Senegal
Fifth Review Under the Policy Support Instrument and Request for Program Extension and Modification of Assessment Criteria—Staff Report; Debt Sustainability Analysis; Informational Annex; and Press Release
Author:
International Monetary Fund. African Dept.
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Publication Date:
24 Jun 2013
eISBN:
9781484338483
Language:
English
Keywords:
ISCR; CR; deficit; real GDP; current account; long-term debt; priority expenditure; financing gap; Eurobond financing; financial situation; expenditures prioritization; Government debt management
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Program implementation has been satisfactory, and all assessment criteria were met. The fiscal deficit was reduced to 5.9 percent of GDP despite a significant revenue shortfall. Delays were incurred in the implementation of reforms in the energy sector. The authorities intend to accelerate reforms to improve the business environment by streamlining expenditure and by improving the efficiency of the state to reduce the fiscal deficit to below 4 percent of GDP by 2015. This will restore fiscal buffers and ensure long-term debt sustainability.

Abstract

Program implementation has been satisfactory, and all assessment criteria were met. The fiscal deficit was reduced to 5.9 percent of GDP despite a significant revenue shortfall. Delays were incurred in the implementation of reforms in the energy sector. The authorities intend to accelerate reforms to improve the business environment by streamlining expenditure and by improving the efficiency of the state to reduce the fiscal deficit to below 4 percent of GDP by 2015. This will restore fiscal buffers and ensure long-term debt sustainability.

Macroeconomic Performance and Risks

1. The political environment remains tense. Popular demand for action on employment, the cost of living and social safety nets is still high, and impatience is growing with the perceived slow progress on key commitments made by the authorities upon taking over last year. Investigation of key members of the previous administration for alleged embezzlement of public funds will likely continue to fuel tensions with the opposition in parliament. In this tense atmosphere and with local elections in early 2014, the determination of the authorities to implement deep reforms will be tested. The situation in northern Mali is a major concern for the authorities, and they have sent troops there. They consider that the risk of a propagation of the insecurity situation to the broader Sahel region, including Senegal, needs to be addressed forcefully.

2. Economic activity picked up in 2012, and the outlook is positive despite the unfavorable external environment. The cereal and groundnut production rebounded strongly last year after the 2011 drought and growth is estimated to have reached 3.5 percent. Inflation declined, averaging 1.4 percent in 2012. The external current account deficit recorded a large increase to 10.3 percent of GDP, as imports of food (mainly drought-related), fuel, and capital goods grew much more than expected. This deficit was financed mainly by flows to the public sector–both grants and loans–while private sector outflows slowed somewhat. In 2013 growth is projected to increase slightly to 4 percent while inflation would remain subdued.1 The external current account deficit would decrease as a share of GDP, owing to an improvement in the terms of trade and as some of the exceptional factors affecting imports in 2012 would not arise again.

MEFP ¶3, 7

3. Risks to program implementation remain to the downside and have increased. The main external risks are a possible intensification of the euro area crisis and adverse security developments in Mali and the Sahel, which could affect investor sentiment.2 On the domestic side, the main risk is insufficient reform momentum because of strong opposition from vested interests and the election calendar. Insufficient reform of the state and energy sector would hamper fiscal consolidation and economic growth.

MEFP ¶8

Program Performance

4. Program implementation has been satisfactory. All assessment criteria for end-2012 were met. The fiscal deficit was reduced to 5.9 percent of GDP despite a significant revenue shortfall. The latter reflected difficulties in collecting VAT from public agencies that withhold it from their suppliers. Taxes collected on petroleum products also underperformed, mostly related to financial constraints facing SENELEC, the national power utility. The shortfall in revenue was offset by lower expenditure on goods and services, interest payment, and externally-financed investment. The indicative ceiling on the share of the value of public sector contracts signed by single tender was missed by a relatively small margin in September and December 2012. Structural reform implementation recorded mixed progress. The evaluation guide for public investments was finalized in December 2012 and the new tax code was implemented in January 2013 as expected. Information on government land transactions in 2012 was published with a small delay in March 2013. The survey of bank accounts–a critical step to establishing a single treasury account–was eventually completed but took longer than expected. As a result, the completion of the single treasury account has been delayed to end-September 2013, as a study needs to be conducted to assess the impact of closing accounts on the banking system.

MEFP ¶4-5

Text Table 1.

Structural Benchmarks: Fifth PSI Review

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Policy Discussions

5. The authorities have completed their new poverty reduction strategy. The National Strategy for Economic and Social Development (NSESD) provides a good diagnostic of issues to be addressed to achieve higher growth and poverty reduction in Senegal and an adequate framework for resources mobilization and expenditures prioritization (see companion Joint Staff Advisory Note).

MEFP ¶6

6. Discussions focused on the fiscal outlook and the pace of reform implementation. The authorities underscored the many challenges they face, such as a difficult external environment and the need to take into account people’s high expectations on certain issues such as creating jobs and reducing the cost of living. They also reaffirmed their commitment to the program’s main objectives of reducing the fiscal deficit, improving the tax system, strengthening public financial and debt management, and promoting private sector development and good governance. On the fiscal front, they reiterated their firm intention to reduce the deficit below 4 percent of GDP by 2015 to preserve long term debt sustainability and restore margins for fiscal maneuver.

A. Fiscal Policy in 2013

7. The fiscal outlook for 2013 is under strain, reflecting a range of factors. Two exogenous shocks will affect expenditures. The developments in northern Mali will require additional security spending (about 0.3 percent of GDP). Additional capital expenditures (0.1 percent of GDP) will also be needed for the flood prevention program that the authorities designed in the wake of the major floods incurred in the second half of 2012. A major endogenous factor is the energy sector, which is also expected to weigh more than anticipated on the budget because of delays in reforms and in implementing key investments, and in the absence of a tariff adjustment that the authorities wish to avoid in the current political and social context. This could affect significantly SENELEC’s capacity to make tax payments, like in 2012. Continued subsidies to the country’s sole refining company (Societé Africaine de Raffinage, SAR) and for butane gas will also add to budget expenditure (see Box 1 for more detail). Finally, revenue shortfalls in 2012 affect the revenue base and there are continued pressures on the wage bill from the conversion to permanent staff of contractual employees in the education sector.

Budget Support to the Energy Sector

The electricity sector affects the state budget in several ways, including:

  • Tariff compensation to SENELEC (explicit subsidies to electricity consumers): This is a direct and explicit transfer from the budget to compensate SENELEC when it is not allowed to adjust its tariffs. This compensation is determined by a regulatory authority based on a formula, which is being revised. In 2012, the compensation amounted to CFAF 105 billion (1.5 percent of GDP). For 2013, the authorities have decided to cap the budgeted amount at CFAF 80 billion. However, in the absence of a tariff adjustment, this allocation could well fall short of the amount suggested by the formula unless oil prices fall substantially. In addition, the formula currently does not reflect the full extent of SENELEC’s losses.

  • Shortfall in tax collection from SENELEC: Due to financial difficulties, SENELEC has regularly failed to make tax payments in full. In 2012, the amount of tax due but not paid stood at CFAF 38 billion (0.5 percent of GDP), about half of which was cleared through a cross-debt settlement and subsequent recapitalization of SENELEC by the government.

  • Financial support for power rental and investments in capacity: In 2012, the budget paid the cost of renting mobile power generators which were used to increase supply and avoid blackouts (CFAF 15 billion, or 0.2 percent of GDP). The budget also paid for the rehabilitation or extension of existing power plants (CFAF 23 billion in domestically-financed investment, or 0.3 percent of GDP).

  • The total cost to the budget of supporting the electricity sector therefore amounted to CFAF 181 billion in 2012, or 2.5 percent of GDP (not including the on-lending of resources contracted by the government). Despite this massive support, SENELEC’s financial situation remained shaky and it accumulated arrears to suppliers.

