Document of the World Bank
FOR OFFICIAL USE ONLY
Public Disclosure Authorized Report No. 57565-BJ
INTERNATIONAL DEVELOPMENT ASSOCIATION
SUPPLEMENTAL FINANCING DOCUMENT
FOR A
PROPOSED SUPPLEMENTAL FINANCING Public Disclosure Authorized
IN THE AMOUNT OF SDR 14 MILLION
(EQUIVALENT TO US$ 22 MILLION)
TO THE
REPUBLIC OF BENIN
FOR THE
SIXTH POVERTY REDUCTION SUPPORT CREDIT Public Disclosure Authorized (March 21, 2011)
Poverty Reduction and Economic Management 4 Country Department AFCF2
Public Disclosure Authorized Africa Region
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
BENIN - GOVERNMENT FISCAL YEAR January 1 – December 31
CURRENCY EQUIVALENTS (Exchange Rate Effective as of December 2, 2010)
Currency Unit = CFA Franc (CFAF) US$1.00 = CFAF500
WEIGHTS AND MEASURES Metric System
ABBREVIATIONS AND ACRONYMS
CARE Cooperative for Assistance and Relief Everywhere (Care International) CGC Cellule de Gestion de Crises CFAF CFA Franc ECF Extended Credit Facility GDP Gross Domestic Product GFDRR Global Fund for Disaster Risk Management GFRP Global Food Response Program IDA International Development Association IFRC International Federation of the Red Cross IMF International Monetary Fund NGO Non Governmental Organization ONASA Office Nationale d’Appui à la Sécurité Alimentaire (Food Security Support Office) PDNA Post-Disaster Needs Assessment PER Public Expenditure Survey PRSC Poverty Reduction Support Credit PSIA Poverty and Social Impact Assessment SBEE Société Béninoise d’Énergie et d’Électricité (Energy and Electricity Company of Benin) SCO Société de Ciments d’Onigbolo (Onigbolo Cement Company) SCRP Stratégie de Croissance pour la Réduction de la Pauvreté (Poverty Reduction Strategy Paper) SDR Special Drawing Right SONAPRA Société Nationale pour la Promotion Agricole (National Cotton Company) UN United Nations UNDP United Nations Development Program UNHCR United Nations High Commission for Refugees UNICEF United Nations Children‟s Fund WASH Water, Sanitation and Hygeine WFP World Food Program
Vice President : Obiageli Ezekwesili (AFRVP) Country Director : Madani M. Tall (AFCF2) Sector Director Marcelo Guigale (AFTPM) Sector Manager : Miria Pigato (AFTP4) Task Team Leader : Cal MacWilliam (AFTP4)
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SUPPLEMENTAL FINANCING FOR THE SIXTH POVERTY REDUCTION SUPPORT CREDIT
TABLE OF CONTENTS
1. BACKGROUND ...... 1 2. THE IMPACT OF THE CRISIS ...... 3 3. THE GOVERNMENT‟S RESPONSE TO THE CRISIS ...... 5 4. BANK‟S RESPONSE AND STRATEGY ...... 7 5. THE REFORM PROGRAM SUPPORTED THROUGH THE SIXTH POVERTY REDUCTION SUPPORT CREDIT: AN UPDATE ...... 8 A. Economic Performance Since the Approval of PRSC6...... 8 B. Reform Progress Since the Approval of PRSC6 ...... 11 C. Poverty and Social Impact Analysis ...... 13 D. Environmental Issues ...... 14 6. RATIONALE FOR PROPOSED SUPPLEMENTAL FINANCING ...... 14 7. IMPLEMENTATION ARRANGEMENTS ...... 16 A. Terms of the Supplemental Financing ...... 16 B. Funds Flow and Auditing Requirements for the Supplemental Financing ...... 17 8. BENEFITS AND RISKS ...... 18 A. Benefits ...... 18 B. Risks ...... 18 List of Annexes
Annex 1: IMF Relations Note ...... 20 Annex 2: Progress on PRSC 4-6 Monitoring Indicators ...... 21 Annex 3: Country at a Glance ...... 22
List of Figures
Figure 1: Affected Areas ...... 2
List of Tables
Table 1: Key Economic Indicators, 2007-2013 ...... 10
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REPUBLIC OF BENIN
SUPPLEMENTAL FINANCING FOR THE SIXTH POVERTY REDUCTION SUPPORT CREDIT
Grant and Program Summary
Recipient: Republic of Benin Implementing Agency: Ministry of Economy and Finance Operation Type: Supplemental Financing Amount: SDR 14 million (US$ 22 million equivalent) Terms: Grant on standard IDA terms.
Main Policy Areas: As in PRSC-6, to support implementation of the Government's reform agenda in the following areas: (i) improving the regulatory framework and policy environment for private investment, including support for completion of cotton sector and infrastructure reforms; (ii) pursuing progress towards the MDGs by improving access to quality basic services and ensuring greater efficiency of public expenditures on human capital formation; and (iii) promoting better governance, notably through public financial management reforms. 2010 Key Outcome Indicators: • Private sector investment share in GDP 15.8% • Access to electricity 30% • Cotton production Kg/Ha 1,311 • Access to safe water for rural population 53% • Visit rate to health centers by children under 5 85% • Visit rate to health centers by pregnant women 88% • Primary education completion rate (girls) 67% (56%) • Payment delay for public expenditures <24 days • Public contract bidding process time 5 months
Program Development The PRSC series is an integral part of the Bank Group's Country Objectives and Assistance Strategy (CAS) for 2009-2012. The proposed Contribution to CAS: Supplemental Financing builds on the foundation of progress achieved during the previous PRSCs and to date with PRSC-6. The overall objective is to support implementation of Benin's poverty reduction strategy. Specifically, it supports: (i) modernizing the regulatory framework and policy environment for private investment and infrastructure; (ii) increasing progress toward the MDGs by raising the quality, efficiency and access for basic social services; and (iii) promoting better governance through public financial management reforms.
iii
Risks and Risk Mitigation: The risks facing this operation primarily include: (i) the risk of further external shocks, including future flood incidents; and (ii) political risk in light of upcoming elections. These risks are mitigated by concurrent Bank and donor partner investments in providing medium term support to Benin to prevent and mitigate the impact of future flood-related damage. In addition close Bank/Fund and donor coordination and collaboration around policy dialogue, together with close cooperation in planning and implementing flood relief measures will limit political risk.
Operation ID: P125114
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REPUBLIC OF BENIN
SUPPLEMENTAL FINANCING FOR THE SIXTH POVERTY REDUCTION SUPPORT CREDIT
1. BACKGROUND
1.1. Several countries in Central and West Africa experienced devastating floods over the course of the 2010 rainy season. Nearly 2 million people were affected and 377 deaths were recorded. The floods led to significant losses in terms of economic and social infrastructure, such as roads, schools and health clinics, serious losses in housing, and large agricultural losses, both to crops and livestock. Benin was the country most severely affected by floods in West Africa.
1.2. Torrential rainfall combined with record-high water levels on all the major rivers in Benin (Niger, Ouémé, Couffo and Mono) caused severe flooding throughout the country over late September, throughout October and into November, with flood waters remaining in some areas into 2011. For example, whereas 136 mm of rain fell from January to September 2009, 128 mm was recorded on one day in September 2010 and the September monthly total was 344mm. Damage to dwellings, livestock, crops, and social and economic infrastructure was extensive. In addition to immediate relief operations provided by several UN and international agencies, including civil society groups, extensive reconstruction efforts will need to follow in the medium and long term.
1.3. The President of the Republic of Benin sent a formal request for Bank assistance on September 30, 2010. During the Annual meetings on October 10, the Minister of State for Planning and the Minister of Finance met with the Vice-President for the Africa Region and the Country Director, and reiterated the request for Bank assistance.
