1. We thank staff for the comprehensive reports on Senegal and for the productive policy discussions held with the country’s authorities during the mission for the first Policy Support Instrument (PSI) review and the 2008 Article IV consultation. We are appreciative of the useful advice the staff has continued to provide to the authorities in support of their efforts to overcome the policy challenges facing the country and we acknowledge the valuable role played by Management and the Board in this process. Keeping up with their attachment to transparency, the authorities have consented to the Fund publication of their letter of intent and the staff report.
2. As discussed in the staff report and below, the authorities’ implementation of the PSI structural conditionality and quantitative conditions has been almost perfect to date. In addition to signaling the authorities’ strong ownership of, and their commitment to, the program’s objectives and reform agenda, this impressive performance should put to rest doubts previously expressed by a few Directors about the qualification of Senegal for the status of mature stabilizer and good PSI candidate. Notwithstanding the significant progress made in the implementation of their reform agenda, the authorities are aware that key policy challenges remain to be tackled. They are determined to continue their reform efforts and, in this endeavor, they will continue to welcome the Fund’s useful advice.
Economic and Structural Performance under the PSI and Economic Outlook
3. In 2007, a number of developments are noteworthy on the macroeconomic front. Reflecting the dynamism of the Senegalese economy, particularly in the secondary and tertiary sectors, the rate of GDP growth doubled compared to the previous year, reaching almost 5 percent. Higher energy and food prices continued, however, to take a big toll on inflation and the current account deficit which rose to about 6 percent and 10 percent respectively. In spite of these shocks which, from the authorities’ standpoint, justified granting additional subsidies and introducing temporary tax exemptions on a limited number of consumption goods, the authorities succeeded in meeting the targeted basic fiscal balance and reducing the overall fiscal deficit. However, given the strong budgetary pressures in the face of several competing priority needs and the inflexibility of the targeted basic fiscal balance, these achievements came at the cost of the timeliness of the issuance of some payment orders and unfulfilled spending commitments even though expenditures in priority sectors were increased.
4. In line with the authorities’ strong commitment to sound macroeconomic policies, all quantitative assessment criteria were met, except for the one on domestic payment arrears which was inadvertently missed during the first few weeks of the program period. However, in view of the corrective action they have taken, the authorities are hopeful that Directors will support their request for waiver of the assessment criterion.
5. In addition to the prowess they have demonstrated on the macroeconomic front, the authorities have shown a determined implementation of their structural reform agenda. Indeed, the single-worded comments in Table 9 of the staff report convey a clear sense of the impressive implementation of the PSI reform agenda, with virtually all of the dozen of structural conditions set for the PSI review being met. With respect to the sole condition that was partially met, the authorities have renewed their commitment to submit to the audit court the complete 2004 and 2005 Treasury accounts.
6. The authorities remain optimistic about the country’s economic outlook. Growth prospects are favorable given the expected continuous dynamism of the construction sector and services. Thanks to the regional central bank’s prudent policies, core inflation is expected to be kept low going forward. External current account balance is expected to fluctuate around its current level and to be partly improved by the implementation of the new restructuring plan of the chemical company, Industries Chimiques du Senegal, which is expected to pave the way for full recovery of the company, thereby boosting exports. As many spending commitments made in 2007 are expected to be settled this year, the fiscal deficit is expected to increase before following a downward path in 2009 onwards.
Policy and Reform Agenda for 2008–2009
7. The authorities have thus far made significant strides in advancing the reform and policy agenda they have elaborated in the context of the PSI program, with staff’s valuable assistance. Still, they are fully aware that much remains to be done to overcome the significant challenges facing the country, notably coping with rising food and energy prices, sustaining improvement in fiscal governance and transparency, and advancing the remaining reform agenda.
8. Rising food and energy prices has been a key challenge facing the Senegalese authorities both on the policy and social fronts. As in many other countries, this shock has triggered an outburst of consumers’ outcry in Senegal. As the authorities attach high priority to mitigating the adverse impact of the shock on social welfare, the initial policy response consisted in a series of actions that included suspension of indirect taxes and customs duties on a few food products as well as energy subsidies, thus contributing to fueling existing pressures on the budget. However, determined not to let these measures come at the expense of macroeconomic stability and fiscal sustainability, the authorities subsequently took vigorous steps to rationalize public spending in nonpriority sectors and address payment delays while safeguarding public expenditures in social sectors. Most notably, the administrative orders sent last month by the Prime Minister and the Minister of Economy and Finance to all line ministries were meant to serve these purposes.
9. Going forward, the authorities also intend to elaborate mechanisms for better targeting this assistance to the most vulnerable households. In this process, staff analysis of the policies to protect the poor from rising energy and food prices will be of great interest. They will aim to achieve higher agricultural production and lower production costs in the energy sector which they view as medium-term solutions to these shocks. Several initiatives are already underway in this connection, including infrastructure development and productivity-enhancing measures in both the agricultural and energy sectors and the recapitalization of the electricity company. At the regional level, they will take part to efforts that WAEMU finance ministers recently agreed to undertake in order to cope with increases in food and energy prices.
