Senegal: Staff Report for the 2014 Article IV Consultation and Eighth Review Under the Policy Support Instrument–Informational Annex

EXECUTIVE SUMMARYArticle IV issues. The government is committed to implementing the “Plan Sénégal Emergent” (PSE), which contains valid diagnostics and policies to boost growth and accelerate poverty reduction. GDP growth is projected to rise from less than 4 percent in recent years to 4.5 percent in 2014. Inflation remains low. Growth can potentially reach 7 percent by 2019 if PSE- related reforms are consistently and rapidly implemented. The authorities believe this growth rate will be achieved two years earlier. The impact of Ebola on growth will be limited in 2014 but can become substantial in 2015 should the epidemic spread in the region.Fiscal stance. The fiscal outlook has improved owing to stronger revenue performance and expenditure control, and the overall deficit is expected to fall to about 5 percent of GDP in 2014. The 2015 budget targets a further reduction in the deficit to 4.7 percent of GDP, less ambitious than the 4.0 percent of GDP recommended by staff. However, the authorities expect to limit the deficit close to the level recommended by staff by holding back appropriations for new public investment projects until feasibility studies are ready. Staff and authorities agreed that Ebola-related shocks could add 0.3 percent of GDP to the deficit in 2015. The authorities remain committed to bringing the fiscal deficit in line with the WAEMU target of 3 percent of GDP in the medium term.Structural reforms. The PSE offers an achievable development strategy, including the right mix of private investment to be crowded in by public investment in both human capital and infrastructure. However, unlocking private investment, including FDI, requires speeding up reforms to the business climate and improving public sector governance. Frontloading public investment without implementing the necessary structural reforms may jeopardize fiscal targets and debt sustainability while failing to raise growth from its sub-par trend.Program implementation. Performance under the PSI-supported program has been satisfactory with end-June 2014 program targets met except for a minor breach of the non- concessional borrowing ceiling due to weak debt management. This borrowing does not materially affect debt sustainability, and debt management weaknesses are being addressed.Staff recommends completion of the eighth PSI review and proposes a waiver ofnonobservance of the assessment criterion on non-concessional borrowing.

Abstract

EXECUTIVE SUMMARYArticle IV issues. The government is committed to implementing the “Plan Sénégal Emergent” (PSE), which contains valid diagnostics and policies to boost growth and accelerate poverty reduction. GDP growth is projected to rise from less than 4 percent in recent years to 4.5 percent in 2014. Inflation remains low. Growth can potentially reach 7 percent by 2019 if PSE- related reforms are consistently and rapidly implemented. The authorities believe this growth rate will be achieved two years earlier. The impact of Ebola on growth will be limited in 2014 but can become substantial in 2015 should the epidemic spread in the region.Fiscal stance. The fiscal outlook has improved owing to stronger revenue performance and expenditure control, and the overall deficit is expected to fall to about 5 percent of GDP in 2014. The 2015 budget targets a further reduction in the deficit to 4.7 percent of GDP, less ambitious than the 4.0 percent of GDP recommended by staff. However, the authorities expect to limit the deficit close to the level recommended by staff by holding back appropriations for new public investment projects until feasibility studies are ready. Staff and authorities agreed that Ebola-related shocks could add 0.3 percent of GDP to the deficit in 2015. The authorities remain committed to bringing the fiscal deficit in line with the WAEMU target of 3 percent of GDP in the medium term.Structural reforms. The PSE offers an achievable development strategy, including the right mix of private investment to be crowded in by public investment in both human capital and infrastructure. However, unlocking private investment, including FDI, requires speeding up reforms to the business climate and improving public sector governance. Frontloading public investment without implementing the necessary structural reforms may jeopardize fiscal targets and debt sustainability while failing to raise growth from its sub-par trend.Program implementation. Performance under the PSI-supported program has been satisfactory with end-June 2014 program targets met except for a minor breach of the non- concessional borrowing ceiling due to weak debt management. This borrowing does not materially affect debt sustainability, and debt management weaknesses are being addressed.Staff recommends completion of the eighth PSI review and proposes a waiver ofnonobservance of the assessment criterion on non-concessional borrowing.

Relations with the Fund

(As of November 1, 2014)

Membership Status: Joined: August 31, 1962; Article VIII

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans:

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Latest Financial Arrangements:

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Projected Payments to Fund 2/

(SDR Million; based on existing use of resources and present holdings of SDRs):

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Implementation of HIPC Initiative:

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Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts cannot be added.

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period.

Implementation of Multilateral Debt Relief Initiative (MDRI):

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The MDRI provides 100 percent debt relief to eligible member countries that qualified for the assistance. Grant assistance from the MDRI Trust and HIPC resources provide debt relief to cover the full stock of debt owed to the Fund as of end-2004 that remains outstanding at the time the member qualifies for such debt relief.

Safeguards Assessments:

The Central Bank of West African States (BCEAO) is a common central bank of the countries of the West African Economic and Monetary Union (WAEMU). The latest assessment of the BCEAO was completed on December 13, 2013. The assessment found that the bank continued to have a strong control environment and has, with the implementation of the 2010 Institutional Reform of the WAEMU, enhanced its governance framework. Specifically, an audit committee was established to oversee the audit and financial reporting processes, transparency has increased with more timely publication of the audited financial statements, and the BCEAO is committed to IFRS implementation by end-2014. The assessment also identified some limitations in the external audit process and recommended that steps be taken to ensure the adequacy of the mechanism through selection of a second experienced audit firm to conduct joint audits.

