Public Information Notice No. 11/100

Public Information Notice: IMF Executive Board Concludes 2001 Article IV Consultation with Togo

July 27, 2011

On July 18, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Togo.¹ The Executive Board also completed the sixth review of Togo’s performance under its Extended Credit Facility (ECF) arrangement.

Background

Since the conclusion of the last Article IV consultation in April 2009, Togo has made further progress in overcoming the legacy of its protracted 1990-2005 domestic crisis. Despite an adverse global economic environment, growth has continued to accelerate, reaching 3.7 percent in 2010. Economic Growth nevertheless remains modest relative to population growth and to other countries in the region. Average inflation in 2010 remained modest at 1.4 percent, thanks largely to abundant local food production and limited pass-through of higher global oil prices. The current account deficit has widened owing to higher oil prices and imports of intermediate and capital goods, reflecting in part higher public investment spending. Public finances have strengthened markedly, given the external debt relief under the Highly Indebted Poor Countries Initiative (HIPC) and prudent fiscal policy.

The Togolese authorities have built a strong record of implementation of their IMF-supported economic program. With the conclusion of the sixth review of its ECF arrangement, Togo has successfully completed its three-year program in a timely manner. In 2010, budget execution was particularly strong, with all fiscal performance criteria met by ample margins. Revenue collection improved, and current expenditures remained within program ceilings. The execution of priority social spending and of capital projects improved substantially in 2010, nearly reaching ambitious targets.

The conduct of fiscal policy in 2011 was complicated by the mounting subsidies following the non-adjustment of fuel pump prices, notwithstanding global higher prices. In June, the authorities began gradual fuel price adjustments and initiated targeted social measures, developed in consultation with stakeholders, to cushion the impact on the vulnerable population. To offset partially the budgetary cost of fuel subsidies, the authorities postponed some lower-priority investment spending to 2012. Overall, the budget stance has become somewhat more accommodative in 2011, targeting a domestic primary deficit of 1.6 percent of GDP, rather than 0.4 percent previously. Fiscal balances for 2008-2011 have nevertheless remained consistent on average with the authorities’ initial target for the program, as a result of the overperformance in 2010.

Structural reforms to address weaknesses stemming from the domestic crisis have advanced since 2009, although progress has been slower than planned in some key areas. While improvements in public financial management have generally proceeded well, reform efforts have not yet yielded desired results in other sectors, such as phosphates and banking. In particular, the privatization process for the four largest state-owned banks—a key step to improve their soundness, protect public finances and promote financial intermediation—is taking longer than anticipated, in part due to the need to establish an inclusive consultative mechanism to make strategic choices on the privatization process. Following these decisions, the authorities re-energized the privatization process by issuing a call for expressions of interest in the local and international media. The authorities remain committed to seeking strategic investors and aim to bring the banks to the point of sale before end-2011.

For the medium-term, the authorities are emphasizing policies to strengthen the foundations for growth. To address infrastructure bottlenecks, the authorities intend to scale up public investment by around 2½ percent of GDP a year in 2012-2014, while maintaining macroeconomic stability and debt sustainability. With the objective of mobilizing more domestic resources for priority social and investment spending, the authorities intend to redouble efforts to modernize tax and customs administration and reduce tax exemptions.

Despite Togo’s considerable progress in economic stabilization, it remains vulnerable, and risks persist. Worsening of external price shocks would lead to deterioration in growth, the current account, price stability, and the budget. Persistent constraints in administrative capacity could delay implementation of reforms designed to address key obstacles to growth, thereby postponing recovery.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the strong track record and successful completion of the ECF-supported program, despite the adverse shocks and limited administrative capacity. Economic growth has picked up, bolstered by countercyclical fiscal policy in 2010 and progress in implementing the reform agenda. Directors stressed that continued commitment to preserve fiscal sustainability and address underlying structural weaknesses is critical to boosting growth potential. They welcomed the authorities’ intention to remain closely engaged with the Fund and development partners in order to consolidate the gains achieved thus far.

Directors welcomed the implementation of the automatic mechanism for adjusting retail prices for oil products, accompanied by targeted measures to cushion the social impact. They supported the emphasis of the medium-term fiscal framework on scaling up investment in infrastructure and priority social spending. Directors underscored the need to be vigilant about potential shortfalls in revenue and the quality of public projects. Adopting a rules-based framework anchored on the fiscal deficit and debt level would be helpful in this regard. Directors encouraged further efforts to strengthen public financial management, revenue collection, and management of contingent liabilities, with technical support from development partners. They noted that Togo remains at moderate risk of debt distress, calling for improved capacity in debt management, and a financing strategy that relies on grants and highly concessional loans.

Directors considered speeding up bank privatization to be central to the reform agenda—a key step to improve access to credit and promote private sector growth. They also stressed that a financial sector development strategy is a high priority in this area, and welcomed its preparation in cooperation with stakeholders and with technical assistance from the Fund.

Directors underlined the importance of broader and deeper structural reforms to boost competitiveness and productivity growth, and reduce poverty. Efforts should focus on improving the business climate, increasing investment in physical and human capital, and enhance governance in public sector operations. Directors noted that membership in the West African Economic and Monetary Union has provided an important anchor of stability, particularly in the face of recent external shocks.