Benin - First Structural Adjustment Credit Program

Document of The World Bank Report No. 12105 PERFORMANCE AUDIT REPORT REPUBLIC OF BENIN FIRST STRUCTDRAL ADJUSRIENT CREDIT (CREDIT 2023-BEN) JUNE 29, 1993 Operations Evaluation Department 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 EOUNALENTS (period average) Currencv Unit = CFA Franc (CFAF) 1986 US$1.00 = CFAF 346.30 1987 US$1.00 = CFAF 300.54 1988 US$1.00 = CFAF 297.85 1989 US$1.00 = CFAF 319.01 1990 US$1.00 = CFAF 272.26 1991 US$1.00 = CFAF 282.11 1992 US$1.00 = CFAF 264.69 ABBREVIATIONS AND ACRONYMS BBD Banque BBninoise pour le DBveloppement (Development Bank of Benin) BCB Banque Commerciale du BBnin (Commercial Bank of Benin) BCEAO Banque Centrale des Etats de 1'Afrique de 1'Ouest (Central Bank of West African States) CNCA Caisse Nationale de CrBdit Agricole (Agricultural Credit Bank) PAR Performance Audit Report PCR Program Completion Report PDV Programme de DBpart Volontaire (Voluntary Departure Program) PE Public Enterprise PFP Policy Framework Paper SAF Structural Adjustment Facility SAL Structural Adjustment Loan (Credit) FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY THE WORLD BANK Wuhlngton, D.C. 20433 U.S.A. June 29, 1993 WMORANDUM TO W E F . ~ ~ U T IDWCTORS W AND THE PRESIDENT SUBJECT: Performance Audit Report on Republic of Benin - First t Credit (CreditZM;I=BIEM Attached is the Performance Audit Report on Republic of Benin - First Structural Adjustment Credit (Credit 2023-BEN) prepared by the Operations Evaluation Department. The primary objective of this first SAL was to support a fundamental reorientation of the economy, away from state intervention towards greater reliance on market forces, through refonns aimed at reducing the public sector's role in the economy, improving public sector resource management, restructuring the banking system and promoting private sector activity. The turnaround in Benin's economic policy environment has been dramatic, and the overall outcome of the SAL reform program was clearly satisfactory. Good progress was made in implementing reform measures in some areas, suggesting that the process is sustainable, even though much uncertainty remains because there were also significant delays and areas of inaction; in addition, so far there is little evidence of any response of the formal private sector to the reforms. The institutional impact of the SAL was partial: the quality of investment planning, e.g., needs much further improvement. The above assessment is in general agreement with that contained in the Program Completion Report. Probably the most important lesson to be learned from the Benin experience is that the patience and persistence of the Bank over a long number of years, during which the groundwork was laid for reform and consensus built, were key factors in the successful transformation of the economy. In addition, while the refonns need much further consolidation and a second SAL is under implementation, private sector promotion remains a major challenge. Because Benin's development is unavoidably intertwined with that of neighboring Nigeria, this will need to be factored in more explicitly in future strategies. Attachment lbis docllmmt h a r rPstrictcd dimib& md may be dby dpclltr only in tbc peafotmancc o f their OW&tics. Itr contmlb may mot aCberaiac be disdased ritbocrt World B a d aothorkdoo.  FOR OFFICIAL USE ONLY T STRUCTU- (CREDIT 2023-BEN) PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i BASICDATASHEET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii EVALUATlONSUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v I. BACKGROUND ................................... U. OBJECTIVES AND CO~TEN'I'OF THE SAL ................ III. ATION AND O U T C O m.................... Overall Evaluation .................................. IV. AND ............... List of Tatles: 1: Consolidated Operations of the Central Government, 1986-1991 . . . . . . 2: Balance of Payments Data, 1986-1991 . . . . . . . . . . . . . . . . . . . . . . List of Figures: 1: Recipients' Use of Severance Packages . . . . . . . . . . . . . . . . . . . . . 2: Principal Activity after Departure . . . . . . . . . . . . . . . . . . . . . . . . . This document has a restricted distribution and may be used by recipients only in the performance or their olficial duties. Its contents may not otherwise be disclosed without World Bank authorization.  O R M A W AUDIT STRUCTURAL ADJUSTMENT C - (CREDIT 2023-BEN) PREFACE This is a Performance Audit Report (PAR) on the First Structural Adjustment Credit (SAL I) for the Republic of Benin. The Credit, in the amount of SDR 33.5 million (USS45 million equivalent), was approved on May 23, 1989, and closed on December 31, 1990, nine months behind schedule. The credit was fully disbursed. The PAR is based on the Program Completion Report (PCR) prepared by the Africa Regional Office and issued in 1992,1fthe President's Report, sector and economic reports, the credit documents, summaries of the Board discussions, study of the program files, and discussions with Bank staff. An OED mission visited Benin in November 1992 and discussed the effectiveness of the Bank's assistance with Government officials, the donors. and the business community. Their kind cooperation and invaluable assistance in the preparation of this report is gratefully acknowledged. The PCR provided a good account of the program experience and implementation, and discussed the performance of the Bank and the Government. The PAR provides a more detailed comparison between macroeconomic results and original objectives, and adds a discussion on the end- use of the SAL and other donor funds in suppon of the program. o the Borrower for comments, but none were received. The draft PAR was sent t ' 1 of Benin - First Structural PCR,Be~ublic C d i t (Credit 2023-BEN), Repon No. 10844, June 30, 1992.  PERFORMANCE AUDIT REPORT REPUBLIC OF BENIN FIRST STRUCTURAL ADJUSTMENT C R E D R (CREDIT 2023-BEN) BASIC DATA SHEET CREDIT POSITION (Amounts io US$ Million) As of Mav 31. 1993 - Credit Original Disbursed la Cancelled Re~aid Outstanding /a Cr. 2023-BEN 45.0 44.1 0.01 -- 47.5 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS Appraisal Estimate (US$M) 22.5 Actual (US$M) 21.0 Actual as 96 of Appraisal (96) 93.3 % Date of Final Disbursement: November 5, 1990 PROGRAM DATES Orinioal Actual Initiating Memorandum Negotiations Letter of Development Policy Board Approval Signing Effectiveness Credit Closing STAFF INPUTS (staffweeks) Preappraisal 53.8 6.1 59.9 Appraisal 2.7 51.3 54.0 Negotiations 26.9 26.9 Supervision 5.0 43.6 0.7 49.3 Other - - - - - 8.0 8.0 Total 56.5 89.3 43.6 0.7 8.0 198.1 - /a Disbursed and outstanding amounts differ from the original amount of the credits in terms of US$ because of changes in the USSISDR exchange rates.  