Budget support to the energy sector also includes:

  • Domestic petroleum product price stabilization: During the presidential election campaign last year, the automatic full pass-through of fluctuations in international oil prices to domestic prices was suspended. This was done by reducing taxation (more specifically by adjusting the VAT base), with a negative impact on budget revenue. In the second half of the year, the authorities used the decrease in international prices to restore almost entirely the VAT base. Foregone revenue from price stabilization efforts is estimated at CFAF 24 billion in 2012 (0.3 percent of GDP). Price stabilization was briefly re-introduced in early 2013. Butane gas prices do not reflect international prices, at a cost of about 0.1 percent to the budget.

  • Direct and indirect supports to SAR: SAR is a private company in which the state still has a 46 percent stake. Support to SAR affects the budget in two ways: an annual direct transfer (through a tax on petroleum products whose proceeds are allocated in part to SAR) and foregone customs duties on refined petroleum products (as crude oil imported by SAR is subject to a lower rate than refined products). Support to refining has cost taxpayers an average CFAF 40 billion over the past few years (0.6 percent of GDP).

8. A slightly slower pace of fiscal adjustment is proposed for 2013. The new fiscal deficit target for 2013 (5.3 percent of GDP, against an initial target of 4.9 percent) would accommodate the impact of exogenous shocks. However, it would still entail a significant reduction of the deficit and require substantial efforts in light of other pressures on the budget, particularly those stemming from the energy sector. The authorities expect the revenue base to be shored up by a number of new measures. These include a new tax on cosmetic products, an increase in the tax on tobacco, the inclusion in the VAT base of certain telecommunication activities, the end of the exemption from VAT of certain activities financed by external resources, and an advanced payment on the income tax made at the importation stage (which should allow bringing more small and medium businesses into the tax net). The authorities estimate that all these measures will generate at least 0.4 percent of GDP in revenue. In addition, the partial elimination of VAT withholding should improve the collection of this tax. On the expenditure side, investment financed on external concessional resources has been revised downward significantly in light of delays in mobilizing the financing; however, such investment is still expected to increase in nominal terms from 2012. Interest payments are also expected to be lower than programmed, thanks in part to lower interest rates. The cabinet approved in May 2013 a supplementary budget for 2013 reflecting these changes.

MEFP ¶10-11

Text Table 2.

Senegal: Government Financial Operations, 2012–13

(Percent of GDP)

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9. A new Eurobond will be issued to close the financing gap and improve the overall profile of public debt. At the time of the 4th PSI review, the authorities had indicated their intention to use the $200 million space still available under the program ceiling for nonconcessional borrowing. Further analysis and discussions with market participants, however, suggested that there is a strong case for tapping international markets for a larger amount, and as a result the authorities now plan to issue a new 10-year Eurobond of $500 million. Current market conditions seem indeed favorable, as indicated by the yield on the 2011 Eurobond (below 6 percent). A larger amount would not only allow closing the financing gap, which is higher than the $200 million expected at the time of the 4th PSI review, but also improving the structure of the public debt by reducing recourse to short-term financing on the regional financial market. Such financing is relatively costly, with yields at issuance generally above 5.5 percent, and its short maturity increases rollover risks. Substituting Eurobond financing would allow increasing the average maturity at issuance of market debt issued in 2013 by about 2 years, at about unchanged interest cost. 3 The authorities also expect to be able to raise new external financing with a grant element between 15 and 35 percent to fund road and flood-prevention projects. The companion debt sustainability analysis, updated for these new borrowing assumptions, shows that the deterioration of the external debt outlook would be limited and that Senegal would continue to face a low risk of debt distress under the assumption that fiscal consolidation is pursued as envisaged in the program.

MEFP ¶15

B. Reforming the State

10. Deep reforms to streamline expenditures and improve the efficiency of the state are critical to reducing the fiscal deficit in a lasting way. The twin objectives of the reforms are to strengthen fiscal sustainability, but also to do this in an efficient and growth-friendly manner. A number of studies or audits will become available shortly and will provide a good basis for making well-informed decisions in key areas. For instance, the now completed physical and biometric audit of the public service will help streamline the government payroll and better control it in the future. The audit of public agencies will be used to prepare (by end-July 2013) and implement a plan to rationalize the recourse to agencies, which have proliferated in the 2000s; this should have a positive impact on public governance, transparency, and efficiency. A high-level commission made recently a number of propositions worth considering to reform higher education and allocate better scarce public resources in this area.

MEFP ¶12-14

11. Tax policy and revenue administration reforms will continue. On tax policy, the immediate priority is to ensure satisfactory implementation of the new tax code. Once this is done, the authorities intend to focus on other outstanding issues, such as the taxation of mining, telecommunications, and financial activity. The finalization and submission to parliament of the new customs code has been rescheduled to end-September 2013 to allow sufficient time for close consultation with the private sector. The modernization of the tax and customs administration is also progressing well; information sharing and coordination between the two departments has increased substantially in the recent period, which bodes well for the broadening of the tax base. E-filing and e-payment of taxes should be available to all taxpayers in the region of Dakar by end-2013 (proposed new benchmark).

MEFP ¶16-18

12. Efforts to strengthen public financial management (PFM) and public governance are ongoing. Senegal was the first country to complete the transposition of the WAEMU directives on PFM into national law. Full implementation of the transparency code is expected in 2014. This will require an in-depth assessment of the legal impact, working on institutional and reporting arrangements, preparing implementation decrees, and adopting a law on assets disclosure (whose transmission to parliament by end-2013 is a proposed new benchmark).

MEFP ¶19-21

Text Table 3.

Structural Benchmarks: Sixth and Seventh PSI Reviews

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C. Promoting Growth and Private Sector Development

13. Delays were incurred in the implementation of reforms in the electricity sector. The rehabilitation and extension of some existing power plants have continued but is somewhat behind schedule. The expected coming on stream of these units in 2013 will substantially reduce the recourse to costly rental generators. This should contribute to an improvement in the power sector’s financial situation. The operational and financial restructuring of SENELEC has started, but progress has been slower than expected. The performance contract between the government and SENELEC will be signed in early June2013, with a 5-month delay. Following a review conducted last year, the cabinet approved a new reform strategy for the sector in February 2013. The new plan confirmed the need for changing the power generation mix, investments in transportation and distribution networks, and restructuring SENELEC. 4 A number of donors, including the World Bank, the African Development Bank, and the French Development Agency, provide substantial advisory and financial support to the authorities in their efforts to reform the sector. All stakeholders agree that reforming SENELEC, expanding capacity and introducing more cost-effective technologies are critical components of a reform plan.

MEFP ¶22-24

14. Accelerating implementation of energy sector reforms remains critical for growth and fiscal sustainability. Staff urged the authorities to accelerate the implementation of all the components of the power sector reform strategy, including the large medium-term investment projects that are key to durably reducing production costs, electricity subsidies, and the fiscal deficit. The authorities reported that the construction of two coal-fired plants was expected to start soon. Staff reiterated that reform delays increased the risk of power outages and were a major obstacle to reducing the heavy burden borne by the budget to support the sector. The latter has adverse implications for fiscal sustainability and the ability of the authorities to fund high-priority programs. In addition, these explicit or implicit subsidies have been ineffective in putting the electricity sector on a sound financial footing and are poorly targeted. They should be phased out and replaced by more effective and targeted social safety nets, such as the family transfers currently being considered by the authorities. While agreeing that the level and structure of taxation on petroleum products might need to be reconsidered once the fiscal situation improves, staff urged the authorities to revert to full pass-through of international oil price changes to domestic petroleum product prices. The authorities emphasized their intention to prepare a strategy on the future of SAR by end-August 2013. Staff welcomed this intention and urged the authorities to give due consideration to eliminating budget support to refining activities.

