Senegal: Selected Issues
Author: International Monetary Fund. African Dept.
Publication Date:
28 Jan 2019
eISBN:
9781484396292
Language:
English
Keywords:
ISCR; CR; Senegal; revenue; GDP; wage; resource revenue; development objective; hydrocarbon production; cash flow; landscape in Senegal; Natural resources; Fiscal governance; Oil; gas and mining taxes; Fiscal stance; Sub-Saharan Africa
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Selected Issues

Abstract

Selected Issues

Natural Resources in Senegal Before and After the Recent Oil and Gas Discoveries1

The natural resource landscape in Senegal has changed substantially following significant oil and gas discoveries between 2014 and 2017. This paper estimates the macroeconomic impact of these discoveries and discusses potential fiscal frameworks for managing related revenues. Pre-production investment (2019–2021) will lead to an increase in the current account deficit, but this will be followed by a boost to exports as hydrocarbon production comes online (2022 onwards). Discoveries are important but will not lead to a major transformation of the economy, with hydrocarbons expected to make up not more than 5 percent of GDP. Fiscal revenues would average about 1.5 percent of GDP over a 25-year period and about 3 percent of GDP when production peaks. Given the relatively small gains in revenue, staff recommends a fiscal framework that allows for an initial drawdown of government resources to finance large up-front investment needs, followed by an appropriate target level of the non-resource primary balance which is to serve as a medium-term fiscal anchor. Issues related to managing the volatility of resource revenues are also discussed.

A. Introduction

1. Substantial oil and gas discoveries have recently been made in Senegal, and production is expected to start in 2022. Between 2014 and 2017, oil and gas reserves worth about 1 billion barrels of oil and 40 Trillion cubic feet (Tcf) of gas (most of it shared with Mauritania) were discovered. In 2014, substantial oil discoveries off the coast of Senegal south of Dakar were reported in the SNE field. This was followed by gas discoveries in 2016 and 2017 in the waters near the Senegal-Mauritania border. These discoveries could potentially have a significant impact on the Senegalese economy, but past experiences in other countries suggest that there are many pitfalls to avoid, both prior to production (pre-resource curse) and post-production (resource curse).

2. This paper estimates the macroeconomic impact of oil and gas discoveries and discusses potential fiscal frameworks for managing related revenues. The emphasis is on the macro-economic implications of the recent discoveries, with a focus on the two fields that are close to their final investment decision (FIDs) like SNE, or have announced it recently, like GTA. It presents one central baseline case using a set of simplifying assumptions that provides a practical benchmark for policy analysis. However, it is important to note that the analysis of this sector is complex and touches many different areas, so it is useful to state what this paper does not do. It will not discuss uncertainties surrounding this scenario or technical issues related to extraction, transportation and value-added activity. It also doesn’t look at the important issue of marketing and the risks related to finding international markets for exports—particularly challenging for gas. The paper is structured as follows. Section B describes the current state of minerals in Senegal, while section C discusses the new oil and gas discoveries in detail. Section D explains how macro-economic aggregates are calculated from projects’ cash flow balances, while section E focuses on the fiscal sector. Section F concludes.

B. Senegal’s Mineral Sector

3. Senegal produces substantial natural resources and has at its disposal further untapped potential. Senegal has a soil rich in mineral resources, including precious metals (gold and platinoids), base metals (iron, copper, chromium and nickel), industrial minerals (phosphate limestone, salts, and barite) and heavy minerals (zircon and titanium). Over the past decade, the new discoveries and production of gold, zircon and titanium have been added to already established production of phosphate and other products. Over the past few years, the proportion of the mining sector in total GDP has been relatively steady at about 2.5 percent (Figure 1—top left panel). In addition, activity in the mining sector makes a wider contribution to GDP though spillovers to other sectors, including transport and value-added activities such as refining and industrial chemicals.

Figure 1.
Figure 1.

Senegal: Current Contribution of the Mining Sector to the Senegalese

Citation: IMF Staff Country Reports 2019, 028; 10.5089/9781484396292.002.A001

Sources: Senegal Authorities; DPEE; ANSD; and IMF staff calculations.

