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Senegal

Author(s):
International Monetary Fund
Published Date:
July 2008
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Executive Summary

Senegal’s macroeconomic performance improved in 2007, broadly in line with program projections. While economic growth recovered, rapidly rising food and energy prices raised inflation and put pressure on the fiscal and external accounts.

Although the headline overall fiscal deficit declined and the program target on the basic fiscal balance was met, there were fiscal slippages in 2007. The authorities committed more spending than the program envisaged, partly for food and energy subsidies, and postponed to 2008 the issuance of payment orders equivalent to 2 percent of GDP, delaying payments to the private sector. In addition, there is a possibility that extrabudgetary spending of about 0.2 percent of GDP may have occurred.

Aside from this fiscal issue, Senegal performed well under the PSI. All structural conditionality was respected (albeit one measure only partially), and all quantitative assessment criteria were met except the zero ceiling on domestic arrears, which was exceeded for the first three weeks after the program began. Because corrective action was prompt, the staff supports the authorities’ request for a waiver.

Senegal’s economic outlook remains positive, although downside risks have increased. Economic growth could accelerate slightly and the external current account deficit stabilize, with its financing being increasingly provided by FDI. Inflation should return to its historic average once price pressures on food and energy products abate.

The authorities agreed with the staff’s analysis that structural reforms will be key to raising external competitiveness and helping turn around Senegal’s long-standing poor export performance. The real exchange rate seems to be in line with economic fundamentals.

The PSI’s fiscal program aims to correct past fiscal slippages, preserve debt sustainability, contribute to domestic stability, and restore the integrity of the budget framework. The authorities need to revisit their system of food and energy subsidies to bring it in line with budgetary affordability, improve its targeting, and limit economic distortions. The program’s structural measures will focus on fiscal governance and transparency and help shore up fiscal policy against a variety of risks, including from the planned special economic zone.

On balance, the staff recommends completion of the first PSI program review.

I. Introduction

1. Senegal faces important macroeconomic challenges which it has begun to address under an economic program supported by the three-year PSI approved in November 2007. These challenges were identified during the 2006 Article IV consultation discussions and became the pillars of the PSI: (i) reversing the rising trend in the fiscal deficit to underpin macroeconomic stability and safeguard debt sustainability; (ii) improving fiscal governance and transparency so as to enhance policy credibility and sustain external assistance; (iii) encouraging private sector activity by improving the business environment and addressing structural impediments to higher economic growth; and (iv) limiting financial sector vulnerabilities and raising the sector’s contribution to the economy.

2. The PSI is off to a broadly satisfactory start but new challenges have emerged. It enjoys strong political support and has served its intended role of providing a framework for economic policymaking and reassuring donors. However, the international environment has become more challenging in recent months, including through the more subdued world growth outlook, the turbulence in financial markets, and, in particular, the sharp rise in food and energy prices. The latter has triggered street demonstrations and forced the government to adopt countervailing measures. These measures, together with investment spending pressures and problems controlling spending near year-end, significantly affected budget execution in 2007 and limit the government’s room for maneuver going forward.

II. Higher Economic Growth But Worrisome Surge in Food and Energy Prices

3. The Senegalese economy rebounded in 2007, broadly in line with the projections underlying the program (Figure 1).

  • Economic growth. Buoyant activity in the services and construction sectors raised GDP growth to 4¾ percent in 2007, from 2¼ percent in 2006 (Table 1). However, for the second year in a row, agricultural output declined.

  • Inflation. Rapidly rising energy and food prices raised inflation and put pressure on the external and fiscal accounts. Inflation reached 6 percent, the highest level since the 1994 devaluation. The authorities suspended VAT and customs duties on certain food products in mid-2007, gradually raised the subsidy on butane gas, and introduced subsidies on petroleum products in late 2007. This may have temporarily restrained inflation and helped maintain social peace, but the budgetary costs were substantial, at 1½ percent of GDP.

  • Balance of payments and external debt. The increase in the external current account deficit to 10½ percent of GDP reflected rising energy and food imports, while exports remained stagnant on account of the delayed restructuring of the phosphate company ICS (Table 2).1 Capital inflows increased due to higher foreign direct investment (FDI) and receipts from the sale of a third telecom license, which helped keep external debt indicators stable relative to 2006.

    Table 1.Senegal: Selected Economic and Financial Indicators, 2004–13
    2004200520062007200820092010201120122013
    Est.Proj.
    (Annual percentage change)
    National income and prices
    GDP at constant prices5.95.62.34.85.35.95.95.85.75.6
    Of which: nonagriculture GDP6.04.83.95.75.36.16.15.95.85.7
    GDP deflator0.52.33.45.24.02.32.22.22.22.2
    Consumer prices
    Annual average0.51.72.15.94.42.22.02.02.02.0
    End of period1.71.43.96.22.92.12.02.02.02.0
    External sector
    Exports, f.o.b. (in CFA francs)9.24.40.1-2.923.49.510.07.67.56.2
    Imports, f.o.b. (in CFA francs)9.815.69.012.723.311.310.18.88.87.2
    Export volume4.4-3.8-11.9-0.38.48.98.17.97.27.2
    Import volume1.94.25.87.710.211.611.09.27.87.1
    Terms of trade (deterioration (-))-3.1-2.410.3-7.01.50.82.70.0-0.7-0.9
    Nominal effective exchange rate2.2-0.30.21.4
    Real effective exchange rate0.1-1.3-0.24.6
    (Changes in percent of beginning-of-year broad money, unless otherwise indicated)
    Money and credit
    Net domestic assets3.18.65.08.58.58.79.79.48.68.1
    Domestic credit2.510.45.811.58.99.010.19.78.98.4
    Credit to the government -3.1-4.13.04.72.02.43.43.12.31.8
    Credit to the economy (percentage growth)9.224.54.210.711.011.211.411.611.711.7
    (Percent of GDP, unless otherwise indicated)
    Government financial operations
    Revenue18.319.219.920.921.421.120.720.921.021.2
    Grants2.11.61.52.52.12.12.12.02.02.1
    Total expenditure and net lending23.324.127.527.228.527.326.926.927.127.3
    Overall fiscal surplus (+) or deficit (-)
    Payment order basis, excluding grants-5.2-4.6-7.3-6.0-7.1-6.2-6.1-6.0-6.0-6.1
    Payment order basis, including grants-3.1-3.0-5.8-3.5-4.9-4.1-4.0-4.0-4.0-4.0
    Primary fiscal balance 1/-1.8-2.3-5.2-3.3-4.2-3.4-3.4-3.3-3.3-3.2
    Basic fiscal balance 2/0.70.9-3.4-0.7-1.6-1.0-0.9-0.9-0.7-0.5
    Gross domestic investment26.029.528.731.732.035.136.837.137.538.0
    Government9.79.99.811.411.311.712.212.312.612.9
    Nongovernment16.319.618.920.320.823.424.624.824.925.1
    Gross domestic savings13.414.111.211.510.212.413.714.014.214.6
    Government8.47.93.57.45.77.89.09.29.49.8
    Nongovernment5.06.27.74.14.54.64.74.84.84.8
    Gross national savings19.921.819.321.320.923.624.925.025.425.9
    External current account deficit (-)
    Including current official transfers-6.1-7.8-9.4-10.4-11.1-11.5-11.9-12.1-12.1-12.1
    Excluding current official transfers-7.9-9.3-10.4-12.1-12.4-12.8-13.2-13.3-13.3-13.4
    Central government domestic debt 3/3.53.34.35.66.16.98.29.310.010.5
    External public debt (nominal) 3/4/44.042.417.818.120.020.921.021.321.922.8
    External public debt service (percent of exports) 4/7.45.64.24.43.23.73.73.63.53.3
    External public debt service (percent of government revenue) 4/10.97.95.44.93.94.64.74.54.44.1
    Gross domestic product (billions of CFA francs)4,2434,5824,8465,3445,8566,3486,8727,4308,0288,662
    Sources: Senegalese authorities; and Fund staff estimates and projections.

    Defined as total revenue and grants minus total expenditure and net lending, excluding interest expenditure.

    Defined as total revenue minus total expenditure and net lending, excluding externally financed capital expenditure, on-lending, and expenditure financed with HIPC Initiative and MDRI assistance.

    Debt outstanding at year-end.

    After HIPC and MDRI (from 2006) debt relief.

    Sources: Senegalese authorities; and Fund staff estimates and projections.

    Defined as total revenue and grants minus total expenditure and net lending, excluding interest expenditure.

    Defined as total revenue minus total expenditure and net lending, excluding externally financed capital expenditure, on-lending, and expenditure financed with HIPC Initiative and MDRI assistance.

    Debt outstanding at year-end.

    After HIPC and MDRI (from 2006) debt relief.

    Table 2.Senegal: Balance of Payments, 2004–13
    2004200520062007200820092010201120122013
    Est.Proj.
    (Billions of CFA francs, unless otherwise indicated)
    Current account-257-355-455-556-651-732-820-901-968-1,052
    Balance on goods-521-691-828-1,062-1,308-1,475-1,624-1,782-1,955-2,111
    Exports, f.o.b.7988328338109991,0941,2041,2951,3911,478
    Imports, f.o.b.-1,319-1,524-1,661-1,872-2,307-2,569-2,827-3,077-3,347-3,589
    Services and incomes (net)-78-70-65-60-16-32-35-20-1-20
    Credits437518512530635682733794864922
    Debits-514-587-577-590-651-714-767-814-865-942
    Of which: interest on public debt-41-36-36-22-31-34-37-39-40-49
    Unrequited current transfers (net)3424054375666737748399009881,079
    Private (net)270341409498603698756818898973
    Public (net)726528697076828391105
    Of which: budgetary grants1912948252729242635
    Capital and financial account2812345126077997948979931,0881,161
    Capital account74691,234182107115124134144156
    Private capital transfers4667899101010
    Project grants7063648698106115124134145
    Debt cancellation and other transfers 1/1/2/001,16389000000
    Financial account207165-7224246936797728599441,006
    Direct investment3428110143316356446483523512
    Portfolio investment-1514-1122282641444642
    Other investment188123-820260349297285332375452
    Public sector (net)3233-1,01897204164136156195233
    Of which: disbursements157154147156251227213233276323
    program loans13213919783336384145
    project loans144133107138133154177195235279
    non-concessional loans000040400000
    amortization-127-122-1,166-54-47-67-77-77-82-90
    Of which: non-concessional loans00000-8-16-16-16-16
    Private sector (net)12984173135145133149176180219
    Errors and omissions2762528000000
    Overall balance24-1225751149627792120109
    Financing-24122-57-51-149-62-77-92-120-109
    Net foreign assets (BCEAO)-126-9-83-75-167-78-88-101-129-117
    Net use of Fund resources-23-22-660000-1-2-2
    Purchases33110000000
    Repurchases-26-24-770000-1-2-2
    Other-10212-16-75-167-78-88-99-127-115
    Deposit money banks026-373-10-11-11-12-12-13
    Payments arrears (reduction (-))0000000000
    Exceptional financing 2/3/1011056321292723212121
    Residual financing gap0000000000
    Memorandum items:
    Current account balance
    Including current official transfers (percent of GDP)-6.1-7.8-9.4-10.4-11.1-11.5-11.9-12.1-12.1-12.1
    Excluding current official transfers (percent of GDP)-7.9-9.3-10.4-12.1-12.4-12.8-13.2-13.3-13.3-13.4
    Gross official reserves (billions of CFA francs)6686626617359039811070117012981414
    (months of imports of GNFS)4.84.13.83.83.83.83.83.83.93.9
    Gross domestic product (billions of CFA francs)4,2434,5824,8465,3445,8566,3486,8727,4308,0288,662
    Sources: Central Bank of West African States (BCEAO); and Fund staff estimates and projections.

    Includes receipts from sale by the government to a Sudanese operator of a telecom license for US$200 million in 2007.

    Reflects MDRI stock debt relief in 2006. Debt relief from the Fund is recorded as a capital transfer. Debt relief from the IDA and the AfDF on the amounts falling due in 2006 is shown as exceptional financing, while debt relief on amounts due in 2007 and beyond is recorded as a capital transfer.

    Until 2005, HIPC Initiative flow debt relief granted by the IMF is recorded as a grant, and that granted by the World Bank, the African Development Bank, Paris Club creditors, and Kuwait is recorded as exceptional financing.

    Sources: Central Bank of West African States (BCEAO); and Fund staff estimates and projections.

    Includes receipts from sale by the government to a Sudanese operator of a telecom license for US$200 million in 2007.

    Reflects MDRI stock debt relief in 2006. Debt relief from the Fund is recorded as a capital transfer. Debt relief from the IDA and the AfDF on the amounts falling due in 2006 is shown as exceptional financing, while debt relief on amounts due in 2007 and beyond is recorded as a capital transfer.

    Until 2005, HIPC Initiative flow debt relief granted by the IMF is recorded as a grant, and that granted by the World Bank, the African Development Bank, Paris Club creditors, and Kuwait is recorded as exceptional financing.

    Figure 1.Senegal: Recent Macroeconomic Developments, 2001–07

    Sources: BCEAO; and IMF staff estimates.

    1Difference between actual and required reserves, which are a percentage of deposits, short-term credit, and gross foreign claims.

  • Fiscal policy. The headline overall fiscal deficit, defined on a payment order basis, was kept at 3½ percent of GDP in 2007, compared with 6 percent of GDP a year before (Tables 3 and 4). However, unsettled expenditure commitments equivalent to 2 percent of GDP need to be carried over to 2008, causing significant delays in payments to the private sector (see below). This suggests that the overall fiscal deficit in 2007 on a commitment basis was about 5½ percent of GDP; since most of the goods and services were delivered in 2007, this may have contributed to upward pressure on prices in certain areas, such as construction.

