June 1, 2000
June 1, 2000
ABBREVIATIONS AND ACRONYMS
1. A debt sustainability analysis (DSA) for Senegal was first undertaken in 1998 under the original Initiative for Heavily Indebted Poor Countries (HIPC). Subsequently, the criteria of debt sustainability were revised under an enhanced HIPC Initiative and the DSA has now been updated to take account of the new sustainability criteria. In the DSA document of April 1998,2 the Executive Directors of the Fund and IDA were informed of Senegal's good track record in implementing the comprehensive medium-term adjustment and reform program that was adopted after the CFA franc devaluation of January 1994. The good track record has continued since then. The reform and adjustment programs have been supported by two ESAF arrangements, the first covering the three-year period 1994-97 (SDR 131 million or approximately US$190 million) and the second ongoing arrangement covering the period 1998-2001 (SDR 107 million or approximately US$150 million). The scope and content of these arrangements are presented in Section II along with an assessment of progress, which continues to be satisfactory. The program has also been supported by IDA with adjustment credits for economic recovery (US$25 million), for private sector development (US$40 million), for agriculture (US$45 million) and for the energy sector (US$100 million) as well as a number of investment credits in the areas of health, education, transport and rural development.
2. Per capita income in Senegal in 1998 was US$530, which is well below the US$895 operational cutoff for IDA eligibility. Furthermore, Senegal is not creditworthy for IBRD lending and is, therefore, an IDA-only country. Its good economic performance and track record of structural reform continue to justify active IDA support. In addition to a continued good track record with respect to PRGF-supported programs, the Government of Senegal has also put together an Interim Poverty Reduction Strategy Paper (I-PRSP), which lays out plans for developing a comprehensive poverty reduction strategy. The authorities intend to involve civil society in the process of developing, implementing and monitoring a full poverty reduction strategy and it is anticipated that this participatory process will lead to the finalization of a comprehensive PRSP in support of Senegal's completion point under the enhanced HIPC Initiative, tentatively projected for end-2001. Reaching a completion point would require satisfactory performance under the PRGF-supported program, adoption and implementation of a few key structural and social development measures, and securing financial assurances from Senegal's other external creditors concerning their participation in the enhanced HIPC Initiative.
3. This paper presents a new assessment of Senegal's eligibility for assistance under the enhanced HIPC Initiative. It updates the DSA that was distributed to the Executive Directors of the Fund and IDA in April 1998. The conclusion of the 1998 analysis was that the external debt burden of Senegal was sustainable, based on the debt sustainability criteria applicable at the time. However, an updated DSA indicates that the external debt burden of Senegal is not sustainable under the debt sustainability targets of the enhanced HIPC Initiative. Section IV presents a detailed updated DSA, which incorporates debt relief from successive Paris Club reschedulings of which the latest was agreed in June 1998.
4. Overall, Senegal has a favorable track record of macroeconomic stabilization and reform since the devaluation of the CFA franc in January 1994. The reform program undertaken by the authorities and supported by successive ESAF Arrangements and by an IDA lending program enabled them to build upon Senegal's restored external competitiveness to achieve sustained and balanced growth, improve the external balance, and consolidate public finances with encouraging results.3 Average real GDP growth exceeded 5 percent between 1996 and 1999, while annual inflation remained below 3 percent over the same period, thereby maintaining the consumer price index based real effective exchange rate roughly 30 percent depreciated compared to the level reached before the 1994 devaluation of the CFA franc. Tight fiscal policies resulted in a strong improvement in the central government's fiscal position. Since 1995, and after several years of deficit, the basic fiscal balance4 showed surpluses, that remained above 1.5 percent of GDP between 1996 and 1999. The improved fiscal position contributed to a decline by almost one half in net credit to the government since 1994, which allowed for an increase in credit to the economy, consistent with the financing needs of the private sector. Since 1997, Senegal has made a positive contribution to the net foreign asset position of the zone. Senegal has been a member of WAEMU since its inception in 1994 and is actively involved in initiatives to promote the economic integration of the WAEMU countries. The external current account deficit (excluding official transfers) declined slightly between 1996 and 1999. Nonetheless, social indications show that social development has been lagging and that the situation with respect to poverty may have deteriorated.
