Abstract
1. On behalf of our Senegalese authorities, we would like to thank the Executive Board, Management, and staff for their continued support to Senegal’s efforts to maintain macroeconomic stability, and implement key reforms in the framework of their development strategy, the “Plan Senegal Emergent” (PSE). They value the constructive policy dialogue held with the IMF team in the context of the fifth review under the Policy Coordination Instrument (PCI), and the second reviews under the Stand -By Arrangement (SBA) and the Standby Credit Facility (SCF).
I. Introduction
1. On behalf of our Senegalese authorities, we would like to thank the Executive Board, Management, and staff for their continued support to Senegal’s efforts to maintain macroeconomic stability, and implement key reforms in the framework of their development strategy, the “Plan Senegal Emergent” (PSE). They value the constructive policy dialogue held with the IMF team in the context of the fifth review under the Policy Coordination Instrument (PCI), and the second reviews under the Stand -By Arrangement (SBA) and the Standby Credit Facility (SCF).
2. The Senegalese economy is confronting multiple shocks including from rising global food and energy prices which is exacerbated by the war in Ukraine, climate shock, and the tightening of global financial conditions. The regional political instability and the sanctions imposed by the Economic Commission of West African States (ECOWAS) on Mali are also weakening economic activity and fueling inflation. These adverse developments affecting the most vulnerable households are putting additional pressures on fiscal and external positions as the economy is barely recovering from the Covid-19 pandemic.
3. In this context, the authorities are requesting an augmentation of access under the SBA and SCF by 40 percent of quota (SDR 129.44 million) to address the additional balance of payments needs in 2022. They also request a waiver for the nonobservance of a performance criterion for which corrective actions have been taken, and the modification of a performance criterion and quantitative target in line with the revised macroeconomic framework. The authorities remain committed to the objectives of the program supported by the PCI, the SBA and the SCF. They will tackle the new pressing social and security needs, while continuing to consolidate macroeconomic stability, promote strong and inclusive private sector-led growth, and establish a framework for the sustainable and transparent management of the hydrocarbon sector.
II. Recent economic developments and outlook
4. Real GDP growth in 2021 was stronger than expected at 6.1 percent against a forecast of 5 percent, owing to the rebound of non-agricultural activities. However, the dynamism of the secondary and tertiary sectors was offset by the decline in agricultural production following the record 2020/21 campaign. Average inflation stood at 2.2 percent and at 2.9 percent for food products.
5. In the external sector, the current account deficit worsened to 13.3 percent, up from 10.9 percent in 2020. While the trade balance improved slightly due notably to increased exports of phosphoric acid, and petroleum and peanut products, fuel and food imports also progressed while the deficit of the services account worsened in line with the imports related to the development of hydrocarbon projects. The surplus in the secondary income account was consolidated with strong remittances flows representing 10.6 percent of GDP.
6. In the fiscal area, budget execution resulted in a deficit of 6.3 percent of GDP consistent with the program target. Total revenue (excluding grants) fell short of target, owing notably to the underperformance of tax revenues, while total expenditure reached 97 percent of the target, including expenditure financed from the SDR allocation for the health sector, social protection, and for settling unpaid obligations. The stock of public sector debt stood at 73.2 percent of GDP, up from 69.2 percent of GDP in 2020.
7. The banking sector remained resilient despite the pandemic, with capital adequacy strengthening by 6.4 percent compared to 2020. The gross volume of non-performing loans also improved with the stock of NPLs falling from 13.3 percent at end-December 2020 to 11.5 percent at end-December 2021.
8. The authorities broadly concur that the outlook remains highly uncertain, and that downside risks are significant. The war in Ukraine has clouded the outlook for the remainder of 2022, resulting in a downward revision of economic growth to 5 percent, against an initial forecast of 5.5 percent. Inflation is projected at around 5.5 percent in line with the sharp rise in food prices. The current account deficit is expected to hover around 13 percent of GDP, owing to the deterioration of the terms of trade. Nonetheless, the authorities believe that the medium-term outlook remains favorable, notably with economic growth averaging 10 percent over the period 2023–24 on the back of the prospective hydrocarbon production.
