Senegal
Selected Issues
Author: International Monetary Fund
Publication Date:
26 Oct 2001
eISBN:
9781451833904
ISBN:
9781451833904
Language:
English
Keywords:
ISCR; CR; producer price; market price; CFA franc; financial situation; private sector; treasury system; CCP account; public enterprise
Download PDF (5.8 MB)

In Senegal, average annual real GDP growth has been more than 5 percent since 1995, with inflation well below 3 percent. Senegal’s economic performance has been broadly satisfactory in 2000 and during the first quarter of 2001. Yet, despite this economic performance, poverty is still prevalent. According to the household survey of 1995 Enquête Sénégalaise Auprès des Ménages (ESAM), 65 percent of the population is below the poverty line. The human development index of the United Nations Development Program (UNDP) ranks Senegal 154th out of 174 countries.

Abstract

In Senegal, average annual real GDP growth has been more than 5 percent since 1995, with inflation well below 3 percent. Senegal’s economic performance has been broadly satisfactory in 2000 and during the first quarter of 2001. Yet, despite this economic performance, poverty is still prevalent. According to the household survey of 1995 Enquête Sénégalaise Auprès des Ménages (ESAM), 65 percent of the population is below the poverty line. The human development index of the United Nations Development Program (UNDP) ranks Senegal 154th out of 174 countries.

I. Developments In The Groundnut Sector1

1. The Société Nationale de Commercialisation des Oléagineux du Sénégal (SONACOS) was established in 1975 to manage the newly nationalized groundnut oil factories. With the dissolution of the Office National de Coopération et d'Assistance au Développement (ONCAD) in 1980,2 SONACOS took responsibility for the marketing of groundnuts and oil products. Since the dissolution of the Société Nationale d'Approvisionnement du Monde Rural (SONAR) in 1985, it has also been involved in the distribution of seeds and fertilizers to farmers, which, together with the collection of the groundnut harvest, has been assured by SONAGRAINES, a 100 percent subsidiary of SONACOS. SONACOS also imports unrefined vegetable oil and sells the processed oil on the local market, exploiting the price difference on international markets between the more expensive groundnut oil, which is exported, and cheaper ordinary vegetable oil, which is used to supply the local market. In addition, a variable levy that increases the price spread between refined and unrefined imported vegetable oils allows SONACOS to make profits with the refining of imported unrefined vegetable oils.

A. The Importance of the Groundnut Sector for the Senegalese Economy

2. When Senegal gained independence in 1960, the groundnut sector was crucially important for the economy. Groundnuts contributed an estimated 7 percent of GDP and accounted for about 80 percent of exports. In the mid-1970s, groundnut oil production boomed and its international prices rose sharply (Figures 1 and 2), reinforcing the importance of the sector (Figure 3). Nonetheless, harvests remained volatile, mainly owing to unstable rainfalls. Moreover, the severe financial problems of ONCAD and its dissolution diminished some of the government's efforts to encourage groundnut production. In combination with climatic changes, a declining fertility of the soil, and environmental degradation, this factor contributed to a secular decline of the groundnut sector. By 2000, groundnuts accounted for only about 2 percent of GDP and 8.9 percent of exports. Despite its diminishing role in the economy, groundnuts are still an important source of cash income for the rural sector. The sector therefore is likely to have a significant impact on poverty.3

Figure 1.
Figure 1.

World Prices of Groundnut Oil

($/ton)

Citation: IMF Staff Country Reports 2001, 188; 10.5089/9781451833904.002.A001

Figure 2.
Figure 2.

Senegal; Exports of Groundnut Oil

(tons)

Citation: IMF Staff Country Reports 2001, 188; 10.5089/9781451833904.002.A001

Figure 3.
Figure 3.

Estimated Groundnut Sector Share of GDP

Citation: IMF Staff Country Reports 2001, 188; 10.5089/9781451833904.002.A001

B. The Organization of the Groundnut Sector and Recent Developments

3. The groundnut sector has traditionally been organized as an integrated filière. All activities related to groundnut production—distribution of seeds and fertilizers, training of farmers, collection of the harvest, transformation of groundnuts, and marketing of the products—were concentrated in one dominant public entity (SONACOS). Under the agricultural sector adjustment program of 1995, the government committed itself to taking a number of steps to reduce the government's role in the sector. These included a) the creation of a Comité national interprofessionel de l'arachide (CNIA) in 1996; b) the signature of an agreement by the government, the CNIA, and SONACOS regarding the distribution of responsibilities of each partner and the price-setting mechanism in 1997; and c) the phased withdrawal of SONAGRAINES from the distribution of seeds and fertilizers. This process was supported by the European Union under the Stabilization System for Export Earnings (STABEX) program. STABEX funds were used in 1995 for a newly created Fonds de soutien that replaced a similar earlier structure.4 The regular income source of the Fonds de soutien is a variable levy (prélèvement) on imported vegetable oil.5

4. During the 2000/01 campaign the government returned to a more interventionist policy characterized by the setting of the producer price above the level determined by CNIA and the pricing of inputs below market prices. The government set a producer price of CFAF 145 per kilogram while the CNIA's agreed formula suggested a price of CFAF 136 per kilogram. At the request of the government, SONAGRAINES distributed (for credit) about 70,000 tons of seeds and 17,000 tons of fertilizers for a value of CFAF 14.5 billion. By end-April 2001, SONAGRAINES had recovered CFAF 9.7 billion of these producer loans.6 But the government forgave the interest that would normally be charged on these loans.

