## _cr1603

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### Tax Expenditure: definition, levels, transparency, and policy implications
- Definition and purpose:
  - Tax expenditures = revenue losses due to preferential tax provisions (special exemptions, allowances, deductions, credits, deferrals, reduced tax rates) that provide incentives for economic and social policies.
  - In Senegal, tax expenditures aim at funding poverty reduction programs and public investment projects under the Investment Code, Mining Code, and development programs.
- Recent levels and composition:
  - Tax expenditures in 2013 reached 40 percent of revenue and 7.3 percent of GDP.
  - Composition: about 60 percent target social objectives; 26 percent target economic development; about 8 percent are benefits granted under the Mining Code.
  - Tax expenditure has increased in recent years after a decline in 2008–09.
- Transparency and tax-code reforms:
  - Senegal publishes tax expenditures; information compiled up to 2013.
  - January 2013 Code Général des Impôts eliminated almost all separate codes and enclosed tax incentives inside the general tax code; significant tax expenditures nevertheless remain.
- Analysis and policy implications:
  - Despite generous incentives and large tax expenditures, FDI and productive private investment remain low relative to comparable developing countries.
  - More efficient to improve investment climate (logistics, infrastructure, regulatory framework) than to grant tax exemptions.
  - The benefit of each tax expenditure should be evaluated relative to its cost; broader incentive reforms could be financed by eliminating ineffective tax expenditures.
- Policy recommendations:
  - Systematically evaluate costs and benefits of existing tax expenditures and reform those that are ineffective.
  - Prioritize reforms to the investment climate (logistics, infrastructure, regulatory framework) over new or expanded tax exemptions.
  - Use savings from eliminating ineffective tax expenditures to finance reforms that directly support investment, jobs and growth.

### Financial-sector regulatory and supervisory reforms; resolution and deposit insurance
- Recommended measures:
  - Accelerate upgrading the regulatory framework to international standards and enhance prudential supervision.
  - Strengthen resilience of the financial sector including micro-finance institutions.
  - Raise banks’ capital requirements.
  - Subject bank holding companies incorporated in the WAEMU to appropriate banking regulation and consolidated supervision.
- Priority actions:
  - Make deposit insurance operational as a matter of priority.
  - Establish a single and independent administrative resolution mechanism to ensure prompt and effective resolution of banks with negative capital.

### Structural reforms, program progress, and enterprise restructuring
- PSE objective: promote sustained strong growth through reforms to boost private investment in key strategic sectors.
- Estimated impact:
  - The non-exhaustive list of reforms could add as much as 3–4 percentage points to Senegal’s growth potential.
- Cautions:
  - Sustained strong growth feasible but requires determined implementation of the PSE; partial implementation yields low impact.
- Government action on Senegal Airlines:
  - July decision: government agreed to take over troubled Senegal Airlines (largely privately owned), with potential budget impact.
  - Authorities to decide by end-November 2015 (MEFP ¶12) between:
    - setting up a new airline and liquidating Senegal Airlines; or
    - developing a restructuring plan that does not compensate private shareholders for their losses nor gives them shares beyond new capital contributions.
  - Restructuring or creation of a new airline would not involve fiscal outlay in 2016 and beyond unless Government takes responsibility for operational losses.
- Agency restructuring and pay reforms:
  - Closure of 16 agencies identified in initial reform plan and merger of 8 others into 3 not implemented.
  - Decree caps pay by category for directors general and executives.
  - By end-December 2015 authorities will:
    - set maximum pay levels for the rest of agency staff; and
    - update agency restructuring measures.
  - For agencies to be maintained, agency performance contracts (PCs) to be introduced by 2020.
  - With World Bank support, at least (8) PCs to be signed by December 2015.
  - By end-2015, staff at agencies earmarked for closure to be redeployed and useful functions transferred.

### Box 3 — reforms required to achieve PSE growth targets (selected sectoral reforms)
- Reforms supported by the PSI:
  - Foster macroeconomic stability for higher private investment.
  - Create budget space for public investment in human capital and infrastructure; find savings by reducing subsidies for loss-making enterprises (e.g., Senegal Airlines and Agencies).
  - Improve PFM to promote public investment effectiveness.
  - Promote tax-system reforms to simplify compliance and encourage formalization of SMEs.
- Reforms by World Bank and development partners (selected):
  - Energy sector: (i) accelerate restructuring of SENELEC; (ii) reorganize and clarify status of SAR; attract private investment via greater transparency.
  - Peanut sector: rebuild competitive oil milling sector, introduce competition, structure smallholders, upgrade small-scale oil manufacturing units, implement seed legislation.
  - Land reform: pass comprehensive land reform to establish property rights and mobilize resources for irrigation and mechanization.
  - Labor market: protect workers not jobs; facilitate labor rotation; support job search, training, unemployment benefits; emphasize ex-post verification over ex ante approval for investment.
  - Tourism: diversify supply; improve quality and promotion; develop micro tourism; improve connectivity.

### Oil-pricing and petroleum taxation policy
- Pump-price policy: stabilize pump prices while oil prices remain in the range of USD 40 to USD 60 per barrel.
- Margins for intermediaries fixed at January 2015 level.
- Price fluctuations outside this band will be passed on to consumers.
- Staff encourages abolishing special levies in favor of transfers transparently shown in the budget; proposals to be discussed at next review.

### Land reform, local-government support, and peer learning
- Expedite finalization of land reform (MEFP ¶34); comprehensive land reform proposals expected by year end from independent commission.
- PDIDAS provides technical assistance for rural communities to allocate land to private operators via an inclusive, transparent, competitive process.
- Peer-learning engagements with Mauritius (agreement with Board of Investment of Mauritius) and planned dialogue continuation with Cape Verde, Mauritius and Seychelles in January 2016.

### Program monitoring, conditionality adjustments, and benchmarks
- Quantitative ACs for 2015 and 2016 remain broadly as initially programmed.
- Understandings on new SBs and modification of existing SBs:
  - New SBs: establish an integrated projects bank covering lifecycle of projects (end-June 2016 SB); introduce medium-term budget framework (end-March 2017 SB).
  - Benchmarks on PPP evaluations and TSA establishment clarified to remove ambiguities.
- Debt policy and AC adjustments:
  - Authorities request removal of AC on external non-concessional borrowing (ENCB) in line with Fund’s new debt limits policy; rationale: Senegal at low risk of debt distress, adequate debt monitoring capacity, and comprehensive fiscal data.
  - Authorities committed to gradually lowering overall deficit (subject to an AC).
  - A debt anchor to be enshrined in the budget process starting with the 2016 budget (end-December 2015 SB).
  - No government guarantee authorized without signature of Minister of Finance; information on guaranteed external debt available and published by Ministry of Finance.
  - Staff recommends better recognition and control of contingent liabilities from PPP projects.
- PPP evaluation benchmark:
  - Authorities propose eliminating continuous benchmark on PPP evaluation going forward.
  - One PPP project evaluated: Train Express Regional; government adopted IMF’s new P-FRAM tool for analyzing fiscal impact of PPPs; to be applied to new PPPs including in PRE context.
  - Staff supports implementation of PPP evaluation policy rather than continuous monitoring.
- TSA implementation timetable:
  - First-generation TSA (limited to Treasury bank accounts) to be extended in Q1 2016.
  - By end-June 2016, TSA coverage to include bank accounts of network of accounting officials of public agencies and institutions.
  - Second-generation TSA consolidation to be finalized in December 2017.

### Macroeconomic performance, risks, and policy priorities (staff appraisal)
- Growth:
  - Historical average of 3–3.5 percent over last 30 years.
  - 4.7 percent in 2014; 5.1 percent in 2015.
  - PSI target: 5.9 percent growth targeted under the PSI is realistic with accelerated actions.
- Inflation remains contained.
- Fiscal deficits declining and expected to reach WAEMU convergence criterion of 3 percent of GDP by 2018 (one year ahead of schedule).
- Fiscal policy and revenue risks:
  - Authorities intend to keep 2015 and 2016 fiscal deficit targets in line with program.
  - Commitment to use PRE-created space to adjust expenditure if end-year tax revenue shortfall.
  - Shortfall in tax revenue at end-June indicates need for strong policy responses to raise revenue and control expenditure.
  - Action on tax expenditures important to safeguard revenues and achieve PSE growth targets.
  - For 2016 budget, measures to raise revenue and control expenditure must be solidified to meet 4.2 percent of GDP deficit target.
  - Energy subsidies should be kept at the level realized through June 2015 and eliminated altogether in 2016.
- Institutional reforms and monitoring tools:
  - Expansion and institutionalization of the PRE, adoption of a debt anchor, and operationalization of the P-FRAM toolkit commended.
  - Successful implementation requires concerted departmental efforts and continued collaboration with Fund staff.
- Governance, rent seeking, and enterprise restructuring:
  - Critical to tackle rent seeking and continue reform of agencies, energy sector, and enterprises in difficulty.
  - Restructuring Senegal Airlines must be forceful and timely to avoid taxpayer burden and enhance governance credibility.

### Recommendation on PSI review and Assessment Criterion
- Staff recommends completion of the first PSI review and supports the authorities’ request for modification of the Assessment Criterion on external non-concessional borrowing.

