Togo’s Economic Update BOOSTING GROWTH AND RESTORING FISCAL SPACE IN UNCERTAIN TIMES August 2025 Economic Policy Global Department i ©2025 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 World 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. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for non-commercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank. 2025. Togo Economic Update: Boosting growth and restoring fiscal space in uncertain times. Washington, DC: World Bank.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. ii CONTENTS EXECUTIVE SUMMARY .................................................................................................................. vi SUMMARY OF KEY POLICY OPTIONS ............................................................................................. viii ACRONYMS AND ABBREVIATIONS.................................................................................................... x ACKNOWLEDGMENTS ................................................................................................................... xi CHAPTER I - TOWARDS SUSTAINABLE AND INCLUSIVE GROWTH IN TOGO: THE ROLE OF PRIVATE INVESTMENTS ...............................................................................................................................2 1. RECENT ECONOMIC DEVELOPMENTS ........................................................................................2 2. ECONOMIC PROSPECTS AND RISKS ...........................................................................................8 CHAPTER II - ENHANCING REVENUE MOBILIZATION AND PUBLIC INVESTMENT MANAGEMENT TO RESTORE FISCAL SPACE ................................................................................................................. 16 1. INTRODUCTION .................................................................................................................... 16 2. DOMESTIC REVENUE MOBILIZATION ....................................................................................... 16 2.1. TAX REVENUE MOBILIZATION IN TOGO: RECENT TRENDS AND REFORM BENEFITS ............... 17 2.2. TAX STRUCTURE AND EFFICIENCY ................................................................................... 20 2.3. TAX POLICY AND ADMINISTRATION MEASURES AS SOLUTIONS TO BOOST TAX REVENUE MOBILIZATION IN TOGO ........................................................................................................... 22 2.4. KEY POLICY OPTIONS ........................................................................................................ 26 3. PUBLIC INVESTMENT MANAGEMENT ...................................................................................... 27 3.1. STRENGTHENING PUBLIC INVESTMENT EFFICIENCY.......................................................... 27 3.2. STIMULATING PRIVATE SECTOR INVESTMENT .................................................................. 30 3.3. KEY POLICY OPTIONS ........................................................................................................ 31 REFERENCES ............................................................................................................................... 33 ANNEX ......................................................................................................................................... x iii List of Figures Figure 1 - Togo has managed to maintain robust and stable growth over the last decade .......................... 3 Figure 2 - The rural-urban divide has widened since 2018, and food security remains high ....................... 3 Figure 3 - Decelerating public investment contributed to slower growth in 2024 ........................................ 4 Figure 4 - Industrial activity moderated due to softening mining and energy production........................... 4 Figure 5 - Rainfalls were generally in line with historical norms in 2024, excluding the third quarter with below average precipitations ........................................................................................................................ 4 Figure 6 - Vegetation on cropland hovered around historical averages in 2024 but dropped at the start of 2025 .............................................................................................................................................................. 4 Figure 7 - Food insecurity remained high, particularly in the Savanes region .............................................. 5 Figure 8 - The current account deficit stabilized in 2024 at 3.2 percent of GDP .......................................... 6 Figure 9 - Inflation trended down in 2024, but food prices remained volatile ............................................. 6 Figure 10 - Monetary policy was maintained thorough year 2024 compared with the Euro area............... 6 Figure 11 - Monetary policy has been on an easing cycle in both advanced and developing economies ... 6 Figure 12 - Overlapping crises have increased the fiscal deficit, but the country embarked on fiscal consolidation ................................................................................................................................................. 7 Figure 13 - In recent years, Togo recorded high level of public debt ............................................................ 7 Figure 14 - Private investment and consumption will drive GDP growth ..................................................... 9 Figure 15 - The poverty is expected to decline in 2026-27 ........................................................................... 9 Figure 16 - GDP growth will moderate in 2025, amidst lower inflation ..................................................... 10 Figure 17 - Fiscal consolidation facilitated by increase in revenues and expenditure cuts ........................ 10 Figure 18 - Debt is expected to decline as the Togo meets the 3 percent deficit target ............................ 10 Figure 19 - Modest inward FDIs highlight challenges in attracting new capital to drive transformation ... 11 Figure 20 - Climate change and natural hazards could impact GDP per capita and poverty in Togo, but structural transformation and targeted adaption measures could significantly reduce their impacts ...... 15 Figure 21 - Togo has made substantial progress in domestic revenue mobilization, but tax collection performance still lags behind some of its peers, highlighting room for improvement .............................. 18 Figure 22 - Togo had the highest increase in CPIA score, indicating significant progress in revenue mobilization efficiency due to tax reforms that have been implemented in recent years ......................... 18 Figure 23 - Recent years reforms have contributed to tax revenue mobilization....................................... 18 Figure 24 - … and tax revenue gain from reforms have increased over the years of reforms .................... 18 Figure 25 - The 2012 Togo’s tax reforms have generated more gain on indirect taxation compared to direct taxation ............................................................................................................................................. 19 Figure 26 - Togo’s tax revenue is concentrated in few components of tax, mainly taxes on goods and services, taxes on int trade and transactions and taxes on income, profits and capital gains ................... 20 Figure 27 - Togo’s average TCI is relatively high compared to other countries in the list, indicating tax revenue concentration ................................................................................................................................ 21 Figure 28 - Negative correlation between the tax-to-GDP ratio and the TCI, highlighting the importance reducing tax concentration and broaden the tax base ............................................................................... 21 Figure 29 - The structure of the economy, digitalization efforts and financial development play a crucial role in supporting tax revenue diversification ............................................................................................ 21 Figure 30 - Togo's tax expenditure is relatively high compared to that of most of its peers, indicating the need for continued rationalization to strengthen domestic revenue mobilization .................................... 22 Figure 31 - Togo shifted from profit-based incentives to cost-based incentives following the introduction of the new code in 2019 ............................................................................................................................. 22 Figure 32 - Carbon taxation could yield significant revenue gains.............................................................. 25 Figure 33 - …and reduce emission intensity even with modest taxation levels ......................................... 25 iv Figure 34 - Access to infrastructure is well below what Togo’s public capital stock could deliver ............. 27 Figure 35 - Alternative infrastructure quality indicators confirm low investment efficiency ..................... 27 Figure 36 -Expected efficiency gains are large if Togo raises its PIMA score to best performing Sub- Saharan Africa peers. .................................................................................................................................. 28 Figure 37 - Most promising avenues to crowd in private investment in Togo is to cap public debt, increase the share of concessional financing, reform taxation and improve the control of corruption................... 30 List of Figures Table 1 - Recent development - Main Macroeconomic Indicators ............................................................... 3 Table 2 - Outlook - Main Macroeconomic Indicators .................................................................................... 9 v EXECUTIVE SUMMARY 1. Togo’s economic trajectory in recent years has been shaped by both resilient performance and emerging vulnerabilities. The 2025 Economic Update underscores the urgency of restoring fiscal space and implementing strategic structural reforms to sustain private sector-led growth and job creation. Through an integrated analysis in two chapters, the report presents a nuanced narrative of the country’s macroeconomic outlook and delineates actionable policy paths to foster inclusive, sustainable development. Sustaining economic growth in a complex environment 2. Togo’s recent growth performance has been robust but increasingly constrained by tightening fiscal conditions and weakening global demand. Following a strong rebound from the COVID-19 pandemic, with real GDP growth exceeding 6 percent annually between 2021 and 2023, the economy moderated to 5.3 percent in 2024 and is projected to slow further to 5.0 percent in 2025. This deceleration reflects the transition from expansionary to contractionary fiscal policies, a drop in global demand for exports, and persistent structural bottlenecks in energy and logistics. Notably, industrial activity has weakened, exacerbated by recurrent electricity shortages and supply disruptions. Meanwhile, the services sector remains dynamic, and agriculture has demonstrated resilience, despite irregular rainfall patterns and growing food insecurity in northern regions. 3. Togo is facing external headwinds amid growing global trade tensions and policy uncertainty. Against the backdrop of heightened policy uncertainty and rising trade barriers, the global economic context has become more challenging in 2025, with the risk of further adverse policy shifts materializing, particularly with respect to trade relations among the largest economies. The direct impact of higher tariffs on Togo’s export prospects is limited, but rapidly shifting direction, timeline, and magnitude of trade policy are set to generate high levels of uncertainty that deters capital investments and results in weaker risk appetite and financial market volatility. 4. Growth is projected to recover to 5.5 percent on average in 2026 and 2027, contingent on a reduction in trade policy uncertainty and the attainment of deficit reduction targets. As the drag from fiscal consolidation efforts and weak global demand is expected to wane, ongoing private investments, particularly those centered around the development of the Adétikopé Industrial Platform (PIA), along with a sustained recovery in consumer spending as inflation moderates should support growth in coming years. However, to ensure that Togo is on track to reach upper- middle-income status by 2045 and reduce extreme poverty below 10 percent, the country would need to further raise its growth potential through structural reforms. These reforms should seek to attract more private capital, boost skills, and tackle spatial inequalities in access to infrastructure, services, and economic opportunities. In particular, FDI inflows have remained modest over the last decade and concentrated in a few sectors, partly reflecting persistent challenges in infrastructure, energy access, and governance that need urgent attention. 5. The growth outlook is subject to downside risks. A Further escalation in geopolitical uncertainty, regional insecurity linked to conflicts in the Sahel, and intensifying climate shocks could disrupt economic activity more than currently expected, straining public resources, and exacerbating poverty and fragility risks. These risks can be mitigated through a coherent domestic policy agenda that strengthens resilience, promotes inclusive growth, and fosters social cohesion. vi Ensuring a balanced and pro-growth return to fiscal rectitude 6. Persistent fiscal imbalances and rising public debt are leading to difficult arbitrages. The overall fiscal deficit narrowed to 6.1 percent of GDP in 2024, following a peak of 8.3 percent in 2022, but improvement has come at the cost of reduced public investment and remains above regional averages. Public debt reached 69.7 percent of GDP in 2024, with growing reliance on short-term borrowing from regional markets, exposing the country to refinancing risks. Although the debt sustainability analysis indicates that Togo’s debt remains manageable, it remains classified as being at high risk of distress in 2025 and 2026. 