Organization: World Bank
Type of publication: Report
Site of Publication: World Bank
Date of the publication: March 2022
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Following a period of high volatility, mainly due to political tensions, Togo has enjoyed a steady rate of economic growth since 2008. Between 2001 and 2008, Togo’s economic growth was somewhat volatile and averaged 1 percent, reflecting political tensions and a commodity prices cycle.
Since 2008, growth was significantly higher, averaging 5.3 percent, reflecting an easing of political tensions, significant public investment, and improvement in doing Business between 2017 and 2019
Despite this improvement, the growth performance of Togo is below that of West African Economic and Monetary Union (WAEMU) peers and led to slower than expected improvement in the well-being of the population. Growth was not as inclusive as expected. In addition, the Togo’s growth momentum was slowed by the COVID19 crisis. The narrowing of the fiscal space due to the contraction of activity and mitigation measures implemented to cushion the impact on households and firm could limit the Government’s ability to finance the recovery. This chapter examines the constraints and opportunities for sustained and inclusive growth in Togo.
Understanding Togo’s Economic Growth History
Togo’s economic growth path
COVID-19 slowed Togo’s strong growth momentum and exacerbated structural constraints that hinder economic growth and economic transformation. Prior to the COVID-19 crisis, Togo’s economic growth was relatively robust, supported by stable macroeconomic conditions and significant improvements in the business climate.
The structure of the economy has barely changed in the last two decades. It remains dominated by the tertiary sector which accounts for 49.5% and 49.1% of GDP in 2019 and 2020 respectively
Trade and logistics are the key components while significant phosphate reserves (including carbonated phosphates) constitute a reliable manufacturing base. Agriculture sector represents the second large share of GDP (about 20.4 percent of GDP in 2019 and 40 percent of the labor force), but its potential remains relatively untapped. The country has yet to take full advantage of its potential, as GDP growth is lower than WAEMU peers. While critical Doing Business reforms have been achieved, efforts to shift the development model towards private sector led growth are constrained by insufficient infrastructure, notably in energy and telecommunications and governance deficiencies. Insufficient customs procedures and logistics weaknesses also prevent Togo from fully harnessing its potential as a transport and logistics platform. Finally, the potential of digital technology remains insufficiently tapped and prevents innovation in key economic sectors.
Between 2001 and 2019, growth was moderate and somewhat volatile during the period 2001-2007. GDP growth averaged 4% during between 2001 and 2009, which is below the WAEMU average of 4.6%, driven mainly by poor performance between 2001 and 2008 on the one hand and a slowdown of the activity in 2017 on the other. As a result, and given a steady increase in the population, GDP per capita grew at a slower rate than expected. The growth path also showed cyclical fluctuations, largely reflecting peaks due to the sharp increase in phosphate and cotton production and prices, and troughs related to political instability.
Structural breaks analysis suggests that Togo’s growth history can be divided into three periods: The period 2001-2007 was characterised by a period of political instability with disputes related to contested elections and political rotation. During the first period, output grew by an average of 1 percent, below WAEMU and other peer’s average. Growth accelerated to 5.7 percent between 2008 and 2016, driven by a more stable political environment, a sharp increase in investments and a strong expansion of the phosphate and cotton sectors. Finally, 2017-2019 was marked by a major change in fiscal policy aimed at keeping deficits low and gradually reducing debt. Real GDP growth expanded by 4.8 percent on average.
Drivers of economic growth
On the demand side, growth has been supported by a scaling up of public investment and higher private consumption. Public investment increased significantly from 2.1% of GDP in 2001 to 5.6% in 2019, with a peak of 14% in 2016. On the other hand, there has been a negative contribution from net exports in all sub-periods, particularly in the second sub-period, despite the strong expansion of the phosphate and cotton sectors. Indeed, the Togolese economy has shown modest export performance in recent years, notably due to potential problems of low trade competitiveness. As a result of the COVID-19 pandemic, private consumption feel from a decline in household incomes and business activity as social-distancing measures were implemented. In contrast, public investment increased to mitigate the fallout from the pandemic and promote the recovery.
On the supply side, agriculture, manufacturing, and transport and telecommunications supported economic growth. These three sectors contributed to more than half of the average annual growth rate of 4.8% for the period 2001-2019. While the expansion of transport services reflects significant government spending on road, port and airport infrastructure, growth in the manufacturing sector was partly driven by improvements in electricity supply, including the construction of a 100 MW power plant in 2010. The service sector was significantly affected by the COVID-19 pandemic as travel restrictions negatively impacted tourism.
Growth accounting reveals that capital and labour accumulation have been the main drivers of past growth
Capital accumulation grew by 6.2% per year between 2001 and 2019 and accounted for two-thirds of GDP per capita growth. Capital accumulation was fastest during the second period of high investment, while the contribution of labour remained relatively stable over time. Total factor productivity (TFP) growth was roughly flat over the period 2001-2019, but this masks strong variations between the three sub-periods: with negative TFP growth during the first period of political instability, more robust TFP growth during the second period of higher investment, and weak TFP growth during the period of debt reduction and lower investment.
Per capita growth over the past two decades has been driven by labour productivity and reflected slow structural transformation. Structural change was very slow, mainly reflecting intrasectoral reallocation. The share of workers employed in agriculture decreased steadily from 47.8 percent in 2001 to less than 40 percent in 2019 while the share of workers in the service sector rose similarly. Employment in the industrial sector stagnated despite higher productivity. Furthermore, per capita growth mainly reflected labour productivity although its contribution is lower compared to peers.
