SENEGAL: 2006 BUDGET CONTINUES TO FOCUS ON THE

UNCLAS SECTION 01 OF 06 DAKAR 000933

SIPDIS

SIPDIS
SENSITIVE

STATE FOR EB/IFD/ODF, AF/EPS AND AF/W
TREASURY FOR OFFICE OF AFRICA - PETERS
NAIROBI FOR ECON - BAIN

E.O. 12958: N/A
TAGS: EFIN ECON EAID MARR SG
SUBJECT: SENEGAL: 2006 BUDGET CONTINUES TO FOCUS ON THE
SOCIAL SECTOR


DAKAR 00000933 001.2 OF 006



1. (SBU) SUMMARY: Senegal's 2006 budget allocates more
money to the social sector (education and health),and
relies on CFA francs (CFAF) 43.1 billion (USD 78.3
million) in savings from the Heavily Indebted Poor
Countries (HIPC) debt relief initiative to reduce poverty,
which affects nearly 57 percent of the population. The
2006 budget projects domestic revenue of CFAF 926 billions
(USD 1.68 million) -- 9.1 percent higher than the 2005
budget revenues. The 2006 projection assumes a broader
tax base, which the Government of Senegal (GOS)
optimistically projects will increase by 21.1 percent to
reach CFAF 508.2 billion (USD 924 million) or 54.8 percent
of total internal revenue. Budgeted expenditures for 2006
are CFAF 1,407.8 billion (USD 2.56 billion) -- just over
9.1 percent higher than 2005 budget level, leaving a CFAF
22 billion (USD 40 million) gap, which the Senegalese hope
to close with additional grants and foreign loans. About
22.3 percent of Senegal's 2006 budget revenues will come
from foreign transfers, a slight drop from 2005 levels.
The budget estimates 2006 GDP growth to remain at 5
percent, a number that is significantly below the 7.5
percent growth needed to alleviate poverty and boost
economic development by 2015, as envisioned in the
government's Accelerated Growth Strategy. Moreover, some
economists are predicting that energy shortages could cut
2006 GDP growth to just three percent. END SUMMARY.

HEFTY INCREASE PLANNED IN EXPENDITURES
--------------

2. (U) The 2006 budget projects total expenditures and
net borrowing of CFAF 1,407.8 billion (USD 2.56 billion),
including expenditures financed with HIPC resources of
CFAF 43.1 billion (USD 78 million),an increase of 9.1
percent from 2005's CFAF 1,293.0 billion (USD 2.34
billion). This is mainly due to a significant, 17-percent
increase in other expenditures, which include subsidies of
CFAF 9 billion to Sonacos (the recently privatized peanut
oil plant),CFAF 25 billion for social welfare spending
(to include subsidies for butane gas bottles),a seven
percent increase in the civil service wage bill, and a 4.7
percent increase in GOS's contribution to capital
investment. The operating budget, which excludes debt
service and capital investments, for 2006 has been set at
CFAF 628 billion (USD 1.14 billion),up 12 percent from

2005. New measures include CFAF 9 billion (USD 16
million) to hire 5,000 school teachers, health workers and
Ministry of Justice officials; CFAF 29 billion (USD 52
million) for operating costs; and CFAF 34.4 billion (USD
62.5 million) in other expenditures.

DEBT SERVICE BURDEN DECREASES
--------------

3. (U) The GOS increased budgeted expenses under the
"Treasury Special Accounts" (TSA) by two percent. This
category consists of special funds to support various
government commitments, including investment guarantees,
water resource management and environmental resource
funds. As opposed to previous years, this year the
majority of TSA represent relatively small amounts that
are financed by earmarked taxes. Other important
categories such as the "National Retirement Fund and the
"Caisse Autonome d'Amortissements" (CAA) (the account used
to service public debt) have been withdrawn from the TSA
and are now part of the general budget, a positive move
towards greater transparency. In 2006, expenditures out
of the CAA are budgeted at CFAF 119 billion (USD 216
million),an increase of seven percent over 2005 levels.
The G-8 debt relief package initiative, other debt
forgiveness, debt rescheduling and tight controls on new
debt issuance within Senegal's IMF program have all
contributed to the reduction of Senegal's debt service
burden.

