## _cr12337 ## Source details **Canonical URL:** [_cr12337](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12337.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12337.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12337.pdf.json) --- ### Recent developments and short-term outlook - Political transition: President Sall elected March 2012; governing coalition secured a broad legislative majority in July 2012. - Growth: - Average growth, 1995–2005: 4.5 percent. - Average growth, 2006–2011: 3.3 percent. - Real GDP growth: 2.6 percent in 2011; projected 3.7 percent in 2012; projected 4.3 percent in 2013. - Inflation: projected to remain below 2 percent. - External balances: - Current account deficit: projected 7.6 percent of GDP in 2012. - Overall balance of payments: projected to record a small deficit in 2012. - Poverty: - Poverty incidence: 68 percent (earlier), 48 percent after robust period; 47 percent in 2011. - Rural poverty incidence: 57 percent. - Urban poverty incidence: 33 percent. - Shocks and constraints: food and fuel global prices, global financial crisis, electricity sector crisis, drought in the Sahel, regional instability (northern Mali). ### Fiscal position, public finance management, and policy priorities - Fiscal deficits and debt: - Fiscal deficit: below 4 percent of GDP in 2007; 6.7 percent of GDP in 2011. - Public debt-to-GDP ratio: expected to exceed 45 percent in 2012. - Financing pressures and vulnerabilities: - Financing difficulties in early 2012 led to delays in paying suppliers. - Updated DSA indicates current fiscal deficit levels incompatible with long-term sustainability absent consolidation and stronger debt management. - Authorities' actions and targets: - 2012 measures: reduction in number of ministries; abolition of the senate and vice-presidency; rationalization of diplomatic representation; closure/merger of public agencies; efforts to reduce running costs. - 2012 fiscal deficit likely to remain below 6 percent of GDP due to these measures and delays in certain energy investments. - Financing in 2012 to rely on high recourse to the regional market and a large loan from France. - Fiscal objectives: reduce deficit below 5 percent of GDP in 13–142013 and below 4 percent by 2015. - PFM and debt management: - Transposition into national law of WAEMU PFM directives nearly completed; implementation underway. - Comprehensive audit of agencies ongoing; audit of civil service ongoing to control payroll. - Cost-benefit analysis to be used for larger investment projects included in the 2014 budget; project evaluation guide expected by end-2012. - Completion of the single treasury account expected by early 2013. - Creation of a public debt directorate; first medium-term debt strategy prepared recommending extending maturity of regional market debt and priority to concessional financing. - MTDS and borrowing limits: - Total ceiling US$500 million over 2011–13 for nonconcessional external debt; remaining ceiling after 2011 issuance is US$200 million. - Separate ceiling equivalent to CFAF 44 billion in 2011–13 for untied nonconcessional external debt financing with grant element ≥ 15 percent. ### Subsidies, social safety nets, and efficiency - Electricity sector transfers and subsidies: - Annual budgetary transfer to SENELEC in 2012 expected to amount to about CFAF 100 billion (1.4 percent of GDP). - Power losses exceed 20 percent of supply. - Authorities intend to cap electricity subsidies at CFAF 80 billion in 2013, requiring projected savings of about CFAF 45 billion, or 0.6 percent of GDP. - Savings to come from operational and financial restructuring of SENELEC and possible tariff reconsideration if oil prices remain high. - Social safety nets: - Current reliance on food and fuel price subsidies; these are poorly targeted. - Authorities plan broader and better-targeted social safety nets to be introduced in 2013. - Reforms to improve efficiency and transparency: - Restructuring plan for agencies to be designed in 2013 based on audit conclusions. - Improved transparency in land operations intended. ### Growth constraints and structural reforms to rekindle growth - Growth accounting and drivers: - Growth mostly explained by factor accumulation; Total factor productivity (TFP) has declined since 2006. - Sustained high growth required for further poverty reduction. - Infrastructure and investment: - Key projects: new international airport expected to be completed by 2014; toll highway section to Diamniadio expected by the summer of 2013. - Power sector crisis in 2010–11; emergency plan “Takkal” reduced outages at high cost. - Large investments and restructuring of SENELEC needed to lower cost of doing business and increase generation capacity with more cost-effective technologies. - Public investment and financing (model insights): - Exclusive reliance on fiscal adjustment to finance higher public investment unrealistic. - Relying on nonconcessional borrowing could lead to permanently higher debt ratios and debt sustainability problems. - Best option: rely on concessional resources and improve public investment management to raise investment efficiency. - Raising TFP through reforms is as high a priority as scaling up public investment. - Business environment and tax/customs reforms: - Senegal ranked 166th out of 183 countries in the 2013 Doing Business survey. - New tax code to enter into force in 2013 aiming for a simpler, equitable, and efficient tax system. - New customs code to be implemented in 2013; ongoing reforms to improve tax and customs administration. ### Financial sector and external stability - Strategic policy themes: - (i) fiscal policies to reduce vulnerabilities and foster inclusiveness; - (ii) policies to rekindle growth; - (iii) strengthening the financial sector and external stability. - Debt management emphasis: - Strengthen debt management and extend maturities on regional market debt to reduce rollover risks and keep borrowing costs low. ### Risks and scenario analysis - Domestic risks: - Insufficient fiscal consolidation compromising debt sustainability. - Slow improvement in public resource management affecting fiscal consolidation. - Delays in energy sector reform with negative impacts on growth and the budget. - External risks: - Intensification of the crisis in Europe and a further slowdown in the world economy. - Food security concerns related to higher international cereal prices. - Possible spillovers from political instability in Mali. - Public investment efficiency model scenario: - Baseline assumption: one dollar in public investment increases capital stock by 70 cents on average. - Alternative (downside) assumption: one dollar increases capital stock by 25 cents on average (public investment management index score 0.94 out of 4). - Impact: lower efficiency would reduce long-term annual growth by about one percentage point and correspond to no TFP increase; would make fiscal consolidation more challenging. - Additional downside external scenarios: - Protracted lower global growth: annual average 1.6 percentage points below the baseline in 2014–16, a 30 percent drop in oil prices after three years and 20 percent lower nonfuel commodity prices → Senegal’s growth in 2015 would be lower by about ½ percentage point. - Sharp downturn in global growth: 2 percentage points lower growth in 2013 → Senegal’s growth would be lower in 2013 by about 1 percentage point. ### Growth outlook and development strategy (staff perspectives) - Domestic engines of growth required given weaker external environment. - NSESD finalized November 2012 with three pillars: - (i) boosting economic growth, productivity, and wealth creation; - (ii) promoting human capital, social protection and sustainable development; - (iii) strengthening governance, institutions, peace and security. - Staff recommendations: - Develop detailed sectoral programs and action plans; ensure realism, sequencing, cost and financing; link priority actions with the budget and a medium-term expenditure framework. - Financial sector development should be central to an inclusive growth strategy. - Growth based on capital-intensive natural resource projects may create few jobs unless adequately taxed; growth based on higher farm productivity and rural jobs likely to reduce poverty faster. ### Macroeconomic projections and scenarios (selected series) - Real GDP growth (percent) — PSI baseline: 2.6 3.7 4.3 4.8 5.0 5.1 5.2 - Real GDP growth (percent) — Lower investment efficiency in 2013-17: 2.6 3.7 4.2 4.2 4.1 4.1 4.1 - Fiscal deficit (percent of GDP) — PSI baseline: -6.7 -5.9 -4.9 -4.3 -3.9 -3.7 -3.5 - Fiscal deficit (percent of GDP) — Lower investment efficiency in 2013-17: -6.7 -5.9 -5.5 -4.9 -4.5 -4.3 -4.1 ### Financial sector structure and main risks - Financial system dominated by the banking sector: - 19 commercial banks; banks represent about 90 percent of the financial system. - Five largest banks account for 66 percent of assets and collect 79 percent of deposits. - Access to the financial system: about 20 percent of the population. - Main banking vulnerabilities: - Concentration of lending to few sectors and companies; large exposure to the public sector. - Asset quality concerns: gross NPLs to total loans relatively high, reflecting portfolios of three banks with NPLs > 20 percent; most other banks NPLs < 5 percent. - Relatively high provisioning for NPLs mitigates risks. - Sector indicators: on average well capitalized, profitable, and liquid; asset quality the main concern. - Stress-tests: liquidity and interest rate risks manageable; concentration of lending major source of vulnerability. ### Financial deepening, constraints, and supervisory issues - Financial depth trends: - Broad money to GDP increased from 36 percent in 2006 to 40 percent in 2011. - Credit to the economy: almost 30 percent of GDP; largely short-term and directed toward trade and food and fuel imports. - Constraints: - Informational asymmetries, weak business and judicial environment, tax regime costly to financial services, regulatory and supervision issues, limited skills. - Recommendations: - Enhance micro-prudential regulation and strengthen supervision; improve compliance with prudential rules. - Monitor development of banking groups regionally and strengthen regional supervision. - Develop a holistic view of the financial system and systemic risk in Senegal. ### Program status, monitoring changes, and fiscal targets - Program is on track; end-June 2012 fiscal deficit target met by a substantial margin. - Proposed monitoring changes: - Revise end-2012 fiscal deficit assessment criterion downward to 5.9 percent of GDP. - New fiscal targets for end-June 2013 and end-2013 proposed. - Reschedule structural benchmark on restructuring agencies from end-2012 to end-July 2013. - Include new structural benchmarks in debt management, tax and customs reform, public investment appraisal, and transparency. - Authorities plan to use remaining space for nonconcessional borrowing (US$200 million) and propose broadening scope of investment expenditures financeable this way to road infrastructure, and urban water and sanitation. ### Staff appraisal and policy recommendations - Fiscal policy: - Authorities’ objective of keeping fiscal deficit below 6 percent of GDP in 2012 and below 5 percent in 2013 is adequately ambitious. - Debt sustainability calls for further reduction of the fiscal deficit and stronger debt management. - Reduce fiscal deficit while addressing social needs by improving public spending efficiency, streamlining agencies, and more cost-effective support to vulnerable populations. - Phase out costly and poorly targeted food and fuel subsidies and broaden social safety nets. - Structural reforms and growth: - Main medium-term challenge: move to higher, sustainable, and inclusive growth. - Staff urges authorities to finalize and implement strategy on new energy investments and restructuring SENELEC; accelerate financial sector development strategy implementation. - Risks: - Domestic: delays in energy-sector reform and state reform difficulties. - External: uncertainty about world economic prospects. - External vulnerabilities manageable but reducible via prudent fiscal/borrowing policies and increased non-price competitiveness. ### Energy sector: Annex I — Electricity subsidies in Senegal (key facts and figures) - Power sector reliance: - About 10 percent of available electricity supply purchased from regional hydropower; heavy reliance on oil imports for generation. - Sector weaknesses: increasing oil prices, tariffs below full cost recovery, lack of maintenance, delays in capacity investment. - Historical indicators (2005–2011, as presented in source): - Total power supply (GWh): 2,171; 2,192; 2,306; 2,400; 2,489; 2,618; 2,559. - Electricity sales (percent of supply): 79; 79; 77; 78; 79; 79; 80. - Electricity losses (percent of supply): 21; 21; 23; 22; 21; 21; 20. - Average tariff (CFA/kWh): 799; 900; 1,011; 1,121; 1,318; 1,131; 1,191 (sales receipts per kWh). - Operating subsidies received (CFA billion): 26; 33; 37; 60; 40; 28; 103. - Total quasi-fiscal costs (CFA billion): 85; 133; 83; 95; 67; 106; 141. - Total losses in 2011: estimated CFAF 141 billion (2.1 percent of GDP). - Tariff gap comprised about two thirds of this amount; remainder corresponds to unaccounted losses reflecting SENELEC inefficiencies. - SENELEC liabilities (stock, CFA billion): 149; 248; 252; 312; 336; 402; 385. - Tariff gap and compensation: - In July 2011 the tariff formula was revised; 2011 tariff compensation estimate revised from CFAF 45 billion to about CFAF 96 billion. - The 2011 average tariff was about 40 percent below the level suggested by the CRSE formula. - Collection of billed units close to 100 percent; losses between production and billing about 20 percent (technical losses <10 percent efficient systems). - Distributional effects: - Subsidies are poorly targeted; many poor households not connected to grid. - World Bank analysis: only 12.5 percent of subsidies implicit to tariff structure benefited the poor. - Cumulative transfers to SENELEC over last five years ≈ CFAF 400 billion — nearly equivalent to resources needed for coal-fired plants to increase production capacity by >50 percent. - Policy implications: - Finalize energy sector strategy; implement new production units (natural gas, hydropower, coal-fired) expeditiously. - Improve tariff compensation system; reduce unaccounted losses and improve SENELEC efficiency. - Reconsider subsidy design; explore targeted measures to protect low-income and vulnerable households while reducing fiscal burden. ### Absorptive capacity, public investment scaling up, and model-based scenarios - Absorptive capacity and parameters: - Cost overruns: public investment projects assumed to incur cost overruns equal to 74 percent of initial investment. - Absorptive capacity parameter: 11. - Gross return on infrastructure investment: 0.313. - Investment efficiency parameter: 0.70 (each dollar of public investment increases stock by 70 cents). - User fees parameter: 0.83. - Baseline scenario (mixed financing): - Financing mix: concessional and nonconcessional external borrowing and domestic borrowing. - Public debt rises to 60 percent by the 10th year before declining. - Higher public investment increases permanently per capita income; limited by crowding out of private investment from domestic borrowing. - Alternative scenarios: - Fiscal adjustment only (finance via higher consumption taxes): consumption tax would need to jump from 18 percent to 33 percent. - Concessional borrowing only (unlimited concessional financing): public debt reaches 57 percent by eighth year then trends down; boosts growth more than other scenarios. - Nonconcessional borrowing only: public debt reaches 68 percent by end of projection period; debt sustainability concerns. - Conclusion: - Modest scaling up of public investment benefits growth without jeopardizing sustainability provided not financed exclusively through nonconcessional borrowing. - Financing public investment through concessional borrowing preferable, conditional on availability. - Critical structural conditions: absorptive capacity, return on infrastructure, investment efficiency, and user fees. ### Debt Sustainability Analysis (DSA) — summary and implications - Since May 2011 DSA, debt outlook deteriorated. - Public debt-to-GDP projected to reach 46 percent in 2012. - Senegal continues to face a low risk of debt distress, but risks have increased. - Baseline macro assumptions (selected exact values): - Real GDP growth: 2010: 4.1; 2011: 2.6; 2012: 3.7; 2013: 4.3; 2014: 4.8; Long term: 5.3. - Overall fiscal deficit (percent of GDP): 2010: 5.2; 2011: 6.7; 2012: 5.9; 2013: 4.9; 2014: 4.3; Long term: 2.7. - Current account deficit (percent of GDP): 2010: 4.4; 2011: 6.1; 2012: 7.6; 2013: 7.1; 2014: 6.7; Long term: 5.3. - Discount rate change: - Discount rate adjusted from 4.0 percent to 3.0 percent, increasing present value of debt. - Stress-test findings: - Stress tests breach thresholds for PV debt-to-GDP, PV debt-to-exports, and debt service-to-revenue under certain shocks. - Including remittances (13 percent of GDP in 2011) produces a more favorable assessment with only marginal breaches. - Policy implications: - Reduce fiscal deficits and strengthen debt management. - Approach nonconcessional borrowing with caution. - Develop domestic debt markets gradually to reduce reliance on external financing. ### Banking system soundness and microfinance - Financial system composition: - Banks: Total assets CFAF 3,365 bn (88% of total financial system in table); deposits CFAF 2,401 bn; credits CFAF 2,022 bn. - Microfinance: 234 establishments; MFIs’ loans ≈ 10 percent of bank credit; MFIs credit rose from CFAF 81 billion in 2005 to CFAF 219 billion in July 2012. - Banking sector developments: - Bank credit to the economy increased by 19 percent in 2011 (to 29 percent of GDP); preliminary 2012 suggests credit exceeded 30 percent of GDP. - Number of bank branches increased 11 percent in 2011; bank accounts increased 44 percent in 2011. - Key soundness indicators (selected): - Capital adequacy: Capital to risk-weighted assets 12.9 13.5 13.8 16.3 18.0 16.0 16.7 16.9 (selected series as presented). - Gross NPLs to total loans (selected): 16.8 18.6 17.4 18.7 20.2 16.2 14.8 17.5 (selected series as presented). - Provisions to NPLs (selected): 52.0 53.8 51.5 53.1 54.9 54.0 43.0 55.4 (selected series as presented). - Profitability: Return on assets mid-2012: 1.8 percent; Return on equity mid-2012: above 17 percent. - Main vulnerabilities: - Asset quality: gross NPLs elevated due to a few banks; provisioning high but asset quality main concern. - Concentration: lending concentrated to a few sectors and borrowers; large exposure to public sector. - Structural weaknesses: underdeveloped interbank market; no explicit deposit insurance; some prudential ratios systematically breached. - Regulatory and supervisory recommendations: - Strengthen micro-prudential regulation and supervision; improve compliance with prudential rules. - Develop national systemic risk function in Ministry of Finance; enhance regional coordination. - Review bank resolution framework and strengthen crisis prevention and resolution mechanisms (including regional deposit insurance and financial stability fund development). ### Program monitoring, assessment criteria, and structural benchmarks (selected) - Floor on overall fiscal balance (including grants) for end-2012: minus CFAF 425.4 billion (example computation in TMU). - Ceilings: - Ceiling on contracting or guaranteeing new nonconcessional external debt: US$500 million per period (with remaining US$200 million available for 2011–13 after 2011 issuance). - Ceiling on the budgetary float: CFAF 50 billion per quarter. - Structural benchmarks (selected statuses): - Operationalize the new public debt directorate — Implementation date January 15, 2012 — Status: Met. - Prepare a medium-term debt strategy — Implementation date September 30, 2012 — Status: Met. - Finalize the new general tax code and submit to parliament — Implementation date September 30, 2012 — Status: Met with delay in November 2012. - Prepare evaluation guide for investment projects — Implementation date December 31, 2012 — Status: In progress. - Finalize Single Treasury Account — Implementation date February 28, 2013 — Status: In progress. *Source: Excerpts from STAFF REPORT FOR THE 2012 ARTICLE IV CONSULTATION, FOURTH REVIEW UNDER THE POLICY SUPPORT INSTRUMENT, AND REQUEST FOR MODIFICATION OF AN ASSESSMENT CRITERION—INFORMATIONAL ANNEX (document identification: _cr12337, November 26, 2012).