July 10, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street NW
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler:

1. In August 1996, the International Monetary Fund approved a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF), now the Poverty Reduction and Growth Facility (PRGF), in support of Benin's economic and financial policies for the period 1996-99. In August 1999, the commitment period under that arrangement was extended until August 26, 2000. Under this program, macroeconomic performance was satisfactory, living standards improved, and progress was made in the area of structural reforms. However, much remains to be done to eradicate poverty in Benin. Because of delays in the implementation of key structural measures, the government could not adopt a third annual program that could have been supported by a third annual PRGF arrangement within this extended commitment period. Accordingly, the government requests the cancellation, effective immediately, of the three-year PRGF arrangement approved in August 1996. To further the progress achieved under the previous program, the government has adopted a program covering the period April 2000-March 2003, which seeks to reduce poverty and achieve a high growth in a stable macroeconomic environment, and for which it is seeking the financial assistance of the international community.

2. In the attached memorandum on economic and financial policies, the government sets forth the objectives and policies that it intends to pursue in the framework of the medium-term strategy, and specifies the objectives and actions for the first year of the program. In support of this program, the Government of Benin requests a three-year arrangement under the PRGF in an amount equivalent to SDR 27 million.

3. The government has also begun designing a poverty reduction strategy with the participation of the civil society and Benin's development partners, which is to be completed by April 2001. In the meantime, the government has prepared an interim Poverty Reduction Strategy Paper (PRSP), which defines the process and the timetable for preparation of the PRSP and specifies preliminary objectives for combating poverty. The interim PRSP will be transmitted to you separately.

4. The government is convinced that the policies set forth in the memorandum on economic and financial policies are adequate to achieve the objectives of its program, but stands ready to take additional measures that may prove necessary. During the period of the three-year arrangement, the Government of Benin will consult with the Managing Director of the International Monetary Fund on any further appropriate measures to be adopted, either at their own initiative or at the request of the Managing Director. Moreover, during the period of this arrangement, and for as long as Benin has financial obligations to the Fund arising from loan disbursement under the arrangement, the government will consult the IMF from time to time on its economic and financial policies, either at its own initiative or at the request of the Managing Director.

5. The Government of Benin will provide the International Monetary Fund with information that it may request for purposes of monitoring progress in implementing its economic and financial policies. Benin will also cooperate with the International Monetary Fund in conducting a midterm review of the first year under the program, to be completed no later

than end-November 2000. The review will assess economic and financial developments during 2000, the 2001 budget, and progress in preparing a poverty reduction strategy. It will also set the timing of the review that will establish the phasing out and the conditions of the disbursements to be made during the second year of the program,

Sincerely yours,

Attachment: Memorandum on Economic and Financial Policies for 2000-03

BENIN

Memorandum on Economic and Financial Policies for 2000-03

July 10, 2000

I. Introduction

1. Discussions on a new three-year program that the International Monetary Fund could support under an arrangement under the Poverty Reduction and Growth Facility (PRGF) were held in Cotonou in February and May 2000. The program consolidates the substantial progress made over the last few years and aims at achieving high and sustainable economic growth and financial viability over the medium term. The proposed objectives and policies are in line with the medium-term strategy described in the interim poverty reduction strategy prepared by the authorities. The government reaffirms its commitment to implement all the policies described in this memorandum.

II. Program Implementation in 1998-99

2. The last program, covering the period October 1998-September 1999, was prepared in the context of a medium-term strategy aimed at ensuring sustainable economic growth and medium-term financial viability. In particular, it focused on strengthening financial policies and liberalizing the economy in order to promote national saving and private investment. It also aimed at improving public resource management to increase the resources allocated to education and health. Macroeconomic performance in 1999 was broadly satisfactory, although the deteriorating financial situation of the cotton sector remains a concern. With respect to structural reforms, the government implemented a number of key measures but fell behind schedule on others. As a result, progress in this area still needs to be consolidated.

3. Real GDP grew by 5 percent in 1999, compared with 4.5 percent in 1998, despite the decline in cotton output. Higher growth was due in part to a rebound in manufacturing output after the power shortage in 1998 and higher food production, thanks to favorable weather conditions. During the same period, average annual inflation, as measured by the consumer price index, fell from 5.8 percent to 0.3 percent, mainly owing to lower food prices.

4. The external current account deficit (including current grants) remained unchanged at 5.8 percent of GDP in 1999, slightly less than anticipated. This reflects a sharp increase in the volume of exports, especially cotton, accompanied by a 20 percent drop in the terms of trade, owing to a decline in cotton export prices and an increase in the price of imported petroleum products.

A. Fiscal Policy

5. The government continued its fiscal consolidation efforts by taking steps to improve tax administration, strengthen revenue collection, and keep expenditure under control, while increasing budget allocations for the social sectors. As a result, the overall balance (payment order basis and including grants) recorded a surplus equivalent to 2.3 percent of GDP, compared with 1.0 percent anticipated under the program. Excluding grants, the overall balance showed a deficit equivalent to 1.1 percent of GDP.