15. The authorities intend to accelerate reforms to improve the business environment. In the financial sector, the authorities will update their action plan to improve access to credit for households and small and medium firms, and will seek to improve coordination among the various stakeholders involved in the implementation of the plan. They will also start implementation of the three-year reform program to improve the business environment recently adopted by the Presidential Council on Investment. This program includes a number of specific measures, which the authorities hope will help improve Senegal’s ranking in international surveys on competitiveness and doing business.

MEFP ¶25-27

D. Program Monitoring

16. The authorities have requested a one-year extension of the PSI-supported program to end-2014. This would allow them to benefit from continued Fund support in the implementation of key aspects of the reform of the State, which is expected to produce their full effect in the next 18 months. Continued Fund engagement will also be useful at a time when the authorities plan to tap again international financial markets and would provide a strong policy framework ahead of the 2014 elections.

17. A number of changes are proposed to program monitoring. The end-June and end-December 2013 fiscal deficit targets would be raised, as explained above. The program’s ceiling on nonconcessional borrowing would be raised to $800 million to accommodate the new Eurobond. It is also proposed to raise the ceiling for external borrowing with a grant element between 15 and 35 percent to CFAF 67 billion to facilitate the financing of priority projects. The requested one-year extension of the program requires adding a seventh and a eighth review for program monitoring purposes. Targets and benchmarks for the period beyond the 6th review are proposed in Table 9.

Table 1.

Senegal: Selected Economic and Financial Indicators, 2011–18

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Sources: Senegalese authorities; and IMF staff estimates and projections.
Table 2.

Senegal: Balance of Payments, 2011–18

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Sources: Central Bank of West African States (BCEAO); and IMF staff estimates and projections.
Table 3.

Senegal: Government and FSE Financial Operations, 2011–18

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

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

Expenditure on health, education, environment, the judiciary, social safety nets, sanitation, and rural water supply.

Table 4.

Senegal: Government and FSE Financial Operations, 2011–18

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Sources: Senegalese authorities; and IMF staff estimates and projections.
Table 5.

Senegal: Monetary Survey, 2010–13

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Sources: Senegalese authorities; and IMF staff estimates and projections.
Table 6.

Financial Soundness Indicators for the Banking Sector, 2006–12

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Source: BCEAO

Break in the series in 2010 due to a methodological change.

Excluding the tax on banking operations.

Table 7.

Quantitative Assessment Criteria and Indicative Targets for 2011–12

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Indicative targets for March and September 2012, except for the assessment criteria monitored on a continuous basis. See Technical Memorandum of Understanding for definitions. Indicative targets shown in italics.

Cumulative since the beginning of the year.

The ceiling on the overall fiscal deficit will to be adjusted in line with the TMU definition.

Monitored on a continuous basis.

Investment in the autoroute plus investment under the plan Takkal financed from internal and external concessional resources.

Table 8.

Quantitative Assessment Criteria and Indicative Targets for 2012–13

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Indicative targets for March and September, except for the assessment criteria monitored on a continuous basis. See Technical Memorandum of Understanding for definitions. Indicative targets shown in italics.

Cumulative since the beginning of the year.

The ceiling on the overall fiscal deficit will to be adjusted in line with the TMU definition.

Monitored on a continuous basis.

Table 9.

Quantitative Assessment Criteria and Indicative Targets for 2013–14

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Indicative targets for March and September, except for the assessment criteria monitored on a continuous basis. See Technical Memorandum of Understanding for definitions. Indicative targets shown in italics.

Cumulative since the beginning of the year.

The ceiling on the overall fiscal deficit will to be adjusted in line with the TMU definition.

Monitored on a continuous basis.

Staff Appraisal

18. Implementation of the program has been satisfactory. All assessment criteria for end-2012 were met. Owing to tight expenditure control, the fiscal deficit target (of 5.9 percent of GDP) was met for the first time in many years, despite a significant revenue shortfall. Structural reforms implementation has recorded mixed progress.

19. Staff supports a slightly slower pace of fiscal adjustment in 2013, while keeping the medium-term target unchanged. The fiscal outlook for 2013 is under strain, reflecting a range of factors, in particular the situation in the energy sector. The revised fiscal deficit target for 2013, at 5.3 percent of GDP, is consistent with a significant further reduction in the deficit while accommodating the impact of exogenous shocks (mostly the security situation in Mali and the Sahel). Reaching this target will require a combination of revenue mobilization efforts and strict expenditure control. Staff welcomes the authorities’ renewed commitment to reduce the fiscal deficit to below 4 percent of GDP by 2015, which is necessary to restore fiscal buffers and ensure long-term debt sustainability.

20. The energy sector remains a major source of concern. Direct and indirect support to SENELEC exceeded 2.5 percent of GDP in 2012; these explicit or implicit subsidies are a very heavy burden on the budget that crowds out priority expenditures and makes the reduction of the deficit more challenging. In addition, they are poorly targeted and have been ineffective in putting the electricity sector on a sound financial footing. Staff regrets the delays incurred in tackling the electricity sector reforms, including the reform of SENELEC and the implementation of large medium-term investment projects that are key to durably reducing production costs, electricity subsidies, and the fiscal deficit. Staff urges the authorities to accelerate implementation of all the components of the reform plan, which is critical for growth and fiscal sustainability, and also to revert to full pass-through of international oil price changes to domestic petroleum product prices. Staff welcomes the authorities’ intention to prepare a strategy on the future of SAR and urges them to give due consideration to eliminating budget support to refining activities.

21. Staff encourages the authorities to accelerate implementation of deep reforms to streamline expenditures and improve the efficiency of the state. The next few months will provide a good opportunity for increasing the reform momentum, as a number of studies and audits will become available shortly and will provide a good basis for making well-informed decisions in key areas. (e.g., on streamlining the government payroll, restructuring public agencies, and reforming higher education).

22. Staff recommends completion of the fifth PSI review and supports the authorities’ request for program extension and modification of assessment criteria.

Figure 1.
Figure 1.

Senegal: Historical Perspective, 1998–2012

Citation: IMF Staff Country Reports 2013, 170; 10.5089/9781484338483.002.A001

Source: Millennium Development Goals Database, World Bank, 2013.
Figure 2.
Figure 2.

Senegal: Recent Developments and Short-Term Projections, 2010–2014

Citation: IMF Staff Country Reports 2013, 170; 10.5089/9781484338483.002.A001

Sources: BCEAO; Senegalese authorities; and IMF staff estimates.
Figure 3.
Figure 3.

Senegal: Medium-Term Outlook, 2010–2018

Citation: IMF Staff Country Reports 2013, 170; 10.5089/9781484338483.002.A001

Sources: BCEAO; Senegalese authorities; and IMF staff estimates.
Figure 4.
Figure 4.

Financial Sector Developments

Citation: IMF Staff Country Reports 2013, 170; 10.5089/9781484338483.002.A001

Sources: BCEAO; Senegalese authorities; IMF staff estimates; and Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises.
Figure 5.
Figure 5.

Senegal: Exchange Rate and Competitiveness

Citation: IMF Staff Country Reports 2013, 170; 10.5089/9781484338483.002.A001

Sources: IMF staff calculations and estimates; World Economic Forum; and World Bank.

Appendix I. Letter of Intent

Dakar, Senegal

June 3, 2013

Madame Christine Lagarde

Managing Director

International Monetary Fund

700 19th Street, N.W.

Washington, D.C., 20431

USA

Madame Managing Director,

1. The government of Senegal requests completion of the fifth review and an extension to end-2014 of support under the Policy Support Instrument (PSI) of its macroeconomic program. The details of this program were set forth in the initial Memorandum of Economic and Financial Policies (MEFP) of November 10, 2010, and in the MEFPs pertaining to subsequent program reviews. The attached MEFP takes stock of program performance at end-December 2012, defines the macroeconomic objectives for the rest of 2013 and for 2014, and updates the structural reforms monitored under the program.