III. Performance under the PCI and SBA/SCF- supported program
9. Program performance remains satisfactory amid challenging conditions. All end-December 2021 performance criteria were met except the one related to the floor on tax revenue for which the authorities are requesting a waiver. In this regard, corrective actions have been taken in the 2022 Supplementary Budget Law (LFR), including by integrating the road use tax (TUR) in the budget. Furthermore, the authorities are accelerating the operationalization of their medium term revenue strategy (MTRS).
10. The indicative target on social spending reached 40 percent of total spending, thus exceeding the floor of 35 percent by a notable margin. Two indicative targets were missed namely the ceiling on spending through simplified procedures for non-personalized government services, and the ceiling on government contracts using sole sourcing procurement. A review of the procurement code is underway to bring it in compliance with international standards. On the structural front, four of the program’s eight structural benchmarks/reform targets have been met. The authorities remain committed to advance the reform agenda and are stepping up their efforts to implement the structural measures that have been delayed.
11. Progress has been made in meeting the commitments on transparency and accountability of “Force-Cov id-19” expenditures. Quarterly budget execution reports for 2021 including Covid-19 expenditures have been regularly published. Furthermore, the report of the monitoring committee of “Force-Covid -19” expenditures was published on-line in September 2021, as well as the report on the audit of the Public Procurement Regulatory Agency (ARMP) in November 2021. Regarding the audit court, its provisional report has been submitted to the government in end- May 2022, and the final report is expected to be finalized by mid-July 2022 in accordance with the regulatory timeline.
IV. Medium-term macroeconomic policies and structural reform
Improving fiscal resilience
12. Looking ahead, the authorities will continue their fiscal consolidation efforts while mitigating the impact of the difficult international situation on vulnerable groups, and addressing social and security needs. To this effect, the 2022 Supplementary Budget Law that was approved in May 2022 aims at balancing priority spending and adjustment to preserve fiscal sustainability. In addition, it reflects higher energy subsidies to cope with higher global oil prices, foregone tax revenue to stabilize the prices of basic food products, exceptional cash transfers to poor households, and increased agricultural subsidies to take into account higher fertilizer prices. To limit the fiscal deficit to 6.2 percent of GDP, the supplementary budget also provides for measures to increase revenue, and savings to be achieved by reducing notably externally-financed and domestically-financed investments, and current transfers to agencies. In addition, to guard against fiscal risks, the supplementary budget includes precautionary and management reserves.
13. Nonetheless, the authorities’ medium-term fiscal policy remains anchored on the gradual reduction of the fiscal deficit to 3 percent of GDP by 2024, in accordance with regional commitments. The pursuit of this objective entails strengthening revenue mobilization by broadening the tax base and enhancing the efficiency of revenue agencies through ambitious digital innovations and reorganization. In this context, wide-ranging reforms will be launched in the framework of the MTRS.
14. The authorities are mindful of the need to phase out energy subsidies. To contain them in the agreed envelope in 2022, adjustments were made to electricity tariffs and some fuel products at the end of May 2022. Starting in 2023, energy subsidies will be gradually phased out by updating and implementing the fuel and electricity price revision decrees, and a concomitant acceleration of efforts to sustainably reduce the cost of electricity and fuel production. Going forward, the authorities plan to rely on mechanisms that target directly vulnerable groups in the event of shocks, through existing social safety nets and temporary support, rather than using untargeted subsidies.
15. The authorities take note that Senegal’s debt remains sustainable with a moderate risk of debt distress, albeit with little space to absorb further short-term shocks. In this regard, they are committed to preserving debt sustainability, notably by pursuing a prudent debt policy focused on mobilizing highly concessional resources and giv in g priority to financing through the regional market. Furthermore, they will step up their efforts to upgrade debt management and data through a computerized database management.