### High-frequency indicators and recent developments (narratives)
- Inflation: after being negative for more than a year, inflation picked up in May and June of 2015, driven by food price inflation.
- Exchange rates: Senegal gained some price competitiveness owing to real depreciation.
- Industrial Production Index and Real GDP Growth: growth driven by secondary and tertiary and, more recently, the primary sectors.
- Near- and medium-term projection narratives:
  - Growth expected to pick up gradually while inflation would remain moderate.
  - Fiscal consolidation predicated on expenditure and revenue measures which would keep Senegal at low risk of debt distress; fiscal consolidation would help reduce external vulnerability.

### Selected projected series and aggregated indicators (as presented — numbers preserved)
- GDP at constant prices row (as shown): 3.64.75.15.15.95.96.47.07.17.2
- Of which: nonagriculture GDP (as shown): 3.94.75.05.35.85.86.47.07.17.1
- GDP deflator (as shown): -1.90.11.40.22.31.81.51.61.71.8
- Consumer prices — Annual average (as shown): 0.7-1.1-0.9-0.51.51.31.31.31.31.3
- Consumer prices — End of period (as shown): -0.1-0.80.81.21.41.31.31.31.31.3
- Exports, f.o.b. (CFA francs) (as shown): 1.53.53.83.15.33.68.17.97.59.5
- Imports, f.o.b. (CFA francs) (as shown): 0.8-1.14.12.45.65.86.46.77.06.1
- Export volume (as shown): 9.35.76.05.97.35.56.66.55.97.7
- Import volume (as shown): 2.13.96.89.65.76.46.17.17.26.5
- Current account balance (official transfers included, percent of GDP) (as shown): -10.4-8.8-8.0-8.2-7.2-8.7-8.3-8.1-8.0-7.8
- Current account balance (official transfers excluded, percent of GDP) (as shown): -11.1-9.6-9.1-9.2-8.4-9.7-9.3-9.1-8.9-8.6
- Total public debt (percent of GDP) (as shown): 46.653.255.054.456.055.155.454.857.355.1
- External public debt (percent of GDP) (as shown): 32.439.535.739.337.839.338.937.945.645.7
- External public debt service — Percent of exports (as shown): 6.57.49.79.610.010.09.710.310.611.4
- Revenue (percent of GDP) (as shown): 22.524.224.324.424.224.324.324.324.424.4
- Total expenditure (percent of GDP) (as shown): 27.929.229.029.228.428.627.927.327.227.0
- Net lending/borrowing (Overall Balance) including grants (percent of GDP) (as shown): -5.5-4.9-4.7-4.8-4.2-4.2-3.6-3.0-2.8-2.6
- Primary fiscal balance (percent of GDP) (as shown): -3.9-3.2-2.9-2.9-2.4-2.4-1.9-1.3-1.3-0.5

### Balance of payments — selected levels (Billions of CFAF)
- Current account (2014–20, Act./Est./Proj. row as shown): -766-678-672-769-789-839-897-957
- Exports, f.o.b. (Billions of CFAF) (as shown): 1,4231,4731,5181,5731,7001,8341,9722,159
- Imports, f.o.b. (Billions of CFAF) (as shown): -2,893-2,863-2,932-3,103-3,303-3,523-3,768-3,998
- Services and incomes (net) (as shown): -216-257-282-313-324-341-357-445
- Unrequited current transfers (net) (as shown): 9219701,0231,0741,1371,1911,2571,326

### Fiscal operations (Central Government, selected items; Billions of CFAF and percent of GDP)
- Revenue (Billions of CFAF) (as shown): 1,8771,9782,0041,9912,1412,3042,5112,7392,994
- Taxes (Billions of CFAF) (as shown): 1,4831,6021,5951,5831,7201,8682,0492,2432,471
- Grants (Billions of CFAF) (as shown): 253229240240262277293310305
- Expense (Billions of CFAF) (as shown): 1,4001,3911,4171,4071,4901,4691,5501,6931,896
- Net acquisition of nonfinancial assets (Billions of CFAF) (as shown): 8589629769741,0231,1791,2731,3631,412
- Net lending/borrowing (Overall balance) (Billions of CFAF) (as shown): -381-376-389-389-372-344-312-317-314

### Monetary and financial indicators (selected)
- Broad money (Billions of CFAF, series as shown): 2,8963,1273,4853,7093,973
- Net foreign assets (Billions of CFAF) (as shown): 8798581,0781,1931,246
- Credit to the economy (Billions of CFAF; percentage growth noted) (as shown): 2,1442,4142,5682,8003,044 and "Credit to the economy (percentage growth)9.612.66.4 9.18.7"
- Financial soundness indicators (selected series as shown):
  - Ratio of non-performing loans (NPLs) to total loans: 17.418.720.216.218.419.120.823.0
  - Ratio of provisions for NPLs to total NPLs: 51.553.154.954.056.155.858.152.7

### Program monitoring, assessment criteria, and structural benchmarks (selected)
- Quantitative ACs and indicative targets include floors and ceilings on net lending/borrowing, nonconcessional external debt, budgetary float, and tax revenue; mixed compliance noted (series and met/not met indicators as presented).
- Structural benchmarks (status and dates as presented, selected):
  - Conduct ex-ante, midterm, and ex post evaluation of all PPP projects — Continuous — Ongoing.
  - Sign performance contracts for eight agencies — December 2015 — Ongoing.
  - Eliminate cash tax payments above CFAF 100,000 — June 2015 — Completed.
  - Operationalize connection between DGI and DGID using NINEA — December 2015 — Ongoing.
  - Submit at least ten investment projects listed in 2016 budget for cost–benefit analysis — October 2015 — Completed.
  - Establish integrated projects bank platform — June 2016.
  - Introduce medium-term budget framework — March 2017.

### Letter of Intent and MEFP — program framework and objectives (selected)
- Request: Government of Senegal requests completion of first review of 2015–17 macroeconomic program supported by PSI.
- PSE strategic pillars: (i) structural transformation and growth; (ii) human capital, social protection, sustainable development; (iii) governance, peace, security, rule of law.
- Program objectives: guide PSE implementation relying on high, sustainable, inclusive growth to reduce poverty while safeguarding macro stability and debt sustainability.
- Recent developments and implementation:
  - GDP growth: 4.6 percent in Q1 2015 and 5.2 percent in Q2 2015.
  - Growth expectations: exceed 5 percent in 2015 and be close to 6 percent in 2016.
  - Inflation (first six months of 2015 over 2014): -0.7 percent; expected to stay below 2 percent.
  - GDP deflator: 0.2 percent in 2015; should be 1.8 percent in 2016.
  - All end-June 2015 assessment criteria met; end-June indicative target on tax revenue missed by 0.4 percent of GDP.
- Fiscal policy remainder of 2015:
  - Budget deficit target for 2015: CFAF 389 billion (4.8 percent of revised GDP).
  - Expected revenue gap: may amount to 14 billion.
  - Measures to close gap: reduce tax expenditures; control expenditure; examine parafiscal taxes; include petroleum parafiscal taxes in budget and treat transfers as subsidy.
  - Wage bill cap: limit wage bill to CFAF 526 billion in 2015; cap on corps émergents hires at 4,000.
  - Precautionary reserve institutionalized: CFAF 52 billion mobilized for 2015 investment priorities.

### Precautionary management reserve and mobilization of nonconcessional loans (2016)
- 2016 budget precautionary management reserve: 45 billion.
  - Composition: operating reserve = CFAF 10 billion; investment reserve = CFAF 35 billion (mobilized only for projects with demonstrated profitability via feasibility study).
  - Mobilization subject to ministerial reforms implementation (higher education, national education, health, social action).
- Mobilization of nonconcessional external loans in 2016 considered for investment projects (road infrastructure, energy, urban water, sanitation).
- Debt management and monitoring commitments:
  - Develop medium-term debt strategy appended to budget.
  - Announce, for 2016 budget, central government debt ratio sustainable over five years with corrective measures if thresholds exceeded.
  - Establish database and monitoring mechanism for all external and domestic debt by public enterprises and collateral.
  - Strengthen and expand CNDP.

### Strengthening PFM, TSA, governance, and private-sector promotion (selected)
- TSA deployment targets:
  - Extend first-generation TSA to network of accounting officials by June 2016 (structural benchmark).
  - Finalize TSA consolidation by December 2017.
- Energy sector reform:
  - Estimated cost: CFAF 225 billion between 2016 and 2018.
  - Reform plan to be submitted by end-November 2015 for technical support and financing.
- Financial inclusion, SME support, and diversification:
  - National financial inclusion strategy in 2016.
  - Introduce credit information bureaus (BIC) in 2015.
  - BNDE to increase SME/SMI financing from 2016, with target average annual rate around 6.5 percent.
  - Diversify non-bank instruments: factoring action plan, Islamic finance development, capital markets, procurement fund strategy.

### Debt guarantees, reporting, and program data transmission (selected)
- Debt guarantees defined as explicit public-sector legal obligations to service a debt in the event of nonpayment.
- External debt defined as debt borrowed or serviced in a currency other than the CFA franc.
- Government reporting requirements to Fund staff include timely transmission (three days after adoption) of decisions with economic/financial implications and regular preliminary and final fiscal and debt data within specified lags (30 days, one month, two months as applicable).
- Central bank to transmit monthly balance sheet (lag one month), monthly consolidated bank balance sheet (lag two months), monetary survey (lag two months), lending/deposit rates (monthly), and prudential FSIs (quarterly, lag two months).

