## 1senea2020001 ## Source details **Canonical URL:** [1senea2020001](https://www.imf.org/-/media/files/publications/cr/2020/english/1senea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1senea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1senea2020001.pdf.json) --- ### Plan Sénégal Émergent — Context and PSE II objectives - President Macky Sall reelected in February 2019 for a five-year term with more than 58 percent of the votes. - First phase performance highlights: - Growth averaged about 6 ½ percent in 2014-18. - Poverty declined by 4-7 percentage points since 2011. - Public infrastructure projects completed: airport, roads, and railroad projects. - Fiscal and debt dynamics: - Public investment increasingly financed by non-concessional borrowing, contributing to continued increase in the debt-to-GDP ratio. - Debt dynamics exacerbated by expansion of debt coverage and public sector financing needs beyond the central government deficit. - PSE II (2019-2023) overarching ambition and composition: - Ambition: Senegal to reach emerging market status by 2035. - Three axes: (i) economic growth and structural transformation; (ii) strengthening human capital, social protection and sustainable development; (iii) enhancing governance, peace and security. - Spending allocation: - About 60 percent allocated to infrastructure and agricultural development. - 30 percent allocated to human capital and social protection. - 10 percent allocated to strengthening public institutions and the rule of law. - Selected PSE II socio-economic targets: - HDI: 2015 value 0.49; target value 0.53. - Infant Mortality Rate (per 1,000): 2017 value 42; target 29.2. - Maternal Mortality Rate (per 100,000): 2017 value 236; target 178.4. - Primary Gross Enrollment Ratio (percent): 2017 value 103; target 104. - Average Schooling Duration (years): 2017 value 3.0; target 3.4. - Gini Coefficient: 2011 value 40.2; target 35.8. - National Poverty Rate (percent): 2017 value 41.2; target 33.0. - International Poverty Rate (1.9$ / day): 2017 value 35.6; target 29.9. - Access to Electricity (percent): 2017 value 61.7; target 85.9. - Annual Creation of Jobs: 2017 value 199,980; target 228,317. - Share of Industry in GDP: 2017 value 20.6; target 25. - Exports per capita (CFAF): 2017 value 142,889; target 220,109. - Cost and financing of PSE II (all in CFAF billion): - Total: 14,098 - Secured financing: Government 4,248 - Of which: PPP projects 486 - Donors secured: 5,166 - Expected financing: Donors 2,850 - Expected financing: Private sector (PPP projects) 1,834 - Institutional note: - Authorities cancelled the 2015-19 PSI in February 2019 and requested a new Policy Coordination Instrument (PCI). ### Recent developments (growth, inflation, liquidity, fiscal) - Growth and inflation: - Growth reached 6.7 percent in 2018. - 2019 growth projected at 6 percent (economic activity lost some momentum in 2019H1). - Inflation at end-October 2019: 1.3 percent (y-o-y). - Monetary indicators: - Broad money growth: +2.5 percent at end-September 2019. - Private sector credit growth: +2 percent at end-September 2019. - Net foreign assets declined slightly. - Budget execution and fiscal outcomes: - 2018 revenue collection: 90 percent of original budget law targets. - 2018 deficit reached 3.6 percent of GDP (despite revised PSI target of 3.5 percent of GDP). - 2019H1 revenue collection: 90 percent of target. - End-June 2019 deficit: CFAF 469 billion (3.4 percent of GDP), accumulation of unmet obligations. - End-September 2019 overall deficit: CFAF 562 billion (4 percent of GDP); excluding a one-off government transfer to Senelec (0.7 percent of GDP), the deficit was lower. - Net Borrowing (CFAF billion and % of GDP): - 2018 End-Year Act. Net Borrowing: -472; Net Borrowing (% of GDP): -3.6 - 2019 Q2 (cum.) Net Borrowing: -469; Net Borrowing (% of GDP): -3.4 - 2019 Q3 (cum.) Net Borrowing: -562; Net Borrowing (% of GDP): -4.0 - 2019 Q4 (cum.) Net Borrowing: -523; Net Borrowing (% of GDP): -3.7 - Net Borrowing (excl. SENELEC one-off) (% of GDP): -3.6 (2018), -3.4 (2019 Q2), -3.3 (2019 Q3), -3.0 (2019 Q4) - Memorandum: annual nominal GDP (CFAF billion): 2018 = 13,046; 2019 = 13,983. - Liquidity management and financing: - Domestic fuel prices increased in June 2019: Gasoline +CFAF 80 per liter (+11.5 percent); Diesel +CFAF 60 per liter (+10 percent). - Two short-term non-concessional bridging loans in 2019: CFAF 150 billion (January) and CFAF 125 billion (September). - WAEMU pooled reserves: EUR 13.6 billion covering 4.5 months of prospective imports at end-August 2019. - Current account and trade: - Current account deficit widened to 8.8 percent of GDP in 2018. - 2019H1 goods export value increased +26.4 percent y-o-y; total goods imports increased +4.5 percent. ### Outlook and risks (staff macro projections and risk assessment) - Real GDP growth (percent): - 2017 Act.: 7.1 - 2018 Act.: 6.7 - 2019 Prel.: 6.0 - 2020 Proj.: 6.8 - 2021 Proj.: 7.0 - 2022 Proj.: 8.4 - 2023 Proj.: 11.6 - CPI inflation, average (percent): - 2017 Act. 1.3; 2018 Act. 0.5; 2019 Prel. 1.0; 2020–2023 Proj. 1.5 each year. - Current account balance (% GDP): - 2017 Act. -7.3; 2018 Act. -8.8; 2019 Prel. -9.2; 2020 Proj. -10.7; 2021 Proj. -10.6; 2022 Proj. -7.7; 2023 Proj. -3.8. - Overall fiscal balance (% GDP) (excludes one-off SENELEC operation): -3.0 for 2017–2023. - Public sector debt (percent of GDP): - 2017 Act. 61.2; 2018 Act. 61.4; 2019 Prel. 63.7; 2020 Proj. 61.9; 2021 Proj. 61.3; 2022 Proj. 60.5; 2023 Proj. 57.1. - Outlook narrative: - Growth expected to accelerate to about 7 percent in 2020-21, supported by agriculture, services, and increasing hydrocarbon-related investments. - Hydrocarbon-related investments could temporarily widen the current account deficit to about 11 percent of GDP. - In 2022-24, start of hydrocarbon production could temporarily lift growth to double-digits. - Inflation expected to remain under 2 percent, anchored by the CFAF/euro peg. - Medium-term non-hydrocarbon growth expected between 6 percent and 7 percent. - External position in 2019 assessed as moderately weaker than implied by fundamentals and desirable policy settings. - Risks (tilted to the downside): - Short-term slowdown could be more protracted. - Implementation risks: slow business environment reforms and delays in clearing unmet obligations. - Hydrocarbon uncertainties on timing and size of production. - External risks: regional security threats, trade barriers, protracted slowdown in Europe, large swings in energy prices. - Upside risk: prospects for gold mining projects. ### PCI alignment, pillars, and key reform measures - PCI pillars (fully aligned with PSE II): - (i) Achieving high, sustainable, and inclusive growth, driven mostly by the private sector. - (ii) Consolidating macroeconomic stability through prudent fiscal policy, including increasing revenues and spending efficiency, and sound debt management. - (iii) Managing the oil and gas sector in a sustainable and transparent manner. - Pillar I — Constraints to private sector development (selected): - Low access to and high cost of energy; insufficient workforce skills; rigid labor regulations; burdensome tax and judiciary procedures; lack of access to credit; low efficiency of public investment; lack of competition in some product markets. - Pillar I — Selected reforms and targets: - Justice system: - Establishment of an appeals court (reform target, December 2021). - Digitalization of commercial court procedures. - Commercial court in Dakar in its first year ruled on more than 10,000 cases for a total litigation amount of 0.6 percent of GDP. - Labor markets: - Reform of the labor law underway (reform target, December 2021); less than 10 percent of the workforce is formally employed. - Access to land: - Digital, centralized and integrated land management system (reform target, June 2021). - Investment law: - New legislation envisaged in 2021; staff recommends streamlining and narrowing scope/duration of incentives. - Public Private Partnerships (PPPs): - Private sector participates in 25 projects, public and private investment about 10 percent of GDP. - Authorities commitments: - Update PPP law to require ex-ante evaluation for all projects above CFAF 2 billion (reform target, June 2020). - Subject unsolicited bids to counter-evaluation; set up a PPP database (reform target, June 2021). - Digitalization: - M-tax app to file and pay taxes by mobile phone (reform target, end-December 2020). - Administrative coordination: - Importance of streamlining multiple entities managing initiatives and funds for private sector and SMEs. - Newly created Ministry of Economy, Planning and Cooperation to finalize a comprehensive private sector development strategy. ### Education, vocational training, social protection, and energy transition - Education and skills: - 70 percent of workers are unskilled. - Adult literacy just above 40 percent (SSA average 60 percent). - Vocational training serves only 7 percent of those completing basic education. - Reform targets: study policies to increase secondary completion rates (June 2020); adopt law on professional and technical education (June 2020). - Cash-transfer program “Programme National de Bourses de Sécurité Familiale” currently benefitting more than 300,000 households. - Energy transition: - Electricity production relies on heavy fuel oil and diesel. - Authorities intend to switch to gas and renewables (Annex III) to lower prices, reduce emissions, and reduce government subsidies. ### Financial sector: prudential standards, inclusion, and reform targets - Transition to Basel II/III regulatory standards: 2018 first year of data reporting under new standard and WAEMU chart of accounts. - New regulatory standard forces banks to write off NPLs after 5 years, negatively affecting capital adequacy ratios. - Pockets of vulnerability in smaller financial institutions; options to improve situation could lead to fiscal costs of up to 0.5 percent of GDP. - Strategic deficiencies in AML/CFT identified in 2018 report. - Financial inclusion and access to credit: - Barriers: informality, information asymmetries, contract enforcement difficulties. - Reform targets: - National financial inclusion strategy (reform target, June 2020). - Collateral registry combining movable collateral and mortgages (reform target, December 2021). - Credit bureau expansion using data from utilities (reform target, December 2020). ### Pillar II — Fiscal framework, budget execution, and PFM reforms - Fiscal commitment and 2019–2020 budget framework: - Authorities committed to sound fiscal policies; LFR2 submitted October 2019 includes measures to ensure overall deficit target of 3 percent of GDP (prior action). - Key fiscal measures and outcomes: - Enhanced tax collection implied a 2 percentage points of GDP increase over 2018. - Identified unmet obligations of 0.7 percent of GDP added to the revised budget. - Domestically-financed investment reduced by about CFAF 100 billion compared to initial budget. - Contingency of CFAF 25 billion cannot be allocated unless corresponding revenue materializes. - Unmet obligations and settlement plan (CFAF billion and % of 2019 GDP): - Total (CFAF billion) by column: 328.1 (Pre-2019), 119.2 (2019 LFR2), 99.2 (2/2019), 112.6 (2/2020), 123.7 (2021), 111.8 (2022). - Total (% of 2019 GDP): 2.35, 0.85, 0.71, 0.81, 0.88, 0.80. - Below-the-line treasury operations reflect drawings on pre-2019 comptes de dépôt estimated at CFAF 220 billion. - About CFAF 100 billion (0.7 percent of GDP) to be settled in 2019; residual CFAF 121 billion to be fully accounted for in the 2020 budget. - Fuel and electricity pricing: - Staff advocated greater and more regular pass-through of international oil prices. - Authorities committed to implement a decree on regularly revising fuel prices (continuous reform target). - November 2019: authorities announced electricity tariff increases between 6 percent and 10 percent starting December 1, 2019 for all but low-consumption households; expected compensation amount lowered by about CFAF 3 billion in 2019 at current world oil prices (Brent just above $60 per barrel). - 2020 budget specifics: - 2020 budget targets a 3 percent of GDP deficit and starts settlement of 2017-18 unmet obligations (prior action). - 2020 budget aims to increase tax revenues by about 0.5 percent of GDP. - Fiscal framework (Percent of GDP, Text Table 4): - Revenue (incl. grants): 2018 (Act.) 18.6; 2019 (est.) 20.3; 2020 (proj.) 20.7. - Tax Revenue: 15.3; 17.2; 17.7. - Non-Tax Revenue (incl. FSE): 1.4; 1.2; 1.0. - Grants: 2.0; 1.9; 1.9. - Expenditure: 22.2; 24.0; 23.7. - Compensation of Employees: 5.2; 5.3; 5.4. - Use of Goods and Services: 2.3; 2.8; 2.9. - Interest: 2.0; 2.0; 2.2. - Subsidies, Current Grants and Other Expense: 4.7; 4.5; 3.6. - Of which: subsidies to Electricity Sector: 0.5; 1.5; 0.7. - Of which: Subsidies for Fuel: 0.1; 0.1; 0.2. - Social Benefits: 0.1; 0.2; 0.2. - Net Acquisition of Nonfinancial Assets: 7.9; 9.3; 9.5. - Financed with Internal Resources: 3.9; 4.7; 4.4. - Financed with External Resources: 4.0; 4.6; 5.0. - Net borrowing (% of GDP): -3.6; -3.7; -3.0. - Net borrowing (% of GDP, excl. SENELEC one-off): -3.6; -3.0; -3.0. - Memorandum item: annual nominal GDP (CFAF billion): 13,046; 13,983; 15,085. - PFM and transparency reforms: - Study of expenditure chain (reform target, June 2020). - Rationalize list of expenditures eligible for simplified procedures (reform target, December 2020). - Close accounts of all public agencies in commercial banks and repatriate balances to the single treasury account (reform target, December 2021). - Publish a fiscal risk statement in annex to the 2022 budget (reform target, December 2021). - Start implementation of WAEMU PFM directives in 2020 (performance-based program budgeting, partial devolution, improved recording/reporting). ### Strengthening domestic revenue mobilization (MTRS) - Objective: - Achieve WAEMU 20 percent tax-to-GDP target (excluding hydrocarbon-related revenues) by 2023 (Reform Target, June 2020). - Immediate focus: - Expand tax base, streamline exemptions, improve enforcement, tax audits, and customs controls. - Short-term measure: increase customs prepayments on income taxes for non-registered taxpayers (reform target, June 2020). - Data and digitalization: - Improve data management and tax digital applications. - Quarterly report on use of data and information exchanges between customs and internal tax services (reform target, quarterly from January 2020). - M-tax app: file and pay taxes by mobile phone (reform target, end-December 2020). ### Public debt dynamics, DSA findings, and debt strategy - Debt level and composition: - Public debt tripled since 2008; public debt reached 61.4 percent of GDP in 2018 and projected 63.7 percent in 2019. - Composition shifted toward external borrowing with Eurobond issuances in 2017 and 2018 amounting to US$3.3 billion. - Debt-stabilization strategy: - Proposed fiscal policy: average primary deficit of 1.3 percent of GDP between 2019 and 2024 for the central government and elimination of below-the-line spending. - Objective: gradually reduce stock of debt and ensure downward trajectory of debt-to-GDP ratio (quantitative target) under the PCI. - Financing priorities: privilege domestic and concessional external financing; seek longer maturities for domestically and regionally issued debt. - 2019 actions: - Hedged exchange rate risk related to Eurobond debt service. - Smoothed amortization schedule of the 2011 Eurobond over 2020-22. - Reprofiling about CFAF 150 billion of the CFAF 275 billion bridge loans contracted in 2019. - CNDP and coordination: - Activate National Public Debt Committee (CNDP); develop CNDP procedures manual (reform target, June 2020). - CNDP to examine all new external debt proposals and PPP-financed projects. - Expand fiscal accounts coverage toward general government. - DSA findings: - Risk of debt distress moved from low to moderate. - Public sector debt 2017: 61.2; 2018: 61.4; 2019 projected 63.7; public sector debt projected to peak in 2021 before declining. - Baseline macro assumptions include hydrocarbon projects with first production expected in 2022. - PV of debt and stress tests: contingent liability and market-financing tailored shocks cause temporary threshold breaches (noted as short-lived). - Key DSA thresholds for strong debt-carrying capacity: PV debt-to-GDP ratio 55 percent; PV debt-to-exports 240 percent; debt service-to-exports 21 percent; debt service-to-revenue 23 percent. - DSA macro projections (selected): - Real GDP growth: 2019 6.0; 2020 6.8; 2021 7.0; 2022 8.4; 2023 11.6; 2024 8.0. - Public