5. In late May 2001, for the upcoming 2001/02 campaign, the government reversed the previous decision to withdraw SONAGRAINES from the distribution of seeds. SONAGRAINES distributed more than 30,000 tons of seeds until end-July 2001. Originally, it had been planned to leave the distribution to the private Union interprofessionelle des semences (UNIS) and to involve the Caisse nationale de crédit agricole du Sénégal (CNCAS) in backing producer loans. However, the government strictly enforced the policy that only those farmers who had completely reimbursed past loans were eligible for receiving inputs on a credit basis from SONAGRAINES in 2001; in contrast, during the 2000/01 campaign, following an announcement by the outgoing president in March 2000, all farmers had been eligible, independent of past reimbursements.

C. Demand and Supply Conditions for Groundnuts

6. As a result of favorable rainfalls and the increased government intervention in the sector, groundnut production increased sharply in 1999/2000 and 2000/01. Between 1993 and 1999 SONACOS collected on average about 240,000 metric tons of groundnuts and produced 65,000 metric tons of groundnut oil. In 2000, collection increased to 490,000 tons and rose further to 550,000 in 2001. Oil production rose from 71,000 tons in 1999 to more than 120,000 tons in 2000 and could reach more than 200,000 tons in 2001, including the processing of the remaining 1999/2000 stock of groundnuts.

7. Owing to the limited size of international markets, SONACOS could sell only about 100,000 tons of oil in 2000. The world market for groundnut oil is estimated at about 300,000 tons. Senegal's main export market, western Europe, absorbs about 180,000–200,000 tons annually. Demand appears to be largely inelastic to price changes, so that increases in supply have a significant impact on world market prices. The lack of demand response reflects the fact that groundnut oil has become mostly a luxury and specialty product. Ordinary vegetable oils sell at $300-400 per metric ton, about half of the price for groundnut oil. Above that price, the market of groundnut oil remains segmented from the market for other vegetable oils.

8. In the wake of the doubling of production in Senegal in 1999/2000, international prices declined from $900 per ton in 1998 to about $685 per ton in June 2001. Owing to the inelastic demand, Senegal's oil exports have historically had an impact on world market prices, although this influence has diminished with the decline in production beginning in the 1980s. As shown in Figure 4, historical data imply that a 10 percent increase in production reduces world prices by about 2 percent.7 The deterioration of international prices observed in the past two years has therefore been partially linked to Senegal's exceptional production. The pressures on world prices from Senegal's sharp rise in exports have been compounded by increasing groundnut oil supply from Argentina (50,000 tons) and Sudan (20,000 tons).

Figure 4.
Figure 4.

Change in Log Senegalese Export Volumes (x-axis) and Change in Log World Market Price (y-axis), 1961-2000

Citation: IMF Staff Country Reports 2001, 188; 10.5089/9781451833904.002.A001

9. Notwithstanding the significant decline in international prices for groundnut oil in the recent past, some of the impact has been cushioned because of opposite movements in the exchange rate between the CFA franc and the dollar. The decline in dollar—denominated groundnut prices since 1997 (from more than $1,000 per ton to $685 in mid-2001) has not had the same effect on prices in CFA francs: these declined from CFAF 590 per kilogram to CFAF 460 per kilogram in 2000 but are expected to rise to CFAF 520 per kilogram in 2001 because of the weakness of the euro, to which the CFA franc is linked, vis-à-vis the U.S. dollar.

10. With limited external demand, SONACOS has the choice between two different strategies. The first is to remain export oriented. In this case, the producer price should be directly linked to the world market price (denoted in CFA francs). However, SONACOS would need to strictly limit its purchases to quantities that can be fairly easily absorbed on international markets—about 100,000 tons of oil—equivalent to 350,000 tons of groundnuts. The remainder of the production would then need to be sold for other uses and likely much lower prices on local and regional markets. The second strategy would be to focus also on supplying the local market for vegetable oil with groundnut oil instead of imported vegetable oil. In this case, the producer price needs to be determined in relation to a weighted average of international groundnut oil and vegetable oil prices for SONACOS to remain competitive.

11. SONACOS's future strategy and the government's future policies likely will also influence the supply decision of farmers. Based on historical data, the supply decision of farmers to produce groundnuts, as measured by the amounts collected by SONAGRAINES and its predecessors, can be linked to three factors: the producer price (measured in real 2000 CFA francs), the price of fertilizers (measured in real 2000 CFA francs), and rainfall. Based on the simple model presented in Table 1, about 77 percent of the variation in amounts collected by SONACOS can be explained.

Table 1.

Determinants of the Amount of Groundnuts Collected

article image
Source: Staff estimates.

12. The estimated parameters imply that an increase of CFAF 1 in the real producer price of the past campaign leads to an increase in peanut collection of 2,680 tons. The strong influence of the past real producer price is explained by announcement of producer prices shortly before the collection begins, that is, after producers have already made their decisions. The producer price of the current campaign is therefore statistically insignificant. Similarly, past and current real fertilizer prices exert a strong impact on production and they each have about the same effect on collected amounts as an increase in the real producer price. The lagged effect can be explained by the infrequent application of fertilizers. Finally, each millimeter of additional rainfall appears to raise collected amounts by about 220 tons. An additional and exceptional effect derives from the period 1980/81, when ONCAD collapsed and could not finance the purchase of the harvest.

