Strengthening Senegal’s Fiscal Framework1
The PSE relies on a new composition of public finances, which envisages raising additional revenues and rebalancing spending from current to capital. These plans contrast with the experience in Senegal throughout the last decade, characterized by weak revenue performance and substantial increases in public consumption, particularly the government’s wage bill. In this context, strengthening the fiscal framework would be a key step forward to help steer public finances to support the PSE. This section highlights some areas for improvement, in particular in identifying fiscal challenges and planning a credible medium-term fiscal strategy.
A. Fiscal Performance during the Last Decade
1. The growth of spending above revenues has weakened the sustainability of public finances. The increase in public spending has not been accompanied by a parallel increase in public revenues (Figure 1), thus hampering public finances. As a consequence, the public deficit is at 5.2 percent of GDP in 2014 (up from less than 2 percent of GDP a decade earlier) and public debt is at 53.4 percent of GDP which was already high since the debt relief obtained under the HIPC initiative. While the authorities have committed to deficit reduction, spending continues to exceed revenues. Financing the deficit through increased public debt may prove increasingly difficult and more costly, as international markets are tightening credit conditions for emerging market economies.
Figure 1.Senegal: The Evolution of Spending and Revenues in Senegal, 2000-2014
Source: IMF staff calculations.
2. Current spending growth has been led by the wage bill and the consumption of goods and services. Between 2003 and 2014, overall spending increased by around 7 percentage points of GDP, from nearly 21 to 28 percent of GDP. This has been the third largest increase in the region and has placed Senegal among countries with the highest public spending levels in the WAEMU. In that period, current spending increased by 5 percentage points of GDP, driven by increases in the wage bill, other goods and services, and to a lesser, extent transfers and subsidies (Figure 2).2
Figure 2.Senegal: The Increase in Expenditure Items, 2003-2014
Source: IMF staff calculations.
3. The relatively high wage bill as a share of domestic revenue raises concerns about its sustainability. The consolidated wage bill in 2014 represents about 42 percent of domestic revenue, well above the average of 30.7 and 26 percent in Africa and low-income countries respectively (Figure 3). In addition, this ratio exceeds by a large margin the WAEMU convergence criterion ceiling of 35 percent of domestic revenues. While the size of the public workforce in Senegal (about 150,000 employees) is within international standards. The increase in the wage bill has almost entirely been driven by the use of wage supplements and allowances. Indemnities and other wage supplements surged in the last decade while the share of base salaries in the total wage bill declined substantially over the same period (Figure 4). Allowances are a key element to attract talent and promote a results-oriented performance management, but the sharp increase in allowances seems excessive in view of the modest record of sectoral reforms and macroeconomic performance during the past decade. Against the backdrop of recurrent revenue shortfalls, the large consolidated wage bill is an important source of concern.
Figure 3.Senegal: The Wage Bill as a Share of Revenues, 2014
Source: IMF staff calculations.
Figure 4.Senegal: The Composition of the Wage Bill, 2002-2013
Source: IMF staff calculations.
4. The capital spending in Senegal has increased substantially in the last decade. As a share of GDP, the capital spending budget almost doubled since 2008, reaching about 7 percent of GDP in 2014. Few autonomous agencies execute almost 80 percent of the capital budget. Most of the capital spending took place in the areas of urbanism and sanitation, transport infrastructures and social infrastructures for education and health. The composition, however, varied with the source of financing. For example, the domestically financed public investment was largely devoted to projects related to improve urban development and sanitation, while the externally financed investment projects were directed to ameliorate the education and health sectors. (Figure 5). The size of administrative spending financed by domestic resources is partially explained by the need to cover for operating expenses associated with development projects not financed by donors. This is an area for potential savings.
Figure 5.Senegal: The Composition of Capital Spending, 2009-2013
Source: IMF staff calculations.
B. Challenges for Public Finances under the PSE
5. The PSE requires a stronger revenue performance and a new composition of spending. The fiscal projections included in the PSE for the period 2014 to 2018 aim at increasing public revenues at an average rate of 12.4 percent, and increasing expenditures more slowly at an average rate of 10.2 percent. In perspective, this means that public revenues are expected to increase moderately following their recent trend, but current expenditures will have to grow only at the rate of GDP, which would imply a freeze in real terms. In this context, the PSE plans to accommodate a major increase in public investment between 2014 and 2018, clearly departing from trend projections (Figure 6).