7. Fiscal consolidation efforts should rely on the right balance between enhanced domestic revenue mobilization and greater public spending efficiency. Smart consolidation should indeed seek to maintain critical public services and investment in human and physical capital while improving the efficiency and targeting of fiscal policy. Broadening the tax base 8. Togo’s current tax system remains highly concentrated, with a heavy reliance on value-added and trade taxes. Over the last decade, domestic revenue as a share of GDP has increased from 12.1 percent in 2013 to approximately 14.7 percent in 2023. This progress is attributed to institutional reforms such as the establishment of the Office Togolais des Recettes (OTR), unification of tax rates, and the digitalization of tax filing and payments. These measures have yielded estimated gains of about 2.3 percent of GDP. However, Togo’s tax base remains significantly more concentrated than that of many peers. Revenue mobilization strategies must therefore address both the breadth and depth of the tax system. 9. Several measures to strengthen the tax base offer promising prospects in Togo. This includes rationalizing tax expenditures, which currently reduce tax revenues by about 17.6 percent often without clearly demonstrated developmental benefits, better integrating the informal sector through targeted tax measures and digital payment solutions, expanding property taxation and strengthening administration capacity, digital infrastructure, and governance. Greening the tax system is also identified as a dual opportunity for revenue generation and climate mitigation. Eco- taxes and carbon pricing, including a hypothetical carbon tax of US$7.5 per ton of CO₂, could generate up to 1 percent of GDP annually by 2035 while reducing emissions intensity by up to 27 percent. Strengthening public investment management 10. The quality of public investment management plays a critical area in the delivery of public services, particularly in a fiscally constrained environment. Analysis presented in this report suggests that matching the public investment efficiency of the best performers on the continent could result in gains in infrastructure quality ranging between 14 to 37 percent, without increasing spending levels. To achieve these gains, a suite of institutional and policy reforms is needed. These include the development of a robust regulatory framework for project selection and execution, the integration of climate risk assessments in selection and evaluation of projects, the adoption of transparent procurement practices and the promotion of public-private partnerships (PPPs) to crowd in private capital and reduce fiscal pressures. Strengthening governance and transparency vii across the investment cycle is also critical to building public trust and ensuring that investments deliver measurable development outcomes. Publishing feasibility studies, tracking project execution, and adopting results-based management tools will improve accountability and resource allocation. SUMMARY OF KEY POLICY OPTIONS Objective Policy options Time horizon • Take legislative action to improve access to land, inputs, finance, technology and extension services in the Short term agriculture sector • Strengthen the institutional and regulatory framework for Short term land management at the national and decentralized level • Implement a restructuring plan for the CEET, review the operational and institutional framework for the electricity Short term Stimulate sector private sector-led • Revise the investment code and legislation on Special Medium term activity and Economic Zones job creation • Reduce payment delays on public procurement and ensure Short term better alignment of PPP and procurement legislations • Define clear pathways between secondary education, Medium term TVET and higher education • Define institutional arrangements and content of the main Medium term employment programs for vulnerable populations. • Streamline tax expenditures by removing regressive VAT exemptions, rationalizing the property tax expenditures, Short term automating risk assessments for processing VAT credit refund requests, and increasing audits of VAT credits. • Enhance the electronic tax filing system and reform Medium term synthetic taxation (TPU) to encourage formalization. Enhance • Promote mobile phone tax payments to increase revenue Short term compliance and broaden the tax base. mobilization • Accelerate the modernization of cadastral systems, urban and tax planning, and land management reforms, while investing Medium term efficiency in digital infrastructure for property tax collection. • Strengthen the institutional capacity of the OTR through continuous training and adopting a customer-centric Medium term approach to improve tax administration efficiency. • Green Togo’s tax structure by introducing eco-taxes and Medium term carbon taxation over time. Strengthen • Strengthen the manual of procedures for selecting, Medium term public prioritizing, and appraising public investment projects. financial • Systematize the production and publication of feasibility management Medium term studies for investment projects. viii and spending • Establish rules and procedures for assessing climate Medium term effectivity adaptation and mitigation dimensions in project planning. • Initiate a budget risk statement, including a quantitative Medium term and qualitative assessment of climate risks. ix ACRONYMS AND ABBREVIATIONS AfCFTA African Continental Free Trade Area API-ZF Agence de Promotion des Investissements et de la Zone Franche BCEAO Banque Centrale des États de l'Afrique de l'Ouest BTCI Banque Togolaise pour le Commerce et l’Industrie CAD Current Account Deficit CEET Compagnie Energie Electrique du Togo CFA F Franc de la Communauté Financière Africaine CPIA Country Policy and Institutional Assessment CIT Corporate Income Tax DEA Data Envelopment Analysis ECOWAS Economic Community of West African States EMDEs Emerging and Developing Economies EPZs Export Processing Zones FRS Fiscal Risk Statement FDI Foreign Direct Investment FNE Fonds National pour l'Environnement GDP Gross Domestic Product GGGI Global Green Growth Institute GVCs Global Value Chains HCI Human Capital Index ECF Extended Credit Facility IMF International Monetary Fund INSEED Institut National de la Statistique et des Etudes Economiques et Démographiques MTDS Medium-Term Debt Strategy NDVI Normalized Difference Vegetation Index NPLs Non-Performing Loans OTR Office Togolais des recettes PIA Plateforme Industrielle d'Adétikopé PIM Public Investment Management PIMA Public Investment Management Assessment PPPs Public-Private Partnerships RMP Revenue Mobilization Plans UPF Tax Policy Unit UPT Unique Professional Tax UTB Union Togolaise de Banque USA United States of America VAT Value-Added Tax WAEMU West African Economic and Monetary Union ZAAP Zones d'Aménagement Agricole Planifiées x ACKNOWLEDGMENTS The Togo Economic Update was prepared by a team led by Nimonka Bayale (Economist, EAWM1) and Marc Stocker (Senior Economist, EAWM1) with core team members including Camilla Sacchetto (Economist, EAWM1), and Aissatou Ouedraogo (Economist, EAWPV) for Chapter 1, and Nimonka Bayale (Economist, EAWM1), Marc Stocker (Senior Economist, EAWM1), with the support of Ibrahim El ghandour (Public Sector Specialist, EAWG1) for Chapter 2. The full report has benefited from comments by Rick Emery Tsouck Ibounde (Senior Economist, EAWM2) and Ceren Ozer (Senior Economist, EMFTX). The work was carried out under the supervision and guidance of Marie-Chantal Uwanyiligira (Division Director, AWCF2), Rob Swinkels (Lead Economist, EAWDR), Hans Anand Beck (Practice Manager, EAWM1), Fily Sissoko (Country Manager, AWMTG), Markus Kitzmuller (Lead Country Economist, Program Leader, EECDR), Marc Stocker (Senior Economist, EAWM1), Felix Oppong (Acting lead Economist, EAWM1), and Alberto Portugal (Senior Economist, EAWM1). 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. xi CHAPTER I - TOWARDS SUSTAINABLE AND INCLUSIVE GROWTH IN TOGO: THE ROLE OF PRIVATE INVESTMENTS A strong fiscal policy response since the COVID-pandemic contributed to a significant rebound in economic activity between 2021 and 2023, but growth is estimated to have moderated in 2024 to 5.3 percent and further to 5.0 percent in 2025, as fiscal consolidation efforts, weak external demand, and regional uncertainty weigh on activity. Thereafter, growth is expected to strengthen modestly to an average of 5.5 percent between 2026 and 2027, supported by private investment and consumer spending and a gradual recovery in exports and public spending. over the medium term, Togo would need to maintain growth of at least 6 percent per year on average to achieve upper middle-income status by 2045, and reduce poverty below 10 percent. As Togo seeks to address some of the key developmental challenges, it will also face a series of domestic and external risks, including growing geopolitical uncertainty and debt refinancing pressures in the short term, and intensifying trade policy disruptions and climate shocks over the medium term. 1. RECENT ECONOMIC DEVELOPMENTS 1. In recent years, Togo has maintained robust growth, but poverty is still elevated, with significant disparities between rural and urban areas. Over the last decade, Togo has benefited from its longest spell of above 5 percent growth and saw a strong post-COVID rebound between 2021 and 2023, with growth averaging 6.1 percent with the support of expansionary fiscal policy and robust private investment (Figure 1 and Table 1). However, this performance remains below key regional peers, reflecting low agricultural productivity and insufficient job opportunities in high-value services and manufacturing exacerbated by an underutilized human capital. Economic activity is concentrated around the Lomé region, exacerbating spatial disparities in economic opportunities and access to infrastructure and services. Despite a modest decline in poverty from 45.5 to 43.8 percent between 2018 and 2021, rural areas, particularly the Savanes region, continue to experience high poverty rates (Figure 2). Poor households, particularly in rural areas, are disproportionately affected by shocks and have limited capacity to self-insure, which results in them relying heavily on negative coping mechanisms (e.g., sales of productive assets) and traps them in a vicious cycle of poverty. 2 Figure 1 - Togo has managed to maintain robust Figure 2 - The rural-urban divide has widened since and stable growth over the last decade 2018, and food security remains high Real GDP growth and GDP per capital levels National poverty rate Percent Index = 100 in 1980 Percent 15 GDP growth 120 70 GDP per capita 2018 2021 58.8 58.2 110 60 10 100 50 45.5 43.8 5 90 40 34.3 32.3 0 30 80 22.3 20.1 -5 70 20 -10 60 10 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024 0 National Lome Other urban Rural Source: World Bank Source: World Bank Table 1 - Recent development - Main Macroeconomic Indicators 2020 2021 2022 2023 2024e Real GDP Growth (in percent) 2.0 6.0 5.8 6.4 5.3 Overall fiscal balance (with grants, in percent of GDP) -7.0 -4.7 -8.3 -6.6 -6.4 Current account balance (percent of GDP) -0.3 -0.9 -3.0 -3.3 -3.2 Inflation (CPI, in percent) 1.8 4.5 7.5 5.3 2.9 Source: World Bank 2. Following a robust rebound in 2021-23, growth is moderating in the face fiscal consolidation efforts and an increasingly challenging global environment. Following the 2020 downturn triggered by the global COVID-19 pandemic, growth in Togo rebounded to average 6.1 percent between 2021 and 2023, supported by fiscal stimulus measures and ongoing private investment. However, poverty reduction was hampered by soaring food price inflation, while fiscal space was depleted by rising capital spending and transfers. In 2024, GDP growth is estimated to have slowed to 5.3 percent, as the government shifted from expansionary to contractionary fiscal policy and global demand softened (Figure 3). This compares favorably with growth performance of the Sub-Saharan African region as a whole, which registered 3.3 percent annual growth in 2024, up from 2.8 percent in 2023. However, eight countries on the continent surpassed Togo in 20204, including Benin (7.5 percent), Cabo Verde (7.3 percent), Côte d’Ivoire (6 percent), Ethiopia (8.1 percent), and Rwanda (8.9 percent). These countries benefited from stable macroeconomic conditions, infrastructure investments, and structural reforms. 3. On the supply side, economic activity was supported in 2024 by sustained services sector activity while industrial activity went through a soft patch. Services sector activity was robust in 2024, growing at an estimated 6.2 percent, driven by positive momentum in commercial services, including financial services, ICT, accommodation, and transportation. In contrast, industrial activity decelerated, to annual growth rate of 4.2 percent due to softening mining production following a very strong performance in 2023, and disruptions in electricity production and distribution (Figure 4). In fact, Togo faced recurrent electricity outages in 2024, due to supply disruptions from Nigeria and Ghana and governance financial management challenges at the Compagnie Energie Electrique du Togo (CEET). 