Benin: 2019 Article IV Consultation, Fourth Review Under the Extended Credit Facility Arrangement, and Request for Modification of Performance Criteria—Press Release; Staff Report; and Statement by the Executive Director for Benin
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International Monetary Fund. African Dept.
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Publication Date:
02 Jul 2019
eISBN:
9781498323802
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English
Keywords:
ISCR; CR; Eurobond issuance; deficit; debt ratio; financing mix; financial support; financing ceiling; financing option; Government debt management; Credit; Global; financing source
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2019 Article IV Consultation, Fourth Review under the Extended Credit Facility Arrangement, and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Benin

Abstract

2019 Article IV Consultation, Fourth Review under the Extended Credit Facility Arrangement, and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Benin

Background

1. Benin has very large development needs. At $829 in 2017, GDP per capita is well below the Sub-Saharan Africa (SSA) weighted average of $1,574. Benin is in the bottom quartile of the 2017 Human Development Index. Poverty remains elevated at about 40 percent of the population. Large development gaps exist in several key areas, as illustrated by low staffing in the health sector, limited access to sanitation and electricity, and low literacy rate. The recent costing exercise of the Sustainable Development Goals (SDGs) summarizes the scale of the challenge, with additional expenditure needs estimated at around 20 percent of GDP by 2030.1

2. Achieving development objectives will require a deep transformation of the Beninese economy. Growth should be more stable and inclusive to bring down poverty and generate the tax revenues needed to finance development projects. Economic diversification away from Benin’s traditional sectors would enhance the resilience of the economy. Finally, a stronger participation of the private sector, including foreign investors, could generate additional resources for infrastructure in a context of tighter public finances.

3. The authorities are committed to this agenda of economic development but are facing hurdles. Their strategy is embedded in the 2018–25 national development plan, which establishes strategic guidelines to achieve development objectives and support line ministries in formulating their sectoral programs. Within this framework, the 2016–21 Government Action Plan (GAP) identifies the main priorities and projects in infrastructure, agriculture, and tourism. In 2017, Benin became member of the Compact with Africa (CwA), with the aim of boosting the country’s attractiveness. However, despite Benin’s high growth potential and strong commitment to reform, progress is hampered by structural bottlenecks, such as the small size of the domestic market, high informality, and governance weaknesses.

4. Strong performance under the IMF program will support the authorities’ progress towards development goals. All end-June and end-December QPCs have been met since the beginning of the program in 2017.2 Implementation of past policy recommendations since the 2017 Article IV report has been broadly satisfactory (Annex I). Results have been especially encouraging in the fiscal area: the fiscal deficit is excepted to decline by half in two years (from 5.9 percent of GDP in 2017 to 3.0 percent of GDP in 2019) and the authorities have conducted important reforms to mobilize domestic revenue and improve the efficiency of public investment.

Recent Developments

The macroeconomic and fiscal performance continues to be strong, but signs of vulnerabilities in the financial sector have become more apparent.

5. The growth momentum does not show signs of slowing. 2018 growth is estimated at 6.7 percent (up from 5.8 percent in 2017), mainly driven by strong agriculture and port activity. Cotton production is expected to exceed 700,000 tons in 2018 compared to 598,000 tons in 2017. The volume of merchandise at the Port of Cotonou increased by over 8.5 percent in 2018 (Text Figure 1). Inflation stood at 1 percent last year.

Text Figure 1.
Text Figure 1.

Cotton and Port Activity Indicators (thousands of tons)

Citation: IMF Staff Country Reports 2019, 203; 10.5089/9781498323802.002.A001

Source: Beninese authorities.

6. The fiscal deficit narrowed significantly in 2018. The 2018 deficit is estimated at 4.0 percent of GDP, significantly lower than anticipated at the time of the third review (4.7 percent). The overperformance is mainly due to the under-execution of the investment budget. Revenues were on target. For the first time since the program inception, domestic tax revenues overperformed, and, combined with another overperformance of nontax revenues, offset a significant shortfall at customs.3 Spending on priority social sectors amounted to CFAF 202.4 billion, significantly above the end-December floor (CFAF 167.0 billion). Finally, data for the first quarter of 2019 suggest that revenue collection and the execution of the budget are on track.

7. Preliminary estimates point to a strong contraction of the current account deficit in 2018. After widening in 2017 due to higher food imports and the public investment scaling up, the current account deficit (including grants) declined from 10.0 percent of GDP in 2017 to 8.3 percent of GDP in 2018. The improvement was mainly driven by a significant increase in exports of cotton, and, to a lesser extent, cashew nuts. Reforms to strengthen the technical capacities of farmers, expand cultivable lands, and distribute higher-quality seeds led to a surge of agricultural production, which had also a dampening effect on food imports.

8. Financial vulnerabilities have become more apparent. The aggregate capital adequacy ratio (CAR) of the banking sector declined sharply in the first half of 2018 (from 11.9 percent at end-2017 to 7.6 percent at end-June 2018), with 5 out of 12 banks falling below the regulatory threshold of 8.6 percent. The low CAR is partly the result of the structurally-low profitability of the banking sector, which recorded aggregated losses for three consecutive years in 2015–17 (Selected Issues Paper IV). However, most of the decline in the first half of 2018 was due to the ongoing regulatory Basel II/III reform, which has redefined the scope of bank capital.4 Other financial soundness indicators point to a slight decline in the level of non-performing loans (NPLs) (from 19.4 percent of total loans in 2017 to 18.9 in June 2018) and an increase in loan concentration, with credit to the five largest borrowers rising from 91.6 percent of banks’ capital at end-2017 to 103.3 percent in June 2018 (Table 10).

Table 1.

Benin: Selected Economic and Financial Indicators, 2017–24

article image
Sources: Beninese authorities; IMF staff estimates and projections.

Total revenue (excluding grants) minus current primary expenditure, capital expenditure, and net lending.

Total revenue (excluding grants) minus current primary expenditure and capital expenditure financed by domestic resources.

Includes arreas stock.

Data include central government debt, government guarantees, and domestic arrears.

Table 2.

Benin: Consolidated Central Government Operations, 2017–24

article image
Sources: Beninese authorities; IMF staff estimates and projections.

For 2019, arreas to suppliers of 0.3 percent of GDP are included in expenditure and deficit relative to EBS/18/364.

Total revenue (excluding grants) minus current primary expenditure, capital expenditure, and net lending.

Total revenue (excluding grants) minus current primary expenditure and capital expenditure financed by domestic resources.

Compared to EBS/18/364, the recomposition of the financing reflects the issuance of the eurobond and the related reduction in domestic borrowing.

Includes financing by Beninese banks.

Includes financing by regional banks.

The Eurobond of FCFA 325 billion is used for budget financing. Domestic financing is adjusted downward relative to EBS/18/364 by the same amount.

Table 3.

Benin: Consolidated Central Government Operations, 2017–24

article image
Sources: Beninese authorities; IMF staff estimates and projections.

For 2019, arreas to suppliers of 0.3 percent of GDP are included in expenditure and deficit relative to EBS/18/364.

Total revenue (excluding grants) minus current primary expenditure, capital expenditure, and net lending.

Total revenue (excluding grants) minus current primary expenditure and capital expenditure financed by domestic resources.

Compared to EBS/18/364, the recomposition of the financing reflects the issuance of the eurobond and the related reduction in domestic borrowing.

Includes financing by Beninese banks.

Includes financing by regional banks.

The Eurobond of FCFA 325 billion is used for budget financing. Domestic financing is adjusted downward

Data include central government debt, government guarantees, and arrears.

Table 4.

Benin: Consolidated Central Government Operations, 2018–19

article image
Sources: Beninese authorities; IMF staff estimates and projections.

Data are computed on a cumulative basis

For 2019, arreas to suppliers of FCFA 19.6 billion are included in expenditure and deficit relative to EBS/18/364.

Total revenue (excluding grants) minus current primary expenditure, capital expenditure, and net lending.

Total revenue (excluding grants) minus current primary expenditure and capital expenditure financed by domestic resources.

Compared to EBS/18/364, the recomposition of the financing reflects the issuance of the eurobond and the related reduction in domestic borrowing.

Includes financing by Beninese banks.

Includes financing by regional banks.

The Eurobond of FCFA 325 billion is used for budget financing as follow: 80 billion in Q2, 160 billion in Q3, and 85 billion in Q4. Domestic financing is adjusted downward relative to EBS/18/364 by the same amount.

Table 5.

Benin: Balance of Payments, 2017–24

article image
Sources: Beninese authorities; IMF staff estimates and projections. Note: … = not available.

Excludes re-exports and imports for re-export.

Projections for short-term capital include estimates to adjust for the trend in errors and omissions.

The upward revision in 2019 relative to EBS/18/364 is due partly to the Eurobond issuance.

Table 6.

Benin: Monetary Survey, 2017–20

article image
Sources: BCEAO; IMF staff estimates and projections.

Revisions relative to EBS/18/364 reflect the recomposition of financing after the eurobond.

Including credit to the private sector and to other non-financial public sector.

Table 7.

Benin: Schedule of Disbursements Under the ECF Arrangement

article image
Source: International Monetary Fund
Table 8.

Benin: Indicators of Capacity to Repay the IMF, 2019–33

article image
Sources: IMF staff estimates and projections.

Data are projections

On December 4, 2018 the IMF Executive Board approved an extension of the modified inter est rate setting mechanism which effectively sets interest rates to zero on ECF and SCF through June 30, 2019 and possibly longer. The Board also decided to extend zero interest rate on ESF until end-June 2019 while interest rate on RCF was set to zero in July 2015. Based on these decisions and current projections of SDR rate, the following interest rates are assumed beyond June 30, 2019: projected interest charges between 2019 and 2020 are based on 0/0/0/0.25 percent per annum for the ECF, SCF, RCF and FINFRESF, respectively, and beyond 2020 0/0.25/0/0.25 percent per annum.

Total debt service includes IMF repurchases and repayments.

Table 9.

Benin: Gross External Requirement, 2019–21

(in percent of GDP)

article image
Source: Beninese authorities; IMF staff estimates and projections.

Excluding grants

Table 10.

Benin: Financial Stability Indicators, 2012–18

article image
Source: BCEAO. Note: … = not available.

Year of first data reporting in accordance with Basel II/III and Revised Chart of Accounts (Interim Data)

Identified sectors represent at least 80 percent of credit

The improvement of NPLs since 2015 includes the reduced exposure by several banks to a business group that encountered difficulties in 2012–14.

Excluding taxes on banking operations.

Including savings accounts.

Outlook and Risks

Benin’s economic outlook is favorable, supported by sound macroeconomic and structural policies, but there are downside risks.

9. Medium-term growth prospects are robust. The 2019 real GDP growth forecast is revised up to 6.7 percent to reflect stronger-than-expected agriculture activity. Beyond 2019, growth is projected to remain close to its potential, estimated above 6½ percent (see Box 1). The main drivers of medium-term growth will continue to be strong agriculture and transportation, as well as rising private investment and the lagged effect of the public investment scaling-up.

10. The fiscal deficit and inflation are expected to respect the WAEMU convergence criteria going forward. A stock of arrears of 0.3 percent of GDP inherited from previous governments was uncovered by the January 2019 audit (SB). In line with accounting rules, the 2019 commitment-based fiscal deficit was revised upward from 2.7 to 3.0 percent of GDP. Beyond 2019, the baseline projections assume that the public investment ratio will gradually return to its pre-scaling up level.5 This should maintain the deficit below the 3 percent of GDP regional norm. Inflation should also stay below the 3 percent regional limit over the forecast horizon.

11. The public debt ratio is expected to start declining from 2019 after five years of increase. This decline is the result of continued fiscal consolidation and strong economic growth. Two developments have impacted the 2019 debt projection since the last review.6 First, the stock of arrears inherited from previous governments has been added to the 2019 debt stock. In the context of the annual budget, arrears will be repaid in cash over a period of three years at a pace of 0.1 percent of GDP per year. Second, in March 2019, the authorities issued a first Eurobond of €500 million (5.2 percent of GDP), while scaling down, by the same amount, their domestic financing plans for the year (see section on debt management below). As a result, total borrowing for 2019 is unchanged relative to the last review but the share of external debt relative to domestic debt has increased.

Medium-Term Growth in Benin

Estimating medium-term growth is difficult in small, low-income economies like Benin, where growth tends to be volatile and subject to structural changes. For robustness, three alternative approaches are employed:

  • Statistical filter. A Hodrick-Prescott filter estimates trend output growth at 6.5 percent (for 2018).

  • Econometric estimation. An econometric Growth-at-Risk (GaR) model, which projects a growth distribution, estimates medium-term growth between 6.4–6.8 percent depending on the specification (Selected Issues Paper I).

  • Production function approach. This approach uses demographic data from the International Labor Organization, capital accumulation projections from the macroeconomic framework, as well as alternative scenarios for future total factor productivity growth (25th, 50th, and 75th percentile of productivity growth recorded over 2008–18). The method places growth in the range of 5.5 and 7.3 percent at the end of the forecast horizon, with a mid-point at 6.6 percent.

uA01fig01

Benin, Growth Decomposition, by Component

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 203; 10.5089/9781498323802.002.A001

Source: Beninese authorities and IMF Staff estimates.

12. The current account is projected to keep improving in the medium term. Its gradual convergence towards about 5 percent of GDP assumes the successful implementation of the fiscal consolidation plan and the expansion of agriculture production. There is ample room to raise production capacity for cashew nuts, whose exports are expected to increase significantly. Cotton exports are also projected to rise, although at a slower pace.7 The external sector assessment indicates that Benin’s external position was broadly consistent with fundamentals and desirable policy settings in 2018 (Annex III).

13. The outlook is nonetheless subject to downside risks (Annex II). In the short term, the primary sources of risks are: (i) political discontent in the aftermath of the April 2019 Parliamentary elections, which may disrupt the reform momentum; (ii) lower-than-expected growth in Nigeria, which would weaken Benin’s exports, fiscal position, and growth; and (iii) further deterioration of bank profitability, which would weigh on credit and economic activity in the formal sector. In the medium term, growth prospects are heavily dependent on the ability to revive private investment and attract foreign investors. A tightening of international and regional financial conditions (which will depend, among other factors, on the ability of Ivory Coast and Senegal to issue Eurobonds) could raise debt servicing costs.

Authorities’ Views

14. The authorities envisage a more buoyant growth outlook. In their view, staff’s forecasts do not fully capture the structural break set in motion by the new policies of the government. They expect growth to exceed 7 percent in 2019 and beyond (MEFP ¶28). They agreed that agriculture and port activity will be key drivers of medium-term growth, but they also emphasized the role of future GAP projects (which will boost construction) and the development of new sectors such as tourism and digital economy. They consider that the main risks to growth could come from uncertainties about the pace of increase in private investment and the regional economic outlook, including demand from Nigeria. However, risks should be mitigated by the government’s reform agenda geared towards improving the business climate and diversifying the growth engines. Regarding the inflation and current account projections, the authorities concurred with IMF staff assessment.

Policy Discussions

Discussions focused on the five key components of a medium-term strategy that would put Benin on the path towards achieving the SDGs: (A) revenue mobilization to create budgetary space for development programs; (B) debt sustainability to foster economic stability and bolster investor confidence; (C) economic diversification and transformation to make growth stronger, more sustainable, and less volatile; (D) risks to growth posed by financial sector vulnerabilities; and (E) the governance reform agenda.

