Benin Country Report - EIU

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Country Report

Benin

Generated on January 12th 2015

Economist Intelligence Unit20 Cabot SquareLondon E14 4QWUnited Kingdom

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Benin

Summary Summary

Basic data

Political structure

Economic structure Annual indicators

Quarterly indicators

Comparative economic indicators

Outlook for 2015-16 Political stability

Election watch

International relations

Policy trends

Fiscal policy

Monetary policy

International assumptions

Economic growth

Inflation

Exchange rates

External sector

Forecast summary

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Benin 1

Country Report 1st Quarter 2015 www.eiu.com EconomistIntelligenceUnitLimited2015

SummaryEditor: Bjorn Dahlin van Wees

Forecast Closing Date: December 17, 2014

Outlook for 2015-16

Although we expect the president, Boni Yayi, to remain in power until the2016 poll, growing opposition to him and his administration means thatpolitical stability will be fragile and policymaking slow.Any effort to prolong Mr Yayi's stay in power, either by delaying the nextpresidential election or by changing the constitution to allow him to standagain in the 2016 poll, is likely to trigger widespread public protests.The fiscal deficit will widen gradually from an estimated 2.1% of GDP in 2014to 2.6% of GDP in 2016 as the gains from fiscal reforms are offset by risingpublic wages, capital expenditure and election-related spending.Growing cotton exports, expanding port activity and rising public investmentwill help to maintain relatively robust real GDP growth, which will average4.9% a year in 2015-16.We expect positive price growth to return in 2015, averaging 0.4%, on theback of continued growth in the public-sector payroll and a weaker currency.As world food prices rise in 2016, inflation will quicken to 1.2%.The current-account deficit will widen slightly, from an estimated 10.9% ofGDP in 2014 to 12% of GDP in 2016, as high public investment and robustdemand pressures boost the import bill, outweighing rising cotton exports.

Review

Benin's Constitutional Court has ruled that Article 42 of the constitution,which limits presidents of the country to two five-year terms, cannot beamended, appearing to rule out a third term for Mr Yayi.Following street protests and fierce criticism of the authorities' handling ofthe election preparations, the government has transferred CFAfr3.15bn(US$6m) to the commission in charge of updating the voter registration lists.Despite this, anti-government protests have continued and oppositionparties marched in Cotonou and Porto Novo in mid-December, in protestagainst the authorities' failure to organise local elections in a timely manner.The government has announced measures aimed at trying to formalise thelarge informal sector in an attempt to boost tax revenue collection.In October the regional central bank announced the introduction of mostlyfreebankingthroughouttheeightcountryUnionconomiqueetmontaireouest-africaine in an attempt to boost financial inclusion.

Basic data

Land area

112,622 sq km

Population

10.3m (World Bank actual, 2013)

Main towns

Population in '000 (2012 World Gazetteer estimates):

Cotonou: 789.7

Abomey-Calavi: 468.6

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Porto Novo (capital): 271.1

Climate

Tropical, drier in the north

Weather in Cotonou (altitude 7 metres)

Hottestmonth,March,2628Ccoldestmonth,August,2325Cdriestmonth,December, 13 mm average rainfall; wettest month, June, 366 mm average rainfall

Languages

French, Fon, Yoruba and others

Measures

Metric system

Time

1 hour ahead of GMT

Public holidays

Fixed: January 1st, January 10th (Vodoun Day), May 1st (Labour Day), August 1st(Independence Day), August 15th (Assumption), November 1st (All Saints' Day),December 25th

Variable (according to Christian and Muslim calendars): Eid al-Adha (Tabaski),Prophet's Birthday, Eid al-Fitr, Easter Monday, Ascension Day, Whit Monday

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Political structure

Official name

RpubliqueduBnin

Form of state

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Unitary republic

Legal system

Based on December 1990 constitution

National legislature

National Assembly with 83 seats, elected by universal suffrage for a four-year term

National elections

March 2011 (presidential); April 2011 (legislative); next legislative and presidentialelections due in April 2015 and 2016 respectively

Head of state

President, elected by universal suffrage for a five-year term, for a maximum of twoterms

National government

President and his appointed government; the cabinet was last reshuffled in August2014

Main political parties

ForcescaurispourunBninemergent(FCBE),createdinJanuary2007tosupportthe president, Boni Yayi, holds 41 seats in the National Assembly; the RenaissanceduBnin(RB)previouslysupportedthepresidentbutisnowdividedanditsallegiance is uncertain; the main opposition alliance is Union fait la Nation (UN),dominatedbyPartidurenouveaudmocratique(PRD)butalsoincludingPartisocialdmocrate(PSD)andMouvementafricainpourladmocratieetleprogrs(MADEP); other smaller parties include the Alliance cauris 2 and Alliance forcedansl'unit(AFU)

President: Boni Yayi

Minister of state

Highereducation&research:FranoisAbiola

Key ministers

Agriculture, livestock & fisheries: Issa Azizou

Communications & ICT: Jean Dansou

Culture, crafts, tourism & literacy: Jean-Michel Abimbola

Decentralisation & local government: Isidore Gnonlonfoun

Defence:RobertThophileYarou

Development & economic analysis: Marcel de Souza

Economy&finance:KomiKoutch

Energy,oilexploration,mines&water:BarthlmyKassa

Environment, housing & urbanisation: Christian Sossouhounto

Evaluation of public policy & privatisation: Antonin Dossou

Family & social affairs: Naomi Azaria

Foreign affairs: Nassirou Bako Arifari

Health:DorotheKindGazard

Institutional relations: Gustave Sonon

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Interior & security: Simplice Dossou

