P500463 Tog - Macroeconomics, o’s 2024 Economic Trade Update: Building Resilience and Investment 0 Togo’s 2024 Economic Update: Building Resilience © 2024 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The Word Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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Togo’s 2024 Economic Update: Building Resilience 0 Contents EXECUTIVE SUMMARY ........................................................................................................................5 Summary of key policy options ...........................................................................................................8 Acronyms and Abbreviations ............................................................................................................ 10 AKNOWLEDGMENTS ........................................................................................................................ 11 CHAPTER I – TOWARDS SUSTAINABLE POVERTY AND DEBT REDUCTION ...................................... 12 1. RECENT ECONOMIC DEVELOPMENTS .................................................................................... 12 2. PROSPECTS AND RISKS ......................................................................................................... 19 3. POLICY OPTIONS .................................................................................................................. 27 CHAPTER II – AGROFORESTRY AND CLIMATE CHANGE: THE NATURAL SOLUTION? ........................ 31 1. AGRICULTURE AND STRUCTURAL TRANSFORMATION IN TOGO ............................................. 31 2. CLIMATE CHANGE IMPACTS ON AGRICULTURE ...................................................................... 34 3. SCALING UP AGROFORESTRY TO ACCELERARE RURAL TRANSFORMATION ............................. 37 A. IDENTIFYING SUITABLE LAND FOR AGROFORESTRY ......................................................... 38 B. ESTIMATING BENEFITS AND INVESTMENT NEEDS ............................................................ 40 I. ESTIMATED COSTS AND ECONOMIC RETURNS OF AGROFORESTRY .........................................41 II. ILLUSTRATIVE SCENARIO FOR A NATIONAL AGROFORESTRY PLAN .........................................43 III. THE CASE OF AGROFORESTRY IN HIGHLY VULNERABLE AREAS..............................................45 4. CONCLUSIONS AND POLICY OPTIONS TO LEVERAGE AGROFORESTRY AT SCALE ...................... 47 REFERENCES ................................................................................................................................. 51 List of Figures Figure 1.1: Real GDP growth has been resilient in recent years, but at the cost of depleted fiscal buffers ............ 12 Figure 1.2: Togo’s growth performance still lags behind some aspirational peers, mostly due to structural factors ...................................................................................................................................................................... 12 Figure 1.3: Despite recent years’ increase, investment rates in Togo still trail those of most peers ....................... 13 Figure 1.4: Private capital remains low and saw only limited improvements over the last decade........................ 13 Figure 1.5: Produced and human capital are lagging peers and remain below natural capital endowment ........... 14 Figure 1.6: Agricultural productivity remains low and stagnant, hindering the sector’s development ................... 14 Figure 1.7: Industrial activity recovered in the second half of 2023, supported by the phosphate sector .............. 14 Figure 1.8: … and rising electricity production amid growing demand ................................................................ 14 Figure 1.9: Above average cumulative rainfall supported a good 2023-24 agriculture harvest ............................. 15 Figure 1.10: .... but food insecurity remained high, particularly in the Savanes region ......................................... 15 Figure 1.11: Poverty has declined in recent years ............................................................................................. 16 Figure 1.12: …but the rural-urban divide remains ............................................................................................. 16 Figure 1.13: Headline and core inflation have continued to ease during 2023 .................................................... 17 Figure 1. 14: Overlapping crises have deepened debt challenges in Togo ........................................................... 18 Figure 1.15: A strong rebound in export in Q4 helped narrow the merchandise trade deficit............................... 19 Figure 1.16: Traffic in the port of Lome continued to expand in 2023, despite sanctions on Niger ....................... 19 Figure 1.17: The economic outlook for Sub-Saharan Africa remains moderate ................................................... 20 Figure 1.18: The global trade recovery is one of the slowest on record .............................................................. 20 Figure 1.19: WAEMU foreign exchange reserves are worryingly low…................................................................ 20 Figure 1.20: Partly due to the slow pace of monetary policy tightening compared with the Euro area ................. 20 Figure 1.21: The port of Lomé is critical for transshipment in the region… .......................................................... 21 Figure 1.22: … and is a vital entry and exit point for goods destined for landlocked countries ............................. 21 Figure 1.23: Small scale informal trade accounts for a significant share of agriculture and food exports to neighboring countries ..................................................................................................................................... 21 Figure 1.24: Improvement in revenue mobilization is driven by indirect and international trade taxation ............ 22 Figure 1.25: Planned cuts to government spending target capital spending and transfers ................................... 22 Figure 1.26: …with particularly large cuts planned for domestically financed public investment .......................... 23 Figure 1.27: Public debt will remain high, but should start declining in 2025 ...................................................... 23 Figure 1.28: Access to infrastructure is low given Togo’s current level of public capital stock ............................... 24 Figure 1.29: Expected efficiency gains are large if Togo raises its PIMA score to best performing Sub-Saharan Africa peers.............................................................................................................................................................. 24 Figure 1.30: Domestic debt share in overall public debt is projected to drop in the medium term… ..................... 24 Figure 1.31: … which will help contain rising debt service costs ......................................................................... 24 Figure 1.32: Buoyant private consumption and investment will support growth in 2024-25 ................................ 25 Figure 1.33: and keep GDP per capita on a steady upward trend ....................................................................... 25 Figure 1.34: Agriculture is the main source of income of rural and poor populations .......................................... 25 Figure 1.35: Poverty rate is set to decline in rural and urban areas, with the gap between the two widening slightly ...................................................................................................................................................................... 25 Figure 1.36: Structural reforms are crucial to put potential growth on an upward trend ...................................... 27 Figure 1.37: Overall debt distress risk is considered high, but should fall below the risk threshold in 2026 ........... 27 Figure 2.1: Agriculture’s relative output and labor productivity in Togo remain below potential.......................... 31 Figure 2.2: In Togo more than elsewhere, Agriculture grows at the extensive margin, with generally stagnant productivity .................................................................................................................................................... 31 Figure 2.3: Land productivity is below regional peers ........................................................................................ 32 Figure 2.4: …and is also reflected in lagging cereal yields .................................................................................. 32 Figure 2.5: Agroforestry in Togo already exists, though at limited scale.............................................................. 33 Figure 2.6: Temperatures have significantly increased in Togo over the last few decades…. ................................ 34 Figure 2.7: …While extreme precipitations have become more frequent and widespread ................................... 34 Figure 2.8: High temperatures concentrate in the Northern Savanes and Kara regions ....................................... 35 Figure 2.9: Precipitations concentrate in elevated lands in western and north-eastern parts of Togo................... 35 Figure 2.10: Temperatures are expected to rise, but to varying degrees depending on climate scenarios............. 35 Figure 2.11: Trends in precipitations are significantly more uncertain ................................................................ 35 Figure 2.12: Crop production could drop by 11 percent under dry/hot conditions .............................................. 36 Figure 2.13: Vegetables, yams, cassava and maize yields would be most affected .............................................. 36 Figure 2.14: Soil erosion could also have adverse effects on yields .................................................................... 36 Figure 2.15: Suitable lands are found across Togo, vulnerable areas concentrate in Savanes and Kara ................. 38 Figure 2.16: A wet/warm scenario could see an increase in suitable land for conventional farming, but especially for agroforestry .............................................................................................................................................. 40 Figure 2.17: A dry/hot scenario could still see some increase in suitable land for agroforestry while it would areas would shrink for conventional farming ............................................................................................................. 40 Figure 2.18: Profitability of agroforestry investments is always higher than conventional farming, even without consideration of carbon sequestration… .......................................................................................................... 41 Figure 2.19: …but benefits take longer to materialize and initial investments are higher, implying that conventional practices are more attractive in the short term ............................................................................ 41 Figure 2.20: Conversion of all suitable land to agroforestry would be a major boost to food security................... 42 Figure 2.21: …while carbon sequestration benefits would be very substantial as well ......................................... 42 Figure 2.22: Converting 20 percent of suitable cropland for agroforestry would be mostly benefit Plateaux and Maritime, and help save land in Kara and Savanes ............................................................................................ 44 Figure 2.23: Developing 50 percent of suitable grassland and shrubland into agroforestry would favor Kara and Centrale regions, and save land in Kara, Savanes and Maritime ......................................................................... 44 Figure 2.24: Investments needs for a national agroforestry plan would initially surpass those for conventional farming but stabilize at a lower level................................................................................................................ 45 Figure 2.25: Conversion of 20 percent of cropland and 50 percent of grassland and shrubland to agroforestry could triple crop production from those areas .................................................................................................. 45 Figure 2.26: 80 percent of the 764,000 farmers that would benefit from agroforestry investments would be in the Plateaux, Centrale and Kara regions ................................................................................................................. 45 Figure 2.27: Developing agroforestry instead of conventional farming on the selected areas could save the equivalent of 8,010 Ktons of CO2 by 2050 ........................................................................................................ 45 Figure 2.28: Highly vulnerable but structurally suitable areas for agroforestry in Savanes and Northern Kara regions........................................................................................................................................................... 46 List of Tables Table 1. Main Macroeconomic Indicators......................................................................................................... 29 Table 2. Fiscal Accounts and Financing Needs................................................................................................... 30 Table 2.1: Temperatures could rise nearly twice faster in the dry/hot scenario, compared with the wet/warm scenario ......................................................................................................................................................... 36 Table 2.2: Precipitation would increase in the wet/warm scenario while declining towards 2040-50 in the dry/hot scenario ......................................................................................................................................................... 36 Table 2.3: Land characteristics and connectivity are key to determine suitability ................................................ 38 Table 2.4: Plateaux, Kara, and Centrale have the large areas that are suitable today for agroforestry .................. 39 Table 2.5: Quantifiable costs and benefits of agroforestry versus conventional agricultural practices (BAU)......... 40 Table 2.6: Policy and knowledge interventions with associated target benefits and costs ................................... 49 EXECUTIVE SUMMARY This 2024 Economic Update for Togo is articulated in two chapters. The first chapter presents recent economic and poverty developments, as well as the outlook, key risks, and priorities to lift growth and accelerate structural transformation. The second chapter offers a deep dive on the likely impact of climate change on the agriculture sector in Togo and how scaling up agroforestry systems could help smallholder farmers increase their welfare, while boosting food security, preventing the loss of arable land, and reducing carbon emissions. Economic activity has been resilient in Togo over the last few years thanks in part to fiscal stimulus which now needs to be unwound to reduce deficits and put public debt on a sustainable trajectory. Togo's economy has exhibited robust growth over the past decade, averaging 5.1 percent since 2013 (2.9 percent in per capita term), albeit slowing slightly to 4.6 percent (2.3 percent per capita) during a period of rapid fiscal consolidation between 2016 and 2019 and maintaining the same average pace since the COVID-19 pandemic hit in 2020, largely supported by a significant increase in public spending that helped mitigate the impact of sequential crises on the economy and poverty. In fact, growth remained positive in 2020 as public investments helped offset a contraction in private consumption during the COVID-19 pandemic, hovering around 6,1 percent from 2021 to 2023 as a post-COVID rebound was reinforced by additional fiscal stimulus and ongoing private investment. Faced with an unsustainably high budget deficit in 2022-23, the government has now embarked on a period of rapid fiscal consolidation that will require difficult choices regarding public spending and revenue mobilization efforts. These tradeoffs could be made easier and the effect of fiscal consolidation on growth significantly reduced if ambitious reforms are able to boost public sector efficiency and mobilize private capital. While Togo's recent economic performance has been positive, it still fell short of regional peers1 such as Benin and Cote d’Ivoire, or more aspirational ones like Bangladesh or Vietnam. This can mostly be attributed to structural factors, including a relatively muted contribution of capital deepening to Togo’s potential growth; the predominance of low yielding agricultural practices; persistently large disparities in economic opportunities and access to basic services between rural and urban areas; a highly concentrated private sector; and limited strides in industrialization despite the expansion of port activities and the development of agro-processing and other industrial zones. The economic outlook remains positive for the next few years, contingent upon enacting adequate policy decisions and implementing ambitious reforms. With global demand remaining subdued in 2024 and fiscal consolidation measures intensifying, growth in Togo is projected to slow to 5.3 percent in 2024 (2.9 percent in per capita term), before gradually strengthening to 5.4 percent in 2025 and 5.8 percent in 2026 (3.5 percent per capita). Rising aggregate demand will notably be supported by ongoing and planned private investment projects and a recovery in consumer spending as inflationary pressures taper down. Exports will provide an additional boost from 2025 as the global economy regains some strength while public investment is expected to pick up as fiscal consolidation efforts end. The announced exit of Mali, Niger and Burkina Faso from ECOWAS is expected to lead to relatively modest trade disruptions in the short term but is heightening regional uncertainty, which could weigh on investment sentiment, notably around the development of the Lome-Ouagadougou-Niamey economic corridor. Overall, growth projections have been revised slightly downwards, reflecting slower than expected demand from neighboring countries, tighter financing conditions, larger cuts in public investment, and increased regional uncertainty. In this context, poverty is projected to decrease gradually in 2024 and 2025 and more substantially in 2026, cumulating a projected 4.4 percentage points decline from the 43.8 percent poverty rate observed in 2021. The growth and poverty outlook are subject to downside risks, including the possibility of an unnegotiated disorderly exit of Mali, Niger, and Burkina Faso from ECOWAS, which could lead to financial market instability in the 1 Throughout this report, Togo is benchmarked against a group of structural peers (countries with similar structural characteristics) and aspirational peers (countries that have set a strong development precedent and to which Togo could aspire). As in the 2022 Country Economic Memorandum, a data-driven approach was used to identify both sets of peers. Structural peers include Benin, Guinea, and Sierra Leone. Aspirational peers are Bangladesh, Vietnam, Cote d'Ivoire, Morocco, Senegal, and Rwanda. short term, trade dislocations, and a reversal of regional integration efforts over the medium term. Rising insecurity in the North could also weigh on investment, trade, and public finances, while unforeseen climate shocks would negatively impact agricultural productivity and amplify fragility risks. However, upside risks to the current projections are also identified, including faster reform implementation, resolution of regional uncertainties, and an easing of global financing conditions that could stimulate private investment more than currently anticipated and help support fiscal consolidation efforts. The agricultural sector could make a more substantial contribution to Togo’s structural transformation with necessary productivity-enhancing investments and efforts to reduce exposure to climate hazards. Despite a relatively low and declining share in GDP, agriculture occupies 40 percent of the workforce in Togo and remains the main source of income for 60 percent of rural workers and 70 percent of those living under the national poverty line. Yet