## 1senea2022002

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### Growth Accounting 1999–2019: summary findings and constraints
- Annual per capita growth between 2014 and 2019 averaged 3.2 percent.
- Annual GDP per capita growth (cyclically-adjusted averages):
  - 1999-2005 = 3.9%; 2006-2013 = 3.2%; 2014-2019 = 5.9%.
- Growth drivers (2014–2019):
  - Labor force growth about 3 percent per year.
  - Substantial capital accumulation; growth contribution of capital stock: 1999-2005 = 1.1% points; 2006-2013 = 1.7% points; 2014-2019 = 3.0% points.
  - Total factor productivity (TFP) contribution: 1999-2005 = 1.2%; 2006-2013 = -0.3%; 2014-2019 = 1.0%.
  - Growth contribution of labor (% points): 1999-2005 = 1.6%; 2006-2013 = 1.8%; 2014-2019 = 1.8%.
- Sectoral and expenditure patterns (averages 2014–2019):
  - Production-side contributions: tertiary sector = 3.1% (largest); secondary sector = 1.3%; primary sector = 1.0%; indirect taxes = 0.8%.
  - Expenditure-side contributions: private consumption = 3.4%; private investment = 2.7%; public consumption = 0.6%; public investment = 0.5%; net exports = -1.9%; inventory change = 0.9%.
  - Gross fixed capital formation reached over 30 percent of GDP in 2019; slightly less than half of fixed capital formation went to construction; about 1/4 to machinery and equipment; rest to intangible assets.
  - Incremental capital to output ratio deteriorated significantly in 2018 and 2019.
- External environment (2010–2019):
  - Terms of trade improved in 2014/15; real effective exchange rate declined; remittances and capital inflows were strong.
- Debt and fiscal space:
  - Central government debt rose from 36.9 percent of GDP in 2013 to 57.3 percent of GDP in 2019.
  - Shift towards external commercial debt increased vulnerabilities; moderate risk of debt distress by end-2019.
- Labor market and demographics:
  - About 200,000 youths join the labor force each year.
  - Formal labor market estimated at about 500,000 jobs in 2019; large absorption of new entrants into low-productivity informal services.
  - Formal jobs equal to about 1/10 of the workforce.
- Structural transformation and productivity constraints:
  - No notable structural transformation in value added by sector; little advance in export diversification or complexity.
  - Labor reallocation from primary to tertiary between 2011 and 2018, but services sector productivity per worker declined.
  - Identified constraints: high cost of energy; distortive business environment; lack of access to land and financing; high labor costs and labor market rigidities; weak human capital.
  - Contribution of inventory changes averaged 0.9 percentage points from 2014 to 2019 due to one-off factors and stock accumulation for major infrastructure projects.

### Comparisons with sustained high-growth episodes and implications
- Compared with 52 sustained growth episodes (median average annual per capita growth = 4.6 percent):
  - Senegal’s TFP contribution was about 2 percentage points lower than in other sustained high-growth episodes.
  - Private investment contribution to GDP growth exceeded levels observed in other countries; public investment contribution remained below average.
  - Typical structural transformation (agriculture → industry) observed in high-growth countries did not occur in Senegal.
  - Senegal’s tax-to-GDP ratio is below the average seen in other high-growth episode countries.
- Medium-term outlook and policy implications:
  - Under unchanged policies, an average annual growth rate of 6.2 percent between 2014 and 2019 (about 3 percent on a per capita basis) could be an upper bound of non-oil output growth in the medium to long term.
  - To achieve sustained high per capita growth and emerging-market transformation by 2035, private investment must play a lead role given rapidly diminishing fiscal space.
  - Government strategy revisions (PAP2A) and the “Programme d'urgence pour l’insertion socioéconomique et l’emploi des jeunes” amount to 3 percent of GDP over three years.
  - Staff recommendation: broaden access to education and skill development; comprehensive structural reform push addressing constraints; strengthen sectoral policy design, evaluation, and selectivity to avoid rent seeking.
- Estimated reform payoff:
  - IMF staff research suggests closing reform gaps could boost annual growth by 1.3 percentage points over the medium term if Senegal aligns with leading low-income countries in reform areas.

### Reforms cover six main areas (priorities and sectoral targets)
- Six reform areas overview:
  - Business climate: overhaul labor market, facilitate access to land, improve commercial justice, reduce regulatory burden through PREAC III; cooperate with G-20 Compact with Africa Initiative.
  - Inter-African trade: implement national strategy for African continental free trade agreement.
  - Cost and access to electricity: transition from heavy fuel to gas and renewables; expand access from 70 percent to universal by 2025.
  - Education and skills: scale up universities/schools, vocational training, youth employment program targeting informal self-employed.
  - Transport infrastructure: improve urban transport, road network, regional airports, Dakar-Bamako railway, new seaport in Ndayane.
  - Catalyzing private investment: new PPP framework and dedicated Fund; partial government guarantees; diaspora mobilization; SME/informal sector financing.
- Four priority sectors for vertical policy:
  - Agriculture, forestry, livestock, and fishery processing:
    - Processing rate estimated at 15 percent.
    - Plan to set up four agro-food processing hubs (“agropoles”) and expand processing to 15 new products.
  - Mineral, hydrocarbon processing:
    - Subsoil reserves: gold, iron, copper, zinc, manganese, tin, uranium; building materials; ornamental stones.
    - Senegal expected to become an oil and gas producer from 2023.
    - Promote local transformation and SME emergence via local content policy.
  - Pharmaceuticals:
    - 90 percent of demand covered by imports (equivalent to US$ 239 million in 2016).
    - Regional market estimated at US$ 1.2 billion in 2019.
    - Plans for an integrated park (“Pharmapolis”) and reforms including establishing a national drug-regulation authority.
  - High-tech and innovation-intensive industry:
    - Ambition to create 35,000 jobs in the digital sector and increase contribution of digital technology to GDP from 5 to 10 percent by 2025.
    - Targeted assembling products and creative industries (2014: more than 6,000 companies, 105,000 jobs and CFAF 877 billion).
- Implementation and governance:
  - Establish High Presidential Council on Industrialization (HCPI), strengthen permanent secretariat, create Industry Advisory Council, set up monitoring and evaluation framework.
  - Supply-side measures: targeted R&D, training, quality standards, local content policies, integrated industrial parks, and digital/creative industrial parks (starting with Diamniadio).

