Senegal: Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix on Senegal examines the magnitude, quality, and composition of fiscal adjustment, and the sustainability of public debt in the context of a debt dynamics framework. The paper explains the rationale for fiscal adjustment and presents some characteristics of the desired tax and expenditure policies. It describes the structure and size of the public sector in Senegal, and discusses historical developments in fiscal deficits and debt accumulation. The paper also assesses the quality of fiscal adjustment in Senegal.

Abstract

This Selected Issues paper and Statistical Appendix on Senegal examines the magnitude, quality, and composition of fiscal adjustment, and the sustainability of public debt in the context of a debt dynamics framework. The paper explains the rationale for fiscal adjustment and presents some characteristics of the desired tax and expenditure policies. It describes the structure and size of the public sector in Senegal, and discusses historical developments in fiscal deficits and debt accumulation. The paper also assesses the quality of fiscal adjustment in Senegal.

I. Fiscal Adjustment and Public Debt Sustainability in Senegal, 1986-961

A. Introduction

1. With Dakar the capital of the former French West Africa Federation, Senegal became independent in 1960 with a well-developed infrastructure and productive base, a well-educated civil administration, and relatively high per-capita income. In the decade and a half following independence, the government’s economic policy was based on an inward-looking strategy and widespread state intervention, with a soaring civil service and public sector. Government intervention spread, first in the agricultural sector and then gradually to all sectors of the economy, with labor, trade, and pricing policies leading to severe distortions in resource allocation. The number of public enterprises expanded through nationalization and new enterprise creation. By the early 1980s, the public enterprise sector was suffering severe problems due to under capitalization, mismanagement, biased incentives, soft budget constraints, and dependence on government subsidies, all of which further distorted the Senegalese economy. The deterioration of the economic situation was accompanied by significant external official borrowing and budgetary assistance, and increasing recourse to short-term debt.

2. By the late 1970s, early 1980s, the Senegalese economy, afflicted by domestic and external imbalances, was in clear need of adjustment and the government embarked on a series of adjustment programs, supported by the IMF and the World Bank.2 The outcome of the adjustment programs throughout the 1980s and early 1990s was mixed. While the financial situation was largely stabilized, economic growth, private investment, and saving did not pick up. There was little if any progress toward diversification of production and the economy remained vulnerable to the vagaries of the weather. In 1994, Senegal, together with the other members of the CFA franc zone undertook a 50 percent devaluation of the CFA franc, supported by a comprehensive adjustment program. The devaluation gave a second wind to the Senegalese economy, which has since recorded positive rates of growth.

3. Fiscal policy was a major component of the adjustment programs. The objectives were to strengthen public finances by improving the government revenue to GDP ratio, eliminating domestic and external payment arrears, reducing current spending, improving the efficiency of public investment, reducing the size of the public sector, and reducing or eliminating price distortions created by subsidies and transfers. This note examines the magnitude, quality, and composition of fiscal adjustment, and the sustainability of public debt in the context of a debt dynamics framework. The next section explains the rationale for fiscal adjustment and presents some characteristics of the desired of tax and expenditure policies. Section C describes the structure and size of the public sector in Senegal, and discusses historical developments in fiscal deficits and debt accumulation. Against this background, Section D assesses the quality of fiscal adjustment in Senegal. Section E presents a framework for analyzing the dynamics of public debt and discusses the sustainability of Senegal’s debt burden. Section F concludes.

B. Fiscal Adjustment and the Needed Fiscal Effort

The rationale for fiscal adjustment

4. Fiscal adjustment is at the core of the adjustment programs for the CFA franc zone countries. Strengthening the budgetary position and increasing government saving are key actions to help bolster domestic savings, restore external viability, and stabilize or reduce the debt burden. Adjustment also requires that the role of public enterprises be reduced, and their finances be put on a sound footing, in order to create opportunities and resources for the private sector to prosper and generate economic growth.3 Fiscal adjustment must also be durable: although some policy measures with short-term effects may be easy to implement, the risk of reversals are high if the measures do not address structural fiscal problems. A competent and motivated public administration is essential for the efficient implementation of tax policy and public expenditure management. Strengthening administrative capacity is, therefore, an essential element of adjustment effort.

5. There are three crucial aspects of fiscal adjustment: magnitude, quality, and sustainability.4 The necessary magnitude of fiscal adjustment, including the related issue of the length of time over which the adjustment is needed, will depend on the nature of the imbalance, the stance of macroeconomic policies, cyclical developments, and political or administrative constraints. Among the factors that determine the required amount of adjustment are whether the cause of the imbalance is short-lived or permanent; whether large external imbalances need to be corrected; and whether financing is available. A substantial reduction in fiscal imbalances will generally require a mix of revenue and expenditure policies. The quality of adjustment refers to this mix, as well as to the composition of the revenue and expenditure measures and to the short- to medium-term durability of the adjustment program. The quality of adjustment determines its impact on economic growth through its direct effect on saving, investment, and the efficiency of resource allocation. Finally, it is not only important that adjustment programs be durable, in the sense of not being quickly reversed, they also need to be sustainable in the sense that successful implementation results in a stable long-run debt burden that can be serviced without recourse to borrowing.

