Report No. 4686-BEN F L L Benin Country Economic Memorandum (In Four Volumes) Volume 1: Economic Performance and Prospects March 15, 1984 Western Africa Region 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 EQUTIVALEINTS Currency Unit = CFAF 1/ US$1.00 CFAF 355- CFAF 1,000 US$2.81 WEIGHTS AND MEASURES 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) 2 0.62 mile (mi) 1 square kilometer (km ) = 0.386 square mile (sq. mi.) 1 metric ton (m ton) = 2,204 pounds (lb) 1 hectare (ha) 3 2.47 acres 1 cubic meter (m ) 1.308 cubic yards FISCAL YE4R January 1 - December 31 1/ The CFA Franc (CFAF) is tied to the French Franc (FF) in the ratio of FF I to CFAF 50. The French Franc is currently floating. Throughout the text the CFAF/dollar equivalents are established using the rate of CFAF 355/$. FOR OFFICIAL USE ONLY ABBREVIATIONS AND ACRONYMS AfDB African Development Bank AGB Societe d'Alimentation Generale du Benin BCXAO Banque Centrale des Etats de l'Afrique de l'Ouest BBD Banque Beninoise de Developpement BCB Banque Commerciale du Benin BOAD Banque Ouest Africaine de Developpement CAA Caisse Autonome d'Amortissement CARDER Centre d'Action Regionale pour le Developpement Rural CATS Cooperative Agricole du Type Socialist CCCE Caisse Centrale de Cooperation Economique (France) CEB Compagnie Electrique du Benin/Communaute Electrique du Bgnin CNCA Caisse Nationale de Credit Agricole CPU College Polytechnique Universitaire DEP Direction des Etudes et de la Planification DPE Direction de la Planification d'Etat EC European Communities ECOWAS Economic Community of West African States EDF European Development Fund ENU Ecole Normale Superieure FAC Fonds d'Aide et de Cooperation (France) FAS Fonds Autonome de Stabilisation et de Soutien des Prix de Produits Agricoles FED Fonds European de Developpement FLASH Faculte des Lettres, Arts et Sciences Humaines FNI Fonds National d'Investissement FRA/GTZ The German Association for Technical Co-operation FSA Faculte des Sciences Juridiques, Economiques et Politiques FST Faculte des Sciences Techniques GRVC Groupement Revolutionnaire a Vocation Cooperative IBETEX Industrie Beninoise des Textiles IDA International Development Association IFAD International Fund for Agricultural Development INSAE Institut Nationale de la Statistique et de l'Analyse Economique INEEPS Institut National pour l'Enseignement de l'Education Physique et Sportive INSS Institut National des Sciences de la Sante INE Institut National de l'Economie INSJA Institut National des Sciences Juridiques et Administratives MDRAC Ministere du Developpement Rural et de l'Action Cooperative MPSAE Ministeredu Plan de la Statistique, et de l'Analyse Economique OBEKAP Office Beninoise des Manutentions Portuaires OCBN Organisation Commune Benin-Niger des Chemins de Fer et des Transports PAC Port Autonome de Cotonou PAM Programme d'Alimentation Mondiale SBEE Socigte Beninoise d'Eau et d'Electricite SCO Societe des Ciments d'Onigbolo SNAFOR Societe Nationale pour le Developpement Forestier This document has a restricted distribution and may be used by recipients only in the performance of I their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ABBREVIATIONS AND ACRONYMS (continued) SOBEPALH Societe Beninoise de Palmiera Huile SOBEMAC Societe Beninoise des Materiaux de Construction SOBETEX Societe Beninoise des Textiles SONACEB Societe Nationale de Commercialisation et d'Exploration du Benin SONACI Societe Nationale des Ciments SONACOP Societe Nationale de Commercialisation des Produits Petroliers SONAFEL Societe Nationale des Fruits et Legumes SONAGRI/SONAPRA Societe Nationale pour la Production Agricole SONAPECHE Societe Nationale drArmement et de Peche COUNTRY DATA - BENIN page 1 of 2 AREA POPULATION 1/ DENSITY 112,622 sq km 3.34 million (1979)- Rate of growth: 2.7% (1961-79) 29.6 per sq km (1979) POPULATION CHARACTERISTICS (1979) HEALTH Crude Birth Rate (per 1,000) 47.5 Population per physician 20.734 Crude Death Rate (per 1,000) 18.5 Population per hospital bed 906 Infant Mortality (per 1,000) 45.0 Life Expectancy at Birth (years) 46.9 EDUCATION (1979) ACCESS TO SAFE WATER Adult literacy rate: 11.0% % of population - urban: 50 Primary school enrollment: 47.0% - rural: 20 2/ GNP PER CAPITA IN 1981-/: US $279 GROSS DOMESTIC PRODUCT IN 1981- : ANNUAL RATE OF GROWTH (1978 prices) US $Mln. % 1972-76 1977-81 GDP at Market Prices 951.8 100.0 0.7 3.2 Gross Domestic Investment 333.6 35.0 10.9 20.4 Gross National Savings 12.5 1.3 25.8 -28.0 Exports of Goods, nfs 298.9 31.4 -2.8 7.3 Imports of Goods, nfs 658.0 69.1 0.2 12.0 Current Account Balance -328.9 -34.6 7.3 23.4 OUTPUT, EMPLOYMENT AND PRODUCTIVITY IN 1981: Value Added Labor Force Value Added per Worker US $Mln. % '000 % US $ % Primary Production 369.8 43.7 1,253.6 73.6 245.0 59.4 Secondary Production 108.0 12.8 103.9 6.1 1,039.5 209.4 Services4/ 367.6 43.5 345.8 20.3 1,063.0 214.4 Total-' Average 845.4 100.0 1,703.3 100.0 496.3 100.0 GOVERNMENT FINANCE (PROVISIONAL) CENTRAL GOVERNMENT (CFAF Billion) % of GDP 1981 1981 1976-80 Current Revenues 52.6 20.2 15.5 Current Expenditures 34.8 13.4 10.7 Net Lending and Transfers 3.2 1.2 2.6 Current Surplus 14.6 5.6 2.3 Capital Expenditures 25.1 9.7 3.7 Overall Balance 10.5 04.1 -1.4 External Borrowing and Grants 13.9 5.3 2.5 _/ Population Census . 2/ At current exchange rates. 3/ Coversions to dollars in the table are at the average exchange rate prevailing during the period covered. 4/ GDP at factor costs COUNTRY DATA - BENIN (continued) page 2 of 2 MONEY, CREDIT AND PRICES 1976 1977 1978 1979 1980 1981 (in millions CFAF outstanding end year) Money Supply (money and quasi-money) 30,631 34,918 39,017 46,774 61,408 71,292 Claims on Central Government / -7,082 -9,422 -12,917 -11,776 -17,543 -20,853 Claims on the Private Sector- 32,100 38,600 47,100 59,400 85,000 87,000 (percentage or index numbers) Money as % of GDP 22.1 23.2 23.2 23.9 28.5 27.6 General Price Index 83.8 86.8 100.0 113.3 131.4 159.2 Annual Growth Rates General Price Index 3.6 15.2 13.3 16.0 21.2 Net Claims on Government -/ -33.0 -37.1 8.8 -49.0 -18.9 Claims on the Private Sector- 20.3 22.0 26.1 43.1 2.4 BALANCE OF PAYMENTS (in US$ millions) EXTERINAL DEBT, DECEMBER 1981 (US$ millions) 1978 1979 1980 -198-1- Public debt incl. guaranteed 617.8 Export of goods, nfs 222 261 323 299 Non-guaranteed private debt Imports of goods, nfs 370 509 703 658 Total outstanding & disbursed 617.8 Resource gap (deficit = -) -148 -207 -380 -359 2/ NET DEBT SERVICE RATIO FOR 1981- (%) Workers remittances 37 39 44 38 Public debt inclu. guaranteed 6.8 Non-guaranteed private debt Net transfers and otherToaousndg dibre factor payments 3 -1 -2 -7 Total outstanding & disbursed Balance current account -108 -169 -338 -328 IBRD/IDA LENDING (November 30, 1982) (US$ million) Direct private investment 1 17 40 34 IBRD IDA Official flows Grants 38 64 51 85 Outstanding & disbursed -- 72.00 Borrowing (net) 35 54 277 180 Undisbursed -- 63.57 Short term capital 16 14 21 12 Outstanding i. undisb. -- 135.57 Other items, errors and omissions 4 7 -46 71 RATES OF EXCHANGE Increase in reserves (+) -22 -13 5 54 Year US$1-CFAF Net reserves (end year) -2 -15 -10 44 1975 214.32 Gross reserves (end year) 14 13 8 61 1976 238.98 Equivalent months imports 0.5 0.4 0.2 1.2 1977 245.67 1979 212.72 1980 211.30 1981 217.73 1982 328.62 1983 on 355.00 1/ Includes public enterprises 2/ Debt service as a percentage of exports of goods and non=factor services Non-available VOLUME I BENIN: ECONOMIC PERFORMANCE AND PROSPECTS TABLE OF CONTENTS SUMMARY AND CONCLUSIONS .......................... 3 I. BACKGROUND. 8 II. RECENT ECONOMIC DEVELOPMENTS. .. .... 10 A. Sources of Growth ....10 B. Expenditure on Available Resources . . ..15 C. Employment, Wages and Manpower Training ...18 D. Money, Credit and Prices ...20 E. Public Finance ....................... ........ 22 F. Public Enterprises .. .. ................. 25 G. Balance of Payments .............................. 26 H. External Debt and Foreign Aid . . ..28 III. SECTOR PERFORMANCE AND ISSUES . . .30 A. Agriculture ................................ .. . . . . 30 B. Industry ......................36 C. Transport ...41 D. Energy ...43 E. Social Sectors ...................44 IV. DEVELOPMENT PROSPECTS ...........................47 A. Benin's Development Plan for the Mid-1980s .47 B. Medium-Term Projections........................... 52 V. DEVELOPMENT STRATEGY ISSUES AND RECOMMENDATIONS ... 58 A. Comparative Advantage ...58 B. Public Enterprises ....... . 60 C. Major Projects.... . ....... ..... .. . 61 D. Public Finance .. .62 E. Public Investment Constraints ..... 63 F. Planning Process ..... . . 64 G. Concessionary Financing . . . .66 2 PREFACE This report is based on the findings of an economic mission that visited Benin in June 1982. The mission was composed of the following members: Raymond Rabeharisoa, Senior Loan Officer Maria E. Freire, Economist David Bovet, Consultant (Coordinating Author) Manga Kuoh, Industrial Project Officer (Public Enterprises) Kuldeep Ohbi, Transport Economist (Transport) Peter Boone, research Assistant (Agriculture) Bill Shaw, Research Assistant (Social Sectors, Public Finance) Mr. Robert Crown, Agricultural economist, collaborated in the preparation of the Agriculture Chapter in Volume II. This report is the final version of the draft discussed with the Government by a Mission which visited Cotonou in late 1983*. The report includes four volumes: Volume I: Benin: Economic Performance and Prospects Volume II: The Economic and Social Sectors Volume III: The Public Enterprises Sector Volume IV: Statistical Appendix * The Mission consisted of Richard Westebbe, Chief, Sven Kjellstrom, Resident Representative, Manga Kuoh, Loan Officer, Emmanuel Akpa, Country Economist, Peter Boone, Consultant, Peter Ludwig, Transport, and Messrs. Marc Blanc, Henri Marticou, Eugene Sinodinos of WAPA A, Abidjan. A joint Government- World Bank communique was issued summarizing the conclusions of the discussion. SUMMARY AND CONCLUSIONS 1. Major changes in Benin's economic policies and performance have occurred over the past five years. A key decision to increase public control over the modern sector of the economy was implemented during the second half of the 1970s, leading to financial problems in several of the leading industrial and service enterprises. The First Plan (1977-1980) proposed ambitious public investments in a few large projects, and these have now been implemented with mixed results. Rapidly-increased external debt, coupled with the recent weakness in demand overseas and in neighboring Nigeria, has led to a difficult public finance situation at present. 2. In the face of these developments, the Government has recently taken positive steps to eliminate economic distortions and improve the management of public finance. Agricultural producer prices are being raised and input subsidies eliminated in a planned fashion. Pricing, personnel and management policies affecting the public enterprises are being revised, and some marginal units have been liquidated. Greater attention is being devoted to Benin's important economic relations with its neighbors. Assistance has been sought to strengthen the Government's ability to manage its public finance, external debt and planning functions. These very recent policy changes should lay the basis for more vigorous growth in the longer term. Recent Economic Developments 3. Benin remains a small, poor nation, with an estimated 1981 GDP per capita of $270 for a population of 3.5 million. Three-fourths of the labor force is engaged in traditional farming activities. The industrial sector consists of a few import substitution and agricultural processing plants. Recently, exploitation of local petroleum, cement and sugar resources has commenced. Exports of these commodities--just now beginning--will far outweigh traditional exports of oil palm products and cotton. Unofficial exports of foodcrops and re-exports of imported consumer goods to Nigeria and Niger continue. In the social sectors, education has reached many more children than previously, though at a sacrifice in quality terms. Health conditions remain poor, and life expectancy at birth is 47 years. 4. Real GDP growth over the 1976 to 1981 period averaged 3.6 percent per annum, up substantially from the 0.7 percent annual trend during 1972-1976. Although Benin's economic statistics are notably weak, growth appears to have been particularly strong in 1977 and in 1981, when there were sharp increases in construction, manufacturing, trade activity and public administration. This growth was linked to the heavy public investment program and to strong demand in neighboring countries. Agriculture, on the other hand, has consistently grown by less than one percent per annum over the last ten years. Traditional export crops have suffered from inadequate Government pricing policy, shortages of modern inputs, and poor weather conditions. The Government has recently adopted a policy aimed at improving agricultural incentives. Certain foodcrops that enjoy strong demand in Benin and neighboring markets have performed well. 4 5. The external sector has been characterized by major and rising deficits on the current account. Substantial imports of capital goods have been recorded, financed by suppliers credits and official sources, in support of the major public investment program. As gross domestic investment reached the very high level of 35 percent of GDP in 1981, the current account deficit increased to 34 percent of GDP. Both investment and the current account deficit are expected to decline in coming years, relative to GDP. On the export side, unrecorded exports have climbed to an estimated 86 percent of total exports in 1981, while recorded commodity exports declined in real berms. 6. iNet borrowing rose dramatically in 1980 and 1981, on moderate commercial and official terms not linked to Eurodollar rates. Total debt outstanding (including undisbursed) quadrupled from 1976 to 1981, reaching an estimated $589 million (CFAF 209 billion). Virtually all Benin's foreign debt has been contracted by the Government or is Government-guaranteed. The debt service ratio has increased from 4 percent of exports in 1976 to 7 percent in 1981, and is projected to reach 24 percent in 1983. Financial difficulties with several of the recent large resource exploitation projects, which now appear likely in the case of the sugar and cement projects, may impact on public finances since the total debt service is equivalent to 43 percent of Government revenues in 1983. However, both the sugar and cement projects include Nigerian Government equity participation and joint loan guarantees. 7. Public finances, after a remarkably sound performance during the mid- 1970s, have recently been characterized by a declining current surplus, with the exception of 1981. Indications are that this surplus may be seriously eroded in the next few years. Current revenues, over half of which are derived from import duties, have accounted for about 15 percent of GDP in recent years. These revenues were linked to imports unofficially re-exported to Nigeria and to business activity related to Benin's large investment program. Both sources of taxable surplus are presently diminishing. About three-fourths of current expenditures go for wages and salaries, with education taking a 33 percent share of the current budget. Overall, the public finance position after investment expenditures has been negative. 8. Public enterprise difficulties also pose a liability for Government finances. Two-thirds of the 60 enterprises are in financial difficulties. Losses have been financed by the state-owned banks, rather than through transfers from the current budget. As many of these losses cannot now be repaid, the Government either as shareholder or as banker will have to recognize some of these deficits. Public enterprise difficulties have stemmed from poor initial project design, undercapitalization, inexperienced business management, inadequate Government pricing and personnel policies, and other inefficiencies. The Government announced in 1982 a series of valuable measures to strengthen the public enterprises, including more realistic pricing policies, better incentives for managers and workers, tougher controls, and the liquidation of non-viable units. These decisions are now being implemented. 5 Outlook and Issues 9. Benin's economic growth will be limited by several constraints over the medium-term which make it unlikely that GDP will grow by more than 3 to 4 percent per year during the 1982-1990 period. Key constraints are: a. Slowdown of demand in neighboring markets and the difficulties in achieving rapid gains in agriculture or implementing new industrial activities. b. Reduced investment levels due to lack of identified, viable projects and borrowing capacity restricted by present debt level. c. High recurrent costs of existing investments and policies. d. Impact of the three major projects--petroleum, sugar and cement-- on public finance. 10. These constraints make it all the more important that policy changes be adopted to provide better incentives in agriculture and industry, and to control the potential drain on public finance which would be caused by further public enterprise and major project losses. The mission estimates that substantially higher economic growth can be achieved with proper policies than under an alternative scenario incorporating continued difficulties in agriculture, industry and trade. The debt service and public finance constraints are serious in either case: Best-Estimate Alternative Scenario "Favorable" Scenario "Less Favorable" Policies ----real growth rates, percent p.a., 1982-90--- GDP Growth 3.4 2.1 Exports Growth 7.5 5.4 Imports Growth 2.7 0.7 Govt. non-debt current spending 3.7 2.7 ---------Ratios, 1990------------------- Private consumption per capita vs.1982 96 90 GDI/GDP 25 21 Debt Service/Exports 23 26 Debt Service/Government Revenues 55 58 11. The Benin Government has recently reviewed a number of policies in light of national and international economic problems. The Second Plan (1983- 1987) presented to donor countries in March 1983 outlines the Government's critique of past performance and strategy for future development. Problems of excessive centralization, inadequate management and technical training, and the need for better planning are discussed. And specific actions have been taken, including price increases, cutbacks in the hiring of new college graduates by the civil service, a more formal project analysis procedure, and gradual elimination of agricultural subsidies. The Government has requested assistance in the management of external debt information, in the establishment of closer public finance controls, in the evaluation of industrial projects and policies, and in the strengthening of the planning function. The World Bank Group is prepared to support these requests. 