Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Togo

June 13, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Public Information Notice (PIN) No.07/67
June 13, 2007

On June 8, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Togo.1


Togo faces enormous development challenges after 25 years of economic decline. The long-lasting socio-political crisis and withdrawal of donor support have taken a toll on Togo's economy, infrastructure, and institutions. Traditional export sectors have been eroded by adverse terms of trade, real exchange rate appreciation, and the mismanagement of state-owned enterprises. Governance problems and banking sector difficulties have inhibited private investment. Weak fiscal management has led to the rapid accumulation of debt and arrears, and debt is now at unsustainably high levels.

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, which are also seen as crucial for the resumption of donor support. The authorities have initiated important economic reforms, including steps to strengthen fiscal governance. Economic policies are monitored under a nine-month Staff-Monitored Program (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 following the slump in 2005. Real GDP grew an estimated 2 percent in 2006, as the improved political climate and dynamism in trade-related services offset the drag on growth caused by the crisis in the cotton sector and daily electricity outages. The current account deficit rose modestly, reflecting the impact of 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 have weakened Togo's external competitiveness in recent years. Despite large inflows of liquidity, inflation has been subdued. Broad money grew 22 percent in 2006, as the improved political climate led to a surge in remittances and trade-related capital inflows. While these inflows boosted the banking system's net foreign assets, they did not translate into higher domestic credit. They also did not have a discernible impact on domestic prices. 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, reflecting recent reforms in administration, tax arrears recovery, and an exceptional profit transfer from the Banque Centrale des Etats de l'Afrique de l'Ouest (BCEAO). The government tightened expenditure control in the second half of 2006 by curtailing offbudget operations. The 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 Togo's unsustainably high public debt (about 103 percent of GDP). The 2007 budget aims to anchor macroeconomic stability in an election year by reducing the primary fiscal deficit to ½ percent of GDP. The adjustment would come from a sharp reduction in discretionary spending, supported by reforms to minimize the use of exceptional spending procedures. Allocations for health, education, and public infrastructure would remain broadly unchanged.

The authorities have embarked on important structural reforms, in particular steps to strengthen fiscal governance. Revenue administration reforms started in mid-2006 with the replacement of the tax and customs directors and closure of bank accounts used to divert revenues for offbudget operations. This was followed by the establishment of internal and external audit programs in the tax department and steps to introduce advanced software in the customs department. Unlike in previous years, spending commitments and payment authorizations under the 2006 budget were closed before December 31, which will help control spending in 2007. A recent audit has 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.

Despite repeated liquidity injections, several large banks remain fragile and pose a risk to macroeconomic stability. 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 WAEMU Banking Commission and IMF technical assistance.

Executive Board Assessment

Executive Directors welcomed the recent political and economic reforms in Togo, which mark an important break from the past. Directors noted that the formation of a national unity government and progress toward organizing free parliamentary elections have helped restore economic confidence and supported a nascent economic recovery.

Directors welcomed Togo's good performance under the SMP. They commended the progress made in restoring fiscal discipline and strengthening governance, in particular the reforms to strengthen tax and customs administration and improve expenditure control. Directors also noted the recent audits of domestic debt and of the state-owned cotton company. They encouraged the authorities to complete the remaining structural benchmarks under the SMP and to minimize delays.

Directors cautioned, however, that downside risks to the economic outlook remain substantial, including from possible disruptions in the election process, financial sector weaknesses that could also have adverse spillovers to the regional level, and the deepening problems with energy supply.

Directors stressed the importance of containing fiscal pressures in the run-up to the elections. They noted that the problems of the energy, cotton, and the banking sectors might create additional pressures. To mitigate the risks of expenditure overruns or possible shortfalls in donor support, Directors encouraged the authorities to strengthen spending controls, improve the monitoring of budget execution, and backload nonpriority expenditures to the extent possible.

Directors stressed the need to make progress toward fiscal and debt sustainability. Continued reforms to strengthen fiscal governance will be critical for increasing revenue collection and reallocating spending toward health, education, and infrastructure. A gradual primary fiscal adjustment combined with comprehensive debt relief under the HIPC Initiative and MDRI could help bring debt to sustainable levels and prevent the accumulation of new arrears. Directors noted that progress toward the Millennium Development Goals would require a substantial increase in external assistance from the current low level. Improved public expenditure management was seen as an important prerequisite for securing additional aid flows.

Directors considered that Togo's membership in the WAEMU currency union provides an important anchor of stability. They expressed concern, however, about Togo's loss in external competitiveness over the past two decades, largely caused by weaknesses in governance, deteriorating infrastructure, terms of trade shocks, and—more recently—real exchange rate appreciation. Nevertheless, given Togo's comparatively low wages, Directors saw little evidence of a significant exchange rate overvaluation. At the same time, they stressed the need to improve external competitiveness in order to support higher economic growth and prevent a widening current account deficit. The policy focus should be on raising productivity growth, which will require improving the investment climate through structural reforms, infrastructure investment, and improved fiscal governance.

