1. We thank staff for a comprehensive report on Senegal’s request for a three-year Fund arrangement under the Policy Support Instrument (PSI). The Senegalese authorities have expressed their appreciation of the fruitful and candid dialogue they held with Fund staff during program discussions in Dakar. They have also valued the useful role played by staff during last month’s Consultative Group meeting for Senegal at which development partners pledged to provide the country with about four billion US dollars over a three-year period, in support of the authorities’ Accelerated Growth Strategy (SCA) and second PRSP. The significant excess of these pledges over the authorities’ initial expectations signals the credibility of the authorities’ reform agenda in the eyes of the donor community. It is now their hope that that these pledges will be translated into timely and actual disbursements over the commitment period.
Recent Macroeconomic Developments and Economic Outlook
2. During the last Executive Board discussion on Senegal, we provided an account of Senegal’s strong macroeconomic performance between 2003 and 2005.9 We elaborated on how the prudent policies conducted by the authorities during this period helped maintain average real GDP growth at around 6 percent, and keep inflation and overall fiscal deficit (including grants), on average, below 2 percent and 3 percent of GDP, respectively.
3. Primarily on account of a number of adverse developments, including oil price increases and the scale-down in the operations of the Industries Chimiques du Sénégal (ICS), macroeconomic performance weakened in 2006. Real GDP growth and average inflation were slightly higher than 2 percent, and the external current account deficit widened, reaching about 10 percent of GDP. Although the authorities’ efforts to strengthen tax administration contributed to raising tax revenues to about 20 percent of GDP in 2006, four percentage points higher than in 2000, overall fiscal deficit (including grants) is estimated to have increased to about 5.8 percent of GDP, largely fueled by energy subsidies and, to a lower extent, increase in the wage bill.
4. In 2007, the economy has shown signs of recovery. Growth is expected to recover from last year’s slowdown. With the vast public infrastructure program underway and the expected gradual recovery of ICS following the agreement recently concluded between the authorities and the company’s main private stakeholder on a tentative restructuring plan, real GDP is expected to jump back to a 5 percent growth path. The medium-term growth outlook remains positive. In the PRSP’s most optimistic scenario, real GDP growth can be significantly stronger in the medium-term provided the additional resources sought by the authorities to finance their latest PRS are mobilized. My authorities are committed to effectively utilizing these resources. In particular, they are determined to put in place by end-January 2008 an institutional framework for the implementation and monitoring of the SCA which aims to help achieve annual growth rate above 7 percent in the medium-term.
5. Although higher international prices of oil and some foodstuffs and adjustments in some energy prices are expected to cause a spike in the general price level this year, my authorities expected that the inflation rate will be contained at around 2 percent over the medium term. Preliminary estimates suggest that the 2007 fiscal deficit will be about 4.7 percent of GDP, slightly higher than targeted earlier this year but significantly lower than the 5.5 percent fiscal deficit estimated in the authorities’ draft fiscal program. The fact that this figure compares favorably with the authorities’ initial estimate shows that they have successfully implemented some of the cost-saving measures they identified to this resolve, notably by cutting significantly energy subsidies and nonpriority expenditures. Over the medium-term, the authorities are determined to maintain fiscal deficit at about 4 percent of GDP. After a recent widening partly due to the impact of the oil shock and difficulties faced by ICS, one of the country’s largest exporting companies, the current account deficit (including official transfers) is expected to narrow down to one-digit level from 2007, and stabilize over the medium-term.
Key Opportunities Already Seized Under the Proposed PSI
6. The Senegalese authorities have expressed and demonstrated a strong commitment to implement a Fund arrangement under the PSI. Ahead of the Board’s consideration of their request for a PSI, all prior actions were implemented and they have taken significant steps towards the implementation of a significant number of other actions agreed with Fund staff in the context of the proposed PSI. Most notably, these include a number of measures aimed at enhancing fiscal transparency and governance and strengthening the procurement framework.
Enhancing fiscal transparency
7. In the context of the discussions under the PSI, the authorities have taken unprecedented steps to improve transparency in the operations conducted by public and parapublic entities. Consistent with their stated commitment to transparency in the conduct of the airport project, the authorities have made available to the public revenue streams associated with the airport tax collection. They have also disclosed publicly the main provisions of all related contracts signed by the government, notably with the project company, AIBD, the construction company, banks, and the International Air Transport Association (IATA).10 Fiscal risks associated with the airport project have been significantly mitigated through the transfer to the construction company of risks associated with the design, construction, and delays in project execution. Moreover, the government has regained full ownership of the AIBD.
8. In the same vein, the authorities fully disclosed to the staff the details about the implementation of their large investment program which is underway in the run-up to the 2008 Summit of the Organization of the Islamic Conference (OIC). Furthermore, they submitted to the Parliament last September a supplementary budget law that, among other objectives, aim to regularize financial operations associated with the infrastructure projects undertaken in this context.
9. Furthermore, the authorities intend to modify by end-December 2007 the legal status of the Agency for investment promotion and major public projects, APIX, while improving its ability to fulfill in an effective manner its mandate of enhancing the business environment.