6. Total government revenue, excluding grants, was 16 percent of GDP in 1999, ½ percentage point more than anticipated in the program, owing to large transfers payments by state enterprises and an increase in customs duties at year's end. Total expenditure rose from 16.8 percent of GDP in 1998 to 17.1 percent in 1999 as a result of a large increase in capital expenditure and social sector outlays. The wage bill was 3.5 percent lower than the programmed amount because of delays in updating the civil service roster and recruitment.

7. The government continued its efforts to settle domestic arrears, which were equivalent to 0.8 percent of GDP (CFAF 11.3 billion) in 1999. It also continued verifying other reported claims on the government amounting to almost 2 percent of GDP. The settlement of external arrears reflects the agreement with Argentina (debt buyback with an 84 percent discount). The deficit on a cash basis was largely covered by external assistance to finance investment projects and adjustment programs. However, the table on central government financial operations continues to show an excess financing, and the authorities are seeking to reconcile the balances of all accounts used in drawing that table.

8. The fiscal outcome in the first quarter of 2000 was in line with projections for the year. The overall deficit, on a cash basis, amounted to 0.5 percent of GDP, including CFAF 7.2 billion in government expenditure committed in 1999 but paid in January 2000. Taking into account CFAF 7.2 billion in 1999 government expenditure that was paid in January 2000, the overall deficit, on a cash basis, narrowed to 0.5 percent of GDP. The deficit was more than covered by external financial assistance, so that the government's position vis-à-vis the banking system continued to improve.

B. Money and Credit Developments

9. Monetary developments in 1999 mostly reflect efforts made by the Central Bank of West African States (BCEAO) to accelerate the sorting out of member countries' notes held by the national agency. As a result, broad money expanded by 37.1 percent in 1999; relative to the beginning-of-period money stock, net foreign assets rose by 32.3 percent and net domestic assets by 4.8 percent. The government's net position improved by 13.3 percent. In contrast, bank claims on nongovernment sector grew by 52.8 percent during the year, mainly because credits to the cotton sector were not repaid on time while credits to the trade and services sectors increased.

10. Banks generally observe the prudential ratios monitored by the regional banking commission, except for the ratio regarding the loan portfolio structure and the ratios of medium-term assets and liabilities. Moreover, as the financial situation of a major bank deteriorated in 1999, the government supported the banking commission's recommendations for that bank to improve its reporting system, produce more reliable financial data, and carry out a recapitalization, given that its capital and reserves were used to cover loan losses. Meanwhile, the bank has agreed to strengthen its financial position before resuming credit operations. The government has also taken actions to strengthen the financial situation of mutual savings and loans associations, especially that of FECECAM, which deteriorated sharply in 1999 as a result of widespread nonperforming loans, embezzlement in certain branches, inadequate internal and external audit systems, and management shortcomings. Nonperforming loans averaged 30 percent at end-December 1999, with much higher levels in some branches.

C. Structural Reforms

11. The government continued to implement structural reforms, albeit with some delays, as efforts to accelerate the pace in late 1999 were only partially successful. The delays affected in particular the cotton sector and civil service reforms, for which the government is seeking broad consensus among all those intervening in those sectors. Nevertheless, progress was made in updating the civil service administrative files, which permitted the publication of a quarterly report on trends in civil service employment. In connection with the reform of the civil service pension system, the government also completed a census of retired civil service employees, which resulted in lowering pension payments.

12. With respect to the reform of the cotton sector, the government adopted decrees on the sale of seed cotton to private ginning companies and transferring to the private sector the organization of imports of fertilizers and pesticides. Owing to the drop in the international price of cotton, the government reduced the producer price of seed cotton from CFAF 225 per kilogram to CFAF 185 per kilogram for the 1999/2000 crop year. Regarding public enterprise reforms, the government adopted a strategy to liberalize the telecommunications sector. Reforms of the water and energy sectors, by contrast, progressed slowly in 1999. The distribution of petroleum products was liberalized following the privatization of SONACOP, the state monopoly, and a flexible mechanism was adopted for setting their retail prices. Hence, in February 2000, retail petroleum prices were increased by 24 percent in line with the increase in international prices, with the exception of the price of kerosene, which was kept below the import price. As a result, the government established a subsidy mechanism for this product.

III. The Program for April 2000-March 2003

13. Over the next three years, the government will continue to implement policies based on three main objectives: financial stability, high and sustainable economic growth, and implementation of an overall poverty reduction strategy. The program also emphasizes good governance, regional integration in WAEMU and ECOWAS, and an in-depth reform of public administration, including a policy of decentralization.

14. Preparations for a national poverty reduction strategy began in November 1999, followed by a government seminar in March 2000. It intends to elicit the active participation not only of concerned public units and agencies, but also of civil society and representatives of bilateral and multilateral development partners. Furthermore, the government will seek technical and financial assistance from the international community in preparing the programs and setting the targets that underpin the strategy. This process will lead to the preparation of Benin's poverty reduction strategy paper (PRSP) in the coming 12 months. The preparation of the strategy could require the government to modify some of the assumptions and objectives underpinning the program supported by the Poverty Reduction and Growth Facility (PRGF).

