Report No. 4686-BEN F L L

BeninCountry 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 recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization

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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 acres1 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 theratio of FF I to CFAF 50. The French Franc is currently floating.Throughout the text the CFAF/dollar equivalents are establishedusing the rate of CFAF 355/$.

FOR OFFICIAL USE ONLYABBREVIATIONS AND ACRONYMS

AfDB African Development BankAGB Societe d'Alimentation Generale du BeninBCXAO Banque Centrale des Etats de l'Afrique de l'Ouest

BBD Banque Beninoise de DeveloppementBCB Banque Commerciale du BeninBOAD Banque Ouest Africaine de DeveloppementCAA Caisse Autonome d'AmortissementCARDER Centre d'Action Regionale pour le Developpement RuralCATS Cooperative Agricole du Type SocialistCCCE Caisse Centrale de Cooperation Economique (France)CEB Compagnie Electrique du Benin/Communaute Electrique du BgninCNCA Caisse Nationale de Credit AgricoleCPU College Polytechnique UniversitaireDEP Direction des Etudes et de la PlanificationDPE Direction de la Planification d'EtatEC European CommunitiesECOWAS Economic Community of West African StatesEDF European Development FundENU Ecole Normale SuperieureFAC Fonds d'Aide et de Cooperation (France)FAS Fonds Autonome de Stabilisation et de Soutien des Prix de

Produits AgricolesFED Fonds European de DeveloppementFLASH Faculte des Lettres, Arts et Sciences HumainesFNI Fonds National d'InvestissementFRA/GTZ The German Association for Technical Co-operationFSA Faculte des Sciences Juridiques, Economiques et PolitiquesFST Faculte des Sciences TechniquesGRVC Groupement Revolutionnaire a Vocation CooperativeIBETEX Industrie Beninoise des TextilesIDA International Development AssociationIFAD International Fund for Agricultural DevelopmentINSAE Institut Nationale de la Statistique et de l'Analyse EconomiqueINEEPS Institut National pour l'Enseignement de l'Education Physique

et SportiveINSS Institut National des Sciences de la SanteINE Institut National de l'EconomieINSJA Institut National des Sciences Juridiques et AdministrativesMDRAC Ministere du Developpement Rural et de l'Action CooperativeMPSAE Ministeredu Plan de la Statistique, et de l'Analyse EconomiqueOBEKAP Office Beninoise des Manutentions PortuairesOCBN Organisation Commune Benin-Niger des Chemins de Fer et des TransportsPAC Port Autonome de CotonouPAM Programme d'Alimentation MondialeSBEE Socigte Beninoise d'Eau et d'ElectriciteSCO Societe des Ciments d'OnigboloSNAFOR Societe Nationale pour le Developpement Forestier

This document has a restricted distribution and may be used by recipients only in the performance ofI their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

ABBREVIATIONS AND ACRONYMS (continued)

SOBEPALH Societe Beninoise de Palmiera HuileSOBEMAC Societe Beninoise des Materiaux de ConstructionSOBETEX Societe Beninoise des TextilesSONACEB Societe Nationale de Commercialisation et d'Exploration du BeninSONACI Societe Nationale des CimentsSONACOP Societe Nationale de Commercialisation des Produits PetroliersSONAFEL Societe Nationale des Fruits et LegumesSONAGRI/SONAPRA Societe Nationale pour la Production AgricoleSONAPECHE Societe Nationale drArmement et de Peche

COUNTRY DATA - BENIN page 1 of 2

AREA POPULATION 1/ DENSITY112,622 sq km 3.34 million (1979)-

Rate of growth: 2.7% (1961-79) 29.6 per sq km (1979)

POPULATION CHARACTERISTICS (1979) HEALTHCrude Birth Rate (per 1,000) 47.5 Population per physician 20.734Crude Death Rate (per 1,000) 18.5 Population per hospital bed 906Infant Mortality (per 1,000) 45.0Life Expectancy at Birth (years) 46.9

EDUCATION (1979) ACCESS TO SAFE WATERAdult literacy rate: 11.0% % of population - urban: 50Primary 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 3.2Gross Domestic Investment 333.6 35.0 10.9 20.4Gross National Savings 12.5 1.3 25.8 -28.0Exports of Goods, nfs 298.9 31.4 -2.8 7.3Imports of Goods, nfs 658.0 69.1 0.2 12.0Current Account Balance -328.9 -34.6 7.3 23.4

OUTPUT, EMPLOYMENT AND PRODUCTIVITY IN 1981:

Value Added Labor Force Value Added per WorkerUS $Mln. % '000 % US $ %

Primary Production 369.8 43.7 1,253.6 73.6 245.0 59.4Secondary Production 108.0 12.8 103.9 6.1 1,039.5 209.4Services4 / 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 15.5Current Expenditures 34.8 13.4 10.7Net Lending and Transfers 3.2 1.2 2.6Current Surplus 14.6 5.6 2.3Capital Expenditures 25.1 9.7 3.7Overall Balance 10.5 04.1 -1.4External 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 PRICES1976 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 71,292Claims on Central Government / -7,082 -9,422 -12,917 -11,776 -17,543 -20,853Claims 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 27.6General Price Index 83.8 86.8 100.0 113.3 131.4 159.2

Annual Growth RatesGeneral Price Index 3.6 15.2 13.3 16.0 21.2Net Claims on Government -/ -33.0 -37.1 8.8 -49.0 -18.9Claims 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 debtNet 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 flowsGrants 38 64 51 85 Outstanding & disbursed -- 72.00Borrowing (net) 35 54 277 180 Undisbursed -- 63.57

Short term capital 16 14 21 12 Outstanding i. undisb. -- 135.57Other items, errors and

omissions 4 7 -46 71 RATES OF EXCHANGEIncrease in reserves (+) -22 -13 5 54 Year US$1-CFAF

Net reserves (end year) -2 -15 -10 44 1975 214.32Gross reserves (end year) 14 13 8 61 1976 238.98Equivalent months imports 0.5 0.4 0.2 1.2 1977 245.67

1979 212.721980 211.301981 217.731982 328.621983 on 355.00

1/ Includes public enterprises2/ 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 .... 10B. Expenditure on Available Resources . . .. 15C. Employment, Wages and Manpower Training ... 18D. Money, Credit and Prices ... 20E. Public Finance ....................... ........ 22F. Public Enterprises .. .. ................. 25G. Balance of Payments .............................. 26H. External Debt and Foreign Aid . . .. 28

III. SECTOR PERFORMANCE AND ISSUES . . .30

A. Agriculture ................................ .. . .. . 30B. Industry ...................... 36C. Transport ... 41D. Energy ... 43E. Social Sectors ................... 44

IV. DEVELOPMENT PROSPECTS ........................... 47

A. Benin's Development Plan for the Mid-1980s .47B. Medium-Term Projections........................... 52

V. DEVELOPMENT STRATEGY ISSUES AND RECOMMENDATIONS ... 58

A. Comparative Advantage ... 58B. Public Enterprises ....... . 60C. Major Projects.... ........ ..... .. . 61D. Public Finance .. .62

E. Public Investment Constraints ..... 63F. Planning Process ..... . . 64G. Concessionary Financing . . . .66

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PREFACE

This report is based on the findings of an economic mission that visited Beninin June 1982. The mission was composed of the following members:

Raymond Rabeharisoa, Senior Loan OfficerMaria E. Freire, EconomistDavid 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 thepreparation of the Agriculture Chapter in Volume II.

This report is the final version of the draft discussed with the Government by aMission which visited Cotonou in late 1983*. The report includes four volumes:

Volume I: Benin: Economic Performance and ProspectsVolume II: The Economic and Social SectorsVolume III: The Public Enterprises SectorVolume IV: Statistical Appendix

* The Mission consisted of Richard Westebbe, Chief, Sven Kjellstrom, ResidentRepresentative, 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 thediscussion.

SUMMARY AND CONCLUSIONS

1. Major changes in Benin's economic policies and performance haveoccurred over the past five years. A key decision to increase public controlover the modern sector of the economy was implemented during the second halfof the 1970s, leading to financial problems in several of the leadingindustrial and service enterprises. The First Plan (1977-1980) proposedambitious public investments in a few large projects, and these have now beenimplemented with mixed results. Rapidly-increased external debt, coupled withthe recent weakness in demand overseas and in neighboring Nigeria, has led toa difficult public finance situation at present.

2. In the face of these developments, the Government has recently takenpositive steps to eliminate economic distortions and improve the management ofpublic finance. Agricultural producer prices are being raised and inputsubsidies eliminated in a planned fashion. Pricing, personnel and managementpolicies affecting the public enterprises are being revised, and some marginalunits have been liquidated. Greater attention is being devoted to Benin'simportant economic relations with its neighbors. Assistance has been soughtto strengthen the Government's ability to manage its public finance, externaldebt and planning functions. These very recent policy changes should lay thebasis for more vigorous growth in the longer term.

Recent Economic Developments

3. Benin remains a small, poor nation, with an estimated 1981 GDP percapita of $270 for a population of 3.5 million. Three-fourths of the laborforce is engaged in traditional farming activities. The industrial sectorconsists of a few import substitution and agricultural processing plants.Recently, exploitation of local petroleum, cement and sugar resources hascommenced. Exports of these commodities--just now beginning--will faroutweigh traditional exports of oil palm products and cotton. Unofficialexports of foodcrops and re-exports of imported consumer goods to Nigeria andNiger continue. In the social sectors, education has reached many morechildren than previously, though at a sacrifice in quality terms. Healthconditions remain poor, and life expectancy at birth is 47 years.

4. Real GDP growth over the 1976 to 1981 period averaged 3.6 percent perannum, up substantially from the 0.7 percent annual trend during 1972-1976.Although Benin's economic statistics are notably weak, growth appears to havebeen particularly strong in 1977 and in 1981, when there were sharp increasesin construction, manufacturing, trade activity and public administration.This growth was linked to the heavy public investment program and to strongdemand in neighboring countries. Agriculture, on the other hand, hasconsistently grown by less than one percent per annum over the last tenyears. Traditional export crops have suffered from inadequate Governmentpricing policy, shortages of modern inputs, and poor weather conditions. TheGovernment has recently adopted a policy aimed at improving agriculturalincentives. Certain foodcrops that enjoy strong demand in Benin andneighboring markets have performed well.

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5. The external sector has been characterized by major and risingdeficits on the current account. Substantial imports of capital goods havebeen recorded, financed by suppliers credits and official sources, in supportof the major public investment program. As gross domestic investment reachedthe very high level of 35 percent of GDP in 1981, the current account deficitincreased to 34 percent of GDP. Both investment and the current accountdeficit are expected to decline in coming years, relative to GDP. On theexport side, unrecorded exports have climbed to an estimated 86 percent oftotal exports in 1981, while recorded commodity exports declined in realberms.

6. iNet borrowing rose dramatically in 1980 and 1981, on moderatecommercial and official terms not linked to Eurodollar rates. Total debtoutstanding (including undisbursed) quadrupled from 1976 to 1981, reaching anestimated $589 million (CFAF 209 billion). Virtually all Benin's foreign debthas been contracted by the Government or is Government-guaranteed. The debtservice ratio has increased from 4 percent of exports in 1976 to 7 percent in1981, and is projected to reach 24 percent in 1983. Financial difficultieswith several of the recent large resource exploitation projects, which nowappear likely in the case of the sugar and cement projects, may impact onpublic finances since the total debt service is equivalent to 43 percent ofGovernment revenues in 1983. However, both the sugar and cement projectsinclude 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, withthe exception of 1981. Indications are that this surplus may be seriouslyeroded in the next few years. Current revenues, over half of which are derivedfrom import duties, have accounted for about 15 percent of GDP in recentyears. These revenues were linked to imports unofficially re-exported toNigeria and to business activity related to Benin's large investmentprogram. Both sources of taxable surplus are presently diminishing. Aboutthree-fourths of current expenditures go for wages and salaries, witheducation taking a 33 percent share of the current budget. Overall, thepublic finance position after investment expenditures has been negative.

8. Public enterprise difficulties also pose a liability for Governmentfinances. Two-thirds of the 60 enterprises are in financial difficulties.Losses have been financed by the state-owned banks, rather than throughtransfers from the current budget. As many of these losses cannot now berepaid, the Government either as shareholder or as banker will have torecognize some of these deficits. Public enterprise difficulties have stemmedfrom poor initial project design, undercapitalization, inexperienced businessmanagement, inadequate Government pricing and personnel policies, and otherinefficiencies. The Government announced in 1982 a series of valuablemeasures to strengthen the public enterprises, including more realisticpricing policies, better incentives for managers and workers, toughercontrols, and the liquidation of non-viable units. These decisions are nowbeing implemented.

5

Outlook and Issues

9. Benin's economic growth will be limited by several constraints overthe medium-term which make it unlikely that GDP will grow by more than 3 to 4percent per year during the 1982-1990 period. Key constraints are:

a. Slowdown of demand in neighboring markets and the difficulties inachieving rapid gains in agriculture or implementing new industrialactivities.

b. Reduced investment levels due to lack of identified, viableprojects 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 changesbe adopted to provide better incentives in agriculture and industry, and tocontrol the potential drain on public finance which would be caused by furtherpublic enterprise and major project losses. The mission estimates thatsubstantially higher economic growth can be achieved with proper policies thanunder an alternative scenario incorporating continued difficulties inagriculture, industry and trade. The debt service and public financeconstraints 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 2.1Exports Growth 7.5 5.4Imports Growth 2.7 0.7Govt. non-debt current spending 3.7 2.7

--------- Ratios, 1990-------------------

Private consumption per capita vs.1982 96 90GDI/GDP 25 21Debt Service/Exports 23 26Debt Service/Government Revenues 55 58

11. The Benin Government has recently reviewed a number of policies inlight of national and international economic problems. The Second Plan (1983-1987) presented to donor countries in March 1983 outlines the Government'scritique of past performance and strategy for future development. Problems ofexcessive centralization, inadequate management and technical training, andthe need for better planning are discussed. And specific actions have beentaken, including price increases, cutbacks in the hiring of new collegegraduates by the civil service, a more formal project analysis procedure, andgradual elimination of agricultural subsidies. The Government has requestedassistance in the management of external debt information, in theestablishment of closer public finance controls, in the evaluation ofindustrial projects and policies, and in the strengthening of the planningfunction. The World Bank Group is prepared to support these requests.

6

12. A broad range of issues currently confronts the Government in itsdifficult tasks ahead. Critical questions include:

a. Comparative Advantage. It will be essential to focus oninvestments in economic activities that enjoy a strong demand and comparativecost advantages. Foodcrops, natural resources, and selected manufacturingactivities appear to meet these criteria. Appropriate economic incentives inagriculture and industry should be further encouraged.

b. Public Enterprises. The means to implement policy decisionsalready taken must be worked out in detail. For specific enterprises,rehabilitation plans need to be prepared based on in-depth feasibility andorganizational studies. Financial resources, domestic and foreign, will berequired to strengthen long-term viable enterprises, and the World Bank Groupis prepared to assist in this effort. The Government may wish to reduce itsrole in enterprises which are not profitable or of strategic importance.

c. Major Projects. The three large projects--petroleum, sugar andcement--represent an investment equal to 70 percent of the 1981 GDP. Problemswhich have arisen, particularly with regard to access to the Nigerian market,and high production costs in relation to current world prices, must bepromptly resolved to avoid serious impacts on Benin's economic and publicfinance position. Those projects are intended to be self-financing,profitable ventures and must be placed on this basis, as the Government'sbudget cannot underwrite losses on projects of this magnitude. NigerianGovernment equity participation in the two projects aimed at the Nigerianmarket (sugar and cement) should help to cooperatively resolve thesedifficulties.

d. Public Finance. The public finance situation is likely to bedifficult in the years ahead, due to the recurrent cost implications of recentinfrastructure investments, the need to re-finance a number of publicenterprises, the likely counterpart funding or subsidy requirements associatedwith the three major projects now coming onstream and rising debt serviceobligations. Deficiencies exist in the management of the public financeswhich must be addressed. On the revenue side, the buoyancy in import dutiesover the past few years associated with goods destined for neighboringcountries is not likely to continue in the mid-1980s. The potential forincreasing public revenues--particularly through higher import duties whichmay still be low in comparison with neighboring countries--should beassessed. The losses from public enterprises and recent large projects mustbe stemmed and reversed to avoid drains on the Treasury. Better coordinationwith the planning process is required so that the debt burden and recurrentcost implications of projects are assessed at the time of selection. Enhancedmonitoring of key revenue and expenditure indicators, and of external debttransactions, is required.

e. Investment Constraints. The present debt level is high and willconstrain further access to foreign commercial loans. However, successfulexecution of the current large projects and an enhanced capability to identifyand 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 wasin the past five years, and preparation of sound productive sector projectswith high rates of return will be essential to tapping these funds. Projectanalysis should therefore be strengthened.