### Energy sector: subsidies, gas-to-power strategy, and reform roadmap
- Scale and fiscal impact of energy subsidies (preserve source numbers exactly):
  - Energy subsidies projected to amount to about 1.1 percent of GDP in 2022 at current world prices (about US$75 per barrel of Brent).
  - Subsidies could reach 1.8 percent of GDP if average oil prices are higher by about US$10 per barrel.
  - Subsidies could reach 1.8 percent of GDP in 2022 if prices remain around US$85/barrel, up from 0.3 percent of GDP in 2020.
  - Fuel subsidies: 0.2 percent of GDP in 2021; expected to rise to up to 0.7 percent of GDP in 2022.
  - Electricity subsidies: 1.1 percent of GDP in 2019 and 2021; tariffs were below cost recovery by 23 percent in 2021 and expected to reach 32 percent in 2022.
  - Table (selected values):
    - Average price per barrel (Brent): 2019 = 64$/barrel; 2020 = 42$/barrel; 2021E = 70$/barrel; 2022 low = (73-75$/barrel); 2022 high = (86$/barrel)
    - Electricity subsidies: 2019 = 1.1; 2020 = 0.3; 2021E = 1.1; 2022 low = 0.7; 2022 high = 1.1
    - Fuel subsidies: 2019 = 0.1; 2020 = 0.2; 2021E = 0.3; 2022 low = 0.3; 2022 high = 0.7
    - Total energy subsidies: 2019 = 1.2; 2020 = 0.3; 2021E = 1.3; 2022 low = 1.1; 2022 high = 1.8
  - World Bank estimate: domestic electricity production costs on average 0.24US$/kWh, against a global benchmark of US$0.10/kWh.
- Root causes and operational issues:
  - Primary cause of high/volatile electricity costs: overdependency on oil.
  - Installed electrical capacity (end-2020): around 1509 MW; heavy fuel and diesel account for about 74 percent of capacity.
  - Recent generation capacity breakdown (2021 figures cited): Oil 1320 MW, Gas 24 MW, Wind 52 MW, Solar 112 MW, Biomass 47 MW, Total 1555 MW.
  - Oil purchases represent about 46 percent of Senelec’s total costs in one estimate; elsewhere ~½ of operating costs.
  - Electricity tariff and fuel subsidy arrears reached 1.5 percent of GDP at end-2019; cross-debt agreement (August 2021) covered 2019-2021 for total amount of 1% of GDP.
- Gas-to-power (GTP) strategy and investments:
  - Estimated investment scale: around US$3bn in public and private investments (preliminary).
  - Potential impact: reduction of about 30 percent of domestic electricity costs if realized.
  - Reseau Gazier du Senegal (RGS) network: planned ~307 km of new pipelines (on top of 56 km existing), to be built through 2027 for total cost nearly FCFA 272 billion (around 1.8 percent of GDP).
  - Strategy targets doubling supply of electricity from current 1509 MW to close to 3000 MV.
  - MCC Power Compact: five-year, US$550 million plus supplemental $50 million from Government of Senegal for total US$600 million program (signed December 2018).
- Reform rationale and recommendations:
  - Negative attributes of subsidies: regressive (richest 20 percent benefit six time more than poorest 20 percent), climate-unfriendly, inefficient fiscal instrument, crowd out priority spending.
  - IMF-identified six key elements of successful energy subsidy reform:
    - (i) Appropriately-phased price increases;
    - (ii) Targeted measures to protect the poor;
    - (iii) Institutional reforms to move towards automatic price adjustments;
    - (iv) Extensive communication strategy with transparency improvements;
    - (v) Comprehensive energy sector plan with long-term objectives and stakeholder consultation;
    - (vi) Improved efficiency of SOEs to reduce producer subsidies.
  - Phasing and sequencing options:
    - Lift prices first on lower-priority products; maintain social tranches for vulnerable households; alternative approach: annual cap on energy subsidies and intra-year price adjustments when cap is reached.
  - Complementary PFM and governance measures:
    - Avoid underbudgeting and new arrears; rationalize flow of funds; return under-endowed extra-budgetary funds to the budget; empower regulators; ensure no-arrears policy and timely endorsement of regulator projections.
  - Protection and targeting:
    - Use existing social channels such as Registre National Unique (RNU) and Programme de bourses de sécurité familiale—PBSF; digital delivery mechanisms; ad hoc non-recurrent short-term support for impacted middle-class and energy-intensive industries.
- Operational caveats and risks:
  - Sequencing risks: lower short-term savings may reduce investments; sequencing can distort consumption patterns; gradual reform may encounter growing opposition.
  - Legal/regulatory gaps: recently adopted gas and electricity codes contain cross-regulation and loopholes; need robust implementing decrees and clearer oversight (e.g., CRSE oversight of gas sector).
  - Investment delivery constraints: progress slow on governance and execution of major projects; contemplated gas pipeline PPP not yet at financial close; conversion of existing plants formalized in 2019 but pending execution.
- Expected fiscal space redeployment:
  - Redirect savings toward cheaper, cleaner energy sources, transmission and electrification infrastructure, and investments to lower domestic energy costs (including gas-to-power as transitional step and renewables ramp-up).

### Annex I — quantitative highlights and benchmarks
- GDP growth by period (averages):
  - 1999–2005: 4.1%; 2006–2013: 2.8%; 2014–2019: 6.2%.
- Production-side sector contributions (1999–2005 | 2006–2013 | 2014–2019):
  - Primary Sector: 0.7% | 0.4% | 1.0% (agriculture: 0.4% | 0.1% | 0.8%).
  - Secondary Sector: 1.0% | 0.7% | 1.3% (extractive industries: 0.0% | 0.1% | 0.2%; agricultural processing/other manufacturing: 0.5% | 0.4% | 0.6%; construction: 0.1% | 0.1% | 0.3%).
  - Tertiary Sector: 2.1% | 2.0% | 3.1% (retail: 0.5% | 0.5% | 0.9%; specialized services incl. oil/gas exploration: 0.1% | 0.2% | 0.8%; public administration: 0.1% | 0.1% | 0.4%).
- Expenditure-side contributions (1999–2005 | 2006–2013 | 2014–2019):
  - Private Consumption: 2.8% | 2.3% | 3.4%.
  - Private Investment: 0.4% | 1.0% | 2.7%.
  - Net Exports: -1.0% | -0.8% | -1.9%.
  - Inventory Change: 1.1% | -0.6% | 0.9%.
- Investment benchmarks:
  - Current investment-to-GDP ratio about 30 percent (2019).
  - Average investment-to-GDP ratio in high growth episode countries: 23.3 percent in first seven years; 31.5 percent in remaining years.
  - Asian success-story gross capital formation to GDP (examples):
    - Republic of Korea (1963–1996) — Real GDP per capita growth: 8.0; Gross capital formation to GDP: 30.8
    - Malaysia (1971–1996) — Real GDP per capita growth: 5.0; Gross capital formation to GDP: 30.6
    - Thailand (1973–1996) — Real GDP per capita growth: 5.8; Gross capital formation to GDP: 32.1
    - Vietnam (1992–2019) — Real GDP per capita growth: 5.6; Gross capital formation to GDP: 29.8
  - Neoclassical “golden rule” calibration cited yields optimal investment-to-GDP ratio of about 26 percent (calibration reported as 26.25 percent under α = 0.35; p = 0.03; δ = 0.05; n = 0.03; g = 0.01).
- Export composition (2019 share by destination):
  - Switzerland 18%, India 11%, China 8%, Mali 10%, West Africa 17%, EU 15%, Rest of the World 20%.

