Public Information Notice No. 01/107

Public Information Notice: IMF Concludes 2001 Article IV Consultation with Senegal

October 18, 2001

On September 28, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Senegal.¹

Background

Senegal's economy continued to grow at a solid pace in 2000. Real GDP growth reached an estimated 5.6 percent, driven by strong growth in agricultural output and a buoyant telecommunications sector, and inflation remained low at 0.7 percent. The external current account deficit (excluding official transfers) widened slightly to 8.1 percent of GDP in 2000, following a deterioration in the terms of trade. Money supply grew at a rate of 10.4 percent, significantly faster than nominal GDP growth (6.4 percent). Credit to the economy expanded by more than 28 percent, linked to the financial difficulties of the groundnut and energy sectors. On the fiscal side, the overall deficit narrowed from 3.5 percent of GDP in 1999 to 2 percent of GDP. Revenue performance was strong and Senegal's tax revenue exceeded the regional convergence criterion of 17 percent of GDP. The basic budget surplus, which measures the underlying fiscal policy stance, declined from 1.7 percent of GDP to 1.2 percent of GDP.²

Outside the framework of the budget, longstanding structural problems led to a substantial build-up of debt by two public enterprises to local banks and suppliers. The groundnut company
(SONACOS) could not reimburse the 1999/2000 crop credit and borrowed an additional 2.7 percent of GDP from local and foreign banks in early 2001. The additional borrowing was in part supported by guarantee deposits, which the government placed in local banks. As a result, the public treasury faced a tight liquidity situation. The financial situation of the national power company (SENELEC) worsened after the government decided to repurchase the shares from a private strategic investor in 2000 and its credit lines were reduced. The company has accumulated a substantial amount of arrears over the past 9 months with adverse financial repercussions for petroleum suppliers and the local refinery. Under the PRGF-supported program, the government is committed to taking actions to resolve the debt problems of the two public enterprises, notably through the privatization of SENELEC by the end of the year, withdrawal of SONAGRAINES from the collection and transport of groundnuts before the next groundnut campaign, and privatization of SONACOS shortly after the 2002/03 campaign.

As regards structural reforms, the government implemented the VAT at the single rate of 18 percent and reintroduced the pass-through mechanism for the retail prices of petroleum products. The government also strengthened tax administration with the introduction of a single taxpayer identification number and a large-taxpayer unit. It pursued the liberalization of the petroleum sector with the removal of the surtax on imported petroleum products. A reform law on the national retirement fund will be submitted to parliament by the end of this year.

The government intends to finalize a Poverty Reduction Strategy Paper (PRSP) by the end of 2001. A participatory process was launched in June 2001, and regional consultations as well as thematic groups have been set up to ensure broad participation of civil society and donors. A household survey is under way to sharpen understanding of Senegal's poverty profile. The complete results of the survey will be integrated into the first annual update of the poverty reduction strategy paper in 2002.

Executive Board Assessment

Directors welcomed the sustained growth performance with low inflation and the expected narrowing of the external current account deficit. Directors noted that the authorities had generally maintained an appropriate budgetary stance over the past year despite the spending pressures that arose in the run-up to the legislative elections. They were encouraged by the government's recent decisions to introduce a single-rate value-added tax and to activate the pass-through mechanism for retail prices of petroleum products. Directors regretted, however, that rising imbalances had adversely affected the operations of key public enterprises and that widespread poverty persisted in spite of high GDP growth.

Directors considered that the long-standing structural problems of the groundnut sector, the electricity company, and the postal service are in large part the causes of the recent difficulties in these public enterprises. They regretted the long delays in undertaking needed structural reforms in these sectors, and while acknowledging the authorities' efforts to address the financial difficulties of these sectors, many Directors expressed concern that these will entail a substantial widening of the fiscal deficit in 2001.

Directors cautioned that the government's decision to assist in the financing of the public enterprise deficits by placing guarantee deposits in local banks is distorting economic incentives and is weakening both government finances and bank portfolios. Noting with concern the decision to keep electricity tariffs unchanged in 2001, they underscored the importance of adjusting tariffs in line with the regulatory formula in order to attract foreign investments that could help to improve the cost structure of the electricity company and end the supply bottlenecks.

Against this backdrop, Directors urged the authorities to address the economy's continuing fragility by implementing, with urgency, structural reforms that contribute to establishing a sound basis for sustainable growth. They particularly stressed the need to limit the government's involvement in the groundnut sector, to allow local prices for inputs and groundnuts to vary with domestic and international market conditions, and to privatize the electricity sector. Directors emphasized that the authorities should adhere to their privatization programs for both sectors without further slippages.

Directors urged the authorities to use the ongoing participatory Poverty Reduction Strategy Paper (PRSP) process to develop a framework for pro-poor and stable growth. In this context, they highlighted the need to better target government spending on priority areas and to improve the tracking of poverty-related expenditures, especially in light of the additional resources made available under the enhanced Initiative for Heavily Indebted Poor Countries. Directors also underlined the need for appropriate safety nets to mitigate the impact on the poor of the reform of the electricity and groundnut sectors.

Directors noted that Senegal's competitiveness continues to be strong. They welcomed the prudent monetary policy conducted at the regional level and the authorities' intention to eliminate government recourse to their statutory advances by meeting domestic financing needs through the issuance of treasury bills. Directors also commended the authorities' overall satisfactory performance under the convergence pact of the West African Economic and Monetary Union (WAEMU), and encouraged them to continue to implement sound policies to achieve WAEMU convergence criteria. They endorsed the findings of the Financial System Stability Assessment (FSSA). While Directors were encouraged by the generally healthy state of the Senegalese financial system and the low risk for a systemic crisis, they urged the authorities to implement the recommendations of the FSSA, notably to strengthen the judicial framework, reduce risk concentration of bank portfolios, and strengthen the oversight of the insurance and microfinance sectors.