IMF Executive Board Concludes 2010 Article IV Consultation with Senegal

Public Information Notice (PIN) No. 10/65
May 26, 2010

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 May 24, 2010 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Senegal.1

Background

Following the food and fuel price shocks in 2008, economic activity slowed further in 2009 because of the global economic downturn and domestic shocks, including temporary electricity shortages.

Real gross domestic product (GDP) growth is estimated to have been 1½ percent in 2009. Lower external demand and downward pressure on remittances, tourism receipts, and foreign direct investment (FDI) have impacted growth. The agricultural sector, which benefited from supportive policies and favorable weather, helped to mitigate the impact of depressed demand at home and abroad on the secondary sector (construction, energy) and particularly the tertiary sector (transport, tourism services). The drop in crude oil and food prices pushed down consumer prices. Some fiscal easing has helped to cushion the impact of the global financial crisis. The overall fiscal deficit widened to 5.1 percent of GDP in 2009 from 3.7 percent of GDP two years earlier on account of lower tax revenues and higher expenditure. Inflation has been negative since the second half of 2009. The current account deficit declined mainly because of lower energy and food prices.

There are signs that Senegal’s economy has started to recover. Growth is projected to reach 3½ percent in 2010, driven by a pick-up in external demand and supportive domestic economic policies. Risks to the outlook relate to unexpectedly subdued external demand, financing constraints that limit the fiscal room for maneuver, and renewed problems with electricity supply. Opportunistic changes in economic policies for political reasons could also dampen prospects.

Senegal is pursuing its macroeconomic policies within 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 economic growth and competitiveness; and (iv) limiting financial sector vulnerabilities and raising the sector's contribution to the economy.

Executive Board Assessment

Executive Directors welcomed the broadly satisfactory implementation of the Senegalese authorities’ economic program supported under the PSI and the Exogenous Shocks Facility. However, a difficult external environment and domestic shocks, including in the energy sector, had slowed down the growth momentum. Directors noted that signs of a recovery have become visible and emphasized that prudent domestic macroeconomic policies and an accelerated implementation of structural reforms would help to strengthen growth further and reduce poverty.

While Senegal’s risk of debt distress is low, Directors underscored the need to gradually withdraw the temporary fiscal stimulus and reduce the budget deficit to a level consistent with debt sustainability. They welcomed the authorities’ plans to further strengthen revenue collection, which is already higher than the regional average, and encouraged the authorities to ensure that public entities pay their taxes on time. Directors stressed that spending pressures had to be contained to preserve macroeconomic stability and debt sustainability and meet the West African Economic and Monetary Union convergence criteria, while safeguarding priority spending.

Directors welcomed the progress made by the authorities in eliminating payment delays to the private sector. They supported the authorities’ commitment to finalize the full normalization of financial relations with the private sector by settling remaining extrabudgetary spending and public institution and agency debt through a transparent and publicly communicated process.

Directors supported efforts to reform public financial management and emphasized the need to maintain the reform momentum. They encouraged the authorities to improve their liquidity and debt management to complement the increasing integrity of their budget framework and expressed concern about program slippages that indicate that closer attention needs to be paid to spending procedures and control mechanism. Directors saw room for further strengthening the authorities’ investment planning and evaluation with a view to ensuring high productivity of government spending.

While Senegal’s real effective exchange rate has appreciated over the past years, Directors noted staff’s assessment that it is not significantly overvalued. They underscored the need to overcome the weak export performance and to improve competitiveness through a more supportive business climate and better governance that would stimulate private-sector growth.

Directors underlined that other complementary policies need to be put in place to regain Senegal’s growth momentum and return to previous growth trajectories. Sustained efforts are required to enhance the financial sector’s contribution to the economy. Directors also encouraged the authorities to implement their energy sector reform plan to limit supply bottlenecks and fiscal risks.


Senegal: Selected Economic Indicators

 
  2005 2006 2007 2008 2009
          Est.
 

National income and prices (percent change)

         

GDP at constant prices

5.6 2.4 4.8 2.3 1.5

Inflation (average)

1.7 2.1 5.9 5.8 -1.1

External sector

         

Current account balance (percent of GDP)

-9.0 -9.5 -11.8 -14.3 -8.7

Exports (in CFA francs, percent change)

4.4 0.1 -3.7 23.0 -15.2

Imports (in CFA francs, percent change)

15.6 9.6 19.5 25.8 -20.4

Real effective exchange rate (percent change)

-1.0 -0.2 5.3 4.4 -1.7

Money and credit

         

Credit to the economy (percent change)

24.5 4.2 10.5 17.2 3.6

Government budget (percent of GDP)

         

Revenue

19.2 19.7 21.1 19.4 18.7

Grants

1.6 1.5 2.6 2.4 3.0

Total expenditure and net lending

24.0 27.2 27.6 26.6 27.1

Overall balance

-3.0 -5.7 -3.7 -4.6 -5.1

Central government domestic debt

3.3 5.3 6.6 5.3 8.1

External public debt

42.3 17.7 17.9 19.8 24.0
 

Source: Senegalese authorities and IMF staff estimates.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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