Race to the Next Income Frontier
Chapter

Chapter 7. Composition and Rationalization of Public Consumption for Emergence

Author(s):
Ali Mansoor, Salifou Issoufou, and Daouda Sembene
Published Date:
April 2018
Share
  • ShareShare
Show Summary Details
Author(s)
Serigne Moustapha Sène

Introduction

During the period 1960–2010, Senegal’s potential growth rate in real GDP was approximately 3 percent (Sène and Thiaw 2011). This rate, adjusted to reflect demographic growth, was insufficient to generate substantial improvements in per capita income. International experience has shown that the countries that have succeeded in emergence have all raised their per capita GDP growth rates to at least 5 percent. In Senegal, the best growth periods have lasted no longer than eight years, but longer-lasting high growth periods would have been required to achieve higher-income status. While the situation has since improved, the country’s growth potential still has not been tapped. Unless Senegal changes course, it will remain in a cycle of insufficient growth and high levels of poverty.

Senegal does not have its own monetary policy, so the budget is the government’s main instrument for steering economic activity and dampening negative shocks, most of which are real. Budget policy is of crucial importance in Senegal, considering that the state accounts for a substantial share of domestic demand. Between 1995 and 2014, public consumption represented 13.9 percent of GDP and public investment accounted for 5.6 percent of GDP. In the medium term, the level of current expenditure should increase, particularly to benefit local governments and social sectors, in which the staffing should reflect population growth.

Taxpayers themselves have a variety of expectations of the budget. In the short and medium terms, they will expect the government to allocate its resources to meet a number of requirements, from the survival of poor, vulnerable households to support for the local private sector and the middle classes, not to mention construction of infrastructure, preparation of human resources, and the undertaking of structural budget reforms. To meet these purposes, budget allocations and the quality of public expenditure must be improved in coordination with the strategic pillars of Senegal’s emergence plan, Plan Sénégal Émergent.

Accordingly, public expenditure will influence activity in the short and medium terms. Even so, budget consolidation consistent with the new budget deficit criterion of 3 percent (in connection with subregional convergence) will not have a neutral effect on business activity. A decline in public expenditure could lead to a reduction in domestic demand. In light of the substantial fiscal discipline in Senegal and in the West African Economic and Monetary Union (WAEMU) countries in general (Moreno-Dodson and Bayraktar 2015), the purpose of this chapter will be to identify a more effective allocation of—and mechanisms to rationalize—current expenditure to enhance technical efficiency in operations.

The first part of this chapter addresses trends in and the structure of public expenditure. This is followed by a review of current expenditures, identifying wages, debt service, maintenance outlays, other purchases of goods,1 the social sectors, and other sectors. The second part of the chapter reviews technical inefficiency, particularly in the preparation and execution phases. The last part proposes reforms to improve resource allocation and strengthen technical efficacy.

Comparative Trends in Public Expenditure

In emerging markets, public expenditure is generally substantial. The economic impact of public procurement is clear, reflecting the state’s intentions, regardless of the mechanisms involved, to expand the domestic productive apparatus. The extent of impact differs, though, reflecting a number of elements, including the state’s share in domestic demand, the efficacy of public expenditure, and the capacity of domestic enterprises to meet demand from the state.

In the wake of the pioneering work by Tanzi and Schuknecht (1997, 2000), many empirical applications have attempted to link public expenditure with a standard aggregate variable such as growth or the standard of living. Figure 7.1 illustrates the linkages between public expenditure and gains in economic growth in Senegal and in aspiring lower-middle-income countries between 1994 and 2013. The selection of a lengthy period of time makes it possible to correct the repercussions of any lags in public expenditure effects.2

Figure 7.1.Public Expenditure and Real GDP Growth, Senegal and Comparator Countries

Source: World Bank, World Development Indicators.

Note: Senegal’s position is shown in red.

As Figure 7.1 shows, Senegal registered a sustained increase in public expenditure without any substantial effects on economic growth.3 Aware of these problems, in connection with the Policy Support Instrument supported by the International Monetary Fund (IMF), especially since 2007, the government undertook reforms to rationalize expenditure. A freeze in real terms was applied to expenditures on goods and services.

From a social standpoint, public expenditure affects households’ standard of living through its direct impact on social services to households and through knock-on effects on wealth and job creation. Poverty or life expectancy4 can be used to gauge this social impact of public expenditure (Figure 7.2). Nevertheless, life expectancy from birth in Senegal is well below the levels in most aspiring countries, while its levels of public expenditure are average.

Figure 7.2.Public Expenditure and Life Expectancy, Senegal and Comparator Countries

Source: World Bank, World Development Indicators.

Note: Senegal’s position is shown in red.

Public expenditure in the social sectors has not produced the expected results. In terms of meeting the needs of the beneficiaries of public education and health services, Senegal’s scores are quite average as compared with those of its African peers (Figures 7.3 and 7.4).5 Shortcomings are especially notable in access to medicine and school textbooks, even though service fees are high.

