestic payments arrears: End-December 2004 Actual: 0.0 ; End-September 2005 Program: 0.0 - Memorandum items: - Budgetary assistance: End-December 2004 Actual: 30.6 ; End-September 2005 Program: 49.0 - Restructuring spending: End-December 2004 Actual: 6.0 ; End-September 2005 Program: 13.0 - Continuous quantitative performance criteria: - Accumulation of external payments arrears: 0.0 ; 0.0 - External debt contracted or guaranteed by government with maturities of 0-1 year: 0.0 ; 0.0 - Nonconcesional external contracted or guaranteed with maturities of over one year: 0.0 ; 0.0 - Indicative targets (Cumulative from december 31, 2004): - Total revenue: End-December 2004 Actual: 351.7 ; End-September 2005 Program: 276.3 ; End-December 2005 Program: 392.8 - Wage bill: End-December 2004 Actual: 118.3 ; End-September 2005 Program: 96.5 ; End-December 2005 Program: 128.7 - Adjustment rules for ceiling on bank financing: - The ceiling on bank financing will be adjusted pro tanto if the amount of disbursed budgetary assistance falls short of program forecast up to a limit of CFAF 7.5 and 15 billion at end-September and end-December, respectively. - If external budgetary assistance exceeds the amount projected in excess of more than CFAF 3 billion, the ceiling will be adjusted downward, by the excess disbursement beyond 3 billion, unless they are used to absorb domestic arrears. ### Structural performance criteria and benchmarks (Table 2 highlights) - Prior actions completed (selected): - Forwarding to Fund staff of the minutes of the Cabinet meeting approving the MEFP and 2005 budget spending adjustments — Completed - Signing by the government of memoranda of understanding with successful bidders on the three lots of ginneries providing for the transfer of plants by end-October — Completed - Launching, to a short list of investment bankers, of invitations to bid for advising in the preparation of the privatization of Benin telecoms SA — Completed - Preparation of terms of reference to conduct an audit, develop the productivity and expand the activities of the port of Cotonou; and launching of invitations to bid to a short list of firms — Completed - Structural performance criteria: - Start up the centralized clearing and invoicing management center of the port of Cotonou — End-December (status) - Structural benchmarks (selected with target dates): - Adoption of a strategy to divest the final lot of ginneries — End-September - Installation of the software for the centralized clearing and invoicing management center of the port of Cotonou — End-September - Approval of a strategy to divest Benin Telecoms SA and launching of invitations to bid for the implementation of the strategy — End-December - Transmittal to Fund staff of the proposed program to develop and expand the activities of the port of Cotonou — End-December - Launching of the invitation to bid for the implementation of the government strategy for divesting the SBEE — End-December - Transmittal to Fund staff of the report of government's debt vis-à-vis civil servants resulting from the past wage freeze and the accompanying plan to settle those obligations — End-December - Transmittal to the Audit Chamber of the relevant accounts of the 2004 budget; transmittal to the National Assembly of the settlement laws for the 2001 and 2002 budgets — End-December - Formalization and execution of the methodology for collecting, processing, and presenting government finance statistics, including the government financial operations table, and increased staffing of the permanent secretariat of the National Commission for Development and Fight Against Poverty (CNDLP) for effective implementation of the methodology — End-December ### Technical Memorandum of Understanding (high-level definitions and net domestic financing) - Purpose: - Defines quantitative and structural performance criteria and benchmarks for the PRGF-supported program and sets out frequency and deadlines for data reporting to IMF staff. - Government definition: - Government means the central government of the Republic of Benin and does not include local authorities, the central bank, or any other public entity with autonomous legal personality not included in the table of government financial operations (TOFE). - Debt and concessional borrowing definitions (high level; excerpts): - Debt: as set out in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Borrowing (Executive Board Decision No. 6230-(79/140), amended by Executive Board Decision No. 12274-(00/85) (8/24/00)), includes loans, suppliers’ credits, leases; debt is the present value (at inception of the lease) of all lease payments expected to be made during the period of the arrangement, excluding operation/repair/maintenance payments; arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. - External debt excludes treasury bills and bonds issued in CFAF on the regional financial market of the West African Economic and Monetary Union (WAEMU). - A loan is concessional if the present value to nominal value ratio is less than 65 percent (grant element exceeding 35 percent), using OECD CIRRs as reference rates; for debts with maturity exceeding 15 years, the ten-year OECD reference rate is used; for shorter maturities, the six-month market reference rate is used. - Ceiling on Net Domestic Financing of the Government—definition and calculation: - Net domestic financing is the sum of: - (i) net bank credit to the government (balance between liabilities and claims of government vis-à-vis the central bank and commercial banks); - (ii) net nonbank financing of the government, including proceeds from sale of government assets net of the cost of structural reforms to which these proceeds are earmarked; - (iii) government treasury bills issued in CFAF on the regional financial market of the WAEMU. - Net bank credit includes CFA franc cash balance, postal checking accounts, subordinated debt (obligations cautionnées), and all deposits with the BCEAO and commercial banks of public entities, except industrial or commercial public entities (EPIC) and public enterprises which are excluded. - Net bank credit and net amount of government treasury bills and bonds issued in CFAF in the regional market are calculated by the BCEAO; nonbank financing is calculated by the Beninese Treasury. - Adjustment