stagnant agricultural productivity traps most farmers in subsistence agriculture with low incomes, and limited capacity to invest or adjust to climate or other forms of shocks. In the absence of decisive measures, the potential for agricultural development in Togo could be severely hampered by climate pressures in coming years. First, climate change will impact farmers productivity through heat-related stress. At 32°C, work capacity for intense physical activity is only 60 percent of its potential for an outdoor worker. This effect could reduce labor productivity in agriculture by up to 10.5 percent over the period 2025-50. Second, a combination of changes in rainfall patterns, water availability, high temperatures and climate-related crop diseases are also expected to reduce yields for rain-fed crops by up to 11 percent over the next 25 years, with most affected crops being vegetables, cassava, and maize. The latter could be the most impactful for farming communities given its larger share in land usage and importance for food security. The sector is also vulnerable to soil erosion and flood risk that could intensify amid increasingly erratic rainfall patterns. Nature-based solutions offer promising approaches to increasing resilience to climate shocks, boosting productivity as well as diversifying and increasing farmers’ income. Nature-based solutions are ecologically grounded practices that provide simultaneous benefits for agricultural productivity and climate resilience. Yield augmentation stems from improved soil health, while the integration of trees into cropping systems (agroforestry) reduces heat stress, provides microclimate regulation, erosion control, nitrogen fixation, and natural pest control which all contribute to increased crop yields and lead to more resilient production. Water management strategies like rainwater harvesting, wetland restoration, and erosion control measures like terracing and buffer strips around rivers also safeguard valuable farmland from heavy rains, bolster water availability during droughts and mitigate flood risks. Developing agroforestry at scale holds great promise in terms of food security, smallholder farmers’ welfare and carbon sequestration, but requires significant short-term investments. A suitability analysis was developed to determine areas where agroforestry systems would be most appropriate in Togo, while an economic analysis estimates investment needs, individual and collective gains, and financing options. In a scenario where 20 percent of suitable cropland and 50 percent of suitable grassland and shrubland are converted to agroforestry (about 3,900 km2), investment needs would rapidly increase to reach about 0.8 percent of GDP, but these would significantly increase crop production despite climate pressures. In fact, higher yields and the protection of arable land associated with these investments could help supply the overall population with about 50kg of additional domestically produced crops per person by 2050 and would benefit 764,000 smallholder farmers across the country. In addition, up to 3,755 Ktons of CO2 emissions could be saved when compared with the expansion of conventional farming on equivalent land. The economic analysis presented in this report likely underestimates the actual benefit of agroforestry as it does not quantify the benefit of soil health restoration, improved water quality and quantity, flood risk reduction (riparian agroforestry systems), livestock feed security, and improved microclimate regulation, among others. Selected reforms could help reinforce Togo’s potential for sustainable, inclusive, and resilient growth. This Spring 2024 Economic Update highlights a range of investment opportunities as well as policy and institutional reforms to leverage limited public resources in this period of fiscal consolidation to accelerate development. The report has a particular focus on the transformation of the agricultural sector, and the role that agroforestry could play in boosting welfare, reducing climate vulnerabilities, and sequestering carbon emissions. The Table below summarizes the main policy options identified in the report, focusing on those that either most urgent or most transformative. Summary of key policy options Objective Policy options Time horizon • Systematically cost sectoral strategies and ensure that they are accompanied by concrete targets. Short term • Systematize the production and publication of feasibility studies for investment projects. Short term • Systematically include upkeep and maintenance costs in investment budgeting Short term Strengthen public • Fully implement the credit carry-forward mechanism to ensure continuity in investment funding. Short term investment management • Develop procedures to assess climate risks and include them from appraisal to project implementation. Medium term • Review the organization of responsibilities within government and agencies regarding the conduct of PPPs. Short term • Simplify public procurement processes to ensure more competitive bidding. Short term • Prepare a revenue raising strategy, comprising both tax policy and revenue administration measures. Short term • Rationalize tax expenditures based on regular cost-benefit analysis. Medium term Augment revenue • Support decentralized entities in their revenue collection capabilities. Medium term mobilization • Reinforce corrective measure for non-compliance with tax and customs obligations. Short term • Consider the introduction of eco-taxes and carbon taxation over time. Medium term • Rationalize tax expenditures based on regular cost-benefit analysis. Short term • Improve land tenure security and increase efficiency and transparency in land administration services. Medium term • Improve hydro-agricultural development and irrigation in ZAAPs through better selection of contractors and enforce contract Short term sanctions for technical failures. Boost agriculture • Develop agricultural research and extension strategies. Medium term productivity and resilience • Facilitate certification of seed species and varieties by strengthening the capacity of laboratories and reducing the cost of seed Short term certification. • Improve private sector participation in fertilizer distribution while reducing the role of public sector and strengthening fertilizer Medium term quality control. • Strengthen stakeholders’ capacity to understand existing policy related to climate financing and develop skills necessary to prepare Medium term successful climate fund proposals. • Improve the efficiency of budget execution by strengthening the capacity of actors along the public expenditure chain. Short term • Develop a national agroforestry zoning strategy based on ecological suitability, land-use and climate pressures. Medium term Maximize the potential of • Foster research and the development of fast-growing tree species adapted to diverse conditions to enhance the productivity and Medium term agroforestry resilience of agroforestry systems. • Facilitate access to technical and financing assistance for farmers transitioning to agroforestry systems. Short term Accelerate rural • Update regulations to increase the financial autonomy of AT2ER, strengthen the role of the sector regulator (ARSE), clarify network access conditions for decentralized production. Short term electrification Togo’s 2024 Economic Update: Building Resilience 8 • Set clear performance goals for the CEET and AT2ER and regularly publish comprehensive reports on their operations, finances, and Short term performance. • Optimize tariff structure for electricity to better protect the poor, ensure sustainable revenues for the CEET, and support Short term decentralized renewable energy solutions. • Review the structure of the Tinga fund for rural electrification and define the modalities for integrating the CIZO subsidy for most Short term vulnerable households in the fund. • Negotiate more favorable tariffs for gas supply for thermal power plants and establish hedging contracts for gas prices and exchange Medium term rates Acronyms and Abbreviations BCEAO Central Bank of West African States CBR Cost-Benefits Ratios CCDR Country Climate and Development Report CMIP6 Coupled Model Intercomparison Project 6 EBA Enabling the Business of Agriculture ECB European Central Bank EMDEs Emerging and Developing Economies GCM General Circulation Models GDP Gross Domestic Product IKM Investment and Knowledge Management INSEED Institut National de la Statistique et des Etudes Economiques et Démographiques MAPTO Mouvement Alliance Paysanne du Togo MIFA Mechanism Incentive for Agricultural Financing NBS Nature-Based Solution NPV Net Present Value of Benefits PIA Plateforme Industrielle d’Adetikopé RAFIA Recherche, Appuie et Formations aux Initiatives d’Autodéveloppement RCP Representative Concentration Pathway SSP Shared Socioeconomic Pathway TFP Total Factor Productivity WAEMU West African Economic and Monetary Union ZAAP Planned Agricultural Development Zones Togo’s 2024 Economic Update: Building Resilience 10 AKNOWLEDGMENTS The Togo Economic Update was prepared by a team led by Marc Stocker (Senior Economist, EAWM1) and Vanessa- Paradis Olakemi Dovonou Lamissi (Economist, EAWM1) with core team members including Nimonka Bayale (Economist, EAWM1), Blaise Ehowe Nguem (Economist, EAWM1), Aissatou Ouedraogo (Economist, EAWPV), Chimene Diane Djapou Fouthe (Consultant, HAWS3) for Chapter 1, and Laurent Xavier Frapaise (Consultant, NBS specialist), Fred Kizito (Senior Agriculture Economist, SAWA4) and Nouhoum Traore (Senior Agriculture Economist, SAWA4) for Chapter 2. The preparation of Chapter 2 benefited from the technical and financial support of NBS Invest, which aims to mainstream Natural Based Solutions into climate mitigation and adaptation initiatives in low- income countries. NBS Invest is funded by the Global Environment Facility through its Least Developed Countries Fund and implemented by the World Bank, in partnership with the Global Program on Nature Based Solutions. The work was carried out under the supervision and guidance of Markus Kitzmuller (Lead Economist, EAWM1), Rob Swinkels (Lead Economist, EAWDR), Hans Anand Beck (Practice Manager, EAWM1), and Fily Sissoko (Country Manager, AWMTG). The macroeconomic forecasts presented in this report have been prepared by World Bank staff and may differ from those of the national authorities. We would like to thank the authorities for their collaboration and comments on the content of this report. CHAPTER I – TOWARDS SUSTAINABLE POVERTY AND DEBT REDUCTION This chapter identifies recent economic developments, and outlines major challenges, risks, and opportunities for Togo´s economy. Economic activity has proven resilient to overlapping shocks, with a strong fiscal policy response preventing a recession in 2020 and leading to a growth rebound in 2021-22. Preliminary estimates suggest that growth picked up in 2023 to 6.4 percent, supported by a recovery in private investment and exports, which helped reduce the poverty rate by about 2 percent from 43.8 percent in 2021. Growth is projected to moderate in 2024, to 5.3 percent, as fiscal consolidation efforts, weak global demand, and regional uncertainty weigh on activity, before regaining momentum in 2025 and 2026 as an ongoing recovery in private investment and consumer spending is complemented by strengthening export growth. Risks of regional instability, financial turbulence and climate pressures call for a combination of prudent fiscal policy and bold structural reforms. 1. RECENT ECONOMIC DEVELOPMENTS 1.1 ECONOMIC ACTIVITY Growth in Togo has been robust in recent years, but still modest compared to aspirational peers and insufficient to support rapid poverty reduction. Growth in Togo has averaged 5.1 percent since 2013 (2.9 percent in per capita term), albeit slowing slightly to 4.6 percent (2.3 percent per capita) during a period of rapid fiscal consolidation between 2016 and 2019 to then reach an average of 5 percent (2.8 percent per capita) since the COVID-19 pandemic hit in 2020, largely supported by a significant increase in public spending and robust private investment. In fact, growth remained positive in 2020 as public investments helped offset a contraction in private consumption during the pandemic. Between 2021 and 2023, growth hovered around or slightly above 6 percent as a post-COVID rebound was reinforced by additional fiscal stimulus measures and private investment (Figure 1.1). Despite measures to cap public spending and increase revenues, the budget deficit remained elevated in 2023, at 6.6 percent of GDP, down from a three-decade high of 8.3 percent in the previous year. While Togo’s recent economic performance was positive in the face of a succession of major shocks, it still fell short of many structural and aspirational peers2, including Benin, Cote D’Ivoire, Rwanda, or Bangladesh (Figure 1.2). A gradual shift from an agriculture-dominated economy to a services-led one continued, but most of the working population is still occupied in low-productivity and mostly informal jobs in those two sectors. Figure 1.1: Real GDP growth has been resilient in recent Figure 1.2: Togo’s growth performance still lags behind years, but at the cost of depleted fiscal buffers some aspirational peers, mostly due to structural factors Real GDP growth and budget deficit (Percent of GDP) Real GDP growth (Percent), 2017-2022 10 Budget deficit UTB recap. 8 2017-19 Real GDP growth 2020-22 8 6 6 4 4 2 2 0 Bangladesh Togo Senegal Rwanda Cote d'Ivoire Benin Vietnam 0 -2 2010 2012 2014 2016 2018 2020 2022 2024 2026 Source: World Bank Source: World Bank 2 Throughout this report, Togo is benchmarked against a set of structural (countries that have similar structural characteristics) and aspirational peers (countries that have set a good development precedent and that Togo could aspire to). As in the 2022 Country Economic Memorandum, a data-driven approach was used to identify structural and aspirational peers. Structural peers include Benin, Guinea, and Sierra Leone. Aspirational peers include Bangladesh, Vietnam, Cote d’Ivoire, Morocco, Senegal, and Rwanda. Figure 1.3: Despite recent years’ increase, investment Figure 1.4: Private capital remains low and saw only rates in Togo still trail those of most peers limited improvements over the last decade Public and private investment (percentage of GDP), Private capital stock per person (constant 2017 2010-2022 International Dollars) Togo Aspirational Asia Percent Public Private Aspirational SSA Structural SSA 35 8500 30 25 6500 20 15 4500 10 5 2500 0 500 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: World Bank Source: World Bank Note: Aspirational SSA includes Cote d’Ivoire, Morocco, Rwanda, and Senegal; Structural SSA: Benin, Guinea; Aspirational Asia: Bangladesh and Vietnam. Factors preventing faster and more inclusive growth are mostly structural. Despite some improvements, public and private investment rates have remained insufficient to bring the stock of productive capital per person close to peers (Figure 1.3) and to significantly boost Togo’s growth potential, which remained around 5.5 percent in the years leading to the COVID-19 pandemic. In fact, despite the government's push for public investment since 2010, the level and quality of infrastructure remain below that of most peer countries. Private capital stock in per capita terms has also grown, but from a low level and at slower rate than aspirational peers (Figure 1.4). Several factors are often cited as hindering private investment in Togo including gaps in connectivity infrastructures; constrained access to finance; barriers to trade and competition; perceived weaknesses in public sector governance; and mismatches between the demand and supply of skills on the labor market. As a result, produced capital per person in Togo is about 38 percent lower than the average of peers, whereas natural and human capital are generally comparable (Figure 1.5). One of the most persistent and binding constraints to structural transformation in Togo is the low and mostly stagnant productivity in agriculture (Figure 1.6). This reflects limited access to yield-enhancing inputs (seeds, fertilizers, phytosanitary products), low levels of mechanization and irrigation, and high exposure to climate shocks. Considering these challenges, the second Chapter of this Economic Update investigates the merit of scaling up agroforestry systems in the face of growing climate pressures, demonstrating their potential for boosting food security, income diversification for smallholder farmers and carbon sequestration. Growth in Togo picked up in 2023, reflecting strengthening private investment and exports, despite subdued global demand and tighter financing conditions. Preliminary estimates suggest that growth picked up to 6.4 percent in 2023, with an increased contribution of fixed capital formation and exports. Regarding public investment, new infrastructure work and the purchase of security equipment to address continued instability in the North were partially offset by spending cuts in other sectors, while private investment remained dynamic, supported by ongoing projects such as the development of the Adetikope Industrial Plateform (PIA). This industrial zone aims to create a hub for activity in sectors like textiles, agriculture and food processing, electronics and building materials, and offers integrated logistics and other services to companies located in the zone. It is in the process of developing infrastructure and production facilities, with the organic soybean processing plant (Togo Organics and Naturals) starting production in 2023. Export growth is estimated to have recovered to 6.8 percent in 2023, from 2.8 percent in 2022, despite relatively subdued global demand and regional instability. Private consumption growth reached an estimated 4.3 percent in 2023, benefited from the effect of declining inflation on purchasing power. Figure 1.5: Produced and human capital are lagging Figure 1.6: Agricultural productivity remains low and peers and remain below natural capital endowment stagnant, hindering the sector’s development Wealth per capita (USD per capita), 2018 Total Factor productivity in agriculture (2015=100) Produced capital Natural capital 130 36000 Human capital Total wealth 30000 120 24000 110 18000 100 12000 6000 90 0 80 Bangladesh SSA Senegal Togo Ghana Morocco LIC Sierra Leone Cote d'Ivoire Rwanda Benin Guinea Vietnam 70 2001 2005 2009 2013 2017 2021 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 Source: The Changing Wealth of Nations (2022) Source: USDA Note: TFP measures the efficiency of agricultural production obtained from all land, labor, capital, and material resources used. On the supply side, industrial production exhibited positive momentum during the second half of 2023, supported by the expansion of the extractive sector and the production of electricity (Figure 1.7) . This performance, supported by rising global demand and prices for raw phosphate coincided with government initiatives to revitalize the extractive industry and strengthen its local value chain. Electricity production and distribution was another driver of industrial activity, exhibiting a significant increased in the final quarter of 2023 (Figure 1.8). However, Togo, and in particularly the capital Lome, experienced increased power shortages, notably related to import disruptions from neighbouring Ghana amid growing arrears of the public utility CEET. Despite positive trends in industry at the end of 2023, the capacity utilization rate in the sector dropped slightly from 76.5 percent in 2022 to 75.5 percent in 2023. This highlights that modest demand conditions still prevailed for most of 2023. Figure 1.7: Industrial activity recovered in the second Figure 1.8: … and rising electricity production amid half of 2023, supported by the phosphate sector growing demand Industrial production, Jan=100 Production of electricity, Jan=100 130 2020 2021 2022 2023 130 2020 2021 2022 2023 120 120 110 110 100 100 90 90 80 80 70 70 60 60 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Inseed Source: Inseed The service sector experienced growth as well in 2023, albeit moderate. Value added of the tertiary sector increased by an estimated 7.6 percent in 2023, compared to 6.8 percent in 2022. The turnover indicators for commercial services, which include financiall services, transport, real