sector debt (percent of GDP, Table 5): 2017 47.5; 2018 61.2; 2019 61.4; 2020 63.7; 2021 61.9; 2022 60.8; 2023 59.6; 2024 56.0; 2029 54.7. - Public external debt service to exports: about 9 percent in 2017; 17.5 percent in 2018; estimated 18.5 percent in 2019. - Total public debt service estimated about 28 percent of total revenue in 2019. - Stress test outcomes and risks: - Tailored market-financing shock: temporary increase in cost of new commercial external borrowing by 400 basis points and nominal depreciation of 15 percent vis-à-vis the US$ leads to debt service-to-export breaches in 2020. - Historical scenario: lack of reform and lower growth leads to sustained breaches. - Policy implications: - Careful monitoring of financing needs and borrowing plans. - Prefer regional bond market issuances to minimize borrowing costs and reduce external debt risks. - Strengthen debt management and coordination among ministries. ### Managing oil and gas revenues — fiscal and governance framework - Production timeline and economic impact: - SNE and GTA reservoirs expected to begin production in 2022. - Could expand GDP by about 5 percent annually over the production horizon. - Additional fiscal revenues averaging 1.5 percent of GDP annually. - Yakaar-Teranga reservoir shows recoverable gas amounts similar to GTA, potentially increasing estimates. - Significant uncertainties on reserves size, production schedule, project costs. - Legal and fiscal framework: - Petroleum Law and law on local content adopted in 2019. - Forthcoming law on oil revenue sharing to define principles for spending and saving (reform target, June 2020). - Work ongoing to define a long-term fiscal rule; short-term operational rule targeting non-oil primary or overall balance (reform target, December 2020). - Transparency principles: all resource flows to transit through the central budget; publish beneficial ownership information. - Capacity development: - IMF Fiscal Affairs Department providing TA via a three-year program under the MNRW Thematic Fund, coordinated with the World Bank. - Focus: development of a fiscal framework for oil and gas; World Bank advising on technical/cost aspects. ### Program modalities, financing, and monitoring (PCI) - Program justification: - Three-year PCI appropriate to support macroeconomic policies; no present or prospective balance of payments need identified. - Program to signal reform commitments to development partners and serve as consultation framework with IMF. - Financing: - Program fully financed for first 12 months. - Expected budget support in 2020: amounts to 0.8 percent of GDP (CFAF 125 billion) from World Bank, AfDB, EU and France. - Market access: successful Eurobond issuances in 2017 and 2018; no sovereign arrears. - Quantitative and reform targets: - Quantitative targets monitored semi-annual and continuous for first 12 months. - Prior actions met: revised 2019 budget and 2020 draft budget submitted to parliament on October 14, 2019. - Program review schedule (Table 9): - Board Discussion of PCI Request: January 10, 2020 - First Review: By June 30, 2020 (Test Date: End-December 2019) - Second Review: By December 31, 2020 (Test Date: End-June 2020) - Third Review: By June 30, 2021 (Test Date: End-December 2020) - Fourth Review: By December 31, 2021 (Test Date: End-June 2021) - Fifth Review: By June 30, 2022 (Test Date: End-December 2021) - Sixth Review: By December 31, 2022 (Test Date: End-June 2022) ### Staff appraisal and priority policy recommendations - Macroeconomic context: - Strong recent growth driven by investment, business environment improvements and favorable external conditions. - External position in 2019 moderately weaker than fundamentals and desired policy settings. - Dual challenge: - Sustain high growth while consolidating macroeconomic stability and making growth inclusive to reduce poverty and create jobs. - Recommended reform priorities: - Improve judicial system, workforce skills, access to land and credit, labor market functioning, and financial inclusion. - Evaluate, coordinate, and streamline private sector incentive schemes and dedicated funds to limit fiscal costs. - Fiscal anchor and actions: - Fiscal policy to target a 3 percent of GDP deficit throughout the program period (WAEMU convergence criterion). - Clear unmet obligations from 2017 and 2018 per the 2020 budget plan. - Improve recording and monitoring of expenditure float and arrears. - Eliminate below-the-line treasury operations. - Better manage fuel and electricity subsidies via price adjustments or budget allocations. - Avoid viewing PPPs as an alternative to public borrowing without accounting for costs/risks. - Improve debt management and coordination of debt-related activities. - Revenue and expenditure measures: - Increase revenues by broadening tax base and strengthening revenue administration to reach 20 percent of GDP tax-to-GDP target by 2023. - Reduce administrative costs, restructure public agencies, limit non-standard procedures to free resources for pro-poor spending and investment in education and infrastructure. - Manage transition to program budgeting and new public financial management software carefully to avoid disruptions. - Hydrocarbon management: - Align draft law on management/allocation of hydrocarbon revenues and operational fiscal framework with international best practices. - Ensure all resource flows transit through central budget and publish beneficial ownership information. - Invest in capacity to forecast production, revenues and costs. *Italic: International Monetary Fund staff summary of Plan Sénégal Émergent (PSE) and related PCI discussions as presented in the source content.* ### 1. Plan Sénégal Émergent_________________________________________________________________________ 5 ### Plan Sénégal Émergent ### Context - President Macky Sall was reelected in February 2019 for a five-year term with more than 58 percent of the votes, providing a strong mandate to pursue reforms supporting the second phase of the Plan Sénégal Émergent (PSE) covering 2019-23. - First phase performance highlights: - Growth averaged about 6 ½ percent in 2014-18. - Poverty declined by 4-7 percentage points since 2011. - Public infrastructure projects completed: airport, roads, and railroad projects. - Growth drivers: mix of public investment and strong private consumption supported by low commodity prices, strong growth in trading partners, and increasing remittances. - Fiscal and debt dynamics: - Public investment increasingly financed by non-concessional borrowing, contributing to a continued increase in the debt-to-GDP ratio. - Debt dynamics were exacerbated by expansion of debt coverage and public sector financing needs beyond the central government deficit. - PSE II objectives and composition: - Overarching ambition: Senegal to reach emerging market status by 2035. - Three main axes: (i) economic growth and structural transformation; (ii) strengthening human capital, social protection and sustainable development; (iii) enhancing governance, peace and security. - PSE II period: 2019-2023 with focus on inclusive, private sector-led growth. - PSE II spending allocation: - About 60 percent allocated to infrastructure and agricultural development. - 30 percent allocated to human capital and social protection. - 10 percent allocated to strengthening public institutions and the rule of law. - PSE II key socio-economic targets and financing (selected figures as presented): - HDI: 2015 value 0.49; target value 0.53. - Infant Mortality Rate (per 1,000): 2017 value 42; target 29.2. - Maternal Mortality Rate (per 100,000): 2017 value 236; target 178.4. - Primary Gross Enrollment Ratio (percent of primary school-age population): 2017 value 103; target 104. - Average Schooling Duration (years): 2017 value 3.0; target 3.4. - Gini Coefficient: 2011 value 40.2; target 35.8. - National Poverty Rate (percent of population): 2017 value 41.2; target 33.0. - International Poverty Rate (1.9$ / day): 2017 value 35.6; target 29.9. - Access to Electricity (percent of population): 2017 value 61.7; target 85.9. - Annual Creation of Jobs: 2017 value 199,980; target 228,317. - Share of Industry in GDP: 2017 value 20.6; target 25. - Exports per capita (CFAF): 2017 value 142,889; target 220,109. - Cost of PSE II (all in CFAF billion) Total: 14,098 - Secured financing: Government 4,248 - Of which: PPP projects 486 - Donors secured: 5,166 - Expected financing: Donors 2,850 - Expected financing: Private sector (PPP projects) 1,834 - Institutional note: - Authorities cancelled the 2015-19 PSI in February 2019 and requested a new Policy Coordination Instrument (PCI) to support PSE II implementation. - Performance under the 2015-2019 PSI was broadly satisfactory (Annex I). ### Recent Developments - Growth and inflation: - Growth reached 6.7 percent in 2018, the fifth consecutive year above 6 percent. - Economic activity lost some momentum in 2019H1; 2019 growth projected at 6 percent. - Inflation at end-October 2019: 1.3 percent (y-o-y). - Monetary indicators: - Broad money growth: +2.5 percent at end-September 2019. - Private sector credit growth: +2 percent at end-September 2019. - Net foreign assets declined slightly. - Budget execution and fiscal outcomes: - 2018 revenue collection: 90 percent of original budget law targets. - 2018 deficit reached 3.6 percent of GDP despite a revised PSI deficit target of 3.5 percent of GDP. - 2019H1 revenue collection: 90 percent of target. - End-June 2019 deficit: CFAF 469 billion (3.4 percent of GDP), with accumulation of unmet obligations. - End-September 2019 overall deficit: CFAF 562 billion (4 percent of GDP); excluding a one-off government transfer to Senelec (0.7 percent of GDP), the deficit was lower. - Net Borrowing (selected entries from Text Table 1): - 2018 End-Year Act. Net Borrowing: -472 (CFAF billion) - 2019 Q2 (cum.) Net Borrowing: -469 - 2019 Q3 (cum.) Net Borrowing: -562 - 2019 Q4 (cum.) Net Borrowing: -523 - Net Borrowing (% of GDP): -3.6 (2018 end-year), -3.4 (2019 Q2), -4.0 (2019 Q3), -3.7 (2019 Q4) - Net Borrowing (excl. SENELEC one-off) (% of GDP): -3.6 (2018 end-year), -3.4 (2019 Q2), -3.3 (2019 Q3), -3.0 (2019 Q4) - Annual Nominal GDP (CFAF billion) memorandum: 2018 = 13,046; 2019 = 13,983 (used in memo calculations). - Liquidity management and financing: - Domestic fuel prices increased in June 2019: - Gasoline: +CFAF 80 per liter (+11.5 percent). - Diesel: +CFAF 60 per liter (+10 percent). - Two short-term non-concessional bridging loans contracted in 2019 for liquidity and Senelec payment: CFAF 150 billion (January) and CFAF 125 billion (September). - WAEMU pooled reserves: EUR 13.6 billion covering 4.5 months of prospective imports at end-August 2019. - Current account and trade: - Current account deficit widened to 8.8 percent of GDP in 2018 due to higher energy and capital goods imports. - 2019H1 goods export value increased +26.4 percent y-o-y; total goods imports increased +4.5 percent. - 2019 data suggest trade balance for goods improving. ### Outlook and Risks - Staff macroeconomic projections (selected figures from Text Table 2): - Real GDP growth (percent): - 2017 Act.: 7.1 - 2018 Act.: 6.7 - 2019 Prel.: 6.0 - 2020 Proj.: 6.8 - 2021 Proj.: 7.0 - 2022 Proj.: 8.4 - 2023 Proj.: 11.6 - CPI inflation, average (percent): 2017 Act. 1.3; 2018 Act. 0.5; 2019 Prel. 1.0; 2020–2023 Proj. 1.5 each year. - Current account balance (% GDP): 2017 Act. -7.3; 2018 Act. -8.8; 2019 Prel. -9.2; 2020 Proj. -10.7; 2021 Proj. -10.6; 2022 Proj. -7.7; 2023 Proj. -3.8. - Overall fiscal balance (% GDP) (excludes one-off SENELEC operation): -3.0 for 2017–2023 (consistent projection). - Public sector debt (percent of GDP): 2017 Act. 61.2; 2018 Act. 61.4; 2019 Prel. 63.7; 2020 Proj. 61.9; 2021 Proj. 61.3; 2022 Proj. 60.5; 2023 Proj. 57.1. - Outlook narrative: - Growth expected to accelerate to about 7 percent in 2020-21, supported by agriculture, services, and increasing hydrocarbon-related investments. - Hydrocarbon-related investments could temporarily widen the current account deficit to about 11 percent of GDP. - In 2022-24, start of hydrocarbon production could temporarily lift growth to double-digits. - Inflation expected to remain under 2 percent, anchored by the CFAF/euro peg. - Medium-term non-hydrocarbon growth expected between 6 percent and 7 percent. - Current account deficit expected to decline to below 4 percent of GDP once hydrocarbon exports commence. - External position in 2019 assessed as moderately weaker than implied by fundamentals and desirable policy settings, with some real appreciation in the past 3 years (Annex II). - Risks (tilted to the downside): - Short-term: slowdown in economic activity in 2019H1 could be more protracted. - Implementation risks: slow progress on business environment reforms and delays in clearing unmet government obligations could weigh on activity. - Hydrocarbon uncertainties: large uncertainties on timing and size of hydrocarbon production could delay related exports and fiscal revenues. - External risks: rising regional security threats, increasing trade barriers, protracted slowdown in Europe, large swings in energy prices; low energy prices could delay hydrocarbon investments. - Upside risk: good prospects for gold mining projects. ### Program and Policy Discussions - PCI alignment and pillars: - The PCI is fully aligned with PSE II and structured around three pillars: - (i) Achieving high, sustainable, and inclusive growth, driven mostly by the private sector. - (ii) Consolidating macroeconomic stability through prudent fiscal policy, including increasing revenues and spending efficiency, and sound debt management. - (iii) Managing the oil and gas sector in a sustainable and transparent manner. - Pillar I: Achieving Inclusive and Private Sector-Led Growth — key findings and reform measures - Constraints to private sector development (enumerated): - Low access to and high cost of energy. - Insufficient workforce skills due to a deficient education and vocational training system. - Rigid labor regulations. - Burdensome and lengthy procedures in tax and judiciary systems. - Lack of access to credit. - Low efficiency of public investment. - Lack of competition in some product markets. - Reforms and targets supported under the PCI (selected): - Justice system (PS, ¶9): - Establishment of an appeals court (reform target, December 2021). - Digitalization of commercial court procedures. - Commercial court in Dakar in its first year ruled on more than 10,000 cases for a total litigation amount of 0.6 percent of GDP. - Labor markets (PS, ¶11): - Reform of the labor law underway (reform target, December 2021) to draw more workers into the formal sector (less than 10 percent of the Senegalese workforce is formally employed) and simplify SME filing/reporting. - Access to land (PS, ¶12): - Plan to set up a digital, centralized and integrated land management system (reform target, June 2021) to simplify land registration and facilitate use of land as collateral. - Investment law (PS, ¶8): - New legislation envisaged in 2021 to enhance transparency for potential investors. - Staff recommends streamlining and narrowing scope and duration of investment incentives to contain tax expenditures. - Public Private Partnerships (PPPs) (PS, ¶7): - Private sector participates in 25 projects (toll roads, new airport, electricity generation) resulting in public and private investment of about 10 percent of GDP. - More than a third of PPP projects selected following unsolicited bids. - Staff recommendations: - Introduce competition in PPP proposal process. - Use systematic cost-benefit analyses. - Assess new PPPs as externally financed projects by the national debt committee. - Strengthen monitoring of fiscal risks. - Authorities’ commitments: - Update PPP law to require ex-ante evaluation for all projects above CFAF 2 billion (reform target, June 2020). - Subject unsolicited bids to counter-evaluation by the Ministry of Economy, Planning and Cooperation. - Set up a database for all PPPs and power purchasing agreements presenting budgetary impact and main risks (reform target, June 2021). - Incentive schemes and targeted support to start-ups: - Three special economic zones in place to boost FDI and attract export-oriented manufacturing; currently planned investments amount to about 3 percent of GDP. - Staff emphasized containing fiscal risks and ensuring transparent rules governing incentives. - Digitalization: - Advancing e-government platforms, e-payments and digital data management to reduce administrative burden, tackle informality and mobilize revenues. - Implementation of M-tax app to