A. Creating Fiscal Space for Development Programs

15. Tax revenue mobilization is a priority for the authorities. In 2018, the tax-to-GDP ratio was 14.0 percent of GDP, below the median ratios of SSA countries and non-resource-rich LIDCs (respectively, 15.1 and 15.4 percent of GDP). The authorities eliminated some tax expenditures for GSM mobile phone companies in mid-2018 (with budgetary savings for 2019 estimated at 0.3 percent of GDP). Along with other tax measures, the 2019 budget also removed 0.9 percent of GDP of tax exemptions (IMF Country Report 18/364).

16. Further revenue mobilization will help create space for priority social spending and infrastructure. Baseline projections over 2020–24 assume that fiscal consolidation will continue to rely on the scaling down of public investment initiated in 2018–19, with the goal of bringing the investment ratio back to its pre-scaling up level (Table 3). However, a more desirable medium-term fiscal strategy should focus on revenue mobilization. This would alleviate the need to compress public investment and provide more budgetary space for development programs.8 In 2019, priority social expenditure is expected to grow at the same pace as GDP, despite the overall budget envelope being stable in nominal terms. The authorities have also started the pilot phase of their future universal health insurance system, with the objective of making it fully operational by 2022 (Box 2). Staff emphasized that the new program should be fully financed. Technical and capacity constraints identified during the pilot phase (notably, staff and infrastructure shortfalls in the health provision system) should be lifted before its generalization.

17. There is a large revenue potential from consumption taxes. The mission presented revenue-mobilizing options that could be implemented in the 2020 budget and beyond (Selected Issues Paper III). Excise tax rates, which are below the ceilings set by the WAEMU, could be increased for certain goods. Further rationalization of VAT exemptions is also warranted. Closing the VAT policy and compliance gaps could generate around 3 percent of GDP, while aligning the excise revenue-to-GDP ratio with the SSA average would raise half a percent of GDP. Such a large revenue effort could be achieved over a decade at a pace of ¼-½ percent of GDP per year. It is not included in the current projections.

18. To secure the gains of the revenue mobilization strategy, new tax incentives should be carefully monitored and properly offset. The authorities are contemplating the creation of special economic zones to support their food processing industry (MEFP ¶47). Staff recognizes that targeted incentives may be useful to incentivize new tradable activities in a very competitive international environment. Nonetheless, these incentives can have large budgetary costs and be redundant (that is, the same investments would have been undertaken in their absence). They can also be distortive when large tax breaks require offsets that place excessive burden on other narrow tax bases. Therefore, to be effective, tax incentives must be carefully designed.9 And their budgetary impact should be periodically assessed and accommodated by revenue-raising measures.

The Universal Health Insurance System

In May 2017, the government of Benin adopted the legal framework establishing a new social protection system (Assurance pour le Renforcement du Capital Humain, ARCH) with the aim of ensuring effective and affordable social insurance to the Beninese population, especially the poor (40 percent of the total population). ARCH contains four services: universal health insurance, training, credit provision, and pension insurance for people in the informal sector.

The health insurance is the main component of ARCH and its implementation is the most advanced. In 2019, the government started a pilot phase in three regions by identifying and testing the system on the poorest populations. The insurance is expected to be progressively expanded to the rest of the population and become fully operational by 2022.

Studies about financing and implementation are being conducted with the assistance of USAID and the World Bank. The system is expected to be self-financed, except for poor populations who will benefit from a public subsidy to cover their insurance premium. The budgetary cost of this subsidy is minimal during the pilot phase (0.06 percent of GDP in the 2019 budget), since it is tested on a small sample of the population (about 300,000 extreme poor). When the system is generalized, the cost of the public subsidy should reach 0.5 percent of GDP, according to preliminary estimates. At the moment, the plan is to cover this cost with additional taxes generated by the medium-term revenue mobilization strategy (Selected Issues Paper III).

Authorities’ Views

19. The authorities reaffirmed their commitment to comply with the 3 percent deficit ceiling beyond 2019, while continuing to enhance revenue mobilization. To achieve the development objectives set in their 2018–25 national development plan, the authorities have, so far, relied on the rationalization of current expenditures (in particular the wage bill) and the scaling down of public investment. Over the medium term, they intend to place more emphasis on enhancing tax revenue mobilization in order to support investment in physical infrastructure and social programs such as ARCH (MEFP ¶30). The authorities also agreed that the revenue mobilization strategy should focus primarily on exploiting the potential of consumption taxes (VAT and excises).

B. Preserving Debt Sustainability

20. 2019 is expected to mark a turning point in the debt trajectory. The debt ratio is projected to start declining after five years of continuous increase. Ensuring that debt remains on a declining path afterwards will require strict adherence to the medium-term fiscal consolidation plan, in particular by keeping the fiscal deficit below 3 percent of GDP, in line with the WAEMU criterion. The risk of debt distress continues to be assessed as moderate (see updated Debt Sustainability Analysis (DSA) report).

21. Benin’s first Eurobond issuance helped diversify the financing mix and improved debt terms. In March 2019, the authorities issued their first Eurobond, in the amount of €500 million (5.2 percent of GDP) with a weighted maturity of 6 years and an interest rate of 6.0 percent. The terms compared favorably to issuances on the regional market (e.g., 7.0 percent for a 5-year bond issued earlier in March). The Eurobond brings several benefits, including: (i) diversifying financing sources away from the relatively illiquid regional market, (ii) lowering debt service costs, (iii) hedging against the volatility of other foreign financing sources, and (iv) contributing to regional reserve accumulation.

22. At the same time, greater reliance on non-concessional external financing creates new types of risks that call for enhanced monitoring and management. Compared to regional borrowing, the Eurobond carries an exchange rate risk, which is estimated to be small in the short to medium term given the peg between the CFAF and the euro. The Eurobond will also modify the nature of the refinancing risk by exposing Benin to changes in global risk aversion. For instance, a shift in the risk appetite of international investors due to global factors could result in a decompression of spreads and capital flow reversals in low-income countries, making the Eurobond more difficult to rollover when it becomes due. Reforms of the debt management framework can help manage these new risks (Box 3).

23. A new targeted composition of the portfolio between domestic and external debt should anchor the debt management strategy. Following the debt reprofiling of October 2018 and the recent Eurobond issuance, the debt composition has changed markedly with external debt increasing from 40 percent of total debt in 2017 to close to 60 percent in 2019. Further efforts to optimize the debt portfolio by substituting external for domestic financing should strike the right balance between improving debt terms (lowering interest payments and extending maturities) and maintaining a safe exposure to external risks. In particular, the debt composition target (currently 50–50) should be revised to take into account the current macro-fiscal framework, existing vulnerabilities in the debt portfolio, market capacity constraints, and the expected evolution of market variables (interest and exchange rates). The updated debt composition target will provide guidance on future borrowing activities.

24. Risks to debt arising from future infrastructure projects need to be monitored and managed proactively. About 60 percent of the GAP projects are expected to be financed by the private sector, mainly in the form of Public Private Partnerships (PPPs). While private sector participation may require some public support, the implications for public debt should be carefully monitored. In particular, PPPs should be properly reflected in fiscal accounts, and their fiscal risks assessed. The provision of new guarantees provided to state-owned enterprises (SOEs) should be conditioned on a DSA assessment.10 Regarding the airport project mentioned in IMF Country Report 18/364, feasibility studies are still underway, and the authorities did not have more information on the project size and financing relative to the last review (MEFP ¶43).

Debt Management Framework for Frontier Markets

With its recent Eurobond issuance, Benin has tapped for the first time international sovereign bond markets and, going forward, will be able to access a more diversified set of financing options. The country can learn from the experience of other frontier markets (Guscina, Pedras, and Presciuttini, 2014; and Mecagni, 2014).1 Access to international markets brings opportunities to investors, including increasing available financing, improving debt terms, broadening the investor base, and benefiting from financial innovations. However, this may also generate new vulnerabilities that need to be monitored and managed carefully by reinforcing and adapting the institutional, legal, and operational framework for debt management.

  • Debt management strategy. The move from concessional and/or domestic borrowing towards more market-based international financing often requires enhancing the formulation and implementation of the debt management strategy. Several reforms have proved successful, such as: (i) identifying and updating a targeted composition of debt (for example the share between domestic and external debt) that strikes the right balance between costs and risks; (ii) providing clear indication of future plans regarding foreign and domestic markets debt issuance to meet the targeted debt composition; (iii) better anticipating and planning for debt rollover and avoiding bunching of maturities; (iv) establishing plans for active liability debt management (facilitated by the access to international markets); and (v) nurturing an active investors relationship, including by strengthening public financial management and public debt transparency practices (e.g., publishing information on the composition of public debt in a timely manner).

  • Debt Management Office (DMO) capacity. The debt strategy needs to be supported by organizational and operational changes at the DMO. This includes (i) ensuring the retention and training of qualified staff (more risk-focused and more market-aware); (ii) establishing tighter procedures on debt repayment and monitoring; (iii) clarifying the division of responsibilities and enhancing communication and data exchange between the various bodies involved in debt management (including the Ministry of Finance and DMO) to help mitigate operational and reputational risks; and (iv) organizing the DMO by functional lines (front, medium and back offices) to ensure clear reporting and help manage the new operational risks.

1 Mecagni, M., 2014, “Issuing international sovereign bonds”, International Monetary Fund. Guscina, A., G. Pedras, and G. Prosciuttini, 2014, “First-Time International Bond Issuance New Opportunities and Emerging Risks”, International Monetary Fund.

Authorities’ Views

25. The authorities are committed to maintaining the debt ratio on a firm declining path. They emphasized the reforms recently introduced in the DMO to raise human capacity, strengthen debt monitoring, improve communication with the public, and reinforce the coordination with the Treasury (MEFP ¶15). They see the Eurobond as a first step towards accessing international bond markets on a more regular basis, while maintaining a flexible, proactive, and prudent approach to raise financing on markets offering the best financial conditions. While their 2017–21 debt management strategy document already foresees the use of Eurobonds, the authorities concurred with the need to update the annual operational plan to reflect the new challenges related to the Eurobond issuance, including by revising the debt composition target (MEFP 1137). Regarding the management of PPP-related risks, the Ministry of Finance set up in 2018 a unit in charge of managing them, which is now building capacity to become fully operational (MEFP 1142).

C. Promoting Economic Diversification

26. Benin has a strong medium-term growth potential. As described in Box 1, staff estimates medium-term growth to lie between 6V2 and 7 percent—which places Benin among the fastest growing countries in SSA (Text Figure 2). But the economy remains vulnerable due to its small size, relatively low economic diversification, reliance on formal and informal trade with Nigeria, and financial sector vulnerabilities.

Text Figure 2.
Text Figure 2.

Medium-term Growth of SSA Countries

(percent, 2024)

Citation: IMF Staff Country Reports 2019, 203; 10.5089/9781498323802.002.A001

Source: World Economic Outlook April 2019,except revised forecast for Benin.Note: Acronyms represent country names.

27. Achieving this high potential will require diversifying the economy and fostering economic transformation to make growth more sustainable and less volatile. Benin’s total factor productivity growth has been, on average, barely positive in the past 15 years (Box 1). In terms of structural transformation, the share of the agriculture sector has remained broadly stable, while the expansion of the banking sector was accompanied by a certain degree of deindustrialization (Text Figure 3). Textile and food processing industries have experienced a decline due to foreign competition and lack of past investment.11 On the trade side, diversification and sophistication are relatively low, with a concentration of exports in agricultural products like cotton and cashew nuts (Annex III).

Text Figure 3.
Text Figure 3.

Real Value Added by Economic Sector

(share of real GDP)

Citation: IMF Staff Country Reports 2019, 203; 10.5089/9781498323802.002.A001

Source: Beninese authorities and IMF Staff estimates.

28. Further improvement of the business environment is essential to support the structural transformation of the economy. According to the Global Competitiveness Report, the main impediments to doing business in Benin are access to finance, weak governance, and poor infrastructure. Access to finance and governance are discussed in Sections D and E below. Regarding infrastructure, staff noted the progress made by the government in expanding electricity capacity, which increased by 67 percent between 2015 and 2018. Staff recommended further efforts to improve the financial situation of the distribution company through the swift implementation of the performance improvement plan developed with the support of the Millennium Challenge Corporation and the World Bank (including the introduction of cost-recovery tariffs), as well as accountability measures such as publishing audited financial results.12 With regard to production, staff stressed the importance of ensuring that the cost of supply of electricity remains affordable through an optimal mix of imports and domestic power generation. Finally, inefficiencies, reflected in high losses between the electricity delivered in the grids and billed to customers, will need to be addressed (Selected Issues Paper II).

29. Another priority is to deal with sectoral bottlenecks to growth by raising productivity in agriculture and promoting industrial development. Policies can help move up the quality and productivity ladder in the agriculture sector—for instance, land tenure security, irrigation, extension services, development of high-value crops and food processing, and better storage in warehouses. Staff also emphasized the risks of premature deindustrialization. Manufacturing is generally a key driver of economic development due to its high productivity growth, tradability, low skill requirements, and ease of absorbing new technology. Its decline may undermine economic convergence, unless it is offset by a move towards high-productivity tradable services. Measures to support industrial development could include further improvements in infrastructure, governance reforms (notably, quality of investment climate and rule of law), technical and financial support to small- and medium-size enterprises to help them reach critical size, and targeted tax incentives.13

30. It remains critical to close the large gaps in education and health. The education system performs relatively well according to quantitative indicators (e.g., enrollment rate at the primary level). However, various measures of quality signal weaknesses, such as the low literacy rate (52.5 percent of the young population in Benin compared to 64.3 percent in SSA). In the area of health, multiple indicators signal lingering problems—in particular the high maternal mortality. In both areas, reforms could focus on developing infrastructure and improving staffing, where Benin lags behind comparator countries.14 However, financing is not the only constraint. There is also scope for enhancing spending efficiency (measured as the relationship between the volume/quality of services and the price paid for them). For instance, among SSA countries having broadly similar health expenditure per capita (around $100, PPP), Benin records below-average health outcomes, for instance in life expectancy.

Authorities’ Views

31. The authorities recognize the importance of raising productivity and diversifying the economy. Their medium-term growth strategy relies primarily on strengthening traditional sectors (agriculture and commerce), while developing new high-potential sectors such as tourism, digital economy and knowledge-based economy (MEFP ¶28). Regarding agriculture, the priority is to promote nascent productions such as cashew and pineapple, and further develop the cotton sector. The authorities also acknowledged the diagnostic of deindustrialization, which they attribute to the competition of Asian imports and the difficulty to protect their domestic industry (since tariffs increase the cost of imported investment goods). They plan to develop a special economic zone outside Cotonou, which would benefit from specific tax regime and labor code, in order to attract private investors in the agro-industry. They are now conducting feasibility studies and have entered into discussion with potential business partners.

D. Strengthening the Financial Sector

32. A sound, deep, and inclusive financial sector is another condition for strong medium-term growth. The depth of Benin’s financial sector is relatively limited, with bank credit accounting for about 30 percent of GDP at end-2018. The small size of the formal economy restrains private sector lending, generating high credit concentration and a strong competition for funding given the narrow depositor base. In addition, low profitability, significant exposure to the WAEMU sovereigns as well as high NPLs limit banks’ ability to support credit to the private sector and, ultimately, economic growth. The mission discussed with the authorities the main recommendations of the last WAEMU consultation (IMF Country Report 19/90), in particular, the need to recapitalize small banks, complete the transition to new regulatory and accounting standards along the agreed regional calendar, and strengthen the microfinance sector.