1.4. In response, a multi-sectoral mission was immediately dispatched to Benin. The program included meetings with the National Crisis Committee, including the Minister of the Interior and the Minister of Decentralization. The mission was closely coordinated with the UN system and met with NGOs involved in relief efforts. Site visits included affected areas of Cotonou (by boat) and a helicopter fly-over of the southern third of the country. The Global Fund for Disaster Risk Management (GFDRR) provided $150,000 for a Post-Disaster Needs Assessment (PDNA). While many PDNAs have been exhaustive and time-consuming, determining inventories of needs in all sectors, Benin‟s PDNA focused on a limited number of key sectors where the Bank had a clear comparative advantage. In addition, the PDNA included an analysis of cross-sectoral issues which highlighted other strategic areas for intervention. Specifically, the PDNA mission: (i) provided an assessment of damage and losses; (ii) created an inventory of requirements in agriculture and urban water/sanitation sectors; (iii) defined needed complementary studies; and (iv) identified priority areas of intervention for the Government and donor community.
1 Figure 1: Affected Areas
2 2. THE IMPACT OF THE CRISIS
2.1. Flooding is a recurrent phenomenon in Benin, but in 2010 the high rainfall and the exceptionally high water levels experienced almost simultaneously on the four major rivers in the country resulted in widespread inundation in 55 of 77 communes. According to a report from the Water Department (Direction Générale de l’Eau), the water level recorded in August on the Ouémé was the highest since 1951, which places the current situation as a 50 year event.
2.2. It is difficult to have completely accurate information on the damage, since many rural communities remained inaccessible for extended periods. Data released by the Crisis Management Unit (Cellule de Gestion des Crises), reproduced in UNOCHA SitReps and validated and amended by the PDNA indicates:
680,000 people affected 46 deaths 150,000 homeless 55,575 houses destroyed 455 destroyed/flooded schools 92 health centers flooded/inaccessible 201,600 hectares of crops ruined 81,000 head of livestock dead
2.3. The PDNA undertaken by the Bank/UNDP in collaboration with other partners, including various UN institutions, was not a fully comprehensive PDNA. As such, it was not in a position to provide precise and comprehensive estimates of total flood damages and losses across all sectors and all affected regions. However, in southern Benin the Bank mission observed how the water had partially or totally submerged thousands of homes and public buildings, as well as extensive sections of roads and vast portions of agricultural fields. Many families continued to live in their dwellings despite high water levels, some preferring the attics of their homes, and others sleeping in boats. It is estimated that a significant part of the affected population was hosted by other families or in public buildings. The school year was just beginning when the flooding started, but schools became full of displaced families and this delayed the start of the school year. As of mid-January some schools had yet to reopen.
2.4. Accounts from relief teams who returned from the center and the north of the country indicated that the same situation was present there, as documented by extensive photo and film material. There was a high threat of diffusion of water-borne diseases among the displaced population and approximately 1,000 cases of cholera were reported. This situation was exacerbated by the contamination resulting from inundated latrines (there is no sewage treatment in Cotonou), the contents of which ended up in the flooded streets.
2.5. Total damages and losses estimated in the PDNA exercise totaled over CFAF 100 billion (US$ 200 million), with some CFAF 18 billion of the losses and damages being in
3 agriculture, nearly CFAF 15 billion in housing, and over CFAF 33 billion to other infrastructure. As a result, the IMF, in consultation with the Bank, has revised downward its estimate of 2010 GDP growth from 2.8 percent to 2.5 percent.
2.6. With the losses incurred in agriculture and to rural livelihoods, food insecurity could potentially become a major issue in the coming months. In this sense, the flooding could not have come at a worse time, since the harvest period was only weeks away. The food reserves from the Government‟s food security stocks (ONASA) are meant for the dry period (January to June), but will soon be drawn down at the expense of potential future needs. Furthermore, approximately 12,000 mt of food stocks were lost due to flooded storage facilities. Usage of food stocks in response to flood needs and replacement of lost stocks will require the restocking of national food stocks largely via imports.
2.7. As the floodwaters receded, the emergence of increased rates of infectious diseases, particularly cholera and malaria became a concern. The flooding cut many communities off from health centers, creating a situation that lent itself to a potential outbreak of water-borne disease. An early government and interagency assessment found that 92 health centers across the country were flooded; in many areas clinics were totally inaccessible because of floodwater. Those health centers that remained on dry ground became inhabited by people whose homes had crumbled in the floods and this further compromised the delivery of health services. As a result, health centers that should have been available to help people suffering from diarrhea and infections linked to the water and sanitation situation were unable to properly function.
2.8. The greatest needs for flooded communities were water purification tablets, mosquito nets, malaria medicine and antibiotics. Malaria was a considerable concern, given the pervasiveness of standing water throughout the territory. Cholera was present even before the worst of the flooding, with the Cotonou area experiencing over half of the reported cases and seven deaths. In addition, diarrheal infections, acute respiratory problems and skin infections were widely experienced. It is difficult to put a monetary value on the economic impact of this resultant health crisis on the income of affected households, but it should be considered significant.
2.9. On the macro and fiscal front, IDA, together with the IMF, has assessed the macro/budgetary impact and the implications of the flooding on the 2010 and 2011 budget. As noted, preliminary estimates indicate an economic loss in excess of US$36 million from lost agricultural production alone. The Government has announced that unanticipated budget commitments as a result of the flood will total CFAF5 billion (US$10 million) in 2010. Unanticipated expenditures for 2011 are more difficult to estimate, but will undoubtedly exceed that figure significantly. However, given the difficult fiscal environment, the Government has not committed to an additional expenditure amount directly related to the floods for 2011 and has instead adopted an approach of requesting donor assistance to help fund any additional expenditure. The Government has passed a conservative 2011 budget in-line with their agreed IMF program and it does not reflect additional flood related expenditures. As such, the impact on the Government‟s budget will depend to a considerable extent on the scale of the donor and partner response.
4 3. THE GOVERNMENT’S RESPONSE TO THE CRISIS
3.1. The Government of Benin addressed the flood crisis at the highest political level. In a letter to President Zoellick dated September 30, 2010, the President of the Republic, Dr. Boni Yayi, requested the support of the World Bank to help the affected population. This request was reiterated at the Annual Meetings in Washington by the Benin Delegation headed by Minister of State, Pascal Koupaki and the Minister of Finance, Idriss Daouda.
3.2. On October 1 the Government declared Benin “pays sinistré” (a disaster-striken country) and appealed for aid from the international community. The Government‟s Crisis Management Unit (Cellule de Gestion de Crises, CGC) is chaired at the political level by the Minister of Interior and at the technical level by the Director of the Civil Protection Department. The UNDP acts as Secretariat for the CGC, and coordinates the network of UN agencies and NGOs engaged in the relief operation. The technical aspects of the rescue/relief efforts appear to have been effectively delegated to the UN system. The NGO Caritas was in the lead role in terms of field distribution and coordination.
3.3. Overall, there was good collaboration between the various players, but the unexpected magnitude of the crisis was such that in the first weeks the resources deployed for the response were not in line with the rapidly emerging needs. After some delay however, the system reacted more vigorously and swiftly and the humanitarian situation was brought relatively under control. The Government itself has little capacity to effectively and comprehensively respond to the scale of needs and has, to a considerable degree, been obliged to rely upon international NGOs and the donor community.
3.4. Nonetheless, the UNDP, in a meeting with Bank and IMF officials in mid-January 2011, described the Government response a being well-managed, well-coordinated with the UN system and involved NGOs and transparent in their engagements with the international community and affected communities. The Government apparently reacted quickly in making stocks of medicines, food and other supplies available to those affected by opening up their stores. This led to lower losses than initially anticipated.
3.5. In terms of the impact of the crisis on the Government‟s 2010 budget, the Government has announced additional spending requirements in the amount of CFAF 5 billion (US$ 10 million). These expenditures are broken down as follows: support to health centers – CFAF 1.2 billion; rehabilitation of schools – CFAF 800 million; provision of cereals and seeds – CFAF 800 million; direct assistance to those most affected – CFAF 700 million; assistance to farming families that lost crops and livestock – CFAF 500 million; rehabilitation of local community access roads – CFAF 500 million; humanitarian aid – CFAF 450 million; and, other needs CFAF 50 million.
3.6. The estimates for 2010 noted above represent immediate and urgent expenditure requirements required on the part of the Government. Medium and longer term rehabilitation, reconstruction and related necessary social expenditures will continue into 2011 in amounts probably well in excess of those noted for 2010. However, as noted the Government will largely rely on donor responses to meet 2011 needs.
