IMF Board approves $241.5m Extended Credit Facility for Togo economic reform

The Executive Board of the International Monetary Fund (IMF) on Friday approved a new three-year arrangement for Togo under the Extended Credit Facility (ECF) for SDR176.16 million (120 percent of quota or about US$241.5million) to support the country’s economic and financial reforms.

Togo became a member of the IMF on August 1, 1962, and has an IMF quota of SDR 146.80 million.

It is worthy of note that the Executive Board’s decision enables an immediate disbursement of US$34.5 million, while the remaining amount will be phased over the duration of the program, subject to semi-annual reviews.

The authorities’ ECF-supported program aims to reinforce macroeconomic stability and to promote sustainable and inclusive growth. It aims to reduce the overall fiscal deficit substantially upfront to ensure long-term debt and external sustainability; refocus policies on sustainable and inclusive growth through targeted social spending and infrastructure spending that is financially sustainable; and resolve the existing financial sector weaknesses, especially in the two public banks.

Briefing journalists after the meeting, Mr. Tao Zhang, Deputy Managing Director and Acting Chair, said: “Togo’s economy has shown solid performance in recent years, with sustained growth and low inflation. The country’s growth performance has been underpinned by high levels of public investment to address significant infrastructure gaps.

“However, this capital spending has also increased public debt and debt service pressures, crowding out needed social expenditures. At the same time, lingering deficiencies in the financial sector have remained unresolved.

“The new arrangement under the ECF will support the authorities’ efforts towards fiscal consolidation while maintaining space for pro-poor spending. Public financial and debt management will be strengthened and revenue administration bolstered. The two under-capitalized public banks will be consolidated into one healthy institution. Regulation and supervision standards in the microfinance sector will be strengthened.

“The medium-term economic outlook is favourable, with private sector activity benefiting from stronger infrastructure and an improved business climate. However, further progress will hinge on the authorities’ successful implementation of their ambitious macroeconomic program, as well as pursuing broader structural reforms to improve public financial management and address social needs.”

Recent Economic Developments

The economy has expanded at a healthy rate in recent years. Growth was 5.2 percent in 2014-16 buoyed by infrastructure investments and strong agricultural production. Inflation was well contained, thanks to lower food, energy, and transport prices. Togo’s poverty rate declined to 55.1 percent in 2015 from 61.7 percent in 2006, though it remains geographically concentrated.

The fast pace of public investment has contributed to a pronounced increase in public debt and the current account deficit. Public debt, including prefinancing debt, domestic arrears, and public enterprise debt, increased from 48.6 percent of GDP in 2011 to 80.8 percent in 2016 (76.2 percent excluding public enterprise debt), reflecting public infrastructure investments financed by both domestic and external borrowing. The current account deficit remained high, reaching 9.8 percent of GDP in 2016, largely due to investment-related imports.

Economic growth is expected to increase gradually in the medium term as the fiscal stance is put on a sustainable path. Growth is expected to pick up from 5 percent in 2016 to 5.6 by 2021, with the economy reaping the benefits of an improved transportation network and productivity gains in the agricultural sector.

The private sector is expected to play an increasing role as the engine of growth, as public investment returns to its long-term sustainable level. Downside risks to growth include capacity constraints in implementation of structural reforms, resistance to reforms from interest groups, and further slowdown in Togo’s main regional trading partners. With the improvement in the fiscal stance, public debt is expected to be reduced to 73 percent by 2019 from a projected peak of 81.3 percent of GDP in 2017.

Program Summary

The government has committed to strengthen the fiscal balance and improve public financial management and debt management, while addressing social needs. Fiscal policies will aim to increase revenue, reduce domestically-financed capital spending, and redistribute recurrent spending allocations to target key social needs. The Ministry of Finance will be reorganized and public investments will follow established procurement and budgetary processes. Tax administration will be bolstered by the broadening of the tax base and better monitoring of exemptions. Customs practices will be further modernized and automated.

The Togolese authorities plan to address persistent problems facing two large public banks. The two under-capitalized banks are expected to be legally resolved by the end of the first year of the program, with a single well-capitalized public bank in its place.