rules for the ceiling on net domestic financing: - Ceiling will be adjusted if disbursement of external budgetary assistance (excluding IMF financing and HIPC assistance) net of debt service obligations (excluding IMF repayment obligations) and payments of arrears, exceed or fall short of program forecasts. - If disbursement in excess of more than CFAF 3 billion, ceiling adjusted downward pro tanto by the excess disbursement beyond CFAF 3 billion, unless used to absorb domestic arrears. - If at the end of each quarter disbursements are less than programmed amounts, the ceiling will be raised pro tanto by the amount of the shortfalls up to the limit (on a noncumulative basis) of CFAF 7.5 billion at end-September 2005, CFAF 15 billion at end-December 2005. - The amount of external budgetary assistance provided is calculated from end-December 2004 onward. - Budgetary assistance defined as grants, loans, and debt relief (excluding project loans and grants, IMF resources, and debt relief under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative)). *Source: Excerpt from IMF staff report and Technical Memorandum of Understanding, July 21, 2005.* ### 8. The ceiling on net domestic financing of the government is established as follows : ### _cr05288 - 8. The ceiling on net domestic financing of the government is established as follows : ### Net domestic financing of the government — ceiling - Ceilings: - CFAF 11.0 billion at end-September 2005 - CFAF 6.5 at end December 2005 - Classification: - The ceiling is a performance criterion as at end-September 2005 - The ceiling is an indicative target as at end-December 2005 ### Reporting requirement for domestic financing - Detailed data on domestic financing to the government, including a detailed list of the bank account balances of other public entities, will be transmitted on a monthly basis within the four weeks following the end of the month. - Definitive data will be provided within an additional four weeks after the provisional data have been reported. ### Narrow primary fiscal balance — definition - Defined as the difference between total budgetary revenues (tax and nontax) and the budgetary expenses, less interests on the debt and capital expenditure financed by foreign grants and net loans. ### Narrow primary fiscal balance — performance criterion - Ceilings: - A deficit not higher than CFAF 12.5 billion at end-September 2005 - A deficit not higher than CFAF 19.5 billion at end December 2005 - Classification: - The ceiling is a performance criterion as at end-September 2005 - The ceiling is an indicative target as at end-December 2005 ### Narrow primary fiscal balance — reporting requirement - Provisional data on the narrow primary fiscal balance, including data generated by the computerized budget management system (SIGFIP), will be transmitted on a monthly basis within the four weeks following the end of the month. - Definitive data will be provided within an additional four weeks after the provisional data have been reported. ### Accumulation of new domestic payments arrears on government obligations — definition - Domestic payments arrears on government obligations are defined as: - Outstanding debt owed by the government to residents due following the expiration of a 60-day grace period, unless specified otherwise, but not paid; - Any financial obligation of the government verified as such by the government (including any government debt). - The Caisse Autonome d’Amortissement (CAA-the government debt management agency) and the Treasury keep and update the inventory of domestic debt arrears on government obligations and maintain records of their payments. ### Accumulation of new domestic payments arrears — performance criterion - The government undertakes not to accumulate any new domestic payments arrears on government debt. - For obligations other than government debt, the government undertakes not to accumulate arrears beyond six months. - Monitoring: The non accumulation of domestic payments arrears will be monitored on a continuous basis throughout the program period. ### Accumulation of new domestic payments arrears — reporting requirement - Data on outstanding balance, accumulation, and repayment of domestic payments arrears on government obligations will be provided monthly within eight weeks following the end of each month. ### Nonaccumulation of external public payments arrears — definition - External public payments arrears are defined as the sum of external payments owed to non residents due and not paid on external liabilities of the government and on foreign debt held or guaranteed by the government. - The definition of external debt provided in paragraph 3 applies here. ### Nonaccumulation of external public payments arrears — performance criterion - Under the program, the government will not accumulate external payments arrears, with the exception of arrears arising from debt under renegotiation or being rescheduled. - Monitoring: The performance criterion on the nonaccumulation of external public payments arrears will be monitored on a continuous basis throughout the program period. ### Ceiling on nonconcessional external debt with a maturity of one-year or more newly contracted or guaranteed by the government — definition - Scope: - Applies to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Borrowing (Executive Board Decision No. 6230-(79/140), amended by Executive Board Decision No. 12274-(00/85) (8/24/00)). - Also applies to commitments contracted or guaranteed (including lease-purchase agreements) for which no value has yet been received. - Exclusions: - The definition of external debt excludes bonds issued in the regional market and disbursements under the PRGF arrangement. - Concept of “government” includes: - Government as defined in paragraph 2 - Public institutions of an administrative nature (EPA) - Public institutions of a scientific and/or technical nature - Public institutions of a professional nature - Local governments ### Ceiling on nonconcessional external debt — performance criterion - Nonconcessional external borrowing will be zero throughout the 2005/6 program. ### Ceiling on nonconcessional external debt — reporting requirement - Information on any borrowing (including terms of loans and creditors) contracted or