|
Senegal and the IMF Country's Policy Intentions Documents Free Email Notification Receive emails when we post new
items of interest to you.  |
|
|
|
Republic of Senegal—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical
Memorandum of Understanding
Mr. Horst Köhler Dear Mr. Köhler: 1. To support the implementation of Senegal's program of economic and financial reforms geared toward poverty reduction for the period 2003–05, the Executive Board of the International Monetary Fund on April 28, 2003 approved a three–year arrangement under the Poverty Reduction and Growth Facility (PRGF), in the amount of SDR 24.27 million. The attached memorandum of economic and financial policies describes the results achieved during the first six months of the annual program for 2003 and the progress made through end–September 2003 in the implementation of the structural reforms. It also presents the policies that the government has adopted for the rest of the year with a view to meeting the program objectives. 2. As stated in paragraph 13 of the memorandum, all of the program's quantitative performance criteria were met as at end–June 2003. However, the government's undertaking not to contract or guarantee any nonconcessional debt could not be observed in July 2003, as the public enterprise SENELEC contracted a nonconcessional external loan of CFAF 9 billion. That decision revealed shortcomings in the coordination of external public debt management. 3. The government has since improved the internal tracking structures, with a view to ensuring that the responsibility for prior authorization of any new foreign borrowing by the state or its agencies will be with the Minister of Economic Affairs and Finance. 4. As regards the structural benchmarks, the government produced on an experimental basis, as scheduled, the end–September 2003 treasury balance according to the new chart of accounts. By contrast, delays were experienced in the process launched to solicit private investment in the power and groundnut sectors. In the power sector, the process of awarding an Independent Power Producer (IPP) concession for the production of 60-megawatt electricity began with a call for expressions of interest. In June 2003, six companies were prequalified and received the technical specifications; the complete tender documents were subsequently prepared and the invitations for bids were ultimately issued to the prequalified companies on November 5, 2003. Also, the process of privatization of SONACOS, the groundnut processing company, was held up because of delays incurred in the related technical preparations. As a result, the first phase of the process (the call for expressions of interest) could take place only on July 31, 2003; the second phase (the prequalification of potential investors) was completed on December 10, 2003; and the invitations to bid were actually issued on January 13, 2004. Despite the delays experienced in the implementation of these reforms, considerable progress was made in involving private operators in the power and groundnut sectors-so much so, that the program objectives should be attained. 5. For the reasons explained in the attached memorandum and in light of the remedial measures already taken, the government requests a waiver for its nonobservance of the performance criteria requiring it not to contract any new nonconcessional external debt, to issue invitations to bid for an IPP concession by end–June 2003, and to issue invitations to bid for the privatization of SONACOS by end–July 2003. 6. The government believes that the policies and measures set forth in the attached memorandum, as well as the policies presented in the previous memorandum of economic and financial policies of April 10, 2003, will permit the achievement of its program objectives, however, it will, if required, take any additional measures deemed necessary in this connection. The government will consult the Managing Director of the IMF on the adoption of these measures and before making any amendments to the policies described in the memorandum. 7. To facilitate the attainment of those objectives and the implementation of its policies, the government requests the second disbursement envisaged in the three–year arrangement, in an amount equivalent to SDR 3.47 million, as well as interim assistance from the Fund under the enhanced HIPC Initiative during February–April 2004 in the amount of SDR 1.066 million. 8. The government undertakes to carry out with Fund staff the second review of the PRGF program by end–April 2004. 9. The government of Senegal consents to the publication of this letter, the memorandum of its economic and financial policies, and the report of Fund staff on the first review of the program.
|
Memorandum of Economic and Financial Policies I. Introduction 1. Senegal's commitment to achieve poverty reduction objectives is clearly borne out in the poverty reduction strategy paper (PRSP), which was drafted with the help of all the development stakeholders and endorsed by the donor community at the advisory group meeting in Paris on June 12–13, 2003, following its consideration in December 2002 by the IMF and World Bank Executive Boards. 2. The Economic and Financial Program for 2003–05, designed by the government and based essentially on the PRSP, was approved by the IMF on April 28, 2003. Its implementation will consolidate the macroeconomic foundation and achievements in the area of public finances. To benefit from the external debt relief under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative), the government intends to meet the conditions for the completion point by end–March 2004. 3. A national framework for task monitoring and evaluation is already in place to facilitate the implementation of the poverty reduction strategy. The government of Senegal intends to draft a report on the first year of PRSP implementation by end–January 2004, and will continue working with donors that have offered technical and financial assistance. 4. This memorandum reviews the performance of financial policies and the implementation of structural reforms over the first six to nine months of 2003, and assesses the outlook for the end of 2003. It also sets out the agreed time frame for certain public sector reforms, especially tax and recruitment policy reforms, as well as the agenda for developing a medium–term strategy for the compensation of civil servants. The memorandum provides an updated macroeconomic outlook for 2004 and describes public finance trends. II. Performance Under the Program A. Program Objectives and Financial Policies for 2003 5. The Economic and Financial Program for 2003 was based on a GDP growth rate of 6.6 percent, reflecting a projected partial recovery of agricultural production toward its trend level–which would raise output in the primary sector by 10.8 percent, and by 5.7 percent in the nonagricultural economy. Two key factors were expected to support rising nonagricultural output: the significant investment in recent years in the expansion of chemical and electrical production capacity, and continued strong construction activity (11.9 percent) in conjunction with the public investment program. Inflation was expected to remain moderate, with a change in the GDP deflator of about 2.5 percent. 6. The overall fiscal deficit (including grants) was targeted at 1.3 percent of GDP, and the external current account deficit (including grants) was projected at 5.6 percent of GDP. In the monetary area, a prudent policy was to be maintained, with a projected 8.8 percent increase in broad money, in step with nominal GDP growth. 