2. Program implementation remains satisfactory. All quantitative assessment criteria and indicative targets were met, with the sole exception of the ceiling on public procurements signed by single tender, which was missed by a small margin due to emergency expenditures. For the first time in recent years, the fiscal deficit target was met (at 5.9 percent of GDP). Implementation of structural reforms also recorded significant progress.

3. Reducing the fiscal deficit to levels consistent with debt sustainability remains a policy priority for the government. However, the fiscal outlook for 2013 is under strain due to a range of factors. These include the security situation in Mali and the Sahel and additional expenditure needs for a flood prevention program we designed in the wake of the major floods incurred in the second half of 2012. We therefore propose that the fiscal deficit target for 2013 be revised slightly upward to 5.3 percent of GDP, to accommodate the effects of these two exogenous factors. The new deficit target will still require substantial efforts to mobilize revenue and control spending, which we are committed to achieving. The Government reiterates its commitment to reducing the deficit below 4 percent of GDP by 2015.

4. In light of this change, the government requests modification of the end-June 2013 assessment criterion on the overall fiscal deficit. It is also proposed that the ceiling on nonconcessional borrowing be revised upward by US$300 million to allow for issuance of an international bond on favorable terms, and that the ceiling on semi-concessional borrowing (financing having a grant element in the range of 15-35 percent) be raised to CFAF 67 billion to facilitate the financing of important investment projects. We also propose that the structural benchmark on the submission to Parliament of a new Customs Code be rescheduled to end-September 2013 to allow for further consultations with the private sector.

5. The government believes that the policies and measures set forth in the attached MEFP are appropriate to achieve the objectives of the PSI-supported program. Given its commitment to macroeconomic stability and debt sustainability, the government will promptly take any additional measures needed to achieve the objectives of the program. The government will consult with the IMF—at its own initiative or whenever the Managing Director of the IMF requests such a consultation—before the adoption of any such measures and in advance of revisions to the policies contained in the attached MEFP, in accordance with the Fund’s policies on such consultation.. Moreover, the government will provide the IMF with such information as the IMF may request in connection with the progress made in implementing the economic and financial policies and achieving the objectives of the program.

6. The government authorizes the IMF to publish this letter, the attached MEFP, and the Staff Report relating to the current review.

Sincerely yours,

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  • Attachments: - Memorandum of Economic and Financial Policies (MEFP)

    • - Technical Memorandum of Understanding (TMU)

Attachment I. Memorandum of Economic and Financial Policies

Dakar, June 3, 2013

Introduction

1. The government intends to press ahead with the policies it adopted when it took office. The Senegalese people wish to have better governance, more jobs, more efficient basic services, and a lower cost of living. Accordingly, in order to meet the expectations of the general public, the government has undertaken to reform the State; conduct a prudent policy with respect to public finance and debt in order to safeguard macroeconomic stability; enhance revenue with a view to generating more fiscal space for financing priority spending; further strengthen public financial management and governance; and promote private sector development through structural reforms, with a view to achieving strong, sustainable, and inclusive growth.

2. This MEFP updates the program supported by the Policy Support Instrument (PSI) over the period 2011-13. 1 The MEFP includes three sections. The first section covers recent economic developments and the results of program implementation. The second section focuses on the macroeconomic outlook for 2013 and the medium term, as well as on macroeconomic policy and structural reforms. The last section is devoted to the changes desired in program monitoring.

Recent economic developments and program implementation

3. Recent macroeconomic developments have been broadly in line with the projections made in the Autumn of 2012, although the external current deficit has deteriorated more sharply than anticipated. Economic activity grew by 3.5 percent in 2012 against 2.1 percent in 2011, reflecting a favorable performance in agriculture (17.4 percent). Consumer prices recorded a moderate increase of 1.4 percent in 2012 compared to a 3.4 percent increase the preceding year. Conversely, foreign trade was characterized by a deterioration in the current account; the current account deficit moved from 7.9 percent of GDP in 2011 to 10.3 percent of GDP in 2012, inter alia on account of the upturn in oil imports and foodstuffs. The overall balance of payments has also registered a deficit. Credit to the economy grew by 9.6 percent while the money supply increased by 6.8 percent.

4. Program implementation has remained satisfactory. All quantitative assessment criteria and indicative targets for the program at end-2012 were observed, except for the indicative target on directly negotiated government contracts reflecting emergency procurement associated with floods and the agriculture sector. The budget deficit target was met in spite of sizable revenue losses (deficit of 5.9 percent of GDP). These losses were primarily attributable to the non-transfer to the treasury of the VAT withheld by public agencies and entities, and to the difficulties experienced by SENELEC, which has been unable to pay all its taxes and duties. On the expenditure side, the wage bill recorded a slight slippage, largely as a result of greater-than-anticipated tenure for education contractuals and the associated costs. Conversely, savings were recorded with respect to interest on public debt and current expenditure, and the rate of implementation of certain capital expenditures—in particular, externally funded expenditures—slowed down.

5. Implementation of the structural reforms has also made significant headway:

  • (i) the general tax code has been reformed in a transparent fashion using a participatory approach;

  • (ii) a public investment assessment guide was completed at end-2012 and user training has begun;

  • (ii) information on transactions pertaining to the State’s private property began to be published in March 2013;

  • (iii) the rollout of the Single Treasury Account (STA) has made good progress although it remains incomplete (see below);

Macroeconomic policy and structural reforms for 2013 and the medium-term

6. Senegal’s national economic and social development strategy (SNDES) envisages an emerging economy ensuring sustainable development, whose beneficial effects are widely shared. The SNDES is expected to provide the solutions needed to ensure that the Senegalese economy can be put back on a more vigorous and sustainable growth track. The aim will be to implement reforms designed to trigger further productivity gains as a prerequisite for development, thereby laying the groundwork for a new model of economic growth. The SNDES focuses on three pillars: (i) growth, productivity, and wealth creation; (ii) human capital, social protection, and sustainable development; and (iii) governance, institutions, peace, and security.

A. Macroeconomic Context for 2013

7. In spite of a challenging international environment, GDP growth is expected to record a slight upturn to 4 percent in 2013. This uptick should be supported by the dynamic performance of the agriculture subsector, the coming to fruition of projects financed by the Millennium Challenge Account (MCA), improvement in electricity supply and the return of growth to Mali. Inflation should stay well below the WAEMU convergence criterion of 3 percent. The current account deficit as a percentage of GDP is expected to improve.

8. Risks have increased since the last review. The crisis in the eurozone remains the primary downside risk for the Senegalese economy. The channels whereby weak growth in Europe spreads to the national economy are exports, FDI, aid, transfers of funds, and tourism. The risk that insecurity could spread from Mali may also call for more sizable security expenditures and may affect how risk in the region is perceived by investors. Domestically, the main risks have to do with fiscal consolidation and delays in implementation of energy sector reforms.

9. The progress made and new challenges involved in implementing the main program measures are presented in the remainder of this section and are grouped in accordance with the four main objectives of the program.

B. Pursue prudent Public Finance and Debt Policies to Safeguard Macroeconomic Stability

10. A significant reduction in the budget deficit in 2013 and in the medium term remains a priority objective. In order to preserve debt sustainability and restore fiscal space for the future, it is imperative to reduce the public debt by raising government revenues, through fairer and more efficient taxation, while streamlining government expenditure. In 2013, the reduction of the deficit will be smaller than anticipated, on account of the fiscal impact of two exogenous shocks. The security situation in Mali and in the Sahel requires us to increase Senegal’s security expenditures this year. Furthermore, major flooding in the second half of 2012 necessitated urgent capital expenditures which had anticipated at the time of the 4th program review. In the aggregate, these additional expenditures amount to approximately CFAF 30 billion (including CFAF 20 billion for security expenses) and lead to an upward revision of the budget deficit target for 2013 to 5.3 percent of GDP. However, we remain committed to our goal of reducing the deficit to less than 4 percent of GDP by 2015.

