In a higher interest rate environment and fewer sources of concessional financing available, governments must constantly balance infrastructure investments, social programs, and debt sustainability. A recent financial operation enabled by the World Bank Group helped Benin in the right direction.

In 2024, Benin reached out to the World Bank for ways to support poverty-reducing reforms, strengthen climate resilience, boost growth, and optimize its debt profile. The country's objectives called for a solution involving a Policy-Based Guarantee and a strong reforms-oriented Development Policy Finance operation.

This wasn’t first experience with World Bank financing solutions. In 2018, the country successfully used a €154.8 million IDA Policy-Based Guarantee to raise €387 million in long-term commercial financing at a highly competitive interest rate. 

World Bank Group Guarantees in Action

A €200 million Policy-Based Guarantee issued by the International Development Association (IDA), the Bank’s fund for the poorest countries, helped Benin raise €500 million in commercial financing. It was the first IDA guarantee approved since the World Bank Group Guarantee Platform was launched in July 2024.

World Bank Policy-Based Guarantees cover commercial lenders against the risk of debt service default by sovereign governments. In Benin’s case, the guarantee covers 40% of the financing on a first-loss basis, meaning that the guarantee would indemnify the lenders in full for any debt service installment missed until full utilization of the total amount of the guarantee. This significantly reduced the risk for lenders and enabled the government to obtain better financing terms.

The first-loss guarantee provided by IDA was complemented by second-loss insurance from the African Trade & Investment Development Insurance (ATIDI). This layered approach gave additional comfort to the commercial lender selected by Benin following a competitive request for proposal process, helping Benin secure a 15-year loan with a five-year grace period at a fixed interest rate of 6%.

What did Benin do with this financing? The government launched a tender offer for its 2032 Eurobond, optimizing its debt profile by reducing the stock of debt and extending the average maturity. By using the guarantee to access longer-term commercial financing at better rates, the country diversified its investor base and debt instruments, improving its debt profile while creating space for development spending.

More Money for Development

Policy-Based Guarantees are made available under the World Bank’s Development Policy Financing framework, which supports countries in addressing development financing requirements and promoting policy reform. In this operation, reforms aimed to:

• Boost private sector growth: Only 12% of micro, small, and medium-sized enterprises in Benin currently use banks to finance their investments. To improve access to credit for entrepreneurs, the government created an independent Small and Medium Enterprise Investment and Guarantee Fund.
• Strengthen climate resilience: As one of the most climate change-vulnerable countries in the world, Benin is taking steps to reduce exposure to flooding and expand social protection for affected communities. New urban planning regulations will help lower flood risks, while an expanded social registry will ensure that vulnerable populations receive targeted assistance in flood-prone areas.
• Improve domestic revenue mobilization: Reforms include abolishing payroll tax exemptions for public institutions and implementing value-added tax collection on e-commerce platforms. These measures aim to increase tax revenue from 12.2% to 14.1% of GDP by 2026, creating fiscal space for public investment while ensuring debt sustainability.

What Will the Future Hold?

The reforms supported under this operation are expected to deliver significant development impacts across Benin:

• The share of poor and extremely poor people benefiting from subsidized health coverage is expected to increase from less than 1% to 15% by 2026.
• The Small and Medium Enterprise Investment and Guarantee Fund will help facilitate at least 4 billion West African CFA francs (about US$ 6.4 million) in new lending to small businesses.
• Public revenue increases will allow Benin to expand investments in social programs while maintaining fiscal responsibility.

This initiative highlights how World Bank guarantees can help fill financing needs while delivering advances in development. By integrating guarantees with well-structured development policy operations, countries can unlock new opportunities for economic transformation.