Togo - Country economic memorandum (Vol. 1 of 3) : Recent economic developments and economic outlook

Report No. 3416-TO FILE COPY Togo Country Economic Memorandum (In Three Volumes) Volume 1: Recent Economic Developments and Economic Outlook January 11, 1982 West Africa II Division A FOR OFFICIAL USE ONLY Document of the World Bank 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 EQUIVALENTS Currency Unit CFA Franc (CFAF) US$1.00 _ CFAF 270 1/ CFAF 1 million US$3,704 1/ The CFA Franc (CFAF) is tied to the French Franc (FF) in the ratio of FF 1 to CFAF 50. The French Franc is currently floating. On the date of the Economic Mission the exchange rate was US$1 - CFAF 220.  FOR OFFICIAL USE ONLY P R E F A C E 1. This country economic memorandum was written by a World Bank mission which visited Togo in October-November 1980. The mission consisted of Ms. J. Noel (mission chief), Messrs. S. Kjellstrom (economist) and N. Chhim (debt expert), and Ms. M.A. Bromhead (YP program). Mr. M. Payson (senior departmental economist) joined the mission during the last week of its stay in Togo. 2. The previous economic report (No. 458a-TO) was issued on December 30, 1974. A basic economic mission visited Togo in March/ April 1976, at the beginning of the third Five-year Plan period. The mission's report was issued in green cover in April 1977, but was never issued in grey cover, because of the rapidly changing economic and financial situation in Togo at that time. 3. The present report is therefore comparatively long for a country economic memorandum. It covers the difficult period 1975-80 and looks ahead to the issues and options facing the Government through the mid-1980s. It is intended to provide a statistical and analytical framework for a program of structural reforms which the Government intends to introduce by the end of 1982. The report was discussed extensively in this context with the Government in the third and fourth quarters of 1981. | 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.   TABLE OF CONTENTS VOLUME I Page No. SUMMARY AND CONCLUSION I. Background 1 A. Population and Social Conditions ......................... 1 B. Political Situation ...................................... 1 II. Recent Economic Performance (1975-80) A. Introduction ............................................. 1 B. Overview of the 1960-75 Developments ..................... 2 C. Overview of Recent Developments (1975-80) .... ............ 2 D. Economic System and Development Policy .... ............... 2 E. Third Development Plan 1976-80 ........................... 5 F. Trends in the Main Sectors ............................... 9 (1) Production .......................................... 9 (2) Use of Resources .................................... 10 (3) Balance of Payments ................................. 11 G. Public Finance ........................................... 15 (1) Central Government .................................. 16 (2) OTP ................................................. 18 (3) OPAT ................................................ 19 (4) Public Investment and its Financing .... ............. 20 (5) State and Mixed Enterprises ......................... 22 H. Public Debt .............................................. 25 III. Manpower Situation ........................................... 29 A. Introduction ............................................. 29 B. Manpower ................................................. 29 (1) Present Structure ................................... 29 (2) Prospects ........................................... 31 C. Wages and Salaries ....................................... 33 IV. Development and Financial Prospects (1981-85) ....... ......... 33 A. Introduction ............................................. 33 B. Macro-economic Projections ............... ................ 34 C. Public Finances .......................................... 35 D. Investments and Financing ............... ................. 35 E. The Fourth Development Plan 1981-85 ..... ................. 37 F. Major Development Issues ................ ................. 38   SUMMARY AND CONCLUSION Overview 1. Slow growth and increasing financial disequilibria were the salient features of the Togolese economy during the 1975-80 period. The slow growth represented a deceleration from historical growth trends, and was the result of the levelling off of phosphate production and exports and stagnation or decline in production of exporjt crops. The growth rate was temporarily boosted by exceptionally high investment. The 1974/75 boom in world phosphate prices contributed to a substantial increase in export earnings and Government revenue and prompted the Government to adopt an ambitious Development Plan for 1976-80. 2. Although the boom in phosphate prices collapsed in late 1975, the Government continued to increase investment with the result that a large part of investment had to be financed from abroad. The sectoral allocation of investments undertaken was often different from what had been foreseen in the Plan. The preparation and design of realized investments were inadequate, and the investments did not often yield satisfactory immediate returns. Since most of the investments were directed toward the creation of state enterprises, which upon their completion were unable to service their foreign debt, the Treasury became saddled with an unmanageable debt burden toward the end of the period. Arrears accumulated, IMF assistance became necessary, and short-term public debt relief had to be obtained through debt rescheduling in 1979/80. 3. The financially constrained outlook for 1981-85 has very recently been somewhat mitigated by a second round of debt rescheduling in February 1981 affecting debt due in 1981/82. Notwithstanding this rescheduling, finan- cial constraints imposed by high debt service payments will weigh heavily on developments during the next five years. Growth could accelerate moderately if better use is made of presently underutilized capacity, and if more re- sources are directed toward the rural sector, but there is absolutely no scope to attempt again to accelerate growth through large-scale investments. A stringent fiscal policy will be indispensable to make room for debt service payments, most of which will continue to be supported by the Treasury, because state enterprises will be unable to service more than an insignificant portion of their debt. The necessary improvement in the performance of state enter- prises will instead have to be directed toward avoiding a need for large operating subsidies through the budget. 4. Public investment will necessarily have to become more selective and focused on viable projects with rapid returns. In its present form the recently adopted 1981-85 Development Plan is not compatible with these con- straints, but since the Government has become increasingly aware of the need for policy adjustment away from very expansionary policies toward policies more consistent with Togo's financial and absorptive constraints, it has decided to implement the Plan in two phases, limiting investments and focusing on productive projects during the first phase.  - ii - Recent Growth Performance and Prospects 5. Growth in real GDP averaged about 3 per cent per annum during the 1975-80 period. The secondary and tertiary sectors, which received most of the increased investment, expanded at a more rapid rate, while the primary sector, which benefited from relatively little investment, expanded at an even slower rate. Gross domestic expenditure outpaced production, with the result that the resource gap widened significantly through 1978. Due to the rapid increase in public investment, gross domestic investment rose sharply to exceed 50 percent of GDP in 1978, but declined almost as sharply subsquently, as growing fiscal constraints necessitated a sharp cutback in investment. The outlook for 1981-85 is for an average annual increase in real GDP of 3.5 percent, which would permit an increase in GDP per capita of about 1 percent per annum. Growth is expected to become more evenly spread among the sectors, but still highest in the secondary sector due to expanding mining operations and higher industrial production from existing plants. The modest improvement in projected growth will not relieve unemployment which is expected to worsen, because numerous new entrants into the labor market will not find employment due to wage rigidities and the structure of supply. The pursuit of less expansionary policies is projected to lead to a substantially smaller resource gap and higher domestic savings. 6. In the primary sector, growth has been limited by a relatively low level of investments and extension services, insufficient price incentives and occasional droughts. Despite heavy reliance on traditional production techniques, Togo is nevertheless self-sufficient in food crops, except during serious droughts. The relative neglect of agriculture has meant that only tiny portions of the cultivable land used to grow food crops benefit from fertilizer, insecticides and selected seeds. Yields are consequently low. Production of export crops, mainly cocoa and coffee, has been hampered until recently by not overly attractive producer prices and by aging trees with declining yields. Replanting has not contributed to growth because of the lag of about five years before new trees come into production. Because of the scope to increase output of both food and export crops if a sustained effort is made to prepare and implement good projects, growth in agriculture is projected to be about 3 percent annually between 1981 and 1985. More resources allocated to food crops to modernize production techniques, and the beginning of returns on IDA supported cocoa and coffee replanting schemes will be the main reasons for the more rapid growth in agriculture. 7. The secondary sector experienced some drastic annual swings during the 1975-80 period. Production of phosphate rock slumped badly in 1975 due to a recession-induced decline in demand, but recovered almost completely during the following two years. The massive investments channelled into industrial projects did not boost real GDP due to little or occasionally even negative value added of most new industrial units. Construction went through boom and bust as output doubled between 1975 and 1978, because of greatly stepped up investment and subsequently declined to the 1975 volume. From a peak of 10,000 in 1978, employment in construction was cut to 4,000 in 1980. The capital-intensive nature of much investment realized led to an increase in demand for energy, most of which is met through imports of petroleum products and electricity.  - iii - 8. The outlook for growth in the secondary sector between 1981 and 1985 is mixed. As a whole, the sector is projected to expand at an average annual rate of 5 percent. Assuming the presently excessive transfers of funds from the phosphate mining company to the Treasury can be reduced to enable the company to reconstitute its depleted working capital and assure some self- financing of capacity expansion, output in mining could increase considerably. This assumes furthermore that the Bank-supported CIMAO clinker plant is able to overcome its current technical problems and approach full capacity utiliza- tion. In industry, the Government's intention to adopt remedial policies to redress state enterprises is expected to overcome the stagnation of the branch. This will require a broad range of adjustment measures which could involve the closure of marginal enterprises. Growth in construction will be modest because of financial constraints, while expansion in energy will be boosted by policies aimed at increasing domestic production and reducing the reliance on imported energy. 9. In the tertiary sector growth was concentrated in public services and other private services (mainly financial) during the 1975-80 period. The rapid increase in public services was caused by substantial recruitment to the civil service in 1975-78. During the period as a whole employment in the civil service increased from 23,000 to 39,000. The growing size and sophistication of the banking system accounted for the rapid expansion of other private services, while economic activity in private transport and commerce, which are little affected by public intervention, was more in line with the rest of the economy. The outlook for the tertiary sector points to an annual growth rate of 3 percent between 1981 and 1985. Because of the severe financial constraints facing the Government, output of public services will be practically stagnant. Recruitment to the civil service will have to be reduced to a bare minimum. Growth in transport and commerce is, on the contrary, assumed to quicken on the assumptions that Togo will be able to better organize its transit trade to benefit from existing infrastructure, and that - as in the past - the Government will leave the sector alone. Investment and Financing Problems 10. Most of the problems confronting the Togolese economy during the 1975-80 period can be traced to expansionary policies maintained beyond the point where the financial means were available to pursue them. This led to the implementation of some marginal or unviable projects, haphazard foreign financing, and a drastic change in policy when the bubble burst. The origin of the deterioration in public financial management goes back to the boom in phosphate prices and its impact on Government revenue. 11. In 1975 current revenue of the Government nearly doubled as revenue from phosphates increased from CFAF 4 to 12 billion. In that year most of the surplus funds were placed abroad by the Treasury. However, in 1976, the first year of the third Five-Year-Plan, the Government embarked upon its expansionary program, designed to support the ambitious Plan objectives of economic take- off leading to self-sustained growth, just when the phosphate market collapsed.  - iv - off lending to self-sustained growth, just when the phosphate market collapsed. Current revenue nevertheless continued to rise because the ensuing increase in imports provided higher revenue from import taxes and duties while other tax revenue, mainly from commerce, proved to be remarkably buoyant. Thus, even though current expenditure (excluding debt service) increased rapidly as well, mainly due to a rising wage bill, a sizeable surplus was left to finance investment and debt service. 12. Public investment (in current prices) of the Administration, State enterprises and agencies increased from CFAF 30 billion in 1975 to CFAF 88 billion in 1978, and continued at the still high but reduced rate of CFAF 51 billion in 1980, as disbursements were made on committed projects underway. In part, because of the heavy reliance on foreign financing, which was often project-tied, the investments undertaken differed greatly from those foreseen in the 1976-80 Development Plan. The Plan had, compared to its predecessors, placed more emphasis on rural development, and to a lesser extent on social services, but during implementation major shortfalls were experienced for these two categories, while more than planned was spent on infrastructure (including tourism) and industry. Some major projects, such as luxury hotels cost much more than foreseen in the Plan. 1/ Much of the industrial invest- ment undertaken during the 1976-80 Plan was public investment because the private sector continued to prefer investment in commerce and real estate. Although financial institutions specializing in the promotion of private industrial investments were provided with funds, the funds remained under- utilized because neither private investors, nor the financial institutions themselves, were able to identify and prepare a sufficient number of good projects. Debt and Debt Negotiations 13. Heavy dependence on foreign borrowing to finance rising investment with little immediate return led within a few years to rapidly rising debt servicing to be assumed by the Treasury. By 1977/78 debt service obligations had risen to such an extent that the Treasury had to accummulate sizeable arrears. A debt rescheduling in 1979 had become a necessity. In that year a generous debt rescheduling was obtained through the Paris Club of debt obliga- tions through 1980. Togo adhered scrupulously to the new terms, but this provoked a serious liquidity squeeze in the Treasury during 1980, when CFAF 14 billion (25 percent of current revenue) had to be allocated to debt service. Because of the short-term nature of the debt rescheduling, debt due in 1981 to be paid by the Treasury would have amounted to CFAF 37 billion (over 50 per- cent of current revenue). This left Togo with no choice but to request a second round of debt rescheduling. In February 1981 the Paris Club agreed to reschedule most of Togo's debt under its purview due in 1981/82. But even after this rescheduling, debt service obligations are likely to amount to a very burdensome one-third of current revenue in 1981/82. In addition, because the rescheduling was again short-term, it is likely that Togo will have to apply for another debt rescheduling in 1983. 1/ See main report, paras 15-26 and 48 for composition of realized invest- ment.  v Balance of Payments 14. The balance of payments did not present any major problems during the 1975-80 period. Over the period as a whole a small global deficit was nevertheless recorded, and gross official reverves declined as a portion of imports. Higher costs of petroleum imports were offset by higher export receipts of cocoa and coffee due to exceptionally favorable world market prices. Since much of the increase in imports of capital goods was financed from foreign sources, the growing deficits on current account were largely offset by capital inflows. Debt service was insignificant at the beginning of the period, but became a major charge by the end of the period. Because Togo is a member of the West African Monetary Union, which guarantees the convertibility of its currency, the balance of payments per se is not the constraint on Togo s debt servicing capacity. The binding constraint, and a very real one at that, is instead the amount of domestic currency avail- able to the Treasury to service the debt. Financial Outlook 15. In spite of the significant debt rescheduling in 1981, the 1981-85 period will require judicious policies to balance the need to meet rising debt service obligations with the need to maintain a minimum development effort, in particular in 1983 when debt servicing reaches a sharp peak. There is no scope for additional borrowing on financial markets. Yet, notwithstanding a lower level of investment, foreign financing, especially on concessionary terms, will still be required. Government finances will be extremely tight during the beginning of the period, requiring austerity with respect to current expenditure and the greatest selectivity with respect to investment expenditure. Toward the end of the period rising revenues from phosphates and economic growth in general will begin to ease the financial constraints. Rising debt service and a limited capacity to borrow will, however, put some pressure on the balance of payments, but a significant part of the deficits will be financed by recourse to the IMF. Cautious financial policies and selective investment policies, which need not imply a break on the development effort, would within a few years bring Togo out of its financial problems. Since there remains considerable scope to exploit the resource base of the economy, Togo would afterwards be poised for the assumption of a more rapid and sustainable growth path. 16. Starting in 1979 the Government has shown increasing recognition and will to adjust its policies to financial realities. A stand-by arrange- ment in the upper credit tranches was negotiated with the IMF for 1979/80. The performance criteria of the accompanying financial program were largely respected. A second stand-by arrangement has since been negotiated for 1981/82, with the understanding that it might become expanded into an Extended Facility during 1981, which would require close cooperation between the Bank and the Fund.  - vi - Policy Issues and Structural Reform 17. The medium term outlook for growth of 3.5 percent p.a. during 1981-85, for which the underlying assumptions in agriculture, industry and services are given in paras. 5-9, is essentially compatible with a period of low investment, financial consolidation, and measures to cut back unproductive industrial capacity and to improve the utilization of capacity where returns are potentially positive. In other words, because of the financial constraint, Togo's growth in the next few years is likely to be rather low, even if the Government successfully implements supply side measures to prevent the diver- sion of resources from productive sectors (as in the past, from mining and agriculture, through inappropriate fiscal and pricing policies, and from small scale enterprise, through government and public enterprise absorption of domestic credit facilities) to non-productive sectors (for example, steel manufacture, oil refining, certain agro-industries, various programs in infrastructure). However, growth would be lower still if the Government were unable to stimulate the agricultural sector through the successful realization of ongoing projects to develop cash crops and the introduction of policies to support food crops. 18. Thus the real measure of economic policy in the first half of the 1980s will not be growth per se but the successful restructuring of incentives and institutions within a narrower resource gap to support accelerated growth in the latter half of the decade. Following the economic mission to Togo last October-November, the Government set forth its intention to implement an action program for structural reform in a letter addressed to the World Bank. The main elements of this program would include, in the first instance, the scaling down of the first phase of the 1981-85 Development Plan, the rationali- zation of public enterprise operations, and the establishment of policy machinery to review the options and opportunities in the productive sectors. The World Bank has been supporting this initiative through its ongoing Techni- cal Assistance Project in the Ministry of Plan, a special mission to evaluate public enterprise operations, and project and sector work in agriculture and industry. Certain key short-term pricing measures have been identified to stimulate cash crop production and improve the financial vaibility of mining operations, and recommendations have been formulated to lessen the financial burden of public industrial and service enterprises. Action on these measures would help to maintain economic activity in the current period of financial stabilization and austerity and afford sufficient scope for the Government to undertake a program of studies leading to more comprehensive structural reforms by the end of 1982. 19. Further progress in developing support for a program of structural reform in Togo, in which the Government continues to express strong interest, is now dependent on the progress made on the measures outlined above. To prevent a deterioration in the modest pace of economic development foreseen in the current period of stabilization, Togo will need continued external assistance on soft terms. As the country has substantial underlying potential to expand output in agriculture, minerals and commercial services, its longer term prospects remain quite favorable.  I. BACKGROUND A. Population and Social Conditions 1. Togo's population was estimated at 2.5 million in 1980, of which 2 million are rural and 0.5 million urban. The distribution of the population is uneven with two-thirds concentrated in the south, where densities rise to 100 people per km2. There are many ethnic groups with different languages, religions and social patterns, but the Ewe (44 percent of the population) in the south and the Kabye (23 percent) in the north constitute the two most important groups. Population growth is about 2.5 percent per annum, 2.1 per- cent annually in the rural areas and 5 percent in the urban areas. A high birth rate combined with a high mortality rate has produced a young popula- tion with 50 percent below the age of 15 years. Life expectancy at birth is about 46 years. 2. Basic skill levels of the population are not always very high. Adult literacy rates are below 20 percent. Nevertheless, primary education has been rapidly developed in recent years, and the enrollment ratio (71%) is one of the highest in Africa. The quality of the education system is not very satisfactory and despite recent measures being implemented ill-adapted to the needs of the country. Access to basic health service is limited outside Lome, and malaria, diarrhea, skin deseases and pulmonary infections are common. Daily per capita calorie supply is about adequate (2,300 compared with FAO standards of 2,470 calories). However the quality of the diet is poor, with cereals and tubers providing 82 percent of calories and 75 percent of protein. B. Political situation 3. The political situation has been stable since 1967, when the military took power. With the exception of the President, General Eyadema, the Govern- ment is now totally civilian. Togo is a one-party state, the party being the Rassemblement du Peuple Togolais (RPT). The Party's political bureau, chaired by the President and consisting of 8 members, is the center of power. The President is from the Kabye north, but the composition of the Party, Govern- ment and administration reflects a balanced regional representation. The Government, which has hosted the two Lome conventions, favors international cooperation. II. RECENT ECONOMIC PERFORMANCE (1975-80) A. Introduction 4. Togo is a poor country with a GDP per capita of US$380 in 1980, 1/ but in the rural areas, where 80 percent of the population lives, annual per capita income is only US$180. Agriculture accounts for 80 percent of employ- ment and 30 percent of GDP. The sector is mostly traditional and low-yielding, 1/ GNP per capita is lower at US$363, because of sizeable transfers outside in the form of interest payments on foreign debt.  -2- with smallholder foodcrops accounting for 70 percent of production. However cash crops (cocoa, coffee, palm kernels and more recently cotton) are of increasing importance and generate 30 percent of the country's foreign exchange earnings. The modern phosphate mine employs 1,600 persons, accounts for only 6 percent of GDP, but provides 40 percent of export earnings and 30 percent of Government revenues. The tertiary sector consists mostly of commerce, a legacy of Togo's open door trading policy, transport and public administration; it provides 50 percent of GDP and employs 15 percent of the labor force. B. Overview of 1960-1975 developments 5. Between Independence and 1975, growth averaged a high 7 percent per annum in Togo. It was sustained mainly by the start of phosphate mining in 1960, the output of which increased to 1 million tons in 1966, and 2.8 million tons in 1980, and the creation of some industrial activities, mostly import substitution industries (brewery, textiles, shoe factories and cement), which are largely foreign and privately owned. Agriculture has been growing more slowly, at 3 percent per annum; i.e. just above the population growth rate. The slow pace reflects both the growth constraints in agriculture and the limited investment allocated to this sector by the Government of the sector. 