Benin - Structural Adjustment Program

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 10844 PROGRAM COMPLETION REPORT REPUBLIC OF BENIN FIRST STRUCTURAL ADJUSTMENT CREDIT (CREDIT 2023-BEN) JUNE 30, 1992 Occidental and Central Africa Department Country Operations Division Africa Regional Office 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.  CURRENCY EQUIVAI-ENTS (annual averages) 'T'he CFA franc (CFAF) is tied to the French Franc (FF) in the ratio ot FF I to CFAF 50. The FF is currently floating within the parameters defined by the European Monetary System (EMIS). ABBREVIATIONS AND ACRONYMIS ACP - African. Carihbean and Pacitfic Countries BBD - Banque BNninoise pour lo DNveloppement (Development Bank of Benin) BCB - Banque (ommerciale dLu 1enin (Commercial Bank (of lenin) L3CEAO - Banq(ule Centrale des Etats de l'AtriqLue (le l'O(uest (Central Bank of West African States) CAA - Caisse Autonome d'Amortissen1enft (The National D.bt Management Agency) CEB - Comrmunaute Electrique do Bchnin (The Joint Benin'Togo Power Authority) CNSAPAS - Comimlission Nationale diu Suivi de l'Application du Programme d'Ajustement Structurel (National Comimiission tfOr Monitoring the Adjustment Program) DCA - Development Cred!it Agreement EC - European Community FIR - Foonds d'Indeemniisation et de Remhoursement (Reimbursement Fund for Bank Depositors) IDA - International Developmiient Association INIF - Internatilonal Monetary Fund PFP - Po!icy; Framework Paper PIP - Public Investment Program PRPB - Parti RevoluItionnaire et Populaire du Btnin (POpular ReoVIutionarv Party of Benin) SAL - StructUral AdiLjustm01ent Ci edit/Program SBEE - SOc)i&t 136ninoise (ie I'FatL et de l'Electricite (I'he Water and Electricit) Parastatal) UNIOA - LUnion %Ionltaire Ouest Atricaine (West Atrican Monetary Union) FISCAl \'EAR January I t) Deemiber 31  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 30, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Program Completion Report on Benin - First Structural Adjustment Credit (Credit 2023-BEN) Attached, for information, is a copy of a report entitled "Program Completion Report on Benin - First Structural Adjustment Credit (Credit 2023-BEN)" prepared by the Africa Regional Office. No audit of this program has been made by the Operatiors Evaluation Department at this time. Yves Rovani by H. Eberhard Kopp Attachment 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.  FOR OMCIAL USE ONLY PROGRAM COMPLETION REPORT REPUBLIC OF BENIN FIRST STRUCTURAL ADJUSTMENT CREDIT (CREDIT 2023-BEN) TABLE OF CONTENTS Page No. PREFACE .............................................. EVALUATION SUMMARY ...................................iii PART I: PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE 1........ A. Project Identity .................................... I B. Introduction ...................................... I C. The Historical, Political and Economic Context ................ I D. Preparatior and Design of SAL I ......................... 3 E. Program Results ................................... 5 F. Macroeconomic Performance ............................ 7 G. Implementation and Monitoring of the Program ................ 9 H. Conclusions and Lessons of SAL I ........................ 10 PART II: PROGRAM REVIEW FROM THE BORROWER'S PERSPECTIVE ... 11 PART III: STATISTICAL INFORMATION ......................... 12 Project Timetable ..................................... 12 Cumulative Credit Disbursement ............................ 12 Mission Data ........................................ 12 Staff Inputs ......................................... 13 SAL I Disbursement Schedule .............................. 14 ATTACHMENTS: I. Second Tranche Release Memorandum (6/20/90) .................. 17 II. Matrix of SAL I Policy Measures ............................ 33 III. Main Economic Indicators ................................. 41 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.  - i - PROGRAM COMPLETION REPORT REPUBLIC OF BENIN FIRSI STRUCICTURAL ADJUSTMENT CREDIT (CREDIT 2023-BEN) PREFACE This is the Program Completion Report (PCR) for the First Structural Adjustment Program in Benin for which Credit 2023-BEN in the amount of SDR 33.5 million was approved by the Executive Directors in May 1989, and became effective in June 1989. Credit closing, originally anticipated for March 1990 was extended to December 1990; the Credit was fully disbursed in November 1990 and was then closed. This PCR was prepared by staff of the Country Operations Division of the Occidental and Central Africa Department (Preface, Evaluation Summary, Parts I and III). The Beninese authorities have undertaken an evaluation of the program (Part II), but it has not yet been received. When the Borrower's completion report is finalized, it will be included in the project file. In view of the close cooperation between Bank staff and the Government during the SAL I period, this assessment is not expected to differ significantly from that of the Bank. The Borrower did communicate that they agree with Part I and noted a few minor factual corrections which have been incorporated in the PCR. This report is based, inter alia, on the President's Report, the Letter of Development Policy, the Development Credit Agreement, supervision reports, the memorandum to the Executive Directors recommending release of the second tranche, correspondence between the Bank and the Borrowe, discussions with the Resident Mission, and internal Bank memoranda.  - iii - PROGRAM COMPLETION REPORT REPUBLIC OF BENIN FIRST STRUCTURAL ADJUSTMENT CREDIT (CREDIT 2023-BEN) EVALUATION SUMMARY A. Project Objectives 1. The main quantitative objective of SAL I was to raise real GDP growth to an average of about 3% in 1989-91 and 4% thereafter within a viable macroeconomic framework (para. 11). Investment, increasingly financed by national savings, was expected to average 13% of GDP in 1989-91, and a significant improvement in Benin's overall balance of payments and financial position was projected. Thus, exceptional (non-project) financing needs for 1989-91 were expected to decrease significantly by 1991, while the Government's overall deficit, as a percent of GDP was project_d to decline from 5.8% in 1989 to 2.3 % by 1991 (para. 11).' 