This Selected Issues paper for Senegal reports that reforms of the groundnut sector are an integral part of poverty reduction and growth strategy. To strengthen public finances and instill more efficiency into the groundnut sector, the government has decided to sell the state-owned groundnut processing company and to eliminate the tax and tariff preferences shielding that company from foreign competition. Fiscal decentralization is essentially viewed by the Senegalese authorities as an important tool for raising the efficiency of capital spending and reducing poverty.

Abstract

This Selected Issues paper for Senegal reports that reforms of the groundnut sector are an integral part of poverty reduction and growth strategy. To strengthen public finances and instill more efficiency into the groundnut sector, the government has decided to sell the state-owned groundnut processing company and to eliminate the tax and tariff preferences shielding that company from foreign competition. Fiscal decentralization is essentially viewed by the Senegalese authorities as an important tool for raising the efficiency of capital spending and reducing poverty.

III. The Challenges of Fiscal Decentralization in Senegal 13

A. Introduction

38. Like many other African countries, Senegal has recently initiated a process of fiscal decentralization. Fiscal decentralization—the devolution of spending and revenue sources to subnational levels of governments—has not yet reached the implementation stage in Senegal. Nevertheless, it has generated high expectations both within the government and in the donor community. In this light, it may be timely to review Senegal’s envisaged approach to fiscal decentralization and discuss some of the challenges and risks that could lie ahead.

B. Country Experiences

39. Fiscal decentralization can take different forms. The various options of intergovernmental fiscal relations are expenditure assignment, revenue assignment, intergovernmental transfers, and subnational government borrowing. A review of country experiences shows great diversity in approaches. The devolution of spending is often viewed as the easiest step, while revenue assignment is typically more difficult to put in place, owing to policy coordination and tax administration issues. In theory, it would be desirable to give local authorities both spending power and revenue-raising responsibilities, as this would promote fiscal responsibility at the subnational level. This combination is observed in countries that have engaged in advanced fiscal decentralization reforms. Complete decentralization would involve granting local governments the additional authority to borrow as well. In that case, the issues of control over borrowing and macroeconomic management become relevant and need to be addressed.

40. There has been a widespread interest in strengthening fiscal decentralization in Africa in recent years, with mixed results. While there have been some successes, the weak institutional capacity and accountability of local governments have adversely impacted the process in some countries. Fiscal decentralization has also greatly varied in focus and depth across Africa. In Ethiopia, for instance, fiscal decentralization has represented the predominant reform priority since 2001, with a strong focus on expenditure assignment. In Tanzania, fiscal decentralization took off in 1999 with the Local Government Reform Program, with the objective of improving the delivery of public services through greater spending responsibilities and controls at the local level. In Nigeria, the scope of fiscal decentralization is the greatest in Africa, given the country’s specific political structure. In that country, fiscal federalism is indeed a critical issue with implications for macroeconomic management as well as for the stable and predictable delivery of goods and services at the subnational level.

41. Many countries in Latin America have been quite aggressive in pursuing fiscal decentralization, but often have run into fiscal, financial, and efficiency problems. 14 This is notably the case for Argentina, Bolivia, Brazil, Colombia and Ecuador where problems stemmed from either poorly designed plans, weak oversight of subnational governments, or inadequate administrative capacities at the local level. In many instances, the aggressive decentralization strategy resulted in limited efficiency gains in the delivery of public goods and services and promoted rent-seeking behavior. Pushing programs on subnational governments with limited administrative capacity actually led to declines in the quality of public services. Insufficient institutional frameworks resulted in a concurrent lack of accountability. Moreover, the decentralization process often was taken over by local interest groups that gave rise to rent-seeking behavior or provided distortionary incentives.

C. Senegal’s Approach to Fiscal Decentralization

42. The process of decentralization in Senegal has been on the political agenda for many years, but is far from completion. After its independence, Senegal inherited from a highly centralized administrative framework. However, decentralization rapidly emerged as one of the priorities. In 1960, the status of the 30 existing municipalities was clearly defined. In 1966, regulations were passed to define the status of local communities. In 1972, the rural communities were created, while the number of municipalities was expanded. In 1983, the urban community of Dakar was defined. 15 Following these early steps, the process of administrative reform began that defined regions as local governments and introduced transfers of competencies from the central government to the local authorities in a number of key sectors. 16 The reform, known as régionalisation, was adopted by the law in March 1996. The law aimed at enabling local authorities to plan and enhance economic and social development at the local level by granting them more autonomy vis-à-vis the central government. Its main objectives were to: (i) foster local democracy; (ii) ensure a free administration of local authorities; (iii) promote local development; and (iv) promote good local governance. Under the reform, the different local authorities were also entitled to promote local development through the creation of instruments such as the regional plans of integrated development (PRDI), the municipalities’ investment programs (PIC) and the local development plans (PLD). In practice, however, the local authorities were given very limited financial resources to implement their own development policy, thereby highlighting the need for the design of a proper fiscal decentralization strategy.

