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The following item is a Letter of Intent of the government of Republic of Senegal, which describes the policies that Republic of Senegal intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Republic of Senegal, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
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The Minister

Dakar, June 4, 1999

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Camdessus:

1.  On April 20, 1998, the Executive Board of the International Monetary Fund (IMF) approved a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF) for Senegal. The first annual arrangement under this facility expired on February 28, 1999. To consolidate the results achieved thus far, insure sustained economic growth, and reinforce the financial viability, the government of Senegal has adopted the economic reform program for the second year, emphasizing, inter alia, the strengthening of structural reforms and the continuation of sound budgetary and monetary policies.

2.  To support implementation of its program, the government of Senegal is requesting from the International Monetary Fund a second annual arrangement under the ESAF. In cooperation with the staffs of the Fund and the World Bank, the government of Senegal has updated its medium-term economic and financial policy framework paper (PFP), which is being forwarded to you today under separate cover. The attached memorandum on economic and financial policies, based on the policy framework paper mentioned above, describes the objectives and policies that the government intends to implement during the next three years, as well as the specific policies and measures that it has adopted for the second year of the program, from April 1, 1999 to March 31, 2000.

3.  The government will communicate to the Fund all the information requested by the Fund to evaluate Senegal's progress in implementing its economic and financial policy and achieving the program objectives.

4.  The government believes that the policies and measures set forth in the attached memorandum will enable it to achieve its program objectives, but is ready to adopt promptly any additional measures that may prove necessary to this end. During the period of the second annual ESAF arrangement, the government will consult with the Managing Director on the adoption of any measure deemed appropriate, at its own initiative or whenever the Managing Director requests such a consultation. In addition, after the period covered by the second arrangement and while Senegal has financial obligations to the Fund arising from loans granted under this arrangement, the government will consult with the Fund periodically, at the government's initiative or whenever the Managing Director of the Fund requests a consultation on Senegal's economic and financial policies.

5.  In any event, the Fund and the government of Senegal will conduct a first review of the 1999/2000 program supported by the second annual ESAF arrangement, which will be completed by end-December 1999, and a second review, which will be completed by June 15, 2000 in order to review the progress achieved in the program's implementation.

Sincerely yours,

Mouhamadou El Moustapha Diagne Minister of Economy, Finance, and Planning
Attachment: Memorandum on Senegal's Economic and Financial Policies for 1999


Memorandum on Economic and Financial Policies for 1999
June 4, 1999

I.   Introduction

1.  In 1998 the Government of Senegal embarked on a new medium-term economic and financial program supported by a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF), covering the period 1998-2000. The program is designed to build on the positive results achieved during the previous period (1994-97), to promote strong and sustained growth and reduce poverty, while reinforcing domestic and external financial viability. To achieve these objectives, the government has focused its actions on the consolidation of the fiscal position, liberalization of the trade regime, and on the deepening of structural reforms, including an ambitious privatization program; decisive reforms in the energy, transportation, and agriculture sectors; the modernization of public administration; the creation of a environment propitious for private sector development; and an intensification of efforts to develop human resources. To support these reforms, Senegal has continued to benefit from substantial assistance from the international community, in particular from the International Monetary Fund, the World Bank, the African Development Bank, the European Union, and several bilateral partners, which also granted a stock of debt operation in June 1998 under the aegis of the Paris Club.

2.  As indicated in Section II of this memorandum, implementation of the first annual program has been satisfactory, though there were delays in completing several structural reforms. The government of Senegal is determined to make further progress in its reform program under a second annual program to be supported by the ESAF arrangement, as outlined in Sections III and IV.

II.  Recent Economic Developments

3.  Under the first year's ESAF-supported program, economic developments in Senegal were positive, with increased growth, lower inflation and a reduced external current account deficit compared to 1997. Real GDP growth is estimated to have been 5.7 percent in 1998, with a strong performance in the secondary and especially tertiary sectors offsetting a further decline in agricultural production. Inflation was reduced to an end-period rate of 0.9 percent compared with an increase of 1.9 percent at end-December 1997, helped in part by a decline in the retail prices of petroleum products. The external current account deficit (excluding official transfers) improved slightly compared with the previous year, partly because of the impact of debt service reduction, following the stock of debt operation under the aegis of the Paris Club.

