## _cr07217 ## Source details **Canonical URL:** [_cr07217](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07217.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07217.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07217.pdf.json) --- ### Executive Summary - SMP duration: nine-month SMP (October 2006–June 2007). - Real GDP: estimated growth 2 percent in 2006; projected 3 percent in 2007. - Current account deficit: about 6 percent of GDP (2006). - Broad money growth: 22 percent in 2006. - Inflation: fell to 2¼ percent in the 12 months to February 2007. - Revenues: exceeded the end-2006 SMP target by ¾ percent of GDP. - Domestic primary deficit 2006: contained at 1 percent of GDP (program ceiling 1¾ percent). - 2007 budget target: reduce primary fiscal deficit to ½ percent of GDP. - Election costs: recently estimated at 1½ percent of GDP; budgeted CFAF 5 billion; cap on total adjustor CFAF 12 billion. - Program prospects: successful SMP performance could pave the way for a PRGF arrangement later in the year; large external arrears remain an obstacle. ### Political and program context - Parliamentary elections envisaged for summer 2007; seen as critical for resumption of large-scale donor support. - EU signaled readiness to finance a large part of the election costs. - Authorities agreed to strengthen monitoring of budget execution, reduce reliance on exceptional payments, and backload nonpriority spending to ensure electoral costs, timely payment of salaries, and clearance of SOTOCO’s arrears ahead of planting season. - TMU amend: adjustor raises net domestic financing ceiling and lowers domestic primary fiscal balance floor by amount of fiscal spending on elections above budgeted CFAF 5 billion not financed through grant disbursements by end-June 2007, subject to cap CFAF 12 billion. ### Recent macroeconomic developments and SMP performance - Real GDP drivers 2006: improved political climate and dynamism in trade-related services; offset collapse of cotton sector and daily electricity outages. - Money and credit: - Broad money grew 22 percent in 2006. - Inflows boosted banking system’s net foreign assets but did not translate into higher domestic credit. - Fiscal performance: - All quantitative SMP targets through February 2007 were met. - Domestic primary deficit 2006: 1 percent of GDP. - Revenues benefited from stronger tax and customs administration and a large exceptional profit transfer from the BCEAO. - Domestic arrears were reduced for the first time in years. - Structural benchmarks: all met through February 2007; some reforms (e.g., computerization of customs, completion of strategic audits) show delays and are in progress. ### Near-term risks and election-related financing - Program risks high before elections; disruption could jeopardize economic confidence and donor support. - Election organization costs: 1½ percent of GDP; financing mostly expected from donors; delays in grant disbursements could open temporary SMP financing gap. - Authorities’ agreed measures: strengthen budget monitoring, reduce exceptional payments, backload nonpriority spending. - TMU adjustor details: see above under political context. ### Monetary and banking sector developments and policies - BCEAO observation: rapid monetary expansion in 2006 was channeled into net foreign assets rather than domestic credit. - Policy stance: authorities judged monetary tightening premature but agreed to monitor money growth, prices, and lending practices. - Reserve requirements: staff noted increase in reserve requirements may become appropriate if money growth fuels inflation or imprudent lending. - Banking sector weaknesses: - Several banks severely undercapitalized, primarily due to NPLs to cotton and phosphate sectors. - One large bank faces recurring liquidity problems, posing grave macroeconomic risks. - Togolese banks have the highest NPL ratio in the WAEMU area. - Government took over NPLs of about 4 percent of GDP in 2004–06, reducing sector NPL ratio from 42 to 28 percent. - Three banks remain severely undercapitalized; one bank’s liquidity remains below BCEAO minimum reserve requirement. - Restructuring: - IMF technical assistance mission, with World Bank and regional Banking Commission, prepared plan to strengthen and restructure three banks. - Authorities pledged to implement restructuring strategy consistent with WAMU Banking Commission recommendations. - Restructuring costs: one bank would require annual budget costs estimated at about ½–¾ percent of GDP over five to eight years. - Staff recommendation: BCEAO to take corrective action if monetary boom begins to fuel inflation or imprudent lending. ### State-owned enterprises and energy sector - SOTOCO audit: preliminary findings point to pervasive commercial and financial mismanagement, large financial losses, mounting debts, including arrears to cotton farmers. - Authorities’ pledges on SOTOCO: - (i) repay remainder of these arrears by June 2007; - (ii) strengthen financial controls after 2005 senior management replacement; - (iii) complete financial and strategic audits as soon as possible; - (iv) initiate broader restructuring strategy for the cotton sector, ideally with World Bank assistance. - Phosphate sector: authorities intend to audit and seek a new strategic investor once legal settlement with current investor is reached. - Energy sector constraints: - Daily power outages disrupting most sectors. - Regionwide shortages reduced exports of electricity from Côte d’Ivoire and Ghana to CEB. - Interconnection with Nigeria’s grid and improved hydropower during rainy season are short-term relief; long-term solution requires regionwide upgrading of capacity. - Government exploring private investor options including linking to planned Nigeria-Ghana gas pipeline. - Intergovernmental meeting identified large financing needs to cover CEB losses. ### External competitiveness, traditional exports, and constraints - Traditional exports cotton and phosphates have all but collapsed due to terms of trade shocks, failed sector policies, and losses/arrears of public monopolies. - Competitiveness hampered by real exchange rate appreciation, decaying infrastructure, and poor business environment. - REER: staff find little evidence of significant exchange rate misalignment; REER tracked regional average and is 15 percent below pre-1994 devaluation level. - Goods and services deficit rise since 2003 largely due to higher oil prices and lower cotton exports; over half financed by short-term capital inflows. ### Debt, arrears, and debt sustainability analysis (DSA) — key figures - Public debt: 103 percent of GDP at end-2006; about one-third in arrears. - Public sector debt (selected years, percent of GDP): - 2006: 102.9 - 2017: 123.6 - 2027: 141.8 - Public sector debt (US$): public sector debt including arrears estimated at US$2.3 billion as of end-2006 (102.9–103 percent of GDP). - External debt: US$1.8 billion (81 percent of GDP) as of end-2006. - Arrears at end-2006: about $105 million (World Bank arrears); EU/EIB arrears about $20 million; AfDB arrears about $15 million. - IMF debt: US$8.2 million as of end-2006; IMF debt current. - DSA indicators (no-reform scenario highlights): - NPV of debt to GDP (2006 Est.): 65.6; (2027 Proj.): 52.6. - NPV of debt to exports (2006 Est.): 162.1; (2027 Proj.): 133.3. - NPV of debt to revenue (2006 Est.): 387.9; (2027 Proj.): 329.5. - Debt service to exports (2006 Est.): 7.1; (2027 Proj.): 8.3. - Debt service to revenue (2006 Est.): 16.9; (2027 Proj.): 20.4. - DSA conclusion: debt unsustainable in no-reform scenario; could become sustainable with reforms, fiscal adjustment, and comprehensive debt relief (HIPC/MDRI) per reform scenario. ### Medium-term scenarios — selected time series (exact values preserved) - No-reform scenario (Real GDP percent change; GDP deflator; Nominal GDP in CFAF billions; selected entries 2006–10): - Real GDP (percent change): 2.0, 2.1, 1.7, 1.7, 1.7 - GDP deflator (percent change): 2.1, 2.0, 1.8, 1.8, 1.8 - Nominal GDP (CFAF billions): 1,158.8, 1,206.8, 1,249.4, 1,293.5, 1,339.2 - Investment (percent of GDP): 13.0, 12.5, 12.3, 12.3, 12.3 - Public investment (percent of GDP): 3.6, 3.4, 3.3, 3.3, 3.3 - Savings (percent of GDP): 7.0, 6.1, 6.1, 5.6, 5.0 - Total revenue and grants: 18.3, 17.5, 17.0, 17.0, 17.0 - Overall balance: -2.8, -3.6, -4.8, -5.1, -5.2 - Current account balance: -6.0, -6.4, -6.2, -6.7, -7.3 - External public debt: 80.5, 79.3, 78.9, 78.8, 78.7 - External arrears: 25.6, 27.4, 29.4, 31.3, 33.0 - External assistance (gross; excl. debt relief): 2.2, 2.8, 2.5, 2.5, 2.5 - External debt service due: 2.6, 2.6, 3.0, 2.9, 2.9 - Reform scenario (Real GDP percent change; GDP deflator; Nominal GDP in CFAF billions; selected entries 2006–10): - Real GDP (percent change): 2.0, 2.9, 3.5, 4.0, 4.0 - GDP deflator (percent change): 2.1, 2.0, 2.0, 2.0, 2.0 - Nominal GDP (CFAF billions): 1,158.8, 1,216.3, 1,284.0, 1,362.1, 1,444.9 - Investment (percent of GDP): 13.0, 13.7, 17.0, 19.1, 20.7 - Public investment (percent of GDP): 3.6, 3.6, 5.6, 6.5, 7.1 - Savings (percent of GDP): 7.0, 7.3, 10.7, 12.9, 15.0 - Total revenue and grants: 18.3, 19.0, 20.2, 21.3, 22.3 - Overall balance: -2.8, -2.5, -2.6, -2.2, -1.8 - Domestic primary balance: -1.1, -0.4, 0.1, 0.6, 0.9 - Change in domestic arrears: -0.4, 0.0, -0.5, -0.5, -0.5 - Current account balance: -6.0, -6.4, -6.3, -6.2, -5.7 - External public debt: 80.5, 72.3, 68.2, 65.0, 38.8 - External arrears: 25.6, 0.0, 0.0, 0.0, 0.0 - External assistance (gross; excl. debt relief): 2.2, 3.8, 4.6, 5.3, 5.9 - External debt service due: 2.6, 2.6, 1.3, 0.9, 0.9 ### Medium-term fiscal strategy and external assistance targets - Authorities’ fiscal intentions: - Raise fiscal revenues to about 18 percent of GDP in 2010, based on administrative reforms that could boost revenues by about ½ percentage point of GDP per year. - Reallocate domestically financed expenditures toward health, education, and infrastructure; total reallocation about 3 percentage points of GDP in 2006–10 within a stable domestic primary spending envelope of about 17 percent of GDP. - 2007 budget first step: reduce nonpriority spending by about 1 percentage point of GDP. - Target primary fiscal surplus of about 1 percent of GDP by 2010 (from deficit of 1 percent of GDP in 2006). - External assistance benchmarks: - Raise external assistance to regional average of 6 percent of GDP by 2010 (adds another 4 percent of GDP for priority spending). - Ensure at least two-thirds of foreign aid