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TOGO: Selected Issues Summary

Core Content

This document provides an analysis of state-owned financial institutions (SOFIs) in Togo and Sub-Saharan Africa (SSA), focusing on the performance of SOFIs, the challenges of privatization, and the broader implications for macro-financial stability and fiscal governance. It also examines the efficiency of social spending and governance structures in Togo, highlighting the role of institutional frameworks in shaping financial and economic outcomes.

Main Viewpoints

A. Theoretical Background: SOFIs and Their Role

• Rationale for SOFIs: SOFIs are typically established with a public interest and financial inclusion mandate, often to support development goals and underserved populations.
• Potential Benefits:
  • Development View: SOFIs can promote growth and productivity by channeling long-term investments into sectors with market failures, such as agriculture, R&D, and intangible assets.
  • Social View: SOFIs can address market failures by financing socially desirable projects and reducing financial exclusion.
  • Macro View: SOFIs can act as a countercyclical tool, supporting lending during economic downturns.
• Pitfalls:
  • Weak Governance: SOFIs are often subject to political interference, poor corporate governance, and lack of independence.
  • Fiscal and Financial Risks: SOFIs may absorb losses, leading to repeated recapitalizations and increased public debt.
  • Market Distortions: SOFIs may hinder competition, prevent new private entry, and distort market development due to preferential treatment and lack of transparency.

B. Cross-Country Evidence: SOFIs vs. Private Banks

• Performance Gap: In developing countries, SOFIs generally perform worse than private banks, with lower profitability and higher costs.
• Political Economy Influence: The performance difference is often driven by political considerations, such as the electoral cycle.
• Governance Structures: Private banks tend to have stronger governance, with clear separation between management and oversight.
• Fiscal Discipline: Countries with significant government participation in the banking system tend to have weaker fiscal discipline.
• Empirical Impact:
  • A 1% increase in government-owned banking assets is associated with a 0.5% decrease in private sector credit.
  • Privatization can improve performance, especially when the government fully relinquishes control and sells to strategic investors.
  • Foreign ownership is often linked to better performance due to increased efficiency and regulatory compliance.

C. Privatization in SSA

• Trends: State participation in the financial sector in SSA has declined since the 1990s, with a notable drop in government ownership.
• Togo's Case: Togo has the highest government ownership in the WAEMU region, with SOFIs facing long-term financial difficulties.
• Privatization Waves:
  • First Wave: Late 1970s to early 1980s, with limited progress.
  • Second Wave: Late 1980s to late 1990s, with some countries (e.g., Nigeria) achieving significant progress.
  • Third Wave: Early 2000s, with countries like Tanzania and Zambia showing strong political commitment.
• Challenges in Privatization:
  • Operational Restructuring: Lack of restructuring often leads to continued financial distress.
  • Political Interference: Continued government involvement can undermine performance and lead to inefficiencies.
  • Strategic Investors: Selling to strategic investors, rather than through share issues, is more effective in improving performance.
  • Foreign Ownership: Permits can enhance competition and performance, but are not always implemented effectively.

D. Policies for Successful Bank Privatization

• Commercial Viability: Privatized banks should operate on a commercial basis with clear mandates.
• Fiscal Transparency: Public funds should be used transparently and explicitly for subsidizing specific services.
• Governance Reforms: Strong governance structures are essential to insulate SOFIs from political influence.
• Supervision and Regulation: Privatization should be accompanied by the same regulatory framework as private banks.
• Asset Quality Review: Rigorous asset quality assessments are crucial to avoid further financial instability.

Key Information

• Togo's SOFIs: BTCI and UTB have faced persistent financial challenges, including high non-performing loans (NPLs), poor capitalization, and operational inefficiencies.
• Privatization Attempts: The privatization of BTCI and UTB was delayed, with the government initially favoring a merger over separate privatization.
• Financial Crisis Impact: The 2015 external shock and fiscal deficits have worsened the situation for Togo's SOFIs.
• Government Involvement: The state has retained significant ownership in some SOFIs, which has hindered performance and increased fiscal risks.
• Resolution Efforts: The merger of BTCI and UTB in 2017 was a step towards improving performance and reducing NPLs.

Conclusion

The document emphasizes that while SOFIs can play a role in promoting financial inclusion and supporting development, their long-term viability is often compromised by poor governance, political interference, and lack of transparency. Successful privatization requires a clear commercial mandate, rigorous asset quality reviews, and a supportive regulatory environment. Togo's experience illustrates the challenges and potential benefits of privatizing SOFIs, highlighting the need for effective governance and institutional reforms to ensure macro-financial stability and fiscal discipline.