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f. Planning Process. Further efforts are required to develop acomprehensive yet practical planning system. Criteria must be set to ensureviable investments. Policy analysis should be introduced to permit technicalcomputations to be made of the impacts of alternative policy options. Theseimpacts include the public finance implications of investments, as well as thelikely influence on GDP, the balance of payments and employment. The relativeroles of the technical ministries and the Planning Ministry in the projectplanning cycle should be examined.

12. In light of Benin's continued poverty despite its recentextraordinary development investment effort, it is recommended that foreignassistance be provided on concessionary terms. The increased debt burden dueto heavy foreign borrowing in support of key public investments will constrainfuture access to commercial-term loans. Necessary investment in economic andsocial infrastructure, agriculture, and selected industrial projects, and inthe rehabilitation of public enterprises, requires increased levels ofofficial assistance.

13. The severity and breadth of the problems now facing Benin's economyimply a need for structural adjustment measures in the future. Flexible, non-project lending by the international donor community would be an appropriateresponse. The World Bank Group's proposed public enterprise rehabilitationproject is an example of this type of operation. While the Government hasrecognized a number of its problems and is seeking advice, concrete policydecisions 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 ofWest Africa north to landlocked Niger. In the south, it is 120 km widebordering Togo on the west and Nigeria on the east. The land is relativelyflat or rolling, with the exception of the Atacora hills in the northwestwhich reach elevations of 750 meters. Annual precipitation is considerablyless than in other coastal West African countries, and is subject to wideannual fluctuations. In the south, rainfall averages 1,200 mm per year in tworainy seasons, diminishing to 800 mm in the north during a single wetseason. Soils are generally poor throughout the country, but populationpressure in the south has caused pockets of soil depletion. Benin enjoysdeposits 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 the1979 census. The country's inhabitants are mainly rural (71 percent oftotal). In the sparsely-settled northern provinces, population density is aslow as 10 persons per square kilometer, while in the urbanized southernprovinces it is much higher, exceeding 200 people per square kilometer inAtlantique Province. The population growth rate has been increasing and isestimated at 2.7 percent per year during the 1961-1979 period. Since lifeexpectancy is still quite low (47 years at birth), the population distributionis youthful: 49 percent are below the age of fifteen. About one-fourth ofthe adult population is literate.

Political Development

1.3 Benin achieved its independence from France in 1960, when it wasknown as Dahomey. Regional and other political rivalries during the nexttwelve years led to numerous changes of government. In 1972, Colonel MathieuKerekou assumed the presidency and ushered in a new era of politicalstability. The theme of President Kerekou's administration has been one ofnational unification, the development of an independent economic and socialidentity, and increased popular participation in political life. In 1975, theParty of the People's Revolution was created and the name of Dahomey waschanged to the People's Republic of Benin. The Party and its CentralCommittee retain key policy-making authority, although the Council ofMinisters is the governing administrative group. A new constitution wasadopted in 1977, elections were held in 1979, and President Kerekou now leadsa largely civilian government.

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Economic Background

1.4 Agriculture, supplemented by commercial activities revolving aroundBenin's traditional transit role, is the primary basis of the country'seconomy. Natural resource exploitation in the form of cement and crude oilproduction is just beginning, and existing industrial activity is limited toagricultural processing and a few import substitution activities. Per capitaGDP is estimated at US$270 in 1981. Further details on Benin's economicbackground are contained in the previous World Bank economic report, TheEconomy of Benin (Report No. 2079-BEN), reflecting data collected during a1977 economic mission.

1.5 The 1972-76 period was characterized by low economic growth, whilethe Government concentrated on revising economic institutions and preparing adevelopment program. Growth of GDP is estimated at 0.7 percent per annumduring the 1972-76 period, mainly provided by the service sector. Output ofcash crops and manufactured goods declined, and gross domestic investment wasa moderate 15 percent of GDP. A current surplus was recorded in the CentralGovernment's public finances during the 1972-76 period. Debt service remainedlow, and was only 4 percent of exports (goods and non-factor services) in1976.

1.6 Substantial changes on the economic policy and development frontswere underway, however. A basic decision was taken to exert public controlover key sectors of the economy, and this was implemented by creating publicenterprises to manage most modern-sector activities. These included clinkergrinding, textiles, and the brewery in the industrial sector; the entirebanking sector; the electric and water utility; several transport enterprises;agricultural, livestock and fishing operations; and firms dealing with theimport and distribution of various consumer goods. With a limited amount offinancial resources for expropriations of existing private-sector firms andinitial equity for newly-created enterprises (totalling about CFAF 15billion), the Government began actively managing numerous commercial andindustrial activities formerly operated by the private sector. The economicdifficulties resulting from this major change were not clear until somewhatlater, as discussed in Chapter II.

1.7 The Planning Ministry also undertook a significant nationaldevelopment planning effort in the mid-1970s. The object was to reach a broadagreement on sectoral, regional and project priorities by engaging in a multi-level planning exercise. In late 1977, the First State Plan (1977-1980) waspublished. This plan called for a sharp increase in public investment, andemphasis was concentrated upon implementing several large projects: thecreation of a complete clinker and cement production plant at Onigbolo, thecultivation and processing of sugarcane at Save, the exploitationof offshore oil near Seme, and the doubling of capacity at the port ofCotonou.

1.8 It is against this background of low economic growth and cautiouspublic finances that the ambitious Government plans and economic interventionof the mid-1970s must be viewed. The economic performance which resultedduring 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 respectsduring the late 1970s. The rate of GDP growth increased, partly due to theimpact of a substantial public investment program and partly linked to theimproved economic performance of neighboring countries. Investments includedfour 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 inthe form of import duties on goods destined for re-export to neighboringcountries. Output of two tradable foodcrops (maize and yams) increased inresponse to urban demand and cross-border trade with Nigeria, though otherfoodcrops declined.

2.2 However, the heavy investment effort, expansion of the role of publicenterprises, and a recent setback in the fortunes of Benin's neighbors havecombined to raise problems in the early 1980s. Benin' s external public debthas increased sharply in connection with the financing of large investmentprojects. Current low world prices for primary commodities and depresseddemand in West Africa may jeopardize the near-term export earning potential ofseveral projects in Benin, raising a potential public finance issue becausethe external debt is guaranteed by the Government. The expanded role ofpublic enterprises in the economy since the mid-1970s has led to inefficientand costly organizational structures in industry and the modern servicesector, creating claims on the banking and public finance systems. Inaddition, Benin's traditional, though modest, exports of industrial crops havedeclined 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 economicmission. The quality and currentness of Benin's economic data is such thatstatistical analysis must be regarded as approximate. For instance, GDPgrowth over the 1972-1976 period, now reported at 0.7 percent per annum, wasestimated at 3.0 percent in the previous World Bank economic report. Majoreconomic aggregates such as foodcrop production, cross-border exports and re-exports, balance of payments estimates, and Treasury accounts are inadequatelyquantified or out-of-date. The estimates prepared for this report arebelieved, however, to accurately represent the broad economic trends in Benin,but the margin of error may be large. Sectoral performance and issues areaddressed in greater detail in Chapter III and overall development issues inChapter V.

A. SOURCES OF GROWTH

2.4 Benin enjoyed a relatively strong growth in GDP over the 1976-1981period (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 ratein the late 1970s also compares favorably with the record of low-incomeAfrican nations as a group, which recorded average GDP growth of 1.7 percentover the 1970-1979 period. Still, Benin's GDP per capita--estimated at $270in 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 themain sources of growth during the late 1970s. Construction activities,dominated by major capital development projects, forged ahead with a 12percent growth rate during 1976-1981. Public services added employment andoutlay, resulting in an 8 percent growth rate. Commercial activities grew atabove 3 percent, with a particularly strong performance in 1981, as oil incomerose in Nigeria and uranium boosted Niger's purchases. In contrast, theprimary sector, constituting nearly half of the economy, maintained alackluster performance with average growth below one percent. Poor cash cropperformance reflected inadequate producer prices, input supply problems, andlack of extension advice. However, it is generally believed that foodcropproduction expanded more rapidly than indicated by the available statistics inTable 2.1. Total manufacturing output was the same in 1981 as it had been adecade 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 43.7Agriculture.- 0.9 0.9 34.1 33.2

Foodcrops 1.7 1.4 29.3 31.0Industrial Crops -3.1 -4.1 4.8 2.1

Livestock 5.6 1.3 6.8 7.2Forestry, Fisheries, Mining -6.6 -4.7 5.9 3.3

Secondary Sector -1.1 6.8 12.0 12.8Manufacturing -4.7 3.2 8.8 6.3Construction 6.2 12.2 3.2 5.8Public Utilities 3.7 3.6 0.5 0.7

Services 1.8 4.7 41.2 43.5Commerce 6.4 3.4 18.9 21.8Transport 6.9 3.6 5.8 6.8Public services -6.0 8.1 11.9 11.3Other 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.

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2.6 Trends, issues and prospects in the major sectors are discussed inChapter III. In the following section, a brief summary of production trendsin 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. Governmentsupport is limited to extension activities provided by the provincial ruraldevelopment agencies (CARDERs). The main industrial crops are cotton, oilpalm products, and groundnuts. The growing, marketing and processing of thesecrops are largely Government-controlled. Further discussion of agriculturalinstitutions and issues is presented in paras. 1.21 - 1.62 and in Volume II ofthis report.

2.8 Maize and yam production rose sharply in the late 1970s (see Table2.2). These widely-traded commodities encountered strong demand in domesticand neighboring markets, and farmers substituted from less attractivetraditional crops such as cassava, sorghum and millet. The mission was toldthat previous Government-imposed constraints on the export of fooderops toNigeria were removed in recent years, thus stimulating production. Highermaize output was partly due to introduction of new hybrid seeds. Averageyields have declined, however, for most crops over the past decade, indicatinga more extensive agriculture and a general decline in labor productivity.Shortages in modern inputs, a degradation in improved seed, and a shortage ofgood land in the south have been contributing factors. Output has beeninsufficient to meet the demand for food in the urban centers, afteraccounting for exports of about 20 percent, and cereal imports have thereforeincreased substantially--from 34,000 tons in 1976 to 110,000 tons in 1981.Subsidies on imported rice, maize, and previously wheat have also played anegative role in the urban food supply balance.

2.9 Industrial crop production--including cotton, oil palm products, andgroundnuts--has been declining steadily since the mid-1970s. Overallproduction levels now stand at about 85 percent of their decade-earlierquantities. Most of this decline has occurred since 1980, and represents ashift of resources into fooderop production and away from industrial crops.Insufficiently attractive official prices for cash crops and problems withinput supply are partly responsible for this development, since cotton andgroundnuts appear well-suited climatically to Benin's conditions. Recent IDAand IFAD-financed rural development projects which help to relieveinstitutional and financial constraints are expected to raise cottonproduction in the Zou and Borgou Provinces. The Government has also recentlytaken bold policy decisions to raise cotton producer prices and to eliminateinput subsidies. However, the low productivity and lack of competitiveadvantage evidenced in the oil palm sector is due mainly to climatic factorsthat cannot feasibly be changed. Better plantation maintenance andorganization of production could raise output, but in general oil palmproduction is likely to play a decreasing role in Benin's agriculture.

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Table 2.2 Production Trends in Agriculture

Average Annual Growth Average AnnualRate of Production, %/year Production, tons

1969-71 to 1974-76 1974-76 to 1979-81 1979-81

FoodcropsMaize 2.1 6.2 302,000Sorghum 5.8 -3.1 59,000Yams -1.4 7.0 687,000Cassava -3.9 1.2 639,000Beans -8.1 11.1 31,100Rice 25.3 -5.2 10,200

Industrial CropsOil Palm n.a. -7.4 356,000Cotton -6.7 -5.8 18,700Groundnuts -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, butoverall was no higher in real terms in 1981 than a decade earlier. This is adisappointing performance for a sector which is believed to hold potential forgrowth. Much of the problem was linked to the introduction of publicenterprises as the dominant organizational form in the sector. In 1982, theGovernment adopted new policies aimed at establishing economic price levels,greater management incentives, and tougher performance criteria which shouldlead to a better performance in manufacturing.

2.11 Manufacturing contributes about 6 percent of GDP, and was broughtlargely under Government control during the late-1970s as public enterpriseswere created to manage new and existing operations. Unprofitable operationsof several major enterprises have limited the sector's value-added.Manufacturing activities consist of agricultural processing, food andbeverages, textiles, cement, and assorted artisanal mechanical enterprises.

2.12 Agricultural processing has been affected by declining quantities ofraw material inputs, due to climatic problems in the case of oil palm andorganizational problems in the case of cotton. A maize mill built in 1978 inBohicon has remained idle due to difficulties in purchasing local maize atattractive prices, production problems, and market demand difficulties.Production of soap, however, based on local vegetable oils, has been quitesuccessful and capacity expansion is planned. Food and beverage output,dominated by the brewery (La Beninoise), has increased somewhat in response tostrong demand, but technical problems have held back production despitesubstantial additions to capacity.

1 4

2.13 The textile sector includes one successful and one unsuccessfulpublic enterprise. SOBETEX, printing imported cotton fabric for the local andneighboring markets, expanded production steadily until mid-1982, whenNigerian austerity measures cut demand. The firm has normally generated aconsiderable surplus. IBETEX was conceived as an integrated cotton spinning,weaving and garment-making operation aimed at the European market and usinglocal cotton. Technical, cotton quality and marketing difficulties havesharply reduced IBETEX production. The company has incurred heavy losses andis presently being reorganized. Alternative markets and products need to beexplored, in cooperation with foreign investors.

2.14 Cement output has increased in recent years, as demand rose linked tothe construction of several large projects. A second clinker grinding plantwas installed in 1978, doubling Benin's grinding capacity. Total output ofcement rose to about 270,000 tons in 1981.

2.15 Three major public investment projects have dominated the economybeginning during the late 1970s:

a. Production of cement from the limestone deposits at Onigbolocommenced in mid-1982; the plant has a capacity of 500,000 tons. Sixtypercent of the cement is destined for the Nigerian market. The Government ofNigeria is a 40 percent owner of the project and a co-guarantor of the foreignloans involved. As of early 1983, cement production had halted, because ofOnigbolo's inability to sell cement at competitive prices in Nigeria and thehigh level of unsold stocks.

b. Sugar production from irrigated canefields at Save was scheduledto begin in April 1983, with factory capacity of 47,000 tons. However, lowcane yields (75 tons per hectare) are likely to limit sugar output to 37,000tons. Eighty percent of Save's production is planned to be sold in Nigeria,but market access and pricing issues have not yet been resolved. TheGovernment of Nigeria holds 46 percent of the equity in Save.

c. Petroleum from the Seme offshore field was produced starting inearly 1983. This is a project of the Government of Benin, utilizing aNorwegian service contractor. Production is expected to reach 8,000 barrelsper day by 1985 or even earlier, and the crude oil will be entirely exported.