estate, ICT and accomodation and catering were robust during the in second half of the year, while wholesale and retail trade sectors picked up as well. The construction sector also showed signs of recovery, following a weak start of 2023. Opinions of business leaders in the sector rose above its long-term trend in the fourth quarter of 2023. The agriculture sector continued to expand in 2023 on the back of a favorable season. Agricultural production increased in 2023, supported by favorable weather, higher prices, and an improvement in the business environment. Cumulative rainfall, which increased significantly from 2022 and surpassed 5-year averages (Figure 1.9), coupled with continued government efforts for improved access to agricultural inputs and mechanization services, has created conditions conducive to a relatively favorable crop harvest for the 2023/24 season. Cereal production for 2023 is estimated at 1.5 million tons, marking a 5 percent increase compared to last year and roughly 9 percent above the five-year average (2018-2022). The increase was notably driven by a 5.8 percent improvement in the national Maize production, a 4.1 increase in Rice (Paddy), despite a reduction in their total sown area. The cotton sector also witnessed an increase of around 28 percent in production compared to the previous campaign, marking the first upturn since 2020, supported by the expansion of cultivated areas. Figure 1.9: Above average cumulative rainfall Figure 1.10: .... but food insecurity remained high, supported a good 2023-24 agriculture harvest particularly in the Savanes region Cumulative rainfall, mm Population facing acute food insecurity by region 500 140,000 5y avg 2022 120,000 400 2023 100,000 300 80,000 60,000 200 40,000 100 20,000 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Savanes Maritimes Plateaux Kara Centre Source: World Bank Source: IPC/Cadre Harmonisé reports for West Africa 1.2 POVERTY AND FRAGILITY Despite rising agriculture production, food insecurity remained significant in 2023. Togo remained in 2023 among the 10 countries most affected by food insecurity 3, with around 30 percent of the population facing at least some degree of food insecurity, compared to only 10 percent in 2019. An estimated 6.2 percent of the population faced acute food insecurity between October and December 2023, down from 8.8 percent in December 2022 (Figure 1.10). High food insecurity notably reflects the continued spread of insecurity in the north, and the lingering impact of the recent rise of food, energy, and transport prices. The situation is particularly dire in the Savanes region where one-third of the country’s severely food-insecure population lives. There is also a negative correlation between wealth and severe food insecurity, with the share of those severely food insecure dropping incrementally across wealthier quintiles. The poverty rate is estimated to have slightly decreased since 2021, but the overall number of poor continued to rise. Since 2021, rising inflation impacted households ’ purchasing power, and despite sustained economic growth and higher agricultural incomes, the national poverty rate is estimated to have declined only by 1.9 percent in 2023 from the 43.8 percent registered in 2021 (Figure 1.11). Using the international poverty 3Food security report, Banque Mondiale (Fe bruary 15, 2024) ; Résultats de l’analyse de l’insécurité alimentaire et nutritionnelle aiguë courante en octobre-décembre 2023 et projetée en juin-août 2024. line at $2.15 per day, the extreme poverty rate in Togo was estimated at 26.2 percent, still well above other countries in the region. This slow poverty reduction coupled with faster population growth led to about 40,000 additional extreme poor between 2021 and 2023. More generally, poverty incidence remains elevated with large geographic and demographic disparities. Rural-urban gaps also remain high (Figure 1.12), as 58.2 percent of the rural population was poor in 2021, compared to 20.1 percent in Lome and 32.3 percent in other urban areas. The Savanes region recorded the highest poverty rate at 64 percent in 2021 with a 2 percentage points increase since 2018. Nevertheless, consumption inequality, measured by the Gini coefficient, declined from 0.38 to 0.34 between 2018 and 2021. This was fueled by an increase in the consumption growth of the rural poor, predominantly engaged in agriculture, who benefited from the 2020-22 increases in the price of key staples, such as rice and maize. Figure 1.11: Poverty has declined in recent years Figure 1.12: …but the rural-urban divide remains GDP per capita and poverty rate4 (percent) Poverty rate by areas, 2018-2021 GDP per capita growth Percent 2018 2021 44.6 Poverty rate 4.0 60 44.4 3.5 44.2 3.0 50 GDP per capita (%) Poverty rate (%) 44.0 2.5 40 2.0 43.8 1.5 30 43.6 1.0 43.4 0.5 20 43.2 0.0 10 43.0 -0.5 42.8 -1.0 0 2017 2018 2019 2020 2021 2022 2023 National Lome Other urban Rural Source: World Bank calculations based on EHCVM 2018, EHCVM Source: World Bank calculations based on EHCVM 2018 and 2021 and data portal (https://data.worldbank.org/). EHCVM 2021 Note: GDP per capita (constant price 2015 LCU); Blue scatters denote estimated poverty rate, while yellow scatters show survey period. The pace of poverty reduction has been affected in recent years by increased fragility and security risks. Sharing a 131 km border with Burkina Faso has exposed the country to spillovers from the Sahelian crisis, and these risks are compounded by the lagging development of the northern region of Savanes where factors of fragility concentrate. Climate change exacerbates existing fragility risks and poses another threat for progress with north of Togo being particularly vulnerable to the impacts of climate-related shocks, including drought and floods. In response to the growing fragility, the government is implementing a national prevention strategy supported by substantial investments funded by the government and development partners, notably in the northern regions. In addition, Togo is hosting a growing number of refugees necessitating additional support to enhance services provisions for both refugees and their host communities. 4The methodology for estimating poverty follows three steps: (i) Estimate the share of household consumption derived from labo r income across different sectors (agriculture, manufacturing, services) and from non-labor sources for each household; (ii) Assume that nominal household income (proxied by consumption) from each source grows at the same rate as the nominal GDP growth in the respective sector, or at the overall GDP growth rate for non-labor income; (iii) Calculate the real value of consumption by dividing nominal consumption by the price level, which grows at the rate of inflation. This calculation takes into account household-level consumption of own-produced food, purchased food, and non-food items, with the assumption that own-produced grains are not subject to inflation. Poverty estimates presented here are based on SM2024 MFMOD projections and are subject to change. Figure 1.13: Headline and core inflation have continued to ease during 2023 Inflation, year-to-year (percent) Percent Headline Food 20 Core (excl. food and energy) 15 10 5 0 -5 Apr-20 Apr-21 Apr-22 Apr-23 Jul-23 Jul-20 Jul-21 Jul-22 Oct-23 Oct-20 Oct-21 Oct-22 Jan-20 Jan-21 Jan-22 Jan-23 Source: INSEED, World Bank 1.3 INFLATION, MONETARY POLICY, AND FINANCIAL STABILITY Inflationary pressures continued to recede in 2023, on the back of declining food and energy prices . The rising cost of imported goods and second round effects of high energy costs on domestic value chains have kept headline inflation high during the first half 2023, while a strong harvest, moderating global international prices and monetary policy tightening helped ease inflation in the second half of the year, resulting in an average annual 5.3 percent inflation in 2023, down from a 7.6 percent in 2022 (Figure 1.13). Yet, inflation in Togo remained above the regional average of 3.7 percent and the 3 percent threshold of the BCEAO, reflecting persistently high core inflation, which averaged 6.7 percent in 2023. Domestic prices of major staple remained above pre-pandemic levels, which continue to weigh on non-farming household purchasing power and on food security in some parts on the country. For instance, cereal prices in December 2023 were still 41.5 percent higher than in January 2020. A tighter monetary policy stance contributed to temper domestic price pressures, particularly for non-tradable goods. Although inflationary pressures in WAEMU were primarily externally driven over the last two years, the Central Bank of West African States (BCEAO) hiked policy interests by a cumulative 150 basis points since mid-2022, which helped anchoring inflation expectations. Despite tighter monetary policy, credit to the economy grew significantly in 2023, averaging 16.5 percent compared to 6.1 percent in 2022. In particular, credit to the non- financial private sector expanded by 15.3 percent, compared with 8.3 percent in 2022, indicating positive private investment trends. Togo’s banking system still faces challenges that need close monitoring. Nearly a quarter of banking assets in Togo were held in 2023 by institutions failing to comply with capital adequacy standards. Notably, two key institutions – the remaining state-owned bank UTB and the recently privatized BTCI- still exhibited negative capital positions amounting to about 1.8 percent of GDP. As a result, the sector-wide solvency ratio remained below the mandated 11.25 percent level, albeit improving to 6.4 percent in 2023, up from 3.0 percent in 2020. Average asset quality improved as well, with the ratio of non-performing loans currently sitting at 8.5 percent, down from 16 percent at the end of 2020. The authorities have outlined plans to address remaining vulnerabilities in the sector, including capital injections to elevate UTB’s bank’s regulatory capital above zero, plans to privatize the bank or implement alternative measures to ensure the bank’s adherence to prudential norms. The authorities have also extended support to the privatized bank to strengthen its capital adequacy, further bolstering banking sector stability. These interventions aim to solidify Togo ’s banking sector and minimize risks to financial stability. 1.3 FISCAL POLICY AND DEBT SUSTAINABILITY The fiscal deficit slightly narrowed in 2023, despite some spending slippages. Following the sharp increase in the budget deficit since 2019, the government has now entered a period of needed fiscal consolidation. In this context, the fiscal deficit moderated to 6.6 percent of GDP in 2023 from the three-decade high of 8.3 percent in 2022, on the back of lower transfers and subsidies, restraints in public spending on goods and services and increased revenues. On the revenue side, ongoing reforms to broaden the tax base and improved tax collection increased the tax-to-GDP ratio to 14.7 percent of GDP. However, on the spending side, compared with the 2023 initial budget law, security and military spending was higher than predicted, which was partially offset by reduced purchases of goods and services. Nonetheless, public debt continued to rise and Togo’s reliance on increasingly tight regional bond markets has amplified debt financing pressures. Debt levels continued to rise in 2023, reaching 67.1 percent of GDP, compared to 66.3 percent in 2022, above peers like Benin or Cote d’Ivoire, but lower than Senegal and Rwanda (Figure 1.14). The rise was primarily driven by a 2 percentage points of GDP rise in domestic debt to 42.5 percent of GDP, accounting for about 62 percent of total debt. With average yields on Togo government bonds rising to 7 percent on average in 2023 (from 6 percent in 2022), which has put pressure on debt service costs amid large refinancing needs. External public debt in percentage of GDP slightly rose to 26.1 percent in 2023. While the January 2024 Debt Sustainability Analysis assessed Togo to be at high overall risk of public debt5 distress, it remains at moderate risk of external debt distress. Figure 1. 14: Overlapping crises have deepened debt challenges in Togo General government debt in Togo and peer countries, 2021-23 Percent of GDP 2021 2022 2023 100 80 60 40 20 0 Source: World Bank 1.4 TRADE AND CURRENT ACCOUNT BALANCE The trade deficit narrowed in 2023, on the back of a moderate improvements in the terms of trade. Goods exports in Togo saw a 14.4 percent increase in value in 2023, largely stemming from robust demand and prices for raw phosphate, which covered 45.6 percent of the country’s total exports in 2023. While rising imports partially offset export revenue gains, the overall trade deficit narrowed, notably thanks to terms of trade improvements (Figure 1.15). The Port of Lome, increasingly positioned as a regional hub, recorded a modest traffic increase of 0.7 percent compared to 2022 (Figure 1.16). However, transshipment activities and the number of ships decreased due in part to slowing activities in the neighboring countries and sanctions on Niger. 5 Togo’s public debt includes obligations of the central government and public entities (e.g., CEET). Figure 1.15: A strong rebound in export in Q4 helped Figure 1.16: Traffic in the port of Lome continued to narrow the merchandise trade deficit expand in 2023, despite sanctions on Niger Merchandise trade balance Traffic volume in the port of Lome Billion CFAF Import Export Exports Transshipment Total traffic Imports 35 Ship (number, RHS) 2,000 400 Trade balance 30 200 1,500 25 0 20 1,000 -200 15 -400 10 500 5 -600 2020Q4 2021Q1 2022Q2 2022Q3 2020Q1 2020Q2 2020Q3 2021Q2 2021Q3 2021Q4 2022Q1 2022Q4 2023Q1 2023Q2 2023Q3 2023Q4 0 - 2012 2014 2016 2018 2020 2022 Source: INSEED, World Bank Source: Port of Lome, World Bank The current account deficit increased somewhat in 2023 but remained broadly aligned with fundamentals. The current account deficit reached an estimated 3.3 percent of GDP in 2023, slightly up from 3.0 percent in 2022, despite a narrowing trade deficit. This increase notably reflects declining remittances, which continued to moderate from their peak in 2020, although they remain above an average of 6 percent of GDP over 2010-2019 and thereby constituting an important source of funding for the trade deficits. The country’s real effective exchange rate appreciated by about 2.5 percent in 2023, driven by the relative appreciation of the Euro against the USD and reflecting relatively high domestic inflation. Nonetheless, the real effective exchange rate for Togo still appears to be slightly undervalued (between 3 and 5 percent) compared to the value implied by economic fundamentals. Foreign exchange reserves in 2023 dropped to an estimated 3.6 months of imports, down from 4.3 months in 2022, signaling reduced external buffers. 2. PROSPECTS AND RISKS 2.1 GLOBAL AND REGIONAL CONTEXT Global trade is expected to remain soft in 2024, with demand from advanced economies and China projected to slow, before recovering gradually thereafter. Growth in expected to soften in the United States and China, remain anemic in the Euro area, and increase only slowly in Sub-Saharan Africa, remaining well below its long-term average (Figure 1.17). Weakening growth in China is expected to negatively impact the demand for metals and other raw materials, while recent attacks on commercial vessels transiting the Red Sea have disrupted key shipping routes and supply chains. As a result, global trade should remain soft in 2024, before recovering at a significantly slower pace than during previous upturns (Figure 1.18). Given the outlook for key trading partners and trade recorded in the first semester of 2024, export volumes in Togo are expected to grow by 4.9 percent in 2024, compared to 6.8 in 2023, before gradually accelerating to 6.8 percent in 2025 and 7.8 percent in 2026. In this context, Togo’s current account deficit would widen to 3.6 percent of GDP in 2024, before narrowing to 3.5 percent and 3.4 percent in 2025 and 2026, respectively, as the global economy strengthens and exports accelerate. International commodity prices should continue to ease in 2024-26, implying a slight deterioration in Togo’s terms of trade in the short term. Most commodity prices started weakening alongside robust supplies and moderating demand; however, they remain above pre-pandemic levels. The recent conflict in the Middle East has so far had only a muted impact on international oil prices, which are projected to edge down to $81/bbl in 2024 in view of adequate oil supplies as well as slowing global demand. Metal prices are set to continue their decline as slower growth in China further weighs on demand, while food prices are expected to soften further in a context of continued ample supplies for major crops. The benefits of lower import costs for oil, metals, and food should be more than offset by lower export prices for phosphate and agriculture products, resulting in a slight deterioration of the terms of trade for Togo. Figure 1.17: The economic outlook for Sub-Saharan Figure 1.18: The global trade recovery is one of the Africa remains moderate slowest on record Growth in Sub-Saharan Africa Global trade recovery after 2020 and past recessions Percent 2000-19 average Index, 100 = t-1 7 130 Past global recessions 6 2020 recession 5 120 4 3 2 110 1 0 100 2023e 2022 2023e 2022 2023e 2023e 2022 2022 2024f 2025f 2024f 2025f 2024f 2025f 2024f 2025f 90 Sub-Saharan Angola, Industrial- Non-resource- t-1 t t+1 t+2 t+3 t+4 Africa Nigeria, and commodity rich countries South Africa exporters Source: WB Global Economic Prospects, January 2024 Source: WB Global Economic Prospects, January 2024 Figure 1.19: WAEMU foreign exchange reserves are Figure 1.20: Partly due to the slow pace of monetary worryingly low… policy tightening compared with the Euro area WAEMU foreign exchange reserves Policy interest rate of BCEAO and ECB (percent) 6.0 5.0 BCEAO ECB 5.5 4.0 5.0 3.0 4.5 2.0 4.0 1.0 3.5 0.0 Apr-19 May-21 Nov-18 Nov-23 Jul-20 Mar-22 Aug-22 Oct-21 Jun-18 Dec-20 Jun-23 Feb-20 Sep-19 Jan-23 Jan-18 3.0 2017 2018 2019 2020 2021 2022 2023 Source: BCEAO, World Bank Source: BCEAO, World Bank Regional financing conditions are expected to remain challenging as Togo seeks to refinance a significant portion of its public debt. Global financing conditions are expected to gradually ease, as monetary policy in advanced economies shifts to a more accommodative stance and risk appetite remains robust. In WAEMU, however, financing conditions have continued to tighten at the start of the 2024 reflecting concerns about governments’ growing debt and refinancing needs, diminishing currency reserves and policy uncertainty associated with the announced exit of Mali, Niger, and Burkina Faso from ECOWAS. Against this backdrop, the central bank BCEAO is expected to continue raising interest rates this year, reflecting still above-target inflation as well as the need to prop up foreign exchange reserves that have fallen to worryingly low levels (Figure 1.19) by attracting capital inflows through an increased interest rate differential with the Euro Area (Figure 1.20). Additional tightening could be slightly more pronounced than previously expected due to pressures on the FCFA associated with reduced capital flows to Mali, Niger, and Burkina Faso. Togo remains highly exposed to regional debt market conditions. In fact, outstanding public debt maturing in 2024 is expected to represent 9.75 percent of GDP in Togo, of which 7.42 percent of GDP are accounted for by debt issued on regional markets. Figure 1.21: The port of Lomé is critical for Figure 1.22: … and is a vital entry and exit point for transshipment in the region… goods destined for landlocked countries Volume of transshipment to AES from selected ports Transshipment (percent), 2022 Million tons Via Abidjan Port Via Tema Port 10.0 via Lomé Port 8.0 6.0 4.0 2.0 Benin Côte d'Ivoire Ghana Mali 0.0 Niger Burkina Faso other 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: Ports of Abidjan, Tema, and Lomé Statistics Source: Port of Lomé Statistics Figure 1.23: Small scale informal trade accounts for a significant share of agriculture and food exports to neighboring countries Food exports from Togo to neighboring countries Percent of total trade Customs-recorded SSCBT 50 40 30 20 10 0 Benin Burkina Faso Ghana Source: World Bank The announced exit of Mali, Niger and Burkina Faso from ECOWAS is expected to imply minimal trade disruptions for Togo in the short term, but longer lasting uncertainty around regional integration. The Port of Lomé plays a crucial role for Mali, Niger, and Burkina Faso’s access to international shipping (Figure 1.21), with Burkina Faso alone accounting for about 80 percent of transshipment passing through the Port of Lomé (Figure 1.22). Moreover, Togo exported 18.7 percent of its manufactured goods to the three countries in 2022, while in return, these countries exported 2.8 percent of their agricultural products like cotton, livestock, and shea nuts to Togo. Informal cross- border trade between Togo and Burkina Faso also plays a significant role, notably for food products that are key for regional food security (Figure 1.23). Togo and the three Sahel countries also share important infrastructures, including the critical Lomé-Ouagadougou-Niamey economic corridor (1,065 km) connecting these countries to the Port of Lome. cross-border energy infrastructure and regional fiber optic networks. In particular, the Lomé- Ouagadougou corridor is estimated to generate over $1 billion in economic activity each year and support over 1 million jobs, yet the regional uncertainty threatens its development and use. Short term trade disruptions are expected to be minimal, reflecting the recent lifting of sanctions on Niger, prospects of a negotiated transition, and the continued implementation of a common trade policy among WAEMU countries, which could even imply some positive trade diversion from non-WAEMU ECOWAS countries such as Ghana. Overall, a deteriorating outlook for Mali, Niger, and Burkina and policy uncertainty associated their exit from ECOWAS is only expected to shave off about 0.1 percentage point to Togo’ s growth projections in 2025. 