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