4.  Budget execution in 1998 was better than programmed,1 with overall revenue exceeding the target, and total expenditure held below program limits. The basic fiscal surplus,2 at 2.3 percent of GDP, was nearly double the amount programmed, while the overall budget deficit (on a commitment basis and excluding grants), at 1.2 percent of GDP, was well below the 2 percent of GDP programmed. Government revenue exceeded the program target by 1 percentage point of GDP to reach CFAF 460 billion (16.7 percent of GDP), largely because of strong receipts from taxes on foreign trade. These were higher than forecast, despite the tariff reduction implemented in April 1998 in the context of WAEMU's Common External Tariff (CET). The higher-than-expected customs duty collection was the result of continued efforts at improving customs administration, widening of the tax base, and also a lesser recourse by importing industries to the tariff discounting mechanism, the précisions tarifaires. Public expenditure, at 17.8 percent of GDP, was in line with the program target, with the overruns on the special and correspondent accounts being offset by lower-than-targeted outlays on current expenditures. The latter were below forecast because of a lower wage bill due to delays in introducing the merit-based promotion system in the civil service, reduced interest payments on account of the 1998 Paris Club stock of debt operation, and a lower level of subsidies on butane gas and fuel oil sold to SENELEC in line with depressed international oil prices. However, advances granted by the Treasury to cover the operational losses of the National Retirement Fund (FNR) and the Urban Community of Dakar, and delays in reimbursements by the National Post Office of advances granted by the Treasury contributed to a deterioration in the deficit on the special accounts and correspondent accounts.

5.  The money supply rose in line with nominal GDP growth. Senegal's net foreign assets increased by CFAF 34.5 billion (5.9 percent of beginning-of-period money stock), making a significant contribution to the increase of the net foreign assets of the Central Bank of the West African Monetary Union (WAMU). The strong fiscal performance enabled the authorities to reduce net bank claims on the government below program projections. Credit to the private sector increased by 11.2 percent. The banking system remains broadly healthy, and compliance with the prudential ratios of the regional Commission bancaire was largely satisfactory, although the level of insider lending in one bank remains above the regional norm; on the other hand, the restructuring and recapitalization of the Banque Sénégalo-Tunisienne were completed.

6.  Significant progress was made towards adoption of WAEMU's CET. Firstly, the first-phase in tariff reductions was implemented in April 1998, which lowered the unweighted average assessed duty rate on non-WAEMU dutiable imports from 19 percent to 16.3 percent; secondly, the government adopted in January 19993 a classification of imported goods into four tariff categories consistent with the WAEMU guidelines. Pending the adoption of community-wide arrangements, existing surtaxes were maintained. The number of précisions tarifaires had been halved in April 1998, with the result that the c.i.f. value of imports benefiting from the application of précisions tarifaires fell by 45 percent compared to 1997. Nonetheless, because of a delay in the uniform application of appropriate tariff classifications by all WAEMU member countries, the précisions tarifaires were not fully eliminated by end-1998 as had been planned. Furthermore, petroleum product marketing and pricing were fully liberalized. The authorities began adjusting domestic retail prices automatically each month to reflect changes in world market price of petroleum products and of the value of the US dollar; as a result, it was possible to reduce below projections the subsidies granted on butane gas, and on the fuel used by SENELEC to generate electricity. Nevertheless, SENELEC was unable to pay the distributors for fuel deliveries and accumulated large arrears to them. As a result, distributors accumulated arrears to the refinery SAR, which, in turn failed to pay an equivalent amount in taxes to the Treasury. Also, the amendment terminating the convention between the state and the refinery SAR is still pending.

7.  Five enterprises were privatized in 1998,4 out of 13 originally slated for sale or liquidation. The urban transport company (SOTRAC) was liquidated as planned; however, the strategic partner selected to take over the concession and the assets of the former company withdrew in early 1999. The strategic partner for SENELEC was selected in February 1999 and has assumed full management of the company. The buyer of Air Senegal was chosen in March 1999 and will start operating in June 1999. The call for bids for the groundnut company SONACOS was launched in February 1999, and the selection of the strategic partner is scheduled for July 1999. A report on the economic and financial performance during 1997 of the remaining public enterprises was provided to Fund staff as scheduled. Some delays were encountered in the planned improvements in investment programming and implementation of the public expenditure reviews. In the area of good governance, the first phase of the user survey on the quality of public services was completed. The judicial reform is progressing, including efforts to step up the training of magistrates and to modernize the courts.

8.  The quantitative performance criteria and benchmarks were observed, with the exception of technical deviations in three criteria at end-June, 1998. The structural performance criteria and benchmarks were also observed, except for (a) a delay until October 13, 1998, in the end-August benchmark pertaining to the call for bids for the privatization of the electricity company (SENELEC), and (b) the benchmark for completion of a plan for the reform of the National Retirement Fund (FNR) because of protracted negotiations with labor unions on measures that had been proposed for restructuring the fund. Waivers were granted for the nonobservance of the criteria after implementation of corrective measures.

III.  Medium-Term Strategy and Ojectives

9.  Taking into account the generally satisfactory results achieved in 1998, the government has updated its medium-term strategy and objectives as set out in the Policy Framework Paper for 1999-2001. The government maintains its basic medium-term objectives to preserve macroeconomic stability and external viability, and to accelerate and deepen structural reforms in order to achieve strong and sustainable growth and to significantly reduce poverty. The program projects real GDP growth of about 6 percent a year; seeks to keep inflation below 3 percent; to maintain the basic fiscal balance in surplus, the overall budget deficit (on a commitment basis and excluding grants) below 4.4 percent of GDP;5 and to lower the external current account deficit (excluding official transfers) to around 6 percent of GDP in 2001, consistent with expected flows of project assistance and private foreign investment.