33. The profitability of the Beninese banking sector is negatively impacted by the high level of provisions and the high cost of bank resources. These two factors are identified by the accounting decomposition conducted in the Selected Issues Paper IV.

  • High provisions. Provisions accounted for 13 percent of total credits in Benin compared to an average of 9 percent in the WAEMU banking system at end-2017. The high level of provisions in Benin reflects several factors, including high NPLs (18.9 percent of total loans at end-June 2018), and the fact that the Beninese residence permits (“permis d’habiter”) are not recognized as collateral by the regulator. Like in other WAEMU countries, recent accounting and financial reporting changes have also raised provisioning requirements.

  • Cost of resources. Interest paid on bank deposits is higher in Benin than in other WAEMU countries. This may result from the relatively low volume of savings channeled through the banking system and the market power of large public depositors. In September 2018, the authorities adopted a law establishing the Caisse des Depots et Consignations (CDC). One of the stated objectives of the institution is to lower the cost of term deposits by placing in banks a pool of dedicated savings that may have previously escaped the banking system (e.g., deposit associated with legal contracts). The authorities are in the process of hiring an international consulting firm to assist with the operationalization of the new institution, which is expected to start its activities by the end of the year.15 Staff welcomed the creation of the CDC as a new vehicle to support the financing of strategic development projects. It also urged the authorities to consider additional ways of mobilizing savings and lowering the cost of deposits. These could include: (i) improving public confidence in the financial system through enhanced governance; (ii) expanding the depositor base (especially women) through mobile banking and development of financial sector infrastructure; (iii) advancing financial literacy; and (iv) providing individuals, especially in rural areas, with valid identification documents.

34. The restructuring of the two small public banks initiated last year should continue. These banks (representing 1.3 percent of assets of the banking sector in 2017) have recorded repeated losses in the past several years and are currently restructured with the assistance of an international financial institution. The authorities have announced their decision to merge them in the context of the restructuring, which will reduce the capital needs relative to the statutory minimum level in the WAEMU (CFAF 10 billion per bank) and allow exploiting synergies between the two institutions.16 The authorities prefer merging the banks than closing the weaker one, which provides key financial inclusion services in the country. They have hired an international audit firm to identify merger options and estimate their costs. These options will be discussed with IMF staff during the forthcoming missions. Once the merger option is selected, the authorities will prepare a restructuring plan for the merged bank to be submitted to the Banking Commission for approval by the end of the year. The authorities committed to following best principles for bank mergers presented by staff (MEFP ¶51), including choosing the option that would minimize the cost for the government while preserving financial stability.17

35. Microfinance institutions (MFIs) can also play an important role in fostering financial inclusion and supporting economic development, provided that they are well regulated. There is a significant number of unauthorized MFIs in Benin despite notable efforts by the authorities to clean up the sector (Box 4). Staff encouraged the government to continue formalizing viable and closing unviable unauthorized MFIs. The human resources of the National Surveillance Agency (Agence nationale de surveillance des systems financiers décentralisés) could also be strengthened to better detect risks early on and enforce regulations, including through timely closure.

Microfinance Institutions in Benin

MFIs are key to fostering financial inclusion in Benin. In 2018, the sector comprised of 112 licensed entities, serving over 20 percent of the country’s population, with CFAF 107 billion in deposits collected (1.8 percent of GDP) and CFAF 158 billion (2.7 percent of GDP) in loans issued. However, there is a large number of unauthorized MFIs. The latest data is available for 2011, when a census recorded 495 unauthorized entities. These entities can create financial stability risks that require tighter supervision. In collaboration with the regional supervisor, the authorities have taken steps to close unauthorized and nonviable MFIs and formalize viable ones. Over the 2013–2018 period, 240 unauthorized MFIs were formalized, while 17 nonviable MFIs were closed.

Despite the authorities’ efforts, the proliferation of illegal structures continues. This has prompted the authorities to (i) enact enhanced measures governing the issuance of MFI licenses in 2018 and (ii) strengthen the national supervisory activities—including by implementing a digital collection of financial information from the supervised entities. To obtain a better purview of the current state of the MFI sector, the authorities are also planning to conduct another census by end-2019. Finally, they have initiated reforms related to enhancing the capacity of the supervisory personnel at the National Surveillance Agency but are facing significant problems in retaining qualified staff.

There is also a significant potential for mobile money to bring the unbanked population into the fold. The number of active mobile money account holders increased more than six times, from 393,000 to 2.5 million between 2015 and 2018. Through their National Fund for Microfinance (Fonds National de Microcrédit), the authorities have recently started exploring synergies between MFIs and mobile money providers by developing the technological infrastructure to support the growth of mobile micro-credit. In order to exploit the full potential of these synergies, the national authorities and the BCEAO are jointly assessing and addressing risks for mobile money operators, such as the lack of interoperability across providers and liquidity problems.

Authorities’ Views

36. The authorities are aware of the issue of weak profitability of the banking system and are taking active steps to address it. First, to reduce provision levels, the authorities have recently adopted a decree that will tackle some practical issues with the procedure of formalization of real estate guarantees (MEFP¶ 23). Cadaster and land registry reforms will also help properly evaluate real estate assets owned by banks. Second, in order to lower the cost of term deposits, the authorities stressed the role of the CDC, which will encourage greater mobilization of resources and have positive spillovers on banks through the CDC deposits (MEFP¶ 53–54). Taken together, these measures are expected to positivly affect bank profitablity. Regarding non-bank institutions, the authorities are committed to continuing cleaning up the MFI sector and support synergies between MFIs and mobile money operators.

E. Upgrading the Governance and Anti-Corruption Framework

37. Benin is perceived as facing several governance challenges that may adversely impact its competitiveness and attractiveness to foreign investors as well as its ability to achieve sustainable inclusive growth. International evidence shows that corruption affects economic performance.18 According to the 2018 Global Competitiveness Report, corruption is described as the second most problematic factor for doing business in Benin after constraints on access to financing.19 Nonetheless, Benin performs better than the average of SSA in most international governance rankings, including the Worldwide Governance Indicators and the Transparency International Corruption Perception Index. Also, most governance indicators point to progress in recent years. To keep up the momentum, Benin should push forward the reform agenda in several directions (see more details in Selected Issues Paper V).

38. Fiscal governance reforms can foster a more efficient, transparent, and fairer use of public funds.

  • Revenue administration. To mitigate tax fraud, several weaknesses in revenue administration need to be dealt with, including by shifting more resources towards audit, control, and risk monitoring functions (new SB).

  • Public financial management. To enhance fiscal transparency, the consolidation of the TSA should overcome the technical and operational difficulties that have delayed its implementation so far (new SB). In addition, the management of public investment could be strengthened by improving project selection and ensuring that public procurement is conducted according to the law. The creation of agencies in charge of managing some investment projects should also be subject to strict reporting, accounting and budgeting procedures.

39. Reforms of the regulatory framework could create a more predictable and secure business environment.

  • Trade facilitation. The lack of clarity and automation of the formalities required for importers and exporters creates risks of negotiations and illegal payments between customs agents and individuals seeking to circumvent the rules. Staff emphasized the importance of simplifying and shortening customs procedures (new SB).

  • Enforcement of contracts and property rights. Property registration remains difficult and contract enforcement is weak, creating vulnerabilities to corruption through bribery. Priority should be given to ensuring the efficiency of the recently established Commercial Courts, the transparent enforcement of court fees and the publication of judgements.

40. Anticorruption efforts could focus on better implementing existing laws and reinforcing the effectiveness of existing institutions.

  • Anti-corruption framework. The asset declaration regime should be strengthened to meaningfully and effectively detect acts of corruption. The anti-corruption agency should be provided with full independence to carry out its mandate and its annual reports should be made publicly available. Finally, an anti-corruption strategy should be adopted, setting priorities to mitigate identified risks, establishing an action plan with specific timelines, and identifying resources to be mobilized for its implementation.

  • Anti-Money Laundering (AML). To prevent and detect the laundering of proceeds of corruption, the AML regime should be further strengthened by enhancing the capacity of the financial intelligence unit, reinforcing the supervision of regulated sectors, and addressing the recommendations of the upcoming evaluation against the Financial Action Task Force standards.

Authorities’ Views

41. The authorities were in broad agreement regarding the overall assessment and reform priorities. They reiterated their willingness to enhance transparency and automatize procedures in order to reduce the risks of fraud and corruption. They emphasized the significant reforms taken in recent years to enhance governance, including introducing electronic tax filing and payment, and establishing legal and operational frameworks for investment management, electricity production, port activities, and anti-money laundering (MEFP¶ 17–20). They agreed that more could be done to improve the effectiveness of the judiciary system and the protection of property rights and contracts. Regarding the asset declaration regime, the authorities stressed that all information is freely accessible unpon request to the relevant agencies fighting fraud and corruption. In their view, publishing the declarations could be self-defeating and lead to social tensions and misreporting. They also noted that further progress on AML/CFT may necessitate changes to the WAEMU-level legislation.

Program Conditionality and Modalities

42. Program performance was very satisfactory at end-2018. All end-2018 QPCs were observed. A shortfall in external financing in the second semester led to a compression of public investment and over-performance relative to the basic primary balance floor. All September 2018 indicative targets (ITs) were also met, except the one on net domestic financing.20 As of May 2019, the five SBs under review were met.

43. Modified and new QPCs. The end-June QPC on the basic primary balance was modified to reflect the recognition of domestic arrears (which must be recorded in the fiscal balance according to international accounting rules). The end-June QPC on the domestic financing ceiling and the continuous PC on the external financing ceiling were also jointly modified to reflect the deficit-neutral change in borrowing composition from domestic towards external financing. Specifically, the 2019 external financing ceiling was updated and increased by the amount of the Eurobond (5.2 percent of GDP), while the domestic financing ceiling was revised down by the same amount. In addition, new QPCs were set for end-December 2019.

44. The authorities agreed to add three new SBs to be assessed during the next program review. These SBs relate to a diagnostic of the main impediments to trade (by end-September 2019); the reinforcement of the data and risk analysis capacity of the customs administration (by end-December 2019); and an impact assessment of the TSA on commercial banks (by end-March 2020). In addition, the deadline of the SB on the implementation of a system of control and verification of investments was shifted from end-June to end-November 2019 to take into account the legislative cycle and the time needed to establish a new assembly.

45. The program is consistent with regional policies. By ensuring that all first-order convergence criteria (deficit, debt, and inflation) are met, Benin’s Fund-supported program is aligned with economic policies at the WAEMU level. In particular, it is consistent with the strategy to strengthen reserves and, more generally, regional external stability, as discussed in IMF Country Report 19/90.

46. Financing assurances are adequate. The program is fully financed up to April 2020. Benin has a track record of meeting its obligations to the Fund and has adequate capacity to repay it. At end-April 2019, outstanding Fund credit (including the GRA) was around 91.00 percent of quota or SDR 112.44 million. The debt service payments to the Fund will remain manageable and the risk of debt distress moderate.

47. An updated safeguards assessment of the BCEAO was completed in 2018. It found that the regional central bank had maintained a strong control environment; audit arrangements were in broad conformity with international standards; and the financial statements were prepared in accordance with the International Financial Reporting Standards. The BCEAO has recently enhanced the oversight role of its audit committee in line with the recommendations of the assessment.

Data Issues and Capacity Development

48. Rebasing of National Accounts. The authorities are finalizing the technical work, with the support of the IMF Statistics Department. The plan is to publish the revised national accounts in 2015 base year in the second half of 2019. In parallel, the authorities are also improving their Consumption Price Index (CPI) by both widening the coverage (the index now covers the entire country instead of just Cotonou) and changing the base year to 2014. The national institute of statistics has started publishing the monthly CPI using the new index and is currently working on the back-casting.

49. Conjunctural data. To facilitate an effective program monitoring, staff stressed the need to improve the availability, timeliness and comprehensiveness of high-frequency indicators. This is also important given the higher level of international investors’ scrutiny following the Eurobond issuance.

50. Extension of fiscal accounts to SOEs and subnational governments. Staff stressed the need to extend the DSA coverage to SOEs (see updated DSA report). The authorities agreed to assess the scope for consolidating central government fiscal accounts with the financial statements of the SOEs; their analysis will be discussed with staff during the fifth review mission. Also, they are working with AFRITAC WEST to expand the fiscal accounts to the social security fund and local governments according to GFS 2014 guidelines.

51. Capacity development. Since the 2017 AIV consultation, most Technical Assistance (TA) has focused on domestic resource mobilization, public financial management, and statistics. Implementation has been broadly satisfactory (Annex IV). The IMF local office in Benin has established facilities to allow government officials to take online training. For the next 12 months, TA priorities are well aligned with the program and include cash management, fiscal transparency, revenue administration, and tax policy with a focus on VAT (Annex V).

Staff Appraisal

52. Performance under the program is very satisfactory. All QPCs at end-2018 and all SBs under review were met. Staff supports the authorities’ request for completion of the fourth review under the ECF arrangement. The macroeconomic and structural policies outlined in the MEFP are adequate to pursue the program’s objectives. Risks to program implementation are manageable.

53. The medium-term economic outlook continues to be favorable. Preliminary estimates indicate that 2018 growth accelerated to 6.7 percent, mainly because of stronger port and agriculture activity. These two factors should continue to support medium-term growth, which is projected above 6½ percent over 2019–24. This places Benin among SSA countries with the highest medium-term growth potential. Inflation is expected to remain contained. Finally, Benin’s external position was broadly consistent with fundamentals and desirable policy settings in 2018, but non-price competitiveness remains weak.

54. Maintaining the fiscal deficit below 3 percent of GDP is key for debt sustainability. The authorities are expected to comply with the WAEMU 3 percent of GDP deficit ceiling this year. Fiscal consolidation should continue after 2019 to place debt on a firm downward path and support the regional strategy to foster external stability at the WAEMU level.

55. Beyond 2019, the fiscal strategy should primarily focus on mobilizing more revenue. The authorities are implementing this year an ambitious tax package primarily focused on reducing tax expenditures. Revenue outcomes for the first quarter of 2019 suggest that the authorities are on track to meet the new tax targets. Further revenue mobilization efforts, notably in VAT and excises, are needed to create budgetary space for social spending and prevent additional cuts to public investment. This strategy will also require that tax incentives be periodically assessed and, if necessary, offset with other measures.

56. To sustain Benin’s high growth, the economy needs to accelerate its structural transformation. Staff urged the authorities to speed up reforms aimed at improving the business environment and infrastructure; diversifying the economy and supporting industrial development; promoting high-quality education and health; reinforcing the anti-corruption framework; and addressing financial sector vulnerabilities, especially the weak bank profitability. The authorities should also pursue the restructuring of the two public banks.

57. Maintaining debt on a firm downward path calls for a prudent borrowing strategy and enhanced debt management. The debt ratio is projected to decline in 2019 after five years of continuous increase. The Eurobond paves the way for greater access to non-concessional external financing. This will help diversify the financing mix and create opportunities to lengthen debt maturity, but may also generate new vulnerabilities that will need to be monitored and mitigated carefully.