6. Until 1974, when phosphate prices rose sharply, Togo's financial management was remarkably prudent. Conservative financial policies maintained the country's net official foreign exchange reserves at about US$35 million and kept the debt service ratio below 10 percent until 1975. Public invest- ments, which averaged a low 7 percent of GDP, focussed mostly on the develop- ment of the country's basic infrastructure, roads and the port of Lome. C. Overview of recent developments (1975-80) 7. The mid-1970s were marked by a boom in phosphate prices, which sky- rocketed from US$15 to US$63 per ton between 1973 and 1975, and the nationali- zation of the phosphate mine in February 1974, which increased the receipts of the Government from phosphates from practically nil in 1973 to CFAF 12 billion in 1975. The Government, which at the time of the phosphate boom was preparing the 1976-80 Plan, overestimated the duration of the price upsurge and conceived an overambitious Plan of CFAF 250 billion. The financial stability of Togo soon began to suffer on account of two developments: first, a steep decline in phosphate prices to US$35 per ton by end-1975, a level at which they have stagnated through 1979; and, second, the undertaking by the Government of more investment than foreseen in the Plan. Public investment over the 1976-80 period amounted to CFAF 282 billion, raising the average investment/GDP ratio to a record high level of 34 percent. Since, in addition, most of these projects were ill-defined and financed on expensive terms, the debt service burden rose sharply in 1979, seriously compromising the future of the BOP and the public finances of Togo. D. Economic system and development policy 8. The Togolese economic system can still be characterized as one in which state intervention is quite limited, and where the overall allocation of  resources is determined by market forces. Public sector spending and public enterprises have risen markedly since 1975, but the private sector remains preponderant, especially in agriculture and commerce. For example, employment in the public and parapublic sector accounts for only 8 percent of total employment in 1980, although the number of civil servants increased by 75 per- cent between 1975 and 1980. The private sector leads largely a life of its own and has so far not been unduly compromised by the vicissitudes of public policy. Although in many ways dynamic, the private sector has been reluctant to invest in industrial ventures, preferring instead perceived higher or more secure returns in commerce or real estate. The Government has therefore felt the need to assume a major role in industrial investment after the phosphate boom had brought exceptional revenues. However, the result has been a wasteful allocation of resources, because many public ventures in commercial type activities would never have been undertaken by private entrepreneurs, while outlays on public utilities and other public services have been costly. The generally liberal economic policies of the Government are in part dictated by history, in part by geography. As a former UN trusteeship, Togo has followed an open-door nondiscriminatory trading policy. With long open borders it would have been infeasible to erect a protective system significantly higher than in neighboring countries. Another significant feature of the Togolese economy is the absence of price distortions in most sectors. 9. Prices are with few exceptions free to vary in line with fluctuating supply and demand. No producer prices are fixed for foodcrops, which are marketed and sold competitively on markets throughout the country by numerous traders. Producer prices are fixed for export crops (mostly cocoa and coffee) at levels which in the past implied heavy taxation, but, following repeated increases in producer prices in recent years combined with declining world market prices, the implicit taxation has been greatly reduced. The state trading company SONACOM has a monopoly on imports of a few basic goods, such as salt, rice, sugar, flour and milk. SONACOM sells its products at the same fixed prices across Togo, but the prices charged are set sufficiently high to cover costs. A system of indirect price controls exists in theory for many other consumer goods, in the form of maximum profit margins, but the system is not enforced due to lack of administrative capacity. Prices for petroleum products were raised sharply in July 1980 to reflect higher import cost. A small subsidy for kerosene is offset by higher prices for gasoline. Public services are sold at prices that cover costs or at market-determined prices, with the exception of railroads and accommodation in luxury hotels (where less than full cost pricing appears mainly to benefit foreigners). Cotton fertilizers and insecticides are the only agricultural inputs subsidized. Fertilizer subsidies were, however, reduced significantly in 1981. But subsidies through the budget might have to be increased in the future unless the performance of state enterprises and hotels is improved. 10. While Togo's past and location have imposed constraints on the pursuit of an independent tariff policy, opportunities have arisen as well. During the 1960s and early 1970s border trade flourished and contributed substantially to Government revenue, because Togo's tariffs for some consumer goods, mainly cigarettes and alcoholic beverages, were considerably lower than  - 4 - in neighboring countries. Togo's neighbors reduced their corresponding tariffs in the mid-1970s, and Togo followed suit in order not to lose too much border trade. To offset the ensuing revenue loss other tariffs were raised. As a result, Togo's general tariff structure became more similar to that of neighboring countries. 11. Exemptions granted for investment goods (a major component of imports) have no doubt given an inefficient bias towards capital, but the detrimental effect of this policy has been less important in practice than in principle. Thus, private investors have not been induced by the generous benefits of the Investment Code,--exemptions from import and profit taxes for medium to large scale undertakings--because the limited size of the domestic market and a shortage of technical and managerial skills have proven to be major obstacles to private investment in industry. Regional differentiation of benefits to distribute industry better across the country has also not had much impact, nor, unfortunately, have the special benefits designed for small- scale local enterprises. Much discretion is vested in the Government to determine the scope of benefits. Investors are encouraged to use local labor, but explicit criteria remain to be elaborated to evaluate the contribution of a project to the economy and to grant tax exemptions accordingly. The deter- mining factors are instead often the size and location of the investment. The few modern industrial enterprises which have benefitted from the Investment Code have, however, become so accustomed to these exemptions that they have often insisted on their prolongation when the expiration date has approached. The guarantee of stable rates of taxation for long periods has further reduced the flexibility of tax policy. In light of the limited investment induced by the Investment Code despite the generous benefits offered, it is urgent that a close examination be made of its costs and benefits, and that the tax system be reviewed. 12. The positive side of Togo's liberal economic policy has been that distorting policies with a possible negative impact on the economy have not been formulated or implemented, while there has been free development of private enterprise and foreign capital. On the negative side, however, the Government has been less successful in economic development than in other areas. The mechanisms for Plan administration are rather loose. It has taken several years of discussions between the Government and IDA to arrive at the establishment of a badly needed planning mechanism in the transport sector. The lack of coordination and centralization of decision-making has led to the erratic and excessive investment program described in the following paragraphs. The information on the indebtedness of the states consequently, has not been centralized or monitored. In fact, public investments are the main instru- ments of the Government's development policy, and its performance rather unsatisfactory, under the 1976-80 Plan. 13. The two major assets of Togo's economy are phosphates and agri- culture. Deposits of high grade phosphate rock make Togo one of the most efficient producers in the world. For two decades production of phosphates has generated substantial and rising export receipts and more recently Govern- ment revenue (amounting to CFAF 29 and 19 billion respectively in 1980).  Agriculture still relies heavily on traditional methods, but nevertheless assures self-sufficiency in foodstuffs and generates exports receipts of CFAF 16 billion annually. The constraints to fast economic growth, are inter alia shortages in skilled manpower, a low-yielding agriculture, and a limited domestic market of only 2.5 million people, mostly with low purchasing power. 14. These constraints explain why in 1974/75, when phosphate prices rose, the Government embarked on what turned out to be costly and marginal projects, mostly in industry and commerce. The Government not only lacked the capacity to prepare and implement good projects, especially in agriculture, but these investments were also regarded as a way to "beat the system" (see para. 8), to modernize the economy, and ensure high self-sustained growth. Although the price system is relatively free of distortions, the Government did not rely on the price system for its investment decisions. E. The Third Development Plan 1976-80 15. The 1976-80 Plan was conceived by the Togolese authorities as the first take-off plan of the economy, focussing more on the productive sectors (Table 1), than the previous plans, which concentrated largely on infrastruc- ture. More than half of the investments planned were expected to be in agriculture, industry and commerce. In fact, investments focussed mostly on industry, commerce and tourism. Table 1. COMPOSITION OF THE 1976-80 PLAN (in billions of CFAF) In percent of total Planned Implemented Implementation Administration 13.8 9.0 3.1 Transport, communications and urban development (including tourism) 75.4 125.8 44.5 Rural development 55.4 20.3 7.2 Industry 1/ and commerce 73.9 116.9 41.4 Social services 32.1 10.7 3.8 250.6 282.7 100.0 Source: Table 4.1. 1/ Including CFAF 60 billion in CIMAO. 16. The following principal projects were implemented during the past five years (an elementary cost/benefit analysis would have indicated that very few of these projects were warranted):  - one oil refinery with an annual capacity of 1 million tons costing CFAF 12 billion; - one steel mill with an annual capacity of 20,000 tons, costing CFAF 12 billion; - three thermal plants of about 100 MW capacity, costing CFAF 14 billion; - one textile factory with an annual capacity of 4.4 million T-shirts; 480,000 underwear; 232,000 pyjamas; 1.1 million jeans; 5.8 million towels, costing CFAF 10 billion; - one international airport at Lama Kara to accommodate 4-engine jets, costing CFAF 12 billion; - one hotel (2 Fevrier) of 300 rooms, 100 presidential and ministerial suites, costing about CFAF 35 billion; - one hotel (Sarakawa) of 250 rooms, costing CFAF 5 billion; - creation of a heavy equipment company involving the purchase of 300 agricultural tractors and 30 bulldozers, costing CFAF 1 billion; - one cashew nut factory at Lama Kara, costing CFAF 2 billion; - purchase of 12 grain silos, costing CFAF 2 billion; - one phosphate beneficiation plant with an annual capacity of 600,000 tons, costing CFAF 3 billion; - creation of a shipping company involving the purchase of two cargo vessels, costing CFAF 7 billion; and - one exhibit hall of 2,000 m2, costing CFAF 2 billion. 17. The decision to establish the oil refinery (Societe Togolaise des Hydrocarbures - STH) was based on: first, the Government's desire to be independent of foreign sources of refined products; second, the expectation that demand would grow rapidly in the region; and third, the assumption that preferential prices for crude oil would be obtained from Nigeria. The short- comings of the refinery are linked to its small size and concomitant high fixed costs, and, to a lesser extent, to the quality of its production, at least as far as local consumption is concerned. Togolese demand for refined products is not more than 250,000 tons annually and the refinery produces low-sulfur products for which there is no demand in Togo. CIMAO (a Bank financed clinker plant which is discussed in para. 25 below) and the thermal plants, which are the main users of the refined products, could easily use less expensive high-sulfur fuel. Since the refinery is unable to find any significant outlet in the region, it has to export its production to  Europe. Moreover, Nigeria has not granted a preferential price for its crude to Togo. The refinery can only operate profitably when the margin is large between prices of crude oil and spot prices of refined products in Rotterdam. Until now the refinery has been producing sporadically, and by the end of 1978 it had accumulated CFAF 4 billion of unpaid bills. These were, however, almost entirely repaid in 1979 when the price differential between crude and refined products was exceptionally large. In 1980, the refinery operated only for 6 months, because the price differential did not cover the operating costs. 18. The steel mill (Societe Nationale de Siderurgie - SNS) has an annual capacity of 20,000 tons of reinforced iron rods. It processes local scrap metal, but was designed to process deposits of domestic iron ore, which, however, are not expected to be mined before the end of the 1980s. Presently the steel mill suffers from a lack of scrap metal and financial and technical problems. Because of insufficient local supply, SNS had to import scrap metal from Cameroon at high cost in 1980. Since the mill capacity is three times larger than local consumption, SNS will have to look for outlets in neighboring countries. The financial situation of SNS has been hampered by a serious shortage of working capital; as of mid-1980, SNS had accumulated CFAF 1 billion in overdraft and arrears with the local banks. It is doubtful whether the plant could ever operate economically. 