Figure 7.3.Current Expenditure and Public Investment, Senegal and Comparator Countries

(Percent of total expenditure)

Source: IMF, Government Finance Statistics.

Note: Senegal’s position is shown in red.

Figure 7.4.Public Expenditure in the Social Sectors, Senegal and Comparator Countries

(Percent of GDP)

Source: World Bank, World Development Indicators.

Note: Senegal’s position is shown in red.

Current expenditure occupies a substantial share of public resources in Senegal, as illustrated in Figure 7.3, which covers the period 1994–2013. This situation can be explained by a number of factors, the first of which is clearly the insufficiency of the state’s own resources. The insufficient base for tax assessment and its correlated high rates of tax pressure, a source of tax evasion, have limited the public outlays required to cover minimum levels of government operation, public services, and debt service.

The authorities hope to strengthen the quality and quantity of human resources to ensure that the structural transformation of the economy is successful and to promote development. The state’s efforts to date have not truly produced the expected results, either in the quality of the system’s outputs or in the quantitative requirements of the economy. The diagnostics conducted under the Plan Sénégal Émergent have in fact brought to light a need for more than 196,000 skilled jobs during the first 10 years of the plan’s implementation, including 94,000 jobs for technical training.

Senegal has allocated substantial budget resources to its education sector, in addition to considerable off-budget support from development partners. Substantial public investments have been made in schools, training, and higher education. Figure 7.5 compares the education expenditure per person for different education cycles, both in Senegal and in reference countries.

Figure 7.5.Public Expenditure Per Cycle and Income Per Inhabitant, 2015

Sources: Author’s estimations (Senegal data per secondary school student); and World Bank, World Development Indicators.

Note: The latest reported value for expenditure per secondary school student in Senegal was 29.0 for 2010.

In principle, education expenditure should be rebalanced and shifted in favor of basic education, where current expenditure levels are insufficient. We can also expect conditional transfers to benefit poor households to improve the level of basic education while limiting wastage of resources allocated to this cycle. However, the substantial returns on public expenditure at this basic level should not mean that higher education should be overlooked, not only for the sake of fairness, but to meet the economy’s requirements for skilled workers. In addition to these primary considerations, a detailed analysis of education allocations by cycle has brought to light substantial disparities. For example, personnel expenditure represents nearly four-fifths of the budget for higher education, as against less than 10 percent for administrative and pedagogic management.

Fewer public resources are devoted to the health sector. The level of public health expenditure as a percentage of GDP is far below the levels registered in aspiring countries. Both the level of health infrastructure and the number of health professionals are a far cry from the levels in reference countries, and within Senegal there are also substantial territorial disparities. In addition, the majority of health financing is not socialized. Households in Senegal cover a relatively substantial proportion of their own health care costs, which limits their access to care. There is also scope for improvement in the supply chain for basic medicines.

The inefficient allocation of resources is also reflected in the quality of the infrastructure (Figure 7.6). Yet emerging market status is unachievable in the absence of proper infrastructure. These stylized facts describing public expenditure call for an analysis of the allocation of expenditure by type and heading to identify the causes of inefficiency in public expenditure allocation.

Figure 7.6.Quality of Infrastructure and Access to Electricity, Senegal and Comparator Countries

Source: World Bank, World Development Indicators.

Note: Senegal’s position is shown in red. Quality of infrastructure on the horizontal axis is a rating ranging from 1 (very low) to 5 (very high).

Structure of Current Expenditure

The structure of current expenditure in the medium and long terms reflects the relative importance the government assigns to the different sectors. The concept of duration is very important, since the shocks affecting the economy and society during a given period can lead to a reallocation of expenditure to dampen the effects of shocks on the productive sectors or households. Figure 7.7 compares the structure of the major current expenditure items in Senegal and in middle-income countries.

Figure 7.7.Structure of Current Expenditure, 1994–2003 and 2004–13

(Percent of total expenditure)

Source: IMF, Government Finance Statistics.

During the past 20 years, the wage bill has declined, as a percentage of wealth created within the economy, from 6.5 percent of GDP to 6.3 percent. The government has in fact taken steps to freeze wage supplements and has intensified its control of overtime. With technical assistance from the IMF in connection with the Policy Support Instrument, selective freezes on recruitment in nonpriority areas (security and front-line staff in education and health) are on course. However, the wage bill is still substantial in light of budget resources. As a result of this constraint, it is impossible to create fiscal space to support important projects and assistance for the most vulnerable households. Premiums are paid to staff, particularly in the health sector, regardless of the level of performance during the period considered. These lump-sum payments are designed to compensate for wages that the workers’ unions consider to be insufficient. One can expect this system to lead to complacency among certain staff and to affect the quality of service.

Administrative costs are excessive in the health sector (13 percent in 2011). This affects the other expenditure categories. Accordingly, it affects funds allocated to continuing education in the health sector, in which technology is rapidly changing and for which the allocation would seem to be insufficient, and the size of the wage bill leaves little scope for investment. At all levels of the health pyramid, from hospitals providing state-of-the-art services to drop-in clinics where care is dispensed through second- and third-tier institutions, the medical system leaves much to be desired. It is difficult for local units of government, to which the central government has transferred health infrastructure management, to recruit qualified staff and medical specialists. Equipment maintenance in the health system also requires urgent attention.