7. In the first year of the program, the government was to focus on accelerating the reform agenda for strengthening public expenditure management and on implementing institutional reforms in sectors that, in the past, had seriously impeded attainment of its fiscal objectives, particularly the electricity and groundnut sectors and the postal service. Tax reforms to be introduced in 2004 were prepared in 2003. The government also committed itself to developing, in the course of 2003, a new medium–term recruitment policy and components for a civil service compensation strategy. B. Economic and Financial Developments in the First Half of 2003 and Outlook for the Full Year 8. Economic developments in the first half of 2003 were less favorable than expected, owing to the cumulative effect of several exogenous factors. First, the latest data on the 2002 harvest, which became available at the beginning of 2003, showed that the low rainfall had had a greater impact than originally predicted. The drop in agricultural production in 2002 is now estimated at about 30 percent, compared with the 21 percent drop initially estimated. This led to a reduction in disposable income for rural households and a risk of isolated food shortages in early 2003, and sparked fears of a seed shortage for the 2003 crop year, especially in the groundnut sector. In light of these factors, the authorities launched an emergency program to aid the rural sector, the costs of which were specified in a supplementary budget passed in August 2003 (see Section III.A below). 9. At the same time, weak world prices for certain export goods, including phosphates, combined with the rise of the euro (to which the CFA franc is pegged) against the U.S. dollar, caused a slowdown in economic activity in these sectors, while the decline in rural household income and a lag in execution of public expenditure also dampened domestic demand. The unfavorable private sector conditions thus led to a greater use of bank credit than had been expected, and to a drop in domestic private financial savings, the latter of which was reflected in a 1.3 percent contraction of the money supply at end–June 2003 from its level at end–December 2002. Finally, weak domestic demand and a drop in the price of imported goods caused a slight drop of about 0.3 percent in the consumer price index from June 2002 to June 2003. 10. Fiscal policy was prudent. Tax revenue performance fell short of the six–month targets for 2003, with a shortfall of around CFAF 10 billion (about 3 percent of the target), mainly reflecting slower-than-expected growth in the tax base. However, this loss was more than offset by a lag in the execution of capital expenditures on domestic resources, and by the accumulation in correspondent accounts of resources transferred by the state budget; at the same time, the execution of current expenditures remained strictly within the six–month budget appropriations. Overall, the surplus of the basic budget balance at midyear was nearly CFAF 85 billion, which was about 1 percent of GDP above target. 11. Preliminary indications for the second half of 2003 suggest that the economic trends should partially have been reversed from the first half of the year owing to higher public expenditure, including a more ambitious HIPC funds expenditure program enacted under the supplementary budget of August 2003, as well as better conditions in certain productive sectors. In particular, agricultural production should have edged up toward trend levels (with a resulting growth rate of almost 36 percent over 2002), and production in the secondary sector should have picked up at a rate of about 4.4 percent, which would still be below the program projection of nearly 8 percent. Overall, real GDP and nonagricultural GDP growth are expected to have reached 6.3 percent and 4.2 percent, respectively, as against 6.6 percent and 5.7 percent in the program. The inflation rate, as measured by the average annual consumer price index, should have been close to zero. 12. The increase in broad money should have reached 6.7 percent in 2003. Bank credit to the economy should have risen by 8.8 percent, in line with program targets, under eased monetary conditions. The Central Bank of West African States (BCEAO) lowered its key rates (discount and repurchase rates) by an overall 100 base points and 50 base points, respectively, on July 7 and October 20, 2003. Since then, its key rates have been equal to 5 percent (discount rate) and 4.5 percent (repurchase rate). The external current account balance (including current official grants) should have showed a deficit of about 6.6 percent of GDP, compared with a program target of 5.6 percent, mainly owing to the weakness of certain export sectors. The total value of exports and imports should, however, have been buoyed by a rise in reexport transactions of a temporary nature. C. Performance with Regard to Quantitative Criteria and Indicators 13. All the quantitative criteria for end–June 2003 were met. In particular, the basic budget balance was CFAF 83.5 billion and the reduction in net credit to government was estimated at CFAF 74.2 billion, both of which outcomes exceeded expectations. Concurrently, the electric utility, SENELEC, cleared all of its outstanding arrears. 14. However, the criterion concerning the contraction or guarantee of nonconcessional external public debt, which applies continuously, was not met by end–July 2003 because SENELEC had contracted a nonconcessional external loan from the West African Development Bank (BOAD) to finance emergency investments. Although the government feels that this particular loan was justified, its contraction illustrates the need to reinforce the institutional arrangements for monitoring external public debt. 15. With regard to the quantitative indicators at end–June, neither tax revenue, treasury correspondent accounts, guarantee deposits, nor SENELEC's basic balance measured up to program targets. Tax revenue did not reach the target level due to negative developments in the tax base at the beginning of the year, as mentioned above. As for the treasury correspondents, accumulations in the deposit accounts overshot the program target, although the trend since June 2003 indicates that there should be a marked improvement in this area by end–December 2003. Guarantee deposits exceeded the ceiling set for end–June, mainly because of the difficulties that SENELEC encountered in refinancing the government-backed credit. Nevertheless, this refinancing operation should be resolved by end–December 2003. Finally, although SENELEC achieved an operating surplus, the basic balance did not reach the target level because of a shortfall in the recovery of claims. D. Structural Performance Criteria and Benchmarks 16. With regard to structural criteria, the criterion on the production of treasury account balances from March to July 2003, based on the new West African Economic and Monetary Union (WAEMU) chart of public accounts, was met. 17. The criterion on the tender for bids for an independent power producer (IPP)-type concession was not met by the end of June 2003 because of delays in the technical preparations of the specifications. The procedure for selecting a concessionaire began in May 2003 with a call for expression of interest and was followed by a short-listing of prequalified potential bidders. The document of technical specifications was then transmitted to the short-listed concessionaires at the end of June 2003. However, it turned out that the government needed to discuss further the technical aspects of the financial package for the operation with its development partners engaged in electricity sector reforms, in particular the World Bank, so as to ensure that the tender document and the draft contract for energy purchases satisfied international best practices. The tender was eventually issued to the short-listed concessionaires on November 5, 2003, and a contract should be awarded provisionally by end-January 2004, and finalized within two months. 18. With regard to the privatization of the groundnut processing company, SONACOS, a call for expression of interest was launched on July 31, 2003, but the requirement that a tender for bidding be issued on that date was not met. The shortlist of qualifying potential investors was completed on December 10, 2003. The full tender for bidding was issued to short-listed investors on January 13, 2004. 