  • Financial sector. While micro finance has experienced strong growth, bank credit to the economy has been stagnant over the past three years, at about 23 percent of GDP. Although banks are profitable and generally well capitalized, they suffer from sizeable nonperforming loans, mainly as a result of the financial difficulties of ICS and energy sector companies in a context of excessive loan concentration (Table 7). 2

Table 3.Senegal: Government Financial Operations, 2006–13
20062007200820092010201120122013
Prog.Est.Prog.Proj.Proj.
Total revenue and grants1,0361,2021,2531,2551,3771,4711,5691,7011,8492,016
Revenue9631,0821,1191,1581,2541,3381,4251,5521,6881,835
Tax revenue9221,0391,0751,1261,2221,3031,3871,5111,6441,788
Income tax219244232276254280306334364396
Taxes on goods and services5335776286436977738549371,0311,129
Taxes on petroleum products170217215204272250228240250262
Nontax revenue41444432323538414448
Grants7312013497123133144149161181
Budgetary9414817252729242635
Budgeted development projects6479868098106115124134145
Total expenditure and net lending1,3311,4521,4561,5131,6671,7301,8471,9992,1732,366
Current expenditure8297798428281,0079861,0061,0861,1641,249
Wages and salaries 1/286330329347358381412446482520
Interest due42352941434145525770
Of which: external 2/36272232313437394049
Other current expenditure500414484440606565549588625659
Transfers and subsidies 3/308206252216363306270285303317
Of which: SAR and butane subsidy6644555795460000
Of which: SENELEC8600020100000
Of which: food subsidies0021056200000
Goods and services186192217209229245266290310330
HIPC and MDRI current spending7161515141413131212
Capital expenditure4756656096856607448419141,0091,117
Domestically financed337464395471429483549594640693
Of which: without transfers to PEs337399330426392455549594640693
HIPC and MDRI financed26816075725652514949
Non HIPC/MDRI financed311384335396356427496544590645
Externally financed138201213215231260292320369424
Net lending27850000000
Of which: on-lending3316100000000
Selected public sector entities balance 4/165170000000
Primary fiscal balance 5/-236-210-157-217-247-218-233-246-267-280
Overall fiscal balance (including grants)-279-245-186-258-290-259-278-298-324-350
Overall fiscal balance (excluding grants)-352-364-320-355-413-392-422-447-485-531
Basic fiscal balance 6/-165-56-39-51-95-62-65-64-54-46
Financing279245186258290259278298324350
External financing121159131208252205191210248283
Drawings146181156213251227213233276323
Program loans39431978783336384145
Project loans107138138135133154177195235279
Non-concessional loans for infrastructure development000040400000
Amortization due-58-67-54-53-47-67-77-77-82-90
Of which: Non-concessional loans for infrastructure development00000-8-16-16-16-16
Debt relief and HIPC Initiative assistance 7/41322117292723212121
T-bills and bonds issued in WAEMU-813830191832333228
Domestic financing158855651385487887667
Banking system1281129253405689907870
Of which: T-bills and bonds231551366052681021049280
Nonbank financing 8/30-27-36-2-2-2-2-2-2-2
Errors and omissions-10-10000000
Financing gap0000000000
Memorandum items:
Arrears, WAEMU definition (billions of CFA francs)2000000000
Budgetary float (billions of CFA francs)58343330303030303030
Airport travel tax earmarked for new airport (RDIA)18223628384042444648
IMF MDRI savings on amortization and interest payments202121131397521
MDRI debt relief from IDA and AfDF1,109
IDA and AfDF MDRI savings on amortization and interest payments31272743303436383939
HIPC Initiative expenditure 9/144933442723212121
Priority expenditure (percent of total expenditure) 10/31.233.233.236.839.7
Gross domestic product (billions of CFA francs)4,8465,2475,3445,7285,8566,3486,8727,4308,0288,662
Sources: Senegalese authorities; and staff estimates and projections.

Excludes project-related wages and salaries, which are included in capital spending, and the salaries of autonomous agencies and health and education contractual workers, which are included in transfers and subsidies.

From 2006, reflects post-MDRI debt service schedule.

Excludes subsidies aimed at sector development policies, which are included in capital spending.

Local governments, autonomous public sector entities (e.g., hospitals, universities), and the civil servants’ pension fund (FNR).

Defined as total revenue and grants minus total expenditure and net lending, excluding interest expenditure.

Defined as total revenue minus total expenditure and net lending, excluding externally financed capital expenditure, on-lending, and HIPC/MDRI expenditure.

Until 2005, includes HIPC Initiative debt relief accorded by the IMF, the World Bank, the African Development Bank, and Paris Club Creditors.

Includes receipts from sale of telecom license for $200 million in late 2007.

Refers to HIPC-financed capital and other expenditure.

Defined as expenditures on health, education, environment, the judiciary, social development, sewage and rural irrigation.

Sources: Senegalese authorities; and staff estimates and projections.

Excludes project-related wages and salaries, which are included in capital spending, and the salaries of autonomous agencies and health and education contractual workers, which are included in transfers and subsidies.

From 2006, reflects post-MDRI debt service schedule.

Excludes subsidies aimed at sector development policies, which are included in capital spending.

Local governments, autonomous public sector entities (e.g., hospitals, universities), and the civil servants’ pension fund (FNR).

Defined as total revenue and grants minus total expenditure and net lending, excluding interest expenditure.

Defined as total revenue minus total expenditure and net lending, excluding externally financed capital expenditure, on-lending, and HIPC/MDRI expenditure.

Until 2005, includes HIPC Initiative debt relief accorded by the IMF, the World Bank, the African Development Bank, and Paris Club Creditors.

Includes receipts from sale of telecom license for $200 million in late 2007.

Refers to HIPC-financed capital and other expenditure.

Defined as expenditures on health, education, environment, the judiciary, social development, sewage and rural irrigation.

Table 4.Senegal: Government Financial Operations, 2006–13
20062007200820092010201120122013
Prog.Est.Prog.Proj.Proj.
(Percent of GDP)
Total revenue and grants21.422.923.421.923.523.222.822.923.023.3
Revenue19.920.620.920.221.421.120.720.921.021.2
Tax revenue19.019.820.119.720.920.520.220.320.520.6
Income tax4.54.74.34.84.34.44.54.54.54.6
Taxes on goods and services11.011.011.811.211.912.212.412.612.813.0
Taxes on petroleum products3.54.14.03.64.63.93.33.23.13.0
Nontax revenue0.80.80.80.60.60.60.60.60.60.6
Grants1.52.32.51.72.12.12.12.02.02.1
Total expenditure and net lending27.527.727.226.428.527.326.926.927.127.3
Current expenditure17.114.815.814.517.215.514.614.614.514.4
Wages and salaries5.96.36.16.16.16.06.06.06.06.0
Interest payments 1/0.90.70.50.70.70.60.70.70.70.8
Other current expenditure10.37.99.17.710.48.98.07.97.87.6
Of which: goods and services3.83.74.13.63.93.93.93.93.93.8
Of which: transfers and subsidies6.33.94.73.86.24.83.93.83.83.7
Of which: energy and food subsidies3.10.81.41.02.91.20.00.00.00.0
Capital expenditure9.812.711.412.011.311.712.212.312.612.9
Domestically financed7.08.87.48.27.37.68.08.08.08.0
Of which: without transfers to PEs7.07.66.27.46.77.28.08.08.08.0
Externally financed2.83.84.03.83.94.14.24.34.64.9
Net lending0.60.20.10.00.00.00.00.00.00.0
Selected public sector entities balance 2/0.30.10.30.00.00.00.00.00.00.0
Primary fiscal balance 3/-5.2-4.1-3.3-3.8-4.2-3.4-3.4-3.3-3.3-3.2
Overall fiscal balance
Payment order basis, excluding grants-7.3-6.9-6.0-6.2-7.1-6.2-6.1-6.0-6.0-6.1
Payment order basis, including grants-5.8-4.7-3.5-4.5-4.9-4.1-4.0-4.0-4.0-4.0
Basic fiscal balance 4/-3.4-1.1-0.7-0.9-1.6-1.0-0.9-0.9-0.7-0.5
Financing5.84.73.54.54.94.14.04.04.04.0
External financing2.53.02.43.64.33.22.82.83.13.3
Domestic financing3.31.61.10.90.60.81.31.20.90.8
Errors and omissions0.00.00.00.00.00.00.00.00.00.0
Financing gap0.00.00.00.00.00.00.00.00.00.0
Memorandum items:(Percent of GDP, unless otherwise indicated)
Grants received, assistance from the HIPC and MDRI Trusts1.7
IMF MDRI savings on amortization and interest payments0.40.40.40.20.20.10.10.10.00.0
MDRI debt relief from IDA and AfDF22.9
IDA and AfDF MDRI savings on amortization and interest payments0.60.50.50.80.50.50.50.50.50.4
Airport travel tax earmarked for new airport (RDIA)0.40.40.70.50.60.60.60.60.60.6
Priority expenditure 5/8.69.09.510.010.7
Wages and salaries (percent of fiscal revenue)29.730.529.430.028.528.528.928.728.528.3
Sources: Senegalese authorities; and Fund staff estimates and projections.

From 2006, reflects post-MDRI debt service schedule.

Local governments, autonomous public sector entities (e.g., hospitals, universities), and the civil servants’ pension fund (FNR).

Defined as total revenue and grants minus total expenditure and net lending, excluding interest expenditure.

Defined as total revenue minus total expenditure and net lending, excluding externally financed capital expenditure, on-lending, and HIPC/MDRI expenditure.

Defined as expenditures on health, education, environment, the judiciary, social development, sewage and rural irrigation.

Sources: Senegalese authorities; and Fund staff estimates and projections.

From 2006, reflects post-MDRI debt service schedule.

Local governments, autonomous public sector entities (e.g., hospitals, universities), and the civil servants’ pension fund (FNR).

Defined as total revenue and grants minus total expenditure and net lending, excluding interest expenditure.

Defined as total revenue minus total expenditure and net lending, excluding externally financed capital expenditure, on-lending, and HIPC/MDRI expenditure.

Defined as expenditures on health, education, environment, the judiciary, social development, sewage and rural irrigation.

Table 5.Senegal: Monetary Survey, 2004–08
20042005200620072008
Est.Proj.
(Billions of CFA francs)
Net foreign assets6766607808511,028
Central Bank of West African States (BCEAO)477487569644811
Commercial banks199173210207217
Net domestic assets7708949721,1211,289
Net domestic credit8811,0321,1221,3231,498
Net credit to the government 1/24-351193133
Central bank10884455447
Commercial banks-94-123-462169
Other institutions104121818
Credit to the economy8571,0671,1111,2301,366
Of which: crop credit141091011
Other items (net)-111-138-151-202-209
Broad money (M2)1,4461,5531,7511,9722,317
Currency outside banks344378453484525
Total deposits1,1021,1761,2981,4881,792
Demand deposits563593652770927
Time deposits538582646719865
(Change in percentage of beginning-of-period broad money stock)
Net foreign assets9.8-1.27.74.19.0
BCEAO9.80.75.34.38.5
Commercial banks0.0-1.82.4-0.20.5
Net domestic assets3.18.65.08.58.5
Net credit to the government-3.1-4.13.04.72.0
Credit to the economy5.614.52.96.86.9
Other items (net)0.6-1.8-0.8-2.9-0.4
Broad money (M2)12.97.412.712.617.5
Memorandum items:(Units indicated)
Velocity (GDP/M2; end of period)2.93.02.82.72.5
Nominal GDP growth (percentage growth)6.48.05.810.39.6
Credit to the economy (percentage growth)9.224.54.210.711.0
Credit to the economy/GDP (percent)20.223.322.923.023.3
Variation of net credit to the government (from previous year; billions of CFA francs-40.2-59.246.381.739.9
Central bank discount rate (end of period; percent)4.504.504.754.75
Sources: Senegalese authorities; and Fund staff estimates and projections.

There is a difference in government coverage of the fiscal and the monetary sectors. The change in bank deposits of public entities without counterparts in the fiscal accounts is shown as a memorandum item in Table 3. In 2006, the Fund MDRI-related cancellation of the central bank claim on the government is not reflected in the fiscal accounts, as they are presented on a cash basis. This operation is shown as memorandum item in Table 3.

Sources: Senegalese authorities; and Fund staff estimates and projections.

There is a difference in government coverage of the fiscal and the monetary sectors. The change in bank deposits of public entities without counterparts in the fiscal accounts is shown as a memorandum item in Table 3. In 2006, the Fund MDRI-related cancellation of the central bank claim on the government is not reflected in the fiscal accounts, as they are presented on a cash basis. This operation is shown as memorandum item in Table 3.

Table 6.Senegal: Millennium Development Goals 1/
19901995200020052015
Goal 1. Eradicate extreme poverty and hunger
Target 1: Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day
Poverty gap at US$1 a day (percent)6
National household survey poverty incidence 2/67.957.150.6
Share of income or consumption by poorest 20 percent6
Target 2: Halve between 1990 and 2015, the proportion of people suffering hunger
Prevalence of child malnutrition (percent of children under 5)23[10.8]
Goal 2. Achieve universal primary education
Target 3: Ensure that, by 2015, children will be able to complete a full course of primary schooling
Net primary enrollment ratio (percent of relevant age group)47.368.379.9[100.0]
Youth literacy rate (percent ages 15–24)40.1
Goal 3. Promote gender equality and empower women
Target 4: Eliminate gender disparity in primary and secondary education preferably by 2005 and to all levels of education by 2015
Ratio of girls to boys in primary and secondary education (percent)68.583.987.1[100.0]
Ratio of young literate females to males (percent ages 15–24)60.4
Share of women employed in the nonagricultural sector (percent)26
Proportion of seats held by women in national parliament (percent)131219
Goal 4. Reduce child mortality
Target 5: Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate
Under-5 mortality rate (per 1,000)148143139121[49.3]
Infant mortality rate (per 1,000 live births)90848061
Immunization, measles (percent of children under 12 months)51804175
Goal 5. Improve maternal health
Target 6: Reduce by three-quarters, between 1990 and 2015, the maternal mortality rate
Maternal mortality ratio (modeled estimate, per 100,000 live births)510434[127.5]
Births attended by skilled health staff (percent)3852[75]
Goal 6. Combat HIV/AIDS, malaria and other diseases
Target 7: Halt by 2015, and begin to reverse, the spread of HIV/AIDS
Prevalence of HIV (percent of population aged 15–24)1.01.5
Number of children orphaned by HIV/AIDS25,000
Target 8: Halt by 2015, and begin to reverse, the incidence of malaria and other major diseases
Tuberculosis incidence (per 100,000 people)203.3
Tuberculosis cases detected under DOTS (percent)6154
Goal 7. Ensure environmental sustainability
Target 9: Integrate the principles of sustainable development into policies and programs. Reverse the loss of environmental resources
Forest area (percent of total land area)49.046.245.0
GDP per unit of energy use (2000 PPP U.S. dollar per kilogram oil equivalent)555
CO2 emissions (metric tons per capita)000
Target 10: Halve by 2015 proportion of people without access to safe drinking water
Access to an improved water source (percent of rural population)65[82]
Access to an improved water source (percent of urban population)667890[95]
Target 11: Achieve significant improvement in life of at least 100 million slum dwellers by 2020
Access to improved sanitation (percent of rural population)19.1[59]
Access to improved sanitation (percent of urban population)355660[78]
Goal 8. Develop a Global Partnership for Development
Target 12: Develop and implement strategies for productive work for youth
Fixed line and mobile telephones (per 1,000 people)6944
Personal computers (per 1,000 people)2.57.015.0
Source: World Bank Staff and World Development Indicators.