file and pay taxes by mobile phone (reform target, end-December 2020). - Administrative coordination: - Staff highlighted the importance of streamlining and regrouping multiple entities managing initiatives and funds aimed at supporting the private sector and SMEs. - Authorities noted the newly created Ministry of Economy, Planning and Cooperation plans to finalize a comprehensive private sector development strategy. _Italic: International Monetary Fund staff summary of Plan Sénégal Émergent (PSE) and related PCI discussions as presented in the source content._ ### 17. Initiatives to enhance the quality of education and vocational training, increase ### 17. Initiatives to enhance the quality of education and vocational training, increase opportunities and reduce poverty will complement these reforms. ### Education, vocational training, and social protection - Findings and context: - 70 percent of workers are unskilled. - Adult literacy is well-below the SSA average (just above 40 percent vs. 60 percent). - The vocational training system serves only 7 percent of those completing basic education. - Authorities’ initiatives and reform targets: - Studying policies to increase secondary education completion rates (reform target, June 2020). - Adopt a law on professional and technical education to be finalized by June 2020. - Strengthen programs launched during PSE I to reduce poverty and expand access to social services, including: - A universal healthcare access program. - The cash-transfer program “Programme National de Bourses de Sécurité Familiale” currently benefitting more than 300,000 households. - Move to program-based budgeting to facilitate increased focus on the gender impact of public spending (PS, ¶6 and ¶14). - Staff advice and suggested assessments: - Assess social spending programs’ efficiency (for example energy and agricultural subsidies, tertiary education allowances) to meet PSE objectives. - Explore scope to better reach the poor, including by considering an expansion of the cash-transfer program. ### Energy transition: electricity production, prices, and emissions - Current situation: - Electricity production currently relies on expensive heavy fuel oil and diesel, putting Senegal at a competitive disadvantage. - Authorities’ intent and expected effects: - Switch inputs for electricity production to gas and renewables (Annex III). - Expected outcomes: lower prices, reduced emissions, and reduced need for government subsidies (PS, ¶16). ### Financial stability and development: banking system and inclusion - Banking system and prudential standards: - Transition to Basel II/III regulatory standards is moving forward; 2018 was the first year of data reporting in accordance with the new standard and the new WAEMU chart of accounts. - The new regulatory standard forces banks to write off NPLs after 5 years, which had a negative effect on capital adequacy ratios (Table 7). - Pockets of vulnerability exist in some smaller financial institutions; authorities are assessing options to improve their financial situation, which could lead to fiscal costs of up to 0.5 percent of GDP. - A WAEMU Financial Sector Assessment Program (FSAP) is scheduled for 2020. - Strategic deficiencies in the country’s AML/CFT system were identified in a 2018 report; authorities should swiftly address such deficiencies to prevent adverse consequences on correspondent banking relationships from a potential FATF public listing. - Financial inclusion and access to credit: - Despite progress on financial inclusion, the majority of the population still has no access to financial services. - Barriers to credit for households and smaller firms include informality, information asymmetries, and difficulties to enforce contracts. - Authorities’ initiatives and reform targets to boost financial sector contribution: - National financial inclusion strategy to complement the WAEMU strategy by identifying constraints and policy options to expand access to financial services (reform target, June 2020). - Put in place a collateral registry that combines data on movable collateral and mortgages in cooperation with the BCEAO (reform target, December 2021). - Credit bureau expansion: improve data sources by using information from large billers such as utilities (reform target, December 2020). - Continue initiatives to facilitate access to credit for SMEs. ### Pillar II: Consolidating macroeconomic stability — prudent fiscal policy and debt management - Commitment and 2019–2020 budget framework: - Authorities reiterated commitment to sound fiscal policies, starting with 2019 budget execution and the 2020 budget law. - The second supplementary budget (LFR2) submitted to Parliament in October 2019 includes measures to ensure the overall deficit target of 3 percent of GDP can be reached (prior action). - Key fiscal measures and outcomes: - Enhanced tax collection effort and improvements in tax administration produced a recovery in revenue since July, implying a 2 percentage points of GDP increase over 2018 (Text Figure 4 and PS ¶19). - Identified unmet obligations of 0.7 percent of GDP accumulated during the first months of 2019 were added to the revised budget. - Revised budget fully accounts for energy subsidies needed to cover the gap between administered prices and production cost (Annex III). - Domestically-financed investment was reduced by about CFAF 100 billion compared to the initial budget to avoid accumulation of new unmet obligations. - A contingency of CFAF 25 billion in expenditure was identified that cannot be allocated unless corresponding revenue materializes (PS ¶20). - Unmet obligations and settlement plan (Text Table 3 summary): - Total (CFAF billion) by column: 328.1 (Pre-2019), 119.2 (2019 LFR2), 99.2 (2/2019), 112.6 (2/2020), 123.7 (2021), 111.8 (2022). - Total (% of 2019 GDP): 2.35, 0.85, 0.71, 0.81, 0.88, 0.80 (columns corresponding to settlement plan). - Below-the-line treasury operations reflect drawings on pre-2019 stock of comptes de dépôt estimated at CFAF 220 billion. - About CFAF 100 billion (0.7 percent of GDP) is to be settled in 2019, residual CFAF 121 billion to be fully accounted for in the 2020 budget, with no legal allowance for future flows to be carried over. - Fuel and electricity pricing and subsidy policy: - Staff advocated greater and more regular pass-through of international oil prices. - Authorities committed to implement a decree regarding the mechanism for regularly revising fuel prices to eliminate annual fuel subsidies (PS ¶22, reform target, continuous). - Authorities preferred discretion on monthly adjustments but committed to free up additional budget space (if necessary through a supplementary budget) if price adjustments were suspended to avoid new arrears accumulation. - Discussions to pursue a more automatic adjustment mechanism accompanied by a communication campaign and measures to protect vulnerable populations (e.g., expanding “bourses familiales”). - In November 2019 authorities announced an increase in electricity tariffs between 6 percent and 10 percent starting December 1, 2019 for all but low-consumption households, which remain exempted; this should allow the compensation amount to be lowered by about CFAF 3 billion in 2019 at current world oil prices (with the Brent price just above $60 per barrel). - 2020 budget specifics and targets: - 2020 budget targets a 3 percent of GDP deficit and starts settlement of 2017-18 unmet obligations (prior action, Text Tables 3 and 4). - The 2020 budget aims to increase tax revenues by about 0.5 percent of GDP, supported by measures to expand the tax base and improve tax and customs administration under the medium-term revenue strategy (MTRS). - Text Table 4: Senegal: Fiscal Framework, 2018-20 (Percent of GDP) - Revenue (incl. grants): 2018 (Act.) 18.6; 2019 (est.) 20.3; 2020 (proj.) 20.7. - Tax Revenue: 15.3; 17.2; 17.7. - Non-Tax Revenue (incl. FSE): 1.4; 1.2; 1.0. - Grants: 2.0; 1.9; 1.9. - Expenditure: 22.2; 24.0; 23.7. - Compensation of Employees: 5.2; 5.3; 5.4. - Use of Goods and Services: 2.3; 2.8; 2.9. - Interest: 2.0; 2.0; 2.2. - Subsidies, Current Grants and Other Expense: 4.7; 4.5; 3.6. - Of which: subsidies to Electricity Sector: 0.5; 1.5; 0.7. - Of which: Subsidies for Fuel: 0.1; 0.1; 0.2. - Social Benefits: 0.1; 0.2; 0.2. - Net Acquisition of Nonfinancial Assets: 7.9; 9.3; 9.5. - Financed with Internal Resources: 3.9; 4.7; 4.4. - Financed with External Resources: 4.0; 4.6; 5.0. - Net borrowing (% of GDP): -3.6; -3.7; -3.0. - Net borrowing (% of GDP, excl. SENELEC one-off): -3.6; -3.0; -3.0. - Memorandum item: annual nominal GDP (CFAF billion): 13,046; 13,983; 15,085. - Budget management and contingency measures: - Current spending broadly constant in real terms via: (i) active management of government real estate and vehicles; (ii) reduction in utility bills (especially civil servants’ phone bills); (iii) closing some state representations abroad; and (iv) rationalization of public agencies. - Capital spending increases by about 0.3 percent of GDP while providing space to clear 0.8 percent of GDP in unmet obligations. - Staff urged continued updating of the inventory of unmet obligations, including targeted audits. - Authorities committed to implement an automatic alert system on new debt through the integrated financial management system (PS ¶20). ### Strengthening domestic revenue mobilization (MTRS) and tax administration - Objective: - MTRS aims at achieving the WAEMU 20 percent tax-to-GDP target (excluding hydrocarbon-related revenues) by 2023, integrating tax policy, revenue administration and tax law aspects into a holistic reform strategy (Reform Target, June 2020, see PS ¶26-¶35). - Immediate focus and measures: - Emphasize expanding the tax base (bringing the informal sector into the tax net and streamlining exemptions). - Priorities: improving collection enforcement, tax audits, and enhancing customs controls and procedures. - Short-term measure: increase customs prepayments on income taxes for non-registered taxpayers to encourage compliance (reform target, June 2020). - Data management and digitalization: - Aim to improve data management and increase tax digital applications. - Better coordination between customs and internal tax services, including a quarterly report on the use of data and information exchanges, using manual data reconciliations until finalization of the interconnection between customs and tax administration databases (reform target, quarterly from January 2020). ### Improving spending efficiency, public financial management, and fiscal risk management - Reallocation and investment appraisal: - PCI supports gradual reallocation from low priority public consumption to investment in human capital and infrastructure. - New large investment projects exceeding CFAF 1 billion will be subject to ex-ante cost-benefit analysis (excluding projects affecting defense and security) (reform target, December 2020). - Public investment planning will be better aligned with budget commitment authorization ceilings for 2021-2023 (reform target, December 2020). - Public financial management reforms and controls: - Reduce share of domestically-financed spending executed under exceptional or simplified procedures (about 60 percent of total expenditure in 2017) and reduce procurement contracts awarded using single source contracts (29 percent of total in 2018). - Undertake a study of the expenditure chain in 2020 (reform target, June 2020). - Rationalize list of expenditures eligible for simplified procedures (reform target, December 2020). - Limit budget commitment letters to reduce off-budget operations (reform target, December 2020). - Close accounts of all public agencies in commercial banks and repatriate balances to the single treasury account to improve cash management (reform target, December 2021). - WAEMU directives and budget modernization: - In 2020 Senegal will start implementation of WAEMU public financial management directives, including: - Performance-based program budgeting. - Partial devolution of spending authorization responsibilities to line ministries. - Improved system to record and report budget operations. - Multi-year commitment authorizations to manage multi-year investment projects and reduce need for comptes de dépôt. - Fiscal risk management: - 2019 Fiscal Transparency Evaluation showed fiscal risks are not always well captured, notably contingent liabilities from state-owned enterprises and PPPs. - Authorities will publish a fiscal risk statement in annex to the 2022 budget (reform target, December 2021). ### Public debt dynamics and sustainability - Debt level and composition: - Senegal’s risk of debt distress shifted from low to moderate (new IMF-World Bank DSA, Supplement 1). - Public debt tripled since 2008, reaching 61.4 percent of GDP in 2018 and projected at 63.7 percent of GDP in 2019. - Debt composition shifted toward external borrowing with successive Eurobond issuances in 2017 and 2018 amounting to US$3.3 billion. - Drivers and outlook: - Rise in public debt financed strategic growth-enhancing investments including to develop oil and gas reserves; other factors include below-the-line spending and inclusion of debt from SOEs (including Senelec and Air Senegal). - While limited space to absorb shocks in the near term, Senegal maintains substantial space for borrowing over the long term. *Source: IMF staff report (excerpts from content unit 1senea2020001).* ### 33. The sharp rise in public debt in recent years calls for a strategy to stabilize the ### 1senea2020001 - 33. The sharp rise in public debt in recent years calls for a strategy to stabilize the ### Debt-stabilization strategy and fiscal policy - Proposed fiscal policy: average primary deficit of 1.3 percent of GDP between 2019 and 2024 for the central government and the elimination of below-the-line spending. - Objective: gradually reduce the stock of debt over the medium term and ensure a downward trajectory of the debt-to-GDP ratio (quantitative target) under the PCI. - Monitoring: total nominal public debt to be monitored under the PCI. ### Prudent debt management approach - Financing priorities: privilege domestic and concessional external financing; seek longer maturities for domestically and regionally issued debt (PS ¶42). - 2019 actions: - Hedged exchange rate risk related to Eurobond debt service. - Smoothed amortization schedule of the 2011 Eurobond (originally fully due in 2021) over three years (2020-22). - Reprofiling about CFAF 150 billion of the CFAF 275 billion bridge loans contracted in 2019 (Attachment I). - Authorities to continue exploring options for similar debt liability operations. ### Coordination of debt management functions and data coverage - Proposal: activate the National Public Debt Committee (CNDP) to facilitate coordination where responsibilities are currently split among various entities (PS ¶43). - CNDP responsibilities: - Examine all new external debt proposals of the central government and public entities. - Examine projects financed through PPPs. - Reform target: develop a CNDP procedures manual (reform target, June 2020). - Coverage: expand fiscal accounts to the full public sector, with move towards general government as an intermediate step given the expanded debt perimeter. ### Authorities’ views on borrowing and debt trajectory - Authorities' emphasis: - Public borrowing financed first-rate infrastructure and hydrocarbon production, expected to deliver additional resources to future generations. - Preference that the rating remain low, noting that the debt-to-GDP ratio would be on a firm downward trajectory after 2019. - Reiteration of commitment to limit non-concessional borrowing. ### Managing oil and gas revenues—expected economic impact - Production timeline: Oil and gas fields linked to the SNE and GTA reservoirs expected to begin production in 2022. - Growth and fiscal revenue projections: - Could expand Senegal’s GDP by about 5 percent annually over the production horizon. - Additional fiscal revenues averaging 1.5 percent of GDP annually. - Exploration note: Yakaar-Teranga reservoir shows recoverable gas amounts similar to the GTA field, potentially increasing above estimates substantially. - Risk caveat: significant uncertainties on reserves size, production schedule and profile, and project costs; new discoveries increase overall investment needs. - Recommendation: continue capacity development to manage complex hydrocarbon projects and associated risks. ### Governance and fiscal framework for hydrocarbons - Legal progress in 2019: - Petroleum Law and law on local content adopted by Parliament (PS ¶48). - Forthcoming law on oil revenue sharing to define principles for dividing hydrocarbon revenues between spending and saving (PS ¶51, reform target, June 2020). - Fiscal rule development: - Work ongoing to define a long-term fiscal rule. - Short-term operational rule targeting a non-oil primary or overall balance (PS ¶50), in accordance with regional convergence criteria (reform target, December 2020). - Transparency and management principles: - Enhance transparency over entire extraction and management cycle. - All resource flows to transit through the central budget. - Publish information on beneficial ownership structure of businesses. ### IMF technical assistance and capacity development - IMF Fiscal Affairs Department providing TA via a three-year program under the Managing Natural Resource Wealth (MNRW) Thematic Fund, coordinated with the World Bank. - Focus of TA: development of a fiscal framework for the oil and gas sector; World Bank advising on technical and cost aspects. - Authorities welcomed medium-term capacity-building and inter-institutional cooperation. ### Program modalities, financing, and risks - PCI criteria: Senegal meets criteria for use of the PCI; staff analysis indicates no present, prospective or potential balance of payments need. - Quantitative targets: monitored semi-annual and continuous for the first 12 months of the program (Table 9; PS Table 1a). Standard continuous targets on trade and exchange rate restrictions, bilateral payments arrangements and multiple currency practices and external arrears to apply (PS Table 1b). - Prior actions met: revised 2019 budget and 2020 draft budget submitted to parliament on October 14, 2019. - Capacity development priorities: revenue mobilization, public financial management, debt management, legal and fiscal framework for hydrocarbons (Annex IV). - Financing for first 12 months: program fully financed with good prospects for remaining period. - Expected budget support in 2020: amounts to 0.8 percent of GDP (CFAF 125 billion), main contributors being the World Bank, African Development Bank, the European Union and France. - Market access: successful Eurobond issuances in 2017 and 2018; no sovereign arrears to bilateral, multilateral or commercial creditors. - Implementation risks: - Low overall given strong track record. - Potential constraints: administrative fragmentation could hold back reform agenda. - Uncertainties in oil and gas production could have medium-term implications for investments, exports and fiscal revenues. ### Staff appraisal and policy recommendations - Macroeconomic context: - Senegal achieved strong growth in recent years driven by investment, business environment improvements and favorable external conditions. - External position in 2019 is moderately weaker than implied by fundamentals and desirable policy settings. - Dual challenge: sustain high growth while consolidating macroeconomic stability and making growth inclusive to reduce poverty and create jobs. - PSE II reform priorities: improve judicial system, workforce skills, access to land and credit, labor market functioning, and financial inclusion. - Recommendation: evaluate, coordinate, and streamline private sector incentive schemes and dedicated funds to limit fiscal costs and improve effectiveness. - Fiscal anchor and targets: - Fiscal policy will target a 3 percent of GDP deficit throughout the program period, in line with the WAEMU convergence criterion. - This is intended to balance spending needs and safeguard macro stability by putting public debt on a downward trajectory. - Debt distress rating: IMF-World Bank DSA shows risk of debt distress moved from “low” to “moderate.” - Fiscal risk management actions advised: - Clear unmet obligations from 2017 and 2018 per 2020 budget plan. - Improve recording and monitoring of expenditure float and arrears. - Eliminate below-the-line treasury operations. - Better manage fuel and electricity subsidies by adjusting prices or allocating sufficient funds through the budget. - Avoid viewing PPPs as an alternative to public borrowing given associated costs and risks. - Improve debt management, including enhanced coordination of debt-related activities. - Revenue and expenditure measures: - Increase revenues by broadening tax base, including targeting the informal sector, and strengthening revenue administration. - Focus on reducing tax expenditures to reach the 20 percent of GDP tax-to-GDP target by 2023. - On expenditure side: lower administrative costs, restructure public agencies, limit non-standard spending procedures to free resources for pro-poor spending and investment in education and infrastructure. - Manage transition to program budgeting and new public financial management software carefully to avoid disruptions to budget execution. - Hydrocarbon management recommendations: - Align draft law on management and allocation of hydrocarbon revenues and operational fiscal framework with international best practices. - Ensure all resource flows transit through the central budget and publish beneficial ownership information. - Continue investing in capacity to forecast future production, revenues and costs. *International Monetary Fund summary extract from the Senegal program document.* ### 51. A three-year PCI is appropriate to support the authorities’ macroeconomic policies and ### 1senea2020001 - 51. A three-year PCI is appropriate to support the authorities’ macroeconomic policies and ### Program justification and staff endorsement - A three-year PCI is appropriate to support the authorities’ macroeconomic policies and commitments. - Staff do not foresee a potential balance of payments need over the forecast horizon because Senegal has access to regional and global markets and receives stable support from development partners. - The program will: - continue to signal policies and reform commitments to development partners; - serve as a framework for close consultation with IMF staff. - Staff support the authorities’ request for a 3-year PCI-supported program. ### Macroeconomic outlook and growth projections (selected) - Real GDP growth (annual percent change) projections in Table 1: - 2019: 7.1 - 2020: 6.7 - 2021: 6.0 - 2022: 6.8 - 2023: 7.0 - 2024: 8.4 - Hydrocarbon GDP jump in 2022–2023 (Table 1 indicates a sharp increase in hydrocarbon contribution with "Of which: Hydrocarbon GDP..................359.621.3" as presented). - Non-hydrocarbon GDP growth: - 2019: 7.1 - 2020: 6.7 - 2021: 6.0 - 2022: 6.8 - 2023: 7.0 - 2024: 7.4 - Implementation of PSE II and increased investments in oil and gas are expected to keep growth high; GDP level jumps in 2022 and especially 2023 because of hydrocarbon production coming online. ### Inflation and prices - GDP deflator projections: 2019: 0.6; 2020: 0.6; 2021: 1.1; 2022: 1.1; 2023: 1.8; 2024: 1.2; (Table 1: "GDP deflator0.60.61.11.11.81.22.42.3" — preserving exact values as presented). - Consumer prices (annual average): 2019: 1.3; 2020: 0.5; 2021: 1.0; 2022: 1.5; 2023: 1.5; 2024: 1.5. - Inflation remained low and below 2 percent in 2019 (Figure 4 commentary). ### External sector and current account - Current account balance (percent of GDP, Table 3): - 2017: -7.3 - 2018: -8.8 - 2019: -9.2 - 2020: -10.7 - 2021: -10.5 - 2022: -7.7 - 2023: -3.8 - 2024: -3.7 - Table 2 (Billions of CFAF) current account levels: - 2017: -887 - 2018: -1,150 - 2019: -1,284 - 2020: -1,612 - 2021: -1,731 - 2022: -1,381 - 2023: -778 - 2024: -844 - Current account financing increasingly relies on Eurobonds (Figure 2 commentary and Table 2 entries for portfolio investment and Eurobond issuance). ### Fiscal outlook and public debt - Central government fiscal position (Table 1, percent of GDP): - Revenue: 2019: 19.5; 2020: 18.6; 2021: 20.3; 2022: 20.7; 2023: 21.5; 2024: 22.0; 2024 (projected): 22.7 and 23.0 appear in table rows — preserving the sequence "19.518.620.320.721.522.022.723.0". - Grants: 2019: 2.2; 2020: 2.0; 2021: 1.9; 2022: 1.9; 2023: 1.9; 2024: 1.8; subsequent values: 1.7 and 1.6 as reported. - Total expenditure (percent of GDP): 2019: 22.5; 2020: 22.2; 2021: 24.0; 2022: 23.7; 2023: 24.5; 2024: 25.0; range continues to 25.7 and 26.0 as shown. - Net lending/borrowing (Overall Balance) excluding grants: - 2017: -5.2 - 2018: -5.6 - 2019: -5.7 - 2020: -4.9 - 2021: -4.9 - 2022: -4.8 - 2023: -4.7 - 2024: -4.7 - Net lending/borrowing including grants: - 2017: -3.0 - 2018: -3.6 - 2019: -3.7 - 2020: -3.0 - 2021: -3.0 - 2022: -3.0 - 2023: -3.0 - 2024: -3.0 - Public investment trends: - Net acquisition of nonfinancial assets (percent of GDP): 2019: 8.7; 2020: 7.9; 2021: 9.3; 2022: 9.5; 2023: 10.4; 2024: 10.8; 2024 onward: 11.4 and 11.6 in Table 5 ("8.77.99.39.510.410.811.411.6"). - Total public debt (percent of GDP, Table 1): - 2017: 61.2 - 2018: 61.4 - 2019: 63.7 - 2020: 61.9 - 2021: 60.8 - 2022: 59.6 - 2023: 56.0 - 2024: 54.7 - Debt service (percent of government revenue, Table 1 memorandum): - 2017: 28.3 - 2018: 42.7 - 2019: 29.8 - 2020: 29.8 - 2021: 22.8 - 2022: 22.0 - 2023: 19.6 - 2024: 22.6 ### Monetary and financial sector indicators - Broad money growth (Table 1/6 entries): - Broad money: 2017: 9.2; 2018: 14.2; 2019: 9.1; 2020: 6.6 (Table 1 line "Broad money9.214.29.16.6............"). - Credit to the economy (net) and private credit: - Credit to the economy (net) percent of beginning-of-year broad money changes in Table 1: "Credit to the economy (net) 12.91.44.46.6............" and Monetary Survey (Table 6) shows credit to the economy levels: 2017: 4,209; 2018: 4,275; 2019: 4,504; 2020: 4,880 (Billions of CFAF). - Credit to the private sector growth: 2017: 15.3; 2018: 4.9; 2019: 6.0; 2020: 9.3 (Table 6 memorandum "Credit to the private sector (percentage growth)15.34.9. 6.09.3"). - Non-performing loans (Table 3 and Figure 3 commentary): - Gross NPLs to total loans (Table 7): 2018: 13.1 (and historical series back to 2011 listed). - Net NPLs to total loans (Table 7): 2018: 4.6. - Commentary: "The level of NPLs is falling and is in single digits, net of provisioning." ### Key projections on external financing and balance of payments - Balance of payments (Table 2 highlights, Billions of CFAF): - Exports, f.o.b.: 2019: 2,388; 2020: 2,716; 2021: 3,079; 2022: 3,820; 2023: 5,235; 2024: 5,764. - Imports, f.o.b.: 2019: -4,253; 2020: -4,739; 2021: -5,252; 2022: -5,577; 2023: -6,059; 2024: -6,745. - Services (net): 2019: -311; 2020: -560; 2021: -802; 2022: -626; 2023: -617; 2024: -716. - Current transfers (net): 2019: 1,275; 2020: 1,434; 2021: 1,655; 2022: 1,747; 2023: 1,779; 2024: 2,070. - Financial account and capital flows (Table 2, Billions of CFAF): - Capital and financial account totals: 2019: 1,528; 2020: 1,495; 2021: 1,655; 2022: 1,666; 2023: 1,740; 2024: 1,756. - Direct investment: 2019: 523; 2020: 718; 2021: 773; 2022: 779; 2023: 831; 2024: 915. - Portfolio investment (net) and Eurobond issuance: Table 2 shows Eurobond issuance line with values including "6411,1850013100208" (preserving exact sequence as presented). - Public sector disbursements (Table 2): 2019: 1,005; 2020: 869; 2021: 832; 2022: 832; 2023: 727; 2024: 644. ### Risks and policy responses (Risk Assessment Matrix) - Spillover and global risks: - Rising protectionism and retreat from multilateralism: Relative likelihood High; Potential impact Low. Policy response: Structural reforms to improve external competitiveness. - Sharp rise in risk premia: Relative likelihood High; Potential impact High. Policy response: Continue with fiscal consolidation, efforts to contain Treasury financing needs, and a strengthening of debt management. - Weaker-than-expected growth in Europe: Relative likelihood High; Potential impact Medium. Policy response: Structural reforms to improve external competitiveness. - Large swings in energy prices: Relative likelihood Medium; Potential impact High. Policy response: Contain energy subsidies, including by adjusting domestic energy prices in response to change in world prices. - Domestic and regional risks: - Delays in reforms to boost fiscal revenues and attract private investment: Relative likelihood High; Potential impact High. Policy response: Steadfast implementation of the reform program. - Drought: Relative likelihood Medium; Potential impact Low. Policy response: Provide assistance as needed to agriculture sector. - Domestic and regional security threats: Relative likelihood Medium; Potential impact Medium. Policy response: Ensure that multi-year budget framework allows room to address fiscal contingencies. ### Policy recommendations and operational priorities - Continue fiscal consolidation and strengthen debt management to mitigate exposure to interest rate shocks. - Contain energy subsidies and adjust domestic energy prices in response to world price changes to preserve the fiscal deficit target. - Implement structural reforms to improve external competitiveness and attract private investment. - Maintain close consultation with IMF staff under the three-year PCI framework to signal commitments to development partners and secure financing stability. ### Program review schedule under the PCI (Table 9) - Board Discussion of PCI Request: January 10, 2020 - First Review: By June 30, 2020 (Test Date: End-December 2019) - Second Review: By December 31, 2020 (Test Date: End-June 2020) - Third Review: By June 30, 2021 (Test Date: End-December 2020) - Fourth Review: By December 31, 2021 (Test Date: End-June 2021) - Fifth Review: By June 30, 2022 (Test Date: End-December 2021) - Sixth Review: By December 31, 2022 (Test Date: End-June 2022) *Source: IMF staff report text and tables as provided in the content unit.* ### Annex I. Performance Under the 2015-19 PSI ### Annex I. Performance Under the 2015-19 PSI ### Observance of Quantitative Conditionality - The 2015-19 PSI retained the quantitative conditionality of the 2010-14 PSI, except for assessment criteria (AC) on non-concessional external debt which lost relevance in the Fund’s new Debt Limit Policy given Senegal’s low risk of external debt distress and high debt management capacity. - Observance of quantitative conditionality under the 2015-19 PSI was broadly satisfactory, with 79 percent of AC and indicative targets (IT) met for the seven reviews completed prior to its cancellation. - Two indicative targets were repeatedly breached: - limiting the value of public sector contracts signed by single tender; and - safeguarding the program’s tax revenue targets. - Persistent underperformance in tax revenue mobilization contributed to reliance on debt-creating below-the-line operations to meet the program’s fiscal deficit targets. - Adjustments to quantitative conditionality in response to these breaches: - During the 5th review: added a ceiling on the government’s net financing requirement. - During the 6th review: upgraded the floor on tax revenue from an IT to an AC. ### Structural Reforms and Implementation - Structural reforms progressed broadly as envisaged. - Structural benchmarks focused on: - revenue mobilization through containing tax expenditure and strengthening revenue administration; - strengthening public financial management; and - improving the management of investment projects. - Implementation outcomes: - A majority of structural benchmarks was implemented in time or with slight delays. - A few benchmarks experienced more significant delays owing to limited administrative capacity, competing reform priorities, and resistance by vested interests. *IMF Staff Reports* ### 2. TA delivery could be undermined by rising insecurity in the Sahel region if it spreads ### 2. TA delivery could be undermined by rising insecurity in the Sahel region if it spreads ### Risks to Technical Assistance (TA) delivery and reform implementation - Rising insecurity in the Sahel region, if it spreads to Senegal, could undermine TA delivery. - Political-economy constraints: - Measures to substantially increase revenues could be opposed by taxpayers and by tax administration staff. - Low staffing levels, high turnover and limited capacity in the administration can pose risks to achieving reform objectives. - A range of major PFM reforms is underway simultaneously; weak capacity in line Ministries could jeopardize effective implementation. - Mitigating approaches: - Seek broad endorsement of TA activities and strong political support at a high level. - Intensify hands-on training to mitigate capacity risks. - Use peer learning to increase traction and overcome resistance to reform. - Support reform-minded officials and pay close attention to the political economy of reforms. ### Authorities’ views on CD and TA - The authorities agreed with the CD priorities and welcomed alignment with the objectives