4. Gold has become the most important natural resource, followed by phosphate. Currently gold production represents over 40 percent of total mining output, with significant deposits in the southwestern part of the country. Phosphate production is about 15 percent of the sector and serves as an input to the production of fertilizer. Another resource providing an input into value-added activity is limestone, which is a used in the production of cement. Production of zircon since 2014 has made Senegal the fourth largest producer in the world and represents about 7 percent of mineral sector output. In 2007 a contract with a multinational firm was signed to tap a proven iron ore reserve of 630 million tons in the southeastern part of the country, but it never led to production. More recently, there is interest by a new private company which is undertaking a study of the reserve. The oil and gas sector make up a very small portion of natural resource output, with oil refining coming from imported crude (Figure 1—top right panel).

5. The mining sector has made an increasingly important contribution to both exports and revenues over the past few years. The recent increase in the production of gold, titanium and zircon have contributed to faster export and revenue growth.

  • Exports: Gold has seen the fastest rise in exports, from 1.1 percent of total exports in 2007 to 14.8 percent in 2017. Titanium and zircon represent 3.1 and 2.4 percent of total exports, respectively. The proportion of mineral exports in total exports has grown significantly since 2007, reaching over 22 percent in 2017 (Figure 1—bottom left panel).

  • Revenues: The contribution of the mining sector to total revenues has increased from 3.2 percent om 2013 to 5.2 percent in 2016 (Figure 1—bottom right panel). If one adjusts for one-off revenues in 2014 related to the breaking of an iron ore contract, the rise is relatively steady, with the increases in 2014–15 largely related to the new production of titanium and zircon.

6. The 2003 mining code was revised in 2016. Under the 2003 code, investments were given substantial tax exemptions, including for exploration. The revision of the code in 2016 focused on equitable distribution of revenues between the government and private investors by lowering the period of exploitation from 25 years to 20 years and increasing the tax rate from 3 percent to 5 percent.

C. Oil and Gas in Senegal: History, Discoveries and Expectations

Before the Recent Discoveries2

7. Senegal attracted the interest of oil and gas companies long before the recent discoveries. More than 140 offshore wells have been drilled since the 1950s, and oil was first found in 1961. Over the next years, several minor gas discoveries were made, including the Diamniadio field which produced 7.6 Billion cubic feet (Bcf) of gas until it was shut-in in 2000. In the decades following the initial discoveries, there were only small marginal discoveries, including Giadaga in 1997, about 60 km north of Dakar. By 2014, over the entire basin, only Gadiaga field No. 2 on the onshore Gadiaga block was in production. This field has small natural gas reserves and production, at just 363 million m3 and 41 million m,3 respectively. In past years, all gas was sold and delivered by pipeline to the cement producer SOCOCIM and national electricity company SENELEC. Large proven reserves had been elusive until recently however.

Recent Oil and Gas Discoveries

8. Two major discoveries have profoundly changed the outlook for the hydrocarbon industry in Senegal (Table 1). First, oil was discovered in the FAN and SNE wells in the offshore Sangomar Deep block by Cairn Energy at the end of 2014 (see Figure 2 for a map of recent hyrdrocarbon activity). Second, large gas reserves were found in the Greater Tortue deposit, notably in the Grand Tortue/Ahmeyim (GTA) and Terranga fields in 2016. The GTA area is shared between Senegal and Mauritania. Petrosen, the Senegalese national oil and gas company, which currently owns 10 percent of both SNE and GTA, has the possibility of taking a stake up to 18–20 percent of production in all oil and gas related prospects.

Table 1.

Senegal: Overview of Recent Major Hydrocarbon Discoveries

article image
Source: Senegalese authorities.

These are estimates and still subject to a large degree of uncertainty.

Final Investment Decision.

Figure 2.
Figure 2.

Senegal: Oil and Gas Fields in Senegal and Mauritania

Citation: IMF Staff Country Reports 2019, 028; 10.5089/9781484396292.002.A001

Source: Senegalese authorities.