6 12. A broad range of issues currently confronts the Government in its difficult tasks ahead. Critical questions include: a. Comparative Advantage. It will be essential to focus on investments in economic activities that enjoy a strong demand and comparative cost advantages. Foodcrops, natural resources, and selected manufacturing activities appear to meet these criteria. Appropriate economic incentives in agriculture and industry should be further encouraged. b. Public Enterprises. The means to implement policy decisions already taken must be worked out in detail. For specific enterprises, rehabilitation plans need to be prepared based on in-depth feasibility and organizational studies. Financial resources, domestic and foreign, will be required to strengthen long-term viable enterprises, and the World Bank Group is prepared to assist in this effort. The Government may wish to reduce its role in enterprises which are not profitable or of strategic importance. c. Major Projects. The three large projects--petroleum, sugar and cement--represent an investment equal to 70 percent of the 1981 GDP. Problems which have arisen, particularly with regard to access to the Nigerian market, and high production costs in relation to current world prices, must be promptly resolved to avoid serious impacts on Benin's economic and public finance position. Those projects are intended to be self-financing, profitable ventures and must be placed on this basis, as the Government's budget cannot underwrite losses on projects of this magnitude. Nigerian Government equity participation in the two projects aimed at the Nigerian market (sugar and cement) should help to cooperatively resolve these difficulties. d. Public Finance. The public finance situation is likely to be difficult in the years ahead, due to the recurrent cost implications of recent infrastructure investments, the need to re-finance a number of public enterprises, the likely counterpart funding or subsidy requirements associated with the three major projects now coming onstream and rising debt service obligations. Deficiencies exist in the management of the public finances which must be addressed. On the revenue side, the buoyancy in import duties over the past few years associated with goods destined for neighboring countries is not likely to continue in the mid-1980s. The potential for increasing public revenues--particularly through higher import duties which may still be low in comparison with neighboring countries--should be assessed. The losses from public enterprises and recent large projects must be stemmed and reversed to avoid drains on the Treasury. Better coordination with the planning process is required so that the debt burden and recurrent cost implications of projects are assessed at the time of selection. Enhanced monitoring of key revenue and expenditure indicators, and of external debt transactions, is required. e. Investment Constraints. The present debt level is high and will constrain further access to foreign commercial loans. However, successful execution of the current large projects and an enhanced capability to identify and plan new projects can increase the volume of capital available to Benin. Access to commercial borrowing will be more difficult in the 1980s than it was in the past five years, and preparation of sound productive sector projects with high rates of return will be essential to tapping these funds. Project analysis should therefore be strengthened. 7 f. Planning Process. Further efforts are required to develop a comprehensive yet practical planning system. Criteria must be set to ensure viable investments. Policy analysis should be introduced to permit technical computations to be made of the impacts of alternative policy options. These impacts include the public finance implications of investments, as well as the likely influence on GDP, the balance of payments and employment. The relative roles of the technical ministries and the Planning Ministry in the project planning cycle should be examined. 12. In light of Benin's continued poverty despite its recent extraordinary development investment effort, it is recommended that foreign assistance be provided on concessionary terms. The increased debt burden due to heavy foreign borrowing in support of key public investments will constrain future access to commercial-term loans. Necessary investment in economic and social infrastructure, agriculture, and selected industrial projects, and in the rehabilitation of public enterprises, requires increased levels of official assistance. 13. The severity and breadth of the problems now facing Benin's economy imply a need for structural adjustment measures in the future. Flexible, non- project lending by the international donor community would be an appropriate response. The World Bank Group's proposed public enterprise rehabilitation project is an example of this type of operation. While the Government has recognized a number of its problems and is seeking advice, concrete policy decisions will need to be taken as a pre-condition for non-project lending. 8 I. BACKGROUND Physical Characteristics 1.1 Benin is a corridor-shaped country, running 670 km from the coast of West Africa north to landlocked Niger. In the south, it is 120 km wide bordering Togo on the west and Nigeria on the east. The land is relatively flat or rolling, with the exception of the Atacora hills in the northwest which reach elevations of 750 meters. Annual precipitation is considerably less than in other coastal West African countries, and is subject to wide annual fluctuations. In the south, rainfall averages 1,200 mm per year in two rainy seasons, diminishing to 800 mm in the north during a single wet season. Soils are generally poor throughout the country, but population pressure in the south has caused pockets of soil depletion. Benin enjoys deposits of limestone in the southeast, and petroleum off the coast. Human Resources 1.2 Benin's population is estimated at 3.5 million in 1981, based on the 1979 census. The country's inhabitants are mainly rural (71 percent of total). In the sparsely-settled northern provinces, population density is as low as 10 persons per square kilometer, while in the urbanized southern provinces it is much higher, exceeding 200 people per square kilometer in Atlantique Province. The population growth rate has been increasing and is estimated at 2.7 percent per year during the 1961-1979 period. Since life expectancy is still quite low (47 years at birth), the population distribution is youthful: 49 percent are below the age of fifteen. About one-fourth of the adult population is literate. Political Development 1.3 Benin achieved its independence from France in 1960, when it was known as Dahomey. Regional and other political rivalries during the next twelve years led to numerous changes of government. In 1972, Colonel Mathieu Kerekou assumed the presidency and ushered in a new era of political stability. The theme of President Kerekou's administration has been one of national unification, the development of an independent economic and social identity, and increased popular participation in political life. In 1975, the Party of the People's Revolution was created and the name of Dahomey was changed to the People's Republic of Benin. The Party and its Central Committee retain key policy-making authority, although the Council of Ministers is the governing administrative group. A new constitution was adopted in 1977, elections were held in 1979, and President Kerekou now leads a largely civilian government. 9 Economic Background 1.4 Agriculture, supplemented by commercial activities revolving around Benin's traditional transit role, is the primary basis of the country's economy. Natural resource exploitation in the form of cement and crude oil production is just beginning, and existing industrial activity is limited to agricultural processing and a few import substitution activities. Per capita GDP is estimated at US$270 in 1981. Further details on Benin's economic background are contained in the previous World Bank economic report, The Economy of Benin (Report No. 2079-BEN), reflecting data collected during a 1977 economic mission. 1.5 The 1972-76 period was characterized by low economic growth, while the Government concentrated on revising economic institutions and preparing a development program. Growth of GDP is estimated at 0.7 percent per annum during the 1972-76 period, mainly provided by the service sector. Output of cash crops and manufactured goods declined, and gross domestic investment was a moderate 15 percent of GDP. A current surplus was recorded in the Central Government's public finances during the 1972-76 period. Debt service remained low, and was only 4 percent of exports (goods and non-factor services) in 1976. 1.6 Substantial changes on the economic policy and development fronts were underway, however. A basic decision was taken to exert public control over key sectors of the economy, and this was implemented by creating public enterprises to manage most modern-sector activities. These included clinker grinding, textiles, and the brewery in the industrial sector; the entire banking sector; the electric and water utility; several transport enterprises; agricultural, livestock and fishing operations; and firms dealing with the import and distribution of various consumer goods. With a limited amount of financial resources for expropriations of existing private-sector firms and initial equity for newly-created enterprises (totalling about CFAF 15 billion), the Government began actively managing numerous commercial and industrial activities formerly operated by the private sector. The economic difficulties resulting from this major change were not clear until somewhat later, as discussed in Chapter II. 1.7 The Planning Ministry also undertook a significant national development planning effort in the mid-1970s. The object was to reach a broad agreement on sectoral, regional and project priorities by engaging in a multi- level planning exercise. In late 1977, the First State Plan (1977-1980) was published. This plan called for a sharp increase in public investment, and emphasis was concentrated upon implementing several large projects: the creation of a complete clinker and cement production plant at Onigbolo, the cultivation and processing of sugarcane at Save, the exploitation of offshore oil near Seme, and the doubling of capacity at the port of Cotonou. 1.8 It is against this background of low economic growth and cautious public finances that the ambitious Government plans and economic intervention of the mid-1970s must be viewed. The economic performance which resulted during the 1976-1981 period is analyzed in the following chapter. 1 0 II. RECENT ECONOMIC DEVELOPMENTS 2.1 Benin's economic situation evolved favorably in several respects during the late 1970s. The rate of GDP growth increased, partly due to the impact of a substantial public investment program and partly linked to the improved economic performance of neighboring countries. Investments included four major development projects with broad implications for Benin's economy. These were executed beginning in 1978 and all were operating by 1983. Furthermore, the increasing role of trade helped to expand public revenues in the form of import duties on goods destined for re-export to neighboring countries. Output of two tradable foodcrops (maize and yams) increased in response to urban demand and cross-border trade with Nigeria, though other foodcrops declined. 2.2 However, the heavy investment effort, expansion of the role of public enterprises, and a recent setback in the fortunes of Benin's neighbors have combined to raise problems in the early 1980s. Benin' s external public debt has increased sharply in connection with the financing of large investment projects. Current low world prices for primary commodities and depressed demand in West Africa may jeopardize the near-term export earning potential of several projects in Benin, raising a potential public finance issue because the external debt is guaranteed by the Government. The expanded role of public enterprises in the economy since the mid-1970s has led to inefficient and costly organizational structures in industry and the modern service sector, creating claims on the banking and public finance systems. In addition, Benin's traditional, though modest, exports of industrial crops have declined over the 1976-81 period. 2.3 This chapter briefly explores recent economic developments in Benin, against a backdrop of statistics developed during the Bank's economic mission. The quality and currentness of Benin's economic data is such that statistical analysis must be regarded as approximate. For instance, GDP growth over the 1972-1976 period, now reported at 0.7 percent per annum, was estimated at 3.0 percent in the previous World Bank economic report. Major economic aggregates such as foodcrop production, cross-border exports and re- exports, balance of payments estimates, and Treasury accounts are inadequately quantified or out-of-date. The estimates prepared for this report are believed, however, to accurately represent the broad economic trends in Benin, but the margin of error may be large. Sectoral performance and issues are addressed in greater detail in Chapter III and overall development issues in Chapter V. A. SOURCES OF GROWTH 2.4 Benin enjoyed a relatively strong growth in GDP over the 1976-1981 period (see Table 2.1). Real growth of 3.6 percent per year was achieved, compared with only 0.7 percent annually during 1972-1976. Benin's growth rate in the late 1970s also compares favorably with the record of low-income African nations as a group, which recorded average GDP growth of 1.7 percent over the 1970-1979 period. Still, Benin's GDP per capita--estimated at $270 in 1981--places it close to the average of Africa's low-income countries. 2.5 Benin's large investment program and buoyant Nigerian demand were the main sources of growth during the late 1970s. Construction activities, dominated by major capital development projects, forged ahead with a 12 percent growth rate during 1976-1981. Public services added employment and outlay, resulting in an 8 percent growth rate. Commercial activities grew at above 3 percent, with a particularly strong performance in 1981, as oil income rose in Nigeria and uranium boosted Niger's purchases. In contrast, the primary sector, constituting nearly half of the economy, maintained a lackluster performance with average growth below one percent. Poor cash crop performance reflected inadequate producer prices, input supply problems, and lack of extension advice. However, it is generally believed that foodcrop production expanded more rapidly than indicated by the available statistics in Table 2.1. Total manufacturing output was the same in 1981 as it had been a decade earlier. Table 2.1 Sources of Growth by Sector Annual Growth Rate,% GDP Structure, % (1978 prices) (current prices) 1972-76 1976-81 1972 1981 Primary Sectgr 0.8 0.7 46.8 43.7 Agriculture.- 0.9 0.9 34.1 33.2 Foodcrops 1.7 1.4 29.3 31.0 Industrial Crops -3.1 -4.1 4.8 2.1 Livestock 5.6 1.3 6.8 7.2 Forestry, Fisheries, Mining -6.6 -4.7 5.9 3.3 Secondary Sector -1.1 6.8 12.0 12.8 Manufacturing -4.7 3.2 8.8 6.3 Construction 6.2 12.2 3.2 5.8 Public Utilities 3.7 3.6 0.5 0.7 Services 1.8 4.7 41.2 43.5 Commerce 6.4 3.4 18.9 21.8 Transport 6.9 3.6 5.8 6.8 Public services -6.0 8.1 11.9 11.3 Other 9.7 6.7 4.6 3.6 GDP, factor cost 0.9 3.3 100.0 100.0 GDP, market price 0.7 3.6 111.6 113.2 I/ Details by crop are provided in Table 2.2 Source: Statistical Appendix, Tables 2.1 and 2.4. 12 2.6 Trends, issues and prospects in the major sectors are discussed in Chapter III. In the following section, a brief summary of production trends in key sectors is presented. Agriculture 2.7 Foodcrops dominate the sector, especially maize, sorghum, yams, cassava and beans. Maize is the main crop in the densely populated south, while yams and coarse grains are grown in the sparsely settled north. Marketing of these crops is carried out on the free market. Government support is limited to extension activities provided by the provincial rural development agencies (CARDERs). The main industrial crops are cotton, oil palm products, and groundnuts. The growing, marketing and processing of these crops are largely Government-controlled. Further discussion of agricultural institutions and issues is presented in paras. 1.21 - 1.62 and in Volume II of this report. 2.8 Maize and yam production rose sharply in the late 1970s (see Table 2.2). These widely-traded commodities encountered strong demand in domestic and neighboring markets, and farmers substituted from less attractive traditional crops such as cassava, sorghum and millet. The mission was told that previous Government-imposed constraints on the export of fooderops to Nigeria were removed in recent years, thus stimulating production. Higher maize output was partly due to introduction of new hybrid seeds. Average yields have declined, however, for most crops over the past decade, indicating a more extensive agriculture and a general decline in labor productivity. Shortages in modern inputs, a degradation in improved seed, and a shortage of good land in the south have been contributing factors. Output has been insufficient to meet the demand for food in the urban centers, after accounting for exports of about 20 percent, and cereal imports have therefore increased substantially--from 34,000 tons in 1976 to 110,000 tons in 1981. Subsidies on imported rice, maize, and previously wheat have also played a negative role in the urban food supply balance. 