Limits on increases in remuneration and staffing levels are not short-term policies. Social dialogue, as intended and practiced by the national committee, and incentives such as early retirement, provide no guarantees of immediate success, particularly in connection with their substantial budget cost to the state. The wage bill must be derived from a medium-term framework that links wage increases and bonuses to variables such as social service requirements, support to the productive sectors, and budget resources. A multiyear review would be advantageous.

Moreover, there is volatility in the share of operating and maintenance expenditure. Maintenance and supply expenditure entails annual outlays recorded in the annual budget associated with activities related to the delivery of public service and infrastructure maintenance. In principle, a high ratio is indicative of the importance the government attaches to maintaining productive capital, although a decline in this level is not necessarily indicative of a rationalization of expenditure. During the preparation of the initial draft budget for 2015, any expenditure deriving strictly from current operations was removed from the capital budget, or vice versa. Errors in classification might have led to an overestimation of the share of maintenance and operating expenditure in the overall budget. Moreover, the same expenditure impact exercise will be used in the coming years.

Targeting issues have been long-standing concerns in social protection. Water and electricity subsidies are relatively high in Senegal, although access rates remain low. Two major factors are at work: First, the share of subsidies in total expenditure is not high in Senegal, where patterns are similar to those found in emerging markets during the past 20 years. However, the trends are not linear. We observe a substantial variation in subsidies in Senegal as against reference countries (Table 7.1).

TABLE 7.1Subsidies and the Standard of Living
Access (percent of population)
Subsidies

(percent of total

expenditure)
Drinking WaterElectricity
Total

Population
Rural

Areas
Total

Population
Rural

Areas
Social

Coverage
Senegal14.177.867.356.526.610.3
Middle-Income Countries19.593.882.290.482.854.3
Source: World Bank.Note: Social coverage (couverture sociale, in French) refers to social security or social protection. It is a form of comprehensive social welfare. Social coverage for middle-income countries is for those countries with available statistics.
Source: World Bank.Note: Social coverage (couverture sociale, in French) refers to social security or social protection. It is a form of comprehensive social welfare. Social coverage for middle-income countries is for those countries with available statistics.

For example, the energy crisis near the end of 2010 placed substantial pressure on public finance. Moreover, Senegal is a net importer of petroleum products. Its energy subsidies are intended primarily for the purchase of fuel, particularly when there are sharp rises in world prices, to offset the public electricity company’s operating losses and to limit the impact on energy prices (primarily those for thermal energy). To limit the effects of the surge in world prices on the productive sector and to prevent risks of social unrest, the state granted substantial subsidies to the energy sector, which represented 1.8 percent of GDP during 2007 and 2012.

Similarly, food subsidies have been quite volatile, ranging from zero in 2006, to CFAF 21 billion in 2007, to CFAF 46 billion in 2008, and back to zero in 2009. Subsidies in agriculture are frequently granted to the rural sector for the purchase of food products to cover preharvest food shortages. The state also grants subsidies to modernize agricultural equipment, with a view to reducing sale prices to producers. However, analysis shows that rural productivity has not improved in structural terms. One cannot rule out suspected misappropriations of these subsidies, in light of the insufficient productivity gains observed in rural areas.

In light of the patterns illustrated in Figures 7.8 and 7.9, one cannot reject the assertion that subsidies are countercyclical. In fact, the decline in food production and the surge in the price per barrel of petroleum—two of the three largest shocks that have generally affected the Senegalese economy—along with food shocks at the world level, led to a resurgence in direct subsidies. In addition to direct subsidies to the energy sector, the state substantially increased food support, particularly for the benefit of rural areas. Water and electricity subsidies, which maintain consumer prices and improve household welfare, represented an average of nearly 7 percent of fiscal revenue between 2004 and 2011, with peaks of 22 percent in 2006 and 11 percent in 2008 and 2011. Energy subsidies exceeded current and capital expenditure on health during these years.

Figure 7.8.Changes in Food Production and Subsidies and Transfers, 1995–2013

(Percent)

Source: Senegalese authorities (Ministry of Economy, Finance and Planning).

Figure 7.9.Changes in Petroleum Prices and Subsidies and Transfers, 1995–2013

(Percent)

Source: Senegalese authorities (Ministry of Economy, Finance and Planning).

However, if one considers alternative uses, the conclusions are less clear. The opportunity cost of subsidies is in fact high in Senegal, in light of the lack of a resource deficit in social sectors such as health and education, which also register a deficit in the supply of services. Of course, while subsidies help relieve social tensions and contain increases in production costs when world prices for energy and food products fluctuate, they alter public expenditure forecasts and crowd out other key social expenditure for households.

