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2. Economic performance at end-September and at end-December 2001, the 2002 budget, and the reforms in the groundnut and electricity sectors were discussed in Dakar during the period October 31-November 14, 2001 and February 8-20, 2002. At end-September, all the quantitative performance criteria for the program, except for the one related to the repayment of SENELEC's arrears, were observed. As regards the structural criteria, the government announced the withdrawal of SONAGRAINES from groundnut collection and transport in August, without specifying, however, that transport and collection prices would be freely determined by the market. Both the amendment of the groundnut sector framework agreement and the adjustment of electricity tariffs in the event that the privatization of SENELEC had not been finalized, could be implemented only with some delay. In light of the remedial measures already taken, such as the dissolution of SONAGRAINES and the increase in electricity rates, the government wishes to request waivers for the late observance of certain performance criteria. The government also wishes to request an extension of the interim assistance under the enhanced HIPC Initiative until end-2002 and will request an extension of debt relief under Cologne terms from the Paris Club. The attached memorandum on economic and financial policies describes the objectives set by the government for 2002. The government will provide the IMF with the information necessary for assessing the progress in implementing its economic and financial policies and achieving program objectives.
3. The government believes that the policies and measures set forth in the attached memorandum are adequate to achieve its program objectives, but it is ready to take, in due course, any further measures that may prove necessary for this purpose. During the period covered by an arrangement under the PRGF, the government will consult with the Managing Director of the IMF on the adoption of any measure deemed appropriate, at its own initiative or whenever the Managing Director requests such a consultation. In addition, after the period covered by an arrangement under the PRGF and while Senegal has financial obligations to the Fund arising from loans granted under that arrangement, the government will consult with the Fund periodically, at the government's initiative or whenever the Managing Director requests a consultation on Senegal's economic and financial policies.
Sincerely yours,
/s/
Cheikh Hadjibou Soumaré
Minister Delegate in charge of
the Budget and Housing
Senegal—Memorandum on Economic and
Financial Policies for 2002
Dakar, March 11, 2002
1. In its letter of August 30, 2001 to the Managing Director of the International Monetary Fund (IMF) and in the memorandum attached thereto, the government of Senegal defined its economic and financial objectives for the second half of 2001, as well as the measures it intended to implement to achieve them. To support these economic policies, the Fund's Executive Board completed the first review of the third annual arrangement under the Poverty Reduction and Growth Facility (PRGF) on September 28, 2001 and released the related SDR 9 million disbursement. In this memorandum, the government outlines the results achieved in 2001, its analysis of the deviations observed between projected and actual performance, and the measures it intends to implement in 2002 to achieve its objectives.
I. Results Achieved in 2001 and Measures Implemented
2. The Senegalese economy posted real GDP growth of 5.6 percent in 2001. The slowdown in the global economy following the events of September 11, 2001 had only a negligible impact on the Senegalese economy in 2001, as production in several key export sectors (groundnuts, fishing, and phosphates) had been largely achieved beforehand. Moreover, tourism, the sector potentially more vulnerable to the events, was only marginally affected. The economic impact of power outages in September and October was slight compared with those of 1999-2000. Inflation was moderate, despite a slight upturn owing to the rise in the prices of certain essential goods and the one-off effect of the introduction of a VAT at the single rate of 18 percent in late September; the average rate of 3.0 percent for 2001 is consistent with the WAEMU threshold. As a result of the fall in world petroleum prices, the external current account deficit (excluding official current transfers) narrowed by 2.6 percentage points of GDP in 2001 to 6.4 percent.
