Memorandum on Economic and Financial Policies for 2000/01

December 26, 2000

I. Introduction

1. Discussions on the first review of the program supported by a Fund arrangement under the Poverty Reduction and Growth Facility (PRGF) were held in Cotonou from October 5-19, 2000. The discussions covered program implementation during the second and third quarters of 2000, the outlook for the remainder of 2000 and for 2001, and measures planned for that period, including key aspects of the 2001 budget. Agreement was reached on economic and financial policies that would allow the government to meet the objectives set forth in the July 10, 2000 memorandum on economic and financial policies. The government reaffirms its commitment to implement all the policies described in the present document, which complements the aforementioned memorandum.

II. Program Implementation, April-September 2000

2. The program for 2000 was prepared in the context of a strategy for 2000-03 that aims at achieving sustainable economic growth, reducing poverty, and maintaining financial viability over the medium term. The strategy focuses on strengthening financial policies, liberalizing the economy, and promoting domestic saving and private investment. For 2000, the program's main macroeconomic objectives are to achieve a real GDP growth of 5.5 percent, keep inflation below 3 percent, and contain the current account deficit at 7 percent of GDP.

3. The economic situation is expected to be broadly in line with the program in 2000. Real GDP is projected to grow by 5.3 percent, slightly below the 5.5 percent target, as less favorable rainfall should lessen the increase in food production. The consumer price index rose by 6.1 percent in the 12 months to end-June 2000 because of the increases in the price of petroleum products and the implementation of the common external tariff (CET). Since then, the price index has declined, driven by a reduction in food prices, which should contribute to keep average inflation at about 4 percent in 2000.

4. The price adjustment mechanism for petroleum products pointed to the need for a small increase in the prices of some products in September 2000, in spite of increases totaling 75 percent since January. However, as proposed by the petroleum industry, the government decided to keep prices unchanged, because the widening price differential in favor of Nigeria was already generating a sharp increase in informal imports and a concomitant drop in the formal sector's sales.

5. With respect to the external sector, the current account deficit, including current transfers, is expected to widen from 5.9 percent of GDP in 1999 to 7.3 percent of GDP in 2000, as anticipated under the program. The recovery in cotton prices was faster than projected and allowed the actual deterioration of the terms of trade to remain close to the program's projections, in spite of the sharp increase in oil prices. Capital inflows are likely to exceed forecasts in 2000, leading to an overall surplus of 1.5 percent of GDP, instead of a projected deficit of 0.7 percent. That surplus would allow Benin to contribute about CFAF 30 billion to the international reserves of the Central Bank of West African States (BCEAO).

6. With regard to the program, the benchmarks for end-June 2000 and the quantitative performance criteria for end-September 2000 were met. Furthermore, the government completed the verification of the government finance data at end-1999 and prepared a report reconciling the data on imports and import duties produced by an import preinspection company with the data produced by the customs authorities (performance criteria for end-August 2000).

7. During the first nine months of 2000, the overall fiscal position (on a payment order basis and including grants) showed a surplus equivalent to 1.5 percent of GDP, instead of being balanced as expected under the program. Total revenue over the period slightly exceeded the program objective, attaining 15.7 percent of GDP (annual basis) on account of the tax measures adopted in the 2000 finance law and an improvement in tax collection. Total expenditure is estimated at 16.7 percent of GDP, or less than envisaged, because of underspending on wages and investment projects, in particular those financed with domestic resources. The wage bill was kept below the ceiling of 4.9 percent of GDP (annual basis) specified in the program as a result of the slow pace of recruitment for the year 2000, as well as the phasing in of the 8 percent pay increase granted in July 2000 retroactively to January 1.

8. At end-August 2000, the National Assembly approved a supplementary budget allowing for CFAF 10 billion in additional expenditure, including CFAF 3.5 billion for the health and education sectors and CFAF 4 billion in subsidies for kerosene. These expenditures are partly financed by interim assistance under the HIPC Initiative, estimated at CFAF 6.6 billion.