43. Fiscal decentralization is viewed by the authorities as an important tool for raising the efficiency of capital spending and reducing poverty. There is a broad consensus in the literature that decentralization of spending responsibilities can entail substantial welfare gains. 17 Indeed, efficiency in the allocation of resources would be best served by assigning responsibility for each type of public expenditure to the level of government that most clearly represents the beneficiaries of those outlays. Decentralization was clearly identified in the authorities’ Poverty Reduction Strategy Paper (PRSP) as a means to enhance capacity-building and improve the delivery of the basic social services, one of the four pillars of the PRSP. It was also presented as a guiding principle for the implementation of the poverty reduction strategy, as most PRSP objectives need to be attained at the local level. More specifically, according to the PRSP, fiscal decentralization would help to: (i) shift resource allocation in favor of rural areas; (ii) reach the targeted population; and (iii) generate new economic opportunities for the private sector in rural areas. With the enhanced role played by the local authorities, the process would also contribute to capacity-building in the areas of fiscal management and control, and local development. As regards the efficiency gains of capital spending, the authorities claim that the implementation of fiscal decentralization would promote a more expeditious execution of the budget, notably through decentralized procurements, thereby addressing the bottlenecks hurting the absorption capacity. It would also strengthen the ownership of the investment project at the local level, which would help enhance the productivity of capital spending and reduce the recurring charges.

44. Following progress in political decentralization, the authorities are now considering fiscal decentralization. The authorities are still working on the design of their strategy. A working group, put in place in 2004 under the supervision of the Treasury, has produced a report that outlines Senegal’s strategy toward fiscal decentralization and the authorities’ action plan. The report is expected to be approved shortly by an inter-ministerial committee. 18 The report suggested, as prior action, the establishment of an appropriate legal framework for fiscal decentralization. The framework should include a law authorizing the local authorities to execute budgetary spending, and a convention between the central government and the local authorities clearly defining the role, interaction and obligations of both parties. However, the prior action, which was scheduled for end-2004 has not yet been taken.

45. The authorities envisage a narrow and gradual approach to fiscal decentralization. As spelled out in the authorities’ report, for the time being, fiscal decentralization will be partial, limited to expenditure assignment that would only cover the domestically-financed component of capital spending (the “resources internes du Budget Consolidé d’Investissement- (BCI)”). In 2004, this spending accounted for about 22 percent of total expenditure or 5 percent of GDP. 19 Hence, Senegal has adopted the narrowest definition of fiscal decentralization given that the process will not involve the revenue side or other components of spending such as current expenditure on goods and services and foreign-financed capital spending. Moreover, the decentralization of spending will only affect the execution phase and the management of the resources. The investment projects will continue to be designed by the technical ministries at the central government level and subject to the standard budgetary process. Once the central government budget has been approved, the resources earmarked for specific investment projects will be transferred to the local authorities and recorded in their budget both on the resource and spending sides. As regards the timetable, decentralization is supposed to start with the 2005 fiscal year, with a test limited to projects in the areas of education and health for the regions that have put in place an efficient regional development agency (ARD). If this year’s test turns out to be successful, the experience could be extended in 2006 to the areas of justice and environment. The objective is to implement the decentralization of capital spending for all technical ministries by 2007. 20

46. Fiscal decentralization is also high on the agenda of Senegal’s development partners. The donors are part of a working group on decentralization chaired by the ministry of local governments. The donor community concurs with the authorities that fiscal decentralization will be essential to improve the delivery of basic services, as part of the poverty reduction strategy. The donors also view fiscal decentralization as a way to strengthen the links between policy implementation and the PRSP objectives. In 2002, for instance, the European Union provided €21 million in budgetary support for the decentralization efforts, particularly for development planning initiatives at the level of regions, municipalities and rural communities. Likewise, decentralization has also been identified as one of the key strategic objectives of the USAID’s Country Strategic Plan for 1998-2006.