* ### 1. Impact of Risks on Medium-Term Growth _______________________________________________________9 ### 1. Impact of Risks on Medium-Term Growth ### Recent developments and short-term outlook - Political transition: President Sall elected March 2012; governing coalition secured a broad legislative majority in July 2012. - Growth: - Average growth, 1995–2005: 4.5 percent. - Average growth, 2006–2011: 3.3 percent. - Real GDP growth: 2.6 percent in 2011; projected 3.7 percent in 2012; projected 4.3 percent in 2013. - Inflation: projected to remain below 2 percent. - External balances: - Current account deficit: projected 7.6 percent of GDP in 2012. - Overall balance of payments: projected to record a small deficit in 2012. - Poverty: - Poverty incidence: 68 percent (earlier), 48 percent after robust period; 47 percent in 2011. - Rural poverty incidence: 57 percent. - Urban poverty incidence: 33 percent. - Shocks and constraints: food and fuel global prices, global financial crisis, electricity sector crisis, drought in the Sahel, regional instability (northern Mali). ### Fiscal position, public finance management, and policy priorities - Fiscal deficits and debt: - Fiscal deficit: below 4 percent of GDP in 2007; 6.7 percent of GDP in 2011. - Public debt-to-GDP ratio: expected to exceed 45 percent in 2012. - Financing pressures and vulnerabilities: - Financing difficulties in early 2012 led to delays in paying suppliers. - Updated DSA indicates current fiscal deficit levels incompatible with long-term sustainability absent consolidation and stronger debt management. - Authorities' actions and targets: - 2012 measures: reduction in number of ministries; abolition of the senate and vice-presidency; rationalization of diplomatic representation; closure/merger of public agencies; efforts to reduce running costs. - 2012 fiscal deficit likely to remain below 6 percent of GDP due to these measures and delays in certain energy investments. - Financing in 2012 to rely on high recourse to the regional market and a large loan from France. - Fiscal objectives: reduce deficit below 5 percent of GDP in 13–142013 and below 4 percent by 2015. - Public financial management (PFM) and debt management: - Transposition into national law of WAEMU PFM directives nearly completed; implementation underway. - Comprehensive audit of agencies ongoing; audit of civil service ongoing to control payroll. - Cost-benefit analysis to be used for larger investment projects included in the 2014 budget; project evaluation guide expected by end-2012. - Completion of the single treasury account expected by early 2013. - Creation of a public debt directorate; first medium-term debt strategy prepared recommending extending maturity of regional market debt and priority to concessional financing. ### Subsidies, social safety nets, and efficiency - Electricity sector transfers and subsidies: - Annual budgetary transfer to SENELEC in 2012 expected to amount to about CFAF 100 billion (1.4 percent of GDP), as in the prior year. - Total losses in the electricity sector may significantly exceed this amount (Annex I). - Power losses exceed 20 percent of supply. - Authorities intend to cap electricity subsidies at CFAF 80 billion in 2013, requiring projected savings of about CFAF 45 billion, or 0.6 percent of GDP. - Savings to come from operational and financial restructuring of SENELEC and possible tariff reconsideration if oil prices remain high. - Social safety nets: - Current reliance on food and fuel price subsidies; these are poorly targeted. - Authorities plan broader and better-targeted social safety nets to be introduced in 2013. - Reforms to improve efficiency and transparency: - Restructuring plan for agencies to be designed in 2013 based on audit conclusions. - Improved transparency in land operations intended. ### Growth constraints and structural reforms to rekindle growth - Growth accounting and drivers: - Growth mostly explained by factor accumulation; Total factor productivity (TFP) has declined since 2006 (Annex III). - Sustained high growth required for further poverty reduction. - Infrastructure and investment: - Key projects: new international airport expected to be completed by 2014; toll highway section to Diamniadio expected by the summer of 2013. - Power sector crisis in 2010–11; emergency plan “Takkal” reduced outages at high cost. - Large investments and restructuring of SENELEC needed to lower cost of doing business and increase generation capacity with more cost-effective technologies. - Public investment and financing: - Model simulations indicate increased public investment positively impacts growth, but financing mode matters: - Exclusive reliance on fiscal adjustment to finance higher public investment looks unrealistic. - Relying on nonconcessional borrowing could lead to permanently higher debt ratios and debt sustainability problems. - Best option: rely on concessional resources and improve public investment management to raise investment efficiency (Annex IV). - Raising TFP through reforms is as high a priority as scaling up public investment. - Business environment and tax/customs reforms: - Senegal ranked 166th out of 183 countries in the 2013 Doing Business survey. - Needed reforms: paying taxes, registering properties, protecting investors, enforcing contracts, dealing with construction permits. - A new tax code to enter into force in 2013 aiming for a simpler, equitable, and efficient tax system. - A new customs code to be implemented in 2013; ongoing reforms to improve tax and customs administration. ### Financial sector and external stability - Policy discussions grouped in three themes: (i) fiscal policies to reduce vulnerabilities and foster inclusiveness; (ii) policies to rekindle growth; and (iii) strengthening the financial sector and external stability. - Strengthening debt management and extending maturities on regional market debt emphasized to reduce rollover risks and keep borrowing costs low. ### Risks and scenario analysis (Box 1) - Domestic risks: - Insufficient fiscal consolidation compromising debt sustainability. - Slow improvement in public resource management affecting fiscal consolidation. - Delays in energy sector reform with negative impacts on growth and the budget. - External risks: - Intensification of the crisis in Europe and a further slowdown in the world economy. - Food security concerns related to higher international cereal prices. - Possible spillovers from political instability in Mali. - Model-based alternative scenario on public investment efficiency: - Baseline assumption in simulations: one dollar in public investment increases the capital stock by 70 cents on average. - Alternative (downside) assumption: one dollar in public investment increases the capital stock by 25 cents on average (based on public investment management index score of 0.94 out of 4). - Impact: this lower efficiency would reduce long-term annual growth by about one percentage point and correspond to no TFP increase in the growth accounting framework; would make fiscal consolidation more challenging. - Additional downside external scenarios: - Protracted lower global growth scenario: an annual average 1.6 percentage points below the baseline in 2014–16, a 30 percent drop in oil prices after three years and 20 percent lower nonfuel commodity prices → Senegal’s growth in 2015 would be lower by about ½ percentage point. - Sharp downturn in global growth scenario: 2 percentage points lower growth in 2013 → Senegal’s growth would be lower in 2013 by about 1 percentage point. *Source: _cr12337 - 1. Impact of Risks on Medium-Term Growth* ### 21. Staff underscored that with an external environment less supportive than before the ### _cr12337 - 21. Staff underscored that with an external environment less supportive than before the ### Growth outlook and development strategy - Staff underscored that with an external environment less supportive than before the global financial crisis, domestic engines of growth will be needed. - The focus of the new development strategy on inclusiveness is welcome and will be critical to ensure that growth dividends are widely shared. - Growth relying on capital-intensive natural resource projects is unlikely to create a lot of jobs and benefit the rest of the economy, unless these activities are adequately taxed. - Growth relying on higher farm productivity and broader rural job opportunities is likely to generate additional demand and to lead to faster poverty reduction. - Financial sector development should be an important element of an inclusive growth strategy. ### Macroeconomic projections and scenarios (real GDP growth and fiscal deficit) - Real GDP growth (percent) — PSI baseline: 2.6 3.7 4.3 4.8 5.0 5.1 5.2 - Real GDP growth (percent) — Lower investment efficiency in 2013-17: 2.6 3.7 4.2 4.2 4.1 4.1 4.1 - Fiscal deficit (percent of GDP) — PSI baseline: -6.7 -5.9 -4.9 -4.3 -3.9 -3.7 -3.5 - Fiscal deficit (percent of GDP) — Lower investment efficiency in 2013-17: -6.7 -5.9 -5.5 -4.9 -4.5 -4.3 -4.1 - Staff projection highlights: - A rebound in agriculture after last year’s drought would boost real GDP growth to 3.7 percent in 2012. - Growth would slightly increase in 2013 to 4.3 percent mostly owing to the completion of a number of large infrastructure and mining projects. - Inflation would remain moderate. ### National Strategy of Economic and Social Development (NSESD) and poverty reduction - The NSESD was finalized in November 2012 after extensive consultations with stakeholders. - The NSESD articulates policies and reforms around three strategic pillars: - (i) boosting economic growth, productivity, and wealth creation; - (ii) promoting human capital, social protection and sustainable development; - (iii) strengthening governance, institutions, peace and security. - The NSESD underscores the importance of achieving development objectives within a stable macroeconomic environment. - The NSESD includes three macroeconomic scenarios and their costing, providing a framework for resource mobilization and expenditures prioritization. - IMF and World Bank preliminary staff analysis suggests the NSESD provides a good diagnostic and a good framework for poverty reduction. - Staff recommendations: - Develop more detailed programs in certain sectors, based where possible on existing strategies, to translate the NSESD into specific action plans. - Give particular attention to the realism, sequencing, cost and financing of programs, including opportunities for private sector participation. - Link priority actions with the budgetary process and strengthen budgetary planning through development of a medium-term expenditure framework. ### Financial sector structure and main risks - The financial system is dominated by the banking sector: 19 commercial banks operating mostly in the three largest cities and representing about 90 percent of the financial system. - The five largest banks account for 66 percent of assets and collect 79 percent of deposits. - Microfinance institutions (MFIs) supply limited financial services targeting lower income households; about half of the sector’s activity is concentrated in greater Dakar. - Access to the financial system is about 20 percent of the population. - Insurance companies (25) account for most of the remainder of the domestic financial system. - The regional securities and equity market is a marginal source of funding, except for the government. - The interbank market remains underdeveloped. - Main banking system vulnerabilities identified: - Concentration of lending to a few sectors and companies and large exposure to the public sector. - Asset quality concerns: ratio of gross nonperforming loans (NPLs) to total loans is relatively high, reflecting portfolios of three banks with NPLs in excess of 20 percent, while most other banks have NPLs below 5 percent. - Relatively high level of provisioning for NPLs mitigates risks. - Overall indicators suggest Senegalese banks are on average well capitalized, profitable, and liquid, with asset quality being the main concern. - Stress-tests found liquidity risks and interest rate risks could be withstood given high liquidity and small maturity mismatch between assets and liabilities; concentration of lending was the major source of vulnerability. ### Financial deepening, constraints, and supervisory issues - Financial depth trends: - Ratio of broad money to GDP increased from 36 percent in 2006 to 40 percent in 2011. - Credit to the economy is almost 30 percent of GDP; it has increased strongly but remains largely short-term and directed toward trade and food and fuel imports. - Benchmarking indicates scope for further deepening relative to Côte d’Ivoire, Kenya, and Morocco; Kenya has overtaken Senegal on a number of indicators. - Constraints to financial development (broad agreement between authorities and staff): - Informational asymmetries: limited size of the formal sector, limited availability of audited company statements, absence of credit bureaus (and limited use of existing central bank databases). - Business and judicial environment: absence of formalized property rights in large parts of the country and a judicial process that is costly and slow. - Tax regime: taxes and fees on banking and stock exchange operations are relatively high, raising the cost of financial services. - Regulatory and supervision issues: some regulatory ratios perceived as excessively constraining; some ratios not observed by a number of banks; questions about whether the prudential framework is sufficiently responsive to new national-level needs that will require regional regulation. - Skills: lack of appropriate skills in MFIs moving from micro-enterprises to SMEs and limited financial culture constraining stock exchange use. - Supervisory and systemic risk recommendations: - Enhance micro-prudential regulation and strengthen supervision; improve compliance with prudential rules. - Monitor rapid development of banking groups in Senegal and the region; strengthen supervision at the regional level. - Develop a holistic view of the financial system and systemic risk in Senegal to identify interconnections and potential pockets of systemic risk as interconnectedness and diversification increase. ### Authorities’ strategy and implementation progress - The authorities have a national consultation on credit (2010) leading to an action plan to improve access to credit for households and firms (particularly SMEs) with measures grouped across: use of guarantees; SME debt and equity financing; availability of information; cost of credit; financial intermediation; judicial environment. - Progress made: registering land titles and information provision. - Delays: actions to improve judicial efficiency (training of judges in economic affairs) and measures to streamline public support for SMEs are behind schedule. - Staff view: the action plan remains largely relevant and implementation should be accelerated; some obstacles require regional-level action. - Regional authorities are working on interbank market development, strengthening the public debt market, and reviewing certain prudential rules; these issues to be discussed during the next regional consultation in early 2013. ### External stability and program implementation - External sector assessment: external sector risks are manageable (Annex V). - Senegal has recorded continuous current account deficits for nearly two decades. - Low savings relative to large investment needs imply continued deficits over the medium term, which could become difficult to finance if aid was to decline. - Export performance has been sluggish; inward FDI has picked up somewhat; remittances have become an important source of foreign exchange. - The real exchange rate is broadly in line with economic fundamentals and reserves are adequate. - To reduce external vulnerabilities Senegal needs to implement prudent fiscal and borrowing policies, increase non-price competitiveness, and reduce further external vulnerabilities. - Program status and monitoring changes: - The program is on track. The end-June 2012 fiscal deficit target was met by a substantial margin. - All structural benchmarks were met, although some with delays (electricity subsidies and tax reform). - Preliminary data for end-September suggest all indicative and structural targets met except the ceiling on budgetary float, which was missed by 0.01 percent of GDP. - Proposed program monitoring changes: - Revise the end-2012 fiscal deficit assessment criterion downward to 5.9 percent of GDP. - New fiscal targets for end-June 2013 and end-2013 proposed. - Reschedule structural benchmark on preparing a plan for restructuring agencies from end-2012 to end-July 2013. - Include new structural benchmarks in debt management, tax and customs reform, public investment appraisal, and transparency. - Authorities plan to use remaining space for nonconcessional borrowing (US$200 million) and propose broadening scope of investment expenditures financeable this way to road infrastructure, and urban water and sanitation; use of such financing would close the financing gap in 2013. ### Staff appraisal and policy recommendations - Fiscal policy: - Authorities’ objective of keeping the fiscal deficit below 6 percent of GDP in 2012 and below 5 percent of GDP in 2013 is adequately ambitious. - Debt sustainability considerations call for further reduction of the fiscal deficit and strengthening of debt management in the medium term. - Reducing the fiscal deficit while addressing social and development needs will require improving public spending efficiency, streamlining agencies, and more cost-effective support to vulnerable populations. - Staff welcomes the authorities’ intention to phase out costly and poorly targeted food and fuel price subsidies and to broaden and improve social safety nets. - Streamlining efforts will need to be sustained over several years and will require strong political leadership and good administrative capacity. - Structural reforms and growth: - Main medium-term challenge: move to higher, sustainable, and inclusive growth. - Government role: provide critical infrastructure and implement reforms to improve the business environment. - Staff urges authorities to finalize and implement as soon as possible their strategy on new energy investments and restructuring SENELEC. - Staff urges acceleration of implementation of the financial sector development strategy. - Risks: - Main domestic risks: delays in reforming the energy sector and difficulties reforming the state, which would affect growth and fiscal sustainability. - External risks: uncertainty about world economic prospects. - External vulnerabilities are manageable but could be reduced by implementing prudent fiscal and borrowing policies and increasing non-price competitiveness. *Source: _cr12337 - 21. Staff underscored that with an external environment less supportive than before the* ### 39. Staff recommends completion of the fourth PSI review. The program is on track and the ### _cr12337 - 39. Staff recommends completion of the fourth PSI review. The program is on track and the ### Program assessment and IMF timing - Staff recommends completion of the fourth PSI review. - The program is on track and the authorities’ policies for the coming period are fully consistent with the objectives of the program. - It is proposed that the next Article IV consultation take place on the standard 24–month cycle for program countries. ### Key macroeconomic projections and indicators (selected series as presented) - GDP at constant prices: 2.63.93.74.34.85.05.15.2 - Of which: nonagriculture GDP: 4.83.22.94.04.85.15.25.3 - GDP deflator: 4.32.22.22.42.42.52.42.5 - Consumer prices, annual average: 3.42.51.51.61.81.81.81.8 - Consumer prices, end of period: 2.72.21.61.81.81.81.81.8 ### External sector (selected series) - Exports, f.o.b. (CFA francs): 7.13.24.46.93.65.48.49.2 - Imports, f.o.b. (CFA francs): 8.99.09.54.23.43.36.17.0 - Export volume: -2.70.4-1.04.44.95.56.16.4 - Import volume: 4.34.73.43.24.24.44.54.8 - Terms of trade ("–" = deterioration): 5.6-0.4-0.41.7-0.70.70.60.5 - External current account balance, including current official transfers: -6.1-8.3-7.6-7.1-6.7-6.3-5.9-5.7 (percent of GDP) - External current account balance, excluding current official transfers: -6.8-8.9-8.4-7.8-7.4-7.0-6.5-6.3 (percent of GDP) - Gross official reserves (imputed reserves, billions of US$): 2.01.91.91.91.92.02.12.2 - WAEMU gross official reserves (billions of US$): 15.0 ### Fiscal accounts and public finances (selected series) - Revenue (percent of GDP): 20.220.720.920.820.920.920.620.7 - Grants (percent of GDP): 2.22.72.92.72.72.72.62.6 - Total expenditure and net lending (percent of GDP): 29.029.829.728.427.927.526.926.7 - Overall fiscal surplus (+) or deficit (–), payment order basis, excluding grants: -8.9-9.1-8.8-7.6-7.0-6.6-6.3-6.0 - Overall fiscal surplus (+) or deficit (–), payment order basis, including grants: -6.7-6.4-5.9-4.9-4.3-3.9-3.7-3.5 - Primary fiscal balance ¹: -5.2-4.9-4.3-3.1-2.7-2.4-2.1-1.9 - Gross domestic investment: 28.730.830.330.130.230.530.530.5 - Gross domestic savings:12.512.812.813.514.315.516.416.9 - Total public debt:40.044.945.046.848.148.749.049.0 - Central government domestic debt:11.312.212.312.212.712.913.012.8 - External public debt:28.832.632.734.635.435.836.136.2 - External public debt service, percent of exports:14.07.47.37.66.87.47.27.0 - External public debt service, percent of government revenue:17.28.78.48.77.58.18.07.7 Notes: - ¹ Total revenue and grants minus total expenditure and net lending, excluding interest expenditure. ### Balance of payments highlights (selected series) - Current account (CFAF billions): -415-601-546-551-556-564-567-585 - Balance on goods: -1,055-1,241-1,215-1,232-1,272-1,286-1,331-1,391 - Exports, f.o.b.: 1,1481,2181,1991,2821,3271,3991,5171,656 - Imports, f.o.b.: -2,203-2,459-2,414-2,514-2,599-2,685-2,847-3,047 - Services and incomes (net): -134-138-126-122-110-123-100-79 - Unrequited current transfers (net): 774778795803825845864885 - Capital and financial account: 345582409533561594608635 - Financial account (selected): 226399191361280355401417 - Overall balance: -70-19-137-185304150 ### Monetary and financial sector (selected) - Net foreign assets: 988931930812812 - Net domestic assets: 1,5521,7811,9872,0622,273 - Broad money:2,5402,7112,9172,8743,085 - Broad money (annual change): 14.16.77.56.07.4 - Credit to the economy (percentage growth): 10.418.87.410.67.6 - Credit to the economy/GDP (percent):25.928.728.930.030.2 - Capital adequacy, banking sector (selected): Capital to risk-weighted assets 12.913.513.816.318.016.016.716.9 - Gross NPLs to total loans (selected): 16.818.617.418.720.216.214.817.5 - Provisions to NPLs (selected): 52.053.851.553.154.954.043.055.4 ### Fiscal and program monitoring (assessment criteria and targets, selected) - Floor on the overall fiscal balance (CFAF billions) for selected dates: -427 -455 not met; -102 -70 met; -213 -181 -102 met; 347-425 - Ceiling on contracting or guaranteeing of new nonconcessional external debt by the government (US$ millions): 500 300 met / 500 300 met / 500...300 met / 500500 - Ceiling on the amount of the budgetary float: 50 50 met / 50 49 met / 50...40 met / 50 51 not met / 50 - Indicative target: Floor on social expenditure (percent of total spending): 35 37 met ... met 35 ... 35 met ... 35 ### Medium-term outlook (qualitative points as presented in figures) - Growth expected to be driven by services, the energy sector and construction related to investment projects. - Inflation projected to return to historical trends. - Current account deficit projected to decrease in the medium term and be financed largely by public flows, with continued dependence on foreign financial resources. - Fiscal deficit projected to decline in the medium term, reflecting mostly expenditure control. *Sources: Senegalese authorities; and IMF staff estimates and projections.