Senegal's economic recovery is continuing and has been largely unaffected by the political crisis in Côte d’Ivoire. Policy discussions focused on the economic implications of two new developments since the program was approved in December 2010. Fiscal policy faces a difficult trade-off between additional priority expenditure and the need to preserve debt sustainability. The sustainability of Senegal’s external public and publicly guaranteed (PPG) debt appears vulnerable to rollover risks. This highlights the need for prudent debt management by Senegal, as it seeks to gain greater access to external resources.

Abstract

Senegal's economic recovery is continuing and has been largely unaffected by the political crisis in Côte d’Ivoire. Policy discussions focused on the economic implications of two new developments since the program was approved in December 2010. Fiscal policy faces a difficult trade-off between additional priority expenditure and the need to preserve debt sustainability. The sustainability of Senegal’s external public and publicly guaranteed (PPG) debt appears vulnerable to rollover risks. This highlights the need for prudent debt management by Senegal, as it seeks to gain greater access to external resources.

On behalf of our Senegalese authorities, we would like to thank the Board, Management and Staff for their continued support. They are appreciative of the candid policy dialogue with staff and remain strongly determined to advance their reform agenda in line with the new PSI-supported program. The implementation of this new program is serving the country well, notably by meeting expectations in terms of contribution to fiscal and debt management, public financial management, macroeconomic and financial stability, and private sector development.

Recent economic developments in Senegal were broadly positive, with preliminary estimates for 2010 pointing out to a strengthening of economic recovery, an improvement in the external position, and a slightly higher-than-projected overall fiscal deficit. As with previous reviews, implementation of structural conditionality was broadly satisfactory, reflecting the authorities’ commitment to further advancing their ambitious structural reform agenda. As a result, noticeable progress was made toward devising an emergency plan for restructuring the energy sector, further improving cash flow and debt management, and strengthening transparency of the budget and the execution of large infrastructure projects.

Program performance was also satisfactory on the quantitative front with all end-December 2010 assessment criteria being met except for the one related to the fiscal deficit target. As noted in the staff report, the program target was missed by a small margin due to weaker-than-projected oil-related revenue performance. And it is authorities’ expectation that the ongoing energy sector reform along with more efficient non-priority expenditure management will help avoid recurrence of similar under-performance going forward. The broadly satisfactory quantitative performance under the review period reflects the authorities’ continuous efforts to maintain good macroeconomic management, notably by limiting the budgetary float, managing public debt prudently, abiding by good practices in the area of public procurement, and preserving sizable budgetary allocations to the social sectors. Going forward, these reform efforts will be consolidated along with those that encompass the energy sector, the financial system, and private sector development.

Sustaining Fiscal Reforms and Improving Public Financial Management

The authorities will continue to adhere to prudent fiscal policies with a view to maintaining macroeconomic stability. While still committed to prudent fiscal policy, they have decided to revise upward their original fiscal deficit targets in the short term. This revision helps to accommodate financing needs emanating from the energy sector while leaving unchanged the country’s current low risk of debt distress.

Steps to further strengthen revenue mobilization will continue to be taken notwithstanding the country’s relative good performance in this area by regional standards. In particular, the objective will be served inter alia by the ongoing reform of the general tax code which will be finalized in 2012 in consultation with social partners. In addition, the implementation of the comprehensive tax reform strategy that was recently finalized and submitted to the Council of Ministers is also expected to be revenue-enhancing. Going forward, a study will be conducted to assess the impact of value-added and income tax reforms. Moreover, customs administration will continue to be modernized, thereby further optimizing its significant contribution to revenue collection.

As part of their previously agreed structural agenda, the authorities remain committed to formulating a strategy for establishing a single Treasury account by the end of the third quarter of 2011. In this connection, efforts are underway at the Treasury to process information received in relation with government agencies’ bank accounts with the ultimate goal of streamlining them. The ongoing work aimed at regularizing the remaining extrabudgetary expenditures is on track and expected to be finalized by end-June.

Improving the Efficiency of the Energy Sector

Over recent years, shortages in electricity production and distribution caused major disruptions in economic activity and sporadic episodes of social unrest. In this connection, available impact analyses conducted in relation with the energy crisis in Senegal point to significant costs, particularly in terms of losses of growth potential and social welfare. In particular, a diagnostic study commissioned by the authorities estimates that, in the absence of new investments, these costs could reach annually about 2 points of percentage of GDP and leave up to 50 percent of electricity demand unmet over the medium term. Against this background, the authorities developed an emergency plan for the recovery and restructuring of the energy sector over the period 2010-2014 following a comprehensive and inclusive diagnostic of the sector. Key aspects of the plan include increasing power generation capacities, managing the demand of electricity, and strengthening the financial situation of SENELEC.

With the aim of executing and financing their energy restructuring plan, the authorities put in place an energy sector support fund (FSE) in February. In order to fulfill its role of financing investments needed to foster recovery of the energy sector, the FSE is endowed with resources that are notably mobilized through budget reallocations and transfers, specific tax revenues and levies, and contributions from the country’s partners. It is the authorities’ intention to ensure full transparency in the process of carrying out the energy sector restructuring plan. To this end, the decision has been taken to make public on a 3 monthly basis information on the financial transactions and projects of the FSE. In addition, audits of the FSE;s accounts will be conducted on an annual basis.

Further Strengthening Debt Management

In view of the country’s increasing access to international markets, the authorities recognize the need to further strengthen debt management. Key reforms in this area include the recent establishment of a new debt management unit and the preparation of a medium term debt management strategy. The new debt management unit is scheduled to start operating by end-January 2012 and is expected to manage the issuance and repayment of domestic debt and debt guarantees.

As previously scheduled and consistent with program commitments, a US$500 million 10-year Eurobond was successfully issued early last month. In addition to freeing some resources for the financing of the highway extension project as originally intended, part of these proceeds will likely be directed toward the financing of highly profitable energy projects. This transaction will also contribute to reducing medium-term rollover risks, as most holders of the US$200 million international bond issued in 2009 consented to exchanging their bond holdings with the newly issued bond.

In addition to their revealed attachment to prudent borrowing practices in the process of mobilizing resources needed to finance infrastructure investments, the authorities remain committed to continued transparency in the execution of large infrastructure projects. In this area, it is expected that an audit of the use of resources allocated to the highway extension project will be conducted a few months after its execution begins. At the same time, the preparation of the guidelines for project evaluation continues and is expected to be finalized by end-December 2011.

Advancing Financial Sector Reform

The financial sector was successfully weathered from the recent crisis in Cote d’Ivoire, partly because of banks’ adequate level of capitalization. Still, the authorities are mindful of the need to address some existing weaknesses, including the relatively high level of nonperforming loans, impediments to credit access, and loan concentration. The BCEAO will thus continue to conduct stress tests, broadening credit risk analysis to capture vulnerabilities from sectors and large borrowers. Steps to promote financial sector development are being taken, guided by the action plan developed last year in the context of the second national dialogue on credit. In particular, legislation aimed at facilitating financial leasing activities is expected to be finalized by end-June 2011. Better supervision of the microfinance institutions will remain in the authorities’ reform agenda in the financial sector.

Based on my Senegalese authorities’ commitment to pursue their reform agenda and prudent policies as reflected by the satisfactory program performance under the PSI review, I would appreciate Directors’support for the conclusion of the first review under the Policy Support Instrument.