Figure 6.Senegal: Public Spending Composition Under the PSE, 2014-2018
Source: Senegalese authorities, IMF staff calculations.
6. Under the PSE, public spending should be more efficient to maximize its impact on economic growth. While Senegal has been one of the countries with a higher than average level of public spending in the region, average GDP growth in the last decade has been below the WAEMU and LICs averages. Countries like Niger, Benin, Mali or Burkina Faso have attained higher average growth rates, while maintaining lower public expenditures to GDP levels. Two factors may explain this apparent inefficiency of public spending in Senegal. On one hand, the composition of public spending, as classified in the budget, does not reflect the true size of productive spending, which is significantly lower than the headline numbers show. On the other hand, poor planning of public investment has hampered their impact. This reflects insufficient attention to the economic and social costs- benefit analyses through serious feasibility studies. These problems are compounded by poor execution of the capital budget due to a weak public investment management system leading to low efficiency. The consequence of these deficiencies is a poor linkage between spending and economic growth.
7. The PSE requires a better classification of spending. PSE initial projections were based on a classification of spending which mixes current and capital expenditures, and misclassifies part of the wage bill. In principle, the Senegalese budget system classifies current and capital spending in clearly separated chapters, but certain important budget items are mixed. Under the standard classification, current expenditure represented 60 percent of the budget in 2013, and capital expenditure represented the remaining 40 percent. With a proper classification, the shares are quite different. After reclassifying budget execution by nature of spending, in 2013, public consumption amounted to 77 percent of total outlays, and capital expenditures represented only 23 percent. If salaries of contractual teachers, the wage bill of public entities (agencies, universities and hospitals) and the salaries paid under the investment budget executed by the State are added to the remuneration of central government employees, the wage bill increases by 45 percent. Similarly, total consumption of goods and services is actually 46 percent higher when the operating costs of agencies, universities, hospitals and investment projects are added to the use of goods and services by central government ministries. In this context, the government has begun a gradual process to reclassify spending properly from the 2015 budget law onwards.
8. The PSE needs better budget planning and execution. The PSE assumes that budget projections and execution would evolve together, but this has not been the case in the recent past. This needs to be addressed if spending under the PSE is to have the desired economic impact. Since 2010, the authorities’ fiscal projections have been consistently overoptimistic. According to Mauro (2011) the average difference between the approved budgets and their outcomes in Senegal has been around -1 percent of GDP until 2010, and the deviation of the primary balance could reach up to -2 percent of GDP in the subsequent years (Figure 7). This problem became more pronounced in the recent period between 2010 and 2013. The difference between program projections at the beginning of every year and actual year-end outcomes has been especially important in the case of revenues, reaching up to 1.2 percent of GDP in 2013. These deviations have also been very important in the case of capital expenditures, reaching close to 0.7 percent of GDP. To preserve the deficit targets, revenue underperformance has been systematically offset by reductions of capital expenditures. This is the reverse of what is required to support economic development, which requires that investment projects are executed in a timely manner to maximize their economic impact. If the PSE is to succeed, such budget practices will need to be improved to maximize the economic impact of projected investment.
Figure 7.Senegal: Differences Between Approved Budget and Outcomes
Source: IMF staff calculations based on Mauro (2011).
C. Strengthening Senegal’s Public Finances and Its Fiscal Framework
9. Substantive action should be taken to improve the composition of public finances. Additional fiscal space could be secured by increasing revenues, particularly collecting tax arrears. In addition, public consumption should be frozen in real terms through additional efforts to contain the wage bill, rationalize spending on goods and services, and reduce subsidies to the electricity sector. Subsequent savings could thus be invested in improving human capital and public infrastructure as a means to increase the growth potential of the economy.
10. Budget institutions could help restore fiscal sustainability and improve the efficiency of spending. In this context budget institutions are defined as the structures, rules, and procedures that govern the formulation, approval, and execution of government budgets. These institutions include arrangements for understanding the government’s fiscal position, developing a credible consolidation plan, and implementing that plan through the budget process. Recent evidence (IMF, 2014) suggests that countries with comprehensive fiscal reporting, forecasting, and risk disclosure seemed to have a better assessment of their post-crisis fiscal position and prospects. Those with more credible medium-term frameworks, performance budgeting systems, and intergovernmental fiscal arrangements were quicker to announce their adjustment plans and better at protecting public investment within those plans. Finally, countries with more unified and disciplined budget processes tended to implement their plans more effectively.