### Debt sustainability analysis — baseline, projections, stress tests, and recommendations
- Risk rating:
  - Senegal remains at low risk of debt distress (consistent with Staff Report December 2014 and DSA update June 2015).
- Recent debt stock and composition:
  - External public debt estimated at 39.3 percent of GDP in 2015 (vs. 35.7 percent projected in previous DSA).
  - Commercial debt = 20 percent of total external public debt in 2014.
  - Domestic debt increased from FCFA 1,065.5 billion at end-2014 to FCFA 1,151.5 billion in July 2015; projected at 15.0 percent of GDP.
  - Total public debt = US$7.52 billion or 54.4 percent of GDP (0.6 percentage point less than previous DSA estimate).
- Underlying macro assumptions (selected):
  - Real GDP growth: estimated 5.1 percent in 2015; increase to 7.2 percent in 2020; long run revised to 5.8 percent over 2021–35 (from 7.8 percent in previous DSA).
  - Fiscal deficit: 4.8 percent of GDP in 2015; 4.2 percent in 2016; declining to 2.6 percent in 2020.
  - Current account deficit: revised from 8.0 to 8.2 percent of GDP in 2015; 8.7 percent in 2016; projected 7.8 percent in 2020; long-term ~7½ percent of GDP.
  - Inflation (GDP deflator): 0.2 percent in 2015; 1.8 percent in 2020.
  - External financing terms: average maturity of new debt above 18 years; 4.5 years grace; average cost of new borrowing 2.6 percent.
  - Domestic debt assumed 30 percent of total public debt; 7.5 percent with maturity below one year; new domestic debt real interest rate 4 percent; average maturity 4 years.
  - Discount rate for DSA: 5 percent.
- External DSA projections and stress tests:
  - PV of PPG external debt projected at 31.1 percent of GDP in 2015; declining to 27.9 percent in 2020 and 18.8 percent in 2035.
  - External debt indicators below thresholds under baseline and stress tests except ratio of debt service to revenue showing two spikes that marginally breach threshold due to Eurobond bullet repayments; breaches small and temporary.
- Public DSA and total public debt trajectory (selected)
  - Baseline public debt ratio path:
    - 46.1 percent of GDP in 2015;
    - 47.3 percent of GDP in 2017;
    - 44.5 percent of GDP in 2020;
    - Over time projected to get closer to 40 percent.
  - Under extreme 30 percent depreciation in 2016: debt ratios increase more until 2020; long-term evolution similar to baseline.
  - Historical scenario (real growth and primary balance at historical levels): PV of total public debt grows and in 2026 projected above benchmark of 74 percent of GDP.
  - Conservative scenario parameterization: primary deficit set at 3.3 percent; real GDP growth at 3.8 percent.
- Stress-test conclusions and recommendations:
  - Overall assessment: low risk of debt distress.
  - Minor, temporary breaches driven by Eurobond bullet payments.
  - Debt sustainability hinges on continued fiscal consolidation and achieving high, sustained growth per PSE.
  - Recommendation: cautious approach to semi-concessional and commercial borrowing after removal of non-concessional borrowing limit; continuous monitoring of financing needs and borrowing plans; focus on costs/benefits of Euro vs regional CFAF financing to minimize exchange risks.
  - Authorities concurred with analysis and broadly concurred with maintaining “low” debt risk rating and stressed need to reinforce debt management capacity.

*Source: IMF staff report excerpt — _cr1603 (PDF chapter/section, content compiled up to 2015).*

### 1. Tax Expenditure  _________________________________________________________________________________  7

### 1. Tax Expenditure

### Definition and purpose
- Tax expenditures are defined as revenue losses due to preferential tax provisions that provide incentives for economic and social policies, e.g. special exemptions, allowances, deductions, credits, deferrals, reduced tax rates that shield certain taxpayers from tax rules.
- In Senegal, tax expenditures aim at funding poverty reduction programs and public investment projects under the Investment Code, Mining Code, and development programs.

### Recent levels and composition
- Tax expenditures in 2013 reached 40 percent of revenue and 7.3 percent of GDP.
- About 60 percent of exemptions target social objectives, 26 percent target economic development, and about 8 percent are benefits granted under the Mining Code.
- Tax expenditure has increased in recent years after a decline in 2008–09.

### Transparency and tax-code reforms
- Senegal publishes tax expenditures and information has been compiled up to 2013.
- In January 2013 a new Code Général des Impôts came into force that eliminated almost all separate codes and enclosed tax incentives inside the general provisions of the tax code. Despite this improvement, significant tax expenditures remain.

### Analysis and policy implications
- Despite generous incentives and large tax expenditures, FDI and productive private investment are low in Senegal compared with similar developing countries.
- It is more efficient for Senegal to improve the investment climate (logistics, infrastructure and regulatory framework) rather than granting tax exemptions.
- The benefit of each tax expenditure should be evaluated relative to its cost; reforms of broader incentives could be largely financed by eliminating tax expenditures that have failed to contribute to investment, jobs and growth.

### Policy recommendations
- Systematically evaluate the costs and benefits of existing tax expenditures and reform those that are ineffective.
- Prioritize reforms to the broader investment climate (logistics, infrastructure, regulatory framework) over new or expanded tax exemptions.
- Use potential savings from eliminating ineffective tax expenditures to finance reforms that more directly support investment, jobs and growth.

*Source: IMF staff report excerpt — "1. Tax Expenditure" (content compiled up to 2013).*

### 18.      The authorities were encouraged to accelerate the steps being taken to upgrade the

### _cr1603 - 18.      The authorities were encouraged to accelerate the steps being taken to upgrade the

### Financial-sector regulatory and supervisory reforms
- Authorities encouraged to accelerate steps to upgrade the regulatory framework to international standards and to enhance prudential supervision.
- Reforms aimed at strengthening the resilience of the financial sector including micro-finance institutions.
- Staff reinforced 2015 regional consultation mission recommendation with WAEMU institutions that authorities proceed expeditiously to:
  - raise banks’ capital requirements; and
  - subject bank holding companies incorporated in the WAEMU to appropriate banking regulation and consolidated supervision.
- Priority actions recommended:
  - Make the deposit insurance operational as a matter of priority.
  - Establish a single and independent administrative resolution mechanism to ensure prompt and effective resolution of banks with negative capital.

### Structural reforms — program progress and outstanding actions
- General progress reported, but more decisive measures required to meet PSE growth targets.
- Government action on Senegal Airlines:
  - Government agreed in July to take over the troubled Senegal Airlines, largely owned by the private sector, with potential impact on the budget.
  - Authorities to decide by end-November 2015 (MEFP ¶12) between:
    - setting up a new airline and liquidating Senegal Airlines; or
    - developing a restructuring plan which does not compensate private shareholders for their losses, nor will they receive a share of the company beyond their new capital contribution.
  - Government will look for strategic partners to ensure successful operation and profitability of the restructured or newly created airline.
  - Such restructuring, or creation of a new airline, would not involve any fiscal outlay in 2016 and beyond, unless the Government takes responsibility for operational losses.

- Agency restructuring:
  - Agency restructuring plan will be updated and strengthened (MEFP ¶9–10).
  - Closure of the 16 agencies identified in the initial reform plan and the merger of 8 other agencies into 3 agencies has not been implemented.
  - A decree currently caps level of pay by category for directors general and executives.
  - By end-December 2015, authorities will:
    - set the maximum levels of pay for the rest of agency staff; and
    - update the agency restructuring measures.
  - For agencies to be maintained, agency performance contracts (PCs) will be introduced by 2020.
  - With World Bank support, at least (8) PCs will be signed by December 2015 and their implementation will be closely monitored.
  - By end-2015, staff at agencies earmarked for closure will be redeployed and useful functions transferred to other agencies.

### Box 3 — Reforms required to achieve PSE growth targets
- PSE objective: promote sustained strong growth through economic reforms designed to boost private investment in key strategic sectors.
- Estimated impact:
  - The (non-exhaustive) list of reforms provided could add as much as 3–4 percentage points to Senegal’s growth potential.
- Caution:
  - Sustained strong growth is feasible but requires determined implementation of the PSE and a break with the status quo.
  - Partial implementation could result in a low impact on growth.

- Reforms supported by the PSI:
  - Foster the macroeconomic stability needed for higher levels of private investment.
  - Create budget space for required public investment in human capital and public infrastructure; savings can be found by reducing subsidies for loss-making enterprises, such as Senegal Airlines and Agencies.
  - Improve PFM to promote the effectiveness of public investment.
  - Promote tax-system reforms to make it simple and easy to comply with, encouraging informal SMEs to join the formal sector.

- Reforms to be supported by the World Bank and other development partners:
  - Energy sector reform:
    - (i) accelerate restructuring of SENELEC to increase electricity supply and reduce costs of production;
    - (ii) reorganize and clarify status of the African Refining Company (Société Africaine de Raffinage––SAR);
    - attract more private investment by making sector structure more transparent.
  - Peanut sector reform aligned with PSE and PRACAS objectives: rebuild competitive oil milling sector, introduce increased competition, structure and regulate smallholders, upgrade small-scale oil manufacturing units, implement seed legislation to promote small processing companies and curb exports of unprocessed seeds.
  - Pass comprehensive land reform to establish property rights that encourage loans and private investment in agriculture; introduce measures to mobilize resources for irrigation and mechanization.
  - Labor market reform to protect workers instead of jobs: facilitate labor rotation for economic reasons while supporting job search, training, and an unemployment benefit system; create an investment regime emphasizing ex-post verification over ex ante approval.
  - Finalize tourism-sector reforms: (i) diversify supply; (ii) improve quality of services and labor; (iii) improve promotion of Senegal as popular tourist destination; (iv) develop micro tourism; and (v) improve connectivity to targeted markets.