47. Progress in fiscal decentralization is part of the World Bank’s conditionality. In addition to the emphasis on fiscal decentralization in the World bank’ s Country Financial Accountability Assessment (CFAA) of May 2003, the institution gave a prominent role to fiscal decentralization in the framework of the Poverty Reduction Structural Credit (PRSC) approved in 2004. Under the World Bank’s program, it is expected that the authorities will accelerate transfer of financial resources to local governments in 2005. 21 Concurrently, new rules should be agreed to secure and guarantee that these transfers will be more automatic and predictable to local governments. The decentralization of the consolidated investment program (BCI) should be initiated at the regional level. The institutional framework surrounding the PRSP should be operational in the regions by early 2005 through the finalization of the regional plans (POR), which will be consistent with the sectoral investment strategy (POS), and budgetary controls procedures should be effective at the regional level. Possible triggers for deciding of whether the Bank will proceed with subsequent operation PSRC II could include: (i) strengthen the activities of PRS regional committees; (ii) agree and initiate the decentralization strategy of the BCI in pilot regions/sectors; and (iii) prepare a series of standard measures to facilitate the implementation of procurement rules in the regions. Likewise, the joint staff advisory note issued by the World Bank and the Fund on the PRSP’s progress report stressed the need for more and efficient decentralization and concurred with the authorities’ assessment that more efforts are needed in this area during the next year. 22

D. Main Risks and Challenges

48. In contrast to some other country experiences, the macroeconomic risk of fiscal decentralization will likely be small in Senegal. Since the authorities are focusing exclusively on expenditure assignment financed through budgetary transfers to local authorities, fiscal decentralization will not be associated with substantial risks of fiscal slippages. This is because the role of the local authorities will be confined to executing the projects, with no input on the overall budget envelope. In this respect, the central government will not devolve the control over expenditure policy. It is possible, that poor project execution may lead to overspending, however. This risk argues in favor of the central government maintaining a tight control over the spending execution process.

49. The success of the authorities’ decentralization strategy will depend on how well they will address a number of challenges, shown by other countries’ experiences to be critical for the success of the decentralization. One of the key difficulties will be to improve the administrative capacity of the local authorities. As highlighted in the literature on fiscal decentralization issues, the theoretical efficiency gains from decentralization can be significantly undermined in practice by institutional constraints. In particular, the administrative capacity of subnational governments may be weak, while the incidence of corruption may be greater than at the central level. Moreover, often subnational governments have not been able to develop modern and transparent public expenditure management systems, including adequate financial control, reporting, accounting, and expenditure evaluation mechanisms. In the case of Senegal, this will likely require substantial investment in human and technical resources in areas such as project management, fiscal accounting, and training programs on governance and transparency. In the absence of these accompanying measures, there is a risk that decentralization strategy may prove counterproductive. Weak project management will slow the execution of spending, and with greater resources made available to the local authorities, any slippage on the governance front may hurt progress towards poverty reduction. 23 Monitoring project implementation and tracking of resources may pose a challenge without adequate technical expertise and weak accounting.

50. Decentralization of expenditure responsibilities will pose new challenges for public expenditure management for the authorities. As pointed out by Ter-Minassian (1997), these challenges generally relate to the need to: (i) coordinate the budgetary policies of the central and subnational governments to ensure their consistency with national macroeconomic objectives; (ii) promote responsiveness of all levels of government to the preferences of their constituents in both the allocation of budgetary resources and the delivery of goods and services; and (iii) ensure sound financial management of the operations of each level of government. In the case of Senegal, the coordination of budgetary policies does not pose a problem, but the issues of allocation of resources and sound financial management are highly relevant. Since the resources of the BCI will continue to be allocated at the central level, there is a risk that the authorities’ strategy may have little impact on improving the responsiveness of the budget to the needs of the local population, unless the technical cooperation between the local authorities and the ministries in charge of project design is strengthened. While the authorities are aware of this risk, it remains unclear how the formulation of development projects will better integrate the local priorities.

51. There is a risk that decentralization may magnify the weaknesses identified at the central government level in the area of public expenditure management and fiscal transparency. Reforms in fiscal management are high on the Senegalese authorities’ agenda, notably in the framework of the PRGF-supported program and the World Bank PRSC. Despite significant efforts in recent years, considerable progress, however, remains to be achieved before the fiscal transparency situation can be considered as satisfactory. In particular, (i) fiscal management is increasingly fragmented, with large budgetary allocations transferred to autonomous agencies which operate in relative opacity; (ii) the spending circuit continues to be fairly cumbersome and slow, (iii) the framework for public procurement is not implemented in a transparent way; (iv) despite ongoing progress, accounting procedures are still slow and cannot regarded as fully reliable yet; and (v) internal ex post controls are generally weak. All these issues are likely to be even more relevant at the local government level. Therefore, fiscal management at the central government level will have to be strengthened to constitute a solid foundation for fiscal decentralization.