11. Concerted efforts will be made to reverse the erosion of budget revenue observed in 2012. Comprehensive reform of the General Tax Code will help mobilize additional revenue, including through abolition of the VAT exemption in favor of externally funded operations in the form of subsidies or nonreimbursable grants, VAT taxation of the traffic balance of telecommunications operators, introduction of a tax on cosmetics, an increase in the tobacco tax rate as well as the application of an advance payment on the industrial and commercial profits tax levied on imports of a number of products. Phasing out withholding will help overcome the constraints affecting the management of the VAT and will facilitate VAT collection. Revenues generated by mining activities have also been revised downward. Cooperation between the General Directorate of Customs (DGD) and the General Directorate of Taxes and Government Property (DGID) is continuing through to the efforts of a joint control brigade, the signing of a memorandum on information exchanges and the more widespread use of the single identifier for economic agents (national registration number for enterprises and associations or NINEA); these measures should also help enhance revenue collection.

12. Efforts to curb current expenditure are continuing. In the education sector, action to curb expenditure on the wages of contractuals has been a priority. New software allows for real-time monitoring of trends in staffing levels and their distribution by education district. Furthermore, the survey of teaching personnel has allowed for more efficient deployment in response to needs. To improve management of the civil service and the payroll, the physical and biometric audit of civil service personnel has been carried out and its results will be published shortly. Disputed cases are carefully reviewed. We are undertaking to complete this process before July and to impose appropriate penalties forthwith (including such layoffs as may prove necessary). In order to have a comprehensive database that allows for meaningful budget programming of permanent expenditures (water, electricity, telephone), we have set up a module for the computerized management of such expenses. This tool will now be used to work with and validate data from invoices.

13. Expenditure targeting in certain priority sectors is continuing. Criteria for allocating subsidies to public health establishments are now based on more objective considerations; rationalization of the directorates of the health ministry is also under way. Budget allocations in favor of the agriculture sector have focused on replenishing seed capital and equipment in the rural community. With respect to advanced education, audits of scholarships and the financial equilibrium of universities are in progress; the conclusions should help rationalize the resources earmarked for this sector. A study evaluating government agencies is underway and will make it possible to propose restructuring measures as well as a model performance contract to be signed between the government and the remaining agencies.

14. The urgent need for greater efficiency applies especially to expenditures in favor of the most disadvantaged members of society, in light of the government’s finite resources We repeat our firm intention to phase out subsidies for energy prices (electricity and petroleum products). Last year, direct or indirect support for energy prices cost Senegalese taxpayers over CFAF 160 billion (CFAF 105 billion in tariff compensation for Senelec, nonpayment of taxes and duties by SENELEC in the amount of CFAF 37 billion, and CFAF 24 billion in foregone tax revenue to stabilize prices at the pump). However, these subsidies failed to ensure financial sustainability for SENELEC. This is an unjustifiable burden in the sense that just a fraction of these subsidies goes to benefit the most disadvantaged members of society. We plan to reduce these subsidies and to replace them with better targeted and more efficient social protection arrangements, such as the Family Security Allowance (Bourse de Sécurité Familiale), which will benefit 50,000 vulnerable families in 2013 and will be expanded in the years to come.

15. In line with the debt management strategy prepared in 2012, we intend to continue our efforts to lengthen the maturity of market public debt. This strategy has shown encouraging results, with medium-term and long-term instruments accounting for a more substantial share of domestic/regional debt. This trend will be strengthened and consolidated. The current situation on international markets seems conducive to issuing a new international bond on terms far more favorable than in 2011, provided that this bond is on a sufficient scale to be included in international indices. A new bond in the amount of US$500 million and bearing a maturity of 10 years would make it possible for us to complete the financing of the 2013 budget at a rate close to the domestic financing rate, while also reducing reliance on short-term borrowing on the regional market. Such an operation would make it possible to lengthen significantly the average maturity of market debt and thereby to reduce refinancing risk and interest rate risks. We intend to follow best practices when issuing this new bond. An increase in the envelope for semi-concessional lending (financing having a grant element of between 15 percent and 35 percent) from CFAF 44 to 67 billion would make it possible to provide partial financing for road infrastructure projects, such as the Samba Dia-Joal- Djiffère road, or projects linked to flood prevention.

C. Raise Revenue to Create More Fiscal Space for Financing Priority Spending

16. The new tax code which took effect in January 2013 represents a major step forward, but it is not the last word in tax reform. This year, efforts have focused on establishing the new code, with training for personnel entrusted with applying the new provisions and responsible for communicating with users. Over time, however, there are plans to make further efforts to complete the modernization and reform of the tax laws. In particular, we are referring to the rationalization of stamp duties, comprehensive taxation of the financial sector (banks and insurance) and telecommunications, the imposition of taxes on e-commerce, and environmental taxation. For all of these issues, research must be conducted in the course of 2014, in order to ensure that appropriate solutions can be proposed and implemented as of early 2015.

17. Modernization of the tax administration is continuing. Following the adoption of the new general tax code, it is important to ensure that the code is properly implemented in order to ensure that the efforts to improve the overall performance of the Senegalese tax system can truly come to fruition. Accordingly, the structural reorganization that began with the creation of the medium-sized enterprises tax center will be completed by end-June 2013, with the establishment of a large enterprises directorate as well as of the interregional operational directorates in Dakar and in a number of other major municipalities. Furthermore, appropriate reforms in the area of human resources—such as the recruitment necessary to eliminate the current shortages—will be implemented.

18. The General Customs Directorate (DGD) is continuing efforts to implement the modernization program defined in the 2011-2013 Strategic Plan. For 2013, targets focus essentially on boosting the DGD’s contribution to government budget resources through optimal mobilization and collection of customs revenues; continuation of the privileged partners program through the granting of personalized and simplified customs clearance procedures for eligible firms; extending the scope of the comprehensive GAINDE program to include border offices after the main Dakar offices; integration of special modules (modules-métiers) in GAINDE, with a view to pursuing further efforts to continue the computerization of administrative and customs procedures which took effect on March 11, 2013. The completion and submission to Parliament of the draft reform of the customs code have been rescheduled until September 30, 2013, in order to allow for wider-ranging consultations with the private sector. The midterm evaluation of the strategic plan showed that the planned actions had recorded a rate of execution of 51 percent. The final evaluation, scheduled for early 2014, will make it possible to review the reforms undertaken and to identify the way forward.

D. Strengthen Public Financial Management and Governance

19. Efforts to improve public financial management are continuing. Quarterly budget execution reports, specified by the new organic law on budget laws, will be produced for the year 2013, transmitted periodically to the national Assembly, and published on the dedicated website at the Ministry of finance. The first report is now available. The new WAEMU directives on government finance have been fully transposed into domestic positive law. They will be implemented progressively in with test stages to consolidate the results achieved. An implementation plan will be prepared by end-July 2013 and will be shared with Fund staff. With particular reference to the Transparency Code, work to identify its impact on the existing legal framework will be completed in 2013 with a view to ensuring its effective implementation as of early 2014, following adoption of a law on the disclosure of assets. The draft budget execution law for 2011 was prepared and submitted to the Audit Court in early July 2012. However, the provisional report was not transmitted to the government until end-February 2013. Responses to the comments contained in the provisional report have been transmitted to the Audit Court in preparation for the hearings. The draft budget execution law for 2012 is currently being prepared and will be transmitted to the Audit Court by no later than end-June 2013. Supplemental appropriation orders (décrets d’avances) will be used in exceptional cases only, in accordance with current regulations. Such decrees will be transmitted to the Finance Commission of the National Assembly upon their signature, in pursuance of the provisions of the 2011 Organic Law on budget laws.