### Oil-pricing and petroleum taxation policy
- Authorities’ pump-price policy: stabilize pump prices while oil prices remain in the range of USD 40 to USD 60 per barrel.
- Margins for intermediaries fixed at January 2015 level.
- Price fluctuations outside this band will be passed on to consumers.
- Staff encourages abolishing special levies in favor of transfers transparently shown in the budget to bring transparency to petroleum taxation; these proposals will be discussed at the next review.

### Land reform, local-government support, and peer learning
- Finalization of land reform to be expedited (MEFP ¶34); comprehensive land reform proposals expected by year end from an independent commission.
- PDIDAS provides technical assistance for rural communities to allocate land to private operators via an inclusive, transparent, and competitive process.
- Peer-learning:
  - Authorities have engaged with Mauritian counterparts and signed an agreement with the Board of Investment of Mauritius.
  - In January 2016, Fund staff will facilitate continuation of dialogue with Cape Verde, Mauritius and Seychelles, potentially extending to other middle-income countries if authorities and IMF funding is available.

### Program monitoring and conditionality adjustments
- Quantitative ACs for 2015 and 2016 remain broadly as initially programmed.
- Understandings reached with authorities on new SBs and modification of existing SBs:
  - New SBs: establish an integrated projects bank covering the lifecycle of projects (end-June 2016 SB); introduce a medium-term budget framework (end-March 2017 SB).
  - Benchmarks on PPP evaluations and establishment of the Treasury Single Account (TSA) clarified to remove ambiguities.

- Debt policy and AC adjustments:
  - Authorities request removal of the AC on external non-concessional borrowing (ENCB) in line with Fund’s new debt limits policy.
  - Rationale: Senegal remains at low risk of debt distress, has adequate debt monitoring capacity, and comprehensive and reliable fiscal data for program monitoring.
  - Authorities committed to gradually lowering the overall deficit (subject to an AC).
  - A debt anchor will be enshrined in the budget process starting with the 2016 budget (end-December 2015 SB).
  - No government guarantee can be authorized without the signature of the Minister of Finance; all information on guaranteed external debt is available and published by the Ministry of Finance.
  - Staff recommends better recognition and control of contingent liabilities arising from PPP projects.

- PPP evaluation benchmark:
  - Authorities propose eliminating the continuous benchmark on evaluation of PPP projects going forward.
  - Authorities have evaluated one PPP project, the Train Express Regional, and are committed to continuing the practice.
  - Government has adopted the IMF’s new P-FRAM tool for analyzing fiscal impact of PPPs; it will be applied to new PPPs, including in the context of the newly introduced PRE.
  - Given institutional advances, staff will support implementation of PPP evaluation policy rather than requiring continuous monitoring, freeing resources for other PFM goals (integrated project bank, medium-term budget framework).

- TSA implementation timetable modification:
  - Earlier benchmark to “finalize” the TSA in December 2015 referred only to the start of the process.
  - Authorities intend to accelerate TSA implementation:
    - In the first quarter of 2016, extend the first-generation TSA (limited to Treasury bank accounts).
    - By end-June 2016, TSA coverage will include bank accounts of the network of accounting officials of public agencies and institutions.
    - Consolidation of other public-institution accounts (second-generation TSA) will be finalized in December 2017.

### Staff appraisal — macroeconomic performance, risks, and policy priorities
- Macroeconomic performance:
  - Growth: historical average of 3–3.5 percent over the last 30 years; 4.7 percent in 2014; 5.1 percent in 2015.
  - PSI target: 5.9 percent growth rate targeted under the PSI is realistic provided action on tackling rents and opening the economy is accelerated.
  - Inflation remains contained.
  - Fiscal deficits declining and expected to reach the WAEMU convergence criteria of 3 percent of GDP by 2018, a year ahead of schedule.

- Fiscal policy and revenue risks:
  - Staff welcomes authorities’ intention to keep 2015 and 2016 fiscal deficit targets in line with the program.
  - Commitment to use PRE-created space to adjust expenditure in the event of end-year shortfall in tax revenue.
  - Shortfall in tax revenue at end-June suggests strong policy responses are needed to raise revenue and control expenditure to ensure continued fiscal consolidation.
  - Action on tax expenditures important to safeguard revenues and open up the economy to achieve PSE growth targets.
  - For the 2016 budget, measures to raise revenue and control expenditure must be solidified to meet the 4.2 percent of GDP deficit target.
  - Energy subsidies should be kept at the level realized through June 2015 and eliminated altogether in 2016.

- Institutional reforms and monitoring tools:
  - Authorities’ decision to expand and institutionalize the PRE, adopt a debt anchor, and operationalize the P-FRAM toolkit is commendable.
  - Successful implementation will require concerted efforts across concerned departments within key ministries and continued collaborative work with Fund staff.

- Governance, rent seeking, and enterprise restructuring:
  - Critical to tackle rent seeking and continue to reform agencies, the energy sector, and enterprises in difficulty.
  - Success of fiscal consolidation and PSE growth targets depends on transparency and accountability of government agencies and public enterprises.
  - Energy-sector efficiency and viability are important for promoting SME growth and FDI.
  - Plan to restructure Senegal Airlines needs forceful and timely implementation to avoid unnecessary burden on taxpayers and to enhance credibility on governance.

*Source: _cr1603 - 18.      The authorities were encouraged to accelerate the steps being taken to upgrade the (PDF chapter/section).*

### 32.      Staff recommends completion of the first PSI review and supports the authorities’

### 32.      Staff recommends completion of the first PSI review and supports the authorities’ request for modification of the Assessment Criterion on external non-concessional borrowing.

### Recommendation
- Staff recommends completion of the first PSI review and supports the authorities’ request for modification of the Assessment Criterion on external non-concessional borrowing.

### Recent developments (high-frequency indicators)
- CPI Inflation (12-month inflation rate) series illustrated for 2014M1–2015M9 with Energy, Food, and Overall components; narrative: "After being in the negative territory for more than a year, inflation picked up in May and June of 2015, driven by food price inflation."
- Real and nominal effective exchange rates (12-month percentage change) shown for 2014M1–2015M7; narrative: "Senegal gained some price competitiveness owing to real depreciation."
- Industrial Production Index (IPI) (Annual percentage change, quarterly basis) shown 2012Q4–2015Q2 with Food, Construction, Energy components.
- Real GDP Growth (Annual percentage change, quarterly basis) series with sectoral contributions (Primary sector, Secondary sector, Tertiary sector, Total GDP); narrative: "Growth is driven by the secondary and tertiary and, more recently, the primary sectors."

### Near- and medium-term projections (key narratives)
- Growth: "Growth is expected to pick up gradually while inflation would remain moderate."
- Fiscal consolidation: "Fiscal consolidation is predicated on expenditure and revenue measures..."
- Debt and external vulnerability: "...which would keep Senegal at low risk of debt distress." and "Fiscal consolidation would help reduce external vulnerability."

### Selected projected series and aggregated indicators (as presented)
- GDP at constant prices row (as shown): 3.64.75.15.15.95.96.47.07.17.2
- Of which: nonagriculture GDP (as shown): 3.94.75.05.35.85.86.47.07.17.1
- GDP deflator (as shown): -1.90.11.40.22.31.81.51.61.71.8
- Consumer prices — Annual average (as shown): 0.7-1.1-0.9-0.51.51.31.31.31.31.3
- Consumer prices — End of period (as shown): -0.1-0.80.81.21.41.31.31.31.31.3
- Exports, f.o.b. (CFA francs) (as shown): 1.53.53.83.15.33.68.17.97.59.5
- Imports, f.o.b. (CFA francs) (as shown): 0.8-1.14.12.45.65.86.46.77.06.1
- Export volume (as shown): 9.35.76.05.97.35.56.66.55.97.7
- Import volume (as shown): 2.13.96.89.65.76.46.17.17.26.5
- Current account balance (official transfers included, percent of GDP) (as shown): -10.4-8.8-8.0-8.2-7.2-8.7-8.3-8.1-8.0-7.8
- Current account balance (official transfers excluded, percent of GDP) (as shown): -11.1-9.6-9.1-9.2-8.4-9.7-9.3-9.1-8.9-8.6
- Total public debt (percent of GDP) (as shown): 46.653.255.054.456.055.155.454.857.355.1
- External public debt (percent of GDP) (as shown): 32.439.535.739.337.839.338.937.945.645.7
- External public debt service — Percent of exports (as shown): 6.57.49.79.610.010.09.710.310.611.4
- Revenue (percent of GDP) (as shown): 22.524.224.324.424.224.324.324.324.424.4
- Total expenditure (percent of GDP) (as shown): 27.929.229.029.228.428.627.927.327.227.0
- Net lending/borrowing (Overall Balance) including grants (percent of GDP) (as shown): -5.5-4.9-4.7-4.8-4.2-4.2-3.6-3.0-2.8-2.6
- Primary fiscal balance (percent of GDP) (as shown): -3.9-3.2-2.9-2.9-2.4-2.4-1.9-1.3-1.3-0.5