These very large projects did not come onstream during the periodunder review, but raise issues for the future which are discussed in ChaptersIV 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 performancereflects the major public investment in infrastructure and industry duringthis period. An expansion of the Cotonou port capacity was completed in 1982,and substantial highway and rural road construction has been carried outduring recent years. Construction of the sugar, cement and petroleum projectshas 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. Thecommercial sector is engaged in cross-border trading activities based onexports of Benin's consumer goods (textiles and beverages) and re-exports ofimported consumer goods. Commerce also includes the marketing of foodcrops inurban centers of Benin and to neighboring countries. Activity thereforefluctuates from year to year, and the year 1981 was particularly strong forcommerce. Business volume dropped in the second half of 1982 due to slumpingNigerian demand, but commercial activity was recovering somewhat in early1983.

Public Services

2.18 Rapid growth in civil service employment--15 percent per annum duringthe 1977-1980 period--has increased the sector's contribution to GDP in recentyears. This reverses a long period of low growth in public service activitiessince 1970. Employment in public enterprises--whose contribution is includedunder the industrial sector appropriate to each enterprise--also rose rapidlyduring the late 1970s. However, the automatic employment of college graduatesin the public sector has now been curtailed.

B. EXPENDITURE ON AVAILABLE RESOURCES

2.19 GDP growth and a sharply rising resource gap have expanded totalresources available to the economy at a high 6 percent annual growth rate(1976-1981). These resources have permitted gross domestic investment to riseto unprecedented levels in Benin, while consumption grew at 3.7 percentannually (see Table 2.3). Available resources have grown from 112 percent ofGDP in 1972 to 138 percent in 1981. Foreign resources are clearly tied to theambitious public investment program: fixed investment rose at a 20 percentreal annual rate during the 1976-1981 period, reaching the extremely highlevel of 33 percent of GDP in 1981. This is a substantial investment levelcompared to the overall average for low-income African nations: grossdomestic investment of 15 percent of GDP (in 1979) compared to Benin's 35percent rate (in 1981). Private consumption fared relatively well, recordinga 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.

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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 3.7 100.5 102.7Private -0.2 3.6 90.0 89.3Public 3.7 4.4 10.5 13.4

Gross Investment 10.9 14.1 20.3 34.9Fixed Investment 8.5 19.8 17.9 32.9Change 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 3.6 100.0 100.0Resource 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 inrelation to GDP from 1972 to 1981, the share of national savings in itsfinancing has declined sharply (see Table 2.4). From 31 percent of GDI in1972, this ratio has fallen to less than 2 percent in 1981. Foreign resourcesprovided over 90 percent of GDI during the 1976-1981 period. Gross domesticsavings (before the addition of net factor income and current transfers fromabroad) have been negative during these years. The considerable CentralGovernment current surplus over this period has been offset by publicenterprise dis-savings. Net factor income has remained stable, representingthe net effect of increased savings transferred home by Beninese workers inother countries, and growing official interest payments overseas.

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Table 2.4 Investment and its Financing(as percent of GDP, current prices)

1972 1976 1981

Gross Domestic Investment 16.4 20.3 34.9of which:

Central Government investment n.a. n.a. 12.5Public enterprise investment 8.9 8.3 17.6Private investment 7.5 12.0 4.8

Gross Domestic Savings 3.9 -0.5 -2.7of which:

Government current surplus n.a. 4.9 14.6

Net Factor Income andCurrent Transfers 1.2 3.4 3.2

Gross National Savings 5.1 2.9 0.5

Foreign Resources 11.3 17.4 34.4of which:

Public sectorl! 10.0 12.1 31.2Private sector, short-term anderrors 1.3 5.3 3.2

Source: Statistical Appendix Table 2.3.

1/ Government and public enterprises. Includes suppliers credits and otherforeign lending for the three major investment projects in 1980 and 1981.

2.21 Investment during the late 1970s was concentrated in industry andinfrastructure and carried out within the broad framework of the First StateDevelopment Plan (1977-1980). Actual investment was about 59 percent of thatforeseen in the First Plan. The largest share of public investment went intoindustry--38 percent of total investment (see Table 2.5). The three largeindustrial projects (sugar, cement, and offshore petroleum production)accounted together for 24 percent of public investment during these years, andan even higher share during the last two years. Transport absorbed 30 percentof the total, mainly spent on roads projects and the extension of the port ofCotonou. Public utilities received the next largest share, followed by ruraldevelopment with only 10 percent of total investment. The social and othersectors received minor portions of investment.

2.22 The level of public investment achieved over the 1977-1980 period isimpressive, representing nearly double the level (as a proportion of GDP)achieved during the early 1970s. Development strategy concentrated on severallarge, export-oriented industrial operations based on natural resources

18

previously not exploited in Benin. Serious attention was also devoted to thecountry's transit role, in the form of road and port improvements. The smallshare of public investment received by rural development reflects the greatercomplexities faced in this sector, the preoccupation of planners with majorundertakings in other sectors, and the concern of external donors over pooragricultural policies.

Table 2.5 Public Investment by Sector, 1977-1980(in billions of current CFAF)

Sector Amount PercentRural Development 11.7 10.2

Industry, of which: 43.3 37.8Save sugar 12.5 11.0Onigbolo cement 9.7 8.5Seme petroleum 5.0 4.4

Public Utilities 16.7 14.6

Transport, of which: 33.9 29.7Roads 15.4 13.5Port 8.4 7.4

Commerce 1.7 1.5Tourism 3.9 3.5Education 1.8 1.6Health 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 themodern sector of the economy has risen rapidly, however, absorbing part of therural-urban migration. Wages, on the other hand, have remained at lowlevels. There is no available data on income distribution in Benin, and therehave been no recent household surveys. In the past, there have beenindications that the rural-urban terms of trade did not strongly favor theurban areas, but continued migration to the large cities indicates a likelydivergence between urban and rural living standards.

1 9

Employment

2.24 The traditional agricultural sector continues to employ the greatestportion of the labor force, about 74 percent in 1980 according to Governmentestimates (see Table 2.6). Services occupy 20 percent of the workforce andindustry the remaining 6 percent, with informal activities outweighing formalemployment in both categories. Benin's informal sector is considered to bequite dynamic, and women play an important role, but little information isavailable. 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 inindustry. The public sector expanded at a more rapid rate than privateemployment in the services sector: 16 percent per year (civil service pluspublic enterprises) versus 10 percent annually for private serviceenterprises.

Table 2.6 Employment(1980, except as noted)

Thousand Informal Formal Formal SectorPersons Percent as % of as % of Annual Growth RateTotal of Total Total Total 1977-1980

Agriculture 1,220 73.6 99.6 0.4 23.7Industry 100 6.1 85.5 14.5 9.6Services 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 duringrecent years, and have fallen in real terms. The minimum industrial wage rateis one indicator of this trend: from 1975 to 1982, this rate declined by atotal of 43 percent in real terms. Civil service salary levels have also beenstrictly controlled, and have probably declined by a similar proportion. Thevery low wage levels in the public sector have posed a problem in retainingand motivating qualified staff, who have often been attracted by highersalaries in the parapublic and private sectors. The solution however, may beto reward efficiency rather than to raise salaries across the board. Althougheffective wage rates are not known in detail, wage levels in Benin haveclearly fallen substantially behind those of other West African nations. Forinstance, in 1970, Benin's minimum industrial wage was 22 percent less thanSenegal's, while it is now 66 percent below the Senegalese level.

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Table 2.7 Wage Levels(minimum hourly industrial wage rate, CFAF)

1970 1975 1980 1982

Benin 39.60 45.00 51.75 51-75Ivory Coast n.a. 92.00 174.00 191.00Senegal 50.60 107.05 133.81 152.04

Source: BCEAO

Manpower and Skill Training

2.26 The future requirements for skilled workers, technicians, andprofessionals in the industrial and agricultural sectors have not beenprecisely defined. Nonetheless, it is clear that the present training systemis not well-oriented to support the development of skilled manpower for keysectors of the economy. First, the planning and administration of training isweak and employees are not sufficiently involved in formulating trainingprograms. Second, the quality of existing pre-service training programs isvery low. There is a shortage of trained teachers, a lack of essentialmaterials and equipment, and overemphasis at the lower and middle-levels ongeneral education without enough specialized training. Finally, the numbersof people trained in key fields does not correspond well to the needs. Theoutput of competent skilled workers and technicians for industry is notsufficient, for example, but there is a surfeit of graduates in the commercialfields.

D. MONEY, CREDIT AND PRICES

2.27 Benin's monetary policy is set within the context of the six-nationWest African Monetary Union (UMOA) and its common central bank, the BCEAO.The UMOA has the advantage of a convertible currency, the CFA franc, which islinked 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 adequatelevel of domestic economic activity.

2.28 A relatively expansionary credit policy was pursued in 1982 (Table2.8). This reflected increased demand for credit by the public enterprises tofinance losses, and by the private commercial sector due to the involuntarybuildup of stocks resulting from the slowdown in the re-export trade. Thiscredit expansion also reflected a shift in the Central Government's positiontoward the banking system. During 1981, the Government built up its depositswith domestic banks and nonbanking institutions as a result of its high fiscalsurplus. In 1982, the Government drew down its deposits with the banks bysome CFAF 9 billion, and further drawdowns are expected in 1983.

2.29 Benin's net foreign asset position also reflects the strongGovernment surplus in 1981 and subsequent weakening. Net foreign assets ofpositive 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 24billion by the end of 1983.

2.30 Price inflation in Benin has been relatively moderate in recentyears, although there is no adequate price index available. The mission'sestimates of the implicit GDP deflator provide inflation levels of about 10 to12 percent annually during the 1978-1981 period. The high-income consumerprice index, prepared by one of the diplomatic missions in Cotonou, indicatessimilar levels. The devaluation of the French franc (to which the CFA francis pegged at a level of 50 to 1) in 1981, 1982 and 1983 has been reflected inthe CFAF-dollar exchange rate, which has climbed to the 400 level from arelatively stable range of 200-250 during the 1970s. This exchange rate shiftis likely to have an inflationary impact on urban consumers in Benin, althougha considerable portion of import trade is from France. In principle, thedepreciation of the CFA franc should stimulate certain exports such as cotton,whose world market price is denominated in U.S. dollars. The Governmentshould be able to substantially raise the CFAF producer price for cotton andother 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 87.9Net claims on Government -4.9 -16.6 -15.2 -18.6 -10.8Net 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 12.6price index (% change)

1/ Domestic credit net of on-lending of long-term foreign borrowing andof 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 itsfinancial accounts. However, the level of this surplus in relation to GDP hasbeen declining since 1976, with the exception of 1981 (see Table 2.9). Thecurrent surplus averaged 2.8 percent of GDP over the 1976-1981 period.Indications are that the 1982 and 1983 current surpluses will continue theearlier declining trend. However, serious deficiencies in the public financedata make it difficult to refer with confidence to developments on either therevenue or expenditure side since 1979. There are also considerable lossesamong the state enterprises, which are not consolidated with the publicfinance data. The declining current surplus reverses the trend of the firsthalf of the 1970s, when restrained spending and rising revenues produced anincreasing surplus.

2.32 Government revenues have declined somewhat as a proportion of GDPsince 1976, with the exception of an unusual situation in 1981. Benin'sCentral Government revenues are largely determined by import duties. As notedin Table 2.10, import duties have constituted a rising share of totalrevenues, reaching 65 percent in 1981. Since a considerable share of Benin'simports--especially high-value, high-duty items--are subsequently re-exported,Government revenues in Benin have been more dependent on international tradeconditions and neighboring countries' economic situations than on domestic

1/ The Mission which discussed the Report with Government was not able to obtainconsistent 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 Reportshould therefore be regarded as indicative.

23

production. For instance, sharply higher revenues in 1981 were largely due toduties on imported goods and to taxes on Beninese manufactures, both destinedto Nigeria, in addition to taxes on income generated in the construction ofmajor projects in Benin.

Table 2.9 Central Government Finance Simmary(consolidated position)'

Average1976 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 16.4Import duties 11.0 16.9 21.0 30.0 8.0 11.5 9.1Income taxes 4.2 3.5 3.4 6.8 3.1 2.6 2.4Other 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 11.2Wages 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 avery steady proportion of 10 percent of GDP during the years 1976-1979. Innominal terms, current expenditures increased by 19 percent per year from 1976to 1981, while inflation (implicit GDP deflator) was about 10 to 15 percentannually. This spending increase is primarily attributable to higherbudgetary expenditures in 1980 and 1981 for education (expenditures have risenfrom the equivalent of 2.9% of GDP in 1978 to 4.1% in 1981) and for generalpublic services. Rapid increases were also recorded in Special Accounttransactions (pension fund payments) and in CAA expenditures (representingconsiderably higher interest payments on foreign debt). These increasesresult from economic and social priorities which are likely to continue in thefuture.

24

2.34 Wage and salary costs dominate the economic classification of currentexpenditures. Personnel costs as a proportion of current expenditures haveranged between 64 and 73 percent during the past six years, and the trend hasbeen rising. Higher wage costs appear to be primarily a function of numbersof persons in the civil service rather than of higher salary levels. Civilservice employment has risen by an average of 15 percent per year from 1977 to1980, based on a policy of employing all college graduates. Salaries, on theother hand, have been frozen since 1974, and a general increase of 11 to 15percent approved by the Government in January 1980 has not yet beenimplemented. Calculations of average cost per civil servant substantiate thestrict control over wage levels; the cost of CFAF 630,000 per employee has notchanged (in nominal terms) between 1977 and 1980. In real terms, compensationlevels 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 46.4Import Duties 11.0 13.1 14.0 16.9 21.0 30.0Income Taxes 4.2 3.7 4.8 3.5 3.4 6.8Turnover 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 17.8Import Duties as % Tax

Revenues 49.5 54.6 54.1 60.8 63.8 64.7Import 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 problemsin Benin's public finance data.

2.35 The high proportion of the current expenditure budget devoted towages restricts the funds available for necessary maintenance. The Treasuryapparently postpones spending on materials and supplies each year until thelevel of receipts is fairly well known. In real terms, maintenanceexpenditures have declined over the past five years. This reduced spendingresults in an increasing overhang of postponed maintenance which createsliabilities for future budgetary periods.

2.36 Investment expenditures increased sharply in 1980 and 1981. Thisreflects Benin's spending on major projects such as Seme petroleum, Savesugar, and Onigbolo cement. External financing has risen as well, so that the

2 5

proportion of investment expenditures financed by foreign borrowing hasincreased somewhat. Nevertheless, rising investment has imposed a heavyburden of counterpart financing. Net of increased foreign borrowing, thehigher investment expenditures in 1981 required CFAF 7 billion more in publiccounterpart funds than in 1979.

F. PUBLIC ENTERPRISES

2.37 The role of public enterprises in Benin has grown sharply since themid-seventies, when policy decisions were taken which adopted thisorganizational form as a major element of economic policy. The Government'sobjectives were to strengthen national control over the economy, to providepublic competition in certain key sectors, and to accelerate economicdevelopment. 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 enterpriseshave become such a dominant form of organization that they merit a briefreview in terms of their impact on the economy, public finance and banking.

2.38 Public enterprises represent about 75 percent of modern industrialoutput in Benin. They employed 28,000 persons in 1980, or 40 percent of theformal sector labor force. There are indications, however, that employmentpolicies have caused inefficient absorption of manpower by the publicenterprises and that consumers have not always benefited from the low fixedprices intended to result from public enterprise involvement. The latterproblem arises when a public enterprise holds a legal monopoly on importing agiven product and is expected to distribute the goods at a uniform pricethroughout the country. Public enterprises have not always been in a positionto carry out the distribution function effectively, due to poor organization,with the result that private distributors sell the merchandise at higher thanofficial prices. This leaves the public enterprises with losses, but does notefficiently transmit the intended subsidy to the consumer.

2.39 The public enterprise sector has yielded a low financial return fromthe Treasury viewpoint. At least CFAF 15 billion of public funds have beeninvested as equity in public enterprises, along with guarantees on debtsexceeding CFAF 135 billion, since 1975. The full extent of public enterpriseborrowings has not always been controlled by the Government, although majorprojects have been monitored. Transfers from the current budget have not beenmade, but public enterprise losses have been financed by the state-ownedbanks. In exchange, the contribution of public enterprises to the Treasuryhas been limited to taxes (CFAF 3 to 6 billion per year). No significantdividends have been collected in recent years. Increasing public outflows areexpected over the next several years, as past losses financed by short-termbank credit are absorbed by the Treasury, rehabilitation investments areundertaken, and cash infusions are required for several major new projects.It is estimated that public funding of at least CFAF 10 billion annually maybe required by the public enterprises in the short-term.

