The Executive Board of the International Monetary Fund (IMF) today completed the eighth review of Senegal’s economic performance under the program supported by the Policy Support Instrument (PSI) and also concluded the 2014 Article IV consultation1.
The PSI was approved by the Executive Board on December 3, 2010 (see Press Release No. 10/469). The IMF’s framework for PSIs is designed for low-income countries that may not need, or want, IMF financial assistance, but still seek IMF advice, monitoring and endorsement of their policies. PSIs are voluntary and demand driven (see Public Information Notice No. 05/145). In completing the review, the Board approved a waiver for nonobservance of the assessment criterion on non-concessional borrowing.
Following the Board discussion, Mr. Min Zhu, Deputy Managing Director and Acting Chair, made the following statement:
“The authorities should be commended for successfully maintaining macroeconomic stability, advancing with fiscal consolidation and completing the PSI. However, slow implementation of structural reforms has resulted in below par and sluggish growth. This has hampered poverty reduction. In 2014, exogenous shocks, including the spillovers from the Ebola epidemic, have also weighed down growth.
“To exit the trap of low growth and high poverty, the government has developed an ambitious program “Plan Sénégal Emergent” (PSE). The PSE presents a unique opportunity to unlock a broad-based and inclusive growth that will make Senegal an emerging economy. The goal of a 7 to 8 percent annual growth is feasible in the medium term but would require a broadening, deepening and acceleration of structural reforms. Public consumption should be constrained to create fiscal space for implementation of PSE-related social spending and projects. Substantial improvements are required in the regulatory framework and governance, as well as in the quality and efficiency of public investment.
“The 2015 budget targets a further reduction in the deficit to 4.7 percent of GDP, less ambitious than the 4.0 percent of GDP projected earlier. However, the authorities are taking action to improve the quality of public spending by holding back appropriations for new public investment projects until feasibility studies are ready. This may mean that in practice the deficit is closer to the initial projections. Ebola-related shocks could add 0.3 percent of GDP to the deficit in 2015. The authorities remain committed to bringing the fiscal deficit in line with the WAEMU target of 3 percent of GDP in the medium term.”
The Executive Board also completed the 2014 Article IV Consultation with Senegal.
Senegal’s macroeconomic situation is stable. Inflation remains low. The fiscal outlook has improved owing to stronger revenue performance and expenditure control measures and overall deficit is expected to fall to 5.2 percent of GDP in 2014 from 5.5 percent of GDP in 2013. The current account deficit is expected to decline but would stay at about 10 percent of GDP because of depressed exports.
Slow implementation of structural reforms and exogenous shocks continued to weigh down growth. While progress has been made, particularly in the area of governance and business climate, some delays have accrued in the introduction of the single treasury account, expenditure rationalization, investment expenditure execution, and energy sector reforms, with distortive energy subsidies weighing heavily on the budget. For 2014, growth is expected to reach 4.5 percent (from 3.5 percent in 2013), 0.4 percentage points below earlier estimates, reflecting an expected softening in the tourism sector because of the Ebola epidemic compounded by the late start of the rainy season.
The outlook for the Senegalese economy is positive. The authorities’ new development strategy, Plan Sénégal Emergent (PSE), presents a unique opportunity to unlock a broad-based and inclusive growth that will make Senegal an emerging economy. Risks are mainly domestic and regional, and relate to continued slow implementation of structural reforms, including in the energy sector, and the impact of the regional Ebola epidemic. External risks include possible increases in the cost of public borrowing, global effects of the unwinding of unconventional monetary policies, and potential spillovers from a protracted period of slower growth in partner countries and falling oil prices, which may affect fiscal revenue.
Executive Board Assessment 2
Executive Directors agreed with the thrust of the staff appraisal. They noted that satisfactory program implementation has helped Senegal preserve macroeconomic stability. However, due to internal and external factors, the economy has continued to underperform and unemployment and poverty remain high. The large current account deficit and increasing exposure of the external position to shifting market sentiment pose additional risks to the outlook. Directors stressed that prudent policies and ambitious structural reforms are critical to boosting growth and reducing poverty. In this regard, they welcomed the authorities’ new development strategy as outlined in “Plan Sénégal Emergent” (PSE) and looked forward to its steadfast and timely implementation.
Directors emphasized that accelerating the pace of structural reforms will be key to achieving the PSE objectives. They agreed that reform efforts should be aimed at improving governance and the business climate in order to promote private sector development and to attract foreign direct investment. Priority should also be given to making delivery of public services more efficient, improving the impact of public spending through PFM reforms, containing public consumption to generate the fiscal space for investment in human capital and public infrastructure, and strengthening social safety nets. A comprehensive restructuring of the energy sector and increasing export competitiveness will also be important. Directors welcomed the authorities’ plans to engage with a few comparator countries to develop an active peer learning effort to roll out the required reforms.
Directors encouraged the authorities to anchor fiscal policy on long-term debt sustainability within a medium-term budget framework and reach the WAEMU convergence criteria on the fiscal deficit of 3 percent of GDP by 2019. They noted that attaining this goal will require further strengthening of tax and expenditure policy measures. While supporting the PSE priorities, Directors emphasized that all related investment should be consistent with the authorities’ earlier fiscal consolidation plans and Senegal’s absorptive capacity. In addition, decisions to contract nonconcessional financing should be carefully weighed.
Directors welcomed the initiative to improve the quality of public investment by establishing a precautionary reserve envelope from which funding would only be released for projects with proper feasibility studies. Directors encouraged the authorities to extend this in the 2016 budget.
Directors stressed that continued efforts will be needed to improve public financial management, budget institutions, and economic governance. They underscored that reforms should focus on key areas such as macro-fiscal policy design, development of a medium-term expenditure framework and improved fiscal discipline in budget execution.
Directors highlighted the importance of addressing financial sector vulnerabilities, especially the quality of bank assets. They encouraged continued vigilance of the high level of non-performing loans in close cooperation with the BCEAO and WAEMU Banking Commission. Directors supported the strategy to improve access to financial services.
1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm
International Monetary Fund (IMF)