No. of No. of Staff MonthPlear Weelrs Pefsons Weeks Appraisal Negotiations Supervision I Supervision Il Supervision III Supervision IV ANNUAL REPORT ON PORTFOJ .I0 PERFORMANCE RATINGS Evaluation Development Le$d Management Year s2Bd Obiectives Covenanb Performance OTHER PROGRAM DATA Bormwer/Executing Ageucy: Republic of BeaiP Operation: Structural Adjustment Credit Il Credit No. : 2283-BEN Amount: USS55.0 million BoPrd Dale: June 27, 1991  REPUBLIC OF BENIN FIRST STRUCTURN, ADJUSTMENT CREDIT (CREDIT 2023-BEN) Backmound ves and Content of the && 1. Benin became a Marxist-Leninist State in 4. The fundamental objective of Benin's the mid-1970s and its economic policy was structural adjustment program was to reorient subsequently driven by the objective of in- the economy away from what had proven to be creasing the role of the state in the economy in disastrous state intervention towards greater order to accelerate growth. Partly as a result of reliance on market forces. The focus of the the Government's program, which was heavily Government's program and of the SAL was on financed by foreign commercial borrowing, and public sector reform and on incentives for partly because of oil and uranium booms in private sector development. Five areas of neighboring Nigeria and Niger, economic action were identified: reform of the current growth did accelerate significantly between budget, particularly a reduction of the salary 1976 and 1981. bill through a freeze on hiring and through an ambitious Voluntary Departure Program for 2. By the early 1980s, however, the boom in civil servants (PDV), and, on the revenue side, neighboring countries came to an end. Also, replacement of the internal turnover tax by a Benin's public investment efforts turned out to general expenditure tax, applicable to domestic have been largely wasteful and its economic goods and services as well as to imports; rein- management dismal. The economy grew little forcement of the quality of investment planning; during the ensuing years; the large budgetary deepening and amp1ify ing ongoing public enter- and balance of payments deficits became unsus- prise (PE) reforms; restructuring of the bank- tainahle and gave rise to substantial accumula- rupt banks; and reforms of trade policy and tions of internal and external arrears. deregulation of markets (paras. 2.03-2.10). 3. Reform efforts were begun as early as in 5. The macroeconomic impact of the pro- 1982. With the opening of a resident mission gram was expected to be a real GDP growth in 1983, the World Bank began to promote rate of 3% p.a. during the SAL period (1989- piecemeal change in selected areas, and slowly 91), an improvement in the tax yield by 2-3 but steadily a number of reforms were intro- percentage points of GDP, public savings duced. By 1986 a National Adjustment Com- equivalent to about 1% of GDP by 1990, and a mission was created to prepare a comprehensive reduction in the current account deficit of the reform program. As the economic situation balance of payments by 1.5 percentage points of gradually grew worse, ideological opposition to GDP between 1988 and 1991. The negative comprehensive reform dwindled: the SAL was social impact of adjustment was expected to be approved in May 1989 with substantial backing felt only in urban areas, primarily as a result of from the rest of the donor community. layoffs, but severance packages (the PDV in particular) were expected to soften the blow.  artears and an increase in reserves (paras. 3.12- 3.13). Finally, to date there is no evidence of 6. A major social and political crisis in late any response of the formal private sector to the 1989learly 1990, sparked by public salary reforms. payment arrears, delayed implementation of the SAL. Under pressure, the Government offici- Qverall E v a l w n and Lessons Learnd ally abandoned Marxism-Leninism in December 1989 (paras. 3.02-3.05). Following a National 9. The SAL, and the years of preparation Conference in February 1990, a new interim that preceded it, nurtured by a very patient Government was established (with elections to Bank-country dialogue, clearly played a major be held in early 1991). Subsequently, imple- role in the fundamental reorientation of the mentation of the SAL program was resumed; Beninese economy, away from state interven- while progress can, on the whole, be judged to tion and towards greater reliance on market have been satisfactory, including the funda- forces. Its impact on Benin's future develop- mental change-over in economic policy orienta- ment potential has, therefore, been substantial. tion, there were also important delays and areas In addition, good progress was made in imple- of inaction. menting the SAL measures in some reform areas, suggesting that the process is sustainable. 7. More specifically, there was substantial At the same time, much uncertainty remains, progress in PE reform, especially liquidations because there were also significant delays and and privatizations, and in the PDV. On the failures. The public finance outcome was other hand, the transformation of the internal especially disappointing. It would appear that turnover tax into a general expenditure tax had expectations were unrealistically high. to be delayed by one year primarily because preparatory work proved more difficult and 10. Apart from the policy reforms per se, it is timeconsuming than anticipated; the consul- useful to evaluate the use of the funds which tant's study on tariff reform and industrial were meant to underpin these reforms. The protection, which was to be the basis for a Credit Agreement, as a matter of routine, reform action program, was found to be formally states that the funds would be used to deficient and action had to be delayed to a finance urgently needed imports. The second SAL; in addition, little progress had President's Report is more complete in its been made in improving the quality of invest- paragraph 45: "The proposed credit would ease ment planning, and, though a viable banking Benin's financial constraint during the adjust- system was restored, major problems remain ment period, not only with respect to external (paras. 3.08-3.10). capital requirements, but also by increasing budgetary resources especially to permit the 8. The overall macroeconomic results were payment of the costs associated with the restnrc- mixed. Because of the political turmoil in turing of the banks." In practice the focus was 1989, GDP declined by 2.8% during that year, the counterpart monies in support of the budget. but then rebounded and grew by 3.7% in 1990 The SAL, as well as most of the funds provided and 4.7% in 1991. The financial outcome of by other donors, did not (with the exceptions the program was disappointing however. noted below) finance the cost of adjustment Government revenue performance was especi- policies, but rather primarily covered debts and ally discouraging so that, even though the wage unpaid bills left over by Benin's previous bill was reduced and other non-interest current Government: overdue salary payments, current spending fell to undesirably low levels, public salaries, reimbursement of depositors in the savings remained negative. Oa the balance of bankrupt banks, and other current spending. It payments side, the current account deficit did is most likely that the ultimate use of the SAL not decline as much as expected, but excep- and other donor funds was consumption, which tional finance did permit a major reduction in to some extent allowed increased receptivity to 14. There are four major lessons to be drawn the reform program. from the Benin experience: 11. In contrast, a select part of the funds The patience and persistence of the Bank provided by donors (not including the Bank) did over a long number of years, during finance genuine adjustment costs, namely those which the groundwork was laid for which provided for severance packages for the reform, were key factors in the successful excess labor force departing from the civil transformation of the economy; service and from the PEs. A sample survey of the civil servants who left public employment The widespread consensus on reform under the PDV, a part of the reform program measures, i.e., the ownership of the financed by the European Community, provides program, built during this first SAL must excellent insights into the effectiveness of this be seen in a dynamic context. By 1987, endeavor (paras. 