9. The SNE well is to start oil production around 2021–22, with the FID expected in 2019. Cairn (2018) estimates total reserves to be between 346 and 998 million barrels, with a central estimate of 530 million barrels (Figure 3—left panel). The field would also produce gas, with the total estimated around 1.3 Tcf. Authorities have indicated this gas could be used for domestic power generation. The estimated lifespan of the well is 25 years, with a maximum daily production of around 100,000 barrels per day (bpd).

Figure 3.
Figure 3.

Senegal: Expected Oil and Gas Production in Senegal

Citation: IMF Staff Country Reports 2019, 028; 10.5089/9781484396292.002.A001

Source: Senegalese authorities

10. Grand Tortue/Ahmeyim (GTA) is expected to start gas production in 2022, with the FID announced in December 2018. The GTA Fields, which are located in the Saint Louis Deep offshore Block in the north of the country, is estimated to have reserves of around 15 Tcf. GTA fields are shared between Mauritania and Senegal and an intergovernmental agreement was signed in February 2018 to make a common exploitation of the resource possible. The agreement provides for development of the Tortue field through cross-border unitization, with a 50%-50% initial split of costs, production, and revenue, as well as a mechanism for future equity redeterminations based on field performance. Considering uncertainty around these estimates, the modeling retained in this paper shows total gas production of about 5.3 Tcf for Senegal between 2022 and 2051 (Figure 3— right panel).

11. Recent exploration efforts in the Cayar offshore Profond Block show the Yakaar field holds a lot of promise. In 2017, Kosmos led a second phase of exploration in the Saint Louis Offshore Profond Block and Cayar offshore Profond Block consisting of drilling four exploratory wells. Only the Yakaar field in the Cayar Block was successful, with significant gas reserves of up to 15 Tcf, opening a potential second large LNG field.3 The focus in this paper however, is on GTA and SNE, which are close to, or have recently announced, their respective FIDs, and the macro-economic implications of their expected production trajectory (as shown in Figure 3).

Institutional Set-up

12. Different Senegalese institutions are involved in the oil and gas sector. Petrosen is the national oil and gas company operating under the technical supervision of the Ministry of Petroleum Energies. This Ministry is in charge of the implementation of the sectoral policies. The Ministry of Finance, including the statistics agency ANSD, is involved in all aspects of the economic repercussions of the oil and gas discoveries. Finally, le Comité d’Orientation Stratégique du Pétrole et du Gaz (COS-PETROGAZ), embedded within the Office of the President, is a coordinating mechanism, which brings together all public-sector actors that are relevant for the development of the oil and gas sector. It provides strategic guidance, and develops oil and gas policies, including issues related to local content.

D. Impact of Oil and Gas on Senegal’s Economy

13. Estimating the impact of oil and gas discoveries on the Senegalese economy is done using cash flow balances of hydrocarbon projects and IMF modeling tools. The IMF’s Fiscal Analysis of Resource Industries (FARI) is a tool developed to model the revenue impact of individual resource projects.4 Each project model first combines costs, output volumes, and price parameters to derive pre-tax cash flows. Project-specific fiscal terms are then superimposed, delivering post-tax cash flows. Funding shortfalls are then assessed—to be filled with borrowing and FDI. This, in turn, yields disaggregated government revenue streams and flows of profit to the investor. Apart from the fiscal repercussions of natural resource projects, the data and output from FARI can also be used to quantify the impact on other macro-economic aggregates. In this section of the paper, the impact on GDP, debt and the balance of payments is estimated, while the next section E builds on this analysis to discuss issues relevant to the fiscal sector. A starting point is determining key assumptions regarding hydrocarbon prices, inflation and exports (Table 2).

Table 2.

Senegal: Assumptions Guiding Integration of Hydrocarbons in Macro-Framework

article image
Source: IMF staff.