OPERATING BUDGET DOMINATED BY PERSONNEL COSTS
--------------

4. (U) Current expenditures (Table 3) for 2006 have been
set at CFAF 627.8 billion (USD 1.14 billion),up 12.2
percent from the 2005 level of CFAF 559.1 billion (USD
1.02 billion). The breakdown of the budget by economic
categories (Table 4) reveals the predominance of personnel

DAKAR 00000933 002.2 OF 006


costs (42.4 percent) in the government's operating
expenditures. Though the wage bill is expected to
increase by seven percent due to plans to hire teachers
and health workers, completing the GOS's HIPC commitment
to recruit 15,000 workers between 2003-2006),as well as
workers for the Ministry of Justice, its ratio over tax
revenues (29 percent) remains within the limits
established by the IMF program, which caps the GOS's
personnel costs at 35.5 percent of total revenues (CFAF
926.5 billion or USD 1.68 billion under 2006 revenue
projections). (COMMENT: The GOS's wage bill might be
underestimated and might not include the recent salary
increases for magistrates. END COMMENT.) Of the CFAF
43.1 billion collected from HIPC savings, CFAF 4.1 billion
and CFAF 4.4 billion will be used respectively to improve
the operating expenditures for education and health. The
remaining CFAF 34.5 billion will be used for building more
schools (CFAF 5 billion),more health centers (CFAF 4
billion),infrastructure projects (CFAF 10 billion),
agriculture projects (CFAF 4.7 billion),family welfare
projects (CFAF 3 billion),sewerage projects (CFAF 3
billion),environmental projects (CFAF 2.3 billion),trade
projects (CFAF 1,1 billion) and increasing available
credit to women in rural areas (CFAF 1 billion).


5. (U) An examination of the budget allocations by
function (Table 5, para 17) clearly highlights GOS's
efforts to improve and sustain education and health and
further the poverty alleviation process by empowering
local communities. The Ministry of Education will
continue to have nearly 40 percent of the operating budget
at its disposal, 42 percent (CFAF 106.8 billion or USD 194
million) of which will be spent on personnel costs, while
devoting 17 percent (CFAF 44.1 billion or USD 81 million)
to building new classrooms, broadening access to primary
education, and hiring new teachers.


6. (U) While health spending as a percentage of the
budget declined somewhat in comparison to 2005, health
spending remains significant at 10.5 percent of the
operating budget or CFAF 80.5 billion (USD 146 million),
which is higher than the nine percent established as a
benchmark by the World Health Organization. Twenty six
percent or CFAF 21.1 billion (USD 38 million) of health
allocations will be spent on personnel costs, while 34.5
percent will be used to build hospitals and fund
additional health workers.


7. (U) The Ministry of Armed Forces' budget allocation
increased by 18.4 percent, reflecting a 115 percent
increase in program funding (training exercises, building
and equipment) and 33 percent in supplies. Despite these
increases, the military's share of the operating budget
remained essentially constant at 9.2 percent due to its
disengagement from the Casamance region. The budget for
the Ministry of Interior also increased by 15.6 percent to
take into account the preparation of the upcoming
presidential and legislative elections. To further the
decentralization process, the GOS appropriated CFAF 17.4
billion (USD 32 million) for decentralization. Justice
and Environment are the apparent big winners with
increases of 68 percent and 61 percent in their respective
budgets. The increases are largely for personnel and
investments in the new court house, which is set to open
in 2007, and deforestation projects. The Ministry of
Economy and Finance's budget also went up.

BROADER TAX BASE AND INCREASED REVENUES
--------------

8. (U) The operating budget, the first of three basic
components of Senegal's fiscal plan (Table 1) projects
total general revenues of CFAF 1,344.2 billion (USD 2.44
billion) in 2006, an increase of 9.3 percent over the
previous year. The GOS estimates it can reach this goal
by increasing tax revenue by 9.1 percent to CFAF 876
billion (USD 1.5 billion). The GOS envisions meeting that
goal through more effective collection of existing taxes
and a broadening of the tax base, especially of the value
added tax (VAT). (COMMENT: Broadening the tax base has
been an important element of Senegal's IMF Poverty

DAKAR 00000933 003.2 OF 006


Reduction and Growth Facility (PRGF) program, to which
Wade's government is committed. The Ministry of Finance
is encouraging the informal sector and property owners to
register their businesses and pay taxes with the "slogan"
of one tax paid could contribute to the education of a
full generation of kids. END COMMENT.)


9. (U) The budget shows a continued decline in Senegal's
dependence on duties, which are expected to fall 11.8
percent in 2006 even as customs collections increase.
Duties will drop from 16 to 13 percent of total tax
revenue, despite the planned establishment of import
duties of 25 percent on palm oil and 15 percent on the
import of other vegetable oils. (COMMENT: Discussions are
ongoing between the World Bank and the GOS as these duties
are inconsistent with WTO commitments. END COMMENT.)
Other indirect taxes such as VAT and consumption taxes are
set to increase by 13.4 percent, reaching almost 57
percent of tax revenues. Despite the 25 percent reduction
of the corporate income tax, GOS projects that direct
taxes (e.g. income and corporate taxes) will increase by
4.2 percent. Direct taxes still account for less than a
quarter of tax revenues.