5 International Humanitarian Response 3.7. The UN launched an international humanitarian appeal in the amount of US$ 46,847,399. The appeal noted that an estimated 1 million people in Benin were already food insecure and more than one-third of children under five were chronically malnourished before the flooding. In addition to food, immediate needs noted included clean drinking water, hygiene promotion and adequate shelter. Mosquito nets were also urgently needed to curb the spread of malaria. The Emergency Humanitarian Action Plan targeted 250,000 people with food assistance and agricultural support and 680,000 people with health care and improved access to safe water, sanitation and hygiene. The Central Emergency Response Fund (CERF), a tool created by the United Nations to pre-position funding for humanitarian action, approved US$ 4,390,369 to kick start the emergency response.
3.8. The response to the UN appeal resulted in officially US$ 6.9 million being raised for direct use by the UN and its partners in the appeal. However, some donors provided direct in in- kind assistance related to the appeal and the UNDP estimates that the appeal reached 25% or approximately US$ 11 million. The appeal was subsequently revised down to US$ 21 million and now covers the recovery phase. The following presents a sample, though far from exhaustive, of some of the interventions.
3.9. The Benin Red Cross, with support from the IFRC (US$ 200,000) distributed shelter and water, sanitation and hygiene (WASH) kits. UNICEF supported therapeutic feeding at hospitals and therapeutic centers in several communes. It also established WASH programs and provided water purification tablets and hygiene material to 150,000 people. UNHCR delivered two DC10 airlifts of 3,000 family tents from Copenhagen. Some 100 tents were already available in the country and the UNHCR, in collaboration with its partners on the ground, distributed these tents in the Departments of Alibori, Borgou, Colline, Mono and Zou.
3.10. The World Food Program‟s (WFP) goal was to reach 385,000 people and 13,000 host families with food aid over a two- month period. Very early in the effort distributions had already reached 200,000 people, including 27,000 children, and these had received food baskets consisting of corn, oil, salt, and beans. Children also received a supplementary ration of milk and a ready-to-eat high protein peanut paste.
3.11. CARE worked in the communes of Aguégué, Dangbo, Adjohoun, Bonou, Ouinhi and Zangnanado, where they already had a strong presence, with efforts focused on reducing the risk of waterborne diseases and minimizing the impact of a potential cholera outbreak. CARE also distributed food, water purification tablets, soap, and mosquito nets. CARE and Caritas also distributed food to approximately 2,450 people living with host families in Zangnanado, one of the worst affected areas of the country.
3.12. To support the Ministry of Health, the World Health Organization (WHO) provided health kits for treating 1,000 cholera cases over a period of three months and Doctors without Borders (Médicines Sans Frontières) provided logistical support for the treatment of cholera cases in Cotonou.
6 4. BANK’S RESPONSE AND STRATEGY
4.1. The Bank responded quickly to Benin‟s request for assistance. As noted above, an initial assessment was undertaken to confirm the general scale of the disaster and a PDNA was completed to obtain more detail and better define the exact needs and financial implications. The Bank worked in close cooperation with the broader donor community and the Government.
4.2. In addition to this proposed Supplemental Financing in the amount of $22 million equivalent, the Bank is also restructuring or refocusing several ongoing and planned investment projects in response to the floods. In particular, given the likelihood of a food crisis, additional GFRP resources will be channeled through the new Agricultural Diversification operation under preparation by AFTAR, which could be used to target food security issues (planned Board date: Q3 FY11; lending volume US$15 million). Urban environment problems exposed by the current flooding (drainage, water treatment, solid waste management) will be addressed by scaling up the new AFTEN operation by an additional US$ 20 million (planned Board date: Q3 FY11; lending volume: US$50 million), which may also need to be further tailored to meet current demands. Schools, inundated or occupied by displaced people, may be repaired or rebuilt using resources from the ongoing education project, although the execution of this project has been slow to date. Other modifications to ongoing or planned projects may also be considered and will be further determined following a better understanding of the situation and the potential areas for Bank engagement, particularly those rehabilitation and reconstruction needs that will extend more into the medium-term.
4.3. As such, this proposed Supplemental Financing is complementary to several investment projects that will directly address specific needs in several sectors, including agriculture, urban infrastructure and education. These additional investments will address medium term needs to repair damaged infrastructure, address ongoing and medium term food needs of affected populations and assist in disaster preparedness and mitigation through not only assisting the authorities in their own efforts, but by significantly physically improving some of the hardest hit urban environments so that the impact of future occurrences in these locales are mitigated and minimized. Together these various operations constitute a coordinated and coherent package of support to Benin.
4.4. The Supplemental Financing proposed here will provide direct budget support to the Government of Benin in order to augment their resources as a result of the increased budgetary demands arising from the flood disaster.1 Given that the Government is ultimately responsible for financing and coordinating an appropriate and effective response to the unanticipated needs of its population, budget support is seen as complementary to the other Bank investments and is preferable to a stand-alone operation operating outside of Government channels or independent of the Government‟s budget. Nonetheless, coordination with international relief efforts and the other Bank interventions will be of paramount importance.
1 This Supplemental Financing, of course, will not finance pre-identified expenditures directly as would an investment lending operation. It will provide general financing for the Recipient‟s budget, to be used according to its budgetary processes and priorities.
7 4.5. The Supplemental Financing will allow the Government to flexibly allocate resources for remaining relief efforts where the donor response has not been fully adequate, but more importantly, this will provide resources for the subsequent recovery and rehabilitation phase. Needs in this regard are disbursed across several ministries, including most notably, agriculture, transport, education and health. While the Government is counting primarily on a donor response to assist with these recovery and rehabilitation efforts, several ministries will nonetheless, be required to fund much of this effort from internal resources. Again, this resource allocation will have to be undertaken in close coordination and collaboration with ongoing efforts and resources provided by the UN System, NGOs and international donors.
4.6. To facilitate quick disbursement and remain compliant with BP/OP 8.60 no additional conditionality has been considered for the use of these resources. However, the Government is expected to consult with the relevant players on the priority allocations, and to report in a prompt and transparent manner on the decisions taken on this matter and on the results achieved. The integral role of the donor community, including the Bank, and the close relationship with the authorities and sectoral ministries through sectoral working groups, including those sectors noted above where recovery and rehabilitation efforts will be focused, will facilitate an effective dialogue between the Government and the donor community in the planning, monitoring and tracking of these resources. Ex-post assessment of the use of funds provided by this Supplemental Financing will be undertaken to measure the extent to which the funds supported and leveraged relief, recovery and rehabilitation efforts.
5. THE REFORM PROGRAM SUPPORTED THROUGH THE SIXTH POVERTY REDUCTION SUPPORT CREDIT: AN UPDATE
A. ECONOMIC PERFORMANCE SINCE THE APPROVAL OF PRSC6 5.1. The impact of the floods comes on the heels of other recent significant negative economic shocks. After several recent years of steadily improving GDP growth (rising from 2.9 percent in 2005 to 5.0 percent in 2008) growth slowed to 2.7 percent in 2009. Economic growth projections for 2010 were revised down to 2.8 percent, from 3.0 percent at the time of PRSC-6 approval, and have been revised further to 2.5 percent following full consideration of the impact of the floods. The weaker performance in 2009 and 2010, excluding the flood impact, is largely the result of: weaker global demand for exports, particularly in 2009; a decrease in re-export trade, primarily to Nigeria; lower foreign direct investment; lower public investment; a domestic financial scandal; and, lower cotton production. The global economic crisis has unambiguously resulted in a significant economic slowdown and a widening of the fiscal and current account deficits. As such, recent economic developments in Benin over the past two years, as elsewhere, are largely a result of the impact of a series of crises and resultant responses.
5.2. The economy remains heavily dependent on cotton and transit/re-export trade, both of which suffer from serious vulnerabilities. Cotton is Benin‟s largest single official export, representing typically 25 – 40 percent of annual exports. Regional re-export and transit trade is the other mainstay of the economy (much of it informal), accounting for 20 percent of GDP and 25 percent of government revenues. The recent global economic crisis highlighted Benin‟s vulnerability in this regard, as trade through Benin destined for and coming from neighboring
8 countries slowed. This is estimated to have reduced GDP growth in Benin by approximately 2 percentage points and significantly affected fiscal revenues. The Nigerian response to the food, fuel and global economic crises in 2008/09 had the greatest effect, as transit/re-export trade in Benin is largely based on arbitrage opportunities between Benin and Nigeria. Reduction in tariffs and the removal of quotas and bans on certain imported goods in Nigeria reduced these arbitrage opportunities and affected transit and re-export trade.
