The economy has started to recover from a slowdown associated with the global financial crisis. Senegal has made significant progress under a three-year Policy Support Instrument (PSI), but challenges remain. Increasing growth and reducing vulnerabilities and poverty require broad-based reforms. Higher revenues and better spending quality are essential to creating more fiscal space for priority spending, including infrastructure spending. To help address growth bottlenecks, higher infrastructure investment will temporarily raise fiscal deficits. The contributions of the financial sector and the energy sector to growth should be enhanced.

Abstract

The economy has started to recover from a slowdown associated with the global financial crisis. Senegal has made significant progress under a three-year Policy Support Instrument (PSI), but challenges remain. Increasing growth and reducing vulnerabilities and poverty require broad-based reforms. Higher revenues and better spending quality are essential to creating more fiscal space for priority spending, including infrastructure spending. To help address growth bottlenecks, higher infrastructure investment will temporarily raise fiscal deficits. The contributions of the financial sector and the energy sector to growth should be enhanced.

1. Senegal’s performance under the current PSI remains strong, translating into continuous major improvements in public finance management, fiscal transparency and governance, financial sector intermediation, and private sector development. Indeed, the authorities took necessary steps to meet all program quantitative assessment criteria and most structural benchmarks, albeit some with delay. The completion of the sixth review under the Policy Support Instrument (PSI) is therefore being recommended by staff.

2. Box 1 of the staff report provides a useful summary of the country’s performance under the PSI. On the structural front, measures set as part of conditionality under the program were broadly implemented. On the quantitative front, following initial setbacks, substantial progress was made subsequently. Indeed, performance during the initial phases of program implementation was made difficult by a number of factors, key of which were the daunting policy challenges facing the country at the onset of the global energy and food price shocks. However, the authorities’ strong commitment to the program was instrumental in keeping it on track and advancing its reform agenda amid a difficult domestic and external environment. At the same time, the country’s macroeconomic fundamentals remained strong, reflecting continued macroeconomic stability, sustainable debt, and economic resilience.

3. In order to consolidate the achievements made under the current PSI, my Senegalese authorities are requesting a new PSI in support of their 2010-13 economic program. The new three-year PSI-supported program will continue to provide a framework for policies aimed notably at further strengthening fiscal and debt management, sustaining macroeconomic and financial stability, further improving public financial management, and promoting private sector development. In order to achieve these objectives, my Senegalese authorities are determined to advance their policy and reform agenda, as set forth in their MEFP.

Further Improving Revenue Mobilization and Public Financial Management

4. Further strengthening revenue mobilization remains one of the cornerstones of the authorities’ reform agenda. In this context, a revenue-enhancing tax reform strategy will be prepared and submitted to the Council of Ministers by the end of the first quarter of 2011. Building on Fund technical assistance, this strategy will emphasize specific measures aimedat streamlining tax expenditures and further strengthening tax and customs administration, including rationalization of exemptions applicable to petroleum products, streamlining of the general tax code, and strengthening of capacities of tax collection agencies.

5. Under the current PSI, a comprehensive reform agenda was successfully implemented with the aim of strengthening public financial management (PFM). As a result, the authorities were able to cope with a number of impediments to smooth budget execution. Going forward, they plan to settle remaining extrabudgetary expenditure, if any, in the first half of next year, bringing to rest this legacy of past budget execution difficulties. Furthermore, it is their intention to consolidate achievements in the area of PFM notably by implementing the reform program that was recently finalized in consultation with development partners, inspired by the PEFA exercise, and supported by Fund technical assistance. Finally, I would note that my authorities’ reform agenda also features measures aimed at improving Treasury management, including the creation of a committee in charge of monitoring budget execution and the scheduled move toward a single Treasury account.

Sustaining Improvements in Fiscal Transparency

6. Efforts undertaken in recent years to ensure greater fiscal transparency will be pursued, notably with regard to the financing and implementation of the government’s investment program. In particular, in line with established practice for the construction of the new airport, these will be reflected in the planned monthly publication of transactions related to the extension of the toll road which is one of the largest infrastructure projects underway. At the same time, in order to ensure full transparency in its implementation, my authorities will conduct and publish an audit of the use of the funds earmarked for this project. Furthermore, a number of other measures set as conditionality under the proposed PSI are also reflective of the authorities’ strong attachment to transparency. These include a renewed commitment to limit the share of contracts awarded on a noncompetitive basis to 20 percent of all government contracts as well as their intention to prepare an action plan aimed at improving the realism of budgetary allocations for utility expenses borne by public entities.

Addressing Infrastructure Bottlenecks and Improving Debt Management

7. Despite the unprecedented efforts made by the authorities to upgrade the country’sinfrastructure, much remains yet to be done for it to play its key role in enhancingcompetitiveness and fostering economic activity. In recognition of this need, my authorities are determined to bring to completion the implementation of the infrastructure investment program. For its financing, preference will continue to be given to the mobilization of concessional resources. However, given the increasingly limited access to concessional resources and the magnitude of financing needs, recourse to nonconcessional financing will be necessary to carry out satisfactory implementation of the much-needed infrastructure projects. In this context, the authorities plan to mobilize additional resources to finance highly profitable projects. In particular, they plan to issue a second international bond to carry out the highway extension project. Early in the process of designing this project, they have kept the Fund staff regularly informed about their intention, profitability studies, and financing options and, going forward, they will keep the existing lines of communication open.

8. Going forward, care will continue to be taken to ensure that any recourse to nonconcessional financing will be consistent with the need to preserve debt sustainability. In this endeavor, implementation of the reform agenda of the new PSI in the area of debt management will be instrumental. In particular, the envisaged establishment of an entity in charge of managing public debt and market interventions will be a key step in this direction; so will the preparation of a medium-term debt management strategy and the decision to take into account fiscal risks arising from debt operations in the authorities’ debt sustainability analysis.

9. Planned efforts to improve management of public debt arising from the implementation of the authorities’ investment program will be accompanied by steps to enhance the planning, evaluation and selection of infrastructure projects. At the same time, it is envisaged that an evaluation will be conducted systematically for projects undertaken in certain sectors (education, health, environment, and agriculture) when their cost exceeds a well-defined threshold. At the same time, efforts will be made to harmonize project evaluations across line ministries.

Pursuing the Reform of Energy and Financial Sectors

10. Sectoral reforms are expected to play a critical role in fostering private sector development. In particular, the reform of the energy sector is being advanced with a view to containing fiscal risks emanating from it. It builds on previous measures taken by the authorities in the program context that resulted in the significant reduction of energy subsidies from their peak levels achieved a few years ago at the onset of the recent oil price shock. Work is underway to finalize a restructuring plan for the energy sector that will build on a comprehensive financial and operational audit of the sector. In particular, this plan will define ways of improving performance of the electricity company, SENELEC, as well as its ability to fully meet its obligations vis-à-vis tax and customs authorities.

11. Financial sector reform will proceed according to a comprehensive action plan designed in consultation with concerned stakeholders. Key measures identified in the plan aim inter alia to promote leasing activities, develop banking intermediation, and increase private sector involvement in banks in which the government enjoys a majority ownership.

12. In light of Senegal’s continued strong program and economic performance and the strong commitment of my Senegalese authorities to the reform process, I call on Directors to consider favorably the authorities’ request for a new PSI arrangement. Directors’ support for the cancellation of the current PSI upon approval of the new one would also be appreciated.