In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

External Stability1

Senegal has continued to record sizeable current account deficits over the past decade, financed mainly by official flows, but with increasing recourse to private flows. While official WAEMU reserves are currently adequate and Senegal’s exchange rate shows no significant signs of misalignment, the current account deficit is large, at around 10 percent of GDP, and there are signs of eroding competitiveness. Senegal’s exports have not gained market share and survey-based indicators continue to point to a need for strong measures to improve structural competitiveness and the business environment. Debt remains manageable, but there is little room for higher fiscal deficits or more non-concessional borrowing if Senegal’s current low risk rating is to be preserved. Given these external vulnerabilities, pro-growth fiscal policy must proceed with caution, especially in the fixed exchange rate context where almost all the weight of policy responses is placed on the budget.

A. Current Account and Senegal’s Twin Deficits

1. Senegal’s main external risk is the current account deficit,2 which is now over 10 percent of GDP. Over the past decade, the current account deficit has averaged about 8.6 percent of GDP, with overall fiscal balances averaging -4.4 percent of GDP. The current account deficits have been financed mainly by grants and government borrowing (particularly project loans). Senegal is also increasingly resorting to non-concessional commercial borrowing, which exposes it to shifting donor and market sentiment. Although the deficit is projected to decline in the long term with fiscal consolidation, it will remain high in the medium term, at over 8 percent of GDP. The regional nominal effective exchange rate has appreciated by about 6 percent since the first quarter of 2013, mirroring euro appreciation. However, the real effective exchange rate has appreciated more moderately by about 4 percent owing to low inflation. It remains broadly in line with fundamentals, with Senegal’s investment/savings gap roughly equally shared by the public and private sector.

2. The experience in Senegal is consistent with the theory that shocks in the government budget move the current account in the same direction. From the time of the CFA franc devaluation in 1994 until 2000, Senegal maintained tight fiscal policies, with strong improvements in the central government’s fiscal position. After several years of deficit, the fiscal balance showed surpluses above 1.5 percent of GDP between 1996 and 1999. The external current account deficit (excluding official transfers) also declined slightly between 1996 and 1999. Between 2001 and 2008, fiscal and external imbalances grew, culminating in 2008 with a shock to the balance of payments of 5¼ percent of GDP owing to the impact of rising food and energy prices on the import bill. As a response to the price increases, the government introduced a number of untargeted subsidies, which together with other higher expenditure and lower tax revenues widened the overall fiscal deficit to 5.1 percent of GDP in 2009 from 3.7 percent of GDP two years earlier. In 2009-10, the external and fiscal balances moved in different directions, but fiscal developments in 2012 and 2013 were again accompanied by a widening current account deficit (Figure 1).

Figure 1.
Figure 1.

Senegal: Current Account and Fiscal Deficit (Percent of GDP)

Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A004

Source: IMF staff estimates.

3. The observed correlation between Senegal’s deficits has clear policy implications. analysis suggests that for Senegal, excessive deficit spending can result in large external imbalances. Senegal’s current account deficit will remain high in the medium term, reflecting mainly higher imports associated with infrastructure projects, although it is projected to decrease in the long-term to around 8 percent of GDP. The low savings, especially in a context of large investment needs under the PSE, could mean continued deficits over the medium term, which may become difficult to finance. This means that budget deficits must remain contained within reasonable limits, even in an ambitious investment-led strategy. In addition, fiscal prudence must be accompanied by measures to improve the productivity of public and private investment. The current weaknesses in public investment management and the business environment suggest that there is ample scope for substantial gains.

B. Export Performance

4. Senegal’s export climate suggests a much greater potential for export growth than has been realized to date. The country enjoys a favorable geographic location, with a major seaport and easy access to the large European and North American markets. In addition, it has the benefit of a stable regional currency and a political environment with democratic institutions. The country also offers a relatively competitive export framework, including no taxes on exports, low shipping costs, easy repatriation of capital and income, abundant semi-skilled and unskilled human resources, and a relatively robust telecommunications infrastructure. Senegal is also a party to a range of agreements that provide it with privileged market access, including bilateral agreements with several large economies (in particular China and the United States), and is also signatory to the Cotonou Agreement, which provides (reciprocal) duty-free access to EU markets for African, Caribbean and Pacific country exports.