5. For the coming years, the authorities are determined to continue implementing sound macroeconomic policies, which should contribute to strong and sustained growth. The medium-term macroeconomic framework prepared for 2000 to 2003 will be revised to reflect the budgetary impact of the costs of the poverty alleviation programs planned by the government by end-2001, when they are fully articulated in the context of its overall poverty reduction strategy. Under the current macroeconomic framework, real GDP growth is expected to remain around 5 percent. The basic fiscal surplus is projected to increase progressively from 1.7 percent of GDP in 1999 to 2.5 percent in 2003, as government expenditure growth is contained below nominal GDP growth and government fiscal revenue increases to 17 percent of GDP, as recommended by the guidelines of the West African Economic and Monetary Union (WAEMU).5 Broad money growth is projected to stay in line with nominal GDP, with a further decrease in net credit to the government and an accumulation of net foreign assets. The current account deficit (excluding official transfers) is expected to narrow from about 7 percent of GDP in 1999 to 5 percent in 2003, with export growth exceeding import growth.
6. The authorities also took advantage of the 1994 devaluation to undertake a comprehensive institutional and policy reform, as detailed in Appendix I. A central focus of the reform effort has been to redress the balance between a formerly dominant public sector and a lagging private sector. Significant progress has been made towards the goal of transferring the most productive industrial and commercial enterprises to the private sector, with 16 public enterprises privatized or liquidated between 1994 and 1999, representing more than 60 percent of the government's portfolio. These include the telecommunications, power generation and water distribution enterprises. Among remaining enterprises, eleven units are earmarked for privatization during 2000.
7. Private sector development has been fostered in many other ways in addition to divestiture.6 The regulatory environment for private sector activities was improved with assistance from IDA in the context of a Private Sector Adjustment and Competitiveness Project. The labor market and prices were significantly liberalized. The adoption of WAEMU's common external tariff resulted in a marked lowering and streamlining of external tariffs, and reduction of other trade barriers. Improvements in the legal framework removed barriers to new firms seeking to enter the market. Maritime transport, which was formerly subject to heavy regulation, has been in private hands since the abolition of the public maritime transport monopoly in 1995. All of these measures have greatly enhanced openness and competitiveness. As a result, the share of the private sector in gross domestic investment rose from 58 percent in 1980 to 64 percent by 1997.
8. Good governance is fundamental for well-balanced private sector development. Reforms are being implemented to combat corruption and other illegal practices, and to increase transparency and accountability of high officials. In March 1998 legislation was enacted to establish a court of financial discipline and steps are being taken to improve cooperation between the several institutions responsible for the oversight of public agencies. At the same time, civil service reforms are being introduced to enhance transparency. In addition, important steps have already been taken to decentralize many administrative responsibilities and the associated budget resources from the central government to regional and local entities. It is expected that, by 2001, when the transfer of responsibilities is completed, the entire public administration will become much more responsive to the needs of citizens at the local level.
9. Energy sector reforms include a liberalization of the power sector. With the privatization of the power company (Senelec) the door is now open for direct foreign investment to expand and upgrade the generation and distribution system so as to overcome the power outages that have been so disruptive and costly in the past. There has also been a progressive liberalization of the market for hydrocarbon products, though retail prices of petroleum products have been temporarily frozen at their February 2000 level in the wake of the significant increase in world prices. The authorities liberalized the import and distribution of hydrocarbon products. At the same time, existing surtaxes benefiting the local refinery will be gradually eliminated, thereby establishing a level playing field. The government has also undertaken the liberalization of domestic firewood prices by mid-2000 to encourage a shift to alternative domestic fuels with beneficial effects for forest preservation.
10. The transport sector has also witnessed major changes in recent years. As one of the gatekeepers of import-export traffic to West Africa, Senegal was already well endowed with an extensive transport infrastructure at independence and has a well-developed road network relative to the size and development of its economy. In the past, however, the Public Works Directorate (DTP) experienced difficulties in controlling costs and striking an appropriate balance between road maintenance and construction. The anticipated establishment of an Autonomous Road Agency-to be overseen by a Road Board with a majority of private sector members and to be regulated by the Transport Ministry-should help overcome chronic institutional weaknesses within the sector. Prospects are thus greatly improved for the effective implementation of an IDA-supported second transport sector program, which was launched in July 1999 and spans the period 1999-2004. Maritime transport has gained in efficiency as a result of privatization and air transport stands to benefit from a much-needed infusion of new capital after the sale of Air Senegal. Plans to privatize the Dakar-Bamako railway have been seriously delayed but the government is still determined to privatize the system, most likely before end-2000.
11. Agriculture (including livestock, forestry, and fisheries), which accounts for almost 20 percent of GDP, an estimated 60 percent of employment and a sizeable proportion of the country's export earnings, is of critical importance for Senegal's development prospects. With four-fifths of poor households living in rural areas, no poverty alleviation strategy can succeed without a major focus on rural development and agriculture. Yet output growth has been disappointing. This has been due to (i) unfavorable climatic conditions, which have included successive years of severe droughts;7 (ii) a lack of rural infrastructure, insufficient access to basic rural services such as credit, inputs and potable water; and (iii) an overly bureaucratic government presence. Recognizing the importance of agriculture, the government has undertaken to restructure the central and regional offices of the Ministry of Agriculture to make them more "user friendly" and to foster producer organizations that can assume some of the functions previously handled by government. At the same time, a reform of land ownership is planned that will facilitate access to inputs and credits by farmers.
