Senegal
Background Papers and Statistical Appendix
Author: International Monetary Fund
Publication Date:
24 Jul 1995
eISBN:
9781451833829
Language:
English
Keywords:
ISCR; CR; Senegal; public enterprise; price; GDP; private sector; consumer goods; labor market; trade regime; CFA franc; growth performance; Price controls; Public sector
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This Background Paper and Statistical Appendix examines the factors that may have accounted for Senegal’s growth, savings, and investment performance, focusing in particular on the response to adjustment policies since the mid-1980s. It provides an overview of the long-term economic performance in Senegal. The paper describes the initial conditions that led to an economic crisis in the late 1970s and early 1980s, and discusses the main obstacles to higher sustained growth. The paper also briefly examines the adjustment strategy implemented since the mid-1980s.

Abstract

This Background Paper and Statistical Appendix examines the factors that may have accounted for Senegal’s growth, savings, and investment performance, focusing in particular on the response to adjustment policies since the mid-1980s. It provides an overview of the long-term economic performance in Senegal. The paper describes the initial conditions that led to an economic crisis in the late 1970s and early 1980s, and discusses the main obstacles to higher sustained growth. The paper also briefly examines the adjustment strategy implemented since the mid-1980s.

I. Response of Output, Investment, and Savings to Adjustment Policies. 1978–93

1. Introduction

Since the early 1980s, Senegal has carried out a series of adjustment programs, which have been supported by stand-by arrangements, as well as by arrangements under the structural adjustment facility (SAF) and the enhanced structural adjustment facility (ESAF). 1/ These programs have also been supported by the World Bank with various structural and sectoral adjustment loans, and by other multilateral and bilateral creditors. While the ’policies pursued under these programs have contributed to a reduction in macroeconomic imbalances, economic growth has remained erratic and subdued, and savings and investment ratios have been relatively low (Chart 1). After a short-lived export boom in the mid-1970s, during which real GDP rose by 5 percent a year, economic growth averaged only some 2 percent a year over the period 1978–93 and did not keep up with the 2.8 percent population growth; the investment to GDP ratio was only 13 percent of GDP; and gross domestic savings did not exceed 5 percent of GDP on average (Tables 1 and 2).

Chart 1
Chart 1

SENEGAL SELECTED ECONOMIC INDICATORS, 1974–93

Citation: IMF Staff Country Reports 1995, 071; 10.5089/9781451833829.002.A001

Sources: Data provided by the Senegalese authorities; and staff estimates.
Table 1.

Senegal: Summary of Key Economic Indicators, 1974–93

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Sources: Data provided by the authorities; and staff estimates.

Including public enterprises and stock-building.

Public and publicly guaranteed debt, including Fund credit and Central Bank liabilities.

In percent of exports of goods, services and private transfers; after debt rescheduling and debt cancellation.

1976–93.

1976–77.

Table 2.

Senegal: Key Economic Indicators. 1978–93

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Sources: Data provided by the Senegalese authorities; and staff estimates.

Including public enterprises and stock-building.

Public and publicly guaranteed debt, Including Fund credit and Central Bank liabilities.

In percent of exports of goods, services and private transfers; after debt rescheduling and debt cancellation.

This paper examines the factors that may have accounted for Senegal’s growth, savings, and investment performance, focusing in particular on the response to adjustment policies since the mid-1980s. Section 2 provides an overview of the long-term economic performance in Senegal. Section 3 describes the initial conditions that led to an economic crisis in the late 1970s and early 1980s, and discusses the main obstacles to higher sustained growth. Section 4 briefly examines the adjustment strategy implemented since the mid-1980s and focuses on the impact of macroeconomic and structural policies on growth, savings, and investment, as well as on the role of exogenous shocks. 2/ Finally, Section 5 draws some conclusions from the analysis. Annex I provides empirical evidence on the determinants of growth, and nongovernment savings and investment.

While Senegal has a comprehensive macroeconomic data base, there are a number of deficiencies, including the lack of a reliable data base on sectoral developments and factors of production. 1/ Therefore, meaningful quantitative relationships between growth, investment, savings, and their determinants are difficult to establish. Given these limitations, the analysis presented here is largely qualitative in nature, and relies heavily on existing work on the determinants of growth, investment, and savings in developing countries, as well as on previous Fund staff reports and various World Bank documents. Nonetheless, an attempt was made in Annex I to provide some empirical estimates, but the results have to be interpreted with caution.

2. Long-term economic performance

Senegal is a Sahelian country with a poor resource base, a high population growth rate, and a low per capita income (estimated at US$478 in 1994). The primary sector in the economy, which contributed about 21 percent to real GDP in the early 1990s, is the source of employment for the bulk of the population. About half of its value added originates in agriculture, and its contribution to growth has depended heavily on weather conditions, and has therefore been erratic (Table 3). The two main cash crops, groundnuts and cotton, are important but volatile foreign exchange earners, depending heavily on the volume of rainfall and changes in world market prices. Since the mid-1980s, the fishing sector has emerged as Senegal’s principal export activity. The secondary sector, which accounted for close to 19 percent of GDP in the early 1990s, encompasses a variety of economic activities, but still depends to a large extent on agro-industries. The growth of this sector averaged over 3 percent a year in the past decade, but in recent years it has suffered from the declining competitiveness of the economy. The tertiary sector, which has grown the most steadily over the years and is the largest contributor to GDP (60 percent of GDP), is mainly concentrated in trade, transportation, and tourism. Senegal’s imports are dominated by petroleum products and foodstuffs.

Table 3.

Senegal: Summary of Real GDP Growth by Sector, 1978–93 1/

(Average annual percentage change)

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Sources: Data provided by the Senegalese authorities; and staff estimates.

Arithmetic averages.

Senegal gained its independence in 1960 and had a relatively well-developed physical and social infrastructure and a well-established civil administration. Although the nongovernment (private and public enterprises) sector dominates the economy, the government has always played an extensive role, participating directly in many economic activities and strongly regulating private sector activity. From 1960 until about 1974, strong inward-looking policies were favored and the economy grew at a low rate compared with neighboring countries. The growth performance of the Senegalese economy since 1974 can be divided into four periods. The first period (1974–77) saw a short-lived export boom during which the economy grew at an average annual rate of close to 5 percent, essentially as a result of favorable weather conditions and improved export prices for groundnuts and phosphates. Gross domestic investment was high, representing about 20 percent of nominal GDP. A large share of this was financed by domestic savings, averaging close to 13 percent of GDP a year. However, during this period, expansionary fiscal and monetary policies were pursued, contributing to double digit inflation (Charts 2 and 3). Domestic consumption increased by almost 10 percentage points of GDP to 92 percent by 1977, with a corresponding decline in the savings ratio.

Chart 2
Chart 2

SENEGAL SELECTED ECONOMIC INDICATORS, 1974–93

Citation: IMF Staff Country Reports 1995, 071; 10.5089/9781451833829.002.A001

Sources: Data provided by the Senegalese authorities; and staff estimates.l/ Calendar years.
Chart 3
Chart 3

SENEGAL SELECTED ECONOMIC INDICATORS, 1974–93

Citation: IMF Staff Country Reports 1995, 071; 10.5089/9781451833829.002.A001

Sources: Data provided by the Senegalese authorities; and staff estimates.

During the second period (1978–84), the Senegalese economy met with serious economic difficulties resulting from successive droughts, a deterioration of the terms of trade, and inappropriate financial and structural policies. The average annual real rate of growth dropped steeply to 2 percent, and the investment to GDP ratio fell by over 4 percentage points to around 15 percent. The macroeconomic situation continued to deteriorate, and the fiscal and external current account deficits widened by close to 4 and 9 percentage points of GDP, respectively, over their average levels in the preceding period. 1/ Gross domestic savings fell sharply to less than 2 percent of GDP, with government saving virtually disappearing, and the resource gap widened by almost 7 percentage points of GDP over the period.

In an effort to tackle these economic and financial difficulties and reverse the unfavorable trends, the Government adopted in the first half of the 1980s a number of adjustment programs which have been supported by use of Fund and World Bank resources, as well as by other external assistance. Initially, the results achieved were unsatisfactory, not only because of the adverse impact of the droughts but also due to weaknesses in policy implementation. The authorities’s program that was supported by an extended arrangement in August 1980, went off track soon after its inception, and was subsequently replaced by annual programs. Similarly, the program supported by a structural adjustment loan and credit from the World Bank, which was approved in December 1980, was only partly implemented; and the second tranche of the loan was canceled in June 1983. Under the Fund-supported program for 1981/82, a significant adjustment was made; but the improvement proved only temporary, and the situation deteriorated again in the following year. It was only since mid-1983 that a steady progress has been made toward economic and financial adjustment, as the overall fiscal deficit was reduced and structural reforms were initiated. However, by the mid-1980s economic growth remained slow, owing largely to the adverse impact of recurrent droughts and continuing structural problems in several sectors.