2.2 FISCAL CONSOLIDATION EFFORTS Significant fiscal consolidation is needed in the short term to reduce fiscal financing needs and public debt from current high levels. In line with commitments under the WAEMU convergence criteria and the new ECF program with the IMF, the fiscal deficit is expected to decline to 4.5 percent of GDP in 2024 (excluding the 1.6 percent of GDP one-off effect of the recapitalization of the state-owned bank UTB) and 3.0 percent in 2025, supported in part by an ambitious domestic revenue mobilization strategy. Sustained reforms of the tax and customs policy and administration and the rationalization of tax expenditures should help increase tax revenues by a cumulative 1.5 ppt of GDP between 2022 and 2025, which is more significant than during the 2017-19 fiscal consolidation period (Figure 1.24). Growth-friendly fiscal consolidation will necessitate the right balance between efforts to restraints spending and the preservation of key investments and social programs. On the expenditure side, efforts are expected to concentrate on reducing capital spending, and transfers and subsidies, notably supported by reduced fuel and fertilizer subsidies as international prices moderate. Capital expenditures are projected to fall by a cumulative 3.0 ppt of GDP between 2022 and 2025, reaching an average of 6.9 percent of GDP in 2025-26 (Figure 1.25). This adjustment, albeit significant, is about half of the 2016-19 cuts and would lead to a public investment to GDP ratio in 2025 that would be more than twice higher than in 2019. The dampening impact on growth is expected to be largely offset by a pickup in private investment and consumption. Cuts would be larger for domestically financed investments, but external financed programs are also expected to face constraints (Figure 1.26). Strengthening the selectivity and impact of public investment and focusing on the quality of public spending will be particularly critical to support priority investments and social spending at the current juncture. However, the effectiveness of fiscal consolidation efforts may be impeded by election and security-related spending, which could either delay deficit reduction or negatively impact priority investments. Figure 1.24: Improvement in revenue mobilization is Figure 1.25: Planned cuts to government spending driven by indirect and international trade taxation target capital spending and transfers Cumulative projected improvement in domestic Cumulative projected adjustment in fiscal spending revenue 18 30 15.9 26.0 0.01 0.1 0.1 1.7 16 0.3 0.7 14.0 0.9 25 3.0 14 21.5 12 1.1 20 0.1 0.5 0.3 0.2 0.3 0.7 Percent of GDP Percent of GDP 10 15 8 10 22.9 7.0 12.4 13.5 16.6 6 4 5 2 0 0 G&S Transfer Wages 2022 2025 Interest Capital G&S Direct Trade 2022 2025 Int. s Source: World Bank Source: World Bank Note: The tall bars depict tax revenue levels at the beginning (e.g., Note: The tall bars show spending levels at the beginning (e.g., 12.4 percent of GDP in 2016 and 13.9 percnet in 2022) and at the end 23.1 percent of GDP in 2016 and 25.9 percent in 2022) and at the of each fiscal consolidation episode. The rainfall bars show the end of each fiscal consolidation episode. The rainfall bars show anticipated cumulative improvement in 2023-25, while the scatter the anticipated cumulative adjustment in 2023-25, while the indicates the achieved improvement during 2017-19. Red scatter scatter indicates the 2017-19 adjustment. Red bar/scatter signify points signify a contraction. a contraction. Figure 1.26: …with particularly large cuts planned for Figure 1.27: Public debt will remain high, but should domestically financed public investment start declining in 2025 Initial vs revised investment plan for 2024-25 Budget deficit and public debt Initial PIP domestic Initial PIP external Budget deficit Revised PIP domestic Revised PIP external 10 Percent of GDP 90 12 12 Public debt (RHS) 80 8 10 10 70 6 60 Percent of GDP 8 8 50 4 6 6 40 2 30 4 4 20 0 2 2 10 -2 0 0 0 2011 2013 2015 2005 2007 2009 2017 2019 2021 2023 2025 2024 2025 2026 Source: World Bank Source: World Bank Public investment management reforms could be associated with significant improvements in public service delivery in a tight fiscal framework. Recent assessments of public investment management quality in Togo show progress on project selectivity and planning but continued shortfalls on budgeting, asset management, and transparency. In parallel, public investment efficiency, measured here as the relationship between the quality of public infrastructure and the public capital stock per person, has significant room for improvements in Togo, as it is estimated to be about 14 percent lower than in Cote d’Ivoire, 27 percent lower than in Vietnam, and 67 percent lower than in Singapore, which sits on the efficiency frontier (Figure 1.28). Potential gains from upgrading Togo’s public investment management framework are assessed through a regression linking public investment efficiency scores and Public Investment Management Assessment (PIMA) scores across 34 Sub-Saharan African countries. Results confirm a positive relationship between PIMA scores and public investment efficiency in Sub-Saharan Africa, illustrating that reforms could have significant impacts on public service quality within existing budget constraints. In fact, if Togo was able to increase its PIMA score to match levels in Botswana, the Gambia, and Cote d’Ivoire (best performers in the region), gains in terms of infrastructure quality could range between 14 and 23 percent without increasing overall investment levels (Figure 1.30). Results also confirm a positive relationship between governance indicators and public investment efficiency, highlighting the importance of improved government effectiveness and accountability. Combining effective fiscal consolidation and debt management will be crucial to reduce fiscal sustainability risks. Public debt is expected to start declining from 2025 onwards, as the government hits the 3 percent deficit target (Figure 1.30). However, in the short term, overall debt distress risks remain high as refinancing needs on domestic debt are elevated and debt services costs have increased. Togo’s debt-management framework has improved, notably through the publication of a Medium-Term Debt Strategy, an Annual Borrowing Plan, an Annual Report on Public Debt, Fiscal Risk Statement, and a Public Debt Portal on the Ministry of Economy and Finance (MEF) website, but efforts to reduce debt-service costs and extend debt maturity on Togo’s large domestic debt remain critical. The government’s medium-term debt strategy outlines a significant compositional shift of the portfolio from 34 percent external debt in 2022 to 46 percent in 2025 (Figure 1.31), with concessional lending comprising 42 percent of overall new loans compared to the current 16 percent. Figure 1.28: Access to infrastructure is low given Figure 1.29: Expected efficiency gains are large if Togo Togo’s current level of public capital stock raises its PIMA score to best performing Sub-Saharan Africa peers. Estimated efficiency gains from matching PIMA scores Infrastructure access and public capital stock, 2021 of selected SSA countries Infrastructure access Efficiency score Efficiency score after PIMA reforms 100 SGP Current efficiency score 0.6 90 80 0.5 70 0.4 60 Index 50 0.3 40 30 0.2 Mauritius Nigeria Senegal Cameroon Kenya Burkina Faso Ghana Gambia Zambia Mali Sierra Leone Côte d'Ivoire Botswana Benin 20 TGO 10 0 Public capital stock per person 1 2 3 4 5 Source: World Bank Source: World Bank staff estimates Note: The efficient frontier curve shows which countries have the Note: Based on most recent official PIMA scores, which in the case best combination of public capital stock per person and of Togo date back from 2016 infrastructure quality. Figure 1.30: Domestic debt share in overall public debt Figure 1.31: … which will help contain rising debt is projected to drop in the medium term… service costs Debt composition Debt service costs 80 2.5 Interest payments 90.0 Domestic public debt External public debt Share of domestic debt service cost (RHS) 2.4 85.0 60 Percent of total Percent of GDP Percent of GDP 2.3 80.0 40 2.2 75.0 20 2.1 70.0 0 2.0 65.0 2020 2021 2022 2023 2024 2025 2026 2020 2021 2022 2023 2024 2025 2026 Source: IMF, World Bank Source: IMF, World Bank 2.3 GROWTH AND POVERTY PROSPECTS Growth in Togo is projected to moderate in 2024 reflecting ongoing fiscal consolidation efforts and regional uncertainty, before regaining momentum in 2025-26. With external demand expected to be subdued and fiscal consolidation measures intensifying, growth in Togo is projected to slow to 5.3 percent in 2024, before gradually strengthening to 5.4 percent in 2025 and 5.8 percent in 2026 (3.5 percent in per capita terms). Domestic demand will be supported by ongoing and planned private investment projects and a recovery in consumer spending as inflationary pressures taper down (Figure 1.32). Exports will provide an additional boost from 2025 as the global economy regains some strength. Projected growth in 2025-26 would be aligned with the country’s estimated potential, assuming ongoing reforms supporting increased agriculture productivity, private investment, and labor force participation. The announced exit of Mali, Niger and Burkina Faso from ECOWAS is expected to lead to relatively modest trade disruptions in the short term but is raising regional uncertainty, which could weigh on investment sentiment, notably around the development of the Lome-Ouagadougou-Niamey economic corridor. Moreover, escalation of political tension and social unrest, as observed in 2018, could disrupt economic activity, hindering growth. Compared to previous projections, growth estimates have been revised downwards by 0.2 ppt in 2025, reflecting weaker external demand prospects, tighter financing conditions and increased regional uncertainty. Despite the downward revisions, a favorable growth outlook should help maintain income per capita levels on an upward trajectory that has now been mostly uninterrupted since the early 2010s (Figure 1.33). Figure 1.32: Buoyant private consumption and Figure 1.33: and keep GDP per capita on a steady investment will support growth in 2024-25 upward trend Demand contribution to GDP growth (percentage GDP growth and GDP per capita points) Net Exports Private investment Percent Index = 100 in 1980 Public investment Government Consumption 20 GDP growth 120 Private Consumption GDP GDP per capita (RHS) 8 15 110 10 6 100 5 4 90 0 80 2 -5 -10 70 0 -15 1980 60 2001 2007 2013 2019 2025 1983 1986 1989 1992 1995 1998 2004 2010 2016 2022 -2 2022 2023 2024 2025 2026 Source: World Bank Source: World Bank Figure 1.34: Agriculture is the main source of income of Figure 1.35: Poverty rate is set to decline in rural and rural and poor populations urban areas, with the gap between the two widening slightly Share of household income (percent) Projected poverty rate in Togo and across areas (percent) agriculture industry services nonlabor Poverty rate Total Rural Urban nonpoor 55 45 poor 35 rural 25 urban 15 0 20 40 60 80 100 2021 2022 2023 2024 2025 2026 Source: World Bank Source: World Bank Poverty will decline in coming years, becoming increasingly concentrated in rural areas. Real GDP per capita growth is expected to remain sustained, but should moderate to 2.9 percent in 2024, before recovering again to about 3.5 percent by 2026. Better performance of the services and agriculture sectors, which employ the largest share of the poor population, would contribute to inclusive and sustained poverty reduction in the near and medium term (Figure 1.34). In this context, the poverty rate is projected to gradually decline to [40.4] percent in 2024 and [36.1] in 2026 (Figure 1.35). The decline is expected to be accompanied by an increasing proportion of the poor living in rural areas. The establishment of a national social registry and improvement of the Novissi platforms should help enhance the targeting and effectiveness of social safety nets and disaster response mechanisms. Efforts to accelerate structural transformation, through agricultural yields improvement, ongoing projects around the PIA platform, and the development of the agro-industry would contribute to welfare improvement in rural areas, where most poor reside. Nevertheless, significant progress is needed to ensure that these efforts are inclusive, particularly for women, and to reduce income and gender inequalities. Family planning and other policies supporting lower fertility rates could also help improve education and health outcomes and provide women with greater opportunities to join the work force and lower the incidence of poverty. The agriculture sector in Togo is at a crossroads, facing both significant challenges and promising opportunities in coming years. On the upside, recent investments, and reforms under the government’s 2020 -25 Roadmap are expected to help enhance agricultural productivity and bolster the agro-industrial sector, thereby creating new export opportunities. Initiatives such as the Agricultural Development Areas (ZAAP) program, the establishment of agricultural training centers, the expansion of the Kara Agropole, and the operationalization of the Agricultural Transformation Agency are expected to help support the transformation of the sector over time, while planned investments under the 2024-28 master plan for irrigated agriculture would gradually reduce the reliance on rain- fed systems, thereby decreasing exposure to climate variability. However, the adverse effects of climate change are increasingly evident, with erratic rainfall patterns leading to more uncertain crop production. This unpredictability is impacting the readiness of investors to support agriculture transformation while disproportionately affecting Togo’s small-scale farmers who are often ill-equipped to manage such climate shocks. Togo’s cotton sector also has a significant potential for expansion, but outdated infrastructure and limited access to inputs by farmers restrict productivity, fiber quality and competitiveness on international markets, while value addition through local processing remains limited. At present, agriculture output is expected to grow by close 4.5 percent per year in 2024- 26, compared with an average of 3.3 percent over the preceding decade, but the adoption of more productive and climate resilient practices, alongside government support and private sector investment will be necessary to unlock the full potential of the sector. Togo’s industrialization efforts are attracting new investments, but progress remains gradual. Togo’s Adétikopé industrial plateform (PIA) is attracting new investors, with nearly a dozen recently announcing their commitment to building production facilities in sectors ranging from garment, plastic, beverage, cotton, food processing, and aluminum and plastic pipe manufacturing. In all, the industrial zone now boasts 21 investors, 13 of whom have already begun operations or are building facilities. The PIA still harbors vast potential for growth, with around 150 hectares of unoccupied surface available for leasing, and is seeking to attract local investors, notably in biofuel, agri- food, and services, including with a reduction in the land lease price. Togo’s extractive sector also offer prospects of significant investments if the right conditions are met. In fact, while existing phosphate reserves from shallow clay deposits are expected to be exhausted over the next decade, additional carbonate phosphates have been identified in rock deposits and are estimated to have a potential for 50-100 years of production of five to ten million tons per year. However, unlocking this potential requires substantial investments in machinery, infrastructure, and processing plants. These investments offer an opportunity to convert to electrified or hydrogen-fueled equipment with low emission rates and adopt clear mitigation measures to prevent pollution. Similarly, untapping the potential of the Togo’s cement industry, including in supplying neighboring countries like Benin, Ghana, and Burkina Faso, would require substantial investments in capital-intensive clinker production, which represent a significant opportunity to invest in decarbonization efforts. These include the production of blended cement, which involves reducing the clinker content, adopt more efficient processes in cement manufacturing through best available technologies, use of renewable power and alternative fuels. Under baseline assumptions, industrial output is expected to grow at an average rate of 6.7 percent between 2024 and 2026, outpacing overall GDP growth. Over the medium term, growth is expected to stabilize around 5.5 percent, assuming continued reform efforts and the absence of major shocks. Continued structural reforms will be needed to prevent potential growth from declining in coming years because of diminishing demographic dividends and the possibility of longer lasting scars on human capital and productivity from a sequence of unprecedented shocks since 2020. In fact, to stabilize Togo’s growth a potential around 5.5 percent over the next decade, reforms would need to increase total factor productivity (TFP) and human capital gains by about 0.2 percentage points per year above pre-crisis trends, increase female labor force participation by 1.5 percentage points by 2030 (to 50 percent), and increase the private investment rate by 5 percentage point of GDP (to 25 percent of GDP) over the same period. This is considered ambitious but realistic targets if reforms supported by the current 2025 government roadmap continue and are scaled up in subsequent development program for the period 2025-30 (Figure 1.36). Increased female labor force participation would compensate for the projected slowdown in the active age population growth while capital deepening and total factor productivity would help lift potential growth from a dip around the late 2010s and into the COVID-19 pandemic. Such scenario would increase real income per capita levels by about 30 percent from 2023 to 2030, a gain of 5 percentage points above a status-quo scenario. The growth outlook remains subject to elevated uncertainty linked to the current regional and global context. Longer lasting disruptions to global trade, commodity, and financial markets following a sequence of shocks in recent years could have more severe knock-on effects on a small, open, and relatively indebted economy like Togo than currently anticipated. Additional downside risks include mounting security concerns in