10.  Five key areas have been identified for action to accelerate and deepen structural reforms. First, the government will complete the privatization program and restructuring of the enterprises remaining in its portfolio by end-2000.6 Second, with the assistance of the World Bank, it will embark upon an ambitious institutional reform of the transportation sector so as to lower costs of services and improve the competitiveness of the economy. Third, also with World Bank and other donors' assistance, the authorities will accelerate the reforms in the energy, water, and agricultural sectors. Fourth, they will deepen action for private sector development and investment promotion, by reducing the structural rigidities that impede private initiative, and by streamlining regulatory procedures affecting economic activity and investment. Fifth, the government will implement a coherent program of good governance with emphasis on: fostering the rule of law, vigorously tackling corruption and promoting transparency, reform and modernization of public administration and public services, improvement of the judicial system and its operations, and implementation of appropriate decentralization policies.

IV.  The 1999 Program

11.  Consistent with the revised medium-term strategy, under the 1999 program (April 1, 1999-March 31, 2000), the government projects a GDP growth of about 6 percent, led by a recovery in agricultural output, and seeks to limit inflation at 2 percent and contain the external current account deficit (excluding official transfers) at 7 percent of GDP. The program also aims at increasing domestic savings and investment by about one percentage point of GDP each, to 14 and 20 percent of GDP, respectively.

A.  Government Finance

12.  The original budget for 19997 projected a basic fiscal surplus of 2.6 percent of GDP and an overall budget deficit (on a commitment basis and excluding grants) of 3.3 percent of GDP. However, in May 1999, the government submitted a supplementary budget bill to Parliament, which proposes to utilize accumulated privatization receipts amounting to CFAF 60 billion (equivalent to 2 percent of GDP), of which CFAF 20 billion will be devoted to current outlays of an exceptional and nonrecurrent nature, including severance pay for employees of enterprises liquidated or privatized in 1998. This amount also includes CFAF 9.2 billion to regularize outlays already made in 1998, of which CFAF 5 billion is to pay for services rendered in 1998 by the preshipment inspection company. The government intends to spend the remaining CFAF 39.8 billion, to a large extent, on rural infrastructure projects, including CFAF 3.1 billion for the construction of two regional hospitals. CFAF 23 billion is expected to be spent in 1999, and the balance in 2001. The investment projects to be undertaken in 1999 have been reviewed by the World Bank on the basis of the evaluation criteria used for the public investment program. With this supplementary finance law, the consolidated basic surplus will be equivalent of 1.7 percent of GDP, and the overall fiscal deficit (on a commitment basis and excluding grants) will amount to 4.4 percent of GDP.

13.  In line with its commitment under the 1998 program, in 1999 the government intends also to reduce the end-1998 stock of statutory advances granted by the central bank (BCEAO) by CFAF 9 billion. The balance of the statutory advances at December 31, 1999 will be eliminated by year-end 2001 through the use of Treasury deposits at the central bank and possibly a recourse to the financial market. In order to minimize the financial cost associated with the possible issuance of Treasury bills to reduce the remaining statutory advances, the Government has decided to limit the volume of treasury bills to be issued by December 31, 2001 to a maximum of CFAF 35 billion, equivalent to 57 percent of the outstanding balance of statutory advances as of December 31, 1999 (CFAF 61.4 billion). The end-of-program review will examine this issue, taking into account WAEMU's stability pact and Senegal's financial situation. Notwithstanding the stipulations of this stability pact, however, the percentage of statutory advances to be reduced through recourse to the financial market cannot exceed 57 percent as indicated above.

14.  The bulk of the additional investment outlays in the supplementary budget will be directed at improving rural infrastructure, including rural road rehabilitation and water wells, which would ultimately benefit the poorer segments of the population. The budgetary allocations already made for the health and education sectors under the 1999 budget are in line with the understandings reached with the World Bank. No additional allocations is being provided in these areas in the supplementary finance law because of bottlenecks encountered in previous years in spending all the regular budgetary allocations in these areas. The government will persevere with its policy of improving the implementation capacity of line ministries. In this regard, with the assistance of the World Bank, it will prepare a report identifying factors behind these bottlenecks and proposing remedial actions before end-September 1999. In the meantime, the government, with assistance from the World Bank and UNDP, will accelerate the implementation of the national program to alleviate poverty. Specific well-targeted programs to alleviate poverty in major urban centers will also be put in place by September 30, 1999.