*Source: 1senea2022002 - 1. Growth Accounting 1999–2019*

### 1. Growth Accounting 1999–2019 ______________________________________________________ 5

### 1. Growth Accounting 1999–2019

### Introduction
- Senegal faces the challenge to relaunch the economy and create sustainable jobs for the thousands of youths entering the labor market each year.
- Annual per capita growth between 2014 and 2019 was robust averaging 3.2 percent.
- Upcoming oil and gas production is expected for 2023 and may benefit medium-term prospects, but dynamic development of non-hydrocarbon sectors is required to transform Senegal into an emerging market economy by 2035.
- Fiscal space is diminishing rapidly as public debt and debt service has increased steadily over the last decade.
- About 200,000 youths join the labor force each year.
- The authorities adjusted the development strategy after the pandemic, revising the “Plan Sénégal Émergent (PSE)” into an adjusted plan (PAP2A) that puts additional emphasis on accelerating domestic production of critical supplies through sectoral policies.
- The “Programme d'urgence pour l’insertion socioéconomique et l’emploi des jeunes” amounts to 3 percent of GDP over three years.

### Recent growth developments (1999–2019)
- Annual GDP per capita growth averaged 3.2 percent before the pandemic.
- Growth was broad-based: primary, secondary and tertiary sectors all contributed; services and retail trade (about 50 percent of value added) provided the biggest boost.
- Demand-side: strong private consumption and investment growth; coupled with increasing final public expenditure, net exports made a substantially negative contribution and trade deficit increased.
- Gross fixed capital formation almost doubled as a share of output over the last ten years, reaching over 30 percent of GDP in 2019.
- The external environment was favorable: terms of trade improved in 2014 (largely owing to declining oil prices), real effective exchange rate declined steadily, and remittances and capital inflows were strong.
- The growth spell was accompanied by increasing debt vulnerabilities:
  - Central government debt rose from 36.9 percent of GDP in 2013 to 57.3 percent of GDP in 2019.
  - Shift towards external commercial debt increased vulnerabilities; Senegal moved to moderate risk of debt distress by end-2019.

### Growth accounting and productivity
- Growth drivers (2014–2019): labor force growth about 3 percent per year and substantial capital accumulation.
- Total factor productivity (TFP) contribution was subdued at 1 percent over 2014–2019.
- No notable structural transformation in value added by sector; little advance in export diversification or complexity.
- Labor reallocation from primary to tertiary between 2011 and 2018 occurred, but services sector productivity per worker declined, nullifying aggregate productivity gains.
- The formal labor market was estimated at about 500,000 jobs in 2019 and is too small to absorb the rapidly increasing labor force which grew between 1 and 1.5 million between 2013 and 2019.
- Growth accounting averages per period (cyclically-adjusted):
  - Average GDP Growth: 1999-2005 = 3.9%; 2006-2013 = 3.2%; 2014-2019 = 5.9%.
  - TFP Growth: 1999-2005 = 1.2%; 2006-2013 = -0.3%; 2014-2019 = 1.0%.
  - Growth contribution of capital stock (% points): 1999-2005 = 1.1%; 2006-2013 = 1.7%; 2014-2019 = 3.0%.
  - Growth contribution of labor (% points): 1999-2005 = 1.6%; 2006-2013 = 1.8%; 2014-2019 = 1.8%.

### Comparisons with sustained high-growth episodes
- Senegal’s episode differs from sustained growth spells on several dimensions:
  - Contribution of TFP to growth was about 2 percentage points lower than in other sustained high-growth episodes, indicating factor-intensity of recent growth.
  - Contribution of private investment to GDP growth exceeded levels observed in other countries, whereas public investment contribution remained below average.
  - Structural transformation: high-growth countries typically shift value added from agriculture to industry; Senegal’s sectoral composition remained broadly unchanged.
  - Fiscal indicators: Senegal’s deficit over the period was in line with high-growth countries, but Senegal’s tax-to-GDP ratio is below the average seen in other countries with high-growth episodes.
- A sample of 52 sustained growth episodes (criteria: 10 years of consecutive positive real per capita growth; average annual per capita growth exceeding 2 percent; and no subsequent reversals) yields a median average annual per capita growth rate of 4.6 percent; comparisons use the first seven years of the episode and remaining years.

### Factors constraining productivity and structural transformation
- Key constraints identified across diagnostic studies include:
  - High cost of energy.
  - Distortive business environment.
  - Lack of access to land and financing.
  - High labor costs and labor market rigidities.
  - Weak human capital (education and skills).
- Two additional factors highlighted:
  - High degree of informality: only about 1/10 of the workforce has a formal job; informal production units dominate the corporate sector; new labor market entrants are absorbed primarily in low-productivity informal services.
  - Important share of residential investment in total investment:
    - Slightly less than half of total fixed capital formation went to the construction sector (residential investment, other buildings, and structures).
    - About 1/4 in machinery and equipment and the rest in intangible assets.
    - The incremental capital to output ratio deteriorated significantly in 2018 and 2019.
    - Construction of oil and gas rigs and platforms drove part of investment growth in 2018 and 2019 but do little to boost short-term growth due to very high import content.
- The contribution of the change of inventories is consistently positive with an average 0.9 percentage points from 2014 to 2019 (attributed to one-off factors and accumulation of stocks for major infrastructure projects like “Train Express Regional” and highways and sector-specific developments for groundnuts and petroleum products).

### Economic impact of the COVID-19 pandemic (through 2020)
- The pandemic brought the favorable growth spell to an abrupt end.
- Sectors most affected: contact-intensive and mobility-dependent sectors such as tourism and related activities (transportation and hospitality) and the informal sector.
- Manufacturing turned out significantly weaker than expected pre-COVID-19; agriculture was boosted by an exceptionally good harvest.
- Social impact: the urban population working in the informal sector was particularly hard hit; about 85 percent of households reported declining incomes.
- The pandemic could lower potential growth (“scarring”) by straining the social fabric, reducing household buffers and affecting education.

### Implications for medium-term growth and policy stance
- Accelerating income convergence will require policies to spur productivity growth and improve resource allocation.
- Under unchanged policies, an average annual growth rate of 6.2 percent between 2014 and 2019 (about 3 percent on a per capita basis) could be an upper bound of non-oil output growth in the medium to long term.
- To return to sustained, high per capita growth and transform into an emerging market economy by 2035, private investment will need to play a lead role given rapidly diminishing fiscal space.
- The government’s growth policies move in the right direction but:
  - Try to embrace too much and do not sufficiently contribute to economic transformation.
  - Would benefit from effectively broadening access to education and skill development and a comprehensive structural reform push to address well-identified constraints to private sector development.
  - Sectoral policy interventions could be strengthened by:
    - Better identifying market failures justifying such interventions.
    - More regular and comprehensive evaluations.
    - A more selective choice of sectors.
    - Enhanced transparency and policy design to guard against rent seeking.