The third period (1985–88) was characterized by strengthened adjustment efforts, formulated and adopted within a medium-term framework, which involved bold measures to stabilize and liberalize the economy. 1/ Combined with favorable weather conditions and an improvement in the terms of trade, these actions resulted in a noticeable recovery, with real GDP growing at an annual average rate of over 4 percent. Financial imbalances were reduced as well, as the fiscal deficit (excluding grants) was cut to 3.3 percent of GDP by 1988; and the external current account deficit (excluding official transfers) narrowed to less than 14 percent of GDP. Monetary expansion decelerated to 4 percent a year on average, and average annual inflation was brought down to little over 3 percent from about 10 percent in the previous period. However, the ratio of gross domestic investment to GDP continued to decline, and averaged less than 12 percent. Domestic savings increased on average by 3 percentage points of GDP, thanks mainly to the improvement in the fiscal position, but at 4 percent of GDP, they remained very low.

During the fourth period (1989–93), the economy again experienced erratic growth, averaging less than 1 percent a year, as the economy suffered from unfavorable weather conditions, adverse terms of trade shocks, and a continuous loss of external competitiveness. Furthermore, adjustment efforts weakened and Senegal’s economic and financial position deteriorated. The budget and external current account deficits widened again, and the implementation of key structural reforms stalled. Despite the adoption in mid-1993 of a package of internal adjustment measures, Senegal’s competitiveness and growth prospects remained very weak.

Compared with other countries, in the years 1981–93 Senegal’s average real growth rate was somewhat higher than that achieved in sub-Saharan Africa, or in the CFA franc zone (Table 4). This growth rate, however, remained low compared with the overall performance of developing countries as a group. Moveover, domestic savings, averaging less than 5 percent of GDP during these years, as well as an investment to GDP ratio of some 13 percent, were significantly lower than the averages for sub-Saharan Africa, and much lower when compared with the levels attained by the group of developing countries as a whole. According to World Bank estimates, for sub-Saharan Africa a fixed investment ratio of 13 percent is needed to prevent the capital stock from declining; thus, Senegal’s Capital stock would appear to have increased very little, if at all, during the last 15 years.

Table 4.

Senegal: Comparative Economic Indicators, 1981–93

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Source: Staff estimates.

1981–92.

The empirical evidence on the determinants of Senegal’s growth, investment, and savings performance presented in Annex I, based on a cross-country regression analysis, suggests that Senegal’s sluggish long-term growth performance, in comparison with other developing countries, can largely be attributed to its low rates of physical and human Capital accumulation. Comparing the average value of Senegal’s policy variables with those of other countries, the analysis suggests that, apart from the low level of savings, overall macroeconomic policies were relatively supportive of economic growth and Capital accumulation. The analysis also points to the importance of exogenous factors, such as the level of rainfall and changes in the terms of trade, as well as to the adverse impact of structural impediments on Senegal’s long-term investment and growth performance.

3. Initial conditions and obstacles to growth: The period 1978–84

Senegal faced a serious economic crisis in the late 1970s and early 1980s. The problems were attributable in part to exogenous factors, particularly recurring droughts and deteriorating terms of trade. But they were also due in large measure to inadequate macroeconomic policies, as well as inappropriate production, trade, and pricing policies.

a. Initial macroeconomic conditions

After several years of increasing difficulties, in the late 1970s and early 1980s Senegal’s overall economic and financial Situation deteriorated markedly, with per capita real GDP declining by close to 1 percent a year, domestic financial imbalances assuming serious proportions, and the external payments position coming under severe pressure.

In the six-year period 1978–83, the Government pursued expansionary financial policies that boosted consumption rather than productive investment, while placing increasing pressure on available resources. Domestic demand invariably exceeded supply, resulting in a widening of the resource gap, which averaged 14 percent of GDP annually. Whereas gross domestic savings were negligible and at times negative, gross investment declined to some 15 percent of GDP. Moreover, the quality of investment suffered because of the relatively low rate of return of projects, resulting from inadequate project evaluation, poor management, and a lack of maintenance of the existing stock of assets. The decline in the level of investment and its general inefficiency contributed to the weak growth performance.

The widening fiscal imbalances during the period were traceable to a failure to contain current government expenditure at a time when revenue performance was irregular, owing largely to the weakening of tax collection and the impact of falling income. To finance the high levels of domestic demand, the authorities relied heavily on external borrowing. As a result, the debt service burden increased substantially, and the Government had to seek a number of debt reschedulings. As external and domestic financing covered only part of the deficit, the remainder was financed in several years by the accumulation of domestic and external payments arrears, which in turn adversely affected private sector activity.

b. Structural obstacles to growth

In addition to the deteriorating macroeconomic Situation, growth was adversely affected by the generally inappropriate production, trade, and pricing policies pursued in the 1970s. These policies led to an over-extension of the public sector, the emergence of economic rents, and a weakening of incentives in agriculture and other key sectors of the economy. 1/

The parapublic sector, consisting of wholly or majority government-owned enterprises, was large and inefficient. Public enterprises were engaged in a wide range of activities. In the early 1980s, this sector registered substantial deficits because of undercapitalization, managerial problems, and inappropriate investment, recruitment, and pricing policies. In addition, public enterprises received direct and indirect subsidies, which further aggravated the fiscal imbalances and contributed to more inefficiencies in the system. They also absorbed a large part of bank credit to the economy, thereby crowding out the private sector.

The labor market in Senegal was heavily regulated, and operated in a way that discouraged the hiring of new job seekers or temporary workers. The Department of Labor controlled hiring and layoff practices and the labor code guaranteed lifetime employment to almost all workers in the formal sector. Layoffs entailed complicated and lengthy administrative procedures. The Government set the minimum wage (SMIG) and civil service salaries, with wages in the rest of the economy determined by contracts or through collective bargaining. However, in practice wage rates in the public sector, which remained relatively high, served as a guide for wage setting in the private sector. As a result, production costs rose, productivity decreased, and employment creation was sluggish. A World Bank study estimated that factor productivity in manufacturing declined by 5–7 percent a year during 1980–85.

During that period, Senegal operated an extensive and complex system of price controls. The Government fixed the administered producer prices for a number of agricultural products, as well as the retail prices of essential consumer goods and services. Two other systems of price control were also used: a category of goods was subject to a “strict certification” procedure whereby the price could rise by up to 8 percent if a justification was provided to the Ministry of Commerce; and a second category of goods was subject to a procedure whereby prices could be raised by up to 8 percent a year by simple notification. The prices of the remaining goods were either subject to regulation of profit margins or were market determined. In addition, for certain basic goods, a system of price equalization (péréquation) operated between regions. This extensive and cumbersome system of price controls resulted in further distortions and was a major impediment to private sector initiative.

The financial sector also faced serious difficulties in the early 1980s. By 1983, most banks experienced important liquidity problems due to the accumulation of government payments arrears as well as a growing amount of nonperforming loans. Lending practices generally failed to assess risks adequately; legal mechanisms to enforce loan recovery were weak; and financial institutions were compelled to continue making loans to loss-making and inefficiently managed public enterprises. Crop credits were a particularly important source of financial distress. Given their assumed short-term nature, crop credits were not subject to ceilings but, in the event, tended to be nonperforming. The dissolution of ONCAD (the marketing agency for groundnuts) in 1982 resulted in major balance sheet problems for the banks that had to refinance it. The weak supervision of the banking system also contributed to the financial crisis.

Together, these factors contributed to the failure of the Senegalese economy to sustain growth. At the same time, investment declined, its quality suffered, the rate of savings was low and at times negative, and the domestic and external financial imbalances mounted. As the Situation continued to deteriorate, by mid-1983 the Senegalese authorities decided to launch a serious adjustment efforts and adopted a series of programs supported by the Fund, the World Bank, and other donors.

4. Factors affecting growth, savings, and investment: The period 1985–93

a. Adjustment strategy and key outcomes

The adjustment strategy followed from the mid-1980s has aimed at alleviating the obstacles to sustained economic growth and achieving domestic and external financial viability. The strategy comprised three major elements: (i) a reduction of the fiscal deficit in order to raise domestic savings and restrain demand; (ii) a tight monetary policy, through credit restraint and maintenance of interest rates close to or above levels in France; and (iii) structural policies aimed at liberalizing prices, trade, and domestic markets, reforming the public enterprise sector, and reducing production costs. In view of the fixed parity of the CFA franc vis-à-vis the French franc, structural reforms took on a particularly important role in the adjustment strategy as a means of improving efficiency and external competitiveness given the fall in the equilibrium exchange rate caused by terms of trade movements. As deflationary policies to maintain domestic price and cost inflation below international levels were insufficient to ensure the restoration of external competitiveness, structural reforms designed to reduce domestic costs were pivotal to improving savings and profitability, and to providing an external stimulus to growth while domestic absorption was being restrained.

During the period 1985–93, the Government made efforts to liberalize the economy, reduce distortions in agricultural and industrial production, reform the public enterprise sector, and strengthen public investment programming. The authorities also reduced the overall fiscal deficit, ensured credit restraint, and put in place a more prudent external debt management.

In assessing the outcome of this adjustment strategy on Senegal’s economic performance, two subperiods can be distinguished. During the years 1985–88, sustained adjustment efforts were associated with a strong recovery in real GDP growth, a significant drop in inflation, a reduction in the fiscal deficit, and an improvement of the external position. After a drought-related decline in 1984, real GDP grew at an average annual rate of 4 percent during 1985–88. Inflation declined from an annual average rate of almost 11 percent in the early 1980s to less than 2 percent in 1988, while the external current account deficit narrowed from 22 percent of GDP to 10 percent. Gross domestic savings were negative in 1985, but turned positive from 1986 onward. At the same time, the investment to GDP ratio declined from 16 percent in 1984 to less than 13 percent in 1988. Starting in the late 1980s, however, some of the stabilization gains were reversed as the adjustment efforts weakened and the terms of trade deteriorated. Real GDP growth fell, domestic and external imbalances widened again, and substantial domestic and external payments arrears were accumulated in the early 1990s.