58. Staff supports the authorities’ request for completion of the fourth review of the ECF-supported program. Staff also supports the modification of QPCs on the primary balance and domestic financing for end-June 2019; the modification of the continuous PC on external financing; the new QPCs for end-December 2019; and the addition of three new SBs.

59. Staff recommends that the next Article IV Consultation be held on the 24-month cycle.

Figure 1.
Figure 1.

Benin: Recent Economic Developments, 2010–19

Citation: IMF Staff Country Reports 2019, 203; 10.5089/9781498323802.002.A001

Sources: Beninese authorities and IMF staff calculations.
Figure 2.
Figure 2.

Benin: Fiscal Developments and Projections, 2010–19

Citation: IMF Staff Country Reports 2019, 203; 10.5089/9781498323802.002.A001

Sources: Beninese authorities and IMF staff calculations.
Figure 3.
Figure 3.

Benin: Real and External Sector Developments, 2011–19

Citation: IMF Staff Country Reports 2019, 203; 10.5089/9781498323802.002.A001

Sources: Beninese authorities and IMF staff calculations.

Annex I. Implementation of Past IMF Recommendations1

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Annex II. Risk Assessment Matrix1

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Annex III. External Stability Assessment

The current account deficit is expected to improve in 2018 reflecting strong export growth and the dampening effect of fiscal consolidation on imports. Such a trend should continue in the medium term. The external sector assessment indicates that Benin’s external position was broadly consistent with fundamentals and desirable policy settings in 2018, but non-price competitiveness remains weak.

1. Benin’s current account deficit is elevated. It increased by 1.5 percent of GDP during the 2013–17 period from 8.4 to 9.9 percent of GDP. This reflects primarily the scaling up of public investment and structural weaknesses in competitiveness (see below).

2. However, the deficit contracted markedly in 2018. The current account deficit (including grants) declined from 10.0 percent of GDP in 2017 to 8.3 percent of GDP in 2018. The improvement was mainly driven by a significant increase in exports of cotton, and, to a lesser extent, cashew nuts. Reforms to strengthen the technical capacities of farmers, expand cultivable lands, and distribute higher-quality seeds led to a surge in agricultural production, which had also a dampening effect on food imports.

3. Benin’s exports are relatively concentrated in terms of products and markets. In terms of export diversification and sophistication, Benin is broadly comparable to its WAEMU neighbors but compares unfavorably to the SSA average and to other regions. More than one third of Benin’s exports are agriculture products like cotton and cashew nuts. The Herfindahl-Hirschman index of market concentration ranks Benin above the SSA median (0.18 versus 0.10). Export sophistication, measured by the share of high-technology exports in total manufacturing exports, is below the SSA average.

4. External financing is mainly comprised of concessional financing and FDI. Data shows a relatively stable composition of the financing of the current account deficit between official loans (representing 33 percent of total current account deficit, on average over the last three years) private loans (27 percent), portfolio investment flows (19 percent), FDIs (19 percent), public transfers including project grants (7 percent), partly offset by an increase in reserves (-8 percent).1

5. Attracting FDI in a small market like Benin is challenging. The net inflows of FDIs represented 3.4 percent of GDP in 2017, which is below the SSA average estimated at 5.6 percent of GDP in 2017. At the time of the 2017 IMF/World Bank Annual Meetings, Benin became a full participant in the G20 CwA initiative with the hope of bolstering the private sector financing of the GAP for 2016–21. However, the CwA participation has not yet produced tangible benefits, with no new foreign-financed project initiated under the CwA banner.

Text Figure 3.1.
Text Figure 3.1.

FDIs in percent of GDP, Average 2010–17

Citation: IMF Staff Country Reports 2019, 203; 10.5089/9781498323802.002.A001

Source: World Economic Outlook
Figure 3.1.
Figure 3.1.

Benin: External Developments

Citation: IMF Staff Country Reports 2019, 203; 10.5089/9781498323802.002.A001

Sources: Beninese authorities and IMF staff calculations.

6. Gross international reserve coverage for the WAEMU, as a whole, rose sharply in 2018 reflecting Eurobond issuances and improved compliance with export receipts repatriation requirements.2 After an increase of CFAF 655 billion (US$1.2 billion) in 2017, WAEMU international reserves rose by another CFAF 1,377 billion (US$2.4 billion) to reach CFAF 8,561 billion (US$14.9 billion) at end-2018. The increase in 2018 reflects Eurobond net proceeds, which were almost 75 percent higher than 2017 Eurobond issuances, as well as improved compliance with export receipts repatriation requirements. The rate of repatriation of export receipts is estimated to have increased from 43 percent in 2017 to 56 percent in 2018. At end-2018, external reserves were estimated to cover 4.3 months of prospective extra-regional imports of goods and services up from 3.9 months at end-2017. Under the baseline scenario of fiscal consolidation—where member states meet the regional fiscal deficit convergence criterion of 3 percent of GDP from 2019 onwards and external competitiveness improves in the medium-term—the reserve import cover is projected to reach 4.8 months by 2023.3

7. The EBA-based assessment suggests that Benin’s external position is broadly consistent with fundamentals and desirable policy settings. The assessment is based on two alternative methodologies. First, the EBA’s current account model compares the actual current account balance with the computed norm of the current account and infers the real exchange rate adjustment necessary to bridge the gap. Such a methodology delivers a current account gap at -0.3 percent, resulting in a very small over-evaluation of the Real Effective Exchange Rate (REER) of 0.7 percent. Thus, this model indicates that the REER is broadly consistent with fundamentals and desirable policy settings. A second approach, the EBA’s Lite Index REER approach, compares the fitted REER with the estimated norm of the REER. Such a methodology suggests a small undervaluation of 5.4 percent of the REER. Overall, Benin’s external position is considered as being broadly consistent with fundamentals and desirable policy settings.

Text Table 3.1.

Benin: EBA-based Assessment Results

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Source: IMF Staff Estimates

8. Survey-based indicators show that Benin’s external competitiveness is below peers. The 2017–18 World Economic Forum’s (WEF) Global Competitiveness Report ranks Benin in the bottom 20 percent countries. Such a score remains unchanged compared to the 2016–17 outcome. In most categories, Benin scores below the SSA average. Survey participants list access to trade finance, difficulties in meeting requirements of buyers, and identification of markets for buyers as the most problematic factors for exporting (Figure 2). Burdensome procedures, tariff and non-tariff barriers and corruption at the border are listed as the most severe obstacles to importing (Figures 3.2 and 3.3).

Figure 3.2.
Figure 3.2.

Most Problematics Factors for Exporting

(Percent of responses)

Citation: IMF Staff Country Reports 2019, 203; 10.5089/9781498323802.002.A001

Source: World Economic Forum. Global Enabling Trade Report, 201 6.
Figure 3.3.
Figure 3.3.

Most Problematic Factors for Importing

(Percent of responses)

Citation: IMF Staff Country Reports 2019, 203; 10.5089/9781498323802.002.A001

Source: World Economic Forum. Global Enabling Trade Report, 2016.

Annex IV. Technical Assistance, 2017–19 Assessment

Benin faces capacity and institution building challenges, which are being addressed with tailored technical assistance. Since the last Article IV consultation, technical assistance has aimed at increasing domestic resource mobilization, strengthening public financial management, and improving statistics—with a special focus on strengthening capacity building in the field and achieving structural reforms. Implementation of past TA recommendations has been broadly satisfactory.

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Enquête Modulaire Intégrée sur les Conditions de Vie des ménages.

Enquête Harmonisée sur les Conditions de Vie des Ménages.

Enquête Régionale Intégrée sur l’Emploi et le Secteur Informel, which provides informal sector data on production and intermediate consumption by product.

Annex V. Capacity Development Strategy for FY2019–20

Overall Assessment

Implementation of macroeconomic and structural policies in Benin has generally been satisfactory. The authorities show strong ownership of the IMF program and underlying reform agenda, which is well aligned with the GAP priorities. The Capacity Development (CD) program in Benin and the associated TA delivery are intrinsically interweaved with the ECF arrangement’s policy recommendations. Nonetheless, coordination and capacity issues, data gaps, high staff turnover at both senior and technical levels, and limited resource allocation can weigh on the overall impact of CD activities.

Objectives and Past Achievements

As a low-income country, Benin faces capacity and institution-building challenges, which are being addressed with tailored technical assistance. Enhancing domestic revenue mobilization (revenue administration and tax policy), increasing the efficiency of public expenditures particularly capital spending, improving budget preparation and execution, and increasing the efficiency of cash management will be essential to preserve debt sustainability in the longer term and boost economic growth. These key priorities will also require reforms to strengthen economic governance (in particular through more effective public finance management systems) and improve real, government, and external sector statistics, including, oversight of public enterprises and newly created public agencies.

Program engagement has contributed in the past to capacity building in Benin. Key achievements in recent years have included the following:

  • Gradual implementation of the TSA.

  • Increased capacity to formulate economic and financial policies under the ECF-supported program, including macroeconomic forecasts.

  • Enhanced production of budget execution data and reports.

  • Stronger link between national strategies and the investment program.

  • Extension of multiyear planning to all sectors.

  • Better performance of the tax and customs administrations, and better assessment of tax expenditures.

  • Support provided to the National Institute of Statistics to rebase the national accounts.

Forward-Looking Priorities and Challenges

There is room to improve the impact and scope of the CD activities with more efforts on revenue and customs administration, tax policy, PFM, debt management, national accounts, and enhancing the quality of macroeconomic data. In particular:

  • Public investment management needs to be improved to ensure efficiency and transparency in investment project selection, and monitoring.

  • There is scope for revenue administration efficiency gains, given the large size of the compliance gap in Benin.

  • The tax and customs administrations have improved their exchange of information but the cooperation between the two agencies is not fully effective.

  • An SOE unit was created in 2017, but oversight is weak, needs to be strengthened and consolidated, while the reporting and monitoring of SOEs could be improved.

  • A TSA was created but its implementation has been delayed.

  • The assessment of tax expenditures needs to be more comprehensive.

  • Internal audit and control methods need also to be strengthened by using professional standards and systematic risk-based approach—in particular, with the full implementation of the Chart of Accounts.

Therefore, for FY2020, key priorities and objectives include:

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The main risk to CD is weak absorptive capacity, which could be mitigated by carefully selecting and designing the TA programs to tailor to the local audience’s needs.

Appendix I. Letter of Intent

THE MINISTER

Cotonou, May 27, 2019

TO

Madame Christine LAGARDE

Managing Director

International Monetary Fund

WASHINGTON, DC 20431, USA

Dear Madame Lagarde:

I am pleased to inform you that Benin has made significant progress owing to the implementation of the Government Action Program (GAP). Implementation of the GAP, along with the introduction of important structural reforms in the context of the economic and financial program (2016–2019) concluded with the International Monetary Fund (IMF), have led to a sustained economic growth. This growth has been achieved in a context of low inflation, control of the budget deficit, and a favorable outlook for the current account balance over the medium term.

The economic recovery that began in 2016 is ongoing. In 2017, it was essentially driven by public investment, cotton production, and the Nigerian economy’s emergence from a recession. Growth continued to intensify in 2018, in part owing to a strong performance of the agricultural sector and port activity. Inflation remained subdued in 2018 at 1 percent.

The budget deficit (including grants) was held at 4.0 percent of GDP in 2018, well below the initially programmed level (4.7 percent of GDP), essentially reflecting a decrease in spending. For 2019, the goal is to bring the deficit under the threshold of 3 percent of GDP, in line with the West African Economic and Monetary Union (WAEMU) fiscal convergence criterion.

Finally, the current account deficit (including grants) improved in 2018 owing to strong agricultural exports, in particular cotton and cashew nuts.

The attached Memorandum of Economic and Financial Policies (MEFP) describes the progress made in the implementation of the economic and financial program supported by the Extended Credit Facility (ECF) and presents the additional measures that we expect to take to shore up our achievement of the main objectives for 2019. In this context, we propose three new structural benchmarks relating to the establishment of the Treasury Single Account, the strengthening of the administration’s statistical analysis capacities, and a diagnostic assessment of the main trade barriers in our country.

Overall, the results of the economic and financial program are very satisfactory. All of the quantitative performance criteria for end-December 2018 and the continuous performance criteria have been met. All of the structural benchmarks were met on time. We are asking for a modification of the three quantitative performance criteria concerning the basic primary fiscal balance and budget funding at end-June 2019 to take into account the Eurobond issuance that took place in March 2019.

The government is convinced that the measures and policies outlined in the attached MEFP are adequate to achieve the objectives of its program. It will take all additional measures that may be necessary to this end and will consult the IMF on the adoption of such measures and prior to any revision of the policies outlined in the attached MEFP, in accordance with the Fund’s policies concerning such consultations. The government will provide IMF staff with any information that may be needed to monitor implementation of the program and achievement of the program’s objectives, as set out in the attached Technical Memorandum of Understanding (TMU). The government authorizes the IMF to publish this letter and its attachments on its external website, as well as the IMF staff report, following the approval by the IMF Executive Board of the fourth review under the ECF arrangement.

The government would therefore like to request the completion of the fourth review under the ECF arrangement, a modification of the three quantitative performance criteria at end-June 2019, and the disbursement of SDR 15.917 million (around $22.055 million).

Sincerely yours,

/s/

Romuald WADAGNI

Minister of Economy and Finance

Attachments (2):

  • 1. Memorandum of Economic and Financial Policies

  • 2. Technical Memorandum of Understanding

Attachment I. Memorandum of Economic and Financial Policies for 2018–2019

1. This report is an update of the Memorandum of Economic and Financial Policies (MEFP) of December 2018, attached to the staff report for the third review of the ECF-supported program. The document describes recent economic developments in Benin and sets out the policies that the government intends to implement in 2019. The aim of these policies is to facilitate the continuation of fiscal consolidation and domestic revenue mobilization efforts, as well as to strengthen domestic and external economic stability. Implementation of the quantitative performance criteria and structural benchmarks up to end-December 2018 will be assessed in this MEFP. Some additional structural benchmarks will also be included.

Recent Economic Developments

2. The recovery of economic growth, which begun in 2016, continues. In 2018, growth was essentially driven by the record level of cotton and vegetable production and strong port activity. The tertiary sector (port activity in particular) and the primary sector (agriculture in particular) were the main contributors to growth in 2018, estimated at 6.7 percent. The initial estimates suggest that growth will remain robust in 2019, owing to the strong performance of the port sector, particularly the significant increase in transit traffic to other countries that use the Port of Cotonou. Inflation remained positive in 2018 (1.0 percent), as a result of rising education and transport costs.

3. The preliminary estimates show a strong contraction in the current account deficit in 2018. After expanding in 2017, as a result of an increase in food imports and growth in public investments, the current account deficit (including grants) fell from 10.0 percent of GDP in 2017 to 8.3 percent of GDP in 2018. This improvement is due primarily to a significant increase in exports linked to a record cotton production, and to a lesser extent to higher sales of cashew nuts. Reforms aimed at boosting the technical capacities of farmers, expanding farmland, and distributing higher-quality seeds resulted in an increase in agricultural output, which also led to a reduction in food imports. The external sector assessment indicates that Benin’s external position was broadly consistent with fundamentals and desirable policy settings in 2018.

