Statement by Damian Ondo Mañe, Executive Director for Senegal

This paper focuses on Senegal’s Third and Fourth Reviews Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF) and Request for Waiver of Performance Criteria. Program implementation in 2005 was uneven. Most performance criteria (PCs) for the third and fourth reviews were met, except for the continuous PCs on the arrears of, and budgetary transfers to, the state electricity company, and the ceiling on no-bid public contracts. On the basis of the corrective actions taken and planned, the authorities requested waivers for the missed PCs.

Abstract

This paper focuses on Senegal’s Third and Fourth Reviews Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF) and Request for Waiver of Performance Criteria. Program implementation in 2005 was uneven. Most performance criteria (PCs) for the third and fourth reviews were met, except for the continuous PCs on the arrears of, and budgetary transfers to, the state electricity company, and the ceiling on no-bid public contracts. On the basis of the corrective actions taken and planned, the authorities requested waivers for the missed PCs.

January 9, 2006

1. We thank staff for the comprehensive set of papers on Senegal and for providing the authorities with useful policy advice. We also would like to commend Management and staff for their diligence in bringing these papers within tight deadlines for Board consideration. We express gratitude to Directors for agreeing to waive the minimum circulation period in this case. We are pleased to convey to the Executive Board the authorities’ appreciation of its decisive role in Senegal’s qualification under the MDRI debt relief. The decision that Senegal meets all the criteria to qualify for immediate debt relief is a clear recognition of the authorities’ sound macroeconomic policies, consistent implementation of the PRS, and robust PEM systems. Nevertheless, my authorities view the MDRI debt relief as an invitation to persevere in strengthening macroeconomic and structural policies, enhancing budget management and their poverty reduction strategy with a view to achieving growth and poverty reduction objectives and making the best use of the resources freed by the multilateral debt relief to that effect.

SENELEC and Misreporting Allegations

2. As noted by staff, the financial situation of the electricity company, SENELEC, worsened last year in the aftermath of oil price increases. An action plan has been already implemented with a view to strengthening the financial situation of the company. Key measures include inter alia (i) a 10 percent increase in electricity tariffs on November 1, 2005 which is a first step toward ensuring a full pass-through of oil price increases by end-2006, and (ii) adjustment measures taken by SENELEC to improve its profitability. In view of these measures which should improve the financial situation of SENELEC, the authorities request a waiver for the nonobservance of the performance criteria on the arrears of and budgetary transfers to the company.

3. With regard to the noncomplying disbursement, we wish to echo the authorities’ view that “there was no intent to withhold information nor did misreporting take place, and certainly there was no deliberate intent to provide the Executive Board with inaccurate information concerning SENELEC’s late interest due to the independent electricity producer.” We would like to point out that there was a tacit agreement between SENELEC and its energy supplier, GTI, which granted the former a deferral of payment, at least until the latter claims payment of such interest. In view of the terms of this agreement, it cannot be ascertained that there were any arrears on interest charges on payment to GTI at least so long as GTI did not make a demand for payment of late interest. Moreover, at the time GTI demanded payment of late interest in June 2005, there was disagreement as to the exact amount of interest due, which made it difficult to estimate the arrears of SENELEC. Upon reaching an agreement with GTI on the amount of the late interest, a plan to clear the arrears was agreed upon and SENELEC began to repay promptly on December 15, 2005. Given these circumstances, it is the authorities’ view that there was neither accumulation of arrears nor misreporting to the Fund.

Recent Macroeconomic and Structural Developments

4. Macroeconomic performance has been strong under the PRGF arrangement, with GDP growth rates exceeding 6 percent in 2003 and 2004. For 2005, preliminary estimates indicate that, in the absence of the oil price shock, GDP growth estimated at 5.1 percent could have been along the lines of growth rates reported during the two previous years. Owing to this shock, inflation bounced but stayed within the program limits and the external current account deficit increased by slightly less than one percentage point of GDP.

5. On the fiscal front, strong revenue performance was made possible last year, in part, by the authorities’ efforts to enhance collection of corporate income tax revenues. Total expenditure increased during the same year, accommodating the much-needed infrastructure investment and unexpected spending related to the oil price increase, including transfers to the electricity company and oil refinery.

6. Overall, public expenditure management has been in line with the poverty reduction and growth objectives that the authorities strive to achieve through the implementation of the PRGF-supported program. This is notably reflected by the increasing trend in public investment and social expenditure. Actions taken to strengthen budget management include the decision made by the government last September to halt payment orders each December except for expenditure set forth in the supplementary budget law. The authorities are mindful of the staff concern about the excessive use of no-bid contracts. They are determined to take immediate actions with a view to strengthening procurement practices, including enhanced procurement planning, the submission for parliamentary approval of a revised legal framework for procurement practices, the creation of new agencies to ensure the implementation of the revised legal framework, and the yearly audit of procurement contracts. In light of the above, the authorities request a waiver for the nonobservance of the performance criteria on no-bid contracts.

7. On the structural front, delays in implementing the benchmark on the revised presentation of the main fiscal table—converted into a prior action—were related to the process of program negotiations. As agreement was finally reached with staff on the necessary methodological changes to this table, the authorities moved promptly toward the implementation of the related structural condition.

