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.
Performance Under the 2011-14 PSI1
Senegal has had two successive arrangements under the Fund’s Policy Support Instrument (PSI) since 2007. This section focuses on Senegal’s performance under the latest PSI with respect to three main areas: the overall macroeconomic performance, program conditionality and other policy targets, and technical assistance. It concludes that the overall macroeconomic performance has been below par but acceptable. The main goals of PSI – higher growth, fiscal and debt sustainability – were broadly achieved, but with less favorable outcomes than initially programmed; program performance has been mixed, with qualitative targets largely met but substantial delays in structural reforms. In addition, Senegal has found the technical assistance from the Fund to be useful, although there is scope for improvement in the implementation of the Fund’s recommendations.
1. The 2011-14 PSI is the latest arrangement in a long history of Fund involvement in Senegal. At the authorities’ request, the three-year PSI, approved by the Executive Board on December 3, 2010, was extended by one year during the Fifth Review, and it is set to expire on December 2, 2014. Under the PSI, Senegal has sought the Fund’s advice, monitoring, and endorsement of the authorities’ policy framework, without using the Fund’s financial assistance.
2. Senegal’s PSI was based on country-owned poverty reduction strategies. For the initial implementation period, the PSI was aligned with the projections underlying the second Poverty Reduction Strategy (PRSP-II 2006–2010), including an updated macroeconomic framework for 2011-15. In mid-2012, the authorities finalized their National Strategy of Economic and Social Development (NSESD), which outlined policies and reforms for 2013-17 and became the new national strategy supported by the PSI. NSESD devised policies required to push forward the authorities’ agenda for high, sustained and inclusive growth, and poverty reduction.
3. Within the overriding goal of fostering economic growth, the government’s action plan outlined a number of key objectives. Backed by the 2011-14 PSI, these included: (i) pursuing a prudent fiscal and debt policy and improving expenditure quality so as to maintain macroeconomic stability; (ii) raising revenue to create more fiscal space for priority spending, including additional infrastructure investment; (iii) strengthening further public financial management and governance to enhance fiscal transparency, budget planning and execution, improve the productivity of public expenditure, and reduce budgetary risks; and (iv) stimulating private sector development through structural reforms, particularly in the energy and financial sectors, and other reforms related to the business climate.
A. Macroeconomic Performance
4. Senegal’s macroeconomic policies supported by the PSI have remained aligned with the authorities’ own development and poverty reduction strategies. The NSESD included three growth scenarios. Under the baseline, optimistic, and pessimistic scenarios, the average 2013-17 growth was expected to reach 4.9 percent, 6.8 percent and 3.2 percent respectively. The underlying assumptions of these three scenarios differed with respect to the anticipated level of financing, the absorptive capacity of the economy, and progress in implementing key reforms. The NSESD’s baseline scenario was broadly in line with the PSI.
5. Senegal’s actual growth performance in 2011-14 diverged substantially from all scenarios (Table 1, Figure 1). Growth projections seem to have been systematically biased upward. On average, the projection under the NSESD baseline scenario was the closest to the outcome, with the mean forecast error of only -0.4 percent, a relatively low standard deviation of about 0.4, and an approximately symmetric and relatively peaked distribution. The largest deviation between the projections and the outcome was under the updated PRSP II growth scenario, which was the authorities’ central scenario with at the time of PSI request, where growth was strongly overestimated as the forecast error on average reached -2.6 percentage points with very skewed and flat distribution.