Reforming the tax system

6. The role of tax policy is to raise sufficient government revenue to finance necessary expenditure, without creating excessive tax burdens or major distortions to relative prices. High tax rates and a complex tax system are likely be counterproductive as they make compliance more difficult and encourage tax evasion. A good tax system has the following characteristics (IMF (1995) and EBS/95/166):

• The capacity to generate revenue increases in line with nominal GDP growth without the need for new taxes or frequent changes in tax rates. This implies the desirability of taxes that are levied on a nominal tax base rather than specific taxes levied on quantities.

Efficiency in the sense that the distortionary impact on relative prices and resource allocation is minimized. Efficiency is achieved by levying taxes on a broad tax base, with few exemptions, and at uniform and relatively low rates; for particular categories of goods, excise taxes may be used.

Equity, with a tax burden that is fair, differentiating according to the ability to pay (vertical equity) or giving equal treatment to those in similar circumstance (vertical equity).

Transparency, with tax codes that are readily understood, easy to administer and monitor, which should promote compliance. This also implies the importance of minimizing the frequency of discretionary modifications to tax laws, and clearly explaining and documenting any modifications that are made.

• A low cost system with respect to resources required for assessing and collecting taxes.

7. For a developing country such as Senegal, the following taxes have these characteristics: value-added taxes are efficient and easy to administer, particularly if there is a single rate, a minimum of exemptions, and no differentiation between the sources of production; excise taxes levied on an ad valorem basis on luxury goods or to discourage the consumption of products with negative externalities; a basic and progressive income tax excluding the poorest groups, with only a few income brackets and using withholding taxes to ensure compliance; and profit taxes levied at a single low rate, with tax incentives strictly limited in terms of coverage and duration. As a general rule, relatively high taxes on international trade are a feature of inward-looking development strategies, which are now recognized as counterproductive. Export duties could be justified as a substitute for income taxes that are otherwise difficult to collect, for example in rural areas; this, however, is not valid for Senegal. Import duties with low average rates, a limited number of rates and few if any exemptions can be an effective form of generating revenue provided there is a strong customs administration.

Productive expenditure policy

8. Cutting expenditure is one obvious way to reduce a budget deficit. However, some spending, such as investment—broadly defined to include productive spending on infrastructure, health, education, and the judicial system—can raise the long-term growth potential of the economy. It is crucial therefore that expenditure reducing measures clearly distinguish between productive and unproductive expenditure, and that policy-makers look beyond the short-term effects of expenditure cuts. The following are guidelines for expenditure policies that enhance long-term economic growth:

Avoid across-the-board cuts as they do not differentiate between expenditures that have very different economic and social impacts. Furthermore, these cuts are usually not durable because they defer more fundamental restructuring needed to strike the appropriate balance between personnel, operations, and capital outlays. Because of their ad hoc nature, across-the-board cuts also may lead to the accumulation of payments arrears if the reduced expenditures are essential for the functioning of the administration, the run-down of infrastructure, and may prevent the normal conduct of administrative work, including tax and customs administrations, which can aggravate the initial imbalances.

Offer adequate public sector salaries while containing the overall wage bill, by minimizing disparities between private and public sector workers, relating wages to performance, and, if necessary, freezing or reducing the size of civil service.

Target social programs by identifying vulnerable groups, means testing, and replacing general price subsidies schemes with targeted subsidies or income transfers.

Allocate sufficient resources to human resource development, especially to the crucial areas of basic education, and primary health care. The efficiency and quality of public services in general can be improved through user fees where appropriate.

Ensure an efficient public investment program by improving the design, implementation, and monitoring of projects, and by withdrawing from areas that can be better managed by the private sector.

Reform public enterprises by adjusting their price structure, redefining their role, improving their management, and privatizing all enterprises except those that have a strictly public service function.

C. Structure of the Public Sector in Senegal and Historical Trends

Institutional setting

9. The public sector in Senegal consists of the central government, local authorities, and non-financial public enterprises. Apart from the Presidency, the Office of the Prime Minister, and the ministries (currently 25), the central government comprises the National Assembly, the Economic and Social Council, and the Supreme Court, all of which are covered by the general budget. Local authorities consist of urban units (communes) and rural districts (communautés rurales). The local authorities were given special budgets in 1996 in the context of a deepening of the decentralization policy. In addition, there are 53 nonfinancial public enterprises or agencies,5 a number of entities engaged in cultural and professional activities, and six financial institutions.

10. The consolidated central government financial accounts include all budgetary operations monitored by the Treasury. In 1992, the fiscal year was changed to the calendar year; prior to that, fiscal years ran from July 1 to June 30. The Treasury executes all cash transactions of the government. The Treasury also maintains a number of special and correspondent accounts. In the early 1990s, two major special accounts, the Debt Amortization Fund (CAA) and the Price Stabilization Fund (CPSP), were abolished.

11. Senegal is a member of the West African Economic and Monetary Union (WAEMU). In this context, there is statutory ceiling on central bank advances to the Treasury equivalent to 20 percent of recorded government revenue from the most recent audited year, which limits the extent of monetization of the budget deficit.

The public enterprise sector

12. Public enterprises are present in a large array of activities. Until recently, the public sector had a virtual monopoly over public utilities, including electricity, water, and telecommunications. Public enterprises also dominate mining and transportation, with a smaller involvement in commercial activities, such as commerce, tourism, and manufacturing.