* ### ANNEX I. ELECTRICITY SUBSIDIES IN SENEGAL ### ANNEX I. ELECTRICITY SUBSIDIES IN SENEGAL ### Power sector: current challenges - The sector relies heavily on oil imports for power generation; only about 10 percent of available electricity supply is purchased from regional hydropower. - Primary causes of sector weakness: increasing oil prices, tariffs set below full cost recovery, lack of proper maintenance, and delays in capacity investment. - SENELEC has had a large structural operating deficit over recent years; despite significant budgetary transfers, its net income has been negative since 2005 (except in 2009). - The situation culminated in a major power crisis in 2010–11, with regular power outages. An emergency plan (“Takkal”) was put in place in 2011. Key historical aggregate indicators (selected) - Total power supply (GWh) 2005–2011: 2,171; 2,192; 2,306; 2,400; 2,489; 2,618; 2,559. - Electricity sales (percent of supply): 79; 79; 77; 78; 79; 79; 80. - Electricity losses (percent of supply): 21; 21; 23; 22; 21; 21; 20. - Average tariff (sales receipts per kWh): 799; 900; 1,011; 1,121; 1,318; 1,131; 1,191 (CFA/kWh). - Average Tariff (Compensation incl., per kWh): 941; 1,091; 1,221; 1,441; 1,331; 1,321; 1,169 (CFA/kWh). - Average operating cost (costs per kWh generated and available after normative losses): 971; 1,291; 1,121; 1,261; 1,101; 1,301; 1,147 (CFA/kWh). - Average cost (per kWh): 1,131; 1,481; 1,271; 1,411; 1,271; 1,481; 1,666 (CFA/kWh). - Fuel costs (SENELEC only): 497; 767; 671; 057?; 111; 1163? (source table contains fuel costs row with values as presented in source). - Operating subsidies received (CFA billion): 26; 33; 37; 60; 40; 28; 103. - Operating results (Compensation & subsidies excluded, CFA billion): -33; -56; -40; -61; -27; -80; -100. - Operating results (with subsidies, CFA billion): -7; -23; -3; -11; 3; -5; 24. - Net results (CFA billion): -4; -34; -6; -76; -55; -13 (years as in source). Note: The sector data above are presented exactly as in the source table for 2005–2011. ### Tariff gap and quasi-fiscal costs - Tariff-setting framework elements: - (i) formula to determine maximum revenue to cover operating and capital costs and reasonable profits; - (ii) conditions triggering tariff adjustment; - (iii) compensation mechanism from the budget when tariff adjustments are not allowed; - (iv) periods for revising the formula, tariff conditions, and paying tariff compensation. - In practice tariffs have not allowed cost recovery and required substantial budgetary compensation. - Compensation mechanism flaws (overly optimistic assumptions on future technologies) led to insufficient compensation and losses. - In July 2011 the tariff formula was revised; 2011 tariff compensation estimate revised from an initial CFAF 45 billion to about CFAF 96 billion. - The tariff in 2011 was on average about 40 percent below the level suggested by the CRSE formula. - Collection of billed electricity units reportedly close to 100 percent; losses between production and billing about 20 percent (well above efficient systems’ technical losses <10 percent). - Total losses (difference between cost of units supplied to grid and amounts recovered) in 2011: estimated CFAF 141 billion (2.1 percent of GDP). - The tariff gap (as measured by the formula) made up about two thirds of this amount. - The remainder corresponds to “unaccounted” losses reflecting SENELEC inefficiencies. - The losses not compensated through the formula are ultimately borne by the taxpayer because SENELEC is government-owned. - Main factors affecting electricity subsidies (absent tariff changes or efficiency gains): international oil prices, electricity consumption, and technology. - If oil prices remain high, electricity subsidies will remain large in 2012 and decline only gradually unless more efficient production units are introduced (natural gas, hydropower, or coal-fired plants). Table of quasi-fiscal costs and liabilities (CFA billion, 2005–2011) — as presented in source: - Total quasi-fiscal costs: 85; 133; 83; 95; 67; 106; 141. - Unaccounted losses: 25; 34; 37; 42; 39; 45; 45. - Underpricing (Estimated tariff gaps): 59; 100; 46; 53; 28; 61; 97. - Subsidies transfers/received: 26; 86; 37; 60; 40; 28; 96. - SENELEC liabilities (stock): 149; 248; 252; 312; 336; 402; 385. - Financial liabilities: 87; 110; 121; 141; 149; 164; 128. - Liabilities to suppliers: 62; 138; 131; 171; 187; 239; 257. Quasi-fiscal costs and components as percent of GDP (2005–2011) — as presented in source: - Total quasi-fiscal costs (percent of GDP): 1.8; 2.7; 1.5; 1.6; 1.1; 1.7; 2.1. - Unaccounted losses (percent of GDP): 0.6; 0.7; 0.7; 0.7; 0.6; 0.7; 0.7. - Underpricing (percent of GDP): 1.3; 2.0; 0.9; 0.9; 0.5; 1.0; 1.4. - Subsidies transfers/received (percent of GDP): 0.6; 1.8; 0.7; 1.0; 0.7; 0.4; 1.4. - SENELEC liabilities (stock, percent of GDP): 3.5; 5.4; 5.1; 5.8; 5.6; 6.7; 6.0. - Financial liabilities (percent of GDP): 1.9; 2.2; 2.2; 2.4; 2.5; 2.6; 1.9. - Liabilities to suppliers (percent of GDP): 1.3; 2.8; 2.4; 2.9; 3.1; 3.7; 3.8. Other tariff adjustment history (as presented in source): - Recent tariff adjustments: (i) a 6 percent increase in October 2007; (ii) a 17 percent increase and a new tariff structure in August 2008; (iii) a 12 percent reduction in January 2009; followed by (iv) an increase of 8 percent in July 2009. ### Distributional effects of electricity subsidies - Subsidies are poorly targeted: - Many poor households are not connected to the power grid. Based on 2005–2006 data, all indicators on electricity consumption increase with household income. - Connection and access rates in rural areas were estimated at 15 percent (connection) and 39 percent (access). - Even when connected, poor households are less likely to connect because of connection fees. - World Bank and Fund analyses indicate regressivity: - World Bank analysis suggests only 12.5 percent of the subsidies implicit to the tariff structure benefited the poor. - IMF analysis (Senegal Selected issues, 2008) concluded that the 22 percent tariff increase during 2005-2007 had a very limited effect on the welfare of poor households in rural areas. - Subsidies distort prices and create inefficient allocation incentives: lower tariffs encourage higher electricity consumption by households and businesses. - Subsidies divert resources from pro-poor and priority spending: - Cumulative transfers received by SENELEC over the last five years amounted to about CFAF 400 billion — nearly equivalent to resources needed for the construction of coal-fired plants that would increase production capacity by more than 50 percent. - Annual transfers to SENELEC were comparable to, or higher than, resources allocated for capital spending in the health or education sector (see source Fig. 3). Policy implications and priorities (as presented or implied in source) - Finalize the energy sector strategy and implement investments in new production units (natural gas, hydropower, coal-fired plants) expeditiously, as they will take a few years to come on stream and reduce electricity costs. - Improve the tariff compensation system to provide a fuller picture of sector losses, including revising assumptions fixed for three years and addressing technical and non-technical losses. - Reduce unaccounted losses and improve SENELEC efficiency to lower quasi-fiscal costs borne by the taxpayer. - Reconsider subsidy design given poor targeting; explore better-targeted measures to protect low-income and vulnerable households while reducing fiscal burden. *Source: ANNEX I. ELECTRICITY SUBSIDIES IN SENEGAL (IMF staff note; data and figures as presented in the source).* ### 11. The scope and coverage of the existing social safety nets in Senegal is limited, and ### _cr12337 - 11. The scope and coverage of the existing social safety nets in Senegal is limited, and ### Scope and coverage of social safety nets - Senegal has two conditional cash transfer programs: for orphaned children and those affected by HIV and children in the poorest households. - Senegal has a noncontributory old-age pension, which in practice reaches only a very small and rapidly declining number of beneficiaries. - Most interventions are small and temporary. ### Policies to increase inclusiveness of growth - Sustained overall economic growth is a precondition for further poverty reduction. - Berg and Ostry (2011) argue that longer growth spells are robustly associated with more equality in the income distribution. - Affandi and Peiris (2011) showed that growth is in general pro-poor as it leads to significant declines in poverty across economies and time periods. - Senegal’s experience seems consistent with this cross-country evidence. - Distributional dimension of growth requires special attention. - An increase in inequality may offset and even exceed the beneficial impact on poverty reduction of an increase in income. - Increasing farm productivity and broadening rural job opportunities is important to address rural poverty. - Well-designed public policies are important for promoting inclusiveness. - Recommendations of the 2008 Poverty and Social Impact Analysis (PSIA) for Senegal remain broadly valid. - Short-term protection of poorer households against food and fuel price increases could be achieved at lower budgetary cost and more effectively by redirecting resources to better-targeted measures, including: - targeting poor groups through measures such as school lunches and public works programs; - better-targeting tariffs for small quantities of electricity to protect some of the urban poor. - In the medium term, a well-targeted and conditional cash transfer system is the best option for assistance for the poorest. - Experience of other countries in the region suggests that a minimum social safety net can be provided more effectively at a relatively low cost. Example: in Burkina Faso, the World Bank estimates that a basic social safety net could be set up at a cost of around 1.5 percent of GDP. - Improving access to financial services would also increase growth inclusiveness in Senegal. - Claessens (2005) found that financial development generally increases incomes of the poorest households, whereas unequal access to financial markets can reduce it by impeding investments in human and physical capital. ### Growth performance over the past 20 years — key findings - Three growth periods identified: - Early 1990s: poor performance before the 1994 CFA franc devaluation. - 1995–2005: strong growth, with growth averaging 4.5 percent; volatility due to agriculture output. - 2006–2011: growth decreased to an average of 3.3 percent due to exogenous shocks (food and fuel global prices, global financial and economic crisis, electricity sector crisis, drought in the Sahel). - Senegal’s growth was lower than that of fast-growing SSA countries (Cape Verde, Ethiopia, Rwanda, Tanzania, Uganda). - Sectoral patterns: - Activity increased faster in the tertiary sector; transport and telecommunication together contributed about one percentage point to GDP growth. - Share of tertiary sector in GDP increased significantly; share of secondary sector remained about constant; primary sector share decreased. - Principal growth drivers: - Growth driven mainly by public investment and remittances-fueled private consumption. - Remittances grew by more than 20 percent per year between 1995 and 2005 and became a major source of external financing. - Public investment also grew substantially between 2000 and 2005. - The export sector performed relatively poorly. - Growth accounting: - Growth has been factor-intensive; growth mostly explained by factor accumulation. - Total factor productivity (TFP) declined before the mid-1990s and again since 2006; TFP grew modestly during 1995–2005. - Possible drivers of poor productivity performance: deterioration in doing business and governance indicators; remittances invested in less growth-spurring sectors (housing, informal trade). ### Key statistics on growth, sector contributions, and accounts (preserved exactly from source) - Senegal: Real GDP growth, 1990-2011 — Annual Growth Rates and 5-Year Moving Average (chart referenced). - Table highlights (selected exact figures from tables in text): - Growth averages: 1995–2005 growth averaged 4.5 percent; 2006–2011 average 3.3 percent. - Sectoral contributions (period averages shown in source tables): - PRIMARY SECTOR contributions: 1991-94: 1.9; 1995-05: 2.9; 2006-11: 1.8. - Agriculture contributions: 1991-94: 0.6; 1995-05: 4.3; 2006-11: 1.6. - SECONDARY contributions: 1991-94: 2.8; 1995-05: 4.6; 2006-11: 3.7. - TERTIARY contributions: 1991-94: 0.7; 1995-05: 5.4; 2006-11: 4.2. - Growth accounting (1991-1994 / 1995-2005 / 2006-2011): - Real GDP Growth: 1.3 / 4.5 / 3.3. - Real per Capita Growth: -1.5 / 1.8 / 0.6. - GDP per person employed: -1.7 / 1.4 / 0.2. - Labor Force contribution: 2.1 / 2.2 / 2.2. - Capital contribution: 0.8 / 1.7 / 2.8. - TFP: -1.7 / 0.6 / -1.7. ### Medium-term growth outlook and challenges (2012–17) - Program medium-term projections assume a return to positive TFP growth. - Growth projections: 2012: 3.7 percent; 2013: 4.3 percent; average 5 percent per year over 2014–17. - Assumption: ongoing and planned reforms will improve economic efficiency and restore TFP growth to levels comparable to 1995–2005. - Growth accounting projections (Table 5): - 2012 Real GDP Growth: 3.7; 2013: 4.3; 2014-17: 5.0. - Real per Capita Growth: 2012: 1.0; 2013: 1.6; 2014-17: 2.3. - Labor Force: 2.1 / 2.1 / 2.1. - Capital: 2.1 / 2.0 / 2.0. - TFP: -0.5 / 0.1 / 0.9. - Identified obstacles and priority sectors: - Agriculture and agribusiness: potential in horticulture for exports, rice and cash crops, livestock; modernization needed due to small family farms, rainfall dependence, traditional techniques; obstacles include access to land and credit. - Tourism: potential for business and cultural tourism; Senegal scores well on arrivals but poorly on spending per tourist; loss of market share in Africa over last 15 years needs reversing. - Infrastructure: ICT progress noted; substantial transport and energy challenges remain. Large projects (Blaise Diagne International Airport, Dakar-AIBD highway, Diamniadio Economic Special Integrated Zone) aim to reduce concentration in Dakar and improve access. High cost of electricity noted among highest in SSA. - Business climate: Senegal ranked 154th out of 183 countries in 2012 Doing Business report; reform needed on paying taxes, registering properties, protecting investors, enforcing contracts, dealing with construction permits. ### Annex IV — Implications of public investment scaling up - Increased public investment would have a positive impact on growth but could lead to debt sustainability problems if financed mainly by nonconcessional borrowing. - Public investment as share of GDP rose from 5½ percent to nearly 11 percent in 2011. - Scenario analyzed: scaling up public investment to 15 percent of GDP in 2013 with gradual decrease thereafter (assumed in model exercise). - Model used: open-economy dynamic general equilibrium (DGE) model developed by Buffie et al. (2012). - Key model insight: composition of financing (concessional vs nonconcessional borrowing) critically affects debt dynamics and sustainability. ### Model calibration — main parameters (preserved exactly) - Absorptive capacity parameter: 11 (IMF staff) - Initial return on infrastructure investment: 0.313 (Dessus and Herrera (1996)) - Efficiency of public investment: 0.70 (Briceño-Garmendia et al. (2011)) - User fees for infrastructure services (% of recurrent costs): 0.83 (IMF staff) - Value added in non-traded sector: 0.450 (Authorities) - Capital's share in value added in the traded sector: 0.400 (Authorities) - Capital's share in value added in the non-traded sector: 0.550 (Authorities) - Cost share of non-traded inputs in the production of capital: 0.500 (Authorities) - Depreciation rate: 0.10 (Authorities) - Trend per capita growth rate: 0.017 (Authorities) - Initial real interest rate on domestic debt: 0.035 (IMF staff) - Initial real interest rate on private external debt: 0.035 (IMF staff) - Real interest rate on concessional loans: 0.000 (IMF staff) - Initial real interest rate on public commercial loans: 0.065 (IMF staff) - Initial public domestic debt-to-GDP ratio: 0.10 (IMF staff) - Initial public external concessional debt-to-GDP ratio: 0.192 (IMF staff) - Initial public external commercial debt-to-GDP ratio: 0.103 (IMF staff) - Initial private external debt-to-GDP ratio: 0.200 (IMF staff) - Grants-to-GDP ratio: 0.026 (Authorities) - Remittances-to-GDP ratio: 0.094 (Authorities) - Initial ratio of infrastructure investment to GDP: 0.105 (IMF staff) - Initial consumption VAT: 0.18 (Authorities and IMF staff) - Labor ratio of non-savers to savers: 4.3 (Authorities and IMF staff) *International Monetary Fund — content unit _cr12337* ### 4. Absorptive capacity constraints are significant in Senegal. When absorptive capacity ### 4. Absorptive capacity constraints are significant in Senegal. When absorptive capacity ### Absorptive capacity and model parameters - Cost overruns: public investment projects in Senegal are assumed to incur cost overruns equal to 74 percent of the size of the initial investment. This estimate is based on data provided by the authorities on initial estimates and final costs of large infrastructure projects in Senegal. - Absorptive capacity parameter: to arrive at costs overruns equal to 74 percent of initial investment, taking into account the projected path of investment, the parameter that controls absorptive capacity constraints was set to 11. - Gross return on infrastructure investment: assumed to be 31.3 percent. This assumption is taken from work by Dessus and Herrera (1996). - Investment efficiency parameter: each dollar of public investment in Senegal increases the stock of productive infrastructure by 70 cents (efficiency = 0.70). This assumption is based on Briceño-Garmendia et al. (2011) and compares with a benchmark value of 0.60 used by Buffie et al. for sub-Saharan Africa. - User fees parameter: governments recoup a significant share of recurrent costs; the estimate for Senegal is 0.83. Specific sectoral coverage: tariffs in the power and water sectors cover 72 and 91 percent of recurrent costs, respectively; tolls on the Dakar-Diamniadio toll road point to 85 percent of recurrent costs covered by user fees. The 0.83 estimate is based on Briceño-Garmendia et al. (2011) and IMF staff estimates and compares to a sub-Saharan African benchmark value of 0.50 used by Buffie et al. - Steady-state calibration: steady-state ratios and other parameters were set to either their average over the past 10 years or the level at end-2011. Example: the steady state value for investment spending was set to 9.5 percent of GDP, equal to the average level of public investment to GDP over the last ten years. ### Baseline scenario (mixed financing: concessional, nonconcessional external, domestic borrowing) - Financing mix: higher public investment financed through a combination of concessional and nonconcessional external borrowing and domestic borrowing. - Concessional financing: supply assumed finite and decreasing over time (exogenous). - Nonconcessional financing: assumed to gradually increase (exogenous). - Domestic financing: generated endogenously by the model to cover remaining gap; domestic borrowing in this case also includes borrowing from investors in the WAEMU area. - Public debt trajectory: public debt rises to 60 percent by the 10th year of the projection period before starting to decline. - Growth impact: higher public investment increases permanently per capita income; the impact on growth is positive but limited by some crowding out of private investment from domestic borrowing. ### Alternative scenarios and results - Fiscal adjustment only (no borrowing; finance via higher consumption taxes): - Outcome: economic growth would accelerate and the ratio of public debt to GDP would decrease marginally. - Tax implication: consumption tax rate would need to jump from 18 percent to 33 percent and remain at elevated levels over the medium term. - Assessment: such a large and persistent increase in the consumption tax rate does not seem feasible. - Concessional borrowing only (unlimited concessional external financing, no fiscal adjustment): - Outcome: generally favorable for growth and debt sustainability. - Public debt trajectory: public debt to GDP would initially rise, reaching 57 percent by the eighth year of the projection period, but trend downward thereafter. - Growth: boost to growth greater than in the fiscal adjustment and baseline scenarios because consumption and private investment are not impacted by higher taxes or domestic borrowing. - Caveat: assumption of unlimited access to external concessional financing may be unrealistic given recent history that suggests concessional resources are limited and will need to be supplemented. - Nonconcessional borrowing only (external nonconcessional borrowing, no fiscal adjustment): - Outcome: positive impact on growth due to higher public investment, private investment, and consumption. - Debt sustainability concern: higher cost of borrowing results in a rapid and continuous increase in the debt ratio. - Public debt trajectory: ratio of public debt to GDP reaches 68 percent by the end of the projection period. - Assumption note: nonconcessional borrowing is assumed to carry a real interest rate of 6.5 percent, equal to a nominal rate of 9 percent (close to the initial yield on the 2011 Eurobond) minus a 2.5 percent world inflation rate. ### Conclusion and policy implications - Main conclusion: a modest scaling up of public investment would benefit growth without jeopardizing debt sustainability, provided it was not financed exclusively through nonconcessional borrowing. - Best financing option (conditional): financing public investment through concessional borrowing would yield more favorable results, assuming such financing was available. - Critical structural conditions: outcomes depend critically on absorptive capacity, the return on infrastructure investment, investment efficiency, and user fees. - Policy recommendation: by improving the structural environment for public investment (raising absorptive capacity, enhancing investment efficiency, increasing user fee recovery, and ensuring high returns on infrastructure investment), Senegal could pursue a more ambitious investment program without threatening debt sustainability. - Caution: a worsening of the structural environment would call for a more cautious approach to scaling up public investment. *Source: Excerpt from IMF staff analysis on Senegal (section on absorptive capacity, investment parameters, baseline and alternative financing scenarios, and conclusions).