Author: International Monetary Fund
Site of publication: imf.org
Type of publication: Report
Date of publication: July 2022
Benin made significant strides in macroeconomic management in the three years preceding the COVID-19 pandemic
The reforms were anchored by the Government Action Program (2016-21) and supported by an ECF arrangement (2017-20).
The authorities consolidated public finances and enhanced public financial management while boosting public investment, with significant advances in public debt management and budget transparency. These achievements contributed to strengthening Benin’s credibility, culminating in the country’s first Eurobond issuance in 2019. Despite gaps in private sector development, recommendations from the 2019 Article IV were broadly implemented.
Pre-existing social challenges, pandemic scars, a fragile domestic security situation at Benin’s northern borders and higher cost of living amidst the war in Ukraine risk further eroding hard-won macroeconomic gains.
Even before COVID-19, Benin recorded one of the highest levels of income inequality in the region. Progress towards SDGs has been uneven-Benin ranked 155 out of 165 countries in the 2021 Sustainable Development Report. The pandemic and the impact of the war in Ukraine are exacerbating socio-economic challenges amid historically low social spending levels (Text Figure 2). Intensified terrorist threats from the Sahel region have spilled over to northern Benin, a region that
has traditionally lagged in access to basic public services and social outcomes.
The authorities have requested a Fund-supported program to meet urgent financing needs and support the implementation of Benin’s National Development Plan (PND; 2018-25) to pursue development with a “human face”
The PND puts emphasis on SDGs-Benin developed an innovative SDG bond framework and issued the first-ever SDG bond by an African sovereign in July 2021 (€500 million). In addition to helping Benin meet pressing financing needs, and building on the updated Government Action Program (PAG; 2021-26), the new Fund-supported program seeks to help boost revenue mobilization and improve spending efficiency; enhance social protection and equitable access to basic public services; and reinforce PFM, AML/CFT, governance and anti-corruption frameworks to lay the institutional foundations for sustained private sector-led growth that benefits all Beninese.
While the Beninese economy continued to show resilience in 2021, the recovery has remained fragile and highly dependent on transit trade with Nigeria
- Real GDP growth is estimated at 7.2 percent (y/y) in 2021, driven by a ramp-up in public investment and booming Port activity as transit trade resumed with the re-opening of the Nigeria border. Continued scale-up of cotton production allowed Benin to consolidate its position as the lead cotton producer in West Africa.
- Inflation rebounded in the first quarter of 2022 to 4.1 percent (y/y) (from 1.7 percent in 2021), mainly driven by food prices (7.4 percent), reflecting pandemic-related supply chain disruptions, higher demand from neighboring countries, and soaring international food and energy prices amidst geopolitical tensions. The authorities recently adopted a set of measures to contain food and energy prices.
- The current account deficit widened to an estimated 4.4 percent of GDP in 2021, due to increased imports, driven by higher oil and food prices and the pick-up in public investment, not offset by stronger cotton exports. The larger current account deficit was financed by a surge in portfolio inflows, reflecting Benin’s large Eurobond issuances.
Moreover, the war in Ukraine is compounding pre-existing socio-economic challenges
Although Benin’s direct trade exposure to Russia and Ukraine is relatively small, the spike in international oil, food and fertilizer prices and supply chain disruptions related to the war in Ukraine are widening the current account deficit. In addition, the deterioration in terms of trade is negatively affecting households’ real income, contributing to food insecurity.
Higher import prices have also exacerbated inflationary pressures, especially food-related, at the onset of the war. Meanwhile, normalization of monetary conditions in advanced economies is exerting pressure on bond spreads for frontier markets sovereigns.
Fiscal deficit and debt widened significantly in 2020 and 2021, consistently exceeding earlier expectations as the pandemic persisted.
The overall deficit was 4.7 percent of GDP in 2020, an expansion of 2.9 ppts of GDP compared with the pre-pandemic forecast, driven mostly by COVID-19-related spending and a counter-cyclical infrastructure push. Although domestic tax collection exceeded expectations, thanks to pre-pandemic revenue mobilization reforms and corporate income taxes based on the previous year’s profits, international trade taxes were lower than expected due to the Nigeria border closure. Faced with a protracted pandemic in 2021, the authorities expanded the fiscal deficit further by 1.2 ppts of GDP to 5.7 percent of GDP (compared with an original target of 4.5 percent of GDP). The expansion helped extend pandemic-related spending and boost infrastructure further (CFAF 289 billion), along with new security-related outlays. Domestic taxes were buoyed by an extraordinary arrears collection (CFAF 14 billion or 0.15 percent of GDP) while the re-opening of the Nigeria border in December 2020 contained shortfalls in international trade taxes.
The fiscal expansion in 2020-21 was supported by market and official financing.
Benin was the first SSA country to return to international capital markets since the onset of COVID-19, raising €1 billion in Eurobonds in January 2021, partly to retire more expensive and shorter maturity debt. The country also benefited from substantial support from the international community, including Fund emergency financing and the SDR allocation.