2. The program's structural components aimed at a fundamental reorientation of Benin's development strategy away from state intervention toward greater reliance on market forces (para. loff). Specifically, it sought to: i) reduce the public sector's role in the economy, focusing it on a core set of services whose delivery and management would be improved; ii) reinforce public sector resource management by improving investment programming and the management of a reduced number of public enterprises remaining in the Government's portfolio; iii) restructure the banking system as a basis for resuming effective financial intermediation; and iv) reform incentive policies to promote private sector activity (para. 12). A detailed description of SAL I policy measures is presented in the policy matrix attached as Annex I. B. Implementation Experience 3. A major political and social crisis (para. 8) in the second half of 1989 delayed sustained implementation of SAL I until early 1990. Thereafter program execution resulted in a significant improvement in macroeconomic and public finance performance in 1990 and 1991, broadly in lne with program targets (para. 23ff). Considerable progress was made in civil service reduction (para. 18), fiscal system (para. 17) and public enterprises reform (para. 20), banking system restructuring (para. 21) and improving the incentive framework for the private sector (para. 22). This progress constitutes the basis for broadening and deepening the adjustment process under SAL II, approved in June 1991. 4. Structural Reforms. The initial difficulties in program implementation delayed until 1990/91 some aspects of the fiscal reforms aimed at increasing resource mobilization. While the civil service reduction program was successfully carried out in 1989, lack of external financing hampered its I An official downward -evision of GDP estimates for the 1982-90 period resulted in an estimated 1989 GDP 16 percent lower than the previous estimate. Tne program targets here are expressed in terms of the earlier GDP estimate.  - iv - e.;ecution in 1990 and early 1991. The public investment program could not be carried out as planned in 1989, and despite better program execution in 1990 and 1991, weaknesses in investment progranr ing and monitoring remained, resulting in non-programmed expenditures (para. 19). 5. Despite some delay in restructuring the banking system (para. 23), the liquidation of one state bank was completed and that of the remaining two accelerated. Rehabilitation of the rural credit network was begun. Four private commercial banks were established and attracted an impressive volume of new deposits. The supervisory and regulatory framework of the banking system was reinforced. However, progress in reimbursing depositors and reducing government obligations to the central bank was significantly less than expected. 6. Major improvemerts were made in the incentive framework for the private sector (para. 24). Most kemaining price controls were removed prior to Board approval of SAL II. Deficiencies in the study which was to serve as the basis for rationalizing the system of industrial tariff protection resulted in the delayed implementation of this major reform. 7. Macroeconomic Performance. Performance was broadly in line with progrrm targets i, 1990- 91, a!beit with some mixed results. After a 2% contraction in 1989, average GDP growth in 1990-91 was 3.5 %: aithough significant, the reduction in the fiscal deficit was less than projected (para. 25) and *n 1989/90 the investment/GDP ratio and national savings rate fell to their lowest levels since 1985. The 1989 external current account deficit was reduced by more than the targeted amount, due essentially to sharply reduced imports; normalization of import activity resulted in a 1990 and 1991 deficits comparable to the level before adoption of the program. Consequently, exceptional financing requirements increased over the 1989-91 period. 8. Reporting and Auditing. The Government generally fulfilled its reporting and auditing obligations under the Credit Agreement (para. 35). C. Sustainability 9. Major improvements in the macroeconomic and public finance situation were registered in 1990 and 1991, suggesting a significant response to the reform measures whose sustained implementation only began after the resolution of the political crisis. The recent fundamental changes in Benin have created a good basis for achieving the medium-term objectives of SAL I; a national consensus now exists on the necessity of pursuing the adjustment program and should enable the deeper distortions and structural deficiencies resulting from two decades of inappropriate policies to be addressed. D. Lessons Learned 10. Two mains lessons can be drawn from SAL I (para. 37): i) the importar.e of maintaining the policy dialogue even when progress towards adoption of an adjustment program is slow; and ii) the positive contribution that firmness and joint donor action can make to re-establish conditions conducive to program implementation and sustainability.  PROGRAM COMPLETION REPORT REPUBLIC OF BEigN FIRST STRUCTURAL ADJUSTMENT PROGRAM (CRE:DIT 2023-BEN) PART I. PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE A. PROGRAM IDENTITY Operation First Structural Adjustment Program Credit Number : 2023-BEN Region : Africa Country : Republic of Benin Sector: Non-Project Lending B. INTRODUCTION 1. A First Structural Adjustment Credit (SAL I) to Benin in the amount of SDR 33.5 million (US$45 million equivalent) was approved by the Executive Directors on May 23, and became effective on June 28, 1989. The Credit was released in two equal tranches of US$22.5 million equivalent, the first upon effectiveness, and the second upon fulfillment of. the second tranche release conditions. SAL I was preceded and supported by an IDA-financed technical assistance project (Technical Assistance III, Credit 1530-BEN, US$5.0 million equivalent) approved in December 1984, and by the Public Enterprise Rehabilitation Project (Credit 1748-BEN, US$15 million e-quivalent) approved in December 1986. 2. Efforts to reform Benin's economy date back to 1982 but the adoption of a comprehensive adjustment program represented a major shift in economic orientation, as ref.ected in the Government's Statement of Development Strategy.' SAL I supported the first phase of this program. In addition to IDA support, the program received significant financial assistance from other muitilateral and bilateral donors, including the European Community (US$31.2 million), the African Development Bank (US$14.0 million), France (US$37.2 million), Switzerland (US$9.7 million), Germany (US$5.7 million), Norway (US$3.4 million), anu a first annual arrangement (equivalent to 20% of quota, or SDR 6.28 million) under the IMF's Structural Adjustment Facility. 3. A Second Structural Adjustment Credit, Credit 2283-BEN, of SDR 41.3 million (US$55 million equivalent) was approved by the Board on June 27, 1991, and became effective on October 15, 1991. C. THE HISTORICAL, POLITICAL. AND ECONOMIC CONTEXT 4. Benin, then called Dahomey, was brought into France's empire in the 1890s after valiant resistance by the last warrior king, Gbehanzin. For a number of reasons, the Beninese quickly established a relative prominence and were foutid in administrative and professional functions all over French West Africa. With independence in the early 1960s, many of this colonial ministerial class were ' Report No. P-4931-BEN, Annex V.  -2- no longer welcome and had to return to Benin. The country's political and soc;al instability in the 1960s was in part due to the presence of this newly dispossessed intellectual elite. 5. In 1972, after a period of repeated changes of government and political aclivism by powerful trade unions, Mathieu Kerekou seized power in a military coup. Benin officially became a revolutionary socialist state and cultivated close links with the communist bloc. Consistent with marxist- leninist ideology, economic policy from 1975 was driven primarily by government efforts to accelerate economic growth and development by increasing state ownership of productive activities. Most private businesses and financiai institutions were nationalized, many public enterprises were created, collective farming systems were established in agriculture, and a highly regulated framework was put in place to govern private activity and trade. Large public industrial investments were made, mostly with foreign borrowing. New taxes were introduced and others increased. The expansion of the state's role was associated with a triplin. of the civil service. Due in part to oil and uranium booms ia neighboring Nigeria and Niger, but also as a consequence of activity under the first state plan, the economic impact of these policies was initially favorable, with growth averaging 5% in 1977-80, in a context of interi.al and external stability. 6. By 1983, the end of the boom in neighboring countries and completion of major public sector projects had revealed an economic structure saddled with poorly-designed, low-return investi ants, heavy external debt service, an incentive framework inhosr'table to private activity, and a poorly managed and loss-making state-dominated modern sector. The Government then began to look increasingly to the West for development assistance. One result of this still tentative opening was the establishment of a World Bank Resident Mission i:- Cotonou in 1983. By the late 1980s, excessively expansionary macroeconomic policies had resulted in internal and external imbalances that were unsustainable. In early 1989 the banking system's collapse resulted in a freeze on deposits and a sharp drop in the proportion of taxes paid in liquid form. 7. The Government's initial response to these difficulties was piecemeal, and included measures in the area of investment programming, elimination of irregular salary payments, agricultural producer pricing, public enterprise reform, liberalization of transport, and public utility pricing. A number of IDA-financed projects (including Technical Assistance III and the Public Enterprise Rehabilitation Project) supported these efforts. By themselves, bowever, the measures adopted were insufficient to contain the economic crisis, although they addresse important issues. This was ultimately recognized by the Government in 1988/89 when it adopted a more comprehensive approach to structural adjustment supported by IDA's SAL I and the IMF's first-year SAF. 8. The establishment of the National Commission in charge of SAL negotiations in 1986 to prepare an adjustment program (para. 32) marked the decline of the regime's most powerful political structure by removing iesponsibility for macroeconomic policy from the Politbureau of the single political party (le Parti pour la Revolution Populaire du Benin, or PRPB) to the ministers who reported directly to the President. Thereafter, the implementation of prior actions for SAL I (e.g. a civil service census, computerization of the payroll, audits of banks, etc.) induced greater transparency in public expenditure management and began to reduce political patronage. By early 1989, civil servants, other workers' groups, and the private sector began to view the Bank as an ally in the search for better governance. In December 1989, Colonel Kerekou's government officially abandoned marxism-leninism but popular outrage at the regime could not be overcome; thereafter, Benin's transition to a more oren and pluralist society was rapid. A National 2onference in February 1990 established an interim government and a more broadly representative legislative body; a referendum was held on a new constitution and, iP early 1991, multi-party presidential elections gave Nicephore Soglo (Prime Minister in the interim Government) an overwhelming victory. Former President Kerekou now leads a quite life in Cotonou.  -3-. This dramatic and bloodless unseating of a totalitarian regime has encouraged and inspired others seeking orderly political change elsewhere on the African continent. However unintended it was, SAL I played an important part in this transformation (para. 10) by empowering key segments of the population who would settle for nothing less than a complete change in the regime. D. PREPARATION AND DESIGN OF SAL I 9. The First Structural Adjustment Program was the culmination of a slow and difficult seven-year policy dialogue between the Government -- dominated by the PRPB -- and the Bank. Faced with an increasingly disastrous economic situation in 1986-87 and evidence that past policies had failed, key members of the PRPB's Politbureau softened their ideological opposition to a reform program. By mid-1988 when SAL I was appraised, the Government had substantially completed preparation of its Statement of Development Strategy and had made progress in its parallel dialogue with the IMF. Program Description and Objectives 10. SAL I represented a fundamental reorientation of the Government's development strategy away from dirigisme towards greater reliance on private sector initiative and market forces. The program's major focus was consequently on public sector reform and the creation of an incentive framework supportive of private sector development. At the outset, the Bank recognized the high risks associated with the operation,2 but believed that these were reduced by the large number of prior actions implemented and the broad-based domestic participation in the formulation of the program. The Bank could not of course foresee that the mounting political and social crisis3 would initially impede program implementation and culminate in the eno of the regime. 