Justice,legislation,humanrights&governmentspokesman:ValentinDjnontinAgossou

Labour, public service, administrative & institutional reforms & social dialogue:Yaya Aboubakar

Maritime economy & port infrastructure: Rufu Orou Nan Nansounon

Microfinance, youth employment & women's affairs: Marie-Laurence Sossou

Publicworks&transport:AkNatond

Secondary education & professional training: Alassane Soumanou

Trade,industry&SMEs:FranoiseAssogba

Youth & sports: Safiou Idrissou Affo

Governor of regional central bank (BCEAO)

KonTimokoMeyliet

Economic structure

Annual indicators 2010a 2011a 2012a 2013a 2014b

GDP at market prices (CFAfr bn) 3,250 3,440 3,851 4,104 4,322

GDP (US$ bn) 6.6 7.3 7.5 8.3 8.8

Real GDP growth (%) 2.6 3.3 5.4 5.6 5.1

Consumer price inflation (av; %) 2.3 2.7 6.8 1.0 -1.2

Population (m) 9.5 9.8 10.1 10.3 10.6

Exports of goods fob (US$ m) 1,282 1,251 1,443 2,322b 2,492

Imports of goods fob (US$ m) -1,775 -1,800 -2,002 -3,111b -3,333

Current-account balance (US$ m) -618 -552 -577 -891b -956

Foreign-exchange reserves excl gold (US$ m) 1,200 887 713 695 1,089

Total external debt (US$ bn) 1.6 1.9 2.1 2.5b 2.7

Exchange rate (av) CFAfr:US$ 495.3 471.9 510.5 494.0 493.6a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product

2012

% of

total

Components of gross domestic product

2011

% of

total

Agriculture 32.4Private consumption 76.5

Industry 12.9Government consumption 11.6

Services 54.7Gross domestic investment 20.7

Exports of goods & services 14.3

Imports of goods & services 24.0

Principal exports 2013% of

totalPrincipal imports 2013

% of

total

Cotton 12.8Food 41.1

Re-exports 71.5Capital goods 16.4

Petroleum products 11.7

Main destinations of exports 2013a% of

totalMain origins of imports 2013a

% of

total

Lebanon 8.3China 37.1

China 8.3India 10.3

India 7.1US 7.5

Nigeria 1.9Malaysia 6.7

Niger 2.3Thailand 6.1a Based on partners' trade returns; subject to a wide margin of error.

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Quarterly indicators 2012 2013 2014

4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Prices

Consumer prices (av; 2005=100) 111.1 111.1 111.7 111.1 109.0 110.0 110.9 108.8

Consumer prices (% change, year on year) 7.3 2.6 1.9 1.3 -1.9 -1.0 -0.7 -2.0

Financial indicators

Exchange rate CFAfr:US$ (av) 505.6 496.9 502.1 495.3 482.0 478.9 478.4 495.2

Exchange rate CFAfr:US$ (end-period) 497.2 512.3 501.5 485.7 475.6 475.8 480.3 521.3

Deposit rate (av; %) 3.5 3.5 3.5 3.5 3.5 3.5 3.5 n/a

Discount rate (end-period; %) 4.0 4.0 3.8 3.5 3.5 3.5 3.5 3.5

M1 (end-period; CFAfr bn) 872 996 979 959 1,079 1,130 1,167 n/a

M1 (% change, year on year) 0.3 17.7 10.3 14.7 23.6 13.5 19.3 n/a

M2 (end-period; CFAfr bn) 1,463 1,615 1,570 1,587 1,717 1,788 1,920 n/a

M2 (% change, year on year) 6.2 19.1 9.5 12.5 17.4 10.7 22.3 n/a

Foreign trade (US$ m)a

Exports fob 179 187 283 229 185 180 330 n/a

Imports cif -2,133 -1,964 -2,293 -2,278 -2,255 -2,429 -3,281 n/a

Trade balance -1,953 -1,777 -2,010 -2,049 -2,071 -2,249 -2,951 n/a

Foreign reserves (US$ m)

Reserves excl gold (end-period) 713 677 836 801 695 836 949 n/aa DOTS estimates.Sources: IMF, International Financial Statistics, Direction of Trade Statistics (DOTS).

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Comparative economic indicators

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Outlook for 2015-16

Political stabilityApproachingtheendofhissecondandunderthecurrentconstitutionfinalfive yearpresidentialterm,BoniYayiiscomingunderincreasingpressure.Frequentpublic-sector strikes have adversely affected government operations, and popularfrustration with the slow pace of economic reforms and the lack of improvements inliving standards is high. Moreover, several of the parties in parliament, including thepropresidentialalliance,theForcescaurispourunBninemergent(FCBE),areinternally divided, making the exact balance of power in the legislature uncertain.Indeed,wranglingintheNationalAssemblylessaboutpolicydifferencesthanaboutpoliticalelitestryingtoasserttheirdominanceisintensifyingaheadofthe2015 (legislative) and 2016 (presidential) elections, thus hindering effectivepolicymaking and weakening political stability.