13. In 1985, the government adopted the “New Policy for the Parapublic Sector” (NPSPP) with the aims of (i) withdrawing the State from those enterprises that could be better run by the private sector, and (ii) rehabilitating and improving the efficiency of “strategic” public enterprises that would remain under State control. The initial impact of this strategy was limited: although there was improvement in the management of some enterprises, there was little progress in terms of privatization or liquidation of public enterprises, and the burden on public finance was not reduced.

14. A more comprehensive reform program was initiated in 1989 with World Bank support. The program called for the rehabilitation of enterprises remaining in the State’s portfolio; the privatization or liquidation of 40 enterprises, and the establishment of sound financial relations between the government and the public enterprises. By 1992, only one of the 40 enterprises had not been privatized, while eight additional ones had been privatized. In the context of this reform program, a number of performance contracts were signed to rehabilitate enterprises and restructure the relations between the government and the enterprises. The reform also introduced greater financial discipline and hardened budget constraints on commercial public enterprises.

15. As of end-1996, there were 10 public enterprises (sociétés nationales), 35 joint public enterprises (sociétés d’économie mixte), and some 20 public agencies (établissements publics) (Table 1). The socidtis nationales are entirely owned by the government and are mainly public utility providers (notably, electricity, communication, water, and transportation); in theory, they enjoy a relatively large degree of autonomy. The sociétés d’économie mixte are mixed capital enterprises, whether with a majority or minority government share, of which some may be owned by another public enterprise. There are three kinds of éstablissements publics: commercial and industrial (8 entities), administrative, and professional (some 15 entities). They have the least autonomy and, except for the commercial and industrial entities, they are nonprofit. Since the early 1990s, the government has started withdrawing from the monopolies in public utilities: the management of the water company (SONEES) has been privatized, one-third of the capital of the telecommunications company (SONATEL) was opened to the private sector, and a reform in the energy sector is expected to lead to the privatization of the national electricity company (SENELEC).

Table 1.

Senegal - Public Enterprise Portfolio at end-December 1996 1/

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Data provided by the Cellule de gestion et de Controle du Portefeuille de I’Etat

Highlighted enterprises are slated for privatization.

Financial results are for 1995; for other enterprises, results are for earlier periods.

Not formally an EPIC, but a public agency of a commercial nature.

May not be exhaustive

Fiscal deficits

16. During the period 1978-84, Senegal experienced important declines in output, coupled with three droughts and a significant fall in the world market price of groundnuts, at that time the country’s main export crop. The period was characterized by mounting external and domestic financial imbalances, little investment, and low or negative saving rates.

17. At the same time, the Senegalese government pursued expansionary financial policies that were successful in stimulating consumption but not productive investment, which stagnated. The budget deficit (on a commitment basis and excluding grants) increased from about 1 percent of GDP in 1978,6 to a peak of 10 percent in 1981. Widening fiscal imbalances during that period mainly reflected a failure to contain current expenditure; weak tax collection, in part related to several droughts; deficits of price stabilization schemes and Treasury special and correspondents accounts; and poor financial performance of public enterprises. In addition, liquidity problems of public enterprises resulted in the accumulation of payment arrears, with financial difficulties transmitted from one enterprise to the other, resulting in accumulation of arrears vis-à-vis the Treasury. To finance the deficits as well as the high levels of imports stemming from strong domestic demand, the government made recourse to external borrowing. As a result, the debt service burden increased substantially and the government had to seek a number of debt reschedulings. The external debt stock more than tripled from 25 percent of GDP in 1978 to 86 percent in 1984. As external and domestic financing covered only part of the deficit, the remainder was financed by the buildup of domestic and external payment arrears.

18. The government undertook to stabilize the economy through tighter fiscal policy as early as 1982. Although the adjustment program was characterized by repeated reversals of positive achievements, the budget deficit (on a commitment basis and excluding grants) declined steadily from 10 percent of GDP 1981 to 2½ percent of GDP in 1987 and 1988 (Figure 1, and Tables 2, 3, and 4). In 1989, however, the deficit widened again to 4 percent of GDP, but then improved markedly in 1991 and 1992, before returning to 4 percent of GDP in 1993.

Figure 1.
Figure 1.

Senegal Budget deficit and arrears accumulation

(In percent of GDP)

Citation: IMF Staff Country Reports 1997, 094; 10.5089/9781451833836.002.A001

Source: Data provided by the Senegalese authorities
Table 2.

Senegal - Indicators of Fiscal Deficits

(In billions of CFA francs)

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

Total Government Revenue

(In billions of CFA francs)

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Source: Data provided by the Senegalese authorities.

Taxes on net income and profits and employer’s payroll tax.

Including VAT collected by customs.

Table 4.

Senegal - Budgetary Expenditure

(In billions of CFA francs)

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Source: Data provided by the Senegalese authorities.

19. The main reason behind these erratic results was stop-and-go implementation of adjustment policies that were not durable. As discussed in the next section, various tax reforms failed to generate a durable increase in receipts for several reasons: the tax base continued to be narrow because of the pervasiveness of exemptions; most taxes were relatively inelastic with respect to nominal income; the tax system relied heavily on cyclical revenues; 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 reduced competitiveness. Moreover, a significant proportion of the revenue measures were nonrecurring, such as the collection of tax arrears from public enterprises, and many of these were offset by compensating expenditure measures such as additional transfers to enterprises, and therefore had no impact on the budget.