Senegal: Growth Projection Errors
(Percentage Points)
Senegal: Growth Projection Errors
(Percentage Points)
| Relative to: | 2011 | 2012 | 2013 | 2014 | Average |
|---|---|---|---|---|---|
| PRSP II update | –3.0 | –2.7 | –3.0 | –1.9 | –2.6 |
| PSI request | –2.3 | –1.3 | –1.3 | 0.0 | –1.2 |
| NSESD optimistic scenario | –0.5 | –0.3 | –2.1 | –1.6 | –1.1 |
| NSESD baseline scenario | –0.5 | –0.3 | –0.8 | 0.1 | –0.4 |
Senegal: Growth Projection Errors
(Percentage Points)
| Relative to: | 2011 | 2012 | 2013 | 2014 | Average |
|---|---|---|---|---|---|
| PRSP II update | –3.0 | –2.7 | –3.0 | –1.9 | –2.6 |
| PSI request | –2.3 | –1.3 | –1.3 | 0.0 | –1.2 |
| NSESD optimistic scenario | –0.5 | –0.3 | –2.1 | –1.6 | –1.1 |
| NSESD baseline scenario | –0.5 | –0.3 | –0.8 | 0.1 | –0.4 |
Senegal: Macroeconomic Developments
Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A008
Senegal: Macroeconomic Developments
Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A008
Senegal: Macroeconomic Developments
Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A008
6. Inflation remained subdued during most of the program period. In 2011, inflation peaked at 3.4 percent driven by a spike in international food and oil prices, and transportation costs. The authorities responded by a temporary freeze of key food prices, but later allowed a full pass-through of international food prices and resumed the adjustment of domestic petroleum product prices to reflect world prices. With several increases in the BCEAO’s policy rate, lower import prices and good domestic harvests, Senegal’s inflation quickly returned to the projected path and continued on a downward trend towards the end of the program.
7. The authorities’ fiscal performance has also diverged from their own and program projections. The authorities’ PRSP II update did not include independent fiscal projections as they were fully aligned with the projections underlying the PSI request. Such projections were only published in the NSESD and included three scenarios. Under the baseline scenario, the average fiscal deficit was projected at 4.1 percent of GDP in 2013-17, broadly in line with the PSI. The deficit was supposed to expand to 5.0 percent of GDP in the optimistic scenario, as higher growth should have been financed by new borrowing, and contained at 4.2 percent of GDP in the pessimistic scenario.
8. By mid-2014, neither of the fiscal scenarios was in line with projections. On average, the smallest mean errors were observed under both NSESD scenarios. The actual deficit was substantially better than projected compared to the optimistic scenario (by an average of 0.3 percent of GDP). At the same time, the deficit was considerably higher compared to both the NSESD baseline scenario and the PSI request scenario, on average by 0.4 and 1.1 percent of GDP respectively. This suggests that neither the baseline scenario nor the optimistic scenario were realistic from the outset.
9. The divergence of fiscal projections from targets was driven by forecasting weaknesses of both revenue and expenditure (Figure 2). Tax and nontax revenue underperformed on average by 0.5 percent of GDP during the program period. This one-sided error in revenue projections points at a systematic revenue overestimation. The opposite is true for expenditures, which have been systematically underestimated by about 1.5 percent of GDP on average. As a result of this and the protracted revenue shortfalls and expenditure underestimations, the authorities had to make fiscal adjustments of about 2 percent of GDP each year on average, to meet the fiscal deficit target during the program period. This in turn led to high volatility in government investment, which carried substantial burden in the adjustment
Senegal: Detailed Fiscal Performance
Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A008
Senegal: Detailed Fiscal Performance
Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A008
Senegal: Detailed Fiscal Performance
Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A008
10. The current account deficit has been systematically underestimated during the program period. The average difference between the projection and the outcome was 0.6 percent of GDP, strongly skewed and peaked. On one hand, developments in the current account broadly mirrored and were driven, at least in part, by the evolution of the fiscal deficit, although the divergence from the baseline in the current account was somewhat lower. On the other hand, during the program period Senegal was hit by exogenous shocks, related mainly to sharp increases in imported food and oil prices, and regional geopolitical tensions, which also contributed to the expansion of the current account deficit. The private sector offset at least part of these exogenous shocks by adjusting its saving investment balance accordingly.
11. Finally, the rate of accumulation of domestic public debt has been higher than program projections. The overall average deviation from the projections is relatively small, about 0.7 percent of GDP, and the trajectory of the overall debt accumulation was below the projected trend during the first half of the program. However, it substantially exceeded the projected level towards the end. External debt accumulation was substantially lower than projected, by about 2.8 percent of GDP on average each year. It was explained mainly by the authorities’ prudent policies, low availability of concessional financing, and conditionality on external debt included in the PSI. At the same time, the authorities extensively used domestic and regional financing, which led to a rapid domestic debt accumulation at a rate exceeding the baseline projections by 2.1 percent of GDP.