14. Oil and gas production is to start in 2022, but the impact on the Senegalese economy is already being felt now. This is mostly because the technology to get oil and gas out of the ground is complex, implying the need for large up-front investment, which requires substantial financing. Table 3 gives an overview of the impact on growth, balance of payments and public finances of GTA and SNE. The three panels that make up Figure 4 show combined production from GTA and SNE in barrels of oil equivalents (top panel of Figure 4, this is the equivalent of summing the two individual panels of Figure 3), the impact on nominal GDP (middle panel of Figure 4) and expected investment flows for both projects (bottom panel of Figure 4). Tables 2 and 3 and Figure 4 will guide the discussion of the different macro-economic sectors in the next paragraphs.

Table 3.

Senegal: Integrating Oil and Gas in the Macro-Framework, 2019–23

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Source: IMF Staff calculations.
Figure 4.
Figure 4.

Senegal: Hydrocarbon Production, Value Added and Investment

(Equivalent ‘000 barrels/day, 2022–51)

Citation: IMF Staff Country Reports 2019, 028; 10.5089/9781484396292.002.A001

Sources: Senegalese authorities, IMF staff estimates

Impact on Economic Activity

15. The level of GDP will increase substantially in 2022, but growth will not be significantly affected over the medium-term. Nominal GDP is expected to increase by 13.8 percent in 2022 as oil and gas start flowing from SNE and GTA fields, while real growth would jump from 7.1 percent to 11.6 percent (Table 3, and Figure 4 middle panel). However, contributions to real growth from the hydrocarbon sector are expected to be slightly negative between 2024 and 2040 (Table 3, last column) as SNE and GTA production levels reach a plateau before tailing off towards the end of the production life of the fields (Figure 4 top panel).

16. Contributions from the hydrocarbon sector to value added are calculated through the income approach to GDP. Only relatively simple national accounting identities are necessary to calculate this. The income approach to GDP calculation is used as follows:

article image

Gross operating surplus is equal to the output of the project less taxes on products (which are mostly royalties), minus operating costs and net indirect taxes on production. All these concepts can be traced in the cash flow balances from the different hydrocarbon projects (typically presented in a format as in Table 4).

Table 4.

Senegal: Calculating Hydrocarbon Contributions to GDP via Income Approach

article image

17. Investment in the hydrocarbon sector is expected to increase substantially in the period 2019–2021. In the run-up to first oil, foreseen for 2022, investment needs for SNE and GTA increase markedly (Figure 4, bottom panel). However, most of this investment is linked to imported goods (especially specialized machinery) and would thus not immediately impact domestic value added. An increase in economic activity in some domestic sectors can still be expected (e.g., transportation), while work done by COS-PETROGAZ on local content could also reduce the share of imports in investment. While difficult to measure the exact contribution to GDP, some allowance Source: IMF Staff. for such knock-on effects are included in projections—and show up in increased real GDP growth rates in2019–2021.

18. The model does not incorporate other indirect effects which could also impact the structure of the economy and growth. The increased production of oil and gas is likely to change the input mix in the production processes of other goods and services, which will, in turn, have knock-on effects on growth in these sectors. Depending on policy decisions related to the domestic price and use of oil and gas, sectors that use hydrocarbons as inputs could see large changes, impacting GDP in the process. For example, authorities are making plans to start using

locally-produced gas more intensively in electricity production, which could have knock-on effects on many other sectors. Relatedly, the production of hydrocarbons uses factors of production of the Senegalese economy, resulting in a “multiplier” effect. In other words, the increase in economic growth owing to the new oil and gas production will be higher than just the direct effect of the production itself because it will trigger a chain reaction on supplying industries.

Impact on the Balance of Payments

19. The current account deficit is expected to increase initially and then decrease from 2022 onwards, when oil and gas exports would begin. In the pre-production period, investment related-imports are expected to be large (Figure 4, bottom panel), leading to a peak current account deficit of almost 11 percent of GDP in 2021. Over time, investment needs will decrease, and exports of hydrocarbons will take off, leading to a substantial improvement in the current account. Other items in the current account are also expected to play a role, however (see Table 5 for an overview). The positive effect on the current account will be muted for example, by the repatriation of profits by international companies.