guaranteed by the government shall be transmitted each month within four weeks following the end of the month. ### Ceiling on short-term external debt newly contracted or guaranteed by the government — definition - The definitions in paragraphs 18 and 19 also apply to this performance criterion. - Short-term external debt defined as debt with a contractual term of less than one year. - Import-related loans and debt-relief operations are excluded from this performance criterion. ### Ceiling on short-term external debt — performance criterion - The government will not contract, guarantee, or secure short-term nonconcessional external debt. ### Short-term external debt — stock as of end-2004 - As of December 31, 2004, the government of Benin has no short-term external debt. ### Quantitative indicators — floor on government’s revenues (definition and targets) - Definition: - Government revenues are those that appear in the government’s financial operations table (TOFE). - Indicative targets for total government revenues (cumulative since end-December 2004): - CFAF 276.3 billion at end-September 2005 - CFAF 392.8 at end-December 2005 - Reporting requirement: - The government shall report its revenues to IMF staff each month in the context of the TOFE and before the end of the following month. ### Quantitative indicators — ceiling on the wage bill (definition and targets) - Definition: - The wage bill includes all public expenditure on wages, bonuses, and other benefit or allowances granted civil servants employed by the government, the military, and other security forces, and includes expenditure with respect to special contracts and other permanent or temporary employment with the government. - Excludes salaries related to projects financed by foreign donors and transfers related to the salaries of the teachers at the level of local municipalities. - Indicative targets (cumulative amounts after end-December 2004): - Civil servant wage bill quarterly ceilings: - CFAF 96.5 billion at end-September 2005 - CFAF 128.7 billion at end-December 2005 - Reporting requirement: - The government shall report the wage bill to IMF staff each month in the context of the TOFE. ### Prior actions for circulation of the request for a new arrangement - Actions taken before circulation of the staff report: - Forwarding to Fund staff of the minutes of the Cabinet meeting approving the MEFP and 2005 budget spending adjustments - Signing by the government of memoranda of understanding with successful bidders on the three lots of ginneries proving for the transfer of plants by end-October - Launching, to a short list of investment bankers, invitations to bid for advising in the preparation of the privatization of Benin telecoms SA - Preparation of terms of reference to conduct an audit, develop the productivity and expand the activites of the port of Cotonou; and launching of invitations to bid to a short list of firms ### Structural performance criterion and benchmarks - Structural performance criterion: - Activating the centralized clearing and invoicing system of the port of Cotonou, before end-December 2005. - Structural benchmarks to be completed by end-September 2005: - Adoption of a strategy to divest the final lot of ginneries - Installation of the software for the centralized clearing and invoicing management center of the Port of Cotonou - Structural benchmarks to be completed by end-December 2005: - Approval of a strategy to divest Benin Telecoms SA and launch invitations to bid for the implementation of the strategy - Communication to Fund of the proposed program to develop and expand the activity of the Port of Cotonou - Launching of the invitation to bid for the implemenattion of the government strategy for divesting the SBEE - Transmittal to Fund staff of the report of government's debt vis-à-vis civil servants resulting from the past wage freeze and the accompanying plan to settle those obligations - Transmittal to the Audit Chamber of the relevant accounts of the 2004 budget; transmittal to the National Assembly of the settlement laws for the 2001 and 2002 budgets - Formalization and execution of the methodology for collecting, processing, and presenting government finance statistics, including the government financial operations table, and increased staffing of the permanent secretariat of the National Commission for Development and Fight Against Poverty (CNDLP) for effective implementation of the methodology ### Other data requirements for program monitoring — public finance - The government will provide: - Detailed monthly revenue and expenditure estimates, including social expenditures, payments on arrears, and HIPC Initiative-related expenditure - Monthly data on domestic financing (bank and nonbank) of the budget (including government bonds held by the nonbank public), transmitted on a monthly basis within four weeks of the end of each month - Data on the implementation of the development budget, with detailed information on the sources of financing, transmitted on a quarterly basis within 4 weeks of the end of each quarter ### Other data requirements — monetary sector - Monthly data to be provided within eight weeks of the end of the month: - The consolidated balance sheets of deposit money banks, and the individual bank balance sheet, as needed - The monetary survey - Lending and deposit rates - The standard bank supervision indicators for banks, as well as those for nonbank financial institutions and for individual institutions, as needed ### Other data requirements — external sector - Data to be provided within 12 weeks of the end of each quarter: - Export and import price and volume data - Other balance of payments data, including data on services, private transfers, official transfers, and capital account transactions ### Other data requirements — real sector - The government will provide: - Monthly disaggregated consumer price indices will be transmitted on a monthly basis within two weeks of the end of each month - Any revisions to the national accounts data will be transmitted within eight weeks of the date of revision ### Other data requirements — structural reforms and documentation - The government will provide: - Documentation of all decisions, laws, decrees, orders, and circulars undertaken by the government pertaining to