4. Fiscal consolidation continues in 2018. The containment of expenditure and the improvement in domestic resource mobilization led to an estimated fiscal deficit (on a commitment basis, grants included) of 4.0 percent of GDP in 2018, compared to 5.9 percent of GDP in 2017. The sharp reduction in the fiscal deficit can be explained primarily by the under execution of externally financed public investment. The mobilized revenue at end-December 2018 amounted to CFAF 1,028.6 billion, compared to an initial program target of CFAF 1,021.6 billion. This strong revenue performance is explained by the strong performance of nontax revenue (CFAF 217.2 billion, compared to an initial target of CFAF 166.4 billion), and domestic tax revenue (direct and indirect), which made up for the shortfall in customs revenue (CFAF 55.1 billion).

5. The ratio of public debt to GDP rose from 54.4 percent of GDP in 2017 to 56.8 percent in 2018. The continued reliance on the regional financial market offering less concessional terms for the financing of public investment projects (owing to weaknesses in the disbursement of external commitments), and the granting of government guarantees to the national electricity company (SBEE), increased the level of public debt in 2018.

6. In 2019, we are projecting a decline in public debt to 54.7 percent as a result of the fiscal consolidation and strong economic growth. With a view to diversifying the sources of financing, in 2019 we issued our first Eurobond, which met with great success in the market. The amount of the issuance was €500 million (equivalent to 5.2 percent of GDP), with a weighted maturity of 6 years, an interest rate of 6 percent, and a 3-year repayment plan, over the period 2024–26. The terms of the Eurobond are better than those of securities recently issued in the regional financial market, such as the 5-year bond issued by the Beninese government at the beginning of March 2019 at an interest rate of 6.99 percent. The Eurobond issuance did not result in an increase in overall debt, since it was offset entirely by a decline in domestic borrowing. Ultimately, the debt sustainability analysis (DSA) confirms the moderate risk of debt distress, which has not changed since the conclusion of the December 2018 DSA.

7. For the banking sector, the aggregate banking system’s capital ratio declined significantly in the second half of 2018 (falling from 11.9 percent at end-2017 to 7.6 percent at end-June 2018). Most of the decline in the capital ratio is due to the entry into force of a new prudential arrangement and a new accounting framework. The liquidity ratio (total loans/total deposits) stood at 82 percent at end-June 2018. The heavy concentration of the bank loan portfolio (loans to the 5 largest borrowers/equity capital) remains a source of concern. Finally, the high level of nonperforming loans persists, despite a slight improvement noted at end-June 2018. The ratio of nonperforming loans to total loans fell from 19.4 percent in December 2017 to 18.9 percent in June 2018.

Implementation of the 2018 Program

A. Program Performance

8. Program implementation is satisfactory overall. The available data and information show that all the quantitative performance criteria (QPCs) at end-December 2018 were met. As for the structural benchmarks, all of them were met at end-March 2019. The status of the QPCs at end-December 2018 is as follows:

  • Net domestic financing (NDF) of the government, defined as the sum of net bank credit to the government and net nonbank financing of the government, amounted to CFAF -51.4 billion under a ceiling of CFAF 118.8 billion.

  • The basic primary fiscal balance, defined as the difference between total fiscal revenue and basic primary fiscal expenditures, amounted to CFAF 17.6 billon with a floor set at CFAF 3.9 billion.

  • Total government revenue, which includes tax and nontax revenue – but excludes foreign grants, the revenue of autonomous entities, and privatization proceeds – amounted to CFAF 1,028.6 billion, compared to a floor of CFAF 1,021.6 billion.

9. The strict implementation and monitoring of reforms led to observance of all structural benchmarks in accordance with the timetable indicated in the three-year ECF arrangement. These benchmarks included: (i) the elimination of tax expenditures equivalent to CFAF 60 billion in the 2019 budget law; (ii) the establishment of a credit bureau by the Ministry of Finance; (iii) the performance of an audit by the government of the stock of arrears to domestic suppliers; (iv) the adoption of a decision by the Ministry of Finance to strengthen enforcement of the regulatory framework for the supervision and licensing of microfinance institutions; and (v) the introduction of performance contracts with the main public enterprises.

B. Fiscal Management

10. Concerning the revenue agencies, the implementation of reforms aimed at modernizing the tax administration to ensure lasting improvement in revenue collection continues in 2018. In customs, progress was made in effective implementation of the one-stop foreign trade window (Guichet unique du commerce exterieur, GUCE), with the objective to minimize the use of paper documents in customs clearance operations. Since the first six months of 2018: (i) the GUCE portal is available; (ii) the interface between the GUCE and the goods tracking system to improve cargo monitoring is operational; and (iii) import intentions are now centralized within the GUCE, which, among other things, will help us improve our customs revenue forecasts. We still need to make serious efforts to improve the collection rate for customs arrears. Indeed, the customs administration collects just 5 percent of the duties resulting from the detection of infractions during the control process. We are committed to ensuring that the Directorate General of Customs has an effective collection service and to vigorously pursuing the procedures and penalties provided for by law. In order to build the capacity of the customs administration to assess and mitigate risks, we have decided to strengthen the statistical monitoring service by adding new statisticians to its staff (before end-December 2019).

11. The Directorate General of Taxes (DGI) vigorously pursued the reforms introduced in 2017 within the framework of the tax administration’s Strategic Orientation Plan (POSAF). The key reforms included: (i) continued efforts to promote the use of the banking system for tax payments;1 (ii) the rollout of the tax management system (SIGTAS) to improve operational transparency and contribute to the reduction of tax fraud with a data repository featuring an intelligent business analysis system; (iii) the launch in March 2018 of electronic procedures to enable the electronic filing and payment of taxes. The electronic procedures have been extended to major companies registered at the Coastal, Atlantic, and Borgou-Alibori Taxation Centers for Medium-Sized Enterprises (CIME); and, finally, (iv) the launch of electronic billing machines to improve the collection of VAT. We will conduct an initial assessment of the electronic procedures and electronic billing machines by end-2019.

12. We also strengthened cooperation between the customs and tax agencies. Several IT developments were launched to facilitate information exchanges between customs and taxes. They include: (i) the establishment of a shared platform for tax-customs data exchanges; and (ii) the development of several integrated interfaces in the shared platform. The key capabilities integrated into the platform are: (i) keeping the comprehensive taxpayer directory up to date vis-à-vis the tax administration; (ii) automatic integration of the new Single Taxpayer Identification (Identifiant fiscal unique, IFU) numbers generated by SIGTAS; (iii) recognition by the Automated System for Customs Data (ASYCUDA) of the activation/deactivation of taxpayers; and (iv) automatic integration of all paid customs declarations in ASYCUDA. A recent crosscheck of the two revenue agencies’ data, however, showed that some importers are still unknown to DGI staff. This means that cooperation between the two agencies needs to be further strengthened. To begin with, we will ensure that the system of penalties applicable to importers unknown to the tax administration – a fine of 10 percent, possibly increased by an additional 3 percent – is assessed.

13. As for tax policy, Benin has made significant progress by performing an inventory, evaluation, and publication of tax expenditures. Since 2016, thanks to the creation of the Tax Policy Unit (UPF) and support from the IMF, a report is prepared each year with a list of tax exemptions and it is attached to the budget law for the following year. However, only the evaluation of tax expenditures is published. In order to improve transparency of public finances, we are committed to including the tax expenditure inventory as part of the report on tax expenditures. We will also make it easier for the UPF to access SIGTAS in order to ensure their autonomy in terms of the collection of data needed to estimate tax expenditures. This would also allow the Directorate of Large Enterprises to focus on other important tasks.

14. The implementation of reforms undertaken to ensure the rationalization of public expenditure continued in 2018. In terms of managing the wage bill, the reforms mainly concerned: (i) census-payment operations focused on active and retired government employees, carried out with the aid of biometrics; (ii) use of the banking system for student scholarships; and (iii) systematic use of the banking system for periodic benefits paid to active employees and pensions of CFAF 50,000 or more, etc. Steps were also taken to improve the effectiveness and transparency of public investments, including: (i) continuation of the effort to clean up the public investment projects (PIP) pipeline; (ii) creation of a “public investment preparation and management fund” to finance investment project feasibility studies; and (iii) better articulation of national and sectoral strategies with the public investment program (PIP). Nevertheless, there are still some weaknesses (ex-post evaluation of projects, their physical and financial monitoring, etc.). We will continue to carry out the recommendations contained in the follow-up report on evaluation of public investment management.

15. The debt management office (CAA) has undertaken various reforms related to its technical capacity building. The organization has begun to recruit bilingual staff with qualifications in econometrics and statistics. It undertook a reorganization of the operations department with a view of achieving a more rigorous monitoring and control of disbursements and repayments. The agency also established portfolio managers and each one is responsible for a particular type of lender (local banks, foreign banks, technical and financial partners, etc.). In October 2018 the CAA launched a loan repayment mechanism that is supposed to take effect 15 days before the due dates. The CAA also established a due date monitoring table, which is updated on a daily basis. Within the context of managing commitments, the organization created a team that is devoted exclusively to the financial analysis of loans and another one that is responsible for monitoring the course of loans, from their negotiation to their signature. There is also a legal team responsible for legal issues related to loans. The CAA’s website has been redesigned and a coordination committee, chaired by the minister, has been established. This allows for a consolidation of communications between the Treasury and the CAA during the drafting of the cash flow plan. A survey was conducted to obtain comprehensive data on the debt of public enterprises as well as their contingent liabilities. As a result of the survey, it was found that Benin has 13 public enterprises of an economic nature that are in operation. The amount of non-guaranteed commercial debt of public enterprises was equal to CFAF 49.9 billion, or 0.86 percent of GDP at end-December 2018. Moreover, to minimize the fiscal risks associated with public enterprise debt, the CAA is coordinating, in collaboration with the Directorate General of Government Holdings and Privatization (DGPED), a monitoring arrangement that provides for periodic meetings with said enterprises.

16. Owing to the less concessional terms of financing obtained on the regional financial market and the associated rollover risk of the short-term domestic debt, in October 2018 we initiated a program to optimize the debt portfolio through a reprofiling operation. This arrangement consists of repurchasing certain short-term loans contracted with domestic creditors at high costs with the proceeds of long-term loans contracted with international commercial creditors at lower interest rates. The debt reprofiling operation was financed by a private international financial institution with a guarantee provided by the World Bank. The guarantee amounts to EUR 154.8 million (equivalent to USD 180 million, corresponding to an International Development Association (IDA) allocation of USD 45 million), for a commercial loan to the government denominated in euros in the amount of EUR 387 million (equivalent to USD 450 million). We used two-thirds of the funds to buy back costly domestic debt, including debt owed to a regional development bank. The operation will help reduce the interest costs of public debt and extend its average maturity.

C. Governance Reforms

17. Important steps have been taken in the context of reforming the administrative control bodies. The objective of this reform is to facilitate the creation of a performance culture in the government and step up the fight against impunity by reorganizing the control bodies and implementing measures aimed at their professionalization. This will be achieved by: (i) making the Inspectorate General of Finance (IGF) the central body responsible for operational coordination of the activities of the government’s internal audit units and for monitoring the actions taken by the various ministries in response to the main audit recommendations; (ii) putting the sectoral ministries back at the center of the ministries’ internal control system; (iii) finding a long-term solution to the shortage of quality human resources within the government’s internal audit bodies; (iv) reducing the vulnerability of audit institutions and increasing their contribution to the effectiveness of services; and (v) providing auditors with sufficient resources to perform their assignments. To that end, the government overhauled the regulatory framework with the issuance of three decrees. The new texts formalize a paradigm shift and provide for transitioning from the “inspection-verification” approach to the “internal audit” concept in all its forms. The aim of the new “internal audit” approach is to bring value added to managers, particularly through advisory assistance, with a view to attaining the strategic, operational, and regulatory objectives. The proposed texts will also enable Benin to adopt international standards and overcome the institutional and regulatory obstacles hindering the effectiveness of its internal control and audit activities within the public administration of Benin.

18. In the area of justice, important reforms have been undertaken this year. Two commercial courts were created and operationalized in 2018 following: (i) the identification of buildings to house the Commercial Court of Cotonou and the Court of Commercial Appeals of Porto Novo; and (ii) the appointment of professional and consular judges, and the official installation of the courts in those two jurisdictions. In addition, the Court for the Suppression of Economic and Terrorism Crimes (CRIET), which was installed in August 2018, is now operational. Its objective is to curb terrorism and economic crimes, as provided for in the criminal legislation in force, as well as suppress drug trafficking and related crimes.

19. Anti-corruption efforts are being strengthened thanks to the initiatives undertaken by the National Anti-Corruption Authority (ANLC) to implement the asset declaration regime laid out in the 2011 Anti-Corruption Law. In particular, the ANLC’s measures are intended, among other things, to: (i) ensure that penalties are imposed by responsible courts if the assets of individuals covered by the law are not declared; and (ii) allow the online declaration of assets. In February 2019, parliament passed the Law on Strengthening Public Governance. This law allows the state to hold any official responsible who through his or her acts and actions misleads the government with a negative impact on public finances.

20. Finally, with regard to the observance of international governance standards, Benin ratified the United Nations Convention against Corruption in 2005, followed by the African Union Convention against Corruption and the Economic Community of West African States (ECOWAS) anti-corruption protocol. The ANLC is also in the process of preparing an action plan for implementing the recommendations made following the assessment of the National Integrity System (SNI) carried out by Transparency International in 2016 with the support of the European Union. In addition, in June 2018 parliament adopted the new law on combating money laundering and the financing of terrorism. This will enable Benin to harmonize and strengthen its national regulations in conformity with the new measures under way in the West African Economic and Monetary Union, in order to fight financial crime.

D. Financial Sector

21. The main components of the Basel II and III capital regulations became effective in January 2018, including the definition of tier 1 capital, tier 2 capital, and the capital conservation buffer. The Basel II and III provisions that were recently introduced are being implemented gradually, starting on January 1, 2018. The new prudential framework takes an incremental approach in order to absorb the new requirements with regard to the minimum capital, leverage, and concentration requirements, etc. The framework specifies that the capital adequacy ratio in 2019 should not be below 8.625 percent. At end-June 2018, 5 of the 12 reporting banks making loans were below this regulatory threshold. These standards are considered essential to safeguarding a sufficient buffer of high-quality capital, as well as strengthening banks’ balance sheets. A new chart of accounts for banks and an accounting framework for loan loss provisioning, in line with the IFRS9, were also introduced in January 2018. The standards on liquidity ratios aligned with the Basel II and III principles are being prepared at the regional level.

22. Together with the Central Bank of West African States (BCEAO), the government has a key role in ensuring the stability and soundness of the financial system. To that end, we are pursuing a number of structural reforms. The Law on Credit Information Bureaus (CIB) was adopted by the National Assembly and promulgated on January 23, 2017, by the President of the Republic. The Bureau became fully operational in 2018. The adoption of this law formalizes the establishment of the necessary legal framework for the launch of CIB activities by Benin. In addition, the ministerial decree authorizing the opening of a branch office of CREDITINFO-VOLO in Benin was signed on February 1, 2018. Regarding the policy framework for bank resolution, the Annex to the agreement governing the WAEMU Banking Commission (BC) was amended by Decision No. 10 of 29/09/2017/CM/UMOA of the WAEMU Council of Ministers. As a result, the BC is now responsible for the resolution of credit institutions. The general framework for the resolution of institutions has been defined and the BC has a Resolution College. We are aware that information concerning loans contracted prior to the establishment of the CIB and credit histories dating back more than 3 years are, for the time being, incomplete, due to the fact that banks must request the prior authorization of customers to report such information to the CIB database. We are therefore looking at various legal options to remove this obstacle.