Constraints to economic growth
Despite significant improvement in recent years, some infrastructure deficiencies remain, especially in the sectors of electricity and telecommunication. While a significant increase in public investment between 2008 and 2016 helped upgrade transport infrastructure, more investment is needed in the energy and telecommunications sectors. Togo’s electrification rate has increased steadily over the past two decades from 19.7% of the population in 2001 to more than 50.0% in 2019. This performance in the electricity sector is the result of efforts made to strengthen energy infrastructure (construction of mini solar power plants) and to extend the electricity network in urban centers through various projects, which have helped reduce inequalities in access to energy and electricity.
Also, the cost of the service is high and the quality insufficient. In addition, operational constraints and distribution losses result in uneven power supply, while the relatively high cost continues to pose challenges for businesses and economic growth. Access to the internet network is weak and not affordable. The share of the population covered by the 3G and 4G networks is low compared to WAEMU countries such as Senegal and Benin and aspirational peers including Ghana and Rwanda. As for the connection to the Internet, the implementation of the E-government project has allowed administrations, hospitals and universities to access the Internet in order to facilitate the realization of their missions. Also, the WiFi-Public project has made it possible to have a wireless Internet network accessible in certain specially equipped public places. However, the cost of an internet connection is still high, estimated at 13 percent of GNI per capita (for 1GB) in Togo compared to only 3 percent in Rwanda. Expensive and deficient ICT services constrain firm competitiveness.
Labor productivity has been catching up with the WAEMU average over the last three years but remains significantly lower than aspirational peers. Productivity expanded by 3 percent a year during 2008- 2016, higher than the WAEMU average, allowing a gradual catch-up to WAEMU economies. In 2008, Togo’s productivity level was 72 percent of the WAEMU average. Despite this relatively strong productivity growth, the average level of labor productivity in Togo represents only 30 percent of the aspirational peer average. The low level of labor productivity could partly be explained by weaker productivity growth in the agriculture sector. Most of the productivity gain from 2001 to 2019 has come from significant rise in the share of services and within service reallocation. Although within sector reallocation has accounted for the much larger share of productivity growth, workers are also gradually shifting away from the low-productivity agriculture sector to the service sector with higher productivity. This shift also accelerates urbanization and puts additional pressure on the demand for basic services including water and sanitation.
Togo is rapidly urbanizing but has yet to fully capture the potential benefits of cities in catalysing economic growth. The role of urban markets and service centres has been widely recognized as pivotal to economic growth of countries through agglomeration and structural transformation: no country has reached middle income status without urbanizing (Spence et al, 2009). At 4 percent per year, urban population growth rates in Togo are among the highest in the world. While in 1950 under 5 percent of people lived in urban areas, it is now estimated at 42 percent of the population and is projected to reach 50 percent by 20303 . The country’s capital city, Lomé, holds nearly half of the country’s urban population, while secondary cities are fairly small but growing rapidly. The number of cities with a population of more than 50,000 has grown from none to six in the past two decades, namely Kara, Sokodé, Kpalimé, Atakpamé, Dapaong, and Tsévié. The total population living in these six secondary cities nearly tripled between 1981 and 2016, with an estimate of nearly 500,000 inhabitants in 20164 . These cities represent untapped growth opportunities but are currently constrained by insufficient connective infrastructure and a backlog in essential infrastructure from weak capacity in urban planning, management, and finance.
Togo continues to make progress on many Human Capital measures. Its 2020 Human Capital Index is above all structural peers and aspirational peer Rwanda. And, with adult education and literacy, it does better than its level of income would predict, and it scores higher than all structural peers and aspirational peers Morocco and Rwanda. However, education and training programmes need to adapt to the frequent changes in the labour market and promote a gradual improvement in the quality of the labour force through increased active labour market policies.
The potential of digital technology remains underused and impedes innovation in key economic sectors. Well-functioning digital economies offer the potential to achieve faster growth through innovative products and services, lower transaction costs and more job opportunities. In addition, increased adoption of digital technologies by households, Government and enterprises will enhance broad-based productivity growth. Yet, the adoption of digital technology in Togo remains low compared to aspirational peers. This low adoption of new technology does not only impact innovation and productivity, but also affect resilience. For example, a recent World Bank survey on the economic impact of the COVID-19 pandemic in Togo revealed that only 2.7 percent of the workforce was able to work remotely, and online sales represented only 8.6 percent of total business sales.
Togo’s potential as a multimodal transport and logistics platform is under-exploited. This results in lower trade competitiveness and export diversification. The Doing Business indicator “Cross-border trade” indicates heavy regulations governing logistics and transport services. Delays associated with border compliance and documents for imports are estimated at 96 hours and 132 hours respectively in 2020. The total time required is almost three times higher than in neighbouring Ghana, twice as high as in Benin, and 48% higher than the corresponding time in Ivory Coast. This limits Togo’s efforts to expand its role as a regional hub and to integrate the global value- chains.
The quality of governance is relatively low compared to some structural and aspirational peers, although it has improved in recent years. Improving governance is key for sustainable and faster growth because it prevents the misallocation of resources and increases efficiency. Togo ranks behind its structural and aspirational peers on most of the indicators in the World Governance Indicators. Scope for improvement exists in corruption control, effective governance and the quality of regulation.
The ease of doing business significantly improved in recent years, yet there are still structural constraints for private sector development. According to the 2019 and 2020 Doing Business report, Togo was among the top ten performers worldwide showing the most notable improvement in performance across areas measured by the Doing Business indicator. It was also the best reforming country in Africa. With an improvement score of 7 points, Togo gained 56 places in the previous 2 years and ranks 97 out of 190 economies. The improvement of Togo’s performance was mainly driven by reforms undertaken in a few main areas: starting a business, registering property, obtaining a building permit, connecting to electricity, resolving insolvency, and getting credit. However, major obstacles to private sector development remain, including the burden of taxation, difficulty in accessing finance and the poor quality of infrastructure.
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