the economy of Benin will be submitted within ten days of publication - All studies and research papers related to the economy of Benin will be submitted within two weeks of publication *Source: _cr05288 - 8. The ceiling on net domestic financing of the government is established as follows :* ### 1. Benin’s poverty reduction strategy paper (PRSP), finalized in December 2002, was ### _cr05288 - 1. Benin’s poverty reduction strategy paper (PRSP), finalized in December 2002, was ### Overview - PRSP finalized in December 2002 and discussed at the Bank and Fund Boards in March 2003. - PRSP provides a framework for aligning donor assistance programs, including those of the Bank and the Fund, with Benin’s poverty reduction efforts. ### IMF role and PRGF - 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 essential 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 program focus - Public expenditure management reform is a major focus of the Bank’s assistance program. - Bank activities include: - Strengthening provision of basic social services (education and health). - Pursuing divestiture programs in utility and infrastructure sectors. - Enhancing competitiveness of the cotton sector. - Technical and financial assistance in collaboration with the Fund and other donors. ### IMF–World Bank collaboration - Joint support for Benin’s PRSP and the HIPC Initiative increased Bank–Fund collaboration. - Bank and Fund teams closely coordinate policy advice and structural conditionality. - In general: - The Bank leads policy dialogue on key structural reforms, with strong focus on public expenditure management. - The Fund leads policy dialogue on macroeconomic issues, particularly fiscal elements. ### Areas in which the Bank leads - Divestiture program and private sector development: - Supported privatization through the Private Sector Development Project and the now-closed Transport Sector Project. - Remaining enterprises to be privatized: SONAPRA (cotton parastatal), OPT (telecommunications), SBEE (water and electricity distribution), and the Autonomous Port of Cotonou (PAC). - Energy Services Delivery Project: - Approved by the Bank’s Board on July 6, 2004. - Privatization of the electricity branch of SBEE 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 strategy for private sector participation in PAC management. - Service delivery reforms: - Improving access to basic social services is one of four main PRSP pillars. - Health and basic education received increased budget allocations in the medium term expenditure framework (MTEF). - Bank supported reform programs via investment projects closed in the past three years. - Continued engagement via Poverty Reduction Support Credits (PRSCs). - Key policy measures implemented as conditions for reaching the enhanced HIPC Initiative completion point in March 2003. - First and second PRSCs presented to the Bank’s Board in March 2004 and June 2005, respectively. - Bank leads multisector response to HIV/AIDS based on government framework covering 2000-05 (adopted December 2000); Bank HIV/AIDS project approved January 2002. - Poverty monitoring: - PRSP action plan to establish a reliable income-poverty database in 2003 using a revised methodology. - Bank provides technical support for this action plan and other poverty diagnostics, including: - Poverty and social impact analysis (PSIA) of cotton sector reform (prepared by IDA with the government). - Poverty Assessment (PA), released in June 2004. - Poverty Assessment was disseminated in conjunction with the PRSP in December 2004 with Bank assistance. - Bank advises on strengthening institutional arrangements for poverty monitoring and evaluation. - Cotton sector reforms: - Cotton accounts for around 80 percent of Benin’s export earnings in recent years. - Sector reforms since early 1990s: eliminated SONAPRA’s monopsony in marketing, liberalized input supply, opened sector to private ginners. - Bank Board approved Cotton Sector Reform Project in 2002 to support consolidation of reforms. - Bank assisted in defining regulatory framework for the sector, adopted at end 2004. ### Areas in which the Bank and Fund share the lead - Public expenditure management reform: - Bank’s Public Expenditure Reform Adjustment Credit (PERAC) and Supplemental Credit (both closed) supported a reform launched in 2001. - PERAC aimed to enhance effectiveness and poverty focus of public expenditure. - Achievements reported in the 2004 PER include: - Finalization of an MTEF on the basis of the PRSP. - Completion of a performance-based budget cycle. - Delegation of spending authority to line ministries. - Introduction of a computerized budget implementation system. - Improvements in reporting on and auditing government accounts. - Fund supported these reforms via financial and structural benchmarks in the PRGF. - Fiscal policy and fiduciary framework: - Fiscal consolidation was a key objective of the Fund-supported PRGF. - Bank focuses on inter- and intrasector allocations, particularly 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 through AAA work: update of CPAR, CFAA, and governance and anti-corruption survey. - PRSC-2 supports a comprehensive public procurement reform action plan addressing main weaknesses identified in the 1999 CPAR. - Poverty reduction strategy: - Bank and Fund jointly assisted the government in PRSP preparation. - PRSP discussed at Bank and Fund Boards in March 2003 alongside a joint staff assessment. - Both institutions will jointly advise on refinement, implementation, monitoring, and evaluation. - Bank and Fund staffs helped finalize the second annual PRSP progress report: - Formally transmitted in April 2005. - Circulated to Bank and Fund Boards in June 2005. - Bank supported a detailed PRSP dissemination action plan targeting line ministries, the National Assembly, civil society, and the private sector. - Debt sustainability: - Bank and Fund jointly supported the government’s effort to reach the HIPC Initiative completion point in March 2003. - Bank and Fund staffs updated debt sustainability analysis with authorities. - Authorities need a prudent external financing policy to maintain debt sustainability after enhanced HIPC relief. - Bank and Fund will continue dialogue and advise on strengthening domestic debt-management capacities. - Civil