*Source: 1senea2022002 - 1. Growth Accounting 1999–2019*

### 12.      Reforms cover six main areas:

### 12. Reforms cover six main areas:

### Overview of the six reform areas
- Business climate
  - Overhaul labor market, facilitate access to land, improve commercial justice, reduce regulatory burden through the Business Environment and Competitiveness Reform Program (PREAC III).
  - Supported by cooperation with the G-20 Compact with Africa Initiative.
- Inter-African trade
  - Implement national strategy for the African continental free trade agreement to build a common African market.
- Cost and access to electricity
  - Transition from heavy fuel to gas and renewables to reduce production costs and emissions.
  - Access to electricity should expand rapidly from 70 percent of the population today to universal access by 2025.
- Education and skills
  - Investment planning and policies to enhance quality and access.
  - Scale up investments in new universities and schools and maintenance.
  - Develop vocational training with regulatory framework and certification standards for private operators.
  - New youth employment program targets self-employed in the informal sector with strong training component.
- Transport infrastructure
  - Significant investments to improve urban transportation, road network, regional airports, reinvigorate Dakar-Bamako railway, and build a major new seaport in Ndayane.
- Catalyzing private investment
  - New PPP framework and a dedicated Fund to develop bankable projects and finance the public portion.
  - Partial government guarantees on bank loans to private enterprises to facilitate longer term financing.
  - Dedicated fund to facilitate small and medium-sized enterprises and informal sector financing.
  - Mobilize funds from the Senegalese diaspora for investments.

### Vertical (sectoral) policies and targeted industries
- Four priority sectors identified to boost productivity, employment, output:
  - Agriculture, forestry, livestock, and fishery processing
    - Processing rate currently estimated at 15 percent.
    - Industry is the biggest direct and indirect employer among manufacturing industries.
    - Plan to set up four agro-food processing hubs (“agropoles”) in the north, south, west and center and expand processing to 15 new products (listed in footnote): rice; milk powder; tomato paste; sugar; vegetal oils; meats; cocoa products; wheat flour and semolina; corn flour and meal; other flour and semolina; root and tuber flour; prepared fruits and vegetables; couscous; noodles; spaghetti; and mango juice.
  - Mineral, hydrocarbon processing
    - Subsoil reserves include gold, iron, copper, zinc, manganese, tin, and uranium; building materials; quality ornamental stones.
    - Senegal expected to become an oil and gas producer from 2023.
    - Plans to promote local transformation (e.g., small-scale gold refineries) and incentivize SME emergence through local content policy.
  - Pharmaceuticals
    - Senegal highly dependent on imports: 90 percent of demand covered by imports (equivalent to US$ 239 million in 2016).
    - Regional market estimated at US$ 1.2 billion in 2019.
    - Domestic production concentrated in filling and finishing; short-term ambition to support manufacturing of COVID-19 vaccines and expand filling and finishing.
    - Plans for an integrated park (“Pharmapolis”) and reforms including revision of legal framework dating to 1954 and establishment of a national drug-regulation authority.
  - High-tech and innovation-intensive industry
    - Target branches: (i) digital economy/Industry 4.0; (ii) assembling industries; (iii) creative industries.
    - Ambition: create 35,000 jobs in the digital sector and increase contribution of digital technology to GDP from 5 to 10 percent by 2025.
    - Targeted assembling products include boats fishing; electric wires and cables; agricultural machinery; cell phones and other white electronic products; motor cars, tractors, motorcycles, and bicycles.
    - Creative industry in 2014: more than 6,000 companies, 105,000 jobs and CFAF 877 billion.

### Implementation, governance, and supporting measures
- Governance framework
  - Establish High Presidential Council on Industrialization (HCPI) for strategic steering.
  - Permanent secretariat provided by the Ministry in charge of industry to be strengthened.
  - Establish an Industry Advisory Council for public-private dialogue.
  - Set up monitoring and evaluation framework to assess progress at strategic and operational levels.
- Supply-side measures and incentives
  - Agriculture: targeted R&D, dissemination of varieties and cultivation methods, invest in reducing climate vulnerability, training, quality standards, incentives to modernize processing units.
  - Minerals/hydrocarbons: local content policy, expand training, start-up fund to support local transformation of gold, zircon, phosphate.
  - Pharmaceuticals: establish integrated industrial park, build COVID-19 vaccine manufacturing capacity, reform legal framework, strengthen drug regulation and fight fake medicines.
  - High-tech: develop skills and infrastructure, develop digital and creative industrial parks (starting with Diamniadio), attract investment in advanced manufacturing over time.

### Assessment: risks, principles, and staff recommendations
- General principles for policy interventions
  - Horizontal policies should tackle main growth constraints and consider institutional environment, political economy, cyclical position, and market failures.
  - Vertical policies justified where sector-specific externalities exist, must pass cost-benefit tests, and require safeguards against government failures (weak governance, regulatory capture, rent-seeking).
  - Interventions should include strong governance, regular evaluation, and automatic exit clauses for subsidies or tax exemptions.
- Key risks to sectoral interventions
  - Identification of market failures is technically challenging and politically sensitive; risk of lobbying and rent-seeking (e.g., groundnut value chain).
  - Need for transparent and regular monitoring and evaluation (cost-benefit and distributional analysis); move toward program budgeting could help.
  - Trade-offs between multiple objectives (regional support, interest groups) can undermine efficiency—objectives must be clearly stated.
  - Choice of targeted industries must align with latent comparative advantage; avoid overly ambitious targets requiring scarce inputs.
  - Targeted support to hydrocarbon processing may have limited long-term benefits given expected sharp contraction in global fossil fuel demand in the next 10 to 20 years.
- Staff recommendations (horizontal policies)
  - Deepen and accelerate reforms to improve business environment.
  - Broadening access to education and skill development:
    - Note: more than 60 percent of workforce without formal education and a literacy rate of just over 50 percent.
    - Public education spending relative to GDP is comparatively high, but spending is tilted toward tertiary education.
    - Recommendation to review education spending (including expensive scholarship program that mostly benefits upper income households) and broaden access for poor and rural households.
    - Need programs and training opportunities for out-of-school and underemployed youth with little formal education.
  - Pace and scope of policy reforms:
    - Long-standing issues to address with greater urgency: multiple public support schemes and agencies reducing effectiveness; rigidity of formal labor market; lack of access to finance; restrictions to competition; ineffectiveness of selected agricultural policies.
    - IMF staff research suggests that closing reform gaps could boost annual growth by 1.3 percentage points over the medium term if Senegal aligns with leading low-income countries in reform areas.
      - Source: IMF staff calculations and Structural Reform Database analysis.
- Staff observations on reform impact and priorities
  - Senegal’s structural business competitiveness generally exceeds the sub-Saharan African average.
  - Horizontal reform priorities broadly adequate; emphasis on accelerating reforms to realize potential growth dividends.
  - Vertical policies should focus on sectors consistent with latent comparative advantage (agriculture-based processing, mining/hydrocarbon downstream activities) while being cautious about targeting very advanced industries.