15.  Total revenue in 1999, taking into account a reduction of income taxes on low income salaries (estimated impact of CFAF 6 billion) is projected to reach CFAF 502.1 billion or 16.8 percent of GDP. The revenue projection incorporates the repayment, in two tranches, of tax arrears due by SENELEC/SAR, which were estimated at CFAF 7.2 billion at end-March 1999. A first tranche of CFAF 4 billion will be paid to the Treasury by June 15, 1999, and the remainder, estimated at around CFAF 3.2 billion, will be paid by September 30, 1999. The amendment formally ending the convention between the SAR and the government will be adopted before June 15, 1999. The potential revenue losses linked (a) to the full year impact of the tariff reform introduced in April 1998, (b) the increase from 60 to 80 percent in the abatement on intra-WAEMU imports of approved industrial products adopted on January 1, 1999, and (c) the introduction of the common tariff classification of imported products according to the WAEMU guidelines, are expected to be offset by the full year effect of the substitution of the petroleum price stabilization scheme with excise taxes, by the phasing out of the précisions tarifaires, and by a slightly more buoyant performance in VAT receipts. In addition, although these are not reflected in the revenue projections, the authorities will undertake a significant reduction in exemptions, in particular a rigorous control of those linked to contractual obligations, and reduce fraud, including through improvements in the computerized customs management system and the strengthened monitoring of suspensive customs duty arrangements.

16.  The government will introduce the final phase of WAEMU's CET, as originally designed, on January 1, 2000. In line with the directives of the WAEMU, this reform will reduce the top duty rate from 25 to 20 percent, replace the 5 percent stamp duty levied on most imports with a statistical tax of 1 percent, and fully exempt intra-WAEMU imports of approved industrial products. These measures are estimated to lead to a loss in revenue of approximately CFAF 33 billion (equivalent to 1 percent of GDP) in the year 2000. The government will also implement the decisions, adopted in March 1999 at the regional level, on the use of temporary degressive surtaxes (TDP) and officially established minimum values for purposes of protection for certain products, and ensure that they are consistent with WTO rules. The current system of taxation of rice imports will be reformed before end-September 1999, based on the outcome of a study on the productivity of the rice sector that will be finalized by July 31, 1999. The envisaged taxation will apply to all rice imports—whole or broken—and will take into account, if needed, the supplementary protection mechanisms to the CET foreseen by WAEMU, namely officially established minimum values, the TDP, and the conjunctural import surcharge (TCI),8 which will result in an elimination of existing surtaxes. The Fund and the World Bank staffs will be consulted on both the study and the adoption of the new taxation system. Concerning the précisions tarifaires, the government will submit 655 précisions pertaining exclusively to social products (medications and school books) and subject to negative nominal protection to the WAEMU Commission, with a request to replace them by appropriate customs arrangements agreed upon at the regional level; a further 473 précisions discounting customs duties and VAT, or serving as identifiers, will be eliminated by September 30, 1999; finally the 392 remaining précisions pertaining to imports subject to a zero or positive nominal protection will be eliminated, at the latest, by December 31, 1999. Also, the government will lift its exception to 150 tariff lines in the common tariff classification, following a decision to be taken by the WAEMU on the reservations made by Senegal in this regard.

17.  To make up for the customs revenue losses caused by the reduction in the external tariff and in the context of the agreed program of regional harmonization of indirect taxation, the government will introduce a single rate VAT on July 1, 2000, to allow sufficient time for careful preparation. Based on the need to compensate revenue losses and taking into account the recommendations of recent studies, including the one undertaken by the Fund's Fiscal Affairs Department, the government has decided to set the rate at 18 percent, in harmony with rates prevailing in most other WAEMU countries. The yield of this VAT will be enhanced if the number of exempted goods and services is strictly limited. Because of the introduction of the single rate VAT only on July 1, 2000, the projected full year losses of the introduction of the CET will not be fully compensated by the VAT in 2000. The government intends to offset the revenue shortfall by a number of specific revenue and expenditure measures to be agreed upon during the midterm review. Also, pending the adoption of the regional investment code within WAEMU, the government will not broaden the scope, or the provisions, of the Senegalese investment code. These measures will allow the tax base to expand, reduce tax evasion, and increase the efficiency of the customs and tax administrations. They will be supplemented with steps to reinforce monitoring of large taxpayers, generalize the use of the single identification number (NINEA), and complete the computerization of VAT collection.

18.  In 1999, the government will continue to contain the growth of current expenditure, including the wage bill, in order to ensure adequate funding for priority social sectors, maintenance of public infrastructure and investment, in line with the recommendations of the Public Expenditure Review. The overall wage bill will grow moderately compared with 1998 and be limited to CFAF 170 billion. The number of civil servants (excluding volunteer teachers) will remain within the limit of 67,000 throughout the program period. Expenditure projections for 1999 fully take into account the cost of preparations for the presidential elections in early 2000, estimated at CFAF 4.5 billion. Any savings achieved on wages or other non-priority current outlays will continue to be directed toward social sectors. The share of the social sectors in the operating budget is expected to reach 38 percent, with 31 percent going to education and 7 percent going to health. In addition, consistent with the conclusions of the Public Expenditure Review, the government will improve budget management in the social sectors and the efficiency of the procurement code; it will take steps to strengthen absorptive capacity in the ministries of health, education, and justice, in the execution of their investment budgets.