the North and a disorderly exit of Mali, Niger, and Burkina Faso from ECOWAS, which could lead to trade dislocations and a reversal of previous regional integration efforts over the medium term. Climate shocks and other natural hazards could also negatively affect agricultural productivity, lead to severe disruptions to activity due to more frequent floods and coastal erosion, impact human capital and amplify fragility risks in more exposed northern regions. On the fiscal side, efforts to reduce the budget deficit and debt levels may be impeded by election-related fiscal slippages and persistent insecurity in the northern region that may require additional spending. This combined with rising debt service costs could foreshadow a decline in priority investments, with negative implications for protecting the most vulnerable and for broader productivity and economic growth. The World Bank and IMF continues to place external debt firmly in the moderate risk category, but overall debt distress risk is considered high until 2026, when it should decline below risk threshold under baseline conditions (Figure 1.37). On a more positive note, upside risks to the current projections are also identified, including faster reform implementation, resolution of regional uncertainties, and an easing of global financing conditions that could stimulate private investment more than currently anticipated and help support fiscal consolidation efforts. Figure 1.36: Structural reforms are crucial to put Figure 1.37: Overall debt distress risk is considered high, potential growth on an upward trend but should fall below the risk threshold in 2026 Actual and potential growth scenario Total public debt: baseline, stress scenario and risk threshold (percent of GDP, Present Value) Percent Percent of GDP 6.0 Potential - baseline Potential - BAU 65 60 5.5 55 5.0 50 4.5 45 40 4.0 2023 2025 2027 2029 2031 2033 2020-23 2023-26 2027-30 Source: World Bank Source: World Bank, IMF 3. POLICY OPTIONS Reforms in key sectors are needed to enhance opportunities for more sustainable, inclusive, and green growth in Togo, with a particular focus on the welfare of poor and vulnerable populations. In particular, the modernization of the agricultural sector is critical to support structural transformation and help reduce large discrepancies in development outcomes between urban and rural areas. Reforms are needed to encourage more modern and climate-smart agriculture practices, increase land security to stimulate long term investments, accelerate rural electrification through renewable and decentralized energy generation solutions, and mobilize new financing instruments to support green investments in rural areas. In addition to the adoption of climate-resilient crop varieties and the use of fertilizer, enhancing water, soil, and forest conservation solutions would help improve resilience and increase productivity and welfare among agricultural communities. Accelerating Togo’s industrialization would also require a conducive environment for innovation, knowledge acquisition and competition in key sectors such as agrifood, garment, phosphate, cement, and fertilizers, including efforts to support their backward and forward value chains. Finally, boosting human capital and the resilience of vulnerable populations to shocks is a critical objective reduce poverty and fragility risks in Togo. Key reforms should seek to improve the targeting and effectiveness of social protection and disaster response programs, strengthen learning opportunities for students in underserved rural areas, ensure that higher education and vocational training can effectively respond to the skills needed for tomorrow’s jobs, and continue to progress towards greater gender equality in access to services and economic opportunities. Crafting a well-balanced and sustainable fiscal consolidation strategy represents one of the key challenges facing Togo currently. Prudent control of fiscal spending, including more selective public investment and cuts in unproductive subsidies is crucial to achieve the government deficit target and strengthen debt sustainability without hindering critical investment and social programs. Spending-based consolidation – notably through reduced transfers, subsidies, and the wage bill – are generally found to be more successful in reducing public debt level in a sustained way (Rugy and Salmon 2020; Alesina and Ardagna 2010; Ardagna 2009; Afonso, Nickel, and Rother 2006; Von Hagen, Hughes Hallett, and Strauch 2002). Additionally, well-targeted social safety nets measures are necessary to dampen the short-term distributional impacts of fiscal consolidation efforts. A narrow revenue base, reliant on few resources like phosphate exports and port activities, also calls for tax reforms promoting new sources of revenues that discourage environmentally harmful activities, strengthen tax compliance, and reduce poorly targeted or ineffective tax exemptions. Instances of successful revenue-based adjustments, such as those in Nigeria (1994-2000), Cote d’Ivoire (1993-2000), Zambia (1989-1994), were all bolstered by strengthened tax administration and complementary expenditures cuts. The growth-enhancing reforms presented above could also help offset contractionary impacts of fiscal consolidation efforts and support new sources of fiscal revenues. Delivering on ambitious development goals in a tight fiscal framework will require a heightened focus on the selectivity of public investment, effective project management and execution, and private sector engagement. Empirical research underlines that the positive relationship between public investments, infrastructure quality and growth is closely linked to the selectivity and efficiency of public investment projects. However, Togo’s public investment management framework still suffers from important shortcomings, including in the process of allocating funds to individual projects which lacks consistency and transparency, budget envelopes at the program level that are provisional and not sufficiently detailed, some rationing of project financing resulting in implementation delays, and a still nascent asset management system to address climate-related and other challenges. To overcome these shortcomings, Togo should reinforce its regulatory and institutional framework to clarify responsibilities and standards to be applied throughout the investment management cycle, and strengthen procedures for selecting, prioritizing, and programming public investment projects, and ensure greater coherence with the medium -term budgetary framework. Strengthening public service quality in a fiscally constrained environment also emphasize the importance of mobilizing private sector investments, which require among other things improved public financial management quality, more transparent and efficient preparation of PPP projects, a review the organization of responsibilities within government and agencies regarding the conduct of PPPs, and improvements of public procurement processes to ensure more competitive bidding. Table 1. Main Macroeconomic Indicators 2020 2021 2022 2023 2024 2025 2026 Projections Income and Economic Growth Real PIB growth, at constant market prices 2.0 6.0 5.8 6.4 5.3 5.4 5.8 Real PIB per capita growth (annual %) -0.4 3.5 3.3 4.0 2.9 3.1 3.5 PIB per capita- nominal (US$) 877 965 923 1014 1073 1135 1206 Private Consumption (% of PIB) 71.2 75.3 74.5 73.0 73.4 73.4 73.0 Gross Fixed Investment (% of PIB) 23.6 22.2 23.4 24.6 24.5 24.2 24.7 Gross Fixed Investment - Private (% of PIB) 10.2 9.2 11.2 11.2 9.4 7.8 8.0 Gross Fixed Investment - Public (% of PIB) 13.4 13.0 12.1 13.4 15.0 16.4 16.7 Money and Prices Consumer price inflation (annual %) 1.8 4.5 7.5 5.3 3.5 3.0 2.7 PIB deflator inflation (annual %) 1.9 2.5 4.2 2.7 3.1 3.2 3.0 Real Exchange Rate Index (2015=100) 104.3 102.5 101.3 104.7 105.8 108.1 109.5 Fiscal (% of GDP) Overall Fiscal Balance- including Grants -7.0 -4.7 -8.3 -6.6 -6.1 -3.0 -3.0 Primary Fiscal Balance -4.7 -2.5 -5.8 -4.4 -3.8 -0.6 -0.7 Total Public Debt 62.1 64.8 67.1 67.3 67.9 66.5 64.6 External Public Debt 27.6 27.2 26.1 25.6 26.6 27.0 27.2 External Account (% of GDP) Export Growth 23.3 22.8 24.4 22.9 22.9 23.5 24.2 Import Growth 32.3 31.8 34.6 32.6 32.8 32.7 32.8 Current account balance -0.3 -0.9 -3.0 -3.3 -3.6 -3.5 -3.4 Population and Poverty Population, total (millions) 8.4 8.6 8.8 9.1 9.3 9.5 9.7 Population Growth (annual %) 2.4 2.4 2.4 2.3 2.3 2.3 2.2 International poverty rate ($2.15 in 2017 PPP) 26.5 26.6 26.7 26.2 25.2 23.5 22.0 Table 2. Fiscal Accounts and Financing Needs 2020 2021 2022 2023 2024 2025 2026 Projections Total revenues and Grants (% of GDP) Total Revenues and Grants 16.6 17.1 17.8 18.2 18.5 18.4 18.5 Tax Revenues 12.5 14.0 14.0 14.7 15.3 15.9 16.2 Taxes on Goods and Services 3.9 4.2 3.7 4.0 4.3 4.6 4.8 Direct Revenues 2.8 3.6 3.8 4.0 4.0 4.1 4.3 Taxes on International Trade 5.7 6.2 6.5 6.8 7.0 7.2 7.2 Non-Tax Revenues 1.6 1.3 1.2 1.0 1.1 1.1 1.1 Grants 2.5 1.8 2.5 2.5 2.1 1.4 1.2 Expenditures (% of GDP) Total Expenditures 23.7 21.8 26.0 24.8 24.6 21.5 21.5 Current Expenditures 14.4 13.6 16.2 14.6 14.9 14.3 14.1 Wages and Compensation 5.5 5.4 5.1 5.2 5.1 5.1 5.0 Goods and Services 3.1 2.9 3.5 3.4 3.3 3.3 3.2 Interest Payments 2.3 2.2 2.4 2.2 2.4 2.4 2.3 External Interest Payments 0.3 0.3 0.4 0.5 0.6 0.6 0.6 Domestic Interest Payments 2.0 1.8 2.1 1.7 1.8 1.8 1.7 Current Transfers 3.4 3.1 5.2 3.8 4.1 3.6 3.7 Capital Expenditures 9.3 8.2 9.8 9.9 8.3 6.8 7.0 Fiscal Balance (% of GDP) Overall Fiscal Balance (including grants) -7.0 -4.7 -8.3 -6.6 -6.1 -3.0 -3.0 Overall Fiscal Balance (excluding grants) -9.5 -6.5 -10.8 -9.1 -8.2 -4.5 -4.2 Primary Fiscal Balance (including grants) -4.7 -2.5 -5.8 -4.4 -3.8 -0.6 -0.7 Primary Fiscal Balance (excluding grants) -7.2 -4.3 -8.4 -6.9 -5.8 -2.0 -1.9 CHAPTER II – AGROFORESTRY AND CLIMATE CHANGE: A NATURAL SOLUTION This chapter outlines key challenges associated with climate change for agricultural communities in Togo, highlighting how nature-based solutions could help boost resilience and accelerate structural transformation. It investigates more specifically the benefits of agroforestry systems in terms of increased crop production capacity, reduced climate vulnerabilities, and carbon sequestration. A suitability analysis is developed to determine areas where agroforestry systems would be most appropriate, while an economic analysis estimates potential benefits and investment needs. Results indicate that agroforestry systems are more profitable than conventional agricultural techniques over the long term but that initial investments tend to be larger, and benefits take longer to materialize, emphasizing the importance of developing new financing models and incentives for smallholder farmers. In a scenario where 20 percent of suitable cropland and 50 percent of suitable grassland and shrubland are converted to agroforestry (representing 3,900 km2), investment needs would amount to about 0.8 percent of GDP spread over 5 year horizon, but could double crop production from the identified areas, benefit up to 764,000 smallholder farmers, save up to 3,755 Ktons of CO2 emissions when compared with the development of conventional. 1. AGRICULTURE AND STRUCTURAL TRANSFORMATION IN TOGO Agriculture is the backbone of Togo’s economy but its capacity to drive structural transformation and food security for the wider population has so far been limited. Agriculture employs about 40 percent of the workforce in Togo and up to 70 percent of working poor in rural areas, yet the agricultural landscape faces multiple constraints that hinder productive investments, commercialization, and processing, which limit opportunities to raise living standards in rural areas, support the development of a striving industrial and service sectors and reduce factors of fragility and instability. In fact, the sector’s diminishing share in overall value added and labor productivity barely reaching 60 percent of the national average despite rich natural capital endowments illustrate the sector’s unrealized potential (Figure 2.1). Since the mid-2000s, the increase in agricultural production has largely been driven by the extension of cropland areas rather than improvements in efficiency through sustainable intensification (Figure 2.2). This pattern has led to environmental concerns, including deforestation and soil degradation. Figure 2.1: Agriculture’s relative output and labor Figure 2.2: In Togo more than elsewhere, Agriculture productivity in Togo remain below potential grows at the extensive margin, with generally stagnant productivity GDP share and relatively productivity in agriculture Source of growth in agriculture, 2000-16 Percent GDP share Relative productivity Percent TFP Area expansion 35 70 6 Increase in inputs 30 Increase in production 5 25 60 4 20 50 3 15 2 10 40 5 1 0 30 0 1990-99 2000-09 2010-19 2020-23 Togo Benin Ghana Source: World Bank Source: World Bank Low productivity in agriculture stems from limited access to yield-enhancing inputs and irrigation, low levels of mechanization, and lack of agroecological knowledge. For instance, the use of fertilizers in Togo in 2021 (2.1 kg/ha) was among the lowest in the region, with only 37 percent of agricultural households using them. Only 8 percent of farmers in Togo use improved seeds, and barely 1 percent of agricultural households use irrigation. Additionally, the low level of education of farmers, limited dissemination of knowledge on modern farming practices, pest control, and climate-resilient techniques hinder technical efficiency and technological progress in the sector. As a result, the agriculture sector mostly supplies farmers ’ own consumption and is currently unable to meet the demands of a growing urban population, with only 20 percent of production being commercialized and urban areas relying on imports for food consumption. Predominance of subsistence and rainfed farming practices also mean that variable rainfall and rising temperatures can severely impact the welfare of rural communities. Overall, value added per hectare remains low and has increased at a significantly slower pace that peers in the region (Figure 2.3) which is also reflected in lower average cereal yields (Figure 2.4). Figure 2.3: Land productivity is below regional peers Figure 2.4: …and is also reflected in lagging cereal yields Value added per hectare of agricultural land Cereal yields (t/ha), 2022 (constant 2015 US$) t/ha 3.0 1200 Togo Aspirational SSA Benin 2.4 2.5 1000 2.0 2.0 2.0 1.7 800 1.5 1.4 1.5 1.3 600 0.9 1.0 400 0.5 200 0.0 Togo Morocco Senegal d'Ivoire Rwanda Benin Guinea Leone Sierra 0 Cote 2004 2006 2008 2010 2000 2002 2012 2014 2016 2018 2020 Source: World Bank Source: World Bank In the absence of ambitious climate adaptation and mitigation measures, Togo’s development could be severely impacted by the intensification of climate pressures. Climate change poses significant risks to Togo's core economic sectors, particularly agriculture, energy, health, water resources, and coastal areas. More frequent droughts could impact crop production and water availability. Flooding is already impacting food security and infrastructure, exacerbating the spread of communicable and water borne diseases, such as cholera and malaria, while sea-level rise would threaten coastal settlements, increase coastal erosion risks, and jeopardize important sectors of the economy.6 Agriculture is particularly vulnerable, with extreme temperatures, erratic rainfall patterns, prolonged droughts, and deteriorating soil quality hindering production capacity. These challenges would exacerbate fragility risks, especially in the more climate-vulnerable northern regions where poverty and insecurity concentrate. This would further widen already large urban-rural gaps in income, poverty, and human capital. At the same time, the valorization of Togo’s natural capital remains fundamental to accelerate structural transformation, boost average income per capita and reduce extreme poverty. Moreover, the agriculture sector is also central to Togo’s strategy to decarbonize the economy, being one of its main sources of CO2 emissions. Nature-based solutions (NBS) offer a promising, ecosystem-based approach to increasing resilience to climate shocks, boosting productivity and farmers’ income . Nature-based solutions are ecologically grounded practices aiming at mimicking and enhancing natural processes, while providing simultaneous benefits for agricultural productivity and climate resilience. Yield augmentation stems from improved soil health through practices like cover cropping and compost utilization, while the integration of trees into cropping systems (agroforestry) reduces heat stress, provides microclimate regulation, erosion control, and nitrogen fixation, which are all contributing to increased crop yields, efficiency gains and more resilient production. Similarly, enhanced biodiversity can help 6 World Bank (forthcoming): Togo’s Country Climate Change and Development Report (CCDR) promote natural pest control and pollination, which boosts yields further. Water management strategies like rainwater harvesting, wetland restoration, and erosion control measures like terracing and buffer strips around rivers safeguard valuable farmland from heavy rains, bolster water availability during droughts and mitigate flood risks. Finally, improved forest management can help drive reforestation which in turn reverses land degradation and promotes income diversification among rural communities. The analysis presented here focusses on the opportunity of developing agroforestry at scale. Agroforestry describes practices that integrate non-agricultural plants with crops to promote symbiotic, ecosystem-services. Trees and shrubs are intentionally positioned between and within crop fields to provide ecosystem services, such as nitrogen fixation to improve soil fertility (ex. Leguminous trees and shrubs), water retention and improved drainage (through complex root networks), shade provision for shade-dependent crops (ex. Coffee or Cacao, which are key agricultural export market goods for Togo) as well as soil erosion mitigation by providing cover from heavy rain and winds. Agroforestry can also integrate livestock, which can produce manure to fertilize soils, eliminate weeds through grazing, and serve as natural pest controls for certain insect species. Togo ’s varied ecological zones demand strategic suitability assessments that target placement of interventions in more impactful areas, utilizing soil maps, climatic and topographic data, and matching tree species to local soil characteristics and rainfall patterns, and drawing from positive experiences in the country (Figure 2.5). Balancing land-use needs requires spatial planning that identifies suitable areas for tree integration in crop systems, while promoting long-term farmer investment and participation. Policy considerations include developing a national agroforestry zoning strategy based on ecological suitability and land-use pressures, supporting research and development of fast-growing tree species adapted to diverse conditions, establishing clear guidelines and regulations for agroforestry practices, making progress with agricultural land management reforms, and facilitating access to financing and technical assistance for farmers transitioning to agroforestry systems. Figure 2.5: Agroforestry in Togo already exists, though at limited scale. Source: APAF Agroforestry promotes an ecosystem-centric approach to food production, harnessing the benefits of increased biodiversity, improved soil quality, and regeneration of natural flora for more climate resilient livelihoods. Agroforestry adopts a unique concept among agricultural production systems by integrating non -productive (agroforestry) trees among crops as a tool to replace chemical fertilizers. By implementing trees that naturally fixate nitrogen, farmers can reduce their operating costs on farms and improve the quality of their soil biota. Indeed, the dependence on chemical fertilizers limits the functioning of the soil’s microbiota, such as nitrogen -fixing bacteria, and contributes to increasing soil acidification.7 Certain species, such as Albizia chinensis, have been used in agroforestry systems in Togo to promote natural nitrogen fixation in cacao production farms. 