Table 5.

Senegal: Impact of Hydrocarbons on Balance of Payments Items

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Source: IMF Staff.

20. The financial account will be impacted by how much equity and borrowing will be needed. Profiles of such flows can be non-trivial with large peaks (e.g. the investment profile of the SNE and GTA projects in the bottom panel of Figure 4), while the necessity to borrow for some parts of the planned investment can make the financial account, and hence reserve behavior, non-trivial.

E. Managing the New Oil and Gas Fiscal Revenues

Estimates of New Oil and Gas Fiscal Revenues

21. Oil and gas revenues are expected to bring an extra 1½ percent of GDP, on average over the production period 2022–2043 (bottom part of Table 3). With production expected to start in 2022 and build-up to full capacity by 2030, fiscal revenues are projected to grow from ½ percent of GDP to about 3 percent, and to steadily decline until the end of the production horizon (Figure 5, left panel). Those projected revenues represent, on average, 6 percent of total revenue over the production horizon, reaching about 16 percent of total revenues at peak production in 2030. This represents a significant boost to Senegal’s fiscal revenues (Figure 5, right panel).

Figure 5.
Figure 5.

Senegal: Projected Revenues from SNE and GTA Fields

Citation: IMF Staff Country Reports 2019, 028; 10.5089/9781484396292.002.A001

Note: Revenues are computed without grants.Sources: Senegal Ministry of Oil and Energies, IMF Staff estimates.

22. Although projected revenues are non-trivial, they do not classify Senegal as a resource-rich country.5 Average resource revenues for Sub-Saharan Africa (SSA) resource-rich countries represented about half of their total fiscal revenues and about 15 percent of GDP, on average, over the period 2006–2014 (Table 6), far above what is projected for Senegal. The currently projected production horizon for SNE and GTA is around 25 years, below the SSA average of around 30 years, and far below the average reserve horizon of non-SSA countries of 62 years (Table 6).6

Table 6.

Senegal: Resource-Dependent Countries: Descriptive Statistics

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Average over the period 2006–10.

Years.

Sources: Baunsgaard and others (2012): IMF staff estimates; BP 2011 Statistical Review of World Energy; UNDP Human Development Index; Gupta and others (2011).

Fiscal Frameworks to Manage Oil and Gas Revenues

23. The choice of fiscal framework to manage natural resource wealth depends on many factors, including how long resource revenues are expected to last, and the size of the capital stock. Two elements are critical for determining the length of the resource horizon. First, resources in the ground cannot be transformed into needed financial and physical assets above the ground if their prices are not high enough to make the development of the resource commercially viable (i.e., by meeting the investors’ breakeven price). Thus, while a country may have significant potential resources, only commercially-exploitable reserves can be included when accounting for resource wealth. Second, the weight of resources in total government revenue is important. The structure of the fiscal regime for extractive industries determines when and how much resource revenue flows into the budget. A long resource horizon implies that the contribution of resources to the budget is significant and can be sustained over a lengthy period.

24. A short resource horizon and capital scarcity imply that resource exhaustibility is critical for the fiscal framework. Government consumption must therefore be smoothed over time to address issues of sustainability and intergenerational equity, as well as to accumulate enough savings to manage the volatility of commodity prices. In addition, while capital scarcity implies that the rate of return to capital is likely to be high, there can be challenges in financing these expenditures.

25. In such case, fiscal policy is recommended to be anchored to a non-resource primary balance rule (NRPB) (IMF, 2012). This indicator, calculated as non-resource revenues less primary expenditure, identifies the impact of government operations on domestic demand excluding resource revenues. The level of the NRPB can be used as a benchmark for a sustainable level of spending that considers the finiteness of the resource wealth. Three frameworks that link the sustainable level of spending to the future resource revenue are particularly relevant: the permanent income hypothesis (PIH), the modified PIH (MPIH), and the fiscal sustainability framework (FSF) (IMF, 2012).