3 Figure 3 - Decelerating public investment Figure 4 - Industrial activity moderated due to contributed to slower growth in 2024 softening mining and energy production Real GDP growth and demand components Industrial production, year-on-year growth Total industry Private Consumption Gross Fixed Capital Formation Government Consumption Net exports Percent Mining and extractives 50 Electricity and gas 8 40 6 2.5 2.8 30 1.1 4 0.7 20 0.9 0.8 10 2 3.5 3.9 0 3.2 -10 0 -20 -0.4 -0.4 -2 -1.2 2022 2023 2024 Source: World Bank Source: INSEED 4. Agricultural production was robust but showed signs of moderation around the turn of the 2024-25. The 2024-25 season experienced irregular rainfall (Figure 5), particularly in the Plateaux and Centrale regions. This affected crop yields and vegetation density around the turn of the year and at the beginning of 2025 (Figure 6). Despite increases in tuber, legume and oilseed production, total cereal production grew by about 2 percent, leading to a drop in per capita production. Overall, agriculture output is estimated to have grown by 4.1 percent in 2024, broadly unchanged from 2023. The northern Savanes and Kara regions were affected by intensifying food security concerns due climate stress and growing insecurity (Figure 7). Figure 5 - Rainfalls were generally in line with Figure 6 - Vegetation on cropland hovered historical norms in 2024, excluding the third quarter around historical averages in 2024 but dropped with below average precipitations at the start of 2025 Precipitation in Maritime and Savanes regions Vegetation density on cropland (NDVI) Index 900 2023 2024 Average 800 0.45 700 600 500 400 0.4 300 200 100 0.35 0 Apr-23 Oct-23 Apr-24 Oct-24 Apr-25 Jan-23 Jul-23 Jan-24 Jul-24 Jan-25 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Plateaux Centrale Sources: WFP data Sources: Bank’s staff calculation WFP data 4 Figure 7 - Food insecurity remained high, particularly in the Savanes region Population facing food insecurity 250,000 Sep-Dec 2023 Sep-Dec 2024 200,000 Proj. June-Aug 2025 150,000 100,000 50,000 0 Savanes Maritime Plateaux Kara Centrale Sources: IPC/Cadre Harmonisé reports for West Africa 5. Togo’s current account deficit remained modest in 2024 and broadly aligned with fundamentals. The current account deficit is estimated to have slightly narrowed to 3.2 percent of GDP in 2024, down from 3.3 percent in 2023 (Figure 8), as slower export growth was offset by slowing imports, improving terms of trade. Transshipment activity at the Port of Lomé has been robust throughout 2024. 6. Inflation has been on a downward trend, but food price inflation has been volatile. Headline inflation decreased throughout 2024 to reach 1.8 percent in December, reflecting moderating energy price and core inflation, while food price inflation remained more volatile (Figure 9). The average inflation rate reached 2.9 percent, below the regional average of 3.5 percent and the BCEAO threshold of 3 percent, reflecting low core inflation (1.7 percent). 7. BCEAO’s Monetary policy has remained broadly accommodative. As a WAEMU member, Togo's monetary and exchange rate policies are managed by the BCEAO, which maintains a fixed peg between the CFA Franc and the Euro. The BCEAO maintained its interest rates since end-2023, at 3.5 percent for liquidity calls and 5.5 percent for the marginal lending facility (Figure 10)1, while in general, the monetary policy has been on an easing cycle in both advanced and developing economies (Figure 11). The BCEAO also continued its auction-based allotment system for weekly liquidity injections to ensure the proper functioning of the WAEMU interbank market in 2024. The BCEAO foreign exchange reserves also strengthened in 2024, supported by narrowing fiscal deficits and growing interest rate differential with the Euro Area, as the European Central Bank eased its monetary policy stance. 1 At its meeting on June 4, 2025, the Monetary Policy Committee (MPC) of the Central Bank of West African States (BCEAO) decided to lower its key policy rates by 25 basis points. Accordingly, the main rate at which the Central Bank lends to commercial banks was reduced from 3.50% to 3.25%. 5 Figure 8 - The current account deficit stabilized Figure 9 - Inflation trended down in 2024, but food in 2024 at 3.2 percent of GDP prices remained volatile Exports, imports and current account balance CPI inflation and main components Current Account Balance 20 Exports Inflation Food Imports 15 Energy Transport 0 40 Monthly inflation 10 -1 30 in percent of GDP in percent of GDP 5 -2 20 0 -3 10 -5 -4 0 Oct-23 Oct-24 Jan-23 Apr-23 Nov-23 Jan-24 Apr-24 Nov-24 Jan-25 Apr-25 Mar-23 May-23 Feb-23 Jun-23 Aug-23 Mar-24 May-24 Feb-24 Jun-24 May-25 Aug-24 Mar-25 Feb-25 Jun-25 Jul-23 Jul-24 Sep-23 Dec-23 Sep-24 Dec-24 2019 2020 2021 2022 2023 2024 Source: World Bank Sources: INSEED Figure 10 - Monetary policy was maintained Figure 11 - Monetary policy has been on an easing thorough year 2024 compared with the Euro area cycle in both advanced and developing economies Policy interest rate of BCEAO and ECB (percent) Net balance of policy interest rate changes BCEAO ECB 5 4 3 2 1 0 Sep-23 Jan-20 Sep-20 Jan-21 Sep-21 Jan-22 Sep-22 Jan-23 Jan-24 Sep-24 Jan-25 May-20 May-21 May-22 May-23 May-24 May-25 Source: BCEAO, World Bank Source: World Bank 8. Togo’s banking sector is generally robust, though some institutions face challenges . As one of West Africa's largest financial hubs, Togo hosts 14 banks and 3 non-bank financial institutions. The sector, which dominates the financial system, had a solvency ratio of 8.3 percent and a liquidity coefficient of 107.8 percent as of June 2024. The capital adequacy ratio, aligned with Basel II and III standards and BCEAO regulations, was 4.1 percent in June 2024, up from 2.58 percent in June 2023. The sector is profitable, with net revenue increasing by 18.9 percent and net profit growing by 11.7 percent in 2024, reaching CFA 393.7 billion (US$ 621 million). The loan portfolio quality improved, with non-performing loans (NPLs) dropping to 7.9 percent in June 2024. In terms of reforms, the Banque Togolaise pour le Commerce et l’Industrie (BTCI) has been privatized, and significant progress was made in 2024 on 6 reforming the state-owned Union Togolaise de Banque (UTB). Authorities are completing the bank’s recapitalization to the regulatory minimum and implementing a restructuring plan to ensure profitability and stability. 9. Togo’s fiscal deficit narrowed in 2024 but remained elevated. Following a sharp increase in the post- COVID-19 period, the government embarked in 2023 on a period of fiscal consolidation to slightly reduce the deficit to 3 percent of GDP by 2025. The fiscal deficit moderated to 6.4 percent of GDP in 20242 from 6.6 percent in 2023, driven by increased revenues and lower capital spending. The tax-to-GDP ratio rose to 15.2 percent in 2024 from 14.7 percent in 2023, due to higher taxes and improved tax compliance through digital solutions. Current expenditures slightly increased to 15.1 percent of GDP in 2024 compared to 14.5 percent in 2023, reflecting higher spending on goods and services and transfers. Capital spending declined by 1.5 percent of GDP in 2024 compared to 2023. Despite those efforts, Togo’s deficit remains larger than most regional peers (Figure 12). 10. Public debt continues to rise, with increasing reliance on tight regional bond markets amplifying debt financing pressures. Togo's debt increased from 68.6 percent of GDP in 2023 to 72.1 percent in 2024 (Figure 13). Regional debt markets, which are the main source borrowing for the government, faced tight conditions in 2024. While Togo's Debt Sustainability Analysis (DSA) indicates that the country's debt remains sustainable, domestic debt exposure to regional debt markets pose significant challenges. In fact, Togo’s bond yields averaged 6.9 percent for T-Bills and 7.8 percent for T-Bonds in 2024 up from 6.5 percent and 7.4 percent in 2023. The weighted average maturity also shortened to 1.5 years in 2024 from 3 years in 2023, with 71 percent of financing needs covered by T-Bills, indicating investors’ appetite eased, particularly for long maturities, due to significant exposure of WAEMU banks to sovereign risks, and increased country risk attributed to certain member states. Authorities have secured higher levels of external grants and concessional loans in 2023-24 but not sufficiently to reduce their reliance on regional debt markets. Figure 12 - Overlapping crises have increased the Figure 13 - In recent years, Togo recorded high fiscal deficit, but the country embarked on fiscal level of public debt consolidation Fiscal deficit in Togo and peer countries, 2022-24 Public debt in Togo and peer countries, 2022-24 Percent of GDP 120 2024 2022 2023 16 Percent of GDP 12 2024 2022 2023 80 8 108.5 11.7 40 77.5 72.1 69.1 53.7 58.4 4 5.6 6.4 3.7 4.0 3.9 0 0 Benin Côte d'Ivoire Morocco Rwanda Senegal Togo Benin Côte Morocco Rwanda Senegal Togo d'Ivoire Source: World Bank, MFMOD Source: World Bank, MFMOD 2 The slight decrease in the fiscal deficit in 2024 reflects the reclassification of previously below-the-line expenditures, including the purchase of fertilizers supported by a trade finance facility and advances to local authorities for the construction of waste treatment facilities following significant flooding in 2024. 7 2. ECONOMIC PROSPECTS AND RISKS 11. Togo is facing external headwinds amid growing global trade tensions and policy uncertainty. Against the backdrop of heightened policy uncertainty and rising trade barriers, the global economic context has become more challenging in 2025, with the risk of further adverse policy shifts materializing, particularly with respect to trade relations among the largest economies. Although global goods trade expanded in the early part of 2025, escalating trade restrictions are significantly clouding the near-term trade outlook. Beyond the direct impact of higher tariffs and retaliatory actions, the rapidly shifting direction, timeline, and magnitude of trade restrictive measures are set to generate high levels of policy uncertainty that deters capital investment globally and have weighed substantially on financial markets, resulting in weaker risk appetite and increased volatility. Commodity prices have fallen sharply since the first quarter of 2025, reflecting substantial headwinds to global manufacturing and broader industrial activity. 12. Togo's GDP growth could soften further in 2025, before recovering from 2026 onwards. Growth is projected to moderate to 5.0 percent in 2025, as cuts in public spending and decelerating global trade take a toll. The direct impact of the announced tariff increases on Togo’s exports to the United States— set at a 10 percent floor across the board—will likely have marginal effects on economic activity, as exports to the U.S. constitute only 2.1 percent of Togo's total exports (equivalent to 1 percent of the country's GDP). Togo primarily exports to other African countries (64 percent), particularly within the WAEMU region, followed by Asia (17 percent) and Europe (12 percent), so its export pattern may provide some insulation unless the economic outlook for Europe and Asia deteriorates more sharply than currently anticipated. On the positive side, growth in Togo continues to be supported by ongoing private investments, particularly those centered around the development of the Adétikopé Industrial Platform (PIA), along with a sustained recovery in consumer spending as inflation moderates further. Assuming that trade tensions dissipate and fiscal consolidation efforts moderate, growth should recover back to 5.5 percent in 2026 and 2027, in line with the country's estimated growth potential (Figure 14 and Table 2). 13. Supportive policies in the agricultural sector are expected to result in higher productivity and resilience, thereby increasing its contribution to structural transformation. Despite mixed rainfall outcomes, including overly dry conditions along the Gulf of Guinea in late-2024 and a decline in vegetation density in key agriculture areas in Togo at the start of 2025, yield outcomes are generally expected to be near-average during the 2025-26 season. This is notably supported by the government’s initiatives, including its support for Agriculture Development Zones (ZAAPs). These interventions include multi-year efforts to scale up services to ZAAPs through private sector engagement, including inputs, information, mechanization, and purchasing. However, pressure on yields is expected to continue in areas impacted by persistent conflict and fragility, including the Northern Savanes, as well as the Kara region, where the population exposed to acute food insecurity could continue to rise in 2025. To accelerate structural transformation and eliminate food insecurity, the government is planning investments and reforms to double agricultural yields over the next decade and attract private capital to develop selected value chains. In this context, the international extreme poverty rate, measured at $2.15 (2017 PPP threshold for low-income countries) is projected to decline further, averaging 21 percent over the period 2025-27 (Figure 15). 