5. Despite the country’s relative strengths, Senegal’s exports are not gaining significant market share or increasing as a percentage of GDP. Senegal’s global market share has barely increased over the past decade (Figure 2), while the contribution of exports to GDP has remained around 25 percent. In addition, while Senegal has a relatively diversified export basket compared to its peers, the main goods remain dominant, as do the export destinations. Senegal’s exports are also more concentrated on lower value added products, which exposes it to tougher competition on the global markets. The UEMOA region the primary destination for Senegal’s exports (32.5 percent of the total in 2012). The European Union is the second, with almost 26 percent of the total in 2012). This is followed by Asia, whose share was 22 percent in 2012, while North America still accounts for less than 1 percent of the total. The top five country destinations in 2012, which accounted for almost 55 percent of total exports, were Mali (19.3 percent), Switzerland (12.8 percent) and India (12.6 percent), followed by Guinea (5.3 percent), and France (4.9 percent). This high concentration makes Senegal particularly vulnerable to shocks in the EU, as evidenced by the impact during the global financial crisis. Going forward, production at a zircon mine and the revival of the chemicals industry are expected to boost exports, beginning in 2015. In addition, there are signs of increasing diversification across export partners, mainly in favor of Asian countries, whose share has more than doubled since 2007.

Figure 2.
Figure 2.

Senegal: Export Performance and Exchange Rate (index 2000=100)

Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A004

Source: IMF staff estimates.

C. Foreign Direct Investment and Remittances

6. Senegal also lags behind its comparators in attracting foreign direct investment (FDI). Inward FDI averaged about 1 percent of GDP from 2000-2005, but rose above 2.0 percent in 2006-07. For the past five years, net FDI inflows have remained at an average of around 2 percent of GDP, compared to over 7 percent of GDP on average in other lower-middle-income Sub-Saharan African (LMI SSA) countries, as classified by the World Bank.3 There are few real legal barriers to foreign investment. The Senegalese Investment Code provides equitable treatment of foreign firms. It also offers tax holidays and tax-free export processing zones. There are few barriers regarding total ownership of businesses by foreigners. However, Senegal continues to rank among the lowest in the World Bank ease of doing business survey (see below). The main constraints include access to credit, cumbersome procedures, enforcement of contracts, property rights, and constraints in obtaining long-term credit from commercial banks.

7. Remittances continue to be an important and stable source of foreign exchange, averaging around 12 percent of GDP since 2008. Workers remittances have been robust over the past decade, both nominally and as a percentage of GDP (Figure 3). They have averaged around 12 percent of GDP since 2007, contributing nearly as much as half of exports of goods and services, and over four times FDI inflows. Senegal is now among the top four recipients of remittances as a percentage of GDP in Sub-Saharan Africa (after Lesotho, Togo, Cape Verde, and Guinea-Bissau). In nominal terms, remittances have increased continuously, with the exception of 2009, when they declined by 6.7 percent during the global financial crisis. This decline was modest compared to the drop in FDI inflows in the 2009-10 period (25 percent). Remittance flows are also significant as a share of reserves, amounting to 72 percent in 2013.

Figure 3.
Figure 3.

Senegal: Worker’s Remittances

Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A004

Source: IMF staff estimates.

D. Structural Competitiveness

8. Senegal’s competitiveness depends critically on improving the business environment. Although Senegal has taken steps in recent years to improve the business environment, a number of competitiveness indicators suggest that much more needs to be done. According to various surveys, the business environment is notably hampered by poor investor protection, cumbersome procedures for paying taxes and registering property, inadequate supply of infrastructure, difficulty accessing financing, and corruption.

9. In the 2014 edition of the World Bank’s Doing Business report, Senegal ranks 178 out of 185 countries (Figure 4). It has fallen two places since the last survey in 2013, and is now below the WAEMU average (168). Its worst rankings (182) are in the getting electricity and paying taxes categories. Other categories where Senegal scores poorly include registering property (174), protecting investors (170) and enforcing contracts (167). Senegal ranks below most other lower- and upper-middle-income Sub-Saharan countries (Figure 4).

Figure 4.
Figure 4.

Senegal: Ease of Doing Business, 2013 World ranking out of 185 countries

Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A004

Source: World Bank.

10. The World Economic Forum ranked Senegal 112th in 2014-15 out of 142 countries (Figure 5). Areas in urgent need of attention include health and basic education, for which Senegal ranks 131st. According to the report, only three out of four children receive primary education and communicable diseases continue to erode the health of the general population. Higher education and training (119th place) are also in need of significant improvement, while infrastructure requires significant upgrading (111st place). The report also views Senegal’s macroeconomic environment as challenging, ranking it 97th, mainly because of the high government deficit. Senegal scores better on national institutions (74th) rank, with signs of steady improvement across a range of other indicators. The report also recognizes Senegal’s relatively efficient goods and labor markets (68th place). Senegal also fares well regarding the red tape to start a business, which is judged to be low, even by international comparison (six days and four procedures) (22nd place).