3. The program's quantitative performance criteria on net bank credit to the government and the basic fiscal balance at September 30 and December 31, 2001 were observed. In the last quarter of 2001, the government was faced with a major shortfall in external financing. As the disbursement of a US$50 million tranche of a tariff reform credit from the World Bank (tied to the establishment of computer links between the various departments of the Ministry of Economy and Finance and the establishment of a regulatory framework for utilities and telecommunications) cannot be obtained before the second quarter of 2002, the government was forced to use supplementary bank financing amounting to CFAF 20 billion, as provided for in the program in the event of a shortfall in external assistance. However, although the government received the final US$45 million tranche of the World Bank energy credit following the selection of a provisional buyer for SENELEC, the delay in the negotiations (see below) prevented the mobilization of the CFAF 20 billion in privatization receipts projected in the program. The adjusted ceiling on net credit to the government at end-December was observed through underexecution of budget expenditure. Investment outlays, including those related to the HIPC Initiative, remained 15 percent below projections. The basic fiscal balance at end-December 2001 amounted to a deficit of CFAF 25.9 billion or 0.8 percent of GDP, and the overall deficit stood at CFAF 130.3 billion or 3.9 percent of GDP, mainly as a result of the clearance of SENELEC and SONACOS deficits (CFAF 105 billion) with the proceeds of budgetary transfers.
4. The performance criterion for end-September 2001 on the stock of debt of SONACOS was observed. As programmed, the government disbursed CFAF 65 billion to SONACOS in the fourth quarter, including the signing over of guarantee deposits amounting to CFAF 22 billion. Owing to a larger-than-expected drain on SONACOS's cash flow, partly related to the dissolution of SONAGRAINES (CFAF 4.0 billion) and supplementary bank charges (CFAF 3.8 billion), this transfer was not sufficient to cover the entire cumulative deficit of SONACOS.
5. The ceiling on guarantee deposits placed by the government at local banks at end-September 2001 was observed, and the government has not placed any new deposits since June 2001. The signing over of SONACOS guarantee deposits to banks in October and November 2001 resulted in a sizable decline in such deposits. However, at end-December 2001, guarantee deposits slightly exceeded the program ceiling, owing to the reclassification of a deposit in favor of a public enterprise that had not been taken into account in the program.
6. SENELEC received a total of CFAF 40 billion from the government in July and at end-September 2001. As programmed, the budgetary transfer was financed by an issue of treasury bills on September 28, 2001 (CFAF 42.9 billion). However, as a transfer of CFAF 25 billion could be made only on September 28, 2001, SENELEC did not repay all of its arrears at end-September. Although some suppliers were paid in October, SENELEC was still experiencing financial difficulties in the fourth quarter of 2001, and at end-December the company had accumulated about CFAF 7 billion of new arrears.
7. As SENELEC's privatization plan was amended in early November, the privatization could not be finalized on November 15, 2001 as initially planned. Nevertheless, the consortium Vivendi/O.N.E. was selected on November 20, 2001 as a new strategic partner and the government embarked on negotiations on November 26, 2001 that ended on January 31, 2002. As the negotiations with Vivendi/O.N.E. were inconclusive, the government has invited AES Frontier Ltd., the second-ranking bidder, to initiate discussions. Meanwhile power tariffs were increased by an average of 10 percent on March 1, 2002, which, in principle, should help reduce SENELEC's cash-flow deficit (before government subsidies) to CFAF 9-10 billion during the year.
8. As regards other structural measures under the program, an auditor's report designed to clarify the financial flows between the postal service and the treasury was forwarded to IMF staff on September 28, 2001. The two institutions have started reconciling their reciprocal assets and opening account balances. The postal service's cash deficit in 2001 was estimated at CFAF 17 billion, mostly explained by a cash deficit of CFAF 18 billion in early 2000, which was analyzed in detail in an audit report prepared by the Public Enterprise Audit and Oversight Committee (CVCCEP) of Senegal's General Accounting Office. The postal service took a number of steps to strengthen financial control. For instance, bookkeeping for 2001 was entrusted to an independent firm, the accounts for 1998-99 have been established, and the 2000 and 2001 accounts are being established. The auditor was changed in January 2002.
9. Discussions with producers and development partners on the reform of the groundnut sector continued in October and November 2001. In August, the government announced its intention to withdraw SONAGRAINES from the activity of collection and transport and establish a factory-gate delivery system. However, the announcement made no mention of the free determination of collection and transport prices that was envisaged in the program. Continued discussions aimed at reassuring the rural community and assessing various possible approaches led to the dissolution of the company on November 28, 2001. Discussions with the National Interprofessional Groundnut Committee (CNIA) and the development partners on amending the framework agreement for the sector also continued in October, and the new agreement was finalized on November 28, 2001. The government will seek agreement on a new regulatory framework with groundnut producers and its development partners, which will serve as the basis for the privatization of SONACOS. The audit report on SONACOS and SONAGRAINES was forwarded to IMF staff on December 28, 2001. It indicates that the accounting of the two enterprises is inadequate. To strengthen the supervision of SONACOS, its general management increased the number of accountants at headquarters and in the factories and has begun training staff. It will also study the possibility of establishing a new computerized accounting system. The levy on imported vegetable oil was replaced on February 13, 2002 by a domestic tax, in accordance with WAEMU regulations.