service reform and devolution policy: - Bank provided major technical assistance for design of civil service promotion and compensation reform. - Fund included structural measures in ESAF and PRGF to implement the reform. - A key measure—the 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 closely monitors fiscal implications. - Bank conducted two analytical pieces on public administration reform and decentralization to inform dialogue. - Financial sector policy: - Fund supported efforts to strengthen the financial sector, focusing on ensuring banks meet the Regional Banking Commission’s prudential ratios. - Reform includes divestiture of the state-owned Continental Bank and rehabilitation of microfinance institutions. - Bank support to two major microfinance institutions through the Private Sector Development Project. - Financial sector review completed and report 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 supported this program through macroeconomic policy dialogue, technical assistance, and, until March 2004, the PRGF framework. - 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 portfolio - Country Assistance Strategy (CAS): - Discussed at Bank Board on July 3, 2003. - Objective: help Benin reverse limited or no poverty reduction amid relatively robust growth. - Priorities: deepen cotton sector reforms, diversify the economy, advance social-sector outcomes, build responsive public institutions, promote gender equality, and strengthen collaboration with private sector and civil society. - Supports implementation and refinement of the PRSP and is aligned to the four PRSP pillars. - Enforces gradual shift toward programmatic lending initiated under interim CAS (I-CAS) approved January 2001. - Annual single-tranche PRSCs envisaged as a key vehicle for Bank support. - First PRSC presented to Bank’s Board in March 2004; second PRSC presented in June 2005. - Donor coordination: - PRSP preparation fostered collaboration with development partners and civil society. - Some donors (European Union, African Development Bank, Switzerland, Denmark, and the Netherlands) preparing budget support operations aligned with PRSP and coordinated with PRSC preparation. - Lending portfolio (In million of U.S. dollars, as of June 15, 2005): - Labor Force Development — Effectiveness 3/13/01 — Principal (IDA) 5.0 — Disbursed (IDA) 4.7 - Private Sector — Effectiveness 8/31/00 — Principal (IDA) 30.4 — Disbursed (IDA) 23.8 - Cotton Sector Reform — Effectiveness 9/12/02 — Principal (IDA) 18.0 — Disbursed (IDA) 7.9 - HIV/AIDS Multisector — Effectiveness 7/17/02 — Principal (IDA) 23.0 — Disbursed (IDA) 16.9 - Energy Service Delivery — Effectiveness 4/25/05 — Principal (IDA) 45.0 — Disbursed (IDA) 1.4 - National CDD — Effectiveness 5/2/05 — Principal (IDA) 50.0 — Disbursed (IDA) 1.7 - PRSC-2 — Effectiveness Not yet effective — Principal (IDA) 30.0 — Disbursed (IDA) - - Total — Principal (IDA) 201.4 — Disbursed (IDA) 56.4 - Portfolio totals and CAS targets: - As of June 15, 2005: - Bank lending portfolio consisted of seven operations with a net commitment of US$201.4 million and an undisbursed balance of US$111.9 million. - CAS determined lending volume for FY04 - FY06: US$200 million. - A large part of IDA financing (US$85 million) has been channeled through PRSCs. - Nonlending objective: help government strengthen sector-wide expenditure programs to consolidate programmatic support and build capacity for preparing, implementing, and monitoring these programs. ### Statistical issues (As of end-June, 2005) - Core statistical indicators generally provided to the Fund on a timely basis, but weaknesses remain in national accounts, public finance, monetary statistics, and balance of payments. - Benin adopted the General Data Dissemination System (GDDS) in January 2001; sectoral metadata initially posted September 2001 and due to be updated. - STA technical assistance (funded by the Japanese government) offered to WAEMU members to implement statistical improvement plans. - A Fund regional statistical advisor initiated a government finance statistics assistance program, now managed by AFRITAC West. - A real sector statistics improvement program, in collaboration with AFRISTAT and initiated May 2002, is being implemented. - National accounts: - Benin’s national income accounting system is based on the System of National Accounts 1968 (1968 SNA). - In 2003, INSAE changed the base year for agricultural output accounting and included consumption of fixed capital assets in public administration accounts. - Under the GDDS project for AFRITAC West, a statistical register and industrial production index are being developed; missions scheduled to assist implementation of the 1993 SNA. - Price statistics: - Since January 1998, Benin has been producing the WAEMU harmonized consumer price index (CPI), in compliance with WAEMU standards. - Public finance statistics: - Monthly government finance statistics compiled by the Ministry of Finance with a one- to three-month lag, based on budget, customs, tax, and treasury directorates. - Monthly reconciliation prepared between 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). *Prepared by World Bank Staff; questions may be asked to Mr. David Craig, Country Director for Benin, ext. 32589; or Ms. Nancy Benjamin, Country Economist for Benin, ext. 30189.* ### 5. Benin’s monetary statistics are compiled and disseminated by the regional Central ### _cr05288 - 5. Benin’s monetary statistics are compiled and disseminated by the regional Central ### Monetary statistics — compilation, problems, and planned improvements - Responsibility: - Benin’s monetary statistics are compiled and disseminated by the regional Central Bank of West African States (BCEAO). - Main measurement problem: - Difficulties in estimating currency in circulation for individual member countries, partly because of delays in processing cash in its vaults. - Currency issued in a country of the WAEMU can circulate in any other member country; the country of emission can be identified on BCEAO banknotes. - Currency in circulation in a given country is estimated as the currency issued in that country minus the currency issued in that country that is in the vaults of the various national agencies of the BCEAO. - Because stocks of currency in