On behalf of the Senegalese authorities, we would like to thank staff for their fruitful collaboration and appreciable work reflected in their well-written set of reports. We also wish to express our appreciation to the Executive Board and the donor community for their unfailing support that has contributed to warranting the success of the thrust of the authorities’ vast program of macroeconomic and structural policies. The efforts of the authorities combined with donor technical and financial assistance have contributed to the sharp reduction in poverty over the past few years. According to the latest household survey poverty decreased significantly in the past few years, with the percentage of poor households dropping from 61.4 percent to 48.5 percent between 1994 and 2001.

Recent Economic and Financial Developments and Performance Under the PRGF

Against the backdrop of a locust invasion and sharp increases in oil prices, Senegal’s macroeconomic performance was very strong in 2004. For the second time in a row, real GDP growth rate is expected to have reached about 6 percent.¹ Average annual CPI inflation was contained below one-half of one percent. The external current account deficit (including and excluding official transfers) is estimated to have declined as a result of strong export performance—albeit the appreciation of real exchange rate due to the U. S. dollar depreciation vis-à-vis the euro.

Fiscal performance was strong in 2004, with the basic fiscal balance kept to its 2003 level. The revenue target is expected to have been achieved, with a slight increase in tax revenues as a fraction of GDP compensating partly the reduction in the share of grants. On the expenditure side, current expenditures as a fraction of GDP are projected to have decreased slightly while capital expenditures are expected to have remained stable. Directors may recall that, in 2003, additional drought- and HIPC-related spending led to the increase in the overall fiscal deficit and the nonobservance of the performance criterion on the basic fiscal balance, one of the two missed performance criteria for which the authorities are requesting waivers.

The conduct of prudent monetary policies at the regional level explains the low inflation rate achieved. In particular, available estimates indicate that money supply grew less than nominal GDP and net foreign assets increased by about 6.4 percent, thereby leading to an improvement in the government’s net position vis-à-vis the banking system. Other noteworthy developments on the monetary front include the reduction in banks’ net credit to the government, and the lowering of the regional central bank’s (BCEAO) key lending rates.

Most structural reforms were implemented satisfactorily, including the introduction of a new investment code, the digitization of the real estate registry, and the publication of the half-yearly audited accounts of the electricity company, SENELEC. In the area of budgetary and public financial management, the implementation of the ambitious reform agenda has continued to proceed, although more slowly than initially planned in view of unanticipated technical difficulties.

The authorities also undertook urgently needed repairs to the Port of Dakar, as the poor conditions of the facilities were adversely affecting trade-related activities. The financing for the repairs came from a non-concessional loan from the regional development bank (BOAD). In view of the urgency of the situation, my authorities are requesting a waiver for the missed performance criterion related to this non-concessional loan.

Regarding the infrastructure work undertaken last year in Thiès, and which is consistent with the wealth creation pillar of the PRSP, the authorites agree that Thiès-related expenditures should have followed stricter budgetary procedures. However, in view of the rush to complete the project within a certain time framework, some deadlines were shortened, and not all budgetary procedures were followed. With the assistance of the World Bank, a review of the compliance of contracts with the procurement code has been made, and corrective measures have been taken. In this regard, they undertook all compensatory measures needed to make sure that these expenditures have no effects on the basic fiscal balance. In addition, they took appropriate remedial actions to avoid the occurrence of similar problems in the future, including the repeal of the provisions that permit contracting parties with the government to receive financial compensation, even without formal approval by the competent authorities.

Macroeconomic and Structural Policies for 2005

The outlook for the Senegalese economy is favorable, with real GDP, for 2005, projected to grow by more than 6 percent. Inflation is expected to be kept low; with average CPI inflation estimated to be about 1.5 percent. The current account deficit is expected to narrow further down to 5.5 percent of GDP. The fiscal position will be sustainable, with the primary fiscal deficit projected to amount to less than 2 percent of GDP.

Fiscal Policy and Reform

The overall fiscal deficit, including grants, is projected to be about 2.9 percent of GDP. On the expenditure side, the authorities have already taken measures aimed at accelerating the pace of HIPC-related social spending. The authorities are committed to strengthening fiscal discipline and transparency, particularly in managing resources that may be received from the Organization of Islamic Countries and within the framework of the Millennium Challenge Account (MCA). With a view to strengthening fiscal management and procurement procedures, they will continue the implementation of their program of budgetary and public management reforms according to a set of policy actions and measures adopted since mid-2003.

On the revenue side, the authorities will continue to work on expanding the tax base and improving tax collection. To date, numerous capacity-building projects have been initiated that aim at enhancing the capacities of the Tax Authority, including the recruitment of additional tax officers and assessors and the computerization of its operations. In parallel, the government has intensified the combat against tax fraud and evasion, most notably through on-site audits of tax reimbursement claims and strategic investigations of tax offenses.

