Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with Senegal

April 12, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Public Information Notice (PIN) No. 07/45
April 12, 2007

On January, 29, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Senegal.1


Senegal has experienced strong growth, price stability, and a declining debt stock owing to substantial debt relief, but macroeconomic performance weakened in 2006. Following robust performance in 2003-05 (average real GDP growth rate of about 6 percent), economic growth is estimated to have fallen below 3.5 percent. The decline reflects mainly the impact of higher oil prices, disruption in electricity supply, and interruption in the operations of the chemical company (ICS), one of the largest firms in the country. Since 2002, CPI inflation has remained below 2 percent on an annual average basis, owing to favorable food supply conditions and inadequate adjustments of administered prices of butane gas, electricity, and transport.

The real effective exchange rate has been broadly in line with the underlying economic fundamentals and fairly stable since 2002, as changes in relative prices offset the appreciation of the CFA franc (CFAF) against the U.S. dollar (in line with the euro to which the CFAF is pegged).

The economy remains vulnerable to exogenous shocks and is dependent on donor support. The external current account deficit excluding grants is estimated to have increased by about 5 percent of GDP between 2004 and 2006, owing to the oil price shock and ICS' difficulties. Foreign assistance, in the form of grants, concessional loans, and debt relief (flow savings) amounted to about half of the external current account deficit in 2005-06.

The overall fiscal balance (including grants) moved from a balanced position in 2002 to a deficit of 3 percent of GDP in 2005 and is estimated to have almost doubled to about 5.7 percent of GDP in 2006. The deterioration reflects increases in capital expenditures, the wage bill, and subsidies (2 percent of GDP in 2006) to the electricity company (SENELEC) and the oil refinery (SAR) to compensate them for below-market prices for electricity and butane gas. For the first time since 1995, domestic payments arrears of about 1 percent of GDP are estimated to have emerged by end-2006.

The ratio of the Net Present Value (NPV) of public external debt to exports is estimated to have fallen from 118 percent at end-2004 to about 55 percent at end-2006 owing to Enhanced Heavily Indebted Poor Countries Initiative (HIPC) and Multilateral Debt Relief Initiative (MDRI) debt relief. Central government domestic debt is estimated to have remained at about 3.5 percent of GDP at end-2006.

Poverty and social indicators have improved, but substantial efforts will be needed to meet the Millennium Development Goals (MDGs). The authorities have prepared a new Poverty Reduction Strategy Paper, covering 2006-10, which aims at accelerating progress toward the MDGs.

Executive Board Assessment

Executive Directors observed that Senegal has achieved macroeconomic stability and debt sustainability, and that progress has been made on poverty and social indicators.

Directors observed, nevertheless, that macroeconomic performance had weakened in 2006, with lower growth, higher inflation, and widening fiscal and external current account deficits, reflecting higher oil prices and financial difficulties of a major export company. They stressed that renewed efforts at macroeconomic stabilization and deepening of structural reforms would be critical to improve the economy's resistance to shocks, address problems in budgetary discipline and fiscal transparency, and move toward the Millennium Development Goals. In this context, Directors urged speedy implementation of the authorities' action plan for improving the business environment and reducing the cost of doing business, which would be crucial for enhancing growth prospects. More generally, Directors stressed that the authorities should use the opportunity provided by debt relief under the HIPC Initiative and the MDRI to address Senegal's long-standing economic problems and further reduce poverty.

Directors welcomed the authorities' intention to lower fiscal deficits over the medium term in order to contain the external current account deficit and prevent debt distress and arrears. They highlighted that reducing energy subsidies should be the main component of this policy, supported by containment of the wage bill relative to GDP and limited increases in capital outlays. Directors also urged prompt elimination of domestic payment arrears.

Emphasizing the need for a prudent borrowing policy to maintain debt sustainability, Directors welcomed the authorities' commitment to borrow exclusively on concessional terms in the post-MDRI era. They encouraged close monitoring of the potential liabilities of the government, including those stemming from activities of public agencies.

Directors welcomed the recent measures that allow energy prices to reflect market conditions better, but encouraged further liberalization in the energy sector. They cautioned against the off-budget use of any resources generated by the new pricing mechanism for petroleum products. The government should allow electricity prices to reflect market conditions, with adequate safeguards for the low-income households, and should reduce official intervention in the energy sector.

Directors called for early efforts to improve policy credibility and fiscal governance and transparency, stressing that such improvements would be crucial for ensuring continued international support to Senegal. To this end, they urged the authorities to rectify the breakdown in procurement practices; strictly apply the new procurement code; avoid
off-budget use of public resources with the expansion of the fiscal framework to include the risks posed by parastatals, public-private partnerships, and government guarantees; and ensure transparency in the implementation of the new Dakar airport project.

Directors observed that the financial sector could make a greater contribution to the economy through improved access to credit and enhanced soundness. The large nonperforming loans and credit concentration in the banking system are potential sources of vulnerability, and these weaknesses are exacerbated by the financial difficulties of the chemical export company. Directors stressed the need for banks to make adequate provisions against potential losses arising from the restructuring of this company. In addition, they urged the authorities to accelerate planned judicial reforms to facilitate loan recovery and to discuss with the West African Economic and Monetary Union authorities a possible increase in banks' capital adequacy ratio in view of the risks inherent in the Senegalese economy.

Directors recommended that the authorities rescind recent measures that reduce free trade and hinder competition in the import sector. In particular, they urged the authorities to eliminate the new tax protecting the import operations of the groundnut company as soon as possible.

Directors were of the view that the authorities' second poverty reduction strategy paper provides an adequate framework for poverty reduction in Senegal, and recommended that implementation be vigorously pursued. They also emphasized the need to prioritize public expenditure, improve its effectiveness through better investment planning and evaluation, and involve the private sector in infrastructure projects, especially in view of the tight budgetary conditions.

Senegal: Selected Economic Indicators

  2003 2004 2005 2006

  (Annual changes in percent)

Domestic economy


Real GDP

6.7 5.6 5.5 3.3

Consumer prices

0.0 0.5 1.7 1.9

Exports (in CFA francs)

-1.7 9.2 1.6 -7.9

Imports (in CFA francs)

7.4 9.8 14.4 11.5

Real effective exchange rate 1/

2.5 0.1 -1.3 ...
  (In percent of GDP, unless otherwise indicated)

Gross domestic investment

24.0 23.7 25.6 24.8

Gross national savings

17.8 17.6 17.6 12.9

Current account balance 2/

-6.2 -6.1 -8.1 -12.0

Central government revenue 3/

20.1 20.6 21.1 21.5

Total expenditure and net lending

21.7 23.5 24.3 27.3

Primary balance

-0.5 -1.8 -2.4 -5.0

Overall balance

-1.3 -3.1 -3.0 -5.7

Change in broad money (in percent)

31.5 12.9 7.4 12.6

External public debt

51.1 44.4 42.9 17.0

Sources: Senegalese authorities and IMF staff estimates.

1/ Negative change indicates depreciation.

2/ Including official transfers.

3/ Including grants.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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