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Senegal Positioned to Achieve Long-term Growth Potential

Interchange bridge in Dakar, Senegal. Growth is expected to pick up in 2012 partly due to higher public investment in infrastructure, says the IMF (photo: Sy/Newscom)

COUNTRY REVIEW

Senegal Positioned to Achieve Long-term Growth Potential

IMF Survey online

July 13, 2012

  • Recent peaceful political changeover a welcome development for Senegal and the region
  • Economic growth expected to pick up in 2012, but risks and challenges persist for economic management
  • Ambitious reform implementation is needed to keep Senegal’s public finances on a sustainable track

Senegal’s political stability and renewed commitment to reform can help the country raise its long-term growth potential, says the IMF in its regular assessment of the Western African nation.

Recent presidential and legislative elections led to a peaceful administrative changeover, with a new president, government, and parliament. The new authorities have confirmed their strong commitment to the objectives of the reform agenda supported by the IMF under the Policy Support Instrument (PSI). Program implementation, which slowed significantly ahead of the elections, is now regaining momentum.

In its regular review of the country’s economic developments, the IMF commended the authorities for the orderly political changeover and encouraged their efforts to keep public finances under control in 2012 and reduce the fiscal deficit to a more sustainable level. However, the acceleration of structural reform implementation —particularly in governance and the electricity sector— is desirable to raise long-term growth.

Risks to growth

Following a slowdown in 2011, mostly because of a severe drought in the Sahel, economic growth is projected to pick up to 3.9 percent in 2012. This will primarily reflect the effects of higher public investment in infrastructure, a rebound in agriculture production, and continued strong performance in the mining sector. Consumer price inflation should remain moderate in 2012, at about 2.5 percent. Medium-term economic prospects also look positive.

Economic management may face a number of challenges and risks in the period ahead. A weaker global environment, particularly in Europe, and persistent instability in neighboring countries would reduce external demand and remittances, with negative implications for the external accounts and activity. On the domestic side, people’s expectations are high that the new government will contain the cost of living, resolve permanently the power sector crisis and implement policies that will lead to substantial job creation, especially for the unemployed youth.

Medium term policies

Against this backdrop, several complementary policies and reforms should be implemented to raise the economy’s growth potential, create jobs and strengthen resilience to exogenous shocks.

• Pursue a prudent fiscal policy to safeguard long term debt sustainability. The fiscal deficit target for 2012 was revised upward (to 6.4 percent of GDP) to reflect the impact of exogenous factors, such as the drought in the Sahel on Senegal’s economy and population, as well as the less favorable international environment. But this target will still require significant efforts to control spending, which can be achieved through a reduction in the cost of running government and a deferral of non-priority investments. The fiscal deficit will need to decrease further in the medium term to ensure debt sustainability; the authorities are committed to bringing it below 5 percent of GDP in 2013 and 4 percent by 2015. A prudent borrowing policy guided by a medium-term debt management strategy will also be needed.

• Strengthen revenue mobilization and increase the efficiency of spending. Comprehensive reforms will make the tax system simpler, more transparent and efficient, as well as modernize the tax and customs administrations. On the expenditure side, the authorities’ intention to reduce waste and abuse in public service, streamline expenditure in key spending sectors, and replace the costly and unsustainable general price subsidies (including for energy) with alternative systems better targeting the poor, will increase fiscal space and improve the efficiency of public action.

• Improve public governance. While significant progress has been made, further public financial management reform remains essential for building a more effective state. The new authorities have already sent strong signals in this area, with the adoption by the cabinet in June 2012 of the WAEMU code on fiscal transparency, and setting in motion an ambitious reform of government agencies.

• Accelerate structural reforms to promote private sector development, job creation and competitiveness. Comprehensive reform of the power sector remains critical for growth. Power outages in 2010-11 had a significant impact on economic activity and the welfare of the population. The high cost of electricity, despite large price subsidies, also needs to be reduced in a sustainable fashion. Reforms should be implemented forcefully to increase supply, adopt less costly technologies, and reduce costs and the burden on the budget of subsidizing electricity consumers. Other measures aimed at removing bottlenecks to growth and improving the business climate and governance should also be implemented. This includes among others improving access to financing, particularly for small and medium enterprises and households.