20. Part of the improvement in the fiscal position between 1986 and 1992 reflected a reduction in current spending, which was cut by almost 3 percent of GDP. The reduction in current spending reflected mostly a cut in the outlays on materials and supplies as well as subsidies and transfers, all of which were cut by about 1½ percent of GDP between 1986 and 1992. The wage bill was also brought down by almost one half a percent of GDP over the same period. Capital spending remained around 2¾ percent of GDP between 1986 and 1991, and then increased to around 4½ percent of GDP in 1992.

21. In 1994, the budget deficit deteriorated further to 5¾ percent of GDP, due to the effects of the devaluation, which increased spending more than revenue. After 1994, however, the budget deficit was steadily reduced to less than one half percent of GDP in 1996. The improved the fiscal performance since 1995 stemmed from durable measures to improve tax collection and to contain current spending, including the wage bill.

D. The Quality of Fiscal Adjustment in Senegal, 1986-96

Revenue mobilization and composition

22. There are three tax collecting agencies in Senegal. The Customs Department (DGD) is in charge of assessing and collecting of taxes on imports and exports, including the value-added tax (VAT) on imports.7 Until 1994, fiscal fraud, weak administrative capacity, inadequate human and material resources in the DGD, and a narrow tax base were reflected in low customs revenue. The Tax Department (DGI) is in charge of assessing and collecting domestic taxes, the most important of which are the VAT on domestic goods and the income tax. The third agency is the Treasury Department, which collects most nontax revenues, and receives the taxes collected by the DGD and DGI. The Treasury Department has traditionally suffered from weak organization and staffing, which has been reflected in the absence of strict and timely control over tax collection.

23. The government implemented several reforms to the tax system beginning in 1986. An important set of reforms took place in 1987 with the introduction of a new tax code that simplified the tax schedule, replaced specific taxes by ad valorem taxes, extended the VAT tax to primary commodities and construction materials, reformed the taxation of projects financed by external loans, and modernized a number of administrative procedures. Concomitantly, the investment code was revised to reduce the scope of exemptions. The computerization of the tax collection system was also significantly revamped. At customs, the reforms focused on a simplification of the external tariff and the computerization of customs operations, including the introduction of the’ current customs clearance computerized system (GAINDE). The number of fiscal rates was reduced and the dispersion of rates was lowered substantially. In addition, tariffs were lowered in two stages, reducing the effective tariff rate from 98 percent to 68 percent.

24. Following an IMF technical assistance mission in 1989, another major reform was introduced in 1991. The measures included the introduction of a statistical tax of 3 percent on all merchandise entering customs checkpoints, whether subject to exemptions or not (except for imports financed by grants and diplomatic imports); the collection of deferred customs payments and tax arrears; reductions in customs and tax exemptions; improvements in customs valuation procedures; increased excise taxes on tobacco, coffee, alcoholic beverages, and luxury goods; the extension of the VAT to trade and services,8 combined with a reduction in the maximum rate from 50 percent to 30 percent; the introduction of an equalization tax for small businesses; increases in personal income tax rates by 5 percentage points;9 the introduction of an airport departure tax; increases in the rates and coverage of stamp duties and fees; and the introduction of a minimum presumptive tax based on business license fees. In addition, the tax department was reorganized in January 1990 along functional lines and the training of tax inspectors was intensified. The customs administration reinforced its inspection units and conducted an internal audit of its services. A Swiss import valuation agency, the Société générale de surveillance, also began operations in July 1992.

25. Despite the reforms initiated in 1986, tax revenue as a percent of GDP declined steadily from 15 percent in 1986 to 13½ percent in 1989, mostly because of declining taxes on goods and services and international trade (Figure 2). The tax to GDP ratio rose in the three subsequent years, mainly due to exceptional measures such as the collection of deferred taxes and tax arrears and the receipt of taxes on dividends from public enterprises. Poor revenue performance was due to weak tax administration, subdued economic activity, and the growing importance of the informal sector, which remained virtually untaxed. Nontax revenue was volatile, as it reflected many nonrecurrent factors such as privatization receipts, receipts from fishing agreements, and other exceptional measures.

Figure 2.
Figure 2.

Senegal-Composition of tax revenue

(in percent of GDP)

Citation: IMF Staff Country Reports 1997, 094; 10.5089/9781451833836.002.A001

Source: Data provided by the Senegalese authorities.

26. In 1992, major policy slippages and delays in the implementation of structural reforms led to a rapid deterioration of Senegal’s financial situation and a reversal of earlier gains. The fiscal balance (on a commitment basis and excluding grants) deteriorated to a deficit of 3¾ percent of GDP. There were revenue shortfalls because of delays in the implementation of the automatic adjustment mechanism of petroleum product prices, in the start-up of the import valuation agency, and in the introduction of the equalization tax. In 1993, there was a serious worsening of the fiscal situation, mainly due to expenditures related to presidential and legislative elections. To halt the deterioration, the authorities put in place a rescue plan (plan d’urgence) in August 1993, consisting of a package of internal adjustment measures aimed at reducing the fiscal deficit. On the revenue side, the measures included a doubling of the stamp duty to 6 percent, the imposition of a 12 percent duty on previously-exempt imports, an increase in the import duty on rice, an increase in the retail prices of petroleum products, the extension of the VAT to the transportation of three major commodities, and the doubling of the equalization tax. The impact of these measures during the last four months of 1993 helped to increase total revenue, but, at 16 percent of GDP, it remained about 3½ percentage points below its 1992 level.