10. As we noted during last Board discussions on Senegal, the authorities had started to take steps toward improving fiscal governance and transparency and reducing fiscal risks. Those steps included, inter alia, disclosure of the contracts signed by the government, notably with the project company, AIBD, the construction company, banks, and the International Air Transport Association (IATA); full public ownership of AIBD; publication of the amount of airport tax revenues collected through IATA; enactment of a new procurement code which limits recourse to no-bid contracts in the public sector; and modification of the legal status of the Agency for investment promotion and major public projects, APIX. Since then, other big leaps have been made in the same direction, notably by modifying the legal status of the Agency for investment promotion and major public projects, APIX, containing energy subsidies, and lifting the government’s guarantee on ICS debt to local banks.
11. Going forward, the authorities’ aspiration for improved fiscal governance and transparency will be served by further steps they plan to take in the coming months. In particular, starting from the end of this month, government contracts awarded each quarter will be put in the public domain and subjected to audits. Butane gas subsidies will be significantly reduced this year and capped at CFAF 32 billion, consistent with the authorities’ intent to gradually eliminate them in the medium-term.
12. The authorities are determined to promptly settle any payment delays and extra-budgetary spending that may have occurred. A full account of such delays and spending is expected to be made soon by the financial audit inspectorate of the finance ministry. The authorities will also take a number of further steps aimed at strengthening the budgetary framework, smooth the different phases of budget execution, and improve budget monitoring, including by introducing ceilings on the stock of budgetary float. In view of their large infrastructure program and in line with their previous commitment, the authorities will work, in coming months, on elaborating guidelines to strengthen public investment planning and evaluation.
13. Furthermore, the authorities’ plan to implement measures aimed at enhancing the already highly performing tax administration bodes well for the prospects of revenue mobilization. These measures include connecting the information systems of the main tax-collecting offices and streamlining of direct tax collection responsibilities between the treasury and the tax department.
14. The authorities continue to abide by their commitment to ensure that the planned Special Economic Zone is at least revenue neutral and has no adverse impact of the equity of the fiscal system. To that resolve they have finalized a comprehensive study on the fiscal incidence of the Special Economic Zone. The study analyzes many fiscal implications of the project, particularly on the legal, institutional and economic fronts. They also plan to take specific actions in 2009 that will include: identification of enterprises and sectors that will be authorized to operate in the Zone; sanctions to be effected in case of violations of the Zone’s laws and regulations; and clear delineation of the roles of the Zone’s governing body and the tax and customs Directorates.
15. With regard to the financial sector, the authorities will continue to pursue their previously stated objectives, notably improvement of the soundness of the sector and SMEs’ credit access. For the coming months, their reform agenda will thus include, inter alia, implementing the new legal framework for the microfinance sector, continuing to build capacity of the finance ministry’s unit in charge of supervising the sector, submitting to Parliament the new regional law against the financing of terrorism, and establishing a program of regular issuance of government securities.
16. The authorities’ reform efforts continue to encompass other macrocritical sectors, as well. In particular, work is underway to increase private sector’s involvement in the governance of the energy sector. In the case of the electricity company, SENELEC, such work is being conducted with the assistance of the World Bank. Major reforms are also being conducted by the authorities to make the economy fast-growing and competitive. An institutional framework for implementing the authorities’ Accelerated Growth Strategy has been adopted and critical reforms to improve the business climate are underway. Partly reflecting the effectiveness of such reforms, the country is attracting increasingly significant FDI and positioning itself as a major investment pole in the region.
Additional remarks and Conclusion
17. The authorities would welcome more flexibility in the program fiscal targets. As noted above, their effort to meet the target for the basic fiscal balance was viewed as one of the causes of the distortions that affected budget execution last year, notably by contributing to delays in the issuance of payment orders and unfulfilled spending commitments. While such a situation may require from the authorities better consideration of budgetary ceilings, it also provides a rationale for ensuring more flexibility in fiscal targets set Senegal’s PSI and Fund-supported programs in general. Occasional departures from a tight fiscal stance should be allowed from the authorities’ perspective so long as long-term fiscal sustainability is preserved. This would allow programs not only to better accommodate unexpected shocks and critical infrastructure needs, and thus growth objectives, but also not to introduce any distortions in budget execution processes.
18. In a bid to preserve debt sustainability, the Senegalese authorities remain committed to sound debt management and they continue to have a strong preference for contracting and guaranteeing external loans on concessional terms. However, the increasingly limited availability of concessional loans and grants is becoming more and more at odds with their growing needs for such resources with a view to financing their infrastructure development needs. This partly motivates the following requests they have submitted for Fund consideration. First, they add their voice to that of other authorities in our Constituency who have previously made calls for the Fund to revisit the definition of concessionality in its arrangements, ultimately with the aim at lowering possibly the required minimum grant element. Such a move would help countries like Senegal mobilize additional development financing and would naturally continue to require strict monitoring of the impact of new borrowing on debt sustainability, as is already the case.
19. Second, the authorities appreciate the new nonzero program ceiling on the contracting or guaranteeing of new nonconcessional external debt which accommodates one of their high priority projects, the Dakar-Diamniado toll highway. For future reference, they would appreciate it if the Fund would find ways to allow the PSI program to respond more swiftly to a need for upward adjustment in the ceiling on nonconcessional financing when concessional resources and grants are unavailable to finance priority development projects for which associated returns exceed the cost of nonconcessional borrowing. They view a protracted consultation process with staff in the run-up to such an adjustment as counterproductive and at odds with the needs of a dynamic economy.
20. In light of the above, we call on Directors to consider favorably the authorities’ requests and to support completion of the first review of the PSI program.