Senegal
Staff Report for the 2008 Article IV Consultation, First Review Under the Policy Support Instrument, and Request for Waiver of Assessment Criterion and Modification of Assessment Criteria: Staff Report; Staff Supplement; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Senegal

Senegal’s staff report for the 2008 Article IV Consultation highlights the rapidly rising energy and food prices, and the high inflation in 2007 that put pressure on the fiscal and external accounts. Senegal’s macroeconomic policies were being pursued under an economic program supported by the IMF’s Policy Support Instrument (PSI), which was approved in November 2007. Executive Directors observed scope for improving the targeting of the existing measures while minimizing economic distortions so that they remained consistent with macroeconomic stability and debt sustainability.

Abstract

Senegal’s staff report for the 2008 Article IV Consultation highlights the rapidly rising energy and food prices, and the high inflation in 2007 that put pressure on the fiscal and external accounts. Senegal’s macroeconomic policies were being pursued under an economic program supported by the IMF’s Policy Support Instrument (PSI), which was approved in November 2007. Executive Directors observed scope for improving the targeting of the existing measures while minimizing economic distortions so that they remained consistent with macroeconomic stability and debt sustainability.

Executive Summary

Senegal’s macroeconomic performance improved in 2007, broadly in line with program projections. While economic growth recovered, rapidly rising food and energy prices raised inflation and put pressure on the fiscal and external accounts.

Although the headline overall fiscal deficit declined and the program target on the basic fiscal balance was met, there were fiscal slippages in 2007. The authorities committed more spending than the program envisaged, partly for food and energy subsidies, and postponed to 2008 the issuance of payment orders equivalent to 2 percent of GDP, delaying payments to the private sector. In addition, there is a possibility that extrabudgetary spending of about 0.2 percent of GDP may have occurred.

Aside from this fiscal issue, Senegal performed well under the PSI. All structural conditionality was respected (albeit one measure only partially), and all quantitative assessment criteria were met except the zero ceiling on domestic arrears, which was exceeded for the first three weeks after the program began. Because corrective action was prompt, the staff supports the authorities’ request for a waiver.

Senegal’s economic outlook remains positive, although downside risks have increased. Economic growth could accelerate slightly and the external current account deficit stabilize, with its financing being increasingly provided by FDI. Inflation should return to its historic average once price pressures on food and energy products abate.

The authorities agreed with the staff’s analysis that structural reforms will be key to raising external competitiveness and helping turn around Senegal’s long-standing poor export performance. The real exchange rate seems to be in line with economic fundamentals.

The PSI’s fiscal program aims to correct past fiscal slippages, preserve debt sustainability, contribute to domestic stability, and restore the integrity of the budget framework. The authorities need to revisit their system of food and energy subsidies to bring it in line with budgetary affordability, improve its targeting, and limit economic distortions. The program’s structural measures will focus on fiscal governance and transparency and help shore up fiscal policy against a variety of risks, including from the planned special economic zone.

On balance, the staff recommends completion of the first PSI program review.

I. Introduction

1. Senegal faces important macroeconomic challenges which it has begun to address under an economic program supported by the three-year PSI approved in November 2007. These challenges were identified during the 2006 Article IV consultation discussions and became the pillars of the PSI: (i) reversing the rising trend in the fiscal deficit to underpin macroeconomic stability and safeguard debt sustainability; (ii) improving fiscal governance and transparency so as to enhance policy credibility and sustain external assistance; (iii) encouraging private sector activity by improving the business environment and addressing structural impediments to higher economic growth; and (iv) limiting financial sector vulnerabilities and raising the sector’s contribution to the economy.

2. The PSI is off to a broadly satisfactory start but new challenges have emerged. It enjoys strong political support and has served its intended role of providing a framework for economic policymaking and reassuring donors. However, the international environment has become more challenging in recent months, including through the more subdued world growth outlook, the turbulence in financial markets, and, in particular, the sharp rise in food and energy prices. The latter has triggered street demonstrations and forced the government to adopt countervailing measures. These measures, together with investment spending pressures and problems controlling spending near year-end, significantly affected budget execution in 2007 and limit the government’s room for maneuver going forward.

II. Higher Economic Growth But Worrisome Surge in Food and Energy Prices

3. The Senegalese economy rebounded in 2007, broadly in line with the projections underlying the program (Figure 1).

  • Economic growth. Buoyant activity in the services and construction sectors raised GDP growth to 4¾ percent in 2007, from 2¼ percent in 2006 (Table 1). However, for the second year in a row, agricultural output declined.

  • Inflation. Rapidly rising energy and food prices raised inflation and put pressure on the external and fiscal accounts. Inflation reached 6 percent, the highest level since the 1994 devaluation. The authorities suspended VAT and customs duties on certain food products in mid-2007, gradually raised the subsidy on butane gas, and introduced subsidies on petroleum products in late 2007. This may have temporarily restrained inflation and helped maintain social peace, but the budgetary costs were substantial, at 1½ percent of GDP.