27. As part of a comprehensive adjustment program adopted at the time of the devaluation of the CFA franc in January 1994, the Senegalese authorities undertook a new reform of the tax system that focused on simplification of the system, reduction of rates, and extension of the tax base. The major measures included (Box 1): (i) the reduction of the number of VAT rates and the extension of the VAT tax base; (ii) the simplification of the taxation of petroleum products with a unified VAT rate of 20 percent; (iii) the reduction of excise rates on tobacco, cigarettes, and alcoholic beverages; and (iv) the simplification and reduction of customs tariffs. In addition, the customs and tax departments were gradually reinforced, reorganized, and their computer systems improved. More recent measures included the extension of the VAT to importers and manufacturers’ clients, the conversion of the equalization tax into a withholding tax on VAT payments, the establishment of a large taxpayers unit, the incorporation of excise taxes into the VAT tax base, and the introduction of the single taxpayer registration number.

Indirect Tax Reform, 1994

Following the devaluation of the CFA franc, the Senegalese authorities introduced a major reform of the tax structure in February 1994 aimed at improving the efficiency of the tax system and enhancing tax compliance.

Import taxes

Import categories were simplified by reducing them from seven to four categories: (1) social goods, including inputs for the agricultural and the fisheries sector, and pharmaceutical industries; (2) capital and intermediate goods; (3) basic consumption goods; and (4) other consumption goods. The rates and categories were reduced and simplified, thus limiting tax dispersion. The following system was put in place:

  • Customs duty: was reduced from 15 percent to 10 percent.

  • Fiscal duty: the maximum rate was reduced from 50 percent to 30 percent; the number of rates were reduced from seven to four of 0, 10, 20, and 30 percent; the 10 percent rate was suspended for categories 1 and 2 of goods.

  • Stamp duty: was reduced from 6 and 12 percent to 5 percent, and was extended to all imports with only a few exceptions.

Value-added taxes

The maximum rate was reduced from 34 percent to 20 percent, and the number of rates was reduced from five to two (10 and 20 percent). In 1996, the value-added tax base was amended to be augmented by the value of excises taxes.

Excise taxes

For alcoholic beverages and cola nuts, the maximum rates were reduced from 60 and 65 percent respectively, to 30 percent; the maximum rate on tobacco was reduced from 32.4 to 30 percent; and the excise on cement was abolished.

Surcharge on luxury goods

Selected luxury goods are subjected to a 20 percent surcharge.

In January 1998, a further reform is expected to be introduced in the context of the introduction of a common external tariff within the WAEMU zone. It is expected that the number of import categories will be reduced to four (one of which would be zero) and the maximum duty rate will be reduced to about 25 percent.

28. The impact of these reforms was not felt immediately. In 1994, there was a shortfall of almost 1 percent of GDP in total revenue compared with the objective. This was primarily due to a lower-than-expected level of imports, together with a shift in the composition of imports that led to lower customs receipts, as well as tax fraud and still weak administrative capacity. From 1995 onwards, however, there has been a clear improvement of government revenue, reflecting the earlier reforms as well as the recovery of economic activity that followed the devaluation. Between 1994 and 1996, total tax revenue increased by 1½ percent of GDP to 14 percent of GDP, with the most noticeable recovery in customs tax collection, which increased by 1 percent of GDP to 6¾ percent, followed by taxes on goods and services which increased by ½ percent of GDP to 3½ percent, and direct taxation, which increased by ¼ percent of GDP to 3¼ percent.

Expenditure policy

29. The Budget Department is in charge of the preparation, execution, and monitoring of the budget. There are several weaknesses in budgeting procedures: the budget records the special and correspondents accounts on a net basis, and therefore under-estimates gross expenditures and revenues; and the budget does not cover the entire public sector, so that the overall deficit and public borrowing requirement is understated. In addition, public expenditure management is hampered by a cumbersome and slow process of implementation that was until recently circumvented routinely by administrators, which resulted in expenditure overruns, extrabudgetary spending, and the accumulation of domestic payment arrears. The authorities have recently taken steps to increase the role of the budget as an expenditure management tool.

30. The budgetary procedure includes four steps: (i) the engagement (the commitment) after a ministry submits a proposal that is approved by the comptroller, and a credit title is issued to the supplier and a certification is issued to the ministry - a procedure that may take up to four months; (ii) in the liquidation stage the supply of the goods and services is verified, and the amount to be paid is determined; (iii) the ordonnancement is when the payment order is issued; and (iv) the paiement effectif is when the actual payment is made. The weakness of this system resides in the lengthy time between the beginning of the procedure and the actual payment, which can be anywhere between three months and one year. In addition, it appears that the lack of motivation of the staff often leads them not to follow the procedures diligently.

31. A public expenditure review (PER) was conducted in 1993 by the World Bank. Several of the problems with the budget process identified by that review have not been corrected. First, appropriations are made automatically from year to year, without a reevaluation of the appropriateness of the level of appropriations. Second, there is a weak link between the preparation of the capital and current budgets, with current spending often recorded in the capital budget, or double-counted, making it difficult to assess the efficiency and sustainability of capital expenditures. Third, the part of the investment program financed by external donors is not well monitored by the Treasury, so there is little information on current expenditure required for project implementation, with adverse effects on the execution of projects. Finally, some current expenditure are misclassified, notably some allowances to civil servants are included in materials and supplies instead of the wage bill.