2.9 Industrial crop production--including cotton, oil palm products, and groundnuts--has been declining steadily since the mid-1970s. Overall production levels now stand at about 85 percent of their decade-earlier quantities. Most of this decline has occurred since 1980, and represents a shift of resources into fooderop production and away from industrial crops. Insufficiently attractive official prices for cash crops and problems with input supply are partly responsible for this development, since cotton and groundnuts appear well-suited climatically to Benin's conditions. Recent IDA and IFAD-financed rural development projects which help to relieve institutional and financial constraints are expected to raise cotton production in the Zou and Borgou Provinces. The Government has also recently taken bold policy decisions to raise cotton producer prices and to eliminate input subsidies. However, the low productivity and lack of competitive advantage evidenced in the oil palm sector is due mainly to climatic factors that cannot feasibly be changed. Better plantation maintenance and organization of production could raise output, but in general oil palm production is likely to play a decreasing role in Benin's agriculture. 13 Table 2.2 Production Trends in Agriculture Average Annual Growth Average Annual Rate of Production, %/year Production, tons 1969-71 to 1974-76 1974-76 to 1979-81 1979-81 Foodcrops Maize 2.1 6.2 302,000 Sorghum 5.8 -3.1 59,000 Yams -1.4 7.0 687,000 Cassava -3.9 1.2 639,000 Beans -8.1 11.1 31,100 Rice 25.3 -5.2 10,200 Industrial Crops Oil Palm n.a. -7.4 356,000 Cotton -6.7 -5.8 18,700 Groundnuts -0.3 5.6 60,150 Source: Volume II, Tables 9 and 12. Manufacturing 2.10 Value-added in manufacturing has fluctuated from year to year, but overall was no higher in real terms in 1981 than a decade earlier. This is a disappointing performance for a sector which is believed to hold potential for growth. Much of the problem was linked to the introduction of public enterprises as the dominant organizational form in the sector. In 1982, the Government adopted new policies aimed at establishing economic price levels, greater management incentives, and tougher performance criteria which should lead to a better performance in manufacturing. 2.11 Manufacturing contributes about 6 percent of GDP, and was brought largely under Government control during the late-1970s as public enterprises were created to manage new and existing operations. Unprofitable operations of several major enterprises have limited the sector's value-added. Manufacturing activities consist of agricultural processing, food and beverages, textiles, cement, and assorted artisanal mechanical enterprises. 2.12 Agricultural processing has been affected by declining quantities of raw material inputs, due to climatic problems in the case of oil palm and organizational problems in the case of cotton. A maize mill built in 1978 in Bohicon has remained idle due to difficulties in purchasing local maize at attractive prices, production problems, and market demand difficulties. Production of soap, however, based on local vegetable oils, has been quite successful and capacity expansion is planned. Food and beverage output, dominated by the brewery (La Beninoise), has increased somewhat in response to strong demand, but technical problems have held back production despite substantial additions to capacity. 1 4 2.13 The textile sector includes one successful and one unsuccessful public enterprise. SOBETEX, printing imported cotton fabric for the local and neighboring markets, expanded production steadily until mid-1982, when Nigerian austerity measures cut demand. The firm has normally generated a considerable surplus. IBETEX was conceived as an integrated cotton spinning, weaving and garment-making operation aimed at the European market and using local cotton. Technical, cotton quality and marketing difficulties have sharply reduced IBETEX production. The company has incurred heavy losses and is presently being reorganized. Alternative markets and products need to be explored, in cooperation with foreign investors. 2.14 Cement output has increased in recent years, as demand rose linked to the construction of several large projects. A second clinker grinding plant was installed in 1978, doubling Benin's grinding capacity. Total output of cement rose to about 270,000 tons in 1981. 2.15 Three major public investment projects have dominated the economy beginning during the late 1970s: a. Production of cement from the limestone deposits at Onigbolo commenced in mid-1982; the plant has a capacity of 500,000 tons. Sixty percent of the cement is destined for the Nigerian market. The Government of Nigeria is a 40 percent owner of the project and a co-guarantor of the foreign loans involved. As of early 1983, cement production had halted, because of Onigbolo's inability to sell cement at competitive prices in Nigeria and the high level of unsold stocks. b. Sugar production from irrigated canefields at Save was scheduled to begin in April 1983, with factory capacity of 47,000 tons. However, low cane yields (75 tons per hectare) are likely to limit sugar output to 37,000 tons. Eighty percent of Save's production is planned to be sold in Nigeria, but market access and pricing issues have not yet been resolved. The Government of Nigeria holds 46 percent of the equity in Save. c. Petroleum from the Seme offshore field was produced starting in early 1983. This is a project of the Government of Benin, utilizing a Norwegian service contractor. Production is expected to reach 8,000 barrels per day by 1985 or even earlier, and the crude oil will be entirely exported. These very large projects did not come onstream during the period under review, but raise issues for the future which are discussed in Chapters IV and V. Construction 2.16 The construction sector has performed strongly during the 1970s, doubling its share of GDP over the ten years to 1981. This performance reflects the major public investment in infrastructure and industry during this period. An expansion of the Cotonou port capacity was completed in 1982, and substantial highway and rural road construction has been carried out during recent years. Construction of the sugar, cement and petroleum projects has also absorbed considerable labor and contributed to sectoral value-added. 15 Commerce 2.17 Commerce has traditionally been one of Benin's economic strengths, and growth in this sector matched overall GDP growth during 1976-1981. The commercial sector is engaged in cross-border trading activities based on exports of Benin's consumer goods (textiles and beverages) and re-exports of imported consumer goods. Commerce also includes the marketing of foodcrops in urban centers of Benin and to neighboring countries. Activity therefore fluctuates from year to year, and the year 1981 was particularly strong for commerce. Business volume dropped in the second half of 1982 due to slumping Nigerian demand, but commercial activity was recovering somewhat in early 1983. Public Services 2.18 Rapid growth in civil service employment--15 percent per annum during the 1977-1980 period--has increased the sector's contribution to GDP in recent years. This reverses a long period of low growth in public service activities since 1970. Employment in public enterprises--whose contribution is included under the industrial sector appropriate to each enterprise--also rose rapidly during the late 1970s. However, the automatic employment of college graduates in the public sector has now been curtailed. B. EXPENDITURE ON AVAILABLE RESOURCES 2.19 GDP growth and a sharply rising resource gap have expanded total resources available to the economy at a high 6 percent annual growth rate (1976-1981). These resources have permitted gross domestic investment to rise to unprecedented levels in Benin, while consumption grew at 3.7 percent annually (see Table 2.3). Available resources have grown from 112 percent of GDP in 1972 to 138 percent in 1981. Foreign resources are clearly tied to the ambitious public investment program: fixed investment rose at a 20 percent real annual rate during the 1976-1981 period, reaching the extremely high level of 33 percent of GDP in 1981. This is a substantial investment level compared to the overall average for low-income African nations: gross domestic investment of 15 percent of GDP (in 1979) compared to Benin's 35 percent rate (in 1981). Private consumption fared relatively well, recording a per-capita real increase of nearly one percent per annum during 1976-1981, after a steep per-capita decline in the first half of the 1970s. 16 Table 2.3 Expenditure on Available Resources Annual Growth Rate % Percentage of GDP (1978 prices) (current prices) 1972-76 1976-81 1976 1981 Consumption -0.7 3.7 100.5 102.7 Private -0.2 3.6 90.0 89.3 Public 3.7 4.4 10.5 13.4 Gross Investment 10.9 14.1 20.3 34.9 Fixed Investment 8.5 19.8 17.9 32.9 Change in Stocks 19.6 -16.3 2.4 2.0 Total Expenditure 1.2 6.1 120.8 137.6 Provided by: GDP 0.7 3.6 100.0 100.0 Resource Gap 9.5 14.6 20.8 37.6 Source: Statistical Appendix, Tables 2.3 and 2.5. 2.20 While Benin's gross domestic investment (GDI) level has doubled in relation to GDP from 1972 to 1981, the share of national savings in its financing has declined sharply (see Table 2.4). From 31 percent of GDI in 1972, this ratio has fallen to less than 2 percent in 1981. Foreign resources provided over 90 percent of GDI during the 1976-1981 period. Gross domestic savings (before the addition of net factor income and current transfers from abroad) have been negative during these years. The considerable Central Government current surplus over this period has been offset by public enterprise dis-savings. Net factor income has remained stable, representing the net effect of increased savings transferred home by Beninese workers in other countries, and growing official interest payments overseas. 17 Table 2.4 Investment and its Financing (as percent of GDP, current prices) 1972 1976 1981 Gross Domestic Investment 16.4 20.3 34.9 of which: Central Government investment n.a. n.a. 12.5 Public enterprise investment 8.9 8.3 17.6 Private investment 7.5 12.0 4.8 Gross Domestic Savings 3.9 -0.5 -2.7 of which: Government current surplus n.a. 4.9 14.6 Net Factor Income and Current Transfers 1.2 3.4 3.2 Gross National Savings 5.1 2.9 0.5 Foreign Resources 11.3 17.4 34.4 of which: Public sectorl! 10.0 12.1 31.2 Private sector, short-term and errors 1.3 5.3 3.2 Source: Statistical Appendix Table 2.3. 1/ Government and public enterprises. Includes suppliers credits and other foreign lending for the three major investment projects in 1980 and 1981. 2.21 Investment during the late 1970s was concentrated in industry and infrastructure and carried out within the broad framework of the First State Development Plan (1977-1980). Actual investment was about 59 percent of that foreseen in the First Plan. The largest share of public investment went into industry--38 percent of total investment (see Table 2.5). The three large industrial projects (sugar, cement, and offshore petroleum production) accounted together for 24 percent of public investment during these years, and an even higher share during the last two years. Transport absorbed 30 percent of the total, mainly spent on roads projects and the extension of the port of Cotonou. Public utilities received the next largest share, followed by rural development with only 10 percent of total investment. The social and other sectors received minor portions of investment. 2.22 The level of public investment achieved over the 1977-1980 period is impressive, representing nearly double the level (as a proportion of GDP) achieved during the early 1970s. Development strategy concentrated on several large, export-oriented industrial operations based on natural resources 18 previously not exploited in Benin. Serious attention was also devoted to the country's transit role, in the form of road and port improvements. The small share of public investment received by rural development reflects the greater complexities faced in this sector, the preoccupation of planners with major undertakings in other sectors, and the concern of external donors over poor agricultural policies. Table 2.5 Public Investment by Sector, 1977-1980 (in billions of current CFAF) Sector Amount Percent Rural Development 11.7 10.2 Industry, of which: 43.3 37.8 Save sugar 12.5 11.0 Onigbolo cement 9.7 8.5 Seme petroleum 5.0 4.4 Public Utilities 16.7 14.6 Transport, of which: 33.9 29.7 Roads 15.4 13.5 Port 8.4 7.4 Commerce 1.7 1.5 Tourism 3.9 3.5 Education 1.8 1.6 Health 1.3 1.1 TOTAL 114.3 100.0 Source: Bank Mission Estimates based on Official Data. C. EMPLOYMENT, WAGES AND MANPOWER TRAINING 2.23 Benin's labor force remains largely agricultural. Employment in the modern sector of the economy has risen rapidly, however, absorbing part of the rural-urban migration. Wages, on the other hand, have remained at low levels. There is no available data on income distribution in Benin, and there have been no recent household surveys. In the past, there have been indications that the rural-urban terms of trade did not strongly favor the urban areas, but continued migration to the large cities indicates a likely divergence between urban and rural living standards. 1 9 Employment 2.24 The traditional agricultural sector continues to employ the greatest portion of the labor force, about 74 percent in 1980 according to Government estimates (see Table 2.6). Services occupy 20 percent of the workforce and industry the remaining 6 percent, with informal activities outweighing formal employment in both categories. Benin's informal sector is considered to be quite dynamic, and women play an important role, but little information is available. The formal sector employs only about 4 percent of the labor force, but employment in services grew by 15 percent per year, and by 10 percent in industry. The public sector expanded at a more rapid rate than private employment in the services sector: 16 percent per year (civil service plus public enterprises) versus 10 percent annually for private service enterprises. Table 2.6 Employment (1980, except as noted) Thousand Informal Formal Formal Sector Persons Percent as % of as % of Annual Growth Rate Total of Total Total Total 1977-1980 Agriculture 1,220 73.6 99.6 0.4 23.7 Industry 100 6.1 85.5 14.5 9.6 Services 338 20.3 85.1 14.9 15.4 Total 1,659 100.0 95.8 4.2 14.6 Source: Statistical Appendix Tables 1.3 and 1.4 Wages 2.25 Wage rates have risen only slightly in nominal terms in Benin during recent years, and have fallen in real terms. The minimum industrial wage rate is one indicator of this trend: from 1975 to 1982, this rate declined by a total of 43 percent in real terms. Civil service salary levels have also been strictly controlled, and have probably declined by a similar proportion. The very low wage levels in the public sector have posed a problem in retaining and motivating qualified staff, who have often been attracted by higher salaries in the parapublic and private sectors. The solution however, may be to reward efficiency rather than to raise salaries across the board. Although effective wage rates are not known in detail, wage levels in Benin have clearly fallen substantially behind those of other West African nations. For instance, in 1970, Benin's minimum industrial wage was 22 percent less than Senegal's, while it is now 66 percent below the Senegalese level. 20 Table 2.7 Wage Levels (minimum hourly industrial wage rate, CFAF) 1970 1975 1980 1982 Benin 39.60 45.00 51.75 51-75 Ivory Coast n.a. 92.00 174.00 191.00 Senegal 50.60 107.05 133.81 152.04 Source: BCEAO Manpower and Skill Training 2.26 The future requirements for skilled workers, technicians, and professionals in the industrial and agricultural sectors have not been precisely defined. Nonetheless, it is clear that the present training system is not well-oriented to support the development of skilled manpower for key sectors of the economy. First, the planning and administration of training is weak and employees are not sufficiently involved in formulating training programs. Second, the quality of existing pre-service training programs is very low. There is a shortage of trained teachers, a lack of essential materials and equipment, and overemphasis at the lower and middle-levels on general education without enough specialized training. Finally, the numbers of people trained in key fields does not correspond well to the needs. The output of competent skilled workers and technicians for industry is not sufficient, for example, but there is a surfeit of graduates in the commercial fields. D. MONEY, CREDIT AND PRICES 2.27 Benin's monetary policy is set within the context of the six-nation West African Monetary Union (UMOA) and its common central bank, the BCEAO. The UMOA has the advantage of a convertible currency, the CFA franc, which is linked to the French franc. Policy objectives for Benin, as a member of UMOA, have been the achievement of a sustainable balance of payments and an adequate level of domestic economic activity. 2.28 A relatively expansionary credit policy was pursued in 1982 (Table 2.8). This reflected increased demand for credit by the public enterprises to finance losses, and by the private commercial sector due to the involuntary buildup of stocks resulting from the slowdown in the re-export trade. This credit expansion also reflected a shift in the Central Government's position toward the banking system. During 1981, the Government built up its deposits with domestic banks and nonbanking institutions as a result of its high fiscal surplus. In 1982, the Government drew down its deposits with the banks by some CFAF 9 billion, and further drawdowns are expected in 1983. 2.29 Benin's net foreign asset position also reflects the strong Government surplus in 1981 and subsequent weakening. Net foreign assets of positive CFAF 13 billion at end-1981 had declined to a negative CFAF 5 billion 221 position at end-1982, and are expected to decline futher to negative CFAF 24 billion by the end of 1983. 