At the request of the government of Benin, a team from the International Monetary Fund (IMF), led by Christine Dieterich, Mission Chief for Benin, visited Cotonou from June 6 to 18, to start discussions with the authorities on a possible three-year economic program supported by the Extended Credit Facility (ECF) arrangement.[1]

Ms. Dieterich issued the following statement at the end of the mission:

“The government found a difficult macroeconomic and treasury situation upon assuming office in April 2016. In particular, while fiscal policy was generally sound in earlier years, the fiscal deficit increased to around 8.5 percent of GDP in 2015, with continued spending overruns in the first quarter of 2016. This widening of the fiscal deficit was financed by large bond issuances in the regional financial market, adding significantly to future debt service. Worse, during the last quarter of 2015 and first of 2016, contracts were signed for off-budget projects close to 24 percent of GDP. These loans are expensive and have short maturities. Due to incorrect classification of these arrangements as Private Public Partnerships (PPP), standard procurement procedures were circumvented, raising severe concerns about their governance and quality.

“Despite this expansionary fiscal policy, 2015 growth is estimated to have decelerated to around 5 percent, as the slowdown in Nigeria - Benin’s main trading partner - kicked in. For 2016, with Nigerian growth decreasing further, Benin’s growth is expected to be in the range of 4.5 to 5 percent. Furthermore, poverty has worsened since 2011 compared to the household survey of 2015. Inflation has remained subdued despite a recent rise on account of higher food and fuel prices.

“The government is determined to reverse the deterioration in the fiscal deficit and debt. The 2016 budget supplement is a decisive step towards bringing the fiscal situation back under control. While welcoming this impressive budgetary correction, the team cautioned that careful cash management and commitment control will be required for the rest of the year in order to successfully implement it.

“The government was able to suspend the majority (20 percent of GDP) of the in-transparent off-budget projects, as their implementation had not yet started. An evaluation of these projects and their financing is under way, as this level of additional short-term debt would severely derail fiscal sustainability, and put at risk macroeconomic stability over the next years.

“Looking ahead, the government is in the process of preparing a detailed medium-term investment plan. In view of the debt-service burden and vulnerabilities in the economy, in particular, a narrow and volatile export base, the challenge will be to find the right balance between preserving debt sustainability, and addressing investment needs aimed at removing growth bottlenecks.

“Being well aware of this challenge, the government initiated reforms to improve governance and the regulatory framework, in particular for energy, to facilitate private sector investment. This will not only reduce the investment burden on the budget, but also facilitate the private-sector led growth necessary to create employment for Benin’s young and growing population. These efforts include reforms to improve the government’s spending efficiency, in particular, by addressing severe weaknesses in audit, and to mobilize additional revenues. In addition, developing the appropriate regulatory framework for PPP will be necessary to safeguard against future risks for the budget. The government has also started welcome attempts to improve the governance of state-owned enterprises, in support of an ambitious privatization agenda.

“The team met with the President of the Republic, Minister of State, Secretary General in the Presidency, Minister of State charged with Planning and Development, Minister of Economy and Finance, National Director of the BCEAO, and other government and central bank officials, as well as representatives from the financial sector, and international development partners.

“The team wishes to thank the authorities, as well as all other interlocutors, for their hospitality, the excellent collaboration, and the high-quality discussions. A second mission is planned for late summer, with the objective of completing negotiations on an ECF program supported by the IMF.”

[1] The ECF is a concessional lending instrument for low-income countries with a three-year government economic program agreed with the IMF.