This paper discusses key findings of the Third Review Under the Policy Support Instrument for Senegal. All end-December 2011 quantitative assessment criteria were met—except one on the overall fiscal balance, which was missed by a small margin. Some progress was achieved in structural reforms but a number of benchmarks were missed. The new authorities have confirmed their commitment to the objectives of the program. IMF staff recommends completion of the review and supports the waiver for nonobservance of the end-December 2011 assessment criterion on the overall fiscal deficit.

Abstract

This paper discusses key findings of the Third Review Under the Policy Support Instrument for Senegal. All end-December 2011 quantitative assessment criteria were met—except one on the overall fiscal balance, which was missed by a small margin. Some progress was achieved in structural reforms but a number of benchmarks were missed. The new authorities have confirmed their commitment to the objectives of the program. IMF staff recommends completion of the review and supports the waiver for nonobservance of the end-December 2011 assessment criterion on the overall fiscal deficit.

1. Discussions under the third PSI review were held with the new Senegalese administration issued from the presidential elections that took place a few months ago. In support of its policy and reform agenda, the new government has reaffirmed its continuation of the country’s close program relationship with the Fund and expressed its commitment to the PSI-supported program and to its objectives. Indeed, the PSI-supported program provides the authorities with a useful channel to implement their comprehensive reform agenda that encompasses notably public financial management, fiscal transparency, civil service, and public debt management, and financial and private sector development. In this endeavor, they are appreciative of the productive policy dialogue they held with Management and staff in Washington and Dakar. They look forward to Executive Directors’ continued support for Fund’s PSI engagement in Senegal and they are thankful for the continuous support provided by the Fund to Senegal.

2. Since the new administration took office, it has made major inroads in policy implementation, in line with the authorities’ program commitments. In particular, significant adjustment efforts helped contain the fiscal deficit within its revised target. Moreover, the structural reform agenda is being advanced decisively, notably with a number of new benchmarks having recently been met. Going forward, Fund’s program engagement will be key in helping the authorities cope with the daunting challenges facing the country, stemming from both the difficult external environment and domestic context shaped by large social demands following the elections.

Recent Achievements under the Policy Support Instrument

3. Amid a difficult policy environment, macroeconomic and debt management proceeded broadly in line with program commitments. Program implementation was marked at end-December 2011 by the observance of all quantitative assessment criteria but the one on the fiscal deficit which was missed, as current spending overshot and revenue fell short of targeted levels. More recently, the authorities’ prudent policies helped meet all end-March 2012 quantitative assessment criteria and indicative targets set forth under the program.

4. On the structural front, strides were made in the implementation of the PSI reform agenda though with some delays over the initial program schedule. Notable progress was made toward program objectives, including modernizing tax and customs administration, further strengthening debt and public financial management, and improving supervision of the microfinance sector. Specific actions that contributed to these outcomes included notably the introduction of a unique taxpayer identification number in customs operations, the establishment of a new public debt bureau, the completion of a survey of agencies and public entities, and lessons learnt from an impact analysis of the resources allocated to the microfinance sector.

5. Sound program implementation is expected to contribute to a quick economic turnaround. In particular, after having significantly slowed down last year, economic activity is expected to recover in 2012, notably on account of the implementation of supportive policies in the agricultural sector and public investment programs.

Policy and Reform Agenda for 2012 Onwards

6. Going forward, it is the authorities’ firm intention to continue to make significant inroads in policy implementation with the aim of sustaining progress toward program objectives, namely maintaining macroeconomic stability, increasing fiscal space for priority spending, further strengthening public financial management and fiscal governance and transparency, and promoting private sector development.

Preserving Macroeconomic Stability

7. Macroeconomic stability will be safeguarded through prudent fiscal policy anchored on the authorities’ strong commitment to keep fiscal deficit hovering around the level consistent with fiscal sustainability. While helping contain the rate of inflation below the related WAEMU convergence criterion, this policy stance is expected to lay the foundations for strong and sustained growth in the context of a stable macroeconomic environment. In this regard, the new authorities took prompt and resolute steps to enact fiscal adjustment, as a number of daunting challenges stood in the way of containing the fiscal deficit to sustainable levels, including the need to accommodate pressing social needs and drought relief measures and to mitigate the adverse impact of the weaker external environment on growth and revenue performance.

8. The timely policy response is expected to enable the achievement of the revised program deficit target of 6.4 percent of GDP in 2012. In this connection, the supplementary budget which was adopted last month by the Cabinet implied a significant spending adjustment, including large cuts in current expenditures and postponement of the launch of a number of public investment projects, particularly those that have yet to start or with limited positive impact on growth and poverty reduction. More specifically, several measures were taken in this regard, including the significant reduction of the number of ministries and public agencies as well as efforts to contain government consumption, notably in terms of communication and transportation services. Going forward, the authorities are determined to explore avenues for making more efficiency gains in government spending, notably by better targeting agricultural subsidies and rationalizing social sector outlays among others.