Figure 5.
Figure 5.

Senegal: Global Competitiveness Index (2013-2014, World Ranking out of 142 Countries)

Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A004

Source: World Economic Forum.

11. Senegal’s government effectiveness, as measured by the World Bank’s Governance Indicators, is slightly below average compared to lower- and upper-middle-income Sub-Saharan countries, and has been trending downward over the past decade. By several measures, corruption remains a problem. The World Economic Forum identifies corruption as the second most problematic factor for doing business in Senegal. Transparency International ranks Senegal 112 out of 182 countries in its 2011 Corruption Perception Index. Based on the World Bank’s Governance Indicators, corruption in Senegal is worse than average lower- and upper-middle-income Sub-Saharan countries.

E. Price Competitiveness

12. The assessment of real effective exchange rate (REER) at the regional level does not suggest any significant price-competitiveness issues. The REER was assessed using three complementary methodologies developed by the Consultative Group on Exchange Rates (CGER). Although the regional effective nominal exchange rate appreciated by about 4.6 percent since the beginning of 2013, reflecting the euro appreciation, the real exchange rates appreciated only by 2.5 percent, owing to moderate inflation developments in the region. Senegal experienced a moderate REER increase (by about 4 percent), but model-based assessments do not point to significant misalignments of the real effective exchange rate.

Macroeconomic Balance Approach

13. The macroeconomic balance approach calculates the difference between the current account balance projected over the medium term (the “underlying” current account) and an estimated current account “norm” based on projected values of medium-term economic fundamentals. The exchange rate adjustment that would eliminate this difference over the medium term is then calculated using an estimated elasticity of the current account with respect to the real exchange rate. Senegal’s current account norm is calculated to be between -5.6 and -6.5 percent of GDP, based on coefficients estimated by Vitek (2012) and Lee et al. (2008). Assuming a trade balance elasticity of -0.71 for small countries, the difference between the underlying current account and the current account norm indicates a possible REER misalignment between -4.2 percent and 0.0 percent.4

Figure 6.
Figure 6.

Real and Nominal Effective Exchange Rates (Index 2000=100)

Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A004

Source: IMF.

Equilibrium Real Exchange Rate Approach

14. The equilibrium real exchange rate approach directly estimates an equilibrium exchange rate as a function of medium-term fundamentals. The exchange rate adjustment needed to restore equilibrium over the medium term is then calculated as the difference between the estimated equilibrium real exchange rate and its current value. In the case of Senegal, the REER at end-2011 seems to be 8.5 percent below its estimated equilibrium value.

External Sustainability Approach

15. The external sustainability approach calculates the difference between the underlying current account balance and the balance that would stabilize net foreign assets (NFA) at some benchmark level. Using the same elasticity as in the macroeconomic balance approach, the exchange rate misalignment is equal to the adjustment necessary to bring the underlying current account in line with its NFA-stabilizing level. The current account balance necessary to stabilize Senegal’s NFA-to-GDP ratio at its 2010 level (-48 percent) is estimated to be -3.4 percent compared to an underlying current account of 6.0 percent. Applying a trade balance elasticity of -0.71 implies a possible 3.2 percent REER overvaluation.

F. Reserve Adequacy

16. Official reserves coverage appears adequate by traditional metrics. Reserves are pooled among WAEMU countries, and therefore reserve adequacy must be assessed at the regional level. Regional official reserves are projected to decrease from CFAF 7051 billion (US$13. 8 billion) at end-2012 to CFAF 6886 billion (US$13.9 billion) at end-2013. Reserves coverage remains adequate at 4.7 months of next year imports, 50 percent of broad money, and about 91 percent of short-term liabilities. An alternative analysis based on cost-benefit analysis (Dabla-Norris et al., 2011) indicates that the reserves level is at the low end of the optimal reserves range which varies between 5 to 10 months of imports depending on the interest rate differential with the rest of the world.

G. Debt-Related Risks

17. Senegal’s total public debt and external debt ratios have both increased substantially over the past five years. The ratio of total public debt to GDP amounted to about 47 percent in 2013, up from around 25 percent in 2008. At the same time, the stock of total external public and publicly guaranteed debt has increased from around 20 percent of GDP in 2008 to just over 32 percent at end-2013. These levels are close to those that prevailed before Senegal benefited from debt relief under the Multilateral Debt Relief Initiative (MDRI) in 2006. Debt servicing costs have also increased, reflecting higher recourse to market financing. External public debt service has increased from 4.3 percent of exports in 2008 to about 9 percent in 2013.