15. In the meantime, the government has prepared an interim PRSP. It describes Benin's poverty profile, reviews policies implemented over the past few years to strengthen the economy and reduce poverty, sets out the medium-term economic scenario on which the program is based, and indicates the key elements of a poverty reduction strategy. The interim paper also specifies the institutional framework and consultation process that will be used to prepare the strategy, the poverty reduction targets, and a timetable for its preparation. A matrix of objectives and measures that the government intends to implement in the next three years has also been prepared.

16. The government considers that the poverty reduction goal can be achieved only in the context of financial stability accompanied by high and sustainable growth. Consequently, it intends to continue implementing policies and reforms to ensure economic growth of 5 to 6 percent a year on average, with the investment rate gradually increasing to 20 percent of GDP. Inflation should be kept below 3 percent, while the external current account deficit (including current official transfers) could rise to 7.2 percent of GDP in 2000 before gradually declining thereafter, given a more favorable economic environment.

17. To achieve the medium-term objective, the government will continue to implement a prudent fiscal policy. In particular, the overall fiscal position, including grants, will remain broadly balanced, while the primary deficit (excluding interest payments and grants) will be kept below 2 percent of GDP. At the same time, the authorities will ensure that budget allocations for the social sectors are consistent with the poverty reduction strategy. For that reason, the fiscal target may need to be revised once the PRSP has been completed and financial assistance from development partners established. Furthermore, the government will reform budget preparation and execution procedures in order to make them more effective and useful tools for measuring the impact of social programs on poverty reduction. The government will give a new impetus to the structural reform programs through more vigorous efforts to open up the economy, including by liberalizing prices, privatizing public enterprises in industrial and commercial sectors, exposing businesses to competition, and strengthening the regulatory framework for economic activity.

IV. The Program for April 2000-March 2001

18. The government considers that the prospects for growth in 2000 remain favorable, but that there is a danger of an upward pressure on prices and of a widening external current account deficit. Real GDP could grow by 5 ½ percent, supported by an increase in cotton and manufacturing output. With the harvest ending, it is estimated that seed cotton production will increase by 8 percent to about 360,000 tons in 2000. Industrial output should also increase as a result of major investments in infrastructure and telecommunications. The consumer price index could increase by 3 percent in 2000, compared with less than 1 percent in 1999, because of the increase in petroleum product prices, the effect on prices of the appreciation of the U.S. dollar exchange rate against the CFA franc, and the increase in the average customs tariff caused by the implementation of the WAEMU common external tariff.

19. The external current account deficit is expected to widen by 1½ percentage points of GDP to 7.2 percent of GDP in 2000, as lower cotton prices and higher prices of petroleum products are projected to cause a 3 percent deterioration in the terms of trade. Thus, despite major capital inflows, the overall balance of payments could record a small deficit.

20. During the program period, the government will pursue the price liberalization policy begun in the early 1990s. Currently, the government controls only utility rates and the prices of bread, pharmaceutical products, cement, and school and office supplies, and has begun liberalizing petroleum product prices. As regards public services, the government new price policies will be specified in the bidding document that will open the sectors of telecommunications, water, and energy to private investors. Meanwhile, the government will continue rehabilitating the public water and energy enterprise (SBEE), to reduce its production costs and accelerating recovery of its claims.

21. As for petroleum products, the government will continue the policy of adjusting prices on a quarterly basis. Hence, it increased petroleum product prices by some 34 percent in June 2000 to reflect changes in exchange rates and petroleum prices on the world market over the last three months. For kerosene, the price was increased by 77 percent in June; nevertheless, there is still a small subsidy, which is currently covered by a fee on other petroleum products. Given the recent privatization of the management of the last publicly owned cement enterprise, cement imports were liberalized in June 2000. However, the government considers that the increase in customs duties on gypsum and clinker resulting from the implementation of the common external tariff in the WAEMU, combined with the rise in the prices of petroleum products, would put strong upward pressures on domestic prices and therefore harm the economy. Hence, as permitted under the WAEMU's regulations, the government introduced a request to temporarily suspend the implementation of the new customs duties on gypsum and clinker. Nevertheless, the government intends to liberalize the price of cement over the next 12 months.

A. Fiscal Policy

22. To consolidate the achievements of the past few years, the government will continue its efforts to streamline budget management in order to free additional funds to finance social services outlays and priority investments. In that context, the overall fiscal deficit, including grants, is expected to amount to 0.4 percent of GDP in 2000, compared with a surplus amounting to 2.3 percent in 1999. The primary deficit will widen by 2.1 percentage points of GDP to 2.3 percent in 2000, while the overall deficit, excluding grants should rise to 3.5 percent of GDP. Despite a projected decline in nontax revenue and smaller contributions to the budget by the cotton sector, total revenue should attain 15.7 percent of GDP through a broadening of the tax base and a strengthening of tax collection. To that end, the budget law for 2000 includes the implementation of the WAEMU common external tariff (CET) reform and indirect taxation, as well as the introduction of taxes on the reexport trade and on imports of used cars.

