Public Information Notice No. 00/66

Public Information Notice: IMF Concludes Article IV Consultation with Senegal

August 16, 2000

On June 21, 2000, the Executive Board concluded the Article IV consultation with Senegal.¹

Background

Economic developments in Senegal continue to be encouraging. Real GDP growth remained above 5 percent in 1999 and average inflation below 1 percent. A rebound in agricultural output, and a strong growth in most secondary and tertiary sector activities offset the negative impact of electrical shortages on some segments of the economy. The external current account deficit (excluding official transfers) was equivalent to 7.3 percent of GDP in 1999, somewhat higher than in 1998, in part because of the impact of the increase in world oil prices. The money supply growth was faster than the nominal GDP growth. There was a strong increase of credit to the economy, but also a significant accumulation of net foreign assets by the banking system.

In 1999, the government recorded a basic budget surplus of 1.7 percent of GDP and an overall budget deficit of 3.5 percent of GDP, slightly larger than that of 1998 (3.3 percent of GDP). Revenue remained buoyant while overall expenditures increased modestly because of higher investments outlays. Nevertheless, net bank credit to the government increased modestly because of financial difficulties of the postal service and the drawdown by public entities of deposits from the banking sector at year-end.

Progress was made in the implementation of structural reforms in a number of key areas in 1999. The electrical power company and the national airline were privatized, the précisions tarifaires² were eliminated, and the Common External Tariff of the West African Economic and Monetary Union was implemented on January 1, 2000, leading to a significant reduction in the average tariff rates. However, in the run-up to the presidential elections (a new president was elected in March 2000), delays were encountered in some other major reforms. The privatization of 10 state enterprises was delayed, the automatic adjustment of retail prices of petroleum products in line with international price developments was suspended in February 2000, and the reform of the National Retirement Fund (FNR) was postponed. The new government took action to implement these reforms, including the privatization of 10 state enterprises by year-end, a cap on the budgetary subsidy linked to the freeze of retail petroleum prices, and a review of the reform of the FNR.

The authorities are committed to reducing poverty. They have adopted an interim poverty reduction strategy paper, launched a participatory process with the civil society, and initiated a range of field surveys to acquire better data on the poverty profile in Senegal. The government expects to finalize by end-December 2001 a comprehensive strategy to alleviate poverty.

Executive Board Assessment

Executive Directors welcomed Senegal's satisfactory overall performance in 1999 and so far in 2000. They noted that economic growth continues to be robust, inflation remains low, the 1999 fiscal performance was better than projected, and the external current account deficit was expected to narrow this year. While noting that there had been some difficulties in economic management in the run-up to the elections, they were encouraged by the corrective actions already taken, and stressed that these recent slippages should not detract from the favorable long-term track record of policy implementation that the authorities have established.

Nonetheless, Directors noted that the economy is still fragile and poverty remains widespread in Senegal. They stressed that, in order to assure lasting and high growth, decisive actions will be needed to strengthen budgetary performance, to reinforce structural adjustment efforts, and to enhance transparency. Therefore, they welcomed the authorities' envisaged adjustment and reform program, which should also provide a credible anchor for the poverty reduction strategy outlined in the authorities' interim Poverty Reduction Strategy Paper (PRSP).

On the fiscal front, while noting that the budgetary status for 2000 envisages some easing compared with the original framework, Directors underscored the importance of carrying forward reforms in the fiscal area, notably by offsetting the revenue impact of the tariff reduction under the Common External Tariff (CET) of the West African Economic and Monetary Union (WAEMU) with the introduction of a single-rate value-added tax (VAT) at an appropriately high rate in July 2000, as scheduled; reactivating the passthrough system for the retail prices of petroleum products as envisaged under the program; containing overall outlays, notably the wage bill and the deficit of the postal service; and strengthening management of the Treasury. The need for significant efforts to improve the efficiency of spending on health and education, including steps to increase school enrollment, was also stressed by Directors.

Directors noted that the peg of the CFA franc to the Euro has been appropriate for Senegal, and that the competitive position of domestic producers appears to be satisfactory. They welcomed the continued prudent monetary policy conducted at the regional level and the authorities' planned elimination of recourse to the central bank statutory advances, to be replaced by the issuance of treasury bills, which would further improve the indirect management of monetary policy. Directors stressed the need to continue strengthening financial intermediation and increase competition in the sector, to further compliance by the banks with the revised prudential arrangements, and to streamline the nonbank financial sector.

Directors noted the progress being made in the implementation of structural reforms, although the pace was slower than envisaged. While welcoming the implementation of WAEMU's Common External Tariff, they recommended that the authorities refrain from using the safeguard measures allowed by the CET as a means of granting additional protection to inefficient domestic production, and encouraged them to rapidly eliminate all remaining nontariff barriers. Directors also urged the authorities to redouble their efforts in the area of privatization while adhering closely to the new privatization agenda. They also stressed that the efficiency of the economy will be enhanced through the implementation of reforms agreed with the World Bank in the energy, transportation, and water sectors.

Directors noted the new government's efforts to improve transparency and fight corruption. The audits of major public enterprises and government entities that the authorities intend to carry out constitute important steps in this area. In this connection, Directors emphasized the importance of a strong judiciary and regulatory framework that would stimulate private investment, including foreign direct investment.

Directors welcomed the authorities' intention to undertake, in the coming months, broad-based consultations for the preparation of the full PRSP and looked forward to the completion of a well-defined strategy for the poverty reduction program. In this connection, Directors considered that it will be essential for Senegal to demonstrate, before the completion point under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC), satisfactory adjustment and reform efforts and overall progress in poverty reduction that is broadly acceptable.

Senegal's statistics are generally adequate for surveillance. Nevertheless, Directors urged the authorities to improve the macroeconomic and social indicators database and to assure timely dissemination of reliable statistics.