The data in italics refer to periods earlier than shown.

Data listed under 2000 are for 2001–02.

Source: World Bank Staff and World Development Indicators.

The data in italics refer to periods earlier than shown.

Data listed under 2000 are for 2001–02.

Table 7.Financial Soundness Indicators for the Banking Sector, 2002–07(Percent, unless otherwise indicated)
200220032004200520062007
Dec.Dec.Dec.Dec.Dec.Dec.
Capital Adequacy 1/
Capital to risk weighted assets16.012.111.911.113.113.6
Regulatory capital to risk weighted assets15.511.711.510.812.913.5
Capital to total assets10.37.87.77.68.310.4
Asset composition and quality
Total loans to total assets58.359.657.164.063.873.3
Concentration: loans to 5 largest borrowers to capital104.9141.0131.4179.9103.788.5
Sectoral distribution of loans
Industrial36.441.133.635.528.925.1
Retail and wholesale trade22.219.919.317.018.914.4
Services, transport and communications17.517.227.428.030.029.6
Gross NPLs to total loans 1/18.513.312.611.916.818.6
Provisions to NPLs70.575.375.775.452.053.8
NPLs net of provisions to total loans5.53.33.43.28.88.6
NPLs net of provisions to capital30.727.825.127.267.960.7
Earnings and Profitability
Average cost of borrowed funds2.21.82.02.02.2
Average interest rate on loans9.78.711.711.811.3
Average interest margin 2/7.66.79.79.89.2
After-tax return on average assets1.81.81.81.61.6
After-tax return on average equity21.122.117.615.814.6
Noninterest expenses/net banking income45.548.948.747.949.4
Salaries and wages/net banking income20.621.821.521.221.7
Liquidity
Liquid assets to total assets65.166.566.4
Liquid assets to total deposits82.981.082.0
Total deposits to total liabilities78.582.079.678.375.882.3
Source: Senegalese authorities.

ICS loans backed by government guarantees have a 20 percent weight in the risk-weighted assets. Banks had not made provisions against the overdue amount (about ½ of the total).

Total ICS debt with banks is approximately ⅓ of the total capital of the banking system.

Excluding the tax on banking operations.

Source: Senegalese authorities.

ICS loans backed by government guarantees have a 20 percent weight in the risk-weighted assets. Banks had not made provisions against the overdue amount (about ½ of the total).

Total ICS debt with banks is approximately ⅓ of the total capital of the banking system.

Excluding the tax on banking operations.

Senegal: Selected Financial Sector Indicators, 2002–07

III. The PSI—An Overall Good Program Start But Some Fiscal Slippages

4. The program has started well on the structural side (Table 9). The authorities respected all structural conditions, although one was met partially.

  • Fiscal governance and transparency. The authorities expanded the SIGFIP software to improve the monitoring of arrears and other payment delays; modified the legal status of the agency (APIX) in charge of the new Dakar Integrated Special Economic Zone (DISEZ); implemented a new public procurement framework; and completed a study on the revenue implications of DISEZ (see Box 7 below). The 2004 and 2005 Treasury accounts have been partially submitted to the audit court, and the submission is expected to be completed soon.

  • Private sector development. The authorities adopted a framework law and decree for the Accelerated Growth Strategy, setting the stage for its implementation; and issued a decree to facilitate short-term employment contracts in an effort to increase labor market flexibility.

  • Financial sector development. The authorities submitted to Parliament the new microfinance law that will strengthen supervision of this rapidly growing sector;3 and completed the study to improve accounting practices, which the 2001 and 2004 FSAPs identified as a key obstacle to financial intermediation.4

Table 8.Quantitative Assessment Criteria and Indicative Targets, 2007–08 1/(In billions of CFA francs; unless otherwise specified)
September 30, 2007December 31, 2007March 31, 2008
Indicative targetActualStatusAssessment criteriaAdjusted assessment criteriaActualStatusIndicative targetActualStatus
Assessment criteria
Floor on the basic fiscal balance 2/-42-28met-56-41-39met-1338.2 5/met
Ceiling on the contracting or guaranteeing of new nonconcessional external debt by the government 3/3/4/00met000met00met
Ceiling on government domestic payment arrears (stock) 3/026not met00Arrears eliminated on Nov. 30not met00met
Ceiling on government external payment arrears (stock) 3/00met000met00met
Ceiling on the amount of the float (instances de paiements) at the Treasury5079not met343433met3045not met
Indicative target
Quarterly ceiling on the share of the value of public sector contracts signed by single tender (in percent)2046not met202029not met2054not met

Data for September and March are indicative targets, with the exception of the assessment criteria monitored on a continuous basis.

Defined as total revenue minus total expenditure and net lending, excluding externally financed capital expenditure, on-lending, and HIPC and MDRI spending. Cumulative since the beginning of the year. The 2007 floor has been adjusted upwards because the recapitalization of La Poste (for CFAF15.5 bn) did not take place in 2007; floor will be adjusted downwards by this amount in 2008 from the time it is implemented. Total revenue excludes privatization receipts and sales of mobile telephone licenses.

Monitored on a continuous basis.

This criterion excludes government or government-guaranteed CFAF borrowing from financial institutions within WAEMU. It also excludes external loans contracted by the airport project company (AIDB) to finance the construction of the new Dakar Airport.

Preliminary data.

Data for September and March are indicative targets, with the exception of the assessment criteria monitored on a continuous basis.

Defined as total revenue minus total expenditure and net lending, excluding externally financed capital expenditure, on-lending, and HIPC and MDRI spending. Cumulative since the beginning of the year. The 2007 floor has been adjusted upwards because the recapitalization of La Poste (for CFAF15.5 bn) did not take place in 2007; floor will be adjusted downwards by this amount in 2008 from the time it is implemented. Total revenue excludes privatization receipts and sales of mobile telephone licenses.

Monitored on a continuous basis.

This criterion excludes government or government-guaranteed CFAF borrowing from financial institutions within WAEMU. It also excludes external loans contracted by the airport project company (AIDB) to finance the construction of the new Dakar Airport.

Preliminary data.

Table 9.Senegal: Structural Conditionality, September 2007–March 2008
Policy MeasuresTarget date of ImplementationImplementation Status
Prior Actions
1. Officially publish the government’s decision on an adjustment of electricity prices in the final quarter as specified by decision of the regulatory commission.Implemented on September 28, 2007Completed
2. Publish on the MEF’s website the amount of the airport tax [redevance de développement des infrastructures aéroportuaires (RDIA)] collected by IATA, deposited in an escrow account maintained with a commercial bank, and used to repay the loan for the construction of the airport.Implemented on September 19, 2007Completed
3. Complete the buyback by the government of the private investor’s equity share of 55 percent in the airport project company (AIBD).Implemented on September 14, 2007Completed
Structural Assessment Criteria
4. Expand the SIGFIP software to the payment stage of the expenditure chain, in order to allow a comprehensive monitoring of payment arrears.End-December 2007Completed
5. Amend or revoke Law 2007–13 to modify the status of APIX, as described in paragraph 35.End-December 2007Completed
6. Issue a Prime Minister’s circular letter in order to implement the new legal framework for procurement with effect from January 1, 2008.End-December 2007Completed
Structural Benchmarks
7. Complete the study on the impact of tax exemptions resulting from the probable relocation of Senegalese enterprises to the new integrated special economic zone, prior to the signing of the contract with the zone’s investor and on the basis of a methodology agreed with Fund staff.End-December 2007Completed
8. Adopt the institutional framework for implementing and monitoring the Accelerated Growth Strategy and make this strategy operational by means of a decree implementing the framework law.End-January 2008Completed
9. Undertake a study on possible means to fight against illegal practices in the accounting profession, as described in paragraph 63.End-March 2008Completed
10. Adopt the decree specifying the conditions for fixed-term contract [contrat à durée déterminée (CDD)], clarifying in which sectors fixed-term contracts can be renewed repeatedly.End-March 2008Completed
11. Submit to Parliament the new law on microfinance institutions, as described in paragraph 66.End-March 2008Completed
12. Complete the forwarding of the government’s end-year Treasury accounts for 2004 and 2005 to the Audit Office.End-March 2008Partially completed

5. Other structural measures in the October 2007 MEFP that were not subject to conditionality have also been put in place. Notably, the authorities followed through on their commitments on the airport project and the DISEZ contract, which should limit fiscal risks.

6. The authorities met most end-2007 quantitative targets (Table 8). The continuous quantitative assessment criterion on domestic arrears was not respected for a three-week period immediately after the PSI was approved. The authorities quickly eliminated all such arrears by end-November when they became aware of the nonobservance, and request a waiver. In the staff’s view, the quick corrective action taken and the nonrecurrence of arrears since then form a good basis for supporting the waiver. The indicative ceiling on the share of single-tender public contracts was slightly exceeded in the last quarter of 2007, although single tenders declined substantially from earlier in the year.5

7. While the basic fiscal balance target was met, the surge in unsettled expenditure commitments raises concerns. 6 The authorities committed more capital and current spending than envisaged under the program and warranted in light of Senegal’s macroeconomic circumstances and financing constraints. In addition, they did not react through compensating expenditure cuts to the accelerating costs of food and energy subsidies. This necessitated an abrupt slowdown in the issuance of payment orders toward year-end, with a concomitant rise in payment delays to the private sector.7 There also is a possibility that extrabudgetary spending may have occurred in 2007. The authorities agreed to corrective actions for the first program review, as discussed below.

IV. Key Economic Challenges

A. Overview

8. The 2008 Article IV discussions devoted particular attention to a range of longer-term and some more immediate economic issues.8 The emerging conclusions also informed the selection of conditionality for the PSI program review.

  • Obstacles to raising economic growth and reducing poverty and the authorities’ multi-pronged strategy to put in place a new approach to growth were discussed from a longer-term perspective. In this context, Senegal’s external competitiveness in light of the continued sluggishness of exports was assessed, with a view to identifying appropriate policy options.

  • From a more short- to medium-term perspective, the sustainability of fiscal policy in the face of rising food and energy prices and their budgetary impact was examined. In addition, at the request of the authorities and key donors, staff assessed the possible revenue implications of an Economic Partnership Agreement (EPA) with the EU.

B. Growth, Poverty, and Competitiveness

9. Senegal’s overriding economic challenge is to raise growth and reduce poverty. While growth accelerated immediately following the 1994 devaluation, in recent years trend growth has been flat, at around 4½ percent. Yet, growth has been better in Senegal than in other WAEMU countries. Expansion has been concentrated in services, such as telecommunications, and construction of large infrastructure projects, such as roads. However, the livelihood of about half the population is still closely tied to agriculture which has performed poorly. Cultivation of groundnuts—the main cash crop—is in long-term decline due to lower rainfall, soil degradation, and poor seed and fertilizer management. Although the incidence of poverty fell from 68 percent in 1994–95 to 51 percent in 2005–06, it is still high, particularly in rural areas, and several MDGs are likely to be missed (Figure 2 and Table 6).

Figure 2.Senegal: Millennium Development Goals, 1990–2015

Sources: World Bank, WBDI (World Bank Development Indicators);

United Nations, UNSTATS (United Nations Statistical division); and Senegal’s National Statistical Agency.

Real GDP Growth

(Percent)
Senegal, WAEMU, and Sub-Saharan Africa Macroeconomic Indicators, 1996–2008
1996–2006 Avg.2007 Est.2008 Proj.
Non-oilNon-oilNon-oil
SENWAEMUSSA1SENWAEMUSSA1SENWAEMUSSA1
Real GDP growth (percent)4.23.93.94.84.55.05.34.75.5
Real per capita growth1.71.11.52.61.22.83.01.93.3
Average inflation (percent)-0.32.612.35.92.68.34.42.97.4
Current account balance (percent of GDP)-5.5-5.5-6.2-10.4-5.6-7.5-11.1-5.5-9.0
Foreign reserves (months of imports)3.73.84.63.84.04.73.84.04.5
Fiscal balance incl. grants (percent of GDP)-4.0-2.4-3.4-3.5-3.02.2-4.9-3.0-2.0
Government expenditure (percent of GDP)24.120.628.027.222.329.028.522.429.6
Government revenue (percent of GDP)18.915.919.323.416.721.723.517.722.0
Period-average REER (percentage change)-0.40.7-0.44.62.7
Source: WEO/ WETA database.

Sub-Saharan Africa excluding oil producing countries, Zimbabwe and Senegal.

Source: WEO/ WETA database.

Sub-Saharan Africa excluding oil producing countries, Zimbabwe and Senegal.

10. Estimations by staff suggest that the REER remains broadly in line with economic fundamentals (Box 1). This is consistent with the external stability assessment at the regional level, which found the WAEMU region’s REER not to be misaligned. Other indicators also raise few concerns about the level of the REER. In particular, (i) Senegal’s external debt position is sustainable (see DSA in Supplement 1), and (ii) FDI has recently risen considerably, indicating foreign investor confidence.