Directors saw Togo's overarching medium-term challenge as reviving and sustaining economic growth, following a quarter century of decline. They noted that ending the long-lasting political crisis and reengaging with donors will be critical for reviving growth. Reforms of public enterprises in the cotton and phosphate sectors are additional challenges, alongside policies to diversify and raise productivity in agriculture. Directors encouraged the authorities to work with regional partners and donors to alleviate energy shortages, which are increasingly hampering economic activity. They also highlighted the importance of developing the financial sector, including by restructuring ailing banks, and improving the business environment, including through measures to improve governance.

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. They were therefore encouraged by the authorities' commitment to implement the recommendations of the WAEMU Banking Commission and of IMF technical assistance. Directors also encouraged the authorities to monitor closely the current surge in money growth and be prepared to take corrective policy action in case of emerging inflationary pressures or imprudent lending practices.

Directors noted that successful performance under the SMP could pave the way for consideration of a PRGF arrangement later this year, based on an agreed medium-term economic program consistent with the finalized Interim Poverty Reduction Strategy Paper (I-PRSP). They stressed that this would require understandings with official creditors, including the World Bank, on a mechanism to clear Togo's large external arrears.

Directors noted that the long-lasting political crisis and withdrawal of donor support had weakened Togo's institutional capacity and highlighted the importance of enhanced technical assistance, including in the fiscal area and in economic statistics.

Togo: Selected Economic Indicators

  2003 2004 2005   2006   2007
  Actual   Est.   Proj.¹

  (Percent change, unless otherwise indicated)

National income, prices, and exchange rates


Real GDP

5.2 2.3 1.2   2.0   2.9

Real GDP per capita

2.4 -0.3 -1.3   -0.5   0.4

GDP deflator

-9.9 2.8 7.4   2.1   2.0

Consumer price index (annual average)

-0.9 0.4 6.8   2.2   3.2

GDP (CFAF billions)

972.7 1,023.3 1,112.7   1,158.8   1,216.3

Exchange rate CFAF/US$ (annual average)

580.1 527.5 527.0   524.4   ...

Real effective exchange rate (annual average)

3.7 1.1 2.5   -1.4   ...

Terms of trade (deterioration -)

3.7 -12.2 -3.6   -2.9   ...

Monetary survey


Net foreign assets ²

0.6 27.0 -2.8   19.2   0.0

Credit to government ²

-7.4 -3.6 -1.2   -0.7   6.5

Credit to the nongovernment sector ²

16.1 2.8 6.6   0.4   2.5

Broad money (M2)

11.4 18.3 1.4   22.1   9.0

Velocity (GDP/ end-of-period M2)

3.6 3.2 3.5   3.0   2.8
  (Percent of GDP, unless otherwise indicated)

Gross domestic investment

10.8 11.1 11.8   13.0   13.7


1.1 1.5 2.8   3.6   3.6


9.8 9.5 9.1   9.4   10.1

Gross national savings

6.6 8.1 6.5   7.0   7.3


3.5 2.5 0.3   0.8   1.1


3.1 5.6 6.2   6.2   6.3

Total revenue and grants

17.6 17.5 16.9   18.3   19.0


17.0 16.8 15.7   16.9   16.5

Total expenditure and net lending

15.1 16.6 19.3   21.1   21.6

Domestic primary expenditure

12.5 13.6 16.2   18.0   16.9

Overall balance (payment order basis)

2.4 1.0 -2.4   -2.8   -2.5

Primary balance ³

4.5 3.2 -0.5   -1.1   -0.4

Change in domestic arrears

0.3 0.5 1.9   -0.4   0.0

Current account balance

-4.2 -3.0 -5.3   -6.0   -6.4

Exports (goods and services)

43.3 41.2 40.3   40.5   40.6

Imports (goods and services)

57.3 56.2 57.2   60.1   61.5

External public debt

93.3 86.2 80.8   80.5   ...

Of which: arrears

25.7 24.3 25.8   25.6   ...

External public debt service (percent of exports)

13.9 12.3 7.5   7.2   7.3

Gross international reserves, months of imports

2.3 3.6 2.0   3.2   2.9

Sources: Togolese authorities; and Fund staff estimates and projections.

¹ Projection reflects SMP objectives and the 2007 budget. Assumes external arrears rescheduling and relief.

² Percent of broad money at the beginning of the period.

³ Revenue minus expenditure, excluding grants, interest, and foreign-financed expenditure.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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