23. The government intends to pay particular attention to improving tax and customs administration and strengthening the current program to combat tax fraud and corruption. The government will continue to focus on the implementation of computerization and stricter controls over human resources, including the sanctioning of officials guilty of misconduct.

24. As regards the Domestic Tax Department (DGI), the government will continue in 2000 to restructure the tax unit in charge of large enterprises by reinforcing its staff and its equipment, raising the quality of, and access to, the data contained in the national taxpayer database, and transferring responsibilities for the taxation of medium-sized enterprises subject to the simplified tax regime (RSI) to a new unit. The DGI's management will also be improved by further computerization of its operations and reorganization of its audit services to strengthen the unit responsible for researching and investigating fraud cases (BREP).

25. Regarding the Customs Department, important progress was made to improve the security of procedures and reduce fraud by computerizing the transfer of the manifests to the customs office. The rehabilitation of the Customs Department will continue, with special emphasis placed on achieving computerization and eliminating customs inspectors' ability to establish different import values. Among the main actions, all customs clearance procedures at the port of Cotonou, as well as the main customs offices at the border, will be computerized by end- December 2000, and the customs units responsible for petroleum product imports will be computerized and connected to the main unit responsible for collecting customs duties on petroleum products. The computerized customs system will also be connected to the port's computer network in December 2000, once the latter has become operational. In addition, the management of customs regime will be strengthened to ensure that goods in transit or for reexport actually cross the border. In that context, before end-October 2000, the government will audit the reexport system and clarify the customs procedures applied to imports for Nigeria. Also, with the implementation of a database on import values, customs officials will no longer have the possibility of adjusting customs valuation arbitrarily.

26. As regards the contract with a preshipment inspection company signed in January 2000, the government has taken steps to ensure that the company fulfills all elements of the contract, including the control of imports undertaken by unregistered and foreign importers, and the monitoring of transit and entrepôt regimes, as well as the production of a monthly report, starting in August 2000, reconciling import values collected by the preshipment company and those of the Customs Department. Moreover, the preshipment company will provide a database on import values that will allow the Customs Department to update its database on customs values. Finally, the government will improve the coordination and the sharing of information between the Customs and Domestic Tax Departments so as to better combat tax and customs fraud. In this connection, by end-July 2000, the Customs Department will assess tax penalties against the trading companies that were discovered to have committed customs infractions during an investigation by the Domestic Tax Department. Also, appropriate actions will be taken against the perpetrators and beneficiaries of these infractions.

27. Government expenditure is expected to increase by 2.1 percentage points of GDP to 19.2 percent in 2000, owing to increases in both current and capital outlays. In particular, the wage bill is expected to increase from CFAF 66.3 billion (4.5 percent of GDP) in 1999 to CFAF 77 billion (4.9 percent) in 2000, because of the granting of a general salary increase once the government has adopted and published a new pay scale, and the recruitment for the social sectors, including personnel that was scheduled to be recruited in 1999.

28. Given the financial resources generated from privatization receipts and a recent bond issue by the treasury, the government intends to implement a supplementary public investment program amounting to CFAF 3.5 billion in 2000. The program will be undertaken after consultations with World Bank and Fund staffs and will be included in an amended finance law. The amended law will also include a subsidy for kerosene (CFAF 4 billion), and emergency assistance of CFAF 1 billion to compensate losses of CFAF 11 billion suffered by cotton producers because of insect infestation. Overall, these measures will amount to CFAF 8.5 billion, or 0.5 percentage point of GDP. Furthermore, in the context of the HIPC Initiative, the government will prepare, in consultation with the Fund and World Bank staffs, a program of social projects amounting to US$5 million (CFAF 3½ billion) that will be financed by possible interim debt relief.

29. In order to resolve definitely the problem of outstanding domestic arrears, the government has completed the verification of all outstanding arrears and has begun to implement a settlement plan by June 2000. As a result, the government plans to clear arrears amounting to CFAF 9 billion in 2000.

30. On a cash basis, the overall fiscal deficit would amount to 4.0 percent of GDP this year, compared with 2.8 percent in 1999. After taking into account of net domestic financing, externally financed projects, amortization of the foreign debt, and grants, a financing requirement of approximately CFAF 22.2 billion remains. This could be covered through financing from the IMF (CFAF 9.7 billion) and grants from the European Union and Denmark (CFAF 12.5 billion).

31. The government intends to reform budget preparation and execution procedures during 2000. Supported by the World Bank and other development partners, the authorities will develop medium-term expenditure programs for each ministry. Also, line ministries will exercise greater responsibility in the preparation and execution of their budgets, and their performance will be monitored based on sector-specific indicators. In addition, the government will increasingly use subcontracting agencies to improve the execution rate of public investment projects. This reform, preceded by computerization of all budget and treasury operations, will permit the government to closely monitor the impact of programs on poverty reduction. Also, in line with the WAEMU directives, the Ministry of Finance will be responsible for the preparation of the finance law and its submission to the National Assembly.

