SENEGAL ECONOMIC SNAPSHOT: GREAT HARVEST DOES NOT

UNCLAS SECTION 01 OF 02 DAKAR 003185 SIPDIS SIPDIS STATE FOR AF/EPS, AF/W, EB/IFD/ODF AND INR/AA USDOC FOR 4510/OA/PMICHELINI/AROBINSON-MORGAN/KBOYD USDOC FOR 3131/CS/ANESA/OIO/GLITMAN/MSTAUNTON E.O. 12958: N/A TAGS: ECON EAGR ETRD EFIN EINV SG SUBJECT: SENEGAL ECONOMIC SNAPSHOT: GREAT HARVEST DOES NOT TRANSLATE INTO HIGHER GROWTH REF: DAKAR 3098 ¶1. SUMMARY: Quarterly Ministry of Finance statistics for the last trimester confirm that the strongest contributors to economic growth continue to be government capital investments and remittance-fueled consumer spending. The banking sector,s contribution to facilitating formal sector capital investment is muted. While a hike in energy prices was an external economic shock, the impact in lowered growth and higher inflation was less than might be expected, in part because the Government has been slow to pass through fuel price increases. Senegalese fish, phosphoric acid, and peanut exports all face difficulties. END SUMMARY. ¶2. Since Senegal,s economic statistics are robust by regional standards, the Ministry of Finance,s quarterly update usefully and somewhat reliably profiles business and economic trends. With this in mind, we offer an annotated summary of the most recent edition as a thumbnail sketch of economic trends and business developments. ¶3. The report begins with the news of most interest to Senegal,s business community -- the state of the harvest. The report predicts an increase over last year of 36 percent for the peanut harvest, 17 percent for cotton, and a 1.5 million ton grain harvest, 40 percent above last year,s. A full page is devoted to pluviometric data, noting that rainfall in Dakar was up 311 percent compared to 2004. ¶4. At first glance, statistics suggest a linkage between favorable rainfall and a 40 percent increase in volume commodity exports over the first nine months of 2004. However, the increase is largely an artifact of the launch of mandatory online customs form filing for imports and exports. Senegal,s principal exports are fish, phosphoric acid, and peanut oil, and the second trimester statistics for all three suggest trouble ahead. ¶5. The artisanal fish catch fell from 97,044 to 90,302 tons, further confirmation of long-term decline in a sector employing over one million people. However, the introduction of licensing and somewhat stricter enforcement of fishing limits may have had an impact on tonnage, a fact possibly explaining why the catch actually climbed in the outlying cities of St. Louis and Kaolack. Some pirogues may have shifted operations away from the Thies region, the center of Senegal,s fish industry and a focus for enforcement. Industrial fishing, about a fifth of artisanal activity, fell ten percent over the same period in 2004. ¶6. The troubles of Industrie Chimique du Senegal (ICS) (septel),the phosphorous mining SOE, are evident in a 38 percent fall in activity at ICS,s two mines. ICS is currently the subject of down-to-the-wire discussions between an Indian syndicate and the Senegalese government on an Indian takeover before ICS is forced to foreclosure on up to 180 million USD in debt. ¶7. The statistics suggest that things are no better at Sonacos, a recently privatized peanut and vegetable oil processor. During the second trimester, reports of both a bumper crop and suggestions that Sonacos would be unable to buy more than a fraction of the crop pushed prices down 83 percent, compared to the same period in 2004. Despite a 76 percent increase in processing volume, export value fell 21 percent. Globally, the report notes that peanut oil sells for eight percent less in August 2005 than in August 2004. ¶8. Although the 39.6 percent boost in exports is a mirage created by better customs policing, the positive impact on government finances is undeniable. Direct and indirect tax revenue climbed 22.1 percent and 13.6 percent, respectively, over the same period a year ago. The state took in 664.4 billion CFA francs (CFAF) against 581.6 billion CFAF. Customs duty revenue jumped from 114.3 billion to 133.3 billion CFAF. With this in mind, we note that Senegal recently sold its customs software package to Kenya, an interesting example of intra-African high tech trade. ¶9. The report shies clear of the politically sensitive connection between the rise in oil prices and GOS fiscal good times. During the four months covered by the report, the value of petroleum imports jumped 48.7 percent over the previous trimester. Although oil imports fell 18 percent from year to year, the 145 billion CFAF in oil imports and 72 billion CFAF in gas