Identifier
Created
Classification
Origin
06DAKAR1740
2006-07-19 17:38:00
CONFIDENTIAL
Embassy Dakar
Cable title:  

SENEGAL,S ECONOMIC GROWTH: IS THE WINDOW OF

Tags:  ECON EFIN EAID ENRG SG 
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VZCZCXRO5342
PP RUEHPA
DE RUEHDK #1740/01 2001738
ZNY CCCCC ZZH
P 191738Z JUL 06
FM AMEMBASSY DAKAR
TO RUEHC/SECSTATE WASHDC PRIORITY 5801
INFO RUEHZK/ECOWAS COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHINGTON DC 0031
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEHLMC/MCC WASHDC
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).

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