8 Figure 14 - Private investment and consumption Figure 15 - The poverty is expected to decline in will drive GDP growth 2026-27 Contribution to GDP growth Poverty rate and GDP per capita Poverty rate (%) Real GDP per capita (millions constant LCU) Private consumption Government consumption Government investment Private investment International poverty rate 9 Net exports Lower middle-income pov. rate 60 Real GDP pc 8 4 6 40 4 -1 20 2 -6 0 0 2018 2020 2022 2024 2026 Source: World Bank Source: World Bank Note: National poverty estimates are based on the SM2025 MFMOD projection and are subject to change. Table 2 - Outlook - Main Macroeconomic Indicators 2024e 2025f 2026f 2027f Real GDP Growth (in percent) 5.3 5.0 5.4 5.5 Overall fiscal balance (with grants, in percent of GDP) -6.4 -3.5 -3.0 -3.0 Current account balance (percent of GDP) -3.2 -3.1 -3.0 -3.0 Inflation (CPI, in percent) 2.9 2.8 2.7 2.3 Source: World Bank 14. Inflation should stabilize below 3 percent in coming years, but a recent uptick in food price inflation and continued food insecurity could adversely impact the welfare of the most vulnerable in 2025. Since early 2025, inflation has hovered around 3 percent, with contrasting sectoral trends, including significant rises in food and energy prices driven by both local and international supply conditions, which were partially offset by declines in transport and imported goods. Upward pressure on food prices disproportionately impacts poor households, slowing efforts to reduce poverty. Over the medium term, inflation is projected to move closer to 2 percent (Figure 17), providing ongoing support to consumer spending and strengthening households purchasing power. 9 Figure 16 - GDP growth will moderate in 2025, amidst lower inflation GDP growth and inflation 8 Real GDP growth Inflation 6 6 5.3 6.4 4 5.3 5.4 5.5 4 5.0 2.9 2.8 2.7 2 2 2.3 0 0 2023 2024e 2025f 2026f 2027f Source: World Bank 15. Fiscal consolidation efforts will hold back aggregate demand in 2025, with the dampening effect waning in subsequent years. The 2025 budget is seeking to narrow the fiscal deficit to 3 percent of GDP from 2025 onwards. Tax and customs reforms, along with the rationalization of tax exemptions are expected to help increase revenues by 0.5 percent of GDP per year, while cuts in public investment and transfers should deliver the necessary adjustments on the expenditure side (Figure 18, see also Chapter 2 for details). Grants from Official Development Aid (ODA) are estimated to account for about 8.3 percent of revenue in 2025, with limited impacts from expected disruptions in U.S.-supported programs from USAID and the Millennium Challenge Corporation. Despite a narrowing deficit, elevated refinancing needs and increased debt service costs have created liquidity pressures and are testing the government’s borrowing capacity (Figure 19). Domestic debt constitutes the bulk of public debt and debt services costs, with a heavy reliance on regional debt for borrowing being a key source of vulnerability. The government’s Medium-Term Debt Strategy is aiming to deliver a significant shift in the composition of the debt portfolio towards external debt (from 25.6 percent in 2023 to 54.9 percent in 2026) and longer- maturities (from 6.4 years in 2023 to 8.1 years in 2026). Figure 17 - Fiscal consolidation facilitated by Figure 18 - Debt is expected to decline as the Togo increase in revenues and expenditure cuts meets the 3 percent deficit target Revenues, Expenditures, Deficit (percent GDP) Debt and Interest Payment (percent of GDP) Fiscal balance Revenues Expenditures Government debt (percent of GDP) 80 3 Percent of GDP Percent of GDP Interest payment (percent of GDP) 30 25 60 2 20 40 15 1 10 20 5 0 0 0 Source: World Bank Source: World Bank 10 16. The outlook for industrial activity hinges on progress with energy sector reforms. Preventing electricity outages that have disrupted activity over the last two years and ensuring universal access to energy across the territory is crucial to accelerate industrialization. This will require improving the financial and operational performance of the electricity company (CEET), which currently limits investments in production and distribution capacity, and mobilizing the private sector for decentralized solutions and the development of large-scale renewable energy projects. These main areas of reform and priority investment have been identified in the National Energy Pact that the government finalized in January 2025, which should be swiftly implemented to increase access to reliable and affordable electricity for all. 17. Foreign direct investments (FDI) will need to be scaled up to accelerate structural transformation. After peaking in mid-2000s during Lomé’s port development, inward FDIs have declined, with new projects yiedling limited direct jobs when compared with peers (Figure 20, Box 1.1). Subdued FDI flows, despite improvements in the business environment, point to remaining competitiveness challenges associated access to markets, energy, finance and skills. Leveraging FDIs in key sectors will require ambitous reforms, including streamled regulations, improved public sector governance, alongside investments in workforce training and efforts in fostering robust investor relations to showcase Togo's potential. Figure 19 - Modest inward FDIs highlight challenges in attracting new capital to drive transformation Foreign direct investment in percent of GDP Percent of GDP 7 2000-11 2012-23 6 5 4 3 2 1 0 Source: World Bank BOX 1.2. FOREIGN DIRECT INVESTMENT FLOWS HAVE REMAINED MODEST DESPITE A FAVORABLE BUSINESS ENVIRONMENT After peaking in the mid-2010s, driven by port infrastructure development, inward FDIs in Togo have slowed. Major investments included the US$ 700 million Port of Lomé expansion in 2011 and the US$ 200 million d’Adétikopé industrial platform (PIA) in 2019-20. However, FDIs have significantly declined since, reflecting a broader trend across Africa, exacerbated by the COVID-19 crisis. This decline is particularly concerning, especially given the private sector’s critical role in supporting the government’s ambitious policies. Despite efforts to improve the business environment and attract foreign investors, FDIs have yielded limited direct jobs and have 11 been concentrated among a few countries. The agribusiness sector, with its potential for structural transformation, has seen relatively low FDI. FDI potential in boosting investment and economic diversification in Togo remains untapped. The slowdown in FDI has impacted the investment rate, which stood at 14 percent of GDP over the last five years, below the average of regional peers. While new greenfield FDI projects in renewable energy and digital services were announced, many are yet but some of these still have to materialize. Intra-African investments are higher in Togo than in neighboring countries, and initiatives like the African Continental Free Trade Area (AfCFTA) could enhance Togo’s investment appeal. However, Togo lags behind other Economic Community of West African States (ECOWAS) countries in attracting multinational enterprises, with only eight of them operating in the country. Strengthening integration of multinationals into the local industrial ecosystem could drive job creation and knowledge transfer, further supporting economic growth. Togo's strategic location and assets position it as a potential trade powerhouse. Firms in Togo are generally more outward looking than their peers, with a higher share exporting and benefiting from some form of foreign ownership, and they are generally better integrated in international trade and global value chains (GVCs) compared to peers. However, inadequate infrastructure, stagnant logistics performance, and competition from neighboring ports hinder the potential of the Port of Lomé. Trade openness has also declined in recent years, in part due to the underwhelming performance of cotton and mining exports. These products make up the bulk to Togo’s export revenues, exposing the country to price volatility. Global shocks, compounded by rising protectionism, security concerns, and fragmented trade networks further moderated export growth. Figure B2.1: FDI inflows are concentrated in manufacturing, services and infrastructure, but not in the agrobusiness sector Jobs created by FDI projects over the period 2012- Share of projects in Togo between 2019 and 2023 23 1000 jobs / jobs per project Jobs per million USD 1,500 7 Jobs (x1000) Electricit Jobs per project y, gas, Jobs per million USD (RHS) 5 Administrati steam 1,000 ve and and air support conditio 3 service ning Financial and activities, supply, 500 insurance activities, 1 19.4% 12.9% 9.7% - -1 Information and Educati Manufacturing, Transportation and communicati on, 29.0% storage, 12.9% on, 9.7% 6.5% Source: World Bank 18. Tackling underemployment will be critical to better leverage human capital for stronger and more inclusive growth. Togo’s labor market structure currently locks human capital in low productivity occupations where labor is underutilized, such as subsistence agriculture and low productive domestic services. This reduces its contribution to higher and more inclusive growth and keep workers in precarious conditions such as low wages, job insecurity, and limited social protection. In fact, measured underemployment, which notably covers work of less than 35 hours per week, affects 60 percent of the 12 workforce in Togo. In this context, Togo’s workers are only expected to reach about 22 percent of their potential productivity3 – a level that is well below peers. Nonetheless, the level of education of young people is improving, qualifying them to meet the demands of productive jobs. Strengthening the quality of basic and vocational education, supporting productive social safety nets, and ensuring universal access to healthcare are essential elements to complement efforts to boost the labor market in order to support productivity, resilience, and the well-being of the population. 19. Over the medium term, Togo will need to deliver significantly higher and more inclusive growth to achieve upper-middle income (UMI) status by 2045 and reduce poverty below 10 percent. To achieve such outcome Togo would need to accelerate GDP per capita growth to an average of 4 percent over the next 20 years, up from the 2.8 percent on average over the last decade and 1.1 percent since the mid- 2000s (Figure 21). Such sustained acceleration, which would position Togo in the top 10 percent of growth performers globally, would require the country to significantly boost productivity through structural transformation (Figure 22). This entails diversifying the economy by leveraging Togo’s comparative advantages in agriculture, light manufacturing, logistics and other trade-related services, improving connectivity infrastructure, creating a more enabling environment for private investment and strategic Foreign Direct Investments (FDI), boosting skills and increasing access to better quality jobs, and strengthening climate resilience. In addition to growth gains, such development trajectory would translate in the national poverty rate falling to 8 percent by 2045, compared with 18 percent under a business-as-usual scenario and would also significantly reduce vulnerability to climate and other shocks. Figure 21. Togo would need to significantly Figure 22. Faster structural transformation and a boost growth to reach UMI by 2045 vibrant private sector could help achieve that goal Number of years for Togo to reach UMI status Real GDP growth and demographic dividends Active age population GDP per capita growth Years to reach UMI Percent Labor productivity Ratio 9 2.6 6 Years to reach UMI status (RHS) 40 Labor participation GDP growth GDP per capita growth 8 GDP growth (BAU) 2.4 5 7 Active age pop. ratio 30 Active age pop. ratio (BAU) 2.2 4 6 5 2.0 3 20 4 1.8 2 10 3 1 1.6 2 0 0 1 1.4 Togo - Togo - PHL - Togo - PAN - BGD - VNM - 0 1.2 20Y 10Y 20Y STR 20Y 20Y 20Y Source: World Bank Source: World Bank 20. As Togo seeks to address some of the key developmental challenges, it will also face a series of domestic and external risks. These include global and regional uncertainty as well as more frequent and damaging climate shocks. These could intensify jobs challenge for a rapidly growing youth population and amplify social and political strife. 21. Escalating geopolitical risks could affect Togo’s economic prospects through several channels. Heightened trade policy uncertainty may deter foreign direct investment (FDI) and domestic capital 3The average value is relatively higher among structural peers like Côte d'Ivoire (23%), Senegal, and Rwanda (24%), with the exception of Benin (21%). It is even more elevated among aspirational peers, particularly Bangladesh and Morocco (26%), the Philippines (32%), Panama (33%), and Vietnam (37%). 13 formation, as investors delay or reduce commitments until the global policy landscape becomes more predictable. Additionally, global supply chain disruptions can increase import costs, contributing to inflationary pressures, particularly for essential goods, thereby eroding purchasing power and social stability. Furthermore, Togo’s reliance on external financing heightens its vulnerability to shifts in global risk sentiment, potentially increasing borrowing costs or limiting access to international capital markets. These interconnected channels underscore the urgent need for a robust and coherent domestic policy framework that strengthens investor confidence and cushions the economy against adverse global policy uncertainty. Concurrently, shifts in trade and aid dynamics highlight the importance of accelerating structural reforms to enhance Togo’s competitiveness and attractiveness as a trade and investment destination, mobilize domestic resources, and maintain a prudent, growth-supportive fiscal policy. 