A striking feature of Senegal’s growth performance during 1985–93 was that it was associated with very low, if not stagnant, rates of growth of import and export volumes (Table 5). Rather, variations in real GDP growth were driven primarily by changes in the level of consumption which accounted for over 95 percent of GDP (Chart 4). In the second subperiod, 1989–93, the external current account deficit (before grants) was halved, to 9.5 percent of GDP on average, as compared to the level in 1978–84. This improvement was based almost entirely on a reduction in the trade deficit, reflecting a modest rise in export volume and a stagnant import volume.

Table 5.

Senegal: External Adjustment and Growth, 1974–93

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Sources: Data provided by the Senegalese authorities; and staff estimates.
CHART 4
CHART 4

SENEGAL GROWTH OF EXPENDITURES AND OUTPUT, 1978–93

(Percentage changes at constant prices, unless otherwise indicated)

Citation: IMF Staff Country Reports 1995, 071; 10.5089/9781451833829.002.A001

Sources: Data provided by the Senegalese authorities; and staff estimates.

In terms of savings-investment balances, the external adjustment achieved during 1985–93 was for the most part a result of an improvement in the savings performance of both the government and nongovernment sectors, of some 6 percentage points of GDP. Nonetheless, despite the recovery in the rate of saving by the nongovernment sector in 1985–93, it was still only half of that achieved in the first half of the 1970s. As noted above, the share of fixed investment to GDP changed only modestly during 1985–93: 1/ the share of government investment fell on average by 1 percent of GDP between 1978–84 and 1989–93, while that of the nongovernment sector showed little improvement over past levels. The government sector accounted for almost half of the narrowing of the savings-investment balance between 1978–84 and 1989–93.

Overall, therefore, the impact of the stabilization efforts and structural reforms was mixed, as they met with more success in restoring financial stability than in increasing investment, savings and economic growth. An attempt is made below to shed more light on how different factors may have contributed to this outcome.

b. The role of exogenous shocks

Senegal’s relatively undiversified production and export base, and its dependence on imports of energy, make the economy particularly vulnerable to terms of trade shocks and adverse weather conditions. These shocks can have an important impact on developments in output, savings, and investment. In an undiversified economy such as that of Senegal, one would expect a positive output response to a favorable terms of trade shock that was considered permanent. A favorable (adverse) terms of trade shock would also be expected to lead to an increase (decline) in savings because of consumption smoothing, depending on how temporary the shock was perceived to be and the extent of liquidity constraints. The response of investment to a terms of trade shock is in principle ambiguous and will vary across different sectors.

During the period under review, Senegal experienced a succession of sizable terms of trade and weather-related shocks. 2/ The econometric estimates presented in Annex I suggest that these factors had a significant influence on the path of output. While the terms of trade shocks were clearly large enough to have also had an impact on investment and savings, the estimates did not show a significant relationship. 1/

The strong external adjustment and growth performance during the immediate post-crisis period (1985–88) benefited from a positive terms of trade shock, on average equivalent to 1 percent of GDP per annum. 2/ The deterioration in the growth rate during 1989–93 was associated with a negative terms of trade shock. Senegal also suffered a succession of droughts, which had an important impact on economic activity. One simple proxy for this type of supply shock is given by the deviations from trend in output of the agricultural sector, expressed in percent of total GDP; this measure, however, excludes sizable secondary effects on output in the agro- processing industry and therefore likely underestimates the contribution of droughts to the level of economic activity. As shown by the positive agricultural supply shock in Table 6, this measure suggests that better weather conditions were indeed a factor underlying the stronger growth performance during 1985–88, compared with other periods.

Table 6.

Senegal: Estimates of Output Gap, 1978–93

(In percent of trend GDP)

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Source: Staff estimates.

It bears noting that the first phase of adjustment coincided with more favorable exogenous shocks than occurred both in the preceding crisis period (1978–84) and the second subperiod of adjustment (1989–93). These favorable shocks contributed to the stronger growth performance and recovery in savings recorded in 1985–88.

c. Impact of macroeconomic policies

A stable macroeconomic environment with little uncertainty and high government credibility will tend to promote private investment and induce an efficient allocation of resources. Macroeconomic stability is typically defined as an environment with a low and predictable rate of inflation, a low and sustainable budget deficit, and an appropriate level of the exchange rate. Other factors, such as high external debt servicing burden, may have a negative impact on future growth because they would crowd out public investment and weaken private sector confidence.

(i) Output gap

An important, and frequently raised, question is whether stabilization policies exert a substantial contractionary influence on aggregate demand and thereby delay a recovery in output and investment. An answer to this question requires, as a first step, calculating a measure of the gap between actual and potential or trend output. However, for an economy such as Senegal’s, one cannot attribute deviations in output from a measure of trend output solely or even primarily to fluctuations in demand; as indicated above, supply shocks frequently have also had a sizable impact on output developments. Lacking a structural model of the Senegalese economy that could disentangle demand and supply effects, the approach taken here is to compare a conventional measure of the output gap—the deviation between actual and trend GDP—with a proxy for supply shocks as measured by deviations between actual and trend output in the agricultural sector. 1/ The difference between these two measures is an indicator, albeit imperfect, of the policy-induced component of the output gap.

The evidence from Table 6 suggests that during the adjustment period the output gap was on average small, and that after account is taken of “supply shocks” in the agricultural sector, the remaining component of the gap was even smaller. This assessment should be interpreted with great caution in view of the considerable difficulties involved in measuring the output gap in an economy where growth rates of output are very volatile, which in turn may have been disruptive to longer term growth performance.

(ii) Fiscal policy

Because Senegal is a member of a currency union, the main instrument of independent macroeconomic policy is fiscal policy. Between 1983 and 1991, the fiscal deficit (on a commitment basis, and excluding grants) was reduced from over 7 percent of GDP to less than 2 percent, and the primary balance shifted from a deficit of close to 4 percent to a small surplus of about 1 percent of GDP—although some backsliding occurred after 1991 (Tables 2 and 7, and Chart 2). The fiscal adjustment was achieved mainly through expenditure-cutting measures. Although some increases in revenue were achieved through an improvement in tax and customs duty collections, a widening of the tax base, and a reduction in exemptions, the ratio of total government revenue to GDP declined from its 1978–84 level by about 3 percentage points, to less than 18 percent. The various tax reforms failed to generate substantial additional receipts for several reasons: the tax base continued to be narrow because of the pervasiveness of exemptions, and taxes were relatively inelastic; the tax system relied heavily on revenues of a cyclical nature, such as the taxation of oil products and import duties; customs and tax administrations were weak and fiscal fraud persisted; and the growing informal sector was not captured in the tax net. At the same time, high tariffs raised production costs and added to the loss of competitiveness of the economy. Furthermore, the various exemptions may have indirectly promoted capital-intensive technologies, while Senegal needed more labor-intensive projects, and most likely have contributed to inefficiencies.

Table 7.

Senegal: Fiscal Adjustment, 1974–93 1/

(In percent of GDP)

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Sources: Data provided by the Senegalese authorities; and staff estimates.

Data before and after 1981 are not comparable. Before 1981, expenditures are recorded on a cash basis and thereafter on a commitment basis. Before 1981, capital expenditure excludes foreign-financed projects.

Includes net operations of the Treasury’s special and correspondent accounts.

Calculated as in Heller et al. (1986). The measure of potential output is the same as that used in the main text (Table 6).

On the expenditure side, total spending was cut by over 6 percentage points of GDP between 1983 and 1991. The reduction in total spending reflected mostly a cut in the outlays on materials, supply and maintenance, as well as subsidies and transfers, which were cut by about 3.5 percent of GDP. The wage bill was also brought down by almost 2 percent of GDP over the same period, but its share in total current spending, which amounted to almost half, remained high. The decrease in spending on maintenance contributed to a deterioration of the existing infrastructure, which in turn was detrimental to growth and investment. Spending on education and health services as a percent of GDP (less than 5 percent in 1991) was also hard hit, with unfavorable implications on human resource development. While total outlays declined as a percentage of GDP, capital spending remained around 4 percent of GDP, but the domestic counterpart funds were affected by the budget constraint, contributing to delays in project implementation.

Since mid-1987, a system of three-year rolling investment programs has been in place, in consultation with the World Bank, designed to provide an adequate environment for sustained long-term growth. The programs also aimed at improving the public investment planning system by reforming the process of project evaluation, selection, implementation, and monitoring. Priority has been given to projects with high rates of return, the rehabilitation and maintenance of existing infrastructure and the improvement in the screening of social infrastructure projects. In addition, the investment budget has been incorporated into the Government’s ovserall budget, allowing for a better control of resources.

The process of fiscal adjustment can influence investment and growth through several channels, two of which are assessed in this subsection. First, the effect of fiscal consolidation on aggregate demand could, by weakening demand, discourage investment. Second, a scaling back of the Government’s financing requirement could reduce potential crowding out of nongovernment investment, through direct influences on domestic financial markets and through improved assessments of the longer-term sustainability of the Government’s debt position. Furthermore, as noted earlier, the structure of taxation and composition of expenditures are also important determinants of economic efficiency and growth.