disbursed in grants rather than loans to support deficit reduction from 2¾ percent of GDP in 2006 to 1¾ percent in 2010. - Staff estimate: debt relief would reduce annual external debt service from over 2½ percent of GDP in 2006 to about 1 percent of GDP from 2010 onwards. ### Stress tests, vulnerabilities, and reversion risks - Main finding: Debt may revert to an unsustainable path in case of a permanent reversal in fiscal/economic reforms or a permanent economic shock without adequate policy response. - Stress-test examples and outcomes: - Bound test B5 (one-off 30 percent public debt increase): leads to gradually rising debt over long term. - Severe output shock (bound test B1): two successive years of real GDP growth set at 5½ percentage points below trend causes public debt share of GDP to increase and not revert to a lower level. - B4 (net non-debt-creating flows shock): a debt-financed shortfall in private transfers/FDI totaling about 20 percent of GDP over two years can push NPV of external debt above the relevant threshold before reverting. - Selected debt indicators (sensitivity tables, exact figures preserved in source): - NPV of public sector debt (percent of GDP): 2006 87.9; 2017 106.5; 2027 113.9. - Gross financing need (percent of GDP): 2006 5.9; 2017 8.4; 2027 8.7. - NPV of public sector debt-to-revenue ratio (percent): 2006 520.1; 2017 667.5; 2027 713.9. - Debt service-to-revenue ratio (percent): 2006 15.4; 2017 22.8; 2027 25.0. - Primary deficit that stabilizes debt-to-GDP (percent of GDP): 2006 0.6; 2017 1.7; 2027 2.1. ### Structural reform agenda and medium-term priorities - I-PRSP pillars: (i) political and economic governance; (ii) structural reforms; (iii) social reforms. - Priority actions highlighted: - Reallocate fiscal spending to education, health, and infrastructure. - Resolve energy crisis and upgrade public infrastructure. - Develop the financial sector and restructure ailing banks. - Improve regulatory and legal environment to attract FDI. - Reform state-owned enterprises (cotton and phosphate): clear arrears to cotton farmers; audits of SOTOCO; seek strategic investor for phosphate sector. - Increase agricultural productivity and rural infrastructure. - Prepare costed reform measures and prioritize sequencing. - Medium-term growth drivers and requirements for sustained ~4 percent real GDP growth: - Higher foreign direct investment. - Greater availability of credit to the private sector. - Upgrade of public infrastructure, particularly energy. - Implementation of governance and structural reforms in the I-PRSP. - Threefold increase in external assistance (to regional average); HIPC/MDRI debt relief; fiscal adjustment and reduction of nonpriority spending. ### Banking sector and financial sector reform specifics - Restructuring plan: three undercapitalized banks account for about 60 percent of private sector deposits. - Two banks relatively easy to restructure. - One bank requires significant governance changes and large state capital injection (annual budget cost about ½–¾ percent of GDP over five to eight years). - Agreed broader reforms: - Restructure and privatize state-owned banks. - Improve legal environment: property registration, arbitration, contract enforcement, collateral recovery. - Develop microfinance for SMEs and households. - Increase liquidity and depth of primary and secondary securities markets. - Staff and Directors urged urgent implementation of WAMU Banking Commission and IMF TA recommendations. ### Data, statistical capacity, and monitoring shortfalls - Data weaknesses: - National accounts compiled by extrapolating 1993 comprehensive exercise; annual GDP compiled with six-month delay. - CPI uses 1996 weights; coverage limited to Lomé. - Balance of payments underestimates services and remittances; compiled with six-month delay and revised twice a year. - Monthly TOFE sent with two-month lag; fiscal data quality weak; inconsistencies in domestic arrears records. - Monetary data reported by BCEAO with two-month lag. - Table of Common Indicators: latest observations include Nominal GDP (2006) 1,158.8 (CFAF billions); Gross international reserves (months of imports) 2006 2.9. - Authorities requested IMF technical assistance to upgrade national accounts, balance of payments, and monetary and fiscal data; mission recommended establishing real-time budget execution monitoring. ### Program risks, conditionalities, and PRGF prospects - Near-term risks: - Elections and associated fiscal pressures (donor shortfalls, spending overruns, activity slowdown). - Implementation slippage in SMP structural benchmarks pre-election. - Possible disruption of election process undermining donor reengagement. - Fragile banks with potential regional spillovers. - PRGF prospects: - PRGF-supported program could start in second half of 2007 subject to: (i) fully satisfactory SMP performance; (ii) understandings on arrears clearance with official creditors and financing assurances from donors; (iii) an agreed medium-term reform strategy based on the I-PRSP. - Arrears clearance needs: EU grants could help clear EIB arrears about $20 million; AfDB arrears about $15 million; World Bank arrears about $105 million requiring exceptional treatment. - Staff appraisal recommendations: - Contain fiscal pressures before elections by strengthening spending controls, improving budget monitoring, and backloading nonpriority expenditures. - Pursue fiscal adjustment, structural reforms in tradables, and secure higher external assistance and debt relief to achieve sustainability. - Urgently strengthen and restructure ailing banks; monitor money growth and consider raising reserve requirements if warranted. - Prepare action plan and identify TA needs for statistical capacity improvements. *Source: IMF staff report content (Content unit: _cr07217).* ### Executive Summary ...................................................................................................... ### Executive Summary ### Political and program context - Over the past 12 months, Togo has embarked on major political and economic reforms; a central goal is to end the socio-political crisis by holding free and transparent parliamentary elections for the first time in decades. - Economic policies are monitored under a nine-month SMP (October 2006–June 2007). - The parliamentary elections are envisaged for the summer of 2007 and are seen as critical for the resumption of large-scale donor support. - The EU has signaled readiness to finance a large part of the election costs. ### Recent macroeconomic developments and SMP performance - Real GDP grew an estimated 2 percent in 2006, driven by an improved political climate and dynamism in trade-related services that offset the collapse of the cotton sector and daily electricity outages. - Real GDP growth is projected at 3 percent in 2007, driven by higher public investment, a rebound in cotton production, and continued strong growth in services related to regional trade. - The current account deficit rose modestly to about 6 percent of GDP, reflecting higher oil prices and lower cotton exports. - Broad money grew 22 percent in 2006; these inflows boosted the banking system’s net foreign assets but did not translate into higher domestic credit. - Inflation fell to 2¼ percent in the 12 months to February 2007, aided by moderated food prices. - Fiscal policy improved markedly in the second half of 2006; all quantitative SMP targets through February were met. - Revenues exceeded the end-2006 SMP target by ¾ percent of GDP, reflecting stronger tax and customs administration and a large exceptional profit transfer from the BCEAO. - The domestic primary deficit for 2006 was contained at 1 percent of GDP, below the program ceiling of 1¾ percent, and domestic arrears were reduced for the first time in years. - The 2007 budget aims to reduce the primary fiscal deficit to ½ percent of GDP, representing an underlying fiscal adjustment of about 1 percent of GDP (net of one-off revenues from the BCEAO windfall in 2006); the adjustment relies on a sharp reduction in discretionary spending and reforms to minimize the use of exceptional spending procedures. - All structural benchmarks under the SMP through February 2007 were met; some reforms (e.g., computerization of customs, completion of strategic audits) show delays and are in progress. ### Near-term risks and policy measures ahead of elections - Program risks are high in the run-up to the elections; disruption of the election process would jeopardize economic confidence and donor support. - Election organization costs were recently estimated at 1½ percent of GDP; while most financing is expected from donors, delays in grant disbursements would open a temporary financing gap under the SMP. - The authorities agreed to strengthen monitoring of budget execution, reduce reliance on exceptional payments, and backload nonpriority spending to ensure resources for electoral costs, timely payment of salaries, and clearance of SOTOCO’s arrears to cotton farmers ahead of the planting season. - The authorities and staff agreed on an adjustor to accommodate domestic bridge financing of election costs: the TMU was amended to include an adjustor that raises the net domestic financing ceiling and lowers the domestic primary fiscal balance floor by the amount of fiscal spending on the organization of the elections above the budgeted CFAF 5 billion that is not financed through grant disbursements by end-June 2007, subject to a cap on total adjustment of CFAF 12 billion. ### Monetary and banking sector developments and policies - The BCEAO noted that the rapid monetary expansion in 2006 had been channeled into net foreign assets rather than domestic credit, and the authorities judged monetary tightening to be premature while agreeing to monitor money growth, prices, and lending practices. - Staff noted that an increase in reserve requirements, in line with WAMU policies, may become appropriate if high money growth started to fuel inflation or imprudent lending practices. - Several banks are severely undercapitalized, primarily reflecting nonperforming loans to the troubled cotton and phosphate sectors; one large bank faces recurring liquidity problems, posing grave macroeconomic risks. - An IMF technical assistance mission, in consultation with World Bank experts and the regional Banking Commission, prepared a plan to strengthen and restructure three banks; the authorities pledged to implement a restructuring strategy consistent with WAMU