22. Addressing the risk of continued insecurity and regional instability is crucial. Conflicts in the Sahel and their spillover effects into Togo pose significant risks, particularly with the influx of refugees and internally displaced people (Figures 23 and 24). Insecurity and violent conflicts disrupt economic activities, lower investment, trade, and FDIs, and create fiscal instability, driving increased migration and poverty. The impact of terrorism extends beyond immediate economic disruptions, exacerbating poverty and social inequality. Regions like the Savanes may experience significant population displacement, straining local resources and services. The Government has increased defense and security spending and emphasized support for priority programs in the Savanes region. Balancing these expenditures with social spending and boosting socio-economic opportunities is essential. Figure 23 - Terrorism and violent conflicts have Figure 24 - The Savanes region is also flooded with increasingly impacted Togo in recent years refugees and asylum seekers Violent conflicts and protests by region, 2015- Number of refugees, asylum seekers and IDP, October 2024 150 Attacks backed by the JNIM Number Refugees 80000 Violent conflict and protest events Asylum seekers number of events 100 60000 40000 50 20000 0 0 Centrale Plateaux Kara Maritime Savanes Cote d'Ivoire Togo Benin Ghana Source: Bank’s staff calculation from ACLED Source: UNHCR 23. Climate change could also significantly impact Togo’s development trajectory. Heat waves are becoming more severe, rainfall seasons are more uncertain, and extreme precipitation more frequent. These climate pressures are expected to intensify. If the economy remains unchanged and the labor force stays in low productivity jobs, climate change could reduce average income per capita by 6.1 percent to 12.2 percent over the next 25 years (Figure 24). Poverty could increase by 1.8 to 3.1 percentage points, pushing 250,000 to 500,000 people into poverty. Rising temperatures, reduced crop yields, slower human capital growth, and increased flooding are key drivers of these losses. 14 24. Accelerating structural transformation and implementing targeted adaptation measures to significantly reduce risks from intensifying climate pressures. If Togo emulates the structural transformation of countries like Vietnam, Bangladesh, or the Philippines, the average standard of living could be over 40 percent higher by 2050, and climate impact reduced by nearly 20 percent. This resilience is linked to reduced heat stress exposure and modernized agriculture. Combining structural transformation and climate action could cut climate impact by 60-90 percent and greenhouse gas emissions by 55 percent. However, this requires significant investments, estimated at $13 billion by 2050 in present value, or 6.1 percent of GDP per year until 2035, and 4 percent thereafter. Figure 20 - Climate change and natural hazards could impact GDP per capita and poverty in Togo, but structural transformation and targeted adaption measures could significantly reduce their impacts Projected impact of climate shocks on GDP per Projected impact of climate shocks on poverty capita levels rate Percentage point deviation from baseline Percentage point deviation from baseline 0 5 Urban Rural 4 National 5 3 Human health 2 10 Roads and bridges Flooding and LRT 1 Rainfed crops and livestock Human capital 15 0 BAU STR ADP BAU STR ADP BAU STR ADP BAU STR ADP Wet/warm Dry/hot Wet/warm Dry/hot Source: Bank’s staff estimations Source: Bank’s staff estimations 15 CHAPTER II - ENHANCING REVENUE MOBILIZATION AND PUBLIC INVESTMENT MANAGEMENT TO RESTORE FISCAL SPACE Enhancing revenue mobilization and improving public investment management are critical priorities to support public service delivery while restoring fiscal space. On the revenue side, the analysis suggests that policy and administrative reforms over the last decade led to estimated gains of about 2.3 percent of GDP in additional revenues. The chapter also highlights that Togo's tax revenue structure remains excessively reliant on a limited number of tax sources, including value-added tax (VAT) and taxes on trade, making the country's revenue base narrow and more exposed to shocks. Policy options to broaden the tax base are considered, including efforts to improve tax compliance, streamline tax expenditures, and green the tax structure. On the expenditure side, the chapter examines ways to optimize public investment management, implementing better evaluation systems, adopting e-procurement practices, developing climate-ready investment strategies, and leveraging private investment. 1. INTRODUCTION 1. Togo's fiscal consolidation efforts seek to balance immediate pressures and long-term development goals through effective revenue mobilization and improved investment management. Togo faces immediate fiscal pressures while addressing long-term development challenges. Since 2024, fiscal consolidation efforts have been necessary due to depleted fiscal buffers and soaring debt levels following increased public capital spending and emergency measures since the COVID-19 crisis. The budget deficit declined slightly to 6.4 percent of GDP in 2024, down from 6.6 percent in 2023, and public debt reached 72.1 percent of GDP in 2024. The government aims to reduce the deficit to 3.5 percent of GDP in 2025, and 3.0 percent from 2026 onwards and ensure debt sustainability through policy adjustments. Balancing revenue mobilization, spending restraint, and efficiency measures is crucial to avoid hindering economic growth and development goals. Indeed, effective revenue-driven fiscal consolidation can support development by ensuring adequate revenues for infrastructure, education, healthcare, and social protection programs while reducing dependency on deficit financing. However, excessive taxation can deter investment and stifle economic growth, particularly in economies with high informality. Identifying supportive tax policy and administrative reforms is essential. Likewise, improving public investment management is vital for raising allocative efficiency and the socio-economic impact of public spending. Efficient public investment can significantly boost growth, with high-efficiency countries seeing greater output increases from public investment. Strengthening public investment management, transparency, and accountability mechanisms can yield significant development gains, especially in a tight fiscal environment. 2. DOMESTIC REVENUE MOBILIZATION 2. This section examines the challenges and opportunities related to domestic revenue mobilization in Togo, specifically focusing on the structure and efficiency of tax revenue collection. It analyzes the relationship between tax revenue diversification for achieving sustainable revenue mobilization. This involves efforts to include some informal activities, streamlining tax exemptions, and enhancing tax administration, notably through digitalization, to improve revenue collection. 16 2.1. TAX REVENUE MOBILIZATION IN TOGO: RECENT TRENDS AND REFORM BENEFITS 3. A robust tax system is indispensable for balancing fiscal responsibility with developmental priorities. Strengthening tax policies and administrative frameworks should aim at broadening the tax base while encouraging private sector investment and job creation. This can help reinforce both fiscal sustainability and economic activity, while ensuring that public sector investments in key areas are preserved or reinforced. Furthermore, strengthening domestic revenue mobilization can reduce vulnerability to shocks while supporting inclusive growth and poverty reduction (Adam and Miller, 2021). 4. Domestic revenue mobilization in Togo made significant progress over the last decade. Togo's tax revenue as a percentage of GDP increased from 12.1 percent in 2013 to around 14.7 percent in 2023, representing an average annual gain of 0.25 percentage points. This puts Togo above the performance of peers like Benin and Côte d’Ivoire, the average of West African Economic and Monetary Union (WAEMU) countries, but below that of Rwanda, Senegal or Morocco, as well as the regional convergence, stability, and growth target of 20 percent of GDP (Figure 25). 5. Progress in performance can be linked to significant tax policy and administrative reforms implemented over the last decade. These reforms included the integration of the General Directorate of Customs and the General Directorate of Taxes into a semi-autonomous revenue agency called the Togolese Revenue Authority (OTR). The creation of the OTR, which became fully operational in 2014, marked a significant step towards improving tax collection and compliance in Togo. It also helped modernize and improve service quality through the recruitment of management of technical staff by an independent international firm, and the adoption of Results-Based Management through performance contracts to enhance accountability and efficiency. Other institutional reforms included the creation of the Tax Policy Unit (UPF) in 2020 within the Ministry of Economy and Finance, which has strengthened the capacity to assess and recommend tax policy changes. Noticeable reforms over the last decade included the unification of the corporate tax rate to 29 percent in 2013-14, standardizing the rate for all companies; the introduction of measures to control the conditions for granting tax exemptions and ensuring they are only granted as provided by law; and the digitization of tax returns and payment procedures, enabling remote tax filing and e-payment through banking partners or mobile money. Consequently, Togo recorded the highest increases compared to peers, with a 1-point improvement between 2018 and 2023 in the Country Policy and Institutional Assessment (CPIA) scores for the efficiency of revenue mobilization (Figure 26). 17 Figure 21 - Togo has made substantial progress Figure 22 - Togo had the highest increase in CPIA in domestic revenue mobilization, but tax score, indicating significant progress in revenue collection performance still lags behind some of mobilization efficiency due to tax reforms that have its peers, highlighting room for improvement been implemented in recent years Tax revenue in Togo and comparators, av. 2013-23 CPIA score on efficiency of revenue mobilization 30 Tax to GDP PPT change, 6 1.2 Tax-to-GDP in 2023 4 CPIA score 2018 CPIA score increase in Average 2013-23 5 2023 CPIA score 1 Change between 2013-23, in percent of GDP Increase 2018-2023 3 20 4 0.8 2 3 0.6 10 17.8 20.9 2 0.4 12.9 13.6 13.6 14.7 15.0 1 1 0.2 0 0 0 0 Benin Côte WAEMU Togo Rwanda Senegal Morocco Benin Cote d'Ivoire Senegal Togo Rwanda d'Ivoire Source: Bank’s staff calculations, IMF and World Source: World Bank CPIA data Bank Figure 23 - Recent years reforms have Figure 24 - … and tax revenue gain from reforms have contributed to tax revenue mobilization increased over the years of reforms Tax revenue before and after-tax reforms Trends in tax revenues with and without the reforms TR without reform (yearly avg.) 15 TR trend with reforms 15 TR with reforms (yearly avg.) Tax-to-GDP TR trend without the reforms Gain from reforms (yearly avg.) 14 13 10 12 13.6 11 10.7 10.8 11.3 5 10 2.3 9 0.1 0 8 2005-2013 2014-2023 Source: Bank’s staff calculations using SCM on the Source: Bank’s staff estimations using SCM on the IMF and IMF and World Bank World Bank’s data 6. Quantitative analysis attributes progress on revenue mobilization in part to Togo’s tax policy and administration reforms. Comparing the tax revenue collected during the periods of 2005-2013 and 2014-2023 shows that the total tax revenue increased from an average of 10.8 percent of GDP between 2005 and 2013 to an average of 13.6 percent of GDP between 2014 and 2023. Nevertheless, this increase cannot be attributed solely to the adoption of the reforms. Specific factors related to the structure of the economy, income level, and trade openness could also boost tax revenue mobilization. For instance, Combes et al. (2021) and Le et al. (2012) showed that higher GDP per capita is positively correlated with higher tax revenues. As income levels rise, there is a greater demand for public goods and services, and the overall ability to pay taxes increases. Likewise, countries with greater trade openness tend to have higher tax revenues. This is because 18 trade activities can be taxed, and open economies often have better mechanisms for tax collection. In this specific case, the impact of the tax reforms on tax revenue performance is investigated more formally using a Synthetic Control Method (SCM) estimation procedure (Abadie et al., 2015; Bayale et al., 2023) that separates the impact of changes in the economic structure from those related to reforms. Results indicate that the cumulative gain from the implementation of Togo’s tax reforms between 2014 and 2023 is estimated at 2.3 percent of GDP per year (Figure 27 and 28). The gap between the tax revenue trends under reforms and without reforms progressively increased during the period, with the exception of 2020, when it narrowed due to tax relief measures implemented during the COVID-19 pandemic to support businesses and individuals. Figure 25 - The 2012 Togo’s tax reforms have generated more gain on indirect taxation compared to direct taxation Impact of reforms on direct tax revenues Trends in direct tax revenues with and without the reforms 5 4 TR without reform (yearly avg.) TR trend with reforms TR with reforms (yearly avg.) Tax-to-GDP TR trend without the reforms Gain from reforms (yearly avg.) 4 3 3 2 2.9 2 0.9 1 2.0 2.1 2.0 0.1 1 0 2005-2013 2014-2023 Source: Bank’s staff estimations using SCM on the Source: Bank’s staff estimations using SCM on the IMF and IMF and World Bank’s data World Bank’s data Impact of reforms on indirect tax revenues Trends in indirect tax revenues with and without the reforms TR without reform (yearly avg.) 12 TR trend with reforms 12 TR with reforms (yearly avg.) Tax-to-GDP TR trend without the reforms Gain from reforms (yearly avg.) 11 10 10 8 9 6 10.6 8 8.6 9.2 4 8.6 7 2 1.4 0.0 6 0 2005-2013 2014-2023 Source: Bank’s staff estimations using SCM on the Source: Bank’s staff estimations using SCM on the IMF and IMF and World Bank’s data World Bank’s data 7. Indirect tax revenues have benefited most from past reforms. Impact evaluation results using the Synthetic Control Method (SCM) indicate that the gains from reforms for indirect tax revenues reached 1.4 percent of GDP per year, while the impact of reforms on direct tax revenues is estimated at 0.9 percent of GDP per year (Figure 29). This is partially because the tax structure relies more on indirect taxation than direct taxation, but also because of the growing importance of direct tax exemptions and preferential regimes. As a result, VAT now accounts for 41.7 percent of tax revenues, followed by 19 taxes and duties on trade at 20.9 percent, corporate income tax at 15.9 percent, and personal income tax at 8.6 percent (Figure 39). This heavy reliance on few sources of revenues illustrates that Togo's tax system lacks diversification (narrow tax base), which is essential to support long-term investment, maintain the quality of public services, and increase resilience to shocks. 