Togo: 2019 Article IV Consultation, Fourth Review Under the Extended Credit Facility Arrangement, and Request for Waiver of Nonobservance of Performance Criterion and Modification of Performance Criteria—Press Release; Staff Report; and Statement by the Executive Director for Togo
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International Monetary Fund. African Dept.
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Publication Date:
02 Jul 2019
eISBN:
9781498323925
Language:
English
Keywords:
ISCR; CR; deficit; Togo; Executive Board discussion; disbursement of SDR; Togolese authorities; broad money; debt management; economic activity; debt service; State-owned banks; Arrears; headline inflation
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2019 Article IV Consultation, Fourth Review under the Extended Credit Facility Arrangement, and Request for Waiver of Nonobservance of Performance Criterion and Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Togo

Abstract

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

Context and Recent Developments: Economic Recovery AMID SOCIO-Political Uncertainty

Context

1. Despite bold reforms implemented in recent years, a climate of uncertainty and underdeveloped institutions have prevented Togo from fully unlocking its substantial growth potential. As recommended in the 2016 Article IV consultation, the government stopped the public investment pre-financing and embarked on a strong fiscal consolidation, which has led to a significant reduction in the fiscal deficit and public debt (Box 1). A comprehensive spending review was completed and arrears to the private sector are being gradually cleared. Doing Business Indicators have improved considerably. However, economic growth has decelerated in recent years and remains below the average of the last decade as well as below the average in peer countries. Private investment has been slow in offsetting the decline in public investment. While increasing, social spending has remained below targets. Public debt has declined but remains the highest in the WAEMU. The high non-performing loans (NPLs) and loan concentration in banks, as well as in the microfinance sector, constrain profitability and new lending. Reforms to address weaknesses in the public banks have encountered significant delays. Governance and institutional capacity are weaker than in peers. Economic activities have repeatedly been hindered by bouts of socio-political instability; poverty remains high and is only marginally decreasing (Text Figure 1).

Text Figure 1.
Text Figure 1.

Togo: GDP Growth and Weighted Conflict Index

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: World Development Indicators; CNTS Database; Togolese authorities; and IMF staff estimates.

Main Recommendations from the 2016 Article IV Consultations and Current Status

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Recent Developments

2. Following a sharp deceleration in 2017 due to socio-political tensions, the economy regained momentum in 2018–19. Robust performance of the export-oriented sectors (phosphate extraction, coffee and cocoa, and cotton production), as well as strong activities in the tertiary sector (including at the port and airport), supported the growth recovery. Bank credit to the private sector remained broadly flat in 2018. Economic growth is estimated to have accelerated from 4.4 percent in 2017 to 4.9 percent in 2018. Headline inflation stood at 2 percent in March 2019 (year-on-year). Following a significant improvement in 2017, the current account deficit increased in 2018 but remained markedly smaller than in previous years. The external position is broadly consistent with fundamentals and desirable policy settings; Togo has recourse to WAEMU’s pooled foreign reserves, equivalent to 4.3 months of union imports at end-2018 (Annex I).

3. The fiscal outturn at end-2018 was better than expected (Text Table 1). Total revenue expanded by 2.1 percentage points of GDP relative to 2017 and was in line with projections. Nonetheless, this revenue outturn was partly driven by exceptional revenue (about 1.5 percent of GDP), including ad-hoc collections of disputed tax arrears. Although overall spending increased relative to 2017, it remained significantly below projections, particularly for spending on foreign-financed investment. As a result, the domestic primary balance—which is the fiscal aggregate under the control of the government—improved by 1.6 percentage points of GDP from 2017 to 2018 and was in line with projections. The overall primary balance and the overall balance outperformed targets by large margins. Togo reached the WAEMU fiscal deficit criterion—not exceeding 3 percent of GDP—in 2017 and 2018, two years ahead of the timeline agreed by all member states. However, Togo’s public debt is still the highest in the region. Public debt increased slightly from 75.5 percent of GDP in 2017 to 76.2 percent of GDP in 2018 (or 72.3 percent of GDP and 73.6 percent of GDP, respectively excluding state-owned enterprises (SOEs)) (Text Figure 2). This slight increase is mostly due to some revenue recorded in accounts receivable and not in cash in 2018 (see below), resources borrowed in January 2018 to repay arrears connected to the fiscal year 2017, exchange rate depreciation, and capitalization of accrued interest on Sukuk bonds.

Text Table 1.

Togo: Central Government Financial Operations, 2017–18

(percent of GDP)

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Sources: Togolese authorities; and IMF staff estimates.
Text Figure 2.
Text Figure 2.

Togo: Fiscal Developments, 2016–18

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: World Economic Outlook; Togolese authorities; and IMF staff estimates.

4. The stock of arrears was reduced and Togo’s ability to raise funds in the regional WAMU bond market has improved. The government repaid arrears of about 2 percent of GDP in 2018, in line with projections; arrears management is also being strengthened to prevent new accumulation. Such efforts include the synchronization of procurement, commitment, and cash plans. The subscription rate of government bonds in the regional market improved from an average of 77 percent in 2017 to 92 percent in 2018 and 222 percent during January-April 2019 (Text Figure 3).

Text Figure 3.
Text Figure 3.

Togo: Treasury Bills Coverage Rate, 2018–19

(percent)

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: UMOA Titres; and IMF staff estimates.

Program Performance

5. Five out of six performance criteria at end-December 2018 were met (MEFP¶6, Table 6). The domestic primary balance was in line with the program. All zero ceilings—on (i) non-accumulation of arrears on external public debt; (ii) contracting or guaranteeing of non-concessional external debt; (iii) guaranteeing of domestic loans to suppliers and contractors; and (iv) guarantees on bank prefinancing for public investment—were respected. The indicative target (IT) on domestic arrears was met. The IT on revenue was missed by a small margin of 0.1 percent of GDP. The IT on priority social spending was missed by 0.3 percent of GDP. The authorities are taking corrective measures to address the systematic underperformance on social spending. They are working with stakeholders to boost the efficiency of social spending, shift resources from current spending to capital spending on social infrastructure, and put a system in place to better monitor the social spending execution.

Table 1.

Togo: Selected Economic and Financial Indicators, 2016–24

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Sources: Togolese authorities and IMF staff estimates and projections.

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

Includes state-owned enterprise external debt.

Includes prefinancing debt, domestic arrears and state-owned enterprise domestic debt.

Includes prefinancing debt, domestic arrears and state-owned enterprise debt.

Includes prefinancing debt and domestic arrears.

Table 2a.

Togo: Central Government Financial Operations, 2017–24

(Billions of CFA Francs)

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Sources: Togolese authorities and IMF staff estimates and projections.

The original program for 2018 includes FCFA 42 billion (1.4 percent of GDP) of projected cost for the recapitalization of the two merged state owned banks (reported under net lending).

Table 2b.

Togo: Central Government Financial Operations, 2017–24

(Percent of GDP)

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Sources: Togolese authorities and IMF staff estimates and projections.

The original program for 2018 includes FCFA 42 billion (1.4 percent of GDP) of projected cost for the recapitalization of the two merged state owned banks (reported under net lending).

Table 3.

Togo: Balance of Payments, 2016–24

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Sources: Togolese authorities and IMF staff estimates and projections.

In line with WAEMU BoP methodology, includes commercial bank NFA and Togo loese public sector NFA holdings at the BCEAO.

Table 4.

Togo: Monetary Survey, 2016–24

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Sources: Central Bank of West African States and IMF staff estimates and projections.
Table 5.

Togo: Financial Soundness Indicators of the Banking System, 2014–18Q2

(In Percent)

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Source: BCEAO
Table 6.

Togo: Quantitative Performance Criteria and Indicative Targets, September and December 2018

(Billions of CFA Francs)

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Sources: Togolese authorities; and IMF staff estimates.

Continuous performance criterion and cumulated from the approval of the arrangement on May 5,2017.

Performance criteria and indicative targets for 2018 are adjusted upwards to offset deviations from projected external program financing, subject to a cap of CFAF 10 billion. If net arrears repayments in September 2018 are less than programmed (CFAF 48.6 billion), the end-September indicative target for net domestic financing will be adjusted downwards by the difference between the arrears repayment outturn and programmed repayments.

Indicative target at end-December 2018 calculated cumulatively from the beginning of 2018. The target will be adjusted for one half of the deviation from projected external

With arrears repayment as envisaged in the 2018 budget.

6. The end-December 2018 PC on net domestic financing was missed without significant implications to program objectives (MEFP¶6,Table 6). Net domestic financing exceeded the program ceiling by about 1.5 percent of GDP at end-2018. This underperformance was due mainly to statistical recording as commitments to repay revenue arrears made in late 2018 were paid in 2019. This revenue was recorded in “other accounts receivable” in 2018 (1.2 percent of GDP) and will be transferred to net domestic financing in 2019.1 If this revenue had been recorded in 2018, the net domestic financing at end-December 2018 would have exceeded the program ceiling by only 0.2 percentage point of GDP.

7. Five out of seven structural benchmarks were met (MEFP¶7). In July 2018, the authorities started to send to IMF staff monthly data on the stock of payment arrears by age and strengthened the implementation of the cash plan and the control of commitment authorizations to prevent the accumulation of new arrears. To improve the effectiveness of public investment, a circular was sent to all line ministries to mandate the use of the methodological guide on investment project selection, and henceforth include in the public investment plan and the budget only the projects that have been evaluated and selected based on this methodological guide. Mechanisms and procedures were put in place to facilitate land registration. The tender for the second public bank is on track; the authorities, in consultation with IMF staff, drafted the terms of reference for hiring a transaction advisor for its sale; the authorities submitted to staff a strategic plan for its privatization with a slight delay relative to the program deadline.

8. The privatization process of the first public bank encountered delays and the corresponding structural benchmark was not met (MEFP¶9). Whereas the legal and regulatory due diligence required for the direct sale of this bank was completed, a draft sale contract could not be finalized as an agreement has not been reached yet with the potential buyer. Negotiations between this potential buyer and the government are still underway.

Medium-Term Outlook and Risks

9. Growth is expected to approach 5½ percent over the medium term. Large public investment completed in recent years (new roads and an expanded port and airport) and the recent improvement in the business environment are expected to boost domestic and foreign private investment in the medium term. Inflation is expected to stabilize around 2 percent over the medium term. The current account deficit would remain in the range of 4–5 percent of GDP, as lower demand for capital goods and other imports persists, while exports of cotton, phosphates, agriculture, and light manufacturing goods continue to grow.

10. Risks to the outlook remain tilted to the downside (MEFP¶10, Box 1). At the national level, although socio-political tensions have abated, uncertainty remains high; the Presidential election scheduled for March 2020 may reignite socio-political unrests, which would impact macroeconomic performance. Such unrests can put pressure on the government to postpone the fiscal adjustment and structural reforms. A bill to reform the constitution and reintroduce a two-term limit on the presidential mandate was approved by the Parliament in May 2019. The amendment caps the presidential mandate to two five-year terms but does not apply retrospectively. The amendment also guarantees immunity for life to all former presidents and limit MPs’ mandate to two terms of six years each. In general, Togo is a fragile country and is subject to risks inherent to fragility, including limited administrative capacity, persistent social tensions, and sporadic violence. At the regional level, security risks—including terrorism threats— have been intensifying recently. Such threats could hinder local and foreign private investment, hamper tourism activities, and obstruct government’s efforts to make Togo a regional hub for transport and financial activities. From a global perspective, risks originate from rising protectionism and retreat from multilateralism (reducing trade and FDI), a possible tightening of global financial conditions, and a weaker-than-expected global growth.

Authorities’ Views

11. The authorities broadly shared staff’s views on the medium-term outlook and risks, although they were more optimistic about prospects for growth, in line with the ambitious 2018–2022 National Development Plan (NDP). The authorities concurred with staff that the private sector would play a greater role in driving the economy. However, they were more optimistic than staff on the scope for private sector expansion and on the pace at which reforms would bear fruit. While the NDP’s baseline scenario envisages a GDP growth of 5.5 percent in the medium term, in line with staff’s projections, the NDP’s alternative scenario envisages an average annual growth of 6.6 percent during 2019–22, reaching 7.6 percent in 2022. Under this alternative scenario, the authorities expect a structural transformation of the economy. This ambitious GDP growth is underpinned by a full implementation of the programs and projects planned in the strategic axes of the NDP: (1) a logistics hub of excellence and a world-class business center in the sub-region; (2) agricultural processing, manufacturing and extractive industries poles; and (3) social development and inclusion. The authorities agreed on the balance of risks. They reiterated their commitment to prevent resumption of socio-political tensions. They saw additional downside risks related to the environmental conditions, which would weigh on the performance of the primary sector.

Risk Assessment Matrix1

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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 year and 3 years, respectively.

Policy Discussions

Near-term program discussions centered on accommodating some urgent spending while safeguarding fiscal consolidation and debt reduction, completing reforms of the weak public banks, and improving budget preparation and execution. Medium-term Article IV discussions focused on three key areas to fully unlock Togo’s growth potential and enhance inclusiveness, namely the efficiency of social spending, the financial viability of the banking sector, and governance and institutions.

A. Accommodate Urgent Spending but Safeguard Fiscal Consolidation

12. On a one-off basis, the fiscal framework in 2019–20 will accommodate some urgent spending (MEFP¶11). Given the deteriorating regional environment, this urgent spending is needed to address unforeseen events, which may endanger social and economic stability. It amounts to 1.5 percent of GDP and will be incorporated in a revised 2019 budget. To make room for such spending and create sufficient buffer with regards to the WAEMU deficit criterion, spending of 0.3 percent of GDP previously planned for 2019 will be postponed to 2020 while protecting social and development spending. On this basis, the overall fiscal balance will loosen from the previously envisaged deficit of 1.5 percent of GDP to 2.7 percent of GDP in 2019. The authorities will take appropriate safeguard measures related to the urgent spending to limit the risks of fiscal loosening, preserve WAEMU regional stability, and promote good governance (MEFP¶12).

13. Despite this one-off additional spending, the revised macroframework broadly preserves the fiscal objective of the ECF-supported program (MEFP¶13–14, Text Figure 4). The overall fiscal deficit will worsen by 1.2 percentage points of GDP in 2019 (to 2.7 percent of GDP) and by 0.3 percentage point of GDP in 2020 (to 2.1 percent of GDP). The overall fiscal deficits are expected to remain below 2 percent of GDP in subsequent years, unchanged from previous projections. These fiscal deficits broadly preserve the large fiscal consolidation envisaged at program approval. They are consistent with the WAEMU deficit criterion of an overall fiscal deficit not exceeding 3 percent of GDP (Text Table 2). The debt trajectory will slightly shift upward relative to previous projections and remain above the 70 percent WAEMU debt criterion until 2019, but it is on a downward path. Debt is expected to fall below the DSA benchmark for countries with “medium” debt carrying capacity by 2023, instead of 2022 in previous projections.

Text Figure 4.
Text Figure 4.

Togo: Fiscal Balances and Public Debt, 2016–24

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: Togolese authorities; and IMF staff estimates.
Text Table 2.

Togo: Compliance with the WAEMU Convergence Criteria, 2016–24

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Sources: Togolese authorities and IMF staff estimates and projections.

Includes central government domestic arrears and excludes debt by state-owned enterprises.

14. To safeguard the hard-won fiscal consolidation gains and create space for investment and social spending, it is paramount to bolster permanent revenue (MEFP¶15). While tax policy measures have been introduced and revenue administration reforms have advanced in recent years, the tax revenue outturn at 16.5 percent of GDP in 2018 is still significantly below program approval projections (19.1 percent of GDP) (Figure 5).2 This shortfall can be attributed to some key factors, including the severe socio-political unrests in mid-2017 and the ensuing deceleration of economic activity; the sharp reduction in public investment and its adverse impact on related economic activities; and delays in reform implementation at the revenue authority (OTR). In addition, revenue collection increasingly relies on ad-hoc tax arrears collection or non-tax revenues, which include items that are temporary or uncertain in nature such as license fees and dividends (Text Figure 5). The authorities are taking additional measures to address these weaknesses (Text Box 3).

Text Figure 5.
Text Figure 5.

Togo: Tax and Nontax Revenue

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: Togolese authorities; and IMF staff estimates.

15. Some key weaknesses remain in revenue administration. The taxpayer register is inaccurate and unreliable, with many importers unknown to the revenue authorities. Tax arrears are not properly monitored. Revenue leakage from a high proportion of non-paying VAT returns is significant (56 percent of all returns for large and 62 percent for medium-sized enterprises in 2018). The risk management culture among agents (e.g., focus on early detection) is at an incipient stage. Tax exemptions are declining but remain significant and customs procedures are not sufficiently automated, increasing vulnerabilities to corruption. Not all import and export operations are reported in the customs. As part of the ECF-supported program, the authorities are taking several measures to strengthen revenue collection and ensure its permanency (Box 3).