10. On December 5, 2001, SONACOS issued an invitation to bid for the organization of the collection and transport of groundnuts during the 2001/02 crop year. SONACOS specified certain conditions that must be met by private operators, including the establishment of zones and the securing of a minimum level of financing. It also set an indicative list for collection and transport prices, although the performance criterion for end-December concerning the withdrawal of SONAGRAINES had specified that collection and transport prices would be determined freely by the market. Moreover, a number of operators were approved for specific operating zones after the cutoff date of the invitation to bid because no bids had been submitted. The government believes that these measures were necessary to ensure the success of the first crop year under the new factory-gate delivery system.
11. As programmed, on December 28, 2001 the government submitted a bill to reform the National Pension Fund (FNR) to the national assembly; the bill was approved on February 13, 2002. Although the reform is expected to achieve equilibrium in the FNR's accounts over the next five-ten years, other measures will be needed to secure the long-term equilibrium envisaged in the program. With technical assistance from the World Bank, the government will continue to look for a comprehensive solution for the pension system, including IPRES, and will also examine the possibility of boosting domestic saving through a funded system.
12. Since end-June 2001, the government has routinely applied the pass-through mechanism for petroleum products, except for small bottles of butane gas. Since then, there have been no government subsidies for petroleum products except for butane gas. However, the government has not yet paid the whole revenue loss experienced by the oil refinery (SAR) as a result of the freeze on prices; it also has not paid the subsidies for fuel delivered to SENELEC and for butane, owing to the SAR's pending submission of acceptable documents to support such payments. The amounts invoiced will be paid as soon as supporting documentation has been presented and found acceptable.
13. The monetary survey showed a slight increase of 4.7 percent in credit to the economy in 2001, owing to the repayment of most of SENELEC's arrears and the debt of SONACOS. The repayment of SENELEC's arrears enabled the petroleum companies and the SAR to retire some of their bank credit. The contraction of public enterprise loans during the year considerably reduced the risk concentration in commercial bank portfolios. In 2001, the money supply grew by 14.4 percent.
II. Government Program for 2002
14. The government's economic policy in 2002 is aimed at maintaining a real economic growth rate of about 5 percent and keeping inflation in check. Real GDP growth will be supported by sustained activity in the secondary sector as a result of investments in energy and mining, as well as by continued buoyancy in the tertiary sector. Inflation is expected to fall to 2.3 percent over the year, and the external current account deficit (excluding official current transfers) is projected at 6.7 percent of GDP. These projections take into account the slowdown in global economic activity following the events of September 11, 2001. The program of the Senegalese government aims to consolidate economic growth by speeding up structural reforms, redirecting government expenditure to priority sectors, and increasing public savings following the public enterprise deficits observed in 2001.
A. Government Finance
15. In executing the 2002 budget, the government will prioritize social spending while capping overall expenditure at a level consistent with the achievement of a budget deficit, excluding grants, of 2.6 percent of GDP, that is, a reduction of 1.3 percentage points of GDP compared with 2001. The basic fiscal surplus will amount to 1.3 percent of GDP, compared with a basic deficit of 0.8 percent in 2001. The expected improvement is attributable to the growth in revenue and the elimination of subsidies for petroleum products granted to public enterprises in 2001. To achieve the envisaged tax revenue growth of 1 percentage point of GDP to 18.1 percent, the government is counting on the full-year effect of the single VAT rate in 2001, as well as on steps to strengthen control and computerization. Aware of the importance of domestic saving and debt sustainability following the public enterprise deficits of 2001, the government has decided to reduce domestic debt in 2002 with resources expected from the World Bank. Moreover, the use of prospective privatization receipts will be consistent with the maintenance of a sound macroeconomic framework.