19. As for the structural benchmarks, the national accounts, which were revised on the basis of the System of National Accounts 1993, were published in April 2003. However, the year-end treasury accounts for 2000 to 2001 were not submitted to the Audit Office by end–August 2003 because of disputes over submission procedures and a delay in the closure of accounts for 1997. Publication of the audit of SENELEC's semiannual accounts at end–June 2003, which was initially scheduled for end–September 2003, was possible only on January 8, 2004 because the company management was slightly behind in approving the 2002 audited accounts, which determine the opening balance of the 2003 accounts. III. Economic and Financial Policy Measures for Achieving the 2003 Targets A. Fiscal Policy 20. For the rest of 2003, the fiscal stance remained prudent. The basic fiscal balance (including additional HIPC Initiative-related spending and the costs of structural reforms) is expected to be zero percent of GDP, compared with an initial program target of 0.3 percent. Projected revenue is CFAF 721.3 billion, CFAF 688.5 billion of which is fiscal revenue, as a greater effort on the part of tax administration should partially have compensated for weaker growth in the tax base. The shortfall in nominal tax revenue should only have been on the order of 1 percent of the program target, but tax revenue as a ratio of GDP should have increased to 18.3 percent, compared with the program target of 18.0 percent and a ratio of 17.9 percent in 2002. 21. Disbursement of budget grants, mainly from the European Union, should have amounted to no more than about CFAF 20 billion by end–2003, since part of the aid was deferred until 2004. The program foresaw about CFAF 30 billion in budget grants from the European Union, including disbursements amounting to CFAF 10 billion made prior to 2003 into an account at the BCEAO. 22. Total expenditures should have reached 23.6 percent of GDP, or CFAF 887.4 billion in 2003. This amount includes expenditures authorized in the supplementary budget (LFR2003) of August 8, 2003; this budget allowed the government to set up an emergency aid program for the rural community to alleviate the distress caused by the poor harvest in 2002, and to authorize more HIPC Initiative expenditures than initially planned. The 2003 supplementary budget expenditures amounted to CFAF 60.2 billion, CFAF 44.2 billion of which was HIPC Initiative expenditure (about 75 percent of which was to be executed by the end of 2003), and about CFAF 15 billion has been earmarked for emergency aid for the rural community in the form of food aid, animal feed, and subsidies for the purchase of groundnut seed. In light of the expected slowdown in several sectors of the economy and the resulting impact on poverty levels, the government also felt that these additional expenditures should not be offset by a reduction in nonpriority sector spending, and that the consequent moderate budgetary impact was consistent with program objectives. Moreover, planned expenditures to finance the temporary costs of structural reform were deferred to 2004. 23. External financing, reaching CFAF 71.1 billion, was expected to stay close to program projections but to have a slightly different distribution. The deferral to early 2004 of disbursements of budgetary support from the World Bank and the African Development Bank should have been compensated for by higher external debt relief from interim assistance under the enhanced HIPC Initiative than initially programmed (about CFAF 44 billion, compared with a projected CFAF 24.7 billion) and by the proceeds from treasury bills issues in the countries of the WAEMU (CFAF 8 billion). Taking the slightly larger-than-programmed overall fiscal deficit into account (CFAF 71.2 billion, against the CFAF 51 billion programmed), the reduction of government domestic indebtedness should have been slightly smaller than forecast, and the net indebtedness with the banking system should have increased by around CFAF 7 billion, compared with a planned small reduction. 24. Progress was made in reinforcing public expenditure management. Three WAEMU directives on public finance were adopted as planned in March 2003. Action plans to strengthen budget procedures (CFAA) and procurement procedures (CPAR) were validated by an Interministerial Council in July 2003 and have been implemented since then. Tests were run on transactions for September 2003 in order to integrate treasury settlement transactions into the computer tracking system for expenditures. The testing was completed at the end of 2003. As for disseminating financial data and data on budget control, the government duly filled in the questionnaire pertaining to a mission on the public finance module of the IMF Report on the Observation of Standards and Codes (ROSC), and has requested a mission for 2004. 25. The government intends to pursue its policy of systematically submitting the executed annual budget accounts to the Audit Office for examination and of submitting the budget review laws, which certify proper budgetary execution, for parliamentary scrutiny within the time frame set out in the Organic Law, in keeping with its commitments under the WAEMU directive on this matter. This directive stipulates in particular that a budget review law for the 2002 budget be submitted to parliament, together with the 2004 budget. The Audit Office examined the annual accounts for 1997 and 1998, and the budget review laws will be sent to the National Assembly as soon as possible. However, the problems encountered in 2003 prevented the Audit Office from completing examination of the 1999 annual accounts, and so the accounts for 2000 to 2002 were not examined either. 26. These problems highlighted the need to have clear rules for submitting the accounts and related documentation to the Audit Office, and such rules will enter into force by end–March 2004. 27. To speed the processing of the budget review laws for 1999 to 2003, the government and the Audit Office will request technical and financial support from the World Bank and other bilateral and multilateral development partners, with a view to (i) helping the government submit the accounts and draft budget review laws for the years in question to the Audit Office by the end of 2004; and (ii) assisting the Audit Office in exercising its role as external auditor of government practices within the time frame set in the Organic Law. B. Tax Reform 28. The government submitted the revisions of the General Tax Code to the National Assembly in January 2004. The planned fiscal reform aims to simplify the tax system and make it more equitable, widen the tax base and promote voluntary compliance, promote investment and competitiveness, improve taxpayer guarantees, and combat tax evasion. Salient features of the reform include the following:
29. At the same time, the government submitted a revised draft Investment Code to the National Assembly in January 2004. The objectives of the new Investment Code are the following: channel investment to growth sectors or sectors where Senegal has a comparative advantage, and create jobs. The government will ensure overall consistency in fiscal policy by balancing the guiding principles of the new Investment Code with the reform of the General Tax Code, thereby ensuring that the impact of incentive measures on public finance is insignificant. 