Authorities’ Views

16. The authorities welcomed the flexibility under the program to accommodate the urgent spending and agreed with staff’s assessment of the revised fiscal framework as well as the need to strengthen permanent revenue. Despite the urgent spending, they noted that Togo continues to comply with the WAEMU deficit criterion, ahead of the agreed timeline. The authorities concurred that adequate safeguards will ensure the transparency, recording, accountability, and oversight of this spending. The authorities noted that their domestic revenue mobilization strategy is focused on permanent revenue measures, including broader and comprehensive reforms such as the recent revision of the general tax code, the ongoing land reform, the intensification of anti-fraud measures, and the ongoing review of OTR performance and governance structure. They reiterated their commitment to rapidly reduce public debt and improve debt sustainability. They are considering additional measures to accelerate debt reduction. Such measures include a faster resolution of some disputed tax arrears cases and the sale of some government non-financial assets, with a view to generate resources to repay government liabilities.

Revenue Measures

The introduction of new tax policy and tax and customs administration measures is aimed at compensating for one-off revenue in previous years, strengthening permanent sources of revenue, and safeguarding the hard-won gains of fiscal consolidation in the medium term. The new revenue measures are expected to yield about 1.1 percent of GDP in 2019.

Tax policy (MEFP¶15):

  • Property taxes: following the finalization of the land survey, the provisions related to property tax in the new tax code will be implemented from 2019. This measure will allow expanding the taxation of built and undeveloped properties, starting with a pilot phase covering Lomé and its peripheries. The implementation of this measure is facilitated by the transfer of the Office of the Cadaster, Land Conservation and Registry to the Togolese Revenue Authority since 2018.

  • Motor vehicle taxation: a new tax based on the capacity of the vehicle was introduced in the new tax code and enforced from January 2019.

  • Telecommunication tax: the turnover of telecommunication companies will be subject to a 5-percent tax.

Tax and customs administration (MEFP¶15–16):

  • Import deposit: for importers deemed inactive by the tax administration, the customs administration will require a lump sum deposit corresponding to 15 percent of the import value before the imported merchandise can receive customs clearance (SB end-June 2019, TMU¶32). This measure is aimed at encouraging economic agents, particularly importers, to inform the tax administration about their economic activities and declare the corresponding taxes. The deposit can be deducted against such taxes; the net tax payment will contribute to increase revenue.

  • Cross-checks of tax and customs obligations: importers who have outstanding debts with the tax administration will not be allowed to clear merchandise at the customs administration (SB end-June 2019, TMU¶33). This measure will further encourage economic agents to comply with both tax and customs obligations.

  • Tax arrears collection: the creation of the corresponding unit will be formalized by an act of the General Commissioner and its risk-analysis role will be strengthened in order to increase the recovery rate of tax arrears (from 66 percent in 2017 to 70 percent at end-October 2019 for large companies and from 48 percent to 60 percent for medium-sized companies) (SB at end-October 2019, TMU¶37).

  • Value added tax: VAT collection and control over zero or refund claims will be improved through point-of-sale cash registry, formulation of a strategy for selecting spot checks based on risks; and the appointment of focal points at large and medium-sized taxpayers’ units to centralize the results of spot checks (SB at end-October 2019, TMU¶38). The VAT prepayment system will be extended to public institutions of an industrial and commercial nature (Etablissement Public à caractère Industriel et Commercial), public administration agencies (Etablissement Public à caractère Administratif), state-owned enterprises, as well as some large private companies. To avoid burdening companies’ cash flow and help improve the business environment, the VAT refund system will be strengthened through an escrow account dedicated to this purpose, which is expected to reduce delays.

  • Special Economic Zones: controls will be strengthened on companies under this regime, particularly regarding the sale of their products on the local market, to prevent abusive use of this regime and frauds on tax and customs duties.

  • Customs valuation: the control of customs valuations will be improved by creating a specialized anti-fraud unit to detect valuation anomalies based on supporting documents checks. In case supporting documents are missing, standard transaction valuation on an international comparison basis will be applied.

  • Online customs procedures: efforts will be made to minimize human intervention in customs duty collection and border procedures, with the aim of curtailing revenue leakages. As an initial phase, online submission of customs declarations and supporting documents will be mandatory for the 30 largest importers or filers (SB for end-October 2019, TMU¶39).

Box Table 1.

Revenue Measures in 2019

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B. Reduce Banks’ Vulnerabilities and Enhance Financial Access

17. While taking longer than expected, the authorities are pursuing privatization efforts in the financial sector (MEFP¶21). For the first public bank, negotiations between the government and the potential buyer were expected to be finalized by end-2018 but are still underway. The authorities continued negotiations but could not reach an agreement until end-May 2019. Thus, they are revising their strategy and will submit this revised strategy by end-June 2019 (modified structural benchmark for end-June 2019, TMU¶35). This revised strategy will consist of launching a tender by end-August 2019. The privatization process will be expected to be finalized by end-December 2019 (structural benchmark for end-December 2019, TMU¶42). For the second public bank, the privatization is proceeding as planned. A transaction advisor is being recruited to assist the authorities in the tender process, which is expected to be launched by end-August 2019 (structural benchmark for end-August 2019, TMU¶36). The authorities should carefully monitor the liquidity situations of the two public banks during the privatization process. Experiences from Togo and other countries point to several conditions for a successful bank privatization (Box 4).

Policies for Successful Bank Privatization1

Sub-Saharan Africa’s case studies and cross-country analysis show that several preconditions are required to ensure that the privatization of State-Owned Financial Institutions (SOFIs) can be completed and can lead to higher performance:

  • Prior to privatization, an adverse macroeconomic environment (e.g., fiscal profligacy) reduces the benefits of privatization. Adequate regulatory framework, which is the result of the institutional and political environment, is a key factor of a successful privatization. Reforms to set up the appropriate institutional framework for the privatization process are necessary. The business environment should be conducive to competition, good governance, and entry. It is important to implement corrective actions and privatization plans in a timely manner. Key issues to manage include the cost, the sequencing of other reforms, and achieving political consensus.

  • During the privatization process, the SOFI(s) may need to be prepared for privatization; for insolvent SOFIs, a mix of financial and operational restructuring may be needed before the sale. The design of financial restructuring may consider purchase and assumptions, merger with a stronger bank, or other options. The timing of operational restructuring, such as closure of some branches and reduction of personnel, is strategically important. The operational and financial restructuring of insolvent SOFIs should be appropriately sequenced as delays will inevitably lead to higher losses. Transparency, fairness, and a level playing field are essential. Performance improves more when government fully relinquishes control; when banks are privatized to strategic investors rather than through share issues; and when bidding is open to all, including foreign banks. A prudential review of the new owner and its business plan is paramount to ensure that this new owner is fit and proper to manage the bank and possesses the required financial capacity. The implications of the new bank strategy should be managed ex-ante, particularly on how policy concerns will be dealt with during the sale. A rigorous process should be put in place to ensure fair (market-based) valuation and address any potential impact on equity.

1/ This box summarizes key policy recommendations from the Selected Issues Paper on “State-Owned Banks, Privatization and Macro-Financial Performance in SSA”.

18. Elevated non-performing loans (NPLs), portfolio concentration and common exposures, as well as thin capital buffers are constraining the financing of the economy (MEFP1F22, Annex II). The NPLs, which reached 18.3 percent in June 2018, are concentrated in a few banks (Text Figure 6). The overall capital adequacy ratio was 6.0 percent at end-June 2018. New BCEAO regulation on capital, aligned to international Basel II/III standards, entered into force in 2018, requiring a capital adequacy ratio of 8.65 percent. Only the two problem public banks violate the new requirements; two private banks previously below the minimum CAR have received fresh equity from new strategic shareholders. Some microfinance institutions supervised by the BCEAO display a number of vulnerabilities due to weak governance and internal control and risk management systems, with two of them under provisional administration at end-December 2018.

Text Figure 6.
Text Figure 6.

Togo: Financial Sector Vulnerabilities

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: Togolese authorities; and IMF staff estimates.Note: TGOSOFIs (20 percent of Total Banking Assets); TGOForeign SOFIs (4 percent of Total Banking Assets).

19. Credit infrastructure could be improved to foster financial inclusion (MEFP1F23, Annex II). Togo shows better performance than WAEMU and SSA averages on the number of accounts at financial institutions; however, it has a lower penetration rate of mobile money accounts. Although firms’ access to bank financing compares relatively well against the WAEMU region, some obstacles remain, notably on collateral. The quality of information collected by the credit bureau needs to be improved (e.g., by listing all types of credit) to facilitate better decision making by banks. Lower intermediation costs—through improvements in the land management system, strengthening credit underwriting and recovery systems—could enable more firms to access credit.

Text Figure 7.
Text Figure 7.

Togo: Bank Access Characteristics of Firms, 2009–16

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: World Bank Enterprise Surveys; and IMF staff estimates.

20. The AML/CFT framework needs to be strengthened (MEFP¶24). Togo’s is scheduled to undergo an AML/CFT evaluation by the Inter-Governmental Action Group against Money Laundering in West Africa (GIABA) in March 2020. In this regard, the authorities are encouraged to address technical deficiencies in their legal and institutional framework and enhance the AML/CFT regime’s effectiveness at mitigating risks related to ML/TF and related predicate crimes, including acts of corruption. Following the findings of the national risk assessment, the authorities will prepare an action plan to address the weaknesses identified in the national AML/CFT framework. The recently created Lomé Commercial Court, which deals with commercial disputes, should be made fully operational.

Authorities’ Views

21. The authorities are of the view that the privatization of the public banks is the most effective approach to restore financial viability and prevent fiscal costs. Although recognizing the delays, the authorities are confident that the privatization of the two public banks will be completed in line with their respective new timeline. The authorities also noted that the two banks’ management teams will keep the WAMU Banking Commission informed on recent developments on a regular basis. The authorities agreed that the high NPLs need to be addressed to facilitate credit creation. They will take the necessary measures to enable the Togolese Debt Collection Agency (Société de Recouvrement du Togo) to better collect the state-owned banks’ NPLs which were securitized in the run up to the previous round of privatization. The authorities plan to train judges specialized in banking law to enable them to judge disputes between banks and their customers objectively and fairly.

C. Strengthen the Foundation for Strong and Inclusive Growth

22. In the context of fiscal adjustment, improving the quality of public investment is essential to support economic growth (MEFP¶18). Future investment programs and budgets should strictly include only projects selected through the recently developed cost-effectiveness methodology. As a multi-year budget process strengthens the ability to achieve higher and better medium-term results, the authorities will revise and enforce the multi-year public investment program (SB at end-October 2019, TMU¶40). The multi-year capital expenditure programming should be strengthened by ensuring consistency with realistic resource envelopes of the medium-term budget framework, making it binding in the following year and indicative for the two years thereafter.

23. The move towards program-based budgeting is advancing well (MEFP¶18). Program-based budgets are a requirement under a WAEMU directive. In parallel to the usual approach, program-based presentation of the budget was also produced for all ministries in 2019, as an initial step. A program-based budgeting document will be produced for 2020–22 (SB end-June 2019, TMU¶34). The required institutional support is being progressively put in place to ensure prompt and smooth roll-out of this reform. A new budget calendar incorporating reform innovations, empowering stakeholders and identifying deliverables has been developed and adopted. To transition to program budgeting, the authorities will develop a standard framework of performance indicators3 to define guiding principles and train stakeholders in ministries and institutions (SB at end-October 2019, TMU¶41).

24. The efficiency of social spending needs to be bolstered to achieve better social outcomes, and inclusive growth, despite the fiscal consolidation (MEFP¶19). Based on staff’s analysis, Togo’s social performance is below that of selected peer countries. With the existing amount of inputs, Togo could potentially improve its health-adjusted life expectancy by 4.8 percent and its net primary enrollment rate by 6.3 percent, relative to the current outcome (Box 5). To improve efficiency, the authorities have already completed a comprehensive spending review. Transfer programs to the most vulnerable households could also be enhanced.

25. Enhancing gender equality could significantly improve Togo’s growth prospects. Togo fares well relative to regional peers in terms of gender workforce participation and legal rights but could benefit from further women empowerment. While many gender-based legal restrictions were removed from the legal framework, major differences persist between the legal context and the social norms. The key gender-related constraints include weak access to higher education, access to assets and economic leadership, and more broadly, limited employment opportunities in the formal sector. To combat deeper inequality of opportunities, such as unequal access to labor force, health, education and financial access between men and women, policy makers should focus on more targeted policy interventions (Annex III).

Efficiency of Social Spending in Togo1

Social spending has steadily increased over the last fifteen years. Togo’s social spending, defined as the sum of health and education outlays, grew from 5.4 percent of GDP in 2001 to 7.1 percent of GDP in 2016. However, in 2017–18, public social spending fell short of the target under the ECF-supported program mainly because of execution and efficiency issues. This contrasts with the government’s key policy objective to preserve social outcomes. Closing efficiency gaps in health and education sectors could facilitate the ongoing task of fiscal consolidation.

Social outcomes remain suboptimal. Cross-country comparisons show that there is a scope for increasing the efficiency in Togo’s health and education sectors. Togo’s health outcome is below SSA peers with similar spending level. In education, Togo’s outcome is higher than the SSA average but the unit cost to the State of delivering such an outcome is also higher.

The potential efficiency gains are investigated through a frontier analysis.2/

  • Health. Using the Health-Adjusted Life Expectancy (HALE) as the desired outcome, Togo remains below the frontier. In 2015, Togo allocated PPP$76.3 per capita on the health system with a HALE of 52.3 years. Togo performs below peers with similar spending or outcome (Figure 1a). For instance, a country very close to the frontier spends only PPP$68.5 per capita on the health system with a broadly similar HALE (51.7 years). Togo can therefore save as much as about PPP$7.8 per capita to produce the same HALE. This is equivalent to an input-efficiency of 10.2 percent. Another country spends a broadly similar envelope (PPP$73 per capita) with a HALE of 56.1 years, implying that Togo can improve its HALE by as much as 3.3 years. The corresponding output-efficiency is 6.3 percent.

  • Education. Using net primary enrolment as the desired outcome, Togo is below the frontier. In 2015, Togo allocated PPP$260.5 per capita on the education sector with a net enrolment of 95.4 percent. This performance remains below peers (Figure 1b). For example, a country close to the frontier devotes PPP$223.7 per capita to achieve an enrolment rate of 99.1 percent. The corresponding input-efficiency score is 14.1 percent. In terms of output-efficiency, Togo can improve the net enrolment to 100 percent with the same level of spending. The corresponding output-efficiency is 4.8 percent.

Box 5 Figure 1.
Box 5 Figure 1.

Frontier Analysis of Social Spending in Togo (2015)

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Achieving these efficiency gains will require a series of structural reforms over the medium term in both sectors. Immediate efforts should focus on continuing the expansion of existing social initiatives, including the PUDC and the PAPV.3/ Another key step would be to strengthen the governance in social delivery, as planned in the sectoral strategies. Improving the execution of the budgeted social outlays is also important. Finally, targeting the most vulnerable is a prerequisite for a better efficiency of social spending.

1/ This box summarizes the Selected Issues Paper on “Efficiency of Social Spending in Togo: An Overview”. 2/ The frontier shows the maximum outcome in health-adjusted life and net primary enrollment respectively at each level of expenditure. 3/ ”Programme d’Urgence pour le Développement Communautaire” and “Programme dAppui aux Populations Vulnérables”. Sources: World Development Indicators; and IMF staff estimates.

26. As public investment is constrained, the business environment should be conducive to private investment to foster strong and inclusive growth (MEFP1F20). Togo’s recent growth performance has been below historical and peer averages. The private investment boost that was expected to compensate for the public investment reduction has not materialized yet. Togo made significant progress in recent years to improve the business environment and was amongst the countries with the largest improvements under the latest Doing Business Indicators.4 However, it lags peers on access to credit and protecting minority investors, as well as on the easiness of tax payments (Text Figure 8). While any change in legislation must be done in the OHADA context (which sets common regional system of uniform laws on bankruptcy, debt collection, and rules governing business transactions), the underperformance in getting credit also comes from asymmetries of information making the cost of credit prohibitively high. The coverage of credit bureau is narrow (Annex II). Some recent measures were introduced to alleviate the burden of administrative procedures on firms and individuals: tax telepayment was introduced; reduction of the number of small taxes; and e-filings are being used for contributions to the social security fund (Caisse Nationale de Sécurité Sociale). The authorities are taking measures to facilitate access to public purchases for SMEs/SMIs and reduce payment delays. They will create a specialized structure to assist SMEs/SMIs in carrying out feasibility studies to improve the bankability of projects. Continuous efforts will be required in all aspects of the business environment to achieve the ambition in the National Development Plan to become a regional transportation hub, financial center, and manufacturing base. Substantial progress is needed in reducing income and gender inequalities to achieve sustained growth (Annex III).