2.30 Price inflation in Benin has been relatively moderate in recent years, although there is no adequate price index available. The mission's estimates of the implicit GDP deflator provide inflation levels of about 10 to 12 percent annually during the 1978-1981 period. The high-income consumer price index, prepared by one of the diplomatic missions in Cotonou, indicates similar levels. The devaluation of the French franc (to which the CFA franc is pegged at a level of 50 to 1) in 1981, 1982 and 1983 has been reflected in the CFAF-dollar exchange rate, which has climbed to the 400 level from a relatively stable range of 200-250 during the 1970s. This exchange rate shift is likely to have an inflationary impact on urban consumers in Benin, although a considerable portion of import trade is from France. In principle, the depreciation of the CFA franc should stimulate certain exports such as cotton, whose world market price is denominated in U.S. dollars. The Government should be able to substantially raise the CFAF producer price for cotton and other export crops. 22 Table 2.8 Money, Credit and Prices (billions of CFA francs at end of period) 1977 1978 1979 1980 1981 1982 Net foreign assets 0.9 -2.1 -2.8 13.5 -5.3 Net domestic assets-/ 39-4 44.6 66.3 64.9 87.9 Net claims on Government -4.9 -16.6 -15.2 -18.6 -10.8 Net claims on private sector and P.E.S 44.3 61.2 81.5 83.5 98.7 (annual growth, %) 38.1 33.2 2.5 18.2 Money and quasi-money 39.0 40.7 61.4 75.4 79.4 (as percent of GDP) 22.8 20.7 28.3 29.0 - Implicit GDP deflator 6.8 10.1 11.4 10.9 11.9 - (% change) High-income consumer 6.9 10.2 10.2 11.8 12.6 price index (% change) 1/ Domestic credit net of on-lending of long-term foreign borrowing and of other items. Source: BCEAO, IMF and Bank mission estimates. I/ E. PUBLIC FINANCE- 2.31 The Central Government continues to maintain a current surplus in its financial accounts. However, the level of this surplus in relation to GDP has been declining since 1976, with the exception of 1981 (see Table 2.9). The current surplus averaged 2.8 percent of GDP over the 1976-1981 period. Indications are that the 1982 and 1983 current surpluses will continue the earlier declining trend. However, serious deficiencies in the public finance data make it difficult to refer with confidence to developments on either the revenue or expenditure side since 1979. There are also considerable losses among the state enterprises, which are not consolidated with the public finance data. The declining current surplus reverses the trend of the first half of the 1970s, when restrained spending and rising revenues produced an increasing surplus. 2.32 Government revenues have declined somewhat as a proportion of GDP since 1976, with the exception of an unusual situation in 1981. Benin's Central Government revenues are largely determined by import duties. As noted in Table 2.10, import duties have constituted a rising share of total revenues, reaching 65 percent in 1981. Since a considerable share of Benin's imports--especially high-value, high-duty items--are subsequently re-exported, Government revenues in Benin have been more dependent on international trade conditions and neighboring countries' economic situations than on domestic 1/ The Mission which discussed the Report with Government was not able to obtain consistent public finance data for 1982 and 1983 as Government is in the pro- cess of revising its revenue and expenditure data. The figures in this Report should therefore be regarded as indicative. 23 production. For instance, sharply higher revenues in 1981 were largely due to duties on imported goods and to taxes on Beninese manufactures, both destined to Nigeria, in addition to taxes on income generated in the construction of major projects in Benin. Table 2.9 Central Government Finance Simmary (consolidated position)' Average 1976 1979 1980 1981 1976 1981 1976-81 Tbillions of CFAF) 7is percent of GDP) Current Revenues 22.8 28.5 33.4 52.6 16.7 20.2 16.4 Import duties 11.0 16.9 21.0 30.0 8.0 11.5 9.1 Income taxes 4.2 3.5 3.4 6.8 3.1 2.6 2.4 Other revenues 7.6 8.1 9.0 15.8 5.6 6.1 4.9 Current Expenditures 14.3 20.1 27.8 34.8 10.5 13.4 11.2 Wages and salaries2/ 9.6 14.4 16.3 21.0 7.0 8.1 7.1 Net Lending and Transfers 3.6 5.1 4.4 3.2 2.6 1.2 2.4 Current Surplus 4.9 3.3 1.2 14.6 3.6 5.6 2.8 Investment Expenditure 2.0 7.0 16.2 25.1 1.5 9.7 4.7 Overall Balance 1.6 -3.7 -15.0 -10.5 1.2 -4.1 -1.9 Source: Statistical Appendix Tables 5.1 and 5.9. 1/ Includes Treasury, FNI, CAA and special accounts; excludes public enterprises. 2/ Treasury only 2.33 Current expenditures rose to 13 percent of GDP in 1981 following a very steady proportion of 10 percent of GDP during the years 1976-1979. In nominal terms, current expenditures increased by 19 percent per year from 1976 to 1981, while inflation (implicit GDP deflator) was about 10 to 15 percent annually. This spending increase is primarily attributable to higher budgetary expenditures in 1980 and 1981 for education (expenditures have risen from the equivalent of 2.9% of GDP in 1978 to 4.1% in 1981) and for general public services. Rapid increases were also recorded in Special Account transactions (pension fund payments) and in CAA expenditures (representing considerably higher interest payments on foreign debt). These increases result from economic and social priorities which are likely to continue in the future. 24 2.34 Wage and salary costs dominate the economic classification of current expenditures. Personnel costs as a proportion of current expenditures have ranged between 64 and 73 percent during the past six years, and the trend has been rising. Higher wage costs appear to be primarily a function of numbers of persons in the civil service rather than of higher salary levels. Civil service employment has risen by an average of 15 percent per year from 1977 to 1980, based on a policy of employing all college graduates. Salaries, on the other hand, have been frozen since 1974, and a general increase of 11 to 15 percent approved by the Government in January 1980 has not yet been implemented. Calculations of average cost per civil servant substantiate the strict control over wage levels; the cost of CFAF 630,000 per employee has not changed (in nominal terms) between 1977 and 1980. In real terms, compensation levels have fallen considerably. Table 2.10 Central Government Revenue Trends 1976 1977 1978 1979 1980 1981 (in billions of current CFAF) Tax Revenues! 22.2 24.0 25.9 27.8 32.9 46.4 Import Duties 11.0 13.1 14.0 16.9 21.0 30.0 Income Taxes 4.2 3.7 4.8 3.5 3.4 6.8 Turnover and Excise Taxes 3.3 4.0 4.0 3.7 3.1 3.9 (in percentages) Tax Revenue as % GDP 16.2 15.0 15.1 14.1 15.2 17.8 Import Duties as % Tax Revenues 49.5 54.6 54.1 60.8 63.8 64.7 Import Duties as % Goods Imports 19.4 18.7 18.4 17.1 15.4 18.3 Source: Statistical Appendix Tables 2.3, 5.9 and 3.1. 1/ Data do not agree with current revenues in Table 2.9 due to statistical problems in Benin's public finance data. 2.35 The high proportion of the current expenditure budget devoted to wages restricts the funds available for necessary maintenance. The Treasury apparently postpones spending on materials and supplies each year until the level of receipts is fairly well known. In real terms, maintenance expenditures have declined over the past five years. This reduced spending results in an increasing overhang of postponed maintenance which creates liabilities for future budgetary periods. 2.36 Investment expenditures increased sharply in 1980 and 1981. This reflects Benin's spending on major projects such as Seme petroleum, Save sugar, and Onigbolo cement. External financing has risen as well, so that the 2 5 proportion of investment expenditures financed by foreign borrowing has increased somewhat. Nevertheless, rising investment has imposed a heavy burden of counterpart financing. Net of increased foreign borrowing, the higher investment expenditures in 1981 required CFAF 7 billion more in public counterpart funds than in 1979. F. PUBLIC ENTERPRISES 2.37 The role of public enterprises in Benin has grown sharply since the mid-seventies, when policy decisions were taken which adopted this organizational form as a major element of economic policy. The Government's objectives were to strengthen national control over the economy, to provide public competition in certain key sectors, and to accelerate economic development. Today, there are over 60 public enterprises--wholly or majority- owned by Government--engaged in most economic areas, particularly in industry, agricultural processing, commerce, transport and finance. Public enterprises have become such a dominant form of organization that they merit a brief review in terms of their impact on the economy, public finance and banking. 2.38 Public enterprises represent about 75 percent of modern industrial output in Benin. They employed 28,000 persons in 1980, or 40 percent of the formal sector labor force. There are indications, however, that employment policies have caused inefficient absorption of manpower by the public enterprises and that consumers have not always benefited from the low fixed prices intended to result from public enterprise involvement. The latter problem arises when a public enterprise holds a legal monopoly on importing a given product and is expected to distribute the goods at a uniform price throughout the country. Public enterprises have not always been in a position to carry out the distribution function effectively, due to poor organization, with the result that private distributors sell the merchandise at higher than official prices. This leaves the public enterprises with losses, but does not efficiently transmit the intended subsidy to the consumer. 2.39 The public enterprise sector has yielded a low financial return from the Treasury viewpoint. At least CFAF 15 billion of public funds have been invested as equity in public enterprises, along with guarantees on debts exceeding CFAF 135 billion, since 1975. The full extent of public enterprise borrowings has not always been controlled by the Government, although major projects have been monitored. Transfers from the current budget have not been made, but public enterprise losses have been financed by the state-owned banks. In exchange, the contribution of public enterprises to the Treasury has been limited to taxes (CFAF 3 to 6 billion per year). No significant dividends have been collected in recent years. Increasing public outflows are expected over the next several years, as past losses financed by short-term bank credit are absorbed by the Treasury, rehabilitation investments are undertaken, and cash infusions are required for several major new projects. It is estimated that public funding of at least CFAF 10 billion annually may be required by the public enterprises in the short-term. 1/ A detailed review of the public enterprises is presented in Volume III of the Economic Report. 26 2.40 The banks are heavily exposed to the public enterprises, which account for over 60 percent of all domestic borrowings. Arrears pose serious problems. Ten public enterprises maintain less-than-satisfactory banking relations with the commercial bank, and their total balances outstanding exceed the bank's reserves. Twelve public enterprises are in arrears to the development bank, on original loan amounts exceeding the bank's reserves. This situation has arisen in part because of the explicit or implicit Government guarantees involved. The sizable public finance surplus recorded in 1981 was largely deposited in the banks, and these funds assisted the banks in extending additional credit which helped finance the enterprises' deficits. In coming years, budgetary appropriations will likely be required to relieve the banks in the case of certain loans to public enterprises. G. BALANCE OF PAYMENTS 2.41 Benin's balance of payments reflects rapid increases in imports in recent years, linked mainly to capital investment projects and to re- exports. A very large current deficit has resulted, while on the capital account, large increases in foreign borrowing have led to an overall balance (Table 2.11). 2.42 Imports have expanded eightfold (in current CFAF terms) over the past decade. Much of this increase is due to capital goods imports (which rose from CFAF 4 billion in 1972 to CFAF 49 billion in 1981) in suppport of Benin's First Plan. Consumer and luxury goods imports (dominated by beverages, tobacco, garments and pharmaceuticals) also increased sharply from 18 percent of total imports in 1972 to 32 percent in 1981. While official petroleum product imports have increased, there has also been some unofficial import of gasoline and kerosene from Nigeria. Sharp increases in consumer goods imports during the late 1970s were related to buoyant demand in neighboring Nigeria and Niger, as well as in Benin. 2.43 Exports have grown considerably in recent years. However, recorded exports slipped from 54 percent of total goods exports in 1972 to 14 percent in 1981. The traditional commodity exports have been declining in real terms for the past decade. Palm products exports have fallen from an average of 50,000 tons per year in the first half of the 1970s to 24,000 tons in 1981. Cotton has also declined, from 30,000 tons annually in the 1970-75 period to 10,000 tons in 1981 (although indications are that cotton production is up substantially in 1982-1983, following implementation of a rural development project). On the other hand, unrecorded exports (as reconstructed from other balance of payments data) have grown at a rapid pace, with particularly steep increases in the years 1977 and 1981. These exports likely consist of re- exports of consumer goods, and exports of Beninese manufactured goods and foodcrops, all mainly destined for the Nigerian market. 2.44 The current balance has deteriorated from a deficit of 11 percent of GDP in 1972 to a very large 34 percent deficit in 1981 and an estimated 42 percent in 1982. Workers' remittances have increased significantly, but have been insufficient to overcome the increasing trade deficits. 27 2.45 Capital inflows have risen sharply, particularly during 1980 and 1981 when several major investment projects were financed. Suppliers credits provided the bulk of these funds, on reasonable terms (7.5 to 8.0 percent interest, 12 years maturity). Net borrowing rose from CFAF 11.4 billion in 1979 to the CFAF 50 billion level in 1980 and 1981. Official grant aid and direct foreign investment have also increased, linked to the Government's investment program. 2.46 The overall balance of payments turned positive in 1980 after three years of modest deficits. In 1981, a major positive balance was achieved, although the source of this shift is clouded by the existence of a substantial movement in the "other capital flows and errors" line. Recent developments suggest that the 1981 performance was largely based on the strong Nigerian demand for Beninese goods and re-exports, as net reserves have again been run down to a small negative position as at end-1982. Table 2.11 Summary Balance of Payments (billions of current CFAF) 1972 1976 1979 1980 1981 Exportsl/ 21.6 31.5 64.2 68.3 81.2 Importsl/ 32.1 60.0 108.3 148.5 178.8 Resource Balance -10.5 -28.5 -44.1 -80.2 -97.6 Investment Income -0.7 0.0 -0.2 -0.5 -2.1 Remittances and Private Transfers 1.7 4.7 8.4 9.3 10.3 Current Balance -9.5 -23.8 -35.9 -71.4 -89.4 Official Grant Aid 5.7 12.8 13.7 13.3 23.1 Direct Investm7nt 1.2 0.6 3.6 8.4 9.2 Net Borrowing2 1.5 3.1 11.4 58.7 48.9 Other Capital Flows and Errors3 2.1 8.8 4.5 -8.0 22.9 Overall Balance 1.0 1.3 -2.7 1.0 14.7 Net Reserves, year-end 7.2 4.5 -3.3 -2.2 12.5 Source: Statistical Appendix Table 3.1. 1/ Goods and non-factor services. 2/ Medium and long-term borrowing and other capital. 3/ Net short-term capital, credit from IMF, other flows, and errors. 28 H. EXTERNAL DEBT AND FOREIGN AID 2.47 The massive public investment effort undertaken during the late 1970s was largely financed from abroad. This was reflected in sharply higher capital inflows, which were obtained on harder terms than in the past. Debt service is rising, though much of the increase is related to major export- oriented projects. Because investment has been almost exclusively in the public sector, and because the CFA franc is fully convertible, debt servicing issues are essentially a question of public finance. 2.48 Benin's external debt (outstanding, including undisbursed amounts) increased from $166 million (CFAF 59 billion) at end-1976 to an estimated $589 million (CFAF 209 billion) at end-1981 (see Table 2.12). Of the 1981 outstanding amount, 43 percent was incurred to finance the sugar, cement, and petroleum projects. The mix of borrowing changed as well, shifting the outstanding debt structure from 15 percent on commercial terms in 1976 to 48 percent commercial in 1981. 2.49 Debt service has increased from the $2.8 to $4.2 million level (CFAF 1.0 to 1.5 billion) during 1976-80 to $17 million (CFAF 5.9 billion) in 1981 and $68 million (CFAF 24 billion) projected for 1983 based on existing commitments. Debt service in 1981 accounted for 7 percent of exports (goods plus non-factor services), or 11 percent of Central Government revenues. The three major industrial projects--two of which are jointly guaranteed by the Nigerian Government--account for 79 percent of the debt service due in 1983. Table 2.12 External Debt CFAF billions Percentage (current terms) 1976 1981 1976 1981 Total Debt Outstanding 59 209 100.0 100.0 Public Creditors 50 109 85.4 52.1 Multilateral 24 75 41.1 36.1 Bilateral 26 34 44.3 15.9 Commercial Creditors 9 100 14.6 47.9 Suppliers Credits 5 5 8.1 2.3 Bank loans 4 95 6.5 45.6 Total Debt Service 1.5 5.9 as X Exports (G + NFS) - - 4.2 7.3 as % Govt. Revenues - - 6.6 11.2 Source: Statistical Appendix Table 4.1. 