30. The revised system of investment incentives takes account of changes in the Senegalese economy and its environment. The export processing zone regime is extended to include the electronic customer support services industry. The new Investment Code, which will replace the present code adopted in 1987, broadens its scope to include sectors where the government is pursuing specific, priority objectives. Investments of over CFAF 100 million in these sectors will be eligible. The new Investment Code envisages four types of tax benefits for these sectors, beyond the General Tax Code. It provides exemption from customs duties for eligible capital goods and suspension of VAT payments during the investment period. The suspended VAT will be paid during the operating stage. The new code also provides a tax credit on investment for a limited period of time. In addition, eligible companies get a temporary exemption from the employers' contribution (CFCE) on new hiring. C. Civil Service Recruitment and Compensation Policy in the Medium Term 31. The medium-term recruitment policy aims to accelerate progress toward achieving the PRSP targets for building capacity and promoting basic social services in health and education, and good governance. Raising the ceiling of the workforce is compatible with the WAEMU convergence criterion for the wage bill-fiscal revenue ratio and is justified in view of priority sector constraints, especially for the social sectors, the tax authorities (régies financières), the judiciary, and security. The change in policy is also justified in light of the pressing needs of ministries, in which low staffing has affected the quality of public services. Generally speaking, the staffing indicators for these sectors fall short of generally accepted standards (see Appendix I, Attachment I, Annex I). 32. The government adopted a multiyear recruitment target of 15,000 civil servants for 2003–05, with a hiring rate of 5,000 per year. The cumulative impact of this special recruitment drive on the wage bill is around CFAF 37 billion for the three-year life span of the program, compared with 2002 and not counting wage adjustments. This is consistent with the financial targets of the program in terms of the wage bill. 33. At the same time, the compensation strategy will be reviewed to better adapt it to the economic context. The government has begun a study on civil service compensation policy that will be carried out under the supervision of a steering committee, and the findings will be made available in the first half of 2004. This study will take stock of all legislation on compensation and the civil service compensation arrangements. This will serve as a basis for the government to adopt, during the third quarter of 2004, an equitable, coherent, and incentive-driven compensation system that gives special consideration to issues of competitiveness vis–à–vis private sector employment practices. The implementation of the new compensation strategy will take place within the programmed wage envelope for 2004–05. D. Financial Sector Policies 34. The financial sector remains largely sound, and the authorities are continuing to implement the sector development policy. In September 2003, the government and the banking commission agreed that one bank that lacks equity will be restructured by March 2004 at the latest. The government and the shareholders have agreed on the following modalities for the restructuring:
In the microfinance sector, a policy document is being drafted and a technical assistance program agreed on with AFRITAC West is scheduled to start up in 2004. 35. As part of the macroeconomic framework that underpins the 2003 Economic and Financial Program, the government issued CFAF 23 billion in treasury bills (principal and interest) with a one-year maturity on September 10, 2003 throughout the WAEMU. The interest rates obtained are the lowest of the latest issues in the subregion, which shows the worth of the Treasurer's signature. The outcome bodes well for more regular issues, as well as for issues of greater amounts with longer maturities. The government is striving to gain a foothold in the short-term market and the bond market according to its financial needs in order to develop the financial market, and it is planning to set up a specialized department in the treasury so as to enhance capacity for this purpose. 36. With regard to promoting justice, which is a major factor in the development of the financial and credit market, the government is going ahead with its plan to recruit 186 magistrates, 105 clerks, and 761 administrative assistants as part of its recruitment policy during 2003–05. Several clerks' offices have been modernized and automated to speed up the delivery of justice. Moreover, a ten–year judiciary development plan is being finalized. E.External Debt Policy 37. On July 28, 2003, SENELEC signed an external credit agreement with the BOAD for nearly CFAF 9 billion on a nonconcessional basis, with a view to expanding its production capacity. The government is aware that the terms of the credit agreement do not comply with the provisions of the technical memorandum of understanding (TMU) of April 10, 2003 and will require a waiver. 38. This request is primarily based on the need to carry out extremely urgent investment projects, upon which depend SENELEC's operating activities. The BOAD resources were the sole source of financing that would enable those projects to be completed on time. In addition, the transfer of power plants covered by the BOAD credit to the private sector will start as soon as possible, in keeping with the Letter of Energy Sector Development Policy (Lettre de Politique de Développement du Secteur de l'Energie). 39. In support of its request for a waiver, the government took measures to strengthen its management of external debt policy. In particular, control of public enterprise debt was stepped up to meet the program objectives. A government circular letter was sent to all public institutions covered by the TMU on November 24, 2003, instructing them to seek authorization from the Ministry of Economic Affairs and Finance before contracting an external loan. 40. In its ongoing endeavor to improve the external public debt management system, the government of Senegal has also built up the capacities of the Debt and Investment Directorate of the Ministry of Economy and Finance. Missions have been conducted to reconcile external public debt data with creditors, in cooperation with IMF and World Bank staffs, as part of the preparation of the HIPC Initiative completion point document. Finally, information sharing between the unit in charge of managing public debt and those involved in the design of the macroeconomic framework will be reinforced by the Coordination Committee in the first quarter of 2004. F. Key Sector Reforms: Groundnut and Electricity Groundnuts 41. Government policy for the groundnut industry was defined in the Letter of Groundnut Industry Development Policy (Lettre de Politique de Développement de la Filière Arachide, LPDFA), adopted in May 2003. It mainly aims at diversifying production and making it more dynamic, so as to increase the revenue of small farmers and mitigate the vulnerability induced by the groundnut monoculture. The policy deepens and consolidates the liberalization policy undertaken, in particular by (i) giving private seed producers responsibilities in the production, gathering, storage, and distribution of groundnut seed, and in the transportation and marketing of groundnut seeds; (ii) rationalizing the judicial and regulatory framework (regulations on the marketing of seeds, protection mechanisms, etc.) strictly enforcing existing regulations; and (iii) withdrawing the protective tax on vegetable oil, scheduled before end–March 2004. 42. Concerning the privatization of SONACOS, the prequalification of potential investors was completed on December 10, 2003. The tender document for the final bidding was given, after consultation with the World Bank, to the three prequalified investors on January 13, 2004. The government agrees on the necessity to sell the real estate assets and the production plants and equipment in separate lots. In order to maintain the attractiveness of SONACOS, the patents acquired by the firm will be passed on to the purchaser, opened in public session, like all other assets, and the legal duration of each patent will be strictly enforced. However, any entrepreneur who wishes to use the patent can sign a technical memorandum of understanding with SONACOS. The government also decided that the financial bid will be the only criterion determining the selection among technically qualified bidders, and that the financial bids will be opened to the public session. SENELEC's financial position 43. At end–June 2003, SENELEC's financial position was less favorable than expected. The basic balance (on a payment order basis) of the company was CFAF 5.8 billion, compared with the targeted surplus of CFAF 14.1 billion. This is explained by a shortfall of about CFAF 8 billion in current bill collections and by current operating charges that were over CFAF 2 billion more than expected. This was due, in particular, to the smaller-than-expected supply of low-cost energy from the Manantali Dam, caused, in turn, by low rainfall in 2002. Nevertheless, by end-June 2003, the company did clear its stock of arrears (estimated at nearly CFAF 21 billion at end-2002) by negotiating a bridge loan of CFAF 6 billion that month and by restructuring roughly CFAF 10 billion of its debt to oil companies. The company also successfully launched a CFAF 15 billion bond issue on the regional market. 