Text Figure 8.
Text Figure 8.

Togo: Doing Business Indicators, 2019

(0=lowest, 100=best performance)

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: Doing Business Database 2019; and IMF staff estimates.

27. While improving, Togo’s governance is still weaker than WAEMU and SSA averages (MEFP1F25, Box 6). Togo has put in place many of the necessary institutions and laws that are the foundation for good governance. However, it lags peers on the effective implementation of this framework, as evidenced by perception surveys of the population and users. The authorities focus their efforts on continued reforms in the following areas: fiscal governance through investment prioritization and fiscal transparency; fight against corruption through an effective functioning of the anticorruption law enforcement agencies; fight against money laundering and terrorism financing building on the finding of the national risk assessment; improvement of the judicial system through publication of an annual compendium of judicial and prison statistics, enhancing existing expedited enforcement procedures such as Injonction de Payer, and the implementation of the new Commercial Courts Act; and the streamlining of border procedures and market regulations.

Governance and Institutions1

The Togolese government has become increasingly engaged in institutional reforms to strengthen governance and fight corruption. Togo’s governance indicators, which were comparable with a typical fragile country in Sub-Saharan Africa (SSA) 15 years ago, are approaching SSA and WAEMU averages. Continued efforts are essential to improve the quality and trust in the public institutions and ensure a fair and effective implementation of existing laws and regulations.

Fiscal governance:

  • Bold reforms have been implemented in recent years, but Togo’s fiscal governance seems still weaker than the SSA and WAEMU averages. The publication of fiscal data is incomplete and could be more transparent. While tax and customs administration reforms have advanced, revenue performance would benefit from more efficient use of automated procedures and risk-based analysis. Public investment management has been weak with projects selected based on insufficient technical and financial information; the recently finalized cost-benefit methodological guide is expected to address this issue. Management and monitoring of state-owned enterprises and other public assets are insufficient. Procedures for systematic follow-up of audit reports by the Court of Audits (Cour des Comptes) and other control organs are weak.

  • The ministries would generally need stronger procurement capacity, including developing electronic management of tender processes and establishing procurement compliant reviews and auditing mechanisms.

Market regulation:

  • Following regulatory reforms in recent years, Togo’s regulatory performance seems comparable to other WAEMU and SSA countries. There is room for further improvements, including through continued streamlining and automation of border procedures and a more solid regulatory framework for public projects delegated to private-sector providers.

Rule of law:

  • On paper, the judicial branch is independent from the legislative and the executive branches, but survey data indicate weaknesses in the implementation of the legal framework and limited trust in the judicial courts.

  • The cost of contract enforcement, while on par with other WAEMU countries, is prohibitively high according to Doing Business 2019. The government recently implemented the new Commercial Courts Act and two new commercial courts focused on business conflicts will be opened.

Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT):

  • Togo adopted a new AML/CFT law in 2018. The new law transposes the uniform AML/CFT law developed by WAEMU into the national legal framework. The Togolese authorities are also undertaking a National ML/TF risk assessment using the World Bank methodology.

Box 6 Figure 1.
Box 6 Figure 1.

Togo: Indicators of Governance, 2000–17

(estimate range from -2.5 (weak) to 2.5 (strong))

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Source: Worldwide Governance Indicators.Note: Estimates of control of corruption are derived from perceptions-based data. Caution is needed when comparing these indicators across countries and over time.

Control of corruption:

  • Control of corruption seems weaker than the WAEMU average. Based on survey data, bribes are common in contacts with the police, courts, utility companies, and when asking for permits or other documents; cases of corruption are underreported to the legal authorities because of fear of retaliation or other negative consequences.

  • Against this background, in recent years the Togolese government has established several important institutions to tackle corruption, including the anti-corruption agency (HAPLUCIA, Haute Autorité de Prévention et de LUtte contre la Corruption et les Infractions Assimilées) that became operational in 2017. New anti-corruption legislation has also been adopted or is under preparation, including a requirement of asset declarations for all civil servants who are professionally or politically exposed to risks of corruption. The challenge is now to enforce the anti-corruption legislation.

1/ This box summarizes the Selected Issues Paper on “Togo – Governance and Institutions”.

Authorities’ Views

28. The authorities agreed that, in the context of fiscal adjustment, improving the quality of public investment and promoting private investment are essential to sustaining economic growth. The authorities agreed that the effectiveness of social spending needs to be strengthened to achieve better social outcomes and inclusive growth, despite fiscal consolidation. However, they noted that, as resource optimization is generally a challenge for the budget, the private sector could play a larger role going forward, for instance in healthcare provision. As public investment is limited, they reiterated their determination to improve further the business environment to promote private investment and foster strong and inclusive growth. Regarding the transition to program budgeting, the authorities noted that they are making efforts to address the main challenges related to appointing financial controller positions in line ministries and institutions, adopting the new information system, and finding adequately skilled-personnel to effectively implement the reform.

D. Improve Debt Management Capacity

29. Togo is assessed to be at moderate risk of external debt distress and high risk of overall public debt distress, mainly reflecting the elevated level of domestic debt (MEFP¶26). To improve debt management, the newly-reorganized debt directorate should be fully staffed; the recently approved procedures manual for debt management activities should be implemented; and greater transparency and more active communication with primary dealers and investors would support smooth functioning of the market and its development.

30. The authorities plan to proceed with a debt reprofiling operation in 2019 (MEFP¶27). The objectives of this operation were agreed at the time of the second review of the ECF-supported program. The operation consists of borrowing externally at more favorable terms to repay outstanding domestic or regional debt. It is expected to reduce the NPV of total public debt. The size of the operation will be limited to an amount that keeps unchanged the moderate risk rating on external debt. The authorities have contracted a consultancy firm to advise on this debt reprofiling operation.

Authorities’ Views

31. The authorities fully concurred with staff’s recommendations on debt management policy but preferred a narrower coverage of public debt. The authorities’ policies on debt management are aligned with staff’s recommendations. They are requesting more intensive technical assistance and training from the Fund to strengthen their capacity in this area. The authorities, however, would have preferred to exclude from the public sector debt the debt of some state-owned enterprises as they are of the view that this debt does not represent a fiscal risk to the central government. They plan to submit to staff justifications for such exclusion based on the LIC-DSF guidance note.

Program Modalities

32. The authorities request, and staff supports, a waiver for the nonobservance of the net domestic financing PC as well as modification of two PCs (MEFP¶28–29). While net domestic financing exceeded the program ceiling by about 1.5 percent of GDP at end-2018, the underperformance would have been 0.2 percent of GDP if revenue recorded in “other accounts receivable” had been recorded as cash payments in 2018. The authorities are taking corrective measures, including to strengthen permanent revenue sources. The modification of the PCs on the domestic primary balance and the net domestic financing for end-June and end-September 2019 reflects the additional urgent spending. The modification of net domestic financing also takes into account the 2019 recording of revenue committed in 2018 and paid in 2019. The waiver and modifications of PCs do not alter the thrust of the program objectives. The end-December 2018 structural benchmark on the privatization of the first public bank is proposed to be redesigned and reset to end-June 2019. Six new structural benchmarks have been added for the sixth review.

33. To accommodate the agreement at the time of the ECF approval, the fifth and sixth reviews of the program will take place on a quarterly schedule (MEFP¶30). As agreed initially, the program should end around end-2019 or early 2020, considering the Presidential election in early 2020. Accordingly, the fifth review of the program will be based on the end-June 2019 criteria/targets/benchmarks and is scheduled to be discussed by the IMF Board on or after September 15, 2019. The sixth review of the program will be based on the end-September 2019 criteria/targets/benchmarks and is scheduled to be discussed by the IMF Board on or after December 15, 2019. The program is fully financed with firm commitments from development partners for the remainder of the program including the World Bank, the European Union, and the African Development Bank and others, while ECF disbursements will close the remaining financing needs.

34. Safeguards assessment: 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.

35. Togo’s capacity to repay the Fund is strong. Togo’s capacity to repay the Fund remains adequate (Table 7). Obligations to the Fund would peak in 2025 at 2.3 percent of government revenue or 0.5 percent of GDP.

Table 7.

Togo: Indicators of Capacity to Repay the Fund, 2019–291

article image
Sources: IMF staff estimates and projections.

Includes proposed extension and augmentation of access.

Total debt service includes IMF repurchases and repayments.

Includes state-owned enterprises debt.

36. Capacity development efforts are well aligned with program objectives (MEFP¶31). Capacity development is currently focused on measures to: (i) increase domestic revenue mobilization and modernize the customs administration; (ii) improve PFM, including investment management and program-based budgeting; and (iii) strengthen the compilation and dissemination of statistics. A comprehensive diagnostic of the banking sector may be considered in future fiscal year(s). IMF, World Bank, and development partners are cooperating to build institutional and technical capacity (Annex IV).

Staff Appraisal

37. Economic activity is recovering and is expected to strengthen in the medium term. Following a sharp deceleration in 2017 due to socio-political tensions, economic growth is estimated to have accelerated to 4.9 percent in 2018. It is expected to approach 5½ percent over the medium term as large public investment completed in recent years and the improvement of the business environment are expected to boost private investment. Headline inflation stood at around 2 percent (year-on-year) in March 2019. The external position in 2018 is broadly consistent with fundamental and desirable policy settings.

38. Risks remain tilted to the downside and continue to inhibit the growth potential. At the national level, although socio-political tensions have abated, uncertainty remains high, particularly in light of the Presidential election scheduled for the first half of 2020. At the regional level, security risks—including terrorism threats—have been intensifying recently. From a global perspective, a rise in protectionism and a retreat from multilateralism, a possible tightening of global financial conditions, and a weaker-than-expected global growth may also adversely impact Togo’s economic performance.

39. Staff commends the authorities’ broadly satisfactory performance under the ECF-supported program. Five out of six performance criteria and five out of seven structural benchmarks at end-December 2018 were met. Togo complied with the WAEMU fiscal deficit criterion in 2017 and 2018, two years ahead of the timeline agreed by all member states. Nonetheless, the revenue outturn was partly driven by exceptional and non-permanent revenue; public debt remains above the WAEMU convergence criterion; and the privatization process of one of the two public banks encountered delays.

40. While accommodating some urgent expenditure in 2019–20, staff recommends safeguarding the hard-won fiscal consolidation and pursuing debt reduction. The fiscal deficit will be loosened relative to previous projections but will remain consistent with the WAEMU deficit criterion. Public debt is projected to fall below the 70 percent WAEMU debt criterion from 2020. Staff recommends safeguard measures related to the urgent spending to limit governance risks. Staff urges strengthening permanent revenue to preserve fiscal consolidation in the medium and long term and create fiscal space for much-needed social and infrastructure spending.

41. Staff recommends finalizing reforms related to the two public banks and persevering with structural reforms to promote strong and inclusive growth. In case the ongoing negotiations for the first public bank encounter further delays, staff recommends revisiting the privatization strategy and launching an open tender; a prudential review of the new owner is paramount to ensure a successful privatization. Staff also notes the need to address the elevated non-performing loans. In the context of fiscal adjustment, the quality of public investment needs to be improved to support economic growth; the efficiency of social spending should be bolstered to achieve better social outcomes. To this end, staff welcomes the finalization of the methodological guide on cost-benefit analysis of public investment, the comprehensive expenditure review, as well as the move to program-based budgeting. Staff commends Togo’s achievement in the latest publication of the World Bank’s Doing Business Indicators. Staff notes the need to continue addressing governance challenges and reduce vulnerabilities to corruption and urges further reforms to advance gender equality.

42. Staff supports the authorities’ request for a waiver on the non-observance of a performance criterion and recommends the completion of the fourth ECF review. Program performance has been broadly satisfactory. The LOI/MEFP sets out appropriate policies to achieve the program objectives. The capacity to repay the Fund is adequate. Staff also supports the modification of PCs. The 5th and 6th reviews of the program will be conducted on a quarterly cycle.

43. Staff recommends that the next Article IV consultation for Togo be held on the 24-month cycle.

Figure 1.
Figure 1.

Togo: Economic and Socio-Political Context

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: Human Development Report; World Development Indicators; Togolese authorities; and IMF staff estimates.
Figure 2.
Figure 2.

Togo: Real Sector Developments

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Source: INSEED; PAL; BCEAO; Togolese authorities; and IMF staff estimates.
Figure 3.
Figure 3.

Togo: External Sector Developments

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: Togolese authorities; and IMF staff estimates.Note: 2018 figures are staff estimates.
Figure 4.
Figure 4.

Togo: Fiscal, Monetary, and Banking Sectors Developments

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: UMOA Titres; BCEAO; Togolese authorities; and IMF staff estimates.
Figure 5.
Figure 5.

Togo: Medium-Term Economic Prospects, 2011–24

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: Togolese authorities; IMF staff estimates; and Afrobarometer, Dispatch No. 112, August 2016.
Table 8.

Togo: Schedule of Disbursements Under ECF Arrangement 2017–19

article image
Sources: Togolese authorities; and IMF staff estimates.

In addition to the generally applicable conditions under the Extended Credit Facility

Annex I. External Sector Assessment

Togo’s external position in 2018 is broadly consistent with fundamental and desirable policy settings. The current account deficit was large in the recent past mainly due to imported investment goods but recovered markedly in 2017 and is estimated to have been around the norm in 2018. The current account deficit is projected to remain narrow over the medium term, reflecting reduced imports of capital goods, stronger export supported by structural changes, and prudent fiscal balances. The fiscal adjustment required by the ECF-supported program and structural policies identified as part of the National Development Plan, which aims to improve the business and institutional environment and boost productivity, are necessary to keep the current account contained, and to contribute to regional stabilization polices. The authorities agreed with the thrust of this analysis.

1. The current account balance (CAB) is estimated at -4.9 percent of GDP in 2018. Compared to the average of the past five years, the CAB improved mainly due to continued decline in the demand for capital goods imports, and commodity prices in late 2018 and an overall improvement in terms of trade (Figure 1). From the lowest level in 2013, the CAB has improved significantly, especially following the start of the ECF-supported program in 2017 and the slowdown in public and private investment demand (partly related to the political crisis in 2017). The deficit is projected to remain around the norm over the medium term supported by fiscal and structural policies, but it may increase marginally over the long-term as investment needs could intensify.

Annex 1. Figure 1.
Annex 1. Figure 1.

Togo: Current Account Balance – Key Components, 2012–18

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: Togolese authorities; and IMF staff estimates.

2. Although exports are relatively diversified, they are concentrated in low-value added products such as raw material, unprocessed agricultural produces, and re-exports. Key export items are mining products including phosphates and clinker, and agricultural products (all classified under commodities in Figure 2). While these are important drivers for exports and overall economic activity, more progress is needed to improve the value-added products and the supply chain. On the import side, food, energy, raw material and capital equipment constitute the larger share. In recent years, the decline of other imported products and, especially since 2017, of capital goods imports by the public and private sectors have contributed to the improvement in CAB. However, as capital is still scarce in Togo, investment needs are large, which may weaken the CAB over the long-run.

Annex 1. Figure 2.
Annex 1. Figure 2.

Togo: Export and Import Key Components, 2012–18

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: Togolese authorities; and IMF staff estimates.

3. Togo’s current account deficit is mainly financed by public borrowing and foreign direct investments (FDI). This includes concessional lending, grants and government borrowings, and the ECF financing in 2017–18. Going forward, if the framework in the National Development Plan is successfully implemented, FDI is expected to provide more financing of the CAB, which will reduce the reliance on portfolio investments and regional borrowing.

4. The EBA-lite current account (CA) model suggests that the CA gap is broadly nil.1 Based on the EBA-lite methodology, the current account norm is estimated to be around -5.4 percent implying that the CA gap was around 0.15 percent in 2018 (Table 1). The EBA-lite methodology accounts for the fundamentals, and cyclical and policy variables. Key policy variables include fiscal policy, public health expenditures, financial sector policy, foreign exchange reserves, capital account openness, and monetary policy.

Annex 1. Table 1.

Togo: EBA-lite Current Account and Reel Effective Exchange Rate Models

article image
Sources: Togolese authorities; and IMF staff estimates.

5. As a currency union member, while fiscal policy, and credit and social policies are still determined at the country level, foreign exchange interventions, monetary policy and capital account openness are regional-level policies. Taking these into account, the country level-policy gaps still exist, which need to be addressed to ensure external sustainability. The CA model does not suggest any misalignment of the real effective exchange rate (REER), which should be maintained at its current level going forward through fiscal, labor market, and other structural policies.