12. In December 1997, the Senegalese authorities issued a comprehensive Poverty Reduction Program (PRP), which had been developed in collaboration with grass-roots community organizations and with inputs from a number of donors,8 in particular the UNDP. This program, which was endorsed at the Third Consultative Group Meeting in Paris in April 1998, has now been updated and incorporated into an Interim Poverty Reduction Strategy. The newly-elected government has given its commitment to undertake the actions outlined in the I-PRSP, with a view to adopt a full PRSP by December 2001. The first task of the strategy will be to assemble the database for an updated poverty profile. Field surveys for that purpose will begin in September 2000. While field work is in progress, the interim poverty reduction strategy will be further developed and the medium-term programs for the key sectors of health and education will be integrated within the framework of the national budget cycle beginning in June 2000. It is anticipated that data from the field surveys will become available in late 2000 and a second version of a poverty reduction strategy would be elaborated for April 2001, based on a clearly defined poverty profile. That would be followed by broadly based consultations at both national and local levels with a view to reaching a broad consensus on the final document to be adopted at end-2001.
13. The present strategy aims at (i) improving the availability and quality of social infrastructure in poor communities; (ii) increasing the productivity and incomes of the poor by improving the access of rural communities to basic agricultural services including appropriate technologies, credit, inputs and potable water and also by fostering micro-enterprises; and (iii) strengthening the institutional capacity for monitoring poverty reduction policies. The implementation of this strategy is already sufficiently well advanced that IDA staff are currently preparing a Social Development/Women in Development Project (an Adaptable Program Lending operation) for consideration by the Board in support of the government's efforts. This project would help establish a Social Investment Fund, to reinforce the provision of credit to women and youth, and would support community-based organizations and NGOs with training and capacity building.
14. At the present juncture, it is difficult to identify quantitatively the extent of poverty in Senegal because comprehensive and up-to-date information is lacking. A household survey was conducted in 1991 and a second survey took place in 1994-95. Based on an indicator of caloric intake, the 1991 survey indicated that one third of the population of Senegal is below the poverty threshold. There are some indications that the situation with respect to poverty may have deteriorated between then and 1994. Notwithstanding renewed growth after 1994, and despite consistent efforts to address the needs of the poor within the framework of the 1997 PRP, social indicators show that poverty and lack of access to basic social services still persist in Senegal. As illustrated in Table 1 and 2, while indicators such as access to safe water and life expectancy are broadly comparable to other countries in sub-Saharan Africa, they are generally below the levels prevailing in other low-income countries and below the International development goals. Furthermore, health and education indicators in Senegal are well below those prevailing in countries with similar income levels.
15. Senegal has sought to address these human resource development problems through policies directed at sustaining growth and addressing the needs of the poor, particularly in the fields of primary education, primary health care and rural infrastructure. The PRP was drawn up in the context of the ninth development plan (1996-2001) to complement sector investment programs. It is conceived as a decentralized and consultative program under which grassroots participation is encouraged. The specific strategies of the program are as follows:
A. Health Sector Strategy and Program
16. In 1996, Senegal adopted a national health policy which established a strategic framework for (i) expanding the coverage of integrated primary health care; (ii) implementing integrated systems for the prevention and control of endemic diseases; (iii) improving the quality and efficiency of service at all levels of the public health system; and (iv) fostering the use of generic drugs. To implement this strategy, a five-year program (1998-2002) was introduced with support from IDA in the form of a health sector investment program credit and a credit for the prevention and control of endemic diseases. By the year 2002 to finance its overall well-defined strategy, the government aims to increase the share of health sector expenditures to 9 percent of current outlays, consistent with the norm set by the World Health Organization (WHO), compared to about 7 percent at present. It also aims to increase vaccination coverage to 80 percent from 60 percent in 1997, and to extend contraceptive prevalence to 16 percent from about 11 percent in 1997. Despite some delay, the medium-term program is proceeding well.
17. Senegal has put in place a very successful HIV/AIDS prevention and care program which is often cited as best practice in Africa. At an early stage of the epidemic Senegal launched an effective multi-sectoral response so that HIV prevalence remains remarkably low. As a result, the infection rate among pregnant women was 1.2 percent in 1998. The HIV/AIDS program is sufficiently well funded and staffed and the government has recently taken steps to strengthen and expand its information and education efforts targeted at women and adolescents most at risk. Knowledge Attitude and Practice (KAP) surveys will be conducted on a regular basis to measure changes in sexual behavior and to increase awareness of prevention methods and service availability.