Reducing fiscal risks
10. In taking the unpopular decision of announcing a 6 percent upward adjustment in electricity prices effective from November 1, the Senegalese authorities have shown a strong determination to allow electricity prices to better reflect market conditions. In this connection, they have decided that future electricity tariffs adjustments will be made in accordance with the existing market-based formula while protecting vulnerable consumers. Going forward, it is the authorities’ intention to better monitor the risks arising from the public sector, notably by strengthening the Government Portfolio Management and Control Unit and gradually taking the necessary steps to fully incorporate fiscal liabilities in future budget laws.
Strengthening the procurement framework
11. Recognizing the need to strengthen the procurement framework, the authorities have recently enacted a new procurement framework, which is another testimony of their commitment to further fiscal transparency. This framework enforces the authorities’ strong determination to restrict the use of no-bid contracts in the public sector. As a matter of fact, a governmental seminar held last week provided an opportunity for the Head of State to give firm instructions to all ministries against recourse to such contracts even in cases necessitating the use of emergency procedures. An independent regulatory authority, ARMP, comprising private sector and civil society representatives has been set up, tasked with enforcing the new legal framework. Members of the ARMP regulatory council have been appointed and the consultant recruited to assist the council has begun his assignment since mid-September.
Policy Challenges to be Addressed under the PSI
12. As there is always room for improvement, the PSI arrangement will be an opportunity for the Fund to provide the Senegalese authorities with candid advice in support of their genuine efforts to strengthen fiscal governance and debt management, promote development of the private and financial sectors, and thus lay the foundation for stronger growth and more significant poverty reduction.
Fiscal Policy and Reforms
13. Despite the vigorous steps taken to reduce budgetary transfers to the electricity company, SENELEC, through the announced increase in electricity tariffs, the authorities recognize that further steps will be needed to address the significant fiscal risks stemming from the energy sector. In this regard, they have embarked on a comprehensive restructuring plan aimed at improving the financial situation of SENELEC and the oil refinery company, SAR, strengthening governance in the sector, and increasing private sector involvement in the energy sector. They also concur with the need to further scale down butane gas subsidies and they are determined to do so gradually until their complete phase-out.
14. The authorities fully concur with the need to increase public expenditure in priority sectors (education, health, judicial system, and environment) in order to further improve prospects for poverty reduction. It is their view that preliminary data which showed a decline in spending in the education and health sectors and the judicial system in 2006 did not cover public expenditures made in local administrations. Taking into account local administrations, the authorities’ latest figures show that spending on the education and health sectors and the judicial system were actually more important than previously estimated. The authorities are determined to achieve their objective of allocating 40 percent of total expenditure to these sectors in the medium-term. In this regard, it is their stated intention to allocate primarily to priority sectors and infrastructure development additional public revenues that could be mobilized on an exceptional basis, notably those expected from the sale of a third mobile phone license and mining concession fees.
Integrated Economic zone
15. With the aim at promoting private sector development and attracting foreign investment, the authorities plan to create an integrated economic zone in the context of a PPP. Pending the finalization of the contract with the private developer, the authorities intend to assess the revenue impact of tax exemptions to be granted to investors operating in the zone, standing ready to take eventually necessary actions to guarantee that the zone will be revenue-enhancing. In this regard, the authorities will work with staff on ensuring that the project is at least revenue neutral and the equity of the fiscal system is preserved.
16. Strengthening debt management is key among the objectives pursued by the authorities. In this regard, it is their intention to take steps to avoid the occurrence of any payment delays, improve the monitoring of budget execution, notably the payment stage, and pursue a prudent borrowing policy. These steps will include installation of an accounting software at the Treasury and its connection to the public financial management system, integration of the payment stage of the expenditure chain into the system, and conduct of regular debt sustainability analyses. In the meantime, a circular has already been issued by the ministry of economy and finance which specifies tighter deadlines for the completion of the administrative and accounting phases of the expenditure process. Furthermore, the authorities will continue to exercise prudent debt management and count on materialization of the pledges recently made by donors at the Consultative Group meeting in Paris.
17. In order to enhance the effectiveness and efficiency of public investment, the authorities are determined to improve its planning, monitoring, evaluation, and implementation. This will involve, inter alia, better information sharing between the ministry of economy and finance and sectoral ministries, increasing use of cost-benefit analyses, and systematic preparation of regular project implementation reports. In the implementation of the authorities’ ambitious public investment program, increased recourse to public-private partnerships (PPPs) is foreseen. In this connection, the authorities welcome FAD’s decision to provide them with technical assistance in their efforts to enrich the existing framework for the implementation of PPPs with lessons from international experience.
18. The authorities are committed to strengthening financial sector soundness by enforcing prudential norms. This will include taking necessary actions on a timely basis against banks not in compliance with prudential ratios and implementing the recommendations made by the regional Banking Commission. In order to facilitate SMEs’ credit access and in collaboration with a private partner, the authorities intend to put in place a bank dedicated to servicing these entities and identify ways of addressing illegal practices in the accounting profession. They will also continue their efforts to strengthen the judicial system which translated into a doubling of the budget of the Ministry of Justice between 2004 and 2006. Similarly, steps will be taken to improve access to financial services for the poor while strengthening supervision of microfinance institutions.
19. In the process of implementing their ambitious economic program, the Senegalese authorities are hopeful that they will benefit from the Fund’s useful advice in the context of a PSI. In light of the above, we call on Directors to support the authorities’ request for a PSI.