5.3. The failure to rebound more strongly in 2010 as expected at the time of PRSC-6 approval is due to the prolonged weakness in global markets and the necessary withdrawal of the fiscal stimulus in order to address mounting revenue and budgetary pressures. This recent deceleration of growth, largely due to difficulties in the cotton and re-export sectors, highlights the urgency of deepening reforms to diversify the economy and expand the productive base, something the floods may have made more difficult given the impact on rural infrastructure and livelihoods.
5.4. Furthermore, Benin suffered from a Ponzi scheme scandal which rocked the microfinance sector in mid-2010 and resulted in the loss of some CFAF 160 billion (US$320 million) by approximately 150,000 depositors. This represents an average loss of some US$2,000 equivalent per depositor. Despite the scale of the fraud, the crisis was relatively well- contained. The broader banking system does not appear to be affected and the traditional microfinance institutions also seem to have suffered little adverse impact. The effect of the crisis on households, individuals, firms and their consumption, savings and investment decisions are presently difficult to assess. The resultant direct drop in savings suffered by the losses incurred may affect consumption and investment and may at least partially explain reduced domestic demand, but the impact remains difficult to quantify. The Government is adamant that public funds will not be used to reimburse depositors, though remaining assets in the subject institutions are minimal and recovery rates per dollar of deposits will be very low. The Government would like to ensure the protection of poorer depositors to the extent possible, providing them with preferential access to any recovered and remaining assets. As of mid-January 2010, CFAF 6 billion had been reimbursed to 62,000 of the smallest depositors.
9 Table 1: Key Economic Indicators, 2007-2013
------Actual------Projections------2007 2008 2009 2010 2011 2012 2013 Population growth (%) 3.2 3.2 3.2 3.2 3.2 3.2 3.2 Real GDP Growth (%) 4.6 5.0 2.7 2.5 3.4 4.3 4.8 Real GDP per capita growth (%) 1.4 1.8 -0.5 -0.7 0.2 1.1 1.6 Inflation (CPI, average, %) 1.3 8.0 2.2 2.1 2.8 2.8 2.8 Gross investment (% of GDP) 21.4 20.0 23.3 18.7 20.3 20.2 21.1 Gross private investment (% of GDP) 13.0 14.2 13.6 13.3 13.6 14.1 14.9 Gross domestic savings (% of GDP) 5.0 6.7 10.0 7.1 9.4 9.6 10.8 Revenue (% of GDP) 20.6 19.4 18.4 18.4 18.7 19.1 19.6 Expenditures and net lending (% of GDP) 23.4 22.9 25.8 21.4 23.0 22.8 22.6 Wage bill (% of GDP) 5.4 6.1 7.2 7.3 7.8 7.5 7.4 Overall fiscal balance (% of GDP) -2.8 -3.5 -7.4 -3.0 -4.3 -3.7 -3.1 Overall balance of payments (% of GDP) 3.2 1.6 -1.6 -0.5 -0.2 -0.5 -0.1 Current account (excl. grants, % of GDP) -10.8 -9.0 -11.1 -7.9 -7.2 -7.0 -6.8 Export growth (US$ terms, %) 36.7 20.0 20.3 4.3 3.9 3.0 6.7 Share of cotton exports (% of exports) 27.4 27.2 19.1 22.2 24.3 24.8 23.4 External Debt to GDP (%) 11.7 16.7 16.3 19.4 18.8 18.4 18.1 Debt to service export ratio (%) 9.6 3.2 4.1 5.1 6.2 5.7 5.4 Source: Beninese authorities, IMF and Bank staff estimates and projections.
5.5. Given this series of shocks, and after many years of maintaining positive basic primary fiscal balances, the fiscal position turned negative in 2009. The overall fiscal deficit, excluding grants, was -2.8 percent of GDP in 2007, -3.5 percent in 2008, -7.4 percent in 2009 and -3.0 percent in 2010. In 2009 the authorities responded to the global economic crisis by implementing a strong fiscal stimulus in the first half of 2009, which needed to be reversed in the second half owing to a lack of financing. The stimulus resulted in a large increase in public expenditure, even as revenue declined under weak economic conditions. Despite a partial reversal in the second half of the year, fiscal policy was looser in 2009 than 2008 and the deficit widened. Total revenue declined by 1 percentage point of GDP, as the deceleration in import growth and an increase in exemptions led to a 7 percent nominal decline in customs receipts. Large bonuses to civil servants expanded the wage bill by 24 percent in nominal terms. Domestic capital spending doubled in nominal terms from 2008 to 2009 as a result of the surge in investment in the first half of the year, including the carryover of 3.8 percent of GDP in unfunded expenditures from 2008. As a result, the overall fiscal deficit more than doubled to 7.4 percent in 2009. This fiscal stimulus produced strains on the Treasury, which were addressed in the second half of the year by strengthening tax collection, freezing expenditure commitments and new bonuses to civil servants, and enforcing more rigorous controls on expenditure execution. About two-thirds of the deficit was financed from external grants and concessional loans. Additional financing was mobilized on the regional market and through one-off measures, and about 1.6 percent of GDP in expenditure commitments was carried over to 2010.
5.6. Shortly after approval of the PRSC-6 in April 2010, the Government agreed to a three-year Extended Credit Facility (ECF) arrangement with the IMF, which was approved by the IMF Board in June 2010. While the Government remains committed to the program, they have missed a quantitative performance criterion (net domestic financing) and have had to reduce program ambition on several indicative targets going forward. The difficulties in meeting Fund targets arose as government revenues significantly under-performed program targets over
10 the first half of 2010 and did not rebound sufficiently in the second half of the year to meet end- year targets. In response to the lower than expected revenues, the Government reduced spending, both recurrent expenditures and investment. This reduction in spending, while representing a significant effort on the part of government, did not fully offset the fall in revenues and as a result the performance criterion on net domestic financing for end-June was missed. The target for the basic primary balance however was met. Given the lower than expected revenues, the Budget Directorate, in consultation with sectoral ministries, has identified priority line items that can be tracked and monitored quarterly over 2011 in order to protect priority expenditures. These include priority items in the areas of health, water, environment, infrastructure, agriculture, justice and primary education. Expenditures on these identified priority line items will be monitored by the Government, but also by the IMF and the Bank, in order to ensure that corrective actions are taken should they be subject to further expenditure reductions.
5.7. The latest update of the joint Bank-Fund debt sustainability analysis (DSA – May 2010) confirms that Benin faces a moderate risk of debt distress. The analysis highlights the need to address fiscal slippages in 2009 and 2010 and to put the fiscal situation back on a sustainable path over the medium term. HIPC and MDRI debt relief helped reduce Benin‟s debt stock from 47 percent of GDP at end-2002 to 19.4 percent at end-2010. The implementation of structural reforms will also assist in enhancing growth, expanding exports, attracting foreign direct investment and thereby improving the longer term debt dynamics. The Government is committed to covering its financial needs primarily with grants and highly concessional external assistance, with only limited use of regional borrowing as a last source of financing. The DSA indicated that given the large margin to the debt sustainability thresholds, a limited amount of non-concessional borrowing could be accommodated without risking a marked change in the overall debt risk profile.
5.8. In sum, Benin has an on-track program with the IMF and the macroeconomic policy framework provides an adequate basis for the purposes of this proposed operation. The IMF relations note is attached as Annex 1. The macro framework however, is not without risk. The IMF program, despite being adjusted to reflect current weakness in the global economy and the recent floods, remains rather ambitious and will require a concerted effort on the part of the Government to meet revenue targets and proceed with planned structural reforms.
B. REFORM PROGRESS SINCE THE APPROVAL OF PRSC6 5.9. All prior actions included in PRSC-6 had been met prior to Board approval and there were no triggers included in PRSC-6 since it represented the last operation in the PRSC 4-6 series. The next series, PRSCs 7-9, is currently being prepared. The Government is implementing a number of actions under consideration as prior actions for the next operation and is also advancing on some of the proposed triggers being considered for subsequent operations. As such, there is an active, ongoing and relatively effective policy dialogue process between the Bank and the authorities.