18. The poor stand to benefit greatly from this program of improved health care. It is known that high morbidity and mortality rates amongst the poor are caused mainly by maternal and child illnesses, malnutrition and communicable and respiratory infections. The principal objective in providing an integrated package of primary health care and first level referral services is precisely to reduce the incidence of those disorders. Furthermore, the problem of high maternal mortality is currently receiving much more national attention and a plan of action to expand and improve emergency obstetric care is being implemented. Better health will not only improve morbidity and mortality rates among the poor, it is also the key to increasing their productivity and, hence, their income potential. At the same time, the poor have free access to primary health clinics and risk-sharing mechanisms are being developed through community-based insurance schemes to better ensure access to more costly curative care.
19. In order to enhance effective outreach, the national health strategy of Senegal fosters community participation in cooperation with NGOs both in policy formulation, program design and program implementation. NGO participation in the delivery of health services to under-served communities in rural areas and in the urban periphery is increasing. IDA has been supportive of this effort. As of end-1999, some US$4 million had been committed from IDA credits to finance government contracts with a number of NGOs for the provision of health services.
20. Political commitment to implementing the health sector development priorities remains very strong and execution of the reform agenda is moving forward. The development of a sound network of primary and secondary health facilities is also proceeding satisfactorily. The number of primary health care (PHC) clinics increased from 920 in 1996 to 1,200 in 1999. As a result, the population served by each PHC facility has declined from 8,236 to 7,694, better than the WHO "norm" of 10,000 per PHC facility. The price of prescription drugs has fallen consistently notwithstanding the 1994 devaluation because of a more systematic use of generic drugs. As far as tertiary health care is concerned, hospitals have been given full management and financial autonomy and some 44 community-based health insurance schemes were established by the end of 1999. However, although the mobilization of private resources for tertiary care and cost recovery mechanisms is taking hold, it is too early to assess their impact upon equity and efficiency.
21. The overall financial position of the health sector has also been strengthened as part of the government's reform program. The share of health in the recurrent budget has modestly increased in recent years from 6 percent in 1997 to 6.3 percent in 1999, and is expected to reach 7 percent in 2000, inching toward the 9 percent goal established in the health sector development plan (Table 3). The share of those expenditures going to the regions amounted to 62 percent in 1998 although inequities still persist between Dakar and the seven other regions. Financial management has also been strengthened and focused more clearly on local issues by decentralizing it to elected bodies at the regional, district and communal levels.
22. Two important initiatives are currently being pursued to establish a solid basis of information for monitoring health sector performance over the coming two years or so. First, a national health survey was conducted in September 1999 whose results should become available in June 2000. Second, an assessment of immunization programs was undertaken in January 2000, whose results will provide a basis for raising the present low rates of immunization in order to put the management of child health on a firmer foundation.
B. Education Sector Strategy and Program
23. In recent years, the government has taken concrete actions to address long-standing weaknesses in the education sector which previously impaired progress towards achieving strategic educational objectives and even resulted in declining standards in some areas. In 1998, a ten-year program put together as a collaborative effort between the government, community organizations, education sector institutions and donors, set out a strategic framework for the sector, articulating objectives such as universal primary enrollment by 2008, and identifying resource requirements. The program has broad ownership, which augurs well for successful implementation. In support of this program, an Adaptable Program Lending credit was approved by IDA in April 2000. This will provide the equivalent of some US$50 million to help finance the first three-year implementation phase (designated as Quality Education for All, or QEFA) of the ten-year program. Other multilateral and bilateral donors are expected to provide a further US$65 million in support of the first three-year implementation phase. IDA also has ongoing operations in basic education, female literacy and higher education.
24. Although the government's framework covers the entire education system quite comprehensively, the policies for basic education to be adopted under the QEFA program are likely to have the most direct impact upon poverty reduction. Important steps have already been taken to remove the constraints that previously obstructed progress towards universal primary education and those efforts would be continued under the ten-year program. One major problem in the past is that public expenditures have been unduly skewed towards higher levels of education, leaving primary education with only 36 percent of budget resources devoted to education. Under QEFA, the share of the education budget resources allocated to primary education would be raised to 44 percent by 2003, and the longer-term goal is to increase it to at least 50 percent. This will only be achieved, however, if the government presses forward with cost-recovery measures for post-primary levels of education (one of the objectives of the ongoing IDA Higher Education Project) and with an expansion of private education at higher levels.