### Balance of payments (selected levels, in Billions of CFAF)
- Current account (2014–20, Act./Est./Proj. row as shown): -766-678-672-769-789-839-897-957
- Exports, f.o.b. (Billions of CFAF) (as shown): 1,4231,4731,5181,5731,7001,8341,9722,159
- Imports, f.o.b. (Billions of CFAF) (as shown): -2,893-2,863-2,932-3,103-3,303-3,523-3,768-3,998
- Services and incomes (net) (as shown): -216-257-282-313-324-341-357-445
- Unrequited current transfers (net) (as shown): 9219701,0231,0741,1371,1911,2571,326

### Fiscal operations (Central Government, GFSM 2001 classification — selected items, in Billions of CFAF and percent of GDP)
- Revenue (Billions of CFAF) (as shown): 1,8771,9782,0041,9912,1412,3042,5112,7392,994
- Taxes (Billions of CFAF) (as shown): 1,4831,6021,5951,5831,7201,8682,0492,2432,471
- Grants (Billions of CFAF) (as shown): 253229240240262277293310305
- Expense (Billions of CFAF) (as shown): 1,4001,3911,4171,4071,4901,4691,5501,6931,896
- Net acquisition of nonfinancial assets (Billions of CFAF) (as shown): 8589629769741,0231,1791,2731,3631,412
- Net lending/borrowing (Overall balance) (Billions of CFAF) (as shown): -381-376-389-389-372-344-312-317-314

### Monetary and financial indicators (selected)
- Broad money (Billions of CFAF, series as shown): 2,8963,1273,4853,7093,973
- Net foreign assets (Billions of CFAF) (as shown): 8798581,0781,1931,246
- Credit to the economy (Billions of CFAF; percentage growth noted) (as shown): 2,1442,4142,5682,8003,044 and "Credit to the economy (percentage growth)9.612.66.4 9.18.7"
- Financial soundness indicators highlight: Ratio of non-performing loans (NPLs) to total loans (series as shown) 17.418.720.216.218.419.120.823.0 and Ratio of provisions for NPLs to total NPLs (series as shown) 51.553.154.954.056.155.858.152.7

### Program monitoring, assessment criteria, and structural benchmarks
- Quantitative assessment criteria and indicative targets (selected):
  - Floor on net lending/borrowing (cumulative GFSM 2014 definition): ...-144-138met-255-389-52-137-244-372
  - Ceiling on the contracting or guaranteeing of new nonconcessional external debt by the public sector (US$ millions): ...1,0000met
  - Ceiling on the amount of the budgetary float: ...5028met505050505050
  - Floor on tax revenue (CFAF billions row shows series): ...825796   not met1,1811,5833968891,2831,720
- Structural benchmarks (status and dates as presented):
  - Conduct an ex-ante, midterm, and ex post evaluation of all projects financed under a public-private partnership (PPP) — Continuous — Ongoing
  - Sign performance contracts for eight agencies — December 2015 — Ongoing
  - Eliminate cash tax payments above CFAF 100,000 — June 2015 — Completed
  - Operationalize the connection between the DGI and the DGID to facilitate the exchange of data based on the unique identification NINEA — December 2015 — Ongoing
  - Submit at least ten investment projects listed in the 2016 budget for cost–benefit analysis — October 2015 — Completed
  - For the 2016 budget, announce the debt ratio sustainable over five years with the commitment that, in case thresholds are exceeded, corrective measures (over four years) would be taken in the budget that follows — December 2015 — Ongoing
  - Expand the precautionary reserve envelope for the 2016 budget — December 2015 — Completed
  - Collect at least 50 percent of taxes left unpaid in 2014 — December 2015 — Ongoing
  - Implement the agency reform plan by limiting budget resources, and restricting their use to the payment of wages, for the 16 agencies pending dissolution — December 2015 — Ongoing
  - Institutionalize the precautionary management reserve — September 2015 — Completed
  - Finalize the government flow-of-funds table according to Government Finance Statistics Manual 2001/14 — December 2015 — Ongoing
  - 2016 benchmarks: Establish integrated projects bank platform (June 2016); Develop management strategy for government and public enterprise investment portfolios (March 2016); Extend first-generation TSA to all bank accounts of accounting officials (June 2016)
  - 2017 milestones: Establish accrual basis accounting with initiation of government’s opening balance (January 2017); Introduce a medium-term budget framework (March 2017)

*Sources: Senegal authorities; and IMF staff calculations, estimates, and projections.*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Request and program framework
- The Government of Senegal requests completion of the first review of its 2015–17 macroeconomic program supported by the Policy Support Instrument (PSI).
- The program details were set forth in the initial Memorandum of Economic and Financial Policies (MEFP) of May 8, 2015.
- The attached MEFP reviews implementation over the past six months and updates short- and medium-term objectives and policies under the program.
- The government authorizes the IMF to publish this letter, the attached MEFP, and the related Staff Report, which includes a debt sustainability analysis.
- Attachments listed: I. Memorandum of Economic and Financial Policies (MEFP); II. Technical Memorandum of Understanding (TMU).

### Plan Sénégal Emergent (PSE) and program objectives
- The policies are consistent with the Plan Sénégal Emergent (PSE), which focuses on three strategic pillars:
  - (i) structural transformation of the economy and growth;
  - (ii) human capital, social protection, and sustainable development;
  - (iii) strengthening of governance, promotion of peace and security, and consolidation of the rule of law.
- Program objective: guide implementation of the PSE relying on high, sustainable, and inclusive growth to substantially reduce poverty while safeguarding macroeconomic stability and debt sustainability.
- Reforms aim to restore the government’s fiscal space and create a more attractive business environment for private-sector development.

### Recent economic developments and program implementation
- GDP growth: 4.6 percent in the first quarter of 2015 and 5.2 percent in the second quarter of 2015.
- Growth expectations: exceed 5 percent in the course of 2015 and be close to 6 percent in 2016.
- Inflation: measured as average prices during first six months of 2015 over corresponding period of 2014 amounted to -0.7 percent and will stay below 2 percent.
- GDP deflator: 0.2 percent in 2015 and should be 1.8 percent in 2016; led to downward revisions of nominal GDP for 2015 and 2016.
- Program quantitative assessment criteria for end-June 2015:
  - All end-June assessment criteria were met.
  - End-June indicative target on tax revenue missed by 0.4 percent of GDP due to shortfall in customs revenue (higher than anticipated tax expenditure, January 2015 introduction of the ECOWAS common external tariff, and lower oil prices).
  - Continued rationalization and better control of public expenditure helped meet the fiscal deficit target despite revenue shortfall.
- Structural benchmarks: all met. Examples:
  - Payments of tax amounts over CFAF 100,000 in cash eliminated (structural benchmark June 2015).
  - Precautionary Reserve envelope institutionalized in the draft budget 2016 (structural benchmark September 2015).
  - Cost-benefit analyses for more than ten projects included in the 2016 budget (structural benchmark October 2015).
  - Progress toward establishing the TOFE in accordance with GFSM 2001/2014 and assessing PPP-financed projects.

### Fiscal policy (remainder of 2015)
- Budget deficit target for 2015: CFAF 389 billion (4.8 percent of the revised GDP) — remains unchanged.
- Expected revenue gap: may amount to 14 billion, attributable notably to customs revenue.
- Measures to close gap and maintain deficit level:
  - Reduce tax expenditures.
  - Control expenditure, in particular expenditure related to the precautionary reserve.
  - Comprehensive examination of parafiscal taxes, including those on petroleum products, with these taxes to be included in the budget and corresponding transfers treated as a subsidy.
- Wage bill control:
  - Freeze pay supplements at current level.
  - Tighten controls on overtime.
  - Cap number of staff hired under “corps émergents” integrated into the civil service at 4,000.
  - Freeze recruitment in selected, non-priority areas (excluding security and front-line staff in education and health).
  - Limit the wage bill to CFAF 526 billion in 2015.
- Precautionary reserve (2015):
  - Institutionalized; amount mobilized CFAF 52 billion (reported in investment part of 2015 initial budget law).
  - CFAF 38.6 billion to fund priority investments sufficiently mature (Route des Niayes, high-speed regional rail network, low-cost housing, integrated tourist zones).
  - Remaining CFAF 13.4 billion relates to projects not completable in 2015 due to incomplete studies (tramway, dredging of the Sine-Saloum delta, business park, “Green cities for jobs” special program).
  - Resources could be redirected to other growth-enhancing projects provided revenue allows it.
  - For 2016, the Reserve will also include a part linked to current expenditure, to be mobilized based on progress implementing agreed reforms.