* ### 11. Foreign exchange reserve coverage ### _cr12337 - 11. Foreign exchange reserve coverage ### Foreign exchange reserve coverage — key findings and assessment - Reserves at end-2011: CFAF 7,445 billion. - Reserve coverage metrics (WAEMU, pooled reserves): - More than 6 months of imports. - 60 percent of broad money. - Close to 100 percent of short-term domestic liabilities. - The peg to the euro is guaranteed by the French Treasury—an important factor that mitigates risk. - Assessment: The level of foreign exchange reserves of the WAEMU is adequate. ### External position — summary from the External Position Assessment Matrix - Current account - Background: Domestic saving rate is low; investment needs are high. Large remittances coexist with high current account deficits, which are covered to a large extent by aid. - Recent evolution: The deficit has increased significantly in the past two years, reflecting exogenous factors (e.g., oil prices, drought) and higher fiscal deficits. - Assessment: The current account deficit needs to decrease in the next few years to remain financeable and reduce dependency on aid; fiscal consolidation in advanced economies could reduce aid and fiscal consolidation domestically will play an important role. - Overall assessment: The external position has weakened recently, and is weaker than desirable, even though risks appear manageable at this juncture. Low savings relative to substantial investment needs imply substantial current account deficits. External liabilities are significant and growing. - Real exchange rate - Background: Senegal is part of the WAEMU. The CFA franc is pegged to the euro, which depreciated significantly in recent months. - Assessment: The three CGER methods do not suggest a significant misalignment (results based on end-2011 data ranging from -8 to +4 percent). While the level of the real exchange rate is not an issue, competitiveness could increase through structural reforms to improve the business environment. - Capital account: flows and measures - Background: Official flows (both program and project) have accounted for a significant share of financing in recent years. FDI and portfolio investment are less significant. The overall balance of payments recorded a deficit last year, and is expected to record another one this year. - Assessment: The sustainability of capital account flows depends mainly on donor and market sentiment toward Senegal’s government, which depends on forceful fiscal consolidation and implementation of structural reforms to boost growth. - Foreign asset and liability position - Background: Gross external debt is relatively low at 30 percent of GDP but has increased substantially in the past few years. It consists mainly of concessional loans from official creditors. - Assessment: The net IIP position at -30 percent of GDP in 2012 currently presents limited risk, but the DSA shows that fiscal consolidation is required to stabilize it. ### Macroeconomic and fiscal context (selected figures and projections) - GDP growth: - 2011: 2.6 percent. - 2012 projected (revised): 3.7 percent (revised from 3.9 percent). - 2013 projection: 4.3 percent. - Inflation: - First six months of 2012: 1.5 percent. - 2013 expected: around 2 percent. - Trade and financial flows: - Imports (first half of 2012): increase of approximately 34 percent (mainly foodstuffs and petroleum products). - Credit to the economy (one year): grew almost 17 percent. - Money supply expansion (one year): 5 percent. - External balances: - Current account deficit: high and expected to remain high because of investment-related imports in energy and mining sectors; overall balance of payments expected to record a slight deficit in 2013. ### Fiscal targets and policy commitments - Fiscal deficit targets and proposals: - Target for 2012: below 6 percent of GDP (government requests modifying the assessment criterion accordingly). - Budget proposal for 2013: deficit at 4.9 percent of GDP. - Government intent for 2013 (as indicated in policy statement): reduce budget deficit to less than 5 percent of GDP. - Earlier program target cited: 6.4 percent of GDP (explained as not met due to delays in energy investments and revenue developments). - Policy stance: Commitment to control public spending, pursue fiscal consolidation, and limit increases in public debt while financing priority spending. ### Risks and potential shocks - External downside risks: - Resurgence of the euro zone crisis and global stagnation. - Rising oil prices. - Food security risks (rising international prices of cereals and the threat of locusts). - Spreading instability from Mali. - Domestic downside risks: - Flooding driven by poor sanitation. - Delays in implementation of energy sector reforms. - Possible resistance to government reform or to improvements in the quality of public expenditure, which could adversely affect fiscal control. ### Policy responses, structural reforms, and implementation actions - Fiscal consolidation and prudent borrowing to reduce external vulnerabilities. - Structural reforms to boost growth, increase competitiveness, and reduce external vulnerabilities. - Specific reforms and implementation progress (status as of late 2012): - Action plan on subsidies for electricity consumers: prepared and adopted in October 2012. - Operational and financial restructuring plan for SENELEC: prepared and adopted in November 2012 for immediate implementation. - Medium-term debt management strategy: prepared and finalized by September 30, 2012. - New general tax code: finalized and submitted to parliament in November 2012. - Draft law on transparency: adopted at a meeting of the Council of Ministers and submitted to parliament; decree on the transposition of the WAEMU directive on budget nomenclature signed. - Measures to reduce the cost of running government and streamline public institutions: - Abolition of the Senate. - Suspension of most mobile telephone lines on May 1, 2012, with new subscriptions on a case-by-case basis and usage ceilings. - Physical audit of landlines by the General Inspectorate of Finance. - Identification and monitoring of the hundred largest government water consumers to achieve savings. - Appointment of focal points for monitoring permanent expenditures. - Public administration and social measures: - Performance-based university financing project: of five performance contracts envisaged, three signed and two to be signed shortly; findings expected by end-December 2012. - Health sector: gradual introduction and wider use of performance contracts for hospitals by end-2014; Grand Yoff General Hospital prioritized for 2012. - Physical and biometric audit of government employees: in progress, to be completed by end-June 2013. - New payroll management software (SIGFIP integration): scheduled for end-August 2013 (parallel use period with existing system). - Social safety net: plans to extend social safety net, guarantee minimum income for most vulnerable families, phase out generalized subsidies for energy and food prices, and establish mechanisms (direct food subsidy and/or family subsidy allowance) with targeted focus on rural and suburban households. - Autonomous Fund for Universal Social Protection: to be implemented as of 2013 to help finance Universal Health Coverage and social protection extension to informal sector workers. *Source: _cr12337 - 11. Foreign exchange reserve coverage (excerpts).* ### 15. The initial medium-term debt strategy (MTDS) was recently prepared by the new ### 15. The initial medium-term debt strategy (MTDS) was recently prepared by the new ### Medium-Term Debt Strategy (MTDS) and debt management - The MTDS was prepared by the new public debt directorate, in collaboration with the full range of entities involved in debt issues. - On the basis of an in-depth diagnostic assessment, the strategy recommends reprofiling the debt, while gradually reducing the proportion of short-term instruments in domestic debt. - The government intends to pursue this course of action carefully, based on regional market circumstances. - Reliance on concessional borrowing will have priority, in accordance with the recommendations set forth in the borrowing strategy. - In light of financing constraints, the government intends in 2013 to use the remainder of the program envelope for nonconcessional borrowing ($200 million), as well as the envelope for semiconcessional borrowing, to finance infrastructure investment. - The debt database will be completely centralized by end-2012. ### Raise Revenue to Create More Fiscal Space for Financing Priority Spending - The new tax code has been submitted to Parliament and is expected to enter into force on January 1, 2013. - Tax reforms were carried out transparently in a fully participatory approach, including private sector and labor union contributions to the technical work. - Reforms aim to produce a tax system that is more simple, more equitable, and more efficient. - A more favorable general regime will be put in place instead of the existing system, including inter alia a substantial rollback of tax exemption regimes, almost all of which will be incorporated into the new framework. - VAT reforms: - The new code is designed to make the system more neutral and more efficient. - Plans to phase out the prepayment system according to a three-step timetable: - as of January 1, 2013 for taxpayers enrolled in the large enterprises center (CGE), - as of January 1, 2014 for taxpayers listed at the medium enterprises center (CME), - and as of January 1, 2014 for those taxpayers covered by other tax service centers. - The system for refunding VAT credits is being reformed to enhance flexibility (shorter processing times for “citizen” enterprises, those engaging primarily in exports or those carrying out externally-funded contracts or other agreements), and practical details (refund by check or bank transfer). - Taxation system for individuals will be reformed and simplified. ### Tax administration modernization - Implementation of the tax administration modernization plan is continuing and is being regularly monitored by the General Directorate of Taxes and Government Property (DGID). - The CME became operational in July 2012. - Further structural reforms: reorganization of DGID field offices to institutionalize the distinction between functional and operational directorates (interregional directorates). - A steering committee has been set up; DGID on track to create planned services in December 2012. - Computerization/timing for e-filing and e-payment: - Large enterprises directorate: June 2013. - Other Dakar centers: December 2013. - Regions outside Dakar: December 2014. ### Customs reforms and DGID–DGD cooperation - The General Directorate of Customs (DGD) is implementing the reforms in the 2011-2013 Strategic Plan and commitments in the performance contract with the Ministry of Economy and Finance. - Cooperation strengthened via memorandum of understanding on exchange of information signed August 29, 2012, complementing the obligation to use NINEA in customs operations. - Action plan implemented to improve mobilization, collection, and support of customs revenues generated by current imports; focuses on collection of suspended VAT, compliance with bonded warehouse storage periods, and control of economic regimes. - Proposed reform Decree 83–504 of May 17, 1983 on duty-free entry conditions has made progress and is incorporated into the Customs Code reform. - Technical finalization of Customs Code scheduled for December 2012. - Submission to parliament expected by end-June 2013 (new structural benchmark). - Procedure joint with the DGID in the General Tax Code is expected to reduce revenue losses associated with exemptions. ### Strengthen Public Financial Management and Governance - Transposition of the new WAEMU directives on government finance is progressing; process expected to be completed by end-December 2012 with adoption of the draft law related to the code of transparency in fiscal management. - Decree 2012–673 of July 4, 2012 establishes government budget nomenclature and sets forth annexes for ministries’ programs and allocations for constitutional institutions. - Prior actions to initiate the new regulatory framework include a learning period doing certain operations on a test basis with no legal impact to assess innovations and identify required changes. - 2013 deliverables (guidance and learning): - Draft program budgets and multiyear expenditure programming documents for ministries in charge of ecology and justice. - A 2013–2015 Multiyear Budgetary and Economic Programming Paper. - World Bank project in support of fiscal reforms includes the following studies/activities scheduled for 2012: - (i) diagnostic assessment of institutional and legal changes from new WAEMU directives on government finance; - (ii) studies on feasibility of decentralizing the expenditure authorization process and evolving role of supervision over government financial operations; - (iii) communication and outreach on the new public management implications for policymakers; - (iv) training for financial and sectoral authorities, and nonstate actors regarding strengthening citizen control of public affairs; - (v) customization of IT applications in budget management (SIGFIP) and accounting (ASTER). ### PFM improvements and audit/accountability - Draft budget execution law for 2011 will be submitted to the National Assembly during the first regular session that began in October 2012. - Audit Court will address delays in review of budget execution statements of public accountants dating back to 2002. - Audit Court will ensure executing agencies and similar entities regularly file financial statements or be subject to penalties. - Government has submitted new draft organic law on the Audit Court to the National Assembly. ### Supervision of agencies and parastatals - Transfers centralized in 2011 with deposit accounts on the books of the Public Treasury. - Financial and accounting framework set up; government accounting officers appointed; subsidies contingent on quarterly cash-flow plans. - Assessment commission conducted a comprehensive survey of agencies and similar entities; initial decision to abolish 8 agencies in 2012 is being carried out. - In-depth assessment study by national commission with World Bank assistance may not be completed until June 2013; government action plan to be adopted by end-July 2013. - Immediate measure: government intends to cap remuneration of general directors to reduce agency operating costs. - Financial supervision and governance of the parastatal sector by the Ministry of Economy and Finance will be strengthened. ### Transparency in real estate transactions and government property management - By end-January 2013, government will publish on a publicly accessible website all information relating to the number of files involving final property sales and transfers from government holdings, indicating land areas sold, geographic location, and corresponding revenue received. - Restructuring of real estate holdings underway after diagnostic assessment; will lead to creation of the Directorate of Land and Government Property Affairs as of December 2012. - Urban Property Management Support Project (PAGEF) aims to computerize government property management. - DGID tasks and timing: - (i) embark upon and correctly carry out comprehensive real estate management computerization process; action plan implemented beginning January 2013; - (ii) record and track all government property revenues in SIGTAS as of June 2013; - (iii) conduct an inventory of government property to prepare the general table of government property holdings by December 2013. ### Cost-benefit analysis and investment appraisal - Cost-benefit analysis will be used more systematically in the draft budget law for 2014. - An evaluation guide is being prepared and will start to be used in early 2013. - All investment projects exceeding CFAF 10 billion to be included in the draft budget for 2014 will undergo ex ante cost-benefit assessment using the guide. - These assessments will be shared with Fund staff upon request. ### Single Treasury Account implementation - Implementation continues despite difficulties: only six banks responded to the Ministry circular requesting information on bank accounts. - Resolutions adopted to finalize the Single Treasury Account in February 2013: - (i) ensure accounting personnel at agencies transmit information on bank accounts to which they have access; - (ii) make direct contact with bank management, with assistance from the Directorate of Money and Credit. - A report on implementation status will be produced by the Parastatal Sector Directorate by end-November 2012. ### Private sector development — Energy sector - Execution of investments under the emergency plan for restructuring and reviving the energy sector has been delayed; introduction of more efficient units intended to replace leased units has been delayed; aggressive demand management component has also fallen behind. - Updated investment plan continues with power plant rehabilitation program; envisages: - installing more efficient heavy fuel power plants; - accelerating coal-fired power station projects (375 MW between 2014 and 2017); - introducing natural gas and renewable sources (solar and wind) into the energy mix. - SENELEC restructuring: - A plan for operational and financial restructuring has been prepared based on provisional 2011 financial statements. - Financial restructuring envisages strengthening equity via settlement of cross-debts and conversion of net debt into equity involving SENELEC, the government, and the Deposits and Consignations Fund, and registering government investments as investment subsidies. - Efforts to obtain debt relief for SENELEC, including rescheduling negotiations with creditors and suppliers. - Operational restructuring targets: optimization of power plants, reduction of grid losses, reduction of operating costs, combating fraud, improvements in billing, and reduction of payment delays. - A 2013–2015 performance contract between the government and SENELEC based on the restructuring plan is scheduled to take effect as of January 1, 2013. - Subsidy capping and tariff considerations: - Government intends to limit the electricity consumption subsidy to CFAF 80 billion in 2013. - At current international oil prices, capping this subsidy will assume savings of approximately CFAF 45 billion, requiring cost control at SENELEC and possible electricity tariff revisions. - Tariff adjustments under consideration for certain consumer categories, while protecting low-income households and safeguarding competitiveness. - Medium-term: introduction of more efficient production units expected to lower costs. ### Financial sector developments and reforms - Financial system deepened in recent years with no major negative impact on stability. - Micro-finance institutions improved access to financial services for households and SMEs; microfinance sector restructured after rapid development. - Identified risks and constraints: - Capacity constraints and weak supervisory mechanisms at certain decentralized financial systems; - High degree of market concentration—portfolios concentrated among a handful of borrowers, including the government; - Risks from growing interconnection of financial institutions (banks and insurance, banks and decentralized financial systems) require evaluation and possibly strengthened surveillance. - Impediments to deeper financial development include legal environment and information gaps on SMEs; national dialogue on SME access to credit produced an action plan focused on: - facilitating use of collateral; - enhancing availability of customer information; - lowering certain taxes to reduce cost of credit; - improving legal environment for dispute resolution. - Implementation of the action plan has been delayed despite achievements such as adoption of the law on leasing. - National Committee monitors constraints; WAMU authorities may accelerate assessment and implementation of banking regulation recommendations. ### Financial sector reform priorities and measures - Reforms will be accelerated to deepen the financial sector and facilitate SME and household access: - Implementation of a regulatory framework conducive to creation of private credit registers; preferred course is a regional WAEMU approach with BCEAO preparing a WAEMU-wide draft text to regulate credit bureaus. - Development of financial leasing: new general tax code will correct tax distortions adversely affecting leasing activity. - Diversification of financial products: after leasing reform, promote alternative products, particularly factoring; plan to conduct a study to identify and overcome obstacles impeding factoring development in Senegal. ### Other prerequisites for improving the business climate, governance, and competitiveness - Stronger growth requires increased private sector competitiveness and further improvement of the business climate. - Reforms introduced in recent years need fuller implementation; emphasis on training relevant authorities and simplifying administrative procedures. - Policy priorities: - Lowering production costs, particularly easier and more affordable access to land. - Reforms focusing on the status of the “entrepreneur” per the new OHADA Uniform Act, entailing gradual reforms of the informal sector and emergence of SMEs. - Computerization of the construction permit procedure (TELEDAC) to simplify and speed processing. - Quantitative targets will be set based on indicators in the Doing Business survey to boost the score in coming years. *IMF staff report content unit* ### 32. The budget trends described above led to the downward revision of the budget deficit ### 32. The budget trends described above led to the downward revision of the budget deficit ### Budget revision, timeline, and scope changes - The budget deficit target for 2012 was revised from "6.4 percent" to "5.9 percent of GDP". - It is suggested to modify the relevant assessment criterion accordingly. - Proposed changes to timetable and scope: - Quantitative assessment criteria for end-June 2013 and indicative targets for end-March 2013, end-September 2013, and end-December 2013 have been proposed. - Structural benchmarks in Table 2 of the MEFP are similarly proposed to be updated. - The benchmark on the action plan for agency restructuring is proposed to be rescheduled from "end-2012" to "end-July 2013". - It is proposed to broaden the scope of investment expenditures eligible for financing through nonconcessional borrowing to include "road infrastructure (not only the highway) and urban water and sanitation". - Timing of reviews: - The fifth review of the PSI should normally be completed by "end-June 2013". - The sixth review should be completed by "end-December 2013". ### Key quantitative assessment criteria and indicative targets (as reported) - Selected assessment criteria and status (from Table 1 excerpt for 2011–12): - Floor on the overall fiscal balance ² ³: "-427 -455 not met -102 -70 met -213 -181 -102 met 347 -425" - Ceiling on the contracting or guaranteeing of new nonconcessional external debt by the government (in US$ millions) 4: "500 300 met 500 300 met 500...300 met 500 500" - Ceiling on the amount of the budgetary float: "50 50 met 50 49 met 50...40 met 50 51 not met 50" - Ceiling on nonconcessional debt with a minimum grant element of 15 percent 4: "44 0 met 44 0 met 44...0 met 44 44" - Quarterly ceiling on the share of the value of public sector contracts signed by single tender (percent): "20 16 met 20 14 met 20 ... 11 met 20 20" - Floor on social expenditure (percent of total spending): "35 37 met ...... met 35 ... 35 met ... 35" - Memorandum items (selected figures shown exactly as in source): - Program grants: "37 37 ... 9 ...... 19 ... 13 ... 28 48" - Concessional loans: "210 175...52......105...94...157 328" - Investment in the energy sector and the autoroute 5: "66 66 ... 44 ...... 60...33...122 120" - Program projections for 2013 (from Table 2 excerpt, shown exactly): - Assessment criteria — Floor on the overall fiscal balance ² ³: "-425 -94 -188 -283 -377" - Ceiling on the contracting or guaranteeing of new nonconcessional external debt by the government (in US$ millions) 4: "500 500 500 500 500" - Ceiling on the amount of the budgetary float: "50 50 50 50 50" - Ceiling on nonconcessional debt with a minimum grant element of 15 percent 4: "44 44 44 44 44" - Indicative targets — Quarterly ceiling on the share of the value of public sector contracts signed by single tender (percent): "20 20 20 20 20" - Floor on social expenditures (percent of total spending): "35 ... 35 ... 