CHAPTER FOUR: ECONOMIC GOVERNANCE AND MANAGEMENT __________________________________________________________________________ 4.3 Assessment of APR objectives Objective 1: Promote macroeconomic policies that support sustainable development i. Summary of the CSAR 367. Macroeconomic context and quality of development. The CSAR indicates that the performance of Benin’s economy has varied over the previous five years. However, 2006 showed economic recovery, with a GDP growth rate of 4.5% as against 2.9% in 2005. This recovery was sustained by improvements in trade with Nigeria and a 26% increase in the port traffic. 368. The economy remains vulnerable because of: (i) trade restrictions imposed by Nigeria; (ii) competition from Lome Port, which increased after a decline in the performance of Cotonou Port; (iii) cotton production below projections; and (iii) appreciation of the euro in comparison to the US dollar, which impacted negatively on economic activity, and particularly on cotton exports to the Asian market. Production remains undiversified and cotton continues to be Benin’s major export product. Even though the inflation rate was contained within the limits of the community standard between 2003 and 2004, general price levels started rising from 2005 to almost 5% against a target of 3%. 369. The government has pursued public finance reform but the results need to be consolidated. The overall budget deficit increased from 3.3% of GDP in 2004 to 4.3% of GDP in 2005. This was caused by a significant decline in revenue and an increase in total expenditure and net loans. This deficit was reduced to less than 3% in 2006. 370. Public debt has become sustainable. Public debt started declining, particularly in 2003, when Benin benefited from the HIPC Initiative. Indeed, the debt service/revenue ratio started declining from 2004, thereby reflecting the overall efforts made by the country to remain below the 15% level defined as the international standard for outstanding payments. The ratio has been reducing significantly since 2001 because of debts cancelled under the HIPC Initiative after Benin reached the decision point in July 2000 and the completion point in March 2003. 371. With regard to capital budgets, the public resources allocated to social sectors increased significantly between 2003 and 2004. However, after 2005 the budget allocation to these sectors declined and fell below 30% in July 2007. Benin has paid its debts to the BCEAO and no deficit has been financed by BCEAO in the past five years. 372. Formulation of the government’s macroeconomic forecasts. The CSAR mentions that these forecasts are based on the Finance Law. Other data is also used for making macroeconomic forecasts. These are demographic statistics, 137