national agencies’ vaults are not sorted continuously, the central bank applies sorting coefficients (established in 1990) to these stocks to evaluate amounts of currency issued by each country. - These estimated amounts are used to estimate currency in circulation and adjust net foreign assets of each member country. - Specific issue for Benin: - The sharp downward trend in currency in circulation (and net foreign assets) in Benin since 2001 would reflect a breakdown of the methodology (obsolete sorting coefficients) and the absence of sorting of banknotes by Benin for the past few years, which has resulted in a large stock of unsorted banknotes in Benin. - Evidence that this problem persisted for Benin for data through November 2004 prompted AFR and STA to draft a joint letter to the Governor of the BCEAO requesting: - an analysis of developments in currency-in-circulation and net foreign assets, and - a description of measures being undertaken to improve the situation. - Regional technical engagement and agreed comprehensive plan (missions and seminar): - A monetary and financial statistics mission visited the BCEAO headquarters in Dakar in May 2001. - STA participated in a BCEAO-sponsored seminar on monetary statistics in April 2003. - A comprehensive plan to improve monetary statistics in the BCEAO area was agreed with the 2003 mission, which included: - (i) completion of sectorization of the institutional units and classification of financial instruments, - (ii) expansion of the coverage of other depository corporations to the microfinance institutions, - (iii) compilation of a new monetary aggregate, M3, and a liquidity aggregate, - (iv) reclassification of SDR allocation from foreign liabilities to share and other equity, - (v) reduction of the stock of unsorted notes and improvement of the compilation of currency in circulation, - (vi) improvement in the structure of monthly returns of commercial banks, - (vii) reinforcement of the measures to ensure that the commercial banks comply with the official 30-day deadline for submitting accurate monthly returns, - (viii) reduction of time lag of the central bank’s balance sheet, - (ix) strengthening of staff and data processing resources for monetary and financial data collection and compilation in all National Directorates and the BCEAO headquarters, - (x) design of a system to compile flow data for the central bank and the commercial banks, and - (xi) adoption of the new framework of the MFSM for the compilation and presentation of monetary data. ### Balance of payments — responsibilities, recent improvements, and remaining weaknesses - Institutional responsibility: - Since December 1998, responsibility for compiling and disseminating balance of payments statistics has been formally assigned to the BCEAO by area-wide legislation adopted by WAEMU countries. - The national agency of the BCEAO in Cotonou is responsible for compiling and disseminating Benin’s balance of payments statistics. - The BCEAO headquarters in Dakar delineates methodology and calculates international reserves managed on behalf of participating countries. - Progress and timing: - Data consistency has significantly improved over the past few years, with a full transition to the Balance of Payments Manual, Fifth Edition (BPM5). - Technical assistance by STA (statistical advisor posted at BCEAO headquarters in Dakar from July 1996 through July 1999) contributed to improved yearly balance of payments reporting for 1996-2001; with a backward revision of data to 1988, a consistent series was created. - The BCEAO national agency disseminates balance of payments statistics with a seven month lag, exceeding GDDS guidelines. - The BCEAO compiles and disseminates annual international investment position data with an 18-month lag. - Trade data system: - The ASYCUDA customs computer system was upgraded in 1999, and its installation in all main border customs houses is being completed; this should allow for better monitoring of import data. - Remaining data weaknesses and needs: - Services and transfers (especially workers’ remittances) need improved reporting through intensified contacts with reporting bodies; authorities’ commitment to strengthen human and technical resources should be enhanced. - Financial account: - Foreign assets of the private nonbanking sector are still not well covered, especially assets of WAEMU residents, which are obtained through partial surveys. - The organization of an annual, exhaustive survey for reporting foreign direct investment transactions in Benin is still at a very preliminary stage. - BCEAO recently updated the compilation system for commercial banks’ reporting on payments involving nonresidents; these data are not used to produce annual balance of payments estimates but are used to assess existing information. - Findings from the November 11-23, 2004 technical assistance mission to Cotonou: - Lack of human resources at the national agency of the BCEAO, but a well developed and consistent reporting system. - Trade in goods and recording of informal transactions: statistical adjustments to Customs data appear methodologically sound, but the hypotheses and reference bases are largely untested. - Other current account weaknesses: - Transport services: exports seem largely underestimated. - Public current transfers: receipts have an opposite bias. - Financial account weaknesses: - Coverage of direct investment is poor. - The issue of unsorted banknotes significantly impacts compilation of net external assets in Benin’s balance of payments and international investment position. ### Poverty data - Major methodological weaknesses remain regarding poverty data: - Concerns about treatment of the nonfood expenditure share in calculation of the poverty line. - Concerns about division of Benin into 12 agro-ecological zones. - Concerns about comparability of poverty statistics across urban and rural areas and across time. - Authorities’ response: - The authorities are implementing an action plan to address these methodological issues. ### External debt — recording and management - Institutional responsibility: - The Caisse Autonome d'Amortissements (CAA) is responsible for signing international loan agreements, maintaining the debt database, and servicing the government's external debt obligations. - Systems and coverage: - Since 1995, the CAA has been using the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) to record and manage the debt. - For the majority of creditors, the CAA's database is fairly comprehensive and up-to-date, containing 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. ### Benin: Table of Common Indicators Required for Surveillance (selected timing and frequency notes) - As of July 15, 2005: - Exchange Rates: Current; Frequency of Data: D; Frequency of Reporting: D; Frequency of Publication: M. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: latest observation 10/04; Date received 1/10/05; Frequency: M. - Reserve/Base Money: latest observation 3/05; Date received 6/1/05; Frequency: M. - Broad Money: latest observation 3/05; Date received 6/1/05; Frequency: M. - Central Bank Balance Sheet: latest observation 3/05; Date received 6/1/05; Frequency: M. - Interest Rates: latest observation 6/05; Date received 7/05/05; Frequency: M. - Consumer Price Index: latest observation 05/04; Date received 07/04; Frequency: M. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: latest observation 03/04; Date received 06/04; Frequency: M; Frequency of Publication: A. - External Current Account Balance: latest observation 12/03; Date received 06/04; Frequency: A. - Exports and Imports of Goods and Services: latest observation 12/03; Date received 06/04; Frequency: A; Frequency of Reporting: Q. - GDP/GNP: 2003; Date received 06/04; Frequency: A. - Gross External Debt: 2003; Date received 06/04; Frequency: M; Frequency of Publication: A. - Definitions/legends provided in the table (select): - 1 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. - 2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. - 3 Foreign, domestic bank, and domestic nonbank financing. - 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. - 5 Including currency and maturity composition. - Frequency codes: Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA). ### IMF press release — PRGF arrangement and recent economic assessment - Press Release No. 05/190 — FOR IMMEDIATE RELEASE August 5, 2005: - IMF Executive Board approved a three-year arrangement for Benin under the Poverty Reduction and Growth Facility (PRGF) in an amount equivalent of SDR 6.19 million (about US$9.1 million). - The first disbursement under the arrangement will amount to the equivalent of SDR 0.88 million (about US$1.3 million). - Benin reached the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative in March 2003, receiving total debt relief of about US$265 million. - The last three-year arrangement under the PRGF expired on March 2004 with the full amount drawn. - Quoted assessment by Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair: - The Beninese authorities’ prudent macroeconomic policies can be credited for a decade of sustained economic growth and low inflation. - Since 2003, adverse external developments, budgetary slippages, and delays in implementing key structural reforms contributed to a weakening in economic performance. - Authorities adopted a new economic and financial program to strengthen economic performance, implement an export-led development strategy, reduce vulnerability to shocks, deepen structural reforms to foster private sector development, and reduce poverty. - Fiscal policy aims at correcting recent budgetary slippages, strengthening public finances, ensuring debt sustainability, and implementing the poverty reduction strategy. - Authorities’ decision to limit the deterioration of the 2005 fiscal deficit is described as promising. - Key policy priorities highlighted: - raising the revenue-to-GDP ratio through better tax administration, - restructuring expenditure towards the social sectors, - settlement of wage liabilities from past delays in aligning civil servants’ pay with grade-based wages, accompanied by civil service reforms to enhance fiscal sustainability through greater control of the wage bill, - further improvements in public expenditure management to enhance transparency and governance in public finances, - strengthening the cotton sector and removing key impediments to growth, - sustained reform efforts to stimulate private sector growth and improve the business environment, particularly in transportation infrastructure, telecommunications, and energy. - Specific 2005 cotton sector measures: - government will withdraw from productive and commercial activities in the sector, - take steps to strengthen the sector’s institutional framework. - Medium-term prospects: - Implementation of a strategy to promote and facilitate trade, benefiting from recommendations of a recent diagnostic trade integration study. - Overall competitiveness and the business environment expected to improve with strengthened governance and envisaged reforms of telecommunications, energy, the Port of Cotonou, and the transportation sector. - PRGF loan terms: - annual interest rate of 0.5 percent, - payable over 10 years with a 5½-year grace period on principal payments. ### Annex — Recent economic developments (selected) - Context and trends: - Benin experienced a decade of good economic performance through the early 2000s, but poverty reduction remains a concern. - Deteriorating external environment and domestic policy slippages in the budget and structural reforms led to weakened economic performance after 2002. - The economy is vulnerable to external shocks because of dependence on the cotton sector and trade with Nigeria. - 2004 outcomes: - Economic performance weakened in 2004, with growth slowing to about 3 percent. - Inflation remained low, at 2.6 percent by year-end. - A decline in manufacturing, including cotton ginning, and an intensification of trade restrictions in Nigeria led to: - a slowdown in economic activity, - a deterioration of the external current account deficit, - a loss of government revenues. - Progress on the structural front was uneven, with minor advances in privatization and cotton sector reform. - Policy decisions (civil service wages settlement and a subsidy to farmers because of the fall in world cotton prices) resulted in a weak underlying fiscal situation in 2005. - 2005 program orientation: - The program for 2005 aims at a modest economic recovery, reflecting an economic environment that remains difficult. - Fiscal policy will tighten through adjustment measures. *Source: IMF staff report excerpts and IMF Press Release No. 05/190 (August 5, 2005).