IMF: SENEGAL'S POOR PUBLIC FINANCES WILL MAKE

C O N F I D E N T I A L SECTION 01 OF 04 DAKAR 001223 SIPDIS SIPDIS E.O. 12958: DECL: 06/05/2027 TAGS: ECON EFIN EAID PGOV PREL KCOR SG SUBJECT: IMF: SENEGAL'S POOR PUBLIC FINANCES WILL MAKE DISCUSSIONS ON A NEW PROGRAM DIFFICULT DAKAR 00001223 001.2 OF 004 Classified By: CLASSIFIED BY ECNOMIC OFFICER WALLACE R. BAIN FOR REASON S 1.4 (B) AND (D). ¶1. (C) SUMMARY: According to IMF Resrep for Senegal, Alex Segura, President Wade's administration has greatly exacerbated the country's public finances problems in recent years. The GOS and the IMF are facing difficult negotiations on a new program, whether a PRGF or a Policy Support Instrument, because of a budget deficit that is fast approaching eight percent of GDP. Other critical issues that need to be tackled right away include massive subsidies to unproductive state enterprises, a lack of transparency in public expenditures, and a growing reliance on opaque and politically-expedient "agencies" to head-up major development projects. The current system has worked well for President Wade's political campaign over the previous months, and has allowed his son, Karim, to have tremendous influence in how public resources are managed. While Economy and Finance Minister Diop attempts to hold the line on expenditures, it may well take greater public criticism for Wade to become serious about addressing a public finance situation approaching crisis. END SUMMARY. PREPARING TO NEGOTIATE A NEW PROGRAM -------------- ¶2. (C) Senegal's IMF Resrep Alex Segura (please protect) called on Ambassador May 30 to provide a readout of the recently completed one-week IMF Staff Mission to Senegal. Segura said that because of the negative information collected about Senegal's public finances, and the undoubtedly difficult impending negotiations with the GOS on a new program, he chose to not brief the broader donor community collectively out of concern that the negative assessment would be leaked to the press. Instead, Segura provided briefings to key donors individually, including France, the EU, as well as the U.S. ¶3. (C) With an IMF Country Monitoring Team due to return to Senegal in mid-July, Segura and the Staff Mission attempted to establish the groundwork for discussions on a new IMF program, but Segura was quick to admit that Senegal needs to address some underlying problems, particularly the budget deficit before agreement on a program could be concluded. He explained that the IMF will try to accommodate Senegal's preferences for a program, but that there is no consensus within the Ministry of Finance, let alone among the more senior decision makers of whether to target another PRGF or a non-disbursing Policy Support Instrument (PSI). Prior to the IMF/World Bank spring meetings, Senegalese officials were targeting a PSI, believing it to be more "prestigious" since Senegal had finished its previous PRGF a year earlier. However, after learning of the strict reporting requirements under a PSI, and, for some officials, a realization that Senegal could still benefit from a disbursement program, there is currently an active internal debate on which program to pursue. PUBLIC FINANCE PROBLEM ONE: A GROWING BUDGET DEFICIT -------------- -------------- ¶4. (C) The IMF team underscored to their Senegalese interlocutors a deep concern about the country's budget deficit, which is currently estimated at six percent of GDP, and could reach 8 percent in the coming months, which would be twice the recommended highest level for debt sustainability. While high oil prices are impacting the budget, Segura noted that much of the budget gap increase is directly related to recent discretionary funding. ¶5. (C) The Civil Service wage bill, already high, increased in 2007 to approximately USD 660 million, more than 43 percent of Senegal's operating budget. The increase is attributed to Wade's efforts for political support in the run-up to last February's presidential election and included significant raises to security services and some teachers, as well as increases in quasi-official personnel under contract to support Senegal's vast array of agencies and commissions which have proliferated over the last three years. For the rest of the year wage costs will continue to increase. Though President Wade has promised to reduce the number of Ministries from the current 40 or so, an actual plan has not been developed. At the same time, the administration is planning to expand from 120 to 150 the number of national assembly seats and create a new 100-seat Senate -- all with expensive compensation packages. Further, in response to on-going threats by high school teachers to strike in the coming days, wiping out an entire school year, on May 31 President Wade promised to pay the teachers unions CFA 7 billion (USD 14 million) by the end of the year to offer allowance increases in line with the other select public DAKAR 00001223 002.2 OF 004 sector employees he previously targeted. PUBLIC FINANCE PROBLEM TWO: STATE SUBSIDIES -------------- ¶6. (C) Subsidies to