19.  The deficit on the special and correspondent accounts will be roughly in line with the 1998 outcome, given the delays in implementing the reforms of the FNR. The law amending the existing legislation will be submitted to Parliament during its October 1999 session and the measures, which tighten the provision of retirement benefits and aim at ensuring the retirement's fund long-term viability, will be implemented in 2000. Other transfers to the correspondent accounts, in particular to cover the deficit of the urban community of Dakar, will be strictly limited. An external audit of the operations of the Fonds de Promotion Economique (FPE) will be undertaken and finalized before December 31, 1999. This audit will be undertaken by an independent audit firm of international repute, selected by international bids. The Fund staff will be consulted at the time of the preparation of the terms of reference, the invitation letter, and the short list. A preliminary report will be drafted and forwarded to the Fund staff before the forwarding of the final report. Following the settlement of all past extra budgetary arrears and the payment of current debt maturities, gross outstanding domestic public debt was reduced from 13.7 percent of GDP at end-1997 to 11.4 percent at end-1998. Settlement of current obligations in 1999 should reduce the stock of domestic public debt to 9.6 percent of GDP by end-1999, and further to 6.3 percent by end-2001. The Government intends to achieve these targets while refraining from accumulating any new arrears.

20.  The 1999 investment budget, drafted within the framework of the three-year public investment program (PTIP) for 1999-2001, provides for a 13 percent increase in capital expenditure. This is largely due to an increase in domestically-financed investment outlays through increased public savings, and the use of exceptional resources from privatization operations. In 1999, the government will fully implement the action plan for improving preparation and execution of the investment budget, for strengthening the ability of the Ministry of Finance to evaluate, select, and monitor projects and programs, for expanding the capacities of certain technical ministries to plan and execute programs, and for improving the coordination between the government and donors. This will involve establishment of sectoral spending programs, such as those prepared for the health and education sectors, and the integration of all capital expenditures executed by the government in the presentation of budgetary operations. To this end, the government will transmit to the Fund before June 15, 1999, a complete series of investment outlays financed by external resources for the 1994-98 period.

21.  The quarterly objectives set for budgetary revenue, the wage bill, the basic balance, net use of bank credit, and nonconcessional external loans are provided in the annexed Table 2. Any budget revenue shortfall or expenditure overrun, in particular the wage bill, relative to program limits, will be offset by additional tax revenue or a reduction of nonpriority expenditure, to ensure that the financial objectives of the program are met.

B.  Monetary and Financial Sector Reform

22.  The Central Bank of West African States (BCEAO) will continue to conduct a prudent monetary policy consistent with the growth, inflation, and balance of payments objectives of the WAMU. Money demand in 1999 is expected to grow broadly in line with nominal GDP. Net foreign assets are projected to increase by the equivalent of 11.2 percent of beginning of period money stock, which should again enable Senegal to make a significant net contribution to the net foreign assets of the BCEAO. The net domestic assets of the banking system are expected to decline by the equivalent of about 2 percent of beginning-of-period money stock, principally because the projected expansion of credit to the economy of about 9 percent will be more than offset by a decline in net credit to the government.

23.  The health of the banking system has continued to improve. Following the restructuring of the Banque Sénégalo-Tunisienne (BST), all banks now meet minimum capital requirements and most meet the other prudential regulations of the regional Commission bancaire. Efforts are being made to ensure that a large commercial bank observes the insider lending ratio, including, possibly, through the transfer of some of the loans. Nonetheless, the amount of non-performing loans remains a potential source of fragility, and a bank specializing in agricultural credit may continue to require close monitoring. The adequacy of the legal framework and of procedures essential for the recovery of non-performing loans will be significantly improved by the adoption of the OHADA recovery and enforcement procedures. The government will continue to support the efforts of the WAMU Commission bancaire to ensure that all prudential regulations are observed and to strengthen the prudential arrangements in the zone, and will vigorously support any recommendations resulting from on-site inspections. It will also pay particular attention to monitoring the development and solvency of mutual savings and loan institutions.

24.  The government will continue to support improved access of Senegalese business to capital markets, including through the WAEMU regional stock exchange, which began operations in late 1998, so as to enhance the efficiency of intermediation between private savings and investments. It will also contribute to the expansion of the network of mutual savings and loan institutions, and other forms of micro-lending, which is of particular importance for smaller enterprises.

C.  Structural Reforms

25.  The policy actions in the structural area are among the government's highest priorities for the acceleration of economic growth and the achievement of a lasting reduction in poverty. They include the privatization program, support for private sector development, the national program of good governance, key reforms in the energy, agriculture, and transport sectors, the development of human resources, improvements in education and health, poverty reduction, and initiatives under way to promote trade and economic integration among the WAEMU countries.