18. In terms of composition, the bulk of Senegal’s public debt remains largely external and provided on concessional terms, but the use of financial market instruments is increasing.5 Most of the public debt is external (i.e., owed to non-residents of the West African Economic and Monetary Union, WAEMU), however the share of domestic debt-to-GDP has increased from 5.3 percent in 2008 to around 16 percent in 2013.6 Almost two thirds of Senegal’s external debt is owed to multilateral creditors—primarily the World Bank and the African Development Bank. The largest groups of bilateral creditors are the OECD and certain Arab countries. The share of market debt is still relatively small, although it has grown rapidly over the past few years with the issuance of two Eurobonds in 2009 and 2011, and the contracting of a syndicated loan in 2013, which includes a tranche in euro targeting nonresidents. The authorities postponed a planned Eurobond issuance in 2013, following a sharp tightening of financial conditions on international markets during the course of the year. They then issued a US$500 million Eurobond in mid-2014. Conditions have been relatively favorable in international markets throughout the past few months, and the authorities got a rate of 6.25 percent, a little higher than the 6 percent yield on the 2011 Eurobond. This rate was higher than expected at the time of the previous DSA, partly owing to market concerns about the slow pace of reform, but more favorable than might have been achieved in 2013. However, part of the proceeds was used to repay the euro tranche of the syndicated loan contracted in 2013, which has a shorter maturity and higher rate (6.5 percent).

19. Private external debt has averaged about 20 percent of GDP over the last decade and was estimated at about 36 percent of GDP at end-2013. 7 About half of this debt was in the form of trade credits and bank deposits; the rest consisted of debt securities, loans, and other liabilities. This exposure was partly offset by private external assets amounting to 8 percent of GDP.

20. Senegal remains at a low risk of debt distress. Under the baseline scenario, which is consistent with higher program ceilings for non-concessional and semi-concessional borrowing, all the debt burden indicators remain below their policy-dependent indicative thresholds, and debt ratios in present value terms are lower than in the previous debt sustainability analysis (DSA). Policy-dependent thresholds were increased as Senegal was reclassified to ‘strong’ performer based on higher average CPIA score in 2011-2013.8 The probability approach also shows a more favorable outlook. The stress tests result in two spikes in debt service to revenue ratio, corresponding to the repayment of two Eurobonds, which result in a small and temporary breach of the threshold. The DSA, however, suggests that there is not much space for higher fiscal deficits if the low risk rating is to be preserved. It also indicates a need for caution in resorting to non-concessional borrowing.

Text Table 1.

Total External Debt, Central Government

article image
Sources: Senegalese authorities and IMF staff estimates

21. Global financial conditions warrant close monitoring, as they could affect Senegal’s access to financial markets. The normalization of monetary policy in advanced economies and the re-pricing of emerging market risks may eventually spillover to frontier markets like Senegal. In particular, it could result in either lower appetite for Senegalese securities, an increased risk premium, and an adverse effect on Eurobond terms and issuances for frontier markets like Senegal. To date, the impact of global tightening financial conditions has not yet had a significant impact on interest rates for Senegal. On sovereign bonds, the 2011 Eurobond yield has remained stable. More generally, there have been no visible increases in the interest rates on the regional financial market, which is not significantly integrated with international markets.9 Against this background, the uncertain outlook in the global economy discussed in the first section could also eventually affect risk perceptions regarding Senegal.

H. Reforms to Achieve Higher Exports

22. Senegal is well positioned to become a primary trade hub for West Africa, but more is needed to achieve the export growth required to reach the PSE objectives. Senegal has several competitive advantages: political stability, government commitment, good road networks, a major port, and a competitive exchange rate arrangement. It is also one of the most industrialized countries in the region, and has favorable investment ratings.10 However, experiences in other countries suggest that while access to international markets and a competitive price environment are crucial, Senegal would be in a better position to leverage its advantages, if it improved significantly its structural competitiveness and macroeconomic environment. This would imply action on several fronts.

