By Daniel Ndoye
Benin’s economic landscape is characterized by the Government’s intention to implement structural investment programmes in several economic sectors (transportation, energy, health, tourism, agriculture, etc.). Of a total amount of 6,529 billion CFA francs, or USD 13.8 billion, covering the 2014-2018 period, this development strategy seeks to raise the investment rate to about 27% of GDP in 2018, compared to 19% in 2013. It received the international financial community’s backing during the Paris roundtable held in June 2014. The economic environment is also marked by the sharp drop in oil prices and by the entry into force of the Economic Community of West African States (ECOWAS) Common External Tariff (CET) on January 1, 2015, whose impact on public finance merits an in-depth analysis. Thus Benin’s economic scenario will entail new revenue mobilization and public expenditure management challenges. I addressed this topic in a recent African development Bank study.
Despite progress made by Benin in public finance management over the last decade, analysis of the public finance structure reveals points of vulnerability, namely: (i) heavy dependence of public revenue on re-export trade with Nigeria; (ii) a narrow tax base with the predominance of the informal sector, particularly in the hydrocarbon sector; (iii) public expenditure focused on recurrent expenditure, particularly salaries; (iv) low contribution of domestic resources to capital expenditure and project implementation delays.
In order to overcome these weak points, enable the implementation of the Structural Investment Programme and face the entry into force of the ECOWAS Common External Tariff (CET), particular attention should be paid to the following actions as indicated in the AfDB study:
- Broadening the tax base would enable the country to increase its resources and reduce the vulnerability of these resources to re-export trade – vulnerability that could be compounded by the entry into force of the CET. Increased internal revenue is more important than ever given the need to identify additional tax funds to support investment programmes and to catalyze the mobilization of external resources. Despite this determination to raise the level of investment, the contribution of domestic resources to investment is expected to remain unchanged at 3.5% of GDP between 2015 and 2017, still below the West African Economic and Monetary Union (WAEMU) average. The State must, therefore, continue to implement financial services strategic modernization programmes, namely: extension of the Individual Taxpayer Identification Number (ITIN) and the fight against tax fraud and evasion; and the modernization of financial services.
- The fight against the illegal sale of smuggled gas, or “kpayo”, would likely contribute to increased tax revenue. As illustrated in a recent blog post, the reduction of petrol prices and changes in the structure of subsidies in Nigeria open a window of opportunity for the development of new solutions that could extend beyond the simple fight against an illegal market. These solutions could ensure the development of a scheduled comprehensive programme including a revision of taxes on petrol-derived products, incentives to build gas stations, and the reintegration of “kpayo” (meaning “not original” in the local Goun language) sellers into the formal economy. Such a program would lead to a beneficial situation for all stakeholders. Less resistance could be expected from the population compared with previous attempts to fight against smuggled gas, since the action would be part of a structured programme: the ex-ante negative impact of a decline in the illegal trade in gasoline on transport fares and inflation would be offset by a drop in pump prices at filling stations.
- Streamlining recurrent expenditure – especially salaries – and eliminating bottlenecks in the public expenditure chain. Beyond the implementing of the new budgetary approach, based on programme budgeting, which was launched by the Government in 2015, the improvement of the expenditure chain requires a more efficient public procurement system. Specifically, it is crucial that the existing mechanisms in the new Public Procurement Code; that is, the decrees setting timeframes for public procurement bodies and public service delegations and the ones relating to the partial delegation of public contract approval powers to ministers, be strictly applied. It is also crucial to modernize the public procurement system and build the capacity of contracting authorities. The operationalization of the overall public service reform strategy is another priority for controlling payroll size.