44. The problems in the first half of the year led the management of SENELEC to implement a proactive plan to significantly improve collection and put tight controls on spending. This should have brought the basic balance to CFAF 31.4 billion by end-December 2003, compared with an initial target of CFAF 30.1 billion. In addition, to address the shortage in working capital, SENELEC negotiated a financing package (bank and treasury bills) for CFAF 18 billion, which should help it meet its short-term commitments. Finally, the program target of zero outstanding payment arrears by end-December 2003 should have been achieved. IV. Economic Outlook for 2004 45. The year 2004 should see sustained economic growth of about 6 percent. Agricultural growth should be steady, with production levels returning to their long-term trend, while industrial growth, especially in the chemical sector, and growth in public works should exceed 2003 levels. Inflation will probably remain moderate, with a projected change in the GDP deflator of 1.4 percent. The current external account deficit (including current official transfers) should narrow to 5.7 percent of GDP from 6.6 percent in 2003, mainly thanks to a rise in chemical exports to production-capacity level, and to the absence of the exceptional factors that have made the import bill so large in 2003 (the large volume of food imports and the stock building of petroleum products). 46. Consolidation of public finances will continue. The basic fiscal surplus, excluding HIPC Initiative-related expenditures and structural reform costs, will improve slightly from 1.0 percent of GDP in 2003 to 1.3 percent of GDP in 2004. The overall fiscal deficit, including grants, will increase from 1.9 percent of GDP in 2003 to 2.5 percent in 2004, as a consequence of lower grant levels, a faster execution of the medium-term capital expenditure program, and the cost of structural reforms, which will rise in compliance with the priorities defined in the PRSP. The 2004 budget was adopted by the National Assembly on December 12, 2003. The main parameters of this budget are as follows: (i) projected fiscal revenue of CFAF 748.6 billion, which implies a tax burden of 18.5 percent of GDP, up 0.2 percentage point of GDP from 2003, reflecting ongoing efficiency gains in tax administration, especially with the entry into force of the composite tax, CGU; (ii) wage expenditure categories of CFAF 225.9 billion, reflecting the moderate financial impact of the recruitment program (5,000 new civil servants recruited in the last quarters of 2003 and 2004); (iii) growth in the other current expenditure (CFAF 284.8 billion) and in capital expenditure funded with internal resources (CFAF 189.9 billion, of which CFAF 10.9 billion was the unspent balance of HIPC expenditures under the 2003 supplementary budget that could not be executed in 2003), the latter of which will slightly exceed nominal GDP growth so as to accommodate spending in priority sectors; and (iv) an appropriation of CFAF 26.8 billion for the temporary costs of structural reforms, in particular to cover the recapitalization of the postal service (CFAF 15.5 billion) and the social security arrears of liquidated companies and local authorities (CFAF 11.3 billion for IPRES and CSS). 47. Furthermore, the balance of correspondent accounts is expected to drop by CFAF 5 billion in 2004, thus reversing the buildup of funds in these accounts at end-2002 and during the first part of 2003. The overall fiscal balance, including grants, should reach a deficit of CFAF 101.3 billion. The external financing to cover the deficit is higher than originally expected under the program because the first tranches of the World Bank Private Sector Adjustment Credit (PSAC) and the African Development Bank program were deferred from 2003 to 2004. The net government position in the banking system should therefore improve by about CFAF 28 billion. V. Program Monitoring 48. To ensure effective implementation of the program, the government took
the prior actions listed in Table 3 of the TMU
(Appendix I, Attachment I, Annex II). The execution of the government program
until the end of 2003 will be monitored with the help of quantitative performance
criteria and indicative targets (see Table 1 of the
TMU). Preliminary quantitative performance criteria and
indicative targets have been set for the first two quarters of 2004 (see
Table 1 of the TMU). They will
be finalized on the occasion of the second program review. Technical Memorandum
of Understanding 1. This technical memorandum of understanding (TMU) defines the quantitative and structural performance criteria, indicative targets and structural benchmarks to monitor the program supported by the first annual arrangement under the Poverty Reduction and Growth Facility. It also establishes the terms and time limits for transmitting the data that will enable Fund staff to monitor program implementation and provides numerical illustrations of these criteria and benchmarks based on past outcomes. I. Definition 2. Unless otherwise specified below, the government is defined as the central administration of the Republic of Senegal and does not include any local administration, the central bank, or any government-owned entity with separate legal personality. II. Quantitative Performance Criteria 3. In EBS/03/49, quantitative performance criteria were set for December 31, 2003, for the basic fiscal balance excluding temporary costs of structural reforms and spending financed with resources made available as a result of debt relief under the HIPC Initiative (HIPC-related resources); the change in net bank credit to the government; and the stock of arrears of SENELEC. For September 30, 2003, indicative targets were set for the same items. In this TMU, preliminary indicative targets and performance criteria for the same items are set for March 31 and June 30, 2004. These targets and criteria will be finalized on the occasion of the second review. The performance criteria pertaining to the ceiling on the contracting or guaranteeing of new nonconcessional external debt by the government, as well as domestic and external payments arrears, will be monitored on a continuous basis. A. Basic Fiscal Balance, Excluding Temporary Costs of Structural Reforms and Spending Financed with HIPC-Related Resources Definition 4. The basic fiscal balance is the difference between the government's budgetary revenue and total expenditure and net lending, excluding capital expenditure financed from abroad and gross lending. It includes the balance of special and correspondent accounts at the Treasury. Temporary costs of structural reforms and spending financed with HIPC-related resources are excluded from the definition of the basic balance for the purposes of program monitoring and evaluation. Expenditures counting as "temporary costs of structural reforms" were listed, on an indicative basis, at the outset of the program (Table below). Detailed spending plans for these temporary costs of structural reforms were expected to be specified in a supplementary budget plan in 2003, after consultation with Fund staff. In the event, these costs did not materialize in 2003. Thus the supplementary budget of September 2003 contained only expenditures financed with not-yet allocated HIPC-related resources, as well as emergency spending in rural areas.