*Italic: IMF staff summary of content unit titled "12. Reforms cover six main areas:"*

### Annex I. Anatomy of Senegal’s Recent Growth Experience

### Annex I. Anatomy of Senegal’s Recent Growth Experience

### Overview of the 2014–19 growth spell
- The 2014–19 growth spell was broad-based, factor intensive, and marked by surging investments.
- GDP growth by period (averages):
  - 1999–2005: 4.1%
  - 2006–2013: 2.8%
  - 2014–2019: 6.2%

### Production-side contributions (1999–2019; averages by period)
- Contributions to growth by sector (1999–2005 | 2006–2013 | 2014–2019):
  - Primary Sector: 0.7% | 0.4% | 1.0%
    - of which agriculture: 0.4% | 0.1% | 0.8%
  - Secondary Sector: 1.0% | 0.7% | 1.3%
    - of which extractive industries: 0.0% | 0.1% | 0.2%
    - of which agricultural processing/other manufacturing: 0.5% | 0.4% | 0.6%
    - of which construction: 0.1% | 0.1% | 0.3%
  - Tertiary Sector: 2.1% | 2.0% | 3.1%
    - of which retail: 0.5% | 0.5% | 0.9%
    - of which specialized services (incl. oil/gas exploration): 0.1% | 0.2% | 0.8%
    - of which public administration: 0.1% | 0.1% | 0.4%
  - Indirect Taxes: 0.6% | 0.0% | 0.8%
- The most important growth contribution came from the tertiary sector, which accounts for half of the economy, supported by robust expansions of specialized services that capture oil and gas field exploration, public administrative services, and retail trade.
- Average growth of agriculture benefited from the absence of major droughts.
- In the secondary sector, mining, construction, and manufacturing expanded more dynamically than in previous phases.

### Expenditure-side drivers (1999–2019; averages by period)
- Contributions to growth by expenditure (1999–2005 | 2006–2013 | 2014–2019):
  - Private Consumption: 2.8% | 2.3% | 3.4%
  - Private Investment: 0.4% | 1.0% | 2.7%
  - Public Consumption: 0.6% | 0.5% | 0.6%
  - Public Investment: 0.3% | 0.4% | 0.5%
  - Net Exports: -1.0% | -0.8% | -1.9%
  - Inventory Change: 1.1% | -0.6% | 0.9%
- Key points:
  - GDP growth was driven by private domestic demand.
  - Increasing private consumption remained the single most important contributor.
  - Private investment increased significantly, contributing almost 3 percentage points to growth between 2014 and 2019.
  - Expansion of domestic demand consistently outstripped supply, producing a substantially negative contribution from net exports and an increasing trade deficit.

### External environment (2010–2019 and related)
- Favorable external environment features:
  - Terms of trade improved in 2014/15 amid declining oil prices following negative shocks in 2011 and 2013.
  - Low inflation compared to trade partners caused a steady decline of the real effective exchange rate after 2010.
  - Remittances inflows remained consistently strong.
  - Growth of goods and services exports accelerated markedly after 2013 amid robust foreign demand.
  - Capital inflows were sizeable amid favorable external financing conditions for Senegal and significant Eurobond issuances.
- Remittances, real effective exchange rate, net capital flows, and annual changes of terms of trade all reflected these favorable external conditions over the 2010–19 period.

### Structural transformation and export diversification (1999–2019)
- The economy did not undergo significant structural transformation:
  - The share of primary, secondary, and tertiary sectors in value added remained broadly unchanged.
  - Sectoral shares in total bank credit also remained broadly unchanged.
- Exports have not become significantly more diversified or complex:
  - Export growth was dynamic and some new products were added, but growth has been driven largely by products of lesser complexity such as precious metals (gold, zircon, titan), vegetables and fruits, and fish and related products.
  - Export composition (in constant 2005 CFAF billion) highlights significant shares for Gold, Zircon, Titan; Vegetables and Fruits; Fish and fish products; Phosphates, Fertilizers, Phosphoric Acid, Salt; Refined Petroleum; and Other (incl. cement, cotton and groundnuts).
  - Share of exports by country/region (2019): Switzerland 18%, India 11%, China 8%, Mali 10%, West Africa 17%, EU 15%, Rest of the World 20%.

### The investment surge (Annex II)
- Rapid increase in gross fixed capital formation over the last decade:
  - The share of output invested almost doubled compared to the previous decade, reaching over 30 percent of GDP in 2019.
  - The surge was driven by sharply accelerating private sector investment.
  - Slightly less than half of total fixed capital formation was in the construction sector (residential investment, other buildings, and structures).
  - About 1/4 of fixed capital formation was in machinery and equipment; the rest in intangible assets (research and development, mineral exploration, computer software and databases, and other).
  - At least part of the increase in the investment-to-GDP ratio between 2017 and 2019 was related to inflows of foreign direct investment in the hydrocarbon project.
- Benchmarks and normative guidance:
  - Current investment-to-GDP ratio of about 30 percent could be conducive to sustained higher growth.
  - Average investment-to-GDP ratio in high growth episode countries was 23.3 percent in the first seven years and rose to 31.5 percent in the remaining years.
  - The rate of gross capital formation of four Asian success-story countries averaged around 30 percent (Table):
    - Republic of Korea (1963–1996) — Real GDP per capita growth: 8.0; Gross capital formation to GDP: 30.8
    - Malaysia (1971–1996) — Real GDP per capita growth: 5.0; Gross capital formation to GDP: 30.6
    - Thailand (1973–1996) — Real GDP per capita growth: 5.8; Gross capital formation to GDP: 32.1
    - Vietnam (1992–2019) — Real GDP per capita growth: 5.6; Gross capital formation to GDP: 29.8
  - Neoclassical “golden rule” calibration suggests an optimal investment-to-GDP ratio of about 26 percent (calibration noted as yielding 26.25 percent under assumptions α = 0.35; p = 0.03; δ = 0.05; n = 0.03; g = 0.01). The golden rule can be interpreted as a lower bound for an economy converging to a higher income level.
- Investment efficiency concerns:
  - Output growth did not accelerate commensurately with higher investment rates, pointing to low or deteriorating investment efficiency.
  - Incremental capital to output ratio improved toward peers between 2006 and 2017 but deteriorated significantly in 2018 and 2019.
  - One possible explanation is the increasing share of fixed capital formation in the construction sector:
    - Construction of oil and gas rigs and platforms has very high import content and does little to boost short-term growth.
    - A significant share attributable to the residential sector is likely to have little impact on future productivity and growth.