3.17-3.26). the Beninese economy had slipped into a desperate financial impasse, which meant 12. First, the severance packages themselves that mobilization of support for reform were quite generous, averaging more than four was relatively easy. Now that the eco- times the yearly public salary of the departees. nomic crisis has subsided, it remains to be Second, more than 90% of the departees ended seen whether the momentum of ownership up engaged in informal sector activities, but can be maintained; there was no exodus to rural areas. Instead, two-thirds entered the commercial, transport A well-financed civil service retrenchment and services sectors, primarily because this is program can do much more than retrench: where opportunities are readily available in it can be an important source of private Benin. Given its geographic location -- next to sector investment and growth; and Nigeria and bordering landlocked Niger and Burkina Faso - Benin is a nation of traders and In the longer term, Benin's development transit trade, most of it informal. Third, and is unavoidably intertwined with that of most importantly, the monies received in sever- Nigeria. Some of the most basic policy ance pay were put to remarkably good use: reforms yet to be introduced -. industrial two-thirds found their way into productive and tariff policy reform, exchange rate policy, financial investment. measures to develop private investment opportunities and the pervasive informal 13. The survey data suggest that, for the - sector will have to be designed with group of departees as a whole, current income this constraint in mind. roughly equals previous income, but the dis- tribution of income within the group is much more uneven than before. The survey results clearly indicate that the severance packages were instrumental in promoting private sector investment and growth. It is unfortunate that most donors, including the Bank, have not given much thought to the issue of how sever- ance packages are put to use by the recipients, but instead focus almost exclusively on sever- ance packages as an instrument to reduce public employment.  PERFORMANCE AUDIT REPORT FIRST STRUCTURAL ADJUSTMENT CREDIT (CREDIT 2023-BEN) I. BACKGROUND 1.01 Benin is a small country of 4.9 million people with an annual GNP per capita of US$380 (1991). Agriculture and regional trade are the backbone of the economy. The agricultural sector employs three-fourths of the active population and accounts for nearly 40%of GDP: food crops, cotton and palm products dominate. The country is self-sufficient in food. Cotton is by far the largest of domestic merchandise exports and makes up 70% of the total. The manufacturing sector is small and accounts for only about 10% of GDP and includes, apart from agro-processing, a limited range of consumer goods. The large tertiary sector is dominated by trade and transit activities between Benin and its neighbors, particularly Nigeria: re-exports exceed domestic exports. Thus, the Beninese economy is highly vulnerable to external fluctuations not only in world market prices but also in economic activity in neighboring countries. 1.02 During colonial times, Benin (then called Dahomey) became renowned within the French empire for its educational progress and its educated elite. Consequently, Beninese were employed as advisors to public officials throughout West Africa. When independence came in the early 1960s, the former French colonies began deporting the Beninese who had been running their administration. Back in Benin, this unemployed intellectual elite was an important contributing factor to a long period of political instability, characterized by many military coups and changes in Government and in the constitution, which lasted through 1972 when Mathieu Kerekou seized control in another coup and formed a revolutionary government. Two years later, Marxism-Leninism became official ideology at which time also the country's name was changed to Benin. Close ties with the communist bloc were pursued. 1.03 Subsequently, economic policy was driven by the objective of increasing the role of the state in the economy in order to accelerate growth. Many new state enterprises were formed, private businesses and banks were nationalized, collective farms were set up, regulations and controls on economic activity and trade multiplied, government investment activity boomed, heavily financed by foreign borrowing on commercial terms, and civil service employment tripled. Some of these structural changes were more apparent than real. Thus, e.g., the bulk of agriculture remained in private hands as did much of the commercial activity. Nevertheless, partly as a result of the Government's program and partly because of oil and uranium booms in neighboring Nigeria and Niger, respectively, the economy grew at over 5.5% p.a. in real terms between 1976 and 1981. 1.04 Expenditures under the public investment program peaked in 1982, then dropped to less than half their 1982 level in 1983 and the following years. Also, by 1982-83, the economic booms in Nigeria and Niger had come to an end. Furthermore, the newly completed public investment projects turned out to be an important drain on the economy because they had been generally poorly conceived. All around economic management was dismal, the only bright spot being the agricultural sector which had largely escaped state control. As a result, the economy grew little during the next few years and, with the start of debt servicing on past borrowing, financial problems quickly mounted.. The large budgetary and balance of payments deficits gave rise to substantial accumulations of internal and external arrears. 1.05 The Government began to address some of the country's many problems as early as in 1982, in such areas as agricultural producer prices and policies affecting public enterprises (PEs). It also started to look more and more to the West for assistance and advice, and a World Bank Resident Mission was opened in Cotonou in 1983. Ideological opposition to a comprehensive structural reform program remained an obstacle, however, and the Bank's approach to introducing change was therefore focussed on selected issues and sectors: this would both facilitate and allow additional time for strengthening the dialogue. Thus, in December 1984, the Bank Board approved a Technical Assistance Project for Planning and Economic Management (IDA Credit 1530-BEN) primarily to reinforce the Government's capacity in these areas; and, in December 1986, a Public Enterprise Sector Rehabilitation project was approved (IDA Credit 1748-BEN) to assist Benin in the rehabilitation of the sector, at both the sector and enterprise levels. Also in 1986, the Government took a major step forward through the creation of a National Adjustment Commission to prepare a comprehensive reform program, a decision which in essence transferred responsibility for macroeconomic policy from the Politburo of the single party to the ministers. 1.06 Meanwhile, the economic situation grew progressively worse. To illustrate, the country's three public banks, having been lax in appraising PE credit demands, were virtually bankrupt by the end of 1987, with two-thirds of their combined portfolio classified as bad debt. In spite of the severe cutback in public sector capital spending, the rapidly growing civil service wage bill kept the budget deficit at unsustainably high levels: the Government became a net debtor to the banking system, by the end of 1987 accumulated domestic arrears were equivalent to about 15% of GDP, and there were increasing delays in civil service payments. Likewise, the overall balance of payments' deficit could not be fully financed: external arrears, primarily on debt service, reached the equivalent of 16% of GDP by end-1987. In the face of a desperate economic situation and outlook, and of evidence that past policies had failed, ideological opposition to a comprehensive reform program dwindled. The SAL was appraised in mid-1988, by which time the Government had made good progress in putting a structural reform program together as well as in its dialogue with the IMF on stabilization policies. 1.07 Board presentation of the SAL was postponed to May 1989 to permit joint processing with the first Policy Framework Paper (PFP) together with the IMF; the PFP and a Structural Adjustment Facility (SAF) program were approved by the Fund Board in June 1989. 