Banking Commission recommendations. - The mission urged the BCEAO to take corrective action if the ongoing monetary boom began to fuel inflation or imprudent lending practices. ### Medium-term challenges, reform priorities, and external assistance - Togo’s central medium-term challenge is to revive economic growth after 25 years of decline. - Authorities stressed that ending the political crisis and reengaging with donors will be critical to advance growth-oriented reforms, including: - Reallocating fiscal spending toward education, health, and infrastructure; - Resolving the energy crisis; - Developing the financial sector; - Improving the regulatory and legal environment. - To boost competitiveness within the existing exchange rate regime, authorities plan productivity-enhancing reforms; staff find little evidence that Togo’s exchange rate is significantly misaligned. - Reducing external imbalances will require fiscal adjustment and removal of infrastructure and regulatory bottlenecks. - Fiscal adjustment, higher external assistance, and debt relief will be required to achieve fiscal and debt sustainability; authorities plan to increase revenues and reallocate spending to secure a small primary surplus in the medium term. - HIPC and MDRI debt relief would help bring debt to a sustainable level; authorities stressed that a large increase in external assistance will be needed to implement the I-PRSP. ### Program prospects - Successful performance under the SMP could pave the way for a PRGF arrangement later this year, but Togo’s large external arrears remain a significant obstacle. *Source: Executive Summary (IMF).* ### 13. The mission urged the authorities to accelerate reforms of state-owned ### 13. The mission urged the authorities to accelerate reforms of state-owned enterprises. ### State-owned enterprises: findings and authorities’ commitments - Preliminary findings of SOTOCO’s financial audit point to pervasive commercial and financial mismanagement across all layers of the company, leading to large financial losses and mounting debts, including arrears to cotton farmers. - Authorities pledged to: - (i) repay the remainder of these arrears by June 2007 to restore confidence; - (ii) strengthen financial controls, following the replacement of SOTOCO’s senior management in 2005; - (iii) complete the financial and strategic audits as soon as possible; and - (iv) initiate work on a broader restructuring strategy for the cotton sector, ideally with World Bank assistance. - Authorities also intend to audit the phosphate sector and seek a new strategic investor once a legal settlement with the current investor is reached. ### Energy sector: constraints on growth - Consensus that the deepening energy crisis is the most important obstacle to economic growth. - Daily power outages are disrupting most sectors, including telecommunications. - Regionwide power shortages have sharply reduced exports of electricity from Côte d’Ivoire and Ghana to the Benin-Togo energy company (CEB), two countries with little generation capacity and high production costs. - An intergovernmental meeting identified large financing needs to cover the losses of CEB. - Short-term relief factors: - Recent interconnection with Nigeria’s grid; - Improved hydropower conditions during the rainy season. - Long-term solution requires regionwide upgrading of capacity. - Government exploring with private investors options to upgrade electricity generation, including linking to the planned Nigeria-Ghana gas pipeline. ### Overview: Key challenges (Article IV focus) - Three central medium-term challenges from Article IV discussions: - (i) reviving economic growth and external competitiveness; - (ii) moving toward fiscal and debt sustainability; and - (iii) strengthening the banking sector. - Togo’s growth record: - Per capita income declining by an average of 1 percent a year since the early 1980s. - Causes attributed to: long-lasting socio-political crisis and related withdrawal of donor support; eroded public institutions and infrastructure; adverse relative price movements; mismanagement of state-owned enterprises and banks; weak fiscal policies; mounting arrears; governance problems. ### External competitiveness and traditional export sectors - Two traditional exports, cotton and phosphates, have all but collapsed due to terms of trade shocks, failed sector policies, and mounting losses and arrears of public monopolies. - External competitiveness hampered by: - real exchange rate appreciation, - decaying infrastructure, - poor business environment. - Goods and services deficit rise since 2003 largely due to higher oil prices and lower cotton exports; over half of the increase financed by short-term capital inflows. ### Debt and arrears - Public debt and arrears status: - Public debt of 103 percent of GDP at end-2006, a third of which was in arrears. - The net present value of external public debt is about twice the applicable policy-dependent debt sustainability threshold (per DSA prepared by Fund and World Bank staffs). - DSA implications: - Debt would remain unsustainable in a no-reform scenario; - Debt could become sustainable in an alternative scenario with economic reforms, fiscal adjustment, and comprehensive debt relief. ### Fiscal space, social spending, and public investment - Weak expenditure management and lack of external financing have squeezed social spending and public investment. - Despite proximity to WAEMU convergence criteria on revenues, wage bill, and fiscal balances, expenditures on health, education, and public investment are far below regional averages. - Addressing shortfalls would require: - a large increase in donor assistance combined with higher fiscal revenues and reduced nonpriority spending. ### Medium-term scenarios: no-reform vs reform with debt relief (Table 3 highlights) - Scenario assumptions: - No-reform scenario ¹: Assumes no economic reform, arrears clearance, donor reengagement, or debt relief. - Reform scenario ²: Assumes structural reforms, fiscal adjustment, higher donor support, and external debt and arrears rescheduling/relief in 2007–10. Debt service projections are shown net of the impact of debt and arrears rescheduling/relief. - Selected time series (2006–10) — No reform scenario ¹ (percent of GDP or exact values as shown): - Real GDP (percent change): 2.0, 2.1, 1.7, 1.7, 1.7 - GDP deflator (percent change): 2.1, 2.0, 1.8, 1.8, 1.8 - Nominal GDP (CFAF billions): 1,158.8, 1,206.8, 1,249.4, 1,293.5, 1,339.2 - Investment (percent of GDP): 13.0, 12.5, 12.3, 12.3, 12.3 - Of which: Public: 3.6, 3.4, 3.3, 3.3, 3.3 - Savings (percent of GDP): 7.0, 6.1, 6.1, 5.6, 5.0 - Of which: Public: 0.8, 1.1, -1.5, -1.8, -1.9 - Total revenue and grants: 18.3, 17.5, 17.0, 17.0, 17.0 - Revenues: 16.9, 16.0, 16.0, 16.0, 16.0 - Total expenditure: 21.1, 21.1, 21.8, 22.0, 22.1 - Domestic primary spending: 18.0, 17.4, 18.0, 18.2, 18.2 - Overall balance: -2.8, -3.6, -4.8, -5.1, -5.2 - Domestic primary balance: -1.1, -1.4, -2.0, -2.2, -2.2 - Change in domestic arrears: -0.4, 2.0, 2.8, 3.1, 3.2 - Current account balance: -6.0, -6.4, -6.2, -6.7, -7.3 - Exports of goods and services: 40.5, 40.9, 40.4, 39.9, 39.4 - Imports of goods and services: 60.1, 62.0, 61.2, 60.9, 60.7 - External public debt: 80.5, 79.3, 78.9, 78.8, 78.7 - Of which: external arrears: 25.6, 27.4, 29.4, 31.3, 33.0 - External assistance (gross; excl. debt relief): 2.2, 2.8, 2.5, 2.5, 2.5 - External debt service due: 2.6, 2.6, 3.0, 2.9, 2.9 - Selected time series (2006–10) — Reform scenario ² (percent of GDP or exact values as shown): - Real GDP (percent change): 2.0, 2.9, 3.5, 4.0, 4.0 - GDP deflator (percent change): 2.1, 2.0, 2.0, 2.0, 2.0 - Nominal GDP (CFAF billions): 1,158.8, 1,216.3, 1,284.0, 1,362.1, 1,444.9 - Investment (percent of GDP): 13.0, 13.7, 17.0, 19.1, 20.7 - Of which: Public: 3.6, 3.6, 5.6, 6.5, 7.1 - Savings (percent of GDP): 7.0, 7.3, 10.7, 12.9, 15.0 - Of which: Public: 0.8, 1.1, 3.0, 4.3, 5.3 - Total revenue and grants: 18.3, 19.0, 20.2, 21.3, 22.3 - Revenues: 16.9, 16.5, 17.0, 17.6, 18.0 - Total expenditure: 21.1, 21.6, 22.8, 23.5, 24.1 - Domestic primary spending: 18.0, 16.9, 16.9, 17.0, 17.1 - Overall balance: -2.8, -2.5, -2.6, -2.2, -1.8 - Domestic primary balance: -1.1, -0.4, 0.1, 0.6, 0.9 - Change in domestic arrears: -0.4, 0.0, -0.5, -0.5, -0.5 - Current account balance: -6.0, -6.4, -6.3, -6.2, -5.7 - Exports of goods and services: 40.5, 40.6, 41.7, 42.8, 43.9 - Imports of goods and services: 60.1, 61.5, 63.2, 64.3, 65.2 - External public debt: 80.5, 72.3, 68.2, 65.0, 38.8 - Of which: external arrears: 25.6, 0.0, 0.0, 0.0, 0.0 - External assistance (gross; excl. debt relief): 2.2, 3.8, 4.6, 5.3, 5.9 - External debt service due: 2.6, 2.6, 1.3, 0.9, 0.9 ### Authorities’ reform agenda and strategic pillars - Authorities developing a comprehensive reform strategy based on the Interim PRSP (I-PRSP) with donor technical assistance. Key pillars: - (i) political and economic governance: political and legal reforms, strengthen public finances and budget execution; - (ii) structural reforms: improve business environment, restructure state-owned enterprises, raise agricultural productivity, build infrastructure, develop the financial sector; - (iii) social reforms: wider access to education, health, and safe water. - Need to prioritize reform measures and estimate their costs. ### Central macroeconomic reform scenario: expected drivers and requirements - Initial recovery drivers: increase in foreign-financed public investment; measures to alleviate the cotton sector crisis; improved business confidence following parliamentary elections. - Medium-term conditions for sustained real GDP growth of about 4 percent per year (about 1½ percent on a per capita basis): - higher foreign direct investment; - greater availability of credit to the private sector; - upgrade of public infrastructure, particularly the energy sector; - implementation of governance and structural reforms in the I-PRSP. - Fiscal and financing measures needed: - a threefold increase in external assistance (to the regional average); - higher fiscal revenues; - reduction of nonpriority spending; - HIPC/MDRI debt relief to create additional space for growth-oriented spending; - fiscal adjustment to restore policy consistency and prevent new budgetary arrears, creating predictability for suppliers, creditors, and investors. ### Reviving growth: scope beyond traditional export revivals - Revival of cotton and phosphate alone insufficient to sustain growth: - Cotton