32. In preparation of the implementation of new government accounting standards, the authorities will verify, before end-August 2000, the end-1999 balances of all accounts used in determining the central government financial operations. Also, by the end of October 2000, the treasury will update the balances of all its accounts at end-September 2000, so that they can be validated by the Minister of Finance and transferred to the new accounting standards. In addition, the accounts managed by the debt-management agency (Caisse autonome d'amortissement) will be transferred to the treasury by end-December 2000.

B. Money, Credit, and the Financial System

33. Broad money is projected to expand by 3 percent in 2000, in view of the large increase recorded in 1999, while the net domestic assets of the banking assets should increase by 9 percent in terms of beginning-of-period money. Growth in bank credit to the nongovernment sector could slow from 53 percent in 1999 to 17 percent during 2000, as the central bank, together with the regional banking commission has tightened supervision over commercial banks.

34. The government will strongly support the banking supervision institution in its efforts to strengthen Benin's financial system. The monetary authorities will continue to monitor the observance of prudential ratios to ensure that banks' loan portfolios remain healthy, provisions against nonperforming loans are built up, and the new set of prudential regulations that entered into force on January 1, 2000 is observed. To that end, they will urge commercial banks to gradually reduce the excessive concentration of bank lending to the cotton sector. The government also intends to support enforcement of procedures and measures that would be required should the situation of a bank worsen.

35. With respect to the decentralized financial institutions, the government intends to take a two-pronged approach, with support from the BCEAO and WAEMU's banking commission, as well as from development partners involved in microfinance. First, it will improve the effectiveness of the microfinance unit at the Ministry of Finance responsible for supervising the institutions by boosting its human and material resources. This step will allow the microfinance unit to improve the supervision of all microfinance institutions, especially FECECAM, and enforce the provisions contained in the regional law on decentralized financial institutions (the PARMEC law). Second, in order to contain the serious financial difficulties of certain local savings and loan branches that were placed under the supervision of the Executive Secretariat of FECECAM, the government has requested their external audits before end-September 2000. Then, the audit reports will be used for monthly assessment of the branches' financial situation. The objective is to reduce the level of nonperforming credits from CFAF 1.7 billion at end-April 2000 to CFAF 1.5 billion at end-July 2000, and to CFAF 1 billion by end-December 2000. Moreover, the government will place under temporary management any local associations that would not have significantly reduced their negative net worth at end-December 2000.

C. Structural Reforms and Social Measures

36. The other structural reforms and social measures that the government will implement during the program period are summarized in the matrix attached as an appendix to the interim PRSP. The major reforms cover the civil service reform; the decentralization policy in the context of a broader administrative reform; the liberalization of the cotton, telecommunications, water, and energy sectors; the participation of the private sector in the management of the Port of Cotonou; and reforms in the health and education sectors.

37. The elements of civil service reform that the government will implement comprise the establishment of a single civil service database and implementation of a performance-based compensation system, together with a new pay scale. The civil service rosters in the Ministry of Civil Service and the Payroll Department at the Ministry of Finance will be updated and merged by December 2000, once the new software has been installed at the Ministry of Civil Service. This single roster, which will be accessible to all human resource departments in ministries, will facilitate the updating of civil servant files, and thereby improve civil servant resource management and control over the wage bill while reducing the high level of back pay.

38. The government expects to arrive at an agreement by August 2000 with the trade unions on a new pay scale and the problems related to the wage freeze. It will then request the National Assembly to bring the 1998 law on the civil service compensation system in line with the decisions of the Constitutional Court. The new system will make it possible to reduce automatic salary increases while increasing salary raises granted upon promotion. Moreover, the government will gradually restore the link between the salary and the grade of civil servants on the new pay scale. The link was broken when salaries, but not advancement, were frozen from 1986 to 1992. In spite of the large salary raises granted since then, the advancements approved from 1994 to 1998 have not yet been reflected in salaries. These measures, together with a continuation of the policy of hiring two civil servants for every three entering retirement and the granting of performance-based promotions as of 2004, should limit increases in the wage bill to 5 percent a year as of next year. Nevertheless, the government intends to review its recruitment policy at the end of 2000, given the staffing needs in many ministries.

39. The government is concerned about the difficulties encountered in its efforts to restructure the civil service retirement fund (FNRB). The fund 's widening deficit, which is financed through budgetary transfers, is due to the decline in, and the aging of, civil service personnel. Following recent studies, the government plans to request technical assistance from the International Monetary Fund and other development partners in devising an action plan to reduce the deficit over the medium term.