### Structural reforms (remainder of 2015)
- Agency restructuring and pay reforms:
  - Update agency restructuring plan; decree caps pay levels for Directors General and decision-making bodies.
  - By end-December 2015, Ministry to adopt decision setting maximum pay levels for rest of agency staff.
  - Technical committee to update agency restructuring measures.
  - Agency performance contracts (PCs) to be widely used by 2020; with World Bank support, at least (8) PCs will be signed by December 2015 (structural benchmark).
  - By end-2015, staff at agencies earmarked for closure will be redeployed and useful functions transferred.
- Data and fiscal information improvements:
  - Finalize national registration number for enterprises and associations (NINEA) by end-2015 (structural benchmark December 2015) via joint venture DGID, DGD, and ANSD.
- Senegal Airlines decision:
  - Government to take decision by end-November 2015: either adopt a restructuring plan that does not compensate private shareholders or close Senegal Airlines and create another airline.
  - Private shareholders will not be compensated for losses nor receive a share beyond any new capital contribution.
  - Government will seek strategic partners for viable operation.
- Working groups:
  - Establish by end-December 2015 three working groups to: (i) examine tax expenditures, (ii) analyze troubled companies, (iii) review government subsidies to enterprises.
  - In first quarter 2016, working groups to propose appropriate and fully transparent measures.
  - Any new tax exemption to be granted in line with prevailing rules.

### Macroeconomic policy and structural reforms for 2016 — objectives and forecasts
- Main objective: establish conditions for stronger, more inclusive growth to reduce poverty.
- Growth forecast for 2016: 5.9 percent (with possibility of >6 percent if major reforms accelerate).
- Inflation expected to remain within the 1–2 percent range.
- Current account deficit: expected to reach 8.7 percent of GDP in 2016 and decline thereafter.
- Program three primary aims for 2016:
  - (i) rebuild the government’s fiscal space;
  - (ii) strengthen public financial management and governance;
  - (iii) improve the business environment.
- Fiscal deficit target for 2016: 4.2 percent.

### Rebuild the government’s fiscal space — revenue and expenditure measures
- Revenue mobilization and DGID reforms:
  - Restructure DGID organization; draft text validated and to be available by end of the first quarter of 2016.
  - Specific restructuring measures:
    - transform Large Taxpayers Center (CGE) into Large Taxpayers Directorate (DGE) and eliminate Specialized Tax Services Directorate;
    - create Medium-Sized Taxpayers Directorate (DME), with:
      - i) reduce eligibility threshold for Medium-Sized Taxpayers Center (CME) from CFAF 200,000,000 to CFAF 50,000,000;
      - ii) create one or two new CMEs;
    - transfer tax controls gradually from Fiscal Control and Intelligence Directorate to operational directorates (DGE, DME); DCFR to focus on policy, strategy, and intelligence.
  - Implement a data processing center to provide input to a tax database (tax database and data processing center are in course of implementation).
  - Additional measures to reinforce revenue collection efforts:
    - formation of a group of prosecution officers [agents de poursuites]: officers recruited and being trained; operational by March 2016 at the latest;
    - other means of payment (e-cash [monétique]) under study; DGID intends to integrate all payment instruments into its network.
    - In short term, DGID seeks to give effect to payment by bank transfer; initially apply to taxpayers covered by the CGE within six months after accounting units of the DGCPT become connected to SICA–UEMOA and STAR–UEMOA, planned for the end of 2015.
  - Consider creation of an independent accounting network in the DGID with a Senior Accountant in charge of direct taxes and payments of back taxes following audits.
- Legal and sectoral tax reviews:
  - Review implementation of the new General Tax Code (Code général des impôts) with IMF technical assistance to streamline and refine the Code.
  - Finalize discussions on tax system in financial and telecommunications sectors and on imposition of a business license tax (patente) on factories and industrial facilities in the first quarter of 2016.
  - Target legislation to streamline taxation on telecommunications and in the financial sector by September 2016 at the latest.
- Customs and DGD measures:
  - DGD to simplify tax revenue collection procedures.
  - DGD involvement in NINEA implementation and governance ensured by ANSD and interconnection with financial agencies.
  - Establish simplified and personalized procedures for enterprises awarded contracts to support key investment projects.
- Expenditure control and efficiency:
  - Continue to streamline public consumption spending.
  - Transfers to current expenditure (heading 4): staff of institutions and “seed funds” of the military.
  - Clean up allowance records by eliminating amounts computed in error; ad hoc audits in sensitive sectors.
  - 2016 intentions include:
    - (i) review legal basis and eliminate unjustified payments;
    - (ii) streamline procedures for preparing and implementing administrative acts to reduce delays between signature, coming into force, and pay system implementation;
    - (iii) reform payroll management; rationalize consumption of goods and services and reallocate savings to operation and maintenance;
    - (iv) reallocate wage bill savings in part;
    - (v) strengthen oversight of public hospitals.
- Investment effectiveness and asset management:
  - Improve feasibility studies and socio-economic assessments via an integrated projects bank platform describing project lifecycles and facilitating communication between sectoral ministries and the Ministry of the Economy, Finance and Planning.
  - Define a management strategy for government and public enterprise portfolios in the first quarter of 2016 (structural benchmark).
  - Census of financial assets in country underway; comprehensive review of assets held abroad to ensure consistency.
- Public-private partnerships (PPP):
  - Assess ex ante all projects financed under PPPs pursuant to Article 38 of Law No. 2014–09 and implementing decree.
  - Midterm assessments to be carried out periodically, at least once a quarter.
  - Use PFRAM to analyze fiscal implications of PPP-type projects.
  - Compile a database of existing PPP projects, analyze fiscal costs, and integrate them into fiscal projections.
  - All new PPP-financed projects will be subject to an analysis of fiscal costs.

*Source: Appendix I. Letter of Intent (Dakar, Senegal, November 24, 2015) and Attachment I. Memorandum of Economic and Financial Policies, 2015–17.*

### 23. The government will introduce the precautionary management reserve for 2016. In the

### _cr1603 - 23. The government will introduce the precautionary management reserve for 2016. In the

### Precautionary management reserve (2016)
- The 2016 budget will include a precautionary management reserve amounting to 45 billion.
- Composition:
  - Current expenditure (including wages and salaries, goods and services, transfers and other expenditure) and capital expenditure will be included in the 45 billion.
  - The precautionary reserve in the operating budget will be CFAF 10 billion.
  - For the investment budget, the precautionary reserve will be CFAF 35 billion and will only be mobilized for projects whose profitability has been demonstrated by a feasibility study.
- Mobilization conditions:
  - Deployment of the resources is subject to ministerial departments implementing reforms in their respective economic sectors, particularly higher education, national education, health and social action.

### Mobilization of nonconcessional external loans (2016)
- The government will consider mobilizing nonconcessional external loans in 2016.
- Modalities and uses:
  - Possible interventions in international financial markets or use of nonconcessional facilities of multilateral donors.
  - Resources would be earmarked for financing investment projects, particularly road infrastructure, the energy sector, urban water, and sanitation.

### Debt management and monitoring
- Recognition and commitments:
  - Senegal is recognized as a country with the capacity to autonomously manage its debt.
  - In the absence of debt limits in the program, the government will:
    - Continue to develop a medium-term debt strategy to be appended to the budget.
    - Announce, for the 2016 budget, the central government debt ratio sustainable over five years, with a commitment that, if thresholds are exceeded, corrective measures (over four years) would be taken in the following budget.
    - Introduce a database and establish a mechanism for monitoring all external and domestic debt by public enterprises and all collateral set aside by the government on this debt.
  - The National Public Debt Committee (Comité National de la Dette Publique –– CNDP) will be strengthened and expanded to cover other government departments.

### Strengthening Public Financial Management (PFM)
- Budget management:
  - Organize high-level meetings between government members to discuss budget issues before final decisions.
  - Define strict performance criteria for allocation of additional budget resources in the circular letter on budget preparation.
- Treasury Single Account (TSA):
  - Implementation plan: extend first-generation TSA (limited to bank accounts of direct Treasury accounting officers, Comptables Directs du Trésor –– CDT) to all bank accounts within the network of accounting staff in public institutions and agencies (second-generation TSA).
  - Second-generation TSA deployment and operational target: June 2016 (structural benchmark).
  - TSA finalization target: December 2017; assessment criteria of accounts to be “repatriated” will be established.
- Governance and transparency:
  - Continue implementation of the National Governance Strategy (Stratégie nationale de bonne gouvernance).
  - Institute a national committee for inclusive monitoring of public transparency; tasks, organization and functioning to be defined by a decree (draft circulating).
  - Move to adopt a general law on access to information, complementary to the transparency code.

### Promote the private sector — Energy, Financial sector, Business climate
- Energy sector:
  - Continue reforms of SENELEC.
  - Estimated cost of reforms: CFAF 225 billion between 2016 and 2018.
  - Reform plan to be submitted by end-November 2015 for technical support and financing from development partners (World Bank, African Development Bank).
- Financial sector measures:
  - Commitments to promote banking use and access to bank lending:
    - Develop and implement a financial education program for SMEs.
    - Put in place a national financial inclusion strategy in 2016.
    - Study possibility of extending the measure requiring payment of wages in excess of CFAF 100,000 by direct deposit or any electronic means to the private sector and equivalent employees.
  - Introduction of credit information bureaus (bureaux d’informations sur le crédit –– BIC) in 2015 to establish a healthy lending environment and safeguard financial stability.
  - SME/SMI support:
    - Create a unit for labeling SMEs to provide information and rating for the banking system.
    - From 2016, the National Economic Development Bank (Banque nationale de Développement économique –– BNDE) will take steps to increase its contribution to financing SMEs/SMIs and commit to providing, over time, highest quality banking terms in the SME-SMI subsector (in particular an average annual rate of around 6.5 percent, below the local domestic market rate).
    - Priority Investment Guarantee Fund (Fonds de Garantie des Investissements Prioritaires –– FONGIP) guarantee activities for SMEs/SMIs will be consolidated in 2015–16 and must highlight leverage from government-allocated resources.
  - Diversification of non-bank financial instruments in 2016:
    - Produce an action plan for development of factoring in Senegal.
    - Promote development of Islamic finance, notably by establishing an Islamic microfinance institution.
    - Develop capital markets.
    - Launch a strategy to establish a procurement fund to improve SME access to public procurement.
- Financial stability reporting:
  - Authorities to present financial stability indicators based on the latest version of the Manual of Financial and Banking Statistics.
  - The Central Bank of West African States (BCEAO) will compile and publish financial soundness indicators (FSIs) and complete templates for FSM (metadata), FSD (FSIs), FS1 (institutional coverage of FSIs), and FS2 (sectoral financial statements of the institutions).
- Business climate and land reform:
  - Expedite finalization of work by the commission in charge of land reform.
  - Erect investment platforms to support local governments in promoting investment opportunities in Senegal’s eco-geographical areas.
  - Program for the Inclusive and Sustainable Development of Agribusiness (Programme de développement inclusif et durable de l’agrobusiness –– PDIDAS) provides technical assistance for rural communities to allocate land to private operators via an inclusive, transparent, and competitive process.