1/ A detailed review of the public enterprises is presented in Volume IIIof the Economic Report.

26

2.40 The banks are heavily exposed to the public enterprises, whichaccount for over 60 percent of all domestic borrowings. Arrears pose seriousproblems. Ten public enterprises maintain less-than-satisfactory bankingrelations with the commercial bank, and their total balances outstandingexceed the bank's reserves. Twelve public enterprises are in arrears to thedevelopment bank, on original loan amounts exceeding the bank's reserves.This situation has arisen in part because of the explicit or implicitGovernment guarantees involved. The sizable public finance surplus recordedin 1981 was largely deposited in the banks, and these funds assisted the banksin extending additional credit which helped finance the enterprises'deficits. In coming years, budgetary appropriations will likely be requiredto 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 inrecent years, linked mainly to capital investment projects and to re-exports. A very large current deficit has resulted, while on the capitalaccount, 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 pastdecade. Much of this increase is due to capital goods imports (which rosefrom CFAF 4 billion in 1972 to CFAF 49 billion in 1981) in suppport of Benin'sFirst Plan. Consumer and luxury goods imports (dominated by beverages,tobacco, garments and pharmaceuticals) also increased sharply from 18 percentof total imports in 1972 to 32 percent in 1981. While official petroleumproduct imports have increased, there has also been some unofficial import ofgasoline and kerosene from Nigeria. Sharp increases in consumer goods importsduring the late 1970s were related to buoyant demand in neighboring Nigeriaand Niger, as well as in Benin.

2.43 Exports have grown considerably in recent years. However, recordedexports slipped from 54 percent of total goods exports in 1972 to 14 percentin 1981. The traditional commodity exports have been declining in real termsfor the past decade. Palm products exports have fallen from an average of50,000 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 to10,000 tons in 1981 (although indications are that cotton production is upsubstantially in 1982-1983, following implementation of a rural developmentproject). On the other hand, unrecorded exports (as reconstructed from otherbalance of payments data) have grown at a rapid pace, with particularly steepincreases in the years 1977 and 1981. These exports likely consist of re-exports of consumer goods, and exports of Beninese manufactured goods andfoodcrops, all mainly destined for the Nigerian market.

2.44 The current balance has deteriorated from a deficit of 11 percent ofGDP in 1972 to a very large 34 percent deficit in 1981 and an estimated 42percent in 1982. Workers' remittances have increased significantly, but havebeen insufficient to overcome the increasing trade deficits.

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2.45 Capital inflows have risen sharply, particularly during 1980 and 1981when several major investment projects were financed. Suppliers creditsprovided the bulk of these funds, on reasonable terms (7.5 to 8.0 percentinterest, 12 years maturity). Net borrowing rose from CFAF 11.4 billion in1979 to the CFAF 50 billion level in 1980 and 1981. Official grant aid anddirect foreign investment have also increased, linked to the Government'sinvestment program.

2.46 The overall balance of payments turned positive in 1980 after threeyears of modest deficits. In 1981, a major positive balance was achieved,although the source of this shift is clouded by the existence of a substantialmovement in the "other capital flows and errors" line. Recent developmentssuggest that the 1981 performance was largely based on the strong Nigeriandemand for Beninese goods and re-exports, as net reserves have again been rundown 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 81.2Importsl/ 32.1 60.0 108.3 148.5 178.8

Resource Balance -10.5 -28.5 -44.1 -80.2 -97.6Investment Income -0.7 0.0 -0.2 -0.5 -2.1Remittances and Private

Transfers 1.7 4.7 8.4 9.3 10.3

Current Balance -9.5 -23.8 -35.9 -71.4 -89.4Official Grant Aid 5.7 12.8 13.7 13.3 23.1Direct Investm7nt 1.2 0.6 3.6 8.4 9.2Net Borrowing2 1.5 3.1 11.4 58.7 48.9Other Capital Flows and

Errors3 2.1 8.8 4.5 -8.0 22.9

Overall Balance 1.0 1.3 -2.7 1.0 14.7Net 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.

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H. EXTERNAL DEBT AND FOREIGN AID

2.47 The massive public investment effort undertaken during the late 1970swas largely financed from abroad. This was reflected in sharply highercapital inflows, which were obtained on harder terms than in the past. Debtservice is rising, though much of the increase is related to major export-oriented projects. Because investment has been almost exclusively in thepublic sector, and because the CFA franc is fully convertible, debt servicingissues 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 $589million (CFAF 209 billion) at end-1981 (see Table 2.12). Of the 1981outstanding amount, 43 percent was incurred to finance the sugar, cement, andpetroleum projects. The mix of borrowing changed as well, shifting theoutstanding debt structure from 15 percent on commercial terms in 1976 to 48percent commercial in 1981.

2.49 Debt service has increased from the $2.8 to $4.2 million level (CFAF1.0 to 1.5 billion) during 1976-80 to $17 million (CFAF 5.9 billion) in 1981and $68 million (CFAF 24 billion) projected for 1983 based on existingcommitments. Debt service in 1981 accounted for 7 percent of exports (goodsplus non-factor services), or 11 percent of Central Government revenues. Thethree major industrial projects--two of which are jointly guaranteed by theNigerian 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 52.1Multilateral 24 75 41.1 36.1Bilateral 26 34 44.3 15.9

Commercial Creditors 9 100 14.6 47.9Suppliers Credits 5 5 8.1 2.3Bank loans 4 95 6.5 45.6

Total Debt Service 1.5 5.9as X Exports (G + NFS) - - 4.2 7.3as % Govt. Revenues - - 6.6 11.2

Source: Statistical Appendix Table 4.1.

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2.50 The present level of Benin's debt service is substantially higherthan in the past, but is linked to a major investment thrust. The country'scapacity to service this debt depends on the success of the major projects,which in turn hinges upon favorable developments in worldwide demand and inNigerian demand (in the case of sugar and cement). If the output can be soldat attractive prices, and if trade levels recover following their 1982 slumpso that Benin's import duties rise, there will not be any difficulty inservicing this debt. However, there are major questions surrounding theviability of these projects, particularly in the case of the sugar project(see para. 3.32). Benin's debt servicing capability is further assessed inChapter IV on the basis of alternative macroeconomic projections.

2.51 Concessionary aid for development in Benin has grown fairly rapidlyin the form of grants during the late 1970s, but official loans have notincreased. This means that some aid agencies may be converting their aid toBenin from loan to grant terms. The sharp increase in bilateral grantsappears to reflect improved political relations with key donor nations. Thevolume of concessionary loans, however, has not increased. This may reflectBenin's emphasis during the late 1970s on major industrial projects in whichforeign aid played little role, and the country's limited absorptive capacityfor other simultaneous new projects.

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III. SECTOR PERFORMANCE AND ISSUES

3.1 This chapter presents summaries of the major performance trends andissues in the key sectors of Benin's economy. The material is organized asfollows:

A. AgricultureB. IndustryC. TransportD. EnergyE. Social Sectors

A. AGRICULTURE

Background

3.2 Agriculture is the most important sector of the Beninese economy. Itemploys three-fourths of the active population, and provides 40 percent of theGDP and 36 percent of the foreign exchange earnings. The sector ispredominantly fooderop oriented, producing maize, sorghum, yams, cassava,beans, and small quantities of rice. It is estimated that Benin enjoys anoverall food surplus; a significant portion of domestic foodcrop production(perhaps 20 percent) is exported to Nigeria and Niger. This offsets Benin'sfoodgrain imports, which have been rising in recent years, and which have beensubsidized by the Government through public enterprises. Benin enjoys acomparative advantage in foodcrop production which is likely to continue inthe future. The main industrial crops are palm oil, cotton, and peanuts.Efforts are underway to expand cotton output, which is well-suitedenvironmentally to conditions in northern Benin. But the oil palm sector islimited by insufficient rainfall, and will likely continue to decline invalue.

3.3 Farming patterns vary markedly by region. In the southern andcentral region, two rainy seasons permit double cropping. Land is usedintensively, and the average farm size is 1.2 ha. In the northern region withonly one rainy season, the cropping pattern is less intensive and the averagefarm size is 2.4 ha. There is an average of 3.3 farm workers per farm inBenin. Labor is mainly family labor, yet a small number of farmers fromlarger farms hire workers during peak periods, such as harvesting.Cooperatives exist throughout the country; however, individual farmers stillaccount for about 90 percent of all agricultural production in Benin. Yieldsare generally not high, due partly to low use of modern inputs (improvedseeds, fertilizer). Fertilizers are so far little used in Benin, althoughthey have been shown to improve the generally poor soils and raise yields formost crops.

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Production Trends

3.4 Benin experienced a five-year period of stagnation in staple cropproduction prior to 1976. Production then increased (see Table 3.1) as aresult of better weather and more attractive prices to small farmers.Production of maize and yams has increased sharply during the last five yearslargely in response to increased border trade wtih Western Nigeria. Beans andcassava output has also risen during this time period. Sorghum production hasdeclined in recent years, due largely to a shifting of tastes to maize in thenorth.

Table 3.1 Selected Foodcrop Production(thousand metric tons)

1969-71 1974-76 1979-81

Maize 202 224 302Sorghum 52 69 59Yams 524 489 687Cassava 733 601 639Beans 28 18 31Rice 4 13 10

Source: Ministry of Rural Development

3.5 Benin's industrial crop production is of modest value (exports ofUS$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 anestimated 200-300 thousand ha of wild palm groves. Fruits from the wild palmgroves are processed artisanally and the palm oil is consumed domestically orexported unofficially to Nigeria; the kernels are processed industrially.Between 1962 and 1975, 28,000 ha of improved palm groves were planted and theoutput is }ocessed into palm oil by the Societe Beninoise de Palmier a Huile(SOBEPALH)J', with the kernels being crushed by the Societe Nationale pourl'Industrie des Corps Gras (SONICOG). Productivity is low, with fresh fruityields of only 4 tons/ha compared with yields of 15 tons/ha in other WestAfrican countries. Output of the modern oil palm sector has been stagnatingdue to climatic factors and depressed world prices. Productivity could beraised through better plantation maintenance techniques and organization ofproduction and fresh fruit collection, but yields are not expected to rise tolevels 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 toSONICOG.

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Table 3.2 Selected Industrial Crop Production(thousand metric tons)

1969-71 1974-76 1979-81

Oil palm (fresh fruit bunches) na 523 356Cotton raw 36 25 19Peanuts 46 46 60

Source: BCEAO

3.6 Cotton production in Benin has performed poorly, but significantpolicy improvements have recently been made. Modern cotton production wasintroduced in Benin in 1963 under bilateral technical assistance and theproduction of seed cotton rose from about 5,000 tons in 1965 to 50,000 tons in1972. Production fell to 10,000 tons in 1981, but has now increased to about19,000 tons. The major factors accounting for the past decline have been highfoodcrop prices relative to cotton prices (see Table 3.3, although it shouldbe noted that the labor calendars differ for the two crops) and lack of timelyavailability of fertilizer and insecticides. In the past, the Governmentsupplied subsidized agricultural inputs to cotton producers. The Governmentwas able to finance these subsidies by paying low producer prices for seedcotton relative to the export price. As foodcrop prices became moreattractive, however, farmers diverted fertilizer to fooderop production.Since foodcrop marketing was not controlled by the Government, there were nomeans for Government to generate revenues to cover input subsidies. Thisstrain on public finance limited the Government's ability to import adequatequantities of inputs, and the lack of inputs was seen as threatening progresson the Government's major rural development efforts. As a remedy to thisproblem, beginning with the 1982-83 agricultural campaign, the Governmentbegan a six-year phased elimination of all subsidies on fertilizer andinsecticides. Over the same period, prices paid to farmers for seed cottonwill be increased to compensate for the higher input costs. In 1983, as aresult of improved incentives farmers expanded cotton acreage and outputdespite 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 682Cotton 714 80 57,120 5,560 51,560 112 460

Source: MDRAC and World Bank.

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Agricultural Institutions

3.7 Benin's agricultural sector is served by four major publicagencies: the Ministry of Rural Development, the provincial rural developmentagencies, the national marketing and processing agency, and the agriculturalcredit bank. Major problems in agriculture have recently been addressed bychanging the functions and organization of these key institutions.

3.8 Responsibility for the implementation of rural development policyrests 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 investmentproposals. This capacity is being strengthened under the rural developmentprojects financed by IDA, IFAD, CCCE, and FAC.

3.9 The principal supporting institutions for rural development at theprovincial level are the CARDERs, (Centre d'Action Regional pour leDeveloppement Rural). The CARDERs are responsible for primary marketing ofcotton, which includes assembling seed cotton to central points, payingfarmers, transporting seed cotton to ginneries, and managing the ginneries.There are a number of organizational problems with the ginneries. Theseagencies are also responsible for agricultural extension, primary marketing,research, cooperative support, input distribution, rural roads maintenance,water and other infrastructure development. This multiplicity of activitiesdiverts attention and resources away from what should be the CARDERs' primaryfunction--extension and other direct support to farmers--and should bediscouraged.

3.10 Until recently, the management of cotton ginneries was theresponsibility of SONAGRI, but this responsibility has been transferred to theCARDERs in the cotton-growing provinces. After ginning, cotton seed is nowsold to the newly established SONAPRA (Societe Nationale pour la ProductionAgricole). This system of cotton marketing is the result of a recentreorganization, which consolidated into SONAPRA the functions of (i) SONAGRI,previously responsible for cotton ginning, handling and delivery of cotton toCotonou, as well as input procurement and distribution; (ii) FAS, formerlyresponsible for price stabilization and subsidy payments; and (iii) SONACEB,which had been responsible for export marketing. This reorganization shouldresolve several financing and coordination problems which hindered efficientoperations in the past.

3.11 The national agricultural credit agency, Caisse Nationale de CreditAgricole (CNCA), was established in 1975. CNCA extends credit to stateenterprises, to CARDERs, and through the CARDERs to farmer cooperatives. CNCAalso lends directly to farmers via provincial level agencies (CRCAM) (seeVolume II, Agriculture). The primary source of finance for CNCA has beenrediscounting with the Central Bank of West Africa (BCEAO). CNCA's greatestvolume of loans has been to state enterprises, whose repayment record has notbeen good due to inadequate profitability. Loans to farmer cooperative groupshave been more successful.

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Plan Priorities

3.12 According to the 1983-87 Five-Year PlanY, the Government of Beninattaches high priority to agricultural production and productivity. The ruralsector is supposed to receive CFAF 137.7 billion in investment (23 percent oftotal) according to the plan. This plan represents a quantitative improvementover the First Development Plan (1977-80), in that rural development was onlyallocated 11 percent of total investment in the first plan.

3.13 An examination of the agricultural projects proposed at the March1983 Donors' Roundtable Conference suggests that many of the projects are notyet well-defined and that some may be ill-conceived. For example, a CFAF 2.2billion rehabilitation of SONIAH's irrigation areas is proposed, as well as a1 000 ha irrigated oil palm plantation at Takon-Yoko (CFAF 2.4 billion).Given Benin's past experiences with irrigated rice and the low financialreturns on the 830 ha of oil palm already irrigated in Benin, majorinvestments in these sub-sectors do not appear warranted. Instead, Beninshould concentrate on agricultural projects which exploit its comparativeadvantage in foodcrop and cotton production, such as the rural developmentprojects underway in the Atacora, Zou, and Borgou Provinces.