20. Efforts to improve land governance are continuing, in particular through the Urban Property Management Support Project (PAGEF). The purpose of PAGEF is to ensure the availability, reliability, and accessibility of real estate information while rationalizing and ensuring the transparency of the land management framework. These challenges will be addressed through the automation of land and government property procedures. The government’s properties will be fully inventoried by end-2014. The inventory of laws on real estate, the establishment of a manual of procedures, and the development of a conceptual model for IT data will be completed by no later than mid-2014, while the automation of procedures will be completed by end-2015.

21. The establishment of the Single Treasury Account (STA) has made progress but is not yet complete. The survey of bank accounts opened by the central government and central government agencies has been carried out. In this context, 3,305 accounts were identified, about half of which will be integrated into the STA framework. The elimination or reduction of bank accounts should now be undertaken. It will nonetheless be preceded by a study pertaining to the impact of such measures on the banking system, which shall be completed by end-June 2013. In the immediate future, the chosen approach will be to maintain for each autonomous structure—except in thoroughly justified exceptional cases—one single bank account financed from deposit accounts at the Treasury on the basis of a duly justified estimate of needs. This account will include agencies’ own resources. For accounts that will be retained once the rationalization process is complete, an agreement will be entered into with the banks concerned which inter alia will specify the operating conditions, in particular reporting and sweeping modalities. This process will be completed by end-September 2013. The restructuring of the legal framework for the opening, functioning, and closure of the Treasury deposit accounts of agencies, public entities and related public entities is in progress.

E. Private Sector Development
Energy sector

22. The government adopted a new energy production plan in February 2013. The 2013-2017 plan for developing production facilities is based on an energy policy mix combining coal, natural gas, hydroelectricity, and renewable energies. In addition to the rehabilitation of SENELEC’s production facilities, which are in progress, this plan makes provision for the following additional capacities: the Félou hydroelectric power station of 15 MW in 2013, an IPP in the amount of150 MW (liquefied natural gas) in April 2014, the IPP Tobéne (Taiba Ndiaye) of 70 MW in 2014, a coal-fired IPP (Sendou) of 125 MW in April 2015; an import of 80 MW from the natural gas powered plant in Mauritania in October 2015; a coal-fired IPP with Kepco of 250 MW between 2016 and 2017, and renewable energy projects. A standing interministerial committee for monitoring energy projects has been instituted. The coming on stream of these new units will be accompanied, at current oil prices, by the phase-out of the electricity subsidy and will lead over time to lower costs for the user.

23. Implementation of the plan for the operational and financial restructuring of SENELEC, adopted in November 2012, is in progress. The goals that have been set should allow for rehabilitation of the financial situation; restoration of equilibrium between supply and demand, in addition to optimization of management through the combining of the efforts made by the State (consolidating under share capital the balance of cross-claims accruing to the State and accounting for investments made by the State as a capital subsidy) as well as of the savings anticipated by SENELEC (optimization of the various power plants, reduction of network losses, reduction of operating outlays, efforts to combat fraud, improvement of billing and shorter payment processing times). In addition to the execution of the rehabilitation plan by the SENELEC board of directors, the performance contract between the State and SENELEC will be signed in early June 2013 and independently audited.

24. Other reforms are under way or under consideration in the hydrocarbons sector. The Société Africaine de Raffinage (SAR) receives direct or indirect support from the State of about CFAF 40 billion per year. Various options may be considered in order to address this problem; a strategy will be finalized by end-August 2013. Revision of the petroleum code and standard contracts for research and sharing of hydrocarbon production are continuing. The aim is to improve the framework of laws and regulations governing the exploration and production of oil and gas as well as to establish regulations applicable to petroleum operations, while enhancing the attractiveness of the sector (albeit without having recourse to new tax exemptions). The process, which began in February 2013, will be completed in 2013.

Financial sector

25. The updating of the action plan deriving from the recommendations of the national dialogue on credit in 2010 will be completed at end-June 2013. A number of flagship measures in the existing plan have already been implemented, in particular, the preparation of the law on leasing, the taking into account of tax reforms in the new general tax code (Islamic financial products and venture capital), the launching of the body monitoring the quality of financial services, the carrying out of the study on the analysis of the stable portion of demand deposits and special accounts which led to the reduction of the transformation ratio from 75 percent to 50 percent, and the establishment of a formal framework for dialogue. Notwithstanding these efforts, an execution rate of just 31 percent was recorded for the measures under the plan for which a deadline had been set. In order to expedite the implementation of 33 actions (out of a total of 65) not yet implemented, an update of the action plan has begun. The updating is being conducted on a participatory basis with the stakeholders concerned and with a focus on identifying implementation problems.

26. To facilitate access by SMEs to financial services, three instruments are under development. The National Economic Development Bank (BNDE) is expected to be a universal bank, with a minority public stake specifically dedicated to SME financing. The Sovereign Strategic Investment Fund (FONSIS), wholly held by the State and State agencies, would be required invest in projects that are strategic, vital, profitable, and job-creating, support SMEs through a secondary fund, and manage certain government holdings. The purpose of the Priority Investment Guarantee Fund (FONGIP) would be essentially to contribute guarantees for loans granted by financial institutions for projects, including from economic interest associations of women or young people, making investments in priority sectors defined by the government.

Other factors involved in improving the business climate, governance, and competitiveness

27. The emergence of the private sector as an engine of growth requires establishing a business climate conducive to domestic and foreign private investment. For this purpose, the Presidential Investment Council at end-2012 adopted a new three-year (2013-2015) program for improving the business climate and competitiveness, focusing on four strategic pillars: automation of investment-related administrative procedures; strengthening of the competitiveness of the factors of production; assistance to the concerned departments and communication on reforms; promotion of investment with a substantial social impact. This program encompasses 56 priority measures, including approximately 20 urgent measures to be carried out during 2013 with a view to improving Senegal’s performance in the forthcoming international rankings. The main measures for 2013 are: implementation of the automatic construction permit procedure (to reduce processing times which are currently 210 days); full automation of the procedure for registering a new business; adoption of the law on the status of small entrepreneurs; revision of the Code of Civil Procedure to ensure expeditious treatment of economic disputes and improved protection for investors; computerization of the clerk of court service. A National Commission on Land Reform has been established to equip Senegal with effective land laws and an efficient land management system.

Program implementation

28. We are requesting a one-year extension of the PSI in order to continue benefiting from Fund assistance in implementing reforms critical to attaining the program objectives. A seventh and an eighth review should therefore be added in 2014 to monitor program implementation.

29. In light of the preceding sections, a number of changes in the program design are in order. End-2013 targets are proposed for the quantitative assessment criteria, including a target of 5.3 percent of GDP for the budget deficit. The ceiling on nonconcessional borrowing would be revised upward by US$300 million to allow for issuance of an international bond on favorable terms. The ceiling on semi-concessional borrowing (financing having a grant element in the range of 15-35 percent) would be raised from CFAF 44 billion to CFAF 67 billion. Indicative targets are proposed for 2014, in addition to new structural benchmarks.

Attachment II: Technical Memorandum of Understanding

Dakar, June 3, 2013

1. This technical memorandum of understanding (TMU) defines the quantitative assessment criteria, indicative targets, and structural benchmarks on the basis of which the implementation of the Fund-supported program under the Policy Support Instrument (PSI) will be monitored in 2011–2014. The TMU also establishes the terms and time frame for transmitting the data that will enable Fund staff to monitor program implementation.

Program Conditionality

2. The quantitative assessment criteria for end-June 2013 and end-December 2013, the quantitative targets for end-September 2013 and for 2014, are shown in Tables 1 and 2 of the MEFP, respectively. The prior actions and structural benchmarks established under the program are presented in Table 3.

Table 1.