  • Maintain sound and credible macroeconomic policies. With Senegal in a currency union and a regional exchange rate broadly in line with fundamentals, fiscal policy and structural measures are the only levers available to boost competitiveness. Changing the equation will require strong actions to increase net national savings by cutting back on fiscal deficits, but also by stimulating household savings. Sound fiscal policies will provide the government with greater degrees of freedom to implement policies to boost exports. Credible policies overall will attract the type of investment needed to develop a more diversified and upgraded export basket.

  • Boost foreign direct investment inflows. Empirical evidence suggests that FDI can enhance export performance, in particular, by introducing innovations and transforming the composition of exports (China, Singapore). It also shows that the impact of FDI on export growth varies with the development of the export sector. The impact is strongest at the earliest and the most advanced stages with a lower impact in between11. Senegal already has a good legal framework for encouraging investment, but needs to pay greater attention to the consistency of the investments with its broader PSE objectives and policies in mind (e.g. the upgrading of export quality, skills/technology transfer).

  • Promote export-friendly institutions. Institutions are crucial, but experience elsewhere seems to suggest that institutions matter more at higher levels of export performance. Improved institutions will help Senegal overcome some of the main constraints to doing business, such as credit access to would-be investors, cumbersome procedures, enforcement of contracts, property rights, and constraints in obtaining long-term credit from commercial banks. Better institutions should foster more efficient administration, which is important for the country’s competitiveness. Senegal needs to persevere in its efforts to work with development partners in these areas.

  • Develop infrastructure. Export performance depends critically on physical infrastructure (roads, ports, energy and telecommunications). Senegal’s PSE accords draw significant attention to infrastructure investments, with ambitious programs to modernize the Port of Dakar, build a new international airport, which is expected to handle two times as much the capacity as the current one, and improve the road network.

  • Boost human capital development and productivity. Public investment should also be devoted to increasing the availability and quality of human capital and appropriate use of technology.

References

  • ANSD, 2013, Enquête Nationale Sur le Secteur Informel au Sénégal (ENSIS 2011).

  • Dabla-Norris, Era, Giang Ho, Kalpana Kochhar, Annette Kyobe, and Robert Tchaidze, 2013, “Anchoring Growth: The Importance of Productivity-Enhancing Reforms in Emerging Market and Developing Economies”. IMF SDN/13/08.

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  • Dabla-Norris, Era, Jim Brumby, Annette Kyobe, Zac Mills, and Chris Papageorgiou, 2011, “Investing in Public investment Efficiency”. IMF Working Paper /11/97.

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  • Henn, Christian, Chris Papageorgiou, and Nikola Spatafora, 2013, Export Quality in Developing Countries, IMF Working Paper 13/108.

  • IMF, 2014a, Sustaining Long-Run Growth and Macroeconomic Stability in Low-Income Countries—The Role of Structural Transformation and Diversification—Background Notes.

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  • IMF, 2014b, West African Economic and Monetary Union. Staff Report on Common Policies for Member Countries.

  • Ricci, L., J. Lee, G.-M. Milesi-Ferretti, 2008, “Real Exchange Rates and Fundamentals: A Cross-Country Perspective,” IMF Working Paper 08/13.

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  • Tokarick, 2010, “A Method for Calculating Export Supply and Import Demand Elasticities”, IMF Working Paper 10/180.

  • Vitek F., 2009, Exchange Rate Assessment Tools for Advanced, Emerging, and Developing Economies (Washington: International Monetary Fund).

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1

Prepared by Gillian Nkhata.

2

Current account excluding grants.

3

Other lower-middle-income Sub-Saharan African countries included in the comparison were Cameroon, Cape Verde, Republic of Congo, Cote d’Ivoire, Ghana, Lesotho, Nigeria, Sao Tome and Principe, Swaziland, and Zambia.

5

Public debt refers to the debt of the central government.

6

Domestic debt includes debt issued in the WAEMU financial market.

7

Estimates of private sector external debt are based on BCEAO data on the international investment position.

8

Senegal’s CPIA score was 3.825 in 2013, and on average 3.81 over 2011–13. Under the debt sustainability framework rules, this corresponds to a “strong” performance.

9

For example, Senegal debt is held mainly by WAEMU residents, with little foreign ownership. Further, the transmission mechanism from the policy rates to lending rate remains weak and hampered by shallow and segmented financial markets.

10

Senegal’s Standard & Poor’s credit rating for Senegal is at B+, while Moody’s rating for Senegal sovereign debt is B1.

11

Studies show a U-shaped distribution, which is strong at the outset, then weakens as export development advances, only to become stronger again at later stages of export development (see reference).

Senegal: Selected Issues
Author: International Monetary Fund. African Dept.