12. Several factors may explain the systematic deviations of key macroeconomic variables from their projected path during the 2011-14 PSI.
First, protracted delays in key structural reforms. Higher growth, strong revenue collection, and lower fiscal deficits, required ambitious structural reforms. Most structural reforms, in particular related to the energy sector and public financial management, have been delayed, scaled down or implemented inconsistently, which weighed heavily on growth and revenue.
Second, systematic upward biases in the authorities’ macroeconomic projections. In the recent past, growth has been projected to exceed its historically observed averages and even the empirically estimated potential. To achieve such ambitious growth rates would have required either a substantial increase in total factor productivity, for which the potential is limited without a profound economic modernization, or new labor and capital, which is held back by the lack of productive employment opportunities and financial constraints.
Third, the external environment has been less favorable than anticipated. Senegal was negatively affected by several episodes of oil and food prices increase in international markets, which led to both lower growth and unanticipated increases in fiscal subsidies. On the regional level, Senegal export demand was somewhat affected by regional crises in Côte d’Ivoire and Mali.
Finally, the domestic political cycle did not allow for the vigorous pursuit of reforms that could have had social impact. For almost a year ahead of the March 2012 presidential elections and for several months ahead of the June 2014 local elections, most structural reforms moved ahead much slower than anticipated and the most critical were postponed to the post-election period.
B. Program Performance
13. Senegal’s performance under the 2011-14 PSI program has been satisfactory (Figure 3). After initial difficulties in meeting the assessment criteria during the first half of the program period, program implementation improved during the second half. The quantitative assessment criteria were largely met, and only three out of 48 quantitative assessment criteria were missed, in both cases by small margins. Specifically, the authorities missed (i) the AC on the basic fiscal deficit by 0.2 percent of GDP because of lower than projected oil revenue (First Review); (ii) the overall fiscal deficit target by 0.4 percent of GDP because of administrative weaknesses leading to expenditure overruns (Third Review); (iii) the ceiling on non-concessional borrowing by 0.4 percent of GDP due to the failure to classify properly of a loan with 11 percent grant element as non-concessional (Eighth Review).
Senegal: Performance Under the 2011-14 PSI
Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A008
Senegal: Performance Under the 2011-14 PSI
Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A008
Senegal: Performance Under the 2011-14 PSI
Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A008
14. The authorities’ capacity to control expenditure strengthened during the program period, although serious deficiencies remain. Fiscal deficit targets have been met, however, always at the expense of curtailing expenditure, mainly domestically financed investment, towards year-end. At the same time, weaknesses in revenue collection have persisted and the indicative floor on tax revenue was missed by 1.3 percent of GDP during the Seventh Review. The indicative ceiling on the share of public contracts signed by a single tender was missed by a small margin at the Fifth Review reflecting mainly coordinating difficulties in the procurement process.
15. The implementation of structural reforms has been uneven. Of the 35 structural measures included in the program, about three-quarters have been implemented, either on time or with delays. However, the remaining measures either have not been done or dropped altogether. All measures aimed at controlling the fiscal deficit, improving tax revenue, and enhancing the quality of expenditure, and of debt management have been broadly implemented, although some with substantial delays. This was especially the case for PFM during the program’s second half. The single treasury account has not yet been implemented, and the continuous benchmark on the cost-benefit analysis of the creation of new agencies was missed. As no new projects exceeding CFAF 10 bn were included in the 2014 budget, the benchmark on their cost-benefit assessment could not be met, while the roll out of the new payroll software was met with a substantial delay. Structural problems persisted in the area of private sector development, business climate, investment and infrastructure. Most were related to delays in reforms to the energy sector, electricity subsidies and other infrastructure investment.
