My Senegalese authorities wish to express their deep appreciation to staff for the candid discussions and the constructive policy dialogue during the recent second review of the PSI.
Overall, Senegal’s performance under the PSI remains satisfactory. The reforms under the Fund-supported program which are aligned with those set forth in the Plan Sénégal Emergent (PSE) are having a positive impact on the Senegalese economy. Growth rebounded last year to 6.5 percent from 4.3 percent in 2014 and is forecast to further strengthen, in line with the PSE medium-term growth objective.
At end-December 2015, all assessment criteria under the PSI were met. All indicative targets were also met with the exception of the “ceiling on the share of public sector contracts signed by single tender” due to efforts to accelerate the rural electrification program—a key objective of the PSE. The authorities also achieved progress in the area of structural reforms with 6 out of 10 structural benchmarks met at end-December 2015 (corrective measures have since been taken to address the remaining benchmarks).
Creating the conditions for stronger more inclusive growth while enhancing the economy’s resilience to shocks remains one of the key objectives of the PSI and the PSE. To enhance the country’s growth potential, the authorities will continue to rebuild fiscal space and strengthen PFM and governance by increasing the share of public investment in the budget, relative to public consumption, so as to raise the overall stock and quality of capital (both physical and human) and crowd in private investment. The authorities will also pursue their efforts to improve the business environment with a particular focus on restructuring the electricity sector so as to promote SMEs and attract much-needed FDIs.
While the authorities are aware of the potential downside risks to the outlook (highlighted in paragraph 10 of the report) they are also confident that the current policies and reforms under the PSI will enable Senegal to meet its PSE’s long-term objective of sustained and inclusive growth within a more diversified economy.
2. Recent economic developments
Macroeconomic performance in 2015 was strong with real GDP growth rising to a solid 6.5 percent while inflation remained low at 0.1 percent. Senegal’s growth is also broader-based, led by agriculture and industry. The distribution of agricultural equipment and input (measures envisaged under the PSE) contributed to last year’s improvement in agricultural production and productivity. A good rainfall also helped. Investment and exports remain the main drivers of growth. Rising exports, in turn, along with low international oil prices have narrowed the current account deficit from 8.9 percent in 2014 to 7.6 percent in 2015.
The fiscal deficit improved in 2015 to 4.2 percent from 4.8 percent in 2014 thanks to higher fiscal revenues from a buoyant economic activity and also from the authorities’ stepped up efforts to streamline public consumption, especially the wage bill which remained within the budgeted ceiling. Public debt stabilized at 56.3 percent of GDP—well below the WAEMU convergence ceiling of 70 percent.
3. Outlook and medium-term policies
a. Macroeconomic prospects and policies
Senegal’s outlook remains favorable. Growth is forecast to increase over the medium-term and reach the 7 percent target of the PSE by 2018 amid a stabilized macroeconomic environment. Inflation is projected to remain moderate over the medium-term at 1.2 percent and the current account will steadily narrow to approximately 5 percent of GDP. Senegal’s sound financial system and strong control environment will help support higher economic growth rates.
The authorities reiterate their commitment to the 2016 fiscal target. In this regard, they will pursue their efforts aimed at meeting the WAEMU fiscal deficit convergence criterion over the medium-term. To this end, they will continue to streamline public consumption (particularly subsidies and the wage bill) and reduce the public consumption’s share in total budget spending in favor of public investment, as is currently projected for 2016. Additional efforts to raise revenues will focus on enhancing revenue collection and broadening the tax base. More specifically on revenue collection, a new structure for the recovery of problem tax claims will be put in place by end-September 2016. In an effort to broaden the tax base, the customs administration will exercise stricter control over external trade. Its recently established interconnection with the tax department will help boost revenue.
While Senegal’s public debt rose last year to 56.3 percent of GDP, it is projected to steadily decline going forward and revert to 50 percent over the medium-term. The authorities remain committed to a prudent debt management strategy. For the next budget, they will announce a new debt anchor (the debt ratio considered to be sustainable over five years with a commitment to take corrective measures if the ratio is exceeded). The authorities will tap the international capital markets in 2016 or use the non-concessional facilities of multilateral donors for the financing of essential infrastructure investment projects including in energy water and sanitation.
b. Structural reforms
Along with pursuing a prudent debt management strategy, the authorities also intend to enhance the efficiency of their investment projects, including PPPs, and to improve the quality of public investment. Thus they will develop rigorous criteria for the selection and ranking of projects before they can be included in the budget. Strengthening PFM is also key to the authorities’ structural reforms agenda. The first-generation “Treasury single account” (TSA) is being finalized and the second-generation TSA is expected to be operational in June 2016. The authorities will also strengthen PFM through enhanced supervision of government agencies. The signature of performance contracts with three additional agencies is expected by end-May 2016 (structural benchmark).
The authorities will also introduce by end-September 2016 (structural benchmark) a management strategy for the assets of the government and public enterprises. In addition, they will make arrangements to restructure and privatize public enterprises including Suneor, a key player in the groundnuts sector. Steps have been taken to liquidate Senegal Airlines and the authorities are seeking a strategic partner for the new airline that has been created.
The implementation of the Program of Reforms to the Business Climate and Competitiveness (PREAC) is underway with its first phase focusing on the tourism sector (with the extension of the reduced VAT to all tourism activities and the halving of government royalties charged on airline tickets) and on agriculture (with the suspension of the VAT to promote investment in the sector). The second phase of the PREAC, planned for the period 2016-2018 will focus on port services and electricity with the objective of reducing factor and intermediation costs in those sectors. Efforts to further improve the business climate and promote the private sector also include the creation of an economic space within a SEZ with business-friendly regulations. Accelerating the reform of the electricity sector is also key to improving the business climate. The authorities are making progress in this area with additional power capacity totaling 250 MW expected to come on stream in 2016. They are also considering various options for the reform of Senelec (the national electricity company) with the assistance of the World Bank and the AfDB.
In advancing their reform agenda, the authorities will make good use of their peer-to-peer learning activities which have served the country well. Following their interaction with peers from a number of countries, they have put in place a steering committee comprising representatives from line and sectoral ministries tasked with facilitating the implementation of lessons learnt from successful reform experience. In this endeavor, they will continue to work closely with Fund staff
The PSI remains an important instrument in helping Senegal to make good progress towards the PSE objectives. The authorities remain fully committed to the policies and measures under the PSI. They will continue to pursue steadfastly the measures under the arrangement and seek the Board’s approval for the completion of the second review of the Fund-supported program, and for the modification of the end-June 2016 assessment criterion on net floor/borrowing lending.