2.2. TAX STRUCTURE AND EFFICIENCY 8. Togo's tax revenue structure is more concentrated than many of its peers. Togo’s heavy reliance on a limited number of tax sources, such as VAT and taxes on trade, makes the country's revenue base vulnerable to sector-specific shocks and economic fluctuations (Figure 30). This lack of diversification can lead to significant revenue shortfalls during economic downturns or changes in trade dynamics, thereby constraining the government's ability to finance essential public services and long-term investments. Moreover, an over-reliance on indirect taxes can exacerbate income inequality, as these taxes tend to be regressive, disproportionately affecting lower-income households. A Theil index is used to measure how evenly or unevenly tax revenue is distributed across different categories, with a higher value signaling more concentration (Theil, 1972; Cadot et al., 2011; Giri et al., 2019; Compaoré et al., 2020; Bayale and Yao, 2024). Over the period of 2010-22, Togo’s average tax revenue concentration index (TCI) of 0.58 is relatively high compared to comparators, including Côte d'Ivoire (0.35), and Senegal (0.49), and more significantly South Africa (0.16), Kenya (0.17), and Rwanda (0.21) (Figure 31). A negative correlation between the TCI and the tax-to-GDP ratio across countries emphasizes its critical role in domestic revenue mobilization strategies (Figure 32). To improve revenue diversification, Togo could explore expanding its tax base, enhancing tax administration efficiency, and developing new tax revenue streams. Figure 26 - Togo’s tax revenue is concentrated in few components of tax, mainly taxes on goods and services, taxes on int trade and transactions and taxes on income, profits and capital gains Composition of tax revenues, 2013-23 Share of taxes components (as percent of total tax) Tax-to-GDP Corporate Tax Personal Income Tax Taxes on income, profits and capital gains Taxes on payroll and workforce Wealth Tax Other Direct Taxes 16 Taxes on property Taxes on goods and services Value Added Tax Excise Duties Financial Activities Tax Tax on Insurance Agreements Taxes on int trade and transactions Other taxes Tax on Gambling Income Stamp Duties 14 1.8 12 10 15.9 20.9 8 0.1 8.6 0.3 6 0.3 0.3 2.2 4 6.5 1.4 2 0 41.7 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: Bank’s staff calculations, IMF and World Bank Source: Bank’s staff calculations, IMF and World Bank 9. The structure of the economy and institutional conditions matters for shaping a country’s tax revenue structure and level of diversification. A Bayesian Model Averaging (BMA) approach combined with an econometric method were used to analyze and select various determinants of tax 20 revenue diversification across countries. This analysis indicates that beyond the level of development (proxied by real GDP per capita) which correlates with more solid institutional frameworks and tax policy and administration capacities, digitalization efforts and levels of financial development have also positive effects, while dependence on natural resources and political instability have negative ones (Figure 33). Government actions to ensure more diverse tax base should therefore focus on accelerating structural transformation, strengthening institutional capacity, and boosting digitalization. The use of e-procedures or electronic platforms for tax collection, facilitating the registration and compliance of businesses, and reinforcing oversight institutions are all critical priorities to broadening the tax base and diversifying revenues. Figure 27 - Togo’s average TCI is relatively high Figure 28 - Negative correlation between the tax-to- compared to other countries in the list, GDP ratio and the TCI, highlighting the importance indicating tax revenue concentration reducing tax concentration and broaden the tax base Taxe revenue concentration index (TCI) during last Correlation between the tax-to-GDP ratio and the TCI over last decades (2010-2022) decade (2010-22) 0.7 35 0.58 0.58 0.6 30 0.49 0.50 0.5 y = -9.8653x + 21.988 25 R² = 0.2442 0.4 0.35 Tax-to-GDP 0.3 20 0.21 0.15 0.17 0.2 15 0.1 10 0.0 5 0 0 0.5 TCI 1 1.5 Source: Bank’s staff calculations Source: Bank’s staff calculations Note: A higher Theil index indicates less diversification, while a lower Theil index indicates greater diversification. Figure 29 - The structure of the economy, digitalization efforts and financial development play a crucial role in supporting tax revenue diversification Selected drivers of tax revenue diversification: estimation coefficients (normalized) Share of the informal sector Education HC Agricultural Value added Corruption index Industrial Value added Investment Economic diversification Natural resource revenues Government stability index Financial development Digitalization index log (GDP per capita) 0.0 0.1 0.1 0.2 0.2 0.3 0.3 0.4 21 Source: Bank’s staff estimations Note: Green bars are in absolute values 2.3. TAX POLICY AND ADMINISTRATION MEASURES AS SOLUTIONS TO BOOST TAX REVENUE MOBILIZATION IN TOGO 10. Streamlining tax exemptions will contribute to tax revenue mobilization in Togo. Beyond the implementation of reforms for tax revenue diversification in Togo, the rationalization of tax exemptions remains also a critical priority moving forward. Tax expenditures, which refer to the revenue losses for the government due to special tax provisions such as deductions, exemptions, credits, deferrals, and preferential tax rates, represented 17.6 percent of total tax revenues in 2023, down from 18 percent of total tax revenues in 2021. In 2021, where data is available for peers, it appears that Togo's tax expenditures are relatively high compared to those of most of its peers, with the largest share of tax breaks coming from corporate income tax, value-added tax, and customs duties. In fact, Togo's tax expenditures are higher than those of Côte d'Ivoire (7.1 percent), Benin (14.8 percent), South Africa and Botswana (15.6 percent), and Kenya (16.6 percent), but lower than Rwanda (21.7 percent) and Senegal (35.7 percent) for this specific year (Figure 34). Figure 30 - Togo's tax expenditure is relatively Figure 31 - Togo shifted from profit-based high compared to that of most of its peers, incentives to cost-based incentives following the indicating the need for continued rationalization introduction of the new code in 2019 to strengthen domestic revenue mobilization Tax expenditures in percentage of total tax revenues Number of CIT incentives offered in Togo, by and comparators, 2021 instrument type 30 40 35.7 Reduced Tax 35 Tax expenditures, % of TR Tax Holiday 25 30 Tax Credit Number of CIT incentives 25 21.7 20 20 18.0 15.6 15.6 16.6 14.8 15 15 10 7.1 10 5 0 5 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Calculations based on the Global Tax Source: World Bank Expenditures Database (GTED) 11. One of the important drivers of Togo’s tax expenditures is corporate income tax (CIT) incentives. Incentives are usually designed to attract and retain businesses by reducing their tax burden, thereby encouraging private sector development. However, while CIT incentives can help attract foreign direct investment (FDI) under certain circumstances, their success depends on several factors, including institutional quality, infrastructure, and the broader investment climate. In fact, tax incentives are often not the primary driver of investment decisions, as investors prioritize factors like political 22 stability, market size, and infrastructure (James, 2013). In Togo, the important share of CIT allowance in the tax expenditure (corporate tax represented 22.2 percent in 2023) has coexisted with relatively low FDI flows over the last decade, with a large share of them destined to the development of industrial zones where access to infrastructure and business facilitation were likely to be equally important factors. Before 2019, Togo predominantly used profit-based incentives, such as tax reductions and tax holidays. However, the country has since transitioned to a model that favors tax credits, which are cost-based incentives, as they directly impact on financial costs incurred by businesses, thereby influencing their economic behavior and decision-making (Figure 35). 12. The significant share of CIT allowances in the tax expenditure also reflects the number of CIT incentives introduced with the new 2019 tax code. The new Investment Code adopted in 2019 aligns with the National Development Plan and aims to position the private sector as a key driver of economic growth. Togo offers investors benefits under two regimes: the Investment Code and the Export Processing Zones (EPZs) regime. The Investment Code, designed for ECOWAS-oriented industrial units, governs foreign investments and includes measures such as a reduction in the corporate tax rate and the introduction of an online platform for filing corporate income tax and VAT. Procedures have been simplified by automating tax payments and streamlining processes. However, industries such as banking, financial services, and telecommunications require prior accreditation and are subject to specific WAEMU regulations. The Investment Promotion and Free Zone Agency (API-ZF) is responsible for promoting investment, determining eligibility for benefits under the Investment Code, and overseeing EPZ-specific applications. It is crucial for Togo to carefully balance the benefits of these incentives with the need to maintain a sustainable fiscal policy. Rationalizing and optimizing CIT incentives based on regular cost and benefit analysis will be essential to ensure that they effectively promote economic development without undermining the country's revenue base. Beyond this, VAT and customs duties contribute significantly to tax revenue loss, often without demonstrated socio- economic benefits. According to the 2023 Tax Expenditure Report, VAT and customs duties have contributed 42 percent and 17 percent, respectively, to the total tax expenditures. Therefore, the success of Togo's revenue mobilization efforts will notably depend not only on broadening its tax base but also on better managing VAT and customs duty exemptions. 13. Targeted tax strategies are essential for integrating informal sector into the formal economy, expanding the tax base. Over the last decade, the contribution of the informal sector to the economy averaged 33.4 percent of GDP, hence being a major factor behind the current narrow tax base. The operators of the sector include numerous micro and small enterprises engaged in various activities such as small-scale manufacturing, handicrafts, commerce, and services. International experience across Africa indicates how revenue authorities have engaged with informal economy operators in different contexts, seeking to bring the informal economy into the tax net by encouraging them to formalize their businesses (e.g., presumptive tax regime in Ghana and Kenya, block management system (BMS) for tax compliance for small and medium-sized businesses and enhancing revenue collection in Tanzania, tax registration drive building on the BMS approach in Sierra Leone). In Togo, the Unique Professional Tax (UPT) operates under two distinct regimes. The first regime applies a flat- rate tax for businesses with a turnover of less than CFA 30 million, while the second regime is declarative for businesses with a turnover between CFA 30 million and CFA 60 million. Payment of the UPT exempts businesses from income tax, VAT, and business license tax. The flat-rate UPT is determined based on the type of activity, whereas the declarative UPT rate ranges from 2 to 8 percent 23 of the turnover. Transporters are subject to a specific flat rate. Additionally, a temporary exemption of two years is provided, and deductions ranging from 30 to 50 percent are granted for activities located outside Lomé. This indicates that the country has moved from a generalist strategy of taxing the informal economy in its entirety toward relatively targeted strategies that are both more efficient from a revenue perspective and more equitable from an economic perspective. 14. Digital solutions are also important in strengthening revenue mobilization. Leveraging digital technologies, such as electronic business registration and digital tax payment systems, can encourage informal businesses to transition to the formal economy. These solutions simplify the registration process and make tax compliance more manageable. Moreover, holistic or comprehensive approach to addressing informality involves understanding its multiple dimensions, including its impact on domestic revenue mobilization, individual welfare, and the business environment. For instance, enhancing efforts to completely digitize land titles could facilitate tax payments and enlarge the tax base, with positive effects on tax revenues. 