output had fallen to a quarter of the 2001–05 average. - Cotton and phosphate constitute only a small share of GDP; revival might be temporary. - Deeper impediments include weak institutions, suggesting need for broad reforms to foster private sector growth across agriculture and services, leveraging Togo’s role as a regional trade hub. ### Competitiveness: diagnosis and policy focus - Competitiveness eroded by structural bottlenecks, poor business environment, and deteriorating public infrastructure. - Little evidence of significant exchange rate overvaluation (Box 1); REER tracked regional average and is 15 percent below pre-1994 devaluation level. - Authorities and staff agreed policy focus should be on raising productivity growth in tradables by: - reallocating spending toward public infrastructure, education, and health, while reducing nonpriority outlays; - raising agricultural productivity via improved rural infrastructure to reduce production bottlenecks, enhance marketability, and diversify production; - improving the broader business environment through strengthened governance and simplified regulations to attract foreign direct investment; - avoiding new arrears and developing a repayment strategy for past arrears following the recent debt audit; - restructuring ailing banks and developing the private financial sector to enhance access to credit and lower lending rates; - reforming state-owned enterprises, starting with clearance of arrears to cotton farmers and audits of SOTOCO, and seeking a strong strategic investor for the phosphate sector; - working with regional partners and private investors to alleviate capacity constraints on energy generation and imports. *Source: IMF staff report (Content unit: _cr07217 - 13. The mission urged the authorities to accelerate reforms of state-owned enterprises).* ### 26. Togo faces a heavy public debt burden and looming medium-term spending ### 26. Togo faces a heavy public debt burden and looming medium-term spending pressures ### Debt outlook and medium-term spending pressures - Debt could become sustainable through a combination of economic reforms, fiscal adjustment, and HIPC/MDRI debt relief, but the completion point would not be reached before 2010. - Debt service in cash terms could increase substantially between PRGF approval and the HIPC decision point. - Large additional budget allocations (including a higher wage bill) will be necessary for health, education, and infrastructure to raise economic growth and improve social conditions. - Restructuring of state-owned banks and enterprises is expected to be costly. ### Fiscal adjustment strategy (authorities' intentions and targets) - Authorities envisage a gradual domestic fiscal adjustment based on a gradual increase in revenues and reallocation of spending toward priority areas. - Agreed measures and quantitative targets: - Raise fiscal revenues to about 18 percent of GDP in 2010, based primarily on administrative reforms that could boost revenues by about ½ percentage point of GDP per year. - Reallocate domestically financed expenditures from nonpriority areas toward health, education, and infrastructure investment, while supporting restructuring of state-owned enterprises and banks; total reallocation would amount to about 3 percentage points of GDP in 2006–10 within a stable overall domestic primary spending envelope of about 17 percent of GDP. - A first step in the 2007 budget aims to reduce nonpriority spending by about 1 percentage point of GDP. - Target a primary fiscal surplus of about 1 percent of GDP by 2010, from a deficit of 1 percent of GDP in 2006, to avoid new arrears and provide resources for (post-HIPC) external debt service and domestic arrears clearance, while minimizing new borrowing. ### External assistance, debt relief, and MDG financing needs - Higher external assistance and comprehensive debt relief are critical to reconcile spending needs with fiscal and debt sustainability. - Agreed benchmarks and estimates: - Raise external assistance to the regional average of 6 percent of GDP by 2010, which would add another 4 percent of GDP for priority spending on social sectors, infrastructure, and capacity building. - Ensure that at least two-thirds of foreign aid is disbursed in grants rather than loans, which would support a reduction in the overall fiscal deficit from 2¾ percent of GDP in 2006 to 1¾ percent in 2010. - Secure comprehensive debt relief under the HIPC initiative and the MDRI; staff estimated this would reduce annual external debt service from over 2½ percent of GDP in 2006 to about 1 percent of GDP from 2010 onwards, and ensure long-run debt sustainability. ### Fiscal governance and revenue administration reforms - Planned administrative reforms to support revenue increases: computerization, improved audit procedures, and simplified procedures for taxpayers. - Mission suggestions: review scope for streamlining tax policies, including by limiting exemptions; step up tax audits. - Expenditure control improvements: reinstate proper commitment and payments procedures, limit exceptional payment authorizations, eliminate payments without prior budget line identification. - Establish a system for real-time monitoring of budget execution to improve cash management and spending decisions. - Medium-term reliance on computerization and an improved accounting system to support budget preparation and execution. - Technical assistance will be critical to support these reforms. ### Banking sector weaknesses and restructuring needs - Several large banks remain fragile despite repeated liquidity injections; Togolese banks have the highest NPL ratio in the WAEMU area. - Government took over NPLs of about 4 percent of GDP in 2004–06, reducing the sector’s NPL ratio from 42 to 28 percent. - Three banks remain severely undercapitalized; one large bank experienced liquidity problems in 2006 and its liquidity remains below the BCEAO’s minimum reserve requirement. - WAMU Banking Commission recommendations to strengthen banks include improving internal accounting and information systems, corporate and management structure, credit allocation and risk evaluation, NPL recovery, and provisioning. - Restructuring plan for three undercapitalized banks (about 60 percent of private sector deposits): - Two banks relatively easy to restructure. - One bank would require significant governance changes and a large capital injection by the state, with annual budget costs estimated at about ½–¾ percent of GDP over five to eight years. - Broader financial sector reforms agreed to complement restructuring: - Restructure and privatize state-owned banks. - Improve legal environment: property registration, arbitration procedures, contract enforcement, and bank collateral recovery. - Develop microfinance for SMEs and households. - Increase liquidity and depth of primary and secondary securities markets. ### PRGF arrangement prospects and arrears clearance - Authorities intend to request a PRGF arrangement to anchor reforms and pave the way for HIPC debt relief; a PRGF-supported program could start in the second half of 2007 subject to: (i) fully satisfactory performance under the SMP; (ii) understandings on arrears clearance with all official creditors and financing assurances from donors; and (iii) an agreed medium-term reform strategy based on the I-PRSP. - Togo’s large arrears to multilateral creditors are a significant obstacle: - EU preparing grants that could be used in part to clear Togo’s arrears to the European Investment Bank (about $20 million). - AfDB arrears about $15 million. - Togo’s $105 million in arrears at end-2006 far exceed its IDA allocation and would require exceptional treatment and/or donor help. - Authorities intend to intensify dialogue with multilateral creditors and approach the Paris Club for bilateral debt and arrears rescheduling. ### Program risks - Main near-term risks: - Upcoming elections and associated fiscal pressures (possible shortfalls in donor financing, spending overruns, slowdown in activity and fiscal revenues). - Implementation slippage in SMP structural benchmarks in pre-election period. - Possible disruption or dispute in the election process that could undermine national reconciliation, economic confidence, and donor reengagement. - Fragile financial position of several banks with potential adverse regional spillovers. - Medium-term risk: - Lack of political consensus and weak institutions could block the envisaged economic reform program. ### Data issues - Data weaknesses hamper surveillance and program monitoring. - Mission discussed revising balance of payments series to correct underestimation of service receipts and remittances. - Need to upgrade national accounts data sources and reduce the two-month lag for monetary and fiscal data. - Authorities requested technical assistance to upgrade statistical capacity. ### Staff appraisal — key conclusions and recommendations - Recent political and economic reforms and formation of a national unity government have helped restore economic confidence and supported a nascent recovery; SMP performance has been good so far. - Near-term priority: contain fiscal pressures in the run-up to elections by strengthening spending controls, improving budget execution monitoring, and backloading nonpriority expenditures. - Reducing external imbalances requires fiscal adjustment and productivity-enhancing reforms, especially in tradables. - Overriding medium-term challenge: revive economic growth after a quarter century of decline by: - Improving governance and political reform; - Reengaging donors; - Reallocating budgetary resources toward health, education, and infrastructure; - Reforming public enterprises in cotton and phosphate sectors; - Raising agricultural productivity; - Working with regional partners on energy shortages; - Developing the financial sector and restructuring ailing banks; - Improving the business environment via legal and regulatory reforms. - Combination of domestic fiscal adjustment, higher external assistance, and debt relief will be required to meet economic and social objectives within a sustainable fiscal framework. - Urgent need to strengthen and restructure ailing banks; implement WAMU Banking Commission and IMF technical assistance recommendations promptly. - Monitor money growth surge closely and consider raising reserve requirements if it fuels inflation or imprudent lending. - If end-June SMP targets are met, a PRGF arrangement could start later in the year, contingent on understandings with official creditors (including the World Bank) on arrears clearance mechanisms and resources. - Authorities should prepare an action plan and identify technical assistance needs to improve national accounts and balance of payments statistics and reduce reporting lags for monetary and fiscal data. *Source: IMF staff report excerpt — "26. Togo faces a heavy public debt burden and looming medium-term spending pressures."