26.  To complete the reform of the public enterprise sector, the government has selected eighteen enterprises to be privatized in 1999-2000. Thirteen of these will be put up for sale in 19999, including six large enterprises: additional government shares in the electricity company (SENELEC); the groundnut processing company (SONACOS); the urban transport company (SOTRAC); the Méridien Président Hotel; the textile development company (SODEFITEX); and the Dakar-Bamako line of the national railway (SNCS). Concerning SOTRAC, steps are being taken to select a new strategic partner and a new, mostly privately owned operating company will start its activities in November 1999. The hotel Méridien-Président will be sold through international tender in August 1999. Concerning SODEFITEX, the government has submitted the draft law concerning its privatization to Parliament and intends to finalize this transaction by November 30, 1999; when finalized, the government's share of the capital will be lowered from 77.5 to 30 percent through a sale of shares to cotton producers, company employees, and small-holders. A company (SETI) has already been set up for the operation of the Dakar-Bamako line of the National Railways Company (SNCS); it will start operating by end-December 1999. The other companies scheduled to be privatized in 1999 are a tapestry weaving company (MSAD); an industrial promotion and research company (SONEPI); a real estate company (SICAP); and the company to manage the Dakar industrial estate (SODIDA). The status of the equipment research center (CEREEQ) will be reviewed, and the assets of the national drilling company (SONAFOR) will be sold.

27.  In 2000, three other companies will be privatized, the film distribution company (SIDEC); the company for development of the Petite Côte (SAPCO); and the reinsurance company (SENRE). The assessment of the national lottery (LONASE) and the international foreign trade center (CICES) will start in 2000 and their privatization could take place only in 2001. After completing these sales, only a very small number of public service companies will remain in the government's portfolio and the Government's share in the combined share capital of public enterprises will have been reduced from 87 percent in 1994 to 43 percent in 2001. The remaining enterprises will continue to be restructured and strengthened. Concerning the National Postal Services, the government will establish a strategy to guarantee its long-term viability. The government will provide Fund staff with the report on the economic and financial performance of public enterprises in 1998, as soon as possible, and in any case before end-December, 1999.

28.  Private sector development and investment promotion is a top priority on the government's agenda. This includes, in particular, the adoption of a comprehensive private sector strategy to promote private initiative and develop a favorable environment for private sector activity, including through a reinforcement of the operation of business associations. To streamline administrative procedures for private operators and investors, the recommendations retained by the Government from the World Bank FIAS's investors roadmap report will be implemented before end-1999. These recommendations could include a better functioning of the one stop window for investors (guichet unique), a reduction in multiple sectoral approvals and registrations, and improved access to public land. Also, the Promotion Agency for investors and exporters will be set up before year-end.

29.  The government is firmly committed to implement its national program of good governance which has four major components. First, the strengthening of the rule of law, together with improving public awareness and the deepening of the democratic system, will be foremost in the fight against corruption, including the reduction of all forms of fiscal fraud, for example customs fraud and irregularities in the granting of fishing licenses. Second, the reform of the central government will be deepened and will include a further review of existing civil service regulations and improved human resources management, including preparation of staffing plans for ministries. The new pay and promotion system, which had been delayed, will be effectively implemented before December 31, 1999. This system, which combines both automatic and merit components, constitutes an intermediate step towards a fully merit-based promotion system. The second phase of the user survey on the quality of public services (civil servants survey) will be undertaken before end-June, 1999 and will be followed immediately thereafter by a national focus-group discussion that will include representatives of all sectors of society. Third, the ongoing reform of the legal and judicial system will be accelerated, inter alia, by increasing budgetary allocations for the administration of justice, improving the training of magistrates and judicial personnel in commercial law, and implementing the new recovery and enforcement procedures consistent with the OHADA uniform acts on collateral. Fourth, the planned decentralization policies will focus on capacity building of local entities and their improved financing through the municipal development agency (ADM) and the regional development agency (ARD) which will be set up before end-1999.

30.  Concerning sectoral policies, the government will move decisively to implement the measures outlined in the PFP in the priority areas of agriculture and fisheries, water management, energy, transport, and the environment. It will, in particular, adopt a concrete policy on the rational use and conservation of fish resources and launch a comprehensive reform of the transport sector with a wider participation of the private sector. Continued reforms in the energy sector include, in particular, the launch before end-December 1999 of the capacity enhancing investments at the refinery (SAR).

31.  The development of human resources and poverty alleviation are also high on the government agenda, which intends to implement fully the actions outlined in the PFP relating to the areas of health, education, population policy, the role of women, and the fight against poverty. In particular, the 10-year education and training program (PDEF) will be adopted before end-June, 1999. Also, as already noted, a study identifying the reasons for delays in spending regular budgetary allocations in the areas of health and education and an action plan to remedy this situation will be communicated to the Fund staff before end-September 1999.

32.  Senegal actively participates in the initiatives under way to promote economic integration among WAEMU countries. These are guided by the action plan adopted in January 1999 by the WAEMU Heads of State and Government, which includes: reinforcing the convergence of macroeconomic policies and performance, continuation of structural reforms, and acceleration of regional integration, including through timely adoption of appropriate sectoral policies. The initiatives at the regional level pertain to moving to the last phase of the common external tariff, enacting the supplementary protection mechanisms, the common investment code, the harmonization of indirect and direct taxation, the common budgetary nomenclature, accounting and procedures framework, and ensuring the free movement of people, multilateral surveillance, sectoral policies, and structural funds.