15. Likewise, enhancing the efficiency, equity, and transparency of property tax collection could help improve public service delivery at a decentralized level. Historically, property tax collection in Togo faced weak administration, poor cadastral coverage, and low compliance rates. Key reforms include revising the legal framework, introducing digital tools for property mapping and taxpayer registration, and decentralizing tax management to local governments. In urban centers like Lomé, these reforms have increased tax revenues and improved accountability. Capacity- building for municipal staff and public awareness campaigns have also boosted civic participation and tax compliance. However, challenges such as incomplete cadastral coverage, inaccurate property valuations, and resistance to taxation due to limited public trust remain. To address these issues, authorities could accelerate cadastral modernization, invest in digital infrastructure, and expand public education initiatives. Strengthening local governments' autonomy and technical capacity, along with implementing urbanization and land management reforms and transparent tax revenue usage, will enhance efficiency and taxpayer confidence, making property tax a sustainable and equitable source of local development financing. 16. Greening Togo’s tax structure could help boost revenue mobilization while strengthening climate adaptation and mitigation efforts. Currently, the OTR collects several eco-taxes, but it is not clear if these revenues are being used to fund climate change activities. Moreover, tax expenditures, currently representing 17.3 percent of total revenues, are causing increased greenhouse gas emissions and environmental degradation. Togo has created a national fund for the environment (FNE) to manage national financial resources, including ecotaxes, ecological fees, and carbon mechanisms, which is not yet operational. Fiscal instruments can play a critical role in funding and incentivizing climate adaptation or decarbonization activities. A comprehensive climate finance strategy that is co-led with Ministries of Finance and Planning, based on the framework developed with support from the Global Green Growth Institute (GGGI) in 2022, would maximize their potential. 24 Figure 32 - Carbon taxation could yield Figure 33 - …and reduce emission intensity even with significant revenue gains modest taxation levels Tax revenues by 2035 under different carbon Change in the GHG emission intensity by 2050 tax scenarios under different adaptation and mitigation scenarios Source: World Bank Source: World Bank Note: Since the EGC model simulations are based on Note: STR stands for structural transformation scenario the 2019 MCS, the reference year used is 2019. and ADP for adaptation scenario 17. Modeling shows that carefully designed carbon taxes could provide an important source of financing for adaptation and mitigation. In particular, the gradual introduction of a carbon tax at US$7.5 per ton of CO2 in sectors that are significant sources emissions and for which low carbon alternatives exist like energy, transport, industry, and agriculture could raise an average of 1 percent of GDP per year by 2035 (Error! Reference source not found.36) and reduce emissions b y 9.9 Million tons of CO2Eq by 2050, which would lower the emissions intensity of economic activity by 6 percent (Error! Reference source not found.37). More specifically, such a tax in the p ower sector would be expected to reduce emissions by 9 percent by 2050, thanks to the availability of cost-effective solar alternatives, but a technical economic study on these issues would be necessary. In other sectors, effectiveness would depend on the possibility of scaling up low-emission alternatives at scale, which could take time, as in the case of agriculture, transport, or industry. Simulations suggest that the largest potential for emissions reduction are in the industrial and agriculture sectors. Higher and more targeted carbon taxation levels could yield more significant emission reduction, lowering emission intensity by up to 27 percent. A fee and rebate system could provide greater incentives by subsidizing low carbon activities, while discouraging those with high carbon intensity. The experience of other countries shows it is important to announce carbon taxes well ahead of their implementation to help households and firms avoid locking-in carbon-intensive technologies and investments and to kick-start innovation towards more efficient products and processes, which will help lower the costs of the transition. 25 2.4. KEY POLICY OPTIONS 18. Togo needs to prioritize tax revenue mobilization to create fiscal space, enhance debt sustainability, and achieve sustainable economic growth. In recent years, Togo has made progress in tax revenue mobilization efforts, reflecting tax policies and administration reforms that have been implemented. Nevertheless, there remains significant room for improvement. The ongoing implementation of a well-considered revenue mobilization strategy, comprising both tax policy and revenue administration efforts, will be critical to pursuing balanced fiscal consolidation. These policies could include broadening the tax base, streamlining tax expenditures, and strengthening the institutional capacity of the Tax Revenue Authority. Reforms should be integrated into a larger fiscal strategy that also comprises spending policies. To increase the likelihood of success, the revenue mobilization strategy should be effectively communicated to the public, bolstered by targeted spending to safeguard the most vulnerable from rising living costs, and accompanied by initiatives to improve transparency, accountability, and governance. P Policy options Time horizon 1. Rigorously and regularly evaluate costs and benefits associated with Short term corporate income tax and customs duty incentives 2. Remove regressive VAT exemptions and automate risk assessment for Short term processing VAT credit refund requests 3. Green Togo’s tax structure by introducing eco-taxes and carbon markets and Medium term taxing surface and groundwater extraction 4. Strengthen the institutional capacity of the OTR through continuous training and adopting a customer-centric approach to improve tax administration Medium term efficiency 5. Intensify efforts to enhance fiscal transparency and governance to reassure the public that revenue will be put to good use. A stronger PFM system to Medium term enhance transparency and accountability would be beneficial 6. Enhance the electronic tax filing system to include more businesses from the Medium term informal sector, particularly SMEs 7. Promote mobile phone tax payments to increase compliance and broaden Short term the tax base 8. Increase audit of VAT credits Medium term 9. Expand property taxation by completing the digitization of land titles and Medium term extending the fiscal cadaster to cover the entire country 10. Accelerate the modernization of cadastral systems, urban planning, and land management reforms, while investing in digital infrastructure for property tax Medium term collection. 26 3. PUBLIC INVESTMENT MANAGEMENT 19. This section highlights how further strengthening public investment management could help improve infrastructure and public service quality even in the face significant fiscal consolidation efforts. In fact, substantial efficiency gains could be delivered through improvements in the selectivity, planning and execution of public investment projects, combined efforts to mobilize private sector capital through transparent public-private partnerships (PPPs) and regulatory reforms to bridge infrastructure gaps, reduce fiscal pressures, and foster innovation. 3.1. STRENGTHENING PUBLIC INVESTMENT EFFICIENCY 20. Measures of public investment efficiency confirm that Togo could significantly improve public service quality with existing resources. Public investment efficiency4 is considered here as the relationship between the level of public investment and the quality of infrastructure services. It is calculated as the distance to an estimated efficiency frontier, which is defined by the set of countries with the best infrastructure quality for a given level of public capital stock per person. Analysis based on the non-parametric Data Envelopment Analysis (DEA)5 show that Togo has an efficiency score of 0.32 using a composite index of infrastructure quality including rural electricity access, rural road access, internet access and shipping access. This score means that Togo could potentially improve infrastructure services by up to 68 percent without increasing the stock of public capital per person if it is able to match the allocative efficiency of Singapore, the best performer in a sample of 153 countries included in the analysis (Figure 38). Using more appropriate comparators, Togo could improve infrastructure quality by 14 percent if it could match the efficiency score of Côte d’Ivoire; 27 percent by matching the efficiency score of Vietnam; and 37 percent in the case of Bangladesh (Figure 39). Alternative infrastructure quality indicators were used for robustness checks, most yielding similar results.6 Figure 34 - Access to infrastructure is well below Figure 35 - Alternative infrastructure quality what Togo’s public capital stock could deliver indicators confirm low investment efficiency Infrastructure access and public capital stock, 2021 Public investment efficiency scores, 2021 4 The investment efficiency measure is computed using average values of 2015-2019 investment and capital stock data as input, and the most recent value of the infrastructure connectivity measures as output. 5 The non-parametric Data Envelope Analysis was selected to estimate efficiency scores as it imposes less functional restrictions and allows for multiple input and output variables. The lack of assumptions about statistical distributions means that there are no estimates or significance tests for efficiency scores and can result in sensitivity to the specification of inputs and outputs. 6 Alternative measures include the Infrastructure and Market Access score of the Legatum Prosperity Index (2023), the quality of infrastructure in the Global Innovation Index (2023) and the quality of trade and transport related infrastructure (e.g., ports, roads, railroads and information technology) in the Global Logistics Performance index (2023). These are survey-based indicators, while the primary indicator used in this analysis measures actual infrastructure access, with a focus on rural areas. 27 Infrastructure access index Togo Ghana Morocco Vietnam 100 SGP Cote d'Ivoire Benin Bangladesh Senegal 90 0.8 Investment efficiency score 80 0.7 70 0.6 60 0.5 50 0.4 40 0.3 30 0.2 20 0.1 TGO 0.0 10 Public capital stock per person Average Logistics Legatum Global 0 Connectivity Performance Prosperity Innovation 1 2 3 4 5 Index Index Index Index Source: World Bank Source: World Bank Note: This graph plots per person public capital stock on the Note: This investment efficiency score helps assess how well an horizontal axis and realized investment output on the vertical investment utilizes resources to generate returns. A higher value axis. The efficient frontier curve shows which countries have indicates better effectiveness of resource allocation. The the best combination of the two factors. Countries below the Average Connectivity Index is the simple average of the rates of efficient frontier are less efficient because they offer lower rural electricity access (2021), rural road access (2020), internet output for the same level of input. access (2021) and shipping access (2023). 21. Public investment management reforms could be associated with significant efficiency gains. The potential benefits of such reforms are estimated using cross-country regressions of 34 Sub- Saharan African countries using DEA efficiency scores as the dependent variable and Public Investment Management Assessment (PIMA) scores7 as explanatory variables. Results confirm a positive and highly significant relationship8 between PIMA scores and public investment efficiency across Sub-Saharan African countries, illustrating that reforms could have meaningful impacts on infrastructure quality, even without increased budget allocations. In fact, if Togo was able to increase its PIMA effectiveness score to match best performers in the sample (Botswana, the Gambia, and Cote d’Ivoire), gains in terms of infrastructure quality could range between 14 and 23 percent at unchanged public investment levels (Figure 40). Sound and effective institutions are key for better efficiency. Regression results confirm a positive and significant relationship between governance indicators and public investment efficiency scores. Notably, improved government effectiveness tends to ensure that investments are effectively and strategically allocated, while ensuring efficient planning, execution, and monitoring of the projects. Figure 36 -Expected efficiency gains are large if Togo raises its PIMA score to best performing Sub-Saharan Africa peers. 7 The analysis uses Togo’s 2016 PIMA scores (last official data) and could therefore overstate the gains of reforms given the progress achieved since then. An updated PIMA assessment scheduled for 2023 is still pending. 8 The specified OLS regression highlights only a correlation between public efficiency and the institutions governing public investment management systems, and not a causality. 