23. To strengthen the land reform and formalize the collateral used in lending activities, we created the National State Land and Land Tenure Agency (ANDF) in 2016, which, among other things, handles the conversion of occupancy permits into real estate titles. The initiative included in the 2016 Supplementary Budget Law to eliminate recording fees was successful, and the number of real estate titles recorded has grown. We will also work to advance the electronic recording of real estate titles – which has already been completed for the city of Cotonou – by extending the process to the entire country. In May 2019 we adopted a decree to facilitate the conversion of occupancy permits into real estate titles – which are recognized as collateral by the banking regulator. This should result in a decrease in banks’ provisioning and an improvement in their financial condition. We also established a Trade and Personal Property Credit Register (RCCM) and are planning to provide electronic access to the register. In addition, the implementation of these measures will enable banks to reduce the level of provisions and ultimately increase their capacity to lend to the private sector.

24. Spurred by the BCEAO, a support mechanism has been put into place for the financing of small and medium-sized enterprises/small and medium-sized industries (SME/SMI), or a SME mechanism in the WAEMU. The establishment of such a mechanism was necessary owing to the important role played by SME s in the economic fabric of the member countries. According to the governments, these businesses account for between 80 and 95 percent of the enterprises surveyed. Most of the studies indicate that it is difficult for these businesses to gain access to financing, in particular medium- and long-term financing. The mechanism is focused on four main areas: (i) promotion of SMEs; (ii) improvement of their management; (iii) refinancing of bank loans to SMEs; and (iv) diversification of financial instruments adapted for their financing. In this connection, it is expected that various actors will be involved in the implementation of a number of actions. For the governments, these include the adoption of measures aimed at providing incentives and simplified procedures to encourage the emergence of SMEs (setting aside a proportion of public procurement for SMEs, the development of subcontracting, etc.). The purpose of the support and oversight structures with regard to SMEs is to provide upstream assistance in meeting the eligibility conditions and to perform ex-post monitoring after financing has been obtained. They should then work downstream to ensure a proper use of bank credits, a smooth implementation of business plans, and compliance with deadlines, which will allow for a reduction in the risk of payment default. As for the lending institutions, they will finance the SMEs, either directly or in collaboration with the support and oversight structures of these enterprises. For its part, the BCEAO will take action with regard to the terms of financing offered to SMEs, by making bank credits to these enterprises more attractive through appropriate refinancing (at a rate of 2.5 percent). In Benin, the mechanism was officially launched in August 2018.

25. We believe that the microfinance sector is key to promoting small enterprises’ access to the financial system. To preserve its viability and credibility, we have adopted a ministerial decision for microfinance institutions aimed at strengthening their supervision and the granting of licenses. Progress has been made in closing unauthorized microfinance institutions (MFIs). In addition, the regional financial inclusion strategy is being implemented. Steps have also been taken to rehabilitate the microfinance sector, particularly by improving the quality of financial and accounting information through the implementation in 2016 of the centralized IT solution for monitoring decentralized financial systems (SICS-SFD). In operational terms and with regard to supervision of the sector, in the course of 2018 the National Decentralized Financial Systems Surveillance Agency (ANSSFD) continued implementing the microfinance sector rehabilitation strategy document, which is based on the following three pillars: (i) application of the law to all authorized decentralized financial systems; (ii) application of the law to all entities operating illegally; and (iii) continued strengthening of the stability and balanced operation of the decentralized finance sector with a view to ensuring its long-term sustainability. From 2013 to end-November 2018, of the twenty-five (25) entities on the initial list of unauthorized institutions, the ANSSFD provided step-by-step support to those that prepared applications for authorization. As a result, five (5) large-scale institutions with branches throughout the entire country were authorized. In addition, a national census of microfinance initiatives will be carried out in 2019 to update the list of institutions operating outside of the regulatory framework.

Program for 2019

26. The objective of the three-year program (2017–2019) signed by the IMF and the government of Benin is to lay the foundation for accelerated and inclusive growth while preserving macroeconomic stability and public debt sustainability. Implementation of the reforms is expected to enable: (i) creating a more fiscal space through the mobilization of additional domestic resources; (ii) enhancing the efficiency of public expenditure, particularly investments; and (iii) improving the governance and business environment with a view to stimulating private sector activity.

27. The macroeconomic framework envisages growth of 6.7 percent in 2019, supported essentially by the strong performance of the agricultural sector in general and cotton production in particular, port traffic, and construction. Following the increase in food and oil prices in 2018, inflation is projected at 1.7 percent on average in 2019. The current account deficit (including grants) is expected to narrow to 7.8 percent of GDP in 2019, thanks to the sustained growth of exports in response to the revitalization of the cotton sector and a decline in imports driven by the scaling down of food imports and public investment.

28. Over the medium-term, growth is expected to remain robust (above 7 percent). Our strategy will be to strengthen, on the one hand, the traditional drivers, which are agriculture and port activity, and on the other hand, to develop new sectors with strong potential, such as tourism, the digital economy, and the knowledge economy.

A. 2019 Budget

29. In December 2018, the National Assembly passed the 2019 Budget Law in accordance with the draft submitted by the government and the program objectives. The fiscal deficit, on a commitment basis (grants included), is expected to reach 2.7 percent of GDP in 2019 (3 percent when unpaid debt to suppliers identified during a recent audit are included), compared to 4.0 percent in 2018. Government revenue is expected to amount to 17.7 percent of GDP, while total expenditure would be contained at 22 percent of GDP (22.3 percent when the aforementioned unpaid debt is included).

30. The 2019 Budget Law is based on exceptional tax revenue mobilization. Tax expenditures are expected to decrease by an amount equivalent to 1.2 percent of GDP in 2019 (in part as a result of the elimination by the budget law of tax expenditure equivalent to CFAF 60 billion and the implementation of a system to control the exemptions granted under the special investment regimes). In addition, the budget will adopt other tax-related measures such as a withholding tax on hydrocarbon sales carried out in Benin by nonresidents, enlargement of the base of the visitors’ tax in hotels and similar establishments, as well as the transfer of responsibility for collection of the tax to the DGI, and an increase in the rate of the tax on tobacco and cigarettes. All these tax policy measures, coupled with the pursuit of revenue agency reforms, are expected to result in the mobilization of CFAF 1,112.4 billion in government revenue in 2019. Beyond 2019, we will continue the mobilization of tax revenue with the aim of creating additional fiscal space to finance public investment and priority social spending.

31. We inherited from previous governments wage promises to civil servants as well as unpaid debt vis-à-vis domestic suppliers, some of which we decided to honor in 2019 to preserve the climate of social peace. The 2019 budget includes a provision of CFAF 20 billion to begin the process of settling these debts. We conducted an audit of the estimated stock of unpaid debt to suppliers. The amount is estimated at 0.3 percent of GDP.

32. Should the revenue generated by the tax reforms fall short of the budget forecasts, the government will ensure attainment of the fiscal deficit target by slowing the execution of public investment and the settlement of past wage promises to civil servants made by previous governments.

B. Public Expenditure Efficiency, Management, and Programs

33. Pending the World Bank review of public spending, we have since 2016 undertaken to consolidate the wage bill. The key measures implemented to hold back the pace of wage bill increases have included: (i) the biometric census of public sector personnel, which identified 1,355 ghost workers; (ii) use of the banking system for bonuses and allowances not included on pay slips since 2017; and (iii) the repeal of several decrees and regulations that systematically granted benefits. With the help of these measures, savings of about half a percent of GDP will be achieved in 2019 and will be allocated in part to clearing a portion of the wage promises made to civil servants by former governments. To improve the efficiency of public investment, we have begun to implement the recommendations of the Public Investment Management Assessment (PIMA) report, focusing on the following four areas: (i) strengthening the institutional framework; (ii) ensuring the availability and sustainability of financing; (iii) improving the preparation, selection, and implementation of projects (specifically by publishing their selection criteria); and (iv) ensuring sustainable investments. An IMF Fiscal Affairs Department mission visited Cotonou in February 2019 to monitor the evaluation of public investment management. The mission noted progress in the planning of investments. Nevertheless, there are still some weaknesses. With the support from the IMF, we will continue to implement the updated action plan provided by the mission.

34. In addition, a pilot phase of the insurance component of the government’s social protection project – Insurance to Build Human Capital (ARCH) – began in 2019, targeting extremely poor populations (300,000 people). The project will be expanded to the general population between 2020 and 2022. The government will cover the entire insurance premium for those in extreme poverty and will provide a partial subsidy (up to 40 percent) for the premium paid by populations categorized as impoverished but not in extreme poverty. The insurance system is based on an innovative mechanism for targeting poor populations and the establishment of a single social register in cooperation with the World Bank. The other components of the ARCH program are improvement of skills, access to credit, and underwriting of a retirement pension for around 1.8 million people who are working primarily in the informal sector.

35. Several measures are under way in the implementation of the Treasury Single Account (TSA). They include: (i) the adoption of a regulatory framework for the TSA in 2015; (ii) the interconnection and modernization of the unit responsible for the management of correspondent accounts; and (iii) a partial inventory of public accounts in the books of commercial banks in 2017 and an update in 2018. Nevertheless, we are encountering technical and operational difficulties related to the interface of the Treasury’s computer system with the BCEAO system. In addition, we need to be sure that the effective implementation of the TSA will not have an impact on the banking system. To this end, we will conduct a study to evaluate the impact on the stability of the banking system of the withdrawal of public funds from commercial banks and their placement in the TSA (before end-March 2020).

C. Public Debt Management

36. The Autonomous Amortization Fund (CAA) plans to continue its efforts to optimize the debt portfolio. The aim is in part to align the maturity of the debt with that of financed projects. The CAA has a medium-term debt strategy document for 2017–2021. The document is updated each year to better take into account the financing needs of the current budget.

37. Thus, the annual debt strategy for 2020 will take in account matters related to international financing (including the Eurobond), and in particular, how the government plans to choose between issuances on the domestic market and those on the international market. In addition to the cost of financing, we will take into account the structure of the portfolio (the split between external financing and domestic financing) and the exposure to exchange risk during this process. Our revised debt strategy will include a new quantitative target for the composition in terms of external and domestic debt.

38. In order to strengthen the monitoring of securities issued and developments in the international market, the CAA plans to acquire a Bloomberg terminal. In the meantime, they will communicate with their financial advisers to obtain information about developments in the international market. Implementation of the mechanism to monitor public enterprises should also be stepped up in the context of the medium-term debt strategy.

D. Public Enterprise Reform

39. Public enterprises continue to be a burden on the government budget owing to their weak economic and financial performance. New auditors have been appointed at the 189 public enterprises and government offices. The government has also validated the new draft law on public enterprises. This law, which has been submitted to the National Assembly but has not yet been adopted, covers the creation, organization, and operation of public enterprises and aims to improve their governance and thus their economic and financial performance. The future law calls for close government monitoring of the economic and financial position of public enterprises. Public enterprises will henceforth be required to transmit their financial statements (accompanied by audit reports) to the Ministry of Economy and Finance by the prescribed deadline. Moreover, a consolidated report on the economic and financial position of public enterprises will be attached to the budget law starting in 2019, once the law has been adopted.

40. To limit the impact of public enterprises on the budget, the government also plans to define a dividend policy for each enterprise in order to make them accountable for achieving results while ensuring financial management consistent with their development. The government has concluded performance contracts the Autonomous Port of Cotonou and the Société Béninoise d’Énergie Électrique (SBEE) with support from the Millennium Challenge Corporation. We plan to expand this measure to other public enterprises by end-2019 in the context of the new law.

E. Infrastructure Projects and Public-Private Partnerships

41. Following the establishment of the legal and regulatory framework for public-private partnerships (PPP) by the Law 2016–24 of June 28, 2017, the government adopted implementing decrees to take account of the new institutional framework for the promotion of investment in Benin. The institutional framework has entered into effect, thanks in particular to the technical assistance from the World Bank. Analysis of the options for financing GAP projects has led to the compilation of a catalog of PPP projects. In accordance with international best practices, we will ensure that: (i) investments in PPPs are included in the budget documents and public finance statistics; and (ii) liabilities relating to PPPs are assessed and annexed to the budget law. We will analyze the fiscal risks relating to these PPP projects. To date, Benin has not yet officially signed a PPP contract. There is a project in the energy sector that is being discussed. It pertains to the Maria Gleta power plant. Banks have requested a guarantee for the project, but we have indicated to them that we are not ready yet to provide a guarantee for the project.

42. In 2018 we established a unit within the Ministry of Economy and Finance for the management of fiscal risks related to PPPs. We are now working on improving its capacity to make the unit fully operational.

43. In addition, the government has entered into preliminary discussions with the People’s Republic of China on a future partnership to finance the construction of the Glodjigbé International Airport. At this stage, the financing package and schedule of works have not yet been finalized. We are continuing with all of the preliminary analyses for the financing of the project, and we will discuss them with the IMF teams when they have been finalized. We remain determined to take adequate measures to ensure that the financing of this project is reflected in the public accounts in accordance with international best practices, that the risks on public finances are minimized, and that the public debt sustainability is not jeopardized.

F. Business Environment

44. To make Benin an attractive destination for investors, a new investment promotion mechanism was put in place in 2017, streamlining the institutional and regulatory framework for investment promotion in Benin. At the strategic level, an Inter-ministerial Investment Promotion Committee was created to improve government coordination on issues related to the business environment and to provide a coordinated response to the needs and expectations of investors. At the operational level, the Agency for the Promotion of Investment and Exports (APIEX) has been restructured to become the sole gateway for investors and showcase the promotion of investments and exports in Benin. The APIEX is thus: (i) the one-stop window for business creation, allowing to shorten the business creation time to three hours; (ii) the technical body responsible for reviewing applications for approval under the Investment Code; (iii) the Executive Secretariat of the PPP Support Unit; (iv) the focal point for the implementation of the Doing Business reforms; (v) the administrative authority for the special economic zones; and (vi) the export information and facilitation center.

45. In the area of business creation, the two key undertaken measures are the simplification of the procedures for declaring the existence of a business and elimination of the procedure for the physical verification that the name of an enterprise is unique. The tax payment process has been improved by the establishment of an electronic payment procedure (which is also available to large and medium-sized enterprises), strengthening of the provisions regarding the synthetic business tax, and a reduction in the tax from CFAF 400,000 to CFAF 150,000 in 2019. The reforms pertaining to cross-border trade involve an interconnection between the Nigerian and Beninese customs services, the introduction of an online system for making complaints, the creation of an informational website for users regarding customs clearance conditions, and the establishment of a working group responsible for defining customs clearance standards and streamlining customs procedures. With regard to the protection of minority investors, the time period for the handling of cases dropped from 750 days in 2017 to 57 days in 2018.