11. The macroeconomic objectives established by the Government and the Bank entailed a substantial increase in real GDP over the program period: in contrast to the virtual stagnation of GDP in 1987-88, average growth rates in 1989-1991 were projected at 3% and thereafter were expected to approach 4%, with the primary sector serving as the main engine of growth. The investment/GDP ratio was projected at some 13% over the program period, up from 11.5% in 1988. To finance this level of investment while reducing external imbalances, the national savings rate was expected to increase gradually to the equivalent of 5.4% of GDP by 1991. Reflecting the projected improvement in the overall financial and fiscal situation, the external current account deficit/GDP ratio and the overall budget deficit/GDP ratio were expected to decline to 7.7% and 2.3% respectively by 1991. Accordingly, exceptional financing needs were projected to decrease from US$440 million in 1989 to US$89 million in 1991. 12. Structural measures under the program focu.;: ;d on: reforming fiscal legislation and the tax system; reducing the number of civil servants ar.J administrative reform of the civil service; privatization, liquidation, or rehabilitation of a large number of public enterprises; restructuring the banking system; reforming the system of industrial tariff protection and the adoption of a new investment code and revised labor and commercial legislation. Prior to Board approval of SAL 1, the Government implemented a large number of up-front actions in most of these areas. 2 These were identified as: i) further terms of trade losses resulting from lower export prices; ii) domestic political opposition from beneficiaries of the previous dirigiste policies; and iii) difficulties in finding a foreign private bank to establish a branch in Benin. 3 Including the growing perception that the burden of adjustment was not being equally shared.  -4- 13. A major SAL I reform in the field of resource mobilization was the replacement of the internal turnover tax with a general expenditure tax applicable to domestic goods and services and to imports. Through the implementation of the civil service voluntary departure program, SAL I was designed to further the key objective of reducing and restructuring current expenditure, in support of which partial measures had been introduced beginning in 1986. Some progress had already been made in restructuring the public enterprise sector since 1986 under the Public Enterprise Rehabilitation Project (para. 7); SAL I was intended to consolidate this progress by further reducing the size of the public enterprise sector and through better management and financial performance of those enterprises remaining in the Government's portfolio. In the bankir.g sector, the three defunct state banks were to be liquidated and their depositors partially repaid, while the establishment of at least one internationally renowned private bank and reinforcement of banking supervision/regulation were expected to contribute to more efficient financial intermediation. The incentive framework for the private sector was expected to be significantly improved through trade policy reform, and deregulation measures. 14. Role of the Bank and IMF: Much of the groundwork for SAL I was laid in the context of other investment projects supported by IDA and through the Bank's economic and sector .ork. Beginning in 1982, the Bank's assistance strategy for Benin shifted from a focus on financing traditional investment projects to support of macroeconomic management and rehabilitation of key sectors, with the ultimate goal being the initiation of a comprehensive adjustment program. Economic and sector work emphasized public sector management and sector efficiency issues, and the lending program included credits for infrastructure rehabilitation and for adjustment in the parastatal and cotton sectors. With the advancement of the policy dialogue in 1988 the Bank's assistance strategy was redesigned to make the SAL the centerpiece of IDA lending to Benin. Economic and sector work completed before that time (in particular the 1984 Country Economic Memorandum and the 1987 Public Expenditure Review), as well as IDA-financed projects already underway (notably the Public Enterprise Rehabilitation Project, the Third Technical Assistance Project, and the Second Borgou Rural Development Project) contributed significantly to the design and content of SAL 1. SAL I was appraised in mid-1988 and negotiated the following November but Board presentation was postponed to May 1989 to permit joint processing with the First-Year Policy Framework Paper (PFP) in concert with the IMF.4 Bank management proved far-sighted in nurturing the policy dialogue with Benin despite very slow progress over the years. 15. In the years preceding the adoption of the structu.al adjustment program, Benin requested and received (in addition to the annual Article IV Consultations) several IMF staff visits to pursue a dialogue on a possible stabilization program. Three IMF technical assistance missions reviewed the fiscal system and estimated expenditure arrears. The policy dialogue with the IMF was slow for the same reasons as was the Bank-Benin dialogue but preparation of a sound current budget for 1988 and the Government's decision to embrace a comprehensive adjustment program moved it forward considerably, and an IMF mission to Cotonou in July 1988 began preparatory work for a SAF program to be adopted in parallel with SAL I. Bank and Fund staff assisted the Government in elaborating its First-Year Policy Framework Paper; the SAF program and the PFP were approved by the Fund Board in June 1989. 4 The policy analysis underpinning most of the reforms contained in the PFP was produced primarily by Bank staff in the 2-3 years preceding SAL I approval. For the most part, the IMF remained highly skeptical of the Government's commitment to an adjustment program until mid-1988.  -5- E. PROGRAM RESULmS 16. With more sustained program implementation after the resolution of the political crisis in early 1990, and a firm domestic consensus on the need to pursue structural adjustment, performance in 1990 and 1991 was broadly in line with program targets. O7. Although measures were put in place to strengthen the performance of the customs and tax directorates both prior to and after Board approval, implementation of other measures aimed at improving _source mobilization experienced some delays. Thus the introduction of a general expenditure/value added tax, a key fiscal reform initially planned to coincide with the 1990 budget, had to be postponed to 1991 due to administrative delays consequent on the social crisis, the longer preparatory period required, and given the need to coordinate it with the reform of the main revenue source, import taxes, which was also delayed. The 30% across-the-board reduction in the value of imports into Cotonou subject to taxation, introduced by the Government as a transitional measure to raise cash revenue after the collapse of the banking system in early 1989, also proved counterproductive, particularly in view of a sharp contraction of import volumes that year. Reso,urce mobilization improved dramatically in 1990 and 1991, with the revenue targets being broadly attained; revenue performance in 1991 benefitted significantly from implementation of the value added tax, and also from improved customs revenue with the restoration of import taxation to the full c.i.f. value, a substantial increase in import volumes, and the reform of the customs services. 