35" - Maximum upward adjustment of the overall deficit ceiling owing to Shortfall in program grants relative to program projections: "15 15 15 15 15" - Excess in concessional loans relative to program projections: "50 50 50 50 50" - Excess in energy sector and autoroute investment relative to program projections: "50 50 50 50 50" - Memorandum items (concatenated as presented): - Program grants "48 12 24 36 39" (presented in source as "4812243639") - Concessional loans "328 821 642 462 54" (presented in source as "32882164246254") ### Structural benchmarks and status (Table 3 highlights) - Tax revenue, expenditure quality, and debt management - Operationalize the new public debt directorate — Implementation date "January 15, 2012" — Status: "Met" - Prepare a medium-term debt strategy — Implementation date "September 30, 2012" — Status: "Met" - Finalize the new general tax code and submit it to parliament — Implementation date "September 30, 2012" — Status: "Met with delay in November 2012" - Prepare evaluation guide for investment projects — Implementation date "December 31, 2012" — Status: "In progress" - Submit the new customs code to parliament — Implementation date "June 30, 2013" — Status: "New" - Public financial management consolidation - Make use of the national registration number for businesses and associations (NINEA) mandatory for customs operations — Implementation date "January 1, 2012" — Status: "Met" - Launch and complete a comprehensive survey of agencies and their missions — Implementation date "January 31, 2012" — Status: "Met" - Produce a plan for restructuring all agencies and comparable entities — Implementation date "December 31, 2012" — Status: "In progress. Reprogrammed to end-July 2013" - Finalize the Single Treasury Account — Implementation date "February 28, 2013" — Status: "In progress" - Roll out the new payroll management software — Implementation date "August 31, 2013" — Status: "New" - Use cost-benefit assessment for investment projects exceeding CFAF 10 billion to be included in the budget for 2014 — Implementation date "July 31, 2013" — Status: "New" - Private sector, governance, financial and energy sectors - Publish complete information on the Energy Sector Support Fund (FSE) and related items monthly on a specialized government website — Implementation date "July 31, 2011" — Status: "Continuous" - Finalize a study to analyze resources allocated to the microfinance sector — Implementation date "January 31, 2012" — Status: "Met" - Adopt an action plan on subsidies to electricity consumers — Implementation date "August 31, 2012" — Status: "Met with delay in October 2012" - Implement e-filing and e-payment for taxes for large enterprises — Implementation date "June 30, 2013" — Status: "New" ### Technical Memorandum of Understanding (TMU): definitions, adjusters, and reporting - Scope and purpose: - TMU dated "Dakar, November 22, 2012" defines quantitative assessment criteria, indicative targets, structural benchmarks for monitoring the PSI in 2011–2013, and establishes terms/time frame for data transmission. - Government definition: - "Government" means the central administration of the Republic of Senegal and excludes local administration, the central bank, or other public entities with autonomous legal personality not included in the government flow-of-funds table (TOFE). - Overall fiscal balance (program definition): - Definition: difference between total government revenue (revenue and grants) and total expenditure and net lending; Energy Sector Support Fund (FSE) operations are integrated in the TOFE; revenues exclude privatization receipts and sales of mobile phone licenses or other state-owned assets; government expenditure is defined on the basis of payment orders accepted by the Treasury and expenditures executed with external resources. - Example: Floor on overall fiscal balance including grants as of December 31, 2012 is "minus CFAF 425.4 billion", computed as total government revenue "CFAF 1,723.2 billion" minus total expenditure and net lending "CFAF 2,148.7 billion". - Adjustments: - Adjusted downward by budget grants shortfall up to a maximum of "CFAF 15 billion". - Adjusted downward/upward by the amount concessional loans exceed/fall short of programmed amount, up to a maximum of "CFAF 50 billion". - Reporting: provisional monthly data to Fund staff with a lag no more than "30 days"; final data within two months after provisional reporting. - Social expenditure: - Definition: spending on health, education, the environment, the judicial system, social safety nets, sanitation, and rural water supply. - Criterion set as a floor in percent relative to total spending (including the FSE) excluding capital expenditure related to extension of the autoroute and investment projects of the power sector reform plan. - Reporting: semiannual data within "two months" following the end of each period. - Budgetary float: - Definition: outstanding stock of government expenditure for which bills have been received and validated but not yet paid by the Treasury (difference between dépenses liquidées and dépenses payées). - Criterion: ceiling on the budgetary float, monitored at the end of the quarter. - Reporting: transmit SIGFIP expenditure table weekly and at the end of each month; SIGFIP table excludes delegations for regions and embassies and lists any payments without cash impact. - Spending outside normal/simplified procedures: - Criterion applies continuously to any procedure other than normal and simplified procedures; excludes spending under a supplemental appropriation order (décret d’avance) in cases of absolute urgency per Article 12 of the Organic Budget Law. - Reporting: authorities will report any such procedure with the SIGFIP table to Fund staff monthly with maximum delay of "30 days". - Government external payments arrears: - Definition: sum of payments owed and not paid on external debt contracted or guaranteed by the government. - Monitoring: continuous; authorities will promptly report any accumulation of external payments arrears. - Contracting or guaranteeing of new nonconcessional external debt: - Debt definition follows Executive Board Decision No.6230-(79/140) as revised (Decision No. 14416-(09/91)); includes loans, suppliers’ credits, and leases (present value at inception). - Debt guarantees: any explicit legal obligation of the government to service a debt in event of nonpayment. - Debt concessionality: - A debt is considered concessional if it has a grant element of at least "35 percent". - Present value calculation uses currency-specific commercial interest reference rates (CIRRs) published by OECD. - For maturity ≥ 15 years, ten-year-average CIRR used; for maturity < 15 years, six-month average CIRR used. - Margins added to CIRR averages: "0.75 percent" for repayment periods < 15 years; "1 percent" for 15–19 years; "1.15 percent" for 20–29 years; and "1.25 percent" for 30 years or more. - External debt definition: - External debt is defined as debt borrowed or serviced in a currency other than the CFA franc; this applies to debt among WAEMU countries. *International Monetary Fund — Technical Memorandum of Understanding and MEFP excerpts (Dakar, November 22, 2012).* ### 21. Debt-related assessment criteria. The relevant assessment criteria apply to the contracting ### 21. Debt-related assessment criteria. The relevant assessment criteria apply to the contracting ### Debt-related assessment criteria (scope and measurement) - Apply to contracting and guaranteeing of new nonconcessional external debt by: - the government, local governments, SENELEC, the Energy Sector Support Fund (FSE), and any other public or government-owned entity. - Apply to: - debt and commitments contracted or guaranteed for which value has not yet been received. - private debt for which official guarantees have been extended and which, therefore, constitute a contingent liability of the government. - Measured: - on a cumulative basis from the time of approval of the PSI by the Executive Board. - ACs will be monitored on a continuous basis. - No adjuster will be applied to these criteria. ### Special provisions (exceptions and ceilings) - Exemptions: the assessment criteria do not apply to: - (i) debt rescheduling transactions of debt existing at the time of the approval of the PSI; - (ii) debt contracted by the airport project company (AIBD) to finance construction of the new Dakar Airport; and - (iii) short-term external debt (maturity of less than one year) contracted by SENELEC to finance the purchase of petroleum products. - Ceilings and special accounts: - A total ceiling of US$500 million applies over the period 2011–13 for nonconcessional external debt financing to be used for investment projects discussed with Fund staff in road infrastructure, the energy sector, and urban water and sanitation. - The nonconcessional funds obtained in this way will be deposited in a special account. - The authorities will report regularly to Fund staff on the balance of this account and the use of funds. - Following the issuance of a US$500 million Eurobond in May 2011, with an exchange offer for the outstanding 2009 Eurobond, the remaining ceiling for non-concessional borrowing for 2011–13 is US$ 200 million (equivalent to the amount of the 2009 bonds actually redeemed or exchanged in 2011). - A separate ceiling equivalent to CFAF 44 billion in 2011–13 applies for untied nonconcessional external debt financing with a grant element of at least 15 percent. - Projects financed in this way are expected to meet the same economic and social profitability criteria as other capital spending. - The government will inform Fund staff in a timely manner before contracting any debt of this type and will provide sufficient information ahead of time to verify the degree of concessionality. - The government will provide a brief summary of the projects to be financed and their profitability, including an evaluation by the lender or the government. - The government will report the use of funds and project implementation in subsequent MEFPs. - Technical notes (as stated in footnotes): - Reference to a tool for calculation of the grant element of financing packages is noted. - Calculation of concessionality will take into account all aspects of the debt agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees. - For debts in foreign currencies for which the OECD does not calculate a CIRR, calculation of the grant element should be based on the composite CIRR (weighted average) of the currencies in the SDR basket. ### Reporting requirements for new external borrowing - The government will report any new external borrowing and its terms to Fund staff: - as soon as external debt is contracted or guaranteed by the government, but no later than within two weeks of such external debt being contracted or guaranteed. --- ### H. Public Sector Contracts Signed by Single Tender ### Definition and scope - Public sector contracts: administrative contracts, drawn up and entered into by the government or any entity subject to the procurement code, for procurement of supplies, delivery of services, or execution of work. - Single-tender contracts: when the contracting agent signs the contract with the chosen contractor without competitive tender. - The quarterly indicative target will apply to total public sector contracts entered into by the government or any entity subject to the procurement code. - Exclusion: - The ceiling on contracts executed by single tender will exclude fuel purchases by SENELEC for electricity production, reflecting regulation requiring SENELEC to buy fuel directly from SAR based on the existing price structure. ### Reporting requirements - The government will report quarterly to Fund staff, with a lag of no more than one month from the end of the observation period: - the total value of public sector contracts; and - the total value of all single-tender public sector contracts. --- ### III. Additional information for program monitoring ### Documents and timeliness (paragraph 26) - The authorities will transmit the following to Fund staff, in electronic format if possible, with the maximum time lags indicated: - (a) 3 days after adoption: any decision, circular, edict, supplemental appropriation order, ordinance, or law having economic or financial implications for the current program. This includes acts that change budget allocations included in the budget law being executed (e.g., supplemental appropriation orders, cancellation of budget appropriations, orders creating supplemental budget appropriations). - (b) With a maximum lag of 30 days, preliminary data on: - Tax receipts and tax and customs assessments by categories, accompanied by the corresponding revenue on a monthly basis; - The monthly amount of expenditures committed, certified, and for which payment orders have been issued; - The monthly situation of checks issued by agencies from their deposit accounts at the Treasury but not paid to beneficiaries, with the dates of issuance of the checks; - The quarterly report of the Debt and Investments Directorate (DDI) on the execution of investment programs; - The monthly preliminary government financial operations table (TOFE) based on the Treasury accounts; - The provisional monthly balance of the Treasury accounts; and - Reconciliation tables between the SIGFIP table and the consolidated Treasury accounts, between the consolidated Treasury accounts and the TOFE for "budgetary revenues," between the consolidated Treasury accounts and the TOFE for "total expenditure and net lending," and between the TOFE and the net government position (NGP), on a quarterly basis. - (c) Final data will be provided as soon as the final balances of the Treasury accounts are available, but not later than one month after the reporting of provisional data. ### Additional monthly reporting (paragraph 27) - During the program period, the authorities will transmit to Fund staff provisional data on: - current nonwage noninterest expenditures; and - domestically financed capital expenditures executed through cash advances, - Frequency and lag: - monthly basis with a lag of no more than 30 days. - Data source: - drawn from preliminary consolidated Treasury account balances. - Final data: - provided as soon as final balances of the Treasury accounts are available, but no more than one month after provisional data. ### Central bank reporting (paragraph 28) - The central bank will transmit to Fund staff: - The monthly balance sheet of the central bank, with a maximum lag of one month; - The consolidated monthly balance sheet of banks with a maximum lag of two months; - The monetary survey, on a monthly basis, with a maximum lag of two months; - The lending and deposit interest rates of commercial banks, on a monthly basis; - Prudential supervision and financial soundness indicators for bank financial institutions, as reported in the Table entitled Situation des Etablissements de Crédit vis-à-vis du Dispositif Prudentiel, on a quarterly basis, within a maximum delay of two months. ### Public information on a dedicated website (paragraph 29) - The government will update on a monthly basis on the website established for this purpose the following information: - a) Preliminary TOFE and transition tables with the delay of 2 months. - b) SIGFIP execution table, the table for the central government and a summary table including regions, with the delay of 2 weeks. - c) The amount of the airport tax collected, deposited in the escrow account, and used for the repayment of the loan financing the construction of the new airport, with the delay of 1 month. - d) Full information on: - (i) the operations of Energy Sector Support Fund (FSE); - (ii) investment projects in the power sector; - (iii) planning and execution of these projects; - (iv) details of financing and updated costs; and - (v) the balance of the escrow account with the resources of the Eurobond issued in 2011 allocated to the Takkal project (within 3 weeks). - e) Full information on: - (i) the status of the projects related to the extension of the autoroute to Diamniadio, AIDB, Mbour and Thies; - (ii) costs of the projects and their updates; - (iii) financing and cost of financing linked to the projects; - (iv) the balance of the escrow account with the resources of the Eurobond issued in 2011 and allocated to the extension of the autoroute (with the delay of 3 weeks). --- ### Debt Sustainability Analysis (summary and background) ### Key summary finding - Since the last DSA published in May 2011, Senegal’s debt outlook has deteriorated. - Growth in 2012 was slower than expected due to the drought in the Sahel. - Fiscal consolidation has been somewhat less than expected, reflecting exogenous shocks, higher cost of electricity subsidies, and measures to stabilize petroleum product prices. - On balance, Senegal continues to face a low risk of debt distress, but risks have increased. - Overall policy emphasis: reducing fiscal deficits, improving debt management, approaching nonconcessional borrowing with caution, and further developing domestic debt markets. ### Background (public debt structure and recent developments) - Public debt has increased steadily; ratio of public debt to GDP is projected to reach 46 percent in 2012. - The bulk of public debt is external (owed to non-residents of WAEMU), although the share of domestic debt has increased. - Most public external debt is concessional; two-thirds owed to multilateral creditors (primarily World Bank, IMF, AfDB). - Largest bilateral creditors: France, Kuwait, China, Saudi Arabia, and India. - Public domestic debt at end-2011: - equal to 11 percent of GDP. - domestic debt share of total public debt increased from 7 percent in 2005 to 28 percent in 2011. - Nonconcessional borrowing: - December 2009: first Eurobond, 5-year, US$200 million, coupon 8.75 percent, priced to yield 9.25 percent. - May 2011: 10-year, US$500 million Eurobond, coupon 8.75 percent, priced to yield 9.125 percent. - US$200 million used to retire the 2009 Eurobond; remainder earmarked for toll road and investments in the energy sector. - Private sector exposure and contingent liabilities: - Private external debt averaged about 20 percent of GDP over the last decade; equal to 24 percent of GDP at end-2010. - Half of private external debt in the form of trade credits and bank deposits; the rest debt securities, loans, other liabilities. - Private external assets amount to 8 percent of GDP. - Preliminary estimates of contingent liabilities suggest they amount to less than 10 percent of GDP. - No explicit government guarantees of enterprises’ external and internal debt since 2007. - Debt management improvements: - New public debt directorate created by combining units managing domestic and external debt. - First medium-term debt strategy recommends extending maturity of debt issued on the regional market and continuing to prioritize concessional external borrowing. --- ### Underlying assumptions and projections ### Baseline scenario and notable revisions - DSA consistent with macroeconomic framework in staff report for the Fourth Review under the Policy Support Instrument. - Baseline assumes implementation of sound macroeconomic and structural policies, leading to higher growth and narrowing fiscal deficits long term. - Notable revisions compared to May 2011 DSA: - Real GDP growth expected to be a bit lower over next few years and long term compared to previous projections. - 2012 fiscal deficit revised upward in line with the program. - Projected fiscal deficits over medium and long term somewhat lower compared to previous DSA to align with authorities’ commitment to meet WAEMU convergence criterion on the fiscal deficit. - Current account deficit in 2012 expected to be smaller than previously projected following better-than-expected outturn in 2011; long-term current account deficit projections revised lower in line with downward revision to long-run fiscal deficits. ### Selected macroeconomic indicators (exact values reported) - Real GDP growth: - 2010: 4.1 - 2011: 2.6 - 2012: 3.7 - 2013: 4.3 - 2014: 4.8 - Long term: 5.3 - (Previous DSA: 2010: 4.2; 2011: 4.5; 2012: 4.8; 2013: 5.0; 2014: 5.2; Long term: 5.8) - Overall fiscal deficit (percent of GDP): - 2010: 5.2 - 2011: 6.7 - 2012: 5.9 - 2013: 4.9 - 2014: 4.3 - Long term: 2.7 - (Previous DSA: 2010: 5.2; 2011: 6.9; 2012: 5.6; 2013: 4.6; 2014: 4.4; Long term: 3.7) - Current account deficit (percent of GDP): - 2010: 4.4 - 2011: 6.1 - 2012: 7.6 - 2013: 7.1 - 2014: 6.7 - Long term: 5.3 - (Previous DSA: 2010: 5.9; 2011: 8.2; 2012: 8.0; 2013: 7.5; 2014: 7.4; Long term: 7.1) ### Box 1 — Macroeconomic assumptions for 2012–2031 (highlights) - Real GDP growth: - 2012: 3.7 percent rebound after 2011 slowdown. - Growth expected to accelerate, reaching 5.2 percent by 2017. - Long-term average: 5.2 over 2017–2031. - Comparison: average of 5.1 percent in five years prior to global financing crisis. - Public investment: - Ratio of public capital expenditure to GDP projected to reach 12.1 percent in 2012, gradually declining to 11.2 percent by end of projection period. - Historical range: between 6 and 11 percent over past decade. - Current account deficit: - Projected to widen in 2012 due to higher imports of food and weak export demand. - Expected to narrow over medium and long term in line with anticipated fiscal consolidation. - Inflation: - Expected to remain moderate at about 2.5 percent. - Fiscal deficit: - 2012 fiscal deficit expected to fall to 5.9 percent of GDP, mostly due to delays in energy investments. - Authorities target a deficit of 4.9 percent of GDP in 2013. - Over medium and long term, fiscal deficit projected to narrow gradually to 2.8 percent, reflecting commitment to WAEMU convergence criterion on the basic fiscal balance. - Financing assumptions: - Authorities expected to rely increasingly on external nonconcessional borrowing to finance infrastructure projects. - In 2013, authorities assumed to use the remaining space ($200 million) for nonconcessional borrowing in the program. - Thereafter, Senegal expected to borrow 0.5 percent of GDP per year on nonconcessional terms. - The net US$500 million in nonconcessional borrowing in 2011 and 2013 are assumed to be rolled over at maturity. - Over 2012–2014, authorities expected to contract CFAF 42 billion (about US$79 million) in external debt with a grant element between 15 and 35 percent. - The average grant element of new external borrowing is projected to fall from 30 percent to 9 percent over the projection period. - Share of domestic financing expected to gradually increase over the long term as the WAEMU market develops. *Source: Staff report for the 2012 Article IV consultation, Fourth review under the Policy Support Instrument, and Request for modification of an assessment criterion—Debt Sustainability Analysis.