Monetary Policy and Financial Sector Reform

Prudent monetary policy will continue to be conducted at the regional level by the BCEAO. The authorities will continue to commit to the monetary arrangement within the West African Economic and Monetary Union (WAEMU). Given the successful sale of treasury bills in 2003, the government intends to issue further securities on the regional market to cover its financing needs while strictly adhering to the WAEMU directives. The authorities will pursue their ongoing consultations with all relevant parties to stimulate the contribution of the financial sector to the development of economic activity.

The authorities welcome the conclusions of the 2004 Financial Sector Assessment Program-Update (FSAP) report. While they are particularly pleased that the report acknowledges that the stability of the financial sector has been preserved, they are aware of the need to address financial vulnerabilities related to the excessive exposure of banks to large corporations. As an illustration of their commitment to transparency, they have already expressed their consent to the publication of this FSAP report on the Fund’s website. However, as Senegal belongs to the monetary union, WAEMU, the implementation of some of the measures recommended in the Report can only be done at the regional level, and the authorities will work closely with the regional authorities to that effect. With regard to measures to combat money laundering and the financing of terrorism, the authorities are also involved in the WAEMU’s ongoing efforts to put in place a legal framework aimed at criminalizing the financing of terrorism.

Structural Reforms

As I noted during previous Board discussions on Senegal, the authorities’ willingness to strengthen the ownership of the privatization program has explained partly delays in its implementation in the past. Since consensus has now been reached, the government is determined to press ahead with the privatization agenda. In this regard, the privatization of the groundnut processing and vegetable oil refining company, SONACOS, has been decided upon, and, subsequently, the transfer of ownership is expected to be completed by the midst of this year. As mentioned by staff, the authorities have taken actions to eliminate the tax on vegetable oil protection. Concerning the electricity company, SENELEC, the authorities’ intention is to progressively increase the share of electricity produced by private investors under Independent Power Producer (IPP) arrangements and transfer its management to private agents. The government has made it clear that SENELEC will not benefit from any current budgetary transfers and that the company’s indebtedness to banks will not exceed a certain level.

On the delays in the submission of budgets to the Audit Court for verification, we would like to reassure the Executive Board that the authorities have completed the prior action for the second review, namely the submission of the budget and treasury accounts of fiscal years 2002-03 to the Court. Capacity constraints continue to undermine the production of monthly reports on tax due and collected. However, the electronic data-sharing system expected to be operational by June 2005 will enable the preparation of such reports within a maximum lag of one month. In the meantime, such reports will be produced with the available information systems every month, starting with the month of January 2005.

Looking forward, the authorities intend to maintain the conduct of prudent fiscal policies, with a renewed focus on fiscal discipline and transparency. The authorities are convinced that higher long-run growth remains critical to sustain the remarkable progress achieved thus far in the fight against poverty. In this respect, the authorities launched early this year the Accelerated Growth Strategy (SCA) after consulting with representatives from the private sector, NGOs, civil society, and the donor community. Consistent with the wealth creation pillar of the PRSP, the SCA aims to define a road map for achieving growth rates above 7 percent and it is to be elaborated through broad-based consultations with all national stakeholders and international partners. The rationale for the SCA relates notably to the fact that higher-than-prevailing growth rates are critical for Senegal to achieve the MDGs by 2015. Technical committees comprising representatives from the private and public sectors have been put in place that are in charge of defining action plans for the implementation of the SCA. Based on these action plans, a validation workshop and a roundtable with donor representatives are scheduled in October and December 2005 successively.

Conclusion

My Senegalese authorities would like to reiterate their strong commitment to the adjustment process. They are appreciative of the assistance provided by donors and the multilateral institutions. It is their intention to pursue steadfastly the reform process. In view of the progress made in the implementation of the program, and the corrective actions taken, I would like to request Directors’ support for the proposed decision.

Regarding the next steps in Senegal’s relations with the Fund, my Senegalese authorities are of the view that PRGF programs have been critical in enabling Senegal to achieve macroeconomic stability, implement critical structural reforms and achieve external debt sustainability. My authorities’ intentions in their next stage of development endeavors is to create an expanded and transformative private sector-led economy that would enable Senegal to attain high growth and reduce poverty. This, in turn, requires an increased access to global capital and money markets. In order to boost the credibility rating already achieved, my Senegalese authorities would, in place of PRGF, like to have a relationship that would allow them to continue to benefit from the Fund’s signaling role. Accordingly, my Senegalese authorities intend in the near future to contact the Fund and the broader donor community regarding the strategy that would enable them to achieve this goal.