The government has implemented an action plan to clear the stock of arrears as set in June 1998. Under the plan, creditors have had the options to obtain immediate payment against an average discount of 44 percent, or to securitize their claims over five years. As a result, over the first nine months of 2000, the authorities settled domestic arrears for a nominal amount of CFAF 7.1 billion out of a CFAF 24.2 billion stock of verified arrears.

9. The central government deficit, on cash basis, totaled CFAF 26.3 billion over the first nine months of 2000, compared with CFAF 33.6 billion in the program. External financing has been more than enough to cover this deficit.

A. Money and Credit Developments

10. Over the first nine months of the year, the money stock expanded by 12.2 percent. This expansion was reflected in a 9.8 percent increase in the net foreign assets of the banking system relative to the beginning-of-period money stock, whereas net domestic credit rose by 0.6 percent. Bank credit to the nongovernment sector rose by 4.3 percent as a result of lending to the cotton, trade, and manufacturing sectors. However, the brisk increase in bank credit to the nongovernment sector has started to decelerate, particularly since the second quarter of 2000.

11. Banks' compliance with the prudential ratios set by the regional banking commission has deteriorated somewhat in 2000. Although banks generally observe the main prudential ratios, they face difficulties in complying with the ratios for loan diversification, loan portfolio structure, loans to managers, and the matching of long-term assets and liabilities. Moreover, two banks are in difficulty on account of serious management shortcomings and breaches of bank regulations. Although BCEAO key interest rates were increased in June 2000 and reserves requirements raised from 3 percent to 9 percent for banks in Benin, bank profitability remains satisfactory. Furthermore, Beninese banks have generated excess resources, allowing them to participate as net lenders in the regional interbank market and in the treasury securities market for West African Economic and Monetary Union (WAEMU) countries. Regarding mutual credit institutions, the federation of mutual agricultural credit and savings institutions (FECECAM), which faced financial difficulties early in the year, implemented measures over the past six months that allowed it to reduce nonperforming loans by about one-half to CFAF 1 billion in September 2000, a level in line with the program.

B. Structural Reforms

12. With regard to the civil service compensation system, the government adopted a new pay scale in July 2000. It also requested the National Assembly to bring the 1998 law on the compensation system into compliance with the decisions rendered by the Constitutional Court. The implementation of the decentralization policy has slowed somewhat as the municipal elections have been postponed until the first semester of 2001.

13. Following the end of the monopoly of the state cotton enterprise (SONAPRA) over seed cotton marketing, the next step in the reform of the cotton sector is the transition toward a competitive system. In that context, the World Bank assisted the Interprofessional Cotton Association in putting in place by end-November 2000 a mechanism guaranteeing crop credit repayments within the sector (central risk unit), and in strengthening producer organizations' technical capacities and effectiveness in representing their members. However, the government and the World Bank are still discussing the privatization scheme for SONAPRA. For the other public enterprises, the privatizations of the telecommunications company (OPT), the water and electric power distribution company (SBEE), and the Autonomous Port of Cotonou (PAC) has progressed unevenly. In particular, the adoption of regulatory frameworks, a prerequisite to the orderly liberalization of these sectors, is behind schedule because the corresponding draft laws have yet to be submitted to, voted on, by the National Assembly.

III. Policies and Measures Planned for the Remainder of 2000
and the First Quarter of 2001

14. The macroeconomic objectives for 2001 have been slightly revised relative to those indicated in the memorandum of July 10, 2000. The target for real GDP growth has been reduced from 5.7 percent to 5 percent to take account of the expected decline in cotton production, whereas, in the face of rising oil prices, the inflation target has been raised from 2.5 percent to 3 percent. For the same reasons, the target for the external current account deficit has been raised from 6.6 percent of GDP to 6.9 percent. Nevertheless, the overall balance of payments should remain in surplus.