Box 1.Assessment of Senegal’s REER1

Although the REER has somewhat appreciated since 2001, both the fundamental equilibrium exchange rate (FEER) approach and the macroeconomic balance approach find the REER to be broadly in line with its equilibrium level.

  • The FEER approach assumes that the equilibrium REER is related to a set of fundamental factors: terms of trade, productivity, and investment. The relation between the equilibrium REER and these fundamentals is estimated by applying four different econometric techniques. The highest positive and negative deviations of Senegal’s actual REER from the estimated equilibrium REER are shown below (right-hand figure). For end-2007, the deviations range from -10 percent to +15 percent.

  • The macroeconomic balance approach estimates the REER adjustment needed to close the gap between the projected current account (CA) balance implied by macroeconomic fundamentals (CA norm) and the underlying CA balance which is the CA balance stripped of all temporary factors. The analysis finds that a depreciation of less than 8 percentage points would close the gap, but the statistical error associated with the estimation prevents a conclusive finding of overvaluation.

Senegal: Relative Prices and Effective Exchange Rates

(Index 1994=100)

Senegal: Exchange Rate Deviation Bounds

(Percent)
1 This box is based on Chapter I in the accompanying Selected Issues Papers.2 The bounds are calculated as the maximum percentage deviation of the REER from the equilibrium REER estimates, as estimated using four econometric methods.

11. The authorities agreed with the staff’s REER analysis. They pointed out that inflation in Senegal had for years been lower than in its trading partners, which provided a buffer to help absorb the recent nominal appreciation.

12. Although there is no conclusive evidence that the REER is overvalued, Senegal’s export performance has been poor (Figure 3). Net exports have contributed negatively to growth over the last few years, and the near-suspension of ICS’s operations depressed exports in 2006–07. More generally, exports are concentrated in products that have faced a difficult demand situation and relatively low price increases. There appear to be significant obstacles to the production of diverse and high-quality products at low cost (Box 2). These are being addressed under the authorities’ new approach to growth.

Figure 3.Senegal: Export Performance

Sources: IMF staff estimates and UN Comtrade.

1/ The figure shows that most of Senegal’s export products are positioned below the heavy horizontal line that represents the average growth in world exports (9.4 percent) during the period 1994–2006. Some of Senegal’s export products are positioned to the left of the heavy vertical line that represents the average rate of price increases of world exports (4 percent). Note that all exported fuel (e.g., to Mali) represents re-exports of crude, possibly after having been refined.

Box 2.Structural Impediments to Higher Competitiveness1

Survey-based indicators rank Senegal among the least competitive countries.

  • Senegal ranks 100 out of 131 countries in the 2007–08 Global Competitiveness Index; the survey identifies a need for Senegal to enhance labor market efficiency, develop financial markets, and invest in health and education.

  • The World Bank’s 2007–08 Doing Business Index ranks Senegal 162 out of 178 countries; starting a business, registering property, protecting investors, and obtaining credit were seen as the main problems.

  • The Bank’s 2007 Governance Indicators highlight the need for Senegal to tackle corruption and improve administrative efficiency.

1 See Chapter I in the accompanying Selected Issues Papers.

13. The authorities’ new approach to growth is intended to increase the economy’s growth potential. It centers on improving the business environment and financial intermediation, diversifying and strengthening exports, improving infrastructure and the energy sector, and reforming the labor market—which suffers from multiple ills.1 It aims to increase capital and labor utilization and spur productivity growth through the following efforts.

  • The Accelerated Growth Strategy (AGS). Adopted in 2007, it has now been passed into law and the implementation decree has been issued (an end-January 2008 structural benchmark). It focuses on improving the business climate in general and developing specific export sectors.2b

  • Government spending. The authorities aim to channel spending toward areas conducive to growth, such as investment (see Box 3), health, and education. Public investment rose from 6 percent of GDP to 11½ percent of GDP over the past decade and is expected to hover around 12 percent of GDP henceforth. The authorities reiterated their intention to achieve the PRSP target of social spending equal to 40 percent of total spending by 2010.

  • Energy sector reform. The reform recently agreed by the authorities and key development partners should help end energy supply disruptions and the sector’s drag on the budget.3 It aims to (i) restructure and recapitalize the sector, refine pricing formulas, and cut costs; (ii) improve investment planning; and (iii) strengthen the regulatory framework, foster private sector participation, and implement transparent procurement rules.

    Box 3.The Government’s Investment Strategy

    An ambitious investment policy is central to the authorities’ development strategy. Besides boosting investment in health and education, the authorities are determined to close the infrastructure gap in transport and energy and invest in selected sectors under their AGS.

    Senegal’s second PRSP featured the large infrastructure projects that the government plans to realize over the next few years. They include an industrial platform (now the special economic zone), the Dakar-Diamniadio highway, and the new airport. These projects are to provide a basis for private sector development and diversify economic activity away from the congested Dakar area. Because they are large and expertise is limited, the authorities are welcoming public-private partnerships (PPPs) to achieve them; the Fund recently provided technical assistance in this area.

    Interest in improving public investment planning and evaluation is rising. Faced with no scaling up of aid, limited scope to boost revenue or sell government assets, and a shallow regional financial market, better prioritization of investment is the most promising avenue for the authorities to achieve their development objectives. They will develop directives to improve investment planning and evaluation (a structural assessment criterion—see below).

  • Attracting FDI. The authorities have negotiated a range of investment projects with private foreign parties that are projected to bring in a substantial increase in FDI (Box 4).

    Box 4.FDI in Senegal

    FDI could reach 6 percent of GDP annually in the medium term, quadrupling the average of the last decade. The majority of it originates in the Middle East and India.

    A significant portion of FDI is for infrastructure and tourism projects. Some US$300 million was invested in hotels and infrastructure for the summit of the Organization of Islamic States in March 2008—which may help turn Dakar into one of Africa’s major conference centers. Dubai World Ports will invest US$300 million through 2011 to expand the Port of Dakar. JAFZA, another Dubai-based company, has committed to invest up to US$800 million through 2013 to develop the special economic zone near Dakar. The authorities expect the zone’s advanced infrastructure and tax advantages to attract additional FDI.

    Exploitation of resources is also attracting investment. Arcelor-Mittal Steel purchased a 25-year concession for iron ore mining in 2007. The company plans to invest US$2.2 billion to build a new port, renovate railways, and augment health care and infrastructure in nearby villages. The Indian fertilizer company IFFCO has boosted its participation in ICS and is to invest up to US$200 million. In both cases, the government is a minority shareholder and will receive a share of production.

14. The staff concurred that these efforts could raise Senegal’s growth potential, help reduce poverty, and strengthen external competitiveness. It welcomed the general emphasis on investment in infrastructure, health, and education, as well as the authorities’ willingness to rely on price signals (e.g., for electricity tariffs) and involve the private sector in developing key sectors and projects. But the staff cautioned that government support for developing the AGS cluster sectors should be limited, subject to thorough cost-benefit studies, and consistent with the need for fiscal prudence. The staff and the authorities agreed that priority should generally be given to the more cross-sectoral measures under the AGS aimed at improving the business environment; the authorities explained the pivotal role of the Presidential Investment Council in this area that was producing desired changes.4 Overall, the authorities were hopeful that the reform efforts would help achieve their intended objectives and lead to a rapid improvement in Senegal’s competitiveness rankings, similar to the recent successes of countries like Kenya and Ghana.

MEFP ¶24 (refers to relevant MEFP paragraph)

C. Challenges to Fiscal Sustainability

15. Maintaining fiscal sustainability will be instrumental in promoting domestic stability in the context of Senegal’s WAEMU membership. The commitment to fiscal adjustment under the PSI puts Senegal on track to meet, or come close to meeting, the WAEMU fiscal convergence criteria by the end of the program period. The fiscal DSA (Supplement 1) illustrates the criticality of containing the fiscal deficit to preserve public debt sustainability. This in turn would be key to underpin investment and growth and help maintain domestic stability, by containing demand pressures and avoiding crowding out the private sector.

Senegal: Compliance with WAEMU Convergence Criteria
2007200820092010
Progr.
Primary Criteria
Basic fiscal balance/GDP (≥ 0 percent)-0.7-1.6-1.0-0.9
Average inflation (≤ 3 percent)5.94.42.22.0
Total debt/GDP (≤70 percent)23.826.127.729.2
Change in domestic arrears (≤ 0)0.00.00.00.0
Change in external arrears (≤ 0)0.00.00.00.0
Secondary Criteria
Wages and salaries/fiscal revenue (≤ 35 percent)129.428.528.528.9
Domestically financed capital expenditure/fiscal revenue35.334.236.138.5
(≥ 20 percent)
Current account deficit, excluding grants/GDP (≤ 5 percent)12.112.412.813.2
Fiscal revenue/GDP (≥ 17 percent)20.921.421.120.7
Sources: Senegalese authorities; and Fund staff estimates and projections.

Excluding some contractual wages not classified in the wage bill.

Sources: Senegalese authorities; and Fund staff estimates and projections.

Excluding some contractual wages not classified in the wage bill.

NPV of debt-to-GDP ratio

1 This is the most extreme test test (see Supplement 1).

16. The staff identified three distinct challenges to fiscal sustainability, which the authorities agreed needed to be addressed proactively.

  • The effect of food and energy price increases. The support measures taken to protect the population from those price increases crowded out the issuance of payment orders for other spending in 2007. On recent trends, the related subsidies are projected to reach 3 percent of GDP in 2008, or one-tenth of all spending. The staff concurred with the authorities that some form of support is necessary in the short run to help maintain social calm—which the authorities pointed to as Senegal’s most important asset—but the authorities would need to consider affordability, aim for better targeting, and minimize economic distortions. A February 2008 Poverty and Social Impact Analysis (PSIA) conducted by the Fund found that existing subsidies are not well targeted and could be improved (Box 5). The authorities were highly appreciative of the PSIA and the discussion on alternative policy options and indicated they would explore them. They also explained their plans to improve the supply, and lower the costs, of food and energy products. They intend to expand domestic agricultural production, especially of high-yield products such as rice, by improving rural infrastructure and expanding irrigation systems. Energy sector reform is already relatively advanced, and related cost-cutting efforts should yield results in the near future.

    Box 5.Rising Food and Energy Prices: Policy Options1

    The PSIA analyzed the consumption patterns of Senegalese households and found that current policy measures are not well targeted.

    • Food. The support for rice appropriately benefits most the population’s two poorest quintiles. However, for powdered milk and bread, the richer segments gain most from the tax suspensions.

    • Energy. Richer household are most adversely affected by energy price increases, both directly and indirectly through the effect on other consumables. The butane gas subsidy benefits better-off households the most, while the lamp oil tax exemption is more beneficial to the poor.

    Short-term policy options include: (i) shifting subsidies from butane gas to lamp oil; (ii) keeping some of the current tax suspensions, especially for rice; (iii) instituting a subsidized rate for small electricity users; (iv) redirecting existing agricultural subsidies towards increasing farm productivity and broadening rural job opportunities; and (v) targeting relatively poor groups directly through measures such as school lunches, public works programs, or transport subsidies. All these options should be carefully reviewed regularly to ensure that they do not create unintended adverse behavior.

    In the long run, the authorities may want to consider implementation of a conditional cash transfer system. Such systems deliver social protection to the poor in Latin America. They provide money to poor families conditional upon investment in human capital, such as sending children to school or visiting health centers. The PSIA simulations show that such a system could be more cost effective than the current measures to protect the poor in Senegal. Donors could be approached for financial and technical support.

    1This box is based on Chapter II of the accompanying Selected Issues Papers.

  • Prospective trade liberalization under an EPA. Staff analysis suggests that the budgetary impact may be manageable as long as liberalization is spread over time (Box 6). The authorities planned to use the results of the staff’s work in the preparation of a common regional position.

    Box 6.The Budgetary Impact of an Economic Partnership Agreement1

    EPAs aim to establish free trade areas between the EU and most ACP countries, including Senegal. The EU proposes asymmetric liberalization while preserving reciprocity: it would dismantle all tariffs and quantitative restrictions on imports from ACP countries, while partner countries would liberalize about 80 percent of EU imports.

    Senegal has been an outspoken opponent of EPAs. Like other critics, the Senegalese authorities have argued that EPAs would lead to significant revenue losses and undermine the nascent industrial base of African economies. EPAs have also been criticized for neglecting development.

    The staff analysis suggests that Senegal’s low reliance on customs duties and strong tax administration are important assets, so it can enter the EPA negotiation with confidence. The share of customs duties in total revenues declined by half over the last decade, and the share of EU imports in total imports has also fallen. This could limit annual EPA-related revenue losses to 1.2 percent of GDP (6 percent of total revenue) by the end of the trade liberalization period.

    Trade liberalization should thus be phased in over 15–20 years to avoid a fiscal shock. With a gradual approach, (i) revenue losses would average 0.3 percent of GDP annually over the first five years and reach 1.2 percent of GDP only after 2025; (ii) any negative impact on domestic industries would be reduced, as there would be more time to adapt to the changing environment; (iii) the EU’s intention to provide compensation for revenue losses would be more feasible; and (iv) greater regional integration would be facilitated. ECOWAS countries have stated their preference to consolidate their regional trade agreement before achieving “substantial” trade liberalization with the EU.

    1 This box is based on Chapter III of the accompanying Selected Issues Papers.

  • The revenue implications of DISEZ. While the planned special economic zone has substantial upside potential to promote Senegal’s growth and export performance, its downside risks need to be carefully managed. Its substantial tax incentives could undermine Senegal’s traditionally strong tax collections, depending on whether taxes paid by new companies offset those lost from existing Senegalese companies moving to the zone. In addition, the roles of the tax and customs administrations in managing the zone and designing anti-fraud measures need to be defined. Against this background, the staff and the authorities agreed on several DISEZ-related measures as structural conditionality for the program (see below).