6. The real effective exchange rate depreciation started contributing to the current account balance only a few years ago. After a depreciation in 2015, Togo’s REER (CPI based) has been stable despite a minor nominal appreciation in 2018 partially reflecting the strengthening of the Euro (to which WAEMU’s CFAF is pegged) against the US dollar. Relatively lower inflation in Togo has helped to keep the REER relatively stable (Figure 3). Going forward, external sustainability should be supported by competitiveness enhancing policies through improvement in the business environment.

Annex 1. Figure 3.
Annex 1. Figure 3.

Togo: Nominal and Real Effective Exchange Rate, 2010–18

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: Togolese authorities; and IMF staff estimates.

7. The overall assessment of the REER gap is based on the CA model. Compared to the CA model, the REER results indicate substantial misalignment. Given that Togo is a currency union member, and that CFAF is pegged, the divergence of the model outcomes should be interpreted with caution. The impact of country-level polices may have limited impact on the nominal exchange rate developments, which in most cases drives the real exchange rate, particularly with low inflation rate. In general, REER model results are less reliable for countries with a short sample span or that have experienced large structural changes that are not well captured by the regression.2 Given the major data revision in 2017 and 2018, which brings current account balance significantly higher than historical average, it should be noted that the overall assessment is subject to some degree of uncertainty.3

Annex II. Financial Access and Inclusion in Togo

While the provision of financial services has systematically improved in Togo and banking sector development is above WAEMU and SSA low-income averages, there is scope to further expand the financial sector’s contribution to the population’s ability to deal with shocks as well as firms’ financing needs. In particular, reducing intermediation costs and lowering collateral requirements—including facilitation of the collateral legal framework—could improve financial access and inclusion significantly in Togo.

1. Togo enjoys a relatively large and competitive financial sector (Figure 1). The Togolese banking system comprises 14 banks, including two major pan-African banking groups, Ecobank and Oragroup, the country’s largest banks in terms of total assets in 2018. The country has the highest total banking assets-to-GDP ratio among low-income SSA countries. The credit market is deep, with the share of formal private sector credit to GDP at 42 percent at end-2018. The microfinance sector—which serves the informal and agricultural sectors—is relatively well developed. Microfinance institutions (MFIs) serve more clients as a percentage of the population (37 percent) than any other WAEMU country, including the informal sector. The insurance sector is relatively competitive, with twelve insurance companies present in Togo. The national pension system is dominated by the National Pension Fund (Caisse de Retraite du Togo) and the National Social Security Fund (Caisse Nationale de Sécurité Sociale) which have systematically recorded structural deficits and financial sustainability difficulties due to weak governance and lack of diversification of assets.

Annex 2. Figure 1.
Annex 2. Figure 1.

Togo: Financial Development: Financial Institutions

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: Svirydzenka, K. 2016, “Introducing a New Broad-based Index of Financial Development”, IMF Working Paper No. 16/5; BCEAO; and IMF staff estimates.

2. While access to financial services for individuals has been strong, several risk factors are present in the banking sector, which can threaten the availability of credit going forward (Figure 1, Text figure 1). Net interest margins are among the lowest in the WAEMU, while the cost-to-income ratio has been on the rise and is higher than the WAEMU median. The overall efficiency of the banking sector has been declining. Some liquidity indicators have also deteriorated. Risks in the lending environment, unresolved nonperforming assets at the two state-owned banks, and inadequate supervision of the microfinance sector raise systemic risks. While there are big pockets of vulnerabilities related to the two state-owned banks,1 some private banks also display thin capital buffers, high NPLs, loan concentration, common exposure to trade and manufacturing activities, and eroded margins.

3. Progress has been made in increasing access to formal accounts and financial inclusion (Figure 2). Over the last decade, the share of the population (age 15+) with access to some form of financial services has increased from less than 10 percent to 45 percent-out of which 34 percent at a financial institution- driven primarily by the usage of banking services among individuals; the expansion of mobile money accounts (MMAs), has been more limited.

Annex 2. Figure 2.
Annex 2. Figure 2.

Togo: Financial Access and Inclusion

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: Global Findex Database; BCEAO; and IMF staff estimates.

4. Although agricultural producers have access to finance through MFIs and informal credit, commercial banks have provided low and declining amounts of credit to agriculture (Figure 2). While banks must develop the expertise and tools to take agricultural risks, countries with less developed banking sectors and similarly risky weather patterns have more active bank lending to agriculture, as do other countries in the region with similarly difficult land titling issues. As showed in World Bank (2016),2 there are several distortions that affect private incentives to invest in commercial agriculture related to the poor formulation and implementation of policies in the sector (i.e., skewed policy and regulation, tax code, poor public service delivery, lack of local infrastructure) – considerably reducing the profitability of productivity-enhancing investments by commercial and smallholder agriculturalists.

5. Despite developments in the Togolese financial sector, some outstanding weaknesses should be addressed to improve firms’ access to credit (Figure 1). In 2016, access to credit came second among the most pressing obstacle to doing business; and was the main obstacle for a quarter of firms (Figure 2). In addition to access, the cost of finance is an issue. Until very recently, lending interest rates in Togo were in line with or less than those in other WAEMU countries. In 2013, Togo’s bank real lending rate rose above that in the other WAEMU countries, to 12.5 percent, and after a period of decline, it picked up again in 2015, approaching 10 percent at end-2017. This reflects both higher spreads and an increased cost of funds, as would occur with greater risk in the system or increased demand for funds relative to supply. Collateral is another concern. Collateral requirements are high, particularly for small enterprises. Some segmentation is also present, with more difficult access to the financial system for MMSE relative to large corporates – a significant barrier to the growth of the formal enterprise sector.

6. Since 2015, the lack of supply of loanable funds has been more limiting than demand-side factors, manifesting itself via higher real interest rates and lower lending (Text Figure 1). Until 2015, the co-movement of interest rates and lending volumes in Togo were consistent with shifts in the demand for credit as their main driving force (higher real interest rates, and higher lending). Since 2015 the correlation becomes negative (higher real interest rates, and lower lending), suggesting that constraints to the supply of financing driving investment levels have become a more dominant determinant of interest rates and lending levels.

Annex 2. Text Figure 1.
Annex 2. Text Figure 1.

Togo: Credit Growth, Non-Performing Loans and Lending Rate

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: BCEAO; and IMF staff estimates.

Identifying Constraints to Financial Access of Firms

7. We apply a micro-founded general equilibrium model3 to identify ways to boost access to finance for MSMEs. The model is calibrated to quantify the most binding constraints to financial inclusion and hence to growth and productivity. Three financial frictions are at work: participation costs (ψ) limiting access to credit for smaller and poorer entrepreneurs; intermediation costs (x) due to asymmetric information between banks and borrowers leading to net interest spreads; and imperfect enforceability of contracts (χ) resulting in collateral requirements and smaller collateral leverage ratios. To carry out the estimation, macroeconomic and financial indicators specific to Togo are included in the model to determine parameters values and transition paths.4

8. The results point to high collateral requirements and high cost of intermediation as the main borrowing constraints (Text Figure 2). Based on the calibration, the charts in the panel below illustrate the effects of relaxing individually each of the three financial constraints on the number of firms accessing credit, GDP, total factor productivity, income inequality, interest rate spreads, and NPL ratios, suggesting that the tradeoff between access and financial stability needs to be taken into account.

  • Participation costs. There is some scope, although limited, to lower participation costs, such as fixed transaction costs, documentation requirements, and other access barriers could lead to higher investment, productivity, and GDP. The access of SMEs/SMIs in the agricultural sector to bank credit (0.3 percent of total credit), which is currently a major impediment to the development of the agricultural sector should be facilitated by the Agricultural Finance Incentive Mechanism (Mécanisme incitatif de financement agricole, MIFA), a specific form of insurance based on the sharing of agricultural risk (non-rainfall and various hazards). A range of additional measures will be needed to increase productivity/bankability and the finance for agriculture. To this end, the Ministry of Agriculture launched the census of the various actors involved in the agricultural value chains, to better structure them and to set up a global system of support/guidance and development of clusters.

  • Intermediation costs. Lowering these costs could yield significant benefits in terms of more firms accessing credit. To this end, reforms are expected to help reduce real lending rates, namely improve the land management system to create more collateral and strengthen credit underwriting and recovery systems. An important measure that the authorities could undertake in this area is enhancing the coverage of credit information bureaus by expanding information sharing.

  • Collateral constraints. Tackling several structural constraints (such as the insolvency framework and the capacity to recover value from collateral, enhance enforcement, credit culture) could substantially increase the share of firms with access to credit in Togo. This, in turn, could enable additional economic activity.

Annex 2. Text Figure 2.
Annex 2. Text Figure 2.

Togo: Relaxing the Constraints to the Financial Inclusion of Firms

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

9. Tackling the inefficiencies in the existing credit infrastructure and problems with enforceability of loan agreements could lower the cost of financing and reduce collateral requirements. The credit bureau system needs to be further strengthened. Although significant improvement has been made recently, financial service providers indicate that the data is incomplete. Moreover, unpredictable court decisions contribute to the high perceived risk of lending and decrease the value of collateral. Weaknesses in the rule of law have contributed to many banks limiting their activities to what they perceive as less risky segments of the market. Lastly, efforts are needed to increase the capacity of the judiciary to interpret and efficiently enforce creditors’ rights; ensure proper incentives for banks to pursue enforcement and liquidation claims; improve the insolvency law and increase its usage to facilitate the restructuring of viable companies; and introduce voluntary out-of-court workout guidelines.

10. A comprehensive strategy for increasing the availability of long-term finance in Togo-a critical driver of growth- must combine policies to grow the pool of funds with policies to promote the optimal allocation of funds across the public and private sector. Measures aimed at reducing the level of informality and increasing domestic savings in the financial system and resolve asset quality issues could increase long-term financing for the private sector. Strengthening the credit infrastructure and reducing the risk perception in the banking sector will create incentives for banks to lend at longer maturities. Further improvements in the business environment will be critical to increasing the flow of foreign investment capital and make enterprises in Togo more attractive to long-term finance providers. The restructuring of the social insurance system with a view to improve its functioning and governance would not only provide income security for retirees and other beneficiaries but would also release funds needed to develop the economy in the long term. Additional funds (e.g., for healthcare) could be developed to increase the population’s resilience to shocks, mobilize savings and channel them into long-term investments; while the size and complexity of the domestic capital markets could be increased by the resumption of SOEs privatization.

Annex III. Gender Inequality and Development in Togo1

Togo fares well relative to sub/regional peers in terms of gender workforce participation and legal rights but could benefit much more from women empowerment. While many gender-based legal restrictions were removed from the legal framework, major differences persist between the legal context and the social norms. Togolese women are at the center of the economy, with a relatively high participation rate in the labor market. However, women continue to be overrepresented in the informal and agriculture sectors and among the poor, while the gender gap in educational attainment is the highest in the world. Substantial progress is needed with reducing income and gender inequalities to achieve sustained growth.

1. A growing body of empirical evidence suggests that inequality—income or gender related—can impede economic growth (Text Figure 1). Income and gender inequality, including from legal gender-related restrictions, impede growth mainly in countries at earlier stages of development, with large growth losses in sub-Saharan Africa. Moreover, inequality of gender and inequality of income tend to be linked (IMF, 2016).2 Women’s economic empowerment—including through higher levels of school enrollment, equal rights, greater safety, and financial inclusion—can help enhance economic resilience and reduce income inequality, thus supporting economic stability and sustainable growth.

Annex 3. Text Figure 1.
Annex 3. Text Figure 1.

Togo: Social Indicators

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: UNDP and IMF staff estimates.

2. In Togo, the key gender-related constraints include weak access to higher education, access to assets and economic leadership, and more broadly, limited employment opportunities in the formal sector. Togo’s 2017 Gender Inequality Index (GII) – although higher than WAEMU and SSA averages and slowly improving over time- points to difficulties in several areas, including: high maternal mortality ratio (368 deaths per 100,000 live births) and adolescent birthrate (89.1 births per 1,000 women ages 15–19), and the small share of adult female population with secondary education (26.3 percent) compared with male (52.3 percent) (Text Table 1). Togo’s Gender Development Index- based on gender disaggregated Human Development Index- points to further inequalities in gender-disaggregated income, life expectancy in health, and expected average years of schooling. Inequality of opportunities, such as unequal access to education, health services, financial markets and resources as well as differences in empowerment is strongly associated with income inequality. In Togo, the extreme poverty headcount ratio has only modestly come down relative to the 1990s; while income inequality has increased and is above WAEMU and SSA averages (text Figure 1).

Annex 3. Text Table 1.

Togo: Gender Inequality Index (GII) and Components, 2017

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The Gender Inequality Index (GII) measures gender gaps in three arears: health, empowerment (education and political representation) and economic status Sources: Human Development Report; and IMF staff estimates.
Annex 3. Figure 1.
Annex 3. Figure 1.

Togo: Gender Inequality, 2010–17

Citation: IMF Staff Country Reports 2019, 205; 10.5089/9781498323925.002.A001

Sources: World Development Indicators; Human Development Report; World Economic Forum Global Gender Gap, and IMF staff estimates.

3. Togo fares well relative to sub/regional peers in terms of women’s legal rights but more should be done to acknowledge and enforce normative law over customary law, especially in rural areas. The Togolese Constitution approves equality and prohibits discrimination, including on the basis of sex. Although several gender-based legal restrictions were removed early on, customary law is still recognized as a valid source of law- although at no higher legal value than modern law- and several discriminatory provisions persist. Major differences persist between the legal context and the social norms (GIZ Report, 2018).3 Togo has a superposition of normative and customary law, which prevents women for accessing assets. In a rural context, where women are more excluded from decision-making than they are in the urban context, they have no opportunity to acquire land. Similarly, women are also excluded from inheritance processes, despite legislation in force under international law. Only some widows can acquire land, but their daughters will be excluded from their inheritance.

4. The legal framework, while favorable, suffers from application in the field. The duality of modern law and customary law leaves behind inequalities and prohibitions on family, social, economic, community and political. Several initiatives on many levels (legal, technical) to change existing customary practices and certain socio-economic and cultural norms that undermine gender equality have been undertaken: revision of legal texts (family code, penal code, land code); design and implementation of various programs, awareness raising, training, creation of listening centers, support and training of women to manage income-generating activities, support for production and processing equipment for women’s groups, development of religious and traditional arguments to combat customary practices that undermine gender equality.

5. In Togo, female economic empowerment stemming from poor access to wealth/assets is a key constraint. Women’s access to financial services, healthcare services, inheritance rights for daughters, women’s access to land non-land asset use, control and ownership is only partial (World Economic Forum, 2018). For instance, access to credit is free by law for both men and women, however, the law does not prohibit discrimination by creditors based on sex or gender, or marital status in access to credit. In practice, women’s poor access to credit at the level of financial institutions (banks) is often due to high collateral requirements. Women earn, on average, 33 percent less than men. In urban areas, nonetheless, Togolese women can develop very lucrative activities (the so-called “Nana Benz”).

6. The issues of women’s economic empowerment are considered by the National Policy for Equity and Gender Equality and its Action Plan. Togo has an inclusive finance program that allows women to access credit. The government has set up mechanisms such as the National Fund for Inclusive Finance (FNFI), the National Agency for Promotion and Guarantee of SME/SMI Financing (ANPGF). The proportion of public procurements allocated to Women and Young entrepreneurs was increased from 20 percent to 25 percent in 2019. In 2018, this measure led to a significant increase in the creation of firms with about direct and indirect 4,000 jobs.

7. Gender budgeting considerations should be integrated in the budget policies, programs, and processes in fundamental ways. Gender budgeting considers how government programs and policies can promote women’s economic development and gender equality. It considers how these ideas can be incorporated into laws, regulations, and practices that govern the budget. In Togo, recommendations should target gaps in both opportunities and outcomes, for instance equalizing school enrollment rates for boys and girls and boosting overall education attainment levels. The recent measure to initiate reflections to include specific gender-budgeting indicators in the standard framework of performance indicators for performance-based budgeting, is a step in the right direction.

8. Gender-based disparities in education are a key constraint to achieving actual gender parity in Togo. Primary education is free and compulsory; however, as of 2017, 49 percent of women were illiterate compared to 23 percent of men. While 39 percent of women do not have access to the media, this is the case only for 24 percent of men. While 33 percent of female versus 48 percent of male have enrolled in secondary education, only 3 percent of female adults versus 17 percent of male have a diploma. Obstacles to girls’ education include: early marriages, traditional roles in contributing to household chores, socio-cultural burdens, family poverty.

