Senegal: Enhanced Heavily Indebted Poor Countries (HIPC) Initiative Completion Point Document

This paper examines the completion point document for Senegal’s Enhanced Initiative for Heavily Indebted Poor Countries. Senegal could reach the completion point on the basis of a full poverty reduction strategy and sound macroeconomic policies, as well as specific structural and social reforms set out in the decision point document. Major reforms have been advancing in the energy and groundnut sectors and in the postal and pension systems, and institutional improvements in public financial management toward better controls and transparency have been made and are continuing.

Abstract

This paper examines the completion point document for Senegal’s Enhanced Initiative for Heavily Indebted Poor Countries. Senegal could reach the completion point on the basis of a full poverty reduction strategy and sound macroeconomic policies, as well as specific structural and social reforms set out in the decision point document. Major reforms have been advancing in the energy and groundnut sectors and in the postal and pension systems, and institutional improvements in public financial management toward better controls and transparency have been made and are continuing.

I. Introduction

1. In June 2000, the Executive Boards of the IDA and the IMF agreed that Senegal had met the conditions for a decision point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative and defined a set of conditions for Senegal to reach the completion point.1 This paper discusses Senegal’s progress and proposes Board approval of the completion point under the enhanced HIPC Initiative framework.

2. Debt relief under the enhanced HIPC Initiative framework estimated in August 2000 amounted to US$488.3 million in end-1998 net present value (NPV) terms, calculated to bring the NPV of debt to the equivalent of 250 percent of fiscal revenue at end-1998.2 This relief represents a reduction of 19.3 percent of the debt in NPV terms at end-1998 after the full use of traditional debt-relief mechanisms. At the same time, the Boards of the Fund and the IDA also agreed to deliver interim debt relief until Senegal reached the completion point. During the period from the decision point (June 2000) to end-December 2003, the IMF extended interim debt relief of SDR 13.244 million (about US$17.5 million) in nominal terms and approved an additional SDR 1.066 million (about US$1.4 million) for February-April 2004. During the same period, IDA provided interim relief of US$45.5 million by reducing a portion of debt service as it fell due. Senegal has also benefited from interim assistance granted by the African Development Bank (AfDB), the European Union (EU), and the West African Development Bank (BOAD), as well as Paris Club creditors. The total interim assistance extended to Senegal amounted to US$11.2 million in 2000, US$30 million in 2001, US$36 million in 2002, and US$76 million in 2003, and is projected to reach about US$15 million in the first four months of 2004.

3. The Boards agreed that Senegal could reach the completion point on the basis of a full poverty reduction strategy paper (PRSP) and sound macroeconomic policies, as well as specific structural and social reforms set out in the decision point document. In the opinion of the staffs, Senegal has satisfied almost all these conditions, as its government endorsed its full PRSP in June 2002, maintained a satisfactory macroeconomic framework under the previous and the current Poverty Reduction and Growth Facility (PRGF)-supported programs, implemented the planned reforms—albeit with delays in several areas, and reinforced its efforts over the past 1½ years to attain the completion point conditions in the education sector. In the case of public savings, while a strong basic fiscal balance has been maintained since 2000, in 2001 a one-off exceptional budget transfer (equivalent to 3.1 percent of GDP) was made to two parastatals in the context of the PRGF-supported program so as to regularize that financial situation after several years of accumulated losses. This transfer was not anticipated at the time of the decision point, and thus the basic fiscal balance recorded a deficit of 0.6 percent of GDP, deviating clearly from the targeted surplus of 2.2 percent of GDP in 2001. Concerning health care services, where progress has been lagging and waivers will also be needed, the authorities have defined a new sectoral approach, with a view to boosting the rates of immunization and utilization of health centers, with the support of several donors and creditors, including the World Bank and the EU.

4. The paper is organized as follows: Section II assesses Senegal’s performance in meeting the requirements for reaching the completion point under the enhanced HIPC Initiative, as set out in the decision point document; Section NT reviews the status of creditor participation and the delivery of debt relief to Senegal under the enhanced HIPC Initiative and updates the results of the debt sustainability analysis (DSA)—assessing also the sensitivity of debt indicators to changes in macroeconomic variables; and Sections IV and V present conclusions and propose issues for Board discussion, respectively.

II. Assessment of Requirements for Reaching the Completion Point

5. The conditions for reaching the completion point, as set out in the decision point document, comprise: (i) preparation of the PRSP through a participatory process, and concurrent improvements in the poverty database and poverty-monitoring capacity; (ii) maintenance of a stable macroeconomic environment, as evidenced by a satisfactory performance under PRGF-supported programs, as well as compliance with specific targets for macroeconomic variables; (iii) implementation of key structural reforms; and (iv) implementation of critical social service measures and achievement of key social objectives, particularly in the health and education sectors.

