IMF Executive Board Concludes 2008 Article IV Consultation with SenegalPublic Information Notice (PIN) No. 08/74
June 24, 2008
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On June 18, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Senegal.1
Senegal, over the last decade, has achieved macroeconomic stability and recorded economic growth above that in other West African Economic and Monetary Union (WAEMU) countries. Buoyant activity in the services and construction sectors increased GDP growth in 2007 to 4¾ percent, from 2¼ percent in 2006. However, the agricultural sector experienced a second year of output decline.
Rapidly rising energy and food prices raised inflation in 2007 and put pressure on the fiscal and external accounts. Inflation reached 6 percent, the highest level since the 1994 devaluation. Value Added Tax (VAT) and customs duties on certain food products were suspended in mid-2007, the subsidy on butane gas was gradually raised, and subsidies on petroleum products were introduced in late 2007. This may have temporarily restrained inflation, but the budgetary costs were substantial, at 1½ percent of GDP.
The overall fiscal deficit was kept at 3½ percent of GDP in 2007, after 6 percent of GDP a year before. However, expenditure commitments equivalent to 2 percent of GDP have been carried over for settlement in 2008, representing a significant stock of payment delays to the private sector. Fiscal developments were marked by strong revenue collections and increased spending allocations to social sectors.
The external current account deficit in 2007 increased to 10½ percent of GDP as the cost of importing energy and food rose, but exports plateaued because restructuring of the phosphate producer ICS (Industries Chimiques du Sénégal) was delayed and there were structural obstacles that prevented Senegal from being more competitive. Current account financing benefited from higher foreign direct investment (FDI) and receipts from the sale of a third telecom license, which helped keep external debt indicators broadly unchanged from 2006.
Senegal's macroeconomic policies are being pursued under an economic program supported by the IMF's Policy Support Instrument (PSI), which was approved in November 2007 (see Press Release No. 07/246). The authorities' program has four pillars: (i) containing the fiscal deficit to underpin macroeconomic stability and safeguard debt sustainability; (ii) improving fiscal governance and transparency so as to enhance policy credibility and sustain external assistance; (iii) encouraging private sector activity by improving the business environment and addressing structural impediments to higher economic growth and competitiveness; and (iv) limiting financial sector vulnerabilities and raising the sector's contribution to the economy.
Executive Board Assessment
Executive Directors commended the Senegalese authorities on the broadly satisfactory implementation of their economic program supported under the PSI. They noted that Senegal's macroeconomic performance had improved in 2007, with a recovery in growth, although rising food and energy prices had increased inflation and put pressure on the fiscal and external accounts.
Directors observed that Senegal's overriding economic challenge was to raise growth and reduce poverty. They encouraged the authorities to maintain prudent macroeconomic policies and persevere in implementing their structural reforms under the Accelerated Growth Strategy. This, together with energy sector reform, continued efforts to attract FDI, and targeted government spending in infrastructure, health, and education, would encourage private sector-led growth, raise external competitiveness, and strengthen and diversify exports.
Directors agreed that Senegal's real exchange rate does not appear to be overvalued, although developments require close monitoring. They considered that Senegal's sluggish export performance over the last decade was largely related to structural impediments in the economy, and encouraged the authorities to improve the business environment to make it more conducive to private sector activity by accelerating governance and structural reforms.
Directors welcomed the authorities' commitment to fiscal sustainability. They underlined that it was critical to contain the fiscal deficit to preserve debt sustainability, respect the limited financing capacity of the regional financial market, and contain demand pressures, thereby promoting domestic stability in the context of Senegal's monetary union membership. Directors commended the authorities for their continued good revenue performance, which helped support fiscal sustainability. In addition, they welcomed the planned strengthening of tax administration, including the transfer of responsibility for direct tax collections from the Treasury to the Revenue Authority.
Directors supported the authorities' intention to correct the 2007 fiscal slippages, and stressed that it will be crucial to reign in non-priority capital and current spending in 2008 in order to make room for the settlement of expenditure commitments from 2007. Directors urged the careful review and expeditious settlement of payment delays, with a view to rigorously applying the existing budget framework.
Directors recognized the potential of the planned Dakar Integrated Special Economic Zone in generating growth and employment, but emphasized the need to avoid any loss of tax revenues from domestic enterprises moving to the zone and to put in place the necessary safeguards to combat tax fraud and evasion.
Directors noted that international food and energy price increases had placed a considerable burden on the population, and concurred with the authorities that measures should be taken to shield the population's most vulnerable segments from these price increases. Directors saw scope for improving the targeting of the existing measures while minimizing economic distortions and keeping them affordable so that they remained consistent with macroeconomic stability and debt sustainability. For the longer term, they recommended the introduction of a social safety net. In addition, Directors encouraged the authorities to promote the development of the agricultural sector.
Directors welcomed the authorities' commitment to continue public financial management reform and to improve financial sector supervision in the regional context. In particular, given Senegal's emphasis on public investment to support economic growth, they encouraged the authorities to further strengthen their investment planning and evaluation to focus on high-return projects and raise the productivity of government spending. In this context, Directors agreed that the nonconcessional borrowing that the authorities intend to undertake to help finance the Dakar-Diamniadio toll road is appropriate in light of its projected high return and the lack of other financing sources. In addition, they urged a strong implementation of the new public procurement framework.