16. The Government will continue reforms aimed at improving budget execution and the evaluation and selection of investment projects and plans to launch the implementation of the updated budget and financial management reform strategy in the second half of 2022. Furthermore, the improvement of cash management will be continued by consolidating further the Treasury Single Account (TSA). In this connection, of the 276 bank accounts identified in 2020, 100 accounts were closed as of December 31, 2021, and 87 more will be closed by end-June 2022. Concerning the remaining 89 accounts belonging to entities operating in the financial sector, and higher education and health sectors, a gradual and participatory approach is envisaged, taking into account the social sensitivity of these sectors and the specificity of their missions.
17. The efforts to complete the operational framework for the transparent and sustainable management of future hydrocarbon revenues by 2023 will continue. The draft Law (LGRH) was promulgated in April 2022, and the operationalization of various mechanisms provided for by the Law is progressing. Furthermore, the preliminary work related to the anchoring of the non-oil fiscal deficit has been finalized at the end of May 2022. Various decrees are being prepared notably to operationalize the methodology for forecasting reference revenues, and the framework for the governance and management of the intergenerational Fund.
Achieving high and inclusive private sector-led growth
18. The authorities remain committed to promoting the development of a strong private sector which is a key component of Senegal’s development strategy (PSE) to foster strong and inclusive growth, and generate employment and income. To this end, a comprehensive private sector strategy (Stratégie Nationale de Développement du Secteur Privé, SNDSP) has been adopted. It constitutes the overall framework for all public interventions to promote a strong private sector, and create competitive value chains in priority sectors such as agriculture, agrobusiness, infrastructure, hydrocarbons, digital economy, and tourism and finance. Efforts will be accelerated to improve the business climate, notably through the rationalization of support mechanisms to small and medium enterprises (SMEs), and digitalizing key processes including access to financing for SEMs.
19. In the financial sector, the restructuring process of the three non-systemic banks in difficulty continues with the support of WAEMU’s regional bodies. The Government also plans to accelerate the restructuring of the postal office. A new roadmap will be finalized by end-June 2022 to take into account the new guidance from the higher authority concerning the recapitalization, restructuring, recovery plan, and institutional transformation of Poste Finance. On AML/CFT, the authorities are determined to continue implementing the action plan aimed at removing Senegal from the enhanced oversight by the Financial Action Task Force (FATAF) by addressing the most pressing challenges, including the review of the Uniform Law of the WAEMU, strengthening of judicial cooperation, and the control and oversight of reporting entities in general and particularly non-financial institutions.
20. With the increased level of vulnerability revealed by the pandemic and the war in Ukraine, the authorities are keen to extend the coverage of social safety nets which are a priority in their inclusive growth strategy. To this end, the single national register (Registre National Unique, RNU) has been updated and is being used to make exceptional cash transfers to vulnerable households impacted by the Covid-19 pandemic with the support of the World Bank. The authorities now plan to extend the coverage from the current 542,956 to one million households by June 2023 given the delays experienced. Efforts are underway to promote the digital payment of regular cash transfers by November 2022.
21. Another key social safety net is the emergency socio-economic integration of youth employment program which will continue to be implemented. With the view to enhance the efficiency of the program, the authorities remain committed, notably to establish a unique identifier and database of recipients of public funding, and create single windows for employment and entrepreneurship services in the 46 departments of the country.
22. As Senegal is particularly vulnerable to the impacts of climate change, including from drought, flooding, rising sea levels and costal erosion, mitigation and adaptation policies are also key priorities in the PSE reform agenda. The climate change dimension is integrated in the formulation and programming of development policies taking into account other priorities such as health, the fight against poverty and malnutrition, the promotion of renewable energies and energy efficiency, and gender mainstreaming.
V. Conclusion
23. Our Senegalese authorities remain strongly committed to the program supported by the PCI, the SBA and the SCF. In this regard, they will continue to implement reforms aimed at preserving macroeconomic stability, improve public financial management and the business environment, and achieving strong inclusive growth consistent with the goals of the PSE.
24. In view of Senegal’s satisfactory program performance and their strong commitment to pursue reforms, the authorities seek Directors’ support for the completion of the fifth review under the PCI, and the second reviews under the SBA and the SCF. In addition, they request an augmentation of the level of access, a waiver of the non-observance of a performance criterion, and the modification of a performance criterion and quantitative targets.