Performance criteria 5. The performance criterion for the basic fiscal balance excluding temporary costs of structural reforms and spending financed with debt relief under the HIPC Initiative is a floor set at CFAF 58.1 billion on December 31, 2003. The preliminary indicative target on March 31, 2004 and the preliminary performance criterion on June 30, 2004 are floors set at CFAF 16.8 and 49.2 billion, respectively. Reporting requirements 6. During the program period, the authorities will report monthly to Fund staff provisional data on the basic fiscal balance excluding temporary costs of structural reforms and spending financed with HIPC-related resources with a lag of no more than 45 days. The data for revenues, expenditures, special accounts and correspondent accounts that are included in the calculation of the basic fiscal balance, for expenditure financed with HIPC-related resources and for spending for temporary costs of structural reforms will be drawn from preliminary treasury account balances. Spending for temporary costs of structural reforms will also be provided by the authorities in the form of a table similar to the one above with a lag of no more than 45 days. Final data will be provided as soon as the final balances of the treasury accounts are available, but not later than two months after the reporting of provisional data. B. Change in Net Bank Credit to the Government Definitions 7. The definition of government for the purpose of calculating net bank credit to the government is the one applied by the BCEAO. It is broader than the definition of government in paragraph 2. Net bank credit to the government reflects the net credit position of the government-including postal checking accounts (CCP)-vis-à-vis the central bank and commercial banks. Net bank credit to the government is the difference between the government's gross borrowing from the banking system and its claims against the banks. Government claims include treasury cash holdings, deposits (including earmarked privatization receipts and other resources such as loans and grants) at the central bank, deposits in commercial banks, and secured liabilities (obligations cautionnées). The government's debt to the banking system includes central bank credit (mainly statutory advances, IMF net credit, refinancing of secured liabilities, the deposit by Kuwait, and government securities held by the central bank), commercial bank credit (including government securities held by resident commercial banks), ex-ONCAD securities, and private deposits at the CCPs. Government securities held outside the Senegalese banking system are not included in net bank credit to the government. The net bank credit to the government as calculated by the BCEAO serves as the basis for program monitoring. 8. The change in net bank credit to the government as of the date for the quantitative performance criterion or benchmark indicated is defined as the difference between the stock on the date indicated and the stock on December 31 of the preceding year.
Adjusters 9. The ceiling on the cumulative change in net bank credit to the government will be lowered (raised) by the amount by which disbursements of external budgetary assistance (defined as budgetary grants, program disbursements, and debt relief, excluding Fund resources and HIPC Initiative debt relief) exceed (fall short of) program projections. The adjustment will be for the full amount of any excess disbursement but will be limited to CFAF 20 billion in the event of a shortfall.