of the “Plan Senegal Emergent”. - They appreciated the focus on strengthening revenue mobilization (notably broadening the tax base and digitalization), PFM, and putting in place a sound framework to manage hydrocarbon-related revenues. - Long-term experts are seen as particularly helpful to advance crucial reforms; the authorities expressed a wish to receive more TA via long-term experts. - Preferred TA delivery methods: support on the “how to” aspect of implementation, using peer learning and hands-on training. - Requests from authorities: - Better involve their staff in the preparation of TA activities, including in drafting terms of references and funding requests. - Collaborate more closely on the selection of experts for TA activities. ### Program timing, oversight, and commitments - Program request: new macroeconomic and structural reform program supported by the Policy Coordination Instrument (PCI) of the IMF for the period December 2019-January 2023. - Dakar, Senegal — December 18, 2019. - Implementation monitoring: - The IMF will conduct six program reviews on a semi-annual basis to assess program implementation and agree on any additional measures. - The program will be evaluated based on quantitative targets, continuous targets, and reform targets as described in the Program Statement and Technical Memorandum of Understanding (TMU). - Government commitments: - Continue to demonstrate commitment to sound macroeconomic policies and take early action on additional measures if necessary. - Consult with IMF staff before adopting or reviewing measures as needed. - Regularly provide requested information to the IMF to monitor and evaluate program implementation. - Authorize IMF to publish the letter, Program Statement, TMU, and IMF staff report on the program request. ### Recent economic developments (as presented) - 2018: - End of first stage of the PSE (2014-2018) characterized by sustained growth, low inflation and a significant reduction of the budget deficit. - For the fifth consecutive year, growth rate was over 6 percent in 2018, compared to 3 percent in the 2009-2013 period. - Over 2014-2018, the average GDP growth rate was 6.6 percent a year. - 2019: - First year of PAP II (2019-2023) characterized by continued economic dynamism. - In the first half of 2019, nonagricultural economic growth as measured by the General Activity Index (IGA) is up 5.7 percent. - Overall, GDP growth is projected at 6.0 percent for 2019. - Inflation stood at 1.0 percent over the first six months of 2019 compared to the same period in 2018, measured by the national harmonized consumer price index (NHCPI). ### Strategic objectives of the reform program - Program aims (December 2019–January 2023): - Support implementation of the second phase of the PSE while maintaining macroeconomic stability. - Main objectives: - (i) achieve sustained and inclusive growth, driven mainly by the private sector; - (ii) strengthen macroeconomic stability by maintaining fiscal sustainability and managing debt prudently; - (iii) put in place sustainable and transparent management of revenues from hydrocarbon production. - Pillar I: Achieving high, inclusive and private sector-led growth - Private sector at the center of phase two of the PSE; accelerate private investment through strategic, mature, bankable projects with dedicated seed capital. - Strengthen and continue initiatives from first PSE phase: PUDC, PUMA, Program for the Modernization of Towns, PNBSF, Universal Healthcare program (Couverture Maladie Universelle/UMC). - Prepare a private sector development strategy based on: - expanding and upgrading physical infrastructure, sustainable management of natural resources, strengthening human capital; - public sector reforms (legal and judicial framework, financing, simplification of procedures, promotion of competition, labor legislation, public administration reform, tax policy, management of public resources); - development and improved governance of PPPs (review 2014 PPP law; first new draft available by January 2020; create database for all PPPs and power purchase contracts showing budgetary impact and quantifying main risks — reform target, June 2021). - New PPP legal framework: all investment projects financed through PPPs of over two billion CFAF must be subject to a prior evaluation; unsolicited bids require independent review by the Ministry in charge of PPPs (reform target, June 2020). - Evaluate and update the investment law: evaluation report expected in October 2020; adopt a new investment law by end-2021. - Commercial justice reforms: - Transfer residual files from the Court of First Instance to the Dakar commercial court and clarify competencies by end-June 2020. - Establish a court of first instance and an appeals court (reform target, December 2021). - Digitization of judicial activities and of the commercial and credit register (RCCM); digitization of commercial court procedures in Dakar expected to be completed in mid-2020. - “Compact with Africa” action plan priorities: (i) labor administration and laws, (ii) access to land, (iii) access to finance and development of SMEs, (iv) vocational training. - Labor law reform: revised law to be submitted to Parliament by December 2021 (reform target, December 2021); accompanying measures to optimize Labor Inspectorate processes and capacity building. - Access to land reforms: accelerate attribution of land usage and land titles in rural areas and computerize property, real estate, and land registry procedures by putting in place an integrated, centralized land management system (reform target, June 2021). - Access to finance and SME support: - Institutional transformation of FONGIP, support to FONSIS for creation of an SME fund, governance aspects, support to MFIs to develop new loan products and improve credit and risk analysis for SMEs. - Create a single platform for exchange of information among microfinance institutions and work with commercial bank partners of AGF to tailor SME loan products. - Put in place a single online registry for collateral combining movable collateral and mortgages, in cooperation with BCEAO (reform target, December 2021). - Incorporation of large billers into the platform of the Credit Information Bureau (BIC, reform target, December 2020). BIC had 696,797 clients at end-September 2019. - Preparation of a national financial inclusion strategy (reform target, June 2020) with performance monitoring indicators. - Gender and human capital: - Increase share of projects with a gender focus starting with the 2020 budget law. - Education: conduct a study (impact assessment) to identify mechanisms to improve secondary school enrollment of children (reform target, June 2020). - Technical and vocational training reforms: finalization and application of the law on professional and technical training at end-June 2020; strengthen public-private consultation and coordination; improve quality assurance, access, certification, and update industry classification annexes. - Hydrocarbons and energy: - Strengthen regulatory framework by broadening scope to entire energy sector by December 2020. - Prepare and implement a master plan to improve oil and gas logistics by end-2021. - Universal access to electricity targets by 2022: urban electrification rate of 95 percent and rural electrification rate of 75 percent. - Deploy an FSRU of 120MW and use imports from end of first half of 2020 in transition until domestic production becomes available. - Increase penetration rate of renewable energies excluding hydropower to 18 percent by 2022. - Pillar II: Consolidate macroeconomic stability through a prudent fiscal policy - Commit to adhering to all WAEMU convergence criteria and keeping the debt ratio on a sustainable trajectory. - Revenue mobilization: - First draft of the Medium-Term Revenue Strategy (MTRS) to be prepared by December 2019 and finalized by June 2020 (reform target, June 2020). - Complete reform of the overall public finance framework with transposition of the WAEMU directive on the fiscal regime of local governments. *Italic: International Monetary Fund — Program materials and authorities’ statements as presented in the Program Statement for the Period December 2019–January 2023.* ### 19. Short-term fiscal objectives. The Government intends to limit the fiscal deficit to 3 percent ### 19. Short-term fiscal objectives. The Government intends to limit the fiscal deficit to 3 percent of GDP in 2019 and for the following years in the context of the economic and financial program supported by the PCI. ### Short-term fiscal target and fiscal actions - Fiscal target: limit the fiscal deficit to 3 percent of GDP in 2019 and subsequent years. - Short-term revenue measures launched to achieve the supplementary budget law of July 2019 objectives: - Domestic taxation measures: - (i) tightening up the monitoring of declarations and rapid treatment of delinquencies; - (ii) increasing the coverage of tax audits; - (iii) speeding up the collection of tax arrears from government suppliers. - Customs measures: - (i) broadening of the scope of taxes and duties on import operations by the so-called informal sector, with particular emphasis on value, type, and weight declared and the cancellation of customs clearance based on a lump sum deposit (dédouanement forfaitaire); - (ii) strengthening controls on the economic and special customs arrangements as well as on exemptions; - (iii) improving the arrangements for management of the portfolio of customs claims and the monitoring of payment of interest penalties and suspended VAT; - (iv) consolidation of the reform to clear goods in proximity; - (v) optimization of the use of the scanner by making it compulsory for containers for which an inspection outside of the customs perimeter is authorized to go through the red lane. - Composition of expenditures adjusted to ensure full payment of unpaid amounts due in 2019 and unpaid amounts due to the energy sector for previous years while remaining within the 3 percent of GDP deficit target. - A second supplementary budget law (LFR2) was prepared and submitted to Parliament on October 15, 2019 (LFR2) as part of fiscal consolidation. - A reserve of CFAF 25 billion is included to be used if there is a shortfall on the revenue side. ### Senelec transfer and impact on deficit - Government transferred CFAF 125 billion to Senelec to restore financial health. - This is a one-off operation that will increase the 2019 budget deficit by CFAF 100 billion (or 0.7 percent of GDP), leading to an overall budget deficit of 3.7percent of GDP. - Without this exceptional operation, the overall deficit would be limited to 3 percent of GDP. ### Fuel and electricity price mechanisms and continuous reform target - Government will implement the decree on regular revision of fuel prices to eliminate annual fuel subsidies. - If the mechanism is not complied with and price adjustment suspended, Government undertakes to: - include necessary budget allocations in a supplementary budget, and - settle amounts of fuel subsidies and tariff compensation due within 90 days following validation (continuous reform target). - Similarly, if electricity tariffs are below cost-recovery level, Government undertakes to include necessary budget allocations in a supplementary budget law and to pay amounts due within 90 days after validation. ### Repayment strategy for unmet obligations and arrears clearance - Time-bound strategy to repay unmet obligations accumulated before 2019 adopted and included in the 2020 draft budget law; repayments spread over 2020-2022 based on supporting documentation. - The 2020 budget law earmarked CFAF 112.6 billion to clear overdue obligations in energy, construction and public works, agriculture, public real estate, and water sectors. - Remaining payments estimated at CFAF 235 billion to be spread about evenly over 2021-22. - Outstanding deposit account balances declined by CFAF 174.1 billion in 2018 to a total of CFAF 221.8 billion. - Clearance plan: pay CFAF 100 billion in 2019 and CFAF 121.8 billion in 2020 (as reflected in the ceiling on net domestic financing of the Government). - Prohibition to carry forward amounts for current spending and limiting carry forward for investment spending to 5 percent to support clearing. ### Objectives of the 2020 draft budget law (LFI) and fiscal envelope - Objective: increase revenue mobilization by at least 0.5 percent of GDP. - Government financial commitments from prior fiscal years taken into account in amount of 1.3 percent of GDP. - Revenue increase measures include: - increasing the number of registered taxpayers including by crosschecking information with customs; - strengthening tax audits by closely monitoring voluntary declarations and increasing number of controlled entities. - Improved commitment, procurement, and cash flow plans (notably for large investment projects) to improve monitoring of available funds and achieve fiscal deficit target. ### B. Strengthening Domestic Revenue Collection — Medium-Term Revenue Strategy (MTRS) - From 2020, Government will put in place a Medium-Term Revenue Strategy (MTRS). - MTRS aim: significantly improve revenue collection on a sustained basis to achieve a tax-to -GDP ratio1 of 20 percent by 2023, creating space to finance development programs of PSE II while maintaining macroeconomic stability. - MTRS implementation focus areas: - (i) completing the digital transformation of the revenue agencies; - (ii) adapting human resources for controlling the tax base and tax assessment; - (iii) institutional and governance reforms of revenue mobilization programs; - (iv) legislative measures, in particular tax policy measures. - Administrative objectives under MTRS: - (i) broaden tax and customs base by centralizing and using data on taxpayers unknown to revenue administration; - (ii) check consistency of declarations; - (iii) better assess customs value and reduce destination and economic regime fraud; - (iv) improve productivity of revenue services by optimizing processes; - (v) lower costs borne by taxpayers to meet tax and customs obligations. - Main tax policy measures to facilitate formalization and broaden base: - reform of the tax regime for small enterprises, corporate tax, and minimum corporate income tax; - lowering of tax expenditures via better targeting of tax incentives for investment; - property tax reform to aid identification of taxpayers and assets; - simplification of stamp and registration duties; - improvement of the VAT refund system to prevent it from weighing on businesses. - Short-term: customs prepayments on income taxes increased for non-regulated taxpayers to encourage compliance (reform target, June 2020). ### MTRS administrative and technical actions (Ministry of Finance) - Digitization of declarations and tax/customs procedures rich in data on economic agents outside existing portfolio. - Centralization and review of financial data by various administrations to combat tax evasion. - Access by customs to domestic tax data for better optimization of customs investigations; finalization of customs and tax department interconnection including a quarterly report on data/information exchanges (reform target, quarterly from January 2020). - Strategy to "recruit" and retain new taxpayers or first-time filers, with support and reminder procedures for at least two years. - Registration, identification and geo-localization of economic units to strengthen control and collection. - Improvement of audit mission effectiveness and enhancement of the information function. ### Land taxes, e-procedures and VAT efficiency - Special program for mobilization of land taxes to expand domestic tax base; deployment of geo-localization of buildings and addresses in Dakar; first steps in Dakar region in 2020. - Expansion of e-procedures and e-payments; adoption of legal/regulatory framework to support less cash transactions and develop tax base. - Introduction of M-tax for taxpayers to declare and pay taxes by mobile phone (reform target, December 2020). - VAT efficiency measures: - Customs Directorate General to increase staff for monitoring, control, and recovery of suspended VAT and develop digital solutions for monitoring suspended VAT stock. - Directorate General of Taxes and Estates to adopt digital solutions (electronic invoicing machines, e-VAT system) for real-time control of invoices. ### Customs-specific control and digitization measures - Strengthening control over commercial transactions focusing on taxation considerations (cash value and weight) and elimination of flat-rate customs clearance. - Optimizing use of scanner. - Widespread