A. Government Finance

15. In light of the fiscal outcome at end-September 2000, the objectives for 2000 should be achieved. The overall fiscal deficit, on a payment order basis and excluding grants, should be in line with the program at 3.5 percent of GDP. Including grants, the overall fiscal position should be close to balance. In the context of the preparation of the poverty reduction strategy paper (PRSP), the government revised the fiscal targets for 2001 and intends to revise the medium-term targets as well, so as to put a greater emphasis on social programs and to implement an ambitious investment program. In addition, the government, assisted by the World Bank, is preparing medium-term expenditure programs for the Ministries of Health, Education, Rural Development, Environment, and Transportation. Those programs will be completed during the first half of 2001. As a result, the fiscal targets adopted for 2001 will lead to an overall deficit (payment order basis and including grants) estimated at 0.8 percent of GDP, compared with a deficit of 0.1 percent of GDP projected for 2000. The basic balance (excluding externally financed investment projects) should generate a surplus estimated at 0.5 percent of GDP, and, therefore, Benin will continue to observe the main fiscal criterion of the Convergence, Stability, Growth, and Solidarity Pact agreed by WAEMU member countries (i.e., a positive basic balance).

16. To maintain total government revenue at 16 percent of GDP in 2001, the authorities will pursue their efforts to improve tax administration. Measures will include a strengthening of the tax unit in charge of large taxpayers, a tighter monitoring of the valuation procedures at the customs, a computerized monitoring of duties exemptions, and the setting of a computer interconnection between the customs department and the import preshipment inspection company. Given the implementation of a common external tariff and the reform of indirect taxes in WAEMU, the government does not plan major tax measures in 2001; nevertheless, it will maintain the suspension of stamp duties on cars--in effect since last July--and reduce excise taxes on a limited number of consumer products.

17. Concerning expenditure, the government has raised the initial target for 2001 from 18.6 percent of GDP to 20.4 percent (excluding the reduction in debt service stemming from the debt relief obtained under the enhanced HIPC Initiative). The increase mainly reflects increased costs for externally financed investment projects and higher social outlays. Moreover, the budget includes CFAF 6.7 billion to organize the presidential and local elections, as well as CFAF 4 billion to subsidize the price of kerosene (0.2 percent of GDP). Given the importance of pursuing a rigorous wage policy, the government has kept unchanged the initial objective for the wage bill (CFAF 80.8 billion) for 2001. However, the government will increase transfer payments to parents' associations and health center management committees for the purpose of recruiting local personnel. Overall, the government has in 2001 increased budget appropriations for education from 3.9 percent of GDP to 4.2 percent and for health from 2.0 percent of GDP to 2.2 percent. With regard to investments, the government intends not only to increase budget appropriations but also to raise their rate of execution from 75 percent to 85 percent for 2001. As a result, investment expenditure is expected to rise from 7.3 percent of GDP in 2000 to 8.1 percent of GDP in 2001, with a substantial increase for the road development program, including the rehabilitation of local feeder roads, financed by the international community. To increase the rate of execution of projects, the government will ensure that all infrastructure projects are executed by autonomous subcontracting agencies. Furthermore, the number of agencies will be increased from two to four by April 2001 in order to increase competition among them. Also, the authorities are committed to clearing all verified domestic arrears by the end of 2000, following the strategy adopted in June 2000.

18. Overall, the budget deficit (payment order basis) is expected to stand at 4.4 percent of GDP in 2001, compared with the 2.6 percent of GDP envisaged in the initial program. After taking account of net domestic financing, project-related external financing, and amortization payments on the external debt, a CFAF 36.8 billion financing gap remains. The gap is to be covered by program-related loans and assistance that have already been identified (CFAF 21.2 billion), and debt relief anticipated in the context of the enhanced HIPC Initiative (CFAF 15.6 billion, out of which CFAF 8.9 billion will be received upon the completion point).

19. With the 2001 budget, the government has implemented the new budget nomenclature adopted by the WAEMU. Furthermore, the government--with assistance from the World Bank and its other development partners--has introduced a set of measures aimed at strengthening budget preparation and execution and improving the allocation of public resources with an emphasis on social sectors. For that purpose, the government will assess the performance of five (5) ministries in 2001, on the basis of indicators established in their medium-term expenditure programs. Moreover, the units in charge of preparing and executing budgets in individual ministries will receive technical assistance from the international community. To strengthen budget monitoring at the level of the Ministry of Finance, the authorities will set up computer networks for the budget department in January 2001 and for the Treasury Department in 2002, to which all ministries will ultimately be connected. Close attention is also being paid to strengthening the monitoring of budget execution at the level of local governments, which are to become autonomous under the decentralization reform. For this purpose, a new budget nomenclature for local governments is being prepared, and its implementation should ultimately allow a consolidated budget to be prepared for the general government.