5.10. Fiscal consolidation remains on-track, though now under stress from the flood disaster, and is intended to create the fiscal space necessary to increase priority spending while reducing budget deficits. Measures are being implemented to improve the mobilization of domestic revenues while more rigorously managing public expenditure. This is to be
11 accomplished through efforts to expand the tax base, strengthen tax and customs administrations, and combat fraud, including more specifically: tax and customs administration reform, computerization of tax services, implementation of the “guichet unique”, strengthening control measures, and limiting exemptions. Expenditures will be targeted to support growth and poverty reduction, as recommended in the recently completed public expenditure review (PER), and are forecast to average 22.8 percent of GDP during the 2011-2013 period. This will take place in the context of plans to improve public financial management, enhance capacity to absorb resources, and improve the quality of expenditure, with a focus on improving control of recurrent expenditures, particularly the wage bill, and a greater focus on priority spending. Furthermore, civil service reform is proceeding with the current review of the civil service remuneration policy and a stock taking of current civil service reform efforts being important steps toward the development of an overall strategy for reform of the civil service.
5.11. While macroeconomic management has been broadly commendable, despite understandable setbacks the past two years, progress on necessary structural reforms has been more mixed. Significant progress has been made in several areas, including, cotton reform, with the privatization of SONAPRA and implementation of a new sectoral reform strategy, along with the sale of several public companies, such as the cement company and the wood company. Nonetheless, delays have been noted in other important reform areas, notably, public sector reform and reforms related to the port.
5.12. Nonetheless, momentum for reform has been strengthening over the past few months, namely: (i) a financial audit of SBEE and a restructuring plan for the national electricity company; (ii) extension and utilization of the individual tax payer identification system; (iii) signing of a contract and implementation of the “guichet unique” at the port; and (iv) withdrawal of Government ownership in Continental Bank and SCO, as well as the privatization of Benin Telecom.
5.13. While Benin has technically fully implemented the PRSC-6 and met all of the conditions related thereto, significantly lower than expected growth (resulting from the various factors noted earlier, including the floods), the need to reduce public expenditures in response to lower revenues and the slow pace on several fundamental reforms have resulted in PRSC targets and monitoring indicators not being fully met. Early in the PRSC series performance toward the established indicators appeared fully satisfactory and substantial progress had been made. However, the serious slowdown in growth in 2009, the continued weakness in 2010, and the sharp cuts in public expenditures over the past two years have not been without consequence on the monitored indicators. As can be noted in Annex 2, earlier progress on several indicators has been reversed and while several will be or have already been attained, others are unlikely to be met and still others remain uncertain.
5.14. On the positive side, PRSC-6 indicators related to access to electricity and access to safe water have been met and indeed surpassed. Indicators concerning public financial management have also been achieved, but have deteriorated somewhat over the past year due to the difficulties encountered in managing and executing the budget under serious resource constraints, though they remain above target. Education indicators are mixed and remain achievable despite the public resource constraints encountered. Health indicators, despite significant early improvement, have slipped and remain considerably below objectives. While
12 again being directly affected by public resource constraints, performance in the health sector has also been impacted by health worker strikes and work stoppages related to the Government‟s wage and austerity measures. In terms of economic indicators, private investment and cotton production figures show a similar pattern – early progress and more recent deterioration. These economic indicators are largely the result of broader global and regional economic conditions, but also reflect to a certain extent reduced Government expenditure and investment levels.
5.15. The floods have now resulted in additional strains on an already difficult fiscal position. Without external financing to cover a significant portion of the flood related financial demands, the fiscal position will deteriorate further putting in jeopardy not only the IDA- supported program under the PRSC-6 and achievement of its associated performance indicators, but the Fund program as well. Performance indicators under the PRSC-6 would clearly be at risk of deterioration in the absence of a rapid and comprehensive response. In education and health, damage to schools and health centers was extensive. Repair and rehabilitation of these facilities will be required if performance indicators in these sectors are to improve. While the short-term effect of the floods will in all probability be negative on several indicators, a financial response from the Bank would limit under-performance in the medium term and more importantly, would reduce longer term negative impacts that might be exacerbated by a prolonged crisis and thus require a longer and more costly effort to turn around. Indeed, an appropriate Government response to the disaster, financially and technically supported by donors and the Bank, could provide the impetus and momentum to reverse previous negative trends caused by slow growth and the required reduction in Government expenditure and investment.
C. POVERTY AND SOCIAL IMPACT ANALYSIS 5.16. PRSC-6 was expected to have a significant positive direct impact on poverty reduction. In Pillar I, components were designed to improve competitiveness and agricultural productivity, thus helping to promote investment, growth and the rural economy. The Government's 2006 annual report on the social situation (Rapport sur le Profil Social National) put emphasis on the strong link between unemployment, underemployment and poverty. Thus, support for accelerating economic growth and private investment, including through an improved business environment and infrastructure, would support employment creation and poverty reduction. Reform and simplification of the tax regime is aimed at promoting such improvements in the business climate. The PRSC program also supports measures to enhance the financial viability and management of the electricity sector to increase access.
5.17. In addition, the program promotes better functioning of the cotton sector, and results from the 2002 household survey show that households deriving income from cotton are overwhelmingly rural and poor. A 2004 PSIA analysis of planned reforms in the cotton sector in Benin (Report No. 29951-BJ) confirms the social value of pursuing the agenda foreseen, including the privatization of SONAPRA. This analysis was used to support the design of actions in the cotton sector, including activities to stabilize incomes for cotton farmers when world prices or exchange rates are unfavorable. Household survey results will be examined in the ongoing poverty assessment and PSIA-related issues in the agriculture sector will be revisited in an upcoming study on agricultural growth and diversification.
5.18. Components of Pillar II are clearly aimed at improving access and quality of services delivered to the poor. The new poverty assessment and recent PER will allow for more refined
13 analysis of the impact of social service spending. Finally in Pillar III, the strengthening of public sector management is expected to enhance the efficiency and effectiveness of public resources in the delivery of development services. It should be noted that equitable development is an explicit objective of the SCRP, and the PRSC-6 supports it through components emphasizing access to basic services at the decentralized level.
5.19. To the extent that this Supplemental Financing helps ensure the achievement and maintenance of original PRSC-6 objectives, it will have a positive impact on poverty reduction. Furthermore, to the extent that this Supplemental Financing assists the Government in financing required humanitarian assistance and recovery assistance to flood-affected populations and households, the poverty impact could be substantial. The loss of productive assets suffered by individual households, the loss of enabling infrastructure and the need for individual investment in replacing homes, small businesses and other possessions will have a potentially profound impact on poverty levels -- not only presently, but in the medium and longer term as well. Immediate assistance to re-equip affected populations for meaningful employment and income generation will be key in reducing the negative poverty implications arising from the floods.
D. ENVIRONMENTAL ISSUES 5.20. There are no environmental issues related to implementation of the PRSC-6 and policies supported by the proposed Supplemental Financing are not expected to have any significant negative effects on the environment, natural resources, or forests.
6. RATIONALE FOR PROPOSED SUPPLEMENTAL FINANCING
6.1. The magnitude and devastation of the flood and the required response from the Government created pressure on the government's FY10 budget and will continue to pressure the 2011 budget. The government committed an additional CFAF5 billion (US$10 million) in expenditures in 2010 directly attributable to the floods. Additional government expenditures for 2011 have not yet been determined, but will in all likelihood be considerably higher than the comparable figure for 2010 noted above, though the government is seeking donor funds to cover these expenses. The government fully recognized the impact of additional expenditures on its budget position and was hesitant in committing to additional 2010 flood-related expenditures for fear of missing related IMF performance criteria. The IMF has provided assurances that direct flood-related expenditures would be considered outside of and additional to the current program. Nonetheless, the authorities have been conservative and fiscally responsible in their response. A financial response from the Bank would allow them to more directly meet the needs of affected populations without fear of missing IMF program targets.
6.2. Grants or concessionary financing from development partners to finance all, or at least a significant portion of, the additional resource requirement is perhaps the best economic option for the country. In this context, the World Bank is well placed to provide supplemental budget support at this critical juncture. For its part, the Government remains committed to the implementation of the reform program supported under the PRSC series, as is further described below.