25. Another problem towards achieving universal primary education has been a comparatively high level of salaries for public sector teachers, which, given budgetary constraints, crowded out other needed expenditures on books, learning materials and in-service training.9 Moreover, teacher utilization was inefficient with many teachers working less than the minimum required work week. To address these problems, the government has now shifted to hiring teachers on a contract basis at salaries much more commensurate with other comparable employment. Provided that this policy is pursued and the number of civil service teachers diminishes through attrition and retirement, the budgetary savings will allow a sufficient expansion of the teacher force to extend the coverage of primary education to all. At the same time it should be possible to reverse the decline in the number of learning hours per pupil per year, which resulted from double shift operations in many primary schools. Increasing the number of learning hours to a target of 1,000 per pupil per year would contribute greatly to improving the quality of primary education. To achieve these goals the government is now committed to hiring 2,000 primary school teachers annually for at least the next three years compared with 1,200 per year over the past four years, which was barely sufficient to replace teachers leaving the force. Teachers will be also used more efficiently and this will allow a reduction in student/teacher ratios at all levels. An expanding body of teachers, together with a school construction program of 4,000 additional primary school classrooms in the three-year time frame of QEFA, should permit a further increase in the primary school gross enrolment rate which has already risen from 54 percent in the 93/94 school year to 62 percent in 97/98, and which is targeted to reach 70 percent for the 2002/03 school year. The longer-term goal is to reach universal primary education no later than 2008. Expenditures will be targeted at rural and peri-urban areas to ensure that the lowest quintile of the population benefits. Also, the elimination of fees at the primary level and the distribution of free books should increase the demand for education by poor households.
26. As the government advances towards the strategic education goals of expanded access to primary education and improved quality, the education of girls will be given special attention and integrated across the whole range of program interventions. At present, girls are less likely to attend and finish school than boys. In 1997, girls accounted for only 44 percent of pupils enrolled in primary and middle schools and a mere 25 percent in secondary schools. Both repetition rates and dropout rates are higher for girls than for boys. The aim is to close the gap by the year 2010.
27. Alongside these many initiatives the government is taking steps to enhance the involvement of local communities in the education of their children. A new decentralized structure for the management of education will be adopted so that regions, communes and collectivities will assume significant responsibility for managing elementary schools while secondary and higher education institutions will become increasingly more autonomous. Some functions have already been decentralized although not all local communities are ready to handle their new responsibilities effectively. Successful decentralization will depend, therefore, upon a vigorous program of capacity building at the regional and local levels, especially with respect to such matters as financial management, information systems and procurement, so as to ensure that local governments have the resources and expertise to improve the provision of education.
28. The debt sustainability analysis (DSA) was prepared jointly by the Fund and IDA staff and the Senegalese authorities on the basis of loan-by-loan data provided by the authorities and creditors for debt outstanding at December 31, 1998. The debt reconciliation exercise has been completed during the period November 1999 to January 2000, with the nominal debt figures used to estimate the NPV of debt having been reconciled with the creditor-provided debt data and the debtor's database.10 The macroeconomic projections used in this analysis and agreed with the authorities are summarized in Box 1. They are based on the assumption of continued sound macroeconomic policies, further structural reforms and the development of human resources, in particular through the implementation of a poverty reduction program. The exchange and interest rates used for the calculation of the debt data are shown in Table 7.
29. Between end-1997, the point of reference for the previous debt sustainability analysis, and end-1998, the point of reference for the present updated debt sustainability analysis, the total external public and publicly guaranteed debt of Senegal increased by 9.6 percent in NPV terms from US$2,280 million at end-1997 to US$2,498 million at end-1998. For the most part this was due to new borrowings from multilateral creditors including IDA, the IMF, BADEA, WADB, and IFAD. Additionally, an infrastructure development project was financed in part with a US$80 million loan from Taiwan, Province of China (this accounted for 2.6 percent increase in the NPV of external debt). A further reason for the increase between the two end-year NPV figures is due to different exchange rates and different discount rates, which reflect market conditions in 1997 and 1998 respectively.
30. At end-1998, the public and publicly guaranteed external debt of Senegal was US$3,763 million in nominal terms. The present value of this debt stock is estimated at US$2,498 million in end-1998 NPV terms, or 305 percent of government revenues, 162 percent of exports (averaged over 3 years) and 51 percent of GDP. Details of the breakdown by creditor of the end-1998 stock are provided in Table 5 and summarized in Figure 1, both in nominal terms and in NPV terms. It can be seen that IDA is by far the largest single creditor accounting for 25 percent of the total outstanding debt in NPV terms. That is more than twice the exposure of the second largest creditor, the AfDB, with 12 percent of the total. France and the IMF follow closely behind the AfDB as the third and fourth largest creditors accounting for 10 percent and 9 percent of the total, respectively.
Source: Senegalese authorities and staff estimates.