D. Financial Situation of SONACOS in 2001

13. SONACOS's financial position in 1999 was already fragile because of nonreimbursed debts of farmers from previous crop years and the reliance on protection in the market for imported vegetable oil. The profits from this protection subsidized losses generated by groundnut oil production and exports. The new management team that was appointed after the change in government (which is holding 80 percent of the shares) in April 2000 proceeded to write off substantial claims on farmers that the SONACOS had carried on its books for several years. These changes in book values resulted in a negative capital of the company.

14. Owing to the difficulties in marketing its oil production in 2000, SONACOS could not reimburse CFAF 32 billion of crop credits at end-2000. Local banks agreed to convert these crop credits into ordinary loans at higher interest rates. Total outstanding debts of SONACOS at end-2000, which included an overdraft and a commercial loan (discounted export contract) with a local bank to pay interest on the loans, amounted to almost CFAF 46.7 billion (1.5 percent of GDP).

15. In these circumstances, the company had to tap various internal and external sources to be able to finance the 2000/01 campaign. SONACOS contracted new loans of CFAF 77 billion and issued commercial paper for CFAF 15 billion. In addition, the company received reimbursements of CFAF 8 billion for the credits it had extended to farmers, bringing total available resources to CFAF 100 billion. The costs of 2000/01 crop campaign have been estimated at about CFAF 94 billion, of which CFAF 80 billion represents the direct cost of purchasing the groundnut crop and CFAF 14 billion the cost of transportation and storing. Under similar assumptions, the company originally estimated in December 2000 that its peak additional borrowing would reach only CFAF 55-60 billion (instead of the actual CFAF 92 billion) because some of the export earnings would permit financing of a part of the crop purchase.8

Table 2.

Sources of Financing for the 2000/01 Agricultural Campaign

article image
Source: BCEAO, SONACOS.

All external loans are guaranteed with export contracts.

External commercial loan based on an export contract.

16. Until end-May 2001, only very few of the outstanding loans had been reimbursed. CFAF 6.2 billion of commercial papers had been reimbursed on time, as well as $6 million of one of the foreign loans and CFAF 6 billion of the external commercial loan. The first payment of CFAF 2.6 billion on the 1999/2000 crop credit was made with a delay in July 2001. No payments were made on the other loans until end-June 2001, and the estimated debt stock remained close to CFAF 117 billion. The government estimates that SONACOS may be unable to reimburse up to CFAF 65 billion of its debt by end-2001. To address these debts and avoid similar difficulties of the groundnut sector in the future, it developed a set of measures set out in the accompanying staff report.

II. The Circuit Of The TReasury And Postal Service Deficits9

17. The most salient feature of the so-called treasury system prevailing in francophone Africa is the obligation for a number of financial entities related to—or within—the public sector (les correspondants du Trésor) to deposit some or all of their money at the treasury (le circuit du Trésor). This chapter reviews some of the characteristics of this “circuit” in Senegal and illustrates them using the example of the postal checking accounts (centres de chèques postaux or CCP).

18. The systematic centralization of funds operated through the circuit of the treasury has several economic implications, mostly because the fiscal deficit can to some extent be offset by a change in deposits by public entities. If, for example, the postal service runs a surplus and deposits these surpluses in the correspondent account at the treasury, the treasury's financing needs are reduced by the same amount. Hence, the circuit of the treasury weakens the link between the deficit and recourse to financing (see also Table 1 from Bloch-Lainé, 1960). A figure summarizing the main elements of the circuit in francophone Africa, including an illustration using the CCP, is presented in the Appendix.10

A. Key Features of the Circuit du Trésor

19. The circuit of the treasury has gradually narrowed in scope, but remains an important feature of the treasury system in Senegal and, more generally, in francophone Africa. This source of financing was substantial in the 1960s and 1970s, and represented an important source of autonomous nonbank financing.11

20. The centralization of funds through the circuit of the treasury is in a sense equivalent to a single treasury account extending to the public sector at large, but not strictly equivalent. As a result, assets of private entities and individuals, such as those placed in the publicly owned financial institutions like the postal bank and national savings institutions (Caisses d'Epargne), end up as deposits in the circuit of the treasury. These deposits of private assets automatically contribute to finance the central government's deficit. Under this system, entities whose day-to-day operations are not under the direct control of the central government are participating in the general pooling of cash and may, at times, act contrary to the principles of good cash management and planning.12 The extensiveness of its reach differentiates the circuit of the treasury from the general concept of a single treasury account that is also applied elsewhere.

B. The Evolution of the Circuit du Trésor

21. In Senegal, and in francophone Africa in general, the circuit of the treasury operated well up to the oil crisis of 1975. Until the early 1970s, the budgetary systems were relatively small and had limited need for financing. Correspondent deposits were appropriate to achieve their intended purposes, notably, to force public entities to operate within a common cash management framework, and to stabilize their financing requirements.

22. With the onset of the oil crisis, governments of countries like Senegal that were not oil producers started using these deposits to absorb the (structural) shock. De facto, most of the “old” treasury systems had gone bankrupt by 1975. Instead of acting as a tool for improving cash management and easing short-term financing constraints, the circuit of the treasury became a tool to transfer cash tensions and liquidity problems from the central government to other public entities. This resulted in severe imbalances and a number of large public financial establishments went bankrupt, including postal and national savings banks.

23. The crisis forced a number of adjustments in the Senegalese treasury system after 1975 that formally maintained the circuit while weakening its pillars and involuntarily creating incentives for mismanagement. At that time, three major types of “innovations” emerged or developed:

  • Debt management was partially delegated to separate entities, the Caisses Autonomes d'Amortissement as they were generally denominated (see Bouley, Fournel, and Leruth, 2001);

  • New budget management tools were developed to palliate the illiquidity of the treasury; in particular a large numbers of special accounts and special funds were created, often linked to extrabudgetary activities and not necessarily located within the treasury.