In any case, targeting efforts should be strengthened, particularly those focused on rural populations. Through rationalization, Senegal should be able to improve access rates, including through lower costs, with subsidy levels comparable to those of other countries in the same group, that is, lower-middle-income countries. With a gradual approach, Senegal could benefit from first following the example of these countries before shifting its aim for the long term toward the example of higher-middle-income countries.

Technical Inefficiency in Current Expenditures

While most of the preceding stylized facts bring to light the problems of allocating public expenditures in Senegal, it would be ill advised to infer solutions involving a reallocation of budget appropriations. In fact, beyond the functional distribution of expenditures, the process of using expenditures should truly be designed to affect outcomes.

Upon examining the settlement laws, it becomes clear that the authorities have made substantial progress in forecasting expenditures.6 During the past five years, discrepancies between the initial budget and final expenditure outturn have been minimal. It would seem that budget discipline on the expenditure side is under control.

Table 7.2 highlights the reliability of the forecasts of the major current expenditure lines, with the exception of transfers, that have some connection with the economic cycle. However, the accuracy of the budget leaves scope for improvement, even though there are only minor discrepancies between the budget entries and the effectively executed expenditure in the major current expenditure items. This derives in part from the supplementary budget laws, which are designed to adjust the initial budget orientations during the fiscal year and to correct any gaps in preparation. However, efforts must go beyond the interpretation of statistics.

TABLE 7.2Discrepancies between Initial Budget Expenditure and Authorized Expenditure(Percent)
Public Debt0.7
Staff Expenditure−0.8
Operating Expenditure−3.7
Current Transfers12.6
Source: National authorities.
Source: National authorities.

In fact, adjustments during the fiscal year—that is, the reallocation of expenditure items initially recorded on one line to another line—are substantial, as was emphasized in the 2011 Public Expenditure and Financial Accountability (PEFA) report on financial performance, budget discipline, and transparency (Achour, Fischer, and Lecallo 2011). The Organic Law on Budget Laws7 provides mechanisms to adapt and redirect expenditures within the same chapter or article. While the overall envelopes for each major expenditure category remain substantially intact, changes made in the type of expenditure can have a substantial impact on the real economy. Such changes are as harmful as those made during execution.

In addition to problems connected with classification,8 two other changes affect the efficiency of the expenditure envelopes: amendments to the composition of the expenditures of ministerial departments and reassessments of initial credits in connection with the supplementary budget laws.

Moreover, the infra-annual profile is worthy of analysis. Expenditure execution during the latter half of the year, or at any point that is not early enough during the year (as is often the case), leads to an immediate reduction in the impact on real activity during the year in progress. From a long-term standpoint, the problem of mismatching impacts is partially canceled out, although expenditures identified for one year can also be canceled out as a result of other factors, which can derive from the economic cycle and the macroeconomic framework during a specific period. The impacts of such mismatches, however, can also be less substantial than expected.

Moving Toward Reforms to Rationalize Public Expenditure

Budget management quality in Senegal has not improved during the past decade (Table 7.3). Despite many innovations, particularly in connection with the Program on Coordination of Budget and Financial Reforms (PCRBF), improvements are still pending. Neither public expenditure accounting nor tax collection, with the objectives of poverty reduction, has improved during the period.

TABLE 7.3Quality of Budget Institutions(1–6 scale)
Budget ManagementBudget Inclusiveness
2005201420052014
Senegal3.53.53.53.5
Sub-Saharan African Countries Not Rich in Natural Resources2.93.13.33.3
Source: Country Policy and Institutional Assessment.Note: Higher values indicate higher-quality institutions.
Source: Country Policy and Institutional Assessment.Note: Higher values indicate higher-quality institutions.

The distortions observed in taxation9 have not been corrected to reflect the allocation of expenditure. Problems in targeting subsidies and in allocating resources to the social sectors, as discussed in the first part of this chapter, clearly call for reforms to make public expenditure more efficient, particularly since public expenditure adjustments with respect to budget revenue are modest.10

The current context for undertaking such reforms in Senegal is not one of austerity. In connection with the political economy of reforms, one must know how to reconcile often-conflicting interests in a context in which restoring growth and improving the macroeconomic framework have led to further surpluses.

Budget Accuracy and Rationalization of Expenditure

Budget discipline is essential from the standpoint of economic actors. Whether the financial markets, investors, households, or development partners are involved, diligent execution of the expenditure initially recorded in the budget reflects a clear budget policy stance. This is tantamount to budget accuracy, which goes hand in hand with credibility, that is, the perception among economic actors that the government has the capacity and the willingness to conduct successful budget policy as it has defined.

According to the principle of budget accuracy, the government must clearly communicate the budget options available for the forthcoming three to five years to the unions, primarily in education and health, the two major sources of jobs in the public sector. Containment of the wage bill might follow the example of Brazil, where the parliamentary representatives authorize the personnel expenditure limits for a three-year period. Similarly, a number of disparities are observed in the education sector. Many of the teachers who have been recruited have not in fact been teaching. Short-term measures must be executed immediately to redeploy staff on unnecessary detachments.