32. The ratio of current expenditure to GDP has been declining steadily from 18 percent of GDP in 1986, to 15 percent in 1992, and further to 12 percent in 1996. This reduction occurred in large part on account of a reduction in the share of wages and salaries, which dropped from 9 percent of GDP to 6 percent over the same period, although the share of most other items also declined. At the same time, capital expenditures increased from 2¾ percent of GDP in 1986 to 4¾ percent in 1996, with the share of the domestically financed portion increasing from ½ percent of GDP to 1½ percent.

33. In the economic classification of current spending, wages and salaries account for the largest share of current spending, over 50 percent on average during the period 1986-1996 (Figure 3). Wages and salaries reached a peak of over 60 percent of current expenditure in 1993, but by 1996 they had fallen back to about the same share in 1986 (about 52 percent). Wages and salaries also declined relative to GDP, with particularly sharp decreases since 1993. A recurrent feature of the wage bill until recently is the rappels, which are back payments for wage increases previously granted by the automatic promotion system. Material and supplies declined from 18 percent in 1987 to less than 17 percent in 1996. The decrease in spending on maintenance contributed to a deterioration of the existing infrastructure with detrimental effects on longer term growth prospects. Transfers and subsidies (including scholarships) also declined from about 12 percent in 1986 to about 9 percent in 1996.

Figure 3.
Figure 3.

Senegal-Economic classification of spending

(In percent of GDP)

Citation: IMF Staff Country Reports 1997, 094; 10.5089/9781451833836.002.A001

Source: Data provided by the Senegalese authorities.

34. In terms of the functional classification of current spending, on average over the period 1986-96, general public service had the largest share, followed by education, interest on debt, and national defense (Figure 4). Although The ranking of the shares has been relatively stable during the period as a whole, the share of total current spending allocated to education increased from 20½ percent in 1986 to 25½ in 1996, and the share allocated to health rose from 4 percent to 5½ percent over the same period. Despite a restructuring of health expenditures in favor of primary health care in the 1980s, the adequacy and quality of health delivery services has deteriorated and the balance between wages and salaries and materials and supplies has shifted in favor of the former. In the education sector, relatively high teacher salaries have squeezed expenditure on non-wage current expenditure, and spending has favored higher education at the expense of primary education.10 Spending on education and health services as a share of GDP remained relatively stable (Figure 5).

Figure 4.
Figure 4.

Senegal Functional composition at current spending

(in CFAF billion)

Citation: IMF Staff Country Reports 1997, 094; 10.5089/9781451833836.002.A001

Source: Data provided by the Senegalese authorities.
Figure 5.
Figure 5.

Senegal Functional composition at current spending

(in percent of GDP)

Citation: IMF Staff Country Reports 1997, 094; 10.5089/9781451833836.002.A001

Source: Data provided by the Senegalese authorities.

35. The government introduced a three-year rolling public investment program in 1986 (Rouis, 1994). The objectives were to ensure that investment plans were consistent with the macroeconomic framework, by incorporating the investment budget into the government’s overall budget, and to improve project preparation, appraisal, and monitoring. Although there has been an improvement of the management and preparation of the public investment program, it still suffers from lack of coordination, and weak follow-up on the physical and financial execution. In addition, there are still problems in setting the priorities within the overall investment program. As a result, appropriations for social services, including health and education remain relatively low; and within the overall appropriations, the shares allocated for primary education and basic health—which are key to improved development of human resources—have generally been too low.

36. In 1992, the Senegalese authorities undertook measures to cut low-priority expenditures and provide adequate allocations for priority spending. In this context, the government wage bill was to be reduced through the voluntary departure program, limited recruitment, downsizing the staffing of embassies, and not granting cost of living adjustments (Box 2). Subsidies and transfers were also to be reduced, while budgetary allocations for maintenance, social services, and capital outlays were to be increased. In addition, the contribution rates for the national retirement fund (FNR) and the social security fund (IPRES) were raised in April 1991.

Civil service reform

In January 1990, the government introduced a civil service reform program. The program envisaged a restructuring of the administration, with the elimination of 2,850 positions; an early retirement program that would affect about 1,450 staff; and a privatization program that would affect 1,309 staff. Health and education sectors were excluded from the program. The program granted compensation packages (of up to 60 months of salary for the lowest grades and 48 months for other), which were financed by external donors. The implementation of the program was mixed. By October 1991, out of 4,140 possible staff reductions, 3,745 actually departed from the payroll, partly because the funds provided had been used for other purposes in the budget. Ultimately, the program failed because the government was not able to control recruitment or the wage bill: in June 1992, the number of civil servants were 4 percent higher than programmed, and the wage bill was 13 percent higher than programmed (Figure 6). This was mainly the result of the lack of coordination between ministries and the lack of a systematic monitoring of the departures.

Source: Rouis (1994) pp. 322-24.
Figure 6.
Figure 6.

Senegal Government wage bill and civil servants

Citation: IMF Staff Country Reports 1997, 094; 10.5089/9781451833836.002.A001

Source: Data provided by the Senegalese authorities.