18. Concerning piublic employment, personnel expenditure (including pensions and scholarships) was reduced from CFAF 48.6 billion in 1988 to CFAF 43.5 billion in 1990 through the combined effects of normal retirements, a hiring freeze, and departures under the voluntary departure program. The number of departures was, however, below program targets (1,590 had left by end-December 1990, as against a target of 2,500 by end-June 1990), primarily because the external financing required for severance payments was unavailable and due to donors' insistence that the program be revised to reflect the organizational needs of the ministries; the absence of any departures in 1991 after the revised program was agreed to reflected the Government's difficulties in negotiations with tht civil servants' unions, and contributed to a slight increase in the wage bill. Although some of the groundwork had been laid prior to SAL I (civil service census, use of computer records, identifying deficiencies in basic personnel management texts, etc.), less progress was made in improving the administration and efficiency of the civil service than expected. Payroll irregularities continued partly as the result of the co-existence of two different civil service registers, one at the Ministry of Labor and Social Affairs (responsible for managing the civil service) and the other at the Ministry of Finance. Additional administrative reform measures are therefore being pursued under SAL II. 19. Despite a number of reforms introduced and technical assistance provided prior to SAL I approval, the public investment programming, implementation, and monitoring process continued to show significant weaknesses. Notwithstanding the Government's stated policy, PIP proposals submitted for IDA review during the SAL I period included many projects which lacked econonrc justification and did not reflect agreed sectoral strategies. Given the overall macroeconomic and public finance situation, the 1989 portion of the agreed 3-year PIP could not be executed as planned. With an improved overall situation in 1990 and 1991, the rate of PIP execution increased, but an appreciable amount of non-programmed expenditures was registered. IDA-financed technical assistance for investment programming was also less effective than had been expected. Under SAL II, and with the support of the IDA-financed Pre-Investment Project, significant attention is being given to improving PIP preparation, execution, and monitoring. 20. The restructuring of the public enterprise sector, was one of the more successfully implemented components of SAL I. Three enterprises were liquidated, another three successfully privatized, bids  were issued (but the offers made were unattractive) for sale of another six, and diagnostic studies were completed for eight others; these studies are now being used as the basis for further restructuring and privatization efforts under SAL II. As a result of these and earlier efforts, the Government's portfolio, whkch included 60 industrial and commercial enterprises at end-1986 was reduced to 29 by end-1990. In 19i91 the Government issued bids for the privatization of an additional six enterprises, and a contract for the most important of these was recently finalized. With external assistance of IDA and other donors, key enterprises remaining in the Government's portfolio (such as the public utility and cotton ginning/marketing parastatals) were rehabilitated. However, agreement or solutions to the problems faced vy two enterprises that occupy strategic positions in the sugar and cement sectors was delayed (in part due to the reluctance of the Nigerian Government, the co-owner), the financial position of a number of enterprises (e.g. social security, petroleum distribution) deteriorated further, while monitoring of e-nterprise financial performance and investment activity was inadequate. 21. Substantial progiess was made in restructuring the banking systerm under SAL I, despite some delays. The liquidation of the agricultural credit bank (CNCA) was completed in late-1990, liquidation proceedings for the other two state-owned banks (BBD and BCB) were accelerated, and a unit established to p!trsue recovery of their loans. After a long search for a foreign private partner to participate in the establishment of a new commercial bank, four new private commercial banks were operational by early 1990; by end-1990, these banks had collected an impressive amount (about CFAF 45 billion) in new deposits, despite their lack of international standing.5 Progress in reimbursing depositors with accounts frozen in the banking system was, however, significantly less than planned, due to delays in establishing the reimbursement fund (the FIR), failure to use allocated external assistance, and the delayed response of small depositors in collecting their reimbursements. Payments to reduce the Government's obligations to the BCEAO (which had already been rescheduled) also fell far below targets, due to shortfalls in external disbursements. On the other hand, the banking system supervisory and regulatory framework was reinforced as part of the 1989 ECEAO reforms. 22. The implementation of trade reform and deregulation measures gathered momentum after the establishment of the transitional government in early 1990. A new investment code and revised labor and commercial legislation were adopted in April/May 1990; however the subsidiary legislation required to implement these reforms was not passed until December 1990. Although the amendments introduced were generally in line with the core objectives of the reform, a number of provisions in the new investment code and the labor and commercial laws were subsequently found to be unsatisfactory; experience with implementation of the investment code and labor and commercial legislation will be reviewed under SAL II and further revisions are expected before release of the third tranche. The revised commercial law removed import licensing requirements for the bulk of Benin's imports (i.e. from franc zone, EC, and ACP countries). An action plan tc implement reforms in the system of industrial tal iff protection could not be adopted because the study conducted by outside consultants was deficient. Based on the technical adjustments to tariff rates introduced in the context of restoring the import tax base to the full c.i.f. value in early 1991, a thorough reform of the tariff structure will be implemented before release of the third tranche of SAL II; remaining export taxes will also be removed. I The search for an internationally renowned bank to take over the sound portion of the BCB's portfolio was unsuccessful as the concessions demanded by potential candidates proved unaccuptable. It was recognized that less well-placed but acceptable banks should be allowed to set up. These new banks are regional commercial banks with limited correspondents.  -7- F. MACROECONOMIC PERFORMANCE 23. The ambitious macroeconomic targets of SAL I were largely unmet in 1989 but program results were broadly on target thereafter. Real GDP growth, projected at 2.5% for 1989, was an estimated - 2.0%, despite a significant increase in value-added in the agricultural sector (from increased cotton output); per capita incomes reached their lowest levels in five years. The rate of inflation, as measured by the GDP deflator, approximated 3.6%. Reflecting the large contraction in fixed investment, the gross investment/GDP ratio fell to 7.7% as against the program target of 12.6%; the national savings rate, projected at 3.9%, barely approached 1.7%, the lowest level in several years. The dramatic improvement in the 1989 current account deficit was largely temporary, reflecting the large contraction of imports, the extraordinary performance of cotton exports, and the accumulation of external arrears. The increase in net official inflows to finance the program and reduction of the trade deficit resulted in a major improvement in the balance of payments. 24. Overall macroeconomic performance improved dramatically in 1990. Largely in response to the recovery of trade and commerce, real GDP rose by an estimated 4.0% and the rate of inflation remained low at 1.9%. At 11.7% and 3.6% of GDP, respectively, the gross investment and national savings rates showed a major improvement over 1989, although they remained below program targets. As imports returned to more normal levels, the current account deficit widened to the equivalent of 8.1% of GDP; with the commercial banks pursuing an extremely prudent lending policy, the net external assets of the banking system rose by CFAF 23.5 billion (33 billion in 1989). Preliminary estimates for 1991 indicate a continuation of the positive trends registered in 1990, with real GDP growth of 3.0% and an inflation rate of 1.0%; the 1991 current account deficit deteriorated fuirther, however, reflecting a large expansion of import volumes. 25. Although expenditures were kept below program levels, the overall budget deficit widened to the equivalent of 10.5% of GDP in 1989, mainly the result of a 27% decline in government revenues. The latter was in turn the consequence of several factors, including the collapse of the banking system, the contraction in aggregate demand, a decrease in transit trade, an increase in illicit imports, and a decline in the efficiency of revenue collection due to intermittent civil service strikes and growing fraud. Current expenditure, on a commitment basis, was kept 4% below program levels, but salary arrears were nonetheless incurred. Reflecting the non-availability of domestic counterpart funds and the freeze in disbursements by some donors in response to the accumulation of arrears, central government investment expenditure was 15% below program targets. The overall budget deficit was reduced to 9.7% of GDP in 1990 reflecting continued restraint on expenditures and an 11% increase in revenue, which, at some 9.6% of GDP, was however still below program targets. At the equivalent of 11% of GDP, revenue performance in 1991 was broadly in ;ine with program targets, reflecting the improvement in the overall economic environment, the positive impact of the value added tax introduced in early 1991, as well as improved customs revenue collection. The close to 20% increase in revenues facilitated the attainment of a balance in the Government's primary operations6 in 1991. The overall budget deficit was further reduced to 7.9% of GDP in 1991. 26. The somewhat mixed macroeconomic performance under SAL I are above all the result of the unforeseen social and political crisis during the initial six months of program implementation. An additional factor beyond the Government's control was the absence of a banking system throughout 1989 6 Excluding internal and external interest payments, but including the Government's contribution to the public investment program.  (despite strenuous efforts to attract a private foreign partner).7 This, of course, had a profound negative impact on government revenues and the overall economy. Given its transitional nature, the interim government established in early 1990 demonstrated courage in implementing difficult adjustment measures which subsequently bore fruit in the greatly improved macroeconomic and public finance performance registered in 1990 and 1991. 27. Sustainability: The major economic and financial restructuring implied by the macroeconomic targets constitute medium-term objectives whose full achievement was not feasible in the relatively short time period of SAL 1, which was meant to be only the first in a series of IDA-supported operations for Benin's adjustment efforts. The time-frame for achieving some of these objectives has therefore been extended to the SAL II period (1991-93). Macroeconomic and public finance developments both in 1990 and 1991 were very encouraging, suggesting a lasting response to the implementation of adjustment measures. The recent profound changes in political and economic orientation, leading to a reinforced consensus on the need for fundamental reform, should contribute to the sustainability of the structural adjustment process. Based on these developments, and on the continued rigorous implementation of the adjustment program, real GDP growth is projected to average 3.4% in 1991-93, thereafter approaching 4%; real increases in per capita income and consumption should become possible by 1993. However, because medium-term growth is so heavily dependent on cotton, crude oil and re- exports, Benin will continue to be vulnerable to developments in world export and regional markets on which the Government's economic policies have no impact. 