29 2.50 The present level of Benin's debt service is substantially higher than in the past, but is linked to a major investment thrust. The country's capacity to service this debt depends on the success of the major projects, which in turn hinges upon favorable developments in worldwide demand and in Nigerian demand (in the case of sugar and cement). If the output can be sold at attractive prices, and if trade levels recover following their 1982 slump so that Benin's import duties rise, there will not be any difficulty in servicing this debt. However, there are major questions surrounding the viability of these projects, particularly in the case of the sugar project (see para. 3.32). Benin's debt servicing capability is further assessed in Chapter IV on the basis of alternative macroeconomic projections. 2.51 Concessionary aid for development in Benin has grown fairly rapidly in the form of grants during the late 1970s, but official loans have not increased. This means that some aid agencies may be converting their aid to Benin from loan to grant terms. The sharp increase in bilateral grants appears to reflect improved political relations with key donor nations. The volume of concessionary loans, however, has not increased. This may reflect Benin's emphasis during the late 1970s on major industrial projects in which foreign aid played little role, and the country's limited absorptive capacity for other simultaneous new projects. 30 III. SECTOR PERFORMANCE AND ISSUES 3.1 This chapter presents summaries of the major performance trends and issues in the key sectors of Benin's economy. The material is organized as follows: A. Agriculture B. Industry C. Transport D. Energy E. Social Sectors A. AGRICULTURE Background 3.2 Agriculture is the most important sector of the Beninese economy. It employs three-fourths of the active population, and provides 40 percent of the GDP and 36 percent of the foreign exchange earnings. The sector is predominantly fooderop oriented, producing maize, sorghum, yams, cassava, beans, and small quantities of rice. It is estimated that Benin enjoys an overall food surplus; a significant portion of domestic foodcrop production (perhaps 20 percent) is exported to Nigeria and Niger. This offsets Benin's foodgrain imports, which have been rising in recent years, and which have been subsidized by the Government through public enterprises. Benin enjoys a comparative advantage in foodcrop production which is likely to continue in the future. The main industrial crops are palm oil, cotton, and peanuts. Efforts are underway to expand cotton output, which is well-suited environmentally to conditions in northern Benin. But the oil palm sector is limited by insufficient rainfall, and will likely continue to decline in value. 3.3 Farming patterns vary markedly by region. In the southern and central region, two rainy seasons permit double cropping. Land is used intensively, and the average farm size is 1.2 ha. In the northern region with only one rainy season, the cropping pattern is less intensive and the average farm size is 2.4 ha. There is an average of 3.3 farm workers per farm in Benin. Labor is mainly family labor, yet a small number of farmers from larger farms hire workers during peak periods, such as harvesting. Cooperatives exist throughout the country; however, individual farmers still account for about 90 percent of all agricultural production in Benin. Yields are generally not high, due partly to low use of modern inputs (improved seeds, fertilizer). Fertilizers are so far little used in Benin, although they have been shown to improve the generally poor soils and raise yields for most crops. 31 Production Trends 3.4 Benin experienced a five-year period of stagnation in staple crop production prior to 1976. Production then increased (see Table 3.1) as a result of better weather and more attractive prices to small farmers. Production of maize and yams has increased sharply during the last five years largely in response to increased border trade wtih Western Nigeria. Beans and cassava output has also risen during this time period. Sorghum production has declined in recent years, due largely to a shifting of tastes to maize in the north. Table 3.1 Selected Foodcrop Production (thousand metric tons) 1969-71 1974-76 1979-81 Maize 202 224 302 Sorghum 52 69 59 Yams 524 489 687 Cassava 733 601 639 Beans 28 18 31 Rice 4 13 10 Source: Ministry of Rural Development 3.5 Benin's industrial crop production is of modest value (exports of US$18 million in 1981) and consists mainly of oil palm, cotton, and peanuts (see Table 3.2). Oil palm fruit has traditionally been harvested from an estimated 200-300 thousand ha of wild palm groves. Fruits from the wild palm groves are processed artisanally and the palm oil is consumed domestically or exported unofficially to Nigeria; the kernels are processed industrially. Between 1962 and 1975, 28,000 ha of improved palm groves were planted and the output is }ocessed into palm oil by the Societe Beninoise de Palmier a Huile (SOBEPALH)J', with the kernels being crushed by the Societe Nationale pour l'Industrie des Corps Gras (SONICOG). Productivity is low, with fresh fruit yields of only 4 tons/ha compared with yields of 15 tons/ha in other West African countries. Output of the modern oil palm sector has been stagnating due to climatic factors and depressed world prices. Productivity could be raised through better plantation maintenance techniques and organization of production and fresh fruit collection, but yields are not expected to rise to levels which would justify further investment. 1/ In a reorganization which became effective in the latter part of 1982, SOBEPALH was dissolved and its industrial activities were transferred to SONICOG. 32 Table 3.2 Selected Industrial Crop Production (thousand metric tons) 1969-71 1974-76 1979-81 Oil palm (fresh fruit bunches) na 523 356 Cotton raw 36 25 19 Peanuts 46 46 60 Source: BCEAO 3.6 Cotton production in Benin has performed poorly, but significant policy improvements have recently been made. Modern cotton production was introduced in Benin in 1963 under bilateral technical assistance and the production of seed cotton rose from about 5,000 tons in 1965 to 50,000 tons in 1972. Production fell to 10,000 tons in 1981, but has now increased to about 19,000 tons. The major factors accounting for the past decline have been high foodcrop prices relative to cotton prices (see Table 3.3, although it should be noted that the labor calendars differ for the two crops) and lack of timely availability of fertilizer and insecticides. In the past, the Government supplied subsidized agricultural inputs to cotton producers. The Government was able to finance these subsidies by paying low producer prices for seed cotton relative to the export price. As foodcrop prices became more attractive, however, farmers diverted fertilizer to fooderop production. Since foodcrop marketing was not controlled by the Government, there were no means for Government to generate revenues to cover input subsidies. This strain on public finance limited the Government's ability to import adequate quantities of inputs, and the lack of inputs was seen as threatening progress on the Government's major rural development efforts. As a remedy to this problem, beginning with the 1982-83 agricultural campaign, the Government began a six-year phased elimination of all subsidies on fertilizer and insecticides. Over the same period, prices paid to farmers for seed cotton will be increased to compensate for the higher input costs. In 1983, as a result of improved incentives farmers expanded cotton acreage and output despite the drought which reduced yields. Table 3.3 Farmers' Financial Incentive: Maize versus Cotton (Net Income per Man-Day in Zou Province, average 1979-81) Yield Price Revenue Input Cost Net Income Man-days Net Income (kg/ha) (CFAF/kg) (CFAF/ha) (CFAF/ha) (CFAF/ha) per ha per man-day Maize 715 80 57,200 600 56,600 83 682 Cotton 714 80 57,120 5,560 51,560 112 460 Source: MDRAC and World Bank. 33 Agricultural Institutions 3.7 Benin's agricultural sector is served by four major public agencies: the Ministry of Rural Development, the provincial rural development agencies, the national marketing and processing agency, and the agricultural credit bank. Major problems in agriculture have recently been addressed by changing the functions and organization of these key institutions. 3.8 Responsibility for the implementation of rural development policy rests with the Ministry of Rural Development and Cooperative Action (MDRAC) and the Ministry of State Farms, Livestock and Fisheries. The monitoring, evaluation, and planning function of MDRAC has not been effective in the past, which has led to poor technical analysis and preparation of investment proposals. This capacity is being strengthened under the rural development projects financed by IDA, IFAD, CCCE, and FAC. 3.9 The principal supporting institutions for rural development at the provincial level are the CARDERs, (Centre d'Action Regional pour le Developpement Rural). The CARDERs are responsible for primary marketing of cotton, which includes assembling seed cotton to central points, paying farmers, transporting seed cotton to ginneries, and managing the ginneries. There are a number of organizational problems with the ginneries. These agencies are also responsible for agricultural extension, primary marketing, research, cooperative support, input distribution, rural roads maintenance, water and other infrastructure development. This multiplicity of activities diverts attention and resources away from what should be the CARDERs' primary function--extension and other direct support to farmers--and should be discouraged. 3.10 Until recently, the management of cotton ginneries was the responsibility of SONAGRI, but this responsibility has been transferred to the CARDERs in the cotton-growing provinces. After ginning, cotton seed is now sold to the newly established SONAPRA (Societe Nationale pour la Production Agricole). This system of cotton marketing is the result of a recent reorganization, which consolidated into SONAPRA the functions of (i) SONAGRI, previously responsible for cotton ginning, handling and delivery of cotton to Cotonou, as well as input procurement and distribution; (ii) FAS, formerly responsible for price stabilization and subsidy payments; and (iii) SONACEB, which had been responsible for export marketing. This reorganization should resolve several financing and coordination problems which hindered efficient operations in the past. 3.11 The national agricultural credit agency, Caisse Nationale de Credit Agricole (CNCA), was established in 1975. CNCA extends credit to state enterprises, to CARDERs, and through the CARDERs to farmer cooperatives. CNCA also lends directly to farmers via provincial level agencies (CRCAM) (see Volume II, Agriculture). The primary source of finance for CNCA has been rediscounting with the Central Bank of West Africa (BCEAO). CNCA's greatest volume of loans has been to state enterprises, whose repayment record has not been good due to inadequate profitability. Loans to farmer cooperative groups have been more successful. 34 Plan Priorities 3.12 According to the 1983-87 Five-Year PlanY, the Government of Benin attaches high priority to agricultural production and productivity. The rural sector is supposed to receive CFAF 137.7 billion in investment (23 percent of total) according to the plan. This plan represents a quantitative improvement over the First Development Plan (1977-80), in that rural development was only allocated 11 percent of total investment in the first plan. 3.13 An examination of the agricultural projects proposed at the March 1983 Donors' Roundtable Conference suggests that many of the projects are not yet well-defined and that some may be ill-conceived. For example, a CFAF 2.2 billion rehabilitation of SONIAH's irrigation areas is proposed, as well as a 1 000 ha irrigated oil palm plantation at Takon-Yoko (CFAF 2.4 billion). Given Benin's past experiences with irrigated rice and the low financial returns on the 830 ha of oil palm already irrigated in Benin, major investments in these sub-sectors do not appear warranted. Instead, Benin should concentrate on agricultural projects which exploit its comparative advantage in foodcrop and cotton production, such as the rural development projects underway in the Atacora, Zou, and Borgou Provinces. Issues 3.14 The Government has taken a series of practical steps over the past two years to establish the preconditions necessary for an expansion of agricultural production. For example, the Government has recognized that previous attempts to control food prices have proven unsuccessful, and therefore marketing of traditionally produced fooderops has been left mainly to the private sector. The recent creation of the National Cereals Office (ONC) must not reverse this policy. The exact role of the ONC must be clearly defined following the study of food crop marketing planned for early 1984. Without that, there is the obvious risk of the activities of the new public sector agency leading to negative inducement effects on prices and, hence, on agricultural output. The Government's decision to phase out subsidies on agricultural inputs and simultaneously raise producer prices should also have a favorable impact on agricultural production by ensuring availability of these inputs (the lack of which caused serious bottlenecks in the past). Nigerian demand for Benin foodcrops has been strong, and previous constraints on transborder fooderop trade (perhaps never very effective) appear to have been removed. The Government might consider constructing feeder roads to help promote these exports. 3.15 The main issues which require attention in Benin's agricultural policies are the strengthening of agricultural institutions, a greater emphasis on crops in which it enjoys a comparative advantage, a careful focus on successful organizational forms, and the rational resolution of the problem of the inadequate supply of cereals in urban-area markets between harvests. 1/ At the time this Report was written, the actual 1983-87 Plan had not been prepared and the investment plans referred to in this Report are based on the Round Table Document prepared for the Donors' Conference held in March 1983. References made in this Report to the 1983-87 Plan therefore pertain to development intentions and plans as reflected in that document. 35 3.16 Institutions, especially extension, should have clearer objectives and provide more direct support to farmers in improving agricultural practices and increasing productivity and yields. The multiplicity of activities by the CARDERs should be reduced since it diverts attention away from their primary function--supporting farmers. 3.17 Benin must also plan agricultural projects and investments around crops such as cotton and foodcrops in which a comparative advantage exists, because the quality of soils and level of rainfall are well-suited to these crops. On the other hand, the soils and rainfall levels in Benin are not optimal for such cash crops as sugar and oil palm, and consequently yields for these crops are much lower than in other parts of West Africa. Benin's low yields for these crops (4 to 6 tons per ha for oil palm and 75 tons/ha for sugarcane) seriously constrain the economic viability of enterprises in these sub-sectors, and the mission recommends that Benin not invest in expanding the area planted to these crops. On the other hand, the substantial existing fixed investment in sugar and oil palm justifies short-term efforts to increase efficiency and production based on existing plantations and processing facilities. 3.18 Appropriate organizational systems are crucial in agriculture. The Government has correctly recognized the need for a flexible, economically- motivated peasantry engaged in climatically well-adapted production patterns. However, earlier planning documents appear to have contradicted this emphasis in referring to the increasing role of the official marketing system, reflecting an anxiety that the growing incomes of peasants who produce and market their products outside official channels may not be easily tapped to support the country's development programs. The mission's review of the sector (see Volume II) concludes that voluntary cooperative groups of farmers offer a good potential for overcoming some of the sector's constraints. Public enterprises that have directly engaged in crop production have generally incurred heavy losses due to high overheads and inefficiency. This form of involvement should not be undertaken in the future. Where marketing is concerned, the Government now intends to "officialize" peasant crop marketing channels by removing the restrictions that encouraged parallel market activities. This and other forms of incentives to rational decision- making by individual farmers and cooperative groups are more likely to lead to a strong agricultural performance. 3.19 The Benin Government has been subsidizing sales of imported foodgrains to consumers by requiring the public enterprise handling these imports (AGB) to sell at unremunerative prices. The financial burden of AGB's wheat imports proved so great that AGB handed over the task to the privately- owned flour mill, which presumably is able to pass on its full costs to the bakeries. However, subsidies of rice (about 15 percent) and occasional maize imports continue, at the expense of AGB's profitability, due to excessively low fixed wholesale and retail prices. Government's concern about inadequacy of supply of cereals in urban-area markets between harvests led to the creation of a National Cereals Office (Office Nationale de Cereales) in December 1983. Although the initial decree setting it up included the purchase and stocking of cereals among its duties, the Government now appears willing to pare down its size and role. Subsidized grain imports and official intervention on the local market act to depress the supply 36 response of local fooderop producers to the existing high level of demand. The Government and IDA are preparing for a study of the problems caused by the inadequate supplies of grain in urban areas and food subsidies. B. INDUSTRY 3.20 Benin's manufacturing sector is small and did not increase its real contribution to GDP during the 1970s. However, the three major public investment projects included in the First State Plan (1977-1980) are all linked to the industrial sector, and will raise industrial production in the first half of the 1980s. The formal sector is estimated to account for about 60 percent of total industrial value-added, and most activity is concentrated in four fields: food and beverages, vegetable oil processing, textiles and cement. These activities are mainly of the import substitution, import processing, and agricultural processing variety. A dozen public enterprises account for 60 percent of formal sector production (see Volume III for details) with the remainder composed of about two dozen private firms. Little is known about the informal sector, and this analysis is limited to the formal manufacturing sector. 