IMF MISSION HOPES FOR U.S. SUPPORT ON SENEGAL'S PSI AT

UNCLAS SECTION 01 OF 03 DAKAR 001298

SENSITIVE

SIPDIS

STATE FOR EBB/IFD/ODF, A/EPS AND AF/W
ABU DHABI FOR OTA/GRIFFERTY
TREASURY FOR RHALL AND DPETERS

E.O. 12958: N/A
TAGS: EFIN ECON EINV EAID SG
SUBJECT: IMF MISSION HOPES FOR U.S. SUPPORT ON SENEGAL'S PSI AT
REVIEW BOARD

REF: DAKAR 1246 AND PREVIOUS

DAKAR 00001298 001.2 OF 003



1. (U) This cable is sensitive but unclassified and should not be
shared outside of approved USG channels.


2. (SBU) SUMMARY: Senegal's Policy Support Instrument with the IMF
faces a critical Board Review and assessment in December. The
Mission carrying out the second review of the program has returned
to Washington and hopes to better understand the USG's likely
position on maintaining the IMF's current engagement with Senegal.
Work is continuing on a new memorandum of agreement between the IMF
and Senegal's Ministry of Finance, but needs to be completed by
November 30. Key issues still on the table include verifying the
current budget gap needing immediate financing to pay arrears to the
private sector, and also near-term corrective measures to be
implemented by Finance and Treasury officials. We would like to see
a stronger commitment to strict public finance control and
management from the highest levels of the GOS, but also assess
tremendous risk to reform efforts should there be any gap in active
IMF engagement in Senegal. END SUMMARY.

PERSONAL APPEAL FOR U.S. SUPPORT
--------------

3. (SBU) On three occasions during his latest two-week mission to
Senegal, the IMF Mission Chief for Senegal's Policy Support
Instrument (PSI) program Johannes Mueller asked Ambassador Bernicat
and Econ Counselor for our assessment of the "sense in Washington"
for continued support for the IMF's engagement with Senegal.
Mueller was up-front on noting the ongoing difficulties with the
program, but he also highlighted real progress towards a new
memorandum of agreement that would include strict conditionality.
Mueller returned to Washington by November 10, and by November 11 or
12 will be in discussions with IMF Administrators on this latest
(the second) program review. Mueller mentioned that IMF officials
may want to consult with appropriate Treasury and State officials.


4. (SBU) In brief, Mueller requested USG support for the program
(or some program) at the December IMF Board review for a number of
reasons:

-- a failure in the program would be taken as a "slap in the face"
to the GOS, particularly at this time when the IMF is actively
helping middle-income countries climb out of financial crisis;

-- a negative review could lead to the dismissal of Finance Minister
Diop, who is viewed as a knowledgeable and helpful interlocutor, and
a key player for implementing important public finance reform;

-- any break in an IMF program with Senegal would likely have
disastrous consequences by allowing continued abuse via
extra-budgetary spending and would stop the current momentum towards
improved accountability and reform;

-- the IMF's progress with the Finance Ministry on improving
Senegal's 2009 budget framework and application could be lost.

IMF, MINFIN STILL WORKING ON A PLAN TO RESCUE SENEGAL'S BUDGET
--------------

5. (SBU) At the end of his two-week assessment visit, on November
7, IMF Mission Chief Johannes Mueller briefed a large assemblage of
donors on the status of the second review of Senegal's PSI program.
Earlier in the mission, Mueller and IMF ResRep Alex Segura briefed
Ambassador Bernicat privately and with a select group of other key
Chiefs of Mission, both to provide some additional insight into the
review and negotiations with Finance Minister Abdoulaye Diop, and
also to ask about the likelihood that Washington and other Capitals
will continue to support Senegal's program.


6. (SBU) Mueller departed Dakar without a final text for a new
memorandum of agreement between the GOS and the IMF, but he told the
donors that additional information should be available in the coming
week after additional verification of Senegal's internal debt and
concluding agreement on new "corrective measures." The report needs
to be completed no later than November 30 for the IMF Board's
review. According to Mueller, the agreement needs to focus on three
priorities:

-- setting five to ten "immediately needed" corrective measures,
which will be drawn from the current review and the sixty-plus
recommendations presented by the recent IMF investigative mission
(Mueller was not willing to specify what these measures will be).
[Note: the Minister of Finance has agreed to share the

DAKAR 00001298 002.2 OF 003


investigative mission's report and recommendations with the donors
who comprise the Public Finance Working Group, who are the donors
that provide direct budget support and/or technical assistance to
the Ministry of Finance. We are not a member of this group, but
hope to get a copy of the report. End note];

-- resolution of some ongoing data collection problems in order to
verify budget gaps and inappropriate expenditures. [Note: the
IMF's current estimate of Senegal's internal debt is based on
expenditures from 2008 only. The IMF hopes to finalize its
assessment for 2007 within a couple of weeks, and then continue its
review into Senegal's expenditures from 2005-2006, which admittedly
could dig up additional fiscal irregularities and debt. End note];

-- Senegal needs to have made credible progress on financing its
budget gap by the end of the year. Mueller was somewhat vague on
what this meant exactly, at first saying that Senegal needed to
complete its financing, but later acknowledging that there is likely
not enough time to secure new credit and make all necessary payments
on the arrears owed to the private sector before the end of the
year.