14 6.3. Following a Bank mission to Benin in November, a formal damage and needs assessment was prepared. This provided an estimate of losses and damages and will allow the Government to better estimate the necessary Government budget response in 2011. It is clear that the human, social, and economic impacts of the flood were sizeable and continue to impact the economy and personal livelihoods. The negative impact on growth and employment in the short run (of greater import in 2011 than 2010) is likely to occur as a result of: setbacks in agricultural production; losses in fisheries and livestock assets; loss of production in the small- scale manufacturing sector; and damage to irrigation, transport, and communication infrastructure. Relief and reconstruction costs extending into 2011 are likely to be high. Emergency import needs, particularly in terms of rice and other food items, and inputs for agriculture and construction will adversely impact the BOP position.
6.4. The proposed Supplemental Financing would help finance in full the 2010 resource gap incurred as a result of the floods. The activities for which the emergency expenditures have been incurred in 2010, and will continue to be incurred in 2011, though hopefully funded by donors including this proposed operation2, include food and shelter relief, assistance to farmers with agricultural inputs, cash grants to the affected population, and increased Operations & Maintenance (O&M) expenditures to repair infrastructure damage. Financing the resource gap arising out of these emergency needs (by the proposed Supplemental Financing) will allow the Government to continue implementation of the PRSC-6 supported macroeconomic and budget framework. In the absence of the proposed financing, the Government would need to cut further into its existing O&M budget, reduce planned capital spending allocations, or support to recurrent expenditure activities would have to be significantly scaled down. Alternatively, the Government would have to resort to domestic or regional borrowing, which is significantly more expensive relative to concessionary external financing, leads to recurrent interest charges within an already constrained fiscal environment, and is discouraged by the IMF.
6.5. As noted previously, the fiscal situation has been under stress. A combination of the food and fuel price crises in 2008, the global economic crisis in 2008/2009, the slower than expected global rebound in 2010, and several internal factors have negatively impacted fiscal performance. While the Government has taken appropriate measures to respond to these stresses and has been generally responsible in its expenditure management and control, these shocks have led to an environment where the budget situation is rather precarious and necessary investments and programs have been reduced to minimal levels. Investment levels in particular have been cut to levels where the stock of public and social capital is probably deteriorating. The floods now represent an additional exogenous shock that extends this difficult situation beyond the Government‟s ability to respond to within existing resource constraints without resorting to serious expenditure restraints that would further threaten social outcomes, and indeed social cohesion. Additional financing is required to ensure Benin‟s macroeconomic and poverty reduction program, including the specific outcomes associated with the PRSC-6 program, remain viable in the wake of the flood disaster.
2 This Supplemental Financing, of course, will not finance pre-identified expenditures directly as would an investment lending operation. It will provide general financing for the Recipient‟s budget, to be used accordin g to its budgetary processes and priorities.
15 6.6. The proposed operation is consistent with Bank policy as reflected in OP 8.60. According to this policy, supplemental financing may be provided for a development policy operation for which an unanticipated gap in financing jeopardizes a reform program that is otherwise proceeding on schedule and in compliance with the agreed-to policy agenda. More specifically, the proposed Supplemental Financing meets the requirement for Supplemental Financing under OP 8.60 as follows:
(a) The program is being implemented in compliance with provisions of the Credit Agreement. Benin is currently implementing a reform program supported by a PRSC series and is in compliance with all covenants.
(b) The borrower is unable to obtain sufficient funds from other lenders on reasonable terms or in a reasonable time. Under government leadership, development partners, including UN agencies and the Bank, are coordinating the flood relief efforts. The proposed operation would complement financing from other external sources to help address immediate needs. Other development partners pledged additional resources in response to the UN‟s humanitarian appeal, which, along with this Supplemental Financing, would contribute to closing the financing needs for urgent rehabilitation, social support programs, and critical reconstruction investments in the flood affected areas, though the response to date still leaves a significant financing gap. To date no donor has come forward with assistance aimed at addressing the Government‟s direct financing needs. The proposed operation will therefore meet financing needs that are unlikely to be met by other donors and lenders.
(c) The time available is too short to process a further freestanding Bank credit/grant to Benin specifically, or to mount a regional response that would address the broader regional flooding experienced in late 2010, to which Benin would be party. The use of a Supplemental Financing option will enable the Bank to deliver program support in a timely manner to respond to the financial needs of the country resulting from the floods. A timely response from the Bank will help people in the affected areas rebuild their lives. As noted, another planned budget support operation, PRSC-7, will be presented to the Board in calendar 2011 and will address the more medium and long term needs.
(d) The borrower is committed to the program and the implementing agencies have demonstrated competence in carrying it out. The Government has consistently shown commitment to pursuing prudent macroeconomic policies over the medium and long term and implementing needed structural reforms in line with its Poverty Reduction Strategy (SCRP). Capacity issues have on occasion delayed implementation, but commitment remains strong and progress is steady.
7. IMPLEMENTATION ARRANGEMENTS
A. TERMS OF THE SUPPLEMENTAL FINANCING 7.1. The proposed Supplemental Financing will be on a Grant basis. There are no additional requirements to those originally included in the PRSC-6. There will, however, be an overall requirement that the government continue to maintain a satisfactory macroeconomic policy framework as was required under the PRSC series.
16 B. FUNDS FLOW AND AUDITING REQUIREMENTS FOR THE SUPPLEMENTAL FINANCING 7.2. The proposed operation would consist of a single tranche grant of SDR 14 million (US$22 million equivalent) to be available upon effectiveness. The borrower is the Republic of Benin, represented by the Ministry of Economy and Finance. The proposed operation would follow IDA's disbursement procedures for development policy operations and would not be linked to specific purchases. Once the grant becomes effective and provided the Association is satisfied with the implementation of the original program being carried out by the Government of Benin and with the appropriateness of the Recipient‟s macroeconomic policy framework, the proceeds will be deposited by IDA into a dedicated account at the Central Bank (“BCEAO”) designated by the Recipient and which forms part of the Benin's foreign exchange reserves. The Government shall ensure that upon the deposit of the grant proceeds into said account, an equivalent local currency amount is credited in the Government's budget management system, in a manner acceptable to the Bank, using the prevailing exchange rate on the date that the funds are credited to the treasury account. Based on previous experience, the execution of such transaction from the Central Bank to the Treasury (Ministry of Economy and Finance) does not require more than four days. The Government of Benin will report to the Bank on the amounts deposited in the dedicated foreign currency account and credited in local currency to the budget management system with an indication of the exchange rate applied and the date of transfer. The borrower will promptly notify the Bank by fax or email that such transfer has taken place, and that proceeds have been credited in a manner satisfactory to the Bank. The proceeds of the grant will not be used to finance expenditures excluded under the Agreement. If the proceeds of the grant are used for ineligible purposes as defined in the Financing Grant Agreement, IDA will require, promptly upon notice from IDA, the Recipient to refund an amount equal to the amount of said payment to IDA, amounts refunded to the Bank upon such request shall be cancelled. The closing date of the operation will be December 31, 2011. The dedicated deposit account could be audited on terms of reference acceptable to IDA by the Recipient‟s Chamber of Accounts (Chambres des Comptes) (or such other independent auditors acceptable to the Association).
7.3. Fiduciary concerns remain largely as they were for the original PRSC-6 operation and the fiduciary risk management environment and the control environment at the Central Bank are such that the fiduciary arrangements in place for the PRSC-6 will remain in effect. The latest IMF safeguards assessment was undertaken in March 2010. The Central Bank of the West African States (BCEAO) continues to improve its governance structure. The updated safeguards assessment issued by the IMF in March 2010 revealed that the institution continues to have adequate controls in place at the operational level. However, the IMF noted that the overall governance framework should nonetheless be strengthened by the addition of an audit committee to ensure that the Board of Directors exercises appropriate oversight over the control structure, including the audit mechanism and financial statements. The upcoming implementation of the institutional reform of the West African Monetary Union (WAMU) and the BCEAO should help improve this situation. In addition, the assessment noted that efforts to fully implement International Financial Reporting Standards (IFRS) as adopted internationally by other central banks should be further pursued.