  • Balance of payments and external debt. The increase in the external current account deficit to 10½ percent of GDP reflected rising energy and food imports, while exports remained stagnant on account of the delayed restructuring of the phosphate company ICS (Table 2).1 Capital inflows increased due to higher foreign direct investment (FDI) and receipts from the sale of a third telecom license, which helped keep external debt indicators stable relative to 2006.

    Table 1.

    Senegal: Selected Economic and Financial Indicators, 2004–13

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    Sources: Senegalese authorities; and Fund staff estimates and projections.

    Defined as total revenue and grants minus total expenditure and net lending, excluding interest expenditure.

    Defined as total revenue minus total expenditure and net lending, excluding externally financed capital expenditure, on-lending, and expenditure financed with HIPC Initiative and MDRI assistance.

    Debt outstanding at year-end.

    After HIPC and MDRI (from 2006) debt relief.

    Table 2.

    Senegal: Balance of Payments, 2004–13

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

    Includes receipts from sale by the government to a Sudanese operator of a telecom license for US$200 million in 2007.

    Reflects MDRI stock debt relief in 2006. Debt relief from the Fund is recorded as a capital transfer. Debt relief from the IDA and the AfDF on the amounts falling due in 2006 is shown as exceptional financing, while debt relief on amounts due in 2007 and beyond is recorded as a capital transfer.

    Until 2005, HIPC Initiative flow debt relief granted by the IMF is recorded as a grant, and that granted by the World Bank, the African Development Bank, Paris Club creditors, and Kuwait is recorded as exceptional financing.

    Figure 1.
    Figure 1.

    Senegal: Recent Macroeconomic Developments, 2001–07

    Citation: IMF Staff Country Reports 2008, 209; 10.5089/9781451834086.002.A001

    Sources: BCEAO; and IMF staff estimates.1Difference between actual and required reserves, which are a percentage of deposits, short-term credit, and gross foreign claims.

  • Fiscal policy. The headline overall fiscal deficit, defined on a payment order basis, was kept at 3½ percent of GDP in 2007, compared with 6 percent of GDP a year before (Tables 3 and 4). However, unsettled expenditure commitments equivalent to 2 percent of GDP need to be carried over to 2008, causing significant delays in payments to the private sector (see below). This suggests that the overall fiscal deficit in 2007 on a commitment basis was about 5½ percent of GDP; since most of the goods and services were delivered in 2007, this may have contributed to upward pressure on prices in certain areas, such as construction.

  • Financial sector. While micro finance has experienced strong growth, bank credit to the economy has been stagnant over the past three years, at about 23 percent of GDP. Although banks are profitable and generally well capitalized, they suffer from sizeable nonperforming loans, mainly as a result of the financial difficulties of ICS and energy sector companies in a context of excessive loan concentration (Table 7). 2

Table 3.

Senegal: Government Financial Operations, 2006–13

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Sources: Senegalese authorities; and staff estimates and projections.

Excludes project-related wages and salaries, which are included in capital spending, and the salaries of autonomous agencies and health and education contractual workers, which are included in transfers and subsidies.

From 2006, reflects post-MDRI debt service schedule.

Excludes subsidies aimed at sector development policies, which are included in capital spending.

Local governments, autonomous public sector entities (e.g., hospitals, universities), and the civil servants’ pension fund (FNR).

Defined as total revenue and grants minus total expenditure and net lending, excluding interest expenditure.

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

Until 2005, includes HIPC Initiative debt relief accorded by the IMF, the World Bank, the African Development Bank, and Paris Club Creditors.

Includes receipts from sale of telecom license for $200 million in late 2007.

Refers to HIPC-financed capital and other expenditure.

Defined as expenditures on health, education, environment, the judiciary, social development, sewage and rural irrigation.

Table 4.

Senegal: Government Financial Operations, 2006–13

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Sources: Senegalese authorities; and Fund staff estimates and projections.

From 2006, reflects post-MDRI debt service schedule.

Local governments, autonomous public sector entities (e.g., hospitals, universities), and the civil servants’ pension fund (FNR).

Defined as total revenue and grants minus total expenditure and net lending, excluding interest expenditure.

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

Defined as expenditures on health, education, environment, the judiciary, social development, sewage and rural irrigation.

Table 5.

Senegal: Monetary Survey, 2004–08

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Sources: Senegalese authorities; and Fund staff estimates and projections.

There is a difference in government coverage of the fiscal and the monetary sectors. The change in bank deposits of public entities without counterparts in the fiscal accounts is shown as a memorandum item in Table 3. In 2006, the Fund MDRI-related cancellation of the central bank claim on the government is not reflected in the fiscal accounts, as they are presented on a cash basis. This operation is shown as memorandum item in Table 3.

Table 6.

Senegal: Millennium Development Goals 1/

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Source: World Bank Staff and World Development Indicators.

The data in italics refer to periods earlier than shown.

Data listed under 2000 are for 2001–02.