large parastatals are an increasing burden for Senegal. According to Segura, the biggest problem is the state-owned electricity monopoly, Senelec, with recent payments totaling an estimated CFA 250 billion (USD 500 million),with another CFA 70 billion (USD 140 million) given to the majority GOS-owned petroleum refinery SAR. Subsidies to these two firms equal more than eight percent of GDP, and, according to Segura, are potentially leading to an "economic crisis." Further, Senelec has arrears of more than USD 200 million and is losing about USD 5 million a month the GOS told the IMF. Segura said that the IMF will recommend that Senegal increase the price of electricity to consumers as the only possible way out of this burden, even though Senegal's cost of electricity is already high at 27 cents per kwh compared to the regional average of 20-22 cents. Similarly, SAR has USD 30 million debt and is losing approximately USD 3 million per month. The IMF team could not, at this time, conceive of an effective business model for reviving the firm's profitably as a refinery, although it might have a future as a much smaller private operation for petroleum storage and/or distribution. ¶7. (C) Another heavy industrial financial weight is Senegal's phosphates giant ICS. After having been completely shut down in April 2006, the GOS and the Indian partner IFFCO now have ICS operating at 50 percent capacity. However, negotiations between the parties for a final deal on recapitalization have not been concluded (after 18 months of discussions) and no money going into much needed equipment maintenance and improvement. According to Segura, the GOS is maintaining a firm stance over relatively minor points while accepting huge opportunity costs of forgone export earnings. (Note: on May 30, the Minister of Mines announced that a "significant improvement" in the ICS situation would happen by the end of the year. End note.) ¶8. (C) Ministry of Finance officials told the IMF that they believe the Government can keep Senelec's debt (and that of other parastatals) off the government books, but since these debts are guaranteed by the GOS, the IMF insists on including them on their spreadsheet. PUBLIC FINANCE PROBLEM THREE -- GOVERNANCE -------------- ¶9. (C) The IMF is also very worried about the lack of transparence and accountability in budget allocations. Segura noted that the GOS is not assuring value for its money since, in the first quarter of 2007, 93 percent of domestic publicly-financed projects were awarded with non-competitive bids. This lack of transparency doubtless has much to do with President Wade's political campaign leading up to his February 25 reelection, but historically this has always been a major problem. For 2006, 56 percent of government contracts were awarded without competitive bids, in comparison to one percent of contracts from external (donor) funds. Even more alarming is that these figures do not even represent the many quasi public/private agencies doing public works, such as massive road construction projects, and which have long been criticized for their opaque financing and contracting practices. Underscoring the IMF's concerns is the fact that Senegal has not done a thorough audit of its public expenditures sine 1994. ¶10. (C) After years of delay, President Wade recently signed a new public procurement code, which, according to Segura, should help with transparence since it establishes reporting requirements from each ministry. However, the IMF team is not convinced that the GOS is committed to putting in place the implementation structures necessary to assure the new code is followed. PUBLIC FINANCE PROBLEM FOUR -- THE SHADOW AGENCIES -------------- -------------- ¶11. (C) Any discussion of public finance in Senegal inevitably turns to the politically-driven project implementing agencies that have become the bedrock of President Wade's economic development policy. Because many of these agencies, including Senegal's investment promotion bureau (APIX),the project agency for the 2008 Organization of the Islamic Conference (OIC) Summit (ANOCI),and the agency to construct a new international airport (AIBD) are closely linked to the Presidency, and the President's son and top advisor, Karim Wade, they make demands on Senegal's Treasury without accountability, according to Segura. Minister of Economy and Finance, Abdoulaye Diop, told the IMF DAKAR 00001223 003.2 OF 004 that he tries to hold the line on these expenditures, but that in 2006 upwards of CFA 20 billion (USD 40 million) was transferred directly to private bank accounts ostensibly for project financing. ¶12. (C) Segura highlighted the case of the AIBD, which is organized as a private general contracting firm for the construction of Senegal's new international airport, but is listed as providing less than USD 100,000 towards the USD 300 million-plus project. The details of the two major contracts, with the Saudi Bin Laden Group for construction and Germany's Fraport for airport management, are not known. The GOS has been collecting international