B. Money, Credit, and the Banking System

20. The BCEAO sets monetary policy at the WAEMU level according to price stability and balance of payments objectives. In light of anticipated trends in economic activity and financial intermediation, the rate of growth in the money stock is expected to be 9.3 percent during 2001. The government will continue to implement the recommendations of the regional banking commission in order to maintain the soundness of commercial banks' loan portfolios and ensure that they adhere to prudential rules. In particular, with BCEAO assistance, the government will continue to monitor closely bank lending to the cotton sector. Furthermore, with World Bank assistance, the Ministry of Finance will strengthen the human resources and equipment of the unit in charge of supervising cooperative credit institutions, so that the unit can enforce current regulations. In this context, the Ministry of Finance will ensure that the FECECAM continues to carry out its rehabilitation plan, reduce nonperforming loans, and strengthen its organization and management in the wake of an organizational audit performed by an international firm of experts. Finally, the current efforts to recover the outstanding claims of liquidated banks will be pursued, and payment of the private sector's frozen deposits will be completed by end-December 2001.

21. The regional banking commission found that two banks failed to comply with foreign exchange regulations and committed serious irregularities in banking management procedures. Penalties applicable in the event of such irregularities are being enforced, and the government intends to follow the recommendations issued by the commission. One of the banks has been kept under the close surveillance of the BCEAO and the banking commission since November 2000. The government will ensure that the other bank's equity capital is increased so as to comply with the minimum requirement by December 15, 2000. Should this not be the case, the government will designate by end-December 2000 a trustee to oversee the bank's activities. Moreover, the government will implement all additional measures that the banking commission might consider necessary.

C. Other Structural Reforms

22. The structure of petroleum product prices will be reviewed in December 2000 as planned under the quarterly price adjustment mechanism. However, given the sharp increases in retail prices since January 2000 and the ensuing jump in informal imports of oil products from Nigeria, the government intends to suspend any further increase in the price of kerosene and gas oil until end-March 2001, and to make use of the subsidy budgeted for 2001 to cover the potential losses of petroleum companies that could result from this decision. In addition, the government will assess the situation with the Fund staff at the time of the discussions on the program for the second year of the arrangement and decide on appropriate measures. With respect to cement, the government has submitted a request to the WAEMU Commission to temporarily suspend the implementation of the common external tariff (CET) on gypsum and clinker. Should the Commission decide against this request, the government intends to comply with the CET tariff on gypsum and clinker, and to liberalize the price of cement by June 2001.

23. The government is determined to implement the new wage policy for the civil service once the National Assembly has brought the law on the compensation system for the civil service into compliance with the ruling of the Constitutional Court. The new system should make it possible, over the period 2001-04, to resolve the issues related to the freezing of the financial impact of promotions from 1986 to 1992, while observing the ceiling on the wage bill prescribed in the medium-term program. Furthermore, in view of the importance of having up-to-date civil service administrative files for properly implementing the new compensation system, the authorities will ensure that the administrative files maintained by the Ministry in charge of the Civil Service are interconnected by March 2001 with those of the payroll department at the Ministry of Finance and the human resources departments in individual ministries (structural benchmark).

24. The government intends to take further steps to liberalize the regulatory framework, scale back the role of the state in production- and marketing-related activities, promote private sector initiatives, and develop basic social services. As regards public enterprises, in light of the problems that recently emerged in connection with the 1999 privatization of the public enterprise distributing petroleum products (SONACOP), the government intends to reassess the privatization process. The purpose of this assessment, which will be conducted with World Bank assistance, is to prepare a set of recommendations so as to improve privatization procedures and make the process more rigorous from the bidding stage to the selection stage. On the basis of the recommendations, the government will adopt new privatization procedures by end-February 2001. In the meantime, the government will proceed with the privatization under way and submit the reports of the Technical Commission on Denationalization for World Bank assessment.