use of the GAINDE system across domestic offices. - Digitization of transit formalities and extension of electronic tracking of goods shipments to all transport corridors. - Consolidating reform of local customs clearance. - Full digitization of customs clearance procedures and administrative formalities. - Automation of management of suspended VAT. - Extension of the computer application for management of exemptions and economic customs procedures (GRED) to other procedures, outside the mining code. - Cross-checking and consistency control between beneficiary importer activities, amount of exemptions obtained and nature of beneficiary goods to be strengthened at risk analysis and post-clearance control stage by June 2020. ### C. Improve the Efficiency and Transparency of Expenditure - Major expenditure streamlining measures as part of 2020 budget preparation: - Conduct a study of the expenditure chain with IMF technical assistance to limit expenditures executed in simplified procedures and non-competitive procurement (reform target, June 2020). Regulatory text to update framework for expenditure eligible for simplified procedures (reform target, December 2020). Revise November 2018 decree on budget commitment letters to limit them to defense and security sector only (reform target, December 2020). - New investment projects in the 2021 budget law to be submitted to arbitration to prioritize ongoing projects; inclusion of any new investment project of more than CFAF 1 billion subject to conclusive cost-benefit analysis by Ministry of Economy, Planning and Cooperation (reform target, December 2020). - 2021 budget law to present investment program consistent with commitment authorization ceilings for next 3 years (reform target, December 2020); annual performance reports (RAPs) annexed to 2020 budget execution law to report physical and financial execution of main projects. - Restructure and streamline diplomatic missions with closure of some consulates and economic offices and reduction in budget allocated to Ministry of Foreign Affairs and Senegalese nationals living abroad. - Control mobile phone spending to achieve savings of at least CFAF 15 billion over a full year. Decree No. 2019-1310 of August 14, 2019 grants monthly allowance to civil servants for professional use of phones in lieu of direct payment. - Ongoing restructuring of agencies involving dissolutions, mergers, and takeovers involving 24 agencies and similar entities; creation of a Restructuring Fund; social plans and redeployment processes anticipated. - Reform management of government vehicles to restrict availability to certain categories of senior managers to curb fleet growth and associated expenditures. ### PFM and transparency reforms - Continued implementation of WAEMU PFM directives from January 2020. Senegal has transposed seven of eight directives; exception is directive on financial and accounting regime for local and regional authorities. - Organic budget law enshrines transition from means budget to results-based budget, from cash to accrual accounting, and strengthens National Assembly's and Court of Auditors' audit powers. - Budgetary reforms in organic budget law to be fully implemented from January 1, 2020. - Revise Decree No. 2011-1880 of November 11, 2011 on General Regulation on Public Accounts and draft decree on State budget management framework to clarify budgetary authorization rules. - Adopt a new Integrated Financial Information Management System (SIGIF) integrating budget preparation, execution, control, and reporting. - Set up mechanism to monitor multi-year commitments with Payment Appropriations (PA) associated with Commitment Authorizations (CA) for all projects. - Transparency enhancements from 2018 Public Financial Transparency Assessment: - Promote public participation in drafting finance law and dissemination of a citizen budget. - Directorate-General for the Budget to develop and complete budget documentation to meet best international standards and publish promptly after approval covering all annexes, multi-annual and in-year reports, including functional nomenclature. - Develop a government equity strategy and a fiscal risk statement with IMF technical assistance; fiscal risk statement to be annexed to the 2022 budget law (reform target, December 2021). - Consolidation of treasury single account to continue in 2020 with integration of 20 public bodies and closure of remaining commercial bank accounts (except foreign-financed project accounts) and repatriation of balances to treasury single account by end of 2021 (reform target, December 2021). - La Poste restructuring: system eliminating Treasury funding for post office compensation is working; restructuring to put La Poste group on a solid financial footing is underway, including options such as transformation of Postes Finances into a financial institution. *Source: 1senea2020001 - 19. Short-term fiscal objectives. The Government intends to limit the fiscal deficit to 3 percent of GDP in 2019 and for the following years in the context of the economic and financial program supported by the PCI.* ### 41. The debt strategy aims to ensure debt sustainability through prudent management ### The debt strategy aims to ensure debt sustainability through prudent management ### Objectives and strategic orientation - Preserve sustainability of debt and public finances by developing, implementing and monitoring an appropriate debt strategy. - Maintain a prudent debt policy while mobilizing significant resources to finance growth. - Orientation towards innovative instruments: fungible bonds, targeted auctions reserved for specialists in government securities, and structured project finance. - Explore alternative financing sources: development of public-private partnerships (PPPs) for certain large-scale projects and strengthening the business climate to attract foreign direct investment. ### Debt composition and instrument choice - Preference for external loans with the highest concessionality rates and domestic financing with the longest maturities. - Ensure diversification of loan portfolio by balancing borrowing on the regional market and external borrowing to limit associated risks. - Loan terms to be considered according to the nature of projects to be financed. - Senegal will contribute to the development of the sub-regional market through active participation. ### Institutional arrangements and governance - Revitalization of the National Public Debt Committee (CNDP) to facilitate coordination of public debt management. - CNDP Coordination Committee to hold regular meetings to facilitate coordination and information exchange among entities with mandates related to public debt management (Ministry of Finance and Budget, Ministry of Economy, Planning and Cooperation). - Strengthen human resources of the debt office, particularly the middle-office unit, to enable it to: - Fully assume its role as permanent secretariat of the CNDP. - Centralize activities relating to loan commitments, securities issuance, disbursements, and debt service payments. - CNDP responsibility: examine all new proposals for external debt of the central government and public entities, as well as PPP-financed projects. - A CNDP procedures manual to be finalized (reform target, June 2020). ### Recent debt stocks, ratios, and servicing - Central Government debt stock at end-2018: CFAF 7346.4 billion (including CFAF 6436.5 billion in external debt and 910.2 billion in domestic debt). - Central Government's debt ratio in 2018: 56.3 percent of GDP, below the WAEMU ceiling of 70 percent of GDP. - Debt servicing expected to be CFAF 919.0 billion. - Public sector debt (including parastatals and state-owned companies) at end-2018: CFAF 8030.0 billion (61.6 percent of GDP), compared to CFAF 7445.2 billion in 2017 (61.2 percent of GDP). ### Projections and targets - Implementation of the debt management strategy expected to keep public debt (in nominal terms) below 62 percent of GDP in 2020. - Stock of public debt expected to peak in 2021 before gradually declining, approaching 56 percent of GDP by 2024. ### Risk management measures and recent actions - 2019 currency hedge aimed to limit impact of USD/FCFA fluctuations on Eurobond debt service. - Hedging strategy included reprofiling of the 2021 repayment between 2020 and 2022 to limit exchange rate risk, smooth debt service, and reduce vulnerabilities associated with the repayment of the 2011 Eurobond. - Widening of the debt perimeter to the parapublic sector: - Directorate of the Parapublic Sector (DSP) to require regular reporting by parapublic companies on their debt and guarantees granted by the Government. - DSP forwards information to the Public Debt Department for follow-up and to help establish the public sector balance sheet. - Senegal intends to continue extending the debt perimeter to local authorities. ### Hydrocarbons sector fiscal framework (Pillar III) and related fiscal anchors - Petroleum law in force since 2019 governing exploration, exploitation, and production-sharing activities; a local content law also came into force in 2019. - Two further laws to supplement framework: distribution, supervision and management of hydrocarbon revenues; and how gas resources can contribute to reducing energy costs and strengthening competitiveness. - Intention to include creation of an inter-generational fund to be managed by FONSIS and the creation of a stabilization fund in the law on distribution and management of hydrocarbon resources. - Principles for long-term anchoring of fiscal policy: - Consistency with WAEMU fiscal policy rules. - Simplicity for transparency. - Prudence Principle through establishment of reserves accounting for exposure to hydrocarbon risks. - Mechanism to deal with unexpected and permanent shocks. - Government intends to adopt a bill on income distribution and management reflecting best practices and a long-term fiscal anchor to ensure revenue sharing with future generations. - Short-term operational budget rule (excluding oil and gas resources) to be adopted (reform target, end-December 2020). - Draft legislative text on allocation, management and control of hydrocarbon revenues to be based on principles including: - Full budgeting of tax and non-tax revenues from hydrocarbon production. - Planning and alignment of management of hydrocarbon resources with budget documents. - Strengthening of public financial management oversight mechanisms. - Prohibition of any early transfer of hydrocarbon reserves. - Reform target for the draft law: June 2020. ### Program monitoring and governance of reforms - Program monitoring through quantitative targets (QTs), continuous targets (CTs) and reform targets (RTs). - Quantitative targets set for end-December 2019, end-June 2020, end-December 2020, and a continuous QT; reform targets in Table 2 of the Program Statement. - Review schedule: first review by June 30, 2020; second by December 31, 2020; third by June 30, 2021; fourth by December 31, 2021; fifth by June 30, 2022; sixth by December 31, 2022. - CNDP procedures manual and other specific reform target deadlines: - Finalize CNDP procedures manual: End June 2020. - Prepare draft law on allocation, management and control of hydrocarbon revenues: End June 2020. - Adopt new fiscal framework with long-term anchor and short-term operational rule: End December 2020. ### Debt Sustainability Analysis (DSA) findings - Compared with January 2019 DSA, risk of debt distress (external and overall) moved from low to moderate, reflecting a significant shift towards non-concessional external debt to fund investments to develop the hydrocarbon sector. - DSA results: more significant and prolonged breaches of thresholds under stress tests for three out of four key external debt ratios, driven by higher external debt service. - Short-run: limited space to absorb shocks; Long-run: substantial space for borrowing. - Moderate risk of debt distress contingent on adherence to planned fiscal consolidation path, acceleration of reforms, and a prudent borrowing strategy as reflected in the Program Statement. - Importance of addressing fiscal risks from the broader public sector, including the energy sector, to anchor debt sustainability. ### DSA technical details and applicable thresholds (for strong debt-carrying capacity) - Senegal’s debt carrying capacity classified as strong. - Applicable thresholds to public and publicly guaranteed external debt: - PV of debt-to-GDP ratio: 55 percent. - PV of debt-to-exports ratio: 240 percent. - Debt service-to-exports ratio: 21 percent. - Debt service-to-revenue ratio: 23 percent. - Applicable benchmark for the PV of total public debt for strong debt carrying capacity: 70 percent of GDP. *Prepared by the staffs of the International Monetary Fund and the International Development Association; December 19, 2019 (Senegal Joint Bank-Fund Debt Sustainability Analysis and Program Statement excerpts).* ### Box 1. Coverage of Public Sector Data in the DSA ### Box 1. Coverage of Public Sector Data in the DSA ### Coverage and data treatment - Public sector definition used in the DSA includes: (i) the central government, (ii) para-public entities which are part of the general government, and (iii) SOEs. - Total public debt data, including debt of para-public entities and SOEs, are provided by the authorities. - Revenue and expenditure data on para-public entities and SOEs are derived from technical assistance (TA) reports from the Statistics and Fiscal Affairs Departments of the IMF. - The expanded coverage of public sector data in this DSA starting in 2017 creates a structural break with historical data. ### Key debt and deficit figures (coverage effects) - Combining the central government deficit of 3.3 percent of GDP with data from other public-sector entities puts the 2016 public sector deficit at 1.4 percent of GDP. - Overall public-sector deficit widened to 2.5 percent of GDP in 2017 and to 4.6 percent of GDP in 2018 due to implementation of the Plan Senegal Emergent (PSE) investment program. - End-2017 debt stock under expanded coverage: 61.2 percent of GDP, including central government debt of 50 percent of GDP. - End-2018 debt-to-GDP ratio: 61.4 percent of GDP. - External debt at end-2018: about 48.5 percent of GDP compared with 39.8 percent in 2017 (inclusive of loans from BOAD, which was reclassified as domestic debt in 2018). - Applying the same reclassification to the 2017 debt stock would lower the external debt-to-GDP ratio to about 46.5 percent. ### Drivers of recent public sector debt build-up - Accelerated public spending, particularly in 2017-18. - Below-the-line treasury spending. - Inclusion of debt from SOEs such as Senelec and Air Senegal for one-off significant investments. - Significant non-concessional external borrowing. ### Contingent liability stress test design and assumptions - SOEs’ debts are mostly covered by the DSA; the contingent liability stress test accounts for risks from ongoing PPPs and financial markets. - PPPs estimated value: about 6-7 percent of GDP (as in the January 2019 DSA). - Contingent liability shock for PPPs: raises the shock by 2 percent of GDP (corresponding to 35 percent of the total PPP stock). - Contingent liabilities from financial markets: set at the minimum value of 5 percent of GDP, representing the average cost to the government of a financial crisis in a LIC since 1980. - Table summary (values preserved as in source): - PPP: 35 percent of PPP stock → 2.1 (percent of GDP) given PPP capital stock of 6 percent of GDP is larger than 3 percent threshold. - Financial market: 5 percent of GDP → 5.0 (percent of GDP). - Total (2+3+4+5) (in percent of GDP): 7.1 ### Eurobond issuances, composition shifts, and domestic debt - Senegal issued a US$2.2 billion Eurobond in March 2018, its largest ever, amounting to twice the previous issuance of US$1.1 billion in 2017. - A part of the proceeds was used to buy back 40 percent of the 2021 bullet payment on the US$500 million Eurobond issued in 2011. - Domestic debt declined from about 21 percent of GDP at end-2017 to 13 percent of GDP at end-2018, reflecting substitution by Eurobond issuances. - Domestic debt further estimated to decline to about 10 percent of GDP at end-2019 as most borrowing for major projects is external. ### Recent and projected external debt and debt service - Senegal’s external public debt stock stood at 48.5 percent of GDP as of end-2018 (external debt defined based on currency rather than residency). - This represents an increase of over 8 percentage points compared to 2017, mostly reflecting the US$2.2 billion Eurobond issuance. - External