  • More generally, short-term cash management of very scarce resources became a primary focus of financial management and thus intensified the pressure on an ill-equipped administration.

C. The Circuit du Trésor and the Shortage of Liquidity

24. Special accounts have developed in the context of cash tensions and relative illiquidity. They have led to the circumvention of rules of basic budget management, such as the annual timeframe or nonearmarking. Although they were seen as a way of protecting specific policy objectives from the general illiquidity of the central government (by earmarking specific resources), these special accounts may also have helped vested interests to finance their own programs and protected them from the general liquidity problems. For example, the deficit of public entities (such as pension funds) could be financed by the treasury through deficits of the respective special account.

25. The cash crisis at the treasury was exacerbated by the fact that correspondents were allowed to maintain their own bank accounts in parallel to the accounts at the treasury.13 hi most of francophone Africa, correspondents were allowed to circumvent the cash constraint created by the illiquidity of the treasury by owning their own separate bank accounts. Other public entities, such as universities and hospitals, also opened bank accounts to limit the risk of a sudden cash shortage and to benefit from higher, more competitive, interest rates on these deposits. In Senegal, similar practices have exacerbated the cash constraint:

  • Even in cases where these bank accounts were limited, there was a leak in the circuit at a time of cash tensions in the public sector.

  • This leak created a threat that the circuit could suddenly be depleted by massive transfers to privately owned banks and other financial institutions outside the circuit. Not only would such movements of funds be difficult to monitor or predict, there was also a risk that these funds would be used for purposes that should not have received a high priority in the context of a cash crisis.14

D. Correspondent Accounts and Postal Service Deficits

26. In Senegal, among all the correspondents of the treasury, the CCP has a special status as both institutions act as a bank for each other. Indeed, the CCP, like all correspondents of the treasury, keeps deposits at the treasury (as well as in commercial banks). However, the treasury also maintains deposits at the CCP. From the point of view of the treasury, the distinction between the two types of deposits is crucial and is reflected in the fiscal accounts since the evolution of the correspondent account is calculated as the net variation of deposits. For example, if treasury deposits at the CCP go up by CFAF 8 billion and deposits of the CCP at the treasury go down by CFAF 1 billion, the fiscal accounts will show a deterioration of the net position of the correspondent account of the CCP of CFAF 9 billion. At end-March 2001, the stock of deposits held by the treasury (including local and regional offices) at the CCP exceeded CFAF 50 billion.

27. From the point of view of the central bank, the CCP and the treasury are treated as one. Any transfer from a CCP account by an individual or a company to a commercial bank, say, would be treated by the central bank as a transfer from a treasury account, and the money would be withdrawn from the general government account at the central bank. In fact, in the first instance, the treasury pays for any transfer from a CCP account to a commercial bank account from its general central bank account. It is only at a later stage that, through a compensation mechanism, the treasury is compensated with a corresponding increase of its holdings at the CCP. If the CCP is liquid, the treasury can then transfer money from its CCP account to another account (say, at the central bank).

28. Liquidity problems can arise at the treasury when the CCP faces financial difficulties. The compensation mechanism supposes that the CCP is in a position to guarantee the liquidity of the deposits held at the CCP by the treasury. In particular, the treasury should be able to pay its suppliers and others using its CCP assets. If the CCP is not liquid, a transfer made by the treasury from its CCP account would first be drawn on the general treasury account at the central bank and deposited in a commercial bank by the supplier if the latter keeps his main bank account there. It would then lead to an increase in the compensation the CCP owes the treasury and, hence, result in an accumulation of deposits (i.e. an increase in the treasury's book values) at the CCP. In other words, illiquidity of the CCP translates into an accumulation of illiquid deposits by the treasury at the CCP.

29. The example of the relationship of the Senegalese postal service with its foreign counterparts illustrates some of the problems arising from the close link between CCP and government resources. Problems arise for example as a result of the uneven flow of transfers from abroad and the failure by foreign postal services to reimburse the Senegalese postal service. The Senegalese postal service regularly receives more transfers from abroad than the amount of money it is transferring outside the country. Each time a transfer is initiated at a post office abroad, the Senegalese postal service credits this money to its local customer's account or pays the money in cash. This advance is generally compensated to the Senegalese postal service by the foreign postal service on a monthly basis, depending on the particular arrangement. At times (around significant holidays, for example), the amount of these transfers and thus the advance of the Senegalese postal service can be large. As a result, the postal service draws on the liquidity of the treasury, and its correspondent account deficit rises until it receives the compensatory payment from abroad and, in turn, has sufficient liquidity to repay the treasury. If the foreign postal service is illiquid, say, because of liquidity shortages in other countries, the postal service may never get compensated, and the treasury is forced to absorb the deficit of the correspondent account. At this time, the Senegalese postal service holds significant claims against postal services of other countries.

30. The indirect access to the resources of the treasury and the unclear accounting also increase the possibility for fraud. Significant deficits were accumulated in the Senegalese postal service correspondent accounts in 1999 and early 2000. Because of the postal service's large liquidity fluctuations, its indirect access to treasury resources, and its location outside the direct control of the Ministry of Finance, leakages may not be discovered immediately. Faced with rising deficits, the Senegalese government ordered in 1999 an investigation of the postal service by the public accounting office. On the basis of the related audit report, the judiciary has begun proceedings for the formal prosecution of key officials of the postal service.