31. Official multilateral and bilateral creditors account for virtually all public debt outstanding in Senegal. Debt to commercial creditors was virtually eliminated in early 1997, following completion of a debt buyback operation with London Club creditors supported by the World Bank's Facility for Debt Reduction for IDA-only countries. Senegal has benefited from twelve Paris Club rescheduling operations (1987 to 1998) on debt contracted with the Paris Club group of creditors before the cut-off date of January 1, 1983. In June 1998, Senegal benefited from a stock-of-debt operation on Naples terms, which brought the overall reduction of eligible debts to 67 percent in NPV terms. Subsequent to the June 1998 agreement with the Paris Club, Senegal has concluded bilateral rescheduling arrangements with all its Paris Club creditors. The baseline scenario is presented on the basis that the June 1998 Paris Club agreement was implemented by all the bilateral creditors at end-1998. The baseline scenario assumes that the other bilateral creditors provided a reduction in 1998, equivalent to the stock-of-debt operation under Naples terms for all pre-cut off debt.
32. Under the baseline macroeconomic scenario, the external current account deficit (excluding official transfers) is projected to narrow gradually to about 6.6 percent of GDP in 2000 and less than 5 percent of GDP in 2004. Including grants, the deficit is expected to decline from 2.8 percent of GDP in 2000 to 1.8 percent in 2004. As indicated in Box 1, export growth is projected to exceed import growth in value terms, reflecting an improved outlook for the world economy and a projected rise in the prices of primary commodities after 1999. It is assumed that public sector capital inflows in the form of grants and loans will remain the dominant form of financing. Private capital inflows are expected to remain relatively stable at a little below 2 percent of GDP.
A. Sensitivity Analysis
33. The balance of payments projections and debt ratio projections for Senegal are subject to some uncertainty, notably with regard to the assumptions on (i) exports of fish and groundnut products; (ii) the real GDP growth rate; and (iii) the amount of official aid received by Senegal. Each of these factors could be subject to less favorable developments than projected in the baseline scenario. First, a stagnation in the medium-term growth of fish and groundnut exports in volume terms (instead of a 3.9 percent and 3.1 percent increase, respectively, as assumed in the baseline) would significantly raise the average of the NPV-of-debt to exports ratio by 29 percentage points over the projection period. Second, the impact of lower real GDP growth (say, 3 percent per year instead of 5 percent) would raise the NPV-of-debt to government revenue ratio by 29.4 percentage points over and above the 164.1 percent currently projected on average over the period 1998-2018, while the NPV-of-debt to GDP ratio would be raised by 5.2 percentage points. Finally, if it is assumed that official transfer receipts are 20 percent lower on average than in the baseline scenario and that this financing shortfall is to be filled by increased concessional external government borrowing, a further 6.4 percentage points would be added to the average NPV-of-debt to exports ratio over the projection period. A decline in fiscal receipts would raise the NPV-of-debt to revenues ratio over the projection period. However, this is less likely to happen, as under WAEMU's convergence pact adopted in late 1999, fiscal receipts are to rise to 17 percent of GDP by 2002 and remain at least at that level beyond that date.
B. Debt Sustainability Indicators
34. The baseline scenario builds upon the application of a Naples term stock-of-debt operation for official bilateral creditors in 1998 and a macroeconomic scenario based on the assumptions outlined in Box 1. For the baseline scenario, the debt service ratio of public and publicly guaranteed external debt is estimated at 14.7 percent in 1999 but, after that, it decreases significantly throughout the period 2000 to 2018 (Table 10). The debt service-to-revenue ratio falls from 27.9 percent in 1999 to 17.8 percent in 2003, but rises to 24.4 percent in 2004 due to a one-shot principal repayment of US$99.5 million of a loan to Kuwait.11 After 2004, however, the ratio declines to well under 15 percent per annum.
35. Even after the application of traditional debt relief mechanisms, Senegal's external debt ratios remain at unsustainable levels at end-1998 as defined under the export and fiscal/openness criteria. The NPV-of-debt to exports ratio was 162.5 percent in 1998 and the NPV-of-debt to revenues ratio amounted to 305.3 percent (Table 6).
C. Assistance Under the Enhanced HIPC Initiative
36. Under the enhanced HIPC Initiative, countries are eligible for assistance if the NPV of external debt exceeds either 150 percent of exports or 250 percent of fiscal revenue-thresholds beyond which the debt burden is deemed unsustainable. Senegal qualifies under both criteria, but requires more assistance under the fiscal window. Also, with revenue-to-GDP ratio of 17 percent, as compared to the threshold of 15 percent, and an export-to-GDP ratio of 33 percent, which exceeds the threshold of 30 percent, Senegal meets the thresholds for fiscal revenue effort and openness in order to qualify under the fiscal window. In order that the ratio of debt to fiscal revenue may be reduced to a sustainable level, debt relief equivalent to US$452 million in NPV terms would be required. The uses to which HIPC resources will be put will be determined in the context of the PRSP participatory process.