11. OBJECTIVES AND CONTENT OF THE SAL 2.01 The fundamental objective of Benin's structural adjustment program was to reorient the economy away from what had proven to be disastrous state intervention towards greater reliance on market forces, which, in turn, was expected to lead to modest per capita income growth with financial stability. The first SAL, in an amount of $45 million equivalent, was in support of the first phase of the Government's adjustment program. The radical change in Benin's economic policy environment was much welcomed by the rest of the donor community as well and, in addition to IDA, six other multilateral and bilateral donors provided support to Benin's program for an additional $101.2 million equivalent, while the IMF through a first arrangement under the SAF provided about $8.4 million equivalent. 2.02 In line with the basic objectives, the focus of the Government's program and of the SAL was on public sector reform and on incentives for private sector development. Five areas of action were identified: reform of the current budget, particularly a reduction of the salary bill, together with reforms in general public sector management; reinforcement of the quality of investment planning and programming; deepening and amplifying the ongoing PE sector reform; restructuring of the banks; and reform of trade policy and deregulation of markets. 2.03 The restoration of public sector financial viability was essential to restoring macroeconomic balance and was to be achieved primarily through action on the surrent b u m . A tax reform program was expected to improve the tax yield by 2 to 3 percentage points of GDP. Starting as early as in 1987 a number of measures were implemented, prior to Board presentation of the SAL, especially in the area of import tariffs and including the removal of quantitative restrictions and their replacement by import taxes; in addition, some steps were taken towards improving the administration of the tax system. As part of the SAL a major reform was to be introduced with the 1990 budget, when the internal turnover tax was to be replaced by a general expenditure tax, applicable to domestic goods and services as well as to imports. This was a condition of second tranche release. The introduction of the new tax was furthermore to be coordinated with a thorough reform of the import tax system, the latter on the basis of a study of industrial tariff protection (para. 2.10). 2.04 Reducing and restructuring current public spending was probably the most urgent task facing the Government: delays in meeting the payroll had begun as early as in 1986. Measures taken prior to the SAL included improvements in the personnel data base because of many existing irregularities such as "ghost employees", ending automatic recruitment of university graduates into public service, and abolishing the housing allowance for civil servants and the military. A key element of the SAL was the initiation of an ambitious effort to reduce the size of the civil service through a Voluntary Departure Program (PDV) which would be grant-financed by the European Community. The general objective was to reduce the civil service by about 6,000 over four years (from 47,000 in 1987 to 41,000 by 1991) and to reduce the wage bill by about CFA 8 billion (from CFA 45 billion in 1987 to CFA 37 billion in 1991). "Progress as scheduled in the implementation of the civil service reduction program for calendar year 1989" was a second tranche release condition. 2.05 The tight budgetary situation had also given rise to serious under-funding for current spending on operation and maintenance, health and education. To alleviate these constraints, efforts were begun in 1986-87 in the context of IDA projects in the transport and water supply sectors, where mechanisms were set up to improve allocations for O&M and the efficiency with which they were used; in addition, a Social Fund had been set up, in the context of an IDA health project, into which external donors would enter contributions to help finance current spending in health and education. Also, the administration of the public service was to be improved through the preparation of a profile of the existing civil service, in terms of size, skills mix and ministerial distribution, and recommendations for restructuring. 2.06 Improvements in the quality of investment planning, which had been initiated in mid-1986 by subjecting each project to thorough technical, financial and economic analysis were to be reinforced. The investment program was to be made fully compatible and consistent with the macroeconomic outlook and objectives of the adjustment program, in the form of three-year rolling programs. 2.07 Public enternrise reform, under the SAL, was essentially a continuation of efforts initiated in 1986 in the context of the IDA-supported public enterprise sector rehabilitation project. A new overall portfolio review of the sector had been completed in July 1988. On the basis of this review, an action plan was agreed to in December 1988 to carry out selected liquidations (2), privatizations (7), and diagnostic studies for enterprises to be rehabilitated (10). Implementation of the action plan was a second tranche release condition. 2.08 By 1987, Benin's bankine svstem had virtually collapsed. A large share of loans in their balance sheets was non-performing and, following a government decision late in that year to sequester the bank deposits of tax delinquents, there was an exodus of funds from the system, further exacerbating the liquidity crisis. In addition, the economy's rediscount facility at the Central Bank (BCEAO) had been exhausted: temporary facilities outside the normal credit ceilings had to be granted twice (in January and August 1988). 2.09 With Bank and IMF assistance, a comprehensive action program was worked out to restore a viable banking system. The program included: (a) liquidation of the three existing state banks (CNCA, BCB and BBD) and reorganization of the rural credit network; liquidation of CNCA was already underway; (b) creation of a new commercial bank with a majority share held by a foreign private bank; (c) rescheduling of the bank's debts to the Central Bank with the Government on terms compatible with the public finance situation; and (d) reinforcement of supervisory and regulatory functions. During the transition period, the two banks whose liquidation remained to be initiated (BCB and BBD) would be temporarily administered by a team of foreign experts to ensure a minimum level of banking services, assist in the recovery of the banks' claims on the private sector, supervise the auditing of individual accounts and the reimbursement of depositors, and oversee the liquidationprocess. 2.10 &v reform To help the private sector play a larger role in the economy, some pricin~ m l a t i o n measures had already been taken prior to the SAL. They included abolition of the state monopoly of the import of most consumer goods, liberalization of some prices and of food crops marketing, and the removal of quantitative restrictions on imports. Four additional actions, all conditions of second tranche release, were to be taken under the SAL: (a) an evaluation of the framework of industrial tariff protection and import taxation in a study launched in November 1988, and a subsequent action program to be agreed with the Bank; (b) the abolition of import licensing for most imports; (c) a revision of business regulations, licensing and reporting requirements, and an amendment to the labor law to allow more flexibility in hiring and firing; and (d) a revision in the investment code to make it neutral between public and private enterprises as well as regards size and factors of production. 