In order to examine the impact of fiscal policy on aggregate demand, some partial evidence is provided by calculating a fiscal impulse measure. 1/ For an economy such as Senegal’s, this indicator must be interpreted cautiously, since “cyclical” influences on revenues and expenditure are likely to differ from those in industrial countries. In fact, revenue developments are likely to strongly reflect supply-side developments stemming from droughts and terms of trade shocks. The fiscal impulse measure will therefore reflect, among other things, the extent to which supply-induced revenue windfalls (shortfalls) are sterilized (accommodated) or spent (offset). The calculations suggest, however, that the fiscal impulse was on average contractionary during the first phase of adjustment (1985–88)—the period in which the output gap was slightly positive. During 1989–93, when output growth weakened, the fiscal impulse was neutral. Overall, this evidence suggests that fiscal policy was moderately “countercyclical,” did not unduly dampen output growth, and is therefore unlikely to have been a major cause of the slow recovery in nongovernment investment. Furthermore, as discussed in Annex I, the influence of the rate of economic growth on nongovernment investment during 1978–93 does not seem to have been large.

Moreover, government financing needs do not appear to have been a source of direct crowding out in financial markets during the adjustment period, at least not until there was backtracking in fiscal adjustment during 1992–93. The share of nongovernment savings absorbed by the Government’s domestic financing requirement (including the accumulation or repayment of arrears) fell sharply after the mid-1980s. This primarily reflected a decline in recourse to bank financing, although the share of the government sector in total outstanding domestic bank credit did not begin to fall from its end-1984 level until the late 1980s. The net accumulation of domestic arrears, a particularly disruptive form of financing, was reversed during 1985–88 when net repayments were made. However, during 1989–93 strains on the fiscal position led to renewed domestic and external arrears accumulation, even as net repayments were being made to the domestic banking system.

Furthermore, there are two indicators that the sustainability of Senegal’s fiscal position improved between the mid-1980s and the early 1990s. First, the primary balance (including grants) turned from a deficit equivalent to 3.5 percent of GDP in the early 1980s to a surplus of just over 1 percent of GDP in the early 1990s. Second, the ratio of external debt to GDP fell after the mid-1980s, partly as the result of debt forgiveness, which, together with an increasing share of external debt contracted on concessional terms, reduced the debt service burden.

(iii) Monetary and credit policies

Within the institutional framework of the CFA franc zone there is only limited room for an independent monetary policy in Senegal and other West African Economic and Monetary Union (WAEMU) countries, and therefore little scope for inflation and interest rates to be substantially different from those in France for any length of time (once allowance is made for country risk factors). As a result, credit policy is primarily assigned to maintaining an appropriate level of foreign reserves. In addition, there is a statutory ceiling on government borrowing equivalent to 20 percent of recorded revenues in the previous year; when this ceiling becomes a binding constraint, fiscal policy becomes delinked from credit and monetary policy.

Beginning in the 1980s, real interest rates increased considerably and credit policy was substantially tightened (Table 8 and Chart 5); broad money growth decelerated in line with lower inflation and weakening economic growth. The restrictive stance of credit policy severely constrained the expansion of domestic credit to the nongovernment sector; in real terms the rate of credit expansion since the mid-1980s has been close to zero on average. At the same time, the Government’s net recourse to bank financing was diminishing and after 1986 gave way to net repayments. Accordingly, any crowding out of the nongovernment sector from the domestic credit market has been declining since the mid-1980s.

Table 8.

Senegal: Monetary and Credit Conditions, 1974–93

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Sources: Data provided by the Senegalese authorities; and staff estimates.

Deflated by the annual rate of change of the GDP deflator.

Includes public enterprises.

Excludes crop financing and debts of ONCAD, frozen in 1980 and subsequently assumed by the Government.

1975–77.

Based on data from the Centrale des Risques, which does not necessarily correspond with monetary survey data.

CHART 5
CHART 5

SENEGAL INTEREST RATE DEVELOPMENTS, 1970–93

(Annual averages; in percent)

Citation: IMF Staff Country Reports 1995, 071; 10.5089/9781451833829.002.A001

Sources: International Financial Statistics.1/ Monthly average rates for day-to-day loans against private bills.2/ Until October 14,1993, rates for overnight advances; thereafter weekly auction advances.3/ Adjusted on the basis of the GDP deflator.4/ Average lending rate charge.5/ Rate offered by banks on time deposits for under six months.

Domestic interest rates moved in line with rates in France, and by the late 1980s deposit and lending rates had become high in real terms, with real lending rates rising above 10 percent. This large increase in real interest rates is likely to have dampened investment and contributed to the recovery in nongovernment savings. Although there is admittedly little scope for an independent monetary policy in Senegal, real interest rates may have remained too high during the adjustment period. A comparison of domestic interest rates with those in France suggests that risk and liquidity premia increased in the late 1980s and early 1990s. The persistent high level of domestic interest rates thus may be explained to some extent by domestic factors. In spite of the high interest rate and tight credit policy, the contribution of Senegal to the net foreign assets position of the Central Bank of West African States (BCEAO) deteriorated. Moreover, the deterioration of economic performance and fiscal position in Senegal in the early 1990s affected the credibility of the adjustment strategy, resulting in expectations of a devaluation of the CFA franc and large capital outflows; efforts to stem these outflows contributed to upward pressure on domestic interest rates.

(iv) External competitiveness

It is difficult to make a precise assessment of competitiveness in Senegal because of the paucity of comprehensive data; in particular conventional measures of the real effective exchange rate (REER) tend to be flawed. 1/ Nonetheless, a number of indicators point to the fact that, after some improvement in the first half of the 1980s, the competitiveness of the Senegalese economy deteriorated sharply during the period 1985–93, and therefore could not stimulate exports and growth. 2/

First, Senegal’s trade-weighted nominal effective exchange rate (NEER), which had remained virtually stable between 1980 and 1985, appreciated by 47 percent during 1986–93 (Chart 6). Over these years, the appreciation of the CFA franc was 58 percent vis-à-vis the U.S. dollar and even sharper vis- à-vis developing countries in the trade-weighted basket for Senegal. As Senegal’s domestic inflation, measured by the CPI index, was much lower than that of its trading partners, the overall REER declined by 13 percent during 1986–93, but it still rose by 37 percent vis-à-vis developing countries in the basket. Moreover, the evolution of the relative consumer price differential did not reflect changes in relative wage or domestic cost indices. If the average wage index for civil servants is used as a proxy for domestic costs in Senegal, instead of the CPI index, Senegal’s exchange rate shows an appreciation of some 10 percent in real effective terms during 1986–93.

Chart 6
Chart 6

SENEGAL NOMINAL AND REAL EFFECTIVE EXCHANGE RATES JANUARY 1974 - DECEMBER 1994

(Period average, 1980=100)

Citation: IMF Staff Country Reports 1995, 071; 10.5089/9781451833829.002.A001

Sources: IMF Information Notice System.

Second, wage levels in Senegal have been high in that period compared with other developing countries. It is estimated that in the second half of the 1980s, the average civil servant salary in Senegal was about two-thirds higher than that in Malaysia, Morocco, or Tunisia, while studies of labor costs in manufacturing show that average labor costs in Senegal were also 60–70 percent higher than those in the above three countries and even higher than such costs in other neighboring countries.

Third, in view of the high level of production costs, the industrial sector had been granted until 1990 a 25 percent export subsidy on domestic value added. This subsidy was suspended for budgetary reasons. Foreign exchange earnings from fishing, which accounts for the largest share of Senegal’s commodity exports, as well as from tourism, slowed down from the late 1980s. The groundnut sector, the second largest source of export receipts, generated persistent losses partly as a result of declining export prices. Moreover, with high unit labor costs, and a substantially overvalued CFA franc, Senegal relied heavily on high customs duties and domestic tax rates, resulting in distortions and fiscal fraud.

Finally, Senegal’s competitiveness was also affected by the protracted decline in its terms of trade, amounting to 22 percent over the period 1985–93. Although it is difficult to assess the equilibrium level of the real exchange rate, a decline in the terms of trade of this magnitude clearly would imply, ceteris paribus, a need for a reduction in the actual level of the REER.

Senegal’s weak and deteriorating competitive position undoubtedly contributed to the poor performance of exports and dampened investment and growth during the 1980s and early 1990s. While the appreciation of the nominal effective exchange rate and the protracted decline in the terms of trade have been important causes of Senegal’s lack of competitiveness, it is also clear that structural policies made little or no progress in improving efficiency and lowering domestic production costs—this issue is considered in subsection (d) below.

(v) External financing

Under a fixed exchange rate regime, reliance must be placed in the short run on domestic demand restraint to effect external adjustment until improvements in competitiveness are achieved through cost-reduction and structural reforms that yield efficiency gains. In these circumstances, a lack of external financing, which might otherwise ease the burden of demand restraint, could delay a recovery in investment and output. An assessment of the adequacy of external financing is a complex task. The available partial evidence does not, however, suggest that inadequate financing was a major obstacle to a recovery in output and investment.