### Program monitoring indicators and timelines
- Quantitative assessment criteria and indicative targets:
  - Defined for 2015 and 2016, with assessment criteria for end-December 2015, end-June 2016, end-December 2016, and indicative targets for end-March 2016 and end-September 2016 (see Table 1 of the MEFP).
  - Reviews scheduled every six months: second review expected by end-June 2016, third by end-December 2016, and fourth by end-June 2017.
- Debt treatment in program context:
  - In line with the Fund’s new debt limits policy, authorities request elimination of the assessment criterion for nonconcessional external debt.
  - Senegal remains at a low risk of debt distress; debt management capacity is adequate; data for debt surveillance are comprehensive and reliable.
  - Additional measures taken to monitor possible liabilities in PPP projects and government guarantees.
- Information systems and reporting:
  - Ministry of the Economy, Finance and Planning departments have the DMX platform for program data analysis, sharing with the Fund, and forecasting key program indicators.

### Selected structural benchmarks (2015–2017) and statuses
- Completed or ongoing items (selected):
  - Conduct ex-ante, midterm, and ex post evaluation of all projects financed under PPPs — Continuous, Ongoing.
  - Sign performance contracts for eight agencies — December 2015, Ongoing.
  - Eliminate cash tax payments above CFAF 100,000 — June 2015, Completed.
  - Submit at least ten investment projects listed in the 2016 budget for cost–benefit analysis — October 2015, Completed.
  - Institutionalize the precautionary management reserve — September 2015, Completed.
  - Expand the precautionary reserve envelope for the 2016 budget — December 2015, Completed.
  - For 2016 budget, announce debt ratio sustainable over five years with commitment on corrective measures if thresholds exceeded — December 2015, Ongoing.
  - Collect at least 50 percent of taxes left unpaid in 2014 — December 2015, Ongoing.
  - Implement agency reform plan for 16 agencies pending dissolution — December 2015, Ongoing.
  - Finalize government flow-of-funds table according to Government Finance Statistics Manual 2001/14 — December 2015, Ongoing.
  - Establish integrated projects bank describing lifecycle of projects — June 2016 (2016).
  - Develop management strategy for government and public enterprise investment portfolios — March 2016 (2016).
  - Extend first-generation TSA to all bank accounts of accounting officials of public agencies and institutions — June 2016 (2016).
  - Establish accrual basis accounting with initiation of government opening balance — January 2017 (2017).
  - Introduce a medium-term budget framework in line with WAEMU directives — March 2017 (2017).

### Key program definitions and reporting requirements (TMU highlights)
- “Government” means the central government of the Republic of Senegal; excludes the central bank and the non-government public sector.
- “Public sector” includes government, local governments, and all majority government-owned or controlled entities.
- Net lending/borrowing (program definition) = difference between government total revenue and total expenditure (costs and acquisition net of nonfinancial assets); operations of the Energy Sector Support Fund (FSE) are integrated in the TOFE; definition consistent with GFSM 2001/14.
  - Floor on net lending/borrowing as of December 31, 2014: minus CFAF 381 billion (revenue CFAF 1,877 billion; total expenditure CFAF 2,258 billion).
  - Adjustment: floor including grants adjusted downward by budget grant shortfalls up to a maximum of CFAF 15 billion at current exchange rates.
  - Reporting: provisional data on overall fiscal balance and components monthly to Fund staff with lag no more than 30 days; final data no later than two months after provisional reporting.
- Social spending defined as spending on health, education, the environment, the judicial system, social safety nets, sanitation, and rural water supply. Reporting semiannually within two months following the end of each period.
- Budgetary float (instances de paiement) defined as outstanding stock of government expenditure validated but not yet paid by the Treasury; ceiling monitored at the end of the quarter.
  - Reporting: SIGFIP table transmitted weekly and at the end of each month showing committed expenditures, certified expenditures not yet cleared, payment orders, payment orders accepted by Treasury, and payments made; table excludes delegations for regions and embassies and lists payments with no cash impact on Treasury accounts.
- Spending undertaken outside normal and simplified procedures monitored continuously; exclusions limited to spending under a supplemental appropriation order in cases of absolute urgency and national interest per Article 12 of the Organic Budget Law.
  - Reporting: such procedures reported monthly with SIGFIP table to Fund staff within maximum 30 days.
- External payment arrears defined as payments owed and not paid when due on external debt contracted or guaranteed by the public sector; monitored on a continuous basis and reported promptly if any accumulation occurs.
- Debt definition aligned with Executive Board Decision No. 6230-(79/140), revised by Decision No. 14416-(09/91) (August 31, 2009), including loans, suppliers’ credits, and leases (present value of lease payments at inception), and including arrears, penalties, and judicially awarded damages and interest arising from failure to make payment under contractual obligations that constitute debt.

*Source: IMF staff summary of the government measures and TMU as presented in the provided content.*

### 18. Debt guarantees. The guarantee of a debt arises from any explicit legal obligation of the

### _cr1603 - 18. Debt guarantees. The guarantee of a debt arises from any explicit legal obligation of the

### Definitions (Debt guarantees; External debt; Public sector contracts)
- The guarantee of a debt arises from any explicit legal obligation of the public sector to service a debt in the event of nonpayment by the debtor (involving payments in cash or in kind.)
- External debt is defined as debt borrowed or serviced in a currency other than the CFA franc, regardless of the residency of the creditor.
- Public sector contracts are administrative contracts, drawn up and entered into by the government or any entity subject to the procurement code, for the procurement of supplies, delivery of services, or execution of work.
- Public sector contracts are considered “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 by any entity subject to the procurement code.
- The ceiling on contracts executed by single tender will exclude classified purchases and fuel purchases by SENELEC for electricity production reflected in a new regulation that allows SENELEC to but fuel from SAR on the basis of the current price structure.

### Reporting requirements (public sector contracts; government reporting)
- 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 amount of public sector contracts and the total value of all single-tender public sector contracts.

### Tax revenues (definition and monitoring)
- Tax revenues are the sum of revenues from taxes and levies on income, profits and capital gains, salaries and labor, on assets; taxes on goods and services; on foreign trade and international transactions; and other tax revenues.
- The indicative target will be assessed on the basis of data for these revenues provided in the quarterly TOFE.
- Petroleum revenues subject to specific monitoring: the VAT on oil, excise taxes on oil, customs duties on oil, vehicle taxes, and the Petroleum Product Imports Security Fund (FSIPP).

### Additional information for program monitoring (data transmission and lags)
- The authorities will transmit the following to Fund staff, in electronic format if possible, with the maximum time lags indicated:
  - Three days after adoption: any decision, circular, edict, supplemental appropriation order, ordinance, or law having economic or financial implications for the current program (including changes to budget allocations, creation of new agencies or new funds).
  - Within a maximum lag of 30 days, preliminary data on:
    - i) Tax receipts and tax and customs assessments by category, accompanied by the corresponding revenue on a monthly basis;
    - ii) The monthly amount of expenditures committed, certified, or for which payment orders have been issued;
    - iii) 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.
    - iv) The quarterly report of the Debt and Investment Directorate (DDI) on the execution of investment programs;
    - v) The monthly preliminary government financial operations table (TOFE) based on the Treasury accounts;
    - vi) The provisional monthly balance of the Treasury accounts; and
    - vii) Reconciliation tables between the SIGFIP table and the consolidated Treasury accounts, between the consolidated Treasury accounts and the TOFE for “budgetary revenues and expenditures,” and between the TOFE and the net treasury position (NTP), on a quarterly basis; and
  - 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.

- 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 on a monthly basis with a lag of no more than 30 days. Final data will be provided as soon as the final balances of the Treasury accounts are available, but no more than one month after the reporting of provisional data.

- The central bank will transmit to Fund staff:
  - viii) The monthly balance sheet of the central bank, with a maximum lag of one month;
  - ix) The monthly consolidated balance sheet of banks with a maximum lag of two months;
  - x) The monetary survey, on a monthly basis, with a maximum lag of two months;
  - xi) The lending and deposit interest rates of commercial banks, on a monthly basis; and
  - xii) Prudential supervision and financial soundness indicators for bank financial institutions, as reported in the table entitled Situation des Établissements de Crédit vis-à-vis du Dispositif Prudentiel (Survey of Credit Institution Compliance with the Prudential Framework), on a quarterly basis, with a maximum delay of two months.