2.11 The macroeconomic im~act of the program was expected to be, fust of all, a real GDP growth rate averaging 3% p.a. during the period of the SAL (1989-91) and 4% thereafter when the policy changes would begin to have their full impact. In addition, the earlier mentioned expected improvement in the tax yield together with reduced government consumption would generate public savings equivalent to about 1% of GDP by 1990, while the current account deficit in the balance of payments was expected to be reduced by about 1.5 percentage points of GDP between 1988 and 1991. 2.12 The social imvaa of the SAL was fairly well anticipated. Benin is self-sufficient in food, and the rural sector was not expected to suffer much from any of the measures; on the contrary, it might experience some gains as a result of price and trade liberalization. Some hardship was expected to prevail in urban areas as a result of lay-offs, civil service departures and the freeze on hiring, even though it must be remembered that, to the extent that civil servant payments were delayed or not forthcoming, there was already much hardship independent of the SAL. However, severance packages were being developed to help soften the blow; technical advice to help in relocation was expected to be provided by the Center for Private Enterprise Promotion, and a labor-intensive urban works program (roads, sanitation, drainage) would be initiated to employ about 1,500 workers during 1989-91. In addition, the previously referred-to Social Fund, to be financed with foreign contributions, would help alleviate the scarcity of resources in the education and health sectors. 2.13 As is discussed briefly in the President's Report, the Beninese have become attuned to the environmental of development policies. Particular attention is paid to the problems of soil degradation and the evacuation of effluence into the rivers that flow into Cotonou and Porto Novo. As part of a general review of the new economic policy environment, the Government was expected to prepare and adopt a national policy on the environment by end-1989. III. ZMPLEMENTATION AND OUTCQME 3.01 The SAL was approved by the Board in May 1989 and the first tranche of US$22.5 million equivalent became available upon effectiveness in June; release of the second tranche was scheduled for December 1989 and the credit was expected to be closed by March 31, 1990. 3.02 Unfortunately, the final months of 1989 and the early part of 1990 turned out to be a period of major political turmoil and change. While popular discontent with the regime had been on the rise for some time, rooted in years of economic mismanagement, corruption and repression, the proximate cause of the crisis was salary payment arrears which by the end of 1989 had grown to six months. An entire school year had been lost as teachers had been on strike for most of the year; they were now joined by civil servants bringing the government administration to a virtual standstill. 3.03 Not surprisingly, the structural adjustment PI-ogramran into serious delays during these initial months. The Government's primary preoccupation was survival which, above all, meant a resolution to the salary arrears problem. The Bank was not quite certain how to respond. On the one hand, the Bank assumed a coordinating role among the donors and spear-headed efforts to determine the magnitude and timing of resources needed to support the Government's desire to become current with salary payments. Some of the SAL's first tranche counterpart funds were set aside for this purpose and vigorous efforts were made to get other donors to channel as many funds as possible towards the same goal. On the other hand, some of the donors feared that the diversion of resources to emergency salary payments would shortchange other elements of the adjustment program and thus lead to delays, and furthermore that the settlement of salary arrears alone would not resolve the crisis: in the latter event, the Bank's dialogue with an eventual successor Government would be compromised. 3.04 As it turned out, the shortage of government revenue in 1989 was so severe that everything went off track. Neither could the salary arrears problem be resolved nor could damage to other elements of the adjustment program be avoided: the rehabilitation program of the banking system was especially hard hit. Domestic government revenue in 1989 fell short of objectives by some 3096, for several reasons: the decline in economic activity and in imports, the continued absence of new banks, poor enforcement of revenue collection and the disruption in government administration, especially (but not only) in December. Ln addition, there were serious delays in the disbursement of foreign aid, including the first tranche of the SAL. First, the Government had great difficulty in collecting invoices, and even if invoices existed the customs declarations were often missing because customs agents conspired with importers who wanted to avoid paying taxes. Second, the general lack of progress in the structural reform program and the existing political uncertainty caused hesitancy and delays in many donor programs. Eventually, second tranche release had to be postponed by about six months. 3.05 In December 1989, Marxism-Leninism was officially abandoned. Soon after, emergency assistance from donors to help settle the 1989 salary arrears became available. However, the momentum of political change had become unstoppable, eventually culminating in February 1990 when a National Conference was held representing all segments of society: the old constitution was abolished and a mechanism was s d up to introduce a new one; elections were to be held in early 19911' and, in the meantime, a new interim Government was established with a prime minister as effective head of Government. By the end of March 1990 schools reopened and civil servants returned to work. 3.06 The political turmoil immediately preceding the changeover of Government and the consequent delays in the structural reform program should not detract from the fact that real reform was taking place in Benin. As mentioned earlier, several reform measures had already been acted upon prior to Board presentation of the SAL. In addition, the very change from a Mamist-Leninist regime to a democratic one clearly was a major adjustment. In this process, the SAL was a unifying element for the advocates of reform. 3.07 After the new Government came in place the macroeconomic and public finance situation recovered substantially from the dismal 1989 outcome, and sufficient progress in policy reform was made to warrant release of the second tranche of the SAL by June 1990.2 These achievements are very well discussed in the PCR, and especially in its Attachment I:g the highlights are as follows. Of the 7 conditions for second tranche release, 6 were fully or substantially met and one was waived. Especially noteworthy was the progress in PE reform and in the aforementioned Voluntary Departure Program (PDV). Decrees for the liquidation of 2 enterprises were issued as agreed, as were bids for 7 privatizations; 8 of the 10 planned diagnostic studies of PEs were completed and implementation of the recommendations was begun. The PDV program got off to a good start in 1989, with the departure of some 750 employees under the program. On the other hand, the transformation of the internal turnover tax into a general expenditure tax had to be delayed by one year primarily because preparatory work proved more difficult and timeconsuming than anticipated; yet, the conditionality, strictly speaking, was met. Finally, the consultant's study on tariff reform and industrial protection, which was to be the basis for a reform action program, was found to be deficient, and this condition was waived with the understanding that a new study would be completed by endSeptember 1990. The study was completed on schedule, and in early 1991 (after the closing date of SAL I) the import tax base was restored to the full CIF value, reversing an earlier decision, and tariffs were adjusted downwards; this . paved the way for implementation of the original objective, i.e. an action program to rationalize the framework of industrial tariff protection and import taxation, which became part of a second SAL. 3.08 Looking beyond the specifics of second tranche release conditions, implementation of the overall SAL program agreed with the Bank has progressed satisfactorily, although there have been important delays for a number of reasons. On the m n t rev- side, the one-year delay in introducing the general expenditure tax was already referred to earlier. With regard to D v e m v, the target reduction in the size of the civil service was also not met: an interim objective of a reduction by 2,500 had been set for end-June 1990, yet by end-December 1990 only 1,590 had left, partly because the (external) finance required for severance packages was insufficient 1' The electionr gave Nicephore Soglo (Prime Miniatcr in the interim Government) an overwhelming victory. 