37. Based on proportional burden-sharing, multilateral creditors would provide 57.4 percent of overall assistance or US$259 million in NPV terms. Bilateral creditors would be responsible for the provision of the remaining 42.6 percent of relief, equivalent to US$193 million in NPV terms. The largest single contributor towards the Enhanced HIPC Initiative for Senegal would be IDA, with a level of assistance equal to US$116 million in NPV terms. The IMF and AfDB would provide US$42 and US$53 million respectively.
38. The following assumptions were made regarding the delivery of assistance to Senegal under the Enhanced HIPC Initiative:
D. Debt Sustainability After the Enhanced HIPC Assistance
39. At end-1998, the point of reference for debt relief under the enhanced HIPC Initiative, the NPV of Senegal's total debt after traditional debt relief is estimated at US$2,498 million. As a result of debt relief envisaged under the enhanced HIPC Initiative, and taking full account of future projected development assistance flows from multilateral and bilateral sources, it is projected that the total NPV of debt would stabilize in the range of US$2,200-2,400 million for the remainder of the decade (Table 8), permitting a gradual decline in the ratios of debt to exports and debt to fiscal revenue (Figures 2 and 3).
40. The actual time-profile of assistance will depend on the modalities for the delivery of debt relief decided on by each creditor to reach the required NPV reduction. However, a possible flow of nominal assistance was projected using the assumptions outlined above. It is estimated that enhanced HIPC assistance could translate into an annual debt service reduction equal to an average of 0.7 percent of GDP for the period 2000 to 2004. If the entire enhanced HIPC assistance was used to augment social expenditures,15 these would rise by 4.1 percent and 9.6 percent above current projections in 2000 and 2001 respectively.
E. Consultations with Creditors
41. Fund and IDA staff have initiated consultations with the multilateral creditors of Senegal and with the Paris Club regarding the action they would take for Senegal under the enhanced HIPC Initiative.
Figure 2. Senegal
NPV of Debt to Revenue Ratio After Traditional Debt Relief
NPV of Debt to Exports Ratio
After Traditional Debt Relief
Figure 3. Senegal
Debt Service Before and After Enhanced HIPC Assistance
Debt Service Before and After Enhanced HIPC Assistance
Sources: Senegalese authorities; and staff estimates.
42. The delivery of assistance under the enhanced HIPC Initiative is predicated upon satisfactory performance in the areas of macroeconomic management, structural reform and poverty alleviation in accordance with objectives and programs already discussed and agreed with the Fund and IDA.
43. The economic and financial program of Senegal for the years 2000-2001 builds upon the positive results achieved in the period 1994-99. It aims at reducing poverty in the context of strong and sustained growth underpinned by domestic and external financial viability. To that end, the government will continue to focus on consolidating its fiscal position, liberalizing the trade regime and deepening structural reforms with respect to privatization and sector policies in energy, transport and agriculture. At the same time, it will modernize the public administration, establish an environment that is propitious for private sector development and continue its efforts for the development of human resources as an instrument for poverty reduction.
44. The broad parameters of the government's economic strategy are to maintain an average annual rate of GDP growth of at least 5 percent, keep inflation below 3 percent and the external current account deficit (excluding official transfers) below 6 percent of GDP. This would provide a viable context for a significant improvement in social indicators and lasting poverty reduction. An effective reduction in poverty will also depend upon decisive action to lower the rate of unemployment. That, in turn, can only be achieved by higher levels of savings and investment leading to higher growth. The ratio of investment to GDP is projected to increase from about 18.5 percent in 1998 to 20.1 percent in 2001, and the corresponding increase in domestic savings is estimated to be from below 13 percent in 1998 to about 15 percent in 2001, coming mostly from the private sector.
45. Implementation of this macroeconomic program will be monitored within the context of an ongoing PRGF. A number of quantitative macroeconomic and structural performance criteria will be monitored, including those indicated in Box 2 which are of particular relevance to the poverty reduction objectives of the HIPC Initiative.
46. In parallel to the program of macroeconomic and reform measures, the poverty reduction program of Senegal is now entering a critical phase as the government embarks upon a participatory process with civil society to produce a PRSP. While the completion of a full PRSP would be one of the requirements for reaching a completion point, an important preliminary step will be to establish an accurate database for monitoring poverty in Senegal and, to that end, a new and comprehensive household survey is to be undertaken before end-2000.