In the first instance, as discussed earlier, there is no strong evidence of large output gaps in Senegal during 1985–93. Nonetheless, it is also true that import volumes were relatively stagnant after 1983. However, lack of reliable data on the composition of imports (in real terms) makes it difficult to ascertain whether a compression of production inputs and capital goods occurred. It is not clear, moreover, that a higher level of external financing would have encouraged a higher rate of sustainable growth rather than fueling an increase in consumer goods imports. Indeed, the World Bank (1993 a and b) has leaned toward this latter assessment for two reasons, pointing out first, that in the absence of major structural reforms and sustained improvements in competitiveness, the output response to higher external financing would have likely been small. Second, the bulk of foreign financing was channeled through the budget and tended to support higher public consumption, particularly the wage bill, and thus reduced the incentive to implement hard reforms.

d. Impact of structural policies

Structural policies enhance growth by: (i) improving efficiency and resource allocation (through the elimination of price distortions resulting from price controls, subsidies, distortive taxes, domestic and external trade regulations and restrictions); and (ii) expanding the productive capacity of the economy. Structural policies are also expected to influence savings and investment by providing the private sector with an appropriate incentive framework and removing impediments to its activities.

During 1985–93, Senegal initiated and made progress in the implementation of a number of structural reforms to overcome the structural obstacles to growth that were prevailing in the economy. Since the mid- 1980s, the goal has been to improve supply conditions, increase private sector participation in economic activities, and reduce the size and improve the efficiency of the public sector’s involvement in the economy.

(i) Agricultural policy

A new agricultural policy was launched in 1984, aiming at the expansion and diversification of domestic production in order to reduce food imports, especially of rice, and to stimulate exports. Accordingly, production and marketing incentives were to be improved; government interventions, subsidies, and price controls reduced; the land tenure system was to be reformed; and the extension of services and the agricultural credit system strengthened. Progress was made toward meeting these goals, but by the end of the adjustment period under review, there remained a number of important impediments to growth in the sector.

As noted in a 1993 World Bank study, the agricultural reforms met with mixed success. While much of domestic trade was liberalized, prices of many commodities were decontrolled, and import subsidies eliminated, import controls on rice and sugar remained major issues, and producer prices for the principal cash crops—groundnuts and cotton—did not reflect world market prices. With the continued loss of competitiveness, the export- oriented activities registered mounting losses in the early 1990s. Moreover, the goal of food self-sufficiency became increasingly elusive and costly to pursue, as domestic food crops lost competitiveness vis-à-vis imports because of the increasingly overvalued currency. Thus, overall, even though a number of the initial objectives in the sector were achieved, the conditions for sustained and diversified growth were not all satisfied, and agricultural development remained constrained by a lack of competitiveness, unfavorable terms of trade, as well as the remaining controls on production, marketing, and processing of agricultural products.

(ii) Industrial policy

Senegal launched in 1986 a series of reforms under the New Industrial Policy aimed at improving the competitiveness of Senegalese firms, promoting investment and exports, and reducing government intervention and the budgetary cost of administering industrial incentives. 1/ The strategy consisted of two sets of complementary measures: (a) to improve competitiveness by liberalizing the economy through the reduction and harmonization of customs tariffs, the removal of quantitative restrictions, and the opening up of domestic trade; and (b) to facilitate a supply response and investment opportunities through the restructuring of public enterprises and the improvement of the economic and regulatory environment, primarily by reducing the cost of key inputs, including labor. The implementation of these measures took place essentially between 1986 and 1988. Trade liberalization proceeded mostly on schedule, but reforms aimed at reducing the costs of production and improving the incentive environment have proceeded at a much slower pace and, therefore, appear to have had only a marginal impact on the performance of the sector. A 1993 World Bank study concluded that although decontrol of domestic prices and easing of import regulations have improved domestic competition, accompanying measures aimed at improving incentives and the environment for firms were only partially implemented. Moreover, labor costs remained relatively high and little progress was made in dismantling domestic monopolies created under “special agreements” with a number of enterprises. As a result of these constraints, the development of the sector was hindered, private investment remained low, and little foreign investment occurred.

(iii) Labor market

Labor market rigidities were a major impediment to new investment and the creation of employment. Improving the functioning of the labor market was therefore a key element of adjustment in Senegal, and labor reform was launched in 1986. The labor office was abolished in 1987, hiring practices were liberalized, and the constraints on the use of temporary labor relaxed. However, critical clauses of the labor code were not modified, because of strong opposition by the labor unions and fear of social unrest on the eve of the 1988 general election. In 1990, a tripartite committee composed of the Government, employers’ associations, and labor unions was formed to examine existing labor legislation and industrial regulations. A revised labor code was drawn up in 1991, but it was not passed by the National Assembly. However, public sector labor rules were changed by abolishing automatic recruitment from training schools, downsizing the civil service through a voluntary departure program, and freezing the SMIG. In all, although reform of the labor market was identified as a major element of adjustment in Senegal, the partial approach to labor market reforms led to incomplete results. However, the decision to consult with the social partners has enhanced public awareness of the need for reforms, and contributed, albeit after a long delay, to the recent (1994) revision of the labor code.

(iv) Pricing policies

The price controls that prevailed in the 1970s and most of the 1980s had introduced distortions throughout the economy, imposing substantial costs on consumers in the form of higher prices, and for many important industrial inputs, raising production costs through prices set substantially above world market levels. The agriculture sector in particular had been constrained by price controls, as almost all crops were subject to fixed producer prices. However, by 1988 most major domestic prices have been liberalized. Subsidies to the agricultural sector were virtually eliminated, producer prices for food crops were slightly raised, and those for cash crops were reduced. The prices of all but 24 consumer goods had been decontrolled in 1987 and 1988, and the office in charge of price Controls was abolished in 1990. For manufactured goods, prices were decontrolled in conjunction with the elimination of quantitative restrictions on imports. In addition, a price information system was set up for local cereals. These efforts had the effect of improving resource allocation in the economy as prices increasingly became linked to market conditions in Senegal, and for tradable goods, to world prices. Moreover, the liberalization of most product markets provided an incentive to private sector activity in key areas of the economy.

Nonetheless, by the early 1990s, the prices of essential consumer items (rice, sugar, and flour) as well as producer prices of important crops (groundnuts, cotton, and rice) remained regulated. In the energy sector, the Government instituted a simpler and more transparent pricing and taxation system for petroleum products in 1991, and for the first time since 1986, energy prices were reduced by up to 25 percent. However, the distribution of petroleum products and retail prices had not yet been liberalized, and energy costs remained relatively high.

(v) Public enterprise reform

An important structural issue concerned the downsizing of the public enterprise sector, the reduction in the scope of government participation, and the strengthening of the sector’s financial situation. In 1986, there were 61 public enterprises and 25 noncommercial administrative entities in Senegal. Public enterprises had a virtual monopoly in water and power supply; dominated the raining, transport, and Communications sectors; and played a lesser role in commerce, tourism, and manufacturing. The World Bank estimated that public enterprises accounted for 29 percent of total investment in the economy, 17 percent of employment, but only 7 percent of GDP. Moreover, the performance of the sector was generally poor and placed a heavy and growing burden on the budget. During the first half of the 1980s, the financial performance of the public enterprise sector was weak, with losses estimated at some CFAF 20 billion in 1985. This weak financial performance was largely the result of under- capitalization, organizational and managerial shortcomings, ill-designed investment programs, inappropriate recruitment and wage policies, as well as rigidity in the regulatory environment. Moreover, excessive administrative Controls limited management flexibility in operating the public enterprises.

Although the Government’s sectoral approach to parapublic sector reform dates back to the late 1970s, very little tangible progress was accomplished until the second half of the 1980s. In view of the seriousness of the problems facing the sector, in July 1985 the Government adopted, with the assistance of the World Bank, a comprehensive reform program for the parapublic sector, the Nouvelle Politique envers le Secteur Parapublic (NPSPP), as part of the Government’s overall economic and financial adjustment effort. The main objectives of the NPSPP were the withdrawal of the state from nonessential enterprises and the rehabilitation of the public enterprises that were to remain under government control. These aims were to be achieved by restructuring the sector through merger, privatization and liquidation, performance contracts, better pricing policies, simplified control mechanisms, and better internal management. By the late 1980s, although the information base on the sector had improved, auditing and management consulting capacity had been strengthened, and the regulatory framework had been relaxed, only gradual progress had been made in the implementation of the other aspects of the reform, particularly in the privatization or liquidation of enterprises.

A more comprehensive reform program of the public enterprise sector was initiated with the World Bank in 1989, and significant progress has been made in its implementation since then. This program aimed at reducing the scope of government participation and strengthening the financial position of public enterprises. This was to be achieved through a three-pronged approach: first, the rehabilitation of enterprises that were to remain in the public domain; second, the privatization or liquidation of 40 enterprises targeted under the SAL IV; and third, a modification of the financial relations between the Government and the public enterprises. This last aspect involved the settlement, in accordance with a timetable established with the World Bank of the stock of public sector cross-payments arrears, the reduction in the Government’s direct and indirect subsidies to public enterprises, and the ending of guarantees and subsidies on foreign borrowing by these enterprises.