V.  External Sector and Debt Sustainability

33.  Senegal's medium term balance of payments outlook remains favorable. The worsening of the trade deficit projected in 1999, due to a faster increase in imports compared to exports, will result in a slight deterioration in the current account deficit as a ratio to GDP. Nonetheless, sizeable capital inflows linked to investments made by the chemical company (ICS), the privatization of SENELEC, and disbursements from the World Bank, are expected to lead to a surplus in the overall balance of payments position, and a build-up of net foreign assets with the BCEAO projected to reach some CFAF 70 billion. After taking into account financing expected from the World Bank and the Fund, the second year program supported by the ESAF arrangement will be fully financed.

34.  Following the stock of debt reduction operation granted by Paris Club creditors in June 1998, the government has entered into bilateral agreements with most Paris Club creditors before the March 31, 1999 deadline. A second follow-up report was forwarded to the Paris Club Secretariat in May 1999. The government is taking steps to conclude bilateral agreements with other non-Paris Club bilateral creditors, on terms that are at least as favorable as those granted by Paris Club creditors.

35.  To maintain a sustainable external debt position, the government will continue to seek foreign financing in the form of grants and highly concesssional borrowing. It will not contract or guarantee any new nonconcessional loans,10 nor will it allow any accumulation of external arrears during the program period. In addition, the government will continue efforts to improve collection of data on grants and foreign assistance, with a view to reconcile these data with those recorded by donors, and those included in the budget.

VI.  Statistical Issues

36.  The government is aware of the need to step up actions required to improve the quality and coverage of economic and social statistics. In addition to the measures already taken and those now being implemented to improve monetary, balance of payments, and production statistics, the government will implement an action plan to reduce remaining statistical weaknesses in the national accounts, foreign trade, industrial production, and social indicators. To this end, it will increase the resources allocated to its statistics departments and will seek technical assistance from traditional development partners and the IMF. Also, to facilitate preparation and monitoring of economic policy, the government will ensure regular publication of economic and social development statistics by the Directorate of Forecasting and Statistics of the Ministry of Economy, Finance, and Planning. Finally, the government will persevere with the implementation of the accelerated program to tackle the potentially devastating impact of the Y2K bug in the administration's computer systems, in particular the customs GAINDE system. The Y2K Pilot Committee has been provided with the appropriate financial resources in order to complete the task of making the computer systems immune to the year 2000 bug, by November 30, 1999.

VII.  Program Monitoring

37.  To ensure the successful implementation of the program, the government will take the following actions before June 15, 1999: (a) provide Fund staff with a complete time series (1994-98) on a comprehensive measure of public sector investment outlays, including previously off-budget investment expenditures financed by donors; (b) adoption of the legal amendment formally terminating the convention with the refinery SAR; (c) payment by SENELEC/SAR to the Treasury of CFAF 4 billion as a partial settlement of arrears for the delivery of fuel oil.

38.  Program execution will be monitored through the performance criteria and benchmarks detailed in the annexed Tables 2 and 3. The quantitative performance criteria for end-September 1999 and the quantitative benchmarks for end-March 2000 are (a) floor on the basic balance for government financial operations narrowly defined, i.e., excluding grants and foreign-financed investment expenditure; (b) a ceiling on net bank credit to the government; (c) a zero ceiling on outstanding short-term external credits (excluding normal import credits); (d) a zero ceiling on nonconcessional external loans of more than one year and less than 12 years contracted or guaranteed by the government; and (e) a limit of CFAF 8 billion on nonconcessional borrowing with a maturity of more than 12 years to accommodate loans from the West African Development Bank (BOAD)11. These variables will also serve as benchmarks for end-June and for end-December 1999. Cumulative quarterly targets for budgetary revenue and for the wage bill will constitute quantitative benchmarks. In addition, the program will include continuous performance criteria on nonaccumulation of new domestic payments arrears and nonaccumulation of new external payments arrears. Also, during the program period, the authorities will not impose exchange restrictions, introduce multiple currency practices, introduce bilateral payments arrangements that are inconsistent with Article VIII, and impose import restrictions for balance of payments reasons.

