Benin: Classified in medium to long-term political risk category 6/7

Concerns over democratic backsliding and growing regional instability

Benin used to be a beacon of democracy and stability in West Africa. However, political and social tensions are rising due to the growing concentration of power in President Talon’s hands since he took office in 2016. This has led to civil protests and international pressure over human rights violations and the treatment of political opponents. For the first time since 2015, opposition members were once again allowed to participate in a legislative vote in January 2023. The only participating opposition party (the Democrats) won representation in the National Assembly, although with very limited seats. Even though the January 2023 vote somewhat improved parliamentary legitimacy through the presence of opposition members, the ruling coalition still holds a strong majority and will face few challenges until the presidential elections in 2026.

Like most West African coastal nations, Benin is exposed to security risks related to spillovers of jihadist violence from the Sahel, especially from Mali, Niger and Burkina Faso. Terrorism risks are especially high in northern Benin, more particularly in the Pendjari and W national parks. Risks relating to climate change disaster and food insecurity are also important threats and could also lead to growing social unrest.

Economic recovery continues to face headwinds

Benin is a small economy (nominal GDP of USD 17bn) that is highly interlinked with neighbouring Nigeria. It relies on cotton exports (45% of its current account receipts) and exports of food products like nuts, seeds, fruits and meat (21% of total current account receipts). The Covid-19 pandemic reversed many of the gains made during a period of strong governmental and economic progress. Benin’s recovery from Covid-19 was strong, despite the impact of the war in Ukraine, with GDP growth reaching 7.2% and 6% in 2021 and 2022. Economic progress is driven by public investments (under the ‘Programme d’Action du Gouvernement’,2021–2026), agricultural production and port activity. GDP growth projections for the coming five years average around 6%. However, recent headwinds following the closure of the border with Niger and sanctions in response to the neighbouring military coup will negatively impact Benin’s economy in 2023. Moreover, recent weather-related shocks have led to a drop in cotton production (floods), and security threats from jihadist groups at Benin’s northern border are weighing on general macroeconomic performance. The slow economic growth projected in Nigeria is another downside risk. Consequently, Benin’s GDP growth projections are likely to be revised downwards in the coming months.

Following the invasion in Ukraine, Benin was also confronted with soaring import costs caused by high global fuel and food prices and the depreciation of the euro against the US dollar, to which the CFA franc is pegged. Nevertheless, tight regional monetary policies and government subsidies compressing domestic food price hikes helped contain inflation at 2.9% in 2022, down from 5% in 2021. In 2023, inflation is expected to increase again to 3.5%, mainly driven by food prices, and exacerbated by an unfavourable cereals harvest in 2022–2023 (weather shocks). Inflation could accelerate beyond the current estimates, as the recent pump price hikes in Nigeria raised the price of smuggled gasoline significantly in Benin (about 60%), stirring up inflation.

WAEMU liquidity under sustained pressure

Benin’s external balance of payments has been under pressure since the current account deficit doubled in 2021 to 4.5% of GDP and further increased in 2022 to 6.5% of GDP. This results from Benin’s small export magnitude, in combination with soaring import costs caused by high global fuel and food prices and the depreciation of the euro against the US dollar. Benin’s WAEMU membership mitigates the risk of actual foreign exchange shortages as reserves are pooled at the regional central bank (Central Bank of West African States (BCEAO)). Like in many parts of the world, WAEMU is also affected by a drop in liquidity due to worsened terms of trade consisting mainly of food- and fuel-importing member states. On the other hand, investment capital inflows have dropped due to less favourable global financial conditions and growing risk aversion. As a result, regional foreign exchange reserves fell by 20% in 2022 and stabilised at this low level during the first half of 2023 (see graph). To help deal with the immediate funding squeeze and other headwinds, Benin started tapping into two IMF support facilities (ECF/EFF) from July 2022.

Benin’s public finances and financial position are suffering from external shocks

Public finances in Benin are generally sustainable, marked by fiscal prudence and privatisations, combined with increased state investments in infrastructure and agriculture (especially in support of the cotton industry). Over the past two years public finances have degraded, resulting from increased spending requirements (hikes in subsidies and security spending to counter spillovers from Sahel insurgencies), deficient tax collection and falling donor support. The overall fiscal deficit increased to 5.7% of GDP in 2021 and 5.5% in 2022, driving the public debt stock up from 46% of GDP in 2020 to 54% in 2022. Enhanced domestic revenue mobilisation is an important IMF programme requirement in order to converge back to the 3% of GDP fiscal deficit target set by the WAEMU. Assuming fiscal consolidation over the coming years, the public debt stock should moderate down slightly to 52% of GDP by 2025. Indeed, public revenue to GDP is assumed to gradually grow from 13% in 2021 to 15% in 2025, lowering the net interest payments to revenues ratio from 17% to 11% in the same time frame.

Benin benefitted from a large financial market appetite for emerging market investments and issued a Eurobond in 2019 (first repayment due in 2024) and the first-ever African sovereign SDG bond in 2021 (to achieve the UN Sustainable Development Goals). During the Covid-19 pandemic, Benin received substantial international support, but it is one of the few low-income countries that did not use the G20 DSSI payment moratorium. Instead, Benin covered large financing needs through additional external lending, while revenues stagnated. As a result, total external debt to GDP increased from 28% in 2019 to 39% in 2022 but is set to remain stable around this level in the coming years. In terms of current account revenues, the external debt stock grew from 163% in 2019 to 210% in 2022 and is projected to grow to 265% by 2025. Debt service to current account revenues peaked at 23.4% in 2021 before moderating to 11% in 2022 and are projected to remain at sustainable levels for the coming years. According to the latest IMF Debt Sustainability Analysis (May 2023), Benin’s public and external debts are at ‘moderate risk of debt distress’, although space to absorb shocks related to natural disasters, commodity price volatility and depressed terms of trade remains limited.

Analyst: Louise Van Cauwenbergh – l.vancauwenbergh@credendo.com