Issues

3.14 The Government has taken a series of practical steps over the pasttwo years to establish the preconditions necessary for an expansion ofagricultural production. For example, the Government has recognized thatprevious attempts to control food prices have proven unsuccessful, andtherefore marketing of traditionally produced fooderops has been left mainlyto 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 clearlydefined following the study of food crop marketing planned for early 1984.Without that, there is the obvious risk of the activities of the new publicsector agency leading to negative inducement effects on prices and, hence, onagricultural output. The Government's decision to phase out subsidies onagricultural inputs and simultaneously raise producer prices should also havea favorable impact on agricultural production by ensuring availability ofthese inputs (the lack of which caused serious bottlenecks in the past).Nigerian demand for Benin foodcrops has been strong, and previous constraintson transborder fooderop trade (perhaps never very effective) appear to havebeen removed. The Government might consider constructing feeder roads to helppromote these exports.

3.15 The main issues which require attention in Benin's agriculturalpolicies are the strengthening of agricultural institutions, a greateremphasis on crops in which it enjoys a comparative advantage, a careful focuson successful organizational forms, and the rational resolution of the problemof 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 beenprepared and the investment plans referred to in this Report are based onthe Round Table Document prepared for the Donors' Conference held in March1983. References made in this Report to the 1983-87 Plan thereforepertain to development intentions and plans as reflected in that document.

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3.16 Institutions, especially extension, should have clearer objectivesand provide more direct support to farmers in improving agricultural practicesand increasing productivity and yields. The multiplicity of activities by theCARDERs should be reduced since it diverts attention away from their primaryfunction--supporting farmers.

3.17 Benin must also plan agricultural projects and investments aroundcrops such as cotton and foodcrops in which a comparative advantage exists,because the quality of soils and level of rainfall are well-suited to thesecrops. On the other hand, the soils and rainfall levels in Benin are notoptimal for such cash crops as sugar and oil palm, and consequently yields forthese crops are much lower than in other parts of West Africa. Benin's lowyields for these crops (4 to 6 tons per ha for oil palm and 75 tons/ha forsugarcane) seriously constrain the economic viability of enterprises in thesesub-sectors, and the mission recommends that Benin not invest in expanding thearea planted to these crops. On the other hand, the substantial existingfixed investment in sugar and oil palm justifies short-term efforts toincrease efficiency and production based on existing plantations andprocessing facilities.

3.18 Appropriate organizational systems are crucial in agriculture. TheGovernment has correctly recognized the need for a flexible, economically-motivated peasantry engaged in climatically well-adapted productionpatterns. However, earlier planning documents appear to have contradictedthis emphasis in referring to the increasing role of the official marketingsystem, reflecting an anxiety that the growing incomes of peasants who produceand market their products outside official channels may not be easily tappedto support the country's development programs. The mission's review of thesector (see Volume II) concludes that voluntary cooperative groups of farmersoffer a good potential for overcoming some of the sector's constraints.Public enterprises that have directly engaged in crop production havegenerally incurred heavy losses due to high overheads and inefficiency. Thisform of involvement should not be undertaken in the future. Where marketingis concerned, the Government now intends to "officialize" peasant cropmarketing channels by removing the restrictions that encouraged parallelmarket activities. This and other forms of incentives to rational decision-making by individual farmers and cooperative groups are more likely to lead toa strong agricultural performance.

3.19 The Benin Government has been subsidizing sales of importedfoodgrains to consumers by requiring the public enterprise handling theseimports (AGB) to sell at unremunerative prices. The financial burden of AGB'swheat 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 thebakeries. However, subsidies of rice (about 15 percent) and occasional maizeimports continue, at the expense of AGB's profitability, due to excessivelylow fixed wholesale and retail prices. Government's concern about inadequacyof supply of cereals in urban-area markets between harvests led to thecreation of a National Cereals Office (Office Nationale de Cereales) inDecember 1983. Although the initial decree setting it up included thepurchase and stocking of cereals among its duties, the Government now appearswilling to pare down its size and role. Subsidized grain imports and officialintervention on the local market act to depress the supply

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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 theinadequate supplies of grain in urban areas and food subsidies.

B. INDUSTRY

3.20 Benin's manufacturing sector is small and did not increase its realcontribution to GDP during the 1970s. However, the three major publicinvestment projects included in the First State Plan (1977-1980) are alllinked to the industrial sector, and will raise industrial production in thefirst half of the 1980s. The formal sector is estimated to account for about60 percent of total industrial value-added, and most activity is concentratedin four fields: food and beverages, vegetable oil processing, textiles andcement. These activities are mainly of the import substitution, importprocessing, and agricultural processing variety. A dozen public enterprisesaccount for 60 percent of formal sector production (see Volume III fordetails) with the remainder composed of about two dozen private firms. Littleis known about the informal sector, and this analysis is limited to the formalmanufacturing sector.

3.21 The Government is aware of problems in the industrial sector, and hassought foreign advice and assistance. Technical assistance is believed to berequired in the areas of project identification, project promotion withfinancing sources, project analysis, and the review of industrial policies.

Structure of Production

3.22 Manufacturing contributed 6 percent to GDP in 1981. Over 80 percentof modern sector manufacturing value-added occurred in the four fields notedabove (see Table 3.4), dominated by a few state-owned enterprises.

Table 3.4 Industrial Sector Value-Added(in million current CFAF)

1977 1981 1981Value-Added Percent

Formal Sector 8,700 10,386 100.0Food 427 1,751 16.9Beverages 1,448 2S153 20.7Vegetable Oil Prod. 2,322 2,222 21.4Textiles 2,136 1,757 16.9Cement 503 843 8.1Wood 256 250 2.4Paper Products 158 300 2.9Chemicals 455 630 6.1Metalworking, Machinery 995 480 4.6

Informal Sector 2,877 4,182

Total 11,577 14,568

Source: Volume II, Table 17.

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a. Food and Beverages

3.23 Beverages--The public enterprise La Beninoise dominates production ofbeer, soft drinks, mineral water and ice. Employment is around 450 persons,and several new breweries and bottling plants have been added in recentyears. Capacity utilization has been limited by production problems.

3.24 Fruits and vegetables--SONAFEL (a public enterprise) operates atomato paste factory in Natitingou. Production has been minimal, due to thehigh cost of local tomatoes, technical problems and the high cost of importedcans. The factory is not competitive with imports. Another public enterpriseoperates a cashew nut processing unit.

3.25 Flour milling--Imported wheat is milled by GMB (Grands Moulins duBenin), a private mill with a capacity of 125 tons per day.

3.26 Bakeries--A number of private bakeries exist to supply the localmarket.

b. Vegetable Oil Processing

3.27 Palm oil products--Public enterprises (now consolidated into a singleorganization, SONICOG) process fresh fruit from plantation-grown palms, andkernels purchased from small-farmer harvesters of wild palm groves. Theoverall performance has been poor, largely due to marginal climatic conditionsfor oil palm in Benin and poor plantation maintenance. Capacity utilizationin all the mills is extremely low, and the labor force of 1,900 exceedscurrent 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 privateinterest) bleaches and prints imported cotton fabric for sale on the localmarket, which includes Nigerian buyers. The plant is efficiently run and thefabric designs are well-regarded in the marketplace. Output increased untilmid-1982 when Nigerian demand dropped.

3.29 Integrated textile plant--IBETEX, another public enterprise, wasestablished in Parakou in 1975 to produce finished garments from local cotton,for export to Europe. Marketing problems, poor cotton quality, technicaldifficulties and disagreements with the private partners have resulted inheavy losses, reduced output, layoffs, and a reorientation toward the domesticmarket.

3.30 Another textile complex is under construction at Lokossa.

d. Cement

3.31 Clinker grinding--Two clinker grinding plants operate in Benin, bothpublic enterprises: SONACI and SCB. Both utilize imported clinker and gypsumto produce cement (about 270,000 tons in 1981/82) for the local market. TheSONACI plant was inaugurated in 1978, doubling Benin's capacity. Heavy

38

financial losses have resulted from low prices fixed by the Government at atime of rising input costs. Prices were raised in late-1982, but demandappears recently to have decreased. Total employment at the two enterprisesis about 250 persons.

3.32 These are the major ongoing industrial activities in Benin. Otherfirms are engaged on a more modest basis in fields such as ceramic tilemanufacturing, printing, paper clip manufacturing, the blending of perfumes,welding and steel construction, agricultural implement production, kitchenutensils and soft drinks.

e. Major New Projects

3.33 In addition, three major projects presently coming onstream areexpected 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, 43percent by the Nigerian Government and 6 percent by the technical partner F.L.Smidth to produce cement from local limestone deposits. Total cost of theproject is about CFAF 32 billion (US$90 million). The 500,000-ton capacityplant began operations in June 1982 with a work-force of 500 persons, butoperated at 10 to 20 percent of capacity while the issue of exemption fromimport tariffs for sales of cement to Nigeria was resolved. At present, theplant has stopped producing because the cement is not price-competitive on theNigerian 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. Theplant is technically sound, but cash flow problems are likely during themedium-term due to low world cement prices. Current interest by the BeninGovernment in expanding capacity to 1.2 million tons per year is clearlypremature given the imbalance between production costs and market prices.Under "normal" world conditions, SCO should be profitable. Cumulative cashflow shortfalls of CFAF 4 to 8 billion are projected between 1983 and 1989.However, revenues should cover operating costs and make some contributiontoward fixed costs, so it is economic to continue operating the plant. Forthe two governments involved, it will be necessary to find the funds to meetthese shortfalls, whether domestically or through some form of externalborrowing or debt re-scheduling.

3.35 Sugar--The Societe Sucriere de Save (SSS) is also jointly owned bythe Governments of Benin (49 percent), Nigeria (46 percent), and the technicalpartner, Lonrho (5 percent). Total investment cost is approximately CFAF 69billion (US$194 million). With a design capacity of 47,000 tons of sugarbased on irrigated canefields, the plant is likely to produce only 37,300 tonswith the existing cane acreage due to overly optimistic yield estimates.Excess world sugar supply is likely to make SSS unprofitable for the remainderof the 1980s. However, 80 to 90 percent of output is planned for sale on theNigerian market, and the price agreed with Nigeria will be a key determinantof SSS profitability. Projections (see Volume III) indicate that cumulativenegative cash flow could reach CFAF 40 to 50 billion by 1991, due in part tolow yields stemming from climatic and soil factors. Since these projectionswere made, it appears that difficulties in attracting labor at the minimumwage may further drive up costs and increase losses. As with the cementproject, the two governments need to plan for the cash injections that will be

39

required, unless world prices firm up considerably. Since revenues at currentdepressed world market prices appear to still cover operating costs, it isefficient to produce rather than to close the plant. Sugar production isslated to begin in 1983. Total employment will be about 3,500 persons.

3.36 Petroleum--The offshore Seme oilfield is being developed under aservice contract with technical partners Saga Petroleum of Norway andfinancing by Norwegian and UK banks. Total cost is estimated at approximatelyCFAF 56 billion (US$158 million). IDA assistance has been provided fortraining. Oil production began in early 1983, and exports of between 4,000 to10,000 barrels per day are anticipated during the rest of the decade.Recoverable reserves are estimated at about 22 million barrels, although threenew oil deposits have recently been located. No refinery is planned atpresent, nor would one be appropriate to Benin's level of petroleumconsumption. Uncertainties over the future level of world oil prices, andover the volume of recoverable oil and production costs, make uncertain themagnitude of the gains which will be derived by Benin. Even with fairly highpumping rates, most of Benin's oil revenues are committed initially torepaying debts incurred for the project. In the mission's best-estimateprojections, the project's impact on public finances during the first phasewould 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 comparativeadvantage in the industrial sector; the institutional environment; and theprojects proposed in the 1983-87 Plan. Other aspects (e.g., pricing andpersonnel policies, and government-enterprise relations) are discussed in thecontext of public enterprises (see Volume III).

3.38 Benin's major industrial advantages are low labor costs and proximityto the large Nigerian market. Wage rates in Benin are significantly lowerthan those elsewhere in West Africa. The minimum industrial wage is OFAF 52per hour in Benin (or $1.17 per 8 hour day), versus CFAF 152 in Senegal andCFAF 191 in Ivory Coast. Enterprises such as SOBETEX textiles and LaBeninoise beverages have demonstrated that high-demand consumer goods can be.successfully produced in Benin and sold to the domestic and neighboringmarkets. Benin's preferential treatment within the CEAO and EEC markets mayprovide potential demand. The Nigerian market has also been key to thedevelopment of Benin's limestone deposits.

3.39 On the other hand, the sector's weaknesses are that technicaltraining is lacking, there are few experienced industrial managers, Governmentpricing and personnel policies have been poor, private sector investors havelittle interest in tying up capital in industrial enterprises, the smalldomestic market purchases significant amounts of manufactured goods fromNigeria, and there are few incentives to export. Training of both techniciansand enterprise managers is included as a priority in Benin's new Plan;cooperation with competent foreign partners in joint ventures could help toaccelerate the transfer of critical skills. While the investment code hasprobably not been a key constraint, it does favor public over privateenterprises. 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 asthe border remains subject to unanticipated restrictions, it will be difficultto attract the risk capital required for industrial development. The domesticmarket alone is generally too limited to permit economies of scale, andBenin's tariffs provide little protection to import-substitution industries.There are no explicit export incentives. A study of the structure ofindustrial protection and export promotion would be useful.

3.40 Benin lacks powerful institutions dedicated to promoting industrialdevelopment. Four agencies have some involvement in the area, and need to bestrengthened: 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 viewto making it more effective. A study of the existing system of industrialincentives which evaluates its strengths and weaknesses, would provide theinformation required to introduce changes that would induce a greater supplyresponse from industrialists.

3.42 The Ministry's staff responsible for industrial policy and projectslacks the required human and material resources. It is not in a position toeffectively plan new projects in the sector, even though the Government hastaken the leading role in industry. Nor does the Ministry have personneltrained in engineering or management who can assist industrial enterprises.The Chamber of Commerce devotes little effort to industry. The BCP does nothave adequate project identification or analysis capabilities. Finally, theBBD has succeeded only partially in stimulating industrial investment, despitesupport from IDA and other aid agencies.

3.43 Support for these agencies is needed over a number of years todevelop appropriate staff. The Government also needs to study the specificroles of each agency. The mission suggests that the Ministry of Industryshould be primarily responsible for the identification and promotion of newindustrial projects. The Planning Ministry (BCP and other offices) shouldfocus on reviewing project viability, and on coordinating projects. TheMinistry of Industry's staff and the BBD should be leading the industrialdevelopment activities, and technical assistance to these agencies is thus ofhigh priority. The effectiveness of existing industrial policies should alsobe reviewed. Many of these policies--pricing, personnel, distribution,investment promotion--require revision as noted in the public enterprisevolume.

3.44 The stated priorities of the Second Plan in the industrial sector areto rehabilitate existing enterprises, and to orient industry around theprocessing of foodcrops and natural resources. New activities linked to thelarge cement and sugar plants are also proposed, as are non-traditional energyprojects, metalworking, and training.

3.45 Out of the total CFAF 75 billion planned investment in the industrialsector during the 1983-87 period, foreign financing is sought for CFAF 60billion of projects. Of this amount, CFAF 20 billion remain unidentified sofar. The identified projects (extension of Onigbolo, glass bottle factory,steel products, salt ponds, lime production, and gari manufacturing) generallyreflect the overall policies determined for the sector, although the Donors'

41

Round Table Document does not include any specific proposals forrehabilitation of existing operations. But the viability of individualprojects can be questioned. The extension of Onigbolo is premature atpresent, when the plant is operating at a small fraction of capacity andserious marketing and financial problems exist. The other projects'desirability hinges upon detailed economic analysis. One analysis reviewed bythe mission--for the Gari plant--was found to be defective with respect to thecost and availability assumed for the manioc supply to the plant.