46. Furthermore, we made amendments and additions to the land code in 2017, which led to the adoption of a revised Law 2017–15 of August 10, 2017. The revised law provides for a reduction in the time required to obtain property titles and, in the case of foreign investors, the lifting of restrictions on the acquisition of real property. The National Agency of Domain and Land (ANDF) has carried out a number of actions related to the launching of the online land-use registry for Cotonou. These include the creation of online folders for notaries (which enable them to track progress in the handling of their applications) and the establishment of deadlines for the issuance of property transfer deeds by the ANDF. As part of the reforms of construction permits, a memorandum, intended for the Association of Architects, was issued to clarify the costs of providing membership certificates. Likewise, Order 2017–131 of December 18, 2017, provides for a clarification of the minimum requirements that need to be met in order for construction permits to be issued.

47. Under the new arrangement, a specific institutional framework for implementing the Doing Business reforms has been adopted, along with a matrix of annual actions. Two draft laws designed to facilitate private investment have been finalized and submitted to the Parliament for adoption (they have not yet been adopted owing to the legislative cycle and the end of the parliamentary term). One draft law contains amendments to the investment code and the other focuses on the promotion and development of micro-, small- and medium-sized enterprises. Innovations introduced by the new Investment Code include:

• simplification of the approval mechanisms (three mechanisms with clear and precise incentives during the startup and operating periods, two alternative mechanisms to further encourage investors interested in the priority sectors of the economy);

• professionalization of the processing of accreditation files, and time limit on the technical decision;

• improvement of the investment monitoring system;

• incorporation of international best practices for the preparation of investment codes and, in particular, incorporation of the comments provided by the United Nations Conference on Trade and Development (UNCTAD) on the existing code; and;

• structuring of incentives to make Benin more competitive and ensure the consistency of its investment code provisions with the series of exemptions granted to investors in special economic zones, as well as with the specific government assistance initiatives designed to promote entrepreneurship.

48. The aim of the Law on Micro-, Small-, and Medium-Sized Enterprises (MSMEs) is to formalize the transposition into national law of the provisions of the WAEMU Community Charter for MPMEs adopted in December 2015. The key innovations involve:

• the establishment of a mechanism for the identification and categorization of MSMEs eligible for specific government measures and assistance;

• the establishment by law of an agency responsible for implementing the national policy to promote MSMEs;

• assistance and support measures for MSMEs, including market access facilities, protection against government payment delays, and the incentive to co-contract and subcontract with large enterprises;

• tax facilities and incentives for the creation and maintenance of MSMEs (for MSMEs that process local raw materials and for business hubs and incubators);

• measures to promote and finance MSMEs (technical assistance, facilities for access to land and developed sites, specific financing and guarantee mechanisms or institutions); and

• measures to support struggling MSMEs.

49. In addition, in 2018 Parliament adopted a law on hiring that aims to promote job creation. This law has corrected a number of legal gaps, particularly those relating to hiring for trial periods, which has long been unregulated, and the types of contracts, including fixed-term contracts, that can be renewed indefinitely. Moreover, the new law allows foreigners to work under open-ended contracts, whereas previously they had access only to fixed-term contracts. The law also eases the licensing conditions and sets a maximum limit of 9 months of compensation in the event of dismissal deemed abusive by the courts.

50. Over the past five years, the main reforms undertaken in the area of l trade facilitation were aimed at: (i) the establishment of a more rapid and less burdensome computerized process for the customs clearance of imports and exports; (ii) the integration of customs and control services at the Port of Cotonou (PAC); and (iii) delegation of the management of the PAC to the Port of Antwerp. However, we are still experiencing difficulties related to the automation and clarity of customs clearance procedures. Accordingly, we will perform a diagnostic assessment of the main impediments to trade, based on the notification framework of the Trade Facilitation Agreement of the World Trade Organization (WTO) (before end-September 2019).

G. Financial System

51. Two small public banks have reported repeated losses in recent years. The government has put into place a restructuring plan for these two banks. We are currently hoping to perform a merger of these institutions with the aim of reaching a critical size to comply with the minimum capital requirement established in the WAEMU. The merger will also make it possible to take advantage of synergies, in particular by making use of the nationwide network of one of the banks. We have hired an international auditing firm to evaluate the various merger options and their cost to the public purse. In consultation with the IMF team, we will choose a type of merger that will enable the new bank to comply with prudential standards for capital and to regain financial viability. We will ensure that the merger option that is chosen will be the least expensive in terms of public resources. The merger will be in line with international best practices with regards to governance, financial reporting, risk management, control, operations, and strategy. We will then put into place a restructuring plan for the merged bank, which will be presented to the Banking Commission before the end of the year.

52. To modernize the financial sector, the government has also, by Law 2018–38 of September 2018, reactivated the Caisse de Dépôts et Consignations (CDC), which was created on August 31, 1973, by Order 073–60. A Steering Committee for the Operationalization of the CDC was established in January 2019 pursuant to an order issued by the Minister of Economy and Finance and a recruitment notice for its senior members was issued. In addition, we are in the process of entering into a contract with an international consulting firm for the purpose of: identifying the resources of the CDC; drafting a business plan; defining an investment approach and risk management policy; and putting into place a governance framework and human resources management, as well as an information system.

53. The essential mission of the CDC is to receive and conserve movable assets deposited with it and to return them to their rightful owners. It is thus responsible for administering deposits and consignments, providing services relating to the funds whose management is entrusted to it, and receiving administrative and court-ordered consignments and sureties. In general, the CDC has general interest missions in support of the public policies of the central and local governments, particularly in the areas of economic and social development. To achieve them, the CDC pursues investment and risk management policies and strategies that should enable it to better use resources and generate yields above the average cost of government borrowing. To this end, it is adopting prudential rules in line with best practices for investment and risk management.

54. At the practical level, in the context of the modernization of the financial sector of Benin, the CDC will enable the government to: (i) hold equity in companies that it wishes to support or from which it simply wishes to receive dividends, like any shareholder; (ii) work alongside the banking system by making deposits in banks at reduced costs; (iii) participate in the financing of social projects; and (iv) assist effectively in the financing of the economy by making public securities more attractive (proposal of purchase of public securities at low rates by the CDC).

55. We also plan to continue to improve the capacity of the judges and courts to rule on financial matters. The new commercial tribunal in Cotonou is now operational. These courts will help to resolve business disputes. As in previous years, the BCEAO has, in the context of its training program for the judicial profession, undertaken to help build the capacity of judges and magistrates in matters relating to the WAEMU financial regulations.

56. To promote financial inclusion in Benin, the government has taken measures such as the creation of permanent mechanisms for the mobilization of resources by microfinance institutions and improved promotion and coordination of the microfinance sector.

57. To promote the sector, the National Microfinance Fund (FNM) has prepared a new strategic plan for 2017–2021, founded on the following three strategic pillars: (i) facilitating access to appropriate financial resources for microfinance institutions; (ii) building operational capacity and promoting social and technological interventions; and (iii) strengthening governance and the sustainability of FNM actions. In addition, the government, through the Ministry for Social Affairs and Microfinance (MASM), has begun preparing the FinScope survey, the first stage in the Making Access to Financial Service Possible (MAP) process, which will lead to the development of a national financial inclusion strategy in line with the regional financial inclusion strategy developed by the BCEAO. Finally, financial inclusion will be strengthened with the implementation in 2019 of the microfinance component of the Insurance to Build Human Capital (ARCH) project.

H. Rebasing of the National Accounts

58. Since 2016, the government has supported the project for the rebasing of the national accounts and implementation of the System of National Accounts 2008 (SNA 2008). This initiative will lead to significant improvements in: (i) the quality and coverage of the data sources for the national accounts; and (ii) the incorporation of the SNA 2008 innovations regarding the goods and services accounts.

59. The National Statistics and Economic Analysis Institute (INSAE) received an IMF technical assistance mission on national accounts statistics in June 2018. The purpose of this mission was to assist INSAE in: (i) reviewing the estimation methods and the new additional information for the work to rebase the GDP; (ii) reviewing the sources for the revision of GDP, particularly the contribution of the informal sector; and (iii) analyzing the quality of the supply and use tables and the level of GDP in the new base year of 2015. Following this mission, it was apparent that a Survey of Informal Cross-border Trade (ECENE) was a priority to correctly estimate total demand and finalize the supply and use balances (SUB). INSAE has begun the process of conducting this survey, which involves four rounds of visits. The final revised estimates are expected no later than summer of 2019.

I. Quantitative Performance Criteria and Structural Benchmarks

60. Quantitative performance criteria have been set for end-June and end-December 2019 and indicative targets for end-September 2019 (table 1). The structural benchmarks for 2019, as well as their macroeconomic justifications, are described in the table 2. The fifth and sixth program reviews are expected to be completed on or after October 31, 2019, and March 23, 2020, respectively.

Table 1.

Benin: Status of Quantitative Performance Criteria and Indicative Targets, 2018–191

(Billions of CFA francs)

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Sources: Beninese authorities; IMF staff estimates and projections.

The terms in this table are defined in the Technical Memorandum of Understanding (TMU).

The performance criteria and indicative targets are cumulative from the beginning of the calendar year.

The performance criterion on net domestic financing is automatically adjusted as indicated in the TMU.

The performance criteria and indicative targets are cumulative from the beginning of the calendar year.

If the amount of disbursed external budgetary assistance net of external debt service obligations falls short of the program forecast, the ceiling on net domestic financing will be adjusted pro-tanto, subject to limits specified in the TMU.

If the amount of disbursed external budgetary assistance net of external debt service obligations exceeds the program forecast, the ceiling will be adjusted downward by the excess disbursement unless it is used to reduce domestic payment arrears.

The floor of the basic primary balance at end-December 2019 has been revised down to reflect the recognition of arrears.

Table 2.

Benin: Prior Actions and Structural Benchmarks for 2018 and 2019

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Attachment II. Technical Memorandum of Understanding

1. This Technical Memorandum of Understanding (the “Memorandum”) defines the performance criteria, quantitative benchmarks, and structural benchmarks of the Republic of Benin’s program supported by the Extended Credit Facility (ECF). It also specifies the frequency and deadlines for data reporting to the staff of the International Monetary Fund (IMF) for program monitoring purposes.

Program Assumptions

2. Exchange rates under the program. For the purposes of this Memorandum, the value of transactions denominated in foreign currencies will be converted into the domestic currency of Benin (the CFA franc, or CFAF), based on the exchange rates agreed upon for the program projections. The key exchange rates are presented below.1

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Definitions

3. Unless otherwise indicated, “government” is understood to mean the central government of the Republic of Benin and does not include any political subdivisions (such as local governments), the central bank, or any other public or government-owned entity with autonomous legal personality not included in the government’s flow-of-funds table (Tableau des opérations financières de l’État, TOFE).

4. The definitions of “debt” and borrowing for the purposes of this Memorandum are set out in point 8 of IMF Executive Board Decision No. 6230-(79/140), as subsequently amended on December 5, 2014 by Executive Board Decision No. 15688-(14/107):

  • (a) Debt is understood to mean a current – as opposed to a contingent – liability, created under a contractual agreement for the provision of value in the form of assets (including currency) or services, which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) in time, and these payments will discharge the principal and/or interest liabilities incurred under the contract. Debt can take a number of forms; the primary ones being as follows:

    • i) loans, that is, advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the seller in the future (such as repurchase agreements and official swap arrangements);

    • ii) suppliers’ credits, that is, contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided;

    • iii) leases, that is, arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains title to the property. For the purpose of this guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement, excluding those payments that cover the operation, repair, or maintenance of the property; and

    • iv) Treasury bills and bonds issued in Communauté Financière Africaine (CFA) francs on the West African Economic and Monetary Union’s (WAEMU) regional market, which are included in public debt for the purpose of this Memorandum.

Under the definition of debt set out above, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are also debt. Failure to make payment on an obligation that is not considered debt under this definition (for example, payment on delivery) will not give rise to debt.

  • (b) The present value of the loan will be calculated using a single discount rate set at 5 percent.

  • (c) For debts carrying a variable interest rate in the form of a benchmark interest rate plus a fixed spread, the PV of the debt would be calculated using a program reference rate plus the fixed spread (in basis points) specified in the debt contract. The program reference rate for the six-month USD LIBOR is 2.63 percent and will remain fixed for the duration of the program. The spread of six-month Euro LIBOR over six-month USD LIBOR is -294 basis points. The spread of six-month JPY LIBOR over six-month USD LIBOR is -260 basis points. The spread of six-month GBP LIBOR over six-month USD LIBOR is -197 basis points. For interest rates on currencies other than Euro, JPY, and GBP, the spread over six-month USD LIBOR is -200 basis points.2 Where the variable rate is linked to a benchmark interest rate other than the six-month USD LIBOR, a spread reflecting the difference between the benchmark rate and the six-month USD LIBOR (rounded to the nearest 50 bps) will be added; and

  • (d) Domestic debt is defined as debt denominated in CFA francs.

  • (e) “External debt” is defined as debt denominated in any currency other than the CFA franc

Quantitative Performance Criteria

A. Ceiling on Net Domestic Financing of the Government

Definitions

5. Net domestic financing (NDF) of the government is defined as the sum of (i) net bank credit to the government, defined below; and (ii) net nonbank financing of the government, including the proceeds of the sale of government assets, which includes proceeds from the divestiture of shares of public enterprises, that is, privatizations, Treasury bills, and other securitized obligations issued by the government and listed in CFA francs on the WAEMU regional financial market, and any BCEAO credit to the government, including any drawings on the CFA franc counterpart of the Special Drawing Rights (SDR) allocation.2

6. Net bank credit to the government is defined as the balance between the debts and claims of the government vis-à-vis the central bank and local commercial banks. The scope of net credit to the government is that used by the BCEAO and is in keeping with general IMF practice in this area. It implies a definition of government that is broader than the one indicated in paragraph 2. Government claims include the CFA franc cash balance, postal checking accounts, customs duty bills, and all deposits with the BCEAO and commercial banks of government-owned entities, except for industrial or commercial public agencies (EPIC) and government corporations, which are excluded from the calculation. Government debt to the banking system includes all debt to the central bank and local commercial banks, including Treasury bills and other securitized debt.

7. The data deemed valid within the framework of the program will be the figures for net bank credit to the government and for the net amount of Treasury bills and bonds issued in CFA francs on the WAEMU regional financial market, calculated by the BCEAO, and the figures for nonbank financing calculated by the Treasury of Benin.

8. Gross external budgetary assistance is defined as grants, loans, and non-earmarked debt relief operations (excluding project-related loans and grants, use of IMF resources, and debt relief under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief (MDRI) Initiatives. Net external budgetary assistance is defined as the difference between gross external budgetary assistance and the sum of total debt service obligations on all external debt (defined as the sum of interest payments and amortizations on all external loans, including interest payments and other charges to the IMF and on project-related loans, but excluding repayment obligations to the IMF), and all payments of external arrears.

Performance Criteria and Indicative Targets

9. The ceiling on net domestic financing of the government (cumulative since January 1 of the same year) is set as follows: CFAF 15 billion at end-March 2019; CFAF -38.0 billion at end-June 2019; CFAF -158.5 billion at end-September 2019; and CFAF – 289.0 billion at end-December 2019. These ceilings are performance criteria for end-June and end-December 2019, and an indicative target for end-September 2019.