imports during the first nine months of 2005 were close to 20 percent of Senegal,s total imports. DAKAR 00003185 002 OF 002 ¶10. While windfall oil import tax revenue is reflected in government income, parallel damage to government accounts lags behind and does not appear in this report. Last month, the Government announced it would provide 18 billion CFAF in direct fuel purchase subsidies to Senelec, Senegal,s power parastatal. SAR, Senegal,s parastatal oil refinery, has also been operating at a loss and will require an injection of capital. The report is relatively sanguine, reflecting the views of the Statistics Bureau Director, on the potential inflationary impact of energy price hikes, noting only that transport costs were up 4.3 percent over the previous trimester and up 2.7 percent for the year. ¶11. Unfortunately, the statistics do not tell the whole story of energy price impact. While the overall rise in price at the gas pump was muted (due to SAR absorbing part of the cost),private transit operators (minibuses) used the hike in price to justify overhauling their pricing structure. Whereas in the past, Dakar,s urban poor could ride into downtown for one fare (100 CFA),currently they pay a separate fare for each leg of the trip. Transport costs have doubled or tripled for many workday riders. ¶12. Returning to the larger picture, the report illustrates how post-HIPC Senegal is transitioning from a national budget heavily dependent on donor funds to three-legged financing -- tax revenue, principally import/export tariffs and the TVA; HIPC debt relief service payments; and increased government borrowing. This diversification will pick up steam in 2006 as the Wade administration moves aggressively to put the shovel in the ground on its &Grand Travaux8 major infrastructure projects. According to the report, governmental borrowing for the first nine months of 2005 stood at 95.8 billion CFAF against 74.6 for the same period in 2004. However, most borrowing appeared to be at &soft8 concessionary terms, principally loans from the African Development Bank, Islamic Development Bank and other donors. On average, government borrowing terms were an interest rate of 1.96 percent, with a grace period of 5.6 years, and a 30-year term for repayment. ¶13. Elsewhere, the report confirms Senegal,s relatively solid macroeconomic health. Debt service is manageable at 28.7 billion CFAF (of which 15.4 billion CFA is in interest payments) for the trimester. For the first nine months of the year, debt repayment has declined 5.7 percent from the same period in 2004 and represents 11.1 percent of receipts. The report does not take into account debt cancellation according to G-8 Multilateral Debt Relief Initiative terms. ¶14. The report,s analysis of the banking sector is less encouraging. As mute evidence of the shrunken role the formal sector plays in Senegal,s economy, total lending rests at just 1,000 billion CFAF for the trimester, up 73 billion CFAF as credit unions push out financing for the harvest. A full 76 percent of lending is short-term, illustrating the difficulty many businesses have in borrowing to grow their business. This ratio is trending higher (compare, for example, to 61 percent in 1997) even as the number of banks and variety of financial services here grow. Possible explanations include strong growth in consumer borrowing and/or a continued structural deficit in the intangible support (accountants, legal assistance, land titles, etc.) needed to facilitate business expansion. ¶15. Telecommunications and construction are the two industrial activities that ensured solid continued economic growth of around five percent despite an external energy shock. Notwithstanding fears of a real estate bubble, construction starts seemed limited only by cement production constraints. Building was up 8.4 percent for the year and 14.7 percent for the same period. The category &Transport and Communications8 grew 25.5 percent over the same period in 2004. Elsewhere, however, overall industrial production was down one percent for the year. ¶16. COMMENT: This quick statistical walk around the block confirms the truism here that remittances are the hidden motor to Senegal,s economy. In this snap shot, exports were not a key factor in economic health. Although manufacturing and service activity was largely flat, two important sectors hugely dependent on overseas spending -- housing and phone calls -- did very well. The other large contributor to overall economic activity, government spending, seems to be increasingly buoyed by the tax revenues spun off by consumer goods imports. END COMMENT. JACKSON