28. The reduction of budgetary imbalances will require a longer time-span than envisaged under SAL 1. The generation of a current budget surplus, originally programmed for 1990, will not be possible before 1994; an interim objective of obtaining a surplus in the Government's primary operations by 1992 has been agreed upon under SAL II and, based on the encouraging 1991 performance, is attainable. Present projections are for a significant deterioration in the external current account deficit in 1991-92 followed by a gradual improvement to the equivalent of 8.5% of GDP by 1994; Benin will continue to require significant amounts of exceptional financing (including debt relief) well into the mid-1990's, although these should decline sharply by 1993. Second Tranche Release 29. A total of 40 broad categories of reform actions were included in the SAL I policy matrix (Annex I), five of which were listed in the Development Credit Agreement as specific conditions for second tranche release. These entailed: i) the departure of 750 civil servants by end-December 1989; ii) the liquidation of two enterprises, the privatization of seven others, and the completion of diagnostic studies for another ten; iii) the abolition of import licenses for goods from the franc zone, the European Community, and the ACP countries; iv) agreement on action plans to (a) implement reforms in the import taxation and industrial protection systems, (b) replace the domestic turnover tax with a general expenditure tax, and (c) adopt a new investment code; and v) the adoption of simplified business registration, permit, and reporting procedures, and the amendment of the labor law to simplify hiring and firing. 30. Initially planned for December 1989, second tranche release was approved by the Board in June 1990. This delay was mainly the result of unsatisfactory macroeconomic performance in 1989 and of slower progress than anticipated in fulfilling conditions i, ii, and iv (c) above. The request for the waiver of condition iv (a), due to the deficient tariff reform study, was granted; eight of the ten ' The SAL I President's Report correctly identified this as one of the main risks to program implementation.  -9- diagnostic studies in condition ii were completed, and this condition was therefore deemed to have been substantially met, while the other specific conditions were judged to have been fully met. With the substantial improvement in revenue performance and the overall macroeconomic situation following the establishment of the transitional government in early 1990, the Executive Directors agreed that the structural adjustment program was proceeding satisfactorily and that release of the second tranche was therefore warranted. 31. Missions visited Benin in November/December 1989 and March/April 1990 to review progress towards second tranche release. The latter mission concluded that most conditions had indeed been fulfilled and spelled out in detail the remaining actions required. Additional documentation requested to confirm implementation of these actions was received in May 1990; the Government was then informed after Board approval in June 1990 that the second tranche was avaiiable for disbursement, six months later than originally envisaged. G. IMPLEMENTATION AND MONITORING OF THlE PROGRAM 32. Borrower Performance: The inter-ministerial Commission Nationale du Suivi de l'Application du Programme d'Ajustement Structurel (CNSAPAS), established in 1989, was responsible for overseeing implementation and monitoring of SAL 1. Chaired by the Minister of Finance, it included the Ministers of Planning, Industry, Energy, and Public Enterprises, Commerce, Rural Development, Justice, and Labor and Social Affairs. Due to the prevailing crisis, supervision by the Government during the six months following Board approval was inadequate, but improved significantly thereafter. Day-to-day coordination of the CNSAPAS's various sub-commissions was assured by a technical secretariat; the CNSAPAS met regularly during the program period, and beginning in late-1990, the Prime Minister (now President) chaired weekly meetings of the Commission, with the participation of the Bank and IMF Resident Representatives. This reflected the significantly increased political commitment to the program after the transitional government assumed office. The Government generally fulfilled its obligation to submit regular progress reports to the Bank on the adjustment program, although the quality and timeliness of the reporting suggested the need for further improvements, better monitoring, and even closer inter-ministerial/agency coordination. 33. Bank Performance: The first two SAL I supervision missions were relatively brief (Part III); in addition to a change in headquarters staff task management and of the Bank's Resident Representative in Cotonou,8 the second and (longer) third missions were conducted in the midst of the salary-payment and political crises of October-December 1989. This limited the extent to which the Government's attention could be focused on the program's structural elements, although the full range of SAL measures was reviewed during the third mission which overlapped with a parallel IMF mission. By informing President Kerekou in December 1989 that continued donor support could not be justified in the prevailing circumstances, the third mission contributed to the re-establishment of conditions conducive to the implementation of the program. The fourth (and last) supervision mission which assessed progress towards second tranche release included the participation of an IMF staff member, and reviewed public finance and overall progress, as well as specific SAL I conditionalities. 34. Disbursement and Procurement: With the exception of some electricity imports by the Societe Beninoise de l'Eau et de l'Electricite (SBEE) from the CEB in Togo, the bulk of the Credit was I The Resident Representative departed Cotonou in September 1989. For an interim period between November 1989 and April 1990 when a new Resident Representative was appointed, the Bank's Representative in Lome, Togo managed the Benin Resident Mission, spending two days a week in Cotonou.  - 10 - disbursed against private sector imports (for which normal commercial practices were found acceptable by IDA at appraisal); there was no use of international competitive biddirg under SAL I, and disbursements were made upon presentation of proofs of payment. Nonetheless, mobilization of the resources of the first tranche was slow due to serious difficulties experienced by the CAA in amassing import invoices and customs declarations. With the establishment of new banks in early 1990, these difficulties were subsequently overcome, permitting quicker disbursement of the second tranche. 