public debt projected at 53.5 percent of GDP for 2019 (47.2 percent in the previous DSA). - Total public debt projected to reach 63.7 percent of GDP in 2019. - Drivers of 2019 increase include financing requirements for: - reduction in end-2018 outstanding balance in below-the-line comptes de dépôt; - payment of pre-2019 Senelec arrears financed through a short-term external commercial loan of CFAF 125 billion; - larger-than-previously-anticipated investments in Petrosen for oil and gas projects; - purchasing of airplanes by Air Senegal; - a syndicated loan of CFAF 150 billion for other treasury operations (authorities intend to refinance this loan in the regional CFA bond market with a longer maturity). - Public external debt service to exports: - about 9 percent in 2017; - 17.5 percent in 2018; - estimated at 18.5 percent in 2019. - Public external debt service to revenue: - about 8 percent in 2017; - 15.6 percent in 2018; - estimated at 16 percent in 2019. - Total public debt service estimated at about 28 percent of total revenue (including grants) in 2019. ### Differences from previous DSA and debt service dynamics - Increase in the share of non-concessional external debt largely explains differences between current and previous DSA. - Domestic debt share: - about one third of total debt in 2017 (previous DSA base year); - 20 percent of total public debt at end-2018 (current assessment base year). - Debt service dynamics have significantly changed relative to the previous DSA. ### Baseline macroeconomic and borrowing assumptions - Baseline assumes implementation of sound macroeconomic policies, structural reforms, and ambitious investment plan as outlined in the PSE II. - Assumed central government fiscal deficit: remains at 3 percent of GDP over the long term (consistent with WAEMU convergence criteria). - Main macro assumptions: - Natural resources: implementation of two large off-shore oil and gas projects (GTA and SNE), including pre-production investment and borrowing with first production and export expected in 2022. Full investments for phase I and expected investments for phases II and III for both projects were added. - GTA total capital expenditure estimated at $1,452 million, spread over 2020-26. - SNE total capital expenditure estimated at $1,641 million over 2020-32. - Real GDP growth: - 6 percent in 2019; - 6.8 percent in 2020 (previous DSA: 6.9 and 7.5 respectively); - growth rate peaks at 11.6 percent in 2023; - decelerates to 8 percent in 2024; - medium-term projections of real GDP growth: 7.9 percent; - long-run average real GDP growth: 5.1 percent over 2025-39. - Inflation/GDP deflator: - Inflation projected to remain contained at under 2 percent in 2019. - GDP deflator projected at 1.1 percent in 2019 and expected to hover around 2 percent over the medium term. - Fiscal deficit: - Public sector deficit projected at about 4.7 percent of GDP in 2019 (owing to Petrosen and Air Senegal investments); - 4.3 percent of GDP over the medium term; - long-run deficit set at about 2.7 percent of GDP. - Gross financing needs: - Average gross financing needs over the medium-term in the current DSA: about 9 percent of GDP (compared to 7.5 percent in the previous DSA). - External financing mix and terms: - Prudent borrowing strategy assumed: gradually increasing share of domestic debt and seeking concessional external financing when feasible. - Includes two external bridge loans contracted in 2019: CFAF 125 billion for Senelec and CFAF 150 billion syndicated loan repayable in 2020; refinancing of at least CFAF 150 billion through regional bond issuance is included. - BCEAO authorization to place an additional amount of up to CFAF 275 billion in 2019; recent bond issuance by Senegal was oversubscribed by 300 percent. - Average maturity of new debt assumed to remain close to 17 years, with 6-year grace period and an average interest rate of 4 percent (previous DSA had a 7-year grace period and 4 percent average interest). - Domestic borrowing: - Domestic financing assumed to account on average for about 35 percent of total financing over 2019-24; about 10 percent of which has maturity below one year. - New medium- and long-term domestic debt average maturity: 5 years. - Exports: - Exports of goods and services estimated at about 23 percent of GDP in 2019 and projected to average about 27 percent over the medium term (compared with about 22 percent and 24 percent in the last DSA). - Long run exports expected to average 31 percent of GDP (compared to 28 percent in the last DSA). - Current account deficit: - 2018 actual: 8.8 percent of GDP (previous projection: 7.3 percent of GDP). - 2019 projected: 9.2 percent of GDP (previous projection: 7.5 percent of GDP). - Long-term average current account deficit projected to converge to 1.1 percent of GDP (compared to 1.2 percent in the last DSA). - Discount rate for the DSA: 5 percent. ### Box 2 — Oil and Gas: Petrosen borrowing assumptions (summary) - Petrosen investments for phase I: US$1,140 million (US$425 million for GTA and US$715 million for SNE). - Total Petrosen investment across three phases: - GTA: US$1,452 million. - SNE: US$1,641 million. - Petrosen loans assumptions: contracted for a 10-year period, at 7 percent interest per annum, with a 4 year grace period (amortization would start in 2024 and be initially quite low). - Petrosen borrowing numbers reflected in DSA projections for 2019-31 (figures presented in CFAF billions and percent of GDP in the source text). ### Realism checks - Projected medium-term debt-creating flows are similar in nature to historical outturns. - Projected fiscal adjustment for the next three years is well below the top quartile of the distribution of approved Fund-supported programs for LICs since 1990. - Assumed fiscal consolidation plans are consistent with the WAEMU regional fiscal deficit convergence criterion of 3 percent of GDP. - Baseline projection does not deviate significantly in 2020 from growth paths using LIC typical fiscal multipliers from the empirical literature. - Government capital contribution to real GDP growth is conservative and remains in the order of historical magnitudes. *Sources: Senegalese authorities; and staff estimates.* ### 11. Senegal’s capacity to carry debt remains strong. Values in the components of the Composite ### 1senea2020001 - 11. Senegal’s capacity to carry debt remains strong. Values in the components of the Composite Indicator (CI) score, which reflect 10-year averages, have only changed marginally compared to the previous DSA ### Composite Indicator (CI) and macroeconomic context - CI score components reflect 10-year averages and have only changed marginally compared to the previous DSA; therefore thresholds to assess debt sustainability remain unchanged. - Main contributors to the CI score: CPIA value (quality of institutions and policies) and import coverage of reserves. - CI table (components, coefficients, 10-year averages, contributions): - CPIA: coefficient 0.385, 10-year average 3.818, CI Score component 1.474, Contribution 44% - Real growth rate (in percent): coefficient 2.719, 10-year average 7.598, CI Score component 0.216, Contribution 6% - Import coverage of reserves (in percent): coefficient 4.052, 10-year average 39.075, CI Score component 1.5847, Contribution 47% - Import coverage of reserves^2 (in percent): coefficient -3.990, 10-year average 15.269, CI Score component -0.61, Contribution -18% - Remittances (in percent): coefficient 2.022, 10-year average 2.10, CI Score component 0.587, Contribution 0.216% - World economic growth (in percent): coefficient 13.520, 10-year average 3.559, CI Score component 0.481, Contribution 14% - CI Score: 3.34 (CI rating: Strong) - Selected macroeconomic indicators (2016–2019; current DSA vs previous DSA): - Real GDP growth: - Current DSA: 2016 6.4, 2017 7.1, 2018 6.7, 2019 6.0, Medium term1 7.9, Long term2 5.1 - Previous DSA: 2016 6.2, 2017 7.2, 2018 6.2, 2019 6.9, Medium term 8.3, Long term 5.1 - Overall fiscal deficit (percent of GDP) (General Government and Public Sector): - Current DSA: 2016 3.3, 2017 2.5, 2018 4.1, 2019 4.7, Medium term 4.0, Long term 2.4 - Previous DSA (Central Government): 2016 3.3, 2017 2.8, 2018 5.1, 2019 4.3, Medium term 3.7, Long term 2.8 - Current account deficit (percent of GDP): - Current DSA: 2016 4.0, 2017 7.3, 2018 8.8, 2019 9.2, Medium term 7.6, Long term 1.2 - Previous DSA: 2016 4.0, 2017 7.3, 2018 7.3, 2019 7.0, Medium term 7.5, Long term 1.2 - Exports of goods and services (percent of GDP): - Current DSA: 2016 21.5, 2017 21.9, 2018 21.8, 2019 22.7, Medium term 26.4, Long term 31.3 - Previous DSA: 2016 21.5, 2017 21.7, 2018 22.0, 2019 22.3, Medium term 24.0, Long term 28.1 Notes: - 1 Defined as the first 5 years of the projection period. For the current DSA update, the medium term covers the years 2019-2024. - 2 Defined as the last 15 years of the projection period. For the current DSA update, the long term covers the years 2025-2039. - Overall fiscal deficit refers to General Government and Public Sector; previous DSA line refers to Central Government. ### Stress tests and tailored market financing shock - Standardized stress tests use default settings; contingent liability stress test based on quantified contingent liabilities. - Tailored market financing shock applied due to outstanding Eurobond; assumptions: - Temporary increase in the cost of new commercial external borrowing by 400 basis points. - Nominal depreciation of 15 percent of the CFAF vis-à-vis the US$. - Shortening of maturities and of grace periods (shortening rules: if original maturity > 5 years, new maturity set to 5 years; if original maturity < 5 years, new maturity shortened by 0.7 years). - Market financing risk tailored test causes the debt service-to-export ratio to breach its threshold in 2020, reaching 23 percent. ### External DSA baseline and scenarios - Baseline projections: - Public external debt service to revenue projected to peak at about 20 percent in 2020 before reversing. - Public external debt service to exports projected to peak at about 23 percent in 2020 before declining. - Present value of PPG external debt estimated at about 46 percent of GDP in 2019; projected to decline to about 38 percent of GDP in 2024 and 25 percent on average in the long term (below the 55 percent threshold). - Breach details: - Debt service-to-exports ratio exceeds its threshold once (during 2020) by about 2 percentage points, reflecting repayment of non-refinanced portion (CFAF 125 billion CFA) of two bridge loans contracted in 2019 and Eurobond debt service of more than CFAF 125 billion. - The 2020 breach is temporary (one year) and per LIC DSF guidance does not affect the risk rating. - Historical scenario (simulates no progress on reforms and return to low growth): - Simulates a non interest current account deficit and FDI stabilizing at - 5.4 percent of GDP and 1.8 percent, respectively; and real GDP and GDP deflator would grow at 4.8 percent and -1.2 percent, respectively. - Under this scenario most indicators would breach their respective thresholds over the medium to long term. ### Stress test outcomes and risk rating - Under stress tests all four PPG external debt burden indicators breach thresholds in 2020, but breaches are short-lived (maximum three years). - The debt service-to-revenue ratio breach is short-lived (one year) under exchange rate depreciation simulation; such a shock is unlikely given the CFA franc peg. - Most extreme shocks: - Export shock is most extreme for debt-to-exports and debt service-to-exports ratios. - Combination shock worst for PV of debt-to-GDP ratio. - Peak values under shocks: - Debt service-to-export ratio peaks at about 26 percent in 2020. - Debt-to-exports ratio peaks at about 310 percent in 2021 (i.e., close to 30 percent above their thresholds). - Overall external debt assessment: - External debt developments place Senegal at a moderate risk of external debt distress. - Factors considered: GDP rebasing; active liability management (repurchase of 40 percent of the 2011 Eurobond in 2018); introduction of oil and gas-related production and revenues starting in 2022. - Results robust to alternative hypotheses, including scenario where half of Petrosen financing goes through project finance and is removed from DSA after construction phases. ### Drivers of change in risk rating - Change from low to moderate risk results from combined factors affecting debt ratios: - Continued increase in debt, particularly tilt toward non-concessional external debt. - Deterioration of short-term macro indicators: fiscal and current account deficits, and real GDP growth compared with previous projections. - Compared to the last DSA, average debt service over 2019-24 increased by about 19 percent. - Near-term space to absorb shocks is limited; substantial borrowing space exists over the long run. ### Public DSA and debt service vulnerabilities - Public debt indicators: - Debt-to-GDP ratio displays downward trend starting in 2020, accelerating in 2023 as hydrocarbon production intensifies and nominal GDP increases. - Net present value of total public debt projected to decline from 57 percent in 2019 to 49 percent of GDP by 2039 (below benchmark of 70 percent). - Stress test on GDP growth: - Under the most extreme stress test, a shock to GDP growth results in a prolonged breach of the threshold; standardized simulation may overstate magnitude because it creates a sizable permanent increase in the primary deficit inconsistent with Senegal’s stated fiscal policy and historical data. - Historical scenario shows PV of total public debt on an upward trend, highlighting risk from insufficient reforms and low growth. - Debt service to revenues: - Declines from about 39.5 percent of total revenues in 2018 to about 28 percent of total revenues in 2019 as revenue collection improves. - Projected to decline further to an average of 23 percent during 2020-2028 as revenue collection improves, gross financing needs decrease, and some large Eurobonds mature. - Despite decline, debt service remains a sizable share of fiscal revenues, limiting room for other expenditures. ### Risks to the assessment - Risks are balanced: - Upside: additional mining revenue and higher-than-anticipated gas exports could boost exports, government revenue and growth. - Downside: slowdown observed in first half of 2019 could be more protracted if private investment fails to pick up; slippages on structural reforms or fiscal consolidation (including clearing unmet government obligations to suppliers) could worsen debt situation. - Additional investment needs and/or delays in oil and gas production start or changes in production could affect hydrocarbon revenues profile. - External risks: terrorism and large swings in energy prices could weigh on growth and assessment. ### Conclusions and policy recommendations - Conclusion: - Senegal’s risk of debt distress moved from low to moderate mainly due to temporary large investments in hydrocarbon production and a significant shift toward non-concessional external debt, but with substantial borrowing space over the long run. - Most debt indicators breach thresholds under stress tests; rising levels of debt and debt service—particularly external—require cautious approach to commercial borrowing. - Debt service ratios projected to remain somewhat high despite medium-term decline; deterioration in borrowing terms could increase vulnerabilities. - Staff recommendations: - Careful and continuous monitoring of financing needs and borrowing plans. - Development of a transparent pipeline of bankable projects. - Strengthening of debt management. - Enhanced coordination between the Ministry of Finance and Budget and the Ministry of Economy, Planning and Cooperation on assessing new external financing options. - Greater resort to regular issuances on the regional bond market to minimize borrowing costs and reduce external debt risks. - Authorities’ commitment: - Aim to reduce debt ratios over the medium term through further fiscal consolidation, improvements in the current account, and strengthening debt management policies, including attention to terms and volume of non-concessional external financing. - Address fiscal risks from the broader public sector, including the energy sector. *Source: IMF staff estimates and projections as presented in the DSA chapter on Senegal.