10. (U) Non-tax revenues, which include revenues from
maritime activities, industrial enterprises, miscellaneous
services and investments, are expected to decrease by 3.6
percent in 2006, following the termination of counterpart
payments for the fishing agreement with the EU (to be
renegotiated by May 2006). (COMMENT: The GOS expects to
revise the 2006 budget to reflect the changes in non-tax
revenues once the new fishing agreement with the EU is
signed and once the third cellular telephone
telecommunications license is sold. END COMMENT.)

FOREIGN AID REMAINS STABLE OR INCREASES
--------------

11. (U) In contrast, CFAF 417 billion (USD 758.1 million)
in external revenue is expected to be collected from
donors. Of this amount, CFAF 293.0 billion (USD 532.7
million) will come from foreign sources to support GOS
investment program; CFAF 75 billion will come from
debenture loans; CFAF 37 billion will come from
multilateral/bilateral programs; and CFAF 12.6 billion
will derive from budget grants.


12. (U) Foreign assistance is expected to remain stable
at 22.3 percent (Table 2, para 17) of overall government
financing in 2006. The projected need for foreign
assistance is CFAF 315.0 billion, with CFAF 22 billion to
cover the financing gap, and CFAF 293 billion for the
government's investment program. The Government hopes to
bridge the CFAF 22 billion gap through a variety of
bilateral and multilateral grants and loans.

PUBLIC INVESTMENT PLAN DEPENDS ON FOREIGN INVESTMENT
-------------- --------------

13. (U) For 2006, the government investment plan is set
at CFAF 613.3 billion (USD 1.13 billion),compared to CFAF
575.9 billion (USD 1.04 billion) in 2005 -- a 6.4 percent
increase. The investment budget assumes that GOS
resources of CFAF 320.3 billion will be supplemented by
external financing of CFAF 293.0 billion. In 2006,
foreign financing will cover just 48 percent of the
investment program, with 65 percent as loans and the rest
as grants. The 2006 investment program focuses
particularly on social services infrastructure (roads,
water, health and education) at 64 percent of total
investment, followed by the service sector (tourism,
trade, transport and telecommunications) at 19 percent.
The primary sector (agriculture) will receive 13 percent,
and the manufacturing sector (industries and mining) three
percent of total investment.

BUDGET PART OF A STABLE MACROECONOMIC FRAMEWORK
-------------- --

14. (SBU) For 2006, the GOS projects continued stable
macroeconomic growth with a real GDP growth rate of 5
percent and an annual inflation rate of 2.5 percent due to
increases in oil and electricity prices. Strong private

DAKAR 00000933 004.2 OF 006


remittances will help maintain the external current
account deficit at about 7.6 percent of GDP. The overall
fiscal deficit, including grants, is expected to increase
from 3.5 percent of GDP in 2005 to 4 percent of GDP in

2006. (COMMENT: The GOS's real GDP growth for 2006 is
likely to fall short of expectations as the result of
chronic, long and unscheduled power outages. Septel
addresses the energy crisis and its economic implications.
However, some economists predict that annual GDP growth
may be as low as three percent -- half of what it was in
2003-2005. END COMMENT.)


15. (U) Given its track record of stable macroeconomic
performance since 1994, and considering its upcoming
"graduation" from the IMF's PRGF on April 27, 2006, the
GOS would like to continue its close collaboration with
the IMF through a non-financial Policy Monitoring
Arrangement, focusing on accelerated growth, poverty
reduction and deepening fiscal and financial sector
reforms.

COMMENT
--------------

16. (SBU) While most donors view the PMA favorably, the
French fear that any arrangement that does not include
benchmarks and strong monitoring from the IMF could lead
to the collapse of Senegal's macroeconomic stability.


17. (SBU) It is difficult to say whether Senegal has
successfully implemented its post-HIPC debt relief program
in alleviating poverty. According to the second PRGF
progress report published in June 2005, poverty indices
demonstrate a reduction from 57 percent to 54 percent
between 2001 and 2004. Other key measures to be
implemented in the short- to medium-term, such as reducing
the rapid population growth rate and the rate of rural-to-
urban migration, increasing employment and improving
credit access in rural areas term remain difficult.


18. (SBU) While donor support will likely be forthcoming
for this transitional period after its graduation from
PRGF, Senegal will have to commit to deeper economic
reforms that will improve its business climate. This will
be a particularly challenging assignment with the upcoming
February 2007 elections. Pressure will undoubtedly mount
to ignore difficult economic and social reforms and to
distinguish between spending on government programs and
political campaign promises. Wade's government will be
put to the test in resisting political interference that,
in past elections years with the former ruling Socialist
Party government in power, had a severely negative impact
on the economy. END COMMENT.