19. The thermal plants are being built to supply the steel mill with electricity and to meet peak demand in Lome. Two gas turbines of 25 MW have already been installed. A second phase consisting of 4 diesel engines of 10 MW each is under construction. And a third phase of one steam turbine combined with gas turbines with a capacity of 26 MW is planned. If the steel mill continues to run below its capacity, or has to be closed, the thermal plants will be seriously underutilized for a long time. 20. Togotex constitutes one of the investments aimed at developing the north of the country (Lama Kara). Togotex, which is expected to open in 1981, is designed to export 90 percent of its output of garments. Major difficulties which can be foreseen are technical, managerial, commercial and financial. Very little has been done to train the personnel. No marketing arrangements have been made yet, and no provision has been made to constitute working capital. 21. In 1976, the Government established a mixed company with a foreign supplier, Togoroute, equipped with 55 trucks and 70 trailers to carry out interstate transport between Lome and Niger. The company experiences tech- nical, organizational and financial difficulties. The equipment purchased is not adequate. Transporters from Niger are well-organized and have kept the lion's share of the transit traffic. Togoroute has been losing money from the start. The operating losses are estimated at CFAF 0.5 billion per annum. 22. Two large luxury hotels were built during the last five years. One, the Sarakawa (250 rooms) appears justified in the medium term, although it contributes to a temporary surplus of hotel rooms in Lome. The Hotel du 2 Fevrier, the largest single investment project in the Plan and representing  - 8 - 15 percent of total investments, is more difficult to justify. It comprises 300 rooms, 52 presidential and 52 ministerial suites, and is estimated to have cost a total of CFAF 35 billion (a very high US$400,000 per room). Operating costs are more than CFAF 2 billion per annum (excluding financial charges). With itSpresent occupancy rate of about 20 percent, the Hotel du 2 Fevrier is expected to lose CFAF 1.5 billion in 1981. Unless Togo succeeds in attracting international organizations and a large number of conferences to Lome, the Hotel du 2 Fevrier will incur major losses over the foreseeable future. 23. In 1976, the Government purchased 300 tractors to start an agri- cultural mechanization scheme. The equipment has remained greatly under utilized. 24. Among the other non-economical investments are the cashew nut plant in Lama Kara which has a processing capacity greatly exceeding local production and Austrian grain silos which proved unsuitable for Togolese conditions. The beneficiation plant to process the phosphate slimes was ill-conceived because the processing method selected (Hungarian) was not adapted to the Togolese rock. The two cargo vessels bought by the Government have so far been under- utilized, because the vessels were excessively expensive and sophisticated, and the company has not succeeded in capturing profitable freight. The exhibit hall, Togo 2000, will probably be greatly underutilized. 25. The better justified and prepared investments have consisted mostly of: - the construction of a new production line at OTP, costing CFAF 10 billion, which has increased the plant capacity to 3.6 million tons per annum; - three agricultural projects totalling CFAF 11 billion; the cocoa coffee rehabilitation project, the cotton project and the rural development project in the Maritime region, although this latter project has also experienced severe difficulties, and the FED and UNDP projects in Lama Kara; - road construction and improvement which has essentially focussed on the completion of the south-north axis (CFAF 15 billion) linking Lome to landlocked Niger and Upper Volta; - the rural electricity project amounting to CFAF 1 billion; and - the CIMAO project, a clinker plant with an annual capacity of 1.2 million tons, aimed at exploiting the Togolese limestone deposit located at Tabligbo. CIMAO is owned and operated by Togo, Ivory Coast and Ghana, and is intended to supply clinker to the cement plants of these countries. 200,000 tons per annum are expected to be sold in Togo and 500,000 tons in Ivory Coast and Ghana respectively. Total cost of the project was CFAF 60 billion: CFAF 46 billion for the industrial complex financed by the three states and CFAF 14 billion for the infrastructure financed by Togo (storage facilities at the port, a power line, extension of the railway and housing).  - 9 - 26. The realization of the uneconomical or only marginally justified investments which have accounted for about two-thirds of the total investment program over 1975-80, has not directly compromised the productive apparatus of the economy but has serious debt service and recurrent cost implications for the future. The private sector has continued its activities independently of the resource misallocation of the public sector. However, there is no doubt that the Government could have achieved a better allocation of phosphate revenues to meet health, education and social needs, or to improve the country's absorptive capacity by strengthening project preparation and implementation. F. Trends in the main sectors 27. This large investment program has had virtually no impact on the growth of production over 1975-80, except temporarily on construction activi- ties, which are however largely foreign operated. But they have substantially spurred consumption and definitely had a detrimental effect on the balance of payments and public finances of Togo. (1) Production 28. During the 1975-80 period, real GDP increased at a modest annual rate of 2.6 percent. Agriculture increased by only 2.5 percent annually between 1975 and 1980. Food crop production, which is still very vulnerable to vaga- ries of the weather, decreased between 1975 and 1977, due to insufficient rainfall, but increased over the 1978-80 period, because of favorable weather conditions. Due to weather conditions, but also due to insufficient producer prices, production of cocoa and coffee declined between 1975 and 1979, but rose sharply in 1980, due to better rainfall and higher producer prices.  - 10 - Table 2: GROWTH AND STRUCTURE OF GDP 1975-80 Real Growth, % Structure, % p.a. in 1976 CFAF prices 1975 1980 Primary sector 1.5 33.9 30.8 Agriculture 2.5 27.2 26.3 Food crops (1.5) (19.3) (17.5) Export crops (6.5) (7.9) (8.8) Livestock, fishing, forestry -2.7 6.7 4.6 Secondary sector 3.7 17.2 19.1 Mining 9.8 3.8 7.1 Manufactures, handicrafts 2.0 6.7 5.8 Construction 4.2 5.0 4.5 Energy 3.5 1.7 1.8 Tertiary sector 3.2 48.9 50.1 Transport 2.9 6.7 6.7 Commerce, tourism 2.1 27.4 25.8 Other private services 6.6 6.8 8.3 Public services 5.5 8.1 9.3 GDP at market prices 2.6 100.0 100.0 Source: Statistical appendix, Table 2.2. 29. The secondary sector expanded by 3.7 percent per annum, mostly spurred by mining activities. Value added in construction doubled between 1975 and 1978, at the peak of the construction period of the investments included in the Plan, but declined sharply in 1979/80 when investments slowed down. 30. The tertiary sector has, grown at an average annual rate of 3.2 per- cent. Public services have expanded rapidly, because of substantial recruit- ment, which increased Central Government employment by 75 percent between 1975 and 1980. Transport increased by 2.9 percent annually, due to construction activities, and increasing transit traffic to Niger and Upper Volta. Commerce followed the overall growth of the economy. Other private services (mainly financial) expanded rapidly (6.6 percent annually) with the increasing moneti- zation of the economy. (2) Use of resources 31. Gross domestic investment (including changes in stocks) and consump- tion have exceeded GDP by an average of 19 percent over the 1975-80 period, and increased faster than GDP, by an average 8 percent per annum. Gross  - 11 - domestic investment averaged a high 34 percent of GDP, compared with 15 per- cent over the previous five year period. The level of investments (at constant prices) rose sharply from CFAF 45 billion in 1975 to CFAF 88 billion in 1978, reaching a record high of 52 percent of GDP, but declined to CFAF 38 billion in 1980, 22 percent of GDP (Table 3). Bolstered by the expansionary fiscal policy during most of the period, public consumption increased by 11 percent per annum, while private consumption increased by 5 percent annually. Due to the high and rising levels of consumption, gross domestic savings averaged only 15 percent of GDP during the period and tended to decline. Nevertheless gross domestic savings (mostly public savings) covered 44 percent of gross domestic investment, with foreign borrowing making up for most of the rest. (3) Balance of payments 32. The evolution of the balance of payments over the 1975-80 period reflects the fast growth of consumption and investments, which resulted in a near doubling of imports from CFAF 45 billion in 1975 to CFAF 93 billion in 1979 (Table 4). Since exports increased by only 4 percent per annum until 1979, the trade deficit widened from 11 percent of GDP in 1975 to 19 percent in 1979, and amounted to CFAF 40 billion in that year. In 1980, the trade deficit shrunk to CFAF 14 billion, or 6 percent of GDP, as exports increased by CFAF 30 billion, mainly due to petroleum products and phosphates; while imports stagnated notwithstanding the crude oil imports because of a drop in imports of investment goods.  Table 3. USE OF RESOURCES, 1975-80 (In billions of CFAF at constant 1976 prices) Average Annual % Total change % 1975 1976 1977 1978 1979 1980 1975-80 1975 1980 Consumption 119.6 124.7 130.9 142.7 147.3 152.4 6.2 80.5 89.0 Private (100.0) (102.5) (105.7) (117.2) (119.3) (124.4) (5.4) (67.3) (72.6) Public (19.6) (22.2) (25.2) (25.5) (28.0) (28.0) (11.1) (13.2) (16.3) Gross fixed investment 37.0 33.7 53.9 78.6 58.8 35.3 10.5 24.9 20.6 Change in stocks 8.0 3.1 6.6 9.4 5.5 3.0 n.a. 5.4 1.8 Resource balance -16.1 -13.5 -35.3 -60.9 -40.0 -19.4 n.a -10.8 -11.3 Exports 1/ (29.3) (43.4) (43.4) (56.8) (59.6) (65.6) (9.4) (19.7) (38.3) Imports 1/ (-45.4) (-56.9) (-78.7) (-117.7) (-99.6) (-85.0) (17.7) (-30.6) (-49.6) GDP at market prices 148.5 148.0 156.1 169.8 171.6 171.3 2.6 100.0 100.0 Gross domestic savings 28.9 23.3 25.2 27.1 24.3 18.9 -11.0 19.5 11.0 Memorandum items (% of GDP) Consumption 80.5 84.3 83.9 84.0 85.8 89.0 Investments 2/ 30.3 24.9 38.8 51.8 37.5 22.4 Resource balance -10.8 -9.1 -22.6 -35.9 -23.5 -11.3 Gross dorpestic savings 19.5 15.7 16.1 16.0 14.2 11.0 Source : Statistical appendix, table 2.4. 1/ Including non-factor services, _/ Including change in stocks.  - 13 - Table 4: BALANCE OF PAYMENTS 1975-80 (In billions of current CFAF) 1975 1976 1977 1978 1979 1980 Estimate Goods, services and transfers -16.0 -5.9 -19.1 -50.3 -49.5 -22.9 Exports, f.o.b. 30.2 38.0 48.0 58.2 52.7 80.7 Imports, f.o.b. -45.4 -43.2 -62.1 -98.7 -92.6 -94.2 Trade deficit -15.2 -5.2 -14.1 -40.5 -39.9 -13.5 Services (net) 1/ -9.6 -9.6 -15.0 -21.8 -22.6 -24.4 Net transfers 8.8 8.9 10.0 12.0 13.0 15.0 Debt service (actual) 2/ -3.2 -2.6 - -7.7 -17.0 -29.3 Capital account 20.9 9.0 12.8 60.6 60.4 48.0 External borrowing 10.8 13.3 28.0 55.6 60.9 3/ 41.1 3/ Other non-monetary capital 4/ -- -- -- 7.0 1.5 1.5 Monetary capital 5/ 10.1 -4.3 -15.2 -2.0 -2.0 5.4 Overall balance 1.7 0.5 -6.3 2.6 -6.1 -4.2 Change in reserves (increase -) -1.7 -0.5 6.3 -2.6 6.1 4.2 Source: IMF; Statistical Appendix, Table 3.1. 1/ Excluding interest on external debt. 2/ Including interest and principal due, arrears, and the effect of reschedul- ing, and payments through refinancing. 3/ Including refinancing loans of CFAF 12.4 billion in 1979 and CFAF 11.4 billion in 1980. 4/ Including IMF Trust Fund loan and SDR allocations. 5/ Including errors and omissions. 33. Exports consist primarily of mineral and agricultural products (Table 4). Exports of petroleum products began in 1979 following the coming on stream of an oil refinery, but since the refinery relies exclusively on imported crude oil and exports most of its output, trade in petroleum products represents essentially transit trade with a small price differential. Never- theless, exports of petroleum products increased sharply in 1980 to CFAF 26 billion, nearly one-third of total exports due to higher prices. Between 1975 and 1980 exports of phosphate rock almost doubled reaching CFAF 29 billion in 1980 (36 percent of total exports), as phosphate prices were increasing from US$35 per ton in 1975, to US$37 per ton in 1979 and US$50 per ton in 1980, and quantities exported were increasing by 8 percent per annum. Exports of cocoa increased only slightly over the 1975-80 period, because improving prices were partly offset by a trend of declining volumes. Exports of coffee on the contrary more than doubled, entirely due to higher prices.  - 14 - Table 5: EXPORTS AND IMPORTS, 1975-80 (in billions of current CFAF) 1975 1976 1977 1978 1979 1980 Exports, f.o.b. 30.2 38.0 48.0 58.2 52.7 80.7 of which: phosphates 16.5 14.5 21.0 22.0 22.9 28.9 cocoa 5.4 6.6 8.4 7.7 8.9 7.6 coffee 2.6 5.2 8.7 8.2 6.7 6.3 petroleum products -- -- -- 12.0 11.6 26.0 Imports, f.o.b. 45.4 43.2 62.1 98.7 92.6 94.2 of which: investment goods 18.5 21.5 35.3 55.2 47.8 34.6 crude oil -- -- 5.6 11.3 11.0 22.5 Source: Data provided by the BCEAO, IMF, customs statistics, and mission estimates. 34. Imports consist primarily of investment goods (equipment and semi- finished products), consumer goods, and petroleum products. Imports of invest- ment goods nearly tripled between 1975 and 1978 due to the increase in public investment, and then declined by nearly 40 percent between 1978 and 1980. Imports of consumer goods (food and beverages, and other consumer goods) more than doubled between 1975 and 1980. 35. Between 1970 and 1980, Togo's terms of trade improved by about 38 percent. The improvement was primarily due to phosphates. In 1974, terms of trade improved by 100 percent compared to 1970 due to the jump in prices for phosphates. The sharp drop in late 1975 and then gradual recovery of phosphate prices led to a partial cancellation of the terms of trade gain in 1976, after which terms of trade remained rather stable through 1980. Terms of Trade (1976=100) 1/ 1975 1976 1977 1978 1979 1980 148 100 107 96 100 101 1/ Fischer chain index. 