Press Release No. 11/120

Press Release No. 11/120
April 7, 2011

An International Monetary Fund (IMF) mission, led by Norbert Funke, visited Senegal during March 24–April 6, 2011 to conduct the first review under the new three-year Policy Support Instrument (PSI) approved in December 2010. The mission met with the ministers in charge of economy and finance, international cooperation, infrastructure and energy, the National Director of the BCEAO, other government officials, and representatives of the private sector and development partners.

At the conclusion of the visit, the mission issued the following statement:

“The economic recovery is continuing but energy sector supply bottlenecks and the surge in international food and fuel prices pose risks. Growth is estimated to have reached 4.2 percent in 2010, mainly driven by telecommunications, transport, and the financial sector. Year-on-year inflation picked up in the second half of the year and reached 3.7 percent in February, driven by higher food and fuel prices. Based on recent economic activity indicators and an ambitious infrastructure investment agenda, growth is projected to edge up to about 4½ percent in 2011 and annual average inflation to some 3.8 percent. However, in a pre-election context it will be important to avoid economic policy changes that could endanger the achievement of the program objectives. Downside risks include persistent electricity supply problems, higher oil prices and a weaker global recovery. On the upside, a faster global recovery, significant progress with the resolution of electricity problems, a rapid resolution of the crisis in Côte d’Ivoire, and continued structural reforms could support growth.

“Program performance under the current PSI-supported program has been mixed. At end-December, the program target for the fiscal deficit was exceeded by a small margin, partly due to lower than projected oil-related revenues. On the structural side, reforms in the energy sector, tax and customs administration, and debt management are progressing broadly in line with program commitments, albeit in some areas slower than expected.

“Since the start of the program, new financing needs have emerged, in particular in the energy sector. The authorities, assisted by a reputable international consulting firm and development partners, have prepared a restructuring plan for the energy sector that includes short-term emergency measures and medium term investments (Plan Takkal). To partially finance the energy emergency plan, the authorities have adopted some new tax measures and reallocated budgetary resources from lower priority spending.

“The mission sees scope for a somewhat higher than programmed fiscal deficit in 2011 to accommodate additional expenditure related to the energy sector. However, to preserve Senegal’s track record of macroeconomic stability and limit risks of debt distress, a prudent approach to borrowing is needed, in particular in accessing external non-concessional borrowing to finance infrastructure investment.

“The mission stressed the importance of maintaining fiscal transparency and improving the quality of spending. Spending reallocations very early in the year point to some weaknesses in public financial management. All energy sector-related revenues, expenditures, and financing should be transparently reported and monitorable. These operations will need to be fully reflected in the program target for the overall fiscal deficit. The execution of energy investments should be based on realistic plans that take into account existing absorptive capacity. Sizeable investment needs in energy will require difficult budgetary trade-offs and the postponement of lower priority spending.

“Against the backdrop of higher food and fuel prices, the mission discussed with the authorities appropriate policy responses, stressing the importance of well targeted measures. Generalized price subsidies or temporary reductions in customs duties or taxes are typically not very well targeted. With limited fiscal space, any measure with budgetary implications will need to be offset by reducing lower priority spending to maintain the 2011 budget deficit target.

“In terms of other structural reforms, preparatory work on tax policy reform and improving debt management, including the setting-up of a debt management unit are ongoing. On tax policy, the mission urged the authorities to integrate all relevant measures in a comprehensive reform package and to refrain from a piecemeal approach.

“Policy discussions will continue at the margins of the Spring Meetings in Washington, DC. It is expected that the IMF’s Executive Board will discuss the review of the PSI in June 2011.”