--------------
TABLE 1: 2006 BUDGET (BILLIONS OF CFAF)
--------------
2006 2005 PCT CHANGE
BUDGET BUDGET 06-05
--------------

I. ORDINARY BUDGET
--------------

A. Total Revenues 1,344.2 1,229.5 9.3

(1) Internal Revenues 926.5 849.2 9.1
Direct Tax 226.0 200.0 13.0
Indirect Taxes 650.0 602.2 7.9
--Of Which:
---Trade Tax 120.0 136.2 (11.8)
---Vat 508.2 448.0 13.4
---Stamp/Registration Tax 21.8 18.0 21.1
Non-tax Revenue 42.4 38.9 9.0
Extraordinary Revenue 0.1 0.1 0.0
Other Revenue 8.0 8.0 0.0

(2) External Revenues 417.6 380.3 9.8
Budget Grants 12.6 29.1 (56.7)
-Programs 37.0 10.3 259.2
Debenture Loan 75.0 74.0 1.3
Other External Revenues 293.0 266.9 9.7


DAKAR 00000933 005.2 OF 006



B. Total Expenditures 1,360.6 1,246.6

Ordinary Expenditures 627.8 559.1
--Of Which:
---Salaries 266.3 249.3 6.8
---Other 361.5 309.8 16.6
-------------- Subsidies Senelec/Sonacos
Capital Expenditure 613.3 575.9 6.4
--Of Which:
---Internal (GOS) 320.3 309.0 3.6
---External (Donors) 293.0 266.9 9.7
Public Debt 119.5 111.6 7.0

--------------
II. SPECIAL TREASURY ACCOUNTS
--------------

A. Earmarked Revenue 41.7 40.9 1.9

B. Liabilities
And Entitlements 47.2 46.4 1.7

--------------
III. GRAND TOTAL
--------------

A. Revenues 1,385.8 1,270.4 9.0

B. Expenditures 1,407.8 1,293.0 8.8
-------------- ---

C. Financing Gap (22.0) (22.4)


--------------
TABLE 2: FOREIGN FINANCING (BILLIONS OF CFAF)
--------------
GRANTS LOANS TOTAL

Financing Gap (Table 1) 22.0

Total Foreign Investment 101.0 191.8 293.0

Total Foreign Financing 315.0


-------------- --------------
TABLE 3: 2006 BUDGET EXPENSE SUMMARY (BILLION OF CFAF)
-------------- --------------

Overall Budget Summary CFAF Pct Of Total
-------------- -------------- --------------

Operating Expenses 627.8 44.5
--Of Which: Financing Gap 22.0

Debt Service/Entitlements 166.7 11.8
Government Capital Investment 320.3 22.7
Foreign Capital Investment 293.0 21.0
-------------- -------------- --------------
Total Budget 1,407.8 100.0


-------------- --------------
TABLE 4: OPERATING EXPENSES BY CATEGORY (BILLIONS OF CFA)
-------------- --------------

Expense Ordinary New Total Pct Of
Category Expend. Measures Expend. Total
-------------- -------------- -------------- -------------- --------------
Personnel 257.1 9.2 266.3 42.4
Equipment 168.5 28.7 197.2 31.4
Programs 129.7 34.5 164.2 26.2
-------------- -------------- -------------- -------------- --------------
Total 555.3 72.4 627.7 100.0


-------------- --------------
TABLE 5: 2006 EXPENSES BY MINISTRY (BILLIONS OF CFAF)
-------------- --------------

MINISTRY/FUNCTION 2006 PCT PCT OF TOTAL
BUDGET GROWTH 2006 2005
-------------- -------------- -------------- -------------- --------------
Education 250.0 6.0 40.0 42.0

DAKAR 00000933 006.2 OF 006


Health 80.5 -9.0 13.0 15.0
Agriculture 114.6 -3.4 18.2 21.1
Infrastructure 94.0 -30.0 15.0 24.0
Armed Forces 77.6 18.3 12.3 11.0
Interior 41.5 15.6 6.6 6.0
Foreign Affairs 28.4 0.4 4.5 5.3
Economy And Finance 109.2 22.4 17.3 16.0
Decentralization 32.6 7.1 5.1 6.4
Justice 20.0 68.0 3.1 2.0
Environment 24.2 61.0 4.0 2.6
All Others 535.2 23.0 38.0 33.6
-------------- --------------
Source: Data summarized by Embassy from GOS budget
documents.

JACOBS