Table 7.2 illustrates the substantial gap between the initial budget projections and expenditures, as recorded in the budget category “Transfers and Subsidies.” Of course, such transfers are quite sensitive to the economic cycle, although the beneficiary public institutions must have internal mechanisms such as insurance policies to dampen any shocks that may occur. Moreover, private economic actors must sustain additional costs to dampen the shocks. These two factors are addressed in the next two subsections. Budget transparency was obstructed by the widespread use of decrees providing budget advances around 2010. The substantial progress observed during recent years must therefore be maintained.

For some time, the centralization of authorization functions has been preventing the sectoral ministries from proposing agendas for expenditure that reflect their specific requirements. The ministries are in a better position to know and understand the rate at which the resources recorded in their budgets are used. Inefficiencies stemming from the centralization and coordination of the processing of order requests have been potential sources of delays harming the quality of public expenditure. A correction of this anomaly, expected to take effect in connection with the new WAEMU directives scheduled for 2019, should make expenditure more effective. Senegal itself has greatly modernized its expenditure management and public accounting tools.

The multiyear economic and budget programming paper (DPBEP) deriving from the Organic Law on Budget Laws is subject to budget orientation discussions before Parliament. The purpose of this exercise is to promote budget transparency by giving the government the opportunity to present to the national representatives its economic and social policy choices over a three-year time frame. Because modern fiscal management can be difficult to contain within the limited framework of a single budget exercise, the budget law must be supplemented with strategic papers describing a longer time frame.

The adoption of this medium-term sectoral expenditure framework represents substantial progress, as it makes the ministries’ expenditures for the coming years more visible. After all, the ministries must all underpin their budgets with sector policy papers to ensure that their program budget approaches are successful. This will be a requirement beginning 2019 under the WAEMU directives. More rigorous supervision mechanisms must also be adopted under the directives, to avoid substantial changes in the initially adopted execution. In South Africa, the government has made great efforts to define a rule thwarting the temptation to spend more in connection with cyclical revenue increases. That measure was applied through a medium-term expenditure framework.

More Effective Allocation of Current Expenditure

In general, higher education programs and courses must be more effectively aligned with the requirements of the economy. The supply of technical and professional training, including continuing education, has yet to be expanded and must be rescaled. Positive discrimination is required in favor of the Ministry of Professional Education to direct the public supply of higher education toward the scientific, technical, and professional sectors that are still in the minority. Expenditure efforts must also be extended to the intermediate levels.

Much is at stake in the effort to increase access to learning, which has been broadly improved in recent years, but priority must now be given to quality and efficacy in education. In this connection, the accomplishments of the current program for quality improvement, equity, and transparency, which has focused on the lower levels of schooling, are to be replicated for other levels to provide the economy with the human resources compatible with its aspirations for emergence. Widespread use of stipends and aid in the first and second levels of higher education has led to substantial distortions and must be reviewed to reflect the country’s human resource requirements under the Plan Sénégal Émergent.

Moreover, it is an urgent matter to improve medium-term forecasting of staffing and the wage bill by accelerating the computerization of procedures, including administrative instruments, to drastically reduce the lag between the date recruitment instruments become effective and when they are reflected in the wage bill. Wage adjustments, not necessarily at annual intervals, can be established at a level below the inflation rate to enable the state to cut back slightly on real household income. For that purpose, base or indicator-based wages must be reviewed to better reflect the skills of the staff members, their grades, and their positions. It is also clear that further bonuses for staff working outside the capital and major urban areas would make it possible to reduce territorial disparities in areas that are not competitive enough.

Efforts to reschedule the external debt, undertaken a number of years ago, are encouraging. This policy helps reduce the debt service constraints on public finance as a result of closely spaced and substantial maturities. While the average maturity for debt arranged with the financial markets was subject to substantial relief, service on domestic debt in connection with treasury notes and bonds and other bank borrowing (which totaled CFAF 400 billion in the draft initial budget law for 2015) affects the budget. Domestic debt maturities must also be extended.

The precautionary reserve as an incentive measure for reforms is commendable. After all, some sectors are easier to reform than others. This is true for the health and education sectors, in which the political cost of the transition is tremendous. Other ministries might be more successful in implementing structural reforms, leading to a commensurate increase in their chances of benefiting from the reserve. Accordingly, it would be preferable to limit competitive access to the reserve to those ministries for which reforms have been clearly identified for execution in the short term.

More Effective Management of the Parastatal Sector and State Holdings

Management of the parastatal sector is assigned to a dedicated entity based within the treasury. Widespread use of performance agreements should lead to an improved use of the public resources allocated to these institutions.

Budget execution in most institutions (80 percent in 2014) has not been fully satisfactory. The state’s formal or implicit guarantees in favor of these government agencies are also a major source of concern. Nonbank debt (supplier, tax, and social debts) in these agencies alone exceeded CFAF 58 billion (according to the public treasury) as of March 31, 2015. A welcome measure to tamp down this problem would be more widespread use of performance agreements that set expectations for the medium term with parastatal institutions. This is a mechanism that would link the approval of resources to multiyear objectives and improvements in the legal framework governing agencies’ budget execution. The government should not simply wait until the end of the period to determine how completely objectives have been achieved and then select appropriate measures. Performance agreements should be flexible enough to enable corrective measures to be applied during the fiscal year.