3.21 The Government is aware of problems in the industrial sector, and has sought foreign advice and assistance. Technical assistance is believed to be required in the areas of project identification, project promotion with financing sources, project analysis, and the review of industrial policies. Structure of Production 3.22 Manufacturing contributed 6 percent to GDP in 1981. Over 80 percent of modern sector manufacturing value-added occurred in the four fields noted above (see Table 3.4), dominated by a few state-owned enterprises. Table 3.4 Industrial Sector Value-Added (in million current CFAF) 1977 1981 1981 Value-Added Percent Formal Sector 8,700 10,386 100.0 Food 427 1,751 16.9 Beverages 1,448 2S153 20.7 Vegetable Oil Prod. 2,322 2,222 21.4 Textiles 2,136 1,757 16.9 Cement 503 843 8.1 Wood 256 250 2.4 Paper Products 158 300 2.9 Chemicals 455 630 6.1 Metalworking, Machinery 995 480 4.6 Informal Sector 2,877 4,182 Total 11,577 14,568 Source: Volume II, Table 17. 37 a. Food and Beverages 3.23 Beverages--The public enterprise La Beninoise dominates production of beer, soft drinks, mineral water and ice. Employment is around 450 persons, and several new breweries and bottling plants have been added in recent years. Capacity utilization has been limited by production problems. 3.24 Fruits and vegetables--SONAFEL (a public enterprise) operates a tomato paste factory in Natitingou. Production has been minimal, due to the high cost of local tomatoes, technical problems and the high cost of imported cans. The factory is not competitive with imports. Another public enterprise operates a cashew nut processing unit. 3.25 Flour milling--Imported wheat is milled by GMB (Grands Moulins du Benin), a private mill with a capacity of 125 tons per day. 3.26 Bakeries--A number of private bakeries exist to supply the local market. b. Vegetable Oil Processing 3.27 Palm oil products--Public enterprises (now consolidated into a single organization, SONICOG) process fresh fruit from plantation-grown palms, and kernels purchased from small-farmer harvesters of wild palm groves. The overall performance has been poor, largely due to marginal climatic conditions for oil palm in Benin and poor plantation maintenance. Capacity utilization in all the mills is extremely low, and the labor force of 1,900 exceeds current needs. Soap manufactured by SONICOG from palm oil has, however, enjoyed a strong local demand. c. Textiles 3.28 Cotton printing--SOBETEX (a public enterprise with a minority private interest) bleaches and prints imported cotton fabric for sale on the local market, which includes Nigerian buyers. The plant is efficiently run and the fabric designs are well-regarded in the marketplace. Output increased until mid-1982 when Nigerian demand dropped. 3.29 Integrated textile plant--IBETEX, another public enterprise, was established in Parakou in 1975 to produce finished garments from local cotton, for export to Europe. Marketing problems, poor cotton quality, technical difficulties and disagreements with the private partners have resulted in heavy losses, reduced output, layoffs, and a reorientation toward the domestic market. 3.30 Another textile complex is under construction at Lokossa. d. Cement 3.31 Clinker grinding--Two clinker grinding plants operate in Benin, both public enterprises: SONACI and SCB. Both utilize imported clinker and gypsum to produce cement (about 270,000 tons in 1981/82) for the local market. The SONACI plant was inaugurated in 1978, doubling Benin's capacity. Heavy 38 financial losses have resulted from low prices fixed by the Government at a time of rising input costs. Prices were raised in late-1982, but demand appears recently to have decreased. Total employment at the two enterprises is about 250 persons. 3.32 These are the major ongoing industrial activities in Benin. Other firms are engaged on a more modest basis in fields such as ceramic tile manufacturing, printing, paper clip manufacturing, the blending of perfumes, welding and steel construction, agricultural implement production, kitchen utensils and soft drinks. e. Major New Projects 3.33 In addition, three major projects presently coming onstream are expected to raise the industrial sector's output: 3.34 Integrated cement production--The Societe des Ciments d'Onigbolo (SCO) is a public enterprise owned 51 percent by the Benin Government, 43 percent by the Nigerian Government and 6 percent by the technical partner F.L. Smidth to produce cement from local limestone deposits. Total cost of the project is about CFAF 32 billion (US$90 million). The 500,000-ton capacity plant began operations in June 1982 with a work-force of 500 persons, but operated at 10 to 20 percent of capacity while the issue of exemption from import tariffs for sales of cement to Nigeria was resolved. At present, the plant has stopped producing because the cement is not price-competitive on the Nigerian market, and large cement stockpiles exist in Benin. In the medium- term, up to 80-90 percent of the output would be destined for Nigeria. The plant is technically sound, but cash flow problems are likely during the medium-term due to low world cement prices. Current interest by the Benin Government in expanding capacity to 1.2 million tons per year is clearly premature given the imbalance between production costs and market prices. Under "normal" world conditions, SCO should be profitable. Cumulative cash flow shortfalls of CFAF 4 to 8 billion are projected between 1983 and 1989. However, revenues should cover operating costs and make some contribution toward fixed costs, so it is economic to continue operating the plant. For the two governments involved, it will be necessary to find the funds to meet these shortfalls, whether domestically or through some form of external borrowing or debt re-scheduling. 3.35 Sugar--The Societe Sucriere de Save (SSS) is also jointly owned by the Governments of Benin (49 percent), Nigeria (46 percent), and the technical partner, Lonrho (5 percent). Total investment cost is approximately CFAF 69 billion (US$194 million). With a design capacity of 47,000 tons of sugar based on irrigated canefields, the plant is likely to produce only 37,300 tons with the existing cane acreage due to overly optimistic yield estimates. Excess world sugar supply is likely to make SSS unprofitable for the remainder of the 1980s. However, 80 to 90 percent of output is planned for sale on the Nigerian market, and the price agreed with Nigeria will be a key determinant of SSS profitability. Projections (see Volume III) indicate that cumulative negative cash flow could reach CFAF 40 to 50 billion by 1991, due in part to low yields stemming from climatic and soil factors. Since these projections were made, it appears that difficulties in attracting labor at the minimum wage may further drive up costs and increase losses. As with the cement project, the two governments need to plan for the cash injections that will be 39 required, unless world prices firm up considerably. Since revenues at current depressed world market prices appear to still cover operating costs, it is efficient to produce rather than to close the plant. Sugar production is slated to begin in 1983. Total employment will be about 3,500 persons. 3.36 Petroleum--The offshore Seme oilfield is being developed under a service contract with technical partners Saga Petroleum of Norway and financing by Norwegian and UK banks. Total cost is estimated at approximately CFAF 56 billion (US$158 million). IDA assistance has been provided for training. Oil production began in early 1983, and exports of between 4,000 to 10,000 barrels per day are anticipated during the rest of the decade. Recoverable reserves are estimated at about 22 million barrels, although three new oil deposits have recently been located. No refinery is planned at present, nor would one be appropriate to Benin's level of petroleum consumption. Uncertainties over the future level of world oil prices, and over the volume of recoverable oil and production costs, make uncertain the magnitude of the gains which will be derived by Benin. Even with fairly high pumping rates, most of Benin's oil revenues are committed initially to repaying debts incurred for the project. In the mission's best-estimate projections, the project's impact on public finances during the first phase would be negligible. A subsequent phase being considered may, however, generate some net contribution to public revenues. Issues 3.37 This section focuses on three specific issues: Benin's comparative advantage in the industrial sector; the institutional environment; and the projects proposed in the 1983-87 Plan. Other aspects (e.g., pricing and personnel policies, and government-enterprise relations) are discussed in the context of public enterprises (see Volume III). 3.38 Benin's major industrial advantages are low labor costs and proximity to the large Nigerian market. Wage rates in Benin are significantly lower than those elsewhere in West Africa. The minimum industrial wage is OFAF 52 per hour in Benin (or $1.17 per 8 hour day), versus CFAF 152 in Senegal and CFAF 191 in Ivory Coast. Enterprises such as SOBETEX textiles and La Beninoise beverages have demonstrated that high-demand consumer goods can be. successfully produced in Benin and sold to the domestic and neighboring markets. Benin's preferential treatment within the CEAO and EEC markets may provide potential demand. The Nigerian market has also been key to the development of Benin's limestone deposits. 3.39 On the other hand, the sector's weaknesses are that technical training is lacking, there are few experienced industrial managers, Government pricing and personnel policies have been poor, private sector investors have little interest in tying up capital in industrial enterprises, the small domestic market purchases significant amounts of manufactured goods from Nigeria, and there are few incentives to export. Training of both technicians and enterprise managers is included as a priority in Benin's new Plan; cooperation with competent foreign partners in joint ventures could help to accelerate the transfer of critical skills. While the investment code has probably not been a key constraint, it does favor public over private enterprises. Encouragement of greater local private investment in the sector, which is also a Government policy, may depend upon the negotiation of more 40 stable access to the Nigerian market for Benin manufactured goods. As long as the border remains subject to unanticipated restrictions, it will be difficult to attract the risk capital required for industrial development. The domestic market alone is generally too limited to permit economies of scale, and Benin's tariffs provide little protection to import-substitution industries. There are no explicit export incentives. A study of the structure of industrial protection and export promotion would be useful. 3.40 Benin lacks powerful institutions dedicated to promoting industrial development. Four agencies have some involvement in the area, and need to be strengthened: the Ministry of Industry, the Chamber of Commerce and Industry, the Central Projects Bureau (BCP), and the development bank (BBD). 3.41 There is also the need to re-examine the Incentive Code with a view to making it more effective. A study of the existing system of industrial incentives which evaluates its strengths and weaknesses, would provide the information required to introduce changes that would induce a greater supply response from industrialists. 3.42 The Ministry's staff responsible for industrial policy and projects lacks the required human and material resources. It is not in a position to effectively plan new projects in the sector, even though the Government has taken the leading role in industry. Nor does the Ministry have personnel trained in engineering or management who can assist industrial enterprises. The Chamber of Commerce devotes little effort to industry. The BCP does not have adequate project identification or analysis capabilities. Finally, the BBD has succeeded only partially in stimulating industrial investment, despite support from IDA and other aid agencies. 3.43 Support for these agencies is needed over a number of years to develop appropriate staff. The Government also needs to study the specific roles of each agency. The mission suggests that the Ministry of Industry should be primarily responsible for the identification and promotion of new industrial projects. The Planning Ministry (BCP and other offices) should focus on reviewing project viability, and on coordinating projects. The Ministry of Industry's staff and the BBD should be leading the industrial development activities, and technical assistance to these agencies is thus of high priority. The effectiveness of existing industrial policies should also be reviewed. Many of these policies--pricing, personnel, distribution, investment promotion--require revision as noted in the public enterprise volume. 3.44 The stated priorities of the Second Plan in the industrial sector are to rehabilitate existing enterprises, and to orient industry around the processing of foodcrops and natural resources. New activities linked to the large cement and sugar plants are also proposed, as are non-traditional energy projects, metalworking, and training. 3.45 Out of the total CFAF 75 billion planned investment in the industrial sector during the 1983-87 period, foreign financing is sought for CFAF 60 billion of projects. Of this amount, CFAF 20 billion remain unidentified so far. The identified projects (extension of Onigbolo, glass bottle factory, steel products, salt ponds, lime production, and gari manufacturing) generally reflect the overall policies determined for the sector, although the Donors' 41 Round Table Document does not include any specific proposals for rehabilitation of existing operations. But the viability of individual projects can be questioned. The extension of Onigbolo is premature at present, when the plant is operating at a small fraction of capacity and serious marketing and financial problems exist. The other projects' desirability hinges upon detailed economic analysis. One analysis reviewed by the mission--for the Gari plant--was found to be defective with respect to the cost and availability assumed for the manioc supply to the plant. C. TRANSPORT 3.46 The transport sector is particularly important in Benin. In recent years, it has absorbed about a quarter of public investment and provided about a fifth of the formal employment. Since 1978, the sector has contributed between 12 and 15 percent of GDP. Aside from satisfying domestic demand, the sector supplies transit services for land-locked Niger. Overall, prospects for major new developments in the sector remain modest, due to economic difficulties in Benin and in neighboring countries. Summary statistics are presented in Table 3.5. Table 3.5 Transport Trends 1978 1979 1980 1981 1982 ---------------------Cotonou Port Traffic, Thousand tons--------------------- Destination/Origin Benin 664 732 736 815 683 Off. Transit to/from Niger 216 171 211 336 265 Off. Transit to/from Nigeria 151 629 0 0 0 Total 1,031 1,532 947 1,151 948 ---------------------------------Rail Traffic--------------------------------- Total tonnage (thousands) 397 359 340 326 n.a. Passengers (million pass-km) 132 143 163 188 n.a. Freight (million ton-km) 152 140 143 174 n.a. --------------------------Road Expenditures, million CFAF--------------------- Investment 2,648 5,048 7,726 5,043 n.a. Maintenance 625 629 646 672 n.a. Total 3,273 5,677 8,372 5,715 n.a. Source: See Volume II, Tables 15, 17, and 18. 3.47 Benin's transport system is focused on the country's international port of Cotonou. Port capacity was recently expanded to about 1.2 million tons a year with assistance from several donors including IDA (Credit 826- BEN). Port traffic has ranged from 1.0 to 1.5 million tons over the past five years, including substantial transit traffic for Nigeria through 1979, when 42 Nigerian port capacity was expanded. Niger continues to rely on Benin's transit corridor, and accounts for about 30 percent of Cotonou's total tonnage handled. Port capacity is sufficient at present and investments should be kept to a minimum, though the rust-damaged pilings of the eastern jetty will require rehabilitation soon. The port component of the Benin route could be improved by relaxing administrative constraints on transit traffic, removing the state monopoly on cargo handling, and granting free access by port users to the port zone. 3.48 The railway is operated by the OCBN, a bi-national autonomous agency of the Benin and Niger Governments, controlling the railroad between Cotonou and Parakou and licensing truck transport to and from Niger. The 440 km north-south mainline between Parakou and Cotonou carries most of the Niger traffic and the bulk of the Beninese railway traffic. There are two lightly used coastal lines: the 107 km eastern link between Cotonou and Porto Novo- Pobe, and the 33 km western extension connecting Segboroue to Cotonou. 3.49 Since 1975, OCBN has operated at a loss because heavy capital investments were not offset by sufficient tariff increases. Its cumulative losses stood at CFAF849 million in 1982. The theoretical capacity of the system considerably exceeds actual traffic levels, and efficiency could be improved by reducing the excessive wagon turnaround time (14 to 20 days) between Cotonou and Parakou. 