Adjustments

10. Net domestic financing of the government will be adjusted if net external budgetary assistance exceeds or falls short of the program projections indicated in paragraph 10:

  • If, at the end of a quarter, net external budgetary assistance exceeds the total projected amounts (cumulative since January 1 of the same year) by more than CFAF 5 billion, the NDF ceiling will be lowered by an amount equivalent to that excess, minus CFAF 5 billion.

  • If at the end of a quarter, net external budgetary assistance falls short of the projected amounts (cumulative since January 1 of the same year), the NDF ceiling will be increased by an amount equivalent to this shortfall, within the following limits: the increase may not exceed CFAF 15 billion at end-June 2018 and CFAF 25 billion at end-December 2018. The same rule applies for 2019.

11. For the purposes of calculating the adjustment to the NDF ceiling, the following amounts are projected in the program:

  • The amounts of gross external budgetary assistance (cumulative since January 1 of the same year) projected in the program are CFAF 22.6 billion at end-March 2018; CFAF 22.6 billion at end-June 2018; CFAF 39.6 billion at end-September 2018; and CFAF 55.4 billion at end-December 2018.

  • The amounts of gross external budgetary assistance (cumulative since January 1 of the same year) projected in the program are CFAF 0 billion at end-March 2019; CFAF 3.9 billion at end-June 2019; CFAF 10.1 billion at end-September 2019; and CFAF 45.4 billion at end-December 2019.

B. Floor of the Basic Primary Fiscal Balance

Definition

12. The basic primary fiscal balance is defined as the difference between total fiscal revenue (tax and nontax) and basic primary fiscal expenditure (on a commitment basis). Basic primary fiscal expenditure is defined as fiscal (current plus capital) expenditure minus (a) interest payments on domestic and external debt; and (b) capital expenditure financed by external grants and loans. Grants are excluded from revenue and net government lending is excluded from fiscal expenditure.

Performance Criteria and Indicative Targets

13. The floor of the basic primary fiscal balance (cumulative since January 1 of the same year) is a balance of not less than CFAF +15.6 billion at end-March 2019; CFAF +44.5 billion at end-June 2019; CFAF 47.7 billion at end-September 2019; and CFAF 101.7 billion at end-December 2019. The floors for end-June 2019 and end-December 2019 are performance criteria and the floor for end-September 2019 is an indicative target.

C. Floor of Total Government Revenue

Definition

14. Total government revenue includes tax and nontax revenue, as shown in the TOFE, but excludes external grants, revenue of autonomous agencies, and privatization receipts.

Performance Criteria and Indicative Targets

15. The floor on total government revenue (cumulative since January 1 of the same year) is set at an amount that is not less than CFAF 235.1 billion at end-March 2019; CFAF 505.5 billion at end-June 2019; CFAF 762.5 billion at end-September 2019; and CFAF 1112.4 billion at end-December 2019. The floors for end-June and end-December 2019 are performance criteria and the floor for end-September 2019 is an indicative target.

D. Non-Accumulation of New Domestic Payments Arrears by the Government

Definition

16. Domestic payments arrears are defined as domestic payments due but not paid by the government after a 90-day grace period, unless the payment arrangements specify a longer repayment period. The Autonomous Amortization Fund (CAA) and the Treasury record and update the data on the accumulation and reduction of domestic payments arrears. The definitions of debt given in paragraph 4a, of domestic debt in paragraph 4d, and of the government in paragraph 3 apply here.

Continuous Performance Criteria

17. The government undertakes not to accumulate any new domestic payments arrears. The non-accumulation of new domestic payments arrears will be continuously monitored throughout the program.

E. Non-Accumulation of External Payments Arrears by the Government

Definition

18. External public payments arrears are defined as payments due but not paid by the government as of the due date specified in the contract, taking into account any applicable grace periods, on the external debt of the government or external debt guaranteed by the government. The definitions of debt given in paragraph 4a, of external debt in paragraph 4e, and of the government in paragraph 3 apply here.

Continuous Performance Criterion

19. The government undertakes not to accumulate any external public payments arrears, with the exception of arrears related to debt that is the subject of renegotiation or rescheduling. The performance criterion on the non-accumulation of external public payments arrears will be continuously monitored throughout the program.

F. Ceiling on the Present Value of New External Debt Contracted or Guaranteed by the Government with a Maturity of One Year or More

Definition

20. This performance criterion applies not only to debt as defined in paragraph 4a, but also to commitments contracted or guaranteed by the government (including lease-purchase contracts) for which no value has been received. This criterion also applies to private sector debt guaranteed by the government, which constitutes a contingent liability of the government. As indicated in paragraph 4e, external debt excludes Treasury bills and bonds issued in CFA francs on the WAEMU regional market.

21. The term “government” used for this performance criterion and for the performance criterion on the contracting or guaranteeing by the government of new external debt, includes the government, as defined in paragraph 3, local governments, and all public enterprises, including administrative public agencies (EPA), scientific and technical public agencies, professional public agencies, and enterprises jointly owned by the Beninese government with the governments of other countries.

Continuous Performance Criterion

22. The present value of new external borrowing contracted or guaranteed by the government in 2019 will not exceed a cumulative amount of CFAF 797 billion. Changes to this ceiling may be made (subject to approval by the IMF Executive Board) based on the results of the public debt sustainability analysis prepared jointly by the staffs of the World Bank and the IMF.

G. Ceiling on Pre-Financing Contracts for Public Investments

Definition

23. Pre-financing contracts are defined as contracts pursuant to which the following steps are taken concurrently: (i) the government entrusts a private entity with the responsibility for executing public works, financed by a loan to the entity from a domestic commercial bank or group of commercial banks; (ii) the Minister of Finance guarantees this loan and signs an unconditional and irrevocable agreement to replace the private entity to honor the full amount of principal and interest of the loan, which are automatically paid from the Treasury’s account at the BCEAO. The concept of government used for this performance criterion is the one defined in paragraph 3.

Continuous Performance Criterion

24. The government undertakes not to enter into any pre-financing contracts during the program. This performance criterion on pre-financing contracts for public investments will be continuously monitored throughout the program.

Indicative Targets

H. Floor for Priority Social Expenditures

25. Priority social expenditures are determined in line with the priority programs identified in the GAP. These expenditures consist of selected (nonwage) expenditures in the following sectors, inter alia: health; energy, water, and mines; agriculture; livestock and fisheries; social affairs; education; and living standards. The execution of these expenditures is monitored on a payment order basis during the program through the Integrated Government Finance Management System (SIGFIP).

Definition

26. The indicative target for priority social expenditures is defined as the total amount (cumulative since January 1 of the same year) of the payment orders issued under the budget lines indicated in Table 1 below.

Table 1.

Priority Social Expenditure Categories

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Indicative Target

27. The indicative target for priority social expenditures (cumulative since January 1 of the same year) is set as follows: CFAF 15.0 billion at end-March 2018, CFAF 50.0 billion at end-June 2018; CFAF 101.0 billion at end-September 2018; and CFAF 167.0 billion at end-December 2018.

28. The indicative target for priority social expenditures (cumulative since January 1 of the same year) is set as follows: CFAF 37.2 billion at end-March 2019, CFAF 82.5 billion at end-June 2019; CFAF 140.7 billion at end-September 2019; and CFAF 180.0 billion at end-December 2019.

Information for Program Monitoring

I. Data on Performance Criteria and Indicative Targets

29. To facilitate effective program monitoring, the authorities will provide IMF staff with the following data:

Every month:

  • Data on any loan (terms and creditors) contracted or guaranteed by the government, in the first week after the end of the month;

  • Monthly consumer price index, within two weeks of the end of the month;

  • The TOFE, including revenue, detailed data on net domestic financing of the government (bank and nonbank domestic financing, including claims held by the nonbank private sector); and data on the basic primary fiscal balance, including data generated by SIGFIP, within six weeks of the end of the month;

  • Data on the balance, accumulation, amount (stock), and repayment of public domestic and external payments arrears, including in the event that these arrears amount to zero, within six weeks of the end of the month;

  • The monetary survey, within eight weeks of the end of the month.

Every quarter:

  • Data pertaining to the amount of exceptional payment orders or other exceptional measures, within six weeks of the end of the quarter; and

  • Data pertaining to priority social expenditures, within six weeks of the end of the quarter.

J. Other Information

30. The authorities will provide IMF staff with the following data:

Every month:

  • Bank supervision indicators for bank and nonbank financial institutions within eight weeks of the end of the month.

Every quarter:

  • Data on the implementation of the public investment program, including detailed information on sources of financing, within four weeks of the end of the quarter; and

  • Data on the stock of external debt, external debt service, the signing of external loan agreements and disbursements of external loans, within twelve weeks of the end of the quarter.

On an ad hoc basis:

  • In the quarter when they become available: a copy of the budget law and its supplementary documents; a copy of the most recent budget review law; as well as any decree or law pertaining to the budget or the implementation.
1

Gaspar, V., D. Amaglobeli, M. Garcia-Escribano, D. Prady, and M. Soto, 2019, “Fiscal Policy and Development: Human, Social, and Physical Investments for the SDGs,” IMF Staff Discussion Note SDN/19/03.

2

An institutional oversight led to a small accumulation of domestic arrears in the first semester of 2018. Thus, the continuous QPC on non-accumulation of new domestic arrears was not observed over March-June 2018. Since then, the debt management office has set up a new monitoring system.

3

Customs revenues were negatively affected by developments in Nigeria (agricultural reform and relaxation of trade barriers) that reduced its imports from Benin.

4

Using the new definition of capital, the aggregate CAR at end-2017 would have been 8.4, which suggests that about 80 percent of the decline between end-2017 and June-2018 was due to regulatory changes.

5

Public investment accounted for 5.9 percent of GDP in 2016, then went up to 9.1 percent in 2017, and is projected to return gradually to 6.0 percent by 2024.

6

A guarantee of half a percent of GDP was provided to the electricity distribution company in December 2018 and added to the 2018 debt stock.

7

Following the exceptional production growth in the last three years, the cotton sector is now facing constraints related to the availability of land, producers, and ginning plants.

8

This alternative and preferred scenario is not reflected in the baseline projections, which are based on the conservative assumption of unchanged tax policy.

9

“Good” tax incentives are generally (i) targeted towards exporting firms; (ii) not limited to large investments; (iii) temporary; and (iv) cost-based rather than profit-based (see 2015 IMF Policy Paper “Options for LIC Effective and Efficient Use of Tax Incentives for Investment”).

10

Other conditions discussed in IMF How-to Note 2017/06 “How to Strengthen the Management of Government Guarantees” also apply: guarantees should only be considered for projects (i) that generate positive returns, (ii) whose economic benefits exceed costs, (iii) that could not be financed without guarantees, and (iv) for which the beneficiary is creditworthy.

11

The relatively low cotton production until 2015 has also had a negative impact on ginning activities, which are part of the manufacturing sector.

12

The financial situation of the distribution company has improved since 2017 and its debt was estimated at 0.2 percent of GDP at end-2018.

13

Tax incentives generally rank low in investment climate surveys in low-income countries, and there are many examples in which they are reported to be redundant and costly for the budget. Their effective use requires that they be carefully designed. See conditions in footnote 9.

14

The number of teachers (in proportion to the number of students) and doctors (in proportion to the total population) are below best performers in a group of comparator countries with the same level of development (Garcia-Escribano, M., D. Prady, and M. Sy, forthcoming, ‘‘The Spending Challenge for Reaching the SDGs in Sub-Saharan Africa: Lessons Learned from Benin and Rwanda’’, IMF Working Paper).

15

The consulting firm will assist the authorities with the identification of resources to be collected and managed by the CDC; the development of a business plan, investment doctrine and human resource strategy; the implementation of risk management and governance frameworks; and the creation of an information management system.

16

The synergies will build on the weaker bank’s branch network which is spread throughout the country and the stronger bank’s recently deployed modern information system. This will better position the merged bank to attract new customers, including through new product offerings.

17

The following principles will guide the merger process: (i) adequate recapitalization in line with WAEMU’s latest prudential requirements; (ii) minimum cost for the government while preserving financial stability; (iii) strengthening of the new bank’s governance, reporting, and internal control framework; and (iv) efficient organizational structure and business model that ensure the viability of the bank, including by closing non-profitable activities or branches (unless these activities fulfill a public service—in which case the bank should be compensated by a subsidy from the budget in a transparent way).

18

There is a growing understanding that corruption impacts economic performance by weakening the state’s capacity to perform its core functions and by affecting drivers of potential and inclusive growth (see 2017 IMF Policy Paper “The Role of the Fund in Governance Issues—Review of the Guidance Note”).

19

International competitiveness and doing business indicators should be interpreted with caution since their methodology generates margins of error for each governance estimate and they are based on surveys of perceptions by enterprises, citizens, and experts. Estimates reflect the relative, not the absolute, performance of a country.

20

A shortfall in external financing in the third quarter of 2018 led the authorities to rely more extensively on domestic borrowing to execute their public investment plan. This was offset in the fourth quarter through lesser recourse to the regional market.

1

This annex assesses recommendations made in the 2017 IMF Article IV report. “Good” describes recommendations that have been successfully implemented; “in progress” for recommendations whose implementation has been initiated but is yet to be completed; “low” for recommendations that need to be expanded in scope; and “not implemented” for recommendations whose implementation has not yet been initiated.

1

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term (ST)” and “medium term (MT)” are meant to indicate that the risk could materialize within 1 and 3 years, respectively.

1

Errors and omissions represented 3 percent of the current account deficit over the same period. The negative sign indicates an increase in reserves.

2

See IMF, 2019, ‘‘West African Economic and Monetary Union—Staff Report on Common Policies of Member Countries’’, IMF Country Report No.19/90.

3

The WAEMU reserve projections do not include the March 2019 Eurobond issuance of Benin.

1

The share of revenue collected through the banking system in the total revenue collected by the DGI went from 17 percent in December 2017 to 36 percent in June 2018.

1

The deadline has been changed from June 2019 to November 2019 owing to the legislative cycle and the end of the parliamentary term.

2

The unpaid services to suppliers were inherited from the previous governments.

1

2018 exchange rates as at August 18, 2017.

2

The program reference rate and spreads are based on the “average projected rate” for the six-month USD LIBOR over the following 10 years from the Spring 2018 World Economic Outlook (WEO).

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Cover IMF Staff Country Reports
Benin: 2019 Article IV Consultation, Fourth Review under the Extended Credit Facility Arrangement, and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Benin
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2019: Issue 203
Publisher:
International Monetary Fund
ISBN:
9781498323802
ISSN:
1934-7685
Pages:
122
DOI:
https://doi.org/10.5089/9781498323802.002
Text Figure 1.

Cotton and Port Activity Indicators (thousands of tons)

Benin, Growth Decomposition, by Component

(percent of GDP)
Text Figure 2.

Medium-term Growth of SSA Countries

(percent, 2024)
Text Figure 3.

Real Value Added by Economic Sector

(share of real GDP)
Figure 1.

Benin: Recent Economic Developments, 2010–19
Figure 2.

Benin: Fiscal Developments and Projections, 2010–19
Figure 3.

Benin: Real and External Sector Developments, 2011–19
Text Figure 3.1.

FDIs in percent of GDP, Average 2010–17
Figure 3.1.

Benin: External Developments
Figure 3.2.

Most Problematics Factors for Exporting

(Percent of responses)
Figure 3.3.

Most Problematic Factors for Importing

(Percent of responses)