17 8. BENEFITS AND RISKS
A. BENEFITS 8.1. Timely program support will contribute to assisting Benin in covering immediate needs for relief, livelihood support, and reconstruction by accessing financial assistance necessary to mitigate the impact of the floods. The proposed Supplemental Financing will be an important source of resources for the government, as it will provide financing at a time when there is an urgent need for additional government expenditures. Donor response to the UN appeal in the amount of US$ 46 million has been less than hoped for. Furthermore, pledges typically have a longer effectiveness and implementation lag than desired and so flexible financing of the type being proposed through this Supplemental Financing is necessary to speed up the rehabilitation process. The proposed Supplemental Financing is quick disbursing and would contribute to timely provision of support to affected populations. It will also complement the support for medium and long-term rehabilitation that is being planned through restructuring and reprogramming of ongoing operations in the Bank‟s portfolio. Finally, the Supplemental Financing will contribute to minimizing the risks to the overall reform program that is being supported through the current PRSC series, and maintain the integrity of the transition to a new PRSC series planned for implementation in 2011.
B. RISKS 8.2. Benin is inherently vulnerable to annual flooding during and following the rainy season. The major river valleys frequently flood and the population has adapted to this seasonality. The floods experienced in 2010 however, have seen water levels rise in the major river valleys far in excess of normal. There is some concern that climate change may have increased the risk of excessive flooding and that Benin has become more vulnerable to such rare events, i.e., that such events will become less rare. While the proposed Supplemental Financing does not address this risk, the broader Bank program in the country will have to consider the possibility of such recurrent events. As such, the Bank will consider a multipronged approach to assisting Benin in the long-term mitigation of flood damage and flood prevention. In addition, other donors and specialized UN agencies will also be providing more medium term support to further strengthen the government‟s capacity to respond to and mitigate future flood damage. Related to this Supplemental Financing, the follow-on PRSC series will consider the inclusion of measures in this area.
8.3. The political situation presents an additional risk. The first round of the Benin presidential elections took place on Sunday, March 13, following two postponements. The delays were required to allow additional time for electronic voter registration and the issuance of voter registration cards to ensure that all eligible voters will indeed be able to vote. These delays were agreed to by Parliament, by all primary candidates and political parties and were approved by the Constitutional Court. During the electoral and the transition period there is some risk that expenditures could be politically motivated and will therefore be undertaken in a manner perhaps less than optimal in responding to the emergency. This risk has been and will continue to be mitigated by the ongoing policy dialogue process being undertaken by the Bank and the IMF. Given the need to strengthen performance under the IMF-funded ECF program and the implications of going off-track, there exists significant incentive to prudently manage budget resources. Furthermore, Bank/Fund collaboration in Benin is strong, thereby increasing the
18 effectiveness of the policy dialogue process. Donor coordination is also quite strong. Also, the mechanism established to coordinate government and donor efforts to deal with the floods will help ensure well-targeted and coherent actions by all involved, including the Government. Finally, the provision of this Supplemental Financing will be concurrent with the discussions surrounding the initiation of the new PRSC 7-9 series. This engagement involving significant future resource transfers will provide opportunities for monitoring expenditures and policy dialogue and thus provide further incentive to appropriately manage resources associated with the Supplemental Financing. Finally, an appropriate communications strategy will be implemented to ensure the provision of these additional resources to Benin is well known within the public, the donor community and among civil society in Benin. This will help ensure some domestic oversight and the application of domestic pressure for effective allocation and use of these resources.
8.4. While Benin has suffered from, adapted to and accommodated a series of external shocks, unanticipated internal dislocations and now a natural disaster in the form of a nation- wide flood, it should be recognized that the economy continues to remain vulnerable to further external shocks. Given the structure of the economy and its heavy reliance on re-export and transit trade, the Government‟s reform program as envisaged under PRSC-6 remains vulnerable to any one of a number of potential external or internal shocks. Furthermore, a lack of consensus for reforms and a potential slowdown in the reform momentum cannot be discounted given the current political tensions in the lead up to, and the transition following, the elections. While the provision of this Supplemental Financing in no manner exacerbates these risks, it may reduce them to a considerable degree by rendering the fiscal and social situation less fragile.
19 Annex 1: IMF Relations Note
IMF Executive Board Completes First Review under ECF Arrangement with Benin and Approves US$16.5 Million Disbursement
Press Release No. 11/49 February 16, 2011
The Executive Board of the International Monetary Fund (IMF) today completed the first review of Benin‟s economic performance under a three-year Extended Credit Facility (ECF) arrangement. The completion of the review enables the disbursement of SDR 10.61 million (about US$16.5 million), which would bring total disbursements under the program to SDR 21.23 million (about US$33 million).
In completing the review, the Executive Board granted a waiver for nonobservance of the performance criterion relating to net domestic financing at end-June 2010 and approved an extension of the arrangement by three months. The three-year ECF arrangement for Benin was approved on June 14, 2010 (see Press Release No. 10/243) in an amount equivalent to SDR 74.28 million (about US$115.5 million).
After the Executive Board‟s discussion of Benin, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, made the following statement:
“Amid unfavorable external and internal conditions, real GDP growth has been weaker than expected and performance under the program has been mixed. Revenue collection in the first half of 2010 fell below program targets, and the end-June performance criterion on net domestic financing was missed. These slippages were partially addressed with corrective actions in the second half of 2010. During the latter part of 2010, revenue collection efforts intensified, and expenditure was contained in line with available resources. Structural reforms proceeded, but with some delay.
“In September and October 2010, Benin was hit by the worst flooding in 50 years, which caused a major humanitarian crisis. Preliminary estimates suggest that the floods caused considerable damage, particularly in agriculture, and will require substantial reconstruction in 2011.
“The mixed economic performance in 2010 and the adverse shocks have led to a three-month extension of the program and to a revision of the program‟s macroeconomic framework and fiscal objectives. Real GDP growth is now projected to increase to 3.4 percent in 2011 and to improve gradually in the medium term. Achieving the revised objectives of the program will require a major effort to mobilize revenue and contain expenditure. The authorities intend to protect priority social spending, while containing current expenditure in line with reduced revenue expectations and revised deficit targets.
“A timely implementation of the structural reform agenda will be essential to achieve the program objectives. Critical reforms include introduction of a one-stop window at the Port of Cotonou, full adoption of single taxpayer identification numbers, reform of the civil service, and a reform of the energy sector.”