10. The ceiling will be adjusted for the difference between programmed HIPC-related resources and actual HIPC-related resources. HIPC-related resources consist of debt relief under the HIPC Initiative received during the period under consideration and of the stock of resources in the Treasury's HIPC account at the BCEAO at the end of the preceding year. The ceiling will be lowered (raised) for HIPC-related resources exceeding (falling short of) programmed amounts. 11. The ceiling will also be adjusted for the difference between programmed HIPC-related spending and actual HIPC-related spending. HIPC-related spending consists of expenditures in priority sectors that have been financed with HIPC-related resources. The ceiling will be raised (lowered) for HIPC-related spending exceeding (falling short of) programmed amounts. 12. The ceiling will be adjusted for the difference between the amount of programmed costs for structural reforms and the actual costs of structural reforms. The ceiling will be lowered (increased) for expenditures on structural reforms that fall short of (exceed) the programmed amount for temporary costs of structural reforms. The ceiling will be raised only when these additional costs are not covered by additional, not programmed, external budgetary assistance as defined in paragraph 9. 13. The ceiling will be adjusted for the difference between programmed and actual privatization receipts. The ceiling will be lowered (raised) for privatization receipts that exceed (fall short) of the programmed amount. The programmed amount for privatization receipts is CFAF 1.1 billion at September 30, 2003; CFAF 1.1 billion at December 31, 2003; CFAF 0.0 billion at March 31, 2004; and CFAF 0.0 billion at June 30, 2004. In addition, the ceiling on net bank credit to the government will be lowered by the amount of treasury bills issued in 2003 that are held by an entity or person outside the Senegalese banking system. Performance criteria 14. The ceiling set as a performance criterion for the cumulative change in net bank credit to the government under the program at December 31, 2003 was set at CFAF 3.5 billion. The ceilings set as preliminary indicative target at March 31, 2004 and performance criterion at June 30, 2004 are respectively CFAF 3.9 and 18.3 billion. Reporting requirements 15. The BCEAO will report to Fund staff the provisional data on the net bank credit to the government to Fund staff monthly, with a lag of no more than one month after the end of each observation period. Final data will be reported with a maximum lag of two months. 16. Data on privatization receipts will also be reported monthly, be drawn from preliminary balances of treasury accounts, and be transmitted to Fund staff with a lag of no more than 45 days. Final data will be provided as soon as the final treasury accounts are available, but no more than two months after the reporting of provisional data. C. Stock of Arrears of SENELEC Definition 17. The stock of arrears of SENELEC includes all payments due and not paid. Performance criteria 18. The ceiling set as a performance criterion for the stock of arrears of SENELEC is CFAF 0.0 billion on December 31, 2003. The ceiling set as an indicative target is CFAF 0.0 billion on September 30, 2003. The ceilings set as a preliminary indicative target on March 31, 2004 and as a preliminary performance criterion on June 30, 2004 are CFAF 0.0 billion. Reporting requirements 19. The government will report to Fund staff monthly, with a lag of no more than one month after the end of each observation period, the stock of arrears of SENELEC, the newly contracted debt, any new accumulation of arrears, and the debt service and arrears payments made, as well as flows of receipts, current expenditure and investment and debt service expenditure that form part of the monthly calculation of outstanding payments arrears. D. Ceiling on the Contracting or Guaranteeing of Definition 20. This performance criterion applies not only to debt as defined in Point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Executive Board Decision No. 6230-(79/140), last amended by Executive Board Decision No. 12274-(00/85), adopted August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. 21. The definition of debt as specified in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt reads as follows: "(a) For the purposes of this guideline, the term "debt" will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property. (b) Under the definition of debt set out in point 9(a), arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt." 22. Any external debt with a grant element of less than 35 percent is considered nonconcessional, with the exception of IMF lending under the Poverty Reduction and Growth Facility, which is considered concessional even if it does not meet the 35 percent grant element threshold. For debt with a maturity of more than 15 years, the ten-year reference market interest rate, published by the OECD, is used to calculate the grant element. The six-month reference market rate is used for debt with shorter maturities. 23. For purposes of this performance criterion, government is understood to include the government as defined in paragraph 2 above, as well as public institutions of an industrial and commercial nature (EPIC), public administrative institutions (EPA), public institutions of a scientific and technical nature, public institutions of a professional nature, public health institutions, local administrations, public enterprises, and government-owned independent companies (sociétés nationales). Performance criterion 24. Within the context of the program, the government as defined in paragraph 23 above will not contract or guarantee nonconcessional external debt. This performance criterion is monitored on a continuous basis and does not apply to debt rescheduling and restructuring operations, short-term import-related credit and short-term pre-export financing secured on export contracts. Short-term credit refers to maturities of less than one year. It does not apply also to government bonds held by residents of countries in the West African Economic and Monetary Union. Reporting requirements 25. The government will report any new external borrowing and its terms to Fund staff as soon as external debt is contracted or guaranteed by the government. E. External Payments Arrears Definition 26. External payments arrears are defined as the sum of external payments due but unpaid on outstanding external debt that has been contracted or guaranteed by the government, with the exception of external payment arrears arising from government debt being renegotiated with creditors including Paris Club creditors. Debt is understood as defined in paragraph 21 above. Performance criterion 27. Under the program, the government will not accumulate any external payments arrears. This performance criterion will be monitored on a continuous basis. Reporting requirements 28. The government will report to Fund staff any accumulation of external payments arrears as soon as the due date has been missed. F. Domestic Payments Arrears Definition 29. Domestic payments arrears are duly certified domestic expenditure commitments cleared for payment (dépenses ordonnancées) but not paid during a period of 90 days after the date the payment order (ordonnancement) was cleared. Performance criterion 30. Under the program, the government will not accumulate any domestic payments arrears. This performance criterion will be monitored on a continuous basis. Reporting requirements 31. The authorities will report to Fund staff any accumulation of domestic payments arrears as soon as the 90 days period mentioned in paragraph 29 above has elapsed. The government will also keep track of expenditure commitments (dépenses engagées) and commitments duly certified but not yet cleared for payment (dépenses liquidées non encore ordonnancées) in order to minimize delays in payments. III. Indicative targets