* ### 2.1 percent of GDP will partially offset past budgetary slippages and limit the deterioration of the ### _cr05288 - 2.1 percent of GDP will partially offset past budgetary slippages and limit the deterioration of the ### Program overview and objectives - 2.1 percent of GDP will partially offset past budgetary slippages and limit the deterioration of the narrow primary deficit to 0.9 percent of GDP. - The new PRGF arrangement aims to: - strengthen macroeconomic stability; - implement an export-led development strategy to reduce vulnerability to shocks; - deepen structural reforms to foster private sector development; - achieve progress in implementing the poverty reduction strategy. - The authorities’ reform plan emphasizes macroeconomic stability, reforms to promote strong growth and diversification, and a restructuring of public expenditure to support poverty reduction. ### Fiscal stance, near-term measures, and targets (2005) - For the remainder of 2005 the authorities will take measures equal to 1.1 percent of GDP to increase revenue and reduce expenditure. - Targeted fiscal outcomes for 2005: - narrow primary fiscal deficit: 0.9 percent of GDP; - overall deficit: 5.3 percent of GDP. - Revenue target for 2005: at least 17.4 percent of GDP (this integrates the settlement receipt of the electricity company). - Total spending and net lending for 2005 expected to attain 22.7 percent of GDP. - Measures to improve revenue and administration: - introduction of a new taxpayer identification number; - improved computerization of customs and the taxpayer unit; - strengthened monitoring and control of tax exemptions. - Consolidated Central Government operations for 2005 show a financial gap of CFAF13.9 billion to be financed from multilateral and bilateral sources rather than domestic borrowing. - Expected reduced domestic contribution: 0.6 percent of GDP. ### Structural reforms and privatization agenda - Priority sectors for structural reforms: - cotton sector (completion of cotton sector reform; planned privatization of at least 10 ginning plants; transfer of SONAPRA’s ginneries to the private sector; introduce a transparent and flexible price system); - Port of Cotonou (strengthen management and pave way for private sector participation); - telecommunications and electricity parastatals (privatization to be completed by end-2005). - Public sector management reforms: - strengthen fiscal management and civil service reform; - reactivate automatic controls of expenditures through SIGFIP (integrated computerized management system); - improve fiscal transparency, reporting quality, and timeliness. - Trade facilitation measures to restore competitiveness: - reduce transportation costs; - facilitate access to land; - improve domestic regulations governing services; - streamline private sector environment. - Parliament expected to pass export-processing zones (EPZ) legislation as soon as possible. ### Recent developments, vulnerabilities, and external sector - Recent performance and shocks: - economic growth in 2004: about 3.1 percent (from 3.9 percent in 2003); - inflation in 2004: 2.6 percent. - Adverse external shocks: drop in international cotton prices and restrictions on exports to Nigeria. - Exports to Nigeria include informal reexports of about 7 percent of GDP; Nigeria’s 2003 ban on 44 imported items from Benin led to a decline of exports to Nigeria. - Measures taken with Nigeria: - April 2005 trade agreement allowing in Nigeria only goods of Beninese origin and banning reexports goods; - May 2005 Joint Committee on Commerce established to monitor and improve trade relations. - External balances (program projections): - external current account deficit (excluding grants) projected around -8.7 percent to -8.0 percent of GDP over projection period, with target to reduce external current account deficit to about 7 percent of GDP by 2008. - Reserves and debt indicators (conclusion highlights): - NPV of the debt-to-exports ratio projected to remain below 150 percent and decline over the projection period, conditional on adequate international environment and donor grants; - public debt in terms of GDP projected to be about 34 percent over the three years of the new program. ### Medium-term goals, social spending, and financing - Medium-term macroeconomic objectives (next three years): - achieve an annual growth rate of more than 4 ½ percent; - contain inflation at a very low level; - reduce external current account deficit to about 7 percent of GDP by 2008. - Cotton production target: about 600,000 tons of raw cotton within the three-year period. - Investment and spending composition: - two thirds of the increase in investment to be directed to infrastructure and social sectors; - current spending projected to attain 14 ½ of GDP; - capital expenditure to stabilize around 8 percent of GDP; - wage bill containment targeted at 5.7 percent of GDP while making room for increased social and priority sector spending. - Budget support expectation: 6 percent of GDP in the form of concessional loans and grants. - Debt sustainability policy: aim to eliminate the fiscal primary deficit within 2008 while revenue will increase slightly; maintain debt sustainability in the range of 140 percent (NPV debt-to-exports context). ### Risks, challenges, and authorities’ requests - Key risks and challenges: - high dependence on cotton exports and vulnerability to international price shocks; - trade shocks from Nigeria affecting informal reexports (~7 percent of GDP); - potential worsening of debt burden under adverse macroeconomic shocks, notably lower export growth. - Authorities’ conclusions and request: - Benin requests a three-year PRGF arrangement with low access; - calls for strong international community support to achieve the program’s projected goals; - notes eligibility for 100 percent multilateral debt cancellation as decided by the G-8, which could further help achieve the MDGs. *Source: Statement by Damian Ondo Mañe, Executive Director for Benin; IMF staff report and projections as presented in the source document.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05288.pdf_