37. From 1986 to 1990 total expenditure was virtually stable at around 21 percent of GDP, before dropping to 18¾ percent of GDP in 1991 as the adjustment program was implemented. This drop, however, was on account of lower than expected spending on the voluntary departure program and on banking sector reform, where only about 59 percent and 8½ percent of budgetary allocations were spent, respectively; there was actually an overrun in the wage bill, because of the slow implementation of the voluntary departure program and additional recruitment. Between 1986 and 1991, there were cuts in most functional categories of expenditure, except for education and health which increased by 4 percent and 16 percent, respectively. Slippages continued in 1992, with sizable overruns in the wage bill and the Treasury correspondents accounts. From 1991 to 1993, the government accumulated domestic and external payments arrears that reached a peak of 3½ percent of GDP in 1992.

38. As part of the internal adjustment program adopted in 1993, the authorities put in place several measures designed to cut expenditures. These included a wage cut of 5 percent for public sector employees earning less than CFAF 50,000 a month and a 15 percent cut for higher-paid employees, a reduction in the number of embassies and staff posted abroad, and measures to balance the financial accounts of public enterprises in the groundnut and cotton sectors. These measures were successful in curtailing total expenditure in the last four months of 1993. Following the devaluation of the CFA franc, the government succeeded in containing the wage bill, eliminating export subsidies, and reducing operating subsidies to public enterprises. In 1995, a number of measures were put in place to further contain spending, including the closure of several additional embassies a further reduction of diplomatic staff stationed abroad, and an additional increase in the contribution rates to the FNR. An audit of the civil service was also conducted in 1994-95. Finally, a law replacing the system of automatic wage increases with one based on merit was adopted in mid-1997, which, together with other aspects of a public administration reform, should lead to the rationalization and possible reduction of the civil service, and better control of the wage bill.

39. To mitigate the short-term adverse effects of the 1994 devaluation on vulnerable population groups, the government put in place a three-year social safety net program in 1994. This program, which was allocated a budgetary appropriation of CFAF 15 billion in 1994 and CFAF 10 billion in 1995 and 1996, aimed at mitigating price increases for specific products such as bread, rice, and pharmaceuticals. In addition, a vast information campaign targeted at consumers, producers, and economic agents directly involved in trading local and imported products helped to moderate of price increases during the first few months of 1994. Furthermore, budget appropriations for social expenditure, particularly those related to education and primary health care, were raised to cover increases in the prices of imported products. Spending on the social safety net was as planned in 1994; in 1995, spending exceeded the target by CFAF 4 billion, mainly because of higher-than-expected outlays for wheat and rice consumer subsidies; in 1996, it was CFAF 4 billion less than targeted, because subsidies were less than expected as price liberalization lowered prices of some subsidized commodities. In 1997, social safety net expenditures were integrated into the functional expenditure categories.

E. Public Debt Sustainability

40. The budget deficits were mainly financed by external and, to a more limited extent, domestic borrowing, leading to an accumulation of debt. This section uses a standard debt dynamics framework to analyze the relationship between the fiscal deficit, the stock of debt, and GDP growth to assess the sustainability of Senegal’s debt burden. For our purposes, a fiscal deficit is sustainable if the underlying debt to GDP ratio is stable.

41. The primary deficit -- the total revenue minus noninterest expenditure -- can be financed either by the change in the stock of domestic and external debt, or by money creation, and or by the change in payment arrears. For simplicity, we assume that the deficit is financed only by the change in the stock of debt. This gives the following identity:11

Dt=PBt+it[(Dt+Dt1)/2]+Dt1(1)

where Dt is the stock of domestic and external debt at the end of period t, PBt is the primary balance in period t, and it is the interest rate at time t (divided by 100). The stable debt-to-GDP means that:

Dt/Yt=Dt1/Yt1,(2)

where Yt is nominal GDP at time t, and can be rewritten as:

Dt=(1+gt)Dt1(3)

where gt is growth rate of nominal GDP in period t (divided by 100). Substituting equation 3 into equation 1 and rearranging yields the following condition for a sustainable debt-to-GDP ratio:

Dt/Yt=-(PBt/Yt)/[(itgt)/(1+gt)+(it*gt/2)/(1+gt)](4)

42. Equation 4 indicates that the equilibrium debt-to-GDP ratio depends on the primary balance, the interest rate, and the nominal growth rate of GDP. The equilibrium debt-to-GDP ratio increases with the primary deficit to GDP ratio and the interest rate, and decreases with nominal GDP growth. In other words, if a country’s primary deficit or the interest rate paid on its debt increases, its debt-to-GDP ratio will converge to a higher equilibrium level. Conversely, if the growth of nominal GDP increases, the equilibrium debt-to-GDP ratio will decline.

43. We focus on Senegal’s public external debt because comprehensive data on public domestic debt, are not available before 1993.12 The primary deficit is the cash deficit excluding grants and external interest payments. In 1996, the ratio of debt to GDP was 0.72 (Figures 7 and 8), the ratio of cash primary deficit to GDP was almost nil (0.003), nominal GDP growth was 0.085, and the implicit interest rate on foreign debt is 0.033. The equilibrium debt-to-GDP ratio was therefore 0.063, much below the actual.

Figure 7.
Figure 7.

Senegal-External Dept-to-GDP ratio

(in percent)

Citation: IMF Staff Country Reports 1997, 094; 10.5089/9781451833836.002.A001

Source: Data provided by the Senegalese authorities
Figure 8.
Figure 8.