9. Educational outcomes have been strongly associated with gender and wealth. Poverty is one of the obstacles to schooling for children, especially girls and often explains the average years of schooling for girls and boys. There is a six-year schooling gap by gender in low versus high-income families; with only 3 years of schooling for girls from the poorest families. Togo has undertaken reforms in education with free primary school fees, halving secondary school fees for girls, which has lengthened the number of years of schooling for the children of low-income parents, especially girls. In 2017, primary education attainment for the age 25–54 population was 61 percent for female, compared to age 65+ where it was only 8.6 percent.

10. Gender-based disparities in education prevent Togolese women from developing their full economic potential, in turn supporting growth and stability. Labor force participation in Togo is high at about 76 percent in 2017, with women at the center of the economy. However, in general women tend to have low-paid economic activities generally learned in the informal sector. Reducing gender inequality requires women in Togo to gain greater economic power through adequate technical knowledge, access to markets and financial services beyond microfinance. Only 20 percent of the professional and technical workers are female; only 16 percent are R&D personnel; 30 percent are legislators, senior officials and managers. Only 0.6 percent of the female labor force is high-skilled, versus 3.2 percent for male. Female labor force participation rate in technical and professional jobs would rise with an increase in spending on education.

11. To combat deeper inequality of opportunities, such as unequal access to labor force, health, education and financial access between men and women, policy makers should focus on more targeted policy interventions. Such measures include implementing the WAEMU regional gender strategy and increase female education and training, supported by national plans to foster job creation. A crucial component of human capital improvements in Togo, depends on eliminating the gender disparity in educational attendance and outcomes. Raising women’s education attainment will have significant positive impacts on productivity, growth and poverty reduction. It will also help curb the fertility rate.4 Beyond education, addressing skills mismatches will be equally important; strengthening training and vocational programs, enhance private-public sector coordination.

12. Demographic trends and improvements in enrollment, retention and transition should be considered in the design of critically-important education policies. Both a significant increase in budget resources and their effective deployment will be needed to ensure quality education and reduce gender and rural-urban disparities. In addition, it will be important to focus on building basic infrastructure, increasing the teacher-student ratio, and reducing gender disparity in educational attendance and outcomes. Boosting infrastructure—particularly on social protection and public services—will help close gender gaps in education.

13. Investing in education and health is critical to improve the accessibility and quality of education tailored to labor market needs and strengthen health outcomes. Continued efforts to enhance the availability, accessibility and affordability of quality services—including sexual and reproductive health and rights for women and girls—are central to achieving progress. The need to expand coverage, improve quality, and reduce disparities between genders and between rural and urban areas will require additional fiscal space. To increase fiscal space for these expenditures, well-targeted social transfer schemes can be considered. In addition, significant efforts are still required to increase overall domestic revenue mobilization.

14. Greater progress on enhancing gender equality could significantly increase Togo’s growth prospects. The estimated coefficients of income and gender inequality and years of schooling in econometric analyses done in IMF (2015)5 can be used to quantify the average annual GDP per capita growth that could materialize if Togo’s income and gender inequality and education levels were to reach those observed in benchmark African and Asian countries. The results indicate that Togo real GDP per capita growth rate could significantly benefit from decreases in income and gender inequality and improvements in education opportunities. Bringing the average level of income inequality in Togo to the level observed in benchmark countries could potentially increase annual real GDP per capita growth by about 0.5–1.8 percentage points. Closing gender inequality and female legal equity gaps has the potential to boost annual per capita income growth by about 0.2–0.4 and 0.4–0.5 percentage points, respectively. The results also suggest that differences in years of schooling could explain about 0.1–0.3 percentage points of Togo’s shortfall in the income per capita growth rate compared to benchmark African and Asian countries.

Annex IV. Capacity Development Strategy

As a low-income fragile country, Togo faces capacity and institution building challenges. An extensive agenda of IMF Technical Assistance (TA) has been implemented since the beginning of the ECF-supported program. This assistance is coordinated with the IMF-supported program and covers the areas of revenue administration, public financial management (PFM), financial sector, and statistics. The implementation of the TA recommendations has been somewhat uneven so far, due mostly to capacity constraints.

Policy Priorities

1. The priorities under the ECF-supported program and recent economic developments require extensive capacity development (CD). The key policy priorities under the authorities’ program supported by the ECF are to (i) pursue fiscal consolidation to ensure debt sustainability; (ii) enhance fiscal governance on revenue administration and PFM; and (iii) solve the problems of the two public banks to ensure financial stability and prevent future fiscal costs. Recent developments call for continued CD: revenue is lower than projected at the start of the ECF arrangement; despite marked progress, several PFM reforms remain to be completed; fiscal and economic statistics are weak and inconsistent; and banking sector reforms are delayed and NPLs are high.

Past Technical Assistance and Capacity Building

2. Despite progress made by the authorities in the areas where the IMF provided CD, some obstacles to effective absorption of CD remain. Since the start of the current ECF arrangement, TA has been focused on: (i) tax policy; (ii) tax and customs administration; (iii) public investment management; (iv) cashflow and debt management; (v) fiscal accounting and reporting; (vi) public financial management; and (vii) statistics. The implementation of CD recommendations has been uneven across sectors; obstacles are mostly related to capacity weaknesses, insufficient prioritization, and internal coordination issues. Notwithstanding the priority given to revenue mobilization, revenue performance has improved more slowly than expected.

CD Priorities and Objectives

Tax Policy

3. In FY2020 the authorities aim to strengthen the revenue collection through permanent tax policy measures and follow-up on tax expenditures. Despite measures taken in recent years, revenue outturns remain below program approval projections and the revenue structure consists of an increasing share of non-tax revenues, which includes temporary items such as license fees and fluctuating items such as dividends. In February 2012, a mission from the IMF’s Fiscal Affairs Department conducted a diagnosis of the Togolese fiscal system and noted its complexity as well as the presence of certain inconsistencies. A reform strategy was proposed, which aimed to simplify the tax system and improve its neutrality. Another FAD assessment of the tax system took place in 2017 and provided recommendations on how to move towards an efficient tax system conducive to economic growth. The objective is to strengthen revenue collection through permanent tax policy measures. These measures concern (i) the tax on capital income, (ii) the corporate tax, (ii) the value added tax (VAT); the proposals aimed at widening the tax base as well as introducing new taxes (e.g., property tax, telecommunication tax). At the same time, the objective is to simplify the tax system and reduce the burden of paying taxes for firms and individuals. In addition to the tax policy review, the authorities intend to proceed with an overhaul of the exemption and tax expenditure system, and address revenue loss due to evasion. The next FAD assessment of the tax system is scheduled for 2019.

Revenue Administration

4. Reforms will focus on consolidating the performance of the Togolese Revenue Authority (OTR) in a sustainable manner by achieving full coordination between customs and tax authorities. The lack of collaboration between tax and customs undermines OTR’s ability to fight fraud and tax evasion. The close relationship between the tax and the customs administrations is the main added value of a revenue office. The authorities are receiving significant TA on both tax and customs administration and benefit from the expertise of several long-term advisors. On tax administration, the objectives are to increase the enforcement powers of OTR and adopt risk management principles, in order to move from exclusively tracking revenue to risk management. The authorities are taking steps to (i) improve the monitoring of tax arrears collection; (ii) limit VAT losses; (iii) strengthen the control over companies operating in special economic zones and streamlining the various exemptions; and (iv) complete the taxpayer registry. On customs administration, the objective is to establish a proper system for the automated management of risks and achieve coordination with the tax directorate, which requires, at the minimum, the synchronization of tax and customs databases. The authorities are also taking steps to move to a complete dematerialization of all customs declarations and implement a rigorous control of customs valuations.

Public Financial Management

5. CD in PFM is focused on public investment efficiency, cash management, fiscal reporting, and implementing program-based budgeting:

  • Public investment: The 2016 Public Investment Management Assessment (PIMA) ranked Togo in the bottom quartile of countries in the public investment management index (at 0.3 in a scale of 0–1).1 Collection of project data by line ministries was generally poor with sporadic monitoring reports and as a result, public investment projects have been selected based on insufficient technical and financial information. A workgroup was appointed within the Public Investment Program (PIP) committee, and it has elaborated a methodological guidance note to rank investment projects accordingly. Improvements to the guidance note were made with the support of an IMF FAD technical assistance mission in August 2018. A multi-year program budgeting process is now under preparation and the public investment program (PIP) covering 2019–21 was published as an annex to the 2019 Budget. A circular letter was issued in December 2018 requiring that future investment projects should be selected based on a cost-effectiveness methodological guidance and only such projects can be included in the PIP and the budget. At the end of each fiscal year, a report for all completed major projects, including ex-ante and ex-post assessments, will be prepared. A follow-up PIMA mission is scheduled to take place in FY2020.

  • Arrears management: A system was set up to prevent accumulation of new arrears. The authorities prepared an arrears clearance plan and issued circulars to financial services of government entities providing directives to prevent arrears. They continue to strengthen the implementation of the cash plan and the control of commitment authorizations. Furthermore, 32 accounts of general government entities in commercial banks were closed and balances transferred to the Treasury Single Account (TSA), with the medium-term objective of centralizing all revenues and spending in the TSA and start developing cash management instruments.

  • Program-based budgeting: The July 2018 FAD mission launched officially the new EU-funded three-year PFM TA project and installed a new Resident Advisor (long-term). The project covers budget formulation, execution and reporting, and cash and debt management. The authorities have decided to implement program budgeting starting in 2020, instead of the initially agreed timeline of 2022. A program-based budget for 2019–21 was prepared for the entire government and presented for information to Parliament in June 2018. The main results achieved so far include: (i) support for the development of results-based budgeting tools; (ii) technical capacity building for stakeholders; and (iii) experimentation with the 2019–21 program budget for the State. The institutional requirements are being put in place with TA help to ensure prompt and smooth roll-out of this reform.

Debt Management

6. Strengthen Capacity and Reduce Refinancing Risk in the Debt Portfolio. The last debt management performance assessment (DEMPA) completed in 2010 identified significant weaknesses. In response, debt management has been centralized to a new Directorate and a draft manual of procedures has been developed. The Medium-Term Debt Strategy is being updated, with technical assistance from the IMF and the World Bank; the latest joint TA mission took place in mid-2018.

Macroeconomic and Fiscal Analysis

7. The latest 2016 PEFA evaluation assigned the D + rating to the PI-14 macroeconomic and fiscal forecast component, resulting from a lack of collaboration between the Directorate of Forecasting (DP) and that of the budget and the non-use of the PRECOMAT model for the preparation of budget forecasts. Technical assistance was provided by Western AFRITAC in May 2017 focusing on i) Eviews environmental training and Excel functionalities, ii) the revision of the model architecture, the updating of the databases and assumptions, iii) the development of a first version of the macroeconomic framework for the 2017–2022 period, as well as iv) the proposal for a more user-friendly and restructured version of the model. The August 2018 TA and training mission financed by the European Union worked with DP staff to improve the model. The PRECOMAT 3.0 model is currently operational and is being used for macroeconomic forecasting.

Statistics

8. CD in statistics is aiming to strengthen the compilation and dissemination of macroeconomic data and financial statistics and advance the participation in GDDS. The authorities have benefited from training in GFSM 2001/2014, implementation of 2015 as the new base year for the national accounts, and fine tuning of the TOFE bridge tables. In external sector statistics, TA has (i) identified significant inconsistencies including the need to harmonize the banking data used by the balance of payment statistics with the monetary statistics and (ii) provided a comprehensive review of the components of Togo’s international investment position (IIP), including the recording of debt instruments.

Authorities’ Views

9. The authorities agree with the thrust of the CD strategy. They see the CD as being aligned with their reform agenda. The CD from the IMF has helped in the design and implementation of their reform agenda by providing specific measures and supporting the roll-out. The implementation and absorption of the recommendations could be improved through more training and outreach.

Key CD Priorities and Objectives for FY2020:

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Appendix I. Letter of Intent

MINISTRY OF ECONOMY AND FINANCE

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OFFICE OF THE MINISTER

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N°......../MEF/CAB

REPUBLIC OF TOGO Travail-Liberté-Patrie

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Lomé, June 10, 2019

To

Ms. Christine Lagarde

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Ms. Lagarde:

1. The government requests the completion of the fourth review under Togo’s ECF arrangement based on a satisfactory implementation of the program. We met five out of six quantitative performance criteria (QPCs) at end-December 2018 as well as five out of seven structural benchmarks (SBs). In line with the ECF-supported program, fiscal consolidation remained on track during the second half of 2018. The overall primary balance and the overall balance outperformed targets by large margins. We reached the WAEMU fiscal deficit criterion—not exceeding 3 percent of GDP—in 2017 and 2018, two years ahead of the timeline agreed by all member States. Structural fiscal reforms have also progressed. In collaboration with IMF staff, we have been monitoring the monthly data on the stock of payment arrears by age. We have strengthened the implementation of our cash plan and the control of commitment authorizations to prevent the accumulation of new arrears. In addition, important measures have been taken to prioritize public investment projects. We have started the design of a multi-year program budget process to improve our ability to achieve medium-term results.

2. The government remains committed to pursue the fiscal consolidation in 2019, while accommodating some urgent spending needs. The revised macroframework broadly preserves the fiscal objective of the ECF-supported program and ensures that Togo adheres to the regional convergence criteria and contributes to the joint WAEMU countries’ efforts of maintaining strong regional reserves. Appropriate safeguard measures will be taken to ensure transparency, recording, accountability, and oversight of this urgent spending. To address the reliance on one-off and uncertain revenue sources and safeguard the hard-won fiscal consolidation gains, we are taking measures to bolster permanent revenue. On structural reforms, in addition to the measures in the first half of 2019, we will implement measures as structural benchmarks for the second half of 2019 in the following areas: strengthen the tax arrears collection unit; reduce VAT leakages by tightening the control over reimbursement claims; expand online submission of customs declarations; revise and enforce the multi-year public investment program; and complete some milestones for the move to program budgeting.

3. The government requests a waiver for the nonobservance of the performance criterion on net domestic financing at end-December 2018. This deviation is mainly due to the recording of certain revenues planned for 2018 but paid in 2019. The effective underperformance is minor (0.2 percent of GDP) and we are taking corrective measures, including strengthening permanent revenue sources. The government requests modification of the PCs on the domestic primary balance and the net domestic financing for end-June and end-September 2019 to reflect the additional urgent spending. These waiver and modification of PCs do not alter the thrust of the objectives of our ECF-supported program. We also propose redesigning and resetting the structural benchmark on the privatization of the first public bank. Finally, in line with the agreement at the time of the program approval, the fifth and sixth reviews of the program will take place on a quarterly schedule.

4. We are confident that the policies set out in the attached MEFP will enable us to achieve our program objectives. However, we will take any further measures that may become necessary for this purpose. We will consult with IMF staff on the adoption of such measures, and in advance of revisions to the policies contained in the MEFP, in accordance with the IMF’s policies on such consultations. We will provide such information as the IMF may request in connection with progress in implementing our economic and financial policies. We authorize the publication of the staff report for the fourth review under the ECF arrangement combined with the 2019 Article IV consultation, this letter of intent, and the attached MEFP and technical memorandum of understanding.

Very truly yours,

/s/

Sani Yaya

Minister of Economy and Finance

Attachment I. Memorandum of Economic and Financial Policies

1. This Memorandum informs on recent economic developments, reports on performance under the program supported by the ECF arrangement, and describes the authorities’ policies going forward. It takes stock of performance criteria and structural benchmarks at end-December 2018 and sets targets for end-June, end-September, and end-December 2019.

2. The government is committed to pursuing bold reforms of the Togolese economy, notably on fiscal adjustment and in the financial sector. We will take all necessary actions to preserve the hard-won fiscal consolidation; continue reducing public debt to a sustainable level; address weaknesses in the financial sector; and persevere with structural reforms, including on governance. We will pursue efforts under the 2018–2022 National Development Plan (Plan National de Développement – PND). Our main objective consists of transforming structurally the economy to promote strong, sustainable, resilient, and inclusive growth, generating decent employment and improving social welfare. In this regard, actions will be undertaken in the following three strategic axes: (I) establish a logistics hub of excellence and a first-class business center in the subregion; (ii) develop poles for agricultural processing, manufacturing, and extractive industries; and (iii) consolidate social development and strengthen the mechanisms for inclusion.