C. TRANSPORT

3.46 The transport sector is particularly important in Benin. In recentyears, it has absorbed about a quarter of public investment and provided abouta fifth of the formal employment. Since 1978, the sector has contributedbetween 12 and 15 percent of GDP. Aside from satisfying domestic demand, thesector supplies transit services for land-locked Niger. Overall, prospectsfor major new developments in the sector remain modest, due to economicdifficulties in Benin and in neighboring countries. Summary statistics arepresented 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 683Off. Transit to/from Niger 216 171 211 336 265Off. 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 internationalport of Cotonou. Port capacity was recently expanded to about 1.2 milliontons 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 fiveyears, including substantial transit traffic for Nigeria through 1979, when

42

Nigerian port capacity was expanded. Niger continues to rely on Benin'stransit corridor, and accounts for about 30 percent of Cotonou's total tonnagehandled. Port capacity is sufficient at present and investments should bekept to a minimum, though the rust-damaged pilings of the eastern jetty willrequire rehabilitation soon. The port component of the Benin route could beimproved by relaxing administrative constraints on transit traffic, removingthe state monopoly on cargo handling, and granting free access by port usersto the port zone.

3.48 The railway is operated by the OCBN, a bi-national autonomous agencyof the Benin and Niger Governments, controlling the railroad between Cotonouand Parakou and licensing truck transport to and from Niger. The 440 kmnorth-south mainline between Parakou and Cotonou carries most of the Nigertraffic and the bulk of the Beninese railway traffic. There are two lightlyused 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 capitalinvestments were not offset by sufficient tariff increases. Its cumulativelosses stood at CFAF849 million in 1982. The theoretical capacity of thesystem considerably exceeds actual traffic levels, and efficiency could beimproved 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. Thefirst involves track replacement, ballasting, and renovation of signallingequipment (CFAF 5.7 billion). This has largely been financed. The secondincludes strengthening and extension of the line up to the Onigbolo cementplant, and acquisition of equipment. It is likely that cement shipments couldbe made more economically by road for the short distances involved. Anearlier plan to extend the railway from Parakou north to Niamey in Niger iscurrently receiving low priority and should not be pursued, due to the highrisks 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 arelikely 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 thosestrictly needed to reduce costs under conditions of shrinking rail traffic,and study the future role of OCBN in light of the expected dominance of roadtransport.

3.52 Roads are the dominant transport mode in Benin. Of the 7,250 km ofthe road network, 950 km are paved, about 2,300 are accessible on a year-roundbasis and the remaining rural roads are accessible mainly during the dryseason. The backlog of road rehabilitation has been considerably reduced, andthe top priority is now to create an efficient capacity to maintain thenetwork 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 engineeringstudies financed by the European Development Fund have been completed. Thestudies suggest that paving is economically and technically feasible. Thisproject will greatly increase competitive pressures on the parallel railwayline, however, and raises key issues for the future of the OCBN. Projects topave other trunk roads in Benin, including the road from Parakou to UpperVolta, require further study of developmental benefits which might justifythem economically, or the preparation of alternative appropriate standards forupgrading.

3.54 Funding of road maintenance is a major bottleneck. The major sourcesof funds are earmarked taxes on motor fuels and lubricants (deposited in aRoad Fund), and budgetary contributions. The latter have been erratic, andoverall road maintenance expenditures have declined in real terms since1978. This trend may improve somewhat, due to increases in earmarked taxeslevied in 1982. Total resources are still likely to fall short of estimatedneeds.

3.55 A small public enterprise was established in the trucking industry in1977 (Trans-Benin). This enterprise has sustained heavy losses, and cannotcompete with the dynamic private trucking sector. Government may wish toreconsider its role in this firm.

Recommendations

3.56 In order to be able to exploit the full potential of its geographicallocation, Benin needs to prepare and implement an adequate transport strategyto make the system efficient and competitive with competing transit routes vianeighboring countries. The strategy should aim at: (a) capitalizing on itsefficient private trucking system; (b) eliminating efficiency bottlenecks inthe railway, port, and transit agencies; (c) improving the system of road userfees, since taxes on diesel fuel and gasoline have proved insufficient inproviding funds for road maintenance.

3.57 The planned paving of the Dassa-Zoume to Parakou stretch of thenorth-south main road is economically justifiable. Once this road is paved,however, the railroad is likely to lose even more traffic. Any attempt toadministratively distribute traffic between the two modes of transportationwill be disruptive and inefficient. Hence, further investment in the railroadshould be limited to that necessary to keep it operable at the reduced levelof traffic volume. Steps can also be taken to improve the efficiency of thePort which will benefit both the railroad and the road routes.

D. ENERGY

3.58 Benin's energy resources are limited. The only hydrocarbon resourceis the Seme oilfield, which began commercial production in early 1983. Beninhas no known coal deposits. Hydropower potential has been identified, and isto be exploited by construction of the Nangbeto Power Station on the MonoRiver in Togo, to be owned by the bi-national Communaute Electrique du Benin(CEB). Savannah woodlands, covering about 68,000 km2 are the major energysource. Per capita energy consumption in Benin is one of the lowest in theworld--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 energyconsumption in Benin is met by wood and charcoal, followed by petroleumproducts (24%) and hydropower (4%) which are both imported at present.Government's priority in the energy sector is the development of indigenousenergy 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 coastof Benin in water depth ranging from 27-54 meters. In May 1979, theGovernment decided to develop the field and signed a service contract withSAGA Petroleum, a private Norwegian oil company. Drilling of the first sixwells of Phase I started in June 1982. Of the first four wells, the first onewas dry and the others are producing at the predicted levels. The Seme fieldextends beyond what was previously projected, and an intermediate phasedevelopment is considered, consisting of drilling additional wells prior toenhanced recovery (water injection) which might be required at a later date.The further development phase would consist of incremental investments andwould probably make the overall Seme development scheme profitable. Highproduction costs and recent declines in world oil prices are unlikely toproduce any significant net public revenues for the first phase.

Nangbeto Hydroelectric Project

3.60 Power demand in Benin has grown considerably during recent years (14percent per year between 1976-80), and Benin and Togo are planning anexpansion program which includes the construction of a 60 MW Nangbetohydroelectric scheme in Togo on the Mono River separating the two nations.Annual generation would amount to 148 million kwh. The project is estimatedto cost about US$170 million (1983 prices), assuming it is completed onschedule in early 1988. There are still issues concerning the project whichneed clarification, such as tariffs, and institutional aspects of the regionaland national agencies involved in the production, transmission anddistribution of electricity. However, future demand is not considered to be aproblem, and Nangbeto is a cost-effective solution to the energy situationwhich at present relies heavily on electricity purchased from Ghana's VoltaRiver 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 financeconstraints. Health services have not received the same priority aseducation, and health conditions remain poor (see Table 3.6).

Education

3.62 Access to education has expanded rapidly in Benin during the pastdecade, but schooling rates are still low. Student enrollments have grown ata rate of 14 percent per year. Primary school enrollment rates have increasedfrom 34 percent in 1971/72 to 49 percent in 1980/81. Enrollment rates varygreatly by region, ranging from 83 percent in the urbanized south to only 25percent 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 25percent, up from 10 percent in the mid-1970s.

3.63 In 1975, an educational reform was undertaken with the objectives ofdemocratizing the educational system and integrating it into the economic andsocial system of the country. Free schooling was provided to all school-agechildren; local languages were introduced; school cooperative production unitswere organized; and curricula were redesigned to emphasize practicalapplications. A review conducted in 1981 determined that the quality ofeducation had declined since the reform began, due to lack of administrativecapacity and financial resources. Inadequate preparations were made tointroduce the revised curricula, and the cooperatives were largelyTunsuccessful. The rate of success in the major examinations declined shlarply.

3.64 Financial constraints have also limited the quality of education madeavailable to greatly increased numbers of children. Education has consumed afairly high 33 percent of the current budget since 1976, and the Governmenthas taken steps to limit the growth of educational expenses by freezingteachers' salaries and hiring teenagers to teach in the primary schools.Unfortunately, these steps were not consistent with reasonable educationquality. In view of these problems, the Government has requested externalassistance to strengthen the administrative and planning capacity, and togive priority to primary education, technical secondary education, and teachertraining.

Health

3.65 Health conditions in Benin are poor, particularly in rural areas, butare improving gradually. Life expectancy is only 47 years at birth, equal tothat for sub-Saharan Africa as a whole (see Table 3.6), after having risen byten years during the past two decades. The infant mortality rate is above theaverage for low-income developing countries. Malaria is the single main causeof death. Food supply for Benin equals 114 percent of the FAO's miniumuimdaily calorie requirements.

3.66 The level of medical services and sanitation conditions are stillinadequate. With one physician per 21,000 persons, Benin is similar to otherAfrican countries, and there has been some improvement in the number ofdoctors in part due to the establishment of a medical school in Cotonol. Onein five villages have safe water supply.

3.67 The Government does not presently have a comprehensive populationpolicy, and data are extremely limited. The principal concerns are the highlevels of morbidity and mortality and the unbalanced spatial distribution ofpopulation. However, the rapid population growth rate (2.7 percent per annumover the period 1961-1979) has powerful implications for Benin's fuLture, interms of employment needs and social services. Child-spacing services areprovided by the National Committee of Benin for the Promotion of the Family, aprivate organization whose activities are coordinated with the national healthprogram, which operates six centers in the country.

3.68 The Government aims to improve the health situation by expanding theutilization of traditional and modern medical arts among the population, andby promoting preventive medicine. A primary health care system is being

46

established, based on Village Health Units. Despite ambitious plans, healthexpenditures declined as a share of budgetary expenditures from 11 percent in1976 to 5 percent in 1981. Greater financial resources are needed toimplement existing plans for the health sector. One project requiring modestforeign financing is the analysis of the 1979 census data, which would providea baseline for any health-related project studies.

Table 3.6 Health Indicators

Benin Sub-Saharan Africa1980 1977-1979

Life expectancy at birth, years 47 47Child death rate, ages 1-4 25 25Daily calories, % of requirements 114 89Population per physician, thousands 21 24Population per nurse, thousands 2 25Access to safe water, % population 21 25

Source: Government of Benin; Accelerated Development in Sub-SaharanAfrica, (1981)

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IV. DEVELOPMENT PROSPECTS

4.1 This chapter presents the highlights of Benin's 1983-87 developmentplan and the Bank mission's macroeconomic projections over the period to1990. The plan document itself was not available at the time of themission. However, a report prepared for the March 1983 Donors RoundtableMeeting offers valuable insight into the Government's current strategicthinking, as well as a re--iew of past developments, the investment program,and future prospects. This document is reviewed in the first section of thechapter, followed by the mission's projections based on an assessment oflikely developments. This second section gives a quantitative sense to theissues 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 aninternational donors' meeting, begins with review of the strategy pursuedand results achieved during the seventies.l The salient features noted arethe political stability achieved, the improvement in public finances, and thegrowth of state intervention. The report candidly notes, however, that theexpected results were not achieved. This was due to a lack of resources andqualified managers, and to the reality of an open economy in which the scopefor efficient government intervention is limited.

4.3 Several conclusions are drawn from this review of the seventies'experience: Government involvement in productive activities must beselectively re-evaluated; private capital must be called upon to assist indevelopment; and the role of the State lies in the areas of planning,orientation and control. The country's economic goals remain to raise livingstandards 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 byofficializing the parallel market in the sale of domestic foodstuffs to thegrowing markets in Nigeria, and encouraging through price incentives the salesof cash crops, such as cotton, abroad. This externally- and market-orientedstrategy is expected to lead to the expansion of the domestic market,contribute towards the creation of a self-sustaining surplus and have apositive impact on the public finances.

4.5 The Round Table document presents some indication of the implicationof this strategy for various sectors of the economy. The document identifiesagriculture and possibly petroleum as the only sectors capable of generatingthis surplus. This is an over-generalization, although partially correct. In

1/ Le Developpement Economique du Benin: Table Ronde des Partenaires auD6veloppement 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 thepast and is not expected to do so in the near future, and the trade sector isnot believed to productively invest the surpluses generated. Transitactivities are stated to generate costs to the public sector (in terms ofcivil servants) equal to the benefits provided, although the mission cannotagree uith su-ch a view.

4.6 The document provided to the donors addresses in some detail anoperational strategy in agriculture. This emphasis is well-placed, in view ofthe sector's dominant position (74 percent of employment, 40 percent of GDP)and modest past performance. Priority will be accorded to raisingagricultural productivity and extending the area under cultivation. Foodcropsare to be emphasized, with some of the output exported to Nigeria. While thisdocument expressed a preference for centralized marketing control over theseexport sales of fooderops, consensus which developed during the discussion ofthe draft of this Report with the authorities in Cotonou and which wasincluded in the concluding Communiqu6, emphasized the importance of increasingthe role of the market and reducing that of Government. Bureaucraticconstraints, which merely act to dampen the incentives for farm production andthe level of farmer earnings, would be curbed. Peasants are to be stimulatedto invest savings by decentralizing rural development activities to thevillage level, by offering Ministry of Rural Development support in theextension area to the provincial agricultural agencies (the CARDERs), and byimproving the agricultural credit system. In the mission's view, theseindicate that agricultlural policy is gradually moving away from excessiveconcern witn issues of control. The mission regards this development asencouraging since proper incentives and efficient technical support hold thekey 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 aproducer of tools which raise agricultural productivity. This focus seems toignore the possibilities of producing numerous other goods for a variety ofmarkets based on Benin's low labor cost and other advantages. The energystrategy, involves petroleum and hydroelectricity activities, while the transitfunction will be strengthened through emphasis on rural roads.

4,8 In general, Benin's latest industrial planning initiatives recognizeboth the importance of regional markets beyond the limited nationalboundaries, and the need to enroll the private sector in key areas. Thecurrent attitude on both these points is much more flexible than in Benin'sFirst Plan (l977.80). The emphasis on neighboring country markets is well-placed, although the plan does not advance specific steps to improve access tothese markets. In our opinion, both infrastructure and bilateral trade policyimprovements are needed. In dealing with the private sector, the plan seemsambiguous. It speaks about avoiding repressive measures, and of inviting theprivate traders to become active in industrial activities. However, there islittle mention of economic policies which would stimulate private sectorinvestment, aYAd the recently revised investment code clearly favors publicenterprX is

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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 asubstantial level of investment, averaging about 25 percent of GDP, and isabout 7 percentage points higher than the mission's best estimate. Nearlyone-third of the total investment would consist of projects already beingimplemented, with two-thirds representing new projects.

4.10 Rural development is to receive the highest priority in investmentterms, accounting for 23 percent of the total (see Table 4.1). This is doublethe proportion received by this sector in the First Plan (1977-80). Industryis slated to receive 13 percent of total investment, sharply down from the 46percent earmarked for industry in the previous plan. The relatively low levelof investment in industry reflects the priority given to rehabilitation ofexisting public enterprises as opposed to the creation of new industries.Construction and public works projects (21 percent) will continue to developthe nation's infrastructure for domestic and regional transit. Energy andother infrastructure sectors account for the remaining half of totalinvestment.

Table 4.1 Sectoral Distribution of 1983-87 Investment Plan

Percent ofSector Total Value

Rural Development 23.0Construction and Public Works 21.0Industry 12.7Energy 7.3Education and Research 8.4Public Administration 8.4Health and Nutrition 7.3Transport and Communications 6.7Tourism 2.4Commerce 2.4Services 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 beenreduced during the preparation of the actual plan document to CFAF410billion.

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4.11 The content of the investment proposals for each sector has beendiscussed in Chapter III. In summary form, the mission offers the followingobservations on the project emphasis by sector:

Rural Development

4.12 The projects seem oriented in the right direction, with a majoremphasis on provincial-level integrated rural development in Borgou Province,in Mono and in Oueme. The inclusion of reforestry, rural roads, and improvedseed variety projects also appears sensible. A few of the projects seem lesspromising, particularly those involving irrigated palm and rice production(see Volume II). Both natural growing conditions and the organizationalsystem foreseen may not be favorable in these cases. Furthermore, theinvestment level for extension and training may be low depending upon what isincluded 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 toproduce clinker (CFAF 22 billion). The demand for additional cement orclinker is not apparent at the moment and this project might not be viableduring the 1983-87 planning timeframe. Remaining projects are of modest scaleand appear interesting, although generally not yet analyzed in detail.