D. Macroeconomic Framework and Risks

17. Senegal’s macroeconomic outlook for 2008 and beyond is broadly favorable, assuming that prudent macroeconomic policies are pursued. Absent any exogenous shocks, medium-term economic growth could average 5½ to 6 percent (Figure 4). Investment is expected to drive growth in the period ahead, fueled by strong activity in the telecommunications and transport sectors and stepped-up construction activity under largely foreign-financed investment projects. A strong recovery of ICS’s operations in the face of unabated world demand for phosphates is expected to support growth and exports. This would help counter the effect of rising food and energy prices, which in 2008 may negatively impact the trade balance by 1½ percent and 1¼ percent of GDP, respectively. Inflation is projected to revert to its historical level of about 2 percent over the medium term. However, upward pressure on world food and energy prices will likely keep inflation elevated in 2008.

Figure 4.Senegal: Medium-Term Outlook, 2006–12

Sources: BCEAO; and IMF staff estimates.

Senegal : Contributions to Growth, 1996–2013
1996–20072008–13Difference
(In percent)
Real GDP growth4.35.71.5
Primary sector0.10.40.3
Secondary sector0.91.70.8
Tertiary sector3.33.60.3
Consumption3.34.00.8
Private2.43.61.1
Public0.80.5-0.4
Gross fixed investment2.63.60.9
Private 1/1.62.40.8
Public1.01.20.2
Net exports-1.6-1.9-0.2
Exports of goods and non-factor services0.01.61.6
Imports of goods and non-factor services-1.6-3.5-1.9
Labor force 2/1.71.60.0
Physical capital 2/2.02.70.7
Total factor productivity 2/0.61.40.8
Sources: Senegalese authorities; and IMF staff estimates and projections.

Including change in inventories.

The growth accounting exercise assumes a standard Cobb-Douglas production function with an elasticity of output to capital of 0.35-in line with estimates for West Africa (see Sacerdoti et al. WP/98/162).

Sources: Senegalese authorities; and IMF staff estimates and projections.

Including change in inventories.

The growth accounting exercise assumes a standard Cobb-Douglas production function with an elasticity of output to capital of 0.35-in line with estimates for West Africa (see Sacerdoti et al. WP/98/162).

18. The external current account deficit is projected to be 11 to 12 percent of GDP over the medium term and to be solidly financed. In addition to support from development partners, an increasingly large share of the current account will be financed through FDI, resulting in a comfortable level of international reserves and external debt sustainability; the DSA points to a low risk of debt distress (Supplement 1). The surge in FDI will contribute to the projected rise in Senegal’s investment rate. While domestic saving could gradually benefit from greater business sector profitability—as a result of the envisaged structural reforms—and improved financial sector intermediation—assuming that the vulnerabilities in the financial sector are resolved—the program’s fiscal policy stance will be key to supporting domestic saving.

19. The medium-term outlook is subject to downside risks. A sustained reduction in world growth and a slowing of international capital flows emanating from turmoil in global financial markets could be detrimental—although the capital flows to Senegal largely consist of relatively stable FDI. Second, the economy remains vulnerable to shocks, including especially unpredictable price developments in commodities markets and adverse weather and pest conditions affecting agriculture. Third, social and political tensions, possibly exacerbated by food and energy price increases, could weaken the authorities’ ability to implement their reform agenda and maintain macroeconomic stability. And fourth, if competing demands for budgetary resources are not well managed or the crowding-out pressure from food and energy price subsidies persists, fiscal outcomes could be less than desirable and undermine domestic stability.

V. Program Discussions

A. Overview

20. The program environment has become more challenging. The rise in food and energy prices and the need to correct last year’s fiscal slippages have complicated the envisioned fiscal adjustment path. In addition, Senegal has pressing infrastructure needs but faces financing constraints in the regional financial market and no scaling up of donor aid. A one-time loosening of the zero ceiling on nonconcessional external borrowing for a specific high-yield project is therefore appropriate.

21. The authorities reiterated their commitment to maintain the PSI’s four pillars, as outlined above in paragraph 1. It was agreed that the detailed October 2007 MEFP would remain the reference point for the authorities’ reform efforts under their economic program and be refined through a much shorter MEFP for the first program review (Appendix I). The program’s streamlined structural component centers on measures to enhance fiscal governance and transparency. Moreover, some modifications to the definitions of the quantitative program targets are proposed.

B. Fiscal Policy

22. The envisaged medium-term fiscal policy stance—a reduction in the overall fiscal deficit during the program period to 4 percent of GDP—remains appropriate. It will underpin fiscal sustainability, as outlined above, while generally providing sufficient room to address Senegal’s development needs. It should also allow the government to further improve the composition of spending, with the aim of achieving the PRSP target of social spending of 40 percent of total spending by 2010. By contrast, a larger fiscal deficit could worsen the debt sustainability outlook and result in an undesirable increase in fiscal vulnerability. Moreover, the amount of fiscal space has already increased considerably since 2000; further increases in government spending, in particular for investment, could strain the absorptive capacity as long as PFM reforms have yet to come to fruition.

MEFP ¶9

Fiscal Space Indicators for Selected Countries, Changes, 2000–07(Percent of GDP)
Ghana1Malawi2Rwanda1Tanzania1Uganda3Senegal4
Source of fiscal space11.03.38.37.8-3.09.0
Domestic contribution3.4-1.15.33.70.25.7
Revenues3.91.55.42.81.84.1
Domestic interest payments2.82.7-0.30.2-0.50.0
Domestic financing (net)-3.2-5.30.20.7-1.11.7
External contribution7.54.43.04.0-3.33.3
Grants3.12.82.51.5-1.30.6
External financing4.41.60.42.5-2.02.7
Use of fiscal space11.03.38.37.8-3.09.0
Wages4.40.5-0.70.20.70.9
Other current spending3.64.06.38.10.72.4
Development expenditures3.1-1.22.7-0.4-4.45.8
Memorandum item:
Pro-poor spending55.93.86.76.81.64.0
Source: IMF staff calculations.

Change over 2000–06.

Change in 2004–06, when substantial fiscal and macroeconomic consolidation took place.

Change over 2001–06. Development expenditures include net lending and repayment of domestic arrears.

Change over 2000–07.

Definition may vary across time and countries.

Source: IMF staff calculations.

Change over 2000–06.

Change in 2004–06, when substantial fiscal and macroeconomic consolidation took place.

Change over 2001–06. Development expenditures include net lending and repayment of domestic arrears.

Change over 2000–07.

Definition may vary across time and countries.

23. Nonetheless, a fiscal deficit of 5 percent of GDP in 2008 is needed to allow for the settlement of carryover spending from 2007. The authorities attached great importance to a prompt settlement of these payment delays to remove the drag on the private sector. This, together with the projected rise in food and energy subsidies, necessitates a conscientious effort to rein in spending. To ensure that this reprioritization takes place, administrative orders from the Prime Minister and Finance Minister were issued to limit the ability of line ministries to commit new spending, with the former setting the reduced overall budgetary envelopes for both current and capital spending relative to the 2008 budget law and the latter providing the specific budgets for each line ministry consistent with the overall envelope; social sectors were excluded from this exercise (prior action). The authorities also blocked commitment authorizations in the SIGFIP system to enforce the order. This expenditure restraint should help lessen demand pressures in certain sectors, thus contributing to macroeconomic stability.

MEFP ¶10

24. The higher fiscal deficit in 2008 does not represent a loosening of the programmed fiscal policy stance. To the contrary, in aggregate, the combined overall fiscal deficit for 2007 and 2008 is broadly as initially programmed, thus keeping the impact on debt sustainability neutral.

25. The size of the payment delays warrants a careful stocktaking on the nature of the underlying spending, including its compliance with budgetary authorizations.1 Based on a preliminary census that relied on self-reporting by line ministries and agencies, spending equivalent to 0.2 percent of GDP—apparently taken before the program start—was not immediately attributable to existing budget lines. This raises the specter that some of this spending was extrabudgetary. In light of this, the authorities committed to a comprehensive audit by the Inspection Générale des Finances by end-September 2008 to gain a full understanding of all payment delays (structural benchmark). While the backlog of bills should considerably be reduced by then, the audit would lay the basis for a complete and permanent return to normalcy. The authorities agreed that any unauthorized spending would either be regularized in a supplementary budget or rejected by the Minister of Finance. This would reestablish the integrity of the budget framework.

MEFP ¶14

26. Financing constraints in the WAEMU market have become tighter. Banks’ excess reserves have fallen sharply in the wake of borrowing by several WAEMU governments. Tapping the regional market will therefore require more planning to make security issues more predictable and interesting to investors regarding timing and maturity. The program includes a commitment to develop, jointly with the BCEAO by end-June 2008, a rolling two-year plan for securities issues in the regional market, which would be updated each time the market is accessed (structural benchmark). This should help prevent a repeat of past cash-flow problems, lower the risk of payment delays to the private sector, and support the development of the WAEMU market. Importantly, it could also help make monetary operations of the BCEAO more effective, by helping mopping up excess liquidity in a systematic way and providing the central bank with a reliable source of securities for its open market operations.

MEFP ¶13

27. At the request of the authorities, the program includes a nonzero ceiling on nonconcessional borrowing (CFAF 80 billion). This is to provide for part of the government’s share in a toll road that is being developed as a PPP to link Dakar with Diamniadio where the new airport and DISEZ are located—a prerequisite for making both projects viable. Donors, including the Bank, are providing the rest of the government’s share in the project. Donor feasibility studies suggest that its expected return exceeds the anticipated costs of the nonconcessional borrowing. Alternative donor financing for this project is not in sight, and raising funds of this magnitude in the WAEMU market would exceed that market’s capacity. Nonetheless, should receipts from privatization or the sale of other government assets become available, the nonzero ceiling would be adjusted downward correspondingly.2

MEFP ¶12

C. Structural Reform Agenda

28. Structural conditionality is proposed to be streamlined. Six structural assessment criteria or benchmarks are proposed for the PSI’s second review. This compares to nine structural conditions in the program’s initial phase.3

29. Structural conditionality centers on the main pillars of the PSI (MEFP Table 2).4 The MEFP contains additional commitments not subject to conditionality. This holds particularly true for reforms in public financial management and efforts to strengthen financial sector supervision and remove impediments to financial intermediation. The following structural conditions have been agreed with the authorities:

Table 1 of MEFP:Quantitative Assessment Criteria and Indicative Targets for 2008–09 1/(In billions of CFA francs; unless otherwise specified)
June 30, 2008September 30, 2008December 31, 2008
Initial program targetNew target
Assessment criteria
Floor on the basic fiscal balance 2/-26-48-71-95
Ceiling on the contracting or guaranteeing of new nonconcessional external debt by the government 3/4/00080
Ceiling on government domestic payment arrears (stock) 5/0000
Ceiling on government external payment arrears (stock) 5/0000
Ceiling on the amount of the float (depenses liquidees non payees) 6/30504030
Indicative target
Quarterly ceiling on the share of the value of public sector contracts signed by single tender (in percent)20202020

Data for September are indicative targets, with the exception of the assessment criteria monitored on a continuous basis.

Defined as total revenue minus total expenditure and net lending, excluding externally financed capital expenditure, on-lending, and HIPC and MDRI spending. Cumulative since the beginning of the year. Total revenue excludes privatization receipts and sales of mobile telephone licenses.

This target, which was defined on a continuous basis, is now defined on a cumulative basis since the approval of the first program review. The ceiling was raised to CFAF 80 bn in the 4th quarter 2008, to finance exclusively the Dakar-Diamniadio toll highway project. The CFAF 80 billion ceiling will be adjusted downward by the amount of any receipt from a privatization, a sale of a telecommunication license, or any other State asset (such as Sonatel shares) during 2008.

This criterion excludes government or government-guaranteed CFAF borrowing from financial institutions within WAEMU. It also excludes external loans contracted by the airport project company (AIDB) to finance the construction of the new Dakar Airport.

Monitored on a continuous basis.

The budgetary float, which was defined as the expenditure for which a payment order has been issued and which has not been paid, is now defined as the expenditure for which a bill has been received and recognized (depense liquidee) and which has not been paid.

Data for September are indicative targets, with the exception of the assessment criteria monitored on a continuous basis.

Defined as total revenue minus total expenditure and net lending, excluding externally financed capital expenditure, on-lending, and HIPC and MDRI spending. Cumulative since the beginning of the year. Total revenue excludes privatization receipts and sales of mobile telephone licenses.

This target, which was defined on a continuous basis, is now defined on a cumulative basis since the approval of the first program review. The ceiling was raised to CFAF 80 bn in the 4th quarter 2008, to finance exclusively the Dakar-Diamniadio toll highway project. The CFAF 80 billion ceiling will be adjusted downward by the amount of any receipt from a privatization, a sale of a telecommunication license, or any other State asset (such as Sonatel shares) during 2008.

This criterion excludes government or government-guaranteed CFAF borrowing from financial institutions within WAEMU. It also excludes external loans contracted by the airport project company (AIDB) to finance the construction of the new Dakar Airport.

Monitored on a continuous basis.

The budgetary float, which was defined as the expenditure for which a payment order has been issued and which has not been paid, is now defined as the expenditure for which a bill has been received and recognized (depense liquidee) and which has not been paid.

Table 2 of MEFP.Structural Conditionality, 2008–09
Policy MeasuresTarget Date for ImplementationMacroeconomic Rationale
Prior Action
1. Publish administrative orders from the prime minister and finance minister which will limit the authorizations for commitments on current expenditure and domestically-financed capital expenditure, as specified in paragraph 10.Prior to Board presentation of PSI first reviewUnderpin fiscal adjustment and eliminate payment delays, while protecting social expenditure.
Structural Assessment Criteria
2. Adopt and make effective the new tariff structure for electricity, which provides progressive tariff rates, in order to encourage energy savings, with lower tariff adjustments for low-income consumers.August 1, 2008Manage electricity demand to limit the impact of international oil prices on the fiscal and external accounts. Protect the poorest households from increases in international prices.
3. Issue the implementation decree for the application of Law 2007–16 on DISEZ, as specified in paragraph 17 of the MEFP.November 15, 2008Limit the impact of the special economic zone on government revenues and preserve macroeconomic stability.
4. Publish an administrative order from the prime minister with guidelines to strengthen public investment planning and evaluation, as specified in paragraph 16 of the MEFP.November 15, 2008Encourage the selection of the most economically and socially profitable investment projects; improve public expenditure productivity and the growth potential of the economy.
Structural Benchmarks
5. Develop a rolling two-year program of issuance of government securities, in collaboration with the BCEAO, as specified in paragraph 13 of the MEFP.June 30, 2008Improve cash-flow management and avoid payment delays; improve debt management and facilitate financial market development; support BCEAO’s monetary policy.
6. Complete a comprehensive audit of payment delays by the financial audit inspectorate of the MEF (Inspection Générale des Finances), as specified in paragraph 14 of the MEFP.September 30, 2008Eliminate payment delays, reestablish budgetary framework integrity, and underpin the development of the private sector and the soundness of the financial sector.
7. Adopt all the legal texts and regulations allowing the effective transfer of direct State tax collection responsibilities from the Treasury to the DGID effective January 1, 2009, as specified in paragraph 23 of the MEFP.October 31, 2008Improve tax collections and enhance fiscal sustainability, by facilitating the fight against tax fraud.
8. Prepare memoranda of understanding which stipulate the respective rights and responsibilities of APIX, DGID, and DDI regarding the management of DISEZ, as specified in paragraph 17 of the MEFP.March 31, 2009Preserve tax revenues and safeguard fiscal governance and macroeconomic stability.