40. The authorities have embarked on an in-depth reform of the public administration to enhance its ability to fulfill the tasks assigned to it and meet the expectations of the population. A major aspect of this reform is the decentralization policy, which aims at bringing the government nearer to the population and encouraging local communities' participation in the preparation and execution of the policies and programs that affect them. In particular, municipalities are expected to play a key role in the preparation and implementation of poverty-reduction programs, which will be partly financed through central government transfers. The first local elections are scheduled for the fourth quarter of this year, when the population will elect municipal councils headed by mayors. To introduce this reform, the authorities have received support from a large number of development partners, who provide technical assistance to the government agencies responsible for implementing the reform, as well as to the largest cities. The World Bank, in particular, is supporting the strengthening of management capacities in the three main cities, which account for 70 percent of the local communities' budget. To that end, performance indicators have been selected to improve the preparation and execution of local budgets, local tax collection, expenditure allocation, and local services management. At the same time, a new budget classification, consistent with that of the government budget, is being prepared, while the treasury has set up a system to monitor local communities' budget execution on a quarterly basis. In anticipation that the municipalities will be established by early 2001, the government will complete the assessment of the financial situation of local communities by end-October 2000.

41. With respect to the cotton sector, a major milestone was reached when the government issued a decree on June 2, 2000 ending SONAPRA's monopsony on seed cotton marketing. The decree was adopted after an agreement had been reached among members of the Interprofessional Cotton Association on a mechanism guaranteeing repayment of crop credit to the banks without a guarantee from SONAPRA or the government. The government has also decided to open the capital of SONAPRA to private investors and is discussing with development partners, in particular the World Bank, the modalities and timetable for the privatization. Discussions also continue on the transfer to the private sector of responsibility for organizing supplies of inputs, and on the preparation of a regulatory framework defining the government's role in the sector. The World Bank has indicated its willingness to finance the technical assistance needed to implement the reform.

42. The government is determined to continue its privatization strategy for the other public enterprises. Following the adoption of a strategy for the telecommunications sector, the authorities will step up their efforts to select the successful bid by year-end. Also, the government will decide on the modality of its divestiture from the Société Béninoise d'Eau et d'Electricité (SBEE), launch the bidding process by end-2000, and select the winning bid by March 2001. In addition, the two textile enterprises will be privatized over the next two years.

43. As regards the autonomous port of Cotonou, the government has decided to involve the private sector in port management by end-2001. Moreover, it will ensure that the audit of the port's temporary billing system is completed by November 2000 and a new computerized management system for port operations which will link all businesses operating at the port, is in place by December 2000.

44. In addition to the above-mentioned measures to boost development of the private sector, the government will continue to implement its strategy for enhancing the competitiveness of the economy and making the private sector the driving force behind Benin's economic development. The main components of this strategy, which is supported by the World Bank, include strengthening the legal, regulatory, and institutional framework for business; improving relations between the government and the private sector; restructuring the financial institutions supporting private sector development; promoting and diversifying exports; and strengthening the private sector development capacity. With regard to the legal framework, the government will implement the regional business law, revise national legislation, and apply the regional provisions regarding business registration. By end-2000, with the assistance of the World Bank, the government will also draw up an action plan to reform the judiciary, including in particular commercial conflict resolution mechanisms and training programs for judges and other staff. An inventory of all administrative and regulatory provisions governing private enterprises will be made by end-June 2001 as a first step toward their simplification. Also, the government will conduct a study on Benin's competitiveness in order to pinpoint potential sources of growth and the country's comparative advantages. In addition, the government has, in addition, postponed the creation of a free-trade zone pending the conclusions of complementary studies on measures to promote exports while limiting government revenue losses. The government will consult with the International Monetary Fund staff before taking measures concerning the free-trade zone that could have an impact on fiscal policy.

45. In the context of its efforts to combat poverty and raise the living standards of the population, the government has adopted measures in education, health, and social welfare. The measures will be included in the medium-term expenditure program under preparation, and some of them will be implemented in the next 12 months and serve as intermediate targets scheduled for the floating completion point of the enhanced HIPC Initiative, in which Benin wishes to participate. Also, in the supplementary budget under preparation and after consultations with the World Bank and IMF staffs, the government will include social programs amounting to CFAF 3.5 billion, which could be financed by interim assistance that Benin could receive under the HIPC Initiative. In the education sector, they comprise (i) the elimination of tuition fees for all children in rural areas and the introduction of government transfers to compensate schools for lost revenue; (ii) the elimination of repetition of grade 1; and (iii) the transfers of government funds to local communities prepared to hire teachers to fill vacant teaching posts. In the health sector, the measures concern (i) the preparation and discussions with the National Assembly of a strategy to combat AIDS; and (ii) the adoption of a system of annual performance evaluations in the sector.

46. In its efforts to meet targets for the social sectors, the government has already increased allocations for education and health by 13 percent in the budget for 2000, to a level equivalent to 5.9 percent of GDP. In the health sector, current and capital expenditures have been increased by 26 percent and 22 percent, respectively. Current and capital outlays in the education sector are expected to increase by 16 percent and 155 percent, respectively, compared with the 1999 budget. The government also plans to raise the level of budget appropriation execution, which amounted to 86 percent in 1999, by accelerating funding and improving expenditure planning with the assistance of subcontracting agencies. With respect to social welfare, the government has devised a national women's policy and has submitted a law on family to the National Assembly. Furthermore, the government will study the possibility of expanding the social security system to the informal sector, where the majority of the labor force is employed.