* ### 46. It is proposed that the next Article IV consultation be held on the standard 12-month ### _cr07217 - 46. It is proposed that the next Article IV consultation be held on the standard 12-month cycle. ### Article IV timing - It is proposed that the next Article IV consultation be held on the standard 12-month cycle. ### Current debt situation (staff findings) - Public sector debt, including arrears, was estimated at US$2.3 billion as of end-2006, corresponding to 103 percent of GDP. - External debt was estimated at US$ 1.8 billion (81 percent of GDP). - The World Bank and Paris Club creditors account for the lion’s share of external debt, with about US$0.7 billion each. - Arrears account for almost a third of total external debt. - Togo’s debt to the IMF is US$8.2 million as of end-2006; it is current on this debt. - Public debt has been declining since 2000 largely because the CFA franc has appreciated against the U.S. dollar and other currencies; without this appreciation, the debt-to-GDP ratio would have been about 20 percent above its current level. - Togo is in debt distress and is in arrears to the World Bank, the African Development Bank, and other multilateral and bilateral creditors (but not the IMF). - Because Togo has not serviced most of its external debt in recent years, arrears on principal and interest have accumulated rapidly and now account for a substantial proportion of overall debt. ### Key external debt-sustainability indicators (no-reform scenario) - NPV of debt to GDP (indicative threshold 30): 2006 (Est.) 65.6; 2027 (Proj.) 52.6. - NPV of debt to exports (indicative threshold 100): 2006 (Est.) 162.1; 2027 (Proj.) 133.3. - NPV of debt to revenue (excl. grants) (indicative threshold 200): 2006 (Est.) 387.9; 2027 (Proj.) 329.5. - Debt service to exports (indicative threshold 15): 2006 (Est.) 7.1; 2027 (Proj.) 8.3. - Debt service to revenue (excl. grants) (indicative threshold 25): 2006 (Est.) 16.9; 2027 (Proj.) 20.4. ### Scenarios analyzed - No-reform scenario: characterized by low growth and high fiscal deficits; used to determine the extent of Togo’s debt burden. - Reform scenario: describes economic recovery supported by structural reforms, higher external assistance, and potential debt relief under the Enhanced HIPC Initiative and MDRI; used to illustrate potential gains and to test robustness of debt indicators post-debt relief. - The reform scenario projections assume external debt and arrears rescheduling/relief in 2007–10, broadly in line with potential debt relief under the HIPC initiative and MDRI. ### Findings on sustainability and robustness - Under the no-reform scenario, key debt indicators (NPV-to-GDP, NPV-to-exports, NPV-to-revenue) are well above applicable indicative thresholds, indicating debt distress. - Different stress tests indicate that public and external debt would remain sustainable under the reform scenario; in the absence of fiscal and structural reforms, key debt indicators would revert to an unsustainable path. - If an imputation for repayment of arrears is included (assuming a 20-year repayment period and an interest rate of 4 percent), debt service would amount to 11 percent of exports and 26 percent of government revenues (excluding grants) in 2006; the latter would exceed the applicable indicative threshold. ### Selected macroeconomic and balance-of-payments context (high-level figures cited by staff) - Current account balance (memorandum): 2006 -6.4 (percent of GDP). - Exports of goods and services (memorandum): 2006 40.6 (percent of GDP). - Imports of goods and services (memorandum): 2006 61.5 (percent of GDP). - Gross international reserves, months of imports (memorandum): 2006 2.9. - Nominal GDP (CFAF billions) (memorandum): 2006 1,158.8. ### Policy implications and recommended focus (from analysis) - Pursue fiscal adjustment, structural reforms, and higher external assistance to support an economic recovery and to make potential debt relief effective. - Engage with creditors on rescheduling and arrears relief—in 2007 projections staff assume external arrears rescheduling and relief. - Use the reform scenario as the basis for assessing the robustness of debt indicators to shocks and for designing a sustainable debt path. *Sources: Togolese authorities; Fund staff estimates and projections; Joint IMF–World Bank Debt Sustainability Analysis (Supplement I).* ### 4. Togo’s growth performance has been very weak, with per capita income ### 4. Togo’s growth performance has been very weak, with per capita income declining since the early 1980s ### Growth performance and structural constraints - Per capita income has been declining since the early 1980s. - Political turmoil and weak governance have undermined the investment climate. - Access to credit hampered by poor performance of state-owned banks. - Without comprehensive economic reforms and increased external assistance, weak growth is unlikely to change. ### Macroeconomic outlook: No-Reform Scenario (summary) - Central projection: GDP growth to hover around its long-term average of 1¾ percent (below population growth), an overall fiscal deficit exceeding 5 percent of GDP, continued accumulation of arrears, and large external imbalances. - Debt indicators: - NPV of total public debt projected to rise from 88 percent of GDP in 2006 to 114 percent of GDP in 2027. - NPV of total public debt projected to rise from 520 percent of government revenues (excluding grants) in 2006 to 714 percent in 2027. - Debt service projected to rise from 15 percent of government revenues (excluding grants) in 2006 to 25 percent by 2027. - NPV of external debt declines slowly from 388 percent of government revenues in 2006 to 329 percent in 2027 (remains above the indicative threshold of 200 percent). - Ratio of NPV of external debt to exports falls from 162 percent in 2006 to 133 percent in 2027 (remains above the indicative threshold of 100 percent). - External debt service increases to 8 percent of exports by 2027. - Debt service, as a percentage of exports, remains well below the indicative threshold of 15 (note: threshold units as presented). - Table 2 selected indicators (No-Reform Scenario): - Real GDP (percent change): 2007 2.1; 2017 1.7; 2027 1.7 - Real GDP per capita (percent change): 2007 0.4; 2017 0.9; 2027 0.9 - GDP (CFAF billions): 2007 1,206.8; 2017 1,707.4; 2027 2,415.6 - Gross domestic investment (percent of GDP): 2007 12.5; 2017 12.3; 2027 12.3; 2027 (alternate column) 13.7 - Government investment (percent of GDP): 2007 3.4; 2017 3.3; 2027 3.3; 2027 (alternate) 3.6 - Nongovernment investment (percent of GDP): 2007 9.1; 2017 9.0; 2027 9.0; 2027 (alternate) 10.1 - Gross national savings (percent of GDP): 2007 6.1; 2017 4.7; 2027 4.6; 2027 (alternate) 7.3 - Total revenue and grants (percent of GDP): 2007 17.5; 2017 17.0; 2027 17.0; 2027 (alternate) 19.0 - Grants (percent of GDP): 2007 1.6; 2017 1.0; 2027 1.0; 2027 (alternate) 2.6 - Total expenditure and net lending (percent of GDP): 2007 21.1; 2017 22.1; 2027 22.4; 2027 (alternate) 21.6 - Overall balance (payment order basis, percent of GDP): 2007 -3.6; 2017 -5.2; 2027 -5.4; 2027 (alternate) -2.5 - Domestic primary balance (percent of GDP): 2007 -1.4; 2017 -2.2; 2027 -2.2; 2027 (alternate) -0.4 - Current account balance (percent of GDP): 2007 -6.4; 2017 -7.6; 2027 -7.7; 2027 (alternate) -6.4 - Foreign direct investment (percent of GDP): 2007 2.5; 2017 3.0; 2027 3.0; 2027 (alternate) 2.5 ### Macroeconomic outlook: Reform Scenario (summary) - Assumptions: implementation of a comprehensive reform program, increased external assistance, and potential debt relief through the Enhanced HIPC Initiative and MDRI. - Central projection: Real GDP growth rises to around 3½-4 percent per year, sustained by increased FDI, greater availability of credit to the private sector, and upgrades to critical infrastructure. - External assistance envisaged: increase to 6 percent of GDP (with two-thirds in grants). - Structural measures envisaged: - Steps to improve efficiency through improved governance. - Reallocation of fiscal spending toward public investment. - Steps to improve the business environment. - Reform of state-owned enterprises. - Banking sector reform. - Table 2 selected indicators (Reform Scenario): - Real GDP (percent change): 2007 2.9; 2017 3.5; 2027 3.5 - Real GDP per capita (percent change): 2007 1.2; 2017 2.6; 2027 2.6 - GDP (CFAF billions): 2007 1,216.3; 2017 2,163.2; 2027 3,719.6 - Gross domestic investment (percent of GDP): 2007 13.7; 2017 22.6; 2027 22.6 - Government investment (percent of GDP): 2007 3.6; 2017 7.0; 2027 7.0 - Nongovernment investment (percent of GDP): 2007 10.1; 2017 15.6; 2027 15.6 - Gross national savings (percent of GDP): 2007 7.3; 2017 18.1; 2027 18.2 - Government budget: government revenue and nongovernment components reported as in table (see Table 2 for detailed breakdown) - Total revenue and grants (percent of GDP): 2007 19.0; 2017 22.4; 2027 22.4 - Grants (percent of GDP): 2007 2.6; 2017 4.2; 2027 4.2 - Total expenditure and net lending (percent of GDP): 2007 21.6; 2017 23.9; 2027 23.8 - Overall balance (payment order basis, percent of GDP): 2007 -2.5; 2017 -1.5; 2027 -1.4 - Domestic primary balance (percent of GDP): 2007 -0.4; 2017 1.0; 2027 1.0 - Current account balance (percent of GDP): 2007 -6.4; 2017 -4.6; 2027 -4.4 - Foreign direct investment (percent of GDP): 2007 2.5; 2017 4.5; 2027 4.5 ### Debt relief, arrears, and prerequisites for PRGF - As a prerequisite for a PRGF arrangement, Togo would have to reach understandings on the clearance of outstanding arrears on official external debt. - EU preparing several large grants that could be used in part to clear Togo’s arrears to the European Investment Bank (about $20 million). - World Bank staff preparing a development policy needs review and examining options for clearing arrears, which stood at about $105 million at end-2006. - Authorities intend to intensify dialogue with multilateral creditors and approach the Paris Club to request a rescheduling of bilateral debt and arrears. ### Debt sustainability