SENEGAL,S ECONOMIC GROWTH: IS THE WINDOW OF

C O N F I D E N T I A L SECTION 01 OF 03 DAKAR 001740 SIPDIS SIPDIS STATE FOR EB/IFD/ODF, EB/ESC/IEC, AF/EPS AND AF/W AID/W FOR AFR/WA AND AFR/SD TREASURY FOR OIASA/IDB DOE FOR OFFICE OF POLICY AND INTERNATIONAL AFFAIRS USDOC FOR 4510/OA/PMICHELINI/AROBINSON-MORGAN/KBOYD USDOC FOR 3131/CS/ANESA/OIO/DHARRIS/GLITMAN/MSTAUNTON E.O. 12958: DECL: 07/19/2016 TAGS: ECON EFIN EAID ENRG SG SUBJECT: SENEGAL,S ECONOMIC GROWTH: IS THE WINDOW OF OPPORTUNITY CLOSING? REF: A. DAKAR 1703 (NOTAL) ¶B. DAKAR 1100 DAKAR 00001740 001.2 OF 003 Classified By: Ambassador Janice L. Jacobs for reasons 1.4 (b) and (d). ¶1. (SBU) SUMMARY: Senegal,s real GDP growth for 2006 is likely to fall short of earlier expectations. Production in key export sectors is down; fish, phosphate and peanut exports all face difficulties, and indications are that industrial sector output is below projected levels. According to local press reports, available data from key sectors does not support the government,s projection of six percent real GDP growth. The most recent IMF estimates of four percent may even be somewhat optimistic. The Government of Senegal (GOS) has revised its projections down from 6 to 4 percent or less real GDP growth, and is placing most of the blame on the ongoing increases of fuel prices and frequent electricity outages that have lowered production in small and medium-sized industries. Export figures for the first half of 2006 are off pace with the same period in 2005, when annual real growth was 5.5 percent. A significant slowdown in growth will make continued progress on economic reforms and poverty reduction all the more difficult. ¶2. (C) To address the deteriorating macroeconomic situation, the Ambassador led a coordinated donor meeting with Prime Minister Macky Sall on July 13. The donors warned that the GOS is not adequately managing the economy and that attempts to address this mismanagement through normal channels have largely failed. The political environment, particularly upcoming presidential and parliamentary elections, has greatly loosened fiscal discipline, which is behind the current imbalances. The extraordinary donor intervention reportedly got President Abdoualye Wade,s attention and was certainly a not-so-subtle effort to warn the Government that there is more to lose here than an election. END SUMMARY. IMPORTANT EXPORT SECTORS LAG BEHIND -------------- ¶3. (U) Recent reports in the local press have indicated that key sectors behind Senegal,s export-oriented economic growth of the last three years have experienced production declines, and that overall real GDP growth will not reach the level predicted by the Government at the beginning of 2006. After achieving real GDP growth of 5.5 percent in 2005 (which is down from the initial estimate of 6.1 percent),current trends have been characterized by a persistent increase in oil prices and management and financial crises in Senegal,s major industries, leading to a downward revision of GDP growth estimates for 2006 from 6 to less than 4 percent. Recent estimates suggest that the trade balance would reach a deficit of 732 billion CFA francs (CFAF) ($ 1.4 billion) with exports of goods covering only 54 percent of imports. ¶4. (U) The GOS is currently finalizing its Accelerated Growth and Poverty Reduction Strategies, which aim to achieve 7-8 percent GDP growth over the period 2007-2015. The GOS has identified five clusters (agriculture and agribusiness, fishing, textiles and garments, tourism and information technology) to achieve this growth. The fishing sector is Senegal,s single largest export earner, representing almost one-third of its trade in goods but is currently facing a decline (Ref A). Industrial fishing professionals claim that that the volume of fishing sector exports has dropped by 10 percent from 2005 levels. The catch provided to local processing companies has also dropped by some 40 percent over the last year, and industry representatives estimate that plants have been operating at only 20 to 30 percent of capacity. A study released by the Japanese Agency for International Cooperation (JICA) this month, concluded that five out of Senegal,s top seven fish species are in critical condition and require a prompt reduction in fishing in order to recover. Because of the importance of the fishing sector to economy, these declines in production pose a serious threat to achieving the growth objective of 7-8 percent per year. ¶5. (SBU) Senegalese authorities admit that agricultural production in general, and peanut processing in particular (accounting for about 11 percent of exports) remain weak after a poor marketing campaign in 2005, and therefore, will DAKAR 00001740 002.2 OF 003 do little to contribute to export earnings and overall GDP growth for 2006. For example, recent finance ministry figures reveal that inadequate peanut marketing in 2005 has resulted in a 38 percent decline in peanut oil production in ¶2006. Misdirected and inconsistent marketing policy has resulted in 300,000 metric tons (MT) of unsold production out of a total of 800,000 MT. This situation provides little hope for a quick recovery in the peanut sector. ¶6. (U) Revenues from phosphate mining and processing (e.g. fertilizers) -- the second largest export item at roughly 15 percent of total exports -- have been dropping steadily. The main phosphate mining company, Industries Chimiques du Senegal (ICS),is in dire straits, and its production has fallen to 60 percent due to heavy debt and mismanagement. The ICS restructuring plan has not yet been implemented, and this will have a negative impact on growth, keeping in mind that the company accounts for 2 percent of Senegal,s GDP. ¶7. (U) Trade data recently released by the Senegalese Government revealed that for the first six months of the year Senegalese exports of goods to France, its largest trading partner, dropped by roughly 