47. To combat corruption, an agency was set up under the Office of the Presidency in 1996. Its purpose was to educate the population, prevent and detect corrupt practices, and resolutely combat corruption in all its forms. To reinforce these efforts, the government has decided to adopt a national anticorruption strategy to be prepared in broad-based participatory process. To that end, the authorities involved the population in the identification of the sectors mostly afflicted by corruption and prepared a matrix of measures to be taken in the short term. Among these measures, the government will follow through on the trial of 120 embezzlement cases detected between 1996 and 1999. It will also ensure payments of court fines and penalties by those found guilty of embezzling public funds. Furthermore, by December 2000, the government will adopt a draft law on illicit enrichment. Departments of each ministry will prepare procedure manuals and user guides, and a set of performance indicators will be established for supervisors and managers.

48. With regard to regional cooperation, the government will implement the WAEMU reforms concerning the harmonization of public finance laws, public accounting standards, and the chart of government accounts. Under the WAEMU convergence pact, the government has submitted its medium-term convergence program to the commission. On the basis of current policies, Benin will meet all the core regional convergence criteria in 2002. In addition, the government will continue its efforts to produce definitive government accounts (loi de règlement) at the end of each fiscal year, and strengthen the agency responsible for auditing government accounts (Chambre des comptes).

V. External Sector Policies and Financing

49. The current account deficit is expected to widen by 1½ percentage points of GDP to 7.2 percent in 2000, because of drop in the volume of cotton exports and worsening terms of trade due to increased prices of petroleum product imports. After 2000, the current account deficit is likely to narrow progressively to 5½ percent of GDP by 2003, as the terms of trade are expected to recover. At the same time, with the volume of cotton exports expected to grow by 3 percent a year, the overall volume of exports is projected to increase by 4 percent annually, whereas the volume of imports is likely to grow by 6 percent a year, or slightly faster than GDP. Benin will continue to benefit from grants and concessional loans for investment projects and restructuring programs, especially in education, health, and infrastructure. In 2000, exceptional funding requirements are estimated at CFAF 12.5 billion, comprising CFAF 10.4 billion from multilateral organizations and CFAF 2.1 billion from bilateral donors. After 2000, the residual financing requirements are expected to decline given the progressive improvement in public finances. As a result, the overall balance of payments could post a deficit amounting to CFAF 12 billion in 2000, and result in a small reduction in the high level of international reserves accumulated the past few years. The balance of payments is projected to record a surplus of CFAF 8 billion in 2001. Moreover, the International Monetary Fund is expected to grant CFAF 9.7 billion (SDR 10.8 million) under the first year of the arrangement under the Poverty Reduction and Growth Facility. Program execution remains, nevertheless, subject to risks posed by factors, such as delays in the disbursement of foreign aid or deterioration of the terms of trade. The need for corrective measures will be determined at the time of the program reviews.

50. The government will implement the exchange rate policy and regulations in force in WAEMU. It does not intend to impose or intensify restrictions on payments and transfers for current international transactions, to introduce or modify multiple exchange currency practices, or to conclude bilateral payments agreements which are consistent with Article VIII of the Articles of Agreement of the International Monetary Fund. Furthermore, it does not envisage imposing or intensifying restrictions on imports for balance of payments reasons. Transportation allowance ceilings will be administered in a liberal manner, and all bona fide requests for higher amounts will be granted.

VI. Monitoring of the Program

51. Program monitoring will be carried out on the basis of quarterly quantitative benchmarks, indicators, and structural benchmarks established for the period April 1, 2000-March 31, 2001, and through a midterm review. The quantitative limits for end-June 2000 and end-December 2000 are benchmarks for program monitoring; those for end-September 2000 are program performance criteria, the observance of which is a condition for making the second disbursement under the arrangement. The quantitative benchmarks and the performance criteria at end-June 2000 and end-September 2000 include (i) a ceiling on net bank credit to the government; (ii) a reduction of the stock of domestic payments arrears; (iii) the nonaccumulation of new external payments arrears by the central government (on a continuous basis); (iv) a ceiling on new nonconcessional foreign borrowing at terms of 1-12 years, contracted or guaranteed by the central government; and (v)  ceiling on new short-term foreign borrowing, with the exception of regular trade financing. The quarterly ceilings on net bank credit to the government will be adjusted downward (or upward), depending on the amount by which exceptional external assistance, excluding debt relief, exceeds (or falls short of) program estimates, as indicated in the attached Table 1.

52. The measures that will serve as structural performance criteria comprise the reconciliation of the government account balances used in compiling the table on central government financial operations, and the preparation of the first quarterly report reconciling the value of imports and corresponding import duties and fees recorded by the Customs Department and the preshipment inspection enterprise at end-August 2000.