47. Social sector programs in education and health will continue to be implemented alongside the preparation of a comprehensive PRSP. As more up-to-date and accurate information on poverty becomes available, the sector programs in education and health may be targeted even more effectively to the most vulnerable groups. In education, the focus will be on continued systematic implementation of QEFA. In the health area, the main focus of attention would continue to be on primary health care, child immunization, pre-natal care coverage, and preventable endemic diseases all of which are of particular importance in addressing the needs of the poor.
48. In an Interim PRSP, the government has committed to the following three measures.
49. The staff and management of the IMF and the World Bank believe that Senegal's track record, supported by consecutive ESAF arrangements since 1994, its performance under the current program supported by a second annual PRGF arrangement and the Interim Poverty Reduction Strategy Paper presented by the government justify an early decision point under the enhanced HIPC Initiative. They recommend approval of a decision point in June 2000, based on the discussions by the Executive Boards of the IMF and IDA. Interim assistance under the HIPC Initiative will be contingent upon the continued implementation of strong macroeconomic and structural policies that will be monitored through reviews under the PRGF arrangement. In parallel, the ongoing IDA lending and technical assistance program will monitor progress in implementing social sector structural reforms. The timing of the completion point will depend on the successful implementation of a range of reform objectives. These combined indicators of macroeconomic stability established under the PRGF arrangement with structural and social development measures agreed in the policy dialogue between IDA and the authorities, as summarized in Box 2 above. The Senegalese authorities expect that they will have completed a full Poverty Reduction Strategy Paper for a completion point and satisfied other conditions by end-2001.
50. Executive Directors may wish to focus on the following issues and questions:
51. Eligibility and decision point. The staff and management believe that Senegal is eligible for relief under the enhanced HIPC Initiative and recommend approval of a decision point. Do Executive Directors agree?
52. Amount and delivery of assistance. Senegal meets the revenue and openness thresholds for qualification under the fiscal window. In order that the ratio of the NPV of end-1998 debt and central government revenue may be reduced to 250 percent, total assistance under the enhanced HIPC Initiative would amount to US$452 million in 1998 NPV terms. Of that total amount, US$116.1 million would be provided by the International Development Association and US$42.3 million by the International Monetary Fund. Do Executive Directors agree?
53. Completion point. The staff and management believe that Senegal has achieved macroeconomic stability and is designing a comprehensive policy to fight poverty. In view of this track record, they recommend a floating completion point which would be reached when the conditions specified in Box 2 above have been met. Do the Executive Directors agree with this recommendation?
54. Creditor Participation. Some multilateral institutions may require bilateral financial support in order to deliver their share of assistance under the enhanced HIPC Initiative assistance to Senegal. Do Directors agree that the staffs of the Bank and the Fund continue working with other multilateral creditors toward securing their participation?
Senegal: Past Reforms and Future Milestones
b. Future Milestones
b. Future milestones
b. Future milestones
4. Exchange Rate
b. Future milestones
5. Finance & Banking
b. Future milestones
6. Fiscal Policy
b. Future milestones
7. Water Supply
b. Future milestones
8. Public Administration
b. Future milestones
9. Private Sector
b. Future milestones
10. Legal and Judicial Reforms
b. Future Milestones
Senegal: Debt Management Issues
The Direction de la Dette et de l'Investissement (DDI) is the department in the Ministry of the Economy and Finance responsible for public debt management in Senegal. The principal functions of the small public debt division within the DDI are: (i) to project debt service payments; (ii) to insure, together with the Treasury and the Central Bank, payment of debt service due; (iii) to follow the evolution of public debt; (iv) to produce statistics and analysis on Senegal's debt; (v) to prepare and execute contracts of guarantee and on-lending; (vi) to implement rescheduling and debt reduction operations; and (vii) to provide policy advice on new borrowing and debt reduction operations.
The main obstacle for effective debt management in Senegal is the current mainframe system used for debt recording. This system needs to be replaced as it cannot provide adequate projections for debt data, is prone to data-entry error, is not user-friendly, and requires a substantial amount of training to use. Officials from the Ministry are currently working on creating a new computerized debt database. However, the country would like to acquire the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS). In order to do this, the DDI would have to find financing for the start-up costs involved in making CS-DRMS operational, including the funding of software, equipment, installation and training.
A further issue that needs to be addressed is the present level of staffing for the Public Debt Division. The staffing complement of the division has been reduced by approximately three-quarters in recent years to its present level of just three officials. In addition to recruiting extra personnel for the division, capacity-building measures would require a training program for new and existing staff. Although officials from the public debt division have participated in regional debt management workshops organized by Debt Relief International (DRI), a comprehensive debt management training program remains to be established.
The officials of the DDI have identified the measures necessary for debt management capacity building in Senegal.16