Togo - Overview of economy



Togo is a small economy in terms of the total value of its output. This is because the population is small, at around 4.5 million, and the GDP per capita in 1999 was very low at US$1,700 a year (by way of comparison the U.S. figure is US$33,900 per capita). The population is growing rapidly, at 3.4 percent a year, which adds to the problems of generating higher incomes. Most people (66 percent of the total) depend on agriculture for their livelihoods, mostly from small family farms. The economy of Togo has not performed well in recent years. Output has increased less rapidly than population, and average living standards have fallen. The agriculture sector has performed better than industry and services, however, and agricultural output per person has increased in recent years.

Togo is by all accounts a severely underdeveloped country. Low income levels mean that most income is devoted to subsistence, and more than 80 percent of GDP

goes to private consumption. Savings (7 percent of GDP) and investment (13 percent of GDP) are both low. But underdevelopment is more than just a matter of income levels. The United Nations (UN) includes education and health as well as income in its Human Development Index, and the problems in both these areas helped place Togo 145th out of the 174 countries listed by the Human Development Index in 1998.

There are, however, some bright spots in Togo's economic picture. Mineral exploration in 1998 showed oil deposits in Togo waters, which may be exploited if shown to be viable. Hoping to attract investment, the government inaugurated what it calls an "industrial free zone " (actually, a free trade zone) with fiscal benefits in exchange for company guarantees on export levels and employment. And electricity imports fell after the completion in 1988 of a hydroelectric dam, built in conjunction with Benin.

In 1994, Togo embarked upon a strategy to achieve currency and other fiscal stabilization in consultation with the IMF. This program has been delayed due to political instability. The IMF has also since been very critical of the government's loss of momentum in tightening public finances. In the lead-up to the election in 1998 the government overspent, which meant the budget deficit grew to 6.7 percent of GDP, well outside the IMF guidelines of 3 percent of GDP. There is pressure to establish effective control of the budget and to reduce public sector wages, with spending reallocated to poverty alleviation and other high priority issues. Despite efforts to rationalize and broaden the tax system, heavy deficits were still recorded. In the 2000 budget many cutbacks were made. Health spending decreased by 16.3 percent, defense spending decreased by 17.7 percent, presidential office spending decreased by 32.7 percent, and expenditures by the prime minister's office decreased by 51.1 percent. However, the government is still dependent on foreign aid to cover the US$40 million deficit.

Togo is a member of the CFA Franc Zone, with its currency linked by a fixed exchange rate to the French franc. This provides a convertible currency with other countries that share the CFA franc and exchange rate stability. However, in order to achieve this, Togo has agreed to give control of its monetary policy to the regional central bank of the CFA Franc Zone, the Banque Centrale des Etats de l'Afrique de l'Ouest (BCEAO). Since more rapid inflation makes it difficult to maintain the fixed exchange rate, the money supply is under the control of the BCEAO. The BCEAO changed its 1980s policy of expansion and started to restrict credits to the private and government sectors in the early 1990s, which meant a slowdown in the growth of the money supply. As inflation fell after a 1994 devaluation of the currency, BCEAO was able to ease its monetary policy by reducing interest rates from 19.5 percent (1994) to 6 percent (1997). In 1998 BCEAO raised interest rates to 6.25 percent and increased commercial bank minimum reserve ratios (which restrict the banks' ability to lend) to forestall inflation. In 1999 the CFA franc became tied to the euro (the European Union's common currency) at a rate that reflected the euro's relationship to the French franc. A smooth transition meant that the BCEAO was able to cut interest rates to 5.75 percent, making it easier for people and business to borrow money.

Steady economic growth in the 1970s (averaging about 4 percent) gave way to low growth in the 1980s, with GDP growth becoming less than population growth, leading to a reduction in GDP per capita. Political and social unrest in the early 1990s meant that GDP contracted by 3.7 percent in 1992 and 13.7 percent in 1993. The situation was aggravated by depressed world commodity markets and an economic crisis in the West African Franc Zone.

After a return to relative domestic normality and de-valuation in 1994, the economy had a positive, if patchy, recovery. Real GDP increased by 16.7 percent in 1994 (albeit from a very low base), 6.8 percent in 1995, and by 9.7 percent in 1996. Growth fell back to 4.3 percent in 1997, but it became negative in 1998 (at-1.3 percent) due to the energy crisis. GDP growth rallied in 1999, on the back of a good harvest, to 3.5 percent. This improvement partly reflected higher phosphate production, but manufacturing, which is still state dominated, suffered due to weak demand and inefficiency.

On average, consumer inflation is normally around 5 percent or less. In 1994 the CFA devaluation caused inflation to rise to approximately 40 percent, although it fell back down over the next 2 years. Inflation then rose again to 8.7 percent in 1998 due to an increase in the value-added tax (VAT), higher oil and food prices, and increased government spending. By 2000, however, inflation had settled to the targeted 3 percent, and is expected to remain at this level.

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Dec 28, 2010 @ 11:11 am
why is togo less dependent plese help me this is my homework. to no why is togo less dependent .

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