analysis and reform scenario impact - Reform scenario with debt relief projects a steep decline in external and total public debt owing to HIPC Initiative and MDRI and improved macro-fiscal outcomes. - Projections under the reform scenario: - NPV of total public debt projected to decline to 27 percent of GDP by 2027. - NPV of total public debt projected to be 148 percent of government revenues by 2027. - NPV of external debt projected to fall to 16 percent of GDP, or 32 percent of exports, and 85 percent of government revenues by 2027. - External debt service declines steeply between 2007 and 2010 due to rescheduling and cancellation (including under HIPC/MDRI), then increases modestly to around 3 percent of exports. - Under the no-reform scenario, debt indicators remain well above applicable thresholds; under the reform scenario with debt relief, indicators are substantially below the applicable debt thresholds. ### Stress tests and vulnerabilities - Stress tests focus on debt sustainability and robustness of key debt indicators under the reform scenario after debt relief; shocks assumed to occur from 2011 on. - General result: Debt indicators remain below applicable thresholds under most stress tests that simulate temporary shocks or policy reversals; under most temporary shocks and reversals debt increases in 2011–12 and gradually declines thereafter, reaching a sustainable level in the long term. - Notable stress-test findings: - External debt particularly sensitive to stress test B4 (Table 8): a debt-financed shortfall in private transfers from abroad and FDI totaling about 20 percent of GDP spread over two years leads the NPV of external debt to rise above the relevant indicative threshold, though it eventually reverts to a sustainable level. - Severe output shock (bound test B1 of Table 6): two successive years of real GDP growth set at 5½ percentage points below trend would cause public debt as a share of GDP to increase and not revert to a lower level. *Source: IMF staff estimates and projections as presented in the cited chapter.* ### 11. Debt may revert to an unsustainable path (even after debt relief) in case of a ### _cr07217 - 11. Debt may revert to an unsustainable path (even after debt relief) in case of a ### Main finding - Debt may revert to an unsustainable path in case of a permanent reversal in fiscal/economic reforms or a permanent economic shock without an adequate policy response. - Debt relief alone is insufficient to ensure debt sustainability if economic and fiscal reforms are not sustained. ### Stress-test evidence (Reform Scenario with Debt Relief) - Stress tests illustrated in Figures 9–14 show that if key variables revert to historical averages, debt generally increases over time and, in some cases, exceeds indicative thresholds by 2027. - Bound test B5 in Table 6: a one-off increase in public debt by 30 percent results in a gradually rising level of debt over the long term. - Specific stress events shown in figures: - Permanently lower GDP growth from 2011. - Primary balance reverts to 2007 level from 2011. - One-time 30 percent nominal depreciation in 2011. - Reversal in transfers and FDI in 2011-12. - Key variables at historical averages. ### Key projections and indicators (selected exact figures from tables) - Public sector debt (general government debt), selected years (percent of GDP): - 2006: 102.9 - 2017: 123.6 - 2027: 141.8 - o/w foreign-currency denominated (percent of GDP): - 2006: 80.5 - 2027: 80.5 - Change in public sector debt (percent of GDP), selected entries: - 2006: 1.3 - 2017: 2.0 - 2027: 1.7 - Identified debt-creating flows (percent of GDP), selected entries: - 2006: -7.1 - 2017: 1.0 - 2027: 0.7 - Primary deficit (percent of GDP), selected entries: - 2006: 1.9 - 2017: 3.7 - 2027: 3.7 - Revenue and grants (percent of GDP): - 2006: 18.3 - Projection: 17.0 (reform-scenario baseline entries show 17.0 repeatedly) - Primary (noninterest) expenditure (percent of GDP): - 2006: 20.2 - Projection baseline entries show 20.7 and 23.0 in alternate tables - Automatic debt dynamics (percent of GDP), selected entries: - 2006: -8.9 - 2017: -2.7 - 2027: -3.1 - Contribution from interest rate/growth differential (percent of GDP), selected entries: - 2006: -3.1 - 2017: -2.9 - 2027: -3.2 - Residual, including asset changes (percent of GDP), selected entries: - 2006: 8.4 - 2017: 1.0 - 2027: 1.0 - NPV of public sector debt (percent of GDP): - 2006: 87.9 - 2017: 106.5 - 2027: 113.9 - Gross financing need (percent of GDP): - 2006: 5.9 - 2017: 8.4 - 2027: 8.7 - NPV of public sector debt-to-revenue ratio (in percent): - 2006: 520.1 - 2017: 667.5 - 2027: 713.9 - Debt service-to-revenue ratio (in percent): - 2006: 15.4 - 2017: 22.8 - 2027: 25.0 - Primary deficit that stabilizes the debt-to-GDP ratio (percent of GDP), selected entries: - 2006: 0.6 - 2017: 1.7 - 2027: 2.1 - Key macro assumptions (real GDP growth, percent): - 2006: 2.0 - Projection baseline entries: 1.7 (various years), long-run around 1.7–1.8 in some tables; alternate reform-scenario projections show higher growth (e.g., 3.5–4.0 in other tables depending on scenario). ### Sensitivity analysis — selected numeric outcomes (Table 6 and Table 8 excerpts) - Table 6 (NPV of Debt-to-GDP Ratio, Reform Scenario and alternatives), sample values (NPV of Debt-to-GDP Ratio by scenario, 2007–2027 condensed): - Reform Scenario: 67 65 63 35 33 32 30 27 (sequence shown in table) - A1. Real GDP growth and primary balance at historical averages: 35 34 34 38 53 - A2. Primary balance reverts to 2007 level from 2011: 35 34 34 38 51 - A3. Permanently lower GDP growth: 35 34 33 33 42 - B5. 10 percent of GDP increase in other debt-creating flows in 2011: 35 43 42 42 46 - Table 6 (NPV of Debt-to-Revenue Ratio), sample values: - Reform Scenario: 35 13 21 29 41 58 14 91 43 13 2 0 (table lists multiple year-specific exact numbers) - A1: 196 189 188 208 291 (sequence shown) - B5 (10 percent of GDP increase in other debt-creating flows): 196 238 233 232 251 - Table 8 (External debt sensitivity, Reform Scenario), sample values: - Reform scenario (NPV of external debt-to-GDP): 46 46 46 21 20 20 18 16 - A1 (Key variables at historical averages): 21 22 23 29 39 - B4 (Net non-debt-creating flows at historical average minus one standard deviation in 2011-12): 21 29 35 33 22 - For NPV of debt-to-exports and debt service-to-exports, multiple scenario-specific numeric sequences are reported in Table 8 (preserved in source). ### Policy implications and recommended responses - Sustained economic and fiscal reforms are necessary to lock in the gains from debt relief; otherwise debt dynamics can revert toward unsustainability. - Permanent economic shocks require fiscal adjustment beyond the policies assumed in the reform scenario to ensure debt sustainability. - Stress test results imply the need to: - Maintain or improve primary balances relative to reform targets to prevent debt increases. - Monitor vulnerability to large depreciations (e.g., a one-time 30 percent nominal depreciation in 2011 produces materially worse debt outcomes). - Guard against reductions in external flows (grants, transfers, FDI) which materially worsen external debt indicators. *Sources: Togolese authorities; and Fund staff estimates and projections.* ### 1. Over the last decade, Togo has been trapped in a vicious cycle of sociopolitical ### _cr07217 - 1. Over the last decade, Togo has been trapped in a vicious cycle of sociopolitical ### Donor disengagement and arrears - Togo has been in nonaccrual status with the International Development Association (IDA) since May 2002, with arrears of US$106.6 million as of March 2007. - Donor disengagement occurred alongside economic decline, rising poverty, and a sociopolitical impasse. - The World Bank continued analytical and advisory activities (AAA) during the non-accrual period and supported government efforts to prepare its I-PRSP and sectoral development strategies in health, education, agriculture and rural development, and HIV/AIDS. ### World Bank re-engagement and financing instruments - On December 14, 2004, the World Bank Executive Board discussed a Country Re-engagement Note (CRN) for Togo to provide a joint Bank and UNDP re-engagement strategy and a framework to strengthen donor assistance, potentially leading to clearance of arrears to IDA and other major creditors and full resumption of Bank operations. - In July 2005, the Bank approved a US$2.8 million grant under the Low Income Country Under Stress (LICUS) Initiative for a community-driven Emergency Program for Poverty Reduction (EPPR). - As of September 2006, approximately $1 million has been disbursed. - Disbursements financed the completion of some 30 projects (primary schools, health posts, small community infrastructures and community training). - The program trained some 750 people on community approaches to development and project management. - The program established a Bureau de Liaison National to ensure donor coordination and liaison with Government authorities. - Following a positive internal evaluation including independent consultants in October 2006, the last phase of the EPPR is in negotiation. ### Analytical and advisory work (Bank–IMF collaboration) - The Bank conducted a Public Expenditure Management and Financial Review (PEMFAR) and a Financial Sector Review (FSR) in the last quarter of 2005. - The Bank is working closely with the IMF on a Financial Sector Assessment, an Urban Sector Stocktaking Study, and an Agricultural Development assessment. - The Bank supports strengthening poverty diagnosis, information systems, and statistical capacities. - A Core Welfare Indicator Questionnaire survey was carried out in 2006 to provide up-to-date and more reliable statistics. - A development policy needs review is planned during the current fiscal year. - Contact person: Mr. Eric Nelson, phone (202) 473 6699. ### Statistical issues and data quality constraints - Weaknesses in the quality and timeliness of data hamper the effectiveness of surveillance. - National accounts and balance of payments statistics are compiled based on very limited information, with only few surveys and scarce data on primary agriculture and private sector services. - Government finance statistics are derived from a weak accounting system. - Monetary data are reported by the BCEAO with a two-month lag. - Togo participates in the General Data Dissemination System (GDDS) since November 2001. - Metadata posted to the Fund’s Dissemination Standard Bulletin Board in