Recent Economic Developments

3. Economic growth has decelerated in 2017 but regained good momentum in the second half of 2018 on the back of the strong recovery of export-oriented sectors. Robust performance of phosphate extraction and cotton production, as well as the tertiary sector, including airport activities, supported the growth recovery. Bank credit to the private sector has remained broadly flat in 2018. Economic growth is estimated at 4.9 percent in 2018 (compared with 5.6 percent in 2016 and 4.4 percent in 2017). Headline inflation stood at 2 percent (year-on-year) in March 2019. The current account deficit declined significantly in 2017, increased in 2018 but remains smaller compared to previous years. This overall improvement is mainly due to the vigorous fiscal consolidation measures we have implemented and the decrease in imports, including capital goods. Our actions have helped reduce the pressure on regional reserves-estimated at 4.3 months of imports of goods and services at end-2018, compared with 3.9 months at end-2017.

4. Notwithstanding some difficulties encountered in the implementation of the budget in 2018, the overall pace of fiscal consolidation continues. Total revenue increased significantly, from 18.2 percent of GDP in 2017 to 20.3 percent of GDP in 2018. This improvement was driven by customs receipts and non-tax revenue. However, revenue collection relies more and more on exceptional and non-permanent sources. On the other hand, we have faced growing social demands of the population, which have led to an overspending of 0.5 percent of GDP on current expenditure. Domestically-financed investment contributed to our fiscal consolidation efforts, as originally planned. Although foreign-financed investment has been lower than expected, the execution rate has improved significantly compared to 2017. As a result, we achieved the target on the domestic primary balance, which reflects the efforts under the government’s control. The targets on the overall primary balance and overall fiscal balance were reached with large margins. We have achieved the objective of domestic arrears clearance (by about 2 percent of GDP) by strengthening our arrears management and improving our ability to raise funds in the regional market.

5. Despite a slight increase in debt in 2018, the downward trajectory is not at risk. After a rapid increase, between 2011 and 2016, public debt declined from 81 percent of GDP in 2016 to 75.5 percent in 2017 and to 76.2 percent in 2018. Excluding State-owned enterprises (SOEs) debts, these ratios are of 78 percent, 72 percent, and 74 percent, respectively. If the January 2018 issuances of government securities that were used to repay arrears pertaining to the 2017 fiscal year had been recorded in the 2017 debt stock, the government debt would have shown a continuous downward trend. This trend is the result of a major shift in fiscal policy since early 2017, with the phasing out of pre-financing and the implementation of corrective measures aimed at reducing public debt to a sustainable level. While investments undertaken up to 2016 had helped to partly address infrastructure deficiencies, the incurred debt service payments were large, notably for pre-financing, putting increasing pressures on budgetary resources. Government’s efforts to clear domestic arrears have also contributed to reducing the level of total public debt.

Program Implementation

6. Five out of six quantitative performance criteria (QPCs) at end-December 2018 were met. We met the performance criterion on the domestic primary balance. We have not contracted any non-concessional external debt and have met all our debt service obligations. Moreover, we did not issue any guarantees to domestic suppliers or contractors, nor did we pre-finance any public investment. However, we did not meet the net domestic financing target; the deviation relative to the program target amounts to 1.5 percent of GDP. This deviation is mainly due to the recording of certain revenues committed in 2018 but paid in 2019. We met the indicative target on domestic arrears; we have made significant efforts to clear the full amount of domestic arrears targeted under the program for 2018. The indicative target for domestic revenue was missed with a small margin. The indicative target on social expenditure was also missed (by 0.3 percent of GDP) but our social expenditure execution rate improved significantly compared with 2017.

7. We met five out of seven structural benchmarks. All four structural fiscal benchmarks (SBs) on public expenditure management and business environment for end-December 2018 were met. With a view to improve the analysis and monitoring of budget execution, we have sent to IMF staff, since July 2018, monthly data on the stock of payment arrears by age, and, to prevent the accumulation of new arrears, we have strengthened the implementation of our cash plan and the control of commitment authorizations. In addition, with a view to improving the efficiency of public investment projects, important measures have been taken to analyze the maturity of public investment projects before they are budgeted. Circulars were sent to all ministries and institutions of the Republic to mandate the use of the methodological guidance on investment project selection and prioritization, and require that only projects subjected to, and ranked under, this methodological guidance be included in the public investment plan and the budget. We have continued to design a multi-year program budget process to improve our ability to achieve medium-term results. A new budget calendar incorporating reform innovations, empowering stakeholders, and identifying deliverables has been developed and adopted. It is intended to be more comprehensive by integrating all stages of development, and more inclusive by taking into account all key stakeholders. At the program budget level, the main results achieved to date include: (i) support for the development of results-based budgeting tools; (ii) technical capacity building for stakeholders; and (iii) experimentation with the 2019–21 program budget for the State.

8. Our efforts to improve the business environment have begun to yield tangible results. We have put in place mechanisms and procedures to facilitate land registration. We have strengthened the role of the Credit information Bureau (BIC) by amending the uniform law No. 2016–005 of March 14, 2016 regulating credit information bureaus (BICs) in WAMU member States, which allows banks and financial institutions, while participating in the system for sharing credit information or the credit history of their customers, to more accurately assess credit risk and consequently reduce the cost of credit. We are in the process of addressing the important weaknesses that remain, particularly in the banking sector (AML/CFT) and the judicial system. We have launched a multisectoral national risk assessment, with technical assistance from the World Bank, and are currently drafting the general report on the basis of the consolidated sectoral reports.

9. With a view to ensure financial stability and prevent risks to the budget, we have initiated the privatization process of the two public banks. We have completed the process of evaluating the legal and regulatory aspects required for the privatization of the first public bank. However, due to the continuation of negotiations, we are faced with delays in finalizing the preliminary draft sale contract that could be submitted to the Banking Commission. We have drafted the terms of reference for the recruitment of a transaction advisor for the privatization of the second public bank. The strategic plan for its privatization was drafted with a slight delay relative to the program deadline.

Economic Outlook and Policies for 2019

Medium-term Outlook and Risks

10. Economic growth is expected to approach 5.5 percent over the medium term, with the economy reaping the benefits of large public investment completed in recent years and increasing FDI inflows. With improved business environment and public infrastructure (new roads and an expanded port and airport), the private sector is expected to play an increasing role as the engine of growth. Inflation is expected to stabilize around 2 percent in coming years, within the WAEMU community norm of 3 percent. The current account deficit would remain around 4 percent of GDP, as lower demand for capital goods and other imports persists, while exports of cotton, phosphates, agriculture, and light manufacturing goods continue to grow. Downside risks to growth include capacity constraints in the implementation of structural reforms and further economic slowdown among our main regional trading partners. Also, security risks have recently intensified in the subregion. These risks require urgent action to stave off deterioration. Otherwise, these security risks could hinder private investment (domestic and foreign), tourism, and derail government’s efforts to transform Togo into a regional hub for transportation and financial activities.

Fiscal policy

11. We will address some urgent spending in 2019 while maintaining the thrust of our program objectives. We will include an additional urgent spending of 1.5 percent of GDP in 2019 and postpone to 2020 some less urgent expenditure of 0.3 percent of GDP. On this basis, the overall fiscal balance (commitment basis), initially targeting a deficit of 1.5 percent of GDP, will loosen to 2.7 percent of GDP in 2019. The overall fiscal deficit will loosen by about 0.3 percentage point of GDP to about 2 percent of GDP in 2020 and remain below 2 percent of GDP in the medium term. These fiscal deficits broadly preserve the large fiscal consolidation envisaged at program approval. They are also consistent with the WAEMU deficit criterion of an overall fiscal deficit not exceeding 3 percent of GDP. We will protect social and development spending. We will likely have to incur maintenance spending of 0.5 percent of GDP in connection with the urgent spending but will discuss it in future reviews of our ECF-supported program. We will also design development projects for the northern region of the country and will seek grant financing from our partners.

12. We will take appropriate measures related to the urgent spending to limit the risks of fiscal loosening, preserve WAEMU regional stability, and promote good governance. We will strengthen permanent revenue to compensate for one-off or temporary revenue in 2018 and safeguard the fiscal position in the medium and long term. The additional urgent spending will be treated as other government operations and will be handled in line with their existing respective budgetary and procurement procedures. We will ensure that the urgent spending is in line with the principles of transparency, recording, accountability, and oversight. The related measures will include an ex-post audit of these operations by an independent entity, notably the Court of Audit. Further financial integrity safeguards will include a requirement to record the operations related to this additional urgent spending on the budget, both for the request of the approval as well as for the reporting of the execution. Off-budget operations will be avoided.

13. We remain committed to the planned debt reduction over the medium term. Public debt declined from 81.4 percent of GDP in 2016 to 75.5 percent of GDP in 2017, which was followed by a slight uptick to 76.2 percent of GDP in 2018. It is projected to follow a downward trajectory from 2019 and will fall below the WAEMU debt criterion of 70 percent of GDP starting from 2020. Excluding SOEs debt, public debt is projected to converge to the WAEMU debt criterion from 2019. Continued debt reduction over the medium term remains a policy priority to ensure fiscal and external sustainability and create a solid foundation for sustained economic growth. Total public debt is expected to fall below the debt sustainability benchmark for countries with medium debt carrying capacity by 2023.

14. We will implement WAEMU regional policies. We met the convergence criterion on the overall fiscal balance in 2017 and 2018, two years ahead of the deadline agreed by all WAEMU member countries. Our fiscal consolidation and public debt reduction policies contribute to the joint efforts of member countries to maintain regional reserves at a robust level.

15. We are redoubling our efforts to bolster permanent revenues. Despite measures taken in recent years, revenue outturns remain below program approval projections and the revenue structure consists of an increasing share of non-tax revenues, which includes temporary items such as license fees and fluctuating items such as dividends. To address these weaknesses, we are committed to introducing further measures. On tax policy, we are processing the results of the recently finalized land survey with a view to improve the implementation of property tax collection and apply the relevant provision introduced recently in the tax code. A new tax on motor vehicle was also introduced in the tax code. Furthermore, turnovers of telecom companies will be subjected to a 5 percent tax. On revenue administration, we continue to implement reforms that include increasing the enforcement powers of the revenue administration and better coordination between customs and tax authorities. To that end, we will introduce an import lump sum deposit for importers deemed to be inactive pertaining to corporate taxation (SB for end-June 2019) and will prohibit the merchandise customs clearance for importers with outstanding tax arrears (SB end-June 2019). We are increasing the number of tax return audits by cross-checking with information provided by third parties and implementing rigorous control of customs valuations.

16. To complement the measures adopted in previous reviews of the ECF-supported program, the Government is committed to accelerating revenue collection and ensuring its permanency. In particular, we will focus on the following elements:

  • Improve the monitoring of tax arrears collection (66 percent for large companies and 48 percent for medium-sized companies by end-2017). The government will seek to increase the collection rate of tax arrears by formalizing the creation of the Revenue Collection and Receivables Recovery Unit and strengthening its risk analysis role (structural benchmark at end-October 2019);

  • Reduce VAT losses: the proportion of non-paying VAT returns is high (56 percent of all returns for large companies and 62.3 percent for medium-sized companies in 2018). Non-paying VAT returns (nil or reimbursement claims) will be reduced through the roll-out of hardware and software for the setting up of cash registers; the formulation of a strategy for selecting spot checks based on risks; and the appointment of focal points at medium and large taxpayers’ unit to centralize the results of spot checks (structural benchmark at end-October 2019). The VAT prepayment system will be extended to public entities, state-owned enterprises, and some large private companies (such as in the construction, cement, and transportation sectors).

  • The control over companies operating in special economic zones will be strengthened, including over their warehouses and clearance areas.

  • The government will perform an analysis of the capacity of the customs IT system and prepare an action plan for the complete dematerialization of all customs declarations. First, online submission of declarations and attachments will be made mandatory for the clearance of imports for the 30 largest importers or tax filers, by enabling this feature in ASYCUDA World (structural benchmark at end-October 2019).

  • The reliability of the inventories will be improved through capacity building for mid-level personnel to check monthly returns and the early detection of small errors rather than focus on the subsequent detection of serious anomalies.

  • Despite the substantial reduction in tax expenditures (exemptions), revenue losses for the State remain significant; further streamlining efforts will be undertaken.

17. The Government is determined to safeguard the hard-won fiscal consolidation. To achieve this goal, improved revenue mobilization will be accompanied by strict limits on domestically financed current and capital expenditures and measures to avoid the building-up of new arrears. Concerning foreign-financed capital expenditure, we will take full advantage of grants and concessional project financing. Emphasis will be placed on the reallocation of funds to social spending, in accordance with our National Development Plan. We will make efforts to meet the indicative social spending target, set in consultation with development partners, to identify effective and appropriate social spending. We will also endeavor to improve the targeting of spending in order to shift resources to higher priority areas. We will continue our efforts to clear arrears to the private sector and avoid any further build-up. We plan to further refocus our policies on sustainable and inclusive growth through targeted social spending and investments financed sustainably (see below).

Structural Reforms

18. In the context of realigning the level of expenditure with available resources, we will strengthen the efficiency of public spending to support economic growth. We will accelerate the implementation of the recommendations of the public investment management assessment (“PIMA”). The multi-year public investment programming will be strengthened by ensuring consistency with the realistic resource envelopes of the medium-term budgetary framework, which would make it binding for the following year and indicative for the two years thereafter (structural benchmark at end-October 2019). We will prepare a program-budget document covering the period 2020–2022. To this end, we will develop a standard framework of performance indicators to define the guiding principles and train the stakeholders in ministries and institutions (structural benchmark at end-October 2019). We will also initiate steps to include specific gender- budgeting indicators.

19. We will improve the efficiency of social expenditure to promote growth inclusiveness in a context of fiscal consolidation. We have already completed a comprehensive spending review. We will enhance transfer programs to the most vulnerable households. We will also take measures for women’s economic empowerment and poverty alleviation, which disproportionately affects women. In addition, we will endeavor to ensure that men and women, and boys and girls, have the same legal rights and enforce these rights. By end-September 2019, we will be implementing a system to improve the monitoring of the implementation of social expenditure.

20. As public investment is being rationalized, we will continue to improve further the business environment to foster private investment. In recent years, we made great strides to improve the business environment and were amongst the countries with the largest improvement under the latest Doing Business Indicators. We will address the remaining weaknesses, including on access to credit and tax payments. We will further strengthen the support for SMEs/SMIs by enhancing the measure taken recently to facilitate access to public purchases for SMEs/SMIs and reducing payment delays. We will create a specialized structure to assist SMEs/SMIs in carrying out feasibility studies to improve the bankability of projects. We shall establish a formal framework to facilitate regular exchanges between the Government and private sector members.

Financial sector reforms

21. The Government has committed to pursuing privatization efforts in the financial sector, in consultation with the Banking Commission. In 2018, the Parliament adopted the necessary legal framework to complement the general 2014 privatization law and allow specifically the privatization of the two public banks (BTCI and UTB). Although the privatization transaction for the first public bank is encountering some delays, progress is underway. A negotiation committee was set up by the Government to carry out discussions with potential buyers. We continued negotiations but could not reach an agreement until end-May 2019. Thus, we are revising our strategy and will submit this revised strategy by end-June 2019 (modified structural benchmark for end-June 2019). This strategy will include a tender process to be launched by end-August 2019. The privatization process will be finalized by end-December 2019 (structural benchmark at end-December 2019). The privatization process for the second public bank is proceeding as planned. The draft terms of reference for hiring a transaction advisor for its privatization was completed; the hiring of this transaction advisor is underway. We drafted a strategic plan for its privatization with a slight delay relative to the program deadline. The tender for the privatization of the second public bank is planned to be launched by August 2019 (structural benchmark at end-August 2019). The two banks’ Executive management will keep the Banking Commission fully informed of all developments and discuss any course of action.

22. We will approach the Banking Commission in order to assess the overall soundness of the banking system. As a large number of NPLs is concentrated in a few banks, including the two state-owned banks, the measures to address the weaknesses of these two banks will help curb the high level of NPLs. We will take the necessary measures to enable the Togolese Debt Collection Agency -Société de Recouvrement du Togo – to better collect the state-owned banks’ NPLs which were securitized during the last round of privatization. We will work with the Banking Commission to ensure that all banks comply with the new BCEAO regulation on capital.

23. We will build on our good performance to further improve access to financial services and financial inclusion. Our performance shows improvement on a number of key indicators, including the number of accounts at financial institutions; we will pursue efforts in collaboration with the BCEAO to also improve our performance in other areas such as the penetration rate of mobile money accounts. Regarding firms’ access to bank financing, we will take further measures to address some remaining obstacles, notably on collateral. Consequently, we will accelerate procedures for obtaining land title and mortgage registration certificates which would provide reliable security. We will endeavor, in collaboration with the Banking Commission, to lift the obstacles related to the permission and the access to the Credit Information Bureau.

24. We will take the necessary steps to strengthen the AML/CFT regime and the effectiveness of the judicial sector. Based on the findings of the national risk assessment, we will implement an action plan to swiftly address the weaknesses identified in the national AML/CFT framework. In the judicial field, we will speed up liquidation procedures by requiring compliance with regulatory deadlines. We will operationalize the Lomé Commercial Court, which deals with commercial disputes. We will train judges specialized in banking law to enable them to judge disputes between banks and their customers objectively and fairly.