Objective: Support the fiscal policy stance, shore up macroeconomic stability, and strengthen fiscal governance and transparency

  • Ringfencing the revenue impact of DISEZ. The authorities will issue an implementation decree to the DISEZ law by mid-November 2008 to (i) prevent firms from specific sectors, in particular regulated telecommunications companies and petroleum companies selling domestically, from moving to the zone; and (ii) limit fraud possibilities through a list of sanctions and the possible exclusion of certain companies from the zone (structural assessment criterion).5 These measures were agreed upon based on a study undertaken by the authorities of the possible revenue implications of DISEZ (Box 7).

    MEFP ¶17

    Box 7.The Dakar Integrated Special Economic Zone (DISEZ)

    In early 2008, the authorities signed an agreement with JAFZA of Dubai to build and operate a special economic zone outside Dakar. The investor will develop the infrastructure, investing US$800 million, on government-owned land and rent sites to companies that will benefit from a favorable tax regime. The agreement does not contain any government financial guarantees or direct public spending commitments in the zone. As the site is currently barren and undeveloped, it may be two years before the first firms could move into the zone.

    The authorities consider the zone an incubator to modernize the economy and accelerate the pace of reform, with significant positive externalities throughout the country. As such, they expect the zone to create thousands of direct and indirect jobs and play an important role in reducing poverty.

    Although the authorities expect the zone to be at least revenue neutral, they intend to implement safeguards to this effect. In this context, they carried out a study to assess the zone’s potential revenue implications (which met an end-2007 benchmark). The study concluded that the direct tax implications of enterprises moving to the zone would be limited if companies from certain sectors—especially telecommunications—were barred from moving in. The authorities also examined the practices of other economic zones and concluded that entry into, and exit from, the zone will have to be controlled to prevent flagrant fraud and tax evasion. To this end, they intend to enclose the zone with a high fence or wall, allow only very few entry and exit points, administer it rigorously, and introduce transfer pricing rules to combat possibilities for fraud and tax evasion.

  • Auditing all payment delays. See paragraph 25 above.

  • Strengthening tax administration. By end-October 2008, the authorities will transfer responsibility for direct tax collections for large enterprises from the Treasury to the Revenue Authority (structural benchmark). This has been a long-standing Fund technical assistance and fiscal ROSC advice. By placing the assessment and recovery of taxes in the same unit, possibilities for tax evasion will be sharply curtailed. This should help safeguard tax collections and lessen the fiscal risks from DISEZ.

    MEFP ¶23

  • Implementing energy sector reform. As stated above, energy sector reform is macro critical to improve the supply of energy and contain the sector’s drag on the budget. The main budgetary impact has emanated from the authorities’ hesitation to raise electricity prices in line with the cost structure, which in turn was partially motivated by deficiencies in the existing formula. Against this background, the authorities will introduce, by August 1, 2008, a new electricity tariff structure that will have rising marginal costs to discourage high consumption and favor low-income households (structural assessment criterion).

    MEFP ¶22

    Objective: Support implementation of the authorities’ new growth model while safeguarding macroeconomic stability

  • Strengthening investment planning and evaluation: As elaborated in Box 3, the authorities have become increasingly aware of the need for better investment planning and evaluation. Given limited financing options and planning capacity, better selection and prioritization of investment projects, based on well-defined standards, would allow a focus on high-return projects and raise the productivity of government spending. At the same time, the authorities recognize that the investment program needs to be consistent with their strategic objectives and the macroeconomic framework. To this end, they will develop, by mid-November 2008, directives on improving the planning and evaluation of public investment (structural assessment criterion).

    MEFP ¶16

    Objective: Eliminate government cash-flow problems, strengthen debt management, and support financial sector development and the BCEAO’s monetary operations

  • Rationalizing the government’s recourse to the regional financial market. See paragraph 26 above.

D. Program Monitoring

30. Three changes are being proposed in program monitoring:

  • Given the need to expeditiously eliminate expenditure commitments carried over from 2007, it is proposed that the floor on the basic fiscal balance be raised to CFAF 48 billion for end-June 2008.

  • The ceiling on nonconcessional borrowing is proposed to be defined on a cumulative basis and raised from zero to CFAF 80 billion in the fourth quarter of 2008, to help finance the Dakar-Diamniadio toll road. While the expenditure will be made in both 2008 and 2009, the program allows the total amount to be borrowed at once to help the authorities obtain the best financing terms.

  • It is proposed that the ceiling on the budgetary float be redefined to monitor a greater range of payment delays. Instead of just capturing expenditures for which a payment order has been issued but not yet paid, the new definition would start at the point where the government receives and validates a bill. Since the new definition is broader, and it will take some time to clear all existing payment delays, the budgetary float ceiling is raised from CFAF 30 billion to CFAF 50 billion at mid-year, before being gradually lowered to CFAF 30 billion by year-end. However, the zero ceiling on arrears is maintained as an additional safeguard.

VI. Staff Appraisal

31. Senegal’s macroeconomic performance and outlook have improved relative to last year. Economic growth has recovered and prospects are promising, as long as the FDI-driven investment materializes, the restructuring of ICS moves forward, and prudent macroeconomic policies are maintained. This should also help keep the external outlook stable despite a more difficult external environment. However, food and energy price increases could keep inflation above its historic trend in the short run.

32. Structural reforms will be key to raising competitiveness and improving export performance. The authorities’ new growth strategy needs to be implemented vigorously to provide the necessary impetus in this regard. The real exchange rate appears to be broadly in line with economic fundamentals, but its development needs to be carefully monitored.

33. Regarding fiscal policy, the failure to rein in nonpriority spending in 2007 is regrettable. Although the basic fiscal balance target was met at end-2007, delaying the issuance of payment orders for spending equivalent to 2 percent of GDP was a worrisome development and onerous for the private sector. The staff strongly urges the authorities to forcefully implement the Prime Minister’s administrative order to contain spending commitments in 2008 to allow the full clearance of unpaid bills and maintain fiscal prudence.

Moreover, if the audit of past expenditure confirms spending without budgetary authorization, the government should take appropriate action expeditiously.

34. The need to limit risks to social peace can justify food and energy subsidies on a temporary basis if they are well-targeted. Nonetheless, the high costs of such measures crowd out other, possibly higher priority, spending. Raising or even maintaining such subsidies over the medium term is thus not sustainable. It is therefore imperative to identify alternative policy measures, in consultation with development partners and other countries in the region. The guiding principles should be budget affordability, better targeting to help those in need, and limiting economic distortions.

35. The strong implementation of the program’s structural component is commendable. In particular, several key measures were taken to improve fiscal governance and transparency. This strong performance should be built on to strengthen public financial management even further. In addition, the authorities are encouraged to enhance the legal and regulatory environment for the financial sector, closely supervise it, and work toward the removal of identified obstacles to higher financial intermediation.

36. Notwithstanding the fiscal slippages and the somewhat higher risks to the program stemming from the more challenging external environment, the staff recommends completion of the first program review. On balance, the corrective actions initiated by the authorities, together with the broadening of program targets, would allow past fiscal slippages to be fully corrected in 2008 and provide the basis for resuming the path of fiscal adjustment thereafter. On the basis of the prompt corrective actions taken, the staff also supports the authorities’ request for a waiver for the nonobservance of the quantitative assessment criterion on domestic arrears during the first three weeks of the program period. Finally, the program’s structural measures, once implemented, will shore up fiscal policy against a variety of risks, including those related to the planned special economic zone.

37. It is recommended that the next Article IV consultation take place within 24 months, subject to the provisions of the decision on consultation cycles in program countries.

Appendix I

Dakar, Senegal

May 30, 2008

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

700 19th Street, N.W.

Washington, D.C., 20431

Dear Mr. Strauss-Kahn,

1. The attached Memorandum of Economic and Financial Policies (MEFP) reviews implementation to date of the government of Senegal’s macroeconomic and structural program under the country’s three-year Policy Support Instrument (PSI), approved by the IMF Executive Board on November 2, 2007. Details of this program were set in the initial MEFP of October 3, 2007. The attached MEFP builds on this initial Memorandum, with particular emphasis on targets and policy prospects for 2008–09.

2. All assessment criteria for the first review under the PSI were met, save for the nonobservance of the continuous quantitative criterion on domestic arrears. Indeed, this criterion could not be met on a continuous basis at the beginning of the program. However, these arrears were quickly eliminated by end-November and the government has since then avoided any accumulation of new arrears. In light of this prompt corrective measure, the government requests a waiver of the missed criterion.

3. The government believes that the policies and measures set forth in the attached MEFP are adequate to achieve the objectives of a PSI program. Given its commitment to these objectives, it will promptly take any additional measures necessary for their achievement. The government will consult with the IMF—at its own initiative or whenever the Managing Director of the IMF requests such a consultation—before the adoption of any such measures or changes to the policies described in the attached Memorandum.

4. The government will provide the Fund with such information as the Fund may request in connection with the progress made in implementing the economic and financial policies and achieving the objectives of the program.

5. The government authorizes the IMF to publish this letter, the attached Memorandum, and the related Staff Report.

Sincerely yours,

/s/

Ibrahima Sar

Minister of Budget

Attachment: Memorandum of Economic and Financial Policies

Attachment I Memorandum of Economic and Financial Policies

Dakar, May 30, 2008

I. Introduction

1. The government remains committed to higher sustainable growth and making fast progress toward the MDGs. To achieve these goals, it will continue to implement its economic and financial program, which relies on prudent macroeconomic policies and accelerated structural reforms and is supported by the IMF through a three-year Policy Support Instrument (PSI). The government’s commitments, as spelled out in the Memorandum of Economic and Financial Policies (MEFP) dated October 3, 2007, will continue to anchor our policies and reforms going forward. This new MEFP describes recent economic developments and program performance, and presents the specific measures and objectives for 2008–09.

II. Recent Economic Developments and Program Performance

2. Macroeconomic developments in 2007 were broadly in line with program projections. Following a marked slowdown in 2006, and although the agricultural sector experienced a second year of output decline, GDP growth is estimated to have rebounded to 4¾ percent, driven by the services and construction sectors. Inflation increased to about 6 percent and the external current account deficit reached about 10½ percent of GDP, mainly due to large international food and energy price increases.

3. At end-2007, the government met all quantitative assessment criteria except the one on domestic arrears. This criterion could not be met on a continuous basis at the beginning of the program. However, these arrears were quickly eliminated by end-November.

4. The target on the basic fiscal balance was met, and the overall fiscal deficit was lower than expected, at 3½ percent of GDP. This mainly reflects under-execution of HIPC and MDRI expenditure (0.4 percent of GDP), a surplus of nonfinancial public entities (0.2 percent of GDP), and lower-than-expected onlending (0.1 percent of GDP); these lines are excluded from the program criterion definition. However, the government slowed the issuance of payment orders for some expenditure (equivalent to 1.8 percent of GDP) that had already been committed, which made it difficult to honor its commitments to the private sector. The payment delays had become necessary for two main reasons: (i) given the implementation of subsidies and suspensions of certain taxes to contain the impact of food and energy price increases, the government had to slow the issuance of payment orders for other expenditure (mainly investment spending) and (ii) it has committed expenditure in an amount that was higher than what was compatible with the program.

5. The government has been striving to improve public procurement practices. In spite of this, the indicative ceilings on the share of single-tender public contracts for the last quarter of 2007 and the first quarter of 2008 were missed, because a large number of contracts was approved during this period based on the old procurement code. However, the implementation of the new procurement framework will make it possible to meet this indicator as early as the second quarter 2008.

6. The government succeeded in improving the allocation of spending toward priority sectors in 2007.1 The targeted ratio of 33 percent of total expenditure for social spending was met, which represents an increase of 2 percentage points compared to 2006.

7. The government made great strides in implementing its structural reform program. All structural assessment criteria and all but one benchmark through end-March 2008 were met. At this date, the submission of the 2004 and 2005 Treasury accounts to the audit court was only partially completed, since it only covered 9 and 5 accounts (postes comptables), respectively, out of 12. The submission of the 2004 and 2005 accounts will be fully completed by end-April and end-May, respectively. Most other measures not subject to conditionality but specified in the MEFP have been implemented.

III. Macroeconomic Policies for 2008–09

8. The macroeconomic outlook for 2008–09 is broadly favorable despite the more difficult international perspective. Real GDP growth is projected to reach about 5½ percent on average over the next two years, reflecting a gradual recovery of ICS’s operations, buoyant construction activity, and continued strong growth in the telecommunications and transport sectors. Inflation is projected to return to its historical level of 2 percent over the medium term. Nonetheless, because upward pressures on the prices of food and energy are expected to continue in the short run, the government projects the inflation rate at 4½ percent in 2008. The external current account deficit should oscillate between 11 and 12 percent of GDP, financed to an increasingly large extent by FDI inflows. External and domestic public debt would increase moderately, reaching about 21 and 7 percent of GDP, respectively, by 2009. While the regional framework for monetary and exchange rate policies will continue to help preserve low inflation, a prudent fiscal policy will remain the key instrument for achieving macroeconomic stability in Senegal and contribute to the WAEMU’s external stability.