Rationalization would also require the state to avoid delays in paying counterparts for debts owed to parastatal institutions and affecting the supply of care. This is especially true for the massive debt to public hospitals and for benefits provided primarily to the aged. The main reasons are that projected counterpart payments have largely been exceeded and the state has not rigorously controlled requests for reimbursement from the hospitals. A simple arrangement for the control of reimbursement statements would make it possible to reduce the burden on public expenditure. In this connection, the initiative by authorities to establish a parastatal sector observatory to improve the reliability and accessibility of financial information is a praiseworthy effort.

Even with those improvements, some government institutions will need to undergo financial restructuring, according to the supranational rules of the Organization for the Harmonization of Business Law in Africa. When agencies must be eliminated, the budget cost for the process can be so great that the decisions are perpetually postponed. According to international experience, depending on the political cost, the state can adopt an elimination and restructuring agenda with financial support from development partners. Some exceptional resources have also been used as severance pay. During the transition phase preceding such reorganization, capital transfer payments to institutions pending elimination have been discontinued.

There is also a component of public expenditure linked to Senegal’s holdings in enterprises, most of which are large, operating in sectors considered to be strategic. The state’s interventions, outside of capital subscriptions, are generally in the form of emergency financial support and waivers of duties or taxes on both operations and profits, as well as capital transfers. The budget cost for all of this is substantial when one adds cross-debts. For more effective management of the state’s holdings as provided under the Plan Sénégal Émergent, the Senegal Sovereign Fund for Strategic Investments was established, among other purposes, to manage the state’s holdings in essentially new activities. The state intends to accompany high-growth-potential activities until maturity. In the medium term, better synergy is expected between management of the parastatal sector and the operating area of this sovereign fund.

Rationalization of Public Stabilization Expenditure

Negative shocks have placed substantial pressure on public expenditure. Market failures and the lack of appropriate adjustment mechanisms through monetary policy have accentuated the pressure on the budget as a buffer mechanism. Adjustment to shocks through taxation is a limited option, because the tax assessment base is narrow and the resulting level of domestic resources is low. As a result of all of these considerations, Senegal makes substantial use of public expenditure to reduce the impacts of shocks on the economy and on households.

The government clearly must try to improve transparency in the markets for mass consumer goods, so that market mechanisms themselves can serve to dampen many of the shocks. The fight against current speculative11 practices by some traders could be systematized; such frequent practices could amplify the imported shock when world prices increase. By strengthening the intelligence system in this area, the government would need only marginal intervention to reduce the impacts of shocks, primarily on the most vulnerable households. Moreover, the building of public security stocks, designed for use in flooding the market if products should be withheld by traders, should contribute to the cross-subsidy. This direct government intervention is expected to decline as local production increases, particularly for rice, sugar, oil, and milk. Of course, the opportunity cost of purchasing and establishing the stocks must be considered.

In a country with a high prevalence of poverty combined with a substantial risk that many households will become poor in the event of shocks, public expenditure should clearly serve as a shield for vulnerable households. After all, prolonged government intervention, or direct or indirect payments to households that are not commensurate with their income, may have contrary effects, prolonging assistance and crowding out expenses, even for social services and infrastructure. Regular updating of a database on beneficiaries of public assistance, particularly money transfers, and periodic assessment of results in terms of the welfare of inactive persons and training for active persons, notwithstanding the technical considerations, are necessary. More generally, it is in Senegal’s interest to learn from its own experience so that it can adopt a true national policy for targeting social safety nets.

Moreover, public expenditure should be adjusted when a fiscal stabilization mechanism is insufficient to reduce the impacts of shocks on the productive sector and households. In this case, the purpose is to reduce expenditure. Issoufou and others (2014) find, among other things, that reduced public consumption of nontradable goods would lead to a decline in private investment and in real GDP, while a decline in public consumption of tradable goods would lead to an increase in private investment and real GDP. Senegal cannot afford to ignore this simulation exercise, which analyzes the effects of expenditure adjustments in case of major, real shocks or persistent declines in budget revenue, with a view to ensuring the structural transformation of the economy and protection of household welfare. This à la carte adjustment would avoid budget cuts that can be disastrous for certain business sectors.

More Effective Use of External Resources

External resources, in the form of development aid or loans, must be put to more effective use to enhance the effects on growth and poverty reduction. The new approach adopted by the authorities to allocate funds from financial markets to investments leads to a reduction in the elasticity of current expenditure in connection with external funds, all other things being equal. Financing agreements signed since the beginning of the Plan Sénégal Émergent reflect the strategic priorities of the emergence strategy and are compatible with the macroeconomic framework. Oversizing is not currently a real problem, and the risks of economic overheating are minimal. Accordingly, the focus is on management of external resources. At this point, the analysis is sectoral.