The sudden reshuffle of the government in both August 2013 and August 2014,including the removal of several long-standing allies of the president, and risingcriticism against Mr Yayi from within the pro-presidential alliance are examples ofgrowing political uncertainty. In line with Benin's history of volatile patronage-based politics, allegiances change quickly. As the election period draws closer andjostling for influence intensifies, uncertainty will increase further. In addition, asThe Economist Intelligence Unit expects Mr Yayi to step down at the end of hissecond term, prospective successors, including within the FCBE, will assertthemselves more strongly in order to boost their chances in the 2016 presidentialelection, thus further undermining political stability.

Adding to the turbulent political outlook is uncertainty over the timing of upcomingelections. Local polls, now scheduled for March 25th 2015, have been repeatedlypushedbackofficiallybecauseofdelaysoverthevoterregistryrevisionprocess.There is a growing perception that the authorities are dragging their feet over theorganisation of the polls, perhaps in an attempt to prolong Mr Yayi's stay in power,and several public protests against the lack of clarity over the election calendarhave taken place in 2014. Responding to the protests, the authorities set April 26thas the date for the next legislative election, and fears that Mr Yayi will seek tochange the constitution to remove the presidential term limit to allow him to standagain in the 2016 election have diminished after the country's Constitutional Courtruled, in November, that the term limit cannot be scrapped. However, Mr Yayi hasmade ambiguous comments about the importance of holding elections, and anyattempt to extend his hold on power would trigger large demonstrations andundermine political stability. Moreover, widespread frustration over frequent powercuts, continued allegations of official corruption (and the government's half-heartedattempts to address it), political interference in the judicial system, patchy welfareprovision and a lack of jobs will continue to lead to sporadic demonstrations or riotsin2015 16,althoughapopularuprisingalongthelinesseeninneighbouringBurkinaFaso is unlikely given Benin's relatively strong democratic record.

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Election watchThe next legislative and presidential elections are due on April 26th 2015 and inApril 2016 respectively. The political scene in Benin is highly fragmented and nopolitical party is likely to secure a clear victory in the legislative poll. Instead, theoutcome will depend on the ability of the country's disparate political groups toform united and stable alliances to contest the poll. Given ongoing disagreementinside many political parties and quickly shifting alliances, this will be difficult toachieve, and policy uncertainty is likely to increase as the polls draw closer. Giventhe waning popularity of Mr Yayi, a victory of an alliance hostile to the currentpresident is looking increasingly likely and this would slow down policymakingfurther.

Although Mr Yayi has referred to his current term as his "second and last", there iscontinuing speculation that he may still seek to extend his hold on power. If so, thiscould place him on a collision course with the Constitutional Court, which has ruledthattheprovisionsrelatingtopresidentialtermlimits(amaximumoftwofive yearterms) cannot be amended. As Mr Yayi's political backing is weakening, we do notexpect him to succeed in abolishing the term limits. Although political elites havebegun to jostle for position ahead of the 2016 vote, official candidacies are yet to belaunched.Astrongcontender,however,willbeAdrienHoungbdji,whocamesecond in the 2011 poll and has been the leader of the opposition since then,although his prospects will depend upon his ability to forge a cohesive alliance fromthe country's many disparate political parties.

International relationsMr Yayi will continue to strengthen relations with Benin's neighbours and will seekincreasedeconomicco operationwithothercountries,notablyChinaandIndia.Encouraged by Benin's commitment to the economic reform programme drawn up inco operationwiththeIMFandtheWorldBank,donorsespeciallytheEUcountrieswillmaintainsizeablebilateralandmultilateralaidpro grammes.However, donors will remain wary of the slow pace of reform and investmentimplementation, as well as signs of erratic policymaking. Any attempt by Mr Yayi toprolong his stay in office beyond the term limit in 2016 would probably lead to someaid suspensions and complicate relations with Western donors. The governmentwill seek to strengthen relations with Niger, with which it is planning to build acrossborderrailwayline.AproposedroadlinkingNigeriaandCted'Ivoirewouldenhance regional commercial relations, but the benefits of this will not be felt withinthe current forecast period.

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Policy trendsEconomicpolicyin2015 16will,asinpreviousyears,focusonstrengtheningpublicfinancial management and speeding up the implementation of structural reforms andpublic investment projects. Reform efforts will be centred on expanding the revenuebase, streamlining customs administration, bolstering tax compliance, modernisingthe civil service and improving the efficiency of public investment and state-ownedenterprises. To address governance concerns, the administration has promised toreform the civil service and plans to audit seven parastatal companies, beforeeventually expanding the programme to other parastatals and governmentdepartments. However, weak administrative capacities and a lack of political will, aswell as labour and public opposition, mean that progress on reforms andcontroversialrestructuringswillcontinuetobesluggish.Thecountry'sthree yearprogrammewiththeIMFexpiredinmid 2014,butislikelytoberenewedin2015(theauthorities have requested a new programme), maintaining Fund support for thegovernment's reform efforts.

