Abstract
The 2012 Article IV Consultation report for Senegal discusses the fourth review of the Policy Support Instrument (PSI) implementation and request for modification of an assessment criterion. Senegal’s growth has been sluggish in recent years, with implications for poverty reduction. The authorities’ policies since the last Article IV Consultation have been broadly in line with IMF recommendations. In the medium term, growth is expected to return gradually to about 5 percent a year. However, the economy remains exposed to substantial risks.
1. My Senegalese authorities are appreciative of the close collaboration between Senegal and the Fund. They consider the recent Management visit in Dakar as a testimony of this productive working relationship and they highly value the fruitful policy dialogue they had with Management on that occasion.
2. The authorities also attach high importance to the policy advice provided by staff during the 2012 Article IV consultation; key among which is the need to ensure stricter control over the fiscal deficits in the near term and foster stronger and more inclusive growth over the medium term. Consistent with this advice, a strong focus is already being placed by the authorities on lower deficits and stronger growth, as reflected in the 2013 budget which was approved by the parliament and the recently-validated National Strategy for Economic and Social Development spanning the period 2013–17. Moreover, the main recommendations set forth in the comprehensive set of informative staff papers—for which we are thankful—are generally in line with the authorities’ policy and reform agenda and key commitments under the Policy Support Instrument (PSI). These include the need to preserve fiscal sustainability, further improve public financial and debt management, fiscal transparency and governance, and promote further financial deepening.
Preserving fiscal sustainability
3. The authorities put a high premium on maintaining fiscal deficits at levels that are consistent with fiscal and debt sustainability. Reflecting this policy stance, the government took several actions in recent months, including the streamlining of public agencies, the downsizing of the Cabinet, the elimination of some high-level political positions and institutions, and measures aimed at generating efficiency gains and savings in government spending. As a result of these consolidation efforts and the delayed execution of some energy projects, the deficit for 2012 is expected to be contained below 6 percent of GDP—well below the original program target.
4. Going forward, the authorities have restated their commitment to further reduce the deficit. For 2013 in particular, the approved budget is in line with the authorities’ fiscal objective of bringing the deficit below 5 percent of GDP. Over the medium term, the downward trend in fiscal deficit is expected to continue. Achievement of fiscal targets will be facilitated by the implementation of the new tax code which is scheduled to begin early next year. Subsequently, the new customs code which is expected to be finalized and submitted to the parliament during the first half of 2013 will add a significant contribution once it takes effect. Along with these decisive steps, the continuation of ongoing efforts to modernize tax administration will enable timely progress toward fiscal objectives.
5. Concomitant to their work on boosting revenue, the authorities will continue to strengthen their efforts to contain public spending. A key element of their plans to keep expenditure under control will consist in capping electricity consumption subsidies to CFAF 80 billion in 2013. In order to generate the potentially large savings required by the introduction of this cap, all possible options are under consideration. These include, among others, taking cost-cutting initiatives for the electricity company SENELEC and making electricity tariff adjustments while sparing vulnerable households.
Further Improving Public Financial and Debt Management, Fiscal Transparency and Governance
6. The authorities are mindful of the importance of making inroads in further strengthening public financial management and fiscal transparency and governance. In this regard steps were recently taken, that include the signing of the decree on the transposition of the WAEMU’s directive on budget classification and the submission to parliament of a draft law on fiscal transparency. Moreover, opportunities for further improvements in governance will be provided by ongoing comprehensive audits of the civil service and agencies and efforts to establish the single treasury account. Similarly, public governance will benefit from the work underway to ensure greater transparency in land transactions involving the State, notably through the publication of these transactions.
7. The authorities value their fruitful collaboration with staff in the process of assessing the implications of higher debt-financed public investment for growth and debt sustainability yin Senegal. The results of this exercise generally confirm the view that increased public investment typically fosters growth in the country but it may undermine debt sustainability if exclusively financed by nonconcessional resources. Beyond the high sensitivity of the latter result to the model assumption of exclusive reliance on nonconcessional external borrowing to finance investment scaling-up, it is noteworthy that the baseline scenario, which reflects more realistically the composition of financing in Senegal, implies a more positive debt outlook over the long run.
8. Nevertheless, I would like to reiterate that my Senegalese authorities take long-term fiscal and debt sustainability very seriously. Their unfailing determination to preserve it will be served by the renewed emphasis they have put on improving public debt management. Indeed, implementation of their recently-finalized medium-term debt strategy (MTDS) will not only help improve the debt outlook, but also contribute to improved prospects for deficit reduction. This positive outcome will also be helped by the increased reliance on longer maturity bond issuance, and preferential recourse to concessional financing, as recommended by the MTDS. Moreover, the project evaluation guide which is being finalized will help conduct systematically cost-benefit analyses for large investment projects, thereby ensuring that only those with adequate rates of return are retained.
Promoting Further Financial Development in a Stable Macro-financial Environment
9. Financial sector soundness indicators remain strong in Senegal. The latest stress-test exercises conducted by the authorities and staff have reconfirmed that the banking system remains sound with adequate levels of liquidity, profitability, and capitalization although a few banks may need to improve their asset quality and credit continues to be highly concentrated.
10. The in-depth focus of Article IV consultation on the financial sector was a welcome opportunity for the staff to explore avenues for further enhancing financial stability and overcoming impediments to further financial development. We thus view the paper on financial depth and macro-stability in Senegal as an appropriate follow-up of the Executive Board’s recent call for better integrating the interaction between financial deepening and macro-financial stability into financial sector surveillance in low-income countries. The paper provides evidence about the limited systemic risk facing Senegal’s financial sector. It also reveals a number of areas in which the country outperforms or underperforms selected peer countries in terms of financial sector depth and breadth and access to banking services.
11. However, the staff paper identifies some impediments to further financial development and maintain financial stability and formulates a number of useful recommendations to overcome them. The recommendations include in particular, the need to strengthen micro-prudential regulation, enhance banking supervision, and develop the interbank market. On issues related to financial sector development and stability, it is worth noting that a number of responsibilities fall outside the purview of the country authorities and belong to regional authorities, as Senegal belongs to a monetary union with a common regional central bank, as explained by staff. Still, the competent country and regional authorities have endeavored to establish a continuous dialogue with a view to addressing such issues. In other areas under their sole responsibility, the Senegalese authorities are determined to pursue their reform efforts, notably by improving the business and judicial environment, and strengthen the tax regime. In this endeavor, they will be guided by the action plan they have previously developed on the basis of previous consultations with domestic and external stakeholders.
12. In conclusion, the PSI program is on track and performance under the program continues to be strong. On the quantitative front, all end-June 2012 assessment criteria and indicative targets were met, reflecting notably the authorities’ efforts to keep the deficit under control and further strengthen public finance and debt management. At the same time, implementation of the structural reform agenda proceeded satisfactorily. More specifically, steps were taken in line with program commitments to finalize an operational and financial restructuring plan for SENELEC, a medium-term debt management strategy, a draft law on fiscal transparency, an action plan for the reduction of electricity consumption subsidies, and a new tax code.
13. In light of Senegal’s satisfactory program performance and continued commitment to the program objectives, I would appreciate Directors’ support for the completion of the fourth PSI review and the authorities’ request for modification of the assessment criterion on the fiscal deficit.