Quantitative Assessment Criteria and Indicative Targets for 2011–12

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Indicative targets for March and September 2012, except for the assessment criteria monitored on a continuous basis. See Technical Memorandum of Understanding for definitions. Indicative targets shown in italics.

Cumulative since the beginning of the year.

The ceiling on the overall fiscal deficit will to be adjusted in line with the TMU definition.

Monitored on a continuous basis.

Investment in the autoroute plus investment under the plan Takkal financed from internal and external concessional resources.

Table 2.

Quantitative Assessment Criteria and Indicative Targets for 2012–13

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Indicative targets for March and September, except for the assessment criteria monitored on a continuous basis. See Technical Memorandum of Understanding for definitions. Indicative targets shown in italics.

Cumulative since the beginning of the year.

The ceiling on the overall fiscal deficit will to be adjusted in line with the TMU definition.

Monitored on a continuous basis.

Table 3.

Quantitative Assessment Criteria and Indicative Targets for 2013–14

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Indicative targets for March and September, except for the assessment criteria monitored on a continuous basis. See Technical Memorandum of Understanding for definitions. Indicative targets shown in italics.

Cumulative since the beginning of the year.

The ceiling on the overall fiscal deficit will to be adjusted in line with the TMU definition.

Monitored on a continuous basis.

Table 4:

Structural Benchmarks

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Definitions, Adjusters, and Data Reporting

A. The Government

3. Unless otherwise indicated, “government” means the central administration of the Republic of Senegal and does not include any local administration, the central bank, or any other public or government-owned entity with autonomous legal personality not included in the government flow-of-funds table (TOFE).

B. Overall Fiscal Balance (Program Definition)
Definition

4. The overall fiscal balance including grants (program definition) is the difference between the government’s total revenue (revenue and grants) and total expenditure and net lending. The operations of the Energy Sector Support Fund (FSE) are integrated in the government flow-of-funds table (TOFE). The revenues exclude privatization receipts and sales of mobile phone licenses or of any other state-owned assets. Government expenditure is defined on the basis of payment orders accepted by the Treasury (dépenses ordonnancées prises en charge par le Trésor) and expenditures executed with external resources. This assessment criterion is set as a floor on the overall fiscal balance including grants as of the beginning of the year.

Example

5. The floor on the overall fiscal balance including grants (program definition) as of December 31, 2012, is minus CFAF 425.4 billion. It is calculated as the difference between total government revenue (CFAF 1,723.2 billion) and total expenditure and net lending (CFAF 2,148.7 billion).

Adjustment

6. The overall fiscal balance including grants is adjusted downward by the amount that budget grants fall short of program projections up to a maximum of CFAF 15 billion at current exchange rates (see MEFP Tables 1 and 2).

7. The overall fiscal balance including grants is adjusted downward/upward by the amount that concessional loans exceed/fall short of their programmed amount, up to a maximum of CFAF 50 billion at current exchange rates (see MEFP, Tables 1 and 2). For the purposes of this assessment criterion, concessional loans denominated in CFAF and in foreign currency are taken into account.

Reporting requirements

8. During the program period, the authorities will report provisional data on the overall fiscal balance (program definition) and its components monthly to Fund staff with a lag of no more than 30 days. Data on revenues and expenditure that are included in the calculation of the overall fiscal balance, and on expenditure financed with HIPC- and MDRI- related resources, will be drawn from preliminary Treasury account balances. Final data will be provided as soon as the final balances of the Treasury accounts are available, but not later than two months after the reporting of the provisional data.

C. Social Expenditure
Definition

9. Social spending is defined as spending on health, education, the environment, the judicial system, social safety nets, sanitation, and rural water supply. This criterion is set as a floor in percent relative to total spending (including the FSE) excluding capital expenditure related to the extension of the autoroute and the investment projects of the power sector reform plan.

Reporting requirements

10. The authorities will report semiannual data to Fund staff within two months following the end of each period.

D. Budgetary Float

Definition

11. The budgetary float (instances de paiement) is defined as the outstanding stock of government expenditure for which bills have been received and validated but not yet paid by the Treasury (the difference between dépenses liquidées and dépenses payées). The assessment criterion is set as a ceiling on the budgetary float, monitored at the end of the quarter.

Reporting requirements

12. The authorities will transmit to Fund staff on a weekly basis (i.e., at the end of each week), and at the end of each month, a table from the expenditure tracking system (SIGFIP) showing all committed expenditures (dépenses engagées), all certified expenditures that have not yet been cleared for payment (dépenses liquidées non encore ordonnancées), all payment orders (dépenses ordonnancées), all payment orders accepted by the Treasury (dépenses prises en charge par le Trésor), and all payments made by the Treasury (dépenses payées). The SIGFIP table will exclude delegations for regions and embassies. The SIGFIP table will also list any payments that do not have a cash impact on the Treasury accounts.

E. Spending Undertaken Outside Simplified and Normal Procedures

13. This assessment criterion is applied on a continuous basis to any procedure other than the normal and simplified procedures to execute spending. It excludes only spending undertaken on the basis of a supplemental appropriation order (décret d’avance) in cases of absolute urgency and need in the national interest, in application of Article 12 of the Organic Budget Law. Such spending requires the signatures of the President of the Republic and Prime Minister.

14. The authorities will report any such procedure, together with the SIGFIP table defined in paragraph 12, to Fund staff on a monthly basis with a maximum delay of 30 days.

F. Government External Payments Arrears

Definition

15. External payments arrears are defined as the sum of payments owed and not paid on the external debt contracted or guaranteed by the government. The definition of external debt given in paragraph 18 is applicable here. The assessment criterion on external payments arrears will be monitored on a continuous basis.

Reporting requirements

16. The authorities will promptly report any accumulation of external payments arrears to Fund staff.

G. Contracting or Guaranteeing of New Nonconcessional External Debt by the Government

17. Definition of debt. For the purposes of the relevant assessment criteria, the definition of debt is set out in Executive Board Decision No.6230-(79/140), Point 9, as revised on August 31, 2009 (Decision No. 14416-(09/91)).

  • a) The term “debt” will be understood to mean a direct, i.e., non-contingent, liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, according to a given repayment schedule; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows:

    • i. loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

    • ii. suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and

    • iii. leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.

  • b) Under the definition of debt above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

18. Debt guarantees. For the purposes of the relevant assessment criteria, the guarantee of a debt arises from any explicit legal obligation of the government to service a debt in the event of nonpayment by the debtor (involving payments in cash or in kind).

19. Debt concessionality. For the purposes of the relevant assessment criteria, a debt is considered concessional if it includes a grant element of at least 35 percent; 1 the grant element is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt. 2 The discount rates used for this purpose are the currency-specific commercial interest reference rates (CIRRs), published by OECD.3 For debt with a maturity of at least 15 years, the ten-year-average CIRR is used to calculate the PV of debt and, hence, its grant element. For debt with a maturity of less than 15 years, the six-month average CIRR is used. The margins for differing repayment periods (0.75 percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years, 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more) are added to the ten-year and six-month CIRR averages.

20. External debt. For the purposes of the relevant assessment criteria, external debt is defined as debt borrowed or serviced in a currency other than the CFA franc. This definition also applies to debt among WAEMU countries.

21. Debt-related assessment criteria. The relevant assessment criteria apply to the contracting and guaranteeing of new nonconcessional external debt by the government, local governments, SENELEC, the Energy Sector Support Fund (FSE), and any other public or government-owned entity. The criteria apply to debt and commitments contracted or guaranteed for which value has not yet been received. The criteria also apply to private debt for which official guarantees have been extended and which, therefore, constitute a contingent liability of the government. The assessment criteria are measured on a cumulative basis from the time of approval of the PSI by the Executive Board. ACs will be monitored on a continuous basis. No adjuster will be applied to these criteria.