The capacity of Cotonou port, a key source of customs receipts and servicesincome, is expanding on the back of efforts to modernise facilities, streamlinecustoms procedures and extend the port. The government has ambitious plans toinvest in several large infrastructure projects, including boosting power-generationcapacity, upgrading roads and railways, and constructing new ports and a newinternationalairport.DuringaroundtableconferenceinParisinmid 2014thegovernment secured pledges from donors and private investors of nearly US$12bntosupporttheseinvestmentplanswhichincludegreateruseofpublicprivatepartnershipsduringthe2014 18period.However,itisunclearhowmuchwillactually be disbursed, and uncertainty over financing and weak implementationcapacity will delay completion of these projects. The government's plans to reduceits involvement in the cotton sector, in an effort to reduce fiscal risks, have beenderailedafteritretookcontrolofthecountry'smaincottonginner,theSocitdedveloppementducoton(Sodeco),inNovember2013,drawingaccusationsthatitexpropriated private property and flouted the country's laws. Such incidents,coupled with red tape, widespread corruption and inadequate power supplies, willcontinue to affect investor perceptions and weigh on private-sector growth.

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Fiscal policyRevenue growth will benefit from better trade-monitoring procedures at Cotonouport,whichwillreducelevelsofcustomsevasionandfraud.Improve mentsinportproceduresincludingcomputerisationandtheestablishmentofa"one stopshop"systemwillcontinuetoboosttrafficvolumesattheport,supportinggrowthincustoms revenue. Rising cotton output will also support revenue growth, althoughit will be moderated by low prices and disputes between stakeholders in the cottonsector. Domestic revenue collection will also continue to be hampered by weakadministrative capacity, the large informal sector and too generous tax exemptions.External grants will continue to account for up to 10% of total revenue, althoughinflows may be moderated by donors' concerns over weak public financialmanagement and erratic policymaking.

Expenditure growth will remain robust, as a result of a growing public-sector wagebillfurtherexacerbatedbythepromisemadein2014toraisetheminimumwageforgovernmentworkers,probablyfrom2015onwardsandmeasurestoincreasecapital spending in order to address infrastructure deficits. The administration haspromised to reduce subsidies, but public opposition and heightened social tensionsmean that this will be difficult to implement, particularly as elections loom in both2015 and 2016. Although spending is generally lower than budgeted, owing tocapacity constraints, we expect the deficit to widen gradually from an estimated2.1% of GDP in 2014 to 2.6% of GDP in 2016 as salary costs rise, the publicinvestment programme is scaled up and the elections boost spending pressures.The deficits will be financed mainly with concessional borrowing from donors.Given the country's relatively low public debt/GDP ratio (around 30%), theauthorities have indicated that they may seek non-concessional borrowing for someinfrastructure projects.

Monetary policyMonetary policy is determined by the regional central bank, Banque centrale desEtats de l'Afrique de l'ouest (BCEAO), which prioritises inflation-targeting in itseight member countries, as well as maintaining the CFA franc's euro peg. Policy istherefore influenced heavily by that of the European Central Bank (ECB). InSeptember 2014 the ECB cut its refinancing rate by 10 basis points to a new recordlow of 0.05%, and we do not expect it to be raised before 2017. The BCEAO's mainpolicy rate has remained stable at 3.5% since September 2013, despite several ratecuts by the ECB. Yet, given the BCEAO's history of tracking the ECB's monetarypolicy and the benign inflation outlook in the region, the BCEAO may decide tomake a small rate cut in 2015 or 2016.

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International assumptionsInternational assumptions summary(% unless otherwise indicated)

2013 2014 2015 2016

Real GDP growth

World 3.0 3.1 3.8 3.8

OECD 1.4 1.8 2.4 2.3

EU28 0.1 1.3 1.6 1.7

Exchange rates

:US$ 97.6 106.0 124.0 127.0US$: 1.328 1.329 1.220 1.175SDR:US$ 0.660 0.665 0.700 0.713

Financial indicators

3monthinterbankrate 0.22 0.21 0.10 0.38US$ 3-month commercial paper rate 0.11 0.10 0.34 1.43

Commodity prices

Oil (Brent; US$/b) 108.9 99.4 80.3 84.0

Cotton (US cents/lb) 90.4 82.8 69.5 68.3

Food, feedstuffs & beverages (% change in US$ terms) -7.4 -5.4 -6.9 1.4

Industrial raw materials (% change in US$ terms) -5.9 -5.4 4.5 4.5

Note. World GDP growth rates weighted using purchasing power parity exchange rates.

Economic growthAssuming normal weather conditions, cotton output, which grew strongly duringthe 2012/13 and 2013/14 seasons (April-March), will continue to expand, albeit at amore modest pace, over the outlook period as the area planted expands and farmers'access to credit and fertilisers improves on the back of government subsidies anddonorsupport.However,governmentinterferenceinthesectorashighlightedbythetakeoverofSodeco,aprivateginner,in2013hasledtodisputes,andthisislikely to weigh on output growth during the current season. Moreover,underinvestment and the authorities' inability to match the subsidies enjoyed byforeign cotton growers will also moderate the sector's prospects.

TheongoingexpansionandupgradeofCotonouporttheactivitiesofwhichaccountforaround60%ofGDPundertheprivatemanagementofFrance'sBollorGroup, should underpin growth by increasing capacity to handle regional trade.Benin provides important port services to Nigeria, Niger and Burkina Faso, andgrowthinthesecountriesisexpectedtoremainrobustin2015 16,althoughelectionrelated instability in Nigeria has the potential to disrupt trade. Moreover, theworsening threat of piracy in the Gulf of Guinea poses a risk to growth given thepotential impact on activity at Cotonou port.