28 Estimated efficiency gains from matching PIMA scores of selected SSA countries Efficiency score 0.6 Efficiency score after PIMA reforms Current efficiency score 0.5 0.4 0.3 Gambia Zambia Benin Burkina Ghana Mauritius Kenya Mali Senegal Leone Botswana d'Ivoire Cameroon Nigeria Sierra Côte Faso Source: World Bank Note: Based on most recent official PIMA scores, which in the case of Togo date back from 2016 22. Priority reforms could help boost allocative efficiency, strengthen implementation, monitoring and ensure climate-resilient investments projects. On the legal front, Togo could establish an effective regulatory and institutional framework clarifying responsibilities of the various players and their interactions, as well as the procedures and standards to be applied throughout the investment management cycle. On an operational level, the manual of procedures for selecting, prioritizing, and programming public investment projects could be reinforced, ensuring greater coherence of the national planning and the medium-term budgetary framework, as well as of climate strategy objectives. This involves aligning investments with strategic goals, integrating recurring costs into budgeting, implementing projects on time and within budget, systematizing the production and publication of feasibility studies, better coordinating procurement, commitment, and cash flow plans, publishing periodic reports on project implementation, improving the quality of public asset accounting, developing rules and procedures to enable a systematic assessment of climate adaptation and mitigation dimensions in project planning. 23. The integration of the spatial dimension in the planning phase of public investments is essential to ensure a balanced and efficient distribution of resources and infrastructure throughout the territory. Although Togo's 2019 manual of procedures for the selection, prioritization and programming of public investment projects stresses the importance of taking geographical specificities and regional needs into account when evaluating and prioritizing projects, there are no rules guiding the integration of the spatial dimension into the investment planning phase. International best practice recommends that national and sectoral strategies should be guided by a clear vision and sectoral plans that take account of regional disparities and local infrastructure needs. In addition, these various strategies must also be based on robust ex-ante analyses that integrate geographical criteria in order to assess the spatial impact of the projects that will be proposed for the pre-budget selection phase. 29 24. Public investment management would also benefit from a more explicit scoring of climate risks and resilience. Investment in more resilient infrastructure generates benefits that can far exceed the initial cost. For every dollar invested in resilient infrastructure, it is estimated that the net benefit can reach US$ 4 in the long term. The incremental cost of building these infrastructures is generally low. By taking better account of climate risks at the project appraisal – particularly for self-financed projects – selection, planning, design, and implementation stages, public investments could better contribute to Togo’s climate adaptation and mitigation goals. Key priorities include better integrating climate considerations into national and sectoral development plans – including during prior appraisal – and strategies in order to align efforts with government’s climate objectives. It is also essential to develop the capacity to assess the risks posed by climate change to infrastructures and establishing monitoring systems to track the impact of climate change on their investments and make adjustments as needed. A Resilience Rating System (RRS) could be operationalized to assist in project financing and implementation decisions, and to give visibility to the use of hazard and climate change data for infrastructure operations, regular updates of building codes or infrastructure sector regulations. 3.2. STIMULATING PRIVATE SECTOR INVESTMENT 25. Strengthening public service quality in a fiscally constrained environment requires mobilizing private sector investment. Private sector involvement in infrastructure development is crucial to bridge the investment gap, reduce fiscal burdens, improve risk management, and boost efficiency and innovation in project execution, ultimately leading to better infrastructure service delivery. Additionally, the active participation of the private sector would foster innovation and competition and improve benefits for end-users. However, unlocking this potential largely depend on allocative efficiency as well as broader governance and business climate considerations (Cavallo and Daude 2011; Matvejevs and Tkacevs 2022; Chinzara, Dessus, and Dreyhaupt 2023). According to a threshold analysis of the relationship between public and private investment, crowding in effects tend to be larger when initial public investments are low, public debt and deficit levels are moderate, the share of concessional financing is larger, the tax structure and control of corruption efficient. In Togo, most of these factors seems to deter private investment at the current juncture, particularly public debt levels, insufficient reliance on concessional financing, the tax structure and the control of corruption, indicating the potential for growth-enhancing reforms in these areas (Figure 41). Figure 37 - Most promising avenues to crowd in private investment in Togo is to cap public debt, increase the share of concessional financing, reform taxation and improve the control of corruption Gap from estimated threshold values for crowding in effects in Togo 30 2 0 -2 -4 -6 -8 -10 -12 -14 -16 -18 Public Efficiency Public debt Concessional Fiscal balance Tax reform Corruption Government investment debt effectiveness Source: World Bank Note: The gap is computed as the difference between the average for Togo and the estimated threshold. Green bars suggest that Togo is in the crowding-in zone, while red bars indicate a crowding-out effect or that public investment has no statistically significant effect on private investment. 26. Other reforms needed to better leverage private sector investment include ensuring a more transparent and efficient preparation of PPP projects. This includes reviewing the organization of responsibilities within government and agencies regarding the conduct of PPPs, simplify public procurement processes to ensure more competitive bidding, and strengthen regulatory bodies to ensure fair competition. Estimates suggest that four years of continuous improvements in reforms related to the regulatory framework would generate an additional 0.8 percent of GDP above the baseline of no reforms of Private Participation in Infrastructure (Chinzara, Dessus, and Dreyhaupt 2023). In addition, improving the transparency and efficiency of preparation of PPP projects, reassessing the distribution of responsibilities within government and agencies regarding the conduct of PPPs, streamlining and clarifying public procurement processes to promote competitive bidding, and strengthening regulatory bodies to ensure a fair and competitive environment are commendable efforts in order to leverage private investment. The 2023 Public Expenditure and Financial Accountability (PEFA) evaluation highlighted that, although progress had been made in improving transparency in public procurement, several challenges remained, particularly the need to disseminate information more widely to the public, to guarantee optimum transparency and prevent fraudulent practices. 3.3. KEY POLICY OPTIONS 27. Public investment management reforms should help reinforce allocative efficiency, strengthen implementation, monitoring and make sure that projects are climate-ready. On the legal front, Togo could usefully equip itself with a regulatory and institutional framework clarifying responsibilities of the various players and their interactions, as well as the procedures and standards to be applied throughout the investment management cycle. On an operational level, the manual of procedures for selecting, prioritizing and programming public investment projects could be reinforced to improve the preparation and programming of public investment projects, ensuring greater coherence the national planning and the medium-term budgetary framework 31 as well as of climate strategy objectives. This involves aligning investments with strategic goals, integrating recurring costs into budgeting, implementing projects on time and within budget, systematize the production and publication of feasibility studies, better coordinating procurement, commitment, and cash flow plans, publishing periodic reports on project implementation, improving the quality of public asset accounting, developing rules and procedures to enable a systematic assessment of climate adaptation and mitigation dimensions in project planning. Policy options Time horizon Enhance operational procedures 1. Strengthen the manual of procedures for selecting, prioritizing, programming Medium term and appraising public investment projects 2. Review the organization of responsibilities within government and agencies Short term regarding the conduct of PPPs 3. Simplify public procurement processes to ensure more competitive bidding Short term 4. Systematically include upkeep and maintenance costs in investment Short term budgeting Improve project implementation and monitoring 5. Implement measures to ensure projects are completed on time and within Short term budget 6. Integrate recurring costs into budgeting, systematizing the production and publication of feasibility studies, and better coordinating procurement, Short term commitment, and cash flow plans 7. Fully implement the credit carry-forward mechanism to ensure continuity in Short term investment funding Develop Climate-Ready investment strategies 8. Establish rules and procedures for systematically assessing climate Medium term adaptation and mitigation dimensions in project planning 9. Formalize the PIM framework with climate integration, with publication of Medium term revised PIM evaluation 10. Initiate budget risk statement a quantitative and qualitative assessment of Medium term climate risks to public infrastructure 32 REFERENCES Abadie, A., A. Diamond, & J. Hainmueller. (2015). Comparative Politics and the Synthetic Control Method. American Journal of Political Science 59 (2), 495–510. Adam, S., & Miller, H. (2021). The economic arguments for and against a wealth tax. Fiscal Studies, 42(3- 4), 457-483. Bayale, N., Tchagnao, A. F., Nagou, M., & Tchila, P. (2023). Beneficial impact of tax reforms on tax revenue performances in Togo: Myth or reality?. Bulletin of Economic Research, 75(4), 1323-1343. Bayale, N., & Yao, J. P. A. (2024). Analyse de la diversification des recettes fiscales en Afrique. 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Understanding export diversification: Key drivers and policy implications. IMF WP No. 19/105. Le, T. M., Moreno-Dodson, B., & Bayraktar, N. (2012). Tax capacity and tax effort: Extended cross-country analysis from 1994 to 2009. World Bank Policy Research Working Paper, (6252). Matvejevs, Olegs, and Olegs Tkacevs. (2022). Public Investment Crowds in Private Investment - with Ifs and Buts. Working Papers, Working Papers. Thiel, H. (1972). Statistical decomposition analysis. Amsterdam: North-Holland Publishing Company. Chapter IV. World Bank (2014). Introduction to poverty analysis, World Bank WP No. 90288, Washington, DC: World Bank Group. 33 ANNEX Table A1. Togo - Main Macroeconomic Indicators 2021 2022 2023 2024e 2025f 2026f 2027f Annual percentage change, unless otherwise indicated National Accounts Real GDP Growth, at constant market prices 6.0 5.8 6.4 5.3 5.0 5.4 5.5 Private Consumption 12.0 4.7 4.3 5.4 5.4 5.0 4.8 Government Consumption 0.2 7.2 6.3 5.7 0.9 3.8 6.3 Gross Fixed Investment -0.4 11.3 12.0 4.4 5.7 7.8 7.8 Imports, Goods and Services 8.8 2.8 6.8 5.8 5.4 5.8 7.0 Exports, Goods and Services 14.3 5.3 5.8 5.4 5.2 6.0 7.0 Sectoral contribution to growth Agriculture (ppts) 0.8 1.1 0.9 0.9 1.0 1.1 1.2 Industry (ppts) 1.3 1.4 1.5 0.9 1.1 1.3 1.4 Services (ppts) 3.3 3.4 4.0 3.5 2.9 3.0 2.9 Employment and inflation Employment (% of Working Age Population) 56.4 57.0 57.0 56.7 56.7 56.7 56.8 GDP deflator 2.5 4.2 2.7 2.6 3.0 2.7 2.4 Consumer prices (average) 4.5 7.5 5.3 2.9 2.6 2.5 2.4 Selected Monetary Accounts Broad money (M2) 16.4 13.4 12.1 9.6 9.3 9.2 8.9 Policy Interest Rate 2.0 2.0 5.2 5.6 4.7 3.9 3.8 External sector Exports (percent of GDP) 25.8 25.1 25.2 25.3 25.4 25.5 25.9 Imports (percent of GDP) 35.5 35.3 35.1 35.2 35.2 35.4 35.9 Current account balance (percent of GDP) -0.9 -3.0 -3.3 -3.2 -3.3 -3.2 -3.1 Net Foreign Direct Investment 0.3 0.3 0.4 0.4 0.5 0.5 0.5 Terms of trade 1.4 -5.5 -1.6 0.1 0.9 0.6 0.5 Percent of GDP, unless otherwise indicated Debt Public debt (external and domestic) 64.8 67.1 68.6 72.1 70.5 68.0 66.3 External debt 27.2 25.6 26.3 30.4 30.7 31.0 31.7 Fiscal Accounts Total revenue and grants 17.1 17.8 18.2 19.0 19.2 18.8 19.0 Total expenditure and net lending 21.8 26.0 24.8 25.4 22.7 21.8 21.9 Overall fiscal balance (with grants) -4.7 -8.3 -6.6 -6.4 -3.5 -3.0 -3.0 Memorandum items GDP per capita (%) 3.5 3.3 4.0 2.9 2.6 3.0 3.1 Nominal GDP (billion, US$) 8.3 8.2 9.2 10.0 10.8 11.7 12.6 Population (million) 8.9 9.1 9.3 9.5 9.7 10.0 10.2 Source: World Bank x Table A2. Togo - Fiscal Accounts and Financing Needs 2021 2022 2023 2024 2025f 2026f 2027f Percent of GDP Total Revenues and Grants 17.1 17.8 18.2 19.0 19.2 18.8 19.0 Tax Revenues 14.0 14.0 14.7 15.2 15.7 16.2 16.7 Direct Taxes 3.6 3.8 4.0 4.3 4.6 4.8 5.0 Taxes on Goods and Services 4.2 3.7 4.0 4.2 4.4 4.6 4.8 Taxes on International Trade 6.2 6.5 6.8 6.7 6.7 6.8 6.9 Grants 1.8 2.5 2.5 2.7 2.4 1.5 1.2 Expenditures 21.8 26.0 24.8 25.4 22.7 21.8 21.9 Current Expenditures 13.6 16.2 14.6 15.6 14.5 14.1 14.1 Wages and Compensation 5.4 5.1 5.0 5.3 5.3 5.4 5.3 Goods and Services 2.9 3.5 3.4 3.1 3.2 3.1 3.1 Interest Payments 2.2 2.4 2.2 2.7 2.6 2.6 2.6 Current Transfers 3.1 5.2 3.8 3.2 3.5 3.4 3.2 Capital Expenditures 8.2 9.7 11.5 9.6 8.0 7.1 7.8 Overall Balance -4.7 -8.3 -6.6 -6.4 -3.5 -3.0 -3.0 Primary Balance -2.5 -5.8 -4.4 -4.7 -0.9 -0.4 -0.4 Government Financing 4.7 8.3 6.6 5.7 4.1 3.9 3.8 External (Net) 2.7 3.6 3.2 0.4 -0.5 -0.4 -0.2 Domestic (Net) 5.9 6.9 4.2 5.3 4.6 4.3 4.0 Source: World Bank xi