36. Both net service payments and transfer receipts increased sharply between 1975 and 1980. Service payments, mainly for freight and insurance, rose in line with rapidly growing imports. 37. Debt service payments were small at the beginning of the 1975-80 period, but rose dramatically toward the end of the period, because of the large recourse to foreign borrowing in the financing of public investment. Whereas actual debt service payments were only CFAF 3 billion in 1975, 9 per- cent of export earnings, by 1980 they had risen to CFAF 29 billion, 36 percent  - 15 - of export earnings, thereby offsetting most of the inflow of new capital. So rapid was the increase in debt service obligations that Togo had to accumulate sizeable arrears in 1977/78 and reschedule a large portion of obligations due in 1979/80 in order to avoid a balance of payments crisis (see para 59). 38. The large surpluses on capital account during the 1975-80 period were predominantly due to public borrowing. During the period a lopsided balance of payments emerged, with big current deficits largely offset by substantial capital inflows, leading to small overall deficits, thereby preventing a serious depletion of official reserves. Nevertheless gross official reserves declined from 2.4 months of imports in 1975 to 1.9 months in 1980. G. Public finance 39. The public and parapublic sectors consist of three main entities: the Central Government, OTP (phosphate mine) and OPAT (the agricultural marketing board for cocoa, coffee, cotton and palm oil). There are in addi- tion other state enterprises whose numbers increased from 15 to 23 during the Plan period. While OTP revenues are almost entirely budgetized, OPAT revenues were not fully budgetized until 1980. 40. Under the euphoria of greatly increased budget receipts, Togo's financial management has tended to become more relaxed, and to depart from the rather strict conservatism of the past. Recurrent and investment expendi- tures have been growing very fast since 1974. The Government has incurred sizeable extra-budgetary expenditures (largely investment expenditures), which accounted for one-fourth of total expenditures in 1978/79. Budget allocations have frequently been exceeded. Part of the financial surpluses of OPAT and OTP have been used directly to defray public investments thus by-passing the Treasury. The Central Government wage bill has grown two times faster than outlays for materials, thus reducing the material: wage ratio from a satis- factory 6:10 in 1975 to a critical 4:10 in 1980; and road maintenance expendi- tures have become insufficient in the last two years. Faced with increasing shortages of liquidity, the Government as well as the state enterprises accumulated external and domestic arrears. Another serious matter is that in recent years the Government has started to squeeze OTP excessively, "Togo's golden goose", which has suffered from a lack of working capital and has had to rely on expensive borrowing to expand capacity (see para 46). 41. Out of necessity, the Government is committed to reimpose a stricter financial discipline. Under a standby arrangement with the IMF negotiated in April 1979, the Government undertook to limit the increase in expenditures other than debt servicing and to eliminate extra-budgetary expenditures. In 1979 and 1980, extra-budgetary expenditures were reduced by about two-thirds compared with 1978. Greater stringency has ensured better adherence to budget allocations. OPAT's financial surplus became fully budgetized in 1980. But more needs to be done in order to give OTP the necessary funds to operate and to finance investment.  - 16 - (1) Central Government 42. Between 1974 and 1975, as a result of the nationalization of the phosphate mine, and booming export prices, Central Government revenues in- creased from CFAF 17.4 to 32.9 billion (Table 6). They nearly doubled again from 1975 to reach CFAF 62 billion by 1980 as imports grew, causing revenue from import duties to increase sharply, and export taxes on cocoa and coffee increased due to higher world market prices. Table 6: CENTRAL GOVERNMENT FINANCIAL SITUATION, 1.974-80 (in billions of current CFAF) 1974 1975 1976 1977 1978 1979 1980 Estimate Current revenue 17.4 32.9 37.4 43.0 53.0 54.1 62.0 OTP 1/ 3.5 12.1 10.5 13.7 13.7 14.0 19.3 OPAT 1/ 1.3 2.0 3.6 6.3 3.5 3.5 5.5 Import duties 6.5 8.3 11.4 16.5 17.3 20.3 - Other 6.1 10.5 11.9 6.5 18.5 16.3 - As % of GDP (12.9) (24.9) (25.3) (22.5) (26.5) (25.5) (27.8) Current expenditure 2/ -18.2 -21.0 -24.0 -34.0 -33.5 -36.1 -39.1 Wages and salaries -8.3 -10.5 -11.5 -15.5 -17.1 -17.9 -20.0 Materials and supplies -3.2 -6.0 -6.1 -11.0 -8.2 -7.5 -8.7 Subsidies and other currency transfers -6.2 -3.8 -5.0 -5.7 -6.1 -6.9 -7.9 Other -0.5 -0.7 -1.4 -1.8 -2.1 -3.8 -2.5 As % of GDP (-13.5) (-15.9) (-16.2) (-17.8) (-16.8) (-17.0) (-17.5) Current surplus before debt service -0.8 11.9 13.4 9.0 19.5 18.0 22.9 Debt service -1.0 -1.9 -1.3 -1.8 -2.3 -4.8 -14.2 Current surplus after debt service -1.8 10.0 12.1 7.2 17.2 13.2 8.7 Source: Statistical appendix Tables 6.1 and 6.4. 1/ Income and export taxes. 2/ Excluding debt service, but including 10 percent of extra-budgetary expenditure.  - 17 - 43. Current expenditure, excluding debt service, increased moderately between 1974 and 1975, but nearly doubled in the following five years. Ex- penditure for wages and salaries increased substantially (11 percent per annum), because the number of civil servants rose by about 75 percent to 39,000 in 1980. In addition, general wage increases were granted in 1975, 1977 and 1980, albeit at declining percentages, but with a cumulative effect of raising the salaries by 50 percent. Substantial recruitment and higher salaries continued to provide incentives for rural-urban migration. Scholar- ships also more than doubled between 1975 and 1980. Subsidies, mostly to the railways, have remained relatively limited (less than 3 percent of total expenditure). Expenditure for materials and supplies increased significantly between 1975 and 1977, but was cut back sharply when the financial situation deteriorated. 44. Public debt service paid by the Central Government remained modest through 1977, averaging less than CFAF 2 billion, or 5 percent of total current expenditures. Due to the large increase in foreign borrowing, Central Govern- ment debt service obligations rose to CFAF 21 billion in 1979, but actual pay- ments were considerably lower at CFAF 5 billion due to debt rescheduling. In 1980 actual debt service payments by the Central Government rose to CFAF 14 billion, equivalent to 26 percent at current expenditure. 45. The functional composition of current expenditure during the 1975-80 period shows a major shift from social and economic services toward debt service (Table 7). The share of education rose from 18 to 24 percent between 1975 and 1978, but declined to 21 percent in 1980. The share of health, already modest, declined slowly to 6 percent by 1980. The share of current expenditure devoted to agriculture was 5 percent in 1975, but less than 4 per- cent in 1980, while the share of other economic services underwent a similar decline. The portion spent on national defense rose steadily from 11 to 15 percent between 1975 and 1978, but was then cut to 11 percent by 1980. Finally, outlays for general administration absorbed about 15 percent of total current expenditure throughout the period. Disregarding debt service, the functional composition of current expenditures remained relatively stable, although the share of education tended to rise and that of agriculture and other economic services to decline.  - 18 - Table 7: FUNCTIONAL COMPOSITION OF CURRENT EXPENDITURES Net of Debt Service, 1975-80 (in percent of total) 1975 1976 1977 1978 1979 1980 (Budget) General administration 14.9 14.8 12.6 14.1 13.6 16.7 National defense 11.2 12.0 13.1 14.5 13.5 11.0 Education 18.1 18.5 18.7 23.6 23.7 20.8 Health 7.7 7.6 6.6 8.3 6.9 6.3 Other social services 4.7 7.0 5.7 4.0 4.2 4.2 Total social services (30.5) (33.1) (31.0) (31.0) (35.9) (31.3) Agriculture 5.0 5.0 4.5 5.0 4.4 3.9 Other economic services 7.7 4.9 3.6 6.4 6.0 3.4 Total econ. services (12.7) (9.9) (8.1) (11.4) (10.4) (7.3) Unallocable 30.7 30.2 35.3 24.0 27.7 33.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 Amount (billions CFAF) 20.724 23.341 32.633 31.899 34.581 44.873 Source: Data provided by the Treasury, and mission estimates. (2) OTP 46. OTP enjoyed financial autonomy until 1974, when the Government opted for a formula under which OTP returns the export proceeds to the Central Government budget and receives a remuneration which is fixed annually, per ton exported, to cover its operating and financial expenses. In 1980, the unit export price FOB Lome amounted to CFAF 10,500 per ton, of which OTP received CFAF 3,500, an amount which proved insufficient to cover both its operating and financial costs (Table 8). As a result OTP was not able to repay its loans and had to contract loans at very expensive terms to finance the con- struction of its fifth production line. An allocation of CFAF 4500 per ton had been requested by OTP in 1980, and appears realistic in view of working capital needs and rising financial charges.  - 19 - Table 8: OTP CONTRIBUTION TO THE CENTRAL GOVERNMENT BUDGET, 1975-80 1975 1976 1977 1978 1979 1980 Value of exports (CFAF million) 16,500 14,500 21,000 22,000 22,900 28,900 Volume of exports ('000 tons) 1,120 2,010 2,890 2,850 2,990 2,750 Unit price (FOB Lome) (CFAF/ton) 14,700 7,200 7,300 7,700 7,700 10,500 OTP revenue (prix de retrocession) (CFAF/ton) 2,000 2,000 2,500 3,000 3,000 3,500 Treasury levy (CFAF/ton) 12,700 5,200 4,800 4,700 4,700 7,000 OTP treasury payments (CFAF million) 14,200 10,500 13,900 13,400 14,100 19,250 Treasury payments as % of total current revenue 43.2 28.1 32.3 25.3 26.1 31.0 Source: Data provided by OTP, and mission estimates. (3) OPAT 47. Because producer prices for cocoa and coffee were kept substantially below export prices, even when they increased sharply in 1976/77-1977/78, OPAT has registered large trading surpluses, rising from CFAF 3.0 billion in 1974/75 to CFAF 12 billion in 1977/78 and subsequently declining to CFAF 8.0 billion in 1979/80 (Table 9). From this surplus, an average CFAF 4 billion per annum was paid in taxes. An increasing amount, rising from CFAF 0.7 billion in 1974/75 to CFAF 2.7 billion in 1978/79, was spent to subsidize cotton fertilizers. The cumulative financial surplus of OPAT amounted to CFAF 15 billion between 1974/75 and 1979/80, and was used mostly to finance part of the cost of construction of the Hotel du 2 Fevrier and the Hotel Sarakawa, and the expansion of the Niamtougou airport. The pricing policy pursued by OPAT tended to maximize its revenue rather than foreign exchange receipts or farmer incomes, as revealed by a study on Agricultural Pricing in Togo undertaken by Bank staff.  - 20 - Table 9: OPAT-FINANCIAL RESULTS, 1974/75-1979/80 (CFAF million) 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1. Trading profits Cocoa 2,933 3,099 5,712 6,523 5,469 3,940 Coffee 235 4,967 4,704 3,150 5,023 3,529 Cotton -435 213 1,281 307 -61 -756 Palm kernels -172 -67 92 18 85 -99 Other 1/ -387 -3,972 -424 1,961 -885 1,381 Total 344 4,240 11,365 11,959 9,631 7,995 2. Income taxes (budgetized) 2,000 3,600 6,300 3,500 3,500 5,500 3. Fertilizer subsidies 658 728 1,655 1,175 2,663 1,704 4. Surplus 386 -88 3,410 7,284 3,468 791 Source: Data provided by OPAT, and mission estimates. 1/ Including changes in stocks. (4) Public investment and its financing 48. The mission estimates that between 1975 and 1980 total public investment averaged CFAF 55 billion per annum, totalling CFAF 327 billion, in current prices (Table 10). Investment expenditures increased from CFAF 30 billion in 1975 to a peak of CFAF 88 billion in 1978, 44 percent of GDP, and dropped to CFAF 51 billion in 1980 or 23 percent of GDP. 49. Net public savings after debt payments are estimated to have fi- nanced CFAF 82 billion (i.e. 25 percent) of total public investment during the 1975-80 period, a percentage which decreased from 42 percent in 1976 to 15 percent in 1980, as the debt service charge increased. Other local sources, consisting mainly of bank financing, contributed a total of CFAF 51 billion, i.e. 15 percent of investment. The Government has increased greatly its use of Treasury overdrafts at the Central Bank, and approached the statutory limit, while drawing down fully its net creditor position with commercial banks. Foreign financing contributed CFAF 194 billion, i.e. 59 percent of investment: foreign grants accounted for about 16 percent of total foreign financing; the balance was borrowed on terms described in para 56.  - 21 - Table 10: FINANCING OF PUBLIC INVESTMENT, 1975-80 (in billions of CFA francs) 1975 1976 1977 1978 1979 1980 Total Estimate Ordinary Budget Current revenue 32.9 37.4 43.0 53.0 54.1 62.0 282.4 of which CTMB/OTP (12.1) (10.5) (13.7) (13.7) (14.0) (19.2) (82.5) Current expenditure -21.0 -24.0 -34.0 -33.5 -36.1 -39.1 -187.7 Current budget surplus before debt service 11.9 13.4 9.0 19.5 18.0 22.9 94.7 Annexed accounts & Public Enterprises OPAT contributions 1/ 3.0 0.6 5.4 4.9 3.0 -0.5 16.4 Self financing of state enterprises 1.0 1.0 0.5 0.5 - - 3.0 Special accounts & annexed budgets 0.6 0.6 0.8 0.7 -0.2 -1.0 0.3 Variations in Treasury deposits abroad -10.0 5.0 0.9 1.0 0.3 1.4 -1.4 Gross public savings 5.3 20.6 16.6 26.6 21.1 22.8 113.0 Public debt service -2.4 -1.9 -2.3 -3.0 -5.7 -15.4 -31.9 of which: CTMB/OTP (-0.5) (-0.6) (-0.5) (-0.7) (-0.9) (-1.2) (-4.4) Net public savings avail- able for investment 2.9 18.7 14.3 23.6 15.4 7.4 82.3 Other local funds 2/ 15.6 7.7 9.9 6.7 6.0 4.8 50.7 Total domestic financing of public investment 18.5 26.4 24.2 30.3 21.4 12.2 133.0 External financing 11.9 18.3 21.5 57.2 46.9 38.3 194.1 Loans 8.4 15.1 16.4 45.1 39.9 30.8 155.7 Grants 3.5 3.2 5.1 6.9 7.2 7.5 33.4 Direct investment -- -- -- 5.2 -0.2 -- 5.0 Total investments 30.4 44.7 45.7 87.5 68.3 50.5 327.1 % of GDP 23.0 30.2 23.9 43.8 32.2 22.6 29.6 Source: Tables 6.1, 6.3, 6.5, and mission estimates. 