A. Fiscal Policy

Fiscal stance

9. The government reiterates its commitment to limit the overall fiscal deficit to 4 percent of GDP over the medium term. This deficit level will preserve public debt sustainability. This in turn will be key to underpin investment and growth and also help maintain domestic stability by containing demand pressures and avoiding crowding out the private sector. Nonetheless, the deficit will temporarily rise to 4.9 percent of GDP in 2008, after 3½ percent of GDP in 2007, in view of the regularization of expenditure committed in 2007. The deficit target will be consistent with a basic fiscal deficit of CFAF 95 billion in 2008 (quantitative assessment criterion). The government will resume its envisaged medium-term fiscal adjustment path in 2009.

10. The government is aware of the need to curtail nonpriority spending in 2008. To this end, it published on May 19, 2008, an administrative order (circulaire) from the prime minister that limits the authorizations of commitments (engagements) for current expenditure in goods and services to CFAF 229 billion and commitments for domestically-financed capital expenditure to CFAF 429 billion, while at the same time protecting priority expenditures. The administrative order from the prime minister indicates that expenditure related to preceding years will have to be paid in priority. A subsequent administrative order by the Minister of Economy and Finance was issued on May 20, 2008 to provide the breakdown of the authorizations of commitments by ministries consitent with the Prime Minister’s administrative order (prior action). The government has provided the IMF staff with the list of envisaged adjustments relative to the 2008 budget laws. The government will block the authorizations of commitments in SIGFIP (the expenditure tracking system) in order to apply the administrative orders.

11. Spending in favor of priority sectors will continue to be increased. This should make it possible to bring social expenditure to 40 percent of total expenditure, or 10.7 percent of GDP, by 2010. Allocations to social sectors will reach 9.5 percent of GDP in 2008 and 10 percent of GDP in 2009. Expenditure in favor of rural areas and infrastructure spending will also be increased. This will be facilitated by the completion of the replenishment of the HIPC and MDRI accounts, in the amount of CFAF 15 billion in 2008, in line with the commitments from the preceding MEFP (paragraph 46), and by the integral use of this amount and all resources freed by these initiatives. The government will use these accounts exclusively for their intended purpose. Finally, in order to facilitate tracking of HIPC and MDRI expenditure, all payment orders related to such expenditure will be assigned the relevant identifying code by end-2008.

Debt Management

12. To underpin debt sustainability, the government will continue to adhere to the general principle of neither contracting nor guaranteeing external loans on nonconcessional terms. Nonetheless, it will need to have recourse to such resources in the amount of about CFAF 80 billion for one high priority project (quantitative assessment criterion). This would allow us to quickly complement donor resources to cover the State’s share in 2008 and 2009 for the costs of the Dakar-Diamniadio toll highway, which is being developed under a public-private partnership. Several feasibility studies, including those by the World Bank and the Agence Française de Développement, have shown that the return of this project exceeds the cost of the nonconcessional borrowing for the government’s share. The government will consult with IMF staff well in advance for any additional future exceptions to this assessment criterion. The principles for such borrowing are stipulated in paragraph 22 of the preceding MEFP.

13. Consistent with earlier commitments, other aspects of debt management will also be strengthened. First, the government will develop before end-June 2008 a rolling two-year program of issuance of government securities, in collaboration with the BCEAO (structural benchmark). The program will aim at lengthening the maturity profile of securities and make market access more frequent and regular. It will be updated after each security is issued and will be consistent with the macroeconomic framework under the PSI. Such a program of issuance of government securities should help limit the government’s cash flow problems and facilitate the development of regional financial markets. Second, starting in December 2008, the semiannual debt sustainability analysis will include an analysis of risks posed by contingent liabilities stemming from government guarantees, PPPs, and the operations of public enterprises.

Elimination of payment delays

14. Based on a preliminary stocktaking exercise completed in May 2008, we have identified extrabudgetary spending and payment delays in the early stages of the expenditure chain. Spending without budget appropriation, equivalent to about 0.2 percent of GDP, may have taken place in 2007 and early 2008 and will be fully regularized in a new supplementary budget, unless the Minister of Economy and Finance (MEF) considers that it does not respect the rules governing public expenditure as stipulated by article 18 of the 2007 budget law. Payment delays in the early stages of the expenditure chain related to prior fiscal years and amounting to 1.8 percent of GDP will be fully settled during 2008. These delays have arisen because the government slowed the issuance of payment orders, while continuing to commit to expenditures. The preliminary stocktaking exercise will be supplemented by end-September 2008 with a thorough audit of the State’s payment delays by the financial audit inspectorate of the MEF (Inspection Générale des Finances), which will, if need be, be assisted by a specialized private audit firm (structural benchmark). In addition, the government will take appropriate corrective actions to restore the integrity of the budgetary framework and support private sector development and the soundness of the banking system. For this purpose, it will:

  • a. Not accumulate any domestic payment arrears under the WAEMU definition (continuous quantitative assessment criterion).

  • b. Limit the stock of the budgetary float, defined as expenditure for which a bill has been received and recognized (dépenses liquidées) but remains unpaid (quantitative assessment criterion).

  • c. Limit the stock of expenditure committed (dépenses engagées) for which a bill has not been recognized (dépenses non liquidées) .

  • d. Improve the monitoring of budget execution and the expenditure chain by: (i) installing the ASTER accounting software at the Treasury and connecting it to the SIGFIP software of the Ministry of Economy and Finance by the end of the second quarter 2009; and (ii) in the meantime, using the recent extension of SIGFIP to the payment phase.

  • e. Limit Treasury advances to 10 percent of total annual spending on nonwage current expenditure and domestically-financed capital expenditure and to no more than CFAF 30 billion at any given point.

IV. Structural Reforms

A. Fiscal Structural Reforms

15. Fiscal structural reforms will remain at the core of our structural reform program. This should enable us to improve the productivity of public expenditures, enhance fiscal transparency, and better assess, contain, monitor, and report budgetary risks.

Strengthening investment planning and evaluation

16. The government will continue to honor earlier commitments to strengthen public investment planning and evaluation and improve the framework for the implementation of PPPs. This will allow it to enhance efficiency gains and better implement its ambitious investment program that is to help lay the foundation for strong future economic growth. During 2008–09, the following measures will be given priority:

  • a. The government will issue, by November 15, 2008, a prime ministerial administrative order that will stipulate guidelines to strengthen public investment planning and evaluation. These guidelines will be developed in a participative way by representatives of the State’s services involved in investment planning and evaluation. The guidelines will aim to describe the procedures and institutional responsibilities to ensure: (i) consistency of investment projects with strategic objectives and between investment projects; (ii) consistency of investment programs with the medium-term macroeconomic framework; and (iii) the establishment of standards for project analysis according to the size of the projects, as well as the respect of these standards in order to facilitate the selection of the best projects (structural assessment criterion).

  • b. As planned under the Accelerated Growth Strategy (AGS), and in line with the recommendations of the Presidential Investment Council (CPI), the government will prepare, by end-June 2008, a modification to the Law 2004–13 of March 1, 2004, on Build-Operate-Transfer (BOT) contracts. In particular, this modification will aim at allowing, in case of dispute, international arbitration and the choice of the third arbiter by a neutral institution rather than the Dakar regional court.

Large investment projects

17. The government will continue to ensure transparency and efficiency in the execution of its large investment projects. It considers these projects as key to increase the growth potential of the Senegalese economy. Earlier commitments regarding the airport project and the Dakar integrated special economic zone (DISEZ) will continue to be observed. With respect to DISEZ, the government is determined to continue the preparations for making the zone operational by 2010. At the same time, it is committed to creating a zone that generates value added without weakening the government’s revenue base. The zone should therefore help generate a rise in growth and employment while preserving macroeconomic stability. To this end:

  • a. The government will adopt an implementation decree on the DISEZ law by November 15, 2008. The decree will stipulate that (i) regulated enterprises in the telecommunications sector, i.e., telecommunications operators, will be excluded from coverage of the DISEZ law; (ii) enterprises in the hydrocarbons sector will be authorized in the zone only if they are exclusively dedicated to exporting; and (iii) as envisaged under article 30 of the DISEZ law, a list of sanctions will be implemented in case the regulations governing the zone are violated, especially with a view to limiting fiscal fraud and having the possibility of excluding enterprises in case of major breaches of these regulations (structural assessment criterion).

  • b. With a view to ensuring the efficiency, equity, and viability of the tax system, and to limit possibilities for fraud, APIX, the Revenue Authority (DGID) and the Customs Authority (DDI) will agree, by end-March 2009, on memoranda of understanding (protocoles d’accord) that will stipulate, among other things: (i) their respective rights and responsibilities; (ii) the specific measures to fight against fraud and tax evasion; and (iii) the rules for resolving conflict (structural benchmark).

  • c. In order to safeguard the fiscal integrity of the zone, the government will secure it with a wall or a fence and set up a very limited number of access roads. The government will implement a GPS tracking system to track transport vehicles entering and leaving the zone.

  • d. The government will prepare directives on transfer pricing, based on OECD guidelines.

Procurement

18. A new procurement framework is now in place, and the government is determined to apply it forcefully. Specifically:

  • a. The government will redouble its efforts to respect the quarterly indicative target on the share of government contracts awarded on a noncompetitive basis, set at 20 percent of all contracts, including those entered into by agencies.

  • b. Starting at end-June 2008, the government will publish on the website of the central directorate for public procurement (DCMP) the list of contracts awarded quarterly.

  • c. No public procurement will be allowed unless it has been included in the procurement plans submitted to the DCMP.

  • d. Starting at end-June 2008, the procurement regulatory agency (ARMP) will conduct audits and surveys of government contracts, as described in the earlier MEFP.

Monitoring risks inherent to public sector operations and fiscal transparency

19. In order to strengthen the monitoring of fiscal risk and enhance fiscal transparency, the government will:

  • a. Reflect in an annex to the Budget Law, starting with the 2009 Budget Law, the fiscal risks associated with public sector operations, the financial flows related to quasi-fiscal activities of public or private enterprises and public entities, as well as a quantitative assessment of tax exemptions, in aggregate terms, for the last available fiscal year.

  • b. Forward the end-year Treasury accounts (Comptes de gestion) for 2006 to the audit court by end-August 2008 and those for 2007 by end-March 2009.

  • c. Forward the draft budget review law (lois de règlement) for 2004 to the audit court before end-June 2008 and those for 2005–06 before end-December 2008.

  • d. Submit to Parliament by end-October 2008 a law establishing the conditions under which government agencies may be created and specifying the objectives, decision-making bodies, and mechanisms for controlling their operations and budget execution procedures.

  • e. Provide the audit court, in the context of the 2009 Budget Law, with the necessary resources to obtain additional premises with sufficient space—through renting, buying or building offices—and to hire 30 new judges and prosecuting attorneys for each audit chamber.

Alleviating price increases

20. Helping the population cope with the impact of rising food and energy prices is a national priority. In doing so, the government intends to strike the appropriate balance between safeguarding macroeconomic stability and providing immediate temporary relief to those in need. To this end, the government will examine options for improving the targeting of existing relief measures and containing their impact on the budget.

21. With a more medium-term perspective, the government will focus on improving the supply and lowering the costs of food and energy products. The agricultural sector is also vital to the fight against poverty. The government attaches importance to expanding domestic agricultural production, in particular of high-yield products, such as rice. To this end, it will work with farmers to improve infrastructure, particularly irrigation and storage systems; increase competition; and redirect agricultural subsidies to help enhance farm productivity. In the same vein, energy sector reform is aimed at enhancing production and generating cost reductions which the government intends to gradually pass on to consumers.

Energy sector reform

22. Energy sector reform is crucial to improve the supply of energy to the economy and contain fiscal risks. The government has finalized the main elements of its reform program—supported by the World Bank and other donors—with the signature of the sectoral policy letter. The government is guided by the principle of truth in pricing and the implementation of energy savings and efficiency gains. To support the reform program, it will:

  • a. By August 1, 2008, adopt and make effective the new tariff structure for electricity, which provides a progressive pricing structure—which would encourage energy savings—and incorporates lower tariff adjustments for low-income consumers (structural assessment criterion).

  • b. Announce by August 1, 2008, an increase in electricity prices based on the exceptional revision to the existing formula.

  • c. Complete the recapitalization of SENELEC by 2009. In 2008, budgetary resources of CFAF 37 billion will be provided to SENELEC for this purpose.

  • d. The government remains committed to eliminating the butane subsidy by end-July 2009. In the meantime, butane prices will be adjusted to limit the annual subsidy to CFAF 32 billion in 2008.

Tax administration

23. The Revenue Authority (DGID) has followed a roadmap for further enhancing the efficiency of tax administration. The priority measures for the coming months are to:

  • a. Extend by end-December 2008 the tax management software (SIGTAS) to all taxes for all Dakar collection centers.

  • b. Make the interface between the information systems of the three tax revenue-collecting offices (DGID, DGD, and DGCPT) fully operational by February 2009.

  • c. Adopt by October 31, 2008, all the legal texts and regulations necessary for the effective transfer of direct State tax collection responsibilities from the Treasury to the DGID starting January 1, 2009 (structural benchmark). This requires modification of the Tax Code, the decree regulating public accounting, and the ministerial orders relative to the organization of the DGID and the DGCPT. The integration of tax assessment and collection in the same entity will facilitate the fight against fraud and safeguard tax revenues. A schedule for this transfer along the following lines will be published:

    • (i) Effective January 1, 2009 for the region of Dakar: Transfer of the collection of the income tax (IR) by salary deduction, taxes on revenue by professionals (bénéfices non commerciaux et autres sommes payées à des tiers), profits taxes (IS), and income taxes owed by the taxpayers monitored by the large taxpayer unit (CGE).

    • (ii) Effective January 1, 2010: Transfer of the IS and IR owed by other taxpayers in the region of Dakar.

    • (iii) Effective January 1, 2011: Transfer of the IS and IR owed by taxpayers located outside of Dakar.