11. Twelve budget institutions were identified by the IMF as crucial for achieving sustainable public finances and more efficient public spending. These twelve institutions can be grouped in three larger policy areas: (i) understanding the scale and scope of the fiscal challenge; (ii) developing a credible fiscal adjustment plan; and (iii) implementing the plan through the budget process. These institutions and their key design features provided the basis for a 48 questions survey that was completed in cooperation with the Senegalese authorities. The results show that Senegal ranks low in the aggregate ranking of budget institutions, in the lower quartile (Figure 8).
Figure 8.Senegal Overall Index of Budget Institutions
Source: IMF staff calculations.
12. Senegal has the capacity to improve the credibility of its budget. Senegal scores low in assessing fiscal challenges and planning a credible budget, but scores high in the capacity to implement the budget. In particular, Senegal could improve its assessment of the fiscal situation through more comprehensive and timely fiscal reporting, more transparent macro-fiscal forecasts, and greater analysis of fiscal risks. In addition, the credibility of fiscal adjustment plans could also be supported by better designed medium-term frameworks, greater use of expenditure reviews, and stronger intergovernmental fiscal coordination. The single dimension where Senegal stands out from international comparators is in the capacity to implement the budget (Figure 9). But execution of the budget could be strengthened further through tighter controls over supplementary budgets and multi-year spending commitments.
Figure 9.Senegal Components of the Index of Budget Institutions
Source: IMF staff calculations
13. The public investment management system could also be strengthened. Several measures could help generate better value for public money. In the short term, the linkages between the PSE, the macroeconomic framework, and the sectoral strategies of the ministries should be strengthened. In addition, the method to calculate the execution rate of investment should be revised and strict limits introduced to reduce unexpected changes in the composition of public investment. Most importantly, a proper appraisal mechanism is needed to enhance project selection, including systematic application of cost-benefit analysis for large projects. Finally, projects need to be better classified and integrated in a new comprehensive database, in order to enhance the monitoring of new investment.
D. Conclusions and Recommendations
14. Fiscal performance should be enhanced to guarantee the sustainability of public finances. The recent trajectory of fiscal consolidation should continue. Maintaining the commitment to a medium-term deficit target below 4 percent of GDP is fully compatible with the implementation of the PSE. Revenues should keep gaining ground once the tax reform has been implemented while overall expenditures should only grow more moderately. The debt-to-GDP ratio should be kept constant and new investment projects associated with the PSE should be financed with additional revenues or with a reallocation of spending.
15. Improving the composition of the budget could help the PSE succeed. The impact of public spending on growth depends on the cyclical effect of public consumption in the short term and the efficiency of public investment in the medium term. In this context, the ongoing reclassification of spending should continue, as it will help identify areas where savings could be made and programs which should be reinforced. Freezing public consumption, by reducing the growth of the wage bill and cutting unproductive spending, is a crucial aspect of the strategy to gain fiscal space needed to finance additional PSE related investments. At the same time, the central government should accelerate the reform of the agencies, gain control over transferred funds and make sure that a growing number of their activities are aligned with the objectives of the PSE.
16. The quality of public finances could be reinforced through stronger budget institutions. By improving fiscal data and fiscal reporting, Senegal could ameliorate macro-fiscal forecasting and reduce fiscal risks. In addition, fiscal objectives should become more realistic and be embedded in a medium-term budget framework fully consistent with PSE objectives. Program-based budgeting is a crucial reform that would help maximize the economic impact of public finances. In particular, the reform of the public investment management system should be geared towards increasing the number of projects that are fully implemented in a timely and cost-effective manner, especially those related to the PSE. All these actions should be part of a concerted effort to better link the assessment of fiscal challenges with budget planning and implementation.
Prepared by Carlos Mulas-Granados (FAD) with contributions from Olivier Basdevant (MCD) and Renaud Duplay (FAD).
The figures of current and capital spending used in this section are different from published budget figures, as they include a reclassification of current spending which was shown under the capital budget. This reclassification was done in collaboration with Senegalese authorities during a Technical Assistance mission on expenditure rationalization led by the Fiscal Affairs Department (IMF) in February 2014.