16. Total expenditure and net lending will be limited to CFAF 772.7 billion (21.2 percent of GDP) in 2002, including expenditure within the framework of savings related to the HIPC Initiative, estimated at CFAF 31.7 billion. The wage bill will increase by 11.7 percent to CFAF 198 billion, taking into account the impact of the reform of the National Pension Fund (FNR), estimated at CFAF 7.5 billion. Transfers and subsidies will be limited to CFAF 104.4 billion, and the government projects a subsidy of CFAF 10 billion for SENELEC. Social safety net expenditure (subsidies on small bottles of butane gas) will total CFAF 9.2 billion, and the budget does not provide for any transfer or subsidy to SONACOS, or any subsidy for petroleum products (except for butane gas). Capital expenditure is projected at CFAF 271.2 billion, of which 47 percent will be financed from external resources.
17. The government's desire to reduce poverty can be seen in its budget priorities. The main actions planned in this context relate, in particular, to an increase in the education budget, which is expected to grow from 31.6 percent of budgetary expenditure (including foreign-financed investment spending) in 2001 to 32.0 percent in 2002, as well as an increase in the health budget to 9.2 percent of budgetary expenditure. To strengthen decentralization, the government will provide additional appropriations to local governments in the amount of CFAF 2.5 billion.
B. Structural Reforms
18. For the financing of the 2001/02 agricultural campaign, SONACOS has secured CFAF 29 billion from foreign banks at end-January and early February and a total of CFAF 11 billion from a local banking pool. The company expects to mobilize a further CFAF 25 billion in March. These loans are backed by export contracts and vegetable oil sales in the domestic market and are to be repaid in 2002. At any rate, the government will not guarantee any SONACOS loans and will not place any further security deposits in favor of SONACOS. In light of the constraints imposed by the world groundnut oil market and the limited domestic market, the government publicly announced in January 2002 that SONACOS purchases will be strictly capped at a level that allows for the sale of all groundnuts purchased and the stocks carried over from the 2000/01 crop, estimated at 125,000 metric tons of groundnuts (equivalent to 40,000 metric tons of unrefined vegetable oil), so as to avoid any further debt accumulation. On the basis of the 2000 and 2001 performances, the viable export contracts already signed, and the current milling capacity, the government believes that SONACOS can sell 115,000 metric tons of unrefined vegetable oil on the world market at US$680 a metric ton, and sell about 60,000 metric tons of vegetable oil locally assuming that the company imports only 20,000 metric tons of unrefined vegetable oil. On this basis, SONACOS should not buy more than 400,000 metric tons of hulled groundnuts during the 2001/02 crop year.
19. The government will continue to pursue its policy of liberalizing the groundnut sector. An action plan for the privatization of SONACOS before the 2003 plantings will be developed by June 30, 2002. The government expects to finalize a privatization strategy and its discussions with sector participants concerning the future structure of the sector during 2002, and it will issue an invitation to bid by December 31, 2002. Concerning the framework agreement for the sector, the government, following exchanges with development partners on how to best manage the guarantee, disaster, and groundnut sector support funds, as well as on its intended role in the sector, plans to make the necessary amendments to avert an adverse impact on public finances and to safeguard the financial soundness of SONACOS.
20. SENELEC's financial situation remains difficult despite falling world oil prices. Because of its obsolete equipment and an inefficient distribution of installations between base load power plants (using heavy fuel) and other turbines, SENELEC cannot generate electricity at competitive rates and faces supply constraints. Furthermore, the chronic operating deficits have not permitted the emergence of sufficient internal resources to finance much-needed capacity expansion. The government will continue searching for an investor who is prepared to finance necessary investments in SENELEC without government guarantees. However, owing to the need to expand capacity as quickly as possible so as to lower the cost of electricity generation and avert power outages, SENELEC has prepared an invitation to bid on a new power plant and the government will seek concessional financing for these investments.