The execution rates for public expenditure financed with external resources are generally not high. This became evident in the annual review conducted with various donors.12 The operational framework of interventions by donors should clearly be adjusted. The authorities should work with the donors, most of which have their own specific areas of intervention, to examine ways to simplify and accelerate disbursements.

It is a difficult matter in some sectors to observe the budget resources made available to them. This is clear in the budget execution statement produced each week by the staff of the Ministry of Finance. These sectors will undoubtedly have the same problems in absorbing external resources, not including budget support. The training of administrators, disbursement officers, and accountants in the ministerial departments must be strengthened so that the different activities for projects will be more effectively controlled and directed.

Conclusion

The role of the modern state in emergence goes beyond taxation and budget allocations and extends further to control and regulation. After all, a more effective allocation of expenditure and technical efficiency enable the budget to better contribute to the economic and social development objectives in an economy such as Senegal, which does not have its own monetary policy.

Senegal is committed to pursuing the rationalization of public consumption expenditure to promote capital expenditure on human resources and infrastructure. The logic of ongoing improvement is encouraging and is preferable to the pursuit of high-level optimization. In fact, internal resource constraints leave no choice other than to find the means to rationalize expenditure to achieve growth objectives and thus accelerate progress toward emergence.

At the beginning of the 2000s, the composition of public expenditure by type and by intersectoral distribution generally reflected the priorities announced in the government’s policy papers, particularly in connection with poverty reduction strategy. Up until that time, implementation of the Plan Sénégal Émergent was part of this framework of perfect control of the overall allocation, as shown in the five-year action plan for priority projects and activities. The results in the area of economic growth and social welfare were disappointing, and the inefficacy of expenditure was attributable to intrasectoral allocations as well as to inefficient expenditure execution. The operational recommendations made in this chapter have aimed, among other things, to help improve the distribution and execution of expenditure.

Wastage of budgetary resources could be reduced through improved efficiency. The conclusions of the study on remuneration in the civil service13 should be more widely publicized in order to create a strong consensus on the need to rationalize the wage bill. Wage increases should be more closely tied to performance, and greater efforts should be made to identify and promote the most deserving workers.

The precautionary reserve should be extended beyond capital expenditure, without prejudice to the operation of the sectoral ministries that are recording structural delays in the execution of the reforms. Further domestic resources must be mobilized for that purpose.

Finally, despite the substantial share of education and health services expenditures in the public budget, the balance of the costs financed by households is too high. Recent initiatives aimed at the pooling of resources are encouraging and should be replicated, especially to cover more households in rural and suburban areas.

Efforts to reinforce infrastructure investments should be strengthened to create a position as a subregional hub for industry and services as described in the Plan Sénégal Émergent. Expenditure on development of dedicated areas is a prerequisite for attracting investors in tourism, health, and industry. The use of public-private partnership agreements should be explored further to reduce debt service pressure on public finance. Demand for public services can be expected to increase with per capita income. Moreover, the national civic services should be used more effectively to fight unemployment and to provide basic services to households, particularly in rural areas.

Last, rationalization of public expenditure will make it possible to generate further budget margins to finance the Plan Sénégal Émergent. Accordingly, the increase in public funds to finance important projects and the knock-on effects on private investment must be accompanied with more effective investments. As a result, there is a need for reform in the process of selecting and executing investments as well.

References

    AchourA.D.Fischer andD.Lecallo.2011. “Cadre de Mesure de la Performance de la Gestion des Finances Publiques au Sénégal [Performance Measurement Framework of Public Financial Management in Senegal].Public Expenditure and Financial Accountability (PEFA)Washington, DC.

    Acosta-OrmaecheaS. andA.Morozumi.2013. “Can a Government Enhance Long-Run Growth by Changing the Composition of Public Expenditure?IMF Working Paper 3/162International Monetary FundWashington, DC.

    DevarajanSV.Swaroop andH.-F.Zou.1996. “The Composition of Public Expenditure and Economic Growth.Journal of Monetary Economics37(2): 31344.

    DiagneY. S.2014La crédibilité budgétaire au Sénégal[Budget Credibility in Senegal]. Economic Research and Forecasting Directorate (DPEE) Study 30Ministry of Economy, Finance, and PlanningDakar, Senegal.

    DiagneY. S. andA.Fall.2009. “La spéculation contribute-t-elle à expliquer la dynamique des prix des produits alimentaires au Sénégal?[Does Speculation Help Explain Price Dynamics in Food Products in Senegal?]. Economic Research and Forecasting Directorate (DPEE) Study 11Ministry of Economy, Finance, and PlanningDakar, Senegal.

    DuplayR.N.EndB.Wiest andB.Lévy-Frébault.2015. “Construire un ministère stratège pour accompagner l’émergence du Sénégal[Building a Strategic Ministry to Accompany Emergence in Senegal]. International Monetary FundWashington, DC.