Appendix The Circuit du Trésor in Francophone Africa

The diagram below illustrates the working of the circuit du Trésor.

UA01F1
1/ Spending and deposits outside the circuit du Trésor are leaks in and deplete its resources. By contrast, resources collected by the correspondants du Trésor outside the circuit du Trésor are adding to the liquidity of what is sometimes called Treasury money.

Illustration. Suppose public servants were paid through a deposit on their postal bank account–the CCP–and the CCP, in turn, were forced to keep their deposits at the treasury. Thus, when salaries were paid to civil servants, the whole operation would boil down to a transfer from one treasury account to another. The operation had little impact, if any, on the need for liquidity, in spite of the increase in the fiscal deficit. This system still operates in most of francophone Africa.

III. The Senegalese Pension System15

31. The formal Senegalese pension system is composed of two distinct institutions. The first, the National Retirement Fund (Fonds National de Retraite, or FNR), set up in 1961, provides retirement income to civil servants, including the military, police, firefighters, teachers, and the judiciary. Its operation is closely integrated with the government's payroll because its revenue consists of contributions by civil servants and the government that are included in the government's wage bill. The operations of the FNR are recorded in a special account at the treasury.

32. The Senegalese Retirement Institution (Institution de Prévoyance Retraite du Sénégal, or IPRES), established in 1958, covers salaried workers in the formal sector and those public employees who are not civil servants. Although IPRES has a semipublic function and its deposits are included in the government's net bank credit as defined by the central bank, it is administered by the private sector, notably employer organizations and unions.

A. The National Retirement Fund

33. The FNR is organized as a classical pay-as-you-go system. Under such a system, the contributions of workers finance the retirement income of current retirees. The FNR does not hold any reserves and is therefore sensitive to the ratio of workers to retirees. The smaller the number of workers who contribute to the scheme for any given number of retirees, the higher the contribution rate as percentage of their wages must be to finance pensions. Generally speaking, pay-as-you-go systems require fairly low contribution rates for populations with a large share of young people and a small number of retirees. The population aging observed in many industrialized countries, by contrast, puts a heavier burden on the declining number of the young if retirement systems follow the pay-as-you-go principle.

34. Although the Senegalese population features a large proportion of young people, the same is not true of public employees. As a result of the efforts to contain the wage bill, new hires have been reduced considerably since the 1980s, and the civil service in Senegal is aging rapidly. As a consequence, about 1.85 civil servants currently have to support one beneficiary (including widows and orphans) of the FNR with their contributions—a ratio that is already high. Given that most civil servants are between the ages of 35 and 50, a wave of retirements can be expected during the next 20 years, thereby further worsening the ratio of retirees to civil servants—even if, eventually, these workers will be at least partially replaced by new hires.16

35. The civil service pay structure further complicates the problems caused by the aging of the civil service. Only less than half of a civil servant's pay is considered in the assessment of his contributions to the FNR. Each civil servant's pay consists of the base salary, linked to seniority and grade, and the base salary grid has essentially remained unchanged since 1980. In addition, salaries include the ad hoc adjustments (“augmentation”) that the government has made from time to time, most recently in early 2000, and family allowances dependent on the number and age of children.17 However, for the calculation of contributions to the FNR, only the base salary is considered. Thus, none of the wage increases (all of which were in the form of ad hoc adjustments) has raised the contribution base for the FNR. As a result of the fairly small contribution base, contribution rates are currently very high, 35 percent of the base salary, with 15 percent paid by the civil servant and 20 percent by the government.

36. The civil service pay structure also influences how pensions are calculated. The pension formula specifies that the base pension be calculated as a share of the final base salary. The share depends on the number of years of service; in particular, each year of service translates into 2 percent of the base salary, so that a worker with 35 years of service receives a basic old-age pension equivalent to 70 percent of his base salary. The pension formula also gives an incentive to promote civil servants toward the end of their careers to raise the final base salary. In addition, pensioners also receive the cumulative ad hoc adjustments that have been paid to civil servants and family allowances. For a typical pensioner, the adjustments and allowances make up 40 percent of his pension, and, as a result many old-age pensioners receive close to 100 percent of their final base salary. Women receive credit for one year of service for up to six of their children.

37. A primary beneficiary's death often does not end FNR's obligation. At death, the benefits are determined based on whether the beneficiary chose the monogamy or polygamy option at the time of marriage. At death, the surviving spouse or spouses (at equal share) and children continue to receive the benefits, and, owing to the large family sizes, total survivor benefits are almost always as high as the original benefit payment. Moreover, even after the death of the spouse, payments are continued to orphans under the age of 21.

38. The FNR already has a structural deficit that will likely worsen within the next few years. It increased from CFAF 4 billion in 1998 and 1999 to CFAF 6 billion in 2000 and has widened further to CFAF 4.4 billion in the first half of 2001. These deficits are driven by the structural problems related to the aging of the civil service and the small contribution base, and it is likely that, with the bulge of retirees expected during the next 20 years, the financial difficulties of the FNR will worsen.

