Performance under the PSI-Supported Program

Performance under the PSI-supported program has proceeded since the last program review in the face of significant implementation challenges. All but one end-December 2017 assessment criteria (AC) were met, with the missed criterion related to the central government’s overall net financing. In addition, all end-December 2017 and end-March 2018 indicative targets (IT) were met, except those related to the share of the value of public sector contracts signed by single tender and the floor on tax revenue. The nonobservance of the latter target stemmed from revenue underperformance associated with the failure to automatically adjust domestic fuel prices and electricity tariffs in the face of higher oil prices.

Mindful of the associated risks to public finances and program success, the authorities have taken strong corrective actions to keep the program on track. The Council of Ministers has approved the supplementary budget that includes a package of measures aimed at streamlining expenditures and boosting domestic resource mobilization. The supplementary addresses the needs emanating from the security and energy sectors, while being consistent with the revised fiscal deficit target for 2018. Key efforts will be made to collect tax arrears, streamline tax expenditures and increase tax rates for certain goods such as tobacco and alcoholic beverages. Steps will also be taken to repatriate in the budget, the excess revenues of public agencies generated among others by the sale of telecommunication licenses or frequencies. Concurrently, the supplementary budget provides for measures to reduce inefficient current expenditures and postpone low-priority capital expenditures.

On the structural front, three out of five benchmarks were met, while substantial progress is being made toward implementing the remaining ones related to the Post Office and the integrated project bank. In this regard, while the compensation operations between the Post Office and the Treasury were not discontinued as initially envisaged, their scale has been drastically reduced. All but one domestically financed projects exceeding CFA 1 billion originated from the integrated project bank. It is the authorities’ intention to continue abiding by this practice of selecting the priority projects only from the project bank and issuing execution reports once these are implemented.

Medium term macroeconomic policies and structural reforms

Looking ahead, the authorities remain committed to implementing the priority reforms and projects spelled out in the PSE, which aim notably at achieving strong and sustainable inclusive growth. The macroeconomic outlook remains favorable with growth expected to reach 7 percent in 2018 and remain high in the medium term. It is expected to be driven mainly by a dynamic and efficient agricultural sector, continued industrial recovery, and good performance of the tertiary sector (construction, telecommunications, transportation, financial services and tourism). Inflation should remain moderate while pressures on the external position will continue as the price of imported petroleum products rises.

In order to consolidate the economic and social gains achieved under the PSE thus far, the authorities are in the process of developing phase two of the PSE (2019-2023) based on the lessons learned from the first phase. They are keen to continue their efforts to transform Senegal into an emerging economy and make further strides in improving social conditions. In this regard, the efficiency of public service delivery, quality of human capital, access to electricity and financial services are still recognized among the areas requiring further attention and will therefore remain at the forefront of development priorities going forward.

The authorities are mindful that maintaining the growth momentum and enhancing resilience to shocks require sustained implementation efforts to expand fiscal space and improving governance and the business climate. To this end, further efforts will be made to enhance domestic revenue collection, reduce non-priority capital expenditures, contain non-priority expenditures, and address underlying weaknesses in public financial management.

On the revenue side, the authorities are determined to increase the tax-to-GDP ratio from its current level of about 16 percent following the revisions to the national accounts. To comply with the West African Monetary Union (WAEMU) convergence criteria of 20 percent of tax-to-GDP ratio, actions are being stepped up to strengthen the tax policy framework, and modernize the tax and customs administrations. Revenue-enhancing measures recently devised by the Tax Department (DGID) will play a key role to this end.

In this regard, the authorities’ plans to generate more revenue include payment of taxes through mobile phones and the continuation of efforts to collect tax arrears and streamline tax expenditures. Moreover, consideration will continue to be given to ways to tune up tax policies, notably in the areas of mining, financial services and telecommunications, and agriculture.

On the expenditure side, the authorities will continue their efforts to contain current spending while protecting social expenditures as envisaged in the PSE. In this connection, steps will be taken to streamline public consumption, including by controlling the evolution of the wage bill, and increasing the productivity of the public administration through greater use of new technologies.