    FallA. andS. M.Sène.2010. “Taxation optimale des ménages et réformes fiscales au Sénégal[Optimal Taxation for Households and Tax Reforms in Senegal]. Economic Research and Forecasting Directorate (DPEE) Study 18Ministry of Economy, Finance, and PlanningDakar, Senegal.

    FallA. andK.Thiaw.2012. “Productivité des dépenses publiques et croissance économique dans l’UEMOA: une analyse bayésienne sur données de panel[Productivity of Public Expenditure and Economic growth in the UEMOA: A Bayesian Analysis of Panel Data]. Economic Research and Forecasting Directorate (DPEE) Study 21Ministry of Economy, Finance, and PlanningDakar, Senegal.

    International Monetary Fund. 2014a. Fiscal Monitor—Public Expenditure Reform: Making Difficult Choices.Washington, DC.

    International Monetary Fund. 2014b. Government Finance Statistics Manual 2014. Washington, DC.

    International Monetary Fund. 2015a. “Making Public Investment More Efficient.Washington, DC. Unpublished.

    International Monetary Fund. 2015b. “Sénégal: rationalisation de la dépense publique et gestion de l’investissement public» [Senegal: Rationalization of Public Expenditure and Management of Public Investment]. Washington, DC.

    IssoufouS.E. F.BuffieM. B.Diop andK.Thiaw.2014. “Efficience des investissements publics dans le secteur de l’énergie et ajustement budgétaire au Sénégal[Efficient Energy Investment and Fiscal Adjustment in Senegal]. IMF Working Paper 14/44International Monetary FundWashington, DC.

    Moreno-DodsonB. andN.Bayraktar.2015. “Public Spending and Growth in an Economic and Monetary Union: The Case of West Africa.MFM Discussion Paper 6World BankWashington, DC.

    SèneS. M. andK.Thiaw.2011. “La production potentielle du Sénégal: une approche mixte DSGE–fonction de production[Potential Production in Senegal: A Combined Dynamic Stochastic General Equilibrium—Production Function Approach]. Economic Research and Forecasting Directorate (DPEE) Study 19Ministry of Economy, Finance, and Planning DakarSenegal.

    TanziV. andL.Schuknecht.1997. “Reconsidering the Fiscal Role of Government: The International Perspective.American Economic Review87(2): 16468.

    TanziV. andL.Schuknecht.2000. Public Spending in the 20th Century: A Global Perspective.Cambridge, England: Cambridge University Press.

    World Bank. 2007. “Rapport sur la performance de la gestion des finances publiques[Report on the Performance of Public Financial Management]. Washington, DC.

    World Bank. 2012. “Développer les outils des institutions de l’Etat pour une gestion plus efficiente de la dépense publique au Sénégal[Developing Tools for Government Institutions for More Efficient Public Expenditure Management in Senegal]. Washington, DC.

    World Bank. 2013. “Republic du Senegal: évaluation des filets sociaux[Republic of Senegal: Assessment of Social Safety Nets]. Washington, DC.

According to the literature, the breakdown of current expenditure might not support the widely shared conclusion that an increase in such outlays, as compared with capital expenditure, would have a negative effect on growth. See, for example, Acosta-Ormaechea and Morozumi 2013 and Devarajan, Swaroop, and Zou 1996.

Biases in connection with expenditure outside the central government should also be maintained.

Fall and Thiaw (2012) have demonstrated that inefficient public expenditure is prevalent in the West African Economic and Monetary Union (eight countries including Senegal) as compared with other regional groups in Africa.

Life expectancy was selected because the international data on poverty were insufficient.

Afrobarometer experiences with services.

At the end of each fiscal year, a settlement law (loi de règlement) determines the final amount of government expenditure and revenue, ratifies the regulatory operations that affected the budget execution, determines the budget result, and describes the treasury operations.

Loi organique n° 2016-34 du 23 décembre 2016 modifiant la loi organique n° 2011-15 du 08 juillet 2011 relative aux lois de finances [Organic Law 2016-34 of December 23, 2016, modifying Organic Law 2011-15 of July 8, 2011, Relating to the Finance Acts (aka Budget Acts)].

Expenditure strictly deriving from operations has recently been reallocated to operations.

Fall and Sène (2010) consider all direct and indirect levies applied to households and show that the taxation rate is rapidly increasing for the most vulnerable household sectors and is stabilizing for medium- and high-income households.

Diagne (2014) finds that a 1 percent increase in public expenditure is accompanied by 0.56 percent in additional budget revenue.

Diagne and Fall (2009) demonstrated in connection with the food crisis around the end of 2010 that traders were interested in holding a certain quantity of speculative stock so that they could increase their profits when market prices reached a certain level. This induced a loss of real revenue for households.

These exercises are usually conducted on an annual basis with the group of technical and financial partners and bilaterally with some major donors.

In December 2014, the government commissioned a study on pay in the public service to make it more attractive, fair, and equitable. The conclusions were presented in a November 2015 workshop in the presence of all the actors. This is a very interesting diagnosis that has highlighted the weaknesses.

    Other Resources Citing This Publication