39. The number of options available to address the structural problems of a pay-as-you-go system like the FNR is limited. In a way, the government has already promised to those workers who are contributing to the FNR today that it will pay for their pensions later on. This implicit government debt, which does not show up on any books, in some ways needs to be addressed over time. Since sufficient money has not been set aside to pay for pensions, the question is how to distribute the burden of pension payments between workers and pensioners, by raising contributions and cutting back on some of the original promises. So-called parametric reforms address the financing problem by changing the parameters of the system. Options include adjusting the contribution rate, broadening the base for contributions, eliminating some of the family benefits for pensioners, and extending the number of pensionable work years considered in the pension formula. The main constraint in Senegal on any parametric reform of the FNR is the close link to the civil service pay system. Aside from a reform of the entire civil service pay system, any adjustments to the FNR must take into account the existing pay structures.18

40. In addition to adjusting the parameters of the existing system, the government could engage in a systemic reform process. This process could entail moving to a system that is partially or fully funded. The advantage of a systemic change would be to encourage savings and insulate the system from future fluctuations in the number and age structure of civil servants. However, a systemic change cannot avoid the fundamental trade-off necessitated by the existing pressures. In fact, funding retirement income would require that funds be diverted from the FNR and channeled into new savings. This diversion would reduce the income available to pay current pensions during the period of transition and thus sharpen the financial pressures mentioned above. At the same time, it would reduce the government's future liabilities toward pensioners, who could then rely on their own savings during retirement.

B. IPRES

41. IPRES fundamentally also operates as a pay-as-you-go system. However, over the past few years, reserves accumulated by IPRES have reached the level of about two years of its pension outlays. IPRES pensions are based on a point formula that multiplies the points accumulated over a lifetime by the value of a point that is set by IPRES. Thus, in contrast to FNR, IPRES implicitly reflects the entire earnings history, and not only the last wage.

42. Despite IPRES's accumulation of reserves, it also has been subject to an aging of its constituency. In the early 1970s, there were about five contributors per worker. By the year 2000, this ratio had dropped to 1.5. This process should be expected in a pay-as-you-go system that starts with few pensioners. However, in the past few years, the process has also been driven by the slow growth rate of new contributors, which can partially be attributed to low hiring by the government (workers outside the civil service contribute to IPRES, not the FNR), and possibly by the lack of attractiveness of the current scheme for younger workers. These workers and their employers may prefer not to make contributions. Contribution rates are currently 14 percent of wages, up to a ceiling of maximum taxable earnings.

43. Despite its currently comfortable financial position, IPRES will likely face demographic pressures requiring further adjustments to the system. According to IPRES's own projections, contributions will not be sufficient to pay for pensions by around 2005. IPRES has faced such difficulties in the past and was running large deficits in the late 1980s and early 1990s. These difficulties were addressed by raising contribution rates (from 8 percent in 1980 to 14 percent now) and by keeping the increase in the value of pension points below the increase in average wages of contributors, thereby implicitly reducing the replacement rate of pensions benefits for new pensioners (as defined in paragraph 41 above). However, to the extent that the effects of these measures on contributors are not easily predictable, they may reduce the attractiveness of IPRES.

44. Since IPRES's problems do not create immediate pressures, implementation of a more gradual adjustment strategy could be envisaged to secure sufficient and stable retirement income for the formal private sector. Such a strategy could include an adjustment to the parameters of the existing system, such as point values and contribution ceilings, combined with the introduction of a rules-based adjustment of these values to give contributors confidence. However, given IPRES's reserves, as well as its outstanding claims of more than CFAF 20 billion against public enterprises and the Société Nationale de Recouvrement, which is charged with the recovery of loans of failed banks, some transition to a system with a funded element, including individual accounts, could also be a part of the reform agenda. In particular, these assets, if recovered or reimbursed by the government, could form the basis for a partially funded system to encourage savings and the development of local financial markets and intermediation.

IV. Poverty-Related Issues

A. Preliminary Poverty and Social Impact Analysis19

45. In Senegal, average annual real GDP growth has been over 5 percent since 1995, with inflation well below 3 percent. Senegal's economic performance was broadly satisfactory in 2000 and during the first quarter of 2001. Yet, despite this economic performance, poverty is still prevalent. According to the household survey of 1995 (ESAM), 65 percent of the population is below the poverty line.20 The human development index of the United Nations Development Program (UNDP) ranks Senegal 154th out of 174 countries. Population growth remained high at 2.7 percent during 1980-1998. Poverty is more prevalent in rural areas where an estimated 70 percent of the poor are located. Poverty is more severe in areas where production is agricultural and less diversified, and where there is less migration to urban areas.

46. Various studies undertaken by the Senegalese authorities indicate that economic growth in the country may not have had a significant impact on the poor. This may be largely due to low agricultural productivity. The agricultural sector, which employs 70 percent of the labor force, is particularly vulnerable to exogenous shocks (droughts and fluctuations in the market prices of primary commodities) and represents only 10 percent of GDP. In addition, growth has occurred in sectors that supply relatively few jobs (groundnut oil production, fishery product processing plants, phosphates, cement, tourism, and telecommunications).

47. Landless independent workers in the agricultural sector are more widely affected by poverty than are landowners. The prevalence of poverty is also high among the unemployed. Poverty is more widespread in households where the head has a very low level of education or where households are large in size. Poverty is also much higher in polygamous households. Agricultural production methods, combined with lack of access to safe water and poor access to health and education, have contributed to the deterioration of the living conditions of rural households. This situation has encouraged migration to the cities, thereby exacerbating urban poverty.

48. Women are a particularly vulnerable group in Senegal. They often lack access to critical resources such as credit, education,21 health care, support services, land, and inheritance. Many are married at a young age (many by the age of 16 in rural areas), and fertility rates, though declining, remain high (5.5 births per woman from 1993-1998). Women are important agricultural producers of Senegal, focusing on subsistence farming, but they often lack access to information and as well as resources and services to change their situation.