The authorities are mindful of the need to improve the quality of public investment financed with domestic resources. As suggested above, they intend to subject budgetary appropriations to the production of project financial and physical execution reports by each Ministry or agency concerned with the aim of improving the efficiency of public investment. Furthermore, starting with the 2019 budget, the selection committee on public investments will only consider for budgeting the priority projects that have been duly appraised in the integrated projects bank. This approach reflects a strong willingness to improve public investment management, and it is in this context that the Fund has been called upon to conduct a Public Investment Management Assessment (PIMA).

PFM reform efforts will also aim to modernize cash management and debt management at the Treasury Department. In this regard, progress has been made in implementing the Treasury Single Account (TSA) for the Treasury’s network of direct accountants; which is effective since April 2018. In this respect, efforts to upgrade the infrastructure for modern payment and accounting systems are ongoing with the view to support the transition toward an active cash management strategy. An active debt management strategy is being implemented, including through the use of buy-back schemes for outstanding debt previously contracted on less favorable terms. In this connection, part of the proceeds of the recently issued $2.2 billion Eurobond has served this purpose.

Streamlining the comptes de dépôt of entities having balances at the Treasury and reducing financing of the Post Office and the National Pension Fund for public employees (FNR) remain key priorities in addressing the sources of extra-budgetary financing needs. Regarding the flow of the comptes de dépôt, the authorities will enforce by end-December 2018 the recently adopted decree to prohibit carryovers of appropriations on current spending to the following year, and limit carryovers of capital spending to 5 percent of appropriations. With respect to the stock of the comptes de dépôt, the authorities will take action to eliminate by November 2018 past year appropriations for current spending and for investment projects not yet implemented, and re-appropriate past year appropriations for ongoing investment in future budgets. Remaining past year appropriations will be converted to debt instruments to be paid over time for some entities such as the pension funds. These measures are expected to address in a structural manner the issue of the comptes de dépôt.

Furthermore, the authorities are making notable progress toward reducing the FNR deficit with the approval of the Law on the supplementary pension scheme which increases the respective contribution shares of the Government and civil servants to the pension fund. Moreover, the envisaged parametric reform and transformation of the FNR into an independent fund with financial autonomy should also contribute to the restoration of the financial stability of the FNR. Following the audit of the Post Office’s financial flows that has recently been conducted, a significant reduction in the amount of compensation operations between the Treasury and the Post Office was secured. The authorities are determined to continue their reform efforts in this area, including by implement necessary restructuring measures with the assistance of the World Bank.

Regarding structural reforms, actions to promote private sector development will also be pursued. The authorities recognize the importance of a strong private sector contribution in achieving the goals of the PSE. In this connection, they will continue their efforts to overcome major constraints to private sector development including the provision of affordable and reliable energy by addressing the financial and technical problems of the public electricity company (SENELEC). They intend to settle the compensation due to SENELEC and offset commercial losses incurred by other companies operating in the energy sector as domestic fuel prices were not adjusted in a timely manner in line with global prices.

Efforts to further improve the business climate will continue to build on the progress made in the framework of the business environment and competitiveness reforms program (PREAC) which addresses wide-ranging constraints in the areas of real state, rationalization of administrative procedures, labor legislation, credit information and the judicial environment. The authorities believe that continued progress in these areas, combined with the initiatives to develop special economic zones (SEZs) in the framework of the G20 Compact with Africa will stimulate domestic innovative small and medium enterprises (SMEs) and attract more foreign direct investment (FDI) to Senegal.

Conclusion

The Senegalese authorities remain committed to the PSI-supported program. They will continue to implement the policies and reforms set forth in the program, notably with a view to preserving macroeconomic stability and debt sustainability, achieving strong and inclusive economic growth, and ultimately achieving economic emergence.

In light if the above, we would appreciate Directors’ support for the completion of the sixth review under the PSI, as well as the authorities’ requests for waiver of nonobservance of the assessment criterion on the ceiling on central government overall net financing and modification of assessment criteria.