22. Special provisions:

  • a) The assessment criteria do not apply to: (i) debt rescheduling transactions of debt existing at the time of the approval of the PSI; (ii) debt contracted by the airport project company (AIBD) to finance construction of the new Dakar Airport; and (iii) short-term external debt (maturity of less than one year) contracted by SENELEC to finance the purchase of petroleum products.

  • b) A total ceiling of US$800 million applies over the period 2011–14 for nonconcessional external debt financing to be used for investment projects, including in road infrastructure, the energy sector, and urban water and sanitation, and to reduce the recourse to regional market financing. Following the issuance of a Eurobond in May 2011, with an exchange offer for the outstanding 2009 Eurobond, the remaining ceiling for non-concessional borrowing for 2013–14 is US$500 million.

  • c) A separate ceiling equivalent to CFAF 67 billion in 2011–14 applies for untied nonconcessional external debt financing with a grant element of at least 15 percent. Projects financed in this way would be expected to meet the same economic and social profitability criteria as other capital spending. The government will inform Fund staff in a timely manner before contracting any debt of this type and will provide sufficient information ahead of time to verify the degree of concessionality. It will also provide a brief summary of the projects to be financed and their profitability, including an evaluation by the lender or the government. The government will report the use of funds and project implementation in subsequent MEFPs.

Reporting requirements

23. The government will report any new external borrowing and its terms to Fund staff as soon as external debt is contracted or guaranteed by the government, but no later than within two weeks of such external debt being contracted or guaranteed.

H. Public Sector Contracts Signed by Single Tender
Definition

24. Public sector contracts are administrative contracts, drawn up and entered into by the government or any entity subject to the procurement code, for the procurement of supplies, delivery of services, or execution of work. Public sector contracts are considered “single-tender” contracts when the contracting agent signs the contract with the chosen contractor without competitive tender. The quarterly indicative target will apply to total public sector contracts entered into by the government or any entity subject to the procurement code. The ceiling on contracts executed by single tender will exclude fuel purchases by SENELEC for electricity production. This exclusion reflects new regulation, which requires SENELEC to buy fuel directly from SAR based on the existing price structure.

Reporting requirements

25. The government will report quarterly to Fund staff, with a lag of no more than one month from the end of the observation period, the total value of public sector contracts and the total value of all single-tender public sector contracts.

Additional Information for Program Monitoring

26. The authorities will transmit the following to Fund staff, in electronic format if possible, with the maximum time lags indicated:

(a) 3 days after adoption: any decision, circular, edict, supplemental appropriation order, ordinance, or law having economic or financial implications for the current program. This includes in particular all acts that change budget allocations included in the budget law being executed (for instance: supplemental appropriation orders (décrets d’avance), cancellation of budget appropriations (arrêtés d’annulation de crédit budgétaires) and orders or decisions creating supplemental budget appropriations (décrets ou arrêtés d’ouverture de crédit budgétaire supplémentaire).

(b) With a maximum lag of 30 days, preliminary data on:

  • Tax receipts and tax and customs assessments by categories, accompanied by the corresponding revenue on a monthly basis;

  • The monthly amount of expenditures committed, certified, and for which payment orders have been issued;

  • The monthly situation of checks issued by agencies from their deposit accounts at the Treasury but not paid to beneficiaries, with the dates of issuance of the checks.

  • The quarterly report of the Debt and Investments Directorate (DDI) on the execution of investment programs;

  • The monthly preliminary government financial operations table (TOFE) based on the Treasury accounts;

  • The provisional monthly balance of the Treasury accounts; and

  • Reconciliation tables between the SIGFIP table and the consolidated Treasury accounts, between the consolidated Treasury accounts and the TOFE for “budgetary revenues,” between the consolidated Treasury accounts and the TOFE for “total expenditure and net lending,” and between the TOFE and the net government position (NGP), on a quarterly basis.

(c) Final data will be provided as soon as the final balances of the Treasury accounts are available, but not later than one month after the reporting of provisional data.

27. During the program period, the authorities will transmit to Fund staff provisional data on current nonwage noninterest expenditures and domestically financed capital expenditures executed through cash advances on a monthly basis with a lag of no more than 30 days. The data will be drawn from preliminary consolidated Treasury account balances. Final data will be provided as soon as the final balances of the Treasury accounts are available, but no more than one month after the reporting of provisional data.

28. The central bank will transmit to Fund staff:

  • The monthly balance sheet of the central bank, with a maximum lag of one month;

  • The consolidated monthly balance sheet of banks with a maximum lag of two months;

  • The monetary survey, on a monthly basis, with a maximum lag of two months;

  • The lending and deposit interest rates of commercial banks, on a monthly basis; and

  • Prudential supervision and financial soundness indicators for bank financial institutions, as reported in the Table entitled Situation des Etablissements de Crédit vis-à-vis du Dispositif Prudentiel (Survey of Credit Institution Compliance with the Prudential Framework), on a quarterly basis, within a maximum delay of two months.

29. The government will update on a monthly basis on the website established for this purpose the following information:

a) Preliminary TOFE and transition tables with the delay of 2 months.

b) SIGFIP execution table, the table for the central government and a summary table including regions, with the delay of 2 weeks

c) The amount of the airport tax collected, deposited in the escrow account, and used for the repayment of the loan financing the construction of the new airport, with the delay of 1 month.

d) Full information on: (i) the operations of Energy Sector Support Fund (FSE); (ii) investment projects in the power sector; (iii) planning and execution of these projects; (iv) details of financing and updated costs; and (v) the balance of the escrow account with the resources of the Eurobond issued in 2011 (within 3 weeks).
1

The downward revision to the 2013 growth projection reflects a number of factors, such as the delayed start by a few quarters of a big mining project and the slower than expected implementation of large infrastructure investments.

2

In the event of a possible intensification of the euro area crisis, trade, worker remittances, foreign direct investment, and the terms of trade would be the main channels of transmission to Senegal. The share of Europe in Senegal’s exports, however, is declining, which limits the impact of adverse developments in Europe on Senegal. Also, contrary to what happened in 2009, remittances have so far held up well. Another channel is aid, which might also be significantly reduced. The financial sector, however, is mostly funded domestically and therefore has only limited direct exposure to Europe.

3

The exchange rate risk would however increase if the new bond is denominated in dollars. The authorities intend to follow best practice in the issuance of the Eurobond. They are well advanced in the process of hiring financial and legal advisers and expect to issue the new bond early this fall.

4

To limit the financial implications for the government, the plan assumes intensive recourse to independent power producers (IPPs) for the large new production units (in particular coal-fired plants).

1

The content of this program was set out in the initial MEFP of November 10, 2010, as well as in the MEFP of May 19, 2011, of December 2, 2011, of June 22, 2012, and of November 22, 2012.

1

The following reference on the IMF website creates a link to a tool that allows for the calculation of the grant element of a broad range of financing packages: http://www.imf.org/external/np/pdr/conc/calculator.

2

The calculation of concessionality will take into account all aspects of the debt agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees.

3

For debts in foreign currencies for which the OECD does not calculate a CIRR, calculation of the grant element should be based on the composite CIRR (weighted average) of the currencies in the SDR basket.

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Cover IMF Staff Country Reports
Senegal: Fifth Review Under the Policy Support Instrument and Request for Program Extension and Modification of Assessment Criteria—Staff Report; Debt Sustainability Analysis; Informational Annex; and Press Release
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2013: Issue 170
Publisher:
International Monetary Fund
ISBN:
9781484338483
ISSN:
1934-7685
Pages:
75
DOI:
https://doi.org/10.5089/9781484338483.002
Figure 1.

Senegal: Historical Perspective, 1998–2012
Figure 2.

Senegal: Recent Developments and Short-Term Projections, 2010–2014
Figure 3.

Senegal: Medium-Term Outlook, 2010–2018
Figure 4.

Financial Sector Developments
Figure 5.

Senegal: Exchange Rate and Competitiveness