A. Floor on Tax Revenue Definition 32. Tax revenue is defined as the ones included in the government financial operations table (TOFE). Indicative targets 33. The indicative targets set for tax revenue are floors of CFAF 521.7 billion on September 30, 2003 and CFAF 698.5 billion on December 31, 2003. The preliminary indicative targets set for tax revenue are floors of CFAF 176.3 billion on March 31, 2004 and CFAF 375.4 billion on June 30, 2004. Reporting requirements 34. The government will report to Fund staff preliminary tax revenue data monthly, with a lag of no more than one month, on the basis of actual collections as recorded in treasury accounts. Final data will be provided once the final treasury accounts are available, but not later than two months after the reporting of preliminary data. B. Ceiling on the Wage Bill Definition 35. The wage bill is defined as all government expenditure on wages, other compensation, bonuses, allowances, and social benefits granted to or paid for the benefit of civil servants and other public employees. Indicative targets 36. The indicative targets set for the wage bill are ceilings of CFAF 154.4 billion on September 30, 2003, and CFAF 207.4 billion on December 31, 2003. The preliminary indicative targets are CFAF 55.8 billion on March 31, 2004 and CFAF 111.7 billion on June 30, 2004. Reporting requirements 37. The government will report monthly to Fund staff the wage bill data, with a lag of no more than 45 days after the end of the month under consideration. C. Ceiling on the Amount of Current Non-Wage Non-Interest
Expenditures and Domestically Financed Capital Expenditures Executed Definition 38. Current nonwage non-interest expenditures are all current expenditures other than wage and interest payments as reported in the government financial operations table. Domestically financed capital expenditures are all capital expenditures that have not been financed from abroad. Exceptional payments procedures are advance payments (paiements par anticipation) and treasury advances (avances de trésorerie). Indicative targets 39. The indicative targets set for the sum of current non-wage non-interest expenditures and domestically financed capital expenditures executed through exceptional budgetary procedures are ceilings of CFAF 28.2 billion on September 30, 2003, and December 31, 2003. The preliminary indicative targets are ceilings of CFAF 31.7 billion on March 31, 2004 and June 30, 2004. Reporting requirements 40. During the program period, the authorities will report monthly to Fund staff provisional data on current non-wage non-interest expenditures and domestically financed capital expenditures executed through advance payments and treasury advances, with a lag of no more than 45 days. The data will be drawn from preliminary treasury account balances. Final data will be provided as soon as the final balances of the treasury accounts are available, but no more than two months after the reporting of provisional data. D. Ceiling on the Stock of Net Deposits in the Correspondent Accounts of the Treasury, Excluding the Correspondent Accounts of Local Authorities, of Public Agencies, of SN La Poste, of IPRES and the Deposit and Guarantee Accounts Definition 41. The stock of net deposits in the correspondent accounts of the Treasury is defined as the sum of the net credit balance in the entry balance sheet (balance d'entrée) of the considered year and the net inflows in those accounts during the considered period. In the standard list of correspondent accounts of the Treasury, the correspondent accounts excluded from this benchmark are: the accounts of local authorities, numbered 431 through 436; the accounts of public agencies, numbered 442; the accounts of SN La Poste, numbered 440-001; the account of IPRES with the number 462.01; and the deposit and guarantee accounts, numbered 466.13. Indicative targets 42. The indicative targets set for the net deposits in the correspondent accounts of the Treasury, excluding the correspondent accounts of local authorities, of public agencies, of SN La Poste, of IPRES, and deposit and guarantee accounts, are ceilings of CFAF 20.0 billion on September 30, 2003 and December 31, 2003. The preliminary indicative targets are ceilings of CFAF 15 billion on March 31, 2004 and June 30, 2004. Reporting requirements 43. During the program period, the authorities will report monthly to Fund staff provisional data on net deposits in the correspondent accounts of the Treasury, excluding the correspondent accounts of local authorities, of public agencies, of SN La Poste, of IPRES and of deposit and guarantee accounts, with a lag of no more than 45 days. The data will be drawn from preliminary treasury account balances. Final data will be provided as soon as the final balances of the treasury accounts are available, but no more than two months after the reporting of provisional data. E. Floor on the Creditor Flow of the SN La Poste (Postal Service) Treasury Accounts Definition 44. The creditor flow on any date is defined as the difference between the cumulative receipts on the accounts of SN La Poste at the Treasury and cumulative withdrawals from the same accounts since the beginning of the year under consideration. Indicative targets 45. The indicative targets for the creditor flow of the SN La Poste treasury accounts are floors of CFAF 0.0 billion at September 30 and December 31, 2003. The preliminary indicative targets are floors of CFAF 0.0 billion at March 31 and June 30, 2004. Reporting requirements 46. The government will report to Fund staff the provisional flows of the SN La Poste accounts on a monthly basis, with a lag of no more than 45 days. Final data will be provided as soon as the final balances of the treasury accounts are available, but no more than two months after the reporting of provisional data. F. Ceiling on Government Guarantee Deposits Definition 47. Government guarantee deposits are defined as government deposits in local and foreign banks used to guarantee bank loans. Indicative targets 48. The indicative targets for the stock of guarantee deposits are ceilings of CFAF 0.0 billion for September 30, 2003 and December 31, 2003. The preliminary indicative targets are ceilings of CFAF 0 billion for March 31, 2004 and June 30, 2004. Reporting requirements 49. The government will report to Fund staff monthly, with a lag of no more than one month after the end of each observation period, the stock of government guarantee deposits. G. Stock of Debt of SONACOS Definition 50. The stock of debt of SONACOS includes all loans contracted with local and foreign banks. It includes also discounted letters of credit for which the respective export contracts have not yet been executed. Indicative targets 51. The indicative targets for the stock of debt of SONACOS are ceilings of CFAF 0.0 billion on September 30, 2003 and December 31, 2003. Reporting requirements 52. The government and the BCEAO will report monthly to Fund staff the stock of debt of SONACOS, the new debt contracted, and the debt-service payments made, with a lag of no more than one month after the end of each period of observation. H. Basic Balance of SENELEC Definition 53. The basic balance of SENELEC is defined as the difference between (i) total receipts from its clients, including the administration, on a gross-of-tax basis (excluding subsidies), and arrears collected, on a cash basis; and (ii) current operating expenses on a gross-of-tax, invoice basis, including energy, personnel, other operating expenses, fees collected by SENELEC on behalf of other entities, and its net financial charges (interest, fees, and commissions). Indicative targets 54. The indicative targets for the basic balance of SENELEC are floors of CFAF 22.5 billion on September 30, 2003 and CFAF 30.1 billion on December 31, 2003. The preliminary indicative targets are floors of CFAF 10 billion on March 31, 2004, and CFAF 15 billion on June 30, 2004. Reporting requirements 55. The government will report monthly to Fund staff all information needed to calculate the basic balance of SENELEC with a lag of no more than one month after the end of each observation period. IV. Prior Actions A. Prior Action I for the conclusion of the first program review 56. Call for bids on the concession of an Independent Power Producer (IPP) contract to operate a 60 MW production plant, under the conditions outlined in the Energy Sector Policy Letter. B. Prior Action II for the conclusion of the first program review 57. Call for international bids on the privatization of SONACOS. V. Additional Information for Program Monitoring 58. The authorities will report to Fund staff the following, with a maximum lag of 45 days:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||