* ### 8. Another change compared to the previous DSA is the value of the discount rate in the DSA ### _cr12337 - 8. Another change compared to the previous DSA is the value of the discount rate in the DSA ### Discount rate change in the DSA template - The discount rate follows the long-term U.S. dollar commercial interest reference rate (CIRR). - The discount rate was recently adjusted from 4.0 percent to 3.0 percent. - Holding other variables steady, a change in the discount rate from 4 percent to 3 percent raises the present value of debt. - The rules of the DSF require the discount rate to be changed when the U.S. dollar CIRR (six-month average) diverges from the discount rate by at least 100 basis points for a continuous period of at least six months; when this occurs, the magnitude of the change is required to be 100 basis points. ### External DSA stress-test findings and debt-distress implications - Stress tests lead to breaches of three thresholds: the PV of debt to GDP, the PV of debt to exports, and debt service to revenue. - Under current DSA guidelines, such breaches could be interpreted to suggest that Senegal’s risk of debt distress has increased from low to moderate. - The debt-to-GDP threshold breach: - Relatively minor (less than 2 percentage points) but protracted. - Occurs under a stress test simulating a one-time 30-percent depreciation of the exchange rate. - The exchange rate shock is arguably overstated given the peg to the euro, guaranteed by the French Treasury. - At end-2011, 8 percent of Senegal’s public external debt stock was denominated in euro, and another 42 percent was denominated in SDR (which is partially linked to the euro). - The debt-to-exports threshold breach: - Breached by a wider margin in a scenario where borrowing terms are less favorable than under the baseline scenario. - Underscores importance of approaching further nonconcessional borrowing with caution. - The debt service-to-revenue threshold: - Breached by a very small margin in 2021 under the one-time 30-percent depreciation shock. - Under the historical scenario (key variables fixed at their 10-year historical average), the PV of debt to GDP and PV of debt to exports approach, but do not breach, their respective thresholds. - The baseline scenario yields more favorable outcomes than the historical scenario, reflecting projected improvements in real GDP growth and the current account deficit. ### Impact of remittances on debt indicators - Including remittances produces a more favorable assessment: - Debt burden indicators remain well below their thresholds in the baseline scenario. - Stress tests lead to minor breaches of two thresholds. - Justification: remittances have become an important and reliable source of foreign exchange in Senegal and are expected to continue. - Remittances facts: - Remittances have grown every year since 2000, except 2009 when they fell 6 percent. - In 2011, remittances were equal to 13 percent of GDP. - Specific outcomes with remittances: - The PV of debt to GDP plus remittances peaks at 37 percent, compared to a threshold of 36 percent, under a one-time 30-percent depreciation of the exchange rate. - The ratio of debt service to revenue (not affected by remittances) again breaches its threshold by a very small margin in 2021 under the one-time 30-percent depreciation shock. - The PV of debt to exports plus remittances approaches, but does not breach, the threshold in the historical scenario. - Note: The previous DSA did not discuss remittances, since the low risk rating was justified even without including remittances. ### Overall public debt (external plus domestic) and domestic-debt vulnerabilities - Baseline scenario: - The PV of total public debt to GDP and the PV of total public debt to revenue remain relatively flat over the projection period, despite an expected increase in the share of domestic debt as the WAEMU market develops. - The PV of public debt to GDP peaks at 42 percent, well below the benchmark level of 56 percent associated with heightened public debt vulnerabilities for medium performers. - Domestic debt characteristics and risks: - The short average maturity of domestic debt (slightly over one year) is a source of vulnerability, exposing the government to significant rollover and interest rate risks. - In 2013, public debt service is expected to spike, owing mainly to a sharp increase in amortization payments on domestic debt. ### Public debt stress tests and fiscal implications - Stress tests indicate that without fiscal consolidation the path of public debt becomes explosive: - In a scenario assuming an unchanged primary deficit (as a percent of GDP) over the entire projection period, starting with the level projected in 2012, the PV of public debt to GDP grows rapidly and breaches the 56 percent benchmark level in 2021. - The benchmark is also breached in the “historical” scenario (holding real GDP growth and the primary deficit constant at their historical levels) and in a growth shock scenario. - Similar results are produced for the PV of public debt-to-revenue indicator. - These stress tests highlight the importance of reducing fiscal deficits and raising potential output growth. ### Conclusions and policy recommendations - Staff view: Senegal continues to face a low risk of debt distress. - External DSA stress tests result in breaches of three thresholds, but including remittances produces a better picture with only marginal breaches; this justifies keeping a low risk rating for now under the assumption of fiscal consolidation and strengthened debt management. - Emerging vulnerabilities and recommended actions: - Vulnerabilities have increased over recent years, and new risks have emerged as public debt has grown steadily since HIPC and MDRI relief. - The 2011 Eurobond, while addressing medium-term rollover risks, has exposed Senegal to longer term rollover risk, underscoring the importance of improving debt management. - As Senegal shifts to nonconcessional external borrowing, it should approach such borrowing with caution given current debt levels and sensitivity of debt indicators to less favorable borrowing terms. - Relatively low levels of domestic debt suggest scope to further develop domestic debt markets to decrease reliance on external financing; reliance on the regional debt market should increase gradually, taking into account the cost and maturities of such borrowing. - It will be critical to reduce fiscal deficits from levels seen in recent years to maintain debt sustainability. *SENEGAL INTERNATIONAL MONETARY FUND 7 PUBLIC DSA* ### 15. The authorities generally agreed with the assessment, stressed their fiscal consolidation ### 15. The authorities generally agreed with the assessment, stressed their fiscal consolidation ### Authorities' views and fiscal objectives - The authorities generally agreed with the assessment, stressed their fiscal consolidation efforts, and questioned the impact of the change in the discount rate. - They acknowledged that fiscal consolidation and a cautious approach to nonconcessional borrowing were critical for safeguarding debt sustainability. - Actions taken since taking office aimed to keep the fiscal deficit under control in 2012; efforts to reduce the cost of running the government will help keep the 2012 fiscal deficit below 6 percent of GDP. - Fiscal objectives: - Reduce the deficit below 5 percent of GDP in 2013. - Reduce the deficit below 4 percent of GDP by 2015. - Implementation measures highlighted by the authorities: - Continue efforts to reduce the cost of running the government, with full impact in 2013 and beyond. - Comprehensive streamlining of agencies in 2013 expected to generate substantial savings in the medium term. - Rationalizing expenditure in key sectors such as education and health (with World Bank assistance). - More cost-effective support to the most vulnerable segments of the population. - Energy subsidies will be substantially reduced next year and in the medium term. ### Staff response on discount rate and methodology - The authorities challenged staff to explain why a mechanical change in the discount rate should translate into a deterioration of the debt outlook. - Staff explained: - The change in the discount rate applied to all countries, not just Senegal. - The change was consistent with the Fund’s longstanding methodology for calculating present values. ### Debt sustainability indicators and stress testing (selected findings) - Figures and tables present indicators of public and publicly guaranteed external debt under alternative scenarios, 2012-2032, including with remittances. - Table highlights and exact numeric values (selected): - External debt (nominal) series: 50.7, 53.4, 49.0, 53.6, 54.5, 54.6, 54.1, 53.6, 53.1, 49.9, 38.0 (years not separately labeled in excerpt). - o/w public and publicly guaranteed (PPG): 26.9, 27.5, 28.8, 32.7, 34.6, 35.4, 35.8, 36.1, 36.2, 35.7, 26.9. - Change in external debt: 5.6, 2.7, -4.4, 4.6, 0.9, 0.0, -0.5, -0.5, -0.6, -0.6, -1.2. - Identified net debt-creating flows: 7.0, 2.0, -1.7, 3.8, 3.8, 3.2, 2.7, 2.4, 2.1, 2.1, 2.1. - Non-interest current account deficit: 6.5, 3.9, 5.3, 7.6, 3.1, 7.0, 6.5, 6.0, 5.6, 5.2, 4.9. - PV of external debt (selected values): 44.4, 47.6, 48.5, 48.2, 47.4, 46.7, 46.0, 43.4, 34.1 (years not separately labeled here). - PV of PPG external debt (in percent of GDP): 24.2, 26.7, 28.6, 29.0, 29.1, 29.1, 29.1, 29.3, 23.0 (selected series). - Debt service-to-exports ratio (in percent): 19.1, 19.1, 27.0, 19.8, 19.1, 19.4, 19.6, 18.2, 17.4, 15.0, 14.8. - PPG debt service-to-exports ratio (in percent): 5.0, 5.7, 14.0, 7.3, 7.6, 6.8, 7.4, 7.2, 7.0, 5.1, 5.6. - Total gross financing need (Billions of U.S. dollars): 1.2, 0.9, 1.4, 1.4, 1.4, 1.5, 1.5, 1.5, 1.5, 2.1, 4.4. - Non-interest current account deficit that stabilizes debt ratio: 0.9, 1.2, 9.7, 2.3, 5.5, 6.0, 6.1, 5.6, 5.5, 5.3, 5.8. - Stress-test framework notes: - "The most extreme stress test is the test that yields the highest ratio in 2022." - Specific shocks referenced: One-time depreciation shock; Terms shock; combinations thereof. - Scenarios include: Baseline, Historical scenario, Most extreme shock, and threshold comparisons across multiple ratios (PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, debt service-to-exports, debt service-to-revenue). ### Macro assumptions and medium-/long-term projections (selected exact figures) - Key macroeconomic assumptions (series of values presented in table): - Real GDP growth (in percent): 2.1, 4.1, 2.6, 3.9, 1.9, 3.7, 4.3, 4.8, 5.0, 5.1, 5.2, 4.7, 5.2, 5.6, 5.3 (series across periods). - GDP deflator in US dollar terms (change in percent): -6.7, -3.4, 9.4, 7.6, 8.4, -7.0, 0.1, 2.1, 2.2, 2.0, 2.1, 0.3, 2.3, 2.4, 2.4. - Effective interest rate (percent): 0.4, 0.9, 1.7, 0.8, 0.4, 1.2, 1.3, 1.4, 1.4, 1.5, 1.5, 1.4, 1.5, 1.3, 1.4. - Growth of exports of G&S (US dollar terms, in percent): -11.1, 3.1, 10.8, 10.3, 10.5, -5.4, 3.0, 3.1, 6.2, 8.3, 6.9, 3.7, 8.6, 8.9, 8.7. - Growth of imports of G&S (US dollar terms, in percent): -25.0, -1.4, 13.4, 13.7, 17.2, -1.7, 1.3, 2.8, 4.3, 5.2, 5.7, 2.9, 8.4, 8.7, 8.3. - Government revenues (excluding grants, in percent of GDP): 18.6, 19.4, 20.2, 20.9, 20.8, 20.9, 20.9, 20.6, 20.7, 21.2, 22.1, 21.4. - Aid flows (in Billions of US dollars): 0.9, 0.7, 0.6, 0.7, 0.7, 0.7, 0.8, 0.8, 0.8, 0.9, 1.1. - o/w Grants (Billions of US dollars): 0.4, 0.3, 0.3, 0.4, 0.4, 0.4, 0.5, 0.5, 0.5, 0.6, 1.1. - Grant-equivalent financing (in percent of GDP) (selected years): 4.3, 3.1, 3.5, 3.4, 3.3, 3.2, 2.8, 2.1, 2.5 (series appears in table). - Memorandum: Nominal GDP (Billions of US dollars) series includes values: 12.8, 12.9, 14.5, 13.9, 14.6, 15.6, 16.7, 17.9, 19.2, 27.7, 58.9. - Gross workers' remittances (Billions of US dollars): 1.7, 1.8, 1.9, 1.7, 1.7, 1.8, 1.8, 1.8, 1.9, 2.7, 5.7. - PV of PPG external debt (in percent of GDP + remittances) (selected): 21.4, 23.7, 25.5, 26.1, 26.3, 26.4, 26.6, 26.7, 21.0. - Debt service of PPG external debt (in percent of exports + remittances) (selected): 9.2, 4.8, 5.0, 4.6, 5.0, 5.0, 4.9, 3.6, 4.1. ### Financial sector overview and policy recommendations (excerpts) - Structure and access: - Financial system dominated by banking sector: commercial banks representing about 90 percent of the financial system. - Microfinance institutions (MFIs) supply limited services targeting lower income households, raising access to about 20 percent of the population. - Insurance companies account for most of the remainder of the domestic financial system. - Regional securities and equity market is marginal except for the government; the interbank market remains underdeveloped. - Performance and risks: - Banking system appears relatively robust; main risks are lending concentration and asset quality. - Financial soundness indicators suggest banks are on average adequately capitalized, profitable, and liquid. - Micro-prudential regulation of banks needs enhancement and supervision needs strengthening. - Authorities encouraged to develop a holistic view of the financial system and systemic risk. - Obstacles to further financial development identified: - Large informational asymmetries. - Poor business and judicial environment. - Inadequate tax regime. - Regulatory and supervision issues. - Inadequate skills. - Authorities' strategy and regional efforts: - Authorities have a strategy to address several obstacles and intend to accelerate implementation. - Regional authorities are working on development of the interbank market and strengthening the public debt market, which they see as priorities. - Expected gains from further financial deepening: - Facilitates the conduct of fiscal policy. - Makes it easier for agents to deal with volatility. - Fosters investment and growth. *Sources: Country authorities; and staff estimates and projections.* ### 1. Banking System Soundness____________________________________________________________________10 ### _cr12337 - 1. Banking System Soundness____________________________________________________________________10 ### A. Overview of the Structure of the Financial System - The financial system in Senegal is dominated by the banking sector: banks make up about 90 percent of the financial system. - Composition and concentration: - 19 commercial banks concentrated in the three largest cities. - The five largest banks account for 66 percent of assets and collect 79 percent of deposits. - Banks: Total assets CFAF 3,365 bn (88% of total financial system in table), deposits CFAF 2,401 bn, credits CFAF 2,022 bn. - Of which foreign owned banks: assets CFAF 1,904 bn (50%), deposits CFAF 1,598 bn, credits CFAF 1,384 bn. - Microfinance institutions (MFIs): - 234 establishments; about half of activity concentrated in greater Dakar. - More people have accounts at MFIs than at banks; overall financial access about 20 percent of the population. - MFIs’ loans amount to about 10 percent of bank credit. - Insurance and capital markets: - Insurance companies: 25 firms account for most of the remainder of the domestic financial system. - Regional capital markets (BRVM) are a marginal source of private funding; Sonatel is the only listed Senegalese company. - Sovereign issuance: gross issuance likely to exceed CFAF 500 billion (about 7 percent of GDP) in 2012 (average maturity 1.2 year at end-2011). - Eurobonds issued: $200 million in 2009 (5-year) and $500 million in 2011 (10-year). ### B. The Banking Sector — Recent Developments and Structure - Expansion and activity (2011 and preliminary 2012): - Bank credit to the economy increased by 19 percent in 2011 (to 29 percent of GDP). - Number of bank branches increased by 11 percent in 2011. - Number of bank accounts increased by 44 percent in 2011. - Preliminary numbers for 2012 suggest overall bank credit to the economy exceeded 30 percent of GDP. - Business model and client base: - Most banks focus on collecting deposits, lending to bigger firms (including multinationals), and holding/dealing in government securities. - Entry of three new banks and competition from MFIs have pushed banks to offer basic, cheaper services to middle class clients. - Funding and market features: - Bank deposits amount to about 40 percent of GDP. - Interbank market is underdeveloped; limited liquidity traded among banks. - No explicit deposit insurance scheme. - One bank provides Islamic banking services. - Only about 7 percent of the population holds a bank account (noting possible overstatement due to multiple accounts per person). ### C. Banking System Soundness — Risks, Stress Tests, and FSIs - Main risks identified: - Concentration of lending (loans concentrated in a few sectors and companies). - Large exposure to the public sector. - Asset quality concerns (elevated NPLs in a few banks and limited risk-management capacity in some smaller banks). - Stress-test scenarios applied (individual banks): - (i) Sectoral risk: default by the largest individual exposure and a shock to the three largest borrowing industrial sectors. - (ii) Overall credit risk: downgrade of nonperforming loans (NPLs) by one category and an increase in total NPLs by 50 percent. - (iii) Credit risk related to default of a public entity, or default on credit to the government and to public enterprises. - Stress-test results: - Liquidity risks and interest rate risks could be withstood—banks are highly liquid and maturity mismatch is rather small. - Concentration of lending was found to be a major source of vulnerability. - Selected Financial Soundness Indicators and summary metrics: - Capital adequacy: - Capital adequacy ratio (CAR) decreased to 16 percent at end-2011, and increased further through June 2012. - Regulatory minimum CAR: 8 percent. - Asset quality: - Gross nonperforming loans (NPLs) were 16.2 percent at end-2011, and increased further in early 2012. - High NPLs largely reflect portfolios of three banks with NPLs in excess of 20 percent; most other banks have NPLs below 5 percent. - Provisioning mitigates risks; provisioning ratios are relatively high. - Profitability: - Return on assets was 1.8 percent as of mid-2012 for the sector. - Return on equity was above 17 percent. - Profitability is boosted by access to ample and cheap deposits used to purchase government paper. - Liquidity: - Liquidity risks are low for the banking sector as a whole, though three smaller banks do not meet minimum liquidity requirements. - Structural factors and regulatory rules contribute to high liquidity holdings. - Caveats on indicators: - FSIs are backward looking and may hide important variations; accounting conventions differ from best international practices (e.g., a claim becomes nonperforming after 6 months missed payments instead of 3 months). ### D. Microfinance (Section I.C) - Post-reform expansion and concentration: - Regulatory reform in 2008-09 reorganized supervision: MFIs with assets and/or deposits above CFAF 2 billion now supervised by the banking commission; smaller institutions supervised by the Ministry of Finance. - After reform, 118 entities were closed down. - Consolidation led to 18 larger entities (assets or deposits above CFAF 2 billion) representing 90 percent of the MFI sector; one institution makes up 60 percent of the market. - Growth and scale: - MFI credit (and deposits) rose from CFAF 81 billion in 2005 to CFAF 219 billion in July 2012 (about 3 percent of GDP). - Activities and linkages: - MFIs focus on savings accounts and micro-credit to micro businesses in trade, services (catering), agriculture, and transportation. - Larger MFIs cooperate with commercial institutions for money transfers and increasingly use banks to finance operations (no access to BCEAO refinancing). ### E. Key Findings and Policy-relevant Observations - Strengths: - Banking sector overall adequately capitalized (CAR 16 percent end-2011; above the 8 percent regulatory minimum). - Sector is profitable (ROA 1.8 percent mid-2012; ROE above 17 percent). - High liquidity across the system reduces short-term liquidity risk. - Vulnerabilities: - Asset quality is the main concern: gross NPLs 16.2 percent at end-2011 with concentration in a few banks. - Concentration risk of lending to a few sectors and borrowers can cause rapid deterioration. - Accounting and classification practices for NPLs (6-month rule) and sovereign zero risk-weighting mask potential risks. - Underdeveloped interbank market and absence of explicit deposit insurance. - Microfinance implications: - MFIs expand access (raising financial access to about 20 percent) but are concentrated; systemic oversight strengthened via supervisory reorganization for larger MFIs. *Source: _cr12337 - 1. Banking System Soundness____________________________________________________________________10* ### 10. The larger MFIs are increasingly competing with banks. In 2012, the asset holdings of the ### 10. The larger MFIs are increasingly competing with banks. In 2012, the asset holdings of the largest MFI make it as big as the seventh largest bank. ### Competition between MFIs and banks - Four MFIs have been transformed into corporations (“sociétés anonymes”) and are capitalized, often with the support of donors; one MFI has set up its own bank. - Structural and policy advantages that may improve MFIs’ competitive position relative to commercial banks: - Most MFIs are structured as cooperatives, benefitting from tax exemptions originally justified by their social mandate and not-for-profit motive. - The cap on interest charged for loans is 27 percent for MFIs but 18 percent for banks. - MFIs often benefit from public and/or donor support via: (i) direct or indirect funds which constitute cheap financing; (ii) guarantees; and (iii) training of staff. ### Profitability and size distribution in the MFI sector - In 2011: - The 18 larger entities generated cumulative profits of CFAF 4.5 billion. - The other institutions had cumulative losses of about CFAF 0.5 billion. - Factors behind smaller MFIs’ poor profitability: - Rapid sector expansion has shrunk the pool of “lower-risk” clients, forcing lending to “higher risk” borrowers and into new areas/products lacking expertise. - Smaller networks tend to operate in remote areas with a high share of credit to agriculture, which is highly volatile and prone to shocks. ### Prudential indicators for larger MFIs and governance - As of June 2012, only one prudential norm—the cap on operations other than savings and credit (money transfer, for instance)—had not been met. - The sector misses indicative profitability benchmarks: return on equity (5 percent vs. a target of 15 percent); return on assets (2 percent vs. a target of 3 percent); profit margin (13 percent vs. a target of 20 percent); and cost income ratio (81 percent vs. a target ranging between 40 and 60 percent). - The mutual/cooperative structure can raise collective action problems for institutions with many members, potentially increasing governance and accountability issues; governance problems at the largest MFI were addressed forcefully by the authorities. ### Systemic risk: definitions and current assessment - Systemic risk defined as threat of disruption to financial services caused by impairment of parts or all of the financial system with potential serious negative real-economy consequences. - Time-series systemic risk: - Time-series systemic risk has been low so far. - The correlation between credit growth and GDP growth has been very limited (at about 0.1). - Senegal has not been subject to large capital in- and outflows that often cause time-series volatility in emerging markets. - Cross-sectional systemic