### Energy sector and subsidies (selected points from following section)
- Senegal subsidizes electricity tariffs and domestic fuel prices by maintaining constant prices that do not reflect international oil price movements and by compensating the electricity utility (Senelec) and fuel importers for losses.
- Energy subsidies are projected to amount to about 1.1 percent of GDP in 2022 at current world prices (about US$75 per barrel of Brent).
- Subsidies could reach 1.8 percent of GDP if average oil prices are higher by about US$10 per barrel.
- Energy subsidies expose the budget to significant fiscal risks, crowd out other priority spending, and are widely inefficient in improving distributional and environmental outcomes.
- A successful reform should include:
  - A gradual transition towards fully automatic price adjustments.
  - Public financial management reforms to improve the architecture of financial flows in the sector.
  - Redirection of fiscal space towards funding necessary investments to lower domestic energy costs.
  - Priority investment area: gas-to-power strategy as a temporary solution to lower electricity prices while investments in renewable energy generation ramp up.
- Context:
  - Senegal suffers from one of the highest electricity production costs in sub-Saharan Africa, with production highly reliant on oil imports.
  - Limited access to affordable electricity constrains private sector development, productivity, output, and investment, and reduces the effectiveness of public and social service delivery.

*International Monetary Fund — Annex I. Anatomy of Senegal’s Recent Growth Experience (from the provided source content).*

### 2.      The provision of cheaper and more reliable electricity ranks as a top priority in

### 1senea2022002 - 2.      The provision of cheaper and more reliable electricity ranks as a top priority in

### Strategic priority and objectives
- The PSE (Plan Senegal Emergent) target: by 2025 ensure more reliable and competitive electricity while meeting high social and environmental standards.
- PSE specific aims (as stated): ensure availability of energy in sufficient quantity and quality; have one of the lowest electricity prices in the sub-region (~ 60 to 80 FCFA / kWh) to support economic competitiveness; halve household electricity bills; and eliminate cuts and associated losses.

### Root cause of high and volatile electricity costs
- Primary cause: overdependency on oil as key input to produce electricity.
- Installed electrical capacity (end-2020): around 1509 MW; heavy fuel and diesel account for about 74 percent of capacity (note: elsewhere cited generation capacity breakdown for 2021 shows Oil 1320 MW, Gas 24 MW, Wind 52 MW, Solar 112 MW, Biomass 47 MW, Total 1555 MW).

### Energy subsidies: scale, composition, and fiscal impact
- Senegal maintains regulated domestic electricity and fuel prices well below cost recovery levels, with limited/no pass-through of world oil price changes.
- Subsidies primarily compensate public electricity utility Senelec and fuel importers for incurred losses.
- Subsidies are described as significant, volatile, largely inefficient, and regressive (mainly benefiting wealthiest segments).
- Historical underbudgeting led to accumulation of sizeable arrears; electricity tariff and fuel subsidy arrears reached 1.5 percent of GDP at end-2019.
- Under the PCI-supported arrangement, authorities committed in 2020 to either adjusting prices to cost-recovery levels or budgeting adequate amounts to avoid new arrears accumulation, and to repay pre-2020 arrears as part of a 2020–22 arrears clearance plan.

### Quantified subsidy levels and projections (preserve source numbers exactly)
- Subsidies could reach 1.8 percent of GDP in 2022 if prices remain around US$85/barrel, up from 0.3 percent of GDP in 2020.
- Fuel subsidies: reached 0.2 percent of GDP in 2021 and expected to rise to up to 0.7 percent of GDP in 2022.
- Electricity subsidies: 1.1 percent of GDP in 2019 and 2021; tariffs were below cost recovery by 23 percent in 2021 and expected to reach 32 percent in 2022.
- Table of selected historical/projected values (as presented):
  - Average price per barrel (Brent): 2019 = 64$/barrel; 2020 = 42$/barrel; 2021E = 70$/barrel; 2022 low = (73-75$/barrel); 2022 high = (86$/barrel)
  - Electricity subsidies: 2019 = 1.1; 2020 = 0.3; 2021E = 1.1; 2022 low = 0.7; 2022 high = 1.1
  - Fuel subsidies: 2019 = 0.1; 2020 = 0.2; 2021E = 0.3; 2022 low = 0.3; 2022 high = 0.7
  - Total energy subsidies: 2019 = 1.2; 2020 = 0.3; 2021E = 1.3; 2022 low = 1.1; 2022 high = 1.8
- World Bank estimate cited: domestic electricity production costs on average 0.24US$/kWh, against a global benchmark of US$0.10/kWh.

### Gas-to-power strategy: potential and requirements
- Strategy: use upcoming domestic gas production for power generation as transition toward renewables.
- Estimated investment scale: around US$3bn in public and private investments (based on preliminary calculations).
- Potential impact: allow for a reduction of about 30 percent of domestic electricity costs.
- Additional note: a reduction of electricity cost in the order of 30 percent, if passed through to tariffs, would reduce the latter to about US cents per kWh (text leaves the exact cents figure blank), below regional averages cited (lower-middle income average 17.8 US cents per kWh; upper-middle income average 19.4 US cents per kWh).
- Current generation mix (recent): renewables represent about 30 percent of existing generation capacity, but oil-fired plants account for 70 percent of generation capacity.

### Structure of financial flows and arrears dynamics
- Energy sector financial flows are complex, involve multiple players, and contributed to arrears accumulation before 2020.
- Cross-debt agreements regularly used to clear state-Senelec arrears; latest cross-debt agreement (August 2021) covered 2019-2021 for a total amount of 1% of GDP.
- Senelec has arrears against state-owned refinery (SAR), the sole supplier of heavy fuel oil used by Senelec.
- Recourse to IPPs under take-or-pay agreements has been extensive, sometimes expensive, due to limited Senelec investment leeway.

### Fuel subsidies: mechanisms and issues
- Explicit subsidies: hydrocarbons committee defines monthly maximum price chargeable by importers/distributors and determines cost-recovery prices; when administrative prices are below cost-recovery, distributors are entitled to compensation covering commercial losses.
- Implicit subsidies: foregone tax revenues (VAT exemptions on some refined products; excise taxes adjusted), non-inclusion of health/environmental externality costs (implicit carbon cost).
- The Petroleum Products Import Security Fund (FSIPP) is a budget revenue line intended to insulate the budget; it receives a fixed tariff per unit and is revised monthly by the hydrocarbons committee, but revisions are discretionary and not automatic. FSIPP revenues are fungible and not exclusively dedicated to price stabilization.
- FSIPP proceeds were positive in 2020 amid low oil prices, yet in 2021 subsidies were funded through the central budget with a supplemental finance law.
- Absent an automatic adjustment mechanism, fuel subsidies could continue trending upwards and arrears might accumulate.