49. The macroeconomic and structural measures of the government are aimed at reducing poverty by focusing on more pro-poor growth; restructuring the groundnut and electricity sectors that are contributing to a fragile fiscal situation; protecting social sector expenditure; and, introducing a single-rate value-added tax (VAT) to raise revenue. Although the fiscal outturn has been consistent with the program objectives, the fiscal situation has remained fragile because of the unfavorable developments in the groundnut and energy sectors. The measures envisaged to mitigate the impact of the deficits of these sectors on the fiscal outturn and the growth potential of the economy may have an adverse impact on some of the poor groups in the short run but will have significant benefits in the long term. However, the program also incorporates measures to limit the negative impacts in the short term, as explained below.

50. A single VAT at a unified rate will be introduced in replacement of the current dual-rate system with a few untransformed goods of primary necessity (such as rice and fish) exempted. The fiscal reforms, which have consisted of simplifying the tax system and strengthening tax administration and budget management, have contributed to an increase in fiscal revenue larger than planned under the program. However, much of the additional revenue raised was used to finance petroleum product subsidies. Looking ahead, the authorities intend to finance additional poverty-related expenditures with the interim relief provided under the HIPC Initiative. The efforts to promote fiscal transparency developed in the context of the Report on the Observance of Standards and Codes (ROSC) would contribute to the rationalization of expenditure and improve revenue collection, so as to effectively fund expenditure in the social sectors. The planned privatization of SENELEC and SONACOS would also enhance the transparency in the implementation of the budget, including through the elimination of government guarantee deposits that have been used to back bank loans of these enterprises.

51. After subsidizing petroleum products throughout the year 2000, the government reinstated the full pass-through for petroleum products at end-June 2001. A decline in the world market price of oil was passed on to consumers in July and August 2001. The automatic adjustment of the prices of petroleum products would protect petroleum tax revenue and provide additional resources that could be used in the social sectors to reduce poverty. However, the flexibility in the price of retail petroleum products may lead to a higher cost for consumers when the world price of oil increases again. Therefore, regardless of the movements in the world market price of oil, the authorities have decided to maintain the price of butane gas below the world market price, since it is predominantly used by the poor. The government is widely distributing butane gas, even to rural areas, with the objective of reducing the use of firewood as fuel and, therefore, decreasing deforestation. The subsidy will be partially covered by resources under the interim relief granted by Senegal's creditors under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative).

52. To ensure that growth is more pro-poor, the government is now focusing on reforms in the agricultural sector. The main emphasis will be on diversifying and increasing the competitiveness of agricultural products in the international market. Increasing the competitiveness of groundnut oil may prove to be challenging, owing to the limited world demand. One solution being explored is to diversify into roasted peanuts. This would require producing a higher quality of peanut, providing extensive farmer training, and controlling the prevalence of a toxic mold that affects the peanut. Another possibility would be to add value to the peanuts at the rural level by introducing local dehulling mechanisms and small oil presses.

53. In order to guarantee a stable income to farmers, the authorities have maintained a producer price of groundnuts above the world market price and have provided seeds and fertilizers at subsidized rates. However, these policies, coupled with the limited market for groundnut oil, have contributed to sizable deficits in the groundnut sector. The measures to restore the viability of the groundnut sector will entail the realignment of the producer price to the international price and a reduction of the quantity purchased by the public enterprise, SONACOS. It is recognized that there are trade-offs associated with this policy. The reduction of the producer price for groundnuts is likely to reduce household income in rural areas. In the short term, therefore, some farmers may not immediately benefit, and the impact of this policy change on various social groups will need to be tracked. However, such a policy should ensure that sustainable production levels for groundnuts are achieved, thereby reducing household vulnerability to income fluctuations. Furthermore, not all farmers have benefited from the current system since the producer price set by the government does not cover the total production of groundnuts. In addition, owing to the weak financial management of SONACOS, it remains unclear to what extent the poor have benefited from the recent groundnut boom. Thus, the planned privatization of SONACOS should promote greater equity. It is also hoped that the expected efficiency gains from restructuring the sector and privatizing SONACOS will free significant government resources that can then be used for poverty reduction.

54. The state-owned electricity company, SENELEC, faces serious financial problems stemming from the high cost of production. As a result, selective power outages have been introduced. The staff and the authorities agree that the long-term solution will be to reduce the production cost. An increase in the tariff could help to improve the financial situation of the company and facilitate its privatization; moreover, it is likely to have a limited adverse impact on the poor since only 8 percent of poor households have access to electricity. The privatization of SENELEC should increase the efficiency of the company and create conditions for additional investments, thereby lowering the cost of electricity. In the longer term, this lower cost would translate into lower tariffs for consumers, including the poor. Furthermore, the weak financial situation of SENELEC has led to the accumulation of arrears vis-à-vis the oil companies, commercial banks, and external suppliers. The reduction of this deficit, through a price increase in the short run, could improve the conditions for the continuing supply of electricity. This is critical for the production of goods and services.

55. There have been small improvements in education indicators. However, despite the government's efforts, most poor households still have limited access to education (especially girls), attrition rates are high, and quality of education is low. The education system is financed primarily through the budget, and, since 1995, the government has allocated over 30 percent of its budgetary resources to education; official development assistance has also contributed. However, public spending on all four levels of education combined is not pro-poor—the poorest 20 percent of households receive only 6 percent, while the richest 20 percent receive 34 percent. Private sector provision of education remains very limited, with only 10 percent of all students enrolled in private elementary schools. The government aims to provide nationwide availability of primary education by 2010, provide access to primary and secondary education for girls, and reduce attrition rates through the Ten-Year Education and Training Program. Education spending will be tracked through the implementation of the HIPC Initiative public expenditure tracking system.