1/ In addition to tax payments. 2/ Mainly banking system.  - 22 - (5) State and mixed enterprises 50. Until the wave of public investments in the second half of the seventies, the role of state enterprises in the Togolese economy was rela- tively limited. There were only about 15 state enterprises carrying out the activities normally left to the public sector, including electricity, water supply and transport. These enterprises functioned reasonably well, and mostly did not require subsidies with the exception of the railways (CFT). Due to insufficient traffic and poor management, CFT has requested increasing subsidies which rose to CFAF 0.4 billion per annum over the last two years. In addition, there were about 10 mixed enterprises, in which the Government had taken variable participation, and which were also in general functioning satisfactorily. 51. Over the last five years, 8 new state enterprises and 7 mixed enterprises have been established. Table 11: NEW STATE AND MIXED ENTERPRISES State Enterprises Societe Togolaise d'Hydrocarbures (STH) in operation since 1977 - oil refinery Societe Nationale de Siderurgie (SNS) in operation since 1979 - steel mill Togofruit - not yet in operation - cashew nut factory Office Togolais du Disque (OTODI) in operation since 1981 - record factory Centrales Thermiques de Lome - in operation since 1980 - thermal plant Hotel du 2 Fevrier - in operation since 1980 - hotel Hotel Sarakawa - in operation since 1980 - hotel SOTONAM - in operation since 1979 - shipping Mixed Enterprises Togotex - not yet in operation - textile factory Sotexma - in operation since 1978 - agricultural mechanization Togo 2000 - not yet in operation - exhibition hall Soprolait - in operation since 1981 - milk factory Togoroute - in operation since 1976 - transport Togogaz - in operation since 1972 - gas bottling Stalpeche - not yet in operation - fishing Since most of these enterprises are the result of poorly prepared, ill- conceived investments (paras 24-26) and suffer from insufficient inputs, and high prodution costs leading to marketing difficulties, they have already incurred heavy losses, or are likely to. As a result none of these enterprises is able to cover more than a small part of its debt service, which thus has to be borne by the Treasury. In addition, several enterprises which have not  - 23 - been able to cover their operating costs (for instance STH, SNS, Hotel du 2 Fevrier, Sotexma and Togoroute) have accumulated large payment arrears and overdrafts with local and foreign banks. The mission has estimated, as a broad order of magnitude, the accumulated losses excluding financial charges of the major losers as follows: STH in operation since 1977 : CFAF 5.0 billion SNS in operation since 1979 : CFAF 1.0 billion Hotel du 2 Fevrier in operation since 1980: CFAF 2.0 billion Togoroute in operation since 1976 : CFAF 0.5 billion Prospects for Togotex, Togo 2000 and Togofruit are not bright either, con- sidering the financial,managerial, technical and commercial problems that they are likely to face. 52. Moreover, as to management and marketing problems, some of the mixed enterprises such as ITT and SOTCON, which operated efficiently until recently, have incurred losses in the last two years. The losses of ITT increased from CFAF 0.1 billion in 1978 to CFAF 1.2 billion in 1979. 53. So far, many of the loss-making state enterprises have been able to limp along by consuming their capital and not making adequate allowances for depreciation. They have also relied on bank credit and roll-overs, but the potential for continued borrowing from local banks is limited, and financial projections indicate that the Central Government cannot subsidize their probably very substantial losses. It is therefore imperative that the Govern- ment take serious action to screen out or redesign the enterprises, which fail to make a positive contribution to the economy. The Government is well aware of the seriousness of the situation and has recently created a special Ministry of Industry and State Enterprises to tackle these issues. The ministry lacks technical capacity, but has requested Bank assistance to review the major enterprises and make recommendations on how to reinforce the more successful and modify the less successful. The table below contains a tentative grouping of state and mixed enterprises according to the severity of their problems. Enterprises with structural problems are either inherently unviable or have very uncertain prospects. Wherever politically feasible, they should be closed down or sold to private interests. Enterprises with manageable problems are potentially viable, but need major reforms to improve their performance. Enterprises with marginal problems require less far-reaching reforms to improve their performance. Enterprises classified as satisfactory are already functioning reasonably well, but could still in several instances improve performance through adjustments in operations.  - 24 - Table 12: STATE AND MIXED ENTERPRISES Structural Manageable Marginal Problems Problems Problems Satisfactory State Enterprises STH Thermal Plants FAB OTP SNS Togograin SNEET Port Lome Togofruit CCL Hotel Sarakawa ODEF Hotel 2 Fevrier Hotel de la Paix Hotel Tropicana SOTOCO OTODI ONAF OPAT SOTONAM CNPPME Togopharma CNPP SITO SONAPH AGETU Centre Elevage Avetonou SRCC Mixed Enterprises Togoroute Togotex Sodeta CIMTOGO Salinto Soprolait Huilerie Benin Bata Stalpeche Sotoma Togoprom STP Sotexma SAB Togo 2000 TOGOGAZ ITT STB Brasserie Benin GMT SONACOM  - 25 - H. Public debt 54. Over the past five years Togo's outstanding debt and debt service have increased as follows: Table 13: OUTSTANDING DEBT AND DEBT SERVICE (1975-80) (in CFAF billions) 1975 1976 1977 1978 1979 1980 Estimate Outstanding (incl. undisbursed) - as of end of year 37.5 72.7 132.4 197.3 237.7 224.4 - incremental - +35.2 +59.7 +64.9 +40.4 1/ -13.3 Disbursed and outstanding - as of end of year 25.9 37.3 66.6 128.0 187.2 193.0 Debt service due Interest 0.4 0.8 1.4 5.5 6.1 7.1 2/ Amortization 2.8 1.8 3.0 10.0 15.1 34.3 2/ Source: Bank's Debt Reporting System, IMF 1/ Of which CFAF 31 billion debt refinancing. 2/ Before rescheduling. 55. A major feature has been the near quadrupling of the outstanding debt (including undisbursed) between 1975 and 1977, tapering off to an increase of 56 percent between 1977 and 1979, excluding debt refinancing, as Togo started to experience debt repayment problems. The outstanding debt including refinancing amounted at the end of 1979 to a very high 112 percent of GDP. 56. The structure and terms of external public borrowing have varied significantly over time.  - 26 - Table 14: STRUCTURE AND AVERAGE TERMS OF EXTERNAL PUBLIC BORROWING (1975-80) 1975 1976 1977 1978 1979 1980 New commitments (CFAF billion) 11.1 36.5 53.8 53.3 10.8 1/ 15.4 2/ Interest rate (%) 7.7 7.4 5.1 8.1 2.4 3.5 Maturity years 14.9 10.8 22.3 11.2 25.1 26.6 Grace years 3.2 3.3 5.1 2.7 6.5 7.9 Grant element (%) 16.2 12.7 36.2 11.0 52.9 56.6 in percent of total Private credits 74.8 86.7 44.4 67.8 23.3 12.2 Private banks (30.2) (74,7) (21.7) (65.0) - - Suppliers credits (44.6) (11.9) (22.6) (2.7) - - Multilateral 10.3 13.0 23.8 14.2 56.3 21.7 Official bilateral 14.7 0.1 31.7 17.9 20.3 65.9 100.0 100.0 100.0 100.0 100.0 100.0 Source: Bank's Debt Reporting System. 1/ Excluding CFAF 31 billion debt refinancing mostly from official bilateral sources. 2/ Excluding CFAF 11 billion debt refinancing, CFAF 9 billion from creditor Governments and CFAF 2 billion from a group of Belgian suppliers (COBELTO). Between 1975 and 1978 the bulk of external borrowing was obtained from private sources on rather expensive terms: an average of 7.0 percent interest rate; 15 years maturity, including 3.6 years grace. In 1979-80 new borrowing (excluding debt refinancing) stemmed by contrast mainly from official multilateral and bilateral agencies, on concessionary terms: 3.0 percent interest rate, 26 years maturity and 7 years grace. This is mostly due to restrictions on hard- term borrowing and other measures taken under the framework of the stand-by arrangement with the IMF. 57. Parallel to an increasing pace of loan disbursements during recent years, debt service has increased sharply. In 1978 and 1979, debt service due amounted to CFAF 16 billion and CFAF 21 billion respectively (correspond- ing to 31 percent and 39 percent of the Central Government revenues). The Government could not repay such large amounts, and started to accumulate arrears, which amounted to CFAF 27.3 billion in early 1979. The Government was therefore forced to ask for a consolidation of debt service arrears and a rescheduling of its debt:  - 27 - - in May 1979, Togo was granted a refinancing loan of CFAF 33 billion at the Paris Club meeting; - an additional CFAF 10 billion was agreed to in 1980; - the total refinancing of CFAF 43 billion covered the repayment of arrears as of April 1979 and debt service obligations through the end of 1980, leaving nevertheless a balance of arrears of CFAF 12 billion at the end of 1980. The new loans were obtained at interest rates ranging from 2 to 9.75 percent, with a repayment period starting from December 1979; - another rescheduling agreement was signed in Lome in March 1980 with commercial financial institutions, bringing debt service postponement of some CFAF 17 billion in arrears as of and due after end 1979. The interest rates were 6.125 percent on debts in Swiss Francs, an additional 1.5 percent for debts in French Francs, and LIBOR plus 1.5 percent and 1.75 percent for debts in US dollars. The new maturities were 4 years, with one year grace. 58. As a result of these debt relief operations, the profile of debt service at the end of 1980 was projected to average about CFAF 31.5 billion annually, based on the estimated debt outstanding at the end of 1980. Without a second debt rescheduling in 1981, these service payments would still be unmanageable, at 59 percent of Government revenue for 1981 alone (see below). Table 15: PROJECTED DEBT SERVICE 1/ (WITHOUT 1981 RESCHEDULING) (1981-85) 1981 1982 1983 1984 1985 Debt service (CFAF billion) 37.6 34.1 31.0 28.6 21.8 Arrears (CFAF billion) 1.5 1.5 -- -- -- Total 39.1 35.6 31.0 28.6 21.8 % of Government revenues 59.2 48.1 35.6 27.9 18.6 % of merchandise exports 60.0 47.9 35.6 29.0 21.6 (excluding petroleum) 1/ Excluding CIMAO. 59. Consequently Government approached the Paris Club for additional debt rescheduling. At the negotiations, which were held on February 19-20, 1981, the following debt rescheduling agreement was reached for public debt owed to the member countries of the Paris Club:  - 28 - 1. of debt due in 1981, 85 percent will be rescheduled or refinanced over nine years with four years grace. Of the remaining 15 percent due, 2.5 percent will be paid in 1981 and 12.5 percent in 1982. 2. of debt due in 1982, 85 percent will be rescheduled or refinanced over nine years with four years grace. 3. Interest rates on rescheduled debt will be determined through subsequent bilateral negotiations. 4. If need be, the Paris Club will in principle be willing to reconvene in early 1983 to consider rescheduling for that year. This presup- poses however that Togo will continue to have a financial program with the IMF, involving the use of its resources for 1983. As a result of the debt rescheduling agreement, debt service will be reduced by CFAF 22 billion in 1981 and CFAF 20 billion in 1982, and correspondingly increased plus additional interest charges over the 1985-91 period. The average interest rate on rescheduled debt is assumed to be 7 percent. Debt service due in 1983/84 was not affected by the rescheduling agreement (assuming a 4 year grace also for interest on rescheduled debt). Table 16 shows the projected debt service following the 1981 rescheduling agreement. Table 16: PROJECTED DEBT SERVICE 1981-85 1/ (AFTER 1981 RESCHEDULING) 1981 1982 1983 1984 1985 1990 Old debt (CFAF billion) 2/ 23.2 21.1 33.7 29.2 22.7 11.4 New debt (CFAF billion) -- 0.3 0.8 1.4 2.4 14.9 Total 23.2 21.4 34.5 30.6 25.1 26.3 In % of Government revenues 35.2 28.9 39.6 29.9 21.4 13.1 In % of merchandise exports (excluding 35.6 28.8 39.6 31.1 24.9 20.5 petroleum) 1/ Excluding CIMAO. 2/ Debt committed through third quarter 1980. Such a debt service would imply limiting new borrowing to CFAF 65 billion over the 1981-85 period and contracting new loans only on concessionary terms (see para. 76).  - 29 - 60. Two issues arising from the rescheduling of the external public debt deserve mentioning. First, the past and anticipated rescheduling, while alleviating the debt service in the short term, have left in all likelihood an unmanageable debt service burden in 1983, and have increased the debt service in the medium term, because of additional interest payments. These are estimated to amount to around CFAF 10 billion between 1985 and 1990. Second, due to an inadequate assessment of the Togolese economy and financial pros- pects, the 1979/80 debt rescheduling did not prevent a serious peak in debt service obligations in 1981, thereby necessitating a second round of debt renegotiations. A major assumption on which the 1979 debt renegotiation was predicated was that state enterprises, which were the main recipients of foreign loans, would generate enough funds from 1980 to assume a major share of the debt service. This assumption proved over-optimistic. The 1981 debt rescheduling focussed also on short-term debt relief and left a serious peak in debt service obligations for 1983, which will probably necessitate a third round of debt renegotiations in early 1983, because Togo will face major difficulties if it has to increase debt service from CFAF 21 billion in 1982 to CFAF 35 billion in 1983. 