3.50 Two major investments are planned over the next three years. The first involves track replacement, ballasting, and renovation of signalling equipment (CFAF 5.7 billion). This has largely been financed. The second includes strengthening and extension of the line up to the Onigbolo cement plant, and acquisition of equipment. It is likely that cement shipments could be made more economically by road for the short distances involved. An earlier plan to extend the railway from Parakou north to Niamey in Niger is currently receiving low priority and should not be pursued, due to the high risks and low expected returns. 3.51 The planned paving of the last remaining unpaved section (Dassa- Zoume-Parakou) of the parallel highway threatens OCBN's future. Trucks are likely to displace the railway for the carriage of higher-rated merchandise, thus seriously eroding the OCBN's revenue base. The Government should, therefore, cut wasteful operations, limit railway investments to those strictly needed to reduce costs under conditions of shrinking rail traffic, and study the future role of OCBN in light of the expected dominance of road transport. 3.52 Roads are the dominant transport mode in Benin. Of the 7,250 km of the road network, 950 km are paved, about 2,300 are accessible on a year-round basis and the remaining rural roads are accessible mainly during the dry season. The backlog of road rehabilitation has been considerably reduced, and the top priority is now to create an efficient capacity to maintain the network on a routine basis. 43 3.53 By 1987, the last 230 km unpaved section of the north-south highway (from Dassa-Zoume to Parakou) will be paved. Feasibility and engineering studies financed by the European Development Fund have been completed. The studies suggest that paving is economically and technically feasible. This project will greatly increase competitive pressures on the parallel railway line, however, and raises key issues for the future of the OCBN. Projects to pave other trunk roads in Benin, including the road from Parakou to Upper Volta, require further study of developmental benefits which might justify them economically, or the preparation of alternative appropriate standards for upgrading. 3.54 Funding of road maintenance is a major bottleneck. The major sources of funds are earmarked taxes on motor fuels and lubricants (deposited in a Road Fund), and budgetary contributions. The latter have been erratic, and overall road maintenance expenditures have declined in real terms since 1978. This trend may improve somewhat, due to increases in earmarked taxes levied in 1982. Total resources are still likely to fall short of estimated needs. 3.55 A small public enterprise was established in the trucking industry in 1977 (Trans-Benin). This enterprise has sustained heavy losses, and cannot compete with the dynamic private trucking sector. Government may wish to reconsider its role in this firm. Recommendations 3.56 In order to be able to exploit the full potential of its geographical location, Benin needs to prepare and implement an adequate transport strategy to make the system efficient and competitive with competing transit routes via neighboring countries. The strategy should aim at: (a) capitalizing on its efficient private trucking system; (b) eliminating efficiency bottlenecks in the railway, port, and transit agencies; (c) improving the system of road user fees, since taxes on diesel fuel and gasoline have proved insufficient in providing funds for road maintenance. 3.57 The planned paving of the Dassa-Zoume to Parakou stretch of the north-south main road is economically justifiable. Once this road is paved, however, the railroad is likely to lose even more traffic. Any attempt to administratively distribute traffic between the two modes of transportation will be disruptive and inefficient. Hence, further investment in the railroad should be limited to that necessary to keep it operable at the reduced level of traffic volume. Steps can also be taken to improve the efficiency of the Port which will benefit both the railroad and the road routes. D. ENERGY 3.58 Benin's energy resources are limited. The only hydrocarbon resource is the Seme oilfield, which began commercial production in early 1983. Benin has no known coal deposits. Hydropower potential has been identified, and is to be exploited by construction of the Nangbeto Power Station on the Mono River in Togo, to be owned by the bi-national Communaute Electrique du Benin (CEB). Savannah woodlands, covering about 68,000 km2 are the major energy source. Per capita energy consumption in Benin is one of the lowest in the world--65 kg coal equivalent compared with an average 87 kg for countries at 44 the same level of per capita income. At least two-thirds of energy consumption in Benin is met by wood and charcoal, followed by petroleum products (24%) and hydropower (4%) which are both imported at present. Government's priority in the energy sector is the development of indigenous energy resources to supply the increasing domestic demand for energy. The Seme Field 3.59 In 1968, Union Oil discovered the Seme oilfield 15 km off the coast of Benin in water depth ranging from 27-54 meters. In May 1979, the Government decided to develop the field and signed a service contract with SAGA Petroleum, a private Norwegian oil company. Drilling of the first six wells of Phase I started in June 1982. Of the first four wells, the first one was dry and the others are producing at the predicted levels. The Seme field extends beyond what was previously projected, and an intermediate phase development is considered, consisting of drilling additional wells prior to enhanced recovery (water injection) which might be required at a later date. The further development phase would consist of incremental investments and would probably make the overall Seme development scheme profitable. High production costs and recent declines in world oil prices are unlikely to produce any significant net public revenues for the first phase. Nangbeto Hydroelectric Project 3.60 Power demand in Benin has grown considerably during recent years (14 percent per year between 1976-80), and Benin and Togo are planning an expansion program which includes the construction of a 60 MW Nangbeto hydroelectric scheme in Togo on the Mono River separating the two nations. Annual generation would amount to 148 million kwh. The project is estimated to cost about US$170 million (1983 prices), assuming it is completed on schedule in early 1988. There are still issues concerning the project which need clarification, such as tariffs, and institutional aspects of the regional and national agencies involved in the production, transmission and distribution of electricity. However, future demand is not considered to be a problem, and Nangbeto is a cost-effective solution to the energy situation which at present relies heavily on electricity purchased from Ghana's Volta River Authority. E. SOCIAL SECTORS 3.61 Considerable emphasis has been placed on education during the late- 1970s, and both enrollment rates and literacy levels are rising. However, this effort has encountered quality problems due to public finance constraints. Health services have not received the same priority as education, and health conditions remain poor (see Table 3.6). Education 3.62 Access to education has expanded rapidly in Benin during the past decade, but schooling rates are still low. Student enrollments have grown at a rate of 14 percent per year. Primary school enrollment rates have increased from 34 percent in 1971/72 to 49 percent in 1980/81. Enrollment rates vary greatly by region, ranging from 83 percent in the urbanized south to only 25 percent in the rural north. At the secondary school level, only 10 percent 45 school-age children attend school. The adult literacy rate is atzu-6 25 percent, up from 10 percent in the mid-1970s. 3.63 In 1975, an educational reform was undertaken with the objectives of democratizing the educational system and integrating it into the economic and social system of the country. Free schooling was provided to all school-age children; local languages were introduced; school cooperative production units were organized; and curricula were redesigned to emphasize practical applications. A review conducted in 1981 determined that the quality of education had declined since the reform began, due to lack of administrative capacity and financial resources. Inadequate preparations were made to introduce the revised curricula, and the cooperatives were largelyT unsuccessful. The rate of success in the major examinations declined shlarply. 3.64 Financial constraints have also limited the quality of education made available to greatly increased numbers of children. Education has consumed a fairly high 33 percent of the current budget since 1976, and the Government has taken steps to limit the growth of educational expenses by freezing teachers' salaries and hiring teenagers to teach in the primary schools. Unfortunately, these steps were not consistent with reasonable education quality. In view of these problems, the Government has requested external assistance to strengthen the administrative and planning capacity, and to give priority to primary education, technical secondary education, and teacher training. Health 3.65 Health conditions in Benin are poor, particularly in rural areas, but are improving gradually. Life expectancy is only 47 years at birth, equal to that for sub-Saharan Africa as a whole (see Table 3.6), after having risen by ten years during the past two decades. The infant mortality rate is above the average for low-income developing countries. Malaria is the single main cause of death. Food supply for Benin equals 114 percent of the FAO's miniumuim daily calorie requirements. 3.66 The level of medical services and sanitation conditions are still inadequate. With one physician per 21,000 persons, Benin is similar to other African countries, and there has been some improvement in the number of doctors in part due to the establishment of a medical school in Cotonol. One in five villages have safe water supply. 3.67 The Government does not presently have a comprehensive population policy, and data are extremely limited. The principal concerns are the high levels of morbidity and mortality and the unbalanced spatial distribution of population. However, the rapid population growth rate (2.7 percent per annum over the period 1961-1979) has powerful implications for Benin's fuLture, in terms of employment needs and social services. Child-spacing services are provided by the National Committee of Benin for the Promotion of the Family, a private organization whose activities are coordinated with the national health program, which operates six centers in the country. 3.68 The Government aims to improve the health situation by expanding the utilization of traditional and modern medical arts among the population, and by promoting preventive medicine. A primary health care system is being 46 established, based on Village Health Units. Despite ambitious plans, health expenditures declined as a share of budgetary expenditures from 11 percent in 1976 to 5 percent in 1981. Greater financial resources are needed to implement existing plans for the health sector. One project requiring modest foreign financing is the analysis of the 1979 census data, which would provide a baseline for any health-related project studies. Table 3.6 Health Indicators Benin Sub-Saharan Africa 1980 1977-1979 Life expectancy at birth, years 47 47 Child death rate, ages 1-4 25 25 Daily calories, % of requirements 114 89 Population per physician, thousands 21 24 Population per nurse, thousands 2 25 Access to safe water, % population 21 25 Source: Government of Benin; Accelerated Development in Sub-Saharan Africa, (1981) 47 IV. DEVELOPMENT PROSPECTS 4.1 This chapter presents the highlights of Benin's 1983-87 development plan and the Bank mission's macroeconomic projections over the period to 1990. The plan document itself was not available at the time of the mission. However, a report prepared for the March 1983 Donors Roundtable Meeting offers valuable insight into the Government's current strategic thinking, as well as a re--iew of past developments, the investment program, and future prospects. This document is reviewed in the first section of the chapter, followed by the mission's projections based on an assessment of likely developments. This second section gives a quantitative sense to the issues facing Benin which are discussed in Chapter V. A. BENIN'S DEVELOPMENT PLAN FOR THE MID-1980s Development During the Seventies 4.2 Benin's current development planning effort, as reported to an international donors' meeting, begins with review of the strategy pursued and results achieved during the seventies.l The salient features noted are the political stability achieved, the improvement in public finances, and the growth of state intervention. The report candidly notes, however, that the expected results were not achieved. This was due to a lack of resources and qualified managers, and to the reality of an open economy in which the scope for efficient government intervention is limited. 4.3 Several conclusions are drawn from this review of the seventies' experience: Government involvement in productive activities must be selectively re-evaluated; private capital must be called upon to assist in development; and the role of the State lies in the areas of planning, orientation and control. The country's economic goals remain to raise living standards and to provide better education and training. Strategy for the Mid-Eighties 4.4 Benin's new development strategy has been termed "auto-centree" and "auto-entretenue". This strategy aims at raising rural output and incomes by officializing the parallel market in the sale of domestic foodstuffs to the growing markets in Nigeria, and encouraging through price incentives the sales of cash crops, such as cotton, abroad. This externally- and market-oriented strategy is expected to lead to the expansion of the domestic market, contribute towards the creation of a self-sustaining surplus and have a positive impact on the public finances. 4.5 The Round Table document presents some indication of the implication of this strategy for various sectors of the economy. The document identifies agriculture and possibly petroleum as the only sectors capable of generating this surplus. This is an over-generalization, although partially correct. In 1/ Le Developpement Economique du Benin: Table Ronde des Partenaires au D6veloppement Economique et Social de la Republique Populaire du Benin, Rapport de Presentation, Planning Ministry, 1983. 48 the planners' view, industry has not contributed an appreciable surplus in the past and is not expected to do so in the near future, and the trade sector is not believed to productively invest the surpluses generated. Transit activities are stated to generate costs to the public sector (in terms of civil servants) equal to the benefits provided, although the mission cannot agree uith su-ch a view. 4.6 The document provided to the donors addresses in some detail an operational strategy in agriculture. This emphasis is well-placed, in view of the sector's dominant position (74 percent of employment, 40 percent of GDP) and modest past performance. Priority will be accorded to raising agricultural productivity and extending the area under cultivation. Foodcrops are to be emphasized, with some of the output exported to Nigeria. While this document expressed a preference for centralized marketing control over these export sales of fooderops, consensus which developed during the discussion of the draft of this Report with the authorities in Cotonou and which was included in the concluding Communiqu6, emphasized the importance of increasing the role of the market and reducing that of Government. Bureaucratic constraints, which merely act to dampen the incentives for farm production and the level of farmer earnings, would be curbed. Peasants are to be stimulated to invest savings by decentralizing rural development activities to the village level, by offering Ministry of Rural Development support in the extension area to the provincial agricultural agencies (the CARDERs), and by improving the agricultural credit system. In the mission's view, these indicate that agricultlural policy is gradually moving away from excessive concern witn issues of control. The mission regards this development as encouraging since proper incentives and efficient technical support hold the key to improved performance of the agricultural sector. 4.7 Less detailed strategies are provided for the other sectors. Industry is to serve primarily as a processor of agricultural goods and as a producer of tools which raise agricultural productivity. This focus seems to ignore the possibilities of producing numerous other goods for a variety of markets based on Benin's low labor cost and other advantages. The energy strategy, involves petroleum and hydroelectricity activities, while the transit function will be strengthened through emphasis on rural roads. 4,8 In general, Benin's latest industrial planning initiatives recognize both the importance of regional markets beyond the limited national boundaries, and the need to enroll the private sector in key areas. The current attitude on both these points is much more flexible than in Benin's First Plan (l977.80). The emphasis on neighboring country markets is well- placed, although the plan does not advance specific steps to improve access to these markets. In our opinion, both infrastructure and bilateral trade policy improvements are needed. In dealing with the private sector, the plan seems ambiguous. It speaks about avoiding repressive measures, and of inviting the private traders to become active in industrial activities. However, there is little mention of economic policies which would stimulate private sector investment, aYAd the recently revised investment code clearly favors public enterprX is 49 Investment Plan 4.9 The Second Plan calls for public investment of CFAF 600 billioni/' during the 1983-87 period, apparently measured in current terms. This is a substantial level of investment, averaging about 25 percent of GDP, and is about 7 percentage points higher than the mission's best estimate. Nearly one-third of the total investment would consist of projects already being implemented, with two-thirds representing new projects. 