The government will continue with its efforts to improve the unreliable powersupply, a major drag on economic growth, although progress will be slow owing to alack of investors and weak management in the sector. Private foreign directinvestment (FDI) will remain depressed, deterred by the sluggish pace of businessreformandpolicyuncertainty.Growthinconstructionwillcontinuein2015 16,supported by donor-financed public infrastructure projects, while increasingcompetition in the telecommunications sector will boost growth in the servicessector. Overall, real GDP growth, which reached an estimated 5.1% in 2014, will easeslightly,averaging4.9%ayearin2015 16,aspowershortagesanddisputesinthecotton sector moderate the pace of expansion.

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InflationPositive price growth will return in 2015, although inflationary pressures will bemoderated by lower international food prices and improved domestic agriculturaloutput.Moreover,weexpectfuelpricesinNigeriathesourceofmorethan80%ofBenin'sfuelconsumptiontoremainrelativelystableovertheoutlookperiodastheNigerian authorities use easing world oil prices as a way to cut its subsidies billrather than retail fuel prices (which are below current market oil prices).Notwithstanding the Nigerian government's attempts to crack down on illegal fuelsmuggling, this should support price stability. However, on the back of continuedgrowthinthepublicsectorwagebillwhichwillboostdemandpressuresandtheCFA franc's depreciation against the US dollar, we expect average annual inflationto pick up to an average of 0.4% in 2015. As world food prices begin to rise and thefranc continues to weaken, inflation will quicken to 1.2% in 2016. Domestic foodproduction remains heavily dependent on weather conditions, so any weather-related shocks mean that inflation could end up higher than under our centralforecast.

Exchange ratesTheCFAfranc,whichispeggedtotheeuroatCFAfr655.96:1,willfluctuateagainstthe US dollar in line with the euro:dollar exchange rate (on the assumption that theCFA franc:euro peg is maintained). We expect the euro to weaken against the dollarin2015 16astheECBmaintainsaloosemonetarypolicyinresponsetolowinflation, while the Federal Reserve (the US central bank) begins to tighten itsmonetary policy stance. As a result, the average exchange rate of the CFA franc willdepreciate from an estimated CFAfr494:US$1 in 2014 to CFAfr538:US$1 in 2015, andfurther to CFAfr558:US$1 in 2016.

External sectorDespitefallingworldcottonprices,highercottonexportvolumesin2015 16ifnotrecoveringasstronglyasthegovernmentpredictswillhelptoboostexportsovertheoutlookperiod.Re exportstoneighbouringNigeriawillalsoriseovertheoutlook period as GDP growth there remains robust and modernisation projects attheCotonouportboosttrade,althoughtheeffectofgrowingre exportswilllargelybe offset by a rise in the import bill. Despite improving domestic agriculturalproduction and lower global food prices in 2015, rising capital imports on the backof higher public investment and continued strong demand will lead to a widening ofthe trade deficit. The porous nature of Benin's long land borders and the high levelof corruption will make cracking down on crossborder smuggling difficult, and theinformal trading sector is expected to remain significant. The historical structuralservices deficit will widen as growing trade services for Nigeria and Niger are offsetby higher services imports for public investment projects. The secondary incomesurpluswillremainaround2.7%ofGDPin2015 16asaidinflowsstagnate(inrelative terms). Overall, we expect the current-account deficit to widen slightly, froman estimated 10.9% of GDP in 2014 to 12% of GDP in 2016. The deficits will befinanced by concessional loans from multilateral and bilateral creditors, as well asFDI inflows, the latter mainly driven by infrastructure-related public-privatepartnerships.

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Forecast summaryForecast summary(% unless otherwise indicated)

2013a 2014a 2015b 2016b

Real GDP growth 5.6c 5.1 4.9 4.8

Gross agricultural production growth 5.2 4.0 3.8 3.7

Consumer price inflation (av) 1.0c -1.2 0.4 1.2

Central Bank discount rate (end-period) 3.5c 3.5 3.3 3.3

Government balance (% of GDP) -1.9 -2.1 -2.4 -2.6

Exports of goods fob (US$ m) 2,321.8 2,492.3 2,606.5 2,817.9

Imports of goods fob (US$ m) 3,110.8 3,333.4 3,445.6 3,717.5

Current-account balance (US$ m) -890.8 -956.4 -981.7 -1,073.0

Current-account balance (% of GDP) -10.7 -10.9 -11.3 -12.0

Exchange rate CFAfr:US$ (av) 494.0c 493.6 537.7 558.3

ExchangerateCFAfr:100(av) 506.2c 465.5 433.6 439.6

ExchangerateCFAfr:(av) 656.0 656.0 656.0 656.0a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual.

Benin 16


SummaryBasic dataPolitical structureAnnual indicators2010a2011a2012a2013a2014bGDP at market prices (CFAfr bn)3,2503,4403,8514,1044,322GDP (US$ bn)6.67.37.58.38.8Real GDP growth (%)2.63.35.45.65.1Consumer price inflation (av; %)2.32.76.81.0-1.2Population (m)9.59.810.110.310.6Exports of goods fob (US$ m)1,2821,2511,4432,322b2,492Imports of goods fob (US$ m)-1,775-1,800-2,002-3,111b-3,333Current-account balance (US$ m)-618-552-577-891b-956Foreign-exchange reserves excl gold (US$ m)1,2008877136951,089Total external debt (US$ bn)1.61.92.12.5b2.7Exchange rate (av) CFAfr:US$495.3471.9510.5494.0493.6a Actual. b Economist Intelligence Unit estimates.