2' are well reflected in the h u a l Report on Portfolio The difficulties during FY90 end the subsequent tura~rouod Performum ratin*: overall performance rated 3 for FY90, then improved to 2 for FY91 (see Basic Dab Sheet). l Program Completion Report, ' of BeqiP-t Credit, Report No. 10844, June 30, 1992. and partly because donors gradually came to question the wisdom of sucll a program in the absence of any guidance on the personnel needs of individual ministries. It is also somewhat questionable whether one can set precise quantitative targets for "voluntary" departures. However, even though targets were not met, the program must be seen as a major success (see paras. 3.17-3.26 below). During 1991 there were no further departures from the civil service under the PDV, but the program was restarted in 1992 when a total of 2,609 civil servants left under the PDV. On the government ca~italexuenditure side, little progress was made in the context of the SAL towards further improvements in the quality of investment planning: non-programmed expenditures remained substantial. 3.09 One of the more successful components of Benin's structural reforms to date has been the rationalization of the government portfolio of public entemriseg. The initial stimulus to this process was provided by IDA'S 1986 Public Enterprise Rehabilitation project and was then further supported by the SAL. The overall rationalization objective was to be pursued through a combination of privatizations, rehabilitations and some liquidations, backed by supportive dizgnostic studies. Liquidations and the attendant layoffs were expected to be the more sensitive elements of the program and therefore most likely to encounter opposition. However, as time went on, much of the PE sector was found to be in considerably worse shape than expected, saddled with obsolete assets and deteriorated for lack of maintenance: several firms, at first slated for privatization became instead candidates for liquidation and privatization-cum-liquidation became the primary focus of the reform. Between 1986 and through 1992 some 34 PEs were either fully liquidated or the process was begun, out of a total of roughly 75 PEs existing at the end of 1985, far beyond initial expectations. At the same time, several inherently viable firms were sold to private, including foreign PI ivate, interests. On the other hand, rehabilitation of the enterprises meant to remain in the public domain has only just begun. The upshot is that, from the standpoint of the Public Enterprise Rehabilitation project, which is still ongoing, these devslopments have meant much slower disbursements than anticipated; at the same time, major progress was made towards the first priority of the program as a whole, i-e., a reduction in the extent of government involvement in the economy and in the drain on public finances, which meant privatization or liquidation of those firms which were either viable, but in serious financial difficulties, or clearly economically non-viable. 3.10 Progress made in banking sector refoiu likewise was substantial, though in this case there have been delays and major problems remain. The o!d banks are in liquidation. The rural credit network has been reorganized with assistance from IDA'S Rural Savings and Loan Rehabilitation project. Four new private commercial banks were in business by early 1990, and deposits in the new banks have grown from CFAF 7.8 billion in early 1990 to CFAF 98 billion by the end of 1992, suggesting that confidence in the banking system is gradually being restored. In addition, a strengthened banking supervisory committee was established in 1989. After a long, and during the SAL period unsuccessful, search for a majority foreign-owned private bank, Credit Lyonnais opened a branch in Cotonou in January 1993, and had collected some CFAF 3 billion in deposits after only one month of operation. On the other hand, the task of reimbursing depositors in the banks in liquidation is underway, but, primarily because of the difficult public finance situation, the process has been slow. Reimbursements of debts owed to the BCF.AO also have been slow because of shortfalls in expected foreign financing but substantial rescheduling has taken place. The most difficult task remains the process of loan recovery from private debtors. 3.11 Finally, in the area of pricing; policy reform and deremlation, efforts initiated prior to the SAL were continued: a new investment code, labor law and commercial legislation and regulations were adopted during 1990, though further revisions will be made during the implementation of SAL 11. The number of goods subject to price controls was further reduced from 20 to 4. In fulfillment of one of the conditions of second tranche release under SAL 11, the Government has abolished all remaining import licensing requirements. m e second tranche of SAL I1 was released in May 1993.) 3.12 A comparison of the gverall macroeconomic outcome with the targets set in the President's Report (PR) is necessarily limited because official national accounts estimates were subsequently revised. Real GD? growth was projected to average 3 % p.a. during the SAL period (1989-91); because of the political turmoil in late 1989, GDP in fact declined by 2.8% during that year, but then recovered and grew by 3.7% in 1990 and 4.7% in 1991. The financial outcome of the program was more disappointing, however. Some details are shown in Tables 1 and 2. Government revenue performance was especially discouraging. Tax reform had been expected to improve tax yields by 2-3 percentage points of GDP by 1991 (PR, para. 21); however, in spite of the introduction of the general expenditure tax in 1991, the tax share in GDP remained substantially below the level in pre-SAL years. On the other hand, good progress was made in reducing the government wage bill as a share of GDP under the combined influence of a freeze on hiring and the PDV. Yet the fiscal situation remained so tight that non-wage non-interest current spending, which was always underfunded, dropped, during the SAL years, to around half its pre-SAL level in absolute terms (Table 1). Even so, while public savings had been expected to reach 1% of GDP by 1990 (PR, para. 48), they remained negative instead, largely because of the weak revenue performance. Public capital expenditures likewise declined further during the SAL years. Table 1: CONSOLIDATED OPERATIONS OF THE CENTRAL GOVERNMENT, 1986-1991 (in billions of CFA Francs) Current Revenues O/W Tax Revenues Current Expenditures Wages & Salaries Interest Other Current Balance Capital Expenditures Overall Deficit la (As 96 of GDP) Current Revenues O/W Tax Revenues Current Expenditures Wages & Salaries Lnterest Other Current Balance Capital Expenditures Overall Deficit /a - la On a commitment basis. Note: components may not add up to total because of rounding. Sources: Data provided by the authorities, and IMF staff estimates. 