4.10 Rural development is to receive the highest priority in investment terms, accounting for 23 percent of the total (see Table 4.1). This is double the proportion received by this sector in the First Plan (1977-80). Industry is slated to receive 13 percent of total investment, sharply down from the 46 percent earmarked for industry in the previous plan. The relatively low level of investment in industry reflects the priority given to rehabilitation of existing public enterprises as opposed to the creation of new industries. Construction and public works projects (21 percent) will continue to develop the nation's infrastructure for domestic and regional transit. Energy and other infrastructure sectors account for the remaining half of total investment. Table 4.1 Sectoral Distribution of 1983-87 Investment Plan Percent of Sector Total Value Rural Development 23.0 Construction and Public Works 21.0 Industry 12.7 Energy 7.3 Education and Research 8.4 Public Administration 8.4 Health and Nutrition 7.3 Transport and Communications 6.7 Tourism 2.4 Commerce 2.4 Services 0.4 100.0 Source: Le Developpement Economigue du Benin, Ministry of Planning, 1983. 1/ The Round Table Document contained this amount but this has been reduced during the preparation of the actual plan document to CFAF410 billion. 50 4.11 The content of the investment proposals for each sector has been discussed in Chapter III. In summary form, the mission offers the following observations on the project emphasis by sector: Rural Development 4.12 The projects seem oriented in the right direction, with a major emphasis on provincial-level integrated rural development in Borgou Province, in Mono and in Oueme. The inclusion of reforestry, rural roads, and improved seed variety projects also appears sensible. A few of the projects seem less promising, particularly those involving irrigated palm and rice production (see Volume II). Both natural growing conditions and the organizational system foreseen may not be favorable in these cases. Furthermore, the investment level for extension and training may be low depending upon what is included under the regional projects. Industry 4 4.13 One-third of the total amount is for projects as yet unspecified. The largest identified project is the expansion of the Onigbolo plant to produce clinker (CFAF 22 billion). The demand for additional cement or clinker is not apparent at the moment and this project might not be viable during the 1983-87 planning timeframe. Remaining projects are of modest scale and appear interesting, although generally not yet analyzed in detail. Energy 4.14 Investment foreseen in the Roundtable document consists of electricity transmission and distribution, small hydroelectric sites, and charcoal production. The two major projects currently foreseen in the sector- --a second phase of the Seme offshore oil project and the massive Nangbeto multipurpose dam--are little discussed in the Roundtable document, presumably because financing is already considered to be secured. Construction and Public Works 4.15 Major projects are the paving of the Dassa-Zoume to Parakou link of the north-south highway; the paving of the road along Benin's western frontier to Upper Volta; and the extension of the rail line from Pobe to Onigbolo. The missing link in the Parakou road likely has a high rate of return, though it may result in destroying any hope of profitability for the parallel railway. The other two large projects would require considerable study before it can be determined that they are economically justified. Education 4.16 Classroom construction, the establishment of industrial and commercial polytechnic training facilities, and a number of smaller projects make up proposed investment in this sector. The proposed establishment of facilities to offer training in practical skills needed in industry, agriculture and commerce is worthwhile. 51 Health 4.17 Health investment is largely concentrated in the primary health care area. This emphasis is appropriate, and the attention of official donors needs to be attracted to the serious health problems in Benin. Financing 4.18 In terms of financing, the Government estimates that foreign funding has already been obtained for 27 percent of total investment. Additional foreign aid is sought for 53 percent of the total, and domestic funds will cover the remaining 20 percent. This is a high local proportion in historical perspective; Government provided the funds for about 14 percent of total public investment (Central Government plus public enterprises) during the 1976-1981 period. A level of 5 to 10 percent is considered by the mission to be likely during the Second Plan period. Projected Results 4.19 The methodology utilized in the Second Plan to project sectoral growth rates is based on assumptions concerning the execution of the individual projects. To the extent that these assumptions are optimistic, growth rates may be overestimated. The procedure used was to extrapolate the past growth trends, and then to add the expected value-added from ongoing and new projects. 4.20 The annual growth rate of GDP is projected to average 5 percent without petroleum production and 6 percent with petroleum production. The leading sectors would be construction and public works (20 percent growth rate per year), industry (9 percent), and agriculture (4 percent). These growth rates are somewhat higher than the mission's projections discussed in the following section, which include an annual GDP growth of 3.4 percent during the 1982-1990 period. 4.21 The Second Plan also includes balance of payments projections through 1987. However, the Bank mission views these projections as overly optimistic. For instance, the current account deficit projected in the Plan for 1985 is about half the level projected by the mission. Summary 4.22 In summary, the 1983-87 Plan presents the Government's'frank appre- ciation of past development problems, but does not sufficiently define a realistic future strategy and viable project opportunities. There is a useful emphasis on foodcrop production and the possibilities of greater exports, and on the need to rehabilitate existing public enterprises in preference to em- barking on major new projects. Overall, the level of planned public invest- ment appears to be somewhat high, given the current level of external debt and the fact that individual projects have not been thoroughly analyzed before their inclusion in the Plan. There is also insufficient emphasis on providing economic incentives to private producers in the agricultural and industrial sectors, as opposed to attempts at centrally controlling development. The Roundtable document is weak on policy analysis, as discussed in Chapter V. The macroeconomic projections presented to the donor's Roundtable are not detailed and do not reflect a clear linkage to the projects proposed. 52 B. MEDIUM-TERM PROJECTIONS 4.23 The Bank mission has prepared independent projections of Benin's macroeconomic performance until 1990. The objective of this effort is to identify the likely economic implications of current policies and trends underway. These projections are based on actual data available generally through 1981. Emphasis is placed on the structural inter-relationships between investment, production, public finance, balance of payments and external debt. 4.24 The mission's best-estimate projection incorporates major successful developments in agriculture, and the current schedules for production and export of petroleum, cement and sugar. An alternative projection assumes less success in the agricultural and industrial sectors. The differences in GDP growth rates between these two scenarios are presented in Table 4.2 below. Table 4.2 Sources of GDP Growth (Average annual growth rates, percent per year) Best Alternative Actual Estimate Scenario 1976-81 1982-90 1982-90 Primary Sector 0.7 2.7 1.0 Secondary Sector 6.8 6.2 4.5 Services 4.7 3.3 2.2 GDP 3.6 3.4 2.1 Source: Bank mission projections. 4.25 Key constraints on Benin's future economic growth are revealed by these projections, as follows: a. GDP growth will remain low on a per-capita basis, due to the slow-down of demand in neighboring markets and to the difficulties in achieving rapid productivity gains in agriculture or implementing new industrial activities. b. Recent very high public investment levels are not sustainable, due to a lack of identified projects and public finance problems. c. Modest investment expenditure levels should lead to manageable balance of payments and debt service situations. d. The public finance situation is expected to be tight due to high recurrent costs of recent investments and policies. e. The successful operation and marketing of the three major projects will have an important bearing on future growth of investment and consumption. 53 4.26 These findings are discussed in the following paragraphs. Production 4.27 The best estimate of the GDP growth rate is 3.4 percent annually from 1982 to 1990. This is about equal to the rate achieved during the 1976-1981 period, and is higher than the growth trend in the early 1970s. 4.28 Industrial output will show the most rapid increase (6.2 percent per annum), as the three major projects come onstream. By 1985, output is projected as follows: --8,000 barrels per day of petroleum from the Seme offshore field; --500,000 tons of cement annually from the Onigbolo works; and --37,300 tons of refined sugar annually from the Save sugar factory, based on present cane acreage and estimated yields. 4.29 Agricultural output is projected to rise at a 2.7 percent pace in the best-estimate projection, up considerably from the 1976-1981 experience. This assumes successful implementation of ongoing rural development projects in Zou, Borgou and Atacora Provinces. Sustained growth is also contingent upon raising producer prices of cash crops, a high level of maize and yam demand in Nigeria, and removing subsidies on imported foodgrains. 4.30 Construction and tertiary-sector activities are expected to grow at a more moderate pace during 1982-1990 than in the recent past. This reflects lower project-related construction and a slower pace of cross-border trade. Investment 4.31 Total investment is projected to decline sharply as a proportion of GDP until 1985, as the current major projects are completed, in the best- estimate case (Table 4.3). From a peak of 35 percent of GDP in 1981, gross domestic investment will fall to 20 percent of GDP in 1985. This is equal to the relative level of investment during the 1976-1978 period prior to the recent buildup. Investments now in the early planning stage could be executed in the late-1980s, raising the investment rate to 25 percent of GDP in 1990. The high investment level relative to GDP growth reflects the anticipated difficulties with the current major projects and the expected fairly modest rates of return on new projects. 4.32 These investment levels assume public investment of CFAF 417 billion (in current terms) during the 1983-1987 period, or 70 percent of the level projected in the Second Plan. The low level of gross domestic savings-- currently negative and expected to reach only a small positive value by 1990-- and the shortage of economically viable project proposals are likely to constrain investment. 54 Table 4.3 Investment and Savings (as percent of GDP) 1976-78 1980 1981 1982 1985 1990 Gross Domestic Investment 20 34 35 33 20 25 Public Investment 11 28 30 29 17 21 Gross Domestic Savings 0 -3 -3 -4 1 2 Source: Bank mission projections. Public Finance 4.33 Benin is likely to encounter public finance difficulties in the coming years. The public finance situation is expected to be more difficult in 1983 than during 1981, when an unusually high current surplus was recorded. Firm estimates are not yet available for 1982, but it appears that Government revenues from import duties continued strong, while current expenditures rose somewhat. During the remainder of the 1980s, the current spending is likely to rise due to several factors. First, recurrent costs associated with recent infrastructure improvements will be considerable, particularly with regard to the road system, education and health. Second, the public enterprises as a group have incurred heavy deficits which were financed by the banks in recent years. These past losses, as well as costs required to rehabilitate certain enterprises, will necessitate a much higher level of Government current expenditures than was the case heretofore. Third, the major ongoing investments--Save sugar, Onigbolo cement, and Seme petroleum--will require continued counterpart funding and subsidies in some cases in order to operate effectively and repay debt obligations. Import duties are projected to continue providing slightly over half of total Central Government revenues, and these duties will continue to fluctuate with the trade levels of consumer goods passing through Benin for re-export to neighboring countries (see Table 4.4). Table 4.4 Public Finance 1981 1982 1983 1985 1990 -------------as percent of GDP--------------- Current Revenues 20.2 19.7 18.2 18.2 18.2 Current Expenditures1 14.6 16.5 16.7 16.5 16.8 Current Surplus 5.6 3.2 1.5 1.7 1.4 -------as percent of Public Investment-------- Current Surplus 18.8 11.3 8.4 9.8 6.7 1/ Including net lending and transfers. Source: Bank mission projections. 55 4.34 In the best-estimate case, current expenditures are assumed to increase at the same rate as GDP during the remainder of the decade, following sharp real increases in 1982 and 1983. Import duties are believed to have declined in real terms during 1982 and especially in 1983. The current surplus, as a proportion of Government revenues, thus remains at a low level from 1984 to 1990. Favorable factors, such as the possibility of greater than expected petroleum production, are counterbalanced by uncertainty over the level of transborder trade as it affects import duties, in the mission's public finance outlook. 4.35 Interest on external debt paid directly by the Treasury is projected to be quite low over this period, assuming that the loans incurred for large projects are repaid by project-generated cash flows (this assumption is revised in the alternative scenario discussed later on). The current surplus available to help finance investment would be less than 10 percent of the anticipated public investment levels during the 1983-1990 period. Balance of Payments and External Debt 4.36 Benin's balance of payments is particularly difficult to project because of the large value of estimated unrecorded exports. Assuming a stable trend in this item, however, the projections are characterized by a decreasing current account deficit in relation to GDP during the rest of the 1980s. This results from major new exports of petroleum, cement and sugar by 1985, and from a decline in the real value of capital goods imports from the high levels of 1981-82. 4.37 The real growth rate of exports is projected to be 7.5 percent per year during the 1982-1990 period in the best-estimate scenario. By 1985, petroleum, cement and sugar would account for 74 percent of recorded exports, although unrecorded exports would still constitute an estimated 56 percent of total exports. Imports are not projected to increase in real terms between 1982 and 1985, due to lower domestic investment levels. Total imports would then rise at a 4.6 percent real rate from 1985 to 1990, as investment recovers. 4.38 The current account deficit will likely be reduced in coming years, reaching 21 percent of GDP in 1985 and increasing only slightly by 1990. These levels are well below the 41 percent reached in 1982. 4.39 As a result of a diminished trade deficit and a more modest level of public investment, lower capital inflows will be required in the near-term and debt service ratios should begin to stabilize. After rising from 6 percent of exports in 1981 to 22 percent in 1982, the debt service ratio is projected to remain at about the 25 percent level during the period to 1990. Nevertheless, debt outstanding and disbursed will rise to 75 percent of GDP in 1990 from 57 percent in 1982. The projections assume terms and conditions of borrowing in line with Benin's past experience, and assume 90 to 95 percent foreign financing of public investment. 56 4.40 Both the debt service ratio and the outstanding debt levels forecast must be viewed as relatively high for a country at Benin's income level. A particularly important relationship in the case of Benin is that between debt service and public finances, since all medium and long-term foreign borrowings are taken down by the Government or with its guarantee, and the CFA franc is fully convertible. This ratio is projected to attain 55 percent in 1990. However, this is due in part to the large share of debt for revenue-generating enterprises that would not normally have to be covered by public revenues. Even if one excludes the debt undertaken in recent years for the three major industrial projects (intended to be self-financing, and two of which are jointly and severally guaranteed by the Nigerian Government), the ratio of debt service to Central Government revenues is quite high (Table 4.5). Excluding the three large projects, this ratio would reach 28 percent in 1985 and is still projected to reach 46 percent by 1990. These ratios are only sustainable if a significant proportion of the investments undertaken are directly productive or generate revenues for the Government. Table 4.5 Balance of Payments and External Debt ---Growth Rates, per year--- at constant prices 1982-85 1985-90 Exports (Goods and NFS) 14.3 3.5 Imports (Goods and NFS) -0.3 4.6
Groupe de la Banque mondiale · Pre-2003 Economic or Sector Report
Benin - Country economic memorandum (Vol. 1 of 4) : Economic performance and prospects
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Groupe de la Banque mondiale
Type de document
Pre-2003 Economic or Sector Report
Pays
Bénin
Source
Banque mondiale