The IMF has approved a three-year Extended Credit Facility for Benin

The Executive Board of the International Monetary Fund (IMF) has approved a three-year arrangement under the Extended Credit Facility (ECF) for Benin for an amount of $151.03 million, or 90 percent of Benin’s quota to support the country’s economic and financial reform program.

This new program aims to address Benin’s protracted balance of payments needs, and alleviate the impediments to inclusive growth, and poverty reduction by creating fiscal space for infrastructure investment and priority social spending.

It is also aimed at helping to catalyze official and private financing and build resilience to future economic shocks. The Executive Board’s decision will enable an immediate disbursement of SDR 15.917 million (about US$ 21.58 million). The remaining amounts will be phased over the duration of the program, subject to semi-annual reviews.

At the conclusion of the Board meeting, Mr. Tao Zhang, Deputy Managing Director and Acting Chair, made the following statement:

“Despite negative spillovers from neighboring countries, Benin’s economy rebounded in 2016 and its outlook is favorable. Inflation remained subdued and the fiscal deficit narrowed, reflecting the authorities’ efforts to contain expenditure in the face of continued weak revenue performance. Nonetheless, reducing poverty and infrastructure gaps will take time. Against this backdrop, the authorities’ new economic program under the Extended Credit Facility focuses on raising living standards through a structural transformation of the economy while preserving macroeconomic stability. The program is expected to catalyze official and private financing and is consistent with achieving the West African Economic and Monetary Union convergence criteria by 2019.

“The authorities’ goal is to strengthen domestic revenue mobilization and improve the quality of spending to create fiscal space for infrastructure and priority social spending while preserving debt sustainability. To this end, implementing the reforms underway to modernize the Tax and Customs Administrations will be critical, including enhancing their efficiency and strengthening their coordination to ensure a durable improvement in revenue collection.

“The authorities’ measures to enhance financial intermediation—including operationalizing the credit bureau—and their efforts to promote financial inclusion will help sustain healthy credit expansion and support private sector-led economic growth. Implementing the new harmonized regional resolution framework and strengthening the supervisory body for microfinance institutions will be critical to strengthen financial sector supervision.

Further improvements to the business environment are essential, particularly by removing bottlenecks to private-sector development and levelling the playing field for all investors. The authorities’ continued efforts to fight corruption and improve accountability in public administration and competitive procurement for government contracts will support private investment. In addition, improving the quality, coverage, and timeliness of economic statistics will help achieve better policy making.

Despite difficult domestic and external environments, growth in 2016 is estimated to have reached 4 percent on the back of strong agriculture production—after 2.1 percent growth in 2015. Inflation remained subdued at less than 1 percent in 2015 and turned negative in 2016. The fiscal deficit (including grants) narrowed to 6.2 percent of GDP in 2016 from 8 percent of GDP a year earlier, reflecting the authorities’ effort to contain expenditure in the face of continued weak revenue performance.

For 2017 and the medium term, growth is projected to rebound, mainly thanks to agriculture and a significant increase in public investment. Inflation would remain below the West African Economic and Monetary Union’s (WAEMU) threshold of 3 percent and the fiscal deficit also converge to below the WEAMU’s criterion of 3 percent of GDP by 2019, after peaking at 7.9 percent in 2017.

The external current account deficit would remain high, reflecting investment-related imports, but the overall balance of payment position would generate small surpluses on the financial account position.

The new program aims to create fiscal space by stepping up domestic revenue mobilization and enhancing the efficiency of government spending; increasing gradually absorptive capacity to scale up investment; strengthening public debt management, and promoting private sector investment by strengthening institutions and improving the business environment while preserving debt sustainability.

More importantly, it will aim to ensure that scaled-up public investment is consistent with debt sustainability. This is particularly important for Benin, as recent borrowing has significantly reduced available fiscal space, and potential risks from growth shortfalls, fiscal slippages, and contingent liabilities from state-owned enterprises have materialized.

The overarching macroeconomic policy goal is to limit the present value of non-financial public sector debt to no more than 50 percent of GDP. To this end, current indicative projections for the 2018 and 2019 budgets will be reassessed in future program reviews against debt developments as assessed through the debt sustainability analysis.