Building Fiscal space for Priority Expenditure

9. A number of actions are underway that are expected to boost revenue mobilization, thereby freeing additional space for priority spending. Most notably, the new authorities have expressed their intention to pursue the reform program aimed at streamlining tax legislation and incentives, improving the efficiency and transparency of the tax system, boosting tax revenue, and enhancing tax compliance. Progress on this front will entail the establishment of a new general tax code which is scheduled to be submitted to the parliament by end-September 2012 and enacted along with the 2013 budget. As part of the efforts to garner consensus among various stakeholders, the rationale and objectives of the reform program have already been put in the public domain.

10. Moreover, efforts to improve the efficiency of tax and customs administrations will be pursued, paving the way for Senegal’s continued, strong revenue performance. In particular, the modernization of tax collection and customs operations continues to rank high on the agenda of these administrations. As a recognition of the steps taken by the customs administration to introduce innovative technologies, Senegal is a 2012 United Nations Public Service Awards winner in the category “Improving the Delivery of Public Services”. Work is also underway to improve information-sharing between the tax directorate and other tax collecting entities reporting to the finance ministry such as customs administration. In parallel, steps will continue to be taken to improve the process of taxpayer registration and in this endeavor Fund technical assistance is greatly valued.

Strengthening Public Financial Management, Fiscal Transparency and Governance

11. Sound management of public finance ranks high among the authorities’ priorities. To ensure full compliance with international standards and practices in this area, steady and decisive progress has been made toward implementing the six directives of WAEMU’s harmonized public financial management framework. To date, four directives concerning budget laws, public accounting, central government operations summary table and chart of accounts have already been transposed. A decree transposing the fifth directive on budget classification is expected to be issued by the end of September 2012 whereas a draft law implementing the sixth directive on fiscal transparency was adopted last month by the Cabinet. The goal of further strengthening public financial management will also be served by the ongoing implementation of a Treasury single account which is scheduled to be finalized early in 2013.

12. In parallel, debt management is expected to be further strengthened, after the new public debt bureau became recently operational. To this end, the bureau will endeavor to finalize within the next few months a medium-term debt strategy which is expected to be annexed in the forthcoming budget law.

13. The authorities will persevere in their efforts to streamline government agencies. This work has already led to the reorganization and elimination of several public entities. Going forward, it is the authorities’ intention to extend this exercise to all public agencies and similar entities and finalize it by the end of this year. A number of other notable steps underway or planned will further improve governance and transparency. These include ongoing efforts to improve transparency in the real estate transactions involving the State and to finalize guidelines for project evaluation.

Promoting Private Sector Development

14. One of the main objectives of the authorities’ reform agenda is to foster the development of the private sector. While this agenda encompasses several areas, the reforms underway in the energy and financial sectors play a particularly important role in achieving this objective given their macrocriticality and major implications for program success. In the energy sector, a key priority for the new government upon taking office has been to assess the effectiveness of the emergency plan for the recovery and restructuring of the energy sector (Plan Takkal). Domestic and external stakeholders involved in the sector participated in this exercise which notably aimed at exploring ways of sustaining adequate electricity production and distribution. Going forward, the authorities will take steps to improve efficiency in the sector, thereby addressing the fiscal risks arising from it. In this regard, the ongoing work aimed at planning the restructuring of the electricity company and developing an action plan to reduce subsidies on electricity consumption will play a significant role in containing the adverse fiscal incidence of the sector.

15. Reforms undertaken in the financial sector will be pursued in collaboration with the regional central bank, BCEAO. In particular, these will bring about financial innovations and development, notably by laying the groundwork for financial leasing and credit rating services. Ultimately, it is expected that efforts in these areas along with those made in close collaboration with regional authorities to ease credit access will contribute to jumpstarting private sector development.

16. In conclusion, I call on Directors to support the completion of the third review of the PSI in light of the authorities’ strong commitment to program objectives and their ambitious policy and reform agenda under the PSI. I would also appreciate Directors’ support for the authorities’ request for modification of the end-June and end-December 2012 assessment criteria and the waiver for nonobservance of the end-December 2011 assessment criterion on the overall fiscal deficit.

Senegal: Third Review Under the Policy Support Instrument and Request for Modification of Assessment Criteria: Staff Report; Informational Annex; Press Release; and Statement by the Executive Director for Senegal
Author: International Monetary Fund