risk: - Most common forms of cross-section systemic risk are not a major concern currently, though some developments warrant close monitoring. - Interconnection among banks is limited, reflecting underdevelopment of the money market. - High lending concentration exists in most banks, but top borrowers tend to differ across banks; main common exposure is to the government (many banks hold government debt). - With planned development of the interbank and government debt market, bank interconnectedness could increase quickly and will need monitoring. ### Leverage in Senegal (Box 2) - Leverage levels are low to moderate. - Government debt: - Domestic debt has increased rapidly in recent years, but remains at manageable levels (about 10 percent of GDP). - The government borrows abroad largely from donors on concessional terms and has accessed the international capital market in recent years. - Banks: - Banks finance themselves largely out of deposits, with limited debt issuance, keeping leverage in check. - Banks generally are highly liquid. - Households and corporates: - Bank lending is often against guarantees rather than future cash flows; households able to borrow tend to have low gearing ratios. - Most households are credit-constrained and hence unable to leverage up in the formal market; rural pockets may be overleveraged via MFIs, but no data available. - Corporate sector is dual: a few large companies with strong balance sheets borrow short-term for working capital with low leverage; SMEs are largely credit-constrained and unable to leverage. ### Interconnections, SIFIs, and monitoring needs - Interconnection between banks and the rest of the financial system is significant and warrants monitoring: - Insurance companies use bank deposits as an investment vehicle, buy regional bank bonds, and have equity participation in some banks. - Microfinance institutions place money in banks; one MFI even owns a bank. - Lack of detailed data prevents full analysis; risk mapping warrants further investigation by authorities. - None of the Senegalese banks fits the definition of being too big to fail: - Société Générale and BNP Paribas, which have subsidiaries in Senegal, have been designated as SIFIs by the Financial Stability Board. - This designation does not apply to parents of other foreign-owned subsidiaries or any domestically-owned bank. - Important caveat: focus on too-big-to-fail does not imply failure of a smaller bank is unimportant; such failures must be handled well to avoid contagion concerns. ### Benchmarking Senegal’s financial sector: methodology and key comparative findings - Methodology: - The benchmarking assesses depth, breadth, access, and efficiency using structural benchmarks estimated from country economic and structural characteristics (data from 1995 onwards where available). - The difference between observed values and structural benchmarks indicates scope for policy action or successful reforms. - Microfinance could not be benchmarked due to dataset limitations. - Broad results: - Depth: - Senegal outperforms structural benchmarks for banking and insurance, but underperforms for debt and equity markets. - Banking sector: ratios of credit and deposits to GDP are significantly above benchmarks; credit-to-deposit ratio in line with benchmark. - Insurance: ratios of insurance sector assets and insurance premiums to GDP are significantly above benchmarks, though low in absolute terms. - Debt and equity markets remain below potential; equity market underdeveloped given regional nature and limited private-sector recourse. - Breadth: - Competition indicators (3-bank asset concentration, interest rate margin) are close to benchmark; more recent data suggest competition may have increased. - Credit to public sector to GDP is in line with benchmark, reflecting government debt market development. - Insurance sector outperforms benchmark, particularly life insurance. - Underperformance in long-term financing and regional stock market (only one Senegalese company listed vs. predicted 30). - Access: - Number of bank branches relative to population significantly outperforms the benchmark; number of accounts slightly above benchmark. - Mobile banking impact not fully reflected; mobile banking developed rapidly in Kenya but not in Senegal. - Efficiency and profitability: - Broadly in line with structural characteristics for banking sector. - Exception: NPLs are significantly higher and provisioning lower than benchmark. - Comparisons with peers (Côte d’Ivoire, Kenya, Morocco) indicate substantial scope for further deepening: - Depth: - Kenya’s deposits and credit to GDP ratios are about 10 percentage points higher than Senegal’s; Morocco’s are more than twice as high. - Insurers’ assets to GDP are substantially larger in Côte d’Ivoire, Kenya and Morocco. - Stock market capitalization to GDP has picked up markedly in Kenya since 2002. - Breadth: - Kenya has reduced bank asset concentration since 2003; life insurance premiums increased faster in Kenya and Côte d’Ivoire than in Senegal. - Equity market: 50 listed companies in Kenya, more than 70 in Morocco, only one in Senegal. - Access: - Access metrics broadly in line with peers including Kenya, but significantly lower than Morocco for firms and households. - Mobile banking developments in Kenya likely widen the gap in access. *Source: IMF staff analysis as presented in the provided content.* ### 22. Shallow financial markets make it more difficult for firms and households to access ### Shallow financial markets make it more difficult for firms and households to access financial services ### Effects on households and firms - Higher volatility: - Underdeveloped banking systems fail to perform the function of enabling agents, including households, to smooth consumption over time. - Shocks must be fully absorbed by a household’s existing assets; if insufficient, adjustment is instantaneous and may lead to destitution. - Shallow banking systems create pro-cyclical financing conditions: providing credit in good times and cutting it back in bad times, accentuating volatility. - Financial sector development can alleviate liquidity constraints and ultimately reduce volatility. - Lower growth: - Financial development facilitates mobilization of savings to finance investment and contributes to better allocation of resources. - Rioja and Valev (2004a): finance boosts growth in rich countries primarily by raising productivity growth; in poorer countries it primarily increases capital accumulation. - Rioja and Valev (2004b): impact may be nonlinear — countries with very low levels of financial development experience little growth acceleration from a marginal increase, while the effect is larger for rich countries and particularly large for middle-income countries. ### Impact on the public sector: Removing constraints on fiscal policy - Liquidity (and interest rate) risk: - Large part of domestic debt is issued at relatively short maturities, creating significant liquidity risk for the government. - If regional liquidity dries up, the government may face rollover difficulties and be forced to finance via arrears, turning fiscal issues into financial stability risks (if arrears to banks) or risks to private sector development (if arrears to suppliers). - Senegal experienced payments delays to suppliers in early 2012 due to difficulties in raising financing ahead of the presidential election. - Short maturities also expose the government to significant interest rate risks. - Fiscal cost: - A deeper financial market can create more liquidity and economies of scale in debt issuance, reducing the marginal cost of borrowing to the sovereign. - Yields at issuance for bonds with maturities of three to five years were in the 7-9 percent range in the first half of 2012, while average inflation was around 2 percent. - Scope for counter-cyclical policy: - Senegal’s susceptibility to shocks places a premium on fiscal flexibility because monetary policy is set at the regional level. - A deeper financial system would give the government more scope to run counter-cyclical policies, reducing the need for large fiscal adjustment that disproportionately affects subsistence-level populations with limited access to credit. - It would help maintain execution of investment projects, avoiding higher fiscal costs and medium-term output loss from delays. - Diversified investor base: - A homogenous and narrow investor base, with similar risk preferences and time-horizons, creates a market that may be easily disrupted. - Senegal’s debt market liquidity is highly dependent on banks, which are the main investors. - Financing public investment: - A shallow financial system limits the government’s ability to finance long-term investment with large economic and/or social rates of return, notably timely infrastructure investments in energy and transportation. ### Strategic aim: further deepening with stability - Priority and caution: - Further financial development is highly desirable in a low-income country like Senegal, but development must preserve financial stability. - Financial systems can be a source of volatility and crisis, especially when large and highly interconnected; rapid growth in financial aggregates often precedes crises. - Senegal’s financial system remains relatively small and interconnectedness is limited; thus present systemic risks are lower than in more developed countries. - Analytical focus: - Section IV.A of the source analyzes main obstacles to financial development; Section IV.B discusses ways to improve present and future stability. - The main recommendations are summarized in Table 2 of the source. ### Obstacles to further financial development (summary) - Informational asymmetries: - Lack of information on borrowers (limited formal sector size, limited audited company statements, absence of credit bureaus, limited use of central bank databases) increases adverse selection and moral hazard, leading to credit rationing. - The problem affects larger MFIs that overlap banks’ customers and hinders development of the interbank market. - Business and judicial environment: - Absence of formalized property rights in large parts of the country increases difficulty of using land as collateral. - Judicial processes are costly and slow; some judgments are perceived as motivated by social considerations rather than legal merit, discouraging lending to new segments. - Tax regime: - Taxes and fees on banking and stock exchange operations are relatively high, raising cost of financial services and reducing demand. - Regulatory and supervision issues: - Some prudential ratios, such as the transformation ratio, are perceived as excessively constraining medium and long-term credit development. - Several prudential ratios are not observed by a number of banks, affecting credibility of the regulatory and supervisory framework and exacerbating informational problems. - National-level reforms (e.g., credit bureaus, Islamic banking) may be slowed by the need for regional-level regulatory action. - Skills: - Lack of appropriate human capital and risk-management expertise undermines banks and MFIs’ ability to design and sell needed products. - Transition of some MFIs from micro-enterprises to SMEs reduced profitability; banks face similar risks moving into SME lending. - Lack of financial culture contributes to limited recourse to the stock exchange. ### Authorities’ strategy and implementation status - National consultation on credit (2010) produced an action plan with measures grouped in 11 categories: facilitating use of guarantees; SME debt and equity financing and general support to SMEs; availability of information; cost of credit; financial intermediation and the judicial environment. - Progress: - Improvements: registering land titles and information provision. - Delays: introduction of credit bureaus deferred for a regional approach; mobilization of resources measures behind schedule. - A study to determine the share of stable resources among bank deposits has been completed by the Senegalese banking association; this is a pre-requisite for regional reconsideration of the transformation ratio. - Measures to improve efficiency of the judicial process (e.g., training judges in economic affairs) and public support to SMEs are generally behind schedule. - Staff view: - The action plan remains largely relevant and its implementation should be accelerated. ### Regional-level issues - Several obstacles must be addressed regionally (prudential regulation and development of regional financial markets are regional responsibilities). - Regional authorities are working on development of the interbank market, strengthening the public debt market, and reviewing certain prudential rules; these will be discussed in the regional consultation in early 2013. ### Enhancing financial stability - Micro-prudential regulation and supervision: - Some prudential ratios and rules are not in line with international best practices; banks’ compliance with prudential rules needs improvement. - Example compliance data: - The transformation ratio is met by only 11 Senegalese banks. - No bank meets the portfolio structure ratio, which requires that at least 60 percent of a bank’s credit portfolio be composed of rated assets. - Low compliance suggests the need to strengthen supervision and enforcement of corrective measures. - New challenges include monitoring the rapid development of banking groups in Senegal and the region. - Systemic risk and macroprudential approach: - With growing interconnectedness, systemic risk issues will become more likely and need mitigation. - Regional regulation is largely microprudential; a macroprudential approach considers systemic implications of collective behavior (e.g., all banks stopping purchases of sovereign debt). - The recently established Financial Stability Council (regional level) is charged with monitoring and limiting systemic risk; its activity and effectiveness will be reviewed in the next regional mission. - National systemic risk function: - Senegal currently lacks a single national entity with a detailed view of the whole financial system, interconnections, and potential pockets of systemic risk. - Recommendation: develop such a function, preferably under the purview of the Ministry of Finance, in close collaboration with other regulators and supervisors, particularly the BCEAO. - This institution would reflect on the scope for national macroprudential regulation to address country-specific systemic risk, in concert with regional authorities and regulators. ### Bank supervision and resolution (architecture) - Division of labor between national and regional authorities: - Banks and large deposit-taking institutions (including MFIs) are supervised regionally by the BCEAO and the WAEMU Banking Commission. - Smaller microfinance operators are supervised nationally by the Ministry of Finance. - Capital market activity is supervised regionally by CREPMF. - Insurance companies are supervised nationally by the Ministry of Finance, in conjunction with the supra-regional regulator CIMA. - The 2010 central bank reform created the Financial Stability Council, charged with macroprudential supervision at the regional level. - Resolution framework: - The BCEAO national directorate collects financial indicators and carries out offsite supervision; it flags concerns to the banking commission. - The banking commission is responsible for on-site supervision and can recommend prompt corrective actions or sanctions. - In case of solvency concerns, the banking commission can recommend closing an institution; the Ministry of Finance has to formally rescind the banking license but may appeal to the council of ministers, where a simple majority could overrule the banking commission’s decision. *Source: IMF staff report excerpt (Senegal).* ### 31. Another area for further work is the financial crisis prevention and resolution framework. ### _cr12337 - 31. Another area for further work is the financial crisis prevention and resolution framework. ### Financial-crisis prevention and resolution: key observation - "The fact that technically insolvent banks have been allowed to continue operations in some WAEMU countries may reflect weaknesses in the bank resolution framework (Box 3)." - "As shown by the euro-area experience, having a good framework in place will be increasingly important with the deepening of the financial system and further regional integration." ### Ongoing initiatives and priorities - Development of a regional financial stability fund. - Establishment of a deposit insurance scheme. - These initiatives "are areas that will require close cooperation between the national and the regional authorities." ### Recommendations from Table 2 relevant to prevention and resolution - Review and strengthen the financial crisis prevention and resolution framework to ensure that it remains adequate to address new risks (e.g., development of cross-country banking). — Responsible authorities: Regional/National - Enhance further the national/regional coordination to ensure high responsiveness of the prudential framework to new needs. — Responsible authorities: National/Regional - Have a unit in the ministry of finance that has a holistic view of the financial system and systemic risks in Senegal. — Responsible authorities: National - Strengthen bank supervision. — Responsible authorities: Regional - Review bank regulations to facilitate further deepening while preserving stability. Priority should be to address the regulatory ratios which are systematically breached by most banks. Ultimately, bring regulations to international standards. — Responsible authorities: Regional/National ### Related financial-sector development recommendations (context for prevention/resolution) - Accelerate implementation of the action plan that followed the National Consultation on Access to Credit, particularly: - Increasing the availability of information on borrowers. This could cover banks and larger MFIs. — Responsible authorities: National - Facilitating the use of guarantees. — Responsible authorities: National - Reduce cost of using the legal system, including by increasing resources. — Responsible authorities: National - Develop the interbank market. — Responsible authorities: Regional/National - Develop the government debt market by broadening the range of investors and fostering the development of a secondary market. — Responsible authorities: Regional/National - Level the playing field between banks and larger MFIs, for instance by facilitating the transformation of the latter into banks. — Responsible authorities: National/Regional - Review financial activity taxation, after the new tax code has been implemented and revenue concerns have decreased. — Responsible authorities: National *International Monetary Fund — SENEGAL, excerpt from Table 2 and paragraph 31* ### References ### _cr12337 - References ### References - Beck, Thorsten; Edward Al-Hussainy; Asli Demirguc-Kunt; Bilal Husnain Zia, 2011, “Financial Access Dataset” World Bank - Borio, Claudio, 2009, “Implementing the Macroprudential Approach to Financial Regulation and Supervision”, Bank of France Financial Stability Review, September, http://www.banque-france.fr/gb/publications/telechar/rsf/2009/etude04_rsf_0909.pdf - Rioja, Felix and Neven Valev, 2004a, ‘Finance and the Sources of Growth at Various Stages of Economic Development" Economic Inquiry, Vol. 42(1), pp.127–140 - Rioja, Felix and Neven Valev, 2004b, ‘Does one size fit all? A Reexamination of the Finance and Growth Relationship", Vol. 74(2), pp. 429–447 ### Document identification - Title: STAFF REPORT FOR THE 2012 ARTICLE IV CONSULTATION, FOURTH REVIEW UNDER THE POLICY SUPPORT INSTRUMENT, AND REQUEST FOR MODIFICATION OF AN ASSESSMENT CRITERION—INFORMATIONAL ANNEX - Prepared by: The Staff of the International Monetary Fund in Consultation with the World Bank - Date on document: November 26, 2012 ### Relations with the Fund — Membership and Quotas - Membership status: Joined: August 31, 1962; Article VIII - Quota: 161.80 SDR Million (100.00 percent of quota) - Fund holdings of currency (Exchange Rate): 159.97 SDR Million (98.87 percent of quota) - Reserve Tranche Position: 1.85 SDR Million (1.14 percent of quota) - SDR Department net cumulative allocation: 154.80 SDR Million (100.00 percent) - SDR Department holdings: 130.20 SDR Million (84.11 percent) ### Outstanding Purchases and Loans - ESF Arrangements outstanding: 121.35 SDR Million (75.00 percent of quota) - ECF Arrangements outstanding: 11.44 SDR Million (7.07 percent of quota) ### Latest Financial Arrangements (dates and amounts) - ESF: Arrangement Date Dec 19, 2008; Date of Expiration Jun 10, 2010; Amount Approved 121.35 SDR Million; Amount Drawn 121.35 SDR Million - ECF 1/: Arrangement Date Apr 28, 2003; Date of Expiration Apr 27, 2006; Amount Approved 24.27 SDR Million; Amount Drawn 24.27 SDR Million - ECF 1/: Arrangement Date Apr 20, 1998; Date of Expiration Apr 19, 2002; Amount Approved 107.01 SDR Million; Amount Drawn 96.47 SDR Million - 1/ Formerly PRGF. ### Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs) - Forthcoming principal and charges/interest by year: - 2012 Principal 3.47; Charges/Interest 0.00 - 2013 Principal 11.56; Charges/Interest 0.32 - 2014 Principal 24.15; Charges/Interest 0.34 - 2015 Principal 25.66; Charges/Interest 0.30 - 2016 Principal (not explicitly listed as separate value in table) Charges/Interest 0.24 - Total line shown in document: 0.00 3.79 11.89 24.45 25.89 - Note: When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section. ### HIPC Initiative and MDRI Implementation - HIPC Initiative: - Framework: Enhanced - Decision point date: Jun 2000 - Assistance committed by all creditors (US$ Million) 1/: 488.30 - Of which: IMF assistance (US$ million): 42.30 - IMF assistance (SDR equivalent in millions): 33.80 - Completion point date: Apr 2004 - Disbursement of IMF assistance (SDR Million): - Assistance disbursed to the member: 33.80 - Interim assistance: 14.31 - Completion point balance: 19.49 - Additional disbursement of interest income 2/: 4.60 - Total disbursements: 38.40 - Notes: - 1/ Assistance under original framework is expressed in NPV terms at completion point; enhanced framework expressed in NPV terms at decision point. - 2/ Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period. - MDRI: - MDRI-eligible debt (SDR Million)1/: 100.32 - Financed by: MDRI Trust 94.76; Remaining HIPC resources 5.56 - Delivery Date: January 2006: PRGT N/A; GRA 100.32; Total 100.32 - 1/ MDRI provides 100 percent debt relief to eligible member countries that qualified for the assistance. ### Safeguards Assessments - Central Bank of West African States (BCEAO) safeguards assessment completed March 1, 2010. - 2010 update assessment findings: - Controls in place at operational level. - Need to strengthen overall governance framework by adding an audit committee to ensure Board oversight of control structure, audit mechanisms, and financial statements. - Audit committee was established after the assessment following Institutional