Exchange System:

Senegal, a member of the West African Economic and Monetary Union (WAEMU), accepted the obligations under Article VIII, Sections 2(a), 3 and 4 of the Fund’s Articles of Agreement, and maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions. The WAEMU’s exchange regime is a conventional peg to the euro.

The union’s common currency, the CFA franc, had been pegged to the French franc at the rate of CFAF 1 = F 0.02. Effective January 12, 1994, the CFA franc was devalued and the new parity set at CFAF 1 = F 0.01. Effective December 31, 1998, the parity was switched to the euro at a rate of CFAF 655.96 = €1.

The authorities confirmed that Senegal had not imposed measures that could give rise to exchange restrictions subject to Fund jurisdiction. They will inform the Fund, if any such measure is introduced.

Aspects of the exchange system were also discussed in the report “WAEMU: Common Policies for Member Countries” (Country Report No. 14/84).

Article IV Consultations:

The latest Article IV consultation was completed by the Executive Board on December 10, 2012 (Country Report No. 12/337). In concluding the 2012 Article IV consultation, Executive Directors commended Senegal’s satisfactory program implementation despite the challenging internal and external environments. They stressed that although a moderate pickup in growth is expected in the near term, the economy remains exposed to substantial risks.

Directors welcomed the authorities’ continued commitment to their program to ensure macroeconomic stability, strengthen the economy’s resilience to shocks, foster higher and sustainable growth, and reduce poverty. Directors noted that, while Senegal still faces a low risk of debt distress, high fiscal deficits and rising debt ratios need to be addressed. They welcomed the authorities’ commitment to keep the deficit under 6 percent in 2012 and their determination to reduce the deficit further in the medium term to levels that are consistent with fiscal and debt sustainability. Directors also highlighted the importance of stronger debt management. They welcomed the recently finalized medium-term debt strategy, and encouraged the authorities to rely primarily on concessional financing.

Directors underscored the need to improve public financial management and government spending efficiency and transparency. They commended ongoing efforts to reduce the cost of running government, streamline public agencies, and rationalize expenditure in key sectors.

Directors stressed that phasing out the costly and poorly targeted energy price subsidies while strengthening social safety nets is a priority. Sustained progress in all these areas will be necessary to meet the country’s fiscal objectives and make room for critical social and development needs.

Directors noted that the financial sector is generally robust. However, the rising level of NPLs and concentration of lending need to be closely monitored. To move Senegal to a path of higher, sustainable, and inclusive growth, Directors stressed the need to address infrastructure gaps, remove inefficiencies in government operations, and improve the business climate. They welcomed the tax and customs reforms that are underway and called for timely implementation of the new energy investments and restructuring of SENELEC, the national power utility. Directors also encouraged the authorities to deepen and strengthen the financial system to support their growth strategy.

Financial Sector Assessment Program (FSAP) and Report on the Observance of Standards and Codes (ROSC) Participation:

A joint team of the World Bank and the IMF conducted a mission under the FSAP program in 2000 and 2001. The Financial System Stability Assessment (FSSA) was issued in 2001 (IMF Country Report No. 01/189). An FSAP update was undertaken in 2004, focusing on development issues (in particular nationwide supply of basic financial services and access of SMEs to credit, in line with the priorities defined in the PRSP (IMF Country Report No. 05/126). A regional FSAP for the WAEMU was undertaken in 2007 and the FSSA was issued in May 2008 (SM/08/139). A ROSC on the data module was published in 2002. An FAD mission conducted a ROSC on the fiscal transparency module in 2005.

Technical Assistance (2008-14):

A. AFRITAC West

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B. Headquarters

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C. Resident Representative

Stationed in Dakar since July 24, 1984; the position has been held by Mr. Boileau Loko since September 2013.

D. Anti Money Laundering / Combating the Financing of Terrorism

The onsite visit for Senegal’s AML/CFT evaluation took place in July/August 2007 in the context of ECOWAS’s Inter-Governmental Action Group Against Money Laundering in West Africa (GIABA). The report was adopted in early May 2008 by the GIABA Plenary held in Accra, Ghana. The report highlighted several areas of weaknesses in the AML/CFT system, confirmed by a score of 12 non-compliant and 16 partially compliant ratings out of the 40+9 FATF AML/CFT recommendations. In May 2009 Senegal joined the Egmont Group of Financial Intelligence Units (FIUs). The FIU publishes on its website statistics on suspicious transaction reports received, the number of cases transmitted to the judiciary, and the number of convictions. Senegal’s sixth follow-up report was discussed at GIABA’s May 2014 Plenary. It acknowledged the progress achieved, including the efforts to revise the AML/CFT legal framework in line with the 2012 FATF standard, and encouraged Senegal to continue making improvements. At the same time, it was agreed that Senegal would submit its seventh follow-up report to the GIABA Plenary in May 2015.

Joint Management Action Plan Implementation World Bank and Imf Collaboration

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Statistical Issues

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Senegal: Table of Common Indicators Required for Surveillance

(As of November 2014)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank,, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA).

Reflects the assessment provided in the data rosc published in 2002 and based on the findings of the mission that took place in 2001 for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning (respectively) concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), not observed (NO), or not available (NA).

Same as footnote 8, except referring to international standards concerning (respectively) source data, statistical techniques, assessment and validation of source data, and revision studies.

Estimate.

Reported to staff during mission.

1/

Formerly PRGF.

2/

When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.