26. The permanent income hypothesis (PIH) framework allows for a constant non-resource primary balance (NRPB) deficit over time, calibrated by a perpetual return on the net resource wealth. The resource wealth can be thought of as the net present value (NPV) of the future stream of financial revenue from the exploitation of the non-renewable resources. The revenue includes production royalties, taxes on profits, withholding on dividends and state participation, as well as any other payments directly related to the extractive activities, calculated annually over the production horizon. Assuming that the initial fiscal balance position is sustainable and that the economic conditions as of 2019 hold,7 the PIH rule implies a constant NRPB deficit over time of about 0.4 percent of non-resource GDP for Senegal (Figure 6). This level of spending is considered sustainable because it finances the deficit in perpetuity, beyond the depletion of resources in the ground. This NRPB satisfies the government’s inter-temporal budget constraint, i.e., the NPV of non-resource primary deficits equals the NPV of the future resource revenue flows. However, the assumptions onto which the PIH is built are very restrictive, in particular, for countries with large development needs.

Figure 6.
Figure 6.

Senegal: PIH, modified PIH, and FSF Non-Resource Primary Balance and Resource Wealth1

Citation: IMF Staff Country Reports 2019, 028; 10.5089/9781484396292.002.A001

Source: Senegal Ministry of Oil and Energies, IMF Staff estimates.1 Main assumptions are: real GDP growth of average 7.5 percent over the projection horizon, oil price of $60, USD/XOF of 555, a public investment program in line with PSI 7th review and Article IV report, real interest rate of 9 percent, length of the production of 29 years, The capital expenditure profile follows that of Senegal’s development plan, i.e. PSE2, without accounting for the economy’s absorption capacity and other constraints.

27. The modified version of the PIH framework allows for a deviation from the constant NRPB deficit target to accommodate temporary frontloading of capital spending. The PIH approach could be an excessively tight fiscal benchmark in developing countries with a relatively certain extraction horizon, high investment needs, and proven capacity to absorb an acceleration of public spending on capital assets. In the MPIH framework, transformative investment in human capital and infrastructure could be frontloaded over the medium term to enhance potential economic growth in anticipation of future resource revenues. However, to satisfy the intertemporal budget constraint, fiscal adjustment would be required later on, particularly if the scaling up of public investment does not result in higher growth. In the case of Senegal, a large scale public investment program could be financed in the first 8 years (2022–2030). As a result, the perpetual financial resource wealth would decline from just above 30 percent of non-resource GDP to about 27 percent over the horizon.

28. The Fiscal Sustainability Framework (FSF) is a variation of the MPIH that incorporates ex-ante expectations that the initial public investment has important spillover effects on economic growth. The FSF allows for an initial drawdown of government resources for investment in growth-enhancing capital, but later stabilizes the NRPB at a level inferior to that under the PIH or the MPIH. Even if the long-run NRPB level is lower under the FSF, the primary expenditure can be stabilized at a higher level because the initial investment has multiplying effects on the economy, leading to higher growth and non-resource revenues. The net wealth stabilization depends on non-resource growth assumptions—a stark contrast with the PIH and MPIH frameworks that focus on preserving the full amount of financial wealth and do not include non-resource growth spillovers.

29. Managing the volatility of resource revenue can be achieved with price-based rules. A fiscal policy anchored to a structural resource balance target can remove the effect of commodity price volatility by applying price-based rules. Under a price-based rule, budgetary revenues are projected using a smoothed, or structural, price. When actual commodity prices are higher than the structural price, realized revenues are higher than budgetary revenues and the surplus is accumulated in a stabilization buffer. Conversely, when actual prices are lower than the structural price, the deficit is covered by withdrawing funds from the stabilization buffer. In choosing a price-rule formula, consideration must be given to the preference for smoothing spending and the need to adjust to changes in price dynamics. Price formulas with a short backward-looking horizon track changes better in prices but may lead to more volatile expenditure envelopes that can fuel procyclical fiscal policy. Price formulas with longer backward-looking horizons allow smoother expenditure paths but may systematically undershoot or overshoot actual revenues if price trends change (IMF 2012).

