COTONOU (Benin): The Executive Board of the International Monetary Fund (IMF) has concluded the Article IV consultation with Benin.

Following a period of strengthening growth in Benin, the global economic crisis halved real gross domestic product (GDP) growth in Benin in 2009. Weaker demand for exports, a decline in cotton prices and lower inflows of foreign direct investments reduced real GDP growth to 2.7 percent in 2009, compared with 5 percent in 2008. The deceleration was aggravated by the decline in cotton production and floods in the south, while non-cotton agriculture production and transportation continued to grow, as domestic demand was supported by the fiscal stimulus. Inflation declined to an average 2.2 percent in 2009, from 8.0 percent in 2008, reflecting a good harvest and the decline in international food and fuel prices. A sharp decline in transit trade and weaker cotton exports widened the current account deficit excluding grants to 10.8 percent of GDP in 2009. These developments accompanied by a decline in foreign direct investments turned the overall balance of payments into a deficit of 1.6 percent in 2009, from a surplus of 1.6 percent the previous year. The real effective exchange rate in December 2009.appreciated by 1.1 percent year–on–year.

Supported by higher liquidity, broad money expanded at a slightly higher rate than nominal GDP. Following the reduction in reserve requirements from 15 to 9 percent in June 2009, banks increased credit to the private sector by 11 percent at end-2009 despite an increase in government borrowing. At the same time, commercial banks' asset quality improved, the ratio of nonperforming loans declining from 6.5 percent in 2008 to 5.7 percent in 2009. Four banks, however, continue to have negative capital and further corrective actions are needed to ensure that all banks comply with prudential regulations.

Against the backdrop of lower customs collections, the authorities sought to provide a strong fiscal stimulus in the first half of 2009, but were forced to tighten policies thereafter due to financing constraints. Revenue collections declined by 1 percent of GDP in 2009, as a consequence of the deceleration of import growth and the increase in exemptions that led to a 7 percent decline in customs receipts. During the first half of the year, expenditures increased strongly as a result of large awards of bonuses to civil servants and a surge in investment spending. Despite efforts to redress the situation during the second half of the year, the overall fiscal deficit (excluding grants) more than doubled from 3.5 percent of GDP in 2008 to 7.3 percent of GDP in 2009. The deficit was financed through additional external donor support, domestic borrowing, and a carryover of expenditure commitments to 2010.

The implementation of structural reforms is moving forward, albeit with some delays. The authorities have recently privatized key public enterprises, including awarding the concession of the container terminal of the Port of Cotonou to a private operator. The sale of a majority stake in Benin Telecom has been launched and is expected to be completed in the third quarter of 2010. The electricity company is being restructured ahead of its privatization scheduled for end-2011. Tax and customs administration and public finance management are being strengthened.

Benin's short-term prospects remain relatively weak. Real GDP growth is expected to grow by 3.2 percent in 2010, based on a moderate fiscal stimulus to support economic activity. Inflation should remain below 3 percent—the convergence criterion set by the West African Economic and Monetary Union. The authorities are committed to pursuing a more prudent fiscal policy in 2010, which will bring about a moderate adjustment in the overall fiscal deficit to 5.9 percent of GDP. The public wage bill will need to be limited in order to leave adequate fiscal space for priority social and investment spending. This will be facilitated by the structural reform agenda, including further measures to strengthen revenue collection and public financial management. Efforts to further improve external competitiveness and the business climate are continuing, including improving infrastructure, strengthening customs administration, and modernizing the public administration; and second generation reforms aimed at improving land registration, property rights and the financial and judiciary systems.

Executive Board Assessment:
Executive Directors noted that Benin's economy has been hit by the global crisis, leading to sharply lower growth and a large overall fiscal deficit in 2009. Directors also pointed to the adverse impact on Benin's economic performance of the large expansion in the public wage bill and uneven progress on structural reforms. Looking ahead, the key challenges are to contain the impact of the crisis in the short run, while reducing fiscal and external imbalances and boosting sustainable growth and poverty reduction over the medium term. Directors encouraged the authorities to build the necessary support among key stakeholders to ensure successful implementation of their reform program, particularly in the critical fiscal and structural areas.

Directors noted that growth is likely to remain weak in 2010. While there may be some scope for fiscal policy to support the incipient recovery, they stressed that a prudent implementation of the 2010 budget in line with the Extended Credit Facility-supported program will be essential. Over the medium term, considerable adjustment is needed to preserve fiscal and debt sustainability. In particular, the growth of the wage bill needs to be contained, with a view to safeguarding fiscal space for priority spending, reducing distortions in the labor market, and improving external competitiveness. Directors encouraged the authorities to resist spending pressures in the run up to the 2011 elections. They underscored that undertaking the long-delayed comprehensive reform of the civil service is critical to increased efficiency in public service delivery and keeping expenditures in line with fiscal sustainability.

Directors were encouraged by the authorities' commitment to improve tax and customs administration and broaden the tax base. They noted the delays in public financial management reforms, and called on the authorities to step up their reform efforts to improve expenditure administration, including the implementation of the new public procurement code.

Directors underscored the need to reach higher sustainable growth by implementing the authorities' structural reform agenda, which will help make progress toward the Millennium Development Goals. Ambitious reforms will also reduce Benin's vulnerability to external shocks, improve the business environment, and reverse the recent erosion of Benin's external competitiveness.

Directors welcomed the progress made in privatizing the cotton and public utility sectors. They encouraged the authorities to proceed with the planned privatization of Benin Telecom and with the implementation of a regulatory framework for the electricity sector. Directors commended the authorities' intention to save the privatization proceeds and use them, after consultation with Fund staff, to finance projects with a high social rate of return. Second generation reforms to improve land registration, property rights, and the financial and judiciary systems will also be essential to improve the business environment.

Directors encouraged the authorities to continue to enhance banking supervision and improve compliance with prudential ratios, while strengthening the application of the regulatory framework of the microfinance sector. They looked forward to the upcoming Financial Sector Assessment Program review, which should help the authorities further strengthen their supervisory framework.