Reform of the WAMU and the BCEAO. - Efforts needed to fully implement International Financial Reporting Standards reporting framework. ### Exchange System - Senegal is a member of the West African Economic and Monetary Union (WAEMU). - Exchange system: common to union members; free of restrictions on payments and transfers for current international transactions. - CFA franc parity history in document: - CFAF 1 = F 0.02 (peg to French franc prior to Jan 12, 1994) - Effective January 12, 1994: new parity CFAF 1 = F 0.01 (devaluation) - Effective December 31, 1998: parity switched to the euro at CFAF 655.96 = €1 - Authorities confirmed no measures imposing exchange restrictions subject to Fund jurisdiction; will inform Fund if such measures are introduced. - Report referenced: “WAEMU: Common Policies of Member Countries" (Country Report No. 12/59 of March 12, 2012). ### Article IV Consultations — Executive Board conclusions (May 24, 2010) and context - Latest Article IV consultation completed May 24, 2010 (Country Report No.10/165). - Executive Directors’ main points summarized: - Broadly satisfactory implementation of economic program under the PSI and the ESF. - Senegal’s risk of debt distress is low. - Need to gradually withdraw temporary fiscal stimulus and reduce budget deficit consistent with debt sustainability. - Support for strengthening revenue collection; need to contain spending pressures to preserve macroeconomic stability and meet WAEMU convergence criteria while safeguarding priority spending. - Support for public financial management reforms and need to maintain reform momentum. - Encourage improved liquidity and debt management to complement budget framework integrity. - Concern about program slippages; closer attention to spending procedures and control mechanisms needed. - Room to strengthen investment planning and evaluation to ensure high productivity of government spending. - Need to overcome weak export performance and improve competitiveness via better business climate and governance to stimulate private-sector growth. - Complementary policies required to regain growth momentum and return to previous trajectories. - Sustained efforts required to enhance financial sector contribution to the economy. - Encouragement to implement energy sector reform plan to limit supply bottlenecks and fiscal risks. ### Financial Sector Assessment Program (FSAP) and ROSC participation - Joint World Bank–IMF FSAP mission: 2000 and 2001; Financial System Stability Assessment (FSSA) issued 2001 (Country Report No. 01/189). - FSAP update: 2004 (focus on development issues, nationwide basic financial services, SME access to credit), IMF Country Report No. 05/126. - Regional FSAP for WAEMU: 2007. - ROSC data module: published 2002. - FAD mission ROSC on fiscal transparency module: 2005. ### Technical Assistance (2008–12) - AFRITAC West missions and focus areas by year: - 2008: Debt management and financial markets; National accounts; Microfinance; DSA workshop; Institutional sector and quarterly national accounts; Supervision and organization. - 2009: National accounts; Tax administration; Debt management; Microfinance; Macroeconomic and financial statistics; Quarterly national accounts (QNA); Status of reform and scope for further TA; Strengthening public debt management; Strengthening microfinance supervision; Enhancing production and dissemination of public finances statistics. - 2010: Debt management; National accounts; Customs administration; Tax administration; Strengthening public debt management; Quarterly national accounts (QNA); Risk analysis and audit; Tax administration modernization; Follow-up mission. - 2011: National accounts; Customs administration; Public Expenditure Management; Debt management; Tax administration; Quarterly national accounts (QNA); Risk analysis and audit; Strengthening of PFM information systems; Strengthening public debt management; Establishment of medium-sized enterprise tax center. - 2012: Tax administration; National accounts; Identification and registration of tax payers; Quarterly national accounts (QNA); Customs administration; Public Expenditure Management; Risk analysis and audit; Public accounting system. - Headquarters TA (selected entries with dates and purposes): - Fiscal Affairs Jan. 2008: Staff — Public-Private Partnerships - Feb. 2008: Staff — PSIA- Poverty and Social Impact Analysis - Oct. 2008: Staff/AFRITAC — Public financial management - April 2009: FAD Expert — Public financial management - Nov. 2009: Staff/AFRITAC — Revenue administration - Jan. 2010: FAD Expert — Review of the expenditure chain - Feb. 2010: Staff/AFRITAC — Public financial management - July 2010: FAD Expert — PFM (Treasury Single Account and cash forecasts) - Oct. 2010: Staff/Expert/AFRITAC — Revenue administration - Dec. 2010: Staff — Public financial management and accounting (state, PEs, agencies) - May 2011: FAD Expert — Public financial management - June 2011: AFRITAC — Tax administration - Sept. 2011: Staff/Expert — Revenue administration - Nov. 2011: FAD expert — Decentralization of budget authority - Dec. 2011: FAD expert — Consolidation of accounts - Jan. 2012: FAD Experts — VAT Credit Reimbursement System, Tax Exemptions and Reform Process - March 2012: FAD Experts — PIT and Taxation of the Banking and Telecoms Sectors - Monetary and Capital Markets Sept. 2010: Staff — Needs assessment - Jan.-Feb. 2011: Staff/World Bank — Medium-Term Debt Strategy (MDTS) - Statistics Nov. 2008: Staff — SDDS assessment - April 2009: Staff — Government finance statistics - Aug. 2011: Staff — National accounts - Nov. 2011: Staff — Monetary and financial statistics - Legal Jan-Feb 2012: Staff — Tax law ### Resident Representative - Stationed in Dakar since July 24, 1984; position held by Ms. Valeria Fichera since September 2009. ### Anti-Money Laundering / Combating the Financing of Terrorism (AML/CFT) - Onsite AML/CFT evaluation visit: July/August 2007 (GIABA context). - Report adopted: early May 2008 by GIABA Plenary. - Findings: 12 non-compliant and 16 partially compliant ratings out of the 40+9 FATF AML/CFT recommendations. - May 2009: Senegal joined the Egmont Group of Financial Intelligence Units (FIUs). - FIU publishes statistics on suspicious transaction reports, number of cases transmitted to judiciary, and number of convictions. - Senegal’s Fourth Follow-Up Report discussed at GIABA’s May 2012 Plenary; progress acknowledged and encouraged to continue improvements. - Agreement: Senegal will submit its Fifth Follow-Up Report to the May 2013 Plenary. ### Joint Management Action Plan — World Bank and IMF Collaboration (selected items) - Mutual information on work programs: - World Bank: Public finance management TA (Investment project appraisal manual, evaluation of agencies, budget management information systems, internal and external audit, debt management — next mission Dec. 2012); Development policy operation (Governance, education and health reform, energy sector) — December 2012 (Board); Policy notes for the new government — 18 notes — January 2013; Energy sector dialogue — Continuous; Social protection policy notes — December 2012; Poverty and gender policy notes — Continuous/January 2013; Statistics for Results’ project — Continuous/January 2013; Debt management workshop and TA — MTDS and public debt management — November 2012. - IMF: IMF-supported program — Fourth PSI Review and Article IV consultations mission, Sept. 6-19, 2012 — December 2012 (Board); Fifth PSI Review mission (March 2013) — July 2013 (Board). - Technical Assistance planned (selected): - Revenue administration: Six short-term expert visits FY 2013 - PFM: A resident advisor at the Treasury until Sept. 2013; FAD expert visits on decentralization of budget authority (Feb. 2013), central government accounting (Jan. 2013), financial regime of autonomous agencies (Jan. 2013), wage bill budgeting forecasting (March 2013), capital expenditure forecasting (March 2013), tax policy (Mining and tax exemptions Feb. 2013), VAT documents and exemptions (March 2013) - Debt management: MTDS and public debt management — November 2012 - Statistics: Data Work: SRFs Data Development — December 2012; National accounts — Feb. 2013 - Requests for work program inputs: - Fund request to Bank: Analysis on poverty and inclusive growth; Processed data on the 2011 household survey — November 2012 - Bank request to Fund: Analysis on tax reform — Ongoing - Joint products: - JSAN National Strategy for Economic and Social Development (NSESD) — Dec. 2012 - Joint DSA 2012 Article IV Consultation and 4th PSI Review — Nov. 2012 ### Statistical Issues — Assessment of Data Adequacy for Surveillance (As of October 2012) - General: Data provision has some shortcomings, but is broadly adequate for surveillance and program monitoring. Weaknesses in national accounts, production, and social indicators. Authorities committed to improving data quality and availability, relying partially on Fund and other TA. - National accounts: - Compilation generally follows the System of National Accounts, 1993. - Lack of adequate financial resources has constrained data collection and processing. - Data sources deficient in some areas, particularly the informal sector. - Surveys of business and households are not conducted regularly due to financial constraints. - West AFRITAC assisting with improvement of annual and quarterly national accounts (QNA). - Government finance statistics (GFS): - Compiled by Ministry of Economy and Finance from customs, tax, and treasury directorate sources; quarterly disseminated as government financial operations tables (TOFE). - Following Fund TA, TOFE presentations improved and aligned with the extended WAEMU TOFE. - Remaining step: implement recent WAEMU fiscal directives. - A regional advisor in GFS has provided TA to improve consistency of fiscal reporting and migrate to Government Finance Statistics Manual 2001 methodologies. - Advisor supported resumption of reporting for publication in IFS and electronic dissemination of the GFS Yearbook. - Monetary and financial statistics: - Preliminary monetary data compiled by BCEAO national agency and released by BCEAO headquarters. - Authorities report monetary data to STA regularly with a lag of about three months. - Improvements in timeliness of interest rate and main depository corporation data reporting. - STA TA mission visited Dakar in 2011 to assist BCEAO National agency in migration of MFS to the standardized report form (SRF) framework as a pilot for a multi-annual project. - External sector statistics: - Balance of payments compiled by Senegalese national agency of the BCEAO. - With STA support: implementation of BPM5; modification and simplification of company and bank surveys; improved computerization; strengthened training. - Further steps needed to enhance quality and coverage; definitive BOP statistics can be provided with delay of less than one year but significant delays in reporting to STA persist. ### Data Standards and Quality - Senegal participates in the WAEMU regional harmonization process. - Participates in the General Data Dissemination System (GDDS); metadata posted on Fund’s DSBB in 2001. - In 2006, authorities committed to work toward SDDS subscription and appointed a national SDDS coordinator. - 2008 SDDS assessment mission evaluated dissemination practices against SDDS requirements and developed an action plan. - Data ROSC published on IMF website in 2002. ### Table of Common Indicators Required for Surveillance (As of September 2012) — Selected entries and metadata notes - Exchange Rates: Latest observation Current; Date received Current; Frequency of data D; Frequency of reporting D; Frequency of publication D; Data Quality – Methodological soundness D; Data Quality Accuracy and reliability D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest observation 6/2012; Date received 9/2012; Frequency M; Frequency of reporting M; Frequency of publication M - Reserve/Base Money: Latest observation 6/2012; Date received 9/2012; Frequency M; Reporting M; Publication M; Data Quality methodological assessment: LO, LO, O, O; Data Quality accuracy: LO, O, O, LO - Broad Money: Latest observation 6/2012; Date received 9/2012; Frequency M; Reporting M; Publication M - Central Bank Balance Sheet: Latest observation 6/2012; Date received 9/2012; Frequency M; Reporting M; Publication M - Consolidated Balance Sheet of the Banking System: Latest observation 6/2012; Date received 9/2012; Frequency M; Reporting M; Publication M - Interest Rates: Latest observation 6/2012; Date received 9/2012; Frequency M; Reporting M; Publication M - Consumer Price Index: Latest observation 6/2012; Date received 9/2012; Frequency M; Reporting M; Publication M; Data Quality methodological soundness O, LO, O, O; Data Quality accuracy LO, O, O, NA - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Latest observation 6/2012; Date received 9/2012; Frequency M; Reporting M; Publication M - Stocks of Central Government and Central Government-Guaranteed Debt: Latest observation 2011; Date received 9/2012 - External Current Account Balance: Latest observation 2011; Date received 9/2012; Frequency A; Reporting A; Publication A; Data quality O, O, O, O - Exports and Imports of Goods and Services: Latest observation 2011; Date received 9/2012; Frequency A; Reporting A; Publication A - GDP/GNP: Latest observation 2011; Date received 9/2012; Frequency A; Reporting I; Publication A; Data quality LO, LO, LO, LNO; Accuracy LNO, LNO, LNO, LNO - Gross External Debt: Latest observation 2011; Date received 9/2012; Frequency A; Reporting I; Publication A - International Investment Position: Latest observation 2011; Date received 9/2012; Frequency A; Reporting A; Publication A - Footnotes and definitions included in table as in source (numbered 1–11), including methodological and data-quality notes referencing the 2002 Data ROSC and mission findings from 2001. ### Public Information Notice (PIN) No. 12/142 — IMF Executive Board Concludes 2012 Article IV Consultation with Senegal (December 14, 2012) - Announcement: On December 10, 2012, the IMF Executive Board concluded the Article IV consultation with Senegal. - Background summary (extracts): - Senegal’s growth had been sluggish in recent years, with implications for poverty reduction. - Average growth was 4.5 percent in 1995–2005 with poverty incidence falling from 68 to 48 percent. - Growth decreased in subsequent years due partly to exogenous shocks: food and fuel global prices, global financial and economic crisis, electricity sector crisis, and drought in the Sahel. *Prepared from the IMF document _cr12337 - References (November 26, 2012) provided in the source PDF.* ### 3.3 percent in 2006–2011. As a result, poverty incidence barely decreased during this period ### _cr12337 - 3.3 percent in 2006–2011. As a result, poverty incidence barely decreased during this period ### Poverty and social outcomes - Growth averaged 3.3 percent in 2006–2011. - Poverty incidence barely decreased and stood at 47 percent in 2011. - Wide disparities: - Rural poverty incidence: 57 percent. - Urban poverty incidence: 33 percent. ### Fiscal deficits and public debt - Fiscal deficit trajectory: - Below 4 percent of GDP in 2007. - 6.7 percent of GDP in 2011. - Public debt-to-GDP ratio: - Increased continuously and is expected to exceed 45 percent in 2012. - Authorities committed to keeping the deficit under 6 percent in 2012 and reducing it further in the medium term. - Directors emphasized stronger debt management and welcomed the recently finalized medium-term debt strategy, encouraging reliance primarily on concessional financing. ### Political context and reform mandate - President Sall elected by a large majority; governing coalition secured a broad legislative majority in July 2012. - Government faces the challenge of accelerating reforms and meeting high popular expectations. ### IMF-supported program objectives (Policy Support Instrument approved December 2010) Key objectives: - (i) Pursue a prudent fiscal and debt policy and improve expenditure quality to maintain macroeconomic stability and lay groundwork for higher, sustainable growth. - (ii) Raise revenue to create more fiscal space for priority spending, including additional infrastructure investment. - (iii) Further strengthen public financial management and governance to enhance fiscal transparency, budget planning and execution, improve productivity of public expenditure, and reduce budgetary risks. - (iv) Stimulate private sector development through structural reforms, particularly in the energy and financial sectors, and other business climate reforms. ### Executive Board assessment and IMF statement - Program implementation described as satisfactory despite challenging internal and external environments. - Growth outlook: - Moderate pickup expected in the near term. - Rebound in agriculture and completion of large infrastructure and mining projects cited as drivers in 2012 and 2013. - With full implementation of reforms under the PSI, growth should gradually return in the medium term to pre-global financial crisis levels. - Inflation expected to remain moderate. - Fiscal strategy: - Authorities’ plan to reduce the fiscal deficit below 6 percent of GDP in 2012 and 5 percent of GDP in 2013 will help maintain debt sustainability. - Need to make space for growth-supporting public investments and other priority spending. - Priority actions: reduce cost of running government, streamline public agencies, rationalize expenditure in key sectors, phase out costly and poorly targeted subsidies while strengthening social safety nets. - Priority short-term action: accelerate implementation of new energy investments and restructuring of SENELEC (national power utility). - Financial sector: - Generally robust, but rising NPLs and concentration of lending need close monitoring. - Directors encouraged deepening and strengthening the financial system to support growth strategy. ### Quantitative program performance and structural progress - All end-June 2012 assessment criteria and indicative targets were met. - Structural measures taken or finalized in line with program commitments: - Operational and financial restructuring plan for SENELEC. - Medium-term debt management strategy (MTDS). - Draft law on fiscal transparency. - Action plan for reduction of electricity consumption subsidies. - New tax code. - Directors stressed need to improve public financial management, spending efficiency and transparency; commended efforts to reduce government running costs, streamline public agencies, and rationalize expenditure in key sectors. - Emphasis on phasing out energy price subsidies while strengthening social safety nets. ### Authorities’ statement and commitments - Measures taken to preserve fiscal sustainability: - Streamlining public agencies, downsizing Cabinet, elimination of some high-level positions and institutions. - Deficit for 2012 expected to be contained below 6 percent of GDP due to consolidation efforts and delayed execution of some energy projects. - 2013 budget aligned with objective of bringing deficit below 5 percent of GDP. - Implementation of new tax code scheduled to begin early next year; new customs code expected to be finalized and submitted to parliament during first half of 2013. - Modernization of tax administration to facilitate fiscal objectives. - Electricity subsidy policy: - Cap electricity consumption subsidies to CFAF 80 billion in 2013. - Options under consideration include cost-cutting initiatives for SENELEC and electricity tariff adjustments while sparing vulnerable households. - Debt and investment strategy: - Authorities finalized MTDS and will increase reliance on longer maturity bond issuance and concessional financing as recommended by MTDS. - A project evaluation guide is being finalized to ensure cost-benefit analyses for large investment projects. - Financial sector reform priorities: - Strengthen micro-prudential regulation, enhance banking supervision, and develop the interbank market. - Improve business and judicial environment and strengthen the tax regime to support financial development. ### Key statistics and projections (selected figures from Table 1) - GDP at constant prices growth: 2.6 (2011); Proj. 3.9 (2012 EBS/12/85); Proj. 3.7 (2012); 4.3 (2013); 4.8 (2014); 5.0 (2015); 5.1 (2016); 5.2 (2017). - Consumer prices, annual average: 3.4 (2011); 2.5 (2012 EBS/12/85); 1.5 (2012); 1.6 (2013); 1.8 (2014–2017). - Exports, f.o.b. (CFA francs) growth: 7.1 (2011); 3.2 (2012 EBS/12/85); 4.4 (2012); 6.9 (2013); 3.6 (2014); 5.4 (2015); 8.4 (2016); 9.2 (2017). - Imports, f.o.b. (CFA francs) growth: 8.9 (2011); 9.0 (2012 EBS/12/85); 9.5 (2012); 4.2 (2013); 3.4 (2014); 3.3 (2015); 6.1 (2016); 7.0 (2017). - Broad money change: 6.7 (2011); Proj. 7.5 (2012 EBS/12/85); Proj. 6.0 (2016); Proj. 7.4 (2017). - Revenue (percent of GDP): 20.2 (2011); 20.7 (2012 EBS/12/85); 20.9 (2012); 20.8 (2013); 20.9 (2014–2015); 20.6 (2016); 20.7 (2017). - Total expenditure and net lending (percent of GDP): 29.0 (2011); 29.8 (2012 EBS/12/85); 29.7 (2012); 28.4 (2013); 27.9 (2014); 27.5 (2015); 26.9 (2016); 26.7 (2017). - Overall fiscal balance (payment order basis, excluding grants): -8.9 (2011); -9.1 (2012 EBS/12/85); -8.8 (2012); -7.6 (2013); -7.0 (2014); -6.6 (2015); -6.3 (2016); -6.0 (2017). - Overall fiscal balance (payment order basis, including grants): -6.7 (2011); -6.4 (2012 EBS/12/85); -5.9 (2012); -4.9 (2013); -4.3 (2014); -3.9 (2015); -3.7 (2016); -3.5 (2017). - Primary fiscal balance ¹ (percent of GDP): -5.2 (2011); -4.9 (2012 EBS/12/85); -4.3 (2012); -3.1 (2013); -2.7 (2014); -2.4 (2015); -2.1 (2016); -1.9 (2017). - Gross domestic investment (percent of GDP): 28.7 (2011); 30.8 (2012 EBS/12/85); 30.3 (2012); 30.1 (2013); 30.2 (2014); 30.5 (2015–2017). - Gross domestic savings (percent of GDP): 12.5 (2011); 12.8 (2012 EBS/12/85); 12.8 (2012); 13.5 (2013); 14.3 (2014); 15.5 (2015); 16.4 (2016); 16.9 (2017). - External current account balance, including current official transfers (percent of GDP): -6.1 (2011); -8.3 (2012 EBS/12/85); -7.6 (2012); -7.1 (2013); -6.7 (2014); -6.3 (2015); -5.9 (2016); -5.7 (2017). - Total public debt (percent of GDP): 40.0 (2011); 44.9 (2012 EBS/12/85); 45.0 (2012); 46.8 (2013); 48.1 (2014); 48.7 (2015); 49.0 (2016–2017). - Central government domestic debt (percent of GDP): 11.3 (2011); 12.2 (2012 EBS/12/85); 12.3 (2012); 12.2 (2013); 12.7 (2014); 12.9 (2015); 13.0 (2016); 12.8 (2017). - External public debt (percent of GDP): 28.8 (2011); 32.6 (2012 EBS/12/85); 32.7 (2012); 34.6 (2013); 35.4 (2014); 35.8 (2015); 36.1 (2016); 36.2 (2017). - Gross domestic product (CFAF billions): 6,818 (2011); 7,243 (2012 EBS/12/85); 7,225 (2012); 7,718 (2013); 8,286 (2014); 8,921 (2015); 9,600 (2016); 10,351 (2017). ¹ Total revenue and grants minus total expenditure and net lending, excluding interest expenditure. *IMF Press Release No. 12/477; Public Information Notice and Executive Directors’ and Senegalese authorities’ statements (December 10, 2012).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12337.pdf_