3.13 On the balance of payments*side, domestic exports recovered from their 1988 low but were still below their 1986 level by 1991, i n absolute t e r n . While the current account balance had been projected to improve by the equivalent of about 1.5% of GDP between 1988 and 1991 (PR, para. 48), the actual improvement was very small. Exceptional finance, tbe program assistance and especially d&t relief, did permit a major reduction in arrears in 1989 and 1991 and contributed to a substantial increase in reserves (Table 2). Table 2: BALANCE OF PAYMENTS DATA, 1986-1991 ( in billiom of CFA Frrulc~) Exports, f.0.b. O/Wdomestic exports Imports, f.0.b. O/Wdomestic imports Trade Balance Services, net O/Wintererrt due Private Tramfers, net Current Account Balance Cmital Movements. net Grpntr M&LT capital (M&LT disbursementr) (M&LT amortization due) Long-term private Short-term, errors & omissiom Overall Balance Reserves (- = increase) Arrears (+ = increase) Exceptional Finance SAL SAF/ESAF Other Bilateral & Multilateral Debt Relief Memo Items Nominal GDP Current AccountIGDP (%) Note: components may not add up to total b e c a w of rounding. Sources: Data provided by the authorities, and IMF staff estimates.  Overall Evaluation 3.14 The SAL, and the years of preparation that preceded it, have clearly played a major role in the fundamental reorientation of the Beninese economy away from ruinous state intervention and towards greater reliance on market forces. Its impact on Benin's future development potential has, therefore, been significant. Throughout the process the Bank showed patience in helping Benin to internalize the reforms gradually, as the political situation evolved. The Bank also took the lead in coordinating the assistance efforts of other donors. In its design, the SAL rightly addressed what was unquestionably the major problem area, i.e. the budget deficit and the drag on society of non-viable PEs, including the banks. On the other hand, it would appear that the expectations for progress in a number of reform areas were simply unrealistically high in the short time span of a little more than two years. In fact, some of the target., such as that for the civil service reduction program, were set without secured financial backing. 3.15 In some respects reasonably good progress was made, in particular in liquidating and privatizing PEs and in reducing the size of the civil service. At the same time, there were many instances of delay and failure; above all, the public finance outcome fell considerably short of objectives. Also, whatever improvements were made in the incentives' framework for formal private sector activity has clearly been insufficient. As a result, the second SAL for Benin is in most respects a continuation of the policy reforms initiated under the first: it was approved by the Board on June 27, 1991, and is now under implementation. 3.16 Apart from the policy reforms per se, it is useful to evaluate the use of the funds which were meant to underpin these reforms, and, more specifically, to alleviate the transitional costs associated with structural change. The Credit Agreement, as a matter of routine, formally states that the funds would be used to frnance urgently needed imports. The President's Report is more complete in its paragraph 45: "The proposed credit would ease Benin's financial constraint during the adjustment period, not only with respect to external capital requirements, but also by increasing budgetary resources especially to permit the payment of the costs associated with the restructuring of the banks." In practice the focus was the counterpart monies needed in support of the budget. The SAL, as well as most of the funds provided by other donors who jointly financed the reform program, did not (with the exceptions noted below) finance the cost of adjustment policies, but rather primarily covered debts and unpaid bills left over by Benin's previous Government. The bulk of the money was directly or indirectly allocated-u to pay for items such as overdue salary payments, current salary payments, reimbursement of depositors in the bankrupt banks, and other current expenditures. While this infusion of funds has permitted a return to the statusauo some of the underlying reasons for Benin's financial insolvency remain: the weak tax effort and the narrow tax base aggravated by the especially worrisome stagnation in formal sector activity. Progress in recovering past loans from private debtors also remained slow. In the event, it is most likely that the ultimate use of the SAL and other donor funds was consumption expenditures, which to some extent allowed increased receptivity to the reform program. 3.17 In contrast, a select part of the funds provided by donors (not including the Bank) in support of Benin's reform program did finance genuine adjustment costs, namely those which provided for severance packages for the excess labor force departing from the civil service and from the PEs. A i ' In some instances the allocation was insisted upon by the donors; in other instances it was done by the Government; in the cane of the SAL the Bank made informal sugge~tiona.  sample survep of the civil servants who left public employment under the PDV,a part of the reform program financed by the European Community, provides excellent insights into the effectiveness of this endeavor. 3.18 The survey, published in November 1991, was conducted in August 1991 and covered the 1,590 employees who had opted for voluntary departure from the civil service during late 1989 and 1990. Some of the survey results presented below, in particular the income data, had to he derived from the survey data and may therefore be subject to a small margin of error. 3.19 The severance packages themselves were quite generous: depending on salary and seniority, they ranged from CFAF 750,000 to CFAF 12.5 million and averaged CFAF 2.5 million, equivalent to close to $9,000 at prevailing exchange rates;' this compares with an average yearly public salary of close to $2,000 for the departees. It is not surprising that in the prevailing harsh economic conditions, when salaries regularly went unpaid for months, the demand for packages far exceeded the supply of finance, and that the targets for departures set in the framework of the SAL could not be met. 3.20 Before departing from civil service, half of the departees had already been engaged part-time in informal sector activities for a number of years (1 1 years on average): formal and informal sector activities in Benin often engage the same labor force. The great majority of departees had a specific project in mind at the time of departure and two-thirds of them went ahead with that particular project. The primary reasons for leaving were identified as insufficient salary and irregular payment. The bulk of departees were in the relatively lower salary groups and had been in government service for many years. 3.21 More than 90% of the departees ended up engaged in informal sector activities following their departure from the civil service. However, this did not translate into an exodus to rural areas; 75% did not change place of residence (though the number of property owners doubled) and only 1.6% returned to villages. Two of the more relevant findings are captured in Figures 1 and 2 below. First, the monies received in severance pay were put to remarkably good use and, second, as compared with the country's overall economic structure, relatively little interest was shown in agricultural activities. 