39.  The structural performance criteria for end-September 1999 are (a) completion and communication to Fund staff by September 30, 1999 of a study on the factors that account for the delays in spending regular budgetary allocations in the areas of education and health and an action plan to reverse this trend (as described in paragraph 14); (b) elimination by September 30, 1999 of 473 précision tarifaires granting customs duty or VAT discounts or serving as identifiers (as described in paragraph 16); (c) elimination of the variable levy on broken rice and the surtax on whole rice by September 30, 1999 in order to streamline the taxation of rice imports (whole and broken rice) in line with WAEMU's supplementary protection mechanisms (as described in paragraph 16); (d) submission to Parliament for its October 1999 session of a draft law amending existing pension legislation (as described in paragraph 19); (e) payment by September 30, 1999 by SENELEC/SAR of the balance of all the arrears on account of fuel oil delivered (as described in paragraph 15); (f) communication to the Fund staff before September 30, 1999 of the draft 2000 budget law including the replacement of the customs stamp duty by a 1 percent statistical tax, the incorporation of the enlarged definition of investments, and revenue and expenditure measures needed to close a projected financing gap of CFAF 11.6 billion (as described in paragraph 16). The structural benchmarks are (a) bring the Hotel Meridien Président to the point of sale before August 31, 1999 (as described in paragraph 26); (b) communication to the Fund staff before September 30, 1999 of an action plan based on the recommendations of the FIAS report (as described in paragraph 28); (c) communication to the Fund staff before September 30, 1999 of an action plan by the customs to combat fraud, including the cleaning up of the operations of the customs brokers, the fight against the illegal trade in narcotics, and a stringent control of preferential customs regimes (as described in paragraph 29). Lastly, progress in program execution will be evaluated during a first review to be concluded by end-December 1999. This review will focus, inter alia, on (a) execution of the privatization program for 1999; (b) the modalities for implementing the third stage of the tariff reform, beginning on January 1, 2000, including progress made in the full elimination of the remaining précision tarifaires; (c) the major components of the 2000 budget, and in particular the modalities for adoption of a single rate VAT by July 1, 2000 at 18 percent to compensate for the revenue losses linked with the final phase of the CET; (d) the reduction of CFAF 9 billion in the year-end 1998 stock of statutory advances at the central bank; (e) revenue and expenditure measures to offset revenue shortfall stemming from the delayed introduction in the VAT and to close a financing gap projected at CFAF 11.6 billion; (f) progress in the preparation of FPE's external audit report; and (g) progress achieved in the implementation of measures easing procedures faced by investors based on the FIAS report. Also, during this review, the performance criteria for March 31, 2000 will be set.

40.  The structural performance criterion for the second review is the elimination by December 31, 1999 of the 392 précisions tarifaires pertaining to products subject to a zero or positive nominal protection (as described in paragraph 16). The structural benchmarks (some of which will be converted into performance criteria during the first review) are: (a) the reduction by December 31, 1999 by CFAF 9 billion of the December 31, 1998 stock of statutory advances at the central bank (as described in paragraph 13); (b) implementation by December 31, 1999 of the reform of the national retirement fund (FNR) (as described in paragraph 19); (c) finalization by December 31, 1999 of the external audit of the Fonds de Promotions Economique (FPE) (as described in paragraph 19); (d)start of the operation by November 30, 1999 of the mostly privately owned company for urban transportation in Dakar (former SOTRAC) (as described in paragraph 26); (e) privatization by end-November 1999 of the cotton company SODEFITEX (as described in paragraph 26); (f) implementation before December 31, 1999 of the recommendations retained by the government from the World Bank FIAS's investors roadmap report (as described in paragraph 28); and (g) launching before December 31, 1999 of the capacity enhancing investments at the refinery SAR (as described in paragraph 30). Progress in the execution of the program and fulfilling the above-mentioned measures will be evaluated during the second review to be concluded by June 15, 2000.

Attachments (17K pdf):
Table 1: Quantitative and Structural Performance Criteria and
    Benchmarks for the First Annual Arrangement under the ESAF, 1998-2000
Table 2: Quantitative Performance Criteria and Benchmarks for
    the Second Annual ESAF Arrangement (1999-2000)
Table 3: Structural Performance Criteria and Structural
    Benchmarks for the Second Annual ESAF Arrangement (1999-2000)

1This outcome is based on the original narrow definition of investment expenditures (excluding public investment spending, directly financed and executed by donors), which was used in the design of the 1998 program.
2The basic fiscal balance is defined as total government revenue, excluding grants, less total expenditure, excluding externally financed investment.
3Except for 150 tariff lines for which Senegal has made reservations and an end-use tariff discounting mechanism for industrial inputs (précisions tarifaires).
4The Thiès phosphates company (SSPT); the Teranga Hotel; HAMO, a housing company; Dakar-Marine, a shipyard; and SONADIS, a distribution company.
5Calculated on the basis of Fund staff projections, taking into account amounts of foreign-financed investment outlays likely to be executed directly by donors.
6The evaluation of CICES and LONASE will be initiated in 2000 and their privatizations could take place in 2001.
7Based on a comprehensive definition of investment outlays, which includes investments directly financed and executed by donors.
8Pending the decisions expected to be taken by WAEMU's Council of Ministers by June 30, 1999.
9Including Air Senegal, which has already been sold.
10With the exception of loans amounting to CFAF 8 billion granted by the regional investment bank BOAD with a maturity of more than 12 years and a concessional element between 10 and 35 percent.
11The BOAD's operations in Senegal relate to agriculture and water management.