Press Release No. 05/190

Press Release: IMF Executive Board Approves US$9.1 Million Three-Year Arrangement for Benin Under the Poverty Reduction and Growth Facility

August 5, 2005

The Executive Board of the International Monetary Fund (IMF) today approved a three-year arrangement for Benin under the Poverty Reduction and Growth Facility (PRGF) in an amount equivalent of SDR 6.19 million (about US$9.1 million). The first disbursement under the arrangement will amount to the equivalent of SDR 0.88 million (about US$1.3 million).

Benin reached the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative in March 2003, receiving total debt relief of about US$265 million. The last three-year arrangement under the PRGF expired on March 2004 with the full amount drawn.

Following the Executive Board's discussion of the request by Benin, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair stated:

"The Beninese authorities' prudent macroeconomic policies can be credited for a decade of sustained economic growth and low inflation. Since 2003, however, adverse external developments, along with budgetary slippages and delays in implementing key structural reforms, have contributed to a weakening in economic performance.

"In a welcome response, the authorities have adopted a new economic and financial program that seeks to strengthen economic performance, implement an export-led development strategy, reduce the vulnerability of the economy to shocks, deepen structural reforms to foster private sector development, and reduce poverty. Building broad support for reforms under the program will be key to its success.

"Underpinning the achievement of these objectives, fiscal policy appropriately aims at correcting recent budgetary slippages, strengthening public finances, ensuring debt sustainability, and implementing the poverty reduction strategy. In that context, the authorities' decision to limit the deterioration of the 2005 fiscal deficit is promising.

"The authorities' ongoing efforts to raise the revenue-to-GDP ratio through better tax administration and to restructure expenditure towards the social sectors are critical elements of the medium-term fiscal program. The settlement of wage liabilities that arose from past delays in aligning civil servants' pay with their grade-based wages will need to be accompanied by civil service reforms to enhance fiscal sustainability through a greater control of the wage bill. Benin will also need further improvements in public expenditure management to enhance transparency and governance in public finances.

"To achieve higher levels of growth, reduce the vulnerability of the economy to external shocks, and achieve lasting inroads against poverty, the authorities' program aims at strengthening the cotton sector and removing key impediments to growth. Sustained reform efforts to stimulate private sector growth, and improve the business environment will be needed, particularly in transportation infrastructure, telecommunications, and energy.

"In 2005, important reforms will be carried out to raise the cotton sector's productivity and contribute to its further development. In particular, the government will withdraw from productive and commercial activities in the sector, and take steps to strengthen the sector's institutional framework.

"Medium term economic prospects will be enhanced by the implementation of a strategy to promote and facilitate trade that will benefit from the recommendations of a recent diagnostic trade integration study. The overall competitiveness of the economy and the business environment will also improve as a result of strengthened governance including, the envisaged reforms of the telecommunications and energy sectors, as well as the Port of Cotonou and the transportation sector in general," Mr. Kato said

The PRGF is the IMF's concessional facility for low-income countries. PRGF loans carry an annual interest rate of 0.5 percent, and are payable over 10 years with a 5½-year grace period on principal payments.

ANNEX

Recent Economic Developments

Benin experienced a decade of good economic performance through the early 2000s but poverty reduction remains a concern. A combination of a deteriorating external environment and domestic policy slippages, in the budget and in structural reforms, saw economic performance weaken markedly after 2002. Moreover, these developments highlighted the vulnerability of the economy to external shocks because of its dependence on the cotton sector and on trade with Nigeria, its main trading partner.

Economic performance weakened in 2004, with growth slowing to about 3 percent. Inflation remained low, at 2.6 percent by year-end. A decline in manufacturing, including cotton ginning, and an intensification of trade restrictions in Nigeria led to a slowdown in economic activity, a deterioration of the external current account deficit, and a loss of government revenues. Progress on the structural front was uneven, with minor advances in privatization and cotton sector reform. Policy decisions, including on civil service wages and a decision to provide a subsidy to farmers due to the fall in world cotton prices, resulted in a weak underlying fiscal situation in 2005.

Program Summary

The program for 2005 aims at a modest economic recovery, reflecting an economic environment that remains difficult. A tightening of fiscal policy through adjustment measures equivalent to 2.1 percent of GDP will partially offset past budgetary slippages and limit the deterioration of the narrow primary deficit to 0.9 percent of GDP. The structural reform program aims to make progress in implementing the reform agenda of the cotton sector, the Port of Cotonou, and the telecommunications and electricity parastatals, as well as in improving public management.

The new PRGF arrangement seeks to strengthen macroeconomic stability, implement an export-led development strategy to reduce the vulnerability of the economy to shocks, deepen structural reforms to foster private sector development, and achieve progress in the implementation of the poverty reduction strategy. The authorities' reform plan reflects the recommendations of the ex post assessment of performance under Fund-supported programs by focusing on macroeconomic stability, and reforms to promote strong growth and diversification, as well as a restructuring of public expenditure to support poverty reduction.

The authorities' strategy aims at stabilizing and restoring the fiscal situation, and getting structural reforms back on track, particularly in the cotton sector and the Port of Cotonou, while establishing a stronger policy framework to meet medium term objectives. The strategy will initially focus on completing the cotton sector reform and giving new impetus to the privatization program while gradually implementing measures to promote and facilitate trade. Public sector management will focus on a strengthening of fiscal management and civil service reform.

The government has strengthened its reform program through a series of strong prior actions that have validated the fiscal program for 2005 and provided new impetus to key structural reforms, particularly in the period leading up to the presidential elections scheduled for March 2006.