1. This memorandum provides the definitions of the quantitative performance criteria and benchmarks for the three-year program expected to be supported by the IMF under the Poverty Reduction and Growth Facility (PRGF). It also sets out the data-reporting requirements for monitoring the program.

2. Net bank credit to the government is defined as the overall position of the main central government institutions vis-à-vis the banking system. Table 1 of the MEFP shows the ceilings on the net credit to the government for June 30, September 30 and December 31, 2000, and for March 31, 2001.

3. The ceilings on the net credit to the government will be adjusted downward (upward) by the amount by which disbursements on non-project-related external assistance, excluding debt relief, exceed (fall short of) the amount programmed; the required correction in case of shortfall of external assistance will be limited to CFAF 3 billion at end-June 2000, CFAF 6 billion at the end of September 2000, and CFAF 9 billion at the end of December 2000 (cumulative). Program targets are adjusted downward by the amount by which proceeds from privatization exceed the amount programmed for restructuring expenditure.

Reporting requirement. Detailed data on net credit to the government will be transmitted on a monthly basis within six weeks of the end of each month.

4. The reduction of domestic arrears is defined as the payment of verified outstanding claims on government from previous fiscal years and no new arrears should be accumulated. Payment of arrears will be measured by the treasury and, where necessary, supplemented by special audits by treasury and internal audit staff. The minimum payment of verified payment arrears will be on an accumulated basis CFAF 1 billion for June 30, 2000, CFAF 3.5 billion for September 30, 2000, CFAF 8.7 billion for December 31, 2000, and CFAF 8.8 billion for March 31, 2001.

Reporting requirement. Detailed data on repayment of domestic arrears and the remaining stock of arrears will be transmitted on a monthly basis within four weeks of the end of each month.

5. As part of the program, the government will not accumulate any external payment arrears, on a continuous basis.

Reporting requirement. Details of any external debt service arrears are to be reported to the Fund within two weeks.

6. Nonconcessional external borrowing (including lease-purchase agreements) is defined as loans with a grant element of less than 35 percent, calculated using currency-specific commercial interest reference rates. Debt rescheduling and debt reorganization are excluded from the limits on nonconcessional external borrowing. Nonconcessional external borrowing will be zero throughout 2000/01.

Reporting requirement. Details of all new external borrowing, including central government guarantees indicating terms of loans and creditors, will be provided on a monthly basis within four weeks of the end of each month.

7. Short-term external debt is defined as debt contracted or guaranteed by central government with contractual maturity of one year or less, excluding normal trade-related credits. There will be no new short-term external debt throughout 2000/01.

Reporting requirement. Data on all new borrowing and guarantees (including terms of loans and creditors) by central government will be transmitted, with detailed description, on a monthly basis within four weeks of the end of each month.

8. The quantitative benchmarks for the program comprise quarterly minimum spending targets for health and education. This includes both current capital and expenditures, including foreign financed investments. The floor for health expenditures is on an accumulated basis CFAF 7.2 billion for June 30, 2000, CFAF 14.1 billion for September 30, 2000, CFAF 22.3 billion for December 31, 2000, and CFAF 31 billion for March 31, 2001. The floor for education expenditures is on an accumulated basis CFAF 12.9 billion for June 30 2000, CFAF 25.9 billion for September 30, 2000, CFAF 40.8 billion for December 31, 2000, and CFAF 57 billion for March 31, 2001.

9. Required public finance are as follows:

• Detailed monthly revenue and expenditure estimates, including social expenditures and payments on arrears.

• Monthly data on domestic financing (bank and nonbank) of the budget (including government bonds held by the nonbank public) will be transmitted on a monthly basis within four weeks of the end of each month.

• Data on the implementation of the development budget, with detailed information on the sources of financing will be transmitted on a quarterly basis within four weeks of the end of each quarter.

• Public sector external and domestic scheduled debt service and payments will be transmitted on a monthly basis within six weeks of the end of each month.

10. The following data will be transmitted on a monthly basis or as specified below within eight weeks of the end of the month:

• The consolidated balance sheets of deposit money banks, and the individual bank balance sheet as needed;

• The monetary survey;

• Lending and deposit rates;

• Standard bank supervision indicators for banks and nonbank financial institutions, respectively, and for individual institutions as needed.

11. External sector data requirements are as follows:

• Export and import data, including volumes and prices, will be transmitted on a quarterly basis within twelve weeks of the end of each quarter.

• Other balance of payments data, including the data on services, private transfers, official transfers, and capital account transactions, will be transmitted on a quarterly basis within twelve weeks of the end of each quarter.

12. The following requirements will apply to real sector data:

• Monthly disaggregated consumer price indices will be transmitted on a monthly basis within two weeks of the end of each month.

• Any revisions to the national accounts data will be transmitted within eight weeks of the date of revision.

13. Documentation of all measures undertaken by the government will be transmitted to the IMF's African Department within ten working days after the day of implementation. Any official studies pertaining to the economy of Benin, will be submitted within two weeks of publication.