Public Information Notice No. 04/71

Public Information Notice: IMF Concludes 2004 Article IV Consultation with Niger

July 19, 2004

On June 28, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Niger.¹

Background

Since the mid-1990s, Niger has been implementing reforms supported by the Fund through successive Enhanced Structural Adjustment Facility (ESAF) and Poverty Reduction and Growth Facility (PRGF) arrangements.² The last PRGF arrangement with Niger was approved in December 2000 in support of a program covering the period 2000-03. At the time of the fifth review in November 2003, the arrangement was extended to June 2004. In early April 2004, the Executive Boards of the Fund and World Bank concluded that Niger had fulfilled the conditions for reaching the completion point under the enhanced Heavily Indebted Poor Countries Initiative (HIPC), including topping up, and that the government's Poverty Reduction Strategy Paper (PRSP) provided an appropriate analysis of poverty in Niger and of the authorities' strategy to alleviate it. On May 12, 2004, Paris Club creditors agreed to cancel Niger's total external debt with these creditors, in line with the debt relief expected under the enhanced HIPC, topping up relief, and additional bilateral debt cancellation. Non-Paris Club creditors are expected to provide debt relief on comparable terms. Total debt relief is estimated at US$663.1 million in net present value (NPV) terms, of which the Fund will provide US$42.0 million.

Niger's macroeconomic performance has been satisfactory in 2002 and 2003, notwithstanding the adverse impact of the crisis in Côte d'Ivoire and large fluctuations in agricultural output owing to uneven rainfalls. Real GDP growth is estimated to have increased to 5.3 percent in 2003, from 3.0 percent in 2002, owing to a bumper crop made possible by favorable weather conditions and increased activity in the construction and trade sectors. The very good foodcrop recorded during the year contributed to a decline in the consumer price index of 1.6 percent in 2003, compared with an increase of 2.7 percent in 2002. Economic activity has remained buoyant in early 2004, with the agricultural and construction sectors benefiting from continued favorable weather conditions and the implementation of HIPC-funded investment projects in the social sectors and rural areas.

The external current account deficit, after official transfers, narrowed slightly to 6.2 percent of GDP in 2003, as an increase in the trade deficit was offset by lower interest payments and higher official transfers for budgetary assistance. Since end-2001, the real effective exchange rate has appreciated by 5 percent, reflecting the strengthening of the euro (to which the CFA franc is pegged) against the U.S. dollar. Fiscal performance was broadly satisfactory in 2002 and 2003, although revenue collection weakened in 2003, owing mainly to the impact of the crisis in Côte d'Ivoire. The overall fiscal deficit, before grants, is estimated to have fallen by 0.2 percentage point of GDP, to 7.5 percent of GDP in 2003.

Monetary policy, which is conducted at the regional level by the Central Bank for West African States (BCEAO), has remained prudent. The BCEAO reduced the discount rate by 150 basis points to 5.0 percent between July and October 2003 in response to the fall in inflation, the decline in interest rates in the euro area, and its high level of international reserves. The health of Niger's banking system is broadly satisfactory, with the majority of the local banks effectively complying with most of the Regional Banking Commission's prudential regulations.

There has been progress in implementing structural reforms since 2002. Improvements in public expenditure management have made possible modernization of the chain of expenditure, both in terms of management procedures and the information system, and have facilitated enhanced monitoring of the HIPC-funded budget spending that contributes to poverty reduction. At the same time, the authorities have strengthened medium-term budget programs. Significant advances have also been made in implementing the government's poverty reduction strategy, which has resulted in increased school enrollment rates and improved medical coverage in the rural areas. There have been some delays, however, in the area of privatization.

The authorities agreed with the thrust of the staff's assessment of performance under past Fund-supported programs. Notwithstanding the progress made in restoring macroeconomic stability and laying the foundations for sustainable growth, Niger faces many challenges and remains vulnerable to exogenous shocks, especially poor weather conditions, and terms of trade fluctuations. The authorities have expressed interest in a successor PRGF arrangement to help them implement their pending reform agenda and mobilize external assistance.