52. In the presence of administrative constraints, fiscal decentralization competes with other important fiscal reforms on the authorities’ agenda. The authorities are currently working on the devolution of responsibility, initially held by the ministry of finance, for the administrative phase of public spending—the so-called “deconcentration”—whereby the issuance of payment orders would be carried out by the technical ministries, starting in 2005, with a test for the ministries of health, education, justice, and environment. While the deconcentration of the administrative phase of expenditure and fiscal decentralization are consistent and complement each other, they also compete on the authorities’ implementation agenda.24 This competition may explain why significant progress has been achieved in recent months in the “deconcentration” reform, while little has been achieved on the decentralization front.

E. Concluding Remarks

53. Fiscal decentralization can help improve the delivery of goods and services at local levels and generally strengthen the link between fiscal policy and the authorities’ poverty reduction objectives, but it should be implemented with caution. Implementation should take place gradually, consistent with the pace of the development of local administrative capacity, a key variable for the success of the reform. Equally importantly, fiscal decentralization should not distract the authorities from the important task of implementing critical fiscal reforms at the central government level. These reforms are indeed a prerequisite for the success of fiscal decentralization.

F. References

  • Ahmad, E., and V. Tanzi, Managing Fiscal Decentralization 2002, Routledge.

  • Brosio, G., Decentralization in Africa”, in Managing Fiscal Decentralization. ed. By Ahmad, E., and V. Tanzi, 2002, Routledge.

  • Daban, T., Fiscal Decentralization in Latin America: Lessons from Peru, Selected Issues, The International Monetary Fund, Country Report No. 04/156, May 2004.

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  • De Mello, L., and M. Barenstein, Fiscal Decentralization and Governance: A Cross- Country Analysis, IMF Working Paper, WP/01/71.

  • Gouvernement du Sénégal, Lettre de politique du développement rural décentralisé, 1999.

  • Ministère de l’Economie et des Finances, Etude sur la décentralisation de la Gestion des Ressources Internes du Budget Consolidé d’Investissement- Rapport final (projet), 2004.

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  • Ministère de l’Economie et des Finances, Pauvreté et Décentralisation: le Cas du Sénégal, Séminaire sous-régional, July 1-2, 2003.

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  • Ter-Minassian, T., 1997, Fiscal Federalism in Theory and Practice, International Monetary Fund, Washington D.C.

  • United Nations, Decentralization and Poverty Reduction: Does it Work ? Fifth Global Forum on Reinventing Government, Mexico City, November 3–7, 2003.

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  • World Bank. Senegal: Fiscal Decentralization and Sub-National Finance in Relation to Infrastructure and Service Provision, October 1999.

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  • World Bank. Africa Region. Proposed First Poverty Reduction Support Credit. November 12, 2004.

13

Prepared by Benoit Anne.

15

There are three types of local authorities in Senegal: the region, the municipality (“commune”), and the rural community. The country is currently divided in 10 regions, 60 municipalities and 320 rural communities.

16

These sectors included (i) the management and use of the State’s public and private property and of the national domain; (ii) environment and management of natural resources; (iii) health, population and social welfare; (iv) youth, sports and recreation; (v) culture; (vi) education, promotion of languages, literacy, technical and vocational training; (vii) planning; (viii) local development; and (ix) town planning and housing.

18

Ministère de l’Economie et des Finances, Etude sur la décentralisation de la Gestion des Ressources Internes du Budget Consolidé d’Investissement – Rapport final, 2004.

19

It is not clear yet whether the whole envelope of BCI’s domestic resources would be earmarked for decentralization of spending. By international comparison, 5 percent of GDP is towards the lower end of decentralized resources.

20

There are currently no details about further steps to strengthen fiscal decentralization beyond the implementation of the partial expenditure assignment.

21

The World Bank program measures on fiscal decentralization are fully consistent with the authorities’ own strategy.

22

Poverty Reduction Strategy Paper-Annual Progress Report-Joint Staff Advisory Note (IMF Country Report No. 05/115).

23

There are some indications that governance in Senegal is stronger at the central level than at the decentralized level (see, for instance, Gouvernement du Senegal, Lettre de politique du développement rural décentralisé, 1999). However, a growing literature in recent years argues in support a positive association between decentralization and governance (see de Mello and Barenstein, 2001).

24

In addition, these projects also compete with the other components of the authorities’ ambitious program of reforms in the areas of fiscal reporting and ex post controls, that is time-consuming and puts pressure on the workload of the ministry of finance.