Benin Republic’s Gross Debt Nears 50% of GDP
Benin Republic President ,Patrice Talon

Benin Republic’s Gross Debt Nears 50% of GDP

Benin Republic government debt has increased following a Eurobond raise in 2021 which helped Cotonou’s financial position just before the international debt capital market become quite expensive to access for countries in the frontier market -especially.

As of 2021, Benin’s gross government debt has inched near 50% of its gross domestic product (GDP) amidst heavy debt service costs.  In the latest rating note, Fitch said Benin’s debt will peak at 52.6% in 2023 as gross general government debt (GGGD) rose to 49.8% of GDP in 2021 from 46.1% in 2020 due to a wider deficit.

This is projected to decline to 51.9% in 2024, a lever considered to be below the median forecast of 55.8%, owing to gradual progress on fiscal consolidation and strong medium-term growth.

Benin’s growth remains dependent on developments in Nigeria and the evolution of cotton prices, according to Fitch Ratings which has affirmed the country’s ratings with a stable outlook.

Fitch Ratings has affirmed Benin’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B+’ with a stable outlook, though noted that the republic economy is exposed to Nigeria.

According to a recent report, Benin’s ratings are supported by strong trend growth, moderate government debt to gross domestic product (GDP) ratio which Fitch analysts expect will remain below peers, and expected fiscal consolidation anchored by an IMF programme.

However, it is noted the ratings are constrained by a narrow tax base and a relatively undiversified economy heavily exposed to Nigeria and the cotton sector, according to Fitch which expected the country’s fiscal deficit to decline.

The rating explained that Benin’s deficit widened from 4.7% of GDP in 2020 to 5.7% in 2021, the level considered as a better outturn relative to the 6.5% targeted in the 2021 supplementary budget law.

“We expect the deficit to decline marginally to 5.5% of GDP, broadly in line with the government’s revised budget law for 2022”.  In its latest rating note, Fitch forecasts the deficit to gradually narrow to 4.6% of GDP in 2023 and 3.1% in 2024, compared with the authorities’ target of 4.3% and 2.9%, respectively.

It sees the renewal of the temporary food and fuel subsidies as downside risks for public finances, but not a part of the Fitch central scenario.

“The planned fiscal adjustment, starting from 2023, anchored by the IMF programme, will primarily rely on improving revenue mobilisation to increase Benin’s low tax revenue to GDP ratio to 13% of GDP in 2024, from 11% of GDP in 2021”, Fitch stated.

However, Fitch analysts said in the note that they expect tax revenues to grow at a slower pace and reach 12.3% of GDP by 2024, as the large share of informal activity and the difficulty to tax under-exploited economic activity will constrain the increase of tax collection.

The global rating firm said the agreement of new four-year blended IMF Extended Credit Facility/Extended Fund Facility arrangements for USD638 million will address pressing financing needs, as close to 45% of the programme will be disbursed in 2022.

This front-loaded programme will provide additional financing and help maintain confidence of official and commercial creditors. Fitch estimates fiscal financing needs, around 9% of GDP in 2022, will be covered by the IMF, other official creditors and the regional bond market.

Two Eurobond issuances in 2021 have improved Benin’s financing flexibility. Fitch noted that due to international private funding becoming much more expensive in 2022, Benin is likely to prioritise official funding over accessing international markets.

The rating note sees the country’s debt at a peak in 2023. According to Fitch, Benin’s gross general government debt (GGGD) rose to 49.8% of GDP in 2021 from 46.1% in 2020 due to a wider deficit.

The rating firm projected GGGD debt to peak at 52.6% of GDP in 2023 and to then decline to 51.9% in 2024, a lever considered to be below a median forecast of 55.8%, owing to gradual progress on fiscal consolidation and strong medium-term growth.

In 2021, GDP growth rebounded to 7.2% GDP, after 3.8% in 2020.

“We expect growth to remain robust in 2022 at 5.5%, against the authorities initial forecast of 7%, as the economy is affected by the adverse international environment, but the rebound in agriculture and continued expansion of the port activity will support growth”.

Fitch analysts forecast GDP growth to average 6% in 2023-2024, driven by major infrastructure projects such as the completion of the Niger-Benin pipeline, the expansion of the Port of Cotonou and the development of the industrial zone in Glo-Djigbé.

However, it said downside risks stem from further erosion of households’ purchasing power due to increasing commodities prices, deterioration in the international environment, and contagion of regional security risks.

Moreover, Benin’s growth remains dependent on developments in Nigeria and the evolution of cotton prices, though noted that the country enjoys contained inflation. READ: Fidelity Bank Moves to Take Over Kano, Benin, Kaduna DISCOs

In 2022, domestic inflation remained contained at 1.3% year on year in January-August, owing to a good harvest season and temporary measures adopted to mitigate the impact of higher imported food prices.

High international oil price is limited due to fuel subsidies by the government which accounts for 0.3% of GDP in 2022 and informal oil imports from Nigeria amidst growing security risks.

Fitch said Benin is facing growing security challenges as terrorist attacks have intensified since late 2021, nothing that increased terrorist threats from the Sahel region has spilt over to northern Benin.

In addition to increasing the military presence in the north, the government has adopted a “civilian approach” to strengthen the provision of public services in vulnerable areas.

Although concentrated in the north, security risks could require additional security expenditure and impact revenue collection opportunities. The country’s overall World Bank Governance Indicator (WBGI) improved due to progress in tackling corruption and improved government effectiveness.

On its external finances, Fitch forecasts the current account deficit (CAD) to widen from 4.3% in 2021 to 5.8% of GDP in 2022, on the back of a higher import bill reflecting higher import commodity prices and imports related to infrastructure construction, not compensated by strong cotton exports.

“We project Benin’s external position will progressively improve in 2023 and 2024, as commodities prices moderate and cotton exports remain robust, leading to a CAD at 4.6% of GDP in 2024.

Reserves of the regional central bank have risen reaching USD24 billion at end-2021, translating to 5.9 months of imports, supported by Eurobond issuance as well as strong official support.

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