6. By end-December 2003, policy reforms and objectives envisaged for the floating completion point under the enhanced HIPC Initiative had been broadly achieved (Box 1). The remainder of this section reviews Senegal’s progress in meeting these conditions, as well as the government’s agenda in improving the management of public expenditure, including for the purpose of tracking poverty-reducing spending.

Senegal: Summary of Conditions for Achieving the Floating Completion Point

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The immunization rate for 1999 was revised downward by the government to 42 percent, as a result of the review of the expanded Program for Immunization in 2000, which was endorsed by all donors. This revision made the targets set at the decision point unachievable.

A. Macroeconomic Performance in 2001–03

7. Macroeconomic performance over the period 2001–03 was satisfactory, albeit uneven. Real GDP growth averaged a little under 5 percent per annum over 2000–03, dropping to 1.1 percent in 2002 on account of a weather-related fall in agricultural output. Excluding 2002 (which was weather-affected) real GDP growth averaged 5.8 percent. Inflation remained low, averaging less than 2 percent over 2000—03. The external current account deficit (including official grants), declined from 6.3 percent of GDP in 2000 to a range of 5–5∃rac23; percent in 2001–02, reflecting good export performance and a surge in private transfers. The deficit is likely to have risen to 6.6 percent in 2003, reflecting mainly the effect on the trade balance of poor agricultural crops in 2002.

8. Fiscal performance was generally adequate, sustained by efforts in tax revenue administration and expenditure restraint. As envisaged under the PRGF-supported program in 2001, the basic fiscal balance (excluding HIPC Initiative-related spending) shifted temporarily to a deficit of 0.6 percent of GDP from a surplus of 1.3 percent in 2000 because of a large budgetary transfer to cover accumulated losses of two parastatals (SONACOS, the groundnut processing company, and SENELEC, the electric utility) (Table 2).3 In 2002, higher revenues, together with the absence of extraordinary budgetary transfers and tight control on current spending, generated scope for a significant increase in domestically financed capital spending while securing a basic fiscal surplus of 2.1 percent of GDP. ln 2003, this surplus was targeted to narrow by 1 percent of GDP because of accelerated (domestically financed) capital spending and a drought-related emergency program. Over 2000–03, the government maintained a prudent external borrowing policy (see below) and tight control over domestic financing. Net bank credit to the central government evolved along a declining trajectory, and at end-2003, net bank credit was 60 percentage points below the level outstanding at end-2000.4

Table 1.

Senegal: Selected Economic and Financial Indicators, 2000-22

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Sources: Senegalese authorities; and staff estimates and projections.

Includes foreign-financed capital expenditure.

Includes additional expenditures linked to the HIPC Initiative interim assistance debt relief.

Defined as revenue minus total expenditure and net lending, excluding externally financed capital expenditure and on-lending.

Assumes that 75 percent of undistributed HIPC Initiative spending in 2002-03 will be investment and includes accumulationof stocks of CFAF 37 billion in 2000 and 2001 and dccumulation of these stocks in 2002 and 2003.

Projection assumes a reduction in the stock of debt in 2003 owing to Senegal’s reaching the completion point under the HIPC Initiative.

Table 2.

Senegal: Medium- and Long-Term Government Financial Operations, 2000-22

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Sources: Senegalese authorities; and staff estimates and projections.

External debt service includes all debt directly contracted by the government and part of the government-guaranteed debt serviced by the budget.

Include treasury special accounts and correspondent accounts, net lending, and temporary costs of structural reforms

Defined as total revenue minus total expenditure and net lending, excluding externally financed capital expenditure and lending.

Include also treasury bills issued in the West African Economic and Monetary Union (outside Senegal).

Table 3.

Senegal: Medium-Term Balance of Payments, 2002-22

(In billions of CFA francs, unless otherwise indicated)

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Sources: Central Bank of West African States (BCEAO); and staff estimates and projections.
Table 4.

Senegal: Discount Rate and Exchange Rate Assumptions

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Sources: OECD; and IMF, International Financial Statistics.

The discount rates are the average commercial interest reference rates (CIRRs) for the respective currencies over the six-month period ending December 1998 for the decision point; and for the six-month period ending December 2002 for the completion point.

For all currencies for which the CIRRs are not available, the SDR discount rate is used.

As of end-December 1998 for the decision point; end-December 2002 for the completion point.