16. PSI design and conditionality has appropriately focused on areas of Fund expertise and critical importance for Senegal. The program has been mainly fiscal in nature, targeting both fiscal and debt sustainability. At the 1st review, the main program AC was changed from the basic balance to the overall fiscal balance because of an increased focus on debt sustainability. To address difficulties with revenue collection, an indicative target on tax revenue was introduced at the 6th review. At the same time, substantial flexibility has been built into the program by way of adjustors on the fiscal deficit to allow the full use of all concessional financing. The ceilings on non-concessional and semi-concessional external financing have been increased several times to allow Senegal to make full use of additional resources to finance investment in macro-critical areas, such as energy and infrastructure.
C. Technical Assistance
17. During the 2011-14 PSI, Senegal has been a high-intensity user of the Fund’s technical assistance (TA) (Figure 4). In terms of years of staff/expert time (full time equivalent, FTE), Senegal ranked in the top quartile among SSA countries, with an average of 2.2 years of TA provided during the PSI program period. In terms of volume, TA to Senegal substantially exceeded that to all other WAEMU countries, with the exception of Togo, and was comparable to the TA provided by the Fund to Nigeria, DRC and Mozambique. On average, Senegalese officials received more training provided by the Fund’s Institute for Capacity Developments (ICD) compared to an average SSA country.
Senegal: Fund’s Technical Assistance
Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A008
Senegal: Fund’s Technical Assistance
Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A008
Senegal: Fund’s Technical Assistance
Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A008
18. Fund TA to Senegal has focused on several priority areas. About 90 percent was devoted – directly or indirectly - to public finances, compared to 50 percent in other SSA countries. To strengthen Senegal’s PFM, the Fund’s TA has focused on reinforcing budget accounting, improving the coverage and timeliness of fiscal reporting; strengthening cash management, the establishment of a single treasury account and the implementation of the new WAEMU PFM directives. Priorities in the TA related to tax policy have included support for the development of a new tax code, reforms to the VAT, particularly the VAT credit system and exemptions, the personal income tax and the taxation of the banking system. Reforms in tax and customs administration have been geared toward modernizing their functional structures (e.g. establishment of a medium-sized taxpayers’ office in Dakar) and strengthening risk based audits to improve compliance. TA on debt management has contributed to the establishment of a single debt management unit in the ministry of finance and the development of a new debt management strategy. Finally, Senegal has continued to strengthen its macroeconomic statistics, including the production of quarterly national accounts and the introduction of a producer price index, with the ultimate objective of complying with Special Data Dissemination Standards. As Senegal is member of the WAEMU, its TA needs in the monetary and financial sector areas have been addressed mainly at the regional level.
D. Conclusions
19. Senegal’s macroeconomic performance under the PSI-supported program was satisfactory. Key program goals –growth, fiscal and debt sustainability—were achieved, and the overall macroeconomic stability preserved, although outcomes were less favorable than initially programmed. Consequently, the achieved growth rate and fiscal policies were not sufficient to make a visible dent in poverty reduction and improve other social indicators. While the authorities’ own growth and poverty reduction strategies had set the appropriately high targets to achieve the desired growth, fiscal, and social outcomes, the projections turned to be excessively ambitious and incoherent with historically observed trends. Unrealistic expectations have led to systematic upward biases in program projections of key macroeconomic variables.
20. Senegal’s performance under the PSI-supported program was an important guiding post for domestic reforms and their external support. The satisfactory macroeconomic performance and the compliance with key quantitative assessment criteria were somewhat overshadowed by slow program implementation on the structural side. There is a strong case for continued active cooperation between the Fund and Senegal, either in a program or regular surveillance context.
21. Fund TA to Senegal has been helpful in accompanying important reforms. While the priority areas should remain broadly the same, more emphasis is needed on the implementation and follow-up of the earlier advice. Tax collection and expenditure rationalization are the two priority TA areas for the short term that could contribute to a more manageable fiscal performance, reduce the need for disruptive ad-hoc adjustments and improve overall fiscal predictability. Additional TA in public debt management and strategic fiscal policy and PFM issues will be needed. Emphasis on public investment management may be called for in view of the planned increase in infrastructure spending under the PSE.
Prepared by Alexei Kireyev.