With regard to the divestiture program of the 40 targeted enterprises, by end-September 1992, 19 were privatized and 20 liquidated. Only the privatization of one enterprise (the groundnut marketing company—SONACOS) has not yet been implemented. An additional 8 enterprises, which had not been included in the original list, were also privatized. The rehabilitation of public enterprises remaining in the public domain was undertaken through performance contracts and other less formal financial restructuring arrangements; all together, 15 performance contracts and financial restructuring programs were concluded between public enterprises and the Government. Another important aspect of the reform was the need to ease the financial burden of the sector on the budget. In this area, total direct subsidies were reduced by about a third. The Government has also worked out a settlement plan for all cross debts.

The reforms contributed to an improvement in the financial situation and management of key public enterprises. The performance contracts signed between the enterprises and the Government were also useful in clarifying responsibilities between the Government and these entities. The reforms allowed for greater managerial autonomy, and more freedom to adjust tariff rates, contributing to better financial and economic performance. Nonetheless, in spite of the progress made, by 1993 the public enterprise sector still posed a burden on the economy and discouraged private sector investment in key economic activities.

(vi) Financial sector reform

In the mid-1980s, the banking sector in Senegal was in a serious crisis, amplified by a sizable and growing amount of nonperforming loans and severe liquidity problems, which seriously hampered financial intermediation and the conduct of monetary policy and posed fiscal problems. As discussed earlier, the causes of these difficulties were to be found in the inadequate assessment of lending risks, weak legal mechanisms for loan recovery, the continued financing of loss-making public enterprises, and poor management. To solve the crisis, the Government and the BCEAO—with help from among others, the World Bank, and the Fund—embarked in 1988 on a comprehensive reform program. This program encompassed a wide range of measures, such as the restructuring and rehabilitation of the banking system, the reduction of the Government’s share in the equity of individual banks to a maximum of 25 percent, the consolidation/refinancing and recovery of nonperforming loans, and the reinforcement of banking supervision. The reform effort met with a large measure of success. The number of financial institutions was reduced from 16 to 8 between end-1988 and end-1991. A loan recovery institution was created, which took over the nonperforming assets and corresponding liabilities of all liquidated banks. Although the financial sector was significantly strengthened during the late 1980s, there was still a need for improving the judicial framework for loan recovery, as well as for enhancing the use of indirect instruments of monetary policy, which were introduced in late 1993 by the BCEAO. 1/ In this context, flexible and market-determined interest rates were essential to promote savings and ensure better use of resources.

(vii) Tariff and trade policy reforms

Before 1986, Senegal’s trade regime was characterized by high import tariff rates and numerous nontariff barriers, as well as trade and tax advantages granted to selected domestic enterprises through a system of special agreements (conventions spéciales). Initially, this relatively restrictive trade system was intended to support the development of domestic production and the growth of domestic firms. Accordingly, from the mid- 1980s onward, trade policy in Senegal was increasingly used as a tool to correct for the overvalued exchange rate and the declining competitiveness of the economy. In 1987, a system of export subsidies was introduced to promote exports, in particular of high value-added products. However, the system was suspended in 1990 because of insufficient fiscal resources to pay for the subsidies.

Nontariff restrictions took the form of monopoly import rights granted through special agreements, and a system of prior authorizations for the import or export of numerous products. The prior authorizations covered a range of products, including key inputs such as packing materials, which, in the case of imports, reduced the local supply of these items. The restrictive trade regime was supplemented by a complex system of domestic price Controls. Despite the reduction during the late 1980s in the number of commodities subject to price Controls from about 200 to 24, 1/ the remaining price Controls encompassed most essential consumer goods and services, and together covered about 40 percent of the basket composing the consumer price index. For eighteen of these commodities, protection to the selected suppliers was provided through prior authorizations for imports.

The reforms undertaken between 1986 and 1988 in the context of the New Industrial Policy involved the rationalization of the tariff structure, the reduction of the tariff rates, the removal of most quantitative restrictions, and curtailment of the use of reference prices. Some of these measures, however, were reversed in the late 1980s, when tariff rates were raised again. By 1993, the average effective rate of protection remained high with tariff rates on consumer goods set at 75 percent and 45 percent for goods produced locally and other goods, respectively. Overall, although the reforms carried out led to a significant opening up of the Senegalese economy, further trade liberalization was still needed to foster growth and exports.

Assessing the structural policies pursued under the SAF/ESAF-programs during 1985–91 leads to a somewhat mixed picture. The implementation record was broadly satisfactory, notwithstanding the fact that several key measures were taken late in the program period. In particular, there were delays in the reform of the groundnut sector, the ratification of the new labor code, and the improvement of the management and monitoring of the public investment programs. On the other hand, although the direct effects of structural policies on competitiveness are hard to measure, the results in terms of the sought-for increase in investment and export growth were disappointing. By 1993, there were still important structural rigidities prevailing in the economy, relating mainly to the market structure and existence of monopolies for companies that benefit from conventions spéciales. Private sector Companies had monopolies on sugar, cement, and petroleum importing and refining, while state enterprises retained a monopoly on, among other things, rice imports, groundnuts and groundnut oil sector, and port administration. Price Controls still were in effect for 24 products and the privatization program was not completed. Finally, the regulatory and legal environment still needed to be reformed to provide a better climate for private sector activity and incentives for higher investment and exports.

5. Conclusions

Under the adjustment programs adopted during 1983–91, Senegal succeeded in reducing macroeconomic imbalances and inflation significantly, and made progress in implementing structural reforms. Nevertheless; growth remained subdued and uneven, private investment failed to increase; and an adequate level of domestic savings was not mobilized. Structural rigidities persisted and the competitiveness of the economy steadily eroded. The country was not able to achieve the diversification that would insulate the economy from adverse terms of trade and other shocks. Even though the Senegalese economy achieved a good record of growth and stabilization when strong adjustment efforts were undertaken during the years 1985–88, by 1993 the financial situation had deteriorated once again and there was a reversal of some of the earlier gains. These mixed results, combined with Senegal’s inability to sustain reform and consolidate the gains of adjustment, would point to the following conclusions and lessons.

First, reducing domestic and external imbalances is necessary but not sufficient to achieve high sustainable growth. After taking into account the effects of exogenous factors, it does not appear that macroeconomic stabilization policies substantially delayed a recovery in investment and output. However, to achieve adequate levels of private investment, macroeconomic stability has to be supplemented with a high degree of private sector confidence in the economy, and an adequate regulatory and legal framework, including labor market regulations.

Second, internal adjustment alone was not sufficient to achieve high sustainable growth, and the competitiveness issue should have been addressed at the outset of the adjustment process, through the timely and forceful implementation of structural reforms aimed at reducing domestic costs and improving efficiency.

Third, more comprehensive and upfront structural reforms conducive to an enabling environment for private sector development and export promotion would have been more successful. Key distortions and rigidities should have been addressed earlier in the adjustment process.

Fourth, interruptions in reforms can easily erode the gains achieved during the adjustment process and adversely affect the credibility of the reforms undertaken and thus lead to adjustment fatigue.

Finally, the fact that achievement of high and sustained real economic growth as well as increases in investment and savings continued to elude Senegal, pointed to the urgent need for a more comprehensive and strengthened adjustment strategy. Therefore, in early 1994, Senegal decided to adopt a new adjustment strategy that encompassed a 50 percent devaluation of the CFA franc, in concert with the other members of the CFA franc zone. The devaluation on January 12, 1994, accompanied by adequate macroeconomic and structural policies, could lead to high and sustained real growth in the economy, provided that the shortcomings of past adjustment efforts are effectively tackled. A preliminary assessment of the outcomes during the first year after the devaluation is provided in Part II of this report.

ANNEX I: Senegal - Empirical Investigation of the Determinants of Growth, Savings, and Investment

This annex describes the results of an empirical investigation of the determinants of economic growth, as well as nongovernment investment and savings in Senegal.

1. Economic growth

There is a large body of empirical work that draws upon the theoretical framework of endogenous growth models to examine the determinants of long-term growth. The key proposition of these models is that growth can be explained as an endogenous outcome of economic conditions and policies that influence growth through the accumulation of factors of production and their productivity. 1/ In order to identify the determining factors and estimate the impact of policies on Senegal’s long-term growth performance, three approaches were used.

The first approach, based on Barro’s (1989) cross-country analysis, relates the growth of real per capita GDP to the rate of physical and human capital accumulation, the rate of population growth, and the initial level of income. Table 9 presents the results of a cross-country regression for 103 countries over the 1960–92 period, in which the average ratio of investment to GDP was used as a measure of physical capital accumulation, the primary and secondary school enrollment ratios in 1960 as a proxy for investment in human Capital, 2/ and the real per capita income gap vis-à- vis the United States in 1960 as a measure of the relative initial income level. The estimated coefficients indicate that physical and human Capital accumulation are indeed important determinants of economic growth, and that, ceteris paribus, countries with a lower initial level of income tend to grow faster (conditional convergence). However, these outcomes should be interpreted with caution, as the estimated regression equation explains less than one-half of the variations in per capita income growth across countries, a common production function is assumed, and the quality of data is frequently poor.

Table 9.

Growth and Factor Accumulation, 1960–92: Senegal and Selected Regional Groupings 1/

article image
Source: Staff estimates.