B. Accelerated Growth Strategy and Development of the Private Sector

24. The Accelerated Growth Strategy (AGS) will remain the anchor of the reform agenda and of priority measures to enhance the growth potential of the Senegalese economy. Implementation of this strategy is now on track with the adoption of framework law 2008-03 of January 8, 2008, and its implementation decree 2008–56 of January 29, 2008 which sets out the organizing and functioning rules of the institutional framework for implementing the AGS. The institutional set-up will be operational by end-May 2008. In addition, the framework to assist the private sector will be restructured and strengthened in order to better complement the AGS. The President’s Investment Council (CPI) is the appropriate forum to advance the reform agenda for transversal measures, and progress is assessed in weekly meetings of the relevant working groups.

C. Financial Sector Reforms

25. The government is determined to safeguard the soundness of the financial system and enhance its contribution to the economy. To this end, and consistent with earlier commitments, the government will:

  • a. Issue the implementation decrees for the new law on microfinance institutions by end-June 2008 and strengthen the oversight unit within MEF.

  • b. Submit to Parliament by end-December 2008 the new regional law against the financing of terrorism.

  • c. Implement all decisions and recommendations of the WAEMU regional banking commission.

  • d. Work closely with the BCEAO and the WAEMU regional banking commission to limit the impact of the ICS restructuring plan on the banking system.

  • e. Continue to discuss with the Association of Senegalese Banks a reduction in the tax on banking operations (TOB) or its replacement with the VAT, in order to find a solution that would facilitate access to credit while limiting the impact on public finances.

  • f. During the current year, train judges specialized in economic and financial matters and improve procedures for real estate sales.

VI. Program Monitoring

26. Quantitative assessment criteria for end-June 2008 and end-December 2008, and indicative targets for end-September 2008 were set to monitor program implementation in 2008 (see Table 1 of the annexed Technical Memorandum of Understanding—TMU). The government and IMF staff also agreed on the prior action, structural assessment criteria, and benchmarks listed in Table 2 of the TMU. The second and third reviews are scheduled to take place by end-December 2008 and by end-June 2009. The government understands that completion of the second review of the program is contingent upon the observance of the assessment criteria set for end-June 2008 and the structural assessment criteria for the period through November 15, 2008.

Attachment II Technical Memorandum of Understanding

Dakar, May 30, 2008

1. This technical memorandum of understanding (TMU) defines the quantitative and structural assessment criteria, indicative targets, and structural benchmarks on the basis of which the implementation of the Fund-supported program under the Policy Support Instrument (PSI) will be monitored in 2008 and 2009. The TMU also establishes the terms and timeframe for transmitting the data that will enable Fund staff to monitor program implementation.

I. Program Conditionality

2. The quantitative assessment criteria for June 30, 2008 and December 31, 2008 and the quantitative indicators for September 30, 2008, are shown in Table 1. The prior action, structural assessment criteria, and structural benchmarks established under the program are presented in Table 2.

II. Definitions, Adjusters, and Data Reporting

A. The Government

3. Unless otherwise specified below, the government is defined as the central administration of the Republic of Senegal and does not include any local administration, the central bank, or any government-owned entity with a separate legal personality (e.g., public universities and hospitals).

B. Basic Fiscal Balance (Program Definition)

Definition

4. The basic fiscal balance (program definition) is the difference between the government’s budgetary revenue and total expenditure and net lending, excluding externally-financed capital expenditure (financed by donors), drawings on on-lent loans (except on-lent loans to the energy sector financed through donor budget support), and expenditure funded with HIPC- and MDRI-related resources. Budgetary revenue excludes privatization receipts and sales of mobile telephone licenses or other government assets. Government expenditure is defined on a payment order basis. The assessment criterion is set as a floor on the cumulative basic fiscal balance since the beginning of the year.

Example

5. The floor for the basic balance (program definition) as at December 31, 2008 is minus CFAF 95 billion. It is calculated as the difference between budgetary revenue (CFAF 1254 billion) and total expenditure and net lending (CFAF 1667 billion), excluding externally financed capital expenditure (CFAF 231 billion), drawings on on-lent loans (CFAF 0 billion), and expenditure funded with HIPC- and MDRI-related resources (CFAF 87 billion).

Reporting requirements

6. During the program period, the authorities will report monthly to Fund staff provisional data on the basic fiscal balance (program definition) and its components with a lag of no more than 45 days. Data on revenues and expenditure that are included in the calculation of the basic fiscal balance, and on expenditure financed with HIPC- and MDRI-related resources, will be drawn from preliminary treasury account balances. Final data will be provided as soon as the final balances of the treasury accounts are available, but not later than two months after the reporting of the provisional data.

C. Government Domestic Payments Arrears

Definition

7. In line with the WAEMU definition, domestic payment arrears are government expenditures cleared for payment (dépenses ordonnancées) but not paid during a period of 90 days after the date the payment order (ordonnancement) was cleared. The assessment criterion on domestic payment arrears will be monitored on a continuous basis.

Reporting requirements

8. The authorities will report to Fund staff any accumulation of domestic payments arrears, as defined above, as soon as incurred. The government will also report to Fund staff on a monthly basis and with a maximum delay of 60 days all committed expenditure (dépenses engagées) and all certified expenditure that have not yet been cleared for payment (dépenses liquidées non encore ordonnancées).

D. Budgetary Float

Definition

9. The budgetary float (instances de paiement) is defined as the outstanding stock of government expenditure for which bills have been received and validated (dépenses liquidées) but not yet paid. The assessment criterion is set as a ceiling on the budgetary float, monitored at the end of the quarter.

Reporting requirements

10. The authorities will report to Fund staff the amount of budgetary float on the same basis as described in paragraph 8 of this TMU.

E. Government External Payment Arrears

Definition

11. External payment arrears are defined as the sum of payments owed and not paid on the external debt contracted or guaranteed by the government. The definition of external debt given in paragraph 13 is applicable here. The assessment criterion on external payment arrears will be monitored on a continuous basis.

Reporting requirements

12. The authorities will report to Fund staff any accumulation in external payment arrears as soon as the due date is passed.

F. Contracting or Guaranteeing of New Nonconcessional External Debt by the Government

Definition

13. This assessment criterion applies not only to debt as defined in Point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Executive Board Decision No. 6230-(79/140), last amended by Executive Board Decision No. 12274-(00/85), adopted August 24, 2000, but also to commitments contracted or guaranteed by the government for which funds have not been received. It does not apply to government or government-guaranteed CFAF borrowing from individuals or legal entities that are WAEMU residents. It does not apply either to external loans contracted by the airport project company (AIDB) to finance construction of the new Dakar Airport. The definition of new external debt under the AC excludes debt rescheduling transactions of debt existing at the time of the approval of the PSI. This criterion is measured on a cumulated basis since the approval of the first program review. The ceiling was raised to CFAF 80 billion in the fourth quarter of 2008 exclusively to finance the toll highway (Dakar-Diamniadio) project. The CFAF 80 billion ceiling will be adjusted downward by the amount of any receipt from a privatization, a sale of a telecommunication license, or any other State asset (such as Sonatel shares) during 2008.

14. For purposes of this assessment criterion, government is understood to include the government as defined in paragraph 3 above, as well as public institutions of an industrial and commercial nature (EPIC), public administrative institutions (EPA), public institutions of a scientific and technical nature, public institutions of a professional nature, public health institutions, local administrations, public enterprises, and government-owned or controlled independent companies (sociétés nationales) (i.e., public enterprises with financial autonomy where the government holds at least 50 percent of the capital), and government agencies.

15. Any external debt of which the present value, calculated with the reference interest rates mentioned hereafter, is greater than 65 percent of the nominal value (grant element of less than 35 percent) is considered nonconcessional, with the exception of IMF lending under the Poverty Reduction and Growth Facility, which is considered concessional even if it does not meet the 35 percent grant element threshold. For debt with a maturity of more than 15 years, the ten-year reference market interest rate, published by the OECD, is used to calculate the grant element. The six-month reference market rate is used for debt with shorter maturities.

Reporting requirements

16. The government will report any new external borrowing and its terms to Fund staff as soon as external debt is contracted or guaranteed by the government.

G. Public Sector Contracts Signed by Single Tender

Definition

17. Public sector contracts are administrative contracts, drawn up and entered into by government entities subject to the procurement code, for the procurement of supplies, delivery of services, or execution of work. Public sector contracts are considered single-bid contracts when the contracting agent signs the contract with the chosen contractor without competitive tender or award. The quarterly indicative target will apply to public sector contracts examined by the Commission Nationale des Contrats de l’Administration (CNCA) until December 31, 2007, and to those examined by the Direction Centrale des Marchés (DCM) thereafter.

Reporting requirements

18. The government will report quarterly to the Fund staff, with a lag of no more than one month from the end of the observation period, the total value of contracts signed by all ministries and agencies and the total value of all single-bid contracts signed by these ministries and agencies.

III. Additional Information for Program Monitoring

19. The authorities will report to Fund staff the following, with the maximum time lags indicated:

  • (a) Effective immediately: any decision, circular, edict, decree, ordinance, or law having economic or financial implications for the current program;

  • (b) With a maximum lag of 45 days, preliminary data on:

    • Tax receipts and tax and customs assessments by categories, accompanied by the corresponding revenue collected by the Treasury on a monthly basis;

    • The monthly amount of expenditures committed, certified, and for which payment orders have been issued;

    • The quarterly report of the Debt and Investment Directorate (DDI) on execution of investment programs;

    • The monthly preliminary government financial operations table (TOFE), based on the Treasury accounts (balances de compte); and

    • The provisional balance of the Treasury accounts.

  • (c) Final data will be provided as soon as the final balances of the treasury accounts are available, but not later than two months after the reporting of provisional data.

20. During the program period, the authorities will report to Fund staff provisional data on a monthly basis on current nonwage non-interest expenditures and domestically financed capital expenditures executed through advance payments and treasury advances, with a lag of no more than 45 days. The data will be drawn from preliminary consolidated treasury account balances. Final data will be provided as soon as the final balances of the treasury accounts are available, but no more than two months after the reporting of provisional data.

21. The government will report to Fund staff:

  • The monthly balance sheet of the Central Bank, with a maximum lag of two months;

  • The consolidated balance sheet of banks with a maximum lag of two months;

  • The monetary survey, on a quarterly basis, with a maximum lag of two months;

  • The lending and deposit interest rates of commercial banks, on a monthly basis; and

  • Prudential supervision and financial soundness indicators for bank and nonbank financial institutions, as reported in the Table entitled Situation des Etablissements de Crédit vis-à-vis du Dispositif Prudentiel [Survey of Credit Institutions in Relation to the Prudential Framework], on a quarterly basis.

22. The government will update monthly on the website used for this purpose the amount of airport tax—redevance de développement des infrastuctures aéroportuaires (RDIA)—collected, deposited in the escrow account, and used for the repayment of the loan financing the construction of the new airport.

ICS is Senegal’s largest company, but its output in 2007 was at one-third of 2005 capacity because negotiations on its rehabilitation have been protracted (see Box 2 in IMF Country Report No. 07/358). In March 2008, a local court accepted the restructuring plan agreed between the foreign majority owner and the government. This decision allowed the government to rescind its bank loan guarantee. Output is projected to reach capacity by 2010.

WAEMU regulations require that ICS claims continue to be classified as nonperforming, but provisions will have to be raised only if ICS has difficulties in servicing its rescheduled debt.

Microfinance accounts for one-tenth of private sector credit.

Some 80 percent of loan applications are currently rejected by banks, with difficulties in securing and enforcing collateral and low accounting quality being cited as main reasons.

The share of single tenders surged again in early 2008, as ministries and agencies took advantage of the complementary period to issue such tenders related to lines in the 2007 budget.

The basic fiscal balance deviated little from what was programmed, while the overall fiscal deficit was 0.8 percent of GDP smaller than programmed. This reflects items traditionally excluded from the program target because they (i) are beyond the authorities’ control (e.g., externally-financed investment) or (ii) need to be shielded from spending cuts (e.g., HIPC/MDRI spending).

These delays do not constitute payment arrears or budgetary float under the program definition, as they occurred before the issuance of payment orders. The program definition of the budgetary float is being adjusted to capture these delays in the future.

The staff and the authorities decided to step back from the program discussions for an entire day to discuss and reflect on these issues, based on five PowerPoint presentations given by staff.

The Bank’s 2007 Country Economic Memorandum (Senegal—Looking for Work—The Road to Prosperity) analyzes these problems in great detail. Among other things, skill levels in the economy are low and labor regulations onerous. Proposed reforms include enhancing education and training and increasing the flexibility of labor regulations, such as with respect to fixed-term contracts (an end-March 2008 PSI benchmark).

The five sectors are agro-industry, fisheries, electronic customer support services, tourism, and textiles.

The World Bank Board meeting to approve the energy sector development loan is expected for June 2008.

As a striking example, they have reduced the time needed to start a business from 58 days to 48 hours through a one-stop window (guichet unique).

The authorities report budgetary costs of the Islamic Conference at 0.4 percent of GDP, some of which was regularized in a supplementary budget after the event.

The authorities are contemplating the sale of their minority share in SONATEL, the profitable telecommunications company. At the time of the mission, they confirmed that they had not yet made a decision. Given the potentially substantial privatization receipts, staff reiterated that the use of the receipts would need to be thoroughly discussed and fully reflected in the macroeconomic framework. Staff also urged the authorities to use a multi-bid tender for the consultancy and divestiture phase, in line with the new procurement framework and the PSI program’s emphasis on fiscal transparency and governance.

The reduction in structural conditionality takes into account the Board discussion of the IEO report on structural conditionality and the conclusions of the Ex-Post Assessment for Senegal that the excessive conditionality of past programs should be avoided.

Private sector development is one of the pillars of the PSI, but specific conditionality in this area that would pass the macro criticality threshold proved difficult to derive.

In addition, the fiscal and administrative agent role of APIX in relation to the relevant fiscal authorities (customs, revenue authority), as well as specific actions to combat fraud and tax evasion, are to be defined by March 2009 (structural benchmark).

Social expenditures in the context of the program are those of the PRSP. They include spending on health, education, justice, social development, environment, rural hydraulics, and waste management.

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