8 Agroforestry species are also used to provide shade to shade-dependent crops; for instance, coffee is a shade-dependent crop that is known to grow better and in greater quantities when adequately shaded. The shade provided by broad, 7 Pahalvi, H.N., Rafiya, L., Rashid, S., Nisar, B., Kamili, A.N. (2021). Chemical Fertilizers and Their Impact on Soil Health. In: Dar, G.H., Bhat, R.A., Mehmood, M.A., Hakeem, K.R. (eds) Microbiota and Biofertilizers, Vol 2. Springer, Cham. https://doi.org/10.1007/978-3-030-61010- 4_1 8 APAF (2020). Projet de plantation d’arbres fertilitaires au Togo. https://ong-apaf.org/projet-de-plantation-darbres-fertilitaires-au-togo/ agroforestry trees also allow for the maintenance of temperatures and conservation of soil humidity, which is particularly necessary during prolonged droughts and heatwaves. Broad-leaved agroforestry trees also limit the effect of soil erosion during major precipitation events, which are projected to increase in frequency and intensity as the atmosphere warms and holds more moisture. These various, ecosystemic benefits of agroforestry allow for farmers to reduce their operating costs, ensure the viability of their crops, and even improve the quality of certain crops, which can allow farmers to earn price premiums. Togo will need to leverage innovative financial instruments to support such ecosystem solutions. The lack of financial mechanisms to value forests beyond their timber potential, which is one of the leading causes of forest loss, is a key bottleneck in disincentivizing deforestation-linked activities. There is a need to develop and promote carbon financing opportunities through carbon credit markets for agroforest production and conservation of riparian buffers which will offer a high-value opportunity for scaling up these initiatives. Addressing interconnected challenges in agriculture, forestry, and water management is crucial to combat climate vulnerability and enhance food security. Small-scale producers will immensely benefit from discouraging natural resource destruction and encouraging preservation and efficient agricultural practices. NBS offers multiple pathways to achieve these goals, all the while supporting incomes and alleviating rural poverty and helping Togo in meeting its NDC climate objectives and SDG targets in the agriculture sector. 2. CLIMATE CHANGE IMPACTS ON AGRICULTURE Climate change has already created more challenging and erratic conditions for agriculture production in Togo. Rainfall seasons are controlled by the movement of the tropical rain belt, which oscillates between the northern and southern tropics over the course of the year. This results in the country’s dry northern areas and the wet and humid southern areas. Annual temperatures have increased on average by 1.1°C since 1960, at an average rate of 0.24°C per decade (Figure 2.6). Rates of increase have been most pronounced from April to June, with the northern regions experiencing faster increases than the south. Annual rainfall has generally declined in recent decades but has also become more variable on an inter-annual timescale, with more frequent occurrences of extreme precipitations (Figure 2.7). Across the country, large differences in climatic conditions are observed, as temperatures vary according to altitude, latitude, and land use, with temperatures ranging from 19 to 34°C in plains and between 18 and 29°C in forested and mountainous areas (Figure 2.8). Differences in average rainfall and rainy seasons also vary considerably across regions and over time, with significantly wetter conditions around mountainous areas and significantly drier conditions around coastal areas and especially in the northern Savanes region (Figure 2.9). In the latter, about 97 percent of surveyed farmers in the Northern Savanes region have reported noticing a change in temperature and rainfall over the last 20 years (Kissi, Abbey, and Villamor 2023). Figure 2.6: Temperatures have significantly increased in Figure 2.7: …While extreme precipitations have Togo over the last few decades …. become more frequent and widespread Average mean surface temperatures Largest one-day precipitation in Togo since 1950 Source: World Bank Source: World Bank Figure 2.8: High temperatures concentrate in the Figure 2.9: Precipitations concentrate in elevated Northern Savanes and Kara regions lands in western and north-eastern parts of Togo Average temperatures, 1995-2018 Average precipitation, 1995-2018 Source: World Bank Source: World Bank Climate-driven stress threatens income for farming communities and Togo’s social fabric. Studies report declining yields for major crops like maize, millet, and rice, jeopardizing food security and increasing dependence on imports, which impact both rural livelihoods and food security (Kpanou et al., 2023, Bankati and Napo, 2022), with small- scale farmers being particularly vulnerable (Gadedjisso-Tossou et al., 2021). Soil erosion, accelerated by increased dry spells and intense rainfall, strips away essential nutrients, further reducing agricultural productivity and resilience (Amegbeto et al. 2016). More frequent and intense heat waves also have adverse effects on farmers productivity and health, putting disadvantaged populations in particular danger, while floods can destroy low-lying settlements, resulting in property damage and human casualties, and increase the risk of infectious diseases such as malaria, cholera, and respiratory illnesses. Changing climatic conditions are also creating a breeding ground for pests and diseases affecting crops and animals, leading to additional losses and economic burdens for farmers (Kpanou et al., 2023). These adverse effects fall disproportionately on most exposed farming communities, particularly in drier and hotter northern regions (Figure 2.8), where factors of fragility concentrate (Mikémina Pilo et al., 2021), ultimately undermining the social fabric and cultural traditions deeply intertwined with agriculture and increasing risks of social strife and instability. Figure 2.10: Temperatures are expected to rise, but Figure 2.11: Trends in precipitations are significantly to varying degrees depending on climate scenarios more uncertain Average temperatures across climate scenarios in Average precipitation across climate scenarios Togo Source: World Bank Source: World Bank Table 2.1: Temperatures could rise nearly twice faster Table 2.2: Precipitation would increase in the wet/warm in the dry/hot scenario, compared with the wet/warm scenario while declining towards 2040-50 in the dry/hot scenario scenario Change in average temperature by decade relative Percent change in average precipitation by decade to 1990-2020 relative to 1990-2020 Scenario 2020s 2030s 2040s Scenario 2020s 2030s 2040s Dry/hot mean +0.58 ˚C +1.05 ˚C +1.44 ˚C Dry/hot mean +2.2% +1.5% -3.2% Wet/warm mean +0.36 ˚C +0.56 ˚C +0.82 ˚C Wet/warm mean +3.7% +8.5% +11.1% Source: World Bank Source: World Bank Figure 2.12: Crop production could Figure 2.13: Vegetables, yams, Figure 2.14: Soil erosion could drop by 11 percent under dry/hot cassava and maize yields would be also have adverse effects on yields conditions most affected Impact of soil erosion on crop Impact of climate shocks on rain- Impact of climate shocks on production fed crop production individual crops by 2050 Source: World Bank Source: World Bank Source: World Bank Heat stress will intensify over the next couple of decades while precipitations are likely to be more uncertain with changing seasonal patterns. Future climate is inherently uncertain, due to variability in the earth’s physical responses, uncertainty regarding future greenhouse gas emission trajectories, as well as uncertainty across different climate model projections for the coming decades. For the present analysis, a total of eight climate scenarios were selected to explore a range of possible future conditions.9 These scenarios highlight the prospect of a trend increase in temperatures (Figure 2.10) and more variable rainfalls (Figure 2.11), but also a wide dispersion 9 Available climate scenarios were first obtained from the World Bank’s Climate Change Knowledge Portal for 29 General Circulat ion Models (GCMs) from the Coupled Model Intercomparison Project 6 (CMIP6) suite of model outputs. Each GCM has up to five combinations of Shared Socioeconomic Pathway (SSP) and Representative Concentration Pathway (RCP) emissions scenario runs available. For each GCM- SSP combination, a modeled history from 1995 to 2014 and projections from 2015 to 2100 were available, for monthly mean temperature and precipitation. Given that GCM output is biased relative to observed climate conditions, bias-correction and spatial disaggregation was conducted, before then interpolating monthly variables to a daily timestep. of possible outcomes. To be more tractable, climate scenarios were aggregated into wet/warm 10 and dry/hot11 scenarios to assess vulnerabilities and adaptation options under well-defined clusters of possible outcomes. As expected, temperature increases are greatest under the dry/hot scenario, peaking at around 1.5˚C in 2050, with slightly higher gains in central regions, while temperatures would increase by a more moderate 0.8 ˚C on average in the wet/warm scenario (Table 2.1). Regarding precipitation, the wet/warm scenario predicts an increase in precipitation in each decade and throughout the country, peaking at +11 percent by 2040-50 with greater flooding and erosion risks in some regions, while under the dry/hot mean scenario, a decrease relative to baseline conditions is expected towards the end of the projection period, intensifying droughts, and dry spells, particularly in northern regions (Table 2.2). In the absence of decisive measures, agricultural productivity and farmers’ livelihoods could be severely hampered. First, climate change will impact productivity due to intensifying heat stress on labor. At 32°C, work capacity for intense physical activity corresponds to 83 percent of its potential for an indoor worker but only 60 percent for an outdoor worker (Kjellstrom et al., 2018). Farmers will be hardest hit, with a higher proportion engaged in physically intensive activities and exposed to high temperatures. Compared to a scenario without climate change, the effect by 2050 is estimated to range between a 5.5 percent reduction in labor productivity in the wet/warm scenario to a 10.5 percent reduction in the more intense dry/hot scenario. Moreover, a combination of rising temperatures, changes in rainfall patterns, and crop diseases are also expected to reduce average yields for rain-fed crops by between -3 percent in the wet/warm scenario and -11 percent for the dry/hot scenario (Figure 2.12). There are also significant differences across individual crops, with the most affected being vegetables, cassava and maize, the latter being most impactful given its larger share of arable lands (Figure 2.13). Togo is also vulnerable to reduced soil fertility driven by soil erosion, including in central regions near the Mo river basin (Diwediga et al. 2018), while deforestation increases exposure to land degradation and has serious implications on arable land and crop yields. Estimates suggest that soil erosion could reduce crop yields by another 3 percent by 2050 under the wet/warm scenario but would have limited to no effect in the dry/hot scenario (Figure 2.14). Overall, model estimates from the forthcoming World Bank Country Climate and Development Report (CCDR) for Togo suggest that in the absence of decisive adaptation measures, climate change could reduce agriculture output by up to [15] percent over the next 25 years. 3. SCALING UP AGROFORESTRY TO ACCELERARE RURAL TRANSFORMATION Nature-Based Solutions, and agroforestry in particular, offer promising avenues to alleviate climate pressures, boost farmers income, restore soil health, and reduce emissions. A meta-analysis of agroforestry projects in Sub- Saharan Africa found that agroforestry farms increased crop yields in 68 percent of all cases, as they helped increase soil fertility and water regulation through improved infiltration rates and soil moisture contents (Kuyah et al. 2019). Other studies have demonstrated that agroforestry allows farmers to produce a wider range of products, including fruits, nuts, timber, and fodder, leading to increased income opportunities, and reduced economic vulnerability (Singh and Pandey 2011). Beyond benefits in terms of yield, additional income and soil fertility, agroforestry can also help mitigate heat stress. A study on agroforestry in the Brazilian Amazon showed that temperatures can be reduced by up to 5 °C, significantly reducing heat stress on humans, plants, and animals (Gomes et al. 2020). Togo has a history of implementing agroforestry as an effective poverty alleviation and soil health management tool. For instance, one large-scale agroforestry project focusing on corn-cacao-coffee was implemented over ten thousand hectares of agroforestry farmland, trained 14,500 young farmers on agroforestry practices, and planted over 5.1 million plants since the early 2000s. The project evaluation revealed a 32 percent increase in income from corn farming, a 5 percent increase in income from cacao farming, and a 74 percent increase in income from coffee farming (Humbert, P., 2015). Another gender-focused agroforestry project in Togo supported 4 groups of women farmers in the Vo prefecture (Maritime), training them in the usage of organic fertilizers for mushroom production 10 Three scenarios around the 90th percentile of mean precipitation changes (i.e., wet) and the 10th percentile in mean temperature changes (i.e., warm), across SSP2-4.5 and SSP3-7.0 GCMs. 11 Three scenarios around the 10th percentile of mean precipitation changes (i.e., dry) and the 90th percentile in mean temperature changes (i.e., hot), across SSP2-4.5 and SSP3-7.0 GCMs. which helped protect their crops during droughts and increased production (Women Environmental Programme 2017). A. IDENTIFYING SUITABLE LAND FOR AGROFORESTRY Suitable areas for agroforestry are defined using climatic, topographic, and socio-economic factors that tend to favor such systems. These include low slopes and elevation, land-use, and proximity to roads and settlements. Within this category, highly suitable areas are those with limited exposure to climate pressures, with ample precipitation, optimal temperatures for agroforestry (25-27.5C), and high soil quality, while suitable areas are those with similar topographic and socio-economic characteristics but being exposed to higher than optimal temperatures, lower than optimal precipitation, and/or lower soil health (Table 2.3). Beyond these two categories where feasibility and economic returns could be the largest, the analysis also looks at areas that face the most hostile climatic conditions. These areas have the greatest need for climate adaptation assistance and offer positive externalities by preventing desertification, soil erosion and other climate related hazards, but are high risk projects with more limited economic viability. The categorization of land suitability provides decision makers with a tool to prioritize investments. Table 2.3: Land characteristics and connectivity are Figure 2.15: Suitable lands are found across Togo, key to determine suitability vulnerable areas concentrate in Savanes and Kara Factors used for the suitability analysis: Highly suitable, suitable, and highly vulnerable areas: Input Significance Soil Organic Soil The combination of these layers Carbon Health provides insights on a soil’s ability Soil Nitrogen to: absorb and exchange nutrients, filter water to root systems, and Soil Cation have access to basic nutrients that Exchange are key for plant growth Capacity Soil Phosphorus Soil Potassium Soil Drainage Elevation Lower elevations tend to be better suited for agriculture (more consistent, warm temperatures, close proximity to settlements) Slope Lower elevations are less prone to soil erosion Proximity to Settlements Agroforestry systems are better suited for areas with human settlements in proximity for commercial purposes Proximity to Roads Agroforestry systems are better suited for areas in proximity to major roads for commercial purposes (market access) Land Use Type Important to omit unsuitable areas (forests and urban, built-up areas) Precipitation Key for plant growth and crop Temperature yields Table 2.4: Plateaux, Kara, and Centrale have the large areas that are suitable today for agroforestry Identified areas for agroforestry by regions (in KM 2): Region Most Suitable Suitable but Vulnerable Highly Vulnerable Plateaux 388 1,876 70 Kara 325 1,625 2,635 Centrale 74 1,182 <1 Maritime 653 9679 <1 Savanes 6 547 4,953 Source: World Bank Areas with less than optimal climatic or soil conditions today represent the largest potential for agroforestry in Togo. Results indicate that majority of identified areas are considered suitable, whereas few are highly suitable for agroforestry. In total, 7,645 km2 are suitable areas today (20 percent of the national territory), with the largest areas located in the Plateaux and Kara regions, though the Maritime region has the highest proportion of suitable land, followed by Kara (Figure 2.15).12 Highly suitable areas are mostly found in Kara, Plateaux and Marine, but represent a very small share of these regions. In contrast, the Savanes region has highest area and share of land that is highly vulnerable to harsh climatic conditions, and therefore less suitable to agroforestry systems from a pure economic perspective (Table 2.4). While significant proportions of land are currently suitable for agroforestry, the extent and location of these will change as the effects of climate change intensify.13 Assessing how different climate scenarios impact the identification of suitable areas for agroforestry can help planners and policy makers take informed decisions to promote favorable and affordable options and measure the consequences of inaction. A suitability analysis based on projected climate conditions in 2050 illustrates that most regions will see an increase in areas that have appropriate but sub-optimal climate conditions, particularly under the wet/warm scenario, while some areas will become too challenging for agroforestry, particularly under the dry/hot scenario. The latter scenario would see quite dramatic changes in suitable areas. On the one hand, this reflects additional land areas where challenging climate conditions combined with poor soil quality would make agroforestry a more suitable option than conventional farming (monocropping and polyculture farming). This is notably the case in the Plateaux and Centrale regions. On the other hand, additional areas would become unsuitable due to extreme temperatures and/or low precipitations, particularly in the Kara and Savanes regions. The time to act is now. These losses could be avoided if agroforestry were implemented in areas that are still suitable today. To maximize benefits for farmers and avoid that currently suitable areas and their restorative ecosystem services are lost to climate change, it is crucial to act today. Implementing agroforestry in areas that are either suitable or highly suitable today would lead to greater private benefits for farmers, increased sector -wide productivity as well as increased carbon sequestration. 12 This includes forests, lakes, urban areas, built-up areas as well as protected areas (nationally protected forests and habitats), in line with the Do-No-Significant-Harm (DNSH) principle. 