Benin: Risk Assessment

Country Rating¹

Rating: B

Business Climate Rating¹

Rating: C

Risk Assessment²

An economy still very dependent on cotton
In 2010, Benin again experienced modest growth. Cotton production has remained handicapped by chronic under-investment and the decline in the number of producers despite the industry consolidation and stimulus program undertaken. Benin has suffered, furthermore, from shortages of electricity and the effect on consumption of the failure of fraudulent savings institutions.

In 2011, production in the cotton sector is expected to be low once again. Firm raw material prices will, however, continue to partly offset that sluggishness. Privatization of the Cotonou Port will moreover increase capacity for both exports (with Benin very active in re-export trade) and imports of capital goods, and benefit the construction sector. FDI will likely increase significantly in this context. GDP growth will, however, remain vulnerable to a price shock on raw materials with economic performance depending on the government's capacity to convince farmers to diversify their production. Despite fluctuations in prices for public services, food, and oil, inflation has remained mild.

Persistence of major economic imbalances
Benin's trade balance is structurally in deficit due to the growing proportion of hydrocarbon imports. Suffering from a lack of energy resources, the country has to import up to 70% of its electricity needs from Ghana and Côte d'Ivoire. Similarly, the public sector deficit is destined to stay relatively large with spending only kept partly under control and revenues unable to grow significantly without tax reform. Benin's fiscal performance thus far under the $109 million Extended Credit Facility granted by the IMF in June 2010 has, however, essentially satisfied the Fund's requirements. But the efforts to control spending will have to be sustained. In this context, official development aid will continue to be a crucial source of financing with FDI remaining insufficient and Benin lacking access to capital markets.

A weakened government and still difficult business environment
President Boni Yayi, in office since 2006, has governed without an absolute majority in the National Assembly since spring 2008. A year before the upcoming presidential election to be held next July, his position was severely weakened by the impeachment proceedings, albeit unsuccessful, initiated in the wake of a major financial scandal associated with the failure of illegal savings institutions in July 2010. The president moreover has to contend with a unified opposition. Implementation of economic reforms has been delayed in consequence. Repeated electric power failures and continued high unemployment have also increased the exasperation of the people. The business environment continues, meanwhile, to suffer from creeping corruption that disrupts the functioning of the legal system and results in opaque customs procedures.

Strengths

• Strategic geographic position
• Extensive financial support from bilateral and multilateral donors

Weaknesses

• Limited economic diversification (cotton represents 40% of exports)
• Erratic electric power supply
• Governance deficiencies