TitleQuarterly indicators2012201320144 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 QtrPricesConsumer prices (av; 2005=100)111.1111.1111.7111.1109.0110.0110.9108.8Consumer prices (% change, year on year)7.32.61.91.3-1.9-1.0-0.7-2.0Financial indicatorsExchange rate CFAfr:US$ (av)505.6496.9502.1495.3482.0478.9478.4495.2Exchange rate CFAfr:US$ (end-period)497.2512.3501.5485.7475.6475.8480.3521.3Deposit rate (av; %)3.53.53.53.53.53.53.5n/aDiscount rate (end-period; %)4.04.03.83.53.53.53.53.5M1 (end-period; CFAfr bn)8729969799591,0791,1301,167n/aM1 (% change, year on year)0.317.710.314.723.613.519.3n/aM2 (end-period; CFAfr bn)1,4631,6151,5701,5871,7171,7881,920n/aM2 (% change, year on year)6.219.19.512.517.410.722.3n/aForeign trade (US$ m)aExports fob179187283229185180330n/aImports cif-2,133-1,964-2,293-2,278-2,255-2,429-3,281n/aTrade balance-1,953-1,777-2,010-2,049-2,071-2,249-2,951n/aForeign reserves (US$ m)Reserves excl gold (end-period)713677836801695836949n/aa DOTS estimates.Sources: IMF, International Financial Statistics, Direction of Trade Statistics (DOTS).

TitleComparative economic indicators

Political stabilityApproaching the end of his second andunder the current constitutionfinal fiveyear presidential term, BoniYayi is coming under increasing pressure. Frequent public-sector strikes have adversely affected government operations, and popular frustration with the slow pace of economic reforms and the lack of improvements in living standards is high. Moreover, several of the parties in parliament, including the pro-presidential alliance, the Forces cauris pour un Bnin emergent (FCBE), are internally divided, making the exact balance of power in the legislature uncertain. Indeed, wrangling in the National Assemblyless about policy differences than about political elites trying to assert their dominanceis intensifying ahead of the 2015 (legislative) and 2016 (presidential) elections, thus hindering effective policymaking and weakening political stability.

The sudden reshuffle of the government in both August 2013 and August 2014, including the removal of several long-standing allies of the president, and rising criticism against MrYayi from within the pro-presidential alliance are examples of growing political uncertainty. In line with Benin's history of volatile patronage-based politics, allegiances change quickly. As the election period draws closer and jostling for influence intensifies, uncertainty will increase further. In addition, as TheEconomist Intelligence Unit expects MrYayi to step down at the end of his second term, prospective successors, including within the FCBE, will assert themselves more strongly in order to boost their chances in the 2016 presidential election, thus further undermining political stability.

Adding to the turbulent political outlook is uncertainty over the timing of upcoming elections. Local polls, now scheduled for March25th 2015, have been repeatedly pushed backofficially because of delays over the voter registry revision process. There is a growing perception that the authorities are dragging their feet over the organisation of the polls, perhaps in an attempt to prolong MrYayi's stay in power, and several public protests against the lack of clarity over the election calendar have taken place in 2014. Responding to the protests, the authorities set April26th as the date for the next legislative election, and fears that MrYayi will seek to change the constitution to remove the presidential term limit to allow him to stand again in the 2016 election have diminished after the country's Constitutional Court ruled, in November, that the term limit cannot be scrapped. However, MrYayi has made ambiguous comments about the importance of holding elections, and any attempt to extend his hold on power would trigger large demonstrations and undermine political stability. Moreover, widespread frustration over frequent power cuts, continued allegations of official corruption (and the government's half-hearted attempts to address it), political interference in the judicial system, patchy welfare provision and a lack of jobs will continue to lead to sporadic demonstrations or riots in 201516, although a popular uprising along the lines seen in neighbouring Burkina Faso is unlikely given Benin's relatively strong democratic record.

Election watchThe next legislative and presidential elections are due on April26th 2015 and in April 2016 respectively. The political scene in Benin is highly fragmented and no political party is likely to secure a clear victory in the legislative poll. Instead, the outcome will depend on the ability of the country's disparate political groups to form united and stable alliances to contest the poll. Given ongoing disagreement inside many political parties and quickly shifting alliances, this will be difficult to achieve, and policy uncertainty is likely to increase as the polls draw closer. Given the waning popularity of MrYayi, a victory of an alliance hostile to the current president is looking increasingly likely and this would slow down policymaking further.

Although MrYayi has referred to his current term as his "second and last", there is continuing speculation that he may still seek to extend his hold on power. Ifso, this could place him on a collision course with the Constitutional Court, which has ruled that the provisions relating to presidential term limits (a maximum of twofiveyear terms) cannot be amended. As MrYayi's political backing is weakening, we do not expect him to succeed in abolishing the term limits. Although political elites have begun to jostle for position ahead of the 2016 vote, official candidacies are yet to be launched. A strong contender, however, will be Adrien Houngbdji, who came second in the 2011 poll and has been the leader of the opposition since then, although his prospects will depend upon his ability to forge a cohesive alliance from the country's many disparate political parties.