### Electricity subsidies: mechanics and consequences
- CRSE (regulator) sets quarterly actual tariffs and calculates full cost-recovery tariffs; when actual tariffs are below cost recovery, regulator must either adjust tariffs or compensate Senelec through budget subsidies.
- Tariffs were below cost recovery by 23 percent in 2021; expected to reach 32 percent in 2022.
- Oil purchases represent about 46 percent of Senelec’s total costs in one estimate; elsewhere stated oil purchases account for about ½ of Senelec’s operating costs.
- Beyond explicit subsidies, Senelec operational inefficiencies reduce tax and dividend revenues and amount to implicit subsidies (hard to quantify given arrears and cross-flows).
- Tariff compensations have not been settled in a timely manner, contributing to Senelec financial difficulties and hindering investment, including conversion of heavy fuel oil plants to natural gas.

### Rationale for eliminating energy subsidies
- Key negative attributes of subsidies (as summarized):
  - Regressive: IMF research finds subsidies benefit on average the richest 20 percent of households six time more than the poorest 20 percent.
  - Climate-unfriendly: encourage excessive fossil fuel consumption, aggravate emissions, risk jeopardizing carbon reduction pledges.
  - Inefficient fiscal instrument: crowd out health, education, and social spending; create fiscal risks when prices are high; discourage investments in cleaner energy and energy efficiency; and slow sectoral cost reductions.
- Recommendation: large and growing energy subsidies should be gradually eliminated and resources redirected to lowering domestic energy prices via investments and targeted support to poorest segments.

### Options and building blocks for phasing out energy subsidies
- Critical steps to restore financial viability and spending efficiency:
  - (i) A gradual elimination of energy subsidies, building on successful international precedents;
  - (ii) Public financial management reforms to streamline financial flows and improve transparency;
  - (iii) A redirection of the increased fiscal space towards funding necessary investments in the sector.
- IMF-identified six key elements of successful energy subsidy reform:
  - (i) Appropriately-phased price increases, which can be sequenced differently across energy products;
  - (ii) Targeted measures to protect the poor;
  - (iii) Institutional reforms to move towards automatic energy prices’ adjustments;
  - (iv) An extensive communication strategy, supported by improvements in transparency;
  - (v) A comprehensive energy sector plan with clear long-term objectives and consultation with stakeholders;
  - (vi) Improved efficiency of SOEs to reduce producer subsidies.

### Phasing and sequencing guidance
- Possible sequencing approaches:
  - Lift prices first on lower-priority products; maintain prices on products critical to vulnerable households (e.g., diesel and butane) while gradually hiking prices on others (e.g., super-fuel and kerosene) toward cost recovery.
  - For electricity, maintain tariffs at the social tranche while gradually raising other tranches to cost recovery.
  - Alternative: set an annual cap on energy subsidies and raise prices intra-year when cap is reached, requiring close coordination between regulator and budget authorities.
- Trade-offs and risks of gradual reform:
  - Lower short-term savings could reduce investments that would lower sector costs.
  - Sequencing can distort consumption patterns (e.g., shift consumption toward subsidized products).
  - Gradual reform may expose authorities to increasing opposition over time.
  - Need for broad consensus and carefully designed communications campaign supported by transparency improvements.

### Protection and complementary measures (introductory)
- Targeted protection for the poor is identified as a core element; detailed targeting measures are discussed in subsequent sections (beyond the supplied excerpt).

*Prepared by Samuele Rosa, Nabil Hamliri, and Abdoulaye Fame. Source: IMF staff analysis as presented in the supplied chapter.*

### 20.      The elimination of subsidies will require compensatory measures targeted at the most

### 20.      The elimination of subsidies will require compensatory measures targeted at the most 

### Compensatory measures and social protection
- Compensatory measures should target the most vulnerable segments of the population while accounting for welfare impacts on other stakeholders.
- Delivery channels:
  - Use existing social spending channels such as the National Unified Register (Registre National Unique – RNU) and the family subsidies program (Programme de bourses de sécurité familiale—PBSF) to target the poor.
  - Upgrade and institutionalize existing social protection mechanisms and move to digital delivery mechanisms to ensure effective delivery.
- Other stakeholders:
  - Urban middle class and energy-intensive industries will benefit in the medium term from redirected spending towards lowering energy costs.
  - Short-term support for these groups could be provided through ad hoc non-recurrent programs.

### Moving towards automatic price adjustments
- Automatic price adjustment mechanisms are the most effective way to eliminate subsidies.
- Governance and institutional arrangements:
  - Energy sector regulators should be fully empowered to conduct independent assessments of cost recovery prices.
  - Regulators’ projections should be directly reflected in adequate budget envelopes and a no-arrears policy.
  - An institutional process should ensure regulators’ decisions are endorsed by the executive.
  - Regulators should develop capacity to critically review allowable costs presented by Senelec and fuel importers.
- Policy objective:
  - Ensure automatic pass-through of world oil prices to domestic energy product prices to eliminate subsidies and insulate pricing from political interference.

### Communication strategy and transparency
- An extensive communication campaign, supported by transparency measures, is instrumental for successful reform.
- Key messages and transparency actions:
  - Transparently explain the magnitude of energy subsidies as recorded in the budget, their implications for other parts of the budget (i.e., crowding out other priority spending), and their current distribution between rich and poor.
  - Clearly outline benefits of removing subsidies and specify projected use of savings in budget documents, linking savings to:
    - Higher investments in the energy sector aimed at improving quality of service and lowering prices in the medium term, and/or
    - Higher priority social spending.

### Comprehensive energy sector plan and stakeholder consultation
- Publish a comprehensive and unified energy sector plan to improve acceptability of reforms and redirect fiscal savings towards priority investments.
- Plan objectives and content:
  - State a long-term objective of lowering domestic energy costs through investments in lower-cost and greener power generation.
  - Use the plan to unify existing roadmaps (e.g., Electricity Strategy 2035 and gas-to-power strategy) and provide a framework for legal and regulatory reforms, building on the recently enacted electricity code.
  - Reflect ongoing efforts to improve operational efficiency at Senelec and SAR to limit fiscal risks and improve energy spending efficiency.
- Consultation:
  - The plan should benefit from extensive consultations with all stakeholders, including businesses and civil society.

### Improved efficiency of SOEs to reduce producer subsidies
- Continue and expand governance and organizational reforms at Senelec; monitor Senelec’s performance under the recently signed performance contract and focus efforts on lowering electricity costs.
- Replicate the performance contract approach with SAR to strengthen financial positions and reduce budget transfer needs.