- 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 a delay of two months;
  - b. SIGFIP execution table, the table for the central government and a summary table including regions, with a delay of two 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 a delay of one month. Full information on i) the operations of the 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.

### Debt sustainability analysis update — Key conclusions
- Senegal remains at low risk of debt distress, consistent with the Staff Report of December 2014 (Country Report No. 15/2) and the last Debt Sustainability Analysis (DSA) update in June 2015 (Country Report No. 15/273).
- All debt burden indicators are well below their respective thresholds and only the debt service-to-revenue ratio shows two spikes that breach the threshold under stress scenarios, due to Eurobond rollover. These breaches are small and temporary reflecting the bullet payments, and the debt service ratio follows afterwards a stable path, even considering additional non-concessional borrowing to reimburse the Eurobonds.
- The public DSA highlights the critical role for fiscal consolidation and reforms to generate the sustained growth required to preserve debt sustainability.

### Background — recent debt stock and composition (selected figures)
- External public debt in Senegal is estimated at 39.3 percent of GDP in 2015, compared to 35.7 percent projected in the previous DSA.
- Commercial debt stood at 20 percent of the stock of total external public debt in 2014.
- Domestic debt increased from FCFA 1,065.5 billion at end-2014 to FCFA 1,151.5 billion in July 2015 and it is projected at 15.0 percent of GDP, lower than 19.2 percent projected in the latest DSA.
- Total public debt reaches US$7.52 billion or 54.4 percent of GDP, 0.6 percentage point less than what estimated in the previous DSA.

### Authorities’ debt management and financing posture
- Authorities committed to reduce debt ratios over the medium term via fiscal consolidation, improvements in the current account and strengthening of debt management policies.
- Increased financing on internal and regional markets to mitigate exchange rate risks and vulnerability to volatility of external capital flows.
- Medium and long term domestic financing increased from 34.2 percent of total domestic debt in 2011 to 75 percent in 2014.
- New instruments introduced: Islamic bonds with FCFA 100 billion issued in 2014.
- Implicit interest rate on domestic financing decreased from 3.6 to 3.3 percent between 2011 and 2014.
- Eurobond issuances will be considered if financing terms are favorable and if it is not possible to obtain non-concessional financing from development partners.

### Underlying assumptions and borrowing plan (selected assumptions)
- Real GDP growth: estimated at 5.1 percent in 2015 and it will increase to 7.2 percent in 2020; long run revised to 5.8 percent over 2021–35 (from 7.8 percent in previous DSA).
- Fiscal deficit: overall fiscal deficit projected at 4.8 percent of GDP in 2015 and 4.2 percent in 2016, declining to 2.6 percent in 2020. The primary balance is estimated at 2.9 percent in 2015 and projected to decline to 1.3 percent in the long-term.
- Current account deficit: revised from 8.0 to 8.2 percent of GDP in 2015, worsening to 8.7 percent in 2016; projected at 7.8 percent of GDP in 2020 and long-term average about 7½ percent of GDP. Remittances estimated to decline, reaching about 10 percent of GDP in 2020.
- Inflation (GDP deflator): projected at 0.2 percent in 2015 and 1.8 percent in 2020, down from 2.3 percent in the previous DSA.
- External financing mix and terms: average maturity of new debt above 18 years, with 4.5 years of grace period. The average cost of new borrowing is assumed at 2.6 percent. Two exceptions in 2021 and 2024 to rollover the outstanding 10-year Eurobonds issued in 2011 and 2014 with semi-concessional borrowing.
- Domestic borrowing: domestic debt assumed to account for 30 percent of total public debt, 7.5 percent of which with maturity below one year. New medium and long term domestic debt assumed to carry a real interest rate of 4 percent with average maturity of four years.
- Discount rate for the DSA: 5 percent.

### External DSA — projections and stress-test outcomes
- PV of public and publicly guaranteed (PPG) external debt projected at 31.1 percent of GDP in 2015, declining to 27.9 percent in 2020 and 18.8 percent in 2035.
- External debt indicators are below thresholds under the baseline and even under stress tests, with the exception of ratio of debt service to revenue which shows two spikes that marginally breach the threshold in two years due to bullet repayment of the 2011 and 2014 Eurobonds.
- Breaches are small, temporary, and arise under stress scenarios; financing plan assumes higher than usual semi-concessional borrowing in those years to rollover the Eurobonds.
- Currency composition note: external debt denominated mostly in euro (41 percent of external public debt in 2014) and US dollar (36 percent); depreciation of the CFA franc remains a risk to monitor.
- Share of non-resident holding of domestic debt relatively low and stable at around 5–6 percent of GDP – mostly concentrated in the WAEMU.

### Public DSA — overall outlook
- Total (external and domestic) public debt indicators are projected to gradually decline.
- The debt service-to-revenue ratio is projected to remain below 20 percent, with two moderate and temporary increases in 2021 and 2024 corresponding to Eurobond repayments.
- Under the baseline scenario, the PV of total public debt is projected to moderately increase (continued projections and figures follow in the full DSA).

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1603.pdf*

### 46.1 percent of GDP in 2015 to 47.3 percent in 2017 and then to decline to 44.5 percent of GDP in 2020

### _cr1603 - 46.1 percent of GDP in 2015 to 47.3 percent in 2017 and then to decline to 44.5 percent of GDP in 2020

### Debt trajectory and baseline projections
- Public debt ratio path under the baseline:
  - 46.1 percent of GDP in 2015
  - 47.3 percent of GDP in 2017
  - 44.5 percent of GDP in 2020
  - Over time, the ratio is projected to further decrease to get closer to 40 percent.
- Under the most extreme scenario of a 30 percent depreciation of the currency in 2016:
  - Debt ratios increase more than under the other scenarios until 2020.
  - In the long term the evolution of total public debt is similar to what is projected under the baseline scenario.
- Assuming the primary balance does not improve compared to the value projected for 2015:
  - Dynamics are less favorable, but the PV of public debt-to-GDP ratio remains well below the benchmark of 74 percent.

### Historical scenario and implications for growth and fiscal policy
- Historical scenario assumptions:
  - Keeps real GDP growth and the primary balance at their historical levels.
- Outcomes under the historical scenario:
  - The PV of total public debt is on a growing path and in 2026 is projected to be above the benchmark of 74 percent of GDP.
  - This scenario shows the most unfavorable patterns for the PV of public debt-to-revenue ratio and the debt service ratio.
- Policy interpretation:
  - The historical scenario highlights the importance of fiscal consolidation and structural reforms to support strong growth and preserve debt sustainability.
  - It underscores the main goal of the PSE: to orchestrate a break with the past underperformance of the past 30 years.
- Scenario parameterization for a conservative projection:
  - Primary deficit is set at 3.3 percent (despite projected values of 2.9 percent of GDP in 2015 and 1.3 percent on average over 2016–20).
  - Real GDP growth is set at 3.8 percent (below the current projected growth rate of 5.1 percent and almost 3 percentage points lower than the average over 2016–21 projected under the baseline consistent with PSE).

### Growth prospects and reform needs
- Recent and prospective growth:
  - Reforms have begun moving Senegal from the 3½ percent growth rates of the past to about 5 percent.
  - With continued reform, continued growth acceleration can be expected to reach the 7 to 8 percent PSE target within the next few years.
- Risks and requirements:
  - Risks for public debt sustainability remain low, but stress tests underline the importance of making continuous efforts to improve the fiscal stance and of strengthening economic growth.
  - Implementing structural reforms required for the PSE to succeed is necessary for these outcomes.

### Stress tests, debt sustainability assessment, and risk rating
- Overall assessment:
  - Staff’s assessment: Senegal continues to face a low risk of debt distress.
- Observed breaches and drivers:
  - Minor and temporary breaches of the debt service-to-revenue thresholds are exclusively related to bullet payments for the Eurobond issuances.
  - The overall debt dynamic is under control under the baseline and stress scenarios.
- Stress test findings:
  - Debt sustainability hinges on continuing and strengthening fiscal consolidation and on achieving high and sustained growth, as envisaged in the PSE.
  - Given current debt levels and strong debt management capacity, standard macroeconomic shocks are of second order importance for external debt sustainability in Senegal.
- Recommendation:
  - Safeguarding debt sustainability will require a deepening and acceleration of the reforms as discussed in the staff report.

### Borrowing strategy and debt management recommendations
- Caution on borrowing:
  - Preserving debt sustainability requires a cautious approach to semi-concessional and commercial borrowing, especially after removal of the non-concessional borrowing limit.
- Monitoring and strategy:
  - Staff recommends careful and continuous monitoring of financing needs and of borrowing plans, since a rapid accumulation of commercial debt may undermine the low risk of debt distress.
  - To minimize exchange risks, debt strategy should focus on the costs and benefits of borrowing in Euro or from the regional market in CFAF.
- Authorities’ stance:
  - The authorities concurred with the analysis in this DSA and broadly concurred with maintaining a “low” debt risk rating.
  - They stressed Senegal’s strong debt management capacity and reiterated the need for reinforcement of capacity in view of the country’s gradual transition to market sources.

*Source: IMF staff report excerpt on Senegal public debt outlook and DSA.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1603.pdf_