30. Capping real expenditure growth can also reduce pro-cyclicality. Absorption capacity considerations may call for a cap on overall expenditure growth. Many countries are now relying on expenditure rules (IMF, 2018) and resource-rich countries (e.g. Mongolia) have used expenditure caps in combination with other fiscal anchors to smooth expenditure. Generating more predictable changes in spending can limit procyclicality of fiscal policy and generate more financial savings that could be set aside in stabilization buffers, with the excess saved for future generations.

Issues for Consideration

31. Senegal is part of the West African Economic and Monetary Union (WAEMU) and is therefore subject to existing supranational fiscal rules (IMF, 2017). Initial first-order convergence criteria included a balanced budget rule (excluding budget grants and foreign-financed capital expenditures, including HIPC/MDRI financed expenditures) and a 70 percent of GDP ceiling on public debt. These were complemented with less binding convergence targets, called second tier, which included a 20 percent floor on tax revenues to GDP. In January 2015, changes to the WAEMU convergence criteria were enacted. The first order convergence criteria on balanced budgets now specifies that the overall fiscal deficit (including grants) should remain below 3 percent of GDP. The nominal debt-to-GDP ratio was kept at 70 percent of GDP.

32. Senegal’s fiscal policy should be anchored to a fiscal framework that will take into account the new resource wealth. The new framework should allow for Senegal’s development needs, as well as upfront savings for stabilization purposes. Given the relatively limited level of oil and gas reserves and the relatively short reserve horizon, Senegal should gauge well the trade-offs between current consumption and investment against future considerations, accounting for the existing supranational fiscal framework (see how the CEMAC revised its fiscal framework in 2017, in Box 1).

Recent Changes to the Fiscal Framework in the Central African Economic and Monetary Community (CEMAC)

In August 2017, the Member States of the CEMAC revised the fiscal anchor, as part of their Economic and Financial Reform Program (PREF-CEMAC). The reform program’s sixth objective defines a new multilateral surveillance criterion: the reference fiscal balance.

This new criterion on fiscal sustainability is based on the overall fiscal balance and incorporates a rule of financial savings of oil resources. It takes into account all revenues, including grants, and does not exclude any expenditure.

The reference budget balance is equal to the overall budget balance minus the financial savings of the year. It is defined as a percentage of GDP and must be greater than or equal to -1.5 percent of GDP. Based on a threshold of -1.5 percent of GDP, the new balance offers a certain temporal flexibility in the pursuit of a balanced budget.

The new reference balance is defined as follows:

RBBtGDPt=OBBtGDPt−FSORtGDPt

Where RBB stands for Reference Budget Balance, OBB for Overall Budget Balance, and FSOR for Financial Savings of Oil Resources. With:

FSORtGDPt=0.2*ORtGDPt+0.8*Δ(OR¯tGDPt)

Where OR stands for Oil Revenue, and

Δ(OR¯tGDPt)=ORtGDPt−13Σt=−3t=−1ORtGDPt

In other words, the new fiscal rule set savings at 20 percent of oil revenues with a variable component that is dependent of the variation of oil revenues over the last three years.

Source : Programme des Réformes Economiques et Financières de la CEMAC (PREF-CEMAC), Aout 2017.

33. Good management of the resource wealth will be critical to achieve Senegal’s development objectives, as oil and gas resources typically exacerbate governance issues. It is critical that all flow of funds related to oil and gas wealth transit through the budget and be transparently presented in the fiscal tables (i.e. the TOFE), above and below the line. The budget modalities governing the management of the oil and gas revenues should be the existing ones, in order to ensure coherence and transparency. The budget documents (i.e. Loi de Finance) should have annexes reporting the main aggregates of the fiscal framework for oil and gas for example. Concerning the management of resources by sovereign wealth funds, it will be important that these funds are created and managed in accordance with best international practices, and it is recommended to limit the numbers of funds and objectives to limit governance issues.