Energy

4.14 Investment foreseen in the Roundtable document consists ofelectricity transmission and distribution, small hydroelectric sites, andcharcoal production. The two major projects currently foreseen in the sector---a second phase of the Seme offshore oil project and the massive Nangbetomultipurpose dam--are little discussed in the Roundtable document, presumablybecause 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 ofthe north-south highway; the paving of the road along Benin's western frontierto Upper Volta; and the extension of the rail line from Pobe to Onigbolo. Themissing link in the Parakou road likely has a high rate of return, though itmay result in destroying any hope of profitability for the parallel railway.The other two large projects would require considerable study before it can bedetermined that they are economically justified.

Education

4.16 Classroom construction, the establishment of industrial andcommercial polytechnic training facilities, and a number of smaller projectsmake up proposed investment in this sector. The proposed establishment offacilities to offer training in practical skills needed in industry,agriculture and commerce is worthwhile.

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Health

4.17 Health investment is largely concentrated in the primary health carearea. This emphasis is appropriate, and the attention of official donorsneeds to be attracted to the serious health problems in Benin.

Financing

4.18 In terms of financing, the Government estimates that foreign fundinghas already been obtained for 27 percent of total investment. Additionalforeign aid is sought for 53 percent of the total, and domestic funds willcover the remaining 20 percent. This is a high local proportion in historicalperspective; Government provided the funds for about 14 percent of totalpublic investment (Central Government plus public enterprises) during the1976-1981 period. A level of 5 to 10 percent is considered by the mission tobe likely during the Second Plan period.

Projected Results

4.19 The methodology utilized in the Second Plan to project sectoralgrowth rates is based on assumptions concerning the execution of theindividual projects. To the extent that these assumptions are optimistic,growth rates may be overestimated. The procedure used was to extrapolate thepast growth trends, and then to add the expected value-added from ongoing andnew projects.

4.20 The annual growth rate of GDP is projected to average 5 percentwithout petroleum production and 6 percent with petroleum production. Theleading sectors would be construction and public works (20 percent growth rateper year), industry (9 percent), and agriculture (4 percent). These growthrates are somewhat higher than the mission's projections discussed in thefollowing section, which include an annual GDP growth of 3.4 percent duringthe 1982-1990 period.

4.21 The Second Plan also includes balance of payments projections through1987. However, the Bank mission views these projections as overlyoptimistic. For instance, the current account deficit projected in the Planfor 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 arealistic future strategy and viable project opportunities. There is a usefulemphasis on foodcrop production and the possibilities of greater exports, andon 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 andthe fact that individual projects have not been thoroughly analyzed beforetheir inclusion in the Plan. There is also insufficient emphasis on providingeconomic incentives to private producers in the agricultural and industrialsectors, as opposed to attempts at centrally controlling development. TheRoundtable document is weak on policy analysis, as discussed in Chapter V.The macroeconomic projections presented to the donor's Roundtable are notdetailed and do not reflect a clear linkage to the projects proposed.

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B. MEDIUM-TERM PROJECTIONS

4.23 The Bank mission has prepared independent projections of Benin'smacroeconomic performance until 1990. The objective of this effort is toidentify the likely economic implications of current policies and trendsunderway. These projections are based on actual data available generallythrough 1981. Emphasis is placed on the structural inter-relationshipsbetween investment, production, public finance, balance of payments andexternal debt.

4.24 The mission's best-estimate projection incorporates major successfuldevelopments in agriculture, and the current schedules for production andexport of petroleum, cement and sugar. An alternative projection assumes lesssuccess in the agricultural and industrial sectors. The differences in GDPgrowth 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 AlternativeActual Estimate Scenario1976-81 1982-90 1982-90

Primary Sector 0.7 2.7 1.0Secondary Sector 6.8 6.2 4.5Services 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 bythese projections, as follows:

a. GDP growth will remain low on a per-capita basis, due to theslow-down of demand in neighboring markets and to the difficulties inachieving rapid productivity gains in agriculture or implementing newindustrial 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 manageablebalance of payments and debt service situations.

d. The public finance situation is expected to be tight due to highrecurrent costs of recent investments and policies.

e. The successful operation and marketing of the three majorprojects will have an important bearing on future growth of investment andconsumption.

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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 from1982 to 1990. This is about equal to the rate achieved during the 1976-1981period, and is higher than the growth trend in the early 1970s.

4.28 Industrial output will show the most rapid increase (6.2 percent perannum), as the three major projects come onstream. By 1985, output isprojected 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 thebest-estimate projection, up considerably from the 1976-1981 experience. Thisassumes successful implementation of ongoing rural development projects inZou, Borgou and Atacora Provinces. Sustained growth is also contingent uponraising producer prices of cash crops, a high level of maize and yam demand inNigeria, and removing subsidies on imported foodgrains.

4.30 Construction and tertiary-sector activities are expected to grow at amore moderate pace during 1982-1990 than in the recent past. This reflectslower project-related construction and a slower pace of cross-border trade.

Investment

4.31 Total investment is projected to decline sharply as a proportion ofGDP 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, grossdomestic investment will fall to 20 percent of GDP in 1985. This is equal tothe relative level of investment during the 1976-1978 period prior to therecent buildup. Investments now in the early planning stage could be executedin the late-1980s, raising the investment rate to 25 percent of GDP in 1990.The high investment level relative to GDP growth reflects the anticipateddifficulties with the current major projects and the expected fairly modestrates 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 levelprojected 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 toconstrain investment.

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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 25Public 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 thecoming years. The public finance situation is expected to be more difficultin 1983 than during 1981, when an unusually high current surplus wasrecorded. Firm estimates are not yet available for 1982, but it appears thatGovernment revenues from import duties continued strong, while currentexpenditures rose somewhat. During the remainder of the 1980s, the currentspending is likely to rise due to several factors. First, recurrent costsassociated 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 werefinanced by the banks in recent years. These past losses, as well as costsrequired to rehabilitate certain enterprises, will necessitate a much higherlevel of Government current expenditures than was the case heretofore. Third,the major ongoing investments--Save sugar, Onigbolo cement, and Semepetroleum--will require continued counterpart funding and subsidies in somecases in order to operate effectively and repay debt obligations. Importduties are projected to continue providing slightly over half of total CentralGovernment revenues, and these duties will continue to fluctuate with thetrade levels of consumer goods passing through Benin for re-export toneighboring 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 18.2Current Expenditures1 14.6 16.5 16.7 16.5 16.8Current 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.

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4.34 In the best-estimate case, current expenditures are assumed toincrease at the same rate as GDP during the remainder of the decade, followingsharp real increases in 1982 and 1983. Import duties are believed to havedeclined in real terms during 1982 and especially in 1983. The currentsurplus, as a proportion of Government revenues, thus remains at a low levelfrom 1984 to 1990. Favorable factors, such as the possibility of greater thanexpected petroleum production, are counterbalanced by uncertainty over thelevel of transborder trade as it affects import duties, in the mission'spublic finance outlook.

4.35 Interest on external debt paid directly by the Treasury is projectedto be quite low over this period, assuming that the loans incurred for largeprojects are repaid by project-generated cash flows (this assumption isrevised in the alternative scenario discussed later on). The current surplusavailable to help finance investment would be less than 10 percent of theanticipated 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 projectbecause of the large value of estimated unrecorded exports. Assuming a stabletrend in this item, however, the projections are characterized by a decreasingcurrent account deficit in relation to GDP during the rest of the 1980s. Thisresults from major new exports of petroleum, cement and sugar by 1985, andfrom a decline in the real value of capital goods imports from the high levelsof 1981-82.

4.37 The real growth rate of exports is projected to be 7.5 percent peryear 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 oftotal exports. Imports are not projected to increase in real terms between1982 and 1985, due to lower domestic investment levels. Total imports wouldthen rise at a 4.6 percent real rate from 1985 to 1990, as investmentrecovers.

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 ofpublic investment, lower capital inflows will be required in the near-term anddebt service ratios should begin to stabilize. After rising from 6 percent ofexports in 1981 to 22 percent in 1982, the debt service ratio is projected toremain 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 57percent in 1982. The projections assume terms and conditions of borrowing inline with Benin's past experience, and assume 90 to 95 percent foreignfinancing of public investment.

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4.40 Both the debt service ratio and the outstanding debt levels forecastmust be viewed as relatively high for a country at Benin's income level. Aparticularly important relationship in the case of Benin is that between debtservice and public finances, since all medium and long-term foreign borrowingsare taken down by the Government or with its guarantee, and the CFA franc isfully 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-generatingenterprises that would not normally have to be covered by public revenues.Even if one excludes the debt undertaken in recent years for the three majorindustrial projects (intended to be self-financing, and two of which arejointly and severally guaranteed by the Nigerian Government), the ratio ofdebt service to Central Government revenues is quite high (Table 4.5).Excluding the three large projects, this ratio would reach 28 percent in 1985and is still projected to reach 46 percent by 1990. These ratios are onlysustainable if a significant proportion of the investments undertaken aredirectly 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 3.5Imports (Goods and NFS) -0.3 4.6

…----…Ratios, percent------1982 1985 1990

Current Account Deficit/GDP 40.7 21.2 23.7Debt Service/Exports 22.4 25.1 23.3Debt 0 & D/GDP 57.2 71.9 75.4Debt Service/Govt.Revenues 33.6 55.2 54.9D.S. (excluding 3 large projects)/G.R. 20.2 27.6 45.6

Source: Bank mission projections.

Alternative Scenario

4.41 The mission's alternative, less desirable scenario is based on lowergrowth in agriculture (consistent with past statistical trends) and reducedgrowth in exports planned from the three major industrial projects. It alsoassumes a lower level of cross-border trade linked to constrained demand inNigeria and Niger. The lower growth in output--2.1 percent per year GDPgrowth versus 3.4 percent during the 1982-90 period in the best-estimate case--would lead to lower consumption, investment, and Government spending, whiledebt service ratios would be slightly higher due to reduced exports (see Table4.6). Private consumption would be 10 percent lower, in real per-capitaterms, in 1990 than in 1982, and this cannot be considered desirable from thepublic policy viewpoint. The public finance implications of this scenario arethat current expenditures (exclusive of debt service, which is not generally

57

included in Benin's current budget) would grow more slowly and that currentsurpluses would be greatly reduced due to lower domestic activity, less bordertrade, and higher debt service than under the best-estimate projection.

4.42 The main lesson to be drawn from the alternative scenario is thatsuccessful agricultural development and resolution of problems facing thepublic enterprises and the major projects are essential if living standardsare to be maintained or improved. The public finance and balance of paymentssituations are also likely to be untenable in the medium term withoutsubstantial economic reforms. Reaching the best-estimate outcome will requirevigorous implementation of recent favorable policy changes in the agriculturaland industrial sectors. The Government must concentrate on providing economicincentives to producers and minimizing any administrative constraints onoutput. Public enterprise losses must be stemmed through rehabilitation andthrough closing of non-viable units. Problems facing the current three majorprojects must be quickly resolved to avoid the heavy drag on the economy whichcould result if they are not producing efficiently. Further viable investmentprojects must also be identified and implemented tc assure continued growthlater in the decade. Several of these issues are examined in the followingchapter.

Table 4.6 Alternative Projection

Alternative Best-EstimateProjection Scenario

---Real Growth rates, percent p.a., 1982-90---GDP Growth 2.1 3.4Exports growth 5.4 7.5Imports growth 0.7 2.7Government current expenditures 2.7 3.7

…--------------…Ratios, 1990---Private consumption percapita vs. 1982 89.6 96.1

GDI/GDP 20.7 24.7Current Account/GDP -21.2 -23.7Debt Service/Exports 25.5 23.3Debt 0 & D/GDP 80.1 75.4Debt Service/Govt. Revs. 58.0 54.9

Source: Bank mission projections.

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V. DEVELOPMENT STRATEGY ISSUES AND RECOMMENDATIONS

5.1 The world economic situation and Benin's own past performance andplans for future development raise a number of national strategic issues.This chapter discusses selected issues, on the basis of the recent trendsreported in Chapter II and the plans and prospects described in Chapter IV.The objective here is to portray some of the complex economic issues facingBenin's decision-makers and to advance recommendations in certain areas,primarily in the hope of stimulating a mutually beneficial dialogue. Out ofthe many possible choices, the discussion focuses upon seven key issues ofeconomic management policy:

a. Building on Benin's comparative advantage;b. Strengthening the public enterprises;c. Resolving problems with major projects;d. Improving the public finance situation;e. Removing constraints on public investment;f. Implementing an effective planning process; andg. Increasing the flow of concessionary financing.

A. Comparative Advantage

5.2 Building upon Benin's comparative advantage in a regional andinternational economic context must be the essence of a successful developmentstrategy. The 1983-87 Plan (as reported to the March 1983 Donors RoundtableMeeting) touches on a number of strategic elements, but the overriding factorsdictating an appropriate strategy appear to be as follows:

-Small domestic market size, as a result of limited population (3.5million) and low income level (US$270 per capita GDP).

-Low labor costs in agriculture and industry; e.g., Benin's minimumwage is one-fourth that in the Ivory Coast.

-Favorable climatic conditions for growing fooderops and someindustrial crops such as cotton. Unfavorable growing conditions for oil palm,other tree crops, and sugar, due mainly to insufficient rainfall.

-An open economy traditionally enjoying close trading relations withneighboring countries.

-Proximity to a massive market--Nigeria--which imports large amountsof food and certain consumer goods, but which also manufactures numerous itemsdomestically.

-Tradition of dynamic private-sector commercial activity, but verylimited private involvement in industrial activities.

5.3 These factors indicate the importance of encouraging agricultural andindustrial operations which can supply both the domestic and the largeneighboring markets. Proper economic incentives for agriculture and industryshould be emphasized in place of over-reliance on the scarce resource ofpublic management. Services supporting transit trade are also crucial. Thescope for efficient import-substitution activities based on Benin's domesticmarket alone is not sufficient to warrant substantial investment, due to thelimited economies of scale. But production of goods enjoying strong regionaldemand can be economical due to Benin's low labor cost. On the other hand,

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labor productivity and general industrial and marketing experience is still ata low level, and past attempts to export manufactured goods overseas have notbeen successful.

5.4 Comparative advantage suggests that specific crops, products andservices be emphasized. Owing to its relative position in the economy,agriculture will for some time remain the leading sector in Benin'sdevelopment. It is, however, too much of a generalization to state thateither agriculture or industry must be the source of the nation's economicsurplus. Contributions to growth could arise from any viable activityregardless of whether it is in agriculture, in industry or in the servicessector. Any surplus generated from agriculture or oil should be used to bestadvantage to promote other enterprises which in turn will generate asurplus. Industry's goal should not necessarily be to process agriculturalcommodities or to produce equipment that raises agricultural productivity, asstated in the Plan. These intersectoral linkages are likely to develop onlyvery slowly, unless high tariff barriers are erected--and this policy wouldnot be productive in Benin's inherently open economy. For instance, it may becost-effective to import certain agricultural implements while exportingprinted textiles to neighboring countries. It may also be efficient to importwheat--though not reselling at subsidized prices--and export maize and yams.

5.5 Development projects should stem from the identification of marketopportunities and favorable supply conditions. In agriculture, theseconsiderations suggest that crops such as maize, yams, cotton, and possiblybeans and groundnuts, could successfully be promoted. Demand has been strongin recent years, and the level of rainfall in Benin is sufficient for thesecrops. Oil palm, on the other hand, suffers from low productivity owing tounfavorable climatic conditions. While improved techniques of plantationmaintenance and harvesting could raise productivity, the yields are not likelyto rise to levels that would justify further investment in extending existingacreage. In industry, other consumer products with characteristics similar toprinted textiles and beverages could be successful. There may be furthermineral resources--beyond the recently-exploited limestone and petroleumdeposits--that can be tapped. Transport investment, designed to speed theflow of goods in the east-west direction as well as north-south, may promoteBenin's comparative advantage. Proper attention to the social sectors is alsorequired to raise the general level of human resources available for nationaldevelopment.

5.6 The successful implementation of such a strategy requires concreteactions in the planning area, and appropriate policies toward publicenterprises, the private sector, and public finance, as discussed in thefollowing sections.