A cross-sectional regression equation was estimated, using data averaged over the 1960–92 period for a set of 103 countries, with the growth rate of real GDP per capita as the dependent variable, and as explanatory variables: the average share of investment over the sample period; the average rate of population growth over the sample period; the gap between the 1960 level of real per capita income in each country and that in the United States; and primary and secondary school enrollment rates in 1960. The income gap is used to measure the extent to which poorer countries tend to catch up or converge towards richer ones. Data were obtained from the Penn World Tables, Mark 5.6 (Summers-Heston database) valued at 1985 PPP prices, except for school enrollment rates that came from the World Bank World Tables. Asterisks indicate statistical significance at the 5 percent level; adjusted-R2 = 0.45.

Excludes South Africa.

The cross-sectional parameter estimates have been used to calculate the contributions of the explanatory variables to the per capita GDP growth for Senegal, the CFA franc countries, sub-Saharan African countries, and the group of developing countries as a whole. Compared to these country groupings, Senegal’s sluggish long-term growth performance is largely attributable to its low rate of capital accumulation, which has been only half of that in other African countries, and its low rate of investment in human capital, as reflected in the appreciably lower rate of primary school enrollment. Where PINVY is the ratio of private investment to GDP, GINVY is the ratio of government investment to GDP, INF is the percentage change in the CPI, BDEFY is the ratio of budget deficit (excluding grants) to GDP, TOTPCH is the percentage change in the terms of trade, REERPCH is the percentage change in the real effective exchange rate (as calculated in the IMF Information Notice System) and RAININD is an index of the level of rainfall. With the exception of the coefficient of the budget deficit and the inflation rate, all other coefficients have the expected signs. 2/ However, only those for the level of rainfall and changes in the terms of trade are statistically significant, implying that exogenous factors were important determinants of the annual variations in Senegal’s rate of growth. Moreover, the equation explains only a small part of the growth performance over 1973–93, which suggests that structural factors were an important impediment to achieving a higher rate of economic growth. These results, however, should be interpreted with caution, in view of the data problems noted earlier.

Second, a production function-based approach (see Fisher, 1993) was used to examine the influence of economic policies and external conditions on Senegal’s long-term growth performance, as well as the channels—capital accumulation and total factor productivity (TFP) growth—through which these effects are transmitted. A cross-country/time-series regression analysis covering more than 100 countries was performed for the period 1970–92. This analysis provides estimates of the correlation between proxy variables measuring the impact of macroeconomic policies, terms of trade movements, and structural characteristics, and: (i) output growth; (ii) capital accumulation; and (iii) TFP growth. Because the proxy variables for macroeconomic and structural policies can be affected by other nonpolicy related factors, the policy implications of the analysis should be drawn with caution.

Table 10 summarizes the results of the panel regressions and compares Senegal’s policy record with that of other regional groupings. The global results indicate that macroeconomic stability—measured by a low rate of inflation, a small fiscal deficit in relation to GDP, and a small or zero exchange rate premium—as well as improvements in the terms of trade are positively correlated with the growth rate. The analysis also suggests that, after taking into account the effect of the initial level of income, investment in human capital (as proxied by the primary school enrollment rate in 1970) is strongly associated with economic growth. Finally, high tariff protection and an underdeveloped financial system would act as impediments to the rate of capital accumulation. Comparing the average value of Senegal’s policy variables with those of other African and developing countries, it appears that, apart from the low level of government savings, macroeconomic policies were relatively supportive of growth, capital accumulation, and TFP growth. Although the wide fluctuations in the terms of trade during 1970–92 did have a significant impact on the annual fluctuations in Senegal’s growth rates, the average movement in the terms of trade over the period as a whole was small, and did not substantially contribute to the long-term growth differentials between Senegal and the other country groupings. With regard to structural policies, primary school enrollment in 1970 was clearly lower than in other developing countries, while the extent of financial deepening and tariff protection was broadly similar. However, the analysis does not capture the fact that there were considerable distortions in the tariff structure, including highly dispersed rates and widespread exemptions. In addition, the important structural distortions in the agricultural and public enterprise sectors described in the main text are not taken into account.

Table 10.

Senegal: Growth, Investment, and Productivity: The Impact of Policies, 1970–92 1/

(In percent, unless otherwise indicated)

article image
Source: Staff estimates.

The correlations are estimated from three panel regressions with growth in real GDP, capital accumulation and TFP as dependent variables. TFP residuals are calculated as follows: TFP = ZGDP - 0.4 ZKAP - 0.6 ZLAB, where ZGDP is the rate of growth of real GDP, ZKAP is the rate of growth in the real capital stock, and ZLAB is the growth rate of the labor force. The data for the budget surplus, government capital expenditure and savings and the average effective import tax rate are from GFS, data for inflation and broad money are from IFS and all other variables are from Fischer (1993). +++ and—- mean that the correlations are significant at the 1 percent level, and ++(—) and + (-) imply significance at the 5 and 10 percent levels, respectively.

The effects of the budget deficit, on the one hand, and capital expenditures and government savings, on the other, were estimated in separate panel regressions. The estimated effects of the other macroeconomic variables did not differ significantly between the two regressions.

Including grants.

Defined as In (1+premium).

The third approach focusses upon Senegal’s growth performance over time. For the period 1973–93, a growth equation was estimated using ordinary least squares, with the following result: 1/

RGDPG=−35.03*+1.36PINVY+0.66GINVY+0.26BDEFY+0.013INF(1.08)(1.003)(0.508)(0.542)(0.108)+0.263*TOTPCH−0.196REERPCH+0.209***⁢   RAININD⁢ (1.66)(0.923)(3.610)Adjusted⁢   R2=0.37Durbin−Watson=2.24

2. Nongovernment investment

Recent empirical studies on the determinants of private investment in developing countries explain investment behavior in terms of variations in aggregate demand; relative prices, including the real effective exchange rate and the terms of trade; fiscal policy, including public spending on investment projects; monetary policy, in particular real interest rates and the availability of credit to the private sector; the rate of inflation as a measure of uncertainty; and indicators of external debt overhang. 1/

For Senegal, the behavior of the nongovernment investment ratio (in log form and in real terms) was found to be explained by the following six variables: real GDP growth lagged one period (RGDPG) to capture demand effects and with an expected positive coefficient; the log of central government investment to GDP at constant prices (GINV), to account for possible complementarity or crowding-out effects; the ratio of government domestic borrowing to GDP (DCG), as a measure of the Government’s absorption of domestic financial resources, with an expected negative coefficient; the inflation rate (INF) and the ratio of external debt to GDP in logs (DEBT), both with expected negative coefficients; and the level of the real effective exchange rate index in logs (REER). 2/ The results of the regression using ordinary least squares for 1978–93 are as follows: 3/

RPINV=4.075***+0.002*RGDPC−0.178**GINV−0.006DCG(6.74)(2.20)(2.46)(1.22)−0.011***INF−0.125DEBT−0.270*⁢    REER(7.80)(3.98)(2.14)Adjusted⁢   R2=0.86Durbin−Watson=2.63

The equation shows that economic activity—the lagged real GDP growth rate—has a very weak positive influence on the investment rate. Fiscal policy exerts an influence on nongovernment investment. The share of government investment in GDP exerts a statistically significant short-term crowding-out effect. However, complementarity between government and non-government investment, as found by Hadjimichael and Ghura (1995) in panel regressions covering 32 countries in sub-Saharan Africa, may be a characteristic of a subset, for example infrastructure, of total government investment and/or may manifest itself over longer time periods. This hypothesis could not be tested because of the lack of desaggregated data on government investment; lagged terms in government investment, however, were found to be statistically insignificant. The size of the government’s domestic borrowing requirement has a small negative, but statistically insignificant, influence on nongovernment investment. 1/ Uncertainty related to unstable macroeconomic conditions, as measured by the inflation rate, and the external debt ratio to GDP, also had a significant adverse impact on nongovernment investment. Finally, the external competitiveness has a statistically significant impact on the rate of nongovernment investment.

All in all, the analysis suggests that a good part of the behavior of nongovernment investment during 1978–93 can be explained in terms of conventional macroeconomic variables. However, other than for the inflation rate, their estimated impact in absolute terms on the investment ratio is small. 2/ This would point to structural distortions as an important factor behind Senegal’s disappointing long-term investment performance.

3. Nongovernment savings

In a recent study (using pooled cross-country and time-series data), Hadjimichael and Ghura (1995) did not find that the traditional variables used to explain nongovernment savings, such as the age-structure of the population and real GDP growth per capita, influence private savings in sub-saharan Africa. Macroeconomic uncertainty, as proxied by the standard deviations of the inflation rate and the external debt ratio, were found to be more important, while government savings were negatively correlated with private savings, indicating that Ricardian equivalence partially holds. Finally, financial deepening was positively correlated with private savings.

A similar equation was estimated for Senegal. The results should be interpreted with caution, partly because of the problems associated with the calculation of nongovernment savings, which are derived as the difference between total savings and government savings.

The estimated equation for the ratio of nongovernment savings to GDP using ordinary least squares for the period 1973–93, is as follows: 1/ 2/

PVSAV=0.241***+0.004***RGDPPCG−0.046BDEFY−0.839***M2Y(5.84)(3.386)(0.162)(4.970)+0.0001TOTPCH+0.002**⁢         INF(0.104)(2.353)Adjusted⁢  R2=0.70Durbin−Watson=2.05

where RGDPPCG is real GDP per capita growth, BDEFY is the ratio of the budget deficit to GDP, M2Y is the ratio of broad money to GDP, TOTPCH is the rate of change in the terms of trade, and INF is the inflation rate as measured by the rate of change in the CPI.