21. The postal service will pursue the program of reforms that was described in the CVCCEP action plan and converted into presidential directives in June 2000, including an amendment to the agreement between the treasury and the postal service to better safeguard the resources of the treasury. Negotiations to spin off the postal checking service (CCPs) as a subsidiary will also continue. A joint Treasury-Postal Service Committee will continue meeting regularly to reconcile the reciprocal balances and flows in the accounts of the postal service at the treasury. Despite the increase in postal rates in May 2001, which considerably boosted revenue, the postal service will have difficulties in reimbursing treasury advances (nivellements décadaires) and servicing its maturing debts. A World Bank mission in February 2002 analyzed the structural problems faced by the postal service and will make recommendations for ensuring its long-term financial viability. The projected deficit to be borne by the treasury in 2002 is estimated at CFAF 2 billion. The government has also asked an independent firm to assess the value of public services provided by the postal service; starting in 2003, it plans to record in the budget a compensation for these services to be agreed with the postal service.
C. Monetary and Banking Sector
22. The program contains prudent monetary targets that are consistent with the government's fiscal policy and the envisaged decline in inflation. The money supply is expected to grow by 7.9 percent in 2002, the same rate as nominal GDP. Net credit to the government should decline by CFAF 24.6 billion, and credit to the economy should grow by about 10 percent. With a view to deepening monetary integration and facilitating interbank transactions, the regional central bank (BCEAO) will pursue the development of a computerized payments system. In addition, ongoing efforts to boost the efficiency of the judiciary are expected ultimately to reduce the incidence of loan delinquencies. Regarding the phasing out of statutory advances from the BCEAO to WAMU member countries, the WAEMU Council of Ministers will take a coordinated decision within the Union, based on the outstanding balances at end-December 2001.
D. HIPC Initiative and PRSP
23. Substantial progress has been made in the preparation of the full-fledged poverty reduction strategy paper (PRSP), as described in a progress report submitted to IMF staff and the World Bank in December 2001. All the PRSP modules were completed between June and December 2001. In this regard, regional consultations led to the definition of priority objectives and tracking indicators, as well as the identification of poverty reduction measures and an action plan. The thematic groups deepened the focus of the discussions on poverty and defined the specific objectives, necessary actions, and costs. A preliminary draft of the full PRSP, incorporating the results of the above-mentioned consultations, was submitted for the consideration of World Bank and IMF staffs in December 2001, after the holding of a validation seminar. The government expects to submit the full PRSP to the IMF and World Bank Boards during the first half of 2002.
24. The government plans to implement the necessary measures for reaching the enhanced HIPC Initiative completion point in 2002. In particular, nine public enterprises will be privatized by end-June 2002. The discussions on a concession contract for the Dakar-Bamako railway have advanced, and the government believes that the contract can be signed by end-June 2002. In addition, the discussions have started on an increase in the capital of the cotton company (SODEFITEX), and the process of privatizing the company for industrial development of Dakar (SODIDA) will be completed in June. Furthermore, six other enterprises will be privatized by end-June 2002. In the health sector, the government expects to receive new information on the relevant indicators after a resumption of data gathering by employees in the sector.
25. The government attaches a high priority to improving the tracking of public expenditure. A first step in that direction will be taken with the implementation of the WAEMU community guidelines on government finance. After the passage of the new organic law, the 2002 general budget now includes specific budgets (comptes annexes), related to investment expenditure financed with grants and loans, that will make government priorities more transparent. Moreover, to improve the tracking of priority poverty alleviation expenditure, the government has adopted an action plan based on the joint analysis of the World Bank and the IMF staffs. In the education and health sectors, a performance-based budget will be implemented in 2002. The government wishes to request technical assistance from the IMF to improve the management of external public debt. This technical assistance will be based on a diagnostic analysis of the existing mechanism and will result in recommendations to improve the monitoring of external public debt.
III. Program Monitoring
26. The program supported by an arrangement under the PRGF will expire on April 19, 2002, and the government plans to request IMF support under a new three-year arrangement under the PRGF in the course of 2002. Accordingly, the government has established indicative quantitative benchmarks for end-March and end-June 2002 as a basis for assessing performance in the coming months. In addition, the government will pursue the above-mentioned structural reforms, which could be developed further under a new program supported by an arrangement under the PRGF.
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