25. As regards the privatization of individual public enterprises, the bidding procedure for the telecommunications company will be set in motion once the legal and regulatory frameworks have been adopted. As for the water and electricity distribution company (SBEE), the government requested a supplement of information before deciding on the privatization strategy by January 2001. On this basis, and after revision of the regulatory framework, the government expects to complete the privatization before the end of the third quarter of 2001. Concerning the privatization of SONAPRA, the government has agreed with the World Bank to consider several options. The related work is under way and the government, after consultation with the World Bank, will decide on the method for privatizing SONAPRA so as to complete the necessary transactions before the end of the first half of 2001. In the case of the Autonomous Port of Cotonou (PAC), the government is selecting a consulting firm to assist in choosing, by March 2001, an option for private sector involvement in port management and implementing it by the end of the first quarter of 2002.

26. The government participates in regional initiatives to facilitate the economic integration of Benin and other WAEMU countries into the global economy. For this purpose, the government will ensure the adoption and implementation of all decisions taken at the WAEMU level. As regard public finance, regional directives concerning the fundamental law on public finance, the government chart of accounts, the budget nomenclature, and the finance law are being implemented, whereas the authorities intend to implement the directive regarding the table on central government financial operations (TOFE) by end-June 2001. In the context of the convergence agreement, the government submitted to the WAEMU Commission a multiyear convergence program setting forth medium-term macroeconomic objectives consistent with the union's convergence objectives. At present, Benin is complying with all the core convergence criteria except for that regarding inflation, which is likely to be slightly above the union's target of 3 percent. The authorities are also supporting current efforts to accelerate the integration of west Africa within the framework of the Economic Community of West African States (ECOWAS), of which Benin is a member.

D. Governance

27. To promote good governance, the government has prepared a national anticorruption strategy after broad consultations with the population. The plan, to be adopted by the government in January 2001, highlights measures already implemented to forestall and identify corrupt practices and to crack down on all forms of fraud in the public administration. The measures include the adoption of regulations governing relations between government agencies and citizens, as well as manuals of administrative procedures for use by government departments in order to ensure greater transparency. Also, the authorities intend to implement the WAEMU directives establishing a code for transparent public finance management before the end of 2001. Lastly, the ethics unit attached to the Office of the President will continue its actions to combat fraud.

28. Regarding SONACOP, the regional banking commission concluded that bank loans granted to a private entrepreneur for the purchase of a majority of the company's equity capital might have been repaid through manipulation of SONACOP's bank accounts. In order to clarify the situation, the government has brought legal, action and a legal expert has been appointed to investigate the case. The government intends to take all necessary measures in this matter to safeguard the interests of the state.

E. The Fight Against Poverty and Preparation of the PRSP

29. Since the IMF and the World Bank Executive Boards' discussions on the interim PRSP in July 2000, the government has endeavored to take account of the observations of the two Boards in producing the PRSP. These remarks focused, inter alia, on the need (i) to clarify the process for civil society, donors, and lenders; (ii) to achieve significant progress in the area of good governance in order to enhance the effectiveness of the strategy's implementation; and (iii) to devise a more systematic mechanism for allocating the resources freed up by debt relief for the funding of social programs designed to tackle the root causes of poverty.

30. To attain these objectives, the government decided to simplify the institutional framework supporting the preparation of the PRSP. As a result, only one Technical Committee and a Permanent Secretariat will assist the National Commission for Development and Poverty Alleviation. The Commission has also established a work program for preparing the PRSP, which was discussed with Benin's development partners. The program describes the key components of the strategy, the mechanisms envisaged for the participatory process, and the timetable for the preparation of the document. The latter also includes the terms of reference for the additional work and studies to be carried out, their timetable, and the resources required for that purpose, including external financial and technical assistance. In view of the time that has elapsed since the publication of the interim PRSP, and given the magnitude of the remaining tasks, the government recognizes the substantial effort that must be made if it wants to meet the April 30, 2001 deadline for adoption of the PRSP.

31. The government of Benin believes that the economic reforms and measures described in this memorandum, which complements the memorandum of July 2000, will make possible the attainment of the objectives set forth in the program for 2000/01 (April-March). If necessary, the government will adopt such additional measures as may be required to ensure that the objectives are attained.

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.