Executive Board Assessment

Directors commended the authorities for the significant strengthening of policy implementation under Niger's PRGF-supported program, which resulted in encouraging progress toward macroeconomic stability, higher economic growth, and poverty reduction. GDP growth is expected to remain robust in 2004, supported by continuing favorable weather conditions and strong domestic demand underpinned by investment in the social sectors.

Directors considered Niger's medium-term economic prospects to be generally favorable, provided the authorities continue to take strong action to address the considerable economic and social challenges that Niger still faces. These include: the need to boost economic growth rates and improve social indicators; a reduction in the economy's heavy dependence on foreign aid and vulnerability to exogenous shocks; and a continued lowering of the still-high debt burden. Accordingly, Directors highlighted the importance of continued progress toward fiscal consolidation, along with appropriately prioritized reforms to lower production costs, diversify the production and export base of the economy, and improve competitiveness and the business climate.

Directors stressed that long-term fiscal sustainability will be crucial to preserve economic growth and poverty reduction. They commended the authorities' continued sound fiscal management, and encouraged them to maintain fiscal prudence, particularly in the run-up to the presidential elections. Noting Niger's low tax effort by regional standards, Directors underscored the importance of deeper and broader tax reform, including efforts to widen the tax base and bring at least part of the informal sector into the tax system. This will be critical to increasing the resources available for investment and poverty reduction while reducing the dependence on foreign aid. Directors also urged strict control over expenditure, including wage restraint, as well as continued emphasis on priority spending and the provision of an adequate safety net for the more vulnerable groups. It will also be important that the authorities adhere strictly to the schedule for clearing arrears over the next five years. Directors looked forward to the audit of HIPC spending, which will help ensure that HIPC assistance is used effectively.

Directors noted that Niger's external debt will remain high despite HIPC topping up, and that Niger will continue to rely on external financing for some time. They therefore supported the authorities' prudent debt-management strategy of seeking only grants and—exceptionally—highly concessional loan financing. Close collaboration with the donor community will remain key in this regard.

Directors welcomed the continued absence of inflationary pressures, and the prudent easing of monetary policy by the Central Bank for West African States since 2003. They encouraged the authorities to move ahead with the settlement of outstanding statutory advances to the central bank.

Directors welcomed the authorities' commitment to their structural reform agenda. Noting the delays experienced in this area in 2003, they encouraged the authorities to expedite the privatization of the electricity and petroleum importing companies (NIGELEC and SONIDEP) to help lower energy costs and boost private investment. Directors acknowledged the importance of ensuring that the economic and social costs of the privatization process are adequately addressed. They welcomed the improvement in the overall health of Niger's financial institutions, which are generally complying with prudential norms. Going forward, efforts to improve the competitiveness of the banking sector will enhance financial intermediation, while the development of microfinance institutions will help improve access to credit country-wide. Directors encouraged the authorities to press ahead with the privatization of the state-owned Credit du Niger and the restructuring of the National Post and Saving Institution (ONPE). They also encouraged the authorities to implement promptly the recommendations of the recently completed Public Expenditure Management and Financial Accountability Review (PEMFAR) conducted by the World Bank.

Directors welcomed the broadly satisfactory implementation of the PRSP, particularly the progress in expanding health coverage and improving Niger's low primary school enrollment rates, although a further strengthening of efforts in these areas will remain critical. They underscored the importance of carrying out the household survey, and supported the authorities' focus on agricultural and rural development as a vital channel for poverty reduction.

Directors welcomed the ex post assessment of Niger's performance under Fund-supported programs. Going forward, they supported the priority emerging from the assessment on the need to increase investment and savings, including by strengthening public savings through increased revenue mobilization. They also underscored the importance of minimizing direct involvement of the public sector in the economy, establishing adequate conditions for private sector development, and improving infrastructure to ensure a better management of water. Directors emphasized the need to strengthen institutional capacity, particularly in the areas of tax and customs administration, debt management, and statistics. Technical assistance will continue to play a key role to support Niger's reform efforts in these areas.

Directors encouraged the authorities to improve the timeliness, quality, and coverage of Niger's economic data. Particular efforts are needed to strengthen the national accounts and balance of payments statistics and, at the regional level, to address weaknesses in the monetary data.