56. In Senegal, health indicators remain low in comparison to other countries with similar levels of GDP per capita. Life expectancy is 52 years, there is a high incidence of hygiene-and water-related diseases, urban sanitation is poor, and access to the health services is limited. According to a recent report by the government, the infant mortality rate is 58 per 1,000, maternal mortality rate is 410 per 100,000 live births, and the child immunization rate is 68 percent.22 Basic health care spending is low, and the poorest regions are not targeted. The interim PRSP reports that as recommended by World Health Organization (WHO) the health sector target is 9 percent of the share of annual budget expenditures, compared to about 6.5 percent in 2000. Health spending will also be tracked through the HIPC Initiative expenditure tracking system.

B. Treatment and Use of HIPC Initiative Debt Relief23

57. In Senegal, the government's debt department tracks the external debt payments of the government. At end-2000, the government created a HIPC Initiative account at the Central Bank of West African States (BCEAO) to which it intended to transfer the interim relief received in 2001 because the allocation of these resources was to be decided subsequently in a supplementary budget law in mid-2001. In the event, the debt department had some difficulties in accurately identifying the relief because some donors were reimbursing the government after the full payment of debt service, while others were netting out the debt relief beforehand. However, these administrative difficulties were rectified in June 2001 and the full amount of interim relief was paid into the HIPC Initiative account at the BCEAO.

58. The CFAF 4.2 billion made available by the HIPC Initiative during 2000 was spent, in accordance with the information contained in earlier Board documents (EBS/01/9, 1/31/01) on the butane subsidy. For 2001, the authorities have faced some delays in undertaking household surveys. Nevertheless, the conclusions of the interim PRSP appear to be confirmed by the latest findings, and the final PRSP is very likely to emphasize the need to invest in the social sectors, especially education and health, as well as security and the judiciary.

59. Pending the completion of the final PRSP, the government has decided to prepare a supplementary budget law by which the CFAF 23.4 billion available through the HIPC Initiative will be allocated to key social projects in the health and education sectors as well as to rural infrastructure projects. This budget law is expected to be adopted by the national assembly in September 2001.

60. The ability of the government to track HIPC Initiative resources will be assessed in the context of a HIPC Initiative mission, which will visit Dakar in September 2001. The authorities have made some progress in preparing treasury balances on a regular basis, and in producing budget execution data according to an economic and functional classification. However, more work will be required to prepare monthly data on the use of HIPC Initiative resources and to speed up preparation for the adoption in 2002 of the West African Economic and Monetary Union (WAEMU) classification. Further efforts will also be needed to track expenditure at the local level, especially in the context of the decentralization policy pursued by the government.

STATISTICAL TABLES

Table 3.

Senegal: GDP by Economic Sector at Constant 1987 Prices, 1993-2000

(In billions of CF A francs)

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Source: Senegalese authorities.
Table 4.

Senegal: GDP by Economic Sector at Constant 1987 Prices, 1993-2000

(Annual percentage changes)

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Source: Senegalese authorities.
Table 5.

Senegal: Supply and Use of Resources at Current Prices, 1993-2000

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Source: Senegalese authorities.
Table 6.

Senegal: Level of Rainfall on the Groundnut Basin, 1960/61-2000/01

(In millimeters)

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Source: Senegalese authorities.

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

Table 7.

Senegal: Production and Disposition of Groundnuts (Unshelled), 1992/93-2000/011/

(In thousands of metric tons)

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Source: Senegalese authorities.

Crop year (November-October).

Including handpicked select.

Including sales in the parallel market.

Table 8.

Senegal: Cereals Balance, 1992/93-2000/011/

(In thousands of metric tons, unless otherwise indicated)

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Source: Senegalese authorities.

Crop year (November-October); data may not add up because of rounding.

Table 9.

Senegal: Production, Area Under Cultivation, and Yields of Principal Crops, 1992/93-2000/011/

(Production in thousands of metric tons; area in thousands of hectares; yield in metric tons per hectare)

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Source: Senegalese authorities.

Crop year (November-October).

Table 10.

Senegal: Producer Prices of Main Agricultural Products, 1992/93-2000/011/

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Sources: Senegalese authorities; and staff estimates.

Crop year (November-October). By December 1999, the producer prices for all agricultural products had been liberalized, except those for oil groundnuts, cotton, and paddy; the price of paddy was liberalized in June 1994. The producer prices for oil groundnuts and cotton are determined by a committee representing the farmers, the marketing agencies, and the government, taking into account developments in world market prices.

Table 11.

Senegal: Fish Catch by Domestic and Foreign Vessels, 1993-2000

(In thousands of metric tons)

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Source: Direction de I'Océanographie et des Pêches Maritimes.

Domestic catch only for 1993-96.

Table 12.

Senegal: Foreign Fish Catch by Vessel Nationality, 1992-99

(In thousands of metric tons)

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Source: Direction de I'Océanographie et des Pêches Maritimes.
Table 13.

Senegal: Evolution of Livestock, 1993-2000

(In thousands of heads)

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Source: Ministry of Agriculture.
Table 14.

Senegal: Indices of Industrial Production, 1993-2000

(Index, 1976 = 100)

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Source: Senegalese authorities.