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B. Public Enterprises

5.7 Public enterprises play a large role in Benin's economy, and theirperformance has generally been poor. The financial problems are apparent:two-thirds of the public enterprises are currently suffering from majorfinancial difficulties such as negative cash flow, negative working capital,or negative net worth. The causes of these problems--ranging from deficientinitial project design to inadequate pricing--are discussed in detail inVolume III of this report.

5.8 The issues now facing the Government concern both broad policyactions--pricing policy, personnel policy, managerial autonomy and theGovernment-enterprise relationship--and enterprise-specific programs:rehabilitation studies and financial support.

5.9 The need for revised prices in several areas has been recognized bythe Government in a set of policy announcements made in April 1982. Oneeffect of this policy was a sharp increase in the retail cement price inDecember 1982. However, a flexible procedure for setting public enterpriseprices is more important than a revised price level which merely fixes pricesat a higher level. Market conditions are constantly changing, such that thehigher cement price may be inappropriate today in the face of weaker demandand low world clinker and cement prices. Options might be considered whichgrant enterprises the freedom to modify prices regularly based on demandfactors, import prices, and costs of production. A better understanding ofthe actual fixed and variable costs of production--which are not clearlyidentified in the present baremes--would help support case-by-ease priceexperimentation. Cement, beverages, and imported foodgrains are the productswhich particularly require flexible pricing policies.

5.10 Public enterprises have been utilized as one vehicle to fulfill theGovernment's commitment to hire recent college graduates. These hiringdecisions have generally been imposed upon the enterprises by the Ministry ofLabor. As a result, considerable overstaffing and inefficiencies haveoccurred in the public enterprises. It seems important, if the publicenterprises are to operate at a profit without subsidies from the Treasury,that enterprise managers be given the authority to hire and fire personnel.

5.11 The relationship between the public enterprises and the severalministries charged with oversight functions could be improved. On the onehand, the technical and administrative abilities of the ministries are solimited that little real control or dialogue with the enterprises effectivelyoccurs. On the other hand, the full range of constraints upon enterprisemanagers' actions is so great that they have little scope for decision-making. Most of the enterprise's costs and prices are fixed even in themedium-term. Personnel decisions are imposed from outside, workers' bonuseshave been eliminated, and there are no financial incentives for managers. Onthe revenue side, prices are fixed and markets which are to be served arespecified. Enterprise managers themselves typically come from the civilservice and do not view themselves as autonomous business managers.

5.12 This situation could be improved in many ways. One possibility wouldbe for the enterprise and the technical oversight ministry to agree on multi-year strategic goals and policies. Performance levels and access to resources

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would be jointly specified. Greater autonomy for operations would then begranted to the managers, but they would also be held individually accountablefor the performance of their units. Appropriate incentives for managers andworkers should be incorporated. The precise requirements for price increasesor subsidies would be defined.

5.13 Variations on this theme have been introduced in public enterpriseselsewhere, with some success. However, the nature of the agreement must betailored to the level of sophistication achieved by an enterprise in its ownplanning and management capabilities. For instance, in Senegal, contrats-plans are being prepared between the Government and several publicenterprises. The establishment of proper performance criteria is complicated,but reaching agreement on clear goals, responsibilities and resource levelspermits a reduction in the detailed controls by ministries.

5.14 For specific enterprises, rehabilitation needs must be considered. Abroad viability study should generally be conducted for key enterprises todetermine whether the enterprise can be viable, whether it should be retainedas a public enterprise, and what resources or policies are required to ensureits success. IDA and other donors have proposed such studies, and it isbelieved that a sound analysis of this sort is an essential prerequisite tocommitting funds for enterprise restructuring.

5.15 Certain enterprises for which potential can be demonstrated mayrequire financial rehabilitation in order to continue in operation. Methodsfor providing financial assistance should be flexible. In some cases, foreignassistance should support an increase in Government equity in an enterprise.In other cases, loans for working capital or needed equipment may beappropriate. Technical assistances may also be essential to ensure soundoperations management.

C. Major Projects

5.16 The issues posed by the major projects now being implemented--particularly the Save sugar and Onigbolo cement projects--are both immediateand longer-term. These projects represent a major development thrust byBenin, and their implementation is thus of critical importance.

5.17 The key issues of access to the Nigerian market, waiving of importduties for cement, and pricing seem not to have been adequately addressedduring the planning stage of the Onigbolo and Save projects. These must nowbe urgently resolved. As of February 1983, Nigerian insistence on placing animport duty of 20 percent on cement imports from Onigbolo was preventing theplant from operating at more than nominal production rates. Without thetariff, Onigbolo cement could be competitive on the Nigerian market. Problemsof pricing and sales volume are also likely to arise with Save sugar exportsto Nigeria.

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5.18 Given the Nigerian Government equity participation and co-guarantorstatus in both projects, it is surprising that these issues were not dealtwith earlier. One of the lessons from these projects is the importance ofsettling marketing arrangements early in the planning phase, before the plantsare built. For instance, if the output price is to be set in relation to thechanging world price level, the equity participants' responsibility to make upany cash flow shortfall should be specifically agreed upon in advance. Closercoordination is needed between the two governments to resolve implementationdifficulties arising from joint enterprises.

5.19 The financial problems facing both the cement and sugar projectsfirst require access to the Nigerian market, since plant sizes were basedlargely upon Nigerian demand. Furthermore, liquidity and debt repaymentissues may be difficult to solve. The debts have been incurred in foreigncurrencies, so the enterprises will have to be able to convert the Nairaobtained from Nigerian sales into these currencies. This may present problemsdue to Nigeria's shortage of foreign exchange. Also, in case of likelyadditional short-term cash needs, the enterprises will require infusions fromthe two governments, both of which are in tight financial circumstances. Forthe Save sugar project, it appears that initial overly-optimistic yieldforecasts and present world sugar surpluses are likely to push the breakevenpoint into the next decade. Operating costs for both plants are low enough,however, to justify production rather than liquidation.

5.20 The Government's immediate task is to conduct successful negotiationswith the Nigerian authorities. It may also prove useful to retain externaladvisers who can monitor the performance of the firms managing these projects,and who can recommend suitable financing and marketing strategies.

D. Public Finance

5.21 Benin has shifted from a conservative public finance posture duringthe 1970s marked by tight expenditure control and limited development effortsto a much more ambitious approach which is straining the Treasury. Threerelated questions arise: (1) what are the public expenditure pressures likelyto be in the near-term, (2) what are the possible sources of additionalrevenue, and (3) what improvements could be made to the public financeprocess?

5.22 Pressures on the expenditure side are likely to be considerable incoming years, as indicated in the projections of Chapter IV, and theallocation of current spending will become critical. These pressures willstem from the refinancing needs of public enterprises, from counterpartfunding requirements linked to the large projects now being completed, andfrom higher recurrent costs in the areas of economic and socialinfrastructure. These forces are likely to lead to current expenditure growthof 3.7 percent per year in real terms over the 1982-1990 period, and to theallocation of a portion of the investment budget to restructuring the financesof existing operations. The allocation of the current budget will requirecareful planning. In this regard, it is suggested that the high 33 percent ofthe recurrent budget spent on education might be assessed to determine whethercost saving measures can be undertaken in this sector.

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5.23 Public enterprises will cause a drain on the Treasury because theirpast deficits, financed through the banking system, must eventually be madegood by the shareholder--the Benin Government. Depending on what proportionof this funding can be obtained from abroad, considerable budgetaryexpenditures could well be required annually for this purpose. The threemajor projects are also likely to require financing over the near-term to meetcost overruns, additional infrastructure requirements, and sales shortfalls.Finally, the investment recently made in the port, in roads, in schools, inhealth facilities, and in government office buildings will all requireincreased recurrent spending for adequate operations and maintenance.

5.24 Just as expenditures are growing, revenues from import duties andbusiness taxes are likely to decline in real terms from their high 1981level. The recovery of import duties will be largely related to the economicrecovery of Nigeria, since many imported consumer goods are re-exportedunofficially across the border.

5.25 Government revenues, and public savings, will essentially only beraised through economic growth and resulting higher imports. The value-addedtaxes and import duties are likely to remain the chief mechanisms for raisingpublic revenues. These revenue sources are directly tied to general economicgrowth. An additional potential source is the upward revision of user feeschedules to reduce the net cost to Government of providing certain publicservices. The possibilities of raising user fees for services in thetransport and power sectors are currently being explored in the context ofIDA-financed projects.

5.26 Budgeting, budget execution and general public finance managementrequire substantial improvements so that the authorities can have bettercontrol over the financial situation, be able to tell where the situationstands and predict its future evolution. Linkages need to be created betweenthe annual budget process and the investment planning process to ensure thatadequate resources are earmarked for counterpart funding and recurrentcosts. The fact that over 90 percent of recent public investments have beenfinanced from abroad implies that the recurrent budget and external debtservice obligations will be the limiting factors in subsequent publicdevelopment efforts. Technical assistance is needed to bring the publicfinance accounts up to date, and to establish systems for better budgetpreparation and execution, as well as day-to-day monitoring and forecasting oftrends in revenue, expenditure and the public sector's net position with thebanking system. External borrowing commitments and debt servicing obligationsmust also be brought into the overall public finance information system,including obligations of public enterprises guaranteed by the Government.Benin's authorities recognize this need, and the World Bank will support theBeninese effort through a technical assistance project.

E. Public Investment Constraints

5.27 The major constraint on public investment in Benin is the preparationand execution of sound projects. Current difficulties with the implementationof several major projects are likely to diminish access to commercial bankfunds unless quickly resolved. There is also a general decline in the levelof lending by commercial banks to developing countries at present. But

64

Benin's access to funds--mainly from official sources but also from commercialinstitutions--is much more a function of its ability to put together andeffectively manage viable projects.

5.28 One method of improving this ability would be to strengthen theGovernment agencies responsible for project identification and promotion.This responsibility resides primarily with the Directions d'Etudes et dePlanification (DEPs) in each of the functional ministries involved. Atpresent, the technical and marketing skills of these groups need to bestrengthened. There is clearly a role for both the activist sectoral-orientedproject units in the various ministries and for an overall project review andcoordination unit in the Planning Ministry. Technical assistance, such asthat proposed by a recent World Bank mission, could help to improve thecapability of the technical ministries to initiate projects and obtain thenecessary financing.

5.29 Encouraging direct foreign investment, possibly in joint ventureswith public enterprises, could be another way to increase the pace ofinvestment. The Government has taken a great deal of business risk itself inrecent years, by becoming the owner of the major enterprises and financinginvestments largely by borrowing. In recessionary economic periods as atpresent, this exposure can weigh heavily on the Treasury. Foreign equityinvestment, on the other hand, places this burden on the private sector, andalso gives immediate access to industrial expertise in the design andexecution of projects. As a supplement to the Government's own efforts,foreign private investment could help to maintain the rate of economicexpansion. While domestic private investment should also be encouraged, localentrepreneurs are less likely to have the industrial and managerial backgroundand the capital to successfully implant new types of activities in Benin.

5.30 A key requirement for attracting investment is the creation andcontinuation of an attractive business environment. This environment hasimproved in Benin, since the expropriations which occurred some five to tenyears ago, and policies toward investors have been relatively stable.However, the investment code (revised in 1982) reserves key benefits forpublic enterprises which are not available to domestic or foreign privatefirms. This provision may discourage private investment.

F. Planning Process

5.31 The planning process in Benin, despite considerable recent efforts,can still be greatly improved. The basic planning job--how to raise andallocate resources, and how to reconcile potentially conflicting goals, giventhe political aims and the economic realities--remains to be done. Inparticular, the project analysis capabilities, policy analysis, andstatistical base could all be strengthened.

5.32 The need for better project preparation, as discussed above, isapparent in the Donors Roundtable document. An elaborate system of projectsheets (fiches) was established in order to ensure selection of high-priorityprojects for inclusion in the Plan. However, the DEPs in the ministries whowere asked to prepare these sheets do not have the technical capabilities toestimate project costs and benefits. Therefore, when the centralized planningteam received the project proposals, there was no effective means of

65

prioritizing them or weeding out the most unlikely projects. The result is aplan based on inconsistent and poorly analyzed individual projects and onassumed overall sectoral growth rates. There is little linkage between theproposed investments and the anticipated economic growth. The introduction ofnew projects at the Donors' Roundtable, not included in the written document,added further to the impression of a lack of clear priorities and consistentplanning.

5.33 If the DEPs and the Planning Ministry's BCP are to become trueproject analysts, their instructions need to be clear. Projects in thedirectly productive sectors can only be justified if they are profitable whenbased on realistic cost and price assumptions. The Planning Ministry mustensure that the technical ministries' analyses of projects are properlyperformed. For instance, the market price of agricultural crops should beused when evaluating planned agricultural processing plants. Lower,administratively-set prices assumed for crops from Government-ownedplantations will not lead to economic results. This faulty analysis was oneof the causes of the Natitingou tomato paste factory's uneconomic operation.The same error was committed in the Bohicon maize mill project, which is nowstanding idle, and was repeated recently in the analysis of a proposed garifactory.

5.34 For projects in the social sectors, traditional benefit-cost analysistechniques cannot readily be applied. Two key criteria should be employed:(1) the impact on the recurrent budget, and (2) the choice of a facilityshould be the least-cost for the required level of service. Schools andhealth facilities imply heavy burdens on future budgets, and should only beconstructed if adequate funds will be available to operate and maintainthem. Even projects financed with grant aid may be too costly to beaffordable, in terms of recurrent costs.

5.35 Policy analysis is one of the major weaknesses in Benin's planningprocess. The capability to assess the economic and budgetary effects ofalternative Government policies is a necessity to allow political leaders tomake decisions which are based in economic reality. This sort of analysis isnot presently carried out to any extent. It should include wage policy, pricepolicy, investment policy, and tax policy, including the analysis of budgetaryeffects.

5.36 Finally, the paucity of reliable economic statistics in Benin, thelimited capability to analyze data, and the lack of current information act tolimit the effectiveness of the Government's economic managers. Major effortsare required to improve the quality and type of data collected. For instance,agricultural statistics are generally believed not to fully capture the levelof foodcrop production. Farmgate and market price series need to be developedon the basis of monthly surveys. Industrial output should be monitored on acontinuing basis as well. Data to monitor Government finance and debtdevelopments are needed. The problems with computer treatment of statisticsneed to be resolved. Highly centralized data processing which appears toresult in lengthy delays could perhaps be replaced with decentralizedapproaches based on the new microcomputer technology available. Technicalassistance in the area of economic statistics and analysis deserves highpriority in Benin.

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G. Concessionary Financing

5.37 Benin remains a very poor country with large needs for directlyproductive investment and supporting infrastructure. In the short-term, thereis a particular need to assist in financing the rehabilitation of publicenterprises and imports of critical intermediate goods. The Government hasrecognized the need to stimulate increased concessionary financing frombilateral and multilateral sources, as reflected in the Donors' RoundtableConference convened in March 1983. Further close cooperation betweenGovernment officials and donor agencies is essential to move forward towardsthe financing of specific projects.

5.38 In light of Benin's poverty, the inability of public savings tofinance more than about 5 to 10 percent of the future investment program, andthe relatively heavy existing debt burden, the mission recommends that WorldBank Group financial assistance to Benin should continue to be onconcessionary IDA terms. The mission also supports Benin's requests fortechnical assistance in a variety of public management areas, and recommends aclose Bank Group economic dialogue which recognizes Government's desire tostrengthen its economic decision making. Further technical support cangreatly improve Benin's chances of successfully implementing policy andmanagement system changes recently adopted by the Government.

5.39 Benin's economic and public finance situation over the medium-termwill call for structural adjustment measures, major policy reforms andinstitutional changes. The limited identification and execution capacity forinvestment projects, combined with constraints on counterpart funding, maysimultaneously constrict the flow of project-oriented concessionaryfinancing. As a result, a strong case may emerge soon for flexible, non-project lending by Benin's donor community. To ensure that this foreign aid"safety net" is there when it is needed, the Government of Benin may wish toaccelerate its implementation of key policy and institutional reforms. Shouldsuch reforms be adopted, IDA would certainly consider non-project lendingoptions.

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