January 2004 have not been updated since then. - Authorities do not report any fiscal data for publication in the International Financial Statistics (IFS) or the Government Financial Statistics (GFS) Yearbook. ### Specific data weaknesses by domain - National accounts and CPI - Activity in the informal and service sectors is underestimated due to lack of reliable data sources. - A full set of national accounts are currently compiled by extrapolating the results of the last comprehensive exercise in 1993. - Annual GDP data are compiled with a six-month delay. - The CPI uses 1996 weights and its geographical coverage is limited to the city of Lomé. - Balance of payments - Data are compiled based on banks reports, a survey on enterprises, and data from customs. - Informal trade, trade in services, and remittances are underestimated. - Statistics are compiled with a six-month delay and are revised twice a year. - Government accounts and public debt - Government finance statistics are derived from a weak accounting system. - The monthly TOFE (Table of Central Government Financial Operations) is based on a mixture of administrative and accounting data and is sent to AFR with a two-month lag. - Current budget nomenclature does not permit the economic and functional classification of expenditure. - There are inconsistencies in domestic arrears records held by different units of the Ministry of Finance and the stock of domestic debt is in the process of being audited. - Comprehensive external debt data and projections on a loan by loan basis are compiled regularly. - Monetary statistics - Monthly data for Togo, as well as other members of the West African Monetary Union (WAMU), are regularly provided to and disseminated by the Central Bank of the West African Monetary Union (BCEAO) and its national agencies, but data are disseminated with a two-month lag, and sometimes later. - Data on interest rates applied by domestic banks on their lending and borrowing operations are not compiled. - In August 2006, as part of authorities’ efforts to implement the methodology in the Monetary and Financial Statistics Manual, the BCEAO reported to STA monetary data for June 2006 for all member countries using Standardized Report Forms (1SR-central bank, 2SR-other depository corporations, and 5SR-monetary aggregates). These data were reviewed in STA and comments were provided to the authorities. ### Togo: Table of Common Indicators Required for Surveillance (As of May 3, 2007) — selected entries - Exchange Rates: Date of latest observation March 2007; Date received April 2007; Frequency of Data M; Frequency of Reporting Q; Frequency of publication Not published. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation December 2006; Date received March 2007; Frequency of Data M; Frequency of Reporting Q; Frequency of publication Not published. - Reserve/Base Money: Date of latest observation February 2007; Date received May 2007; Frequency of Data M; Frequency of Reporting Q; Frequency of publication Not published. - Broad Money: Date of latest observation February 2007; Date received May 2007; Frequency of Data M; Frequency of Reporting Q; Frequency of publication Not published. - Central Bank Balance Sheet: Date of latest observation February 2007; Date received May 2007; Frequency of Data M; Frequency of Reporting Q; Frequency of publication Not published. - Consolidated Balance Sheet of the Banking System: Date of latest observation February 2007; Date received May 2007; Frequency of Data M; Frequency of Reporting SA; Frequency of publication Not published. - Interest Rates: Date of latest observation January 2007; Date received March 2007; Frequency of Data M; Frequency of Reporting Q; Frequency of publication Not published. - Consumer Price Index: Date of latest observation January 2007; Date received April 2007; Frequency of Data M; Frequency of Reporting SA; Frequency of publication Not published. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation February 2007; Date received May 2007; Frequency of Data M; Frequency of Reporting M; Frequency of publication Not published. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of latest observation February 2007; Date received May 2007; Frequency of Data M; Frequency of Reporting M; Frequency of publication Not published. - Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation February 2007; Date received May 2007; Frequency of Data M; Frequency of Reporting M; Frequency of publication Not published. - External Current Account Balance: Date of latest observation 2006; Date received Mission 2007; Frequency of Data A; Frequency of Reporting OM; Frequency of publication Not published. - Exports and Imports of Goods and Services: Date of latest observation Dec 2006; Date received Mission 2007; Frequency of Data M; Frequency of Reporting OM; Frequency of publication Not published. - GDP/GNP: Date of latest observation 2006; Date received Mission 2007; Frequency of Data A; Frequency of Reporting OM; Frequency of publication Not published. - Gross External Debt: Date of latest observation December 2006; Date received Mission 2007; Frequency of Data A; Frequency of Reporting OM; Frequency of publication Not published. - Footnotes: 1 The general government consists of the central government (budgetary funds, extra-budgetary funds, semi-autonomous government agencies and institutions, and social security funds) and state and local governments. 2 Monthly (M), Quarterly (Q), Semi Annually (SA), Annually (A), on mission (OM). ### IMF Public Information Notice (PIN) No. 07/67 — Key economic assessment (June 13, 2007) - On June 8, 2007, the Executive Board of the IMF concluded the Article IV consultation with Togo. - Background assessment - Togo faces enormous development challenges after 25 years of economic decline. - The long-lasting socio-political crisis and withdrawal of donor support have damaged the economy, infrastructure, and institutions. - Traditional export sectors were eroded by adverse terms of trade, real exchange rate appreciation, and the mismanagement of state-owned enterprises. - Governance problems and banking sector difficulties inhibited private investment. - Weak fiscal management led to rapid accumulation of debt and arrears; debt is now at unsustainably high levels. - Recent policy developments and prospects - Over the past 12 months, Togo has embarked on major political and economic reforms aimed at ending the sociopolitical crisis by holding free and transparent parliamentary elections, seen as crucial for resumption of donor support. - Economic policies are monitored under a nine-month SMP, which could pave the way for a Poverty Reduction and Growth Facility (PRGF) arrangement and eventually debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). - A modest economic recovery is underway: Real GDP grew an estimated 2 percent in 2006. - Recovery driven by improved political climate and dynamism in trade-related services. - Growth offset by drag from the crisis in the cotton sector and daily electricity outages. - The current account deficit rose modestly due to higher oil prices and lower cotton exports. - Appreciation of the euro (and thus the CFA franc) against the U.S. dollar and adverse terms of trade weakened external competitiveness. - Despite large inflows of liquidity, inflation was subdued: Broad money grew 22 percent in 2006. - Inflation fell to 2¼ percent in the 12 months to February 2007, as food prices moderated due to improved agricultural supply conditions in neighboring countries. - Fiscal policy improved markedly in the second half of 2006: - Revenue performance was strong due to administration reforms, tax arrears recovery, and an exceptional profit transfer from the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO). - Government tightened expenditure control in the second half of 2006 by curtailing offbudget operations. - Proceeds from the February 2006 regional bond issue were mostly used to improve public infrastructure and reduce arrears to civil servants and cotton farmers. - The domestic primary deficit for 2006 was contained at 1 percent of GDP, and domestic arrears were reduced for the first time in years. - External arrears continued to accumulate, reflecting public debt of about 103 percent of GDP. - The 2007 budget aims to reduce the primary fiscal deficit to ½ percent of GDP in an election year, through a sharp reduction in discretionary spending and reforms to minimize exceptional spending procedures, while allocations for health, education, and public infrastructure would remain broadly unchanged. - Structural reforms - Revenue administration reforms started in mid-2006 with replacement of tax and customs directors and closure of bank accounts used to divert revenues for offbudget operations. - Establishment of internal and external audit programs in the tax department and steps to introduce advanced software in the customs department. - Spending commitments and payment authorizations under the 2006 budget were closed before December 31. - A recent audit validated domestic government debt and arrears of about 21 percent of GDP at end-2005. - Audits of the state-owned cotton company the Société Cotonnière du Togo (SOTOCO) are underway, and the government has continued to repay SOTOCO’s arrears to farmers. *Italic: Source: IMF staff report content provided in the supplied PDF content unit.