Governance

25. The Government remains committed to continuing efforts to improve governance and institutions. The reforms will focus on the following areas:

  • Continuing fiscal governance reforms, including publishing fiscal data, deepening revenue mobilization reforms, selecting, and prioritizing public investment projects based on rigorous cost-benefit criteria, ensuring closer monitoring of public enterprises, and establishing procedures for systematic follow-up of audit reports by oversight bodies.

  • Strengthening anticorruption measures. HAPLUCIA, the Anti-Corruption Agency became operational in 2017 and is currently scrutinizing corruption cases following a corruption awareness campaign launched in September 2018. Two new laws to strengthen the asset disclosure regime are being adopted: (i) a law requiring the disclosure of assets by all civil service agents, professionally and politically-exposed to corruption, and (ii) a framework law for the full implementation of the United Nations Convention on Corruption.

  • Combating money laundering and terrorist financing (AML/CFT): a new law on AML/CFT was adopted in 2018 and transposes domestically the Uniform Act on AML/CFT adopted by the WAEMU. Togo is currently undergoing a national ML/TF risk assessment and the report is expected to be published in June 2019. Based on the National risk assessment, an action plan will be implemented to mitigate the identified risks and gaps. We will continue to strengthen the overall AML/CFT framework and exert increased vigilance regarding suspicious transactions as well as update the on-site inspection schedule of the AML/CFT supervisors.

  • Improvement of the judicial system: an annual compendium of judicial and prison statistics is being developed and will be published and distributed through appropriate channels, including the Internet. The new Commercial Courts Act provides for accelerated procedures for the settlement of small-value claims, at low cost. We will produce a roadmap to ensure effective implementation of this procedure by end-September 2019.

  • Streamlining border procedures and other market regulations. Automated procedures are a powerful tool to facilitate trade and support modern practices of customs management.

Borrowing Policies and Debt Management

26. We will continue our prudent borrowing policies and further strengthen debt management to contain our public debt vulnerabilities. Although our risk of external debt distress is moderate, we are recognizant of the high level of our domestic debt which creates a high risk of overall public debt distress. Following the recent reorganization of the debt directorate, we will fully staff this directorate and will implement the recently approved procedures manual for debt management activities. We will enhance transparency and engage in more active communication with primary dealers and investors to support smooth functioning of the market and its development.

27. We plan to proceed with a debt reprofiling operation in 2019. The operation consists of borrowing externally at more favorable terms to repay outstanding domestic or regional debt. It is expected to reduce the NPV of total public debt. This operation is expected to be facilitated by a Policy-Based Guarantee from the World Bank; discussions are underway to this end. We have contracted a consultancy firm to advise us on this debt reprofiling operation.

Program Monitoring and Data Production Issues

28. We request a waiver for the nonobservance of the quantitative performance criterion on the net domestic financing at end-December 2018. This underperformance is mainly due to certain revenues planned for 2018 but paid in 2019; the effective underperformance of domestic financing is only 0.2 percent of GDP. Moreover, starting with 2019, the Government has taken corrective measures to strengthen permanent tax revenue so that our fiscal consolidation objectives for 2018/2019 are preserved and the overall objectives of the program remain achievable.

29. We also request a modification of two performance criteria at end-June and end-September 2019. The change in the domestic primary balance and the net domestic financing in 2019 is due to the additional urgent spending explained earlier. The change in net domestic financing also takes into account the 2019 recording of revenue committed in 2018 and paid in 2019.

30. In line with the agreement at the time of the program approval, the fifth and sixth reviews of the program will take place on a quarterly schedule, based on quantitative performance criteria, indicative targets, and structural benchmarks (Tables 2 and 3a-b). The performance criteria and indicators are defined in the attached Technical Memorandum of Understanding (TMU), along with the relevant adjustors. As initially agreed, the program should end around end-2019 or early 2020. Accordingly, the fifth and sixth reviews of the program will be based on performance criteria for end-June 2019 and end-September 2019, respectively, and discussions of the program by the IMF Board will take place on or after September 15, 2019 and December 15, 2019, respectively. The program is financed with support from development partners, while ECF disbursements will close the remaining financing needs.

Table 1.

Togo: Quantitative Performance Criteria and Indicative Targets, September and December 2018

(Billions of CFA Francs)

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Sources: Togolese authorities; and IMF staff estimates.

Continuous performance criterion and cumulated from the approval of the arrangement on May 5,2017.

Performance criteria and indicative targets for 2018 are adjusted upwards to offset deviations from projected external program financing, subject to a cap of CFAF10 billion. If net arrears repayments in September 2018 are less than programmed (CFAF 48.6 billion), the end-September indicative target for net domestic financing will be adjusted downwards by the difference between the arrears repayment outturn and programmed repayments.

Indicative target at end-December 2018 calculated cumulatively from the beginning of 2018. The target will be adjusted for one half of the deviation from projected external

With arrears repayment as envisaged in the 2018 budget.

Table 2.

Togo: Quantitative Performance Criteria and Indicative Targets June, September, and December 2019

(Billions CFA Francs)

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Sources: Togolese authorities; and IMF staff estimates.

Continuous performance criterion and cumulated from the approval of the arrangement on May 5, 2017.

Performance criteria and indicative targets will be adjusted downwards by the amount corresponding to the debt management operations as described in the TMU, and subject to the constraint that these operations do not increase the net present value of the public debt stock. The adjustor is capped at the nominal equivalent of 260.3 billion CFA francs in net-present-value terms. Performance criteria will be adjusted upwards as well to offset deviations from projected external program financing, subject to a cap of CFAF 10 billion.

Continous performance criterion. Performance criteria will be adjusted upwards by the amount corresponding to the debt management operations as described in the TMU, and subject to the constraint that these operations do not increase the net present value of the public debt stock. The adjustor is capped at the nominal equivalent of 260.3 billion CFA francs in net-present-value terms.

Indicative targets calculated cumulatively from the beginning of 2019. Indicative targets will be adjusted for one half of the deviation from projected external program financing.

Calculated cumulatively from the beginning of each calendar year.

Table 3.

Togo: Structural Benchmarks for the 4th Reviews

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31. The government will continue to strengthen the institutional capacity to ensure adequate monitoring of the program. The Permanent Secretariat for Reform Policies and Financial Programs (Secrétariat permanent chargé des politiques de réformes et des programmes financiers –SP-PRPF) will provide (i) technical program monitoring and quarterly progress reports; (ii) liaison between national structures, technical and financial partners; and (iii) coordination of technical assistance. We recognize the weaknesses of our statistics and will take remedial measures in this regard. We will strengthen the staffing within the National Statistics and Accounting Institute (Institut national de la Statistique et des Études économiques et démographiques – INSEED). We have already reduced the lags in the production of final national accounts. In addition, efforts are being made to rebase the GDP according to the 2008 SCN, for production by July 2019, of the accounts for the new base year (2016). For the 2017 accounts, they will be produced by end-December 2019. We will take steps to avoid any delay in the production of final national accounts. We will continue to improve data quality. We have made progress in compiling and producing fiscal reports, particularly the government financial operations table (Tableau des Opérations Financières de l’Etat). We will make all necessary efforts to ensure consistency of data across various sources, such as the budget execution data (i.e. TOFE) and the debt outturn data. We will ensure that the budget projections for the following year are based on estimates of budget execution of the current year. We will make full use of technical assistance from various sources to strengthen our institutional capacity.

32. We are confident that the policies included in this memorandum will allow achieving the objectives of our economic program. We stand ready, however, to take any further measures that may become necessary to ensure the success of its policies, after consultation with the IMF. During the program period, we will not introduce or intensify restrictions on payments and transfers for current international transactions or introduce or modify any multiple currency practice without the IMF’s prior approval, conclude bilateral payment agreements that are incompatible with Article VIII of the IMF’s Articles of Agreement, or introduce or intensify import restrictions for balance of payments reasons.

Table 4.

Togo: Structural Benchmarks for the 5th Review

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Table 5.

Togo: Proposed Structural Benchmarks for the 6th Review

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Attachment II. Technical Memorandum of Understanding

1. This Technical Memorandum of Understanding (TMU) defines the structural and quantitative benchmarks and performance criteria to monitor the program supported by the Extended Credit Facility from the completion of the fourth review through the end of the program. It also specifies the periodicity and the deadlines for the transmission of data to Fund staff for program monitoring purposes.

2. Unless otherwise specified, the government is defined in this TMU as the central administration of the Togolese Republic. It does not include any political subdivisions, the Central Bank of West African States (BCEAO), or any public entity with a separate legal personality.

3. Unless otherwise indicated, public entities are defined in this TMU as majority government-owned companies, and other public entities receiving earmarked tax and quasi-tax revenues.

Definition of Terms

For program purposes, the definition of debt is set out in paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to IMF Executive Board Decision No. 15688-(14/107), adopted on December 5, 2014.1

(a) For the purpose of these guidelines, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and 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; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms; the primary ones being as follows:

(i) loans, i.e., 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 buyer in the future (such as repurchase agreements and official swap arrangements);

(ii) suppliers’ credits, i.e., 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; and

(iii) leases, i.e., 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 the title to the property. For these guidelines, 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.

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

4. Public debt includes obligations of the central government and public entities.

5. Domestic debt is defined as debt contracted or serviced in the franc of the Financial Community of Africa (CFAF), while external debt is defined as debt contracted or serviced in a currency other than the CFAF.

A debt is considered contracted for purposes of the program at the time of issuance of a “no objection” opinion by the Supreme Court, where such an opinion is required under domestic law. Otherwise, a debt will be considered contracted when it enters into effect.

Quantitative Performance Criteria and Indicative Targets

6. For program monitoring purposes:

  • The continuous quantitative performance criteria (PCs) are:

  • (a) a zero ceiling on accumulation of arrears on external public debt;

  • (b) a zero ceiling on government contracting or guaranteeing of nonconcessional external debt, except for the purpose of debt management to reprofile public debt;

  • (c) a zero ceiling on government guaranteeing of domestic loans to suppliers and contractors;

  • (d) a zero ceiling on government guarantees on bank prefinancing for public investments.

  • The periodic PCs for end-June 2019 and end-September 2019 and indicative targets (ITs) for end-December 2019 are:

  • (e) a floor on domestic primary fiscal balance;

  • (f) a ceiling on net domestic financing.

  • The indicative targets (ITs) for end-June 2019, end-September 2019, end-December 2019 are:

  • (a) a floor on total fiscal revenue;

  • (b) a floor on total domestically-financed social spending;

  • (c) a ceiling on net domestic arrears accumulation.

A. Domestic Primary Fiscal Balance (floor)

Definition

7. The domestic primary fiscal balance is defined as the difference between (i) the government’s fiscal revenue and (ii) total fiscal expenses, net of interest and capital spending financed by donors and lenders. The balance will be calculated cumulatively from the beginning of the calendar year. The balances at end-June 2019 and end-September 2019 (performance criteria) and the balances at end-December 2019 (indicative targets) must be equal to or greater than the amounts indicated in Table 1 of the attachments to the MEFP. The data are sourced from the Government Financial Operations Table (Tableau des opérations financières de l’État – TOFE), prepared monthly by the Directorate-General of Economic Studies and Analyzes of the Ministry of Economy and Finance (statistical TOFE). The statistical TOFE will be prepared by the Directorate of Economy in close cooperation with revenue offices and the Treasury. The data provided by the Directorate of Economy will take precedence for program purposes.

Reporting Deadlines

8. Detailed data concerning the domestic primary fiscal balance will be reported monthly within eight weeks of the end of the month.

B. Arrears on External Public Debt

Definition

9. The government will not accumulate payment arrears on external public debt (continuous performance criterion). For purposes of the PC on the non-accumulation of new external payment arrears, arrears are defined as external debt obligations of the government that have not been paid when due in accordance with the relevant contractual terms (taking into account any contractual grace periods). This PC excludes arrears on external financial obligations of the government subject to rescheduling. This criterion excludes arrears on debts subject to dispute or renegotiation. The source of the data is the Public Debt Directorate.

C. Net Domestic Financing (ceiling)

Definition

10. Government net domestic financing is defined as the sum of (i) net credit from the banking sector to the government; (ii) net domestic nonbank financing of the government; and (iii) unidentified financing. The net domestic financing will be calculated cumulatively from the beginning of the calendar year. Net domestic financing at end-June 2019 and end-September 2019 (performance criteria) and net domestic financing at end-December 2019 (indicative targets) must be equal to or less than the amounts indicated in Table 1 appended to the MEFP.

11. Adjustors. The ceiling on net domestic financing will be adjusted downwards by the amount of domestic debt retired as a result of debt management operations. For the purposes of this performance criterion, the definition of “debt-management operations” in paragraph 19, below, shall apply. The adjustor related to debt-management operations is capped at the nominal equivalent of the net present value of CFAF 260.3 billion after converting the nonconcessional external debt into CFA francs using the prevailing exchange rate at the time of the transaction. The ceiling on net domestic financing shall also be adjusted upwards to make up for gaps between projected and actual external financing for the program, subject to a cap of CFAF 10 billion.

12. Net credit from the banking sector to the government is equal to the balance of government claims and debts to national banking institutions in Togo. Government claims include balances in the Togolese Treasury, Treasury deposits in the central bank, Treasury deposits in commercial banks (excluding the deposits of other arms of government, such as deposits from projects financed with external resources and CNSS accounts), and blocked accounts. Government debts to the banking system include assistance from the central bank (excluding BCEAO credits to the government tied to IMF financing), assistance from commercial banks (including government securities denominated in CFA francs held by commercial banks), and deposits in postal checking accounts.

13. Net domestic nonbank financing of the government includes: (i) changes in the balance of government securities issued in CFA francs (including on the WAEMU regional financial market) not held by Togolese commercial banks, calculated on the basis of the initial amount underwritten; (ii) changes in the deposit accounts of Treasury correspondents; (iii) changes in various deposit accounts, including trustee accounts (comptes de consignation) in the Treasury and accounts in which fines and sentences are deposited pending distribution; (iv) repayment of other domestic public debt (including bank loans to the economy assumed by the government and securitized arrears) to nonbank entities (including nonresidents); and income from privatization. The assumption or securitization of debts and arrears by the government is not included in the definition of net domestic financing, whereas the repayment of that debt by the government is included.

14. Unidentified financing is the difference between total financing (net domestic financing plus exceptional financing) and the overall balance on a cash basis (including grants and changes in arrears).

15. Net credit from the banking sector to the government is calculated by the TOFE unit, whereas Treasury bill and bond amounts are determined by the Agence UMOA-Titres. Net domestic nonbank financing of the government is calculated by the Togolese Treasury. Their data will take precedence for program purposes. Data are reported in the Government Financial Operations Table (statistical TOFE) prepared monthly by the Directorate of Economy of the Ministry of Economy and Finance.

Reporting Deadlines

16. Data concerning net domestic financing of the government will be reported monthly within eight weeks of the end of the month.

17. Details concerning any domestic borrowing by the government will be reported every month within six weeks of the end of the month. Data on domestic borrowing will be categorized as short term (less than one year) and long term (one year or more). This rule will also be applied to government-guaranteed domestic loans to government suppliers and contractors. Data on domestic borrowing will be primarily based on the estimates of the Debt unit.

D. Government or Government-Guaranteed Non-Concessional External Debt
Definition

18. Other than as specified below, the government undertakes not to contract or financially guarantee any new nonconcessional external debt at maturities of one year or more (continuous performance criterion). Nonconcessional external debt is defined as all external debt with a grant element of less than 35 percent (http://www.imf.org/external/np/pdr/conc/calculator/default.aspx). The level of concessionality of loans is calculated based on a discount rate of 5 percent. This performance criterion applies not only to the debt as defined in paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to IMF Executive Board Decision No. 15688-(14/107), adopted on December 5, 2014, but also to any commitment contracted or guaranteed for which no value has been received. However, this criterion does not apply to rescheduling that take the form of new debts, or to bond borrowing, Treasury bills, and Sukuk or other instruments issued in CFA francs on the WAEMU regional financial market. For the purposes of this performance criterion, “government” is understood to cover not only the definition given in paragraph 2 above, but also public institutions of an industrial or commercial nature (établissements publics à caractère industriel et commercial – EPIC), public administrative agencies (établissements publics administratifs – EPA), public scientific and technical institutions, public professional establishments, public health agencies, local authorities, public enterprises, national corporations (public corporations with financial autonomy, in which the government holds at least 50 percent of the capital), and state agencies.