35. Reporting and Auditing: In conformity witl. the Development Credit Agreement (DCA), the Government provided reports on progress in implementing the adjustment program prior to supervision missions and the required periodic exchange of views with the Bank. The financial audit of SAL I accounts for 1989 and 1990 was completed in July 1991 and a qualified opinion submitted to the Bank in October 1991. Given the administrative weaknesses at CAA, including the unsatisfactory accounting system, the qualified opinion of the auditors was expected. Contrary to the provisions of the DCA, the Credit accounts were not kept separate from those of CAA; since the latter did not keep copies of supporting documentation, the auditors could not verify the justification of import invoices for some 33% of SAL I disbursements or rule out the possibility of double usage. The collapse of the banking system made it impossible for some private sector importers to produce satisfactory proofs of payment. In view of this unsatisfactory experience, responsibility for submitting withdrawal applications under SAL II has been transferred from the CAA to the BCEAO, Cotonou. H. CONCLUSIONS AND LESSONS OF SAL I 36. SAL I was a major breakthrough after many years of a difficult policy dialogue between the Bank and the Government of Benin. The core objective of reducing the public sector's role in the economy and creating an enabling environment for expanded private sector activity entailed a fundamental shift in previous economic policies (para. 10). Initially overshadowed by a profound political crisis, its implementation resulted in a significant improvement in Benin's macroeconomic and public finance performance and in the adoption of major structural reforms in 1990-91. 37. The political crisis was itse:f partly fueled by the failure of the marxist government to deliver the benefits promised by the adjustment program; that the February 1990 National Conference subsequently endorsed the program is evidence of the important role the SAL played in forging a domestic consensus for comprehensive economic reform. Perhaps its most important achievement is the acceptance, at all levels of Beninese society, of a severely limited role for government in economic activity. Its most important lessons, applicable for the most part to other country experiences, may be summarized as follows: (i) Devoting adequate Bank resources to pursuing the policy dialogue with countries in which progress is painfully slow can eventually reap important rewards. Over a period of seven years Bank management remained committed, despite years of frustration, to convincing the Government that a fundamental reorientation of its policies was required to lay the basis for sustainable growth. Not only was the Government finally convinced; in addition a national consensus emerged in Benin that structural adjustment was inevitable and beneficial. (ii) Firmness on the part of donors when a program has gone off track can contribute to the emergence of a better basis for program implementation, and thus to eventual success. By insisting to the Beninese authorities in December 1989 that additional donor (including IDA) support was incompatible with the existence of widespread civil servants' and teachers' strikes and the loss of a full academic year, donors (including the Bank) made a positive contribution to the evolution of the program. The concerted and constructive response by donors was an important element in the peaceful resolution of the social crisis.  - II - 38. In conclusion, initial difficulties in program execution were overcome and permitted a significant improvement in economic performance once adjustment measures were consistently pursued. Given the extent of Benin's economic deterioration prior to adoption of the adjustment program, the progress made under SAL I in 1990 and 1991 is commendable and forms the basis for deepening the adjustment process under SAL 11. It will, nonetheless, take many years of strong adjustment to remove the deep- seated constraints to growth, particularly in view of the economy's heavy dependence on a few export commodities (para. 27). PART 11. PROGRAM REVIEW FROM THE BORROWER'S PERSPECTIVE 39. The Bank has formally requested that the Government of Benin submit a Program Completion Report.9 By letter of November 5, 1991, the Government informed the Bank that efforts to produce the Report were underway. The Government's assessment is unlikely to differ from that contained in Part I, since it generally reflects the dialogue between both parties during the SAL I period, and during the preparation of SAL II. 9 During SAL 11 Negotiations, through a fax message to the Resident Mission dated September 24, 1991, and through a letter from the Resident Representative to the Minister of Plan dated October 1, 1991.  - 12 - PART IlIl. STATISTICAL INFORMATION Eno=EC TELTABLE First Mention in Files December 1987 Initiating Memorandum June 1988 Letter Of Development Policy April 1989 Negotiations November 1988 Board Approval May 23, 1989 Credit Agreement May 26, 1989 Effectiveness June 28, 1989 Original Credit Closing March 1990 Actual Credit Closing November 1990 CUMULATIV CREDff DISBUllNM Amounts (USSmillion) FY90 FY91 (i) Total Credit Amount 45.0 0 (ii) Actual 21.0 23.1 (iii) (ii) as % of Total 46.7 % 51.3 % (iii) Cumulave Amount 46.7 % 98.0 % 1/ _ MISSION DATA Montb/Year No. Of Weeks No. of Persons Staff Weeks Appraisal June/July 1988 3 8 24 Negotiations November 1988 1 10 10 Supervision I June/July 1989 1 2 2 Supervision E October 1989 2 3 4 Supervision M Nov/Dec. 1989 3 2 5 Supervision IV March/April 3 5 12 1990 1/ The difference be4ween the original credit amount and actual disbursements is due to fluctations in USSISDR exchange rate over the disbursement period.  - 13 - S[AFF ER Staff Weekss ._______ .FY88 FY89 FY90 FY91 FY92 LENP 53.8 6.1 LENA 2.7 51.3 LENN . 26.9 . . l SPN _ 5.0 43.6 .7 ..._ l PCR I 8.0 TOTAL STAFE INPUTS: 198.1  - 14 - (US$ equivalent) 07/21/89 3,S10,511.46 07/21/89 1,306,938.54 08/30/89 7,252,946.52 11/06/89 2,568,632.45 11/06/89 -1,224,234,74 07/21/89 3,510,511.46- 07/21/89 1,306,938.54- 07/21/89 3,510,511.46 0712i1l89 1,306,938.54 12/04/89 2,356,255.50 12/04/89 1,305,001.23 12/22/89 1,524,298.54 ITOTAL CY_ 21,040.818.98 07/17/90 1,061,766.72 07/17/90 861,260.37 07/17/90 1,169,845.01 07/17/90 1,105,029.81 07/17/90 1,110,635.54 07/17/90 1,268,730.45 07/17/90 1,608,430.76 07/17/90 1,521,837.47 07/25/90 4,367,313.69- 07/25/90 8,734,627.39 08/41/90 1,704,952.25- 08/21/90 3,409,904.50 08/31/90 769,378.71-  - 15 - RATE 1 2 AMOLNT (US$ equivalent) 08/31/90 1,538,757.42 09/19/90 301,918.13- 09/19/90 603,836.26 09/25/90 1,811,540.13- 09/25/90 4,368,218.93 10/02/90 268,798.16 11/05/90 3,406,325.77 TOTAXL CY90 23,082,901.65 I.L EYDR C URJ 44,131,720.63  - 17 - Attachment I Intemational Development Association Paae 1 of 15 FOR OFFICIAL USE ONLY FOR .or consideration on EXECUTIVE T7hursday, June 28, 1990 DIRECTORS' MEETING IDA/R90-110 FROM: Vice President and Secretary June 20, 1990 BENIN: Structural Adjustment Credit (Cr. 2023-B