13 The model predicting agroforestry suitability by 2050 has limitations impacting its accuracy. Primarily, it does not incorporate potential changes in soil quality or land use that accompany shifts in temperature and precipitation, potentially leading to an underestimation of suitable areas. Furthermore, the model applies uniform percentage change in temperature and precipitation across 0.5x0.5 degree cells. This approach, while facilitating comparison with other studies, simplifies the complex local climate dynamics. The methodology also involves classifying variables into equal intervals to determine suitability scores, a technique that may not accurately reflect the diverse conditions under which agroforestry can thrive. Particularly, it does not consider the specific needs of different agroforestry systems and the optimal conditions for various tree species used within these systems. These limitations suggest the need for more nuanced, localized analyses to accurately assess agroforestry potential, taking into account soil, land use changes, and specific agroecosystem requirements. Figure 2.16: A wet/warm scenario could see an increase Figure 2.17: A dry/hot scenario could still see some in suitable land for conventional farming, but especially increase in suitable land for agroforestry while it would for agroforestry areas would shrink for conventional farming Suitable areas for agroforestry and conventional Suitable areas for agroforestry and conventional farming until 2050 under wet/warm conditions: farming until 2050 under dry/hot conditions: Km2 Suitable today Km2 Suitable today Suitable for conventional agriculture in 2050 Suitable for conventional agriculture in 2050 5,000 Suitable for agroforestry in 2050 5,000 Suitable for agroforestry in 2050 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 - - Plateaux Kara Maritime Centrale Savanes Plateaux Kara Maritime Centrale Savanes Source: World Bank Source: World Bank B. ESTIMATING BENEFITS AND INVESTMENT NEEDS Agroforestry holds significant promises to address climate risks and support structural transformation, but planification and prioritization require an assessment of its economic viability and investment needs. This demands quantification of both the costs and benefits accrued to agroforestry projects over time. Costs encompass establishment, maintenance, and harvesting expenses, while benefits capture revenues from crops, livestock, and additional products for farmers as well environmental and social benefits like carbon sequestration, improved soil health, and enhanced biodiversity. The quantifiable costs and benefits used in this analysis are presented in Table 5. They are translated into monetary units using market and shadow prices (e.g., for environmental benefits), and adjusted to present value using a discount rate that best reflect the time value of money, risks, and opportunity cost of capital in Togo. A discount rate of 5 percent is assumed, consistent with other studies assessing the environmental and economic benefits of sustainable land use in similar context. However, this study also incorporates a sensitivity analysis with higher discount rates to reduce the weight of future benefits. This cautious approach aims to provide a more conservative estimate of the long-term gains of agroforestry systems compared with conventional agricultural practices (monocropping and polyculture). The analysis assesses profitability (Cost- Benefit Ratios, CBR), and investment needs (Present Value of Costs) and discounted net benefits (Net Present Value of Benefits) for the wet/warm and dry/hot climate scenarios. So long as projects have a positive NPV and a CBR above one, they are considered to be economically viable. Table 2.5: Quantifiable costs and benefits of agroforestry versus conventional agricultural practices (BAU) Agroforestry Monocropping/Polyculture (BAU) • Planting material • Seeds Costs • Tree nurseries • Fertilizers • Training & extension services • Emissions • Expected returns • Expected returns Benefits • Emissions sequestration Source: World Bank i. ESTIMATED COSTS AND ECONOMIC RETURNS OF AGROFORESTRY Benefits from agroforestry are assumed to start accruing after five years of implementation, which should be seen as a conservative assumption. The economic analysis assumes implementation of agroforestry projects over a 10-year period, with benefits accruing after five years, which is the period needed for agroforestry plants to bear fruits and vegetables. The analysis starts in 2025 and extends to 2050, focusing initially on suitable land under current conditions, but also considering changes in suitability under different climate scenarios. Highly vulnerable areas are excluded from the analysis as additional implementation costs and greater risk of failure under extreme climate conditions are difficult to quantify based on existing data. However, conditions of success of agroforestry projects in the harsher climate conditions prevailing in most of the Savanes region and northern Kara region are also discussed at the end of this section. For the development of suitable areas, it is assumed that each square kilometer of agroforestry area would be managed by about 200 farmers (0.5 ha each, in line with current average land area managed by small-holder farmers). Additional jobs for seasonal workers that would be hired for agroforestry harvesting are not directly considered in the analysis but are part of the potential use of additional income generated from farming. Regarding land productivity, average crop yields/ km2 are expected increase by 0.05 percent per year until 2050 under the wet/warm scenario, compared with an expected drop of 0.2 percent per year for conventional practices. Based on a carbon emissions assessment of agroforestry systems in West Africa, carbon sequestration benefits are expected to start after 5 years peak after 20 years, with a yearly rate of carbon sequestration of 0.025 tonnes/plant/year (Tschora and Cherubini, 2020). In contrast, carbon emissions from conventional agriculture practices are assumed to stabilize at 85.5 tonnes/km2/year, which was its estimated value in 2020. Figure 2.18: Profitability of agroforestry investments is Figure 2.19: …but benefits take longer to materialize always higher than conventional farming, even without and initial investments are higher, implying that consideration of carbon sequestration… conventional practices are more attractive in the short term Benefit-cost ratio of investment in agroforestry and conventional farming by 2050, wet/warm Benefit-Cost Ratio of investment in agroforestry and conventional farming 18 Cost-Benefit-Ratio Agroforestry - wet/warm Private Public Total 20 Conventional - wet/warm 15 Agroforestry - dry/hot Conventional - dry/hot 12 15 9 6 10 3 0 5 -3 -6 Agroforestry Agroforestry Conventional Conventional 0 (5%) (10%) (5%) (10%) 2025 2030 2035 2040 2045 2050 Source: World Bank Source: World Bank Note: 5 and 10 percent discount rate, high carbon shadow price Note: 5 percent discount rate, high carbon shadow price Results indicate that agroforestry systems are significantly more profitable than conventional agricultural practices under any climate scenario, and entail additional benefits in terms of carbon sequestration. The main drivers of the profitability of agroforestry are the additional revenue for famers generated from these systems as well as lower overall investment needs over the long run. In fact, assuming a discount rate of 5 percent per year, every dollar invested in agroforestry would return, over a 25-year timespan, $15.89 in wet/warm scenario and $15.16. In the dry/hot scenario. Over 95 percent of the gains would be allocated to private investors through higher economic returns, while 5 percent would derive from carbon sequestration (Figure 2.18). Even doubling the discount rate to 10 percent would still lead to a benefit-to-cost ratio of 11.63 under wet/warm conditions and 11,12 under dry/hot conditions. In comparison, every dollar invested in conventional agricultural farming is expected to return only $8.35 by 2050 at a 5 percent discount rate and $8.16 at a 10 percent discount rate under wet/warm conditions (assuming a high carbon value). Other economic assessments have found comparable, and even higher benefit-to-cost ratios (BCR) for agroforestry, including an assessment of forestry landscape restoration options in Kenya undertaken by the country’s Ministry of the Environment and Forestry. In this case, agroforestry systems using Grevillea robust, maize and avocado were shown to have a BCR of 25.6 (using a 7 percent discount rate over 30 years), and agroforestry using cowpeas and Melia a BCR of 22.8 (Cheboiwo et al. 2019). Estimates presented in this analysis suggest that agroforestry systems in Togo are likely to see similar returns. While agroforestry delivers significant long-term gains and is more profitable over time, initial investment needs are larger, and benefits take longer to materialize than conventional agriculture. Establishing and maintaining an agroforestry system typically requires higher initial investments in seedlings, planting, and management practices compared to conventional agriculture (Ajayi et al., 2014). These costs can be particularly burdensome for resource- constrained smallholder farmers in Togo (World Bank, 2023). While agroforestry offers long-term advantages like increased yields and improved soil fertility these benefits take time to materialize and farmers that often operate with limited resources and face uncertain market conditions, tend to prioritize immediate returns. This leads them to discount the future benefits of agroforestry, making them hesitant to invest in practices with long-term payoffs even when the potential future gains outweigh the initial costs. In fact, a dollar invested in current agricultural practices (monocropping or polyculture) in 2025 would start being profitable in 2027 while the same dollar invested in agroforestry is projected to deliver net returns only in 2030. However, starting in 2040, the profitability of agroforestry investments would surpass that of conventional agricultural practices under any climate scenario (Figure 2.19). Figure 2.20: Conversion of all suitable land to Figure 2.21: …while carbon sequestration benefits would agroforestry would be a major boost to food security be very substantial as well Crop production under different climate and Carbon emission under agricultural systems in a dry/hot agricultural system scenarios (all suitable areas) scenario (all suitable areas, cumulative) Thousand tons 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 - Today Conventional Conventional Agroforestry Agroforestry Dry Hot Wet Warm Dry Hot Wet Warm Source: World Bank Source: World Bank Investing in agroforestry systems today would boost food security, protect arable land and threatened ecosystems such as grasslands and shrublands, and reduce carbon emissions. In fact, developing agroforestry on all suitable lands today could increase food production by up to 155 percent over the next 25 years in the wet/warm scenario (+2.2 million tons of crop production), compared to an increase of 67 percent under the same climate scenario for conventional agriculture (+1.0 million tons of crop production, Figure 2.20). Cumulative investment needs to develop these areas would peak at 2.6 percent of GDP in 2040 for agroforestry, while investments for conventional farming would continue to grow to reach 3.5 percent of GDP by 2045, due to recurrent input costs. One of the key long-term advantages of agroforestry is indeed to provide protective and restorative benefits to land that allow for farmers to continue producing agricultural goods, despite increasing temperatures and erratic precipitation, and with limited recurrent costs. Carbon sequestration is also a critical dividing line between agroforestry and conventional agricultural practices since the former contributes to lower emissions (public benefit) while latter increases them (public cost). Indeed, exploiting all currently suitable land for agroforestry could reduce emissions by 11,960 Ktons of CO2 by 2050, while conventional agriculture on the same land adds 17,310 Ktons of CO2 by 2050. Such scaling up of agroforestry would therefore represent a major contribution to emissions reduction objectives of the government. ii. ILLUSTRATIVE SCENARIO FOR A NATIONAL AGROFORESTRY PLAN Focusing on specific land-use types and assuming that only a fraction of suitable land would be converted to agroforestry offers a more realistic basis for a national development strategy. In this analysis two subsets of suitable areas are considered for agroforestry. In the first subset, 20 percent of cropland that are considered suitable for agroforestry are assumed to be converted. The conversion of cropland is easiest to implement and would likely result in more rapid production gains for farmers. At present, this subset would represent 1,030 km2 of land across Togo, with the largest share accounted for by the Plateaux and Maritime regions, with respectively 356 km2 and 297 km2 of land to be converted (Figure 2.22). Given the prospects of additional land becoming suitable for agroforestry by 205014 (+666 km2 by 2050 in the dry/hot scenario and 693 km2 in wet-warm scenario), up to 340,000 farmers could benefit from this conversion of cropland to agroforestry over the next 25 years. The second subset of suitable areas considered for agroforestry are the conversion of 50 percent of suitable shrubland and grassland. These are more challenging to convert into fully functional agroforestry systems but provide greater benefits in terms of landscape conservation and is therefore more suited to achieve regenerative land use objectives. These areas represent under current conditions about 1,246 km2 of land, mostly in the Centrale and Kara region, with 380 km2 and 501 km2 of land to be developed respectively (Figure 2.23). These areas could significantly increase under both dry/hot and wet/warm conditions, benefiting up to 442,000 farmers by 2050. Togo’s 4th National Communication on Climate Change has highlighted that the conversion of grasslands and shrublands into cropland contributed significantly to CO2 emissions in recent decades, which the government is set to reverse by reforesting some of these areas (MERF 2022). Agroforestry can serve as an effective way of incentivizing the conservation and reforestation of these areas, all the while delivering economic benefits to farmers looking for more arable lands. Converting 20 percent of suitable cropland and 50 of suitable grassland and shrubland would require cumulative investments amounting to about 0.8 percent of GDP but would help supply the population with about 50kg of additional crop production per capita by 2050, and significantly reduce emissions. Estimated investment needs would be broadly similar for the dry/hot and wet/warm scenarios, and while being higher than conventional farming in the first few years, they would stabilize at lower levels over time (Figure 2.24). This development of agroforestry systems at scale could lead to a tripling of crop production from the selected areas, largely stemming from the conversion of grassland and shrubland, but also from higher yields and land preservation of existing cropland (Figure 2.25). By 2050, 764,000 smallholder farmers could have shifted to agroforestry, raising their income and resilience 14The driving forces behind these gains is that agroforestry provides regenerative and protective services to the land, which maintains currently suitable areas, whereas conventional agricultural practices do not. to climate change, while the increased production capacity could supply the Togolese population with an additional 50kg of domestically produced crops per person / per year. This would therefore make a substantial contribution to food security and autonomy. Farming communities in Plateaux, Central and Kara would stand to benefit the most, with the three regions accounting for 80 percent of the direct income generated through this illustrative agroforestry development plan (Figure 2.26). Overall economic returns could reach 1.8 percent of GDP by 2034 and stabilize around 1 percent of GDP over the longer run. Carbon sequestration services from these investments could also be considerable and worth accounting for when developing policies and actions to meet Togo’s NDC objectives. In fact, converting 20 percent of suitable cropland and 50 percent of suitable grassland and shrubland to agroforestry could potentially lead to the sequestration of 3,761 Ktons of CO2 by 2050 instead of production of 4,352 Ktons of CO2 if those areas for exploited through conventional farming (Figure 2.27). Combining these scenarios and/or selecting subsets of each could help meet national and international carbon sequestration targets all the while contributing to greater food security and income for farmers. Figure 2.22: Converting 20 percent of suitable Figure 2.23: Developing 50 percent of suitable grassland cropland for agroforestry would be mostly benefit and shrubland into agroforestry would favor Kara and Plateaux and Maritime, and help save land in Kara and Centrale regions, and save land in Kara, Savanes and Savanes Maritime Areas corresponding to 20 percent of suitable Areas corresponding to 50 percent of suitable cropland land today and in 2050 under dry/hot grassland and shrubland today and in 2050 under conditions: dry/hot conditions: Km2 Suitable today Km2 Suitable today Suitable for conventional agriculture in 2050 Suitable for conventional agri. in 2050 900 Suitable for agroforestry in 2050 900 Suitable for agroforestry in 2050 600 600 300 300 - - Plateaux Kara Maritime Centrale Savanes Plateaux Kara Maritime Centrale Savanes Source: World Bank Source: World Bank Several options exist to support necessary investments, which remain modest compared with estimated gains. This could include a mix of public funding through government grants, loan guarantees, and risk-sharing mechanisms to address the specific needs of smallholder farmers, the mobilization of funding from the multilateral institutions, and finance mechanisms like REDD+ and climate funds. Private sector investment should also play a key role, with avenues such as impact investing, voluntary carbon credit markets, and corporate social responsibility initiatives offering promising opportunities. Payments for ecosystem services, fair trade certification, and access to value chains can further incentivize agroforestry adoption by farmers. By strategically combining these financing options, stakeholders can unlock the full potential of agroforestry in Togo. Figure 2.24: Investments needs for a national Figure 2.25: Conversion of 20 percent of cropland and 50 agroforestry plan would initially surpass those for percent of grassland and shrubland to agroforestry could conventional farming but stabilize at a lower level triple crop production from those areas Cumulative investment needs for developing 20 Crop production from the conversion of 20 percent of percent of suitable cropland and 50 percent of suitable cropland and 50 percent of grassland and suitable grassland and shrubland shrubland under different scenarios Percent of GDP Thousand tons 1.2 1,200 1.0 1,000 800 0.8 600 0.6 400 0.4 Agroforestry - wet/warm Agroforestry - dry/hot 200 0.2 Conventional - wet/warm Conventional - dry/hot - 0.0 Today Conventional Conventional Agroforestry Agroforestry 2025 2030 2035 2040 2045 2050 Dry Hot Wet Warm Dry Hot Wet Warm Source: World Bank Source: World Bank Figure 2.26: 80 percent of the 764,000 farmers that Figure 2.27: Developing agroforestry instead of would benefit from agroforestry investments would conventional farming on the selected areas could save be in the Plateaux, Centrale and Kara regions the equivalent of 3,755 Ktons of CO2 by 2050 Carbon emission from different agricultural systems on Farmers working on agroforestry systems by 2050 in 20 percent of cropland and 50 percent of grassland and a dry/hot scenario shrubland, cumulative) Ktons of CO2 15,000 Conventional Agroforestry 10,000 5,000 Emissions 0 Sequestration -5,000 -10,000 -15,000 2025 2030 2035 2040 2045 2050 Source: World Bank Source: World Bank iii. THE CASE OF AGROFORESTRY IN HIGHLY VULNERABLE AREAS The economic analysis presented so far indicates a promising potential for agroforestry in Togo but has not discussed the specific case of areas deemed to be most vulnerable to extreme climate conditions. The exclusion from the analysis reflects the fact that fixed and variable investment needs and risks associated with agroforestry projects in regions facing most climate pressures are expected to be greater than in other areas, but data limitations prevent a precise quantifying of these differences. For instance, erratic rainfall patterns, extreme temperatures and poor soil health are likely to pose specific threats to tree establishment and survival while drought-prone regions could also be more exposed to elevated fire risks, but no information is available to quantify the impact on economic viability. In the context of Togo, these areas are mostly found in the Savanes region and northern Kara, where temperatures are the highest, the incidence of droughts are higher, and poor soil health is most prevalent (Jans 2019; Desplat and Rouillon 2011). Nonetheless, the