International relationsMr Yayi will continue to strengthen relations with Benin's neighbours and will seek increased economic cooperation with other countries, notably China and India. Encouraged by Benin's commitment to the economic reform programme drawn up in cooperation with the IMF and the World Bank, donorsespecially the EU countrieswill maintain sizeable bilateral and multilateral aid programmes. However, donors will remain wary of the slow pace of reform and investment implementation, as well as signs of erratic policymaking. Any attempt by MrYayi to prolong his stay in office beyond the term limit in 2016 would probably lead to some aid suspensions and complicate relations with Western donors. The government will seek to strengthen relations with Niger, with which it is planning to build a crossborder railway line. A proposed road linking Nigeria and Cte d'Ivoire would enhance regional commercial relations, but the benefits of this will not be felt within the current forecast period.

Policy trendsEconomic policy in 201516 will, as in previous years, focus on strengthening public financial management and speeding up the implementation of structural reforms and public investment projects. Reform efforts will be centred on expanding the revenue base, streamlining customs administration, bolstering tax compliance, modernising the civil service and improving the efficiency of public investment and state-owned enterprises. To address governance concerns, the administration has promised to reform the civil service and plans to audit seven parastatal companies, before eventually expanding the programme to other parastatals and government departments. However, weak administrative capacities and a lack of political will, as well as labour and public opposition, mean that progress on reforms and controversial restructurings will continue to be sluggish. The country's threeyear programme with the IMF expired in mid2014, but is likely to be renewed in 2015 (the authorities have requested a new programme), maintaining Fund support for the government's reform efforts.

The capacity of Cotonou port, a key source of customs receipts and services income, is expanding on the back of efforts to modernise facilities, streamline customs procedures and extend the port. The government has ambitious plans to invest in several large infrastructure projects, including boosting power-generation capacity, upgrading roads and railways, and constructing new ports and a new international airport. During a roundtable conference in Paris in mid2014 the government secured pledges from donors and private investors of nearly US$12bn to support these investment planswhich include greater use of public-private partnershipsduring the 201418 period. However, it is unclear how much will actually be disbursed, and uncertainty over financing and weak implementation capacity will delay completion of these projects. The government's plans to reduce its involvement in the cotton sector, in an effort to reduce fiscal risks, have been derailed after it retook control of the country's main cotton ginner, the Socit de dveloppement du coton (Sodeco), in November2013, drawing accusations that it expropriated private property and flouted the country's laws. Such incidents, coupled with red tape, widespread corruption and inadequate power supplies, will continue to affect investor perceptions and weigh on private-sector growth.

Fiscal policyRevenue growth will benefit from better trade-monitoring procedures at Cotonou port, which will reduce levels of customs evasion and fraud. Improvements in port proceduresincluding computerisation and the establishment of a "onestop shop" systemwill continue to boost traffic volumes at the port, supporting growth in customs revenue. Rising cotton output will also support revenue growth, although it will be moderated by low prices and disputes between stakeholders in the cotton sector. Domestic revenue collection will also continue to be hampered by weak administrative capacity, the large informal sector and too generous tax exemptions. External grants will continue to account for up to 10% of total revenue, although inflows may be moderated by donors' concerns over weak public financial management and erratic policymaking.

Expenditure growth will remain robust, as a result of a growing public-sector wage billfurther exacerbated by the promise made in 2014 to raise the minimum wage for government workers, probably from 2015 onwardsand measures to increase capital spending in order to address infrastructure deficits. The administration has promised to reduce subsidies, but public opposition and heightened social tensions mean that this will be difficult to implement, particularly as elections loom in both 2015 and 2016. Although spending is generally lower than budgeted, owing to capacity constraints, we expect the deficit to widen gradually from an estimated 2.1% of GDP in 2014 to 2.6% of GDP in 2016 as salary costs rise, the public investment programme is scaled up and the elections boost spending pressures. The deficits will be financed mainly with concessional borrowing from donors. Given the country's relatively low public debt/GDP ratio (around 30%), the authorities have indicated that they may seek non-concessional borrowing for some infrastructure projects.

Monetary policyMonetary policy is determined by the regional central bank, Banque centrale des Etats de l'Afrique de l'ouest (BCEAO), which prioritises inflation-targeting in its eight member countries, as well as maintaining the CFA franc's euro peg. Policy is therefore influenced heavily by that of the European Central Bank(ECB). In September 2014 the ECB cut its refinancing rate by 10basis points to a new record low of 0.05%, and we do not expect it to be raised before 2017. The BCEAO's main policy rate has remained stable at 3.5% since September2013, despite several rate cuts by the ECB. Yet, given the BCEAO's history of tracking the ECB's monetary policy and the benign inflation outlook in the region, the BCEAO may decide to make a small rate cut in 2015 or2016.

International assumptionsInternational assumptions summary(% unless otherwise indicated)2013201420152016Real GDP growthWorld3.03.13.83.8OECD1.41.82.42.3EU280.11.31.61.7Exchange rates:US$97.6106.0124.0127.0US$:1.3281.3291.2201.175SDR:US$0.6600.6650.7000.713Financial indicators 3-month interbank rate0.220.210.100.38US$ 3-month commercial paper rate0.110.100.341.43Commodity pricesOil (Brent; US$/b)108.999.480.384.0Cotton (US cents/lb)90.482.869.568.3Food, feedstuffs & beverages (%changeinUS$terms)-7.4-5.4-6.91.4Industrial raw materials (% change in US$ terms)-5.9-5.44.54.5Note. World GDP growth rates weighted using purchasing power parity exchange rates.