19. This performance criterion will be adjusted upwards by the amount of nonconcessional external borrowing used for debt-management operations that improves the overall public debt profile. For debt-management operations executed in 2019, this adjustor will be capped at the nominal equivalent of the net present value of CFA francs 260.3 billion after converting the nonconcessional external debt into CFA francs using the prevailing exchange rate at the time of the transaction. For the purposes of this performance criterion, “debt-management operations” will be limited to the exchange of domestic debt for nonconcessional external debt. The NPV of the domestic debt to be reprofiled shall be calculated as the sum of the discounted debt service flows using a discount rate of 5 percent. The NPV of the external debt to be acquired shall be calculated in the same manner. The net effect of a debt-management operation will be calculated as the difference between, on the one hand, the NPV of the domestic debt to be reprofiled, and on the other hand, the sum of the net cost of the domestic debt repurchase, the NPV of the external debt to be acquired, and any fees associated with the external debt issuance. The net effect of a debt-management operation must be to either reduce or leave unchanged the total stock of public debt in NPV terms. Should any operation involving the contracting or guaranteeing of nonconcessional external debt lead to an increase in the stock of debt in NPV terms, the operation will not be considered as a debt-management operation and would constitute a non-observance of this performance criterion. Before undertaking any debt-management operations, the government will consult with the IMF staff and will provide IMF staff with data on the terms of the debt to be exchanged and the terms of the new non-concessional debt to be contracted, along with data on all fees and costs associated with the transaction, as well as any costs and fees associated with compensating current domestic bondholders and lenders for not holding the debt which will be retired to maturity.

E. Government-Guaranteed Domestic Loans to Suppliers and Contractors
Definition

20. The government is committed to not providing any new financial guarantees for domestic loans to its suppliers or contractors (continuous performance criterion). The concept of “government” used for this performance criterion includes the definition of government in paragraph 2, public institutions of an industrial or commercial nature (EPIC), public administrative agencies (EPA), public scientific and technical institutes, public vocational establishments, public health agencies, local authorities, public enterprises, national corporations (public corporations with financial autonomy, in which the government holds at least 50 percent of the capital), and state agencies.

F. Government Guarantees on Bank Pre-financing for Public Investments

21. The government undertakes not to guarantee any new bank pre-financing for public investments (continuous performance criterion). In a typical pre-financing arrangement, a private company granted a public works contract by the government obtains a loan from a domestic commercial bank or a group of commercial banks. The Ministry of Economy and Finance guarantees this loan and, at the same time, signs an unconditional and irrevocable substitution of debtor agreement to service all principle and interest, which are paid automatically from the Treasury account at the BCEAO. The concept of “government” used for this performance criterion includes the definition of government in paragraph 2, public institutions of an industrial or commercial nature (EPIC), public administrative agencies (EPA), public scientific and technical institutions, public professional establishments, public health agencies, local authorities, public enterprises, national corporations (public corporations with financial autonomy, in which the government holds at least 50 percent of the capital), and state agencies.

G. Total Fiscal Revenue (Floor)
Definition

22. Total fiscal revenue includes tax and nontax revenue, and excludes external grants, the revenue of autonomous agencies, and income from privatization. The data are calculated by revenue offices and reported in the Government Financial Operations Table (statistical TOFE) prepared monthly by the Directorate of Economy of the Ministry of Economy and Finance. The revenue is reflected on a cash basis.

23. The revenue will be calculated cumulatively from the beginning of the calendar year. Revenue collections at end-June 2019, end-September 2019, and end-December 2019 must be equal to or greater than the amounts indicated in Table 1 attached to the MEFP. The revenue floor is an indicative target for the entire duration of the program.

Reporting Deadlines

24. This information will be reported monthly to the IMF within four weeks of the end of the month.

H. Domestically-Financed Social Spending (Floor)
Definition

25. Total (current and capital) domestically-financed social spending is calculated for each category of current and capital accounts (wages, goods and services, transfers and subsidies, other) and capital accounts financed with domestic resources. In a national context, social spending is considered to be public expenditure targeting the following social sectors: (1) Ministry of Education: primary and secondary education, technical and vocational training, and higher education with respect to scholarships and relief allowances: (i) scholarships are awarded to students in need who are pursuing their undergraduate degree (article 21 of Decree No. 2011–173/PR of November 30, 2011, regarding the reform of the scholarship, internship, and relief allowance system, and article 1 of Decree No. 2011–174/PR of November 30, 2011, establishing the scholarship, internship, and relief allowance rates); (ii) relief allowances are granted to students recognized as belonging to a disadvantaged or vulnerable category (article 31 of Decree No. 2011–173/PR of November 30, 2011, regarding the reform of the scholarship, internship, and relief allowance system, and article 2 of Decree No. 2011–174/PR of November 30, 2011, establishing the scholarship, internship, and relief allowance rates); (2) Ministry of Health; (3) Ministry of Social Action, Advancement of Women, and Literacy; (4) Ministry of Grassroots Development, Crafts, Youth, and Youth Employment; (5) Ministry of Agriculture, Livestock, and Fisheries; (6) Ministry of Mines and Energy (rural electrification projects); (7) Emergency Program for Community Development (Programme d’Urgence de Développement Communautaire – PUDC); involved in financing basic socio-economic development actions through socio-economic projects and infrastructure in rural and semi-urban areas (schools, health centers, drinking water and basic sanitation points, rural roads, hydro-agricultural schemes, infrastructure for storing and processing agricultural products, rural electrification, and more generally access to all sources of energy); (8) Support Program for Vulnerable Populations (Programme d’Appui aux Populations Vulnérables –PAPV). Total current and capital social expenditure financed with owner equity covers spending financed with domestic resources, including revenue, domestic financing, and general foreign budgetary support, and excludes all social spending financed with project-specific grants or loans. The source of the data is SIGFiP, from the Directorate-General of Budget and Finance (Ministry of Economy and Finance) prepared at monthly intervals.

26. Social spending will be calculated cumulatively from the beginning of the calendar year. Social spending financed with domestic resources at end-June 2019, end-September 2019, and end-December 2019 must be equal to or greater than the amounts indicated in Table 1 attached to the MEFP. The data provided by the Directorate General of Budget and Finance and the Directorate General of Economic Studies and Analyzes will take precedence for program purposes. The floor on (current and capital) social expenditure financed with domestic resources is an indicative target for the entire program period.

Reporting Deadlines

27. The data on social expenditure financed with domestic resources will be reported every month within eight weeks of the end of the month.

I. Net Domestic Arrears Accumulation (Ceiling)
Definition

28. Domestic payment arrears consist of domestic debt obligations of the government to nonfinancial public and private entities and the domestic debt service (excluding the BCEAO) that have not been paid within 90 days after the contractual due data (taking into account any contractual grace periods). This definition includes, but is not limited to: (i) old domestic financial and commercial arrears (to domestic private-sector suppliers); (ii) old arrears to CNSS (Caisse Nationale de Sécurité Sociale) and CRT (Caisse de Retraite du Togo); (iii) outstanding debts of liquidated companies (TOGOPHARMA, SOTOCO, OTP, IFG, FER, FICAO, and LIMUSCO); and (iv) balances of accounts payable (instances de paiements) reported in the Government Financial Operations Table (statistical TOFE) that have not been paid 90 days after the due date.

29. The net accumulation of domestic arrears will be calculated cumulatively from the beginning of each calendar year. The amounts at end-June 2019, end-September 2019, and end-December 2019 must be less or at most equal to the amounts indicated in Table 1 attached to the MEFP. The arrears ceiling is an indicative target for the entire duration of the program after the completion of the third review.

30. Adjustors. The ceiling on net accumulation of domestic arrears will be adjusted upward by one half of the amount of any shortfall between the actual and the programmed level of external financing for the program. In the event that the actual external financing for the program exceeds the programmed levels, the ceiling for the net accumulation of domestic arrears will be adjusted downward by one half of the amount of any excess financing.

Reporting Deadlines

31. The data on net accumulation of domestic arrears will be reported every month within four weeks of the end of the month.

Structural Benchmarks

32. For the end-June 2019 structural benchmark on strengthening customs controls during the customs clearance process, a lump sum deposit of 10 to 15 percent will be levied on imports made by taxpayers deemed inactive by OTR (i.e., those that are excluded from the list of the Tax Administration, Commissariat des Impôts) with the objective of limiting the loss of tax revenue (and VAT in particular) due to false invoicing, unjustified invoicing, and imports of goods through screen persons, “groupings” or multiple identifiers. The lump sum deposit is based on the assessed value determined at the customs border, it is payable on all imports of goods for commercial purposes in the domestic market, and it is directly transferred to taxes. The deposit will be deducted from the profit tax at the time of the submission of financial statements.

33. For the end-June 2019 structural benchmark on strengthening tax administration powers to collect tax debts, using the fiscal identification number, the customs administration will prohibit the customs clearance and take control of the goods imported by agents and/or owners with outstanding tax debts (e.g., debt related to VAT, profit tax, and employer contributions to social security). A blocking field at customs clearance will be activated for importers with tax debt.

34. For the end-June 2019 structural benchmark on strengthening budget preparation and the performance orientation of budget decision-making, the authorities will develop a document for program-based budget covering 2020–22. The authorities will also make all necessary efforts to undertake the following actions: (1) Regulatory framework: make appointments to the financial controller positions in line ministries and institutions; (2) Information systems: finalize the three new re-coding components (development, execution, and accounting) of the information system (SIGFiP) that are necessary to the implementation of program-based budgeting; (3) Parliamentary approval: launch discussions in Parliament on budget orientations.

35. For the end-June 2019 structural benchmark on the first public bank, submit to IMF staff a revised strategy for the privatization of the first public bank, which consists of launching by end-August 2019 a call for tenders and finalizing the privatization process by end-December 2019.

36. For the end-August 2019 structural benchmark on the second public bank, the authorities will launch the tender for the sale of the bank.

37. For the end-October 2019 structural benchmark on improving tax revenue collection, the Revenue Authority will formalize the creation, by Act of the Commissioner-General, and reinforce the risk-analysis role of the Revenue Collection and Receivables Recovery Unit in order to increase the recovery rate of tax arrears from 66 percent in 2017 to 70 percent in 2019 for large companies (DGE) and from 48 percent in 2017 to 60 percent in 2019 for the medium-sized companies (DME).

38. For the end-October 2019 structural benchmark on reducing non-paying VAT returns (zero or credit) to improve tax revenue collection, the Revenue Authority will (I) start deploying hardware and software for the establishment of cash registers; (ii) formulate a strategy for the selection of risk-based spot checks; and (iii) appoint focal points in the DGE/DME to centralize the results of spot checks.

39. For the end-October 2019 structural benchmark on improving customs duty collection and border procedures, the customs administration will make mandatory the online submission of declarations and attached documents for the consumption of imports for the 30 largest importers or registrants, by enabling this feature in ASYCUDA World. The authorities will also perform an analysis of the capacity of the customs IT system and prepare an action plan for the complete dematerialization of all customs declarations.

40. For the end-October 2019 structural benchmark on improving the efficiency of investment, the multi-year public investment program will be revised and enforced by ensuring coherence with the realistic resource envelopes of the medium-term budgetary framework, which would make it binding for the following year and indicative for the two years thereafter. The authorities will also accelerate the implementation of the recommendations of the public investment management assessment (“PIMA”).

41. For the end-October 2019 structural benchmark on the budgetary resources’ optimization and the transition to the program budgeting, the authorities will develop a standard framework of performance indicators to define guiding principles and train stakeholders in ministries and institutions. Reflections to include specific gender- budgeting indicators will also be initiated.

42. For the end-December 2019 structural benchmark on the first public bank, the authorities will finalize the privatization process.

Reporting Deadlines

The cash management, commitment and procurement plans will be reported every month within four weeks of the end of the month.
1

For 2019, it will be recorded as a negative other account receivable (-1.1 percent of GDP), slightly smaller due to a larger GDP in 2019.

2

Tax policy and administration measures introduced recently include elimination of reduced VAT rates and broadening of the VAT scope, broadening of the property tax base, reduction/elimination of deduction on capital income tax, reduction/elimination of deduction on corporate tax, strengthening of tax arrears collection, and restriction on the use of VAT ineligibility certificate.

3

Specific gender-budgeting indicators will be considered for inclusion in the standard framework of performance indicators for performance-based budgeting.

4

Its score improved from 49 in 2017 to 55 in 2018.

1

The assessment is based on the revised EBA-lite methodology implemented since October 2018.

2

International Monetary Fund, 2016, Methodological Note on EBA-Lite, IMF Policy Paper.

3

The CA deficits in 2017 and 2018 are significantly smaller than the historical average, but closer to the CA norm. Given that the assessment is based in the CA model, it should be noted that the overall assessment is subject to some degree of uncertainty as CA balance data is still provisional.

1

See the Selected Issues Paper on “State-Owned Banks, Privatization and Macro-Financial Performance in SSA” accompanying the Staff Report.

2

World Bank (2016), “Togo – Systematic Country Diagnostic,” Washington, D.C.: World Bank Group

3

Dabla-Norris, E., et al. ,2015, “Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality,” NBER Working Paper, No. 208.

4

These values are: gross savings (%GDP, average): 16.7; value of collateral needed for a loan (% of the loan amount: 226; Percent of firms with a bank loan/line of credit: 42; Non-performing loans (%): 18.3; interest rate spread: 5. Employment share distribution constructed using micro data. Sources: World Bank Enterprise Surveys and World Development Indicators.

1

Prepared by Irina Bunda and Shirin Nikaein Towfighian.

2

Hakura et al, 2016, “Inequality, Gender Gaps and Economic Growth: Comparative Evidence for Sub-Saharan Africa,” IMF Working Paper No. 16/111

3

Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), 2018, “Gender Analysis for Priority Development Areas of GIZ in Togo.”

4

Less educated women tend to have a higher fertility rate, and in Togo 37 percent of all women reported unmet demand for family planning; with the average number of children per woman at 4.45 in 2017 (World Economic Forum, 2018).

5

International Monetary Fund, 2015, “Inequality and Economic Outcomes in Sub-Saharan Africa.” October 2015 Regional Economic Outlook: Sub-Saharan Africa

1

IMF (2016), “Evaluation de la gestion des investissements publics (PIMA),” Fiscal Affairs Department (FAD), May 2016.

Other IMF Content

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Cover IMF Staff Country Reports
Togo: 2019 Article IV Consultation, Fourth Review under the Extended Credit Facility Arrangement, and Request for Waiver of Nonobservance of Performance Criterion and Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Togo
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2019: Issue 205
Publisher:
International Monetary Fund
ISBN:
9781498323925
ISSN:
1934-7685
Pages:
133
DOI:
https://doi.org/10.5089/9781498323925.002
Text Figure 1.

Togo: GDP Growth and Weighted Conflict Index
Text Figure 2.

Togo: Fiscal Developments, 2016–18

(percent of GDP)
Text Figure 3.

Togo: Treasury Bills Coverage Rate, 2018–19

(percent)
Text Figure 4.

Togo: Fiscal Balances and Public Debt, 2016–24

(percent of GDP)
Text Figure 5.

Togo: Tax and Nontax Revenue
Text Figure 6.

Togo: Financial Sector Vulnerabilities
Text Figure 7.

Togo: Bank Access Characteristics of Firms, 2009–16
Box 5 Figure 1.

Frontier Analysis of Social Spending in Togo (2015)
Text Figure 8.

Togo: Doing Business Indicators, 2019

(0=lowest, 100=best performance)
Box 6 Figure 1.

Togo: Indicators of Governance, 2000–17

(estimate range from -2.5 (weak) to 2.5 (strong))
Figure 1.

Togo: Economic and Socio-Political Context
Figure 2.

Togo: Real Sector Developments
Figure 3.

Togo: External Sector Developments
Figure 4.

Togo: Fiscal, Monetary, and Banking Sectors Developments
Figure 5.

Togo: Medium-Term Economic Prospects, 2011–24
Annex 1. Figure 1.

Togo: Current Account Balance – Key Components, 2012–18

(percent of GDP)
Annex 1. Figure 2.

Togo: Export and Import Key Components, 2012–18

(percent of GDP)
Annex 1. Figure 3.

Togo: Nominal and Real Effective Exchange Rate, 2010–18
Annex 2. Figure 1.

Togo: Financial Development: Financial Institutions
Annex 2. Figure 2.

Togo: Financial Access and Inclusion
Annex 2. Text Figure 1.

Togo: Credit Growth, Non-Performing Loans and Lending Rate
Annex 2. Text Figure 2.

Togo: Relaxing the Constraints to the Financial Inclusion of Firms
Annex 3. Text Figure 1.

Togo: Social Indicators
Annex 3. Figure 1.

Togo: Gender Inequality, 2010–17