These results confirm the traditional view that real per capita growth is a statistically significant and positive determinant of nongovernment savings in Senegal. The coefficient of inflation rate was also found to be significant, but surprisingly with a positive sign. This seems to suggest that households in Senegal aim to keep their savings constant in real terms. Finally, again in contrast to Hadjimichael and Ghura, the ratio of broad money to GDP, indicating financial deepening, is significant and negative. This can be interpreted as reflecting a strong income effect on consumption as liquidity constraints ease, or real financial wealth increases.

References

  • Barro, Robert, “Economic Growth in a Cross-Section of Countries”, NBER Working Paper No. 2855 (Cambridge, Massachusetts: National Bureau of Economic Research, February 1989).

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  • Fisher, Stanley, “The Role of Macroeconomic Factors in Growth,” Journal of Monetary Economics. Vol. 32 (December 1993), pp. 485–512.

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  • Hadjimichael, Michael, Dhaneshwar Ghura, Martin Mühleisen, Roger Nord and E. Murat Ucer, Sub-Saharan Africa: Growth. Savings. and Investment. 1986–93, IMF Occasional Paper No. 118 (Washington: International Monetary Fund, January 1995).

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  • Hadjimichael, Michael, and Dhaneshwar Ghura, “Public Policies and Private Savings and Investment in Sub-Saharan Africa: An Empirical Investigation”, IMF Working Paper WP/95/19 (Washington: International Monetary Fund, February 1995).

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  • Heller, Peter, Richard Haas and Ahsan Mansur, A Review of the Fiscal Impulse Measure, IMF Occasional Paper No. 44 (Washington: International Monetary Fund, 1986).

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  • International Monetary Fund, “Common Policy Issues of the CFA Franc Countries,” EBS/94/151 (Washington: International Monetary Fund, July 29, 1994).

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  • Kormendi, Roger and Philip Meguire, “Macroeconomic Determinants of Growth: Cross-Country Evidence,” Journal of Monetary Economics, Vol. 16 (September 1985), pp. 141–63.

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  • Mankiw, Gregory, David Romer, and David Weil, “A Contribution to the Empirics of Economic Growth,” Quarterly Journal of Economics. Vol. 107 (May 1992), pp. 407–37.

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  • World Bank, (a) Senegal: Macroeconomic Update Report, Report No. 11041-SE (Washington: World Bank, June 1993).

  • World Bank, (b) Senegal: Stabilization. Partial Adjustment and Stagnation, Report No. 11506-SE (Washington: World Bank, September 1993).

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1/

The first stand-by arrangement for Senegal was approved on March 30, 1979.

2/

Recent theoretical and empirical studies of economic growth, based on endogenous growth models, have attempted to explain growth by linking it to initial economic conditions and policies that affect physical and human capital accumulation and factor productivity growth. Exogenous factors, such as weather conditions and changes in the terms of trade, also play a key role. For a survey of the literature, see Hadjimichael et al., 1995.

1/

Other statistical weaknesses are discussed in Appendix VI to the staff report for the 1995 Article IV consultation and midterm review under the first annual ESAF (EBS/95/80).

1/

Until 1991/92, the fiscal year ended on June 30. Starting 1993, the fiscal year shifted to calendar year basis. For the purpose of this study, fiscal data is presented on a calendar year basis.

1/

In 1986, Senegal adopted its first SAF-supported program, which was followed by several SAF and ESAF arrangements.

1/

See World Bank (1993 a and 1993 b).

1/

Developments in the share of fixed investment in GDP measured at constant and current prices diverge during the period under review. The investment rate shows, on average, a small but steady increase of 1 percentage point of GDP between 1978–84 and 1989–93, when measured at constant prices. By contrast, the investment rate, measured at current prices declined, on average, between 1978–84 and 1985–88, before recovering in 1989–93.

2/

Adverse weather conditions were experienced in 1978, 1980, 1981, 1984, 1991, and 1992.

1/

However, measures of competitiveness were found to influence investment which suggests that the same would be true for movements in the terms of trade affecting profitability (see Annex I).

2/

The shock is calculated as the change in the U.S. dollar export price index multiplied by the export volume, less the change in the U.S. dollar import price index multiplied by the import volume.

1/

Trend GDP is calculated by applying a univariate Hodrick-Prescott filter to actual GDP for 1970–93. The filter calculates trend GDP by minimizing the variation of actual GDP around the trend, subject to a (specified) constraint on the variations of the growth rate of the trend. Agricultural production in Senegal exhibits a relatively flat trend, and therefore the mean volume of output for 1977–93 is used instead of a trend. Supply shocks in the agricultural sector also generate second round contractionary impulses through their impact on agro-processing industries. Because these are not captured by output deviations in the agricultural sector, this measure will understate the impact of supply shocks.

1/

The measure is similar to that for industrial countries in the World Economic Outlook; see Heller et al. (1986) for a description of the methodology. The measure of potential output is identical to that used in estimating the output gap.

1/

The Information Notice System CPI-based REER index for Senegal is calculated with reference to bilateral trading partners and does not take into account other countries competing in Senegal’s export markets. Also, the CPI index for Senegal is outdated; its weights are based on a 1960–61 household survey, and it coverage is limited to Dakar. Moreover, the CPI index has not reflected movements in domestic wage costs.

2/

Competitiveness of the CFA franc countries is discussed in detail in EBS/94/151.

1/

See World Bank (1993 a and b).

1/

Monetary policy in the WAEMU has been conducted on the basis of an annual monetary program geared toward protecting the foreign reserves of the BCEAO. The conduct of monetary policy in the Union underwent significant reforms over the period 1989–93. Prior to the initiation of these reforms, the BCEAO relied largely on: (i) quantitative credit ceilings; (ii) limits on central bank financing; (iii) a discount rate; (iv) an interbank money market to maximize the retention of funds within the Union and the effective use of the liquid assets of the commercial banks; and (v) a minimum liquidity ratio and two solvency ratios. The principal objective of the reform of monetary policy instruments in October 1993 is to foster a more efficient and flexible monetary policy by gradually replacing administrative Controls over money and credit with more indirect and market-oriented instruments, including: (i) the liberalization of banking conditions; (ii) a major reform of money market operations; (iii) the establishment of minimum reserve requirements; (iv) the promotion of an active regional interbank market; and (v) the strengthening of prudential regulations.

1/

Products subject to price Controls were: sugar, rice, cotton, groundnuts, vegetable oil, tomatoes, tomato paste, wheat flour, wheat bread, pharmaceutical drugs, health care services, imported milk, imported instant coffee, soap, bottled gas, charcoal, soft drinks, cement, reinforced steel bars, petroleum products, urban transport, and water, electricity, and telephone utilities.

2/

The enrollment rates in 1960 were used, rather than the average for the entire period, because returns to investment in education materialize with long lags.

1/

All variables, except REERPCH are lagged one period. T-statistics of the estimated coefficients are given in parentheses; the symbols *** and * next to the estimated coefficients denote statistical significance at the 0.01 and 0.10 levels, respectively.

2/

Using a similar equation in a panel regression and focusing in particular on growth in sub-Saharan Africa, Hadjimichael et al. (1995) found a stable and positive relationship between macroeconomic stability and growth. In addition, their results show that private and government investment have a positive effect on growth.

1/

For an overview, see Hadjimichael et al. (1995).

2/

The REER index uses the INS CPI-based index, but with the average earnings index for civil servants used for Senegal as a proxy for domestic costs, instead of the CPI index.

3/

T statistics of the estimated coefficients (in parentheses) were computed using White’s heteroskedasticity-consistent-variance-covariance estimator. The symbols ***, **, and * next to the estimated coefficients denote statistical significance at the 0.01, 0.05, and 0.10 levels, respectively.

1/

The small size of the estimated coefficient may reflect the substantial share of public enterprises in nongovernment investment. Public enterprises received substantial subsidies, that contributed to the government’s overall borrowing needs.

2/

A 10 percentage point rise in inflation would reduce the investment ratio by almost 1 percentage point (evaluated at the sample mean), while, for example, a 10 percent increase in the external debt to GDP ratio would lead to a 1 percent decline in the investment rate, which is equivalent to a decrease of only 0.1 percentage points of GDP from the investment ratio in 1993.

1/

T-statistics of the estimated coefficients are given in parentheses; the symbols *** and ** next to the estimated coefficients denote statistical significance at the 0.01 and 0.05 levels, respectively.

2/

All variables were lagged, except the change in CPI.

Appendix I. Senegal: Summary of Tax System as of December 1994

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Source: Data provided by the Senegalese authorities

Entirely earmarked for use by the local authorities.

Of which taxes on alcoholic beverages are earmarked for use by the CAA.

Half of the proceeds are earmarked for use by the local authorities.

Table 1.

Senegal: GDP by Economic Sector at Constant 1987 Prices, 1989–94

(In billions of CFA francs)

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Source: Data provided by the Senegalese authorities.

Including mining.

Table 2.

Senegal: Supply and Use of Resources at 1987 Prices, 1989–93

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Source: Data provided by the Senegalese authorities.
Table 3.

Senegal: Level of Rainfall on the Groundnut Basin, 1960/61–1994/95

(In millimeters)

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Source: Data provided by the Senegalese authorities.

The level of rainfall refers to the period May-October of the first year shown.