1. This selected issues paper and the statistical appendix provide background information to the staff report for the 2004 Article IV consultation discussions with Senegal.
2. The staff report discusses an improvement in the prospects for meaningful economic and structural reforms since the 2003 Article IV consultation. It evaluates the decisive actions already taken in key areas, and draws attention to the challenges ahead, such as the strengthening of the public expenditure management and structural reforms in key sectors, The topics in this selected issues paper support the discussion of these key challenges in the staff report.
Distributional effects of reforming the groundnut sector
3. Reforms of the groundnut sector are an integral part of Senegal’s poverty reduction and growth strategy. Although the sector accounts for small share of the economy, groundnuts are still a major cash crop for about one third of households, especially in the rural areas where about 65 percent of the population falls below the poverty line. In order to strengthen public finances and instill more efficiency into the sector, the government has decided to sell the state-owned groundnut processing company and to eliminate the tax and tariff preferences shielding that company from foreign competition. Section I analyzes the distributional effects of these reforms on groundnut producers. It concludes that these reforms should not have a negative impact on the income of groundnut farmers, but that other reforms need to be implemented to address more important challenges faced by groundnut farmers. These reforms include the mitigation of market imperfections in the distribution chain, notably the lack of access to credit by groundnut producers, and necessary adjustments to the declining size of the groundnut oil market. Decreasing and volatile rainfall and soil depletion are the most important challenges for groundnut farmers. Given the declining production trend of the groundnut sector, households active in this sector can only reduce their economic risk if they diversify their activities away from groundnut farming. In the meantime, targeted budgetary transfers rather than price subsidies should be used to compensate farmers for severe exogenous shocks.
The challenges of fiscal decentralization in Senegal
4. Senegal has recently initiated a process of fiscal decentralization. Fiscal decentralization is essentially viewed by the Senegalese authorities as an important tool for raising the efficiency of capital spending and reducing poverty. For the time being, the authorities envisage a narrow and gradual approach to fiscal decentralization. The process will be partial, limited to expenditure assignment that would only cover the domestically-financed component of capital spending. In contrast to some other country experiences, the macroeconomic risk of fiscal decentralization will likely be small. At the same time, the success of the authorities’ strategy will depend on how well they will address a number of challenges, including strengthening the capacity of local authorities. There is also a risk that decentralization may magnify the weaknesses identified at the central government level in the area of public expenditure management and fiscal transparency. Furthermore, in the presence of administrative constraints, fiscal decentralization will compete with other important fiscal reforms on the authorities’ agenda. The chapter concludes that fiscal decentralization can help improve the delivery of goods and services at local levels and generally strengthen the link between fiscal policy and the authorities’ poverty reduction objectives, but it should be implemented gradually.
Structural reform priorities for improving public finance management in Senegal
5. The paper analyzes current and emerging structural reform priorities for improving fiscal management in Senegal. The Senegalese authorities and their development partners agree that strengthening fiscal management is key for achieving higher growth and reducing poverty. Senegal is generally regarded as an example of fiscal discipline in Africa (in view of the small overall fiscal deficits in recent years), but lags behind in putting in place an efficient and transparent system of fiscal management. Substantial progress has been achieved in recent years, however, in improving fiscal management. Despite the progress, a number of critical reforms need to be carried out to bring Senegal’s public finance management to a level commensurate with its economic and social ambitions. Improving fiscal management in Senegal will require quick and decisive actions to deal with the shortcomings. If appropriately backed by the highest political authorities, the work of the Fiscal Reform Commission could help Senegal enhance fiscal management to ensure a better use of public resources and, thereby improve the pace of progress toward the Millennium Development Goals.