8. Furthermore, it is important to note that the authorities’ strategy to cope with the adverse impact of the increased imports of vegetable oil and address the difficult financial situation of the groundnut processing and vegetable oil refining company, SONACOS, was developed in close collaboration with the World Bank and in accordance with the WTO’s Agreement on Safeguards. Measures taken to that effect were, among other things, motivated by the authorities’ desire to protect the livelihood of the many small farmers involved in the groundnut sector whose income would otherwise be adversely affected, thereby aggravating the incidence and depth of poverty.

Prospects and Challenges for 2006

9. The outlook for 2006 remains encouraging, with GDP growth and the external current account deficit projected to be at the same level as in 2005 and CPI inflation expected to rise to 2.5 percent before trending downward in subsequent years.

Fiscal Policy and Reform

10. The fiscal outlook for 2006 is consistent with macroeconomic stability. Still, the authorities intend to limit increases in public investment, in order to allow at most an increase of one-half percentage point of GDP in overall fiscal deficit—from 3.5 percent of GDP in 2005 to 4 percent of GDP in 2006—while paying due attention to absorptive capacity constraints. With the World Bank’s assistance, care will be also taken to increase the productivity of infrastructure investment through better planning, monitoring, and evaluation.

11. With regard to tax revenue, the authorities intend to install a tax management system software during the course of this year. Actions are also envisaged in the coming months to enhance the connection between the Treasury and the tax collecting agencies through the establishment of a data-sharing system. The reduction in the corporate income tax effective as of January 2006 reflects the authorities’ desire to boost private sector development and is expected to have a minor incidence on revenue performance.

12. Enhancing fiscal transparency is among the main objectives pursued by the authorities as well as a key pillar of their macroeconomic program. To that end, an action plan was designed by the government based on the recommendations of the fiscal module of the ROSC, and close collaboration was maintained with the World Bank through the implementation of Country Financial Assessment Accounting and Country Procurement Assessment Review action plans.

Airport Project

13. The airport project is a manifestation of the authorities’ determination to explore innovative ways of financing major infrastructure projects deemed necessary for the development of the economy. A delegation headed by the Prime Minister made a visit to the Fund in June 2005 during which a detailed presentation of the airport project was made to the staff. The authorities explained that the financing scheme of the airport project was in full compliance with the regulations of the International Civil Aviation Organization.

14. From the very beginning, the authorities shared the staff’s call for the need to ensure full transparency in the implementation of the project. However, differences on the nature of transparency procedures to be implemented led to lengthy discussions that finally came to a successful conclusion last month. The authorities have already started to implement the details of the agreement reached with staff on the transparency procedures including the promulgation of a decree on transparency procedures related to the financing and construction of the airport.

Financial Sector Reform and Public Enterprises

15. Although the soundness of the banking sector corroborated by the last FSAP mission is still maintained, the authorities continued to work on reducing vulnerabilities related to banks’ exposure to large corporations. After extensive consultation with domestic stakeholders, the authorities have finalized an action plan aimed at strengthening the financial system and enhancing its supervision. This plan based on the FSAP recommendations envisages a series of measures to reduce nonperforming loans and the vulnerability in the financial sector induced by credit concentration. The main objectives of the priority measures of the action plan are to strengthen the legal and judicial framework, improve prudential regulation, and provide enhanced access to credit for small and medium enterprises. Specific measures to improve prudential regulation were already brought to the competent regional authorities, including the increase in the minimum capital adequacy ratio and the adoption of a law on bank failure in line with best international practices.

16. Concerning the Industries Chimiques du Sénégal, the government has agreed to an increase in the capital of this company with a view to allowing the private partner to recapitalize the company and detain the majority stake.

Accelerated Growth Strategy (SCA) and Poverty Reduction

17. As we noted during the last Board meeting on Senegal, the government of Senegal has decided to place a special emphasis on an accelerated growth strategy (SCA) in order to reach the objective of halving the poverty rate by 2015 and create export opportunities. The SCA was launched early in 2005 after broad consultations with representatives from the private sector, NGOs, civil society, and the donor community. The SCA identifies priority sectors based on the potential for growth, export opportunities, and employment generation along with key constraints to development in each of these sectors. These sectors include agriculture and agro-industries, fisheries, tourism, art crafts and cultural industries, textile and clothing industries, and information and communication technologies and teleservices. Technical committees comprising representatives from the private and public sectors are in charge of defining the action plans for the implementation of the SCA.

18. The implementation of the SCA is expected to begin in June 2006, and its action plan to be aligned with the revised PRSP, which will reflect the key priorities of the government. The implementation of poverty reduction policies appears to be associated with a continuous decline in the number of poor households over recent years. Available estimates indicate that poverty declined from 57 percent in 2001 to 54 percent in 2004.

Conclusion

19. As previously announced, my authorities are eager to maintain their close relation with the Fund at the expiry of the current arrangement under the PRGF. Major accomplishments were made in achieving key objectives under PRGF arrangements, including continued macroeconomic stability, sound financial system, and fiscal and debt sustainability. As we noted in a previous Board meeting on Senegal, the authorities’ intention is to attain higher growth rates and reduce poverty further through a private sector-led economy. To achieve this objective, increased access to international capital markets is necessary and, to this end, the benefit of the Fund’s signaling role is crucial. It is therefore the authorities’ view that a nonfinancial arrangement will be more appropriate at this stage. We are hopeful that Directors will continue to provide their unfailing support to the authorities’ future development endeavors.

20. In view of the major progress made in the implementation of the program and the corrective measures taken by the authorities, I would like to request Directors’ support for the proposed decision.