61. The serious debt servicing problems which have arisen in recent years point to an urgent need for improved debt management. Since 1979 the responsibility for debt management is supposed to be centralized in the SNI, but its role has so far been limited to a time-consuming collection of debt data, a process which is not yet completed. The role of the SNI needs to be strengthened greatly, not only with respect to debt recording and repayment schedules, but also with respect to the contracting of new debt. III. MANPOWER SITUATION AND PROSPECTS A. Introduction 62. Basic skill levels are low in Togo as in neighboring African coun- tries. Adult literacy rates are about 18 percent; and in agriculture, which accounts for 80 percent of employment, improved techniques are practised by less than 10 percent of farmers. Until recently, Government expenditure has concentrated on formal education, while insufficient attention has been given to developing adequate employment skills. B. Labor force Present structure 63. The total labor force is estimated at 950,000, an activity rate of 74 percent of the population aged over 15 years (Table 18). There are 750,000 persons employed in agriculture, which continues to absorb the majority of new entrants to the labor force.  - 30 - 64. The modern formal sector employs 86,000 (9 percent) broken down almost equally between the private and public sectors. Following the phos- phate boom, the number of civil servants increased by 75 percent between 1975 and 1980 to 39,000; employment in state and mixed enterprises tripled from 7,000 to 23,000, and employment in construction temporarily increased from 4,000 to 10,000 between 1975 and 1978 and then fell back to 4,000 again in 1980. Eighty-five percent of parapublic and private modern sector employ- ment is concentrated in Lome and Maritime. Probably due to the small size of the country, jobs are more widely dispersed in a large number of medium to small enterprises than in some neighboring countries. According to a recent survey (ORSTOM 1979) there were a total of 1,146 modern sector enter- prises, industrial and commercial, private and parapublic with about 46,000 workers. Table 17: NUMBER OF ENTERPRISES No. of Enterprises Percent of employment Over 1,000 workers 7 27 300 to 1,000 workers 25 24 50 to 300 workers 118 28 Under 50 workers 996 21 Total 1146 100 Table 18: EMPLOYMENT STRUCTURE (1975-80) 1975 1980 Agriculture 670,000 750,000 Central Government employment 22,500 39,300 Modern sector, private and parapublic 23,000 46,700 of which: manufacturing, mining, and construction : (9,000) (22,700) services (14,000) (24,000) Temporary employees, private or parapublic 7,000 9,300 Informal sector 79,800 96,000 of which: - Commerce in Lome (17,000) (22,000) - Production and other services in Lome (11,800) (15,000) - Commerce elsewhere in Togo (26,000) (30,000) - Production and other services elsewhere in Togo (25,000) (29,000) Total employment 802,300 941,300 Registered unemployment 22,000 25,000 Population (millions) 2.2 2.5 Activity rate of total population 36% 38% Activity rate of population over 15 years old 74% 74% Source: See Table 8.1.  - 31 - There are shortages in the supply of certain types of skilled labor, such as secretaries and accountants of sufficiently high calibre, in part caused by low wages, which leads to some emigration to neighboring countries where wages are higher. 65. Employment in the informal sector is about 96,000, of which nearly 40 percent is in Lome. Small-scale commerce, some of which is very lucrative, dominates the sector. In Lome alone there are about 22,000 petty traders, one for every 3.2 households (IL0 survey 1977). Prospects 66. About 300,000 young people are expected to enter the labor force between 1981 and 1985 (Table 19). Assuming a growth pattern of 2.3 percent per annum in agriculture and 4.6 percent per annum in the informal sector, new job opportunities should total 180,000, allowing for attrition. Modern sector employment, however, will grow by only about 2.8 percent per annum with, including attrition, about 22,000 new jobs. There would thus be excess supply of some 100,000 young people seeking jobs in the 1981-85 period, which would normally put downward pressure on wages and thereby open up additional employ- ment opportunities. But since wages in the formal sector are rigid in a downward direction, and to some extent even in the informal sector, adjustment in wages is not expected to act as a price mechanism in equilibrating supply and demand.  - 32 - Table 19: SUPPLY AND DEMAND OF MANPOWER 1980-85 Demand Supply 1980 Job 1985 Total opportunities Total 1. Agriculture - Incremental 750,000 90,000 840,000 Primary school leavers 170,000 - Attrition 62,000 2. Modern sector Lower secondary school leavers 62,000 Incremental a) Central Government 39,300 6,700 46,000 b) Modern sector private Baccalaureat Holders 10,000 and parapublic 46,700 5,400 52,100 Government Training schools 7,500 of which: manufacturing(22,700) (3,200) (25,900) services (24,000) (2,200) (26,200) c) Small modern business 6,000 1,200 7,200 d) Temporary employees 9,300 1,900 11,200 University graduates 4,000 Attrition 6,500 Informal sector apprenticeships 4,000 3. Informal sector - Incremental 90,000 23,900 113,900 - Attrition 8,000 TOTAL 9412300 205,600 1,070,400 257,500 * Surplus 51,900 Source: Mission Estimates based on expected trends in the growth of the economy. * Assumes about 10 percent of school leavers will not seek to enter the labor force.  - 33 - C. Wages and salaries 67. Wage labor is generally insignificant in agriculture, which is dominated by family labor. In the formal sector, Government salaries have increased by an average of 8.4 percent annually between 1975 and 1980, below the cost of living index which increased by 10.3 percent per year. By com- parison, salaries in the industrial sector and in construction increased much faster between 1976 and 1978, at 14.5 percent per year, and were also considerably higher than in the Government. Those higher salaries reflect skill differentials, but they also partly explain why the Government has difficulty in retaining skilled manpower. 68. The monthly "SMIG" (guaranteed minimum wage) increased by an annual average of 4.8 percent from CFAF 9,000 to CFAF 11,340 between 1975 and 1980; it was well below the minimum scale for permanent civil servants (CFAF 17,650 per month in 1980), who probably have additional social benefits, but is comparable with the wages paid to "agents permanents", Central Government employees without tenure. It is not clear whether the SMIG operates in the private sector; the bulk of informal sector workers, particularly those in petty trade, are self employed. However, the ILO survey of 1977 indicated that about two thirds of those in the informal sector earned more than the SMIG. Household incomes in Lome (4.6 persons per household) are estimated to be CFAF 39,000 per month, about CFAF 20,000 for each active household number, twice the SMIG. 69. Increases in the minimum wage and the civil service salary scale are decided by Government decree. There is no mechanism for automatic adjustments to take account of inflation. These wages were increased by 20 percent at the beginning of 1975, and by a further 15 and 10 percent at the start of 1977 and 1980 respectively. Due to the rigidity of wages and to their erosion in real terms in the public sector, labor markets have not been cleared, some labor has emigrated to higher-paying neighboring countries, and there has been an exodus from the civil service, while some civil servants have assumed more than one function. IV. DEVELOPMENT AND FINANCIAL PROSPECTS (1981-85) A. Introduction 70. In addition to the structural weaknesses described earlier, in the 1980s Togo will face a tight public finance situation which, at least until the mid-eighties, will constrain severely both recurrent and investment expenditures. Under these circumstances, Togo should adopt a strategy aimed at limiting operating losses of state enterprises, and at safeguarding its economic potential by maintaining adequately those past investments which have a positive impact on the economy. New investments should be limited to the most productive projects on terms compatible with public finance and balance of payments prospects.  - 34 - B. Macro-economic projections 71. The growth of Togo over 1981-85 will remain essentially dependent on phosphate mining, which will continue to be the main source of foreign exchange and public revenues. Real growth during 1981-85 is expected to remain modest, averaging 3.5 percent per annum. Growth would be mostly supported by mining activities (phosphate and clinker), causing the secondary sector to grow by 5 percent per annum. Growth in industry would accelerate slightly under the assumption of some improvement in the performance of state enterprises. Agriculture and the tertiary sector would grow at about 3 percent annually, slightly above the expected increase of the population. 72. Assuming that investments do not exceed 17 percent of GDP compared to 34 percent in 1975-80, due to the constraints imposed by very high debt service payments and limited creditworthiness, and that consumption grows at 3 percent per annum, compared to 6 percent in 1975-80, the resource gap would remain manageable at less than 3 percent of GDP. Exports would grow by 8 percent per annum and imports by 7 percent per annum. Table 20: MACRO-ECONOMIC PROJECTIONS 1981-85 1986-90 Growth rate of GDP Constant prices, % p.a. 3.5 4.4 Primary sector 3.2 3.3 Secondary sector 5.0 6.7 Tertiary sector 3.1 3.9 Gross domestic investments as a % of GDP 17.2 23.1 Gross domestic savings as a % of GDP 14.5 18.2 Resource gap as a % of GDP -2.7 -4.9 Debt service as a % of exports 1/ 38.1 17.3 2/ Source: Mission estimates. 1/ Excluding re-exports of petroleum products. 2/ 1990.  - 35 - C. Public finances 73. Public finances will be exceptionally tight during 1981-83. The 1981 rescheduling temporarily alleviated the debt burden, but did not funda- mentally change the problem. Also, since easily mobilizable sources of deficit financing have been exhausted during the last years, deficit spending will be limited primarily to borrowing from the banking system. Fortunately, there are good reasons to assume that current revenues will increase by 14 percent per annum from CFAF 62 billion in 1980 to CFAF 117 billion in 1985, due to larger volumes and higher prices of phosphate rock, and larger volumes of agricultural exports (mostly cocoa and coffee). With a prudent spending policy, the budget situation should therefore start to improve by 1984, after having been quite tight in 1983 due to a peak in debt service. The annual growth in current expenditures (other than debt service) should be limited to an average of 12 percent (considerably lower initially), i.e. slightly below the growth of revenues. This would allow for an annual increase of 10 percent of the wage bill, which would necessarily limit new recruitment and real salary increases. The annual increase in scholarships and other subsidies under the same scenario would be 17 percent, because of an inescapable need to increase operating subsidies to ailing state enterprises (see para 77). Outlays for materials and supplies are projected to increase by 13 percent annually, to make up for the shortfalls in maintenance expenditure in recent years, thereby re-establishing the wage/materials expenditure ratio at its traditional level. Debt service payments are projected to average about CFAF 23 billion per annum over the 1981-85 period, i.e. a high 31 percent of current revenues. 74. Even under these conservative assumptions, net public savings (after debt service) are foreseen to be very small in 1981-83 but rise sharply thereafter to an average of CFAF 23 billion, or 21 percent of current revenues during 1984-85. Most of the deficit in the first three years would be financed by onlending from the Central Bank of the local currency counter- part of the IMF drawings, and by borrowing from local commercial banks without great difficulties. D. Investments and Financing 75. In 1981-1983 the Government is thus not expected to make much of a contribution to the investment program. Over the 1981-85 period as a whole, net public savings (after debt payments) are expected to contribute an average 35 percent (CFAF 53 billion) to the financing of public investment, because of large contributions in 1984-85. Financing from other domestic resources will be negligible for the period as a whole. 76. The balance, CFAF 104 billion, will be financed from foreign sources. The mission estimates that Togo could mobilize CFAF 39 billion in grants, and CFAF 65 billion in loans. These loans should be mostly on concessionary terms. Average terms for new borrowing over the 1981-85 period are estimated at an interest rate of 6 percent with 18 years repayment period, including 5 years of grace. Togo will have to rely on its traditional bilateral and multilateral donors.  - 36 - 77. An important feature of this scenario is the absence of huge subsidies to cover operating losses of state enterprises. The projections, however, are based on the assumption that the Central Government will have to continue to pay the bulk of the debt service of state enterprise, but that they will require only limited operating subsidies. Total subsidies are estimated to average CFAF 5 billion per annum over the 1980-85 period. This might prove an optimistic assumption even if drastic measures are taken to redress the situa- tion of the state enterprises. However, the dilemma is clear. If the Govern- ment has to subsidize these enterprises, it will be at the expense of recurrent expenditures, causing an inefficient functioning of administrative services, and reducing maintenance expenditures to insufficient levels. It would also possibly be at the expense of public investment which under the present scenario is already reduced to the extreme limit necessary to sustain the growth of the economy. Table 21: PUBLIC FINANCE PROJECTIONS, 1980-85 (in current CFAF billion) Average 1980 1981 1982 1983 1984 1985 Growth Rate Ordinary Budget Current revenue 62.0 66.0 74.0 87.2 102.5 117.2 13.6 of which: OTP (19.3) (17.4) (18.9) (24.0) (31.0) (35.4) (13.8) Current Expenditure -39.1 -44.6 -50.1 -55.2 -61.6 -67.3 11.5 Current Budget Surplus before debt service 22.9 21.4 23.9 32.0 40.9 49.9 17.8 Annexed Accounts and Public Enterprises Special Current Treasury Operations 1/ -0.1 -1.0 -0.8 -0.7 -0.5 -1.0 -- Self-financing of State Enterprises -- -- -- 0.5 0.5 1.0 -- Gross Public Savings 22.8 20.4 23.1 31.8 40.9 49.9 18.2 Public Debt Service -15.4 -19.7 -17.8 -30.8 -25.8 -19.0 9.7 Net Public Savings Available for Investment 7.4 0.7 5.3 1.0 15.1 30.9 -- Other Local Funds 2/ 4.8 2.2 -2.3 7.8 -1.9 -10.4 -- Total domestic financing of 12.2 2.9 3.0 8.8 13.2 20.5 -- Public Investment External Financing 38.3 15.8 17.3 18.7 23.5 28.2 -0.8 of which: loans (30.8) (9.8) (10.8) (11.7) (14.5) (18.2) (-3.0) Total Investment 50.5 18.7 20.3 27.5 36.7 48.7 9.5 Source: Data provided by the Treasury, and mission estimates. 