Efficient Energy Investment and Fiscal Adjustment in Senegal
IMF Working Papers, March 12, 2014
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Bibliographic details
- Authors: Salifou Issoufou, Edward F Buffie, Mouhamadou Bamba Diop, Kalidou Thiaw
- Published: March 12, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475527728.001
Summary and main findings
- Senegal's fiscal deficit and public debt have been on the rise in recent years owing partly to an ailing and inefficient oil-based energy sector.
- Using a two-sector, open-economy, dynamic general equilibrium model, the paper investigates effects of varying fiscal policy instruments one at a time and of policy packages that increase public investment in energy and infrastructure in scenarios with varying degrees of debt finance and with different types of supporting fiscal adjustment.
- Lowering the fiscal deficit by raising taxes and cutting government expenditure has adverse effects on growth, real wages and the supply of public services.
- A public investment program that coordinates new investment in low-cost hydroelectric, coal or gas-fired power with a phased contraction of the oil-based sector:
- raises the total supply of energy by 70 percent,
- increases real wages and real GDP,
- stimulates private investment,
- and significantly reduces the fiscal deficit in the medium long term.
- More aggressive investment programs that borrow against future fiscal gains to combine new energy investments with either delayed or frontloaded investments in non-energy infrastructure:
- lead to much higher real wages and real GDP,
- keep public debt sustainable,
- and keep the fiscal deficit low in the medium and long term.
Model, scenarios, and analytical approach
- Model: two-sector, open-economy, dynamic general equilibrium model.
- Policy experiments:
- Varying fiscal policy instruments one at a time.
- Policy packages that increase public investment in energy and infrastructure.
- Scenarios with varying degrees of debt finance.
- Scenarios with different types of supporting fiscal adjustment.
- Energy investments considered: low-cost hydroelectric, coal, gas-fired power; phased contraction of oil-based sector.
- Outcome metrics emphasized: total supply of energy, real wages, real GDP, private investment, fiscal deficit, public debt sustainability.
Policy implications and recommendations
- Avoid deficit reduction strategies focused solely on raising taxes and cutting government expenditure because of adverse effects on growth, real wages, and public service supply.
- Implement coordinated public investment in low-cost energy generation combined with a phased contraction of inefficient oil-based generation to expand energy supply and improve fiscal outcomes.
- Consider borrowing against future fiscal gains to pursue more aggressive investment programs that combine energy investments with strategic non-energy infrastructure investment, as these can boost real wages and real GDP while maintaining sustainable public debt and low fiscal deficits in the medium and long term.