TitleEconomic growthAssuming normal weather conditions, cotton output, which grew strongly during the 2012/13 and 2013/14 seasons (April-March), will continue to expand, albeit at a more modest pace, over the outlook period as the area planted expands and farmers' access to credit and fertilisers improves on the back of government subsidies and donor support. However, government interference in the sectoras highlighted by the takeover of Sodeco, a private ginner, in 2013has led to disputes, and this is likely to weigh on output growth during the current season. Moreover, underinvestment and the authorities' inability to match the subsidies enjoyed by foreign cotton growers will also moderate the sector's prospects.

The ongoing expansion and upgrade of Cotonou portthe activities of which account for around 60% of GDPunder the private management of France's Bollor Group, should underpin growth by increasing capacity to handle regional trade. Benin provides important port services to Nigeria, Niger and Burkina Faso, and growth in these countries is expected to remain robust in201516, although election-related instability in Nigeria has the potential to disrupt trade. Moreover, the worsening threat of piracy in the Gulf of Guinea poses a risk to growth given the potential impact on activity at Cotonouport.

The government will continue with its efforts to improve the unreliable power supply, a major drag on economic growth, although progress will be slow owing to a lack of investors and weak management in the sector. Private foreign direct investment (FDI) will remain depressed, deterred by the sluggish pace of business reform and policy uncertainty. Growth in construction will continue in 201516, supported by donor-financed public infrastructure projects, while increasing competition in the telecommunications sector will boost growth in the services sector. Overall, real GDP growth, which reached an estimated 5.1% in 2014, will ease slightly, averaging 4.9% a year in 201516, as power shortages and disputes in the cotton sector moderate the pace of expansion.

InflationPositive price growth will return in 2015, although inflationary pressures will be moderated by lower international food prices and improved domestic agricultural output. Moreover, we expect fuel prices in Nigeriathe source of more than 80% of Benin's fuel consumptionto remain relatively stable over the outlook period as the Nigerian authorities use easing world oil prices as a way to cut its subsidies bill rather than retail fuel prices (which are below current market oil prices). Notwithstanding the Nigerian government's attempts to crack down on illegal fuel smuggling, this should support price stability. However, on the back of continued growth in the public-sector wage billwhich will boost demand pressuresand the CFA franc's depreciation against the US dollar, we expect average annual inflation to pick up to an average of 0.4% in 2015. As world food prices begin to rise and the franc continues to weaken, inflation will quicken to 1.2% in 2016. Domestic food production remains heavily dependent on weather conditions, so any weather-related shocks mean that inflation could end up higher than under our central forecast.

Exchange ratesThe CFA franc, which is pegged to the euro at CFAfr655.96:1, will fluctuate against the US dollar in line with the euro:dollar exchange rate (on the assumption that the CFA franc:euro peg is maintained). We expect the euro to weaken against the dollar in 201516 as the ECB maintains a loose monetary policy in response to low inflation, while the Federal Reserve (the US central bank) begins to tighten its monetary policy stance. As a result, the average exchange rate of the CFA franc will depreciate from an estimated CFAfr494:US$1 in 2014 to CFAfr538:US$1 in 2015, and further to CFAfr558:US$1 in2016.

External sectorDespite falling world cotton prices, higher cotton export volumes in 201516if not recovering as strongly as the government predictswill help to boost exports over the outlook period. Reexports to neighbouring Nigeria will also rise over the outlook period as GDP growth there remains robust and modernisation projects at the Cotonou port boost trade, although the effect of growing reexports will largely be offset by a rise in the import bill. Despite improving domestic agricultural production and lower global food prices in 2015, rising capital imports on the back of higher public investment and continued strong demand will lead to a widening of the trade deficit. The porous nature of Benin's long land borders and the high level of corruption will make cracking down on crossborder smuggling difficult, and the informal trading sector is expected to remain significant. The historical structural services deficit will widen as growing trade services for Nigeria and Niger are offset by higher services imports for public investment projects. The secondary income surplus will remain around 2.7% of GDP in 201516 as aid inflows stagnate (in relative terms). Overall, we expect the current-account deficit to widen slightly, from an estimated 10.9% of GDP in 2014 to 12% of GDP in 2016. The deficits will be financed by concessional loans from multilateral and bilateral creditors, as well as FDI inflows, the latter mainly driven by infrastructure-related public-private partnerships.

Forecast summaryForecast summary(% unless otherwise indicated)2013a2014a2015b2016bReal GDP growth5.6c5.14.94.8Gross agricultural production growth5.24.03.83.7Consumer price inflation (av)1.0c-1.20.41.2Central Bank discount rate (end-period)3.5c3.53.33.3Government balance (% of GDP)-1.9-2.1-2.4-2.6Exports of goods fob (US$ m)2,321.82,492.32,606.52,817.9Imports of goods fob (US$ m)3,110.83,333.43,445.63,717.5Current-account balance (US$ m)-890.8-956.4-981.7-1,073.0Current-account balance (% of GDP)-10.7-10.9-11.3-12.0Exchange rate CFAfr:US$ (av)494.0c493.6537.7558.3Exchange rate CFAfr:100 (av)506.2c465.5433.6439.6Exchange rate CFAfr: (av)656.0656.0656.0656.0a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual.

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Benin Country Report - EIU