1/ Special accounts and annexed budgets, OPAT contributions, and variations in Treasury deposits abroad. 2/ Mainly banking system and arrears.  - 37 - 78. More generally, if the Government departs from a strict financial orthodoxy, the country's financial situation will definitely worsen with spill-over effects which could seriously compromise the long-term prospects of Togo. By the mid-eighties Togo is expected to undertake or participate in large investments including the construction of a sixth line of production at OTP, a second line of production at CIMAO, a phosphoric acid plant and the Nangbeto Dam. Financial stability will be crucial in the undertaking of these investments which will imply large borrowing, even if they are of an enclave or regional nature. Togo's good financial rating in the mid-1970s helped in mobilizing the funds for the CIMAO project. Lack of financial stability would also jeopardize continuity of the agricultural and education programs started in the late 1970s, which are essential to building up skills and increasing rural incomes. These programs, together with the large investments summarized above, will be the main determinants of Togo's economic growth in the 1980s. E. The Fourth Development Plan, 1981-85 79. The 1981-85 Plan, which was recently approved by the National Assembly includes a total amount of CFAF 250 billion for a priority program, plus CFAF 120 billion for an optional program conditional on the availability of additional funds. These amounts exceed in all likelihood the financing available and Togo's absorptive capacity. The Plan includes certain projects which should have been rejected because of insufficient preparation, improper timing, or cost-benefit considerations. Like preceding plans, the Fourth Plan is essentially a shopping list of projects set in a loose macro-economic framework. The Government's stated goals are described in very general terms: promoting industrialization through the development of small-scale enterprises; promoting rural development, in order to reach self-sufficiency; developing transport and improving the maintenance of the road network; developing research and human resources; and promoting regional development. 80. In fact, the Government is well aware that the Plan is not reali- stic in its current version given the unfavorable economic situation, and decided in late 1980 to implement the Plan in two tranches of 2 1/2 years each, the first tranche corresponding to the period of the greatest financial constrains. 81. Based on estimates of financing available (local and foreign), Togo's absorptive capacity and the status of project preparation, the mission projects that investment over the 1981-85 period might not exceed CFAF 150 billion (in current terms) broken down as follows: CFAF 40 billion over the first 2 years and CFAF 110 billion over the following 3 years. Financial constraints have been spelled out in paras. 76-77. But a qualitative analysis of the Plan also leads to the conclusion that at the moment there are only a limited number of projects, which have reached a sufficient state of prepara- tion, or would yield a satisfactory return, to warrant implementation. If nonetheless the Government succeeds in a near future to prepare a larger number of productive projects, with a very concessionary foreign financing which would not materially increase the debt service burden, then the total amount of investment undertaken during the 1981-85 period could exceed CFAF 150 billion and come closer to the CFAF 250 billion foreseen in the Plan.  - 38 - F. Major Development Issues 82. During the 1975-80 period public policy led to a not always very efficient allocation of resources, an excessive foreign indebtedness and slow growth, which barely kept pace with the increase in population. The most urgent immediate issue which needs to be resolved is how to generate enough budget resources to meet very heavy external public debt service obliga- tions over the medium-term. An austere fiscal policy is called for, but for political reasons will in all likelihood have to be supplemented by further debt rescheduling, because of limits on the capacity to compress spending patterns following the large increases in Government employment and rising recurrent expenditures connected with past investments. A solution to Togo's serious medium-term financial problems, indispensable as it is, will not by itself rekindle growth and rising incomes throughout the population. The scope to pursue development objectives will inevitably be circumscribed by very real financial constraints until the mid-1980s, necessitating judicious policies to balance the need to service the public debt with the need to maintain a minimum development effort, in particular since Togo's capacity for additional external borrowing will be limited. Large haphazard investments in some sectors and relative neglect of others, combined with a deficient incentive system in some areas, have had such an impact on the economy that structural reforms cannot wait until the debt service issue is resolved. Togo is fortunate to have a comparatively rich and varied resource base which together with rational policies and selective structural reforms could sustain more rapid and widely spread growth without endangering delicate financial equilibria. 83. With very limited funds likely to be available for investment, especially through the Government budget, a crucial issue is how best to allocate these scarce resources to achieve the maximum growth impact. During the 1976-80 Plan major weaknesses became evident in planning and project preparation, selection and implementation, and these weaknesses have yet to be fully overcome. Planning can no longer be confined to a wishfully long list of projects at various stages of preparation set in a loose macro-economic framework, with scant regard to financial constraints. Realizing that Togo's creditworthiness has been tainted by the current debt servicing difficulties, and that the availability of domestic financing will be limited, the Govern- ment has decided to implement the 1981-85 Development Plan in two tranches. The first tranche will reflect fully the scarcity of financial resources, while it is hoped that the second tranche will constitute less of a retrench- ment. This is a laudable improvement in planning policy, but it still remains to be carried out in practice, which will require a significant strengthening of the planning capacity of the Government. Great selectivity will have to be applied and sectoral priorities adhered to, which was far from the case during the 1976-80 Plan. Considering Togo's dependence on one single volatile mineral resource, in the immediate future priority should be given to ensuring the maintenance of a healthy phosphate industry. A longer term objective would be to diversify the economy, for instance by tapping more of Togo's agricultural potential. Careful attention will have to be given to terms of financing, which should as a rule be concessionary, to ensure a similar time  - 39 - stream for project benefits and repayment obligations. The management of the public debt would have to be improved to cope with debt service and rescheduling and to coordinate foreign borrowing within Togo's financial constraints. On the project level, a major issue is how to strengthen the capacity to make an independent assessment of projects proposed by private foreign promoters. In the past the Government in several instances has relied almost exclusively on the not always objective evaluations of the promoters, with sometimes most regrettable consequences. This kind of decision making can no longer be afforded during the austere period facing Togo over the next few years. 84. Regarding the sectoral allocation of investment, the principal issue is how to secure a better balance between industry and transport on the one hand, and agriculture and social services on the other hand, while selecting only projects of high priority with rapid returns, or a major impact on target groups. In the past the balance was tilted in favor of industry and transport, especially in Plan implementation, but agriculture is where about 80 percent of the population earns its living and where considerable potential remains to increase production and incomes. Apart from education, the meeting of social needs has so far not received a high priority. 85. In agriculture several issues will have to be addressed. Until now the Government's promotion of rural development has tended to center on individual projects, resulting in a conspicuous multiplicastion of institu- tions and a fragmentation of effort. This has tended to inhibit the introduc- tion of a coherent, lasting institutional and policy framework, because institutions and policies have hinged on the life of various projects. There is substantial scope and need to spread the use of fertilizer, insecticides and selected seeds. The area planted with food crps could be increased if steps are taken to improve marketing and storage. A concerted, national policy to develop food crops is therefore warranted, in particular in combina- tion with cotton, which has rapidly become an important cash crop since 1977. Subsidies and prices are important issues in agriculture, and some revision is already clearly indicated, both with respect to production incentives and fiscal implications. For example, inputs of fertilizer and insecticides in cotton production are heavily subsidized, but most of the subsidy is offset by implicit taxation via an official producer price set below the export price. More realistic input and output pricing would have a favorjable impact on cotton production and on the relative attractiveness of food crops. Fertilizer is also subsidized for coffee and cocoa, but for these cash crops the subsidy is more than offset by heavy implicit taxation through low producer prices, which have resulted in significant financial surpluses in OPAT, which in 1980 contributed 10 percent of Government revenue. The low producer prices have not only discouraged harvesting of existing trees, but have also discouraged replanting. The recent replanting schemes introduced by the Government have had some success, but the issue of which objectives and pricing/subsidy policies to pursue with respect to cash crops remains unsettled. The Govern- ment is showing an increasing awareness of its lack of a coherent policy in this area as manifested by the recent decision to create a price monitoring unit in OPAT.  - 40 - 86. Several important issues arise with respect to state enterprises, many of which were created on flimsy grounds between 1975 and 1980. With few exceptions, the state enterprises are incurring large losses, even when the servicing of foreign debt, which is assumed by the Treasury, is excluded from their costs. While the Government has borne these capital costs, it has refrained from subsidizing operating losses, which were financed through more or less voluntary bank credit and unpaid bills. At best such a policy only buys time; at worst, it lays the groundowrk for larger losses in the future and spreading liquidity problems throughout the economy, with shortages of credit for more productive borrowers. In 1980 the Government created the Ministry of Industry and State Enterprises to address the increasingly serious problems faced by state enterprises, but so far the Ministry has lacked the necessary means to have much of an impact. The state enterprieses, starved for working capital, are running down their equipment and increasingly clamoring for budget subsidies, which the Government is hardly in a position to provide. The issues posed by state enterpriese should be resolved in the near future by closing down inherently unviable units, by restructuring others wherever possible in association with private interests, and by strengthening significantly the Ministry to ensure proper coordination to pursue a coherent policy and to avoid the many costly mistakes of the past. Structural reforms in this area have been agreed in principle by the Government, but will severely test its administrative and political capacity. 87. Because of the disappointing results achieved by state enterprises, and the strictly limited funds available to extend their domain, the Govern- ment needs to consider a return to its traditionally favorable posture towards the private sector. The generous tax exemptions of the Investment Code, which tend to favor capital-intensive production techniques, have - perhaps fortunately - failed to induce much private investment, because such factors as the small local market and shortages of technical and managerial skills have been much more important to potential investors. The Investment Code should be reviewed and the investment environment reasessed with a view to ensure a greater contribution of the private sector, especially small- and medium-scale enterprises, in the industrialization process. The existence of unused funds in Togo's development financing institutions indicates that the situation should be reexamined to identify and remove as far as possible the real bottlenecks holding back private investment in industry.