August 26, 1997
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| Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. |
The IMF Executive Board on July 28, 1997 concluded the 1997 Article IV consultation1 with Senegal.
Background
Following the devaluation of the CFA franc in January 1994, Senegal adopted a comprehensive adjustment strategy supported by the IMF under a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF), aimed at achieving sustained economic growth and financial viability over the medium-term. Senegal's macroeconomic and structural policy achievements during the three-year ESAF period have been substantial.
Following large increases in 1994 and 1995, economic growth is estimated to have risen further from 4 3/4 percent in 1995 to 5 1/2 percent in 1996 reflecting a bountiful agricultural harvest, a further strengthening of construction activity, and continued robust growth in commerce and other private services. Recent indicators suggest that nonagricultural output remained strong in the first half of 1997, while agricultural output declined because of bad weather conditions. Standards of living, as measured by real per capita income, have been rising since 1995.
Inflation continued to abate, following the sharp increase in prices in 1994 associated with the devaluation of the CFA franc. The increase in the consumer price index (CPI) for Dakar declined from about 8 percent in 1995 to 2 3/4 percent in 1996, and remained low and stable during the first half of 1997. The CPI-based real effective exchange rate is estimated to have depreciated by about 2 percent in 1996 and by 3 percent in the first quarter of 1997, contributing to a further improvement in the competitiveness of the Senegalese economy. The external current account deficit, which declined in 1994 and 1995, narrowed further from about 8 percent of GDP in 1995 to 7 1/4 percent in 1996. This improvement mainly occurred in the services balances, while overall export volume growth was constrained by a number of temporary technical difficulties in the groundnut, chemicals, and fisheries sectors.
The Senegalese authorities continued their efforts to increase revenues while restraining nonpriority current spending. As a result, the overall fiscal deficit (on a commitment basis and excluding grants) was reduced from 5 3/4 percent of GDP in 1994 to 2 percent in 1996. Measures to strengthen tax and customs administrations, enlarge the tax base, and improve compliance contributed to an increase in tax revenue to about 14 percent of GDP in 1996. Total government expenditure was reduced to 17 percent of GDP in 1996, reflecting the containment of the wage bill and lower-than-expected interest payments on external debt. At the same time, spending on basic education and primary health services, as well as on basic infrastructure continued to rise.
Monetary policy is conducted at the regional level by the Central Bank of West African States. Broad money increased by 8 1/2 percent in 1996, in line with nominal GDP. Credit to the economy rose by 20 1/2 percent, reflecting private sector financing of activity in the construction, industry, and trade sectors. Interest rates fell in line with the reduction in the discount rate, and the banks' average prime lending rate is now about 8 1/2 percent.
There have been delays in the implementation of structural reforms. Recently, however, the privatization program regained momentum with the sale of one-third of the government's shares in the telecommunications company (SONATEL) and the launching of calls for bids for the privatization of several other public enterprises. Important elements of the energy sector reform are expected to be implemented this year with the support of the World Bank.
It is expected that real GDP will increase by 4 3/4 percent in 1997, as a sharp decline in agriculture output will be more than offset by nonagricultural output growth. Inflation is expected to remain in the 2-3 percent range, and the external current account deficit (excluding official transfers) should improve by one percent of GDP to 6 1/4 percent. The overall fiscal deficit (excluding grants) is expected to narrow to about 1 percent of GDP reflecting the continued efforts to improve tax collection and contain nonpriority spending.
Executive Board Assessment
Executive Directors commended the performance under the program supported by the third annual arrangement under the enhanced structural adjustment facility (ESAF), noting that all quantitative performance criteria for the end of March 1997 had been met. Most of the structural performance criteria and benchmarks had also been met, although implementation of some others had been delayed. Directors observed that economic growth in 1996 had been stronger than anticipated, inflation had continued to decline, and the external current account deficit had been further reduced. They commended the authorities' efforts in furthering price and trade liberalization and in improving the regulatory framework to provide an environment more conducive to private sector activity.
Notwithstanding those improvements, Directors underscored that Senegal's economic situation remained fragile. They urged the authorities to persevere with their reform efforts and to avoid any policy slippages. Directors stressed the need to consolidate the improvement in the fiscal balance in 1997 by increasing the revenue ratio and continuing to restrain nonpriority current spending in order to create room for increased spending in high priority areas. They welcomed the improvement in tax collection and urged the authorities to continue their efforts to rationalize the tax system, widen the tax base, and reduce the reliance on taxes on international trade. On the spending side, Directors stressed that it was essential to contain the wage bill at the programmed amount by limiting recruitment and avoiding general wage increases. In that context, they welcomed the recent adoption by the National Assembly of the law on merit-based wage increases, and highlighted the importance of implementing other aspects of civil service reform. Directors also stressed the importance of holding down nonpriority outlays and strengthening the budgetary process to avoid extrabudgetary spending. They urged the authorities to clear domestic extrabudgetary arrears. At the same time, Directors highlighted the necessity of increasing the level and effectiveness of priority spending on basic education, primary health care, the judicial system, and infrastructure.
Directors emphasized the importance of developing and strengthening the financial sector. They urged the authorities to ensure banks' strict adherence to sound banking practices and to enforce the prudential ratios set by the regional banking commission. They also encouraged the authorities to deepen financial intermediation, and noted that the creation of the regional financial market and the improved application of business law--to ensure the prompt enforcement of contracts--would be important to mobilize savings more effectively and to promote private investment. The development of nonbank and local credit institutions was expected to increase the availability of financing to small business.
Directors regretted that, notwithstanding the progress in structural reforms over the previous three years, there had been repeated delays in the implementation of privatization, public enter-prise reform, and energy sector reform. They noted that the authorities had taken steps recently to make up for delays in those areas, including the reacceleration of privatization. They urged the authorities to fully implement the structural reform agenda envisaged in the program in order to enhance the credibility of their adjustment efforts and to bolster private investors' confidence.
Directors noted that, based on current policies, Senegal's balance of payments and its external debt service were expected to remain sustainable. They underscored the importance of continuing to pursue a prudent debt policy that relied on concessional loans, especially as the debt burden remained high relative to government revenues.
Directors urged the authorities to improve further the quality and timeliness of the statistical database, particularly in the areas of the national accounts and the balance of payments.