### Public financial management (PFM) reforms
- Key reform priorities to reduce fiscal risks and underbudgeting associated with energy subsidies:
  - Avoid fiscal risks and new arrears accumulation through accurate budgeting.
    - Underbudgeting relative to realistic oil price assumptions may lead to arrears accumulation when fiscal space is insufficient.
    - Although electricity arrears have been cleared, new arrears may accumulate with higher oil prices and authorities’ preference to maintain constant tariffs during the pandemic.
    - Fuel sector arrears have been harder to clear and have accumulated, owing to higher global prices and complex institutional clearance processes.
    - Existing delayed compensation mechanisms could be streamlined.
  - Rationalize the existing flow of funds to avoid leakages and additional future costs for the state.
    - The cost of maintaining intermediate bodies adds to overall fiscal costs.
    - Accumulation of arrears creates additional financing costs for energy sector companies that the state eventually covers.
    - Reliance on an under-endowed extra-budgetary fund (FSE) to settle subsidies and arrears is not in line with good practices; the fund should be brought back to the budget and its various expenditures settled directly through appropriate spending categories.

### Investment priorities for redirected savings
- Redirect savings toward reliable, cleaner, and cheaper energy sources:
  - Accelerate Senelec’s investments in cheaper power production through energy mix diversification, focusing on cheaper and domestically available sources such as renewables and domestically produced gas (during an initial transition period) to diversify away from expensive and volatile imported oil.
  - Accelerate investments in transport and access infrastructure, including transmission infrastructure capable of handling (intermittent) solar and wind power to accelerate investments in the sector.
  - Note: Senegal is being supported by the Millennium Challenge Corporation (MCC) in transmission and electrification projects and enabling reforms.

### Gas-to-power strategy and infrastructure
- Objective:
  - Take advantage of upcoming domestic gas production to produce electricity from gas and reduce the cost of electricity.
- Institutional and infrastructure developments:
  - Reseau Gazier du Senegal (RGS) company created in November 2019 as a joint venture between FONSIS, PETROSEN, and SENELEC to oversee construction, operation, upkeep, maintenance, and development of the gas transport network.
- Planned network and costs:
  - RGS's new network should cover around 307 km of pipelines (on top of the 56 km of existing pipelines), to be built through 2027 for a total cost of nearly FCFA 272 billion (around 1.8 percent of GDP).
  - The strategy targets a doubling of the supply of electricity from the current 1509 MW to close to 3000 MV.

### MCC Power Compact and electrification
- MCC support:
  - Five-year, US$550 million MCC Power Compact plus a supplemental $50 million from the Government of Senegal for a total US$600 million program, signed in December 2018.
  - Program components: improving transmission network, increasing electricity access in rural and peri-urban areas of the south and central regions, and improving overall governance and financial viability of the sector.

### Way forward for subsidy elimination and gas-to-power implementation
- Eliminating energy subsidies now could create fiscal space for investments in the GTP strategy.
- Focus areas:
  - Mobilize public and private investments in all three segments of the gas value chain (upstream, midstream, downstream) and accelerate project delivery.
    - Progress remains slow on governance and execution of major projects.
    - The contemplated gas pipeline, to be developed as a PPP, is yet to reach financial close.
    - Conversion of existing power plants was formalized in 2019 but remains to be executed.
    - Investments by Senelec slowed by financial difficulties, linked in part to substantial arrears owed by the state; this can affect the large financing need for building new electric power plants.
  - Better coordinate electricity sector investments to ensure alignment with the desired energy mix.
    - In absence of a clear timeline for gas-to-power projects, Senelec and IPPs continue power generation investments that may lead to oversupply and losses at Senelec under existing take-or-pay agreements.
  - Complete the legal and regulatory framework:
    - Recently adopted gas and electricity codes contain counter-productive cross-regulations and loopholes that may deter private investment, and insufficient oversight of the gas sector by electricity regulator CRSE.
    - Codes should be complemented with robust implementing decrees.
    - Experience from similar countries (e.g., Ghana) indicates robust legal and regulatory frameworks covering the full value chain are needed early to ensure effective delivery and integration of gas into a cleaner energy mix.
    - Note: The newly adopted Electricity Code introduces requirements for least cost plan and third-party access but has gaps on governance, transparent decision making, and the role of the private sector around new generation; it creates legal bases for negotiated deals, unsolicited proposals, and unlimited State ownership in IPPs, and Senegal is working with donors to address these issues at the implementation decree level.

### Annex I — Fuel and electricity subsidies: operational details and quantitative indicators
- Fuel subsidies and pricing mechanics:
  - Cost recovery prices (import parity prices, prix parité importation) are determined every four weeks by the National Hydrocarbons Committee (Comité National des Hydrocarbures-CNH) and include total import cost (including transport), direct costs and applicable taxes; these represent cost recovery prices.
  - The state levies two taxes on imported fuel products: Petroleum Products Import Security Fund (Fonds de Sécurisation des Importations de Produits Pétroliers-FSIPP) and Energy Sector Support Levy (Prélèvement de Soutien au secteur de l’Energie-PSE).
  - Specific import parity prices are calculated separately for refined products and crude oil.
  - In practice, import parity prices have been stabilized and maintained artificially low through tax rate and tax base adjustments, direct capping, downward revisions of FSIPP and PSE rates, and adjustments to the VAT base (stabilisation fiscale). When mechanisms are insufficient, CNH sets an artificially lower import parity price (prix parité importation considéré).
  - In 2020, in a low-price environment, FSIPP was raised and import parity prices were set at their fair level without artificial capping.
- Compensation mechanism for importers:
  - When international price rises are not factored into domestic import parity prices, fuel importers are entitled to compensation under a 2014 decree, paid by a dedicated extrabudgetary Energy Support Fund (FSE - Fonds de Soutien à l’Energie), upon validation by CNH.
  - Losses have been important at SAR, which imports heavy fuel oil on behalf of Senelec.
  - Price capping episodes:
    - Prices were capped between Feb-2016 and Jun-2019, and commercial losses reached 120bnCFA in 2017-19.
    - Arrears are now being cleared, and they have generated difficult financial situations and additional financing costs for licensed importers and for SAR.
- Electricity subsidies and tariff compensation:
  - CRSE determines cost recovery tariffs annually and updates maximum allowed revenue on a quarterly basis.
  - In practice, actual tariffs have been below production costs and required fiscal compensation to Senelec.
    - In 2021, tariffs were underestimated by c. 32 percent.
    - Senelec was eligible to a c. 170bnCFA tariff compensation in 2021.
    - Compensation needs are mainly driven by Senelec’s oil import bill for power production (c. ½ of Senelec’s costs) and related price fluctuations.
    - Compensation is paid by the FSE but funding has been insufficient to cover actual needs.
  - Sensitivity to oil prices:
    - Any rise in oil prices of US$10 per barrel increases tariff compensation needs by about 0.3 percent of GDP.
    - The relationship between oil prices and costs should weaken over time if Senelec succeeds in diversifying its energy mix.

*Source: IMF staff compilation from the provided chapter content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1senea2022002.pdf_