25 percent compared to the same period last year. ELECTRICTY OUTAGES ALSO BLAMED -------------- ¶8. (U) At the same time, a number of local firms have complained, both through contacts and the local press, that production has not met expectations thus far this year and that local sales have lagged. One of the main reasons for production problems has been a growing number of electricity outages, which, according to a recent press report, have already resulted in a record number of lost workdays in the first six months of 2006. According to local contacts, lost production time increases when brief and unscheduled outages (the latter being most often the case) result in lengthy restart procedures as equipment must be cleaned and unclogged, or even repaired and replaced after being damaged by low voltage or power surges. ¶9. (U) Recent reports in the local press have supported the assessment that small and medium-sized enterprises in the export sector have experienced production declines because of electricity cuts. As reported in Ref B, aging and poorly maintained equipment, Senelec,s failure to honor financial commitments to its main suppliers, and increased demand have caused severe electricity shortages, resulting in long power outages. DONORS CAUTIOUS ON SENEGAL,S PERFORMANCE -------------- ¶10. (SBU) A May-June IMF review of GOS efforts under its &Policy Monitoring Agreement8 concluded that Senegal,s macro-economic performance has deteriorated. The IMF noted that GDP growth might not exceed 4 percent; inflation would be higher than 3 percent (presumably driven by a hike in oil prices); and the current account deficit (including grants) might reach 9 percent of GDP. The IMF team also indicated that the recent crisis in Senegal,s electricity sector along with the downturn in production of major industries (fishing, phosphates and peanuts) would negatively affect economic performance. The donors expressed their concerns to the IMF about the deterioration of the country,s economic situation and remained skeptical about the GOS, capacity to undertake policy reforms with the elections just around the corner. ¶11. (SBU) The donor community decided to send a strong signal to the Government to encourage quick and decisive action to resolve the issues that are slowing economic growth and affecting donor and private investment decisions. Therefore, the donor community formulated a concerted policy dialogue intervention with the highest levels of government to raise common concerns. The donor group chose a subgroup to develop common messages and present them to GOS leadership. USAID staff took a leading role in drafting a discussion paper in close collaboration with the French Embassy, EU, World Bank, IMF and Canadian representatives. On July 13, Ambassador Jacobs, as coordinator of the donor community's Private Sector Working Group, led a delegation of donor representatives (French Ambassador Andre Parant, IMF DAKAR 00001740 003.2 OF 003 ResRep Ousmane Dore, World Bank ResRep Madani Tall, EU Acting Delegate Hans-Peter Schadek, UNDP ResRep Alberic Kacou, and USAID Director Olivier Carduner) to discuss concerns related to Senegal's investment climate, and the need for concerted action at the highest level to quickly resolve key economic management issues while there is still time to preserve reasonable growth prospects for 2006. ¶12. (SBU) This action followed upon the donors, June 2005 letter to the Prime Minister urging action in eight areas: improved infrastructure to enhance urban mobility; -- tax cuts; -- modernization of and enhanced transparency in the judiciary; -- access to land; -- stronger anti-corruption measures; -- labor law reforms; -- promotion and funding of small and medium-sized enterprises; and -- enhanced coordination. On July 13, the donors reviewed those themes and urged the Government to act to resolve parastatals, problems and to be transparent about the new airport and the construction projects associated with the March 2008 Organization of the Islamic Conferences (OIC) summit. ¶13. (SBU) Prime Minister Macky Sall, Senior Minister of Economy and Finance Abdoulaye Diop, Senior Minister of Justice Cheikh Tidiane Sy, and Director of the Investment and Export Promotion Agency Aminata Niane described actions the GOS is taking to improve the investment climate and remove obstacles to greater private sector participation in the economy. The Prime Minister also outlined steps the GOS is taking to resolve other issues raised by donors. The discussions were candid and highlighted very real challenges. The Prime Minister proposed a follow up meeting in the near future to provide donors with more complete information on resolution of these issues. COMMENT -------------- ¶14. (C) While the Government has attempted to blame its economic problems on energy prices, the real issues are mismanagement and lack of transparency. Indications are that Senegal will be lucky to reach four percent GDP growth. With some 70 percent of the labor force involved in primary-sector production, any decline in crop, livestock or fish production has a negative effect on domestic consumption. Although not the driving force behind economic growth, weakened domestic demand does affect overall economic wellbeing and efforts to reduce poverty. We can only hope that the current slowdown does not represent the beginning of some serious cracks in Senegal,s fragile economic recovery of the last 10 years. The political environment, particularly upcoming presidential and parliamentary elections, has greatly loosened fiscal discipline, which is behind the imbalances seen today. The extraordinary donor intervention may have gotten President Abdoualye Wade,s attention, but we are uncertain if and how he will react. The meeting with the Prime Minister was certainly a not-so-subtle effort to warn the Government that there is more to lose here than an election. END COMMENT. JACOBS