* ### 22. Authorities’ view. The authorities emphasized that public borrowing had allowed to provide first- ### 22. Authorities’ view. ### Authorities’ perspective - Public borrowing allowed to provide first-rate infrastructure and, by allowing to develop hydrocarbon production, would deliver significant additional resources to future generations. - Authorities would have preferred the rating to remain low, pointing out that the debt-to-GDP ratio would be on a firm downward trajectory after 2019. - Committed to limit non-concessional borrowing and concurred with staff on the need for a prudent debt management strategy. - Plan to continue efforts to expand the coverage of public sector debt. ### Debt indicators and stress-test framework (overview) - Figure focus: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019-29. - Stress test rules: - "The most extreme stress test is the test that yields the highest ratio in or before 2029." - One-off breaches are presented but deemed away for mechanical signals; if a stress test with a one-off breach is still the most extreme after disregarding the one-off breach, only that stress test (with the one-off breach) is presented. - Commodity price shock magnitudes are based on the commodity prices outlook prepared by the IMF research department. - Note: "All the additional financing needs generated by the shocks under the stress tests are assumed to be covered by PPG external MLT debt in the external DSA. Default terms of marginal debt are based on baseline 10-year projections." - Borrowing assumptions (selected labels shown): "Market Financing No", "Interactions No", "Threshold 4.0% 4.0%", "Tailored Tests 5.0% 6 17 5.0% 17 6" (as listed in figure annotations). ### Baseline external DSA highlights (Table 4, 2016-39; percent of GDP unless otherwise indicated) - External debt (nominal) 1/: 56.1 65.1 70.2 79.6 79.0 79.1 77.5 71.9 67.5 54.2 41.6 53.2 68.5 - of which: public and publicly guaranteed (PPG): 32.4 39.8 48.5 53.5 51.9 51.0 48.8 44.5 42.0 31.5 21.3 30.1 42.9 - Change in external debt: -1.2 9.0 5.1 9.4 -0.6 0.1 -1.6 -5.6 -4.4 -2.1 -0.9 - Identified net debt-creating flows: -1.1 -0.2 -0.9 1.3 0.9 0.8 -2.6 -8.0 -5.5 -4.4 -2.8 3.0 -3.1 - Non-interest current account deficit: 2.6 6.1 6.8 6.7 8.1 8.2 5.3 1.6 1.5 -0.6 0.4 5.4 3.0 - Exports: 21.5 21.9 21.8 22.7 23.5 24.1 26.9 30.8 30.4 31.0 32.1 - Imports: 32.5 35.8 36.9 38.2 40.6 42.2 40.1 37.8 37.9 35.3 39.2 - Net current transfers (negative = inflow): -9.5 -9.4 -8.6 -9.1 -9.5 -10.1 -9.7 -8.6 -9.1 -8.7 -8.4 -9.5 -9.1 - Net FDI (negative = inflow): -1.3 -2.4 -2.6 -3.7 -4.8 -4.7 -4.3 -4.0 -4.0 -2.6 -2.2 -1.8 -3.8 - Endogenous debt dynamics 2/: -2.3 -3.9 -5.1 -1.7 -2.4 -2.7 -3.7 -5.6 -2.9 -1.2 -1.0 - Residual 3/: -0.1 9.2 6.0 8.1 -1.5 -0.7 1.0 2.5 1.1 2.3 1.9 0.6 1.7 - Sustainability indicators (selected): - PV of PPG external debt-to-GDP ratio: ......41.1 46.4 45.8 45.2 43.4 39.9 37.5 28.1 18.8 - PV of PPG external debt-to-exports ratio: ......188.7 204.5 195.1 187.6 161.2 129.5 123.4 90.8 58.6 - PPG debt service-to-exports ratio: 10.4 8.9 17.5 18.5 22.7 16.5 14.0 9.5 12.7 10.2 6.2 - PPG debt service-to-revenue ratio: 12.0 7.8 15.6 16.0 20.1 14.5 13.5 10.2 13.4 10.9 6.8 - Gross external financing need (Billion of U.S. dollars): 0.9 1.4 2.1 2.1 2.7 2.6 1.9 0.6 1.1 0.5 0.8 - Key macro assumptions (selected): - Real GDP growth (in percent): 6.4 7.1 6.7 6.0 6.8 7.0 8.4 11.6 8.0 5.3 4.7 4.8 6.8 - GDP deflator in US dollar terms (change in percent): 0.7 2.6 5.3 -4.2 0.7 2.9 2.3 3.3 2.3 2.0 2.0 -1.2 1.5 - Effective interest rate (percent) 4/: 2.7 2.4 3.4 3.6 3.5 3.2 3.2 3.2 3.5 3.0 2.3 2.2 3.3 - Growth of exports of G&S (US dollar terms, in percent): 2.9 12.2 11.5 5.7 11.2 13.1 23.8 31.9 9.1 8.1 7.7 4.2 12.2 - Government revenues (excluding grants, in percent of GDP): 18.5 25.1 24.4 26.1 26.5 27.4 27.9 28.7 28.8 28.9 29.1 - Aid flows (in Billion of US dollars) 5/: 0.9 1.0 1.0 0.8 0.6 0.6 0.7 0.7 0.8 1.0 1.7 - Nominal GDP (Billion of US dollars): 19 21 23 24 26 28 31 36 40 57 112 (table shows spacing across columns) - Memorandum items: - PV of external debt 7/: ......62.8 72.5 72.8 73.3 72.1 67.3 63.3 50.8 39.1 - PV of PPG external debt (in Billion of US dollars): 9.7 11.1 11.7 12.8 13.6 14.4 15.0 16.0 21.1 - Non-interest current account deficit that stabilizes debt ratio: 3.7 -3.0 1.7 -2.7 8.7 8.1 7.0 7.2 5.9 1.6 1.3 Notes: - 1/ Includes both public and private sector external debt. - 3/ Residual includes exceptional financing, changes in gross foreign assets, and valuation adjustments. For projections also includes contribution from price and exchange rate changes. - 4/ Current-year interest payments divided by previous period debt stock. - 5/ Defined as grants, concessional loans, and debt relief. - 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). - 7/ Assumes that PV of private sector debt is equivalent to its face value. ### Public sector debt DSA highlights (Table 5, 2016-39; percent of GDP unless otherwise indicated) - Public sector debt 1/: 47.5 61.2 61.4 63.7 61.9 60.8 59.6 56.0 54.7 54.0 51.4 41.6 57.0 - of which: external debt: 32.4 39.8 48.5 53.5 51.9 51.0 48.8 44.5 42.0 31.5 21.3 30.1 42.9 - of which: local-currency denominated: 15.1 21.4 13.0 10.2 10.0 9.8 10.9 11.5 12.7 22.5 30.1 - Change in public sector debt: 3.0 13.7 0.2 2.3 -1.8 -1.1 -1.2 -3.6 -1.3 -0.1 -0.2 - Identified debt-creating flows: 1.2 -4.7 2.0 2.6 -0.6 -0.9 -1.2 -3.6 -1.3 -0.1 -0.2 2.2 -0.5 - Primary deficit: 1.6 0.6 2.2 2.7 1.9 2.3 2.4 2.1 1.7 1.4 0.7 2.5 1.8 - Revenue and grants: 20.7 27.3 26.3 28.0 28.4 29.3 29.7 30.5 30.5 30.5 30.5 20.2 29.9 - Automatic debt dynamics: -0.4 -5.3 -0.1 -0.2 -2.5 -3.2 -3.6 -5.7 -3.0 -1.4 -0.9 - Residual: 1.8 18.4 -1.8 1.2 -1.3 -0.5 -0.1 -0.6 0.1 -0.6 -0.4 2.1 -0.4 - Sustainability indicators (selected): - PV of public debt-to-GDP ratio 2/: ......55.6 57.0 55.5 54.8 54.1 51.1 50.2 50.6 48.9 - PV of public debt-to-revenue and grants ratio: ......211.2 203.5 195.2 187.2 181.9 167.9 164.9 166.2 160.6 - Debt service-to-revenue and grants ratio 3/: 35.6 26.0 39.5 27.7 27.8 21.4 20.7 18.5 21.4 25.6 28.1 - Gross financing need 4/: 7.4 6.3 12.8 10.5 9.8 8.6 8.5 7.7 8.2 9.2 9.2 - Key macro and fiscal assumptions (selected): - Average nominal interest rate on external debt (in percent): 3.2 2.6 4.1 4.4 4.0 3.7 3.7 3.6 3.7 3.7 3.5 2.6 3.8 - Average real interest rate on domestic debt (in percent): 5.2 4.5 4.3 5.1 5.9 4.3 4.8 3.6 3.7 4.0 4.0 4.6 4.3 - Inflation rate (GDP deflator, in percent): 1.0 0.6 0.6 1.1 1.1 1.8 1.2 2.4 2.3 2.0 2.0 0.7 1.8 - Growth of real primary spending (deflated by GDP deflator, in percent): 10.6 34.0 9.0 14.4 5.5 11.2 10.3 13.1 6.5 5.4 4.8 8.8 7.9 - Primary deficit that stabilizes the debt-to-GDP ratio 5/: -1.4 -13.1 2.0 0.5 3.7 3.4 3.6 5.8 3.0 1.4 0.9 -4.2 2.5 Notes: - 1/ Coverage: central, state, and local governments plus extra budgetary funds, central bank, government-guaranteed debt, non-guaranteed SOE debt. Definition of external debt is Currency-based. - 2/ Underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with differences depending on exchange rate projections. - 3/ Debt service defined as sum of interest and amortization of medium-, long-, and short-term debt. - 4/ Gross financing need defined as primary deficit plus debt service plus stock of short-term debt at end of last period and other debt-creating/reducing flows. - 5/ Defined as primary deficit minus change in public debt-to-GDP ratio that would stabilize the debt ratio in that year. ### Sensitivity analysis and bound/tailored tests (Tables 6 and 7) - External DSA sensitivity (Table 6, PV of debt-to-GDP baseline trajectory): - Baseline PV of debt-to-GDP ratio (2019-2029): 46 46 45 43 40 38 36 34 32 30 28 (annual series shown across columns). - Alternative scenario A1 (historical averages 2019-2039): 46 48 50 53 59 65 70 75 80 87 92. - Bound tests (examples): - B1. Real GDP growth: 46 49 51 49 45 43 41 39 37 34 32. - B6. Combination of B1-B5: 46 57 60 57 53 50 48 46 43 40 37. - Thresholds: multiple thresholds shown as 55 (for PV debt-to-GDP) and 240 (for PV of debt-to-exports), 21 etc., where bold indicates breaches. - Public DSA sensitivity (Table 7, PV of public debt-to-GDP baseline trajectory): - Baseline PV of public debt-to-GDP (2019-2029): 57 56 55 54 51 50 50 50 50 50 51. - Alternative scenario A1: 57 57 58 60 61 63 65 66 67 68 70 72. - Bound tests (examples): - B1. Real GDP growth: 57 61 68 70 70 72 76 79 82 86 89. - B6. Combination of B1-B5: 57 56 57 55 57 55 54 55 55 56 57. - Public debt benchmark: 70 (repeated across columns). - Indicators reported include PV of Debt-to-Revenue Ratio, Debt Service-to-Revenue Ratio, and PV of Debt-to-GDP Ratio across scenarios and tests. ### Drivers of debt dynamics (Figure 8) - Figure decomposes contributions to changes in external and public debt into: - Residual, Price and exchange rate, Real GDP growth, Nominal interest rate, Current account + FDI, Change in PPG debt 3/. - Notes: - 1/ "Difference between anticipated and actual contributions on debt ratios." - 2/ Distribution across LICs for which LIC DSAs were produced. - 3/ Given relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation. - Visual emphasis on historical vs. projected 5-year changes and contributions of residuals and macro factors to debt changes. ### Realism tools and investment-growth contribution (Figure 9) - Figure 9 shows realism tools, 2014-24: - Comparison of Government Investment - Prev. DSA vs. Current DSA and Private Investment - Prev. DSA vs. Current DSA. - Contribution of government capital and other factors to real GDP growth. - Annotation: "Bars refer to annual projected fiscal adjustment (right-hand side scale) and lines show possible real GDP growth paths under different fiscal multipliers (left-hand side scale)." - Panels display: - Contribution to Real GDP growth (percent, 5-year average). - Public and Private Investment Rates (% of GDP). - Data cover Fund-supported programs for LICs (excluding emergency financing) approved since (text truncated in source). *Source: Senegal authorities; and staff estimates and projections.* ### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the ### Statement by Mr. Mohamed-Lemine Raghani and Mr. Oumar Diakite on Senegal (January 10, 2020) ### I. Introduction - Authorities request a new three-year Policy Coordination Instrument (PCI) to support private sector-led, sustainable and inclusive growth. - The PCI is intended to underpin Phase 2 of the Plan Sénégal Emergent (PSE) and implement the Priority Action Plan (PAP 2019-2023). - Senegal’s economic growth has been consistently robust, above 6 percent over the last five years. ### II. Recent Economic Developments and Outlook - 2019 outturns and near-term estimates: - Growth in 2019: 6 percent. - Inflation in 2019: 1 percent. - Fiscal deficit (excluding the one-off transfer to SENELEC): reached the 3 percent-of-GDP WAEMU convergence criterion. - Current account deficit: expected to have widened to 9.2 percent of GDP. - Risks and upside: - Downside risks: rising security threats in the region, increasing trade barriers globally, large swings in energy prices. - Upside factors: positive prospects for gold mining projects; expected large positive spillovers from gas and oil production; implementation of ambitious reform program. ### III. Policies and Reforms under the PCI - Pillars of the PCI: - (i) Promoting high, durable and inclusive growth driven by private sector development. - (ii) Strengthening macroeconomic stability through prudent fiscal and debt policies. - (iii) Ensuring sound management of the hydrocarbon sector. - Promoting Private Sector Development and Inclusive Growth - Strategic focus: - Boost private investment through strategic projects. - Improve physical infrastructure, develop human capital, and enhance natural resources management framework. - Public sector role and regulatory reforms: - Foster new financing mechanisms and simplify administrative procedures. - Tax policy reforms, improved public financial management, strengthened labor legislation, and enhanced competition. - Update the investment law; modernize legal and judicial framework, including creation of an appeals court and digitalization of the registry of commerce; establish legal procedures in the commercial court of Dakar. - Compact with Africa (CwA) participation to accelerate reforms in labor legislation, access to land, access to finance, SMEs development, and vocational training. - Public-private partnerships (PPP): - 2014 PPP law to be thoroughly reviewed and a database created. - All investment projects over CFAF two billion to be subject to prior evaluation and counter-expertise by the Ministry of Economy, Planning and Cooperation for unsolicited bids. - Emphasis on domestic and regional private sector involvement. - Inclusiveness and social programs: - Increase number of projects devoted to gender equality starting with the 2020 budget. - Continue social protection initiatives including Programme d’Urgence de Dévéloppement Communautaire (PUDC) and Programme National de Bourse de Sécurité Familiale (PNBSF). - Electrification targets: - Urban electrification rate target: 95 percent by 2022. - Rural electrification rate target: 75 percent by 2022. - Improve quality and continuity of electricity supply via optimization of the energy mix with natural gas. - Prudent Fiscal Policy to Strengthen Macroeconomic Stability - Fiscal stance: - Commitment to meet all WAEMU convergence criteria, including attaining the fiscal deficit target of 3 percent of GDP going forward. - Revenue mobilization: - Short-term tax administration measures: enhance monitoring of tax declarations, enforce compliance, expand scope of audits, accelerate collection of arrears. - Customs measures: broaden tax base, eliminate the flat rate for customs clearance, streamline exemptions. - Medium-term target: reach a tax revenue-to-GDP ratio of 20 percent by 2023 from a projected 17 percent in 2019. - Starting in 2020, implement a revenue mobilization strategy focusing on digitalization of revenue administrations, adapting human resources, and reforming institutional framework and governance of the revenue mobilization program. - Expenditure management: - Supplementary budget objective: change composition of expenditures to ensure full payment of unpaid obligations due in 2019 and those accumulated in the energy sector. - One-off transfer to SENELEC coupled with electricity tariff increases to help restore SENELEC’s financial situation. - Limit expenditures eligible to simplified procedures; restrict budget commitment letters to defense and security sectors. - Restructure or merge 24 agencies and similar entities to generate cost savings. - Enhance efficiency of the public investment program. - Step up dissemination of budget information per 2018 Public Finance Transparency Assessment recommendations. - Cash management modernization: - Consolidate the Treasury single account (TSA) to integrate accounts of 20 public entities in 2020. - Close remaining accounts in commercial banks and transfer balances to the TSA in 2021, except accounts for externally-financed projects. - Eliminate compensation operations between the Treasury and the Post Office. - Consider transformation of Post Finances into a financial institution to put the Post Office Group on a sound financial footing. - Preserving Debt Sustainability - Authorities’ view on DSA: - Increased borrowing to finance ambitious investment program produced growth-enhancing infrastructure expected to put debt-to-GDP on a downward path. - Debt policy and management commitments: - Mobilize resources for growth-enhancing projects via innovative financial instruments, PPPs, and attracting FDI. - Debt strategy to focus on reducing vulnerabilities and improving financing conditions and terms. - Strengthen debt management through formal process of regular exchange of information and coordination among public debt management entities. - Improve monitoring of debt of para-public entities and government-guaranteed loans as public debt scope widens. - Sound Management of the Hydrocarbon Sector - Strengthen legal and fiscal frameworks for hydrocarbon revenue distribution and management based on international best practices. - Adopted measures in 2019: - Petroleum Law governing oil sector activities. - Law on local content to maximize private sector positive externalities. - Revenue management instruments to be established: - Intergenerational fund. - Stabilization fund to smooth impact of potential exogenous shocks. ### IV. Conclusion - Authorities remain strongly committed to implementing policies and reforms to achieve PSE goals and seek the Executive Board’s approval of their request for a three-year PCI. *Statement by Mr. Mohamed-Lemine Raghani, Executive Director and Mr. Oumar Diakite, Advisor to the Executive Director, on Senegal, January 10, 2020* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1senea2020001.pdf_