Senegal-External debt services

(in CFAF billion)

Citation: IMF Staff Country Reports 1997, 094; 10.5089/9781451833836.002.A001

Source: Data provided by the Senegalese authorities

44. Figure 9 plots the actual primary deficit and the implied equilibrium primary deficit that would stabilize the debt-to-GDP ratio. The results show that from 1987 to 1993, the actual primary deficit was below the equilibrium level, meaning that the Senegal’s debt accumulating at an unsustainable rate in the sense that the equilibrium debt-to-GDP ratio was increasing. Since 1994, however, the actual primary deficit has been below the equilibrium one, indicating that Senegal’s external debt is on a sustainable path and the equilibrium debt-to-GDP ratio is falling.13 This evidence corroborates the analysis presented in Section D that the quality of Senegal’s fiscal adjustment in the 1980s was poor, but that it became much improved in the mid-1990s. In addition, the interest rate on Senegal’s external debt averaged 5 percent in 1987-92, but dropped to about 3.5 percent in 1993-96. This suggests that Senegal had recourse to external commercial borrowing in the 1980s, while, since the early 1990s it has financed its primary deficit mainly through concessional borrowing.

Figure 9.
Figure 9.

Senegal-Actual and equilibrium primary balance

(in percent of GDP)

Citation: IMF Staff Country Reports 1997, 094; 10.5089/9781451833836.002.A001

Source: Data provided by the senegalese authorities and staff estimates.

F. Conclusion

45. Senegal has made considerable progress in reducing fiscal imbalances since 1994. Although past experience shows that fiscal adjustment was often reversed, the quality of recent reform efforts has been higher and the adjustment has been more sustainable. The main features of the fiscal adjustment on the revenue side have been a simplification of the tax system, the lowering of tax rates, and an expansion of the tax base. On the expenditure side, there has been progress in containing low-priority current spending and improving the efficiency of spending on infrastructure and social sectors. However, social indicators in Senegal still compare unfavorably with other sub-Saharan African countries, and there is a need to increase dramatically the coverage and quality of primary education and basic health services. It is important that the authorities persevere with the fiscal consolidation efforts they have pursued so far and make further efforts to raise the revenue to GDP ratio. This would not only help to preserve a stable macroeconomic environment conducive to private sector activity, it would also finance necessary increases in expenditures for human resource development and infrastructure.

46. A number of further reforms are anticipated, particularly in a regional context. First, a new tariff reform is to be introduced in January 1998 in the context of the WAEMU common external tariff. The new tariff rates will be simplified, the effective protection rate will be reduced, and the tax base will be expanded through the reduction or elimination of distortionary exemptions. This might result in a shortfall in customs revenues in the short term. In the longer run, however, it is expected that the economy will benefit from deeper liberalization, which will eventually contribute to increased revenues. In addition, a harmonized indirect taxation system is also planned, with a broadening of the VAT tax base, and the adoption of a common list of excisable goods. On the expenditure side, the new forthcoming budgetary accounting framework and the harmonized budget laws are expected to improve budgetary procedures and expenditure management.

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1

Prepared by Manal Fouad.

2

The first adjustment program was supported by a stand-by arrangement in 1979, while the first Structural Adjustment Facility (SAF) was adopted in 1983.

3

For a discussion of the composition of fiscal adjustment and its impact on growth in the context of Fund-supported programs for a group of eight countries, including Senegal, see EBS/95/166.

4

This section draws on Fiscal Affairs Department, Guidelines for Fiscal Adjustment, International Monetary Fund, Pamphlet series, No. 49, 1995.

5

Figures on public enterprises may differ from one source to the other, depending on the classification used. The 53 enterprises referred to here are defined as those exerting a commercial or industrial activity, and therefore exclude the entities that are nonprofit such as universities, research centers, etc.

6

For ease of exposition, years cited in the text refer to the fiscal years ending June 30, until 1992, and to calendar years from 1993 onward.

7

Export taxes were suspended in 1994.

8

The extension of the VAT became effective on in March 1992 instead of November 1991.

9

This measure was introduced on October 1, 1990 and suspended on December 1, 1990, owing to strong political resistance. It was replaced by a number of compensatory measures such as a levy on sugar, a registration fee for the sale of motor vehicles, and an increase in passport fees.

10

A public expenditure review is now being done with World Bank assistance.

11

Cash deficits in Senegal -- the deficit after change in payments arrears—have been financed mainly by external borrowing because money creation is constrained by the BCEAO rule.

12

In 1993, the stock of government total domestic debt (including domestic payment arrears) amounted to 25 percent of GDP; at the end of 1996, it is estimated at 11 percent of GDP.

13

The sharp drop in 1994 reflects the effect of the sharp increase in nominal GDP following the devaluation of the CFA franc.

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Appendix I. Senegal: Summary of Tax System as of December 1996

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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.

Appendix II. Statistical Tables

Table 1.

Senegal: GDP by Economic Sector at Constant 1987 Prices, 1991-96

(In billions of CFA francs)

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Source: Data provided by the Senegalese authorities.
Table 2.

Senegal: GDP by Economic Sector at Constant 1987 Prices, 1991-96

(Annual percentage changes)

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

Senegal: Supply and Use of Resources at Current Prices, 1991-96

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Source: Data provided by the Senegalese authorities.

Excluding official transfers.