* ### 6. Despite repeated liquidity injections, several large banks remain fragile and pose a risk ### 6. Despite repeated liquidity injections, several large banks remain fragile and pose a risk ### Banking sector weaknesses and risks - Togolese banks have the highest nonperforming loan (NPL) ratio in the West African Economic and Monetary Union (WAEMU) area, reflecting primarily past lending to loss-making enterprises in the cotton and phosphate sectors. - Although the government took over some of the NPLs, several banks have remained severely undercapitalized and one has experienced liquidity problems. - The authorities have recently strengthened monitoring of bank liquidity and prepared a strategy to strengthen and restructure the ailing banks, in collaboration with the WAMU Banking Commission and IMF technical assistance. - Directors stressed the need to strengthen and restructure several undercapitalized commercial banks, whose financial problems—including the still high level of nonperforming loans—pose a significant risk to stability and constrain the development of the private sector. - Authorities committed to implement the recommendations of the WAMU Banking Commission and of IMF technical assistance; Directors encouraged continued implementation. ### Executive Board assessment — key findings and risks - Directors welcomed the recent political and economic reforms in Togo and the formation of a national unity government that helped restore economic confidence. - Directors welcomed Togo’s good performance under the SMP and commended progress in restoring fiscal discipline and strengthening governance (notably reforms to strengthen tax and customs administration and improve expenditure control). - Directors noted audits of domestic debt and of the state-owned cotton company and encouraged completion of remaining structural benchmarks under the SMP. - Directors cautioned that downside risks remain substantial, including: - possible disruptions in the election process; - financial sector weaknesses with potential adverse regional spillovers; - deepening problems with energy supply. - Directors stressed the importance of containing fiscal pressures in the run-up to the elections and recommended: - strengthening spending controls; - improving monitoring of budget execution; - backloading nonpriority expenditures to the extent possible. - On fiscal and debt sustainability, Directors recommended: - continued reforms to strengthen fiscal governance to increase revenue collection and reallocate spending toward health, education, and infrastructure; - a gradual primary fiscal adjustment combined with comprehensive debt relief under the HIPC Initiative and MDRI to help bring debt to sustainable levels and prevent accumulation of new arrears. - Directors emphasized Togo’s WAEMU membership as an anchor of stability but highlighted loss in external competitiveness over the past two decades driven by governance weaknesses, deteriorating infrastructure, terms of trade shocks, and recent real exchange rate appreciation. - Policy focus recommended: raising productivity growth via structural reforms, infrastructure investment, and improved fiscal governance. - Directors saw reviving and sustaining economic growth as the overarching medium-term challenge and urged action on: - ending the political crisis and reengaging donors; - reforming public enterprises in cotton and phosphate sectors; - diversifying and raising productivity in agriculture; - working with regional partners and donors to alleviate energy shortages; - developing the financial sector, including restructuring ailing banks; - improving the business environment and governance. - Directors encouraged authorities to monitor closely the current surge in money growth and be prepared to take corrective policy action for inflationary pressures or imprudent lending practices. - Successful SMP performance could pave the way for consideration of a PRGF arrangement later in the year, contingent on an agreed medium-term economic program and understandings with official creditors on clearing large external arrears. ### Key macroeconomic indicators and fiscal/monetary status (selected figures as reported) - Real GDP: 2003 5.2; 2004 2.3; 2005 1.2; 2006 (Actual) 2.0; 2007 (Est./Proj.) 2.9 - Real GDP per capita: 2003 2.4; 2004 -0.3; 2005 -1.3; 2006 -0.5; 2007 0.4 - GDP deflator: 2003 -9.9; 2004 2.8; 2005 7.4; 2006 2.1; 2007 2.0 - Consumer price index (annual average): 2003 -0.9; 2004 0.4; 2005 6.8; 2006 2.2; 2007 3.2 - GDP (CFAF billions): 2003 972.7; 2004 1,023.3; 2005 1,112.7; 2006 1,158.8; 2007 1,216.3 - Exchange rate CFAF/US$ (annual average): 2003 580.1; 2004 527.5; 2005 527.0; 2006 524.4 - Real effective exchange rate (annual average): 2003 3.7; 2004 1.1; 2005 2.5; 2006 -1.4 - Terms of trade (deterioration -): 2003 3.7; 2004 -12.2; 2005 -3.6; 2006 -2.9 - Monetary survey (percent of broad money at the beginning of the period): - Net foreign assets: 2003 0.6; 2004 27.0; 2005 -2.8; 2006 19.2; 2007 0.0 - Credit to government: 2003 -7.4; 2004 -3.6; 2005 -1.2; 2006 -0.7; 2007 6.5 - Credit to the nongovernment sector: 2003 16.1; 2004 2.8; 2005 6.6; 2006 0.4; 2007 2.5 - Broad money (M2): 2003 11.4; 2004 18.3; 2005 1.4; 2006 22.2; 2007 9.0 - Velocity (GDP/ end-of-period M2): 2003 3.6; 2004 3.2; 2005 3.5; 2006 3.0; 2007 2.8 - Investment and savings (Percent of GDP): - Gross domestic investment: 2003 10.8; 2004 11.1; 2005 11.8; 2006 13.0; 2007 13.7 - Government: 2003 1.1; 2004 1.5; 2005 2.8; 2006 3.6; 2007 3.6 - Nongovernment: 2003 9.8; 2004 9.5; 2005 9.1; 2006 9.4; 2007 10.1 - Gross national savings: 2003 6.6; 2004 8.1; 2005 6.5; 2006 7.0; 2007 7.3 - Government: 2003 3.5; 2004 2.5; 2005 0.3; 2006 0.8; 2007 1.1 - Nongovernment: 2003 3.1; 2004 5.6; 2005 6.2; 2006 6.2; 2007 6.3 - Public finances (Percent of GDP): - Total revenue and grants: 2003 17.6; 2004 17.5; 2005 16.9; 2006 18.3; 2007 19.0 - Revenue: 2003 17.0; 2004 16.8; 2005 15.7; 2006 16.9; 2007 16.5 - Total expenditure and net lending: 2003 15.1; 2004 16.6; 2005 19.3; 2006 21.1; 2007 21.6 - Domestic primary expenditure: 2003 12.5; 2004 13.6; 2005 16.2; 2006 18.0; 2007 16.9 - Overall balance (payment order basis): 2003 2.4; 2004 1.0; 2005 -2.4; 2006 -2.8; 2007 -2.5 - Primary balance³: 2003 4.5; 2004 3.2; 2005 -0.5; 2006 -1.1; 2007 -0.4 - Change in domestic arrears: 2003 0.3; 2004 0.5; 2005 1.9; 2006 -0.4; 2007 0.0 - External sector: - Current account balance: 2003 -4.2; 2004 -3.0; 2005 -5.3; 2006 -6.0; 2007 -6.4 - Exports (goods and services): 2003 43.3; 2004 41.2; 2005 40.3; 2006 40.5; 2007 40.6 - Imports (goods and services): 2003 57.3; 2004 56.2; 2005 57.2; 2006 60.1; 2007 61.5 - External public debt: 2003 93.3; 2004 86.2; 2005 80.8; 2006 80.5 - Of which: arrears: 2003 25.7; 2004 24.3; 2005 25.8; 2006 25.6 - External public debt service (percent of exports): 2003 13.9; 2004 12.3; 2005 7.5; 2006 7.2; 2007 7.3 - Gross international reserves, months of imports: 2003 2.3; 2004 3.6; 2005 2.0; 2006 3.2; 2007 2.9 Notes appearing with indicators: - Projection reflects SMP objectives and the 2007 budget. Assumes external arrears rescheduling and relief. - Percent of broad money at the beginning of the period. - Primary balance³: Revenue minus expenditure, excluding grants, interest, and foreign-financed expenditure. ### Authority statements, commitments, and program intentions - The Togolese authorities reported meeting all performance criteria under the SMP through February and met all structural benchmarks under the SMP through February. - Fiscal performance highlights reported by authorities: - Domestic primary deficit for 2006 was contained at 1 percent of GDP, below the program target of 1.75 percent. - Domestic arrears were reduced for the first time in years. - Revenues exceeded the end-2006 target due to reforms in tax and customs administration and recovery of tax arrears. - Measures: closing spending commitments and payment authorizations under the 2006 budget before December 31, 2006; decree in February 2007 establishing internal and external audit programs in the tax department; preliminary financial audit report on SOTOCO issued. - External sector and reserves: - Gross international reserves increased to 3.2 months of imports from 2.0 months in 2005. - Current account deficit widened to 6 percent of GDP due to higher oil prices and lower cotton exports. - Political progress: - Global political agreement signed in August 2006; national unity government formed in September 2006. - Independent national electoral commission established in October 2006; free and fair legislative elections to be organized before the end of 2007. - Program for 2007 and medium-term plans: - 2007 real GDP growth projected at 3 percent, driven by higher public investment, increase in cotton production and continued strong growth in services related to regional trade. - Authorities developing a comprehensive reform strategy based on the Interim PRSP covering: (i) political and economic governance; (ii) structural reforms to improve business environment, restructure state-owned enterprises, raise agricultural productivity, build infrastructure and develop the financial sector; and (iii) social reforms including wider access to education, health, and safe water. - Fiscal policy commitments: - Administrative reforms to strengthen tax administration: computerization, improved audit procedures, simplified procedures for taxpayers. - Avoiding new arrears and developing a repayment strategy for past arrears following recent audit. - Gradual domestic fiscal adjustment via revenue increases and reallocation toward public infrastructure, education and health. - Call for higher external assistance and comprehensive debt relief (HIPC Initiative and MDRI) given heavy public debt burden. - Monetary and banking sector actions: - Authorities report reducing the NPL ratio from 42 to 28 percent. - Commitment to press ahead with further strengthening banks’ governance and financial position, including restructuring and privatizing state-owned banks, developing microfinance, increasing liquidity and depth of securities markets, and improving legal environment for collateral recovery. - Authorities strengthened monitoring of bank liquidity and prepared a strategy to strengthen and restructure ailing banks with WAMU Banking Commission and IMF technical assistance. - Structural and competitiveness reforms: - Plans to improve business environment, strengthen governance, simplify regulations to attract FDI. - Speed up reforms of state-owned enterprises: clearance of arrears to cotton farmers, audit of SOCOTO, seek a strong strategic investor for phosphate sector. - Work with regional partners and private investors to address energy sector constraints. - Statistical capacity: Authorities requested IMF technical assistance in balance of payments, national accounts, and monetary and fiscal data. ### Conclusions and conditionalities - Authorities agree with staff analysis that Togo is in debt distress and highlighted the need for increased external assistance coupled with benefiting from HIPC Initiative and MDRI. - Authorities requested a PRGF arrangement to mobilize broader donor aid support and debt relief; Directors noted consideration of a PRGF would require understandings with official creditors, including the World Bank, on a mechanism to clear Togo’s large external arrears. *Source: IMF Executive Board discussion and related staff report material as presented in the chapter "6. Despite repeated liquidity injections, several large banks remain fragile and pose a risk."* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07217.pdf_