F. Conclusion

34. The natural resource landscape in Senegal has changed substantially following significant oil and gas discoveries between 2014 and 2017. Before these discoveries, the natural resource sector was dominated by gold and phosphates. The new oil and gas reserves worth about 1 billion barrels of oil and 40 Trillion cubic feet of gas (most of it shared with Mauritania) will profoundly change the natural resource sector. Two projects, SNE (mainly oil) and GTA (gas) are expected to start hydrocarbon production in 2022.

35. This paper has estimated the likely macroeconomic impact of these discoveries. While acknowledging the large uncertainties surrounding timing and levels of production, the paper analyzes impact on macro-economic aggregates from the combined production of SNE and GTA, with the following key results:

  • Growth: pre-production investment will increase growth at the margin due to the large investment needs, some of which will filter through to the Senegalese economy despite the large import content. Hydrocarbon production will have a level effect on GDP as production comes online but will not lead to a total overhaul of the economy, with hydrocarbons representing about 5 percent of GDP between 2024 and 2040.

  • Balance of Payments: Pre-production investment will lead to an increase in the current account deficit through the large investment-related import increase. This will be followed however by a reduction in the current account deficit as exports are boosted once hydrocarbon production comes online in 2022.

  • Fiscal: Oil and gas-related revenues will reach around 3 percent of GDP at peak production in 2030 and would average about 1.5 percent of GDP per year over a 25-year period.

36. To avoid the resource curse, Senegal needs to carefully develop fiscal institutions further and choose an appropriate fiscal framework. Such a framework should consider factors such as the duration of the production period and the level of capital in the economy. In the case of Senegal, staff recommends a fiscal framework which allows for an initial drawdown of government resources to finance large up-front investment needs, followed by an appropriate target level of the NRPB which serves as a medium-term fiscal anchor, as well as upfront savings for stabilization purposes.

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1

Prepared by Abdoulaye Fame, Jules Leichter, Julien Reynaud, and Bruno Versailles.

2

This paragraph is based on Section 4 of Holle Energy (2017) and Whaley (2015).

4

See Luca and Mesa Puyo (2016) for a detailed overview of the FARI methodology.

5

“Resource-rich country” refers to a country whose exhaustible natural resources comprise at least 20 percent of total exports or 20 percent of non-natural resource revenues (see IMF, 2012).

6

The time horizon mentioned for Senegal is related to the current set-up of the GTA and SNE fields for which the FID is expected in the coming months. As mentioned in Section C (Table 1), there are other fields within the Grand Tortue deposit and the new Yakaar discovery that could extend this time horizon.

7

The main assumptions are set at 2019 values, which is the year at which the government is expected to comply with the WAEMU deficit target (3 percent of GDP): non-oil GDP grows at 8.7 percent, non-oil revenues excluding grants represent 18.2 percent of non-oil GDP, inflation is set a 2 percent, and nominal interest rate at 12 percent.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Senegal: Selected Issues
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2019: Issue 028
Publisher:
International Monetary Fund
ISBN:
9781484396292
ISSN:
1934-7685
Pages:
46
DOI:
https://doi.org/10.5089/9781484396292.002
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    Senegal: Current Contribution of the Mining Sector to the Senegalese

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    Senegal: Oil and Gas Fields in Senegal and Mauritania

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    Senegal: Expected Oil and Gas Production in Senegal

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    Senegal: Hydrocarbon Production, Value Added and Investment

    (Equivalent ‘000 barrels/day, 2022–51)

  • View in gallery

    Senegal: Projected Revenues from SNE and GTA Fields

  • View in gallery

    Senegal: PIH, modified PIH, and FSF Non-Resource Primary Balance and Resource Wealth1

Senegal: Current Contribution of the Mining Sector to the Senegalese

Senegal: Oil and Gas Fields in Senegal and Mauritania

Senegal: Expected Oil and Gas Production in Senegal

Senegal: Hydrocarbon Production, Value Added and Investment

(Equivalent ‘000 barrels/day, 2022–51)

Senegal: Projected Revenues from SNE and GTA Fields

Senegal: PIH, modified PIH, and FSF Non-Resource Primary Balance and Resource Wealth1