vast majority of the Savanes region and northern Kara remain structurally suitable for agroforestry (proximity to roads, settlements, ample cropland, low slopes and elevation), and over 90 percent of the active population is occupied in agriculture (De Witte 2013). For this reason, agroforestry investments should also be viewed as a suitable albeit riskier strategy to support agriculture development, food security and land conservation. Figure 2.28: Highly vulnerable but structurally suitable areas for agroforestry in Savanes and Northern Kara regions Source: World Bank Despite higher risks, agroforestry offers a multitude of environmental benefits for highly vulnerable areas. First, deep root systems of the planted trees can improve water infiltration and retention, fostering moisture availability in drought-prone areas. Additionally, decaying leaves add organic matter, promoting nutrient cycling and creating a more productive environment for crops. Trees also act as natural windbreaks, reducing soil erosion and creating a cooler microclimate, which can benefit temperature-sensitive crops (Smith et al., 2017). Agroforestry systems also promote biodiversity by creating habitat for beneficial insects and pollinators, leading to natural pest control and reduced reliance on chemical pesticides (Jose 2009; Batish et al. 2008). Finally, integrating fruit, nut, or timber trees into agricultural systems provides farmers with additional income streams, fostering economic diversification and resilience (Pandey and Kumar, 2005). Successful agroforestry projects in harsh environments require even more careful planning and implementation. Initial investments in seeds, seedlings, or saplings are likely to be significantly higher for drought-resistant and nitrogen-fixing tree species (Leakey, 2010), while irrigation or water harvesting systems for the tree establishment phase could also be more costly in regions with high drought risks. Furthermore, young trees can compete with existing crops for water and nutrients in areas, which could be particularly challenging in areas with limited rainfall and poor soil quality. Selecting drought-resistant, nitrogen-fixing tree species adapted to local soil conditions and climate is therefore paramount. Utilizing native species whenever possible can minimize pest and disease risks. Water harvesting and irrigation techniques can support tree establishment during dry periods. Furthermore, starting with small-scale pilot projects allows for testing the suitability of agroforestry practices and gathering valuable local knowledge before large-scale implementation. Investing in capacity building through training and extension services for farmers on agroforestry techniques, tree selection, and managing tree-crop interactions is particularly crucial for project success in harsh conditions . Offering financial incentives such as subsidies or microloans can help offset initial establishment costs and support farmers during the transition period while promoting secure land tenure rights provides the necessary foundation for long-term investment in agroforestry practices. Finally, developing fire prevention and control strategies in drought-prone regions is essential (Pausas et al., 2008). Regular monitoring and evaluation of project progress are crucial to assess the impact of agroforestry on soil quality, crop yields, and community livelihoods, allowing for adjustments to be made as needed (AREG, 2013). Establishing regional extension services for agroforestry adoption in the Savanes could also address specific challenges in the region. Studies in the Savanes region have demonstrated that farms that have better and more consistent access to agricultural extension services are able to improve crop production and adopt climate adaptation practices (Pilo and Adeve 2016). The services most often provided by extension agencies in the Savanes region were access to credit and information on climate change and its impacts on production.15 Government engagement with NGOs that are currently working with farmers to adopt agroforestry practices on farms could be instrumental to developing successful agroforestry projects in harsh climate conditions. For instance, the Mouvement Alliance Paysanne du Togo (MAPTO) has been assisting farmers adopt agroforestry practices in their production to improve the quality of their soil through forest cover. 16 MAPTO activities have been mainly focused on the Plateaux and Centrale regions until 2022, at which point the organization set a target of planting over 200,000 trees by 2026 in the seven prefectures of the Savanes region. The organization provides an incentive programme for farmers, who are supplied free plant materials and training, in which each batch of 10 trees that survive each year result in a payment of 1.3 dollars to farmers. 17 Other groups, such as the Recherche, Appui et Formation aux Initiatives d’Autodéveloppement (RAFIA) are supporting over 48,000 farmers in the Savanes region adopt agroforestry practices, recognizing that the Savanes faces acute challenges due to its sandy, overexploited soils.18 This NGO further assists farmers with contracting with food distribution companies and the sale of the goods, allowing them to fully benefit from changing their agricultural practices from one that previously depended on artificial inputs, to one that takes a more holistic approach to agriculture through agroforestry practices. 4. CONCLUSIONS AND POLICY OPTIONS TO LEVERAGE AGROFORESTRY AT SCALE Building a resilient and productive agricultural sector in Togo is critical to accelerate structural transformation and boost food security in the face of growing climate pressures. The adoption of climate-smart technology and practices will stimulate diversification and resilience of the sector, leading to increased productivity and higher incomes for farmers. As the agricultural sector becomes more robust and productive, it can attract private investments in upstream and downstream processing and services, promoting value-addition and quality job creation in the sector through the development of agro-industry value chains. Moreover, enhancing the resilience of agriculture will ensure that government spending in the sector is utilized more effectively, channelling resources towards investments that yield long-term benefits, such as improved rural infrastructure, research and development, and extension services. These strategic investments will not only promote allocative efficiency for public expenditure in the agriculture sector but also contribute to a more equitable distribution of economic gains, thereby driving overall economic growth and development in Togo. There is a considerable potential for agroforestry to transform the rural economy, boosting agriculture productivity, resilience to climate shocks, and carbon sequestration. Results presented in this analysis illustrate that the long-term profitability of agroforestry investments is higher than conventional agricultural practices under 15 Ibid 16 Kpakpabia, B. (2023) An Alliance of Cooperatives Adding Trees to Togo’s Farms. AFR100. https://afr100.org/project/alliance- cooperatives-adding-trees-togos-farms 17 Agridigitale (2022) Faire des Savanes une zone de couverture forestière, https://agridigitale.net/article/faire_des_savanes_une_zone_de_couverture_forestire_ 18 Vert Togo (2019). Togo/Pratiques Agroécologiques dans les savanes : le consortium RAFIA, SAM TOGO et l’UROPC -S collaborent. https://vert-togo.tg/togo-pratiques-agroecologiques-dans-les/ any climate scenario, mostly stemming from the fact that ecosystem services associated with agroforestry reduce recurrent costs, increase yields, and preserve land quality. For instance, in a scenario where 20 percent of suitable cropland and 50 percent of suitable grassland and shrubland are converted to agroforestry, the capacity to produce crops from these areas could more than triple by 2050 despite growing climate pressures, which could supply the Togolese population with 50kg of additional domestically produced crops per person and benefit 764,000 smallholder farmers across the country. Moreover, agroforestry systems will help prevent the loss of suitable agriculture land to extreme weather conditions and are significant carbon sinks, potentially saving up to 3,755 Ktons of CO2 when compared with the expansion of conventional farming on similar land. The economic analysis presented in this Chapter likely underestimate the actual benefit of agroforestry as it considered only the effect on crop yields, land preservation, and carbon sequestration, while there are many other ancillary benefits to agroforestry that could not be quantified in this exercise, including soil health restoration, improved water quality and quantity, flood risk reduction (riparian agroforestry systems), sustained food and livestock feed security, and improved microclimate regulation, among others. While the long-term benefits of agroforestry are clearly established, significant upfront investments for cash- strapped farmers and the absence of enabling environment to scale up such solutions are important deterrents. The self-sustaining nature of agroforestry systems means that maintenance costs are significantly lower over the long run, but initial seeds and tree planting imply higher initial investments than conventional agricultural practices, while benefits take longer to materialize. Investments needed to convert 20 percent of suitable cropland and 50 percent of suitable grassland and shrubland were estimated at 0.8 percent of GDP, with the bulk of it occurring in the very first years of development. To bridge the gap, specific financing models and incentives for smallholder farmers need to be put in place. Other constrains to scaling up agroforestry systems include the lack of a national agroforestry zoning strategy, insufficient research and development on fast-growing tree species adapted to local conditions, a lack of technical assistance available for farmers transitioning to agroforestry systems, the absence of clear regulation for agroforestry practices, gaps in land management regulation, as well as in the certification of sustainable agroforestry products. Securing necessary financing to scale up agroforestry in Togo will require both targeted public sector interventions and innovative private and market-based financing. Public sector initiatives, including those supported through development partners, can help incentive project implementation through grants, subsidies and guarantees that help bridge the gap between upfront investments and breakeven benefits. Commercial b anks can also offer loan options with specific terms tailored for agroforestry projects, including with the support of partnerships and/or guarantees with government agencies and NGOs. Similarly, microfinance institutions can offer smaller loans with flexible repayment schedules that are suited to individual farmers or smallholder cooperatives implementing agroforestry practices. The significant potential for carbon sequestration and adaptation to climate change also mean that carbon credit markets are promising avenue for agroforestry projects, generating tradable credits that provide additional income and attract investment from companies seeking to offset their carbon footprint. This option will become increasingly viable as Togo is currently developing the necessary regulatory environment to leverage carbon credits. Finally, crowdfunding platforms can allow individual farmers and cooperatives to raise capital from a large pool of contributors, making them particularly suitable for smaller projects with strong community engagement. In all cases, a well-defined project plan with clear goals, robust financial projections, and effective risk mitigation strategies is critical for attracting potential investors. Decentralized financing instruments improve farmers ability to invest in agroforestry. Small-holder farmers have among the lowest access to traditional, centralized financing tools (ex. bank loans). Indeed, less than half a percent of bank loans are allocated to the agricultural sector due to the perceived risk, which could only grow only grow as climate change renders crop production more challenging.19 A decentralized approach that sources funding from within local institutions and cooperatives can bridge this financing gap. Togo has already had success in establishing local financing institutions, such as in the case of the Faîtière des Unités Coopératives d’Épargne et de Crédit du Togo (Togo cooperative savings and credit association - FUCEC). This is the country’s largest microfinance institution CHAPTER I – 19 Ledy, N. (2019). Togo: less than 1% of bank loans go to the agricultural sector which occupies 60% of the active population a nd generates 40% of the GD P (making up more than 70 percent of the microfinance institution market in Togo) that has developed financial services that are specifically adapted to the agricultural sector (production, processing, storage, and marketing), and provides capacity building for all actors in the agricultural value chain to better manage risks.20 Such instruments functions as a three-way agreement between the financing institution, producers and buyers, allowing small-holder producers to cover their costs (inputs, sewing, weeding, and harvesting) and buyers/aggregators to cover their investment.21 The provision of these loans to the main actors along the agricultural value chain allows for the reduction in loan defaults, and for payments to be paid in a timelier fashion, further lowering the incidence of loan defaults. The expansion of these cooperative-based microfinancing institutions could serve as a vital bridge to the financing gap for agroforestry systems. Revolving funds in cooperative-based agroforestry systems have also been used in several Sub-Saharan African countries. Revolving funds function by pooling financial resources among farmers that work within a cooperative framework agreement; the pooled funds are governed by one or more farmers during a specified period, during which the fund governors can use the pooled funds to finance their own agricultural investments (equipment, labour, transportation logistics...etc.), so long as the fund is replenished before the fund governance shifts to another farmer or group of farmers. Providing farmers with the capacity- building to establish and maintain cooperatives that manage pooled-financing could serve as another effective way to address the current financing gap. Ensuring land tenure security is critical to stimulate long-term investments in agroforestry systems in Togo. Complex land tenure systems, limited access to formal registration, and gender bias hinder farmers' willingness to invest in long-term agroforestry projects. Addressing these challenges requires a multifaceted approach, including streamlining land tenure regulations and procedures to simplify registration processes and ensure greater transparency. This could involve decentralizing land administration, recognizing customary rights, and promoting community-based land management approaches. Educating farmers, particularly women, about their land rights and available registration options is also essential, while exploring alternative tenure arrangements, such as collective land ownership models or long-term leases, could provide greater security for farmers hesitant to invest individually in agroforestry. A successful transition from monoculture to agroforestry at scale requires the development of dedicated support services and incentives by the government. Urgent actions that could have the greatest impacts and Co-Benefits for rural development can be regrouped in five categories: i) developing an enabling environment for promoting ecosystem services; ii) developing a national agroforestry zoning strategy; iii) supporting research and development for fast-growing agroforestry trees; and iv) facilitating access to technical and financial assistance for farmer transitioning to agroforestry. Priority interventions along those five objectives are presented in Table 6. Successful implementation will require cross-sectoral collaboration, consensus building, due consideration of the political economy, complexity, and financing mechanisms that are fit-for-purpose for Togo's diverse landscape. Table 2.6: Policy and knowledge interventions with associated target benefits and costs Policy actions (POL) or investment and knowledge Feasibility ratings Targeted outcomes management interventions (IKM) for 2025-2050 1 Develop an enabling environment for promoting nature- High complexity Ensure farming based solutions such as agroforestry. communities are Limited experience exists on regulatory supported with easier - TG. POL1: Establish clear environmental legislation, criteria, there is limited uptake and adoption access to NBS with guidelines and regulations for agroforestry practices of agroforestry. Need to define and build conducive and inclusive consensus around the existent interventions land tenure policies on - TG. POL2: Develop incentivized tree tenure policies in collaboration with the National their farm lands. - TG. POL3: Strengthen value chains through capacity Development Program (PND) and ensure rural land titling reform by reinforcing building efforts and advisory services 20Appui au Developpement Autonome (2024) FUCEC develops an innovative financing approach to meet the needs of agricultural value chain players in Togo. https://www.ada- microfinance.org/en/blog-news-ada/fucec-develops-innovative-financing-approach-meet-needs-agricultural-value-chain 21 Ibid institutions at the Ministry of Agriculture. 2 Developing a national agroforestry zoning strategy based Low complexity National level on ecological suitability and land-use pressures compendium maps and Conducting crop suitability mapping and strategy for target - TG. POL4: Promote agroforestry with suitability zones targeting will address several site-specific agroforestry and identified for targeting of restoration/rehabilitation climate change and variability challenges, riparian buffers actions of degraded lands support economic, food security and suitability zones would nutritional gains as well as environmental be developed - TG. IKM1: Promote farmer managed regeneration and benefits of product transformation and conservation for enhanced biodiversity and agroecology nutrient cycling with community-based participatory methods and practices 3 Supporting research and development of fast-growing Medium complexity Promoted fast-growing tree species adapted to diverse conditions tree species are This will require engagement with Togo multiplied and are - TG. IKM2: Support further capacity on research and Institute for Agricultural Research (ITRA), accessible for rural innovation for NBS National REDD+ Working Group which is a populations targeted for technical support body as a multidisciplinary improved NBS practices - TG. POL5: Offer fiscal incentives / subsidies for tree team composed of 13 institutions from the specifies adapted to local conditions and climate intervention State, Civil Society Organizations, and packages technical and financial partners. - TG. IKM3: Promote sustainable land management and agroecology practices 4 Facilitating access to technical and financing assistance High complexity Enable small scale for farmers transitioning to agroforestry systems producers to access Current systems have the potential for using extension services for - TG. IKM4: Develop capacity building programs tailored of biomass resources and the wood-energy capacity enhancement, to farmers' needs, focusing on tree selection, planting and sector in a more efficient manner to support and have access to management, crop and livestock integration, and a transition to a low-carbon. Low capacity carbon credit markets marketing agroforestry products. and knowledge on this exist and carbon over the farming financing mechanisms will be a game landscapes targeted for TG. IKM5: Promote equitable carbon pricing for changer but requires policy-level changes sustainable farming and regenerative agriculture as NBS. through establishment of legal frameworks, forming part of the larger initiative under the Global investments in developing carbon financing Gateway strategy opportunities and capacity building. - TG. 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