20 Annex 2: Progress on PRSC 4-6 Monitoring Indicators
Indicator Base 2006 2007 2008 2009 2010 Outcome Outcome Outcome Target Outcome PILLAR I: ENHANCE MACROECONOMIC FRAMEWORK AND CONDITIONS FOR GROWTH Private investment as a share of GDP 13.6 13.0 14.2 13.6 15.8 13.3 Percentage of population having access to electricity 22.0 24.7 25.6 27.7 30.0 Cotton production („000 of tons) 190 269 211 159 355 180 Kg/ha 1042 1146 1166 1059 1311 PILLAR II: SERVICE DELIVERY Access to safe water for the rural population (%) 44.0 46.5 49.9 55.1 53.0 Visit rate to health centers by children under 5 (%) 77.0 83.0 76.5 76.1 85.0 Childbirths attended by medical personnel (%) 77.0 82.0 82.0 77.7 88 Primary school completion rate (%) 65.0 66.0 61.0 65.0 67.0 Of which girls‟ rate (%) 54.0 56.0 52.0 57.0 56.0 PILLAR III: GOVERNANCE AND PUBLIC EXPENDITURE MANAGEMENT Average payment delay (days) 22.9 10.1 15.6 19.5 <24 Public contract bidding time (months) 11 7.6 2.0 3 <5
21 Annex 3: Country at a Glance
Benin at a glance 2/25/10
Sub- Key Development Indicators Saharan Low Benin Africa income (2008)
Population, mid-year (millions) 8.7 818 973 75-79
Surface area (thousand sq. km) 113 24,242 19,310 60-64 Population growth (%) 3.2 2.5 2.1 Urban population (% of total population) 41 36 29 45-49 30-34 GNI (Atlas method, US$ billions) 6.0 885 510 15-19 GNI per capita (Atlas method, US$) 700 1,082 524 GNI per capita (PPP, international $) 1,460 1,991 1,407 0-4
10 5 0 5 10 GDP growth (%) 5.1 5.0 6.4 percent of total population GDP per capita growth (%) 1.8 2.5 4.2
(most recent estimate, 2003–2008)
Poverty headcount ratio at $1.25 a day (PPP, %) 47 51 .. Poverty headcount ratio at $2.00 a day (PPP, %) 75 73 .. Life expectancy at birth (years) 62 52 59 Infant mortality (per 1,000 live births) 78 89 78 200 Child malnutrition (% of children under 5) .. 27 28 150 Adult literacy, male (% of ages 15 and older) 53 71 72 Adult literacy, female (% of ages 15 and older) 28 54 55 100 Gross primary enrollment, male (% of age group) 105 103 102 Gross primary enrollment, female (% of age group) 87 93 95 50
Access to an improved water source (% of population) 65 58 67 0 Access to improved sanitation facilities (% of population) 30 31 38 1990 1995 2000 2007
Benin Sub-Saharan Africa
Net Aid Flows 1980 1990 2000 2008 a
(US$ millions) Net ODA and official aid 88 267 241 470 Top 3 donors (in 2007): European Commission 14 44 3 81 8 France 17 67 74 56 Denmark 2 0 20 45 6 4 Aid (% of GNI) 6.3 14.8 10.7 8.7 2 Aid per capita (US$) 25 56 36 56 0
Long-Term Economic Trends -2 95 05 Consumer prices (annual % change) .. 1.1 4.2 8.0 GDP implicit deflator (annual % change) 10.2 1.6 3.2 7.1 GDP GDP per capita Exchange rate (annual average, local per US$) 211.3 272.3 712.0 447.8 Terms of trade index (2000 = 100) .. .. 100 112 1980–90 1990–2000 2000–08 (average annual growth %) Population, mid-year (millions) 3.6 4.8 6.7 8.7 3.0 3.3 3.3 GDP (US$ millions) 1,405 1,845 2,255 6,680 2.5 4.8 3.9 (% of GDP) Agriculture 35.4 36.1 36.5 32.2 5.1 5.8 4.6 Industry 12.3 13.2 13.9 13.4 3.4 4.1 3.8 Manufacturing 8.0 7.8 8.8 7.5 5.1 5.8 2.7 Services 52.3 50.7 49.6 54.4 0.7 4.2 3.2
Household final consumption expenditure 97.7 86.8 82.4 78.1 1.9 2.6 2.1 General gov't final consumption expenditure 8.6 11.0 11.6 15.0 0.5 4.4 8.3 Gross capital formation 15.2 14.2 18.9 20.7 -5.3 12.2 7.7
Exports of goods and services 15.8 14.3 15.2 15.2 -4.3 1.8 2.7 Imports of goods and services 37.3 26.3 28.1 28.9 -6.2 2.1 1.8 Gross savings 1.1 9.9 10.9 12.1
Note: Figures in italics are for years other than those specified. 2008 data are preliminary. .. indicates data are not available. a. Aid data are for 2007.
Development Economics, Development Data Group (DECDG).
22 Benin
Balance of Payments and Trade 2000 2010
(US$ millions) Total merchandise exports (fob) 386 758 Total merchandise imports (cif) 447 1,494 Voice and accountability Net trade in goods and services -292 -738 Political stability Current account balance -181 -480 Regulatory quality as a % of GDP -8.0 -7.0
Rule of law Workers' remittances and compensation of employees (receipts) 87 145 Control of corruption
Reserves, including gold 406 220 0 25 50 75 100
2008 Central Government Finance Country's percentile rank (0-100) 2000 higher values imply better ratings (% of GDP) Current revenue (including grants) 16.7 18.4 Tax revenue 14.6 16.0 Current expenditure 12.4 15.4 Technology and Infrastructure 2000 2008 Overall surplus/deficit -3.4 -3.0 Paved roads (% of total) 20.0 9.5 Highest marginal tax rate (%) Fixed line and mobile phone Individual .. 30 subscribers (per 100 people) 2 24 Corporate .. 25 High technology exports (% of manufactured exports) 0.1 0.1 External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 1,591 1,320 Agricultural land (% of land area) 29 32 Total debt service 75 58 Forest area (% of land area) 24.2 21.3 Debt relief (HIPC, M DRI) 366 604 Nationally protected areas (% of land area) .. 23.6
Total debt (% of GDP) 70.6 19.4 Freshwater resources per capita (cu. meters) 1,448 1,227 Total debt service (% of exports) 16.6 5.1 Freshwater withdrawal (billion cubic meters) 0.1 ..
Foreign direct investment (net inflows) 60 121 CO2 emissions per capita (mt) 0.24 0.33 Portfolio equity (net inflows) 0 63 GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 4.2 3.8
Energy use per capita (kg of oil equivalent) 301 346 Short-term, 38 IBRD, 0 Private, 0 World Bank Group portfolio 2000 2008 IDA, 255 Bilateral, 305 (US$ millions) IMF, 22 IBRD Total debt outstanding and disbursed 0 0 Disbursements 0 0 Principal repayments 0 0 Other multi- lateral, 366 Interest payments 0 0
IDA Total debt outstanding and disbursed 578 255 Disbursements 36 84 Private Sector Development 2000 2008 Total debt service 8 2
Time required to start a business (days) – 31 IFC (fiscal year) Cost to start a business (% of GNI per capita) – 152.6 Total disbursed and outstanding portfolio 0 0 Time required to register property (days) – 120 of which IFC own account 0 0 Disbursements for IFC own account 0 0 Ranked as a major constraint to business 2000 2008 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 0 0 Tax rates .. 68.0 Tax administration .. 62.0 M IGA Gross exposure – 2 Stock market capitalization (% of GDP) .. .. New guarantees 0 1 Bank capital to asset ratio (%) .. ..
Note: Figures in italics are for years other than those specified. 2008 data are preliminary. 2/25/10 .. indicates data are not available. – indicates observation is not applicable. 23 Millennium Development Goals Benin
With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, +/- 2 years) Benin
Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2008 Poverty headcount ratio at $1.25 a day (PPP, % of population) ...... 47.3 Poverty headcount ratio at national poverty line (% of population) .. 26.5 29.0 .. Share of income or consumption to the poorest qunitile (%) ...... 6.9 Prevalence of malnutrition (% of children under 5) .. .. 21.5 ..
Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) 41 .. 52 80 Primary completion rate (% of relevant age group) 18 27 35 64 Secondary school enrollment (gross, %) 9 13 20 32 Youth literacy rate (% of people ages 15-24) 40 .. 45 52
Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) 49 .. 64 73 Women employed in the nonagricultural sector (% of nonagricultural employment) 21 .. 24 .. Proportion of seats held by women in national parliament (%) 3 7 6 11
Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 184 162 144 123 Infant mortality rate (per 1,000 live births) 111 98 89 78 Measles immunization (proportion of one-year olds immunized, %) 79 65 72 61
Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) ...... 840 Births attended by skilled health staff (% of total) .. 60 66 74 Contraceptive prevalence (% of women ages 15-49) .. 16 19 17
Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 15-49) 0.1 0.8 1.3 1.2 Incidence of tuberculosis (per 100,000 people) 77 80 85 91 Tuberculosis cases detected under DOTS (%) .. 84 86 86
Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 63 63 64 65 Access to improved sanitation facilities (% of population) 12 19 24 30 Forest area (% of total land area) 30.0 27.1 24.2 21.3 Nationally protected areas (% of total land area) ...... 23.6 CO2 emissions (metric tons per capita) 0.1 0.2 0.2 0.3 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 3.2 3.5 4.2 3.8
Goal 8: develop a global partnership for development Telephone mainlines (per 100 people) 0.3 0.5 0.8 1.3 Mobile phone subscribers (per 100 people) 0.0 0.0 0.8 39.7 Internet users (per 100 people) 0.0 0.0 0.2 1.8 Personal computers (per 100 people) .. 0.1 0.2 0.7
100 100 30
75 75 20 50 50 25 10 25 0
2000 2002 2004 2006 2008 0 0
1990 1995 2000 2007 2000 2002 2004 2006 2008 Primary net enrollment ratio
Ratio of girls to boys in primary & secondary Benin Sub-Saharan Africa Fixed + mobile subscribers Internet users education
Note: Figures in italics are for years other than those specified. .. indicates data are not available. 2/25/10
Development Economics, Development Data Group (DECDG).
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