3.22 Altogether, only about 34% of the total of severance packages was spent on consumption: land purchases for family use (a social imperative), debt repayments, private transportation means, ceremonies and other entertainment. On the other hand, on average 15% of the packages was turned into financial investments and half (51%) into productive investments, ranging from agricultural implements, tools and business property acquisitions to taxis and other transport equipment. 2' Centre de Promotion pour 1'Emploi et la Petite et M0yeMe Entreprise, Evaluation du Pronr-e de D ~ D @ V o l o w e 1989-1994: Rapport d'Enqubte, (Ministeredu Plan et de la Restructuration Economique, Delegation de la Commission des Communautes EuropBe~es), Cotonou, Novembre 1991. CFAF 3,938 million was expended for 1,590 departme.  - 12 - Figure 1 Recipients' Use of Severance Packages Personal consumption 1 6 % t repayment 4 % purchases 1 4 % Figure 2 Principal Activity after Departure Other 7% Agriculture 25% Commerce 3.23 Two-thirds of the departees entered the commerce, transport and services sectors. This was partly because those who did not have previous informal sector experience felt comfortable about the chance of succeeding in these sectors, rather than in agriculture e.g., and partly because these are the sectors where opportunities are readily available in Benin. The bulk of depart- became involved in two or three informal sector activities at the same time, in order to spread risks. 3.24 The survey data suggest that for the group as a whole current income roughly equals previous income, even though the returns on the new investments could be expected to be relatively low during the first few months of operation. The distribution of income within the group of departees, however, is much more uneven than before with several having failed in their new endeavors while others have found mucb success. All in all, most departees are pleased with the program and few regret having left the civil service.? 3.25 The availability of severance packages was clearly instrumental in reaching one of the SAL's objectives, i.e., a reduction of public sector employment. In addition, the use made of the monies by their recipients was important for one other, longer-term SAL objective, i.e., the promotion of private sector growth. Given excessive public sector employment, most layoffs are unlikely to have resulted in any decline in production, and the fact that donors grant-financed the severance packages in the case of the PDV should be seen as a windfall to the economy. Moreover, the survey data suggest that the severance packages have made a significant contribution to the country's investment and output. 3.26 It is unfortunate that most donors, including the Bank, have not given much thought to the issue of how severance packages are put to use by the recipients. The focus instead has been on the role of severance pay as an instrument in reducing the size of the civil service. In the latter regard, the l donors have, under the second SAL, rightly begun to insist on clarifying ministerial p e r s o ~ e needs before supporting further departures (i.e., on a genuine civil service reform). More concern is also being expressed for the need for retraining to facilitate redeployment. Yet, the other role of packages, i.e., their potential in promoting private sector growth, also warrants further review. Thus, e.g., for the second stage of the PDV the packages have been made smaller. However, the generous size of the previous packages may have been a crucial factor in their success to the extent that it allowed the recipients, after satisfying some basic consumption needs, to have sufficientfunds lee at their disposal for investment purposes. 3.27 As mentioned before, informal commerce, transport and services were the preferred sectors of entry for many of the package recipients. This was logical. Because of its geographic location - next to Nigeria, bordering land-locked Niger and Burkina Faso, and, together with Togo, squeezed between Nigeria and Ghana - Benin is a nation of traders and transit trade. Partly because of divergent economic policies between Benin and Nigeria, much of this trade is now infonnal and/or illegal. While no accurate data are available, Benin's informal sector is thought to be very much larger than the formal one and growing much more rapidly. Given the porous border with giant Nigeria, it is in fact difficult to visualize many formal private industrial sector opportunities. The fixed CFAF exchange rate as opposed to the devaluing Naira may be one of the obstacles, but a depreciation of the CFAF would not likely have much impact by itself, given the variety of other constraints at this time. It would appear that, in any event, Benin's long-term development potential lies in taking advantage of its location and in further developing its transit and service sectors. The challenge for economic policymakers and for 2' The PDV was designed for civil servants only. In the carc of layoffs nsoociatcd with enterprim thnt wore privdmd, special programs were usually mt up, and there appears b have been Uowim very little hardrhip. On the other hand, in cases of liquidation the wverance pay WM mucb more limited k o u r e the firms were uually clore to bankrupt. the Bank is to recognize this reality when devising strategies. This suggests that ernphasis be placed on providing and maintaining excellent infrastructure (roads, port, communications), that efforts be made to regularize trade relations with Nigeria and promote integration, and that ways be found to connect the informal with the formal sector economy. N. SUSTAINABILITY AND LESSONS LEARNED 4.01 The above assessment of Benin's reform program would suggest that progress made can be sustained, although many uncertainties remain. The series of reform measures taken long before SAL approval, the radical change in Government, the implementation of many SAL measures, the gradual improvement in the macroeconomic and public finance situation following the crisis of 1989, and, above all, the consensus which appears to have been built on the virtues of reform, all are indicative of slow but steady progress. It should be added immediately however that, while the need for further reform is fully recognized, much remains to be done to consolidate the program, both in terms of further financial stabilization efforts and in terms of measures to generate private sector growth. 4.02 There are some four major lessons which can be drawn from this experience. First, the patience and persistence on the part of the Bank over a long number of years, during which the groundwork was laid for reform, were key factors in the successful transformation of the economy from a dirigiste to a marketaiented regime. Second, while a widespread consensus on reform measures was built during this fist SAL, ownership must be seen in a dynamic sense. By 1987, the Beninese economy had slipped into a desperate financial impasse which meant that mobilization of support for reform was relatively easy. The generous response from the donor community also meant that the process thus far has been relatively painless. Therefore, it remains to be seen whether, now that the economy is out of the crisis and some of the reforms are likely to be more painful, the momentum of ownership can be maintained. Third, as explained in detail in paras. 3.17-3.26, a civil service retrenchment program, such as Benin's PDV,can be quite successful in raising private sector investment and growth. It is worth to fiuther explore the reasons for this success. Fourth, in the longer term Benin's development is unavoidably intertwined with that of Nigeria. Some of the most basic policy reforms yet to be introduced will have to be designed with this constraint in mind, including industrial tariff protection reform, exchange rate policy and other measures to develop private investment opportunities and the pervasive informal sector.