passenger landing fees (recently raised to 45 Euro per ticket, quite high by international standards, according to Segura),and has claimed that more than USD 40 million is on hand for the airport construction as a result. However, neither the IMF nor any other independent authority has been able to verify the account activity, which is reportedly held in a bank well known for managing Karim Wade's wealth. ¶13. (C) In another example, Segura expressed frustration at a recently passed APIX-drafted "investment promotion" law that will offer enormous tax exonerations to India's Mittal Corporation for its mining investments to exploit Senegal's iron ore deposits. Segura confirmed that the negotiations with Mittal were done privately, without offering investment opportunities to other firms (and, in fact, a South African firm, Kumba Resources, claims it already holds the rights to those ore deposits). The IMF was not consulted for the new law, even though the IMF played a key role in negotiating Senegal's 2004 investment code. According to Segura, the IMF generally disapproves of special tax exonerations because it unnecessarily reduces needed revenue and establishes a poor precedent for discussions with other potential investors. THE MESSAGE NEEDS TO GET TO PRESIDENT WADE -------------- ¶14. (C) Segura echoed a commonly held belief within the donor community that his close advisors generally do not share bad news with President Wade. Therefore, Segura is hoping to join Minister Diop to brief the President on country's current public finance "crisis." Even though Wade, who has formal training in economics, is fully capable of understanding the negative economic indicators that are to be presented, Segura is not convinced that the President will make improving Senegal,s finances a near-term priority, given the prestige he has invested in the country's big projects, special partnerships, and patronage networks supported by the agencies. However, according to Segura, once the reality of the country's poor performance makes its way into the press, Wade may well take immediate action out of concern for Senegal's international image. (Note: another reason that President Wade may not respond favorably to an IMF presentation is that he is well known to be ambivalent, at best, about the IMF's role in Senegal, and had to be convinced by Minister Diop and others of the importance of a new program. End note.) SUPPORT THE MINISTER OF FINANCE -------------- ¶15. (C) Segura was quite positive on Economy and Finance Minister Diop, characterizing him as understanding the problems and doing the best he can to maintain some fiscal discipline. However, Diop is not always consulted on privately negotiated deals that end up having significant budget implications, and Karim Wade's influence routinely trumps the Minister's counsel. Once news of Senegal's increased budget deficit, the drain on financial resources from massive subsidies to floundering companies, and the lack of transparence in public contracts becomes more public, Segura is concerned that advisors close to the President will try to make Diop the "fall guy." Therefore, Segura requested, and Post concurs, that public and private remarks about Senegal's pubic finances should include a statement of support for Minister Diop's efforts. (Note: it is an even-bet that Minister Diop will be replaced in a likely cabinet reshuffle in the coming weeks. There is widespread speculation that the post will be filled with a Karim Wade confidante. End note.) COMMENT -------------- ¶16. (C) The IMF must make a difficult political calculation on whether this growing public finance crisis reflects temporary backtracking by President Wade and his close advisors in the run-up to February's Presidential and the June 3 legislative elections, or whether this reflects a longer-term, negative trend. While the more formal DAKAR 00001223 004.2 OF 004 negotiations in July between the GOS and the IMF mission may reveal that Wade recognizes the need to put his house in order to gain the IMF's stamp of approval, a look ahead for Wade's legacy does not leave one encouraged. The President has staked his reputation on a massively successful OIC Summit in March 2008 -- but infrastructure projects he hopes to highlight by that time, including roads and hotels, will require continued special attention from the government to be completed anywhere near on time. In addition, there are hundreds of projects to be funded around the country to fulfill campaign promises, and new political patronage networks to consolidate as the expanded National Assembly and new Senate come to life. Shortly after the OIC Summit, the question of Wade's chosen successor will likely become paramount. Whether Wade tries to massage the system to accept Karim or some other PDS ruling party loyalist, the political precedence established in effectively demolishing all opposition parties and politicians has created, for the PDS, a political "best practices" that will be difficult to move away from, regardless of the economic costs. JACOBS