THE BUDGET GAP IS STILL A MOVING TARGET
--------------

7. (SBU) Mueller admitted that they may not be able to verify
exactly how big the 2008 budget gap is, how it evolved, or who is
owed money. However, the IMF is apparently focusing on only the
most critical impacts of the deficit, the debts owed to the private
sector ("instance du payment"). At the most recent briefing he
stopped using the term "arrears." Earlier on November 7, at the
periodic review of the GOS-Donor Consultative Group process, MinFin
Diop claimed that the Senegal's internal debt (for purposes of the
IMF review) was CFA 174 billion (approximately USD 350 million).
Mueller noted to the Ambassador that he expects the target figure to
be around CFA 225 billion.


8. (SBU) For his part, President Wade has recently claimed that
Senegal's internal debt is "only" CFA 130 billion, while business
associations and the press have fixed on a figure of CFA 300 billion
(which is reportedly the amount of a loan the government is trying
to negotiate with France to pay "much of" the private sector
arrears). Recently, a former Finance Minister in the Diouf
administration has claimed the real internal debt is more than CFA
500 billion. As reported in reftel, some of our contacts at the
Ministry of Finance and Treasury have apparently been tasked with
figuring out how to raise close to CFA 475 billion.

REPORTS AND OPTIONS FOR THE BOARD
--------------

9. (SBU) Mueller was pragmatic in discussing the difficult review
that will face the IMF board, scheduled for December 18. There is
no certainty that the Board will give a positive review. If a
negative review is put forth, it would apparently be a first for a
country under a PSI. It may be possible that the board will decide
that the second review was not completed, and then the future of
Senegal's PSI would rest entirely on the third review, which will
take place in March, 2009. There is also the possibility of
discussing a near-term transition from the PSI to a traditional
Poverty Reduction and Growth Facility (PRGF),which could perhaps
include some disbursement of fiscal support (around CFA 30 billion
was bandied about). Mueller expressed rightful concern that such a
shift in program could leave Senegal with no program for a matter of
months, potentially opening a window for new abuses of the country's
Treasury.


10. (SBU) According to Mueller, a strong case could be made that
Senegal meets the criteria for the IMF's new Exogenous Shock
Facility (ESF) since the country clearly suffered a major budget hit
with last summer's increases in energy and food prices -- although
the fiscal shock was exacerbated by the GOS's non-removal of energy
and food subsidies, a step now almost completed. There was some
speculation that Senegal might benefit from around CFA 30 billion is
assistance under an ESF, but Mueller was clear that no country under
a PSI has yet been considered for this assistance, and it might not
be possible.


11. (SBU) In addition, the IMF Board will need to address other
areas where Senegal has not met its PSI obligations, perhaps calling
for specific Reports. These could include admissions by the GOS of
misreporting fiscal data in 2007, and, perhaps, agreeing to
non-concessional external financing.


DAKAR 00001298 003.2 OF 003


MORE NEGATIVE NEWS ON ECONOMIC DATA
--------------

12. (SBU) The impact of the non-payments to the private sector
continues to drag down Senegal's economic performance. Mueller
provided updated, more pessimistic figures for some key indicators.
The IMF estimates 2008 GDP growth at 3.9 percent (which is still
better than the GOS's internal estimate of 3 percent),despite an
estimated 15 percent increase in agriculture production. In
addition to the arrears, the continuing underproduction by
phosphates giant ICS is slowing growth. Mueller estimates that
medium term growth should move back to the five percent range (which
remains well below the target 7-plus GDP growth under the GOS'
Accelerated Growth Strategy). 2008 inflation will likely register
at 6.9 percent, but the Mission estimates a drop to 3.3 percent in

2009. Senegal's balance of payments deficit over the next 12 months
is estimated at 12-13 percent of GDP. The country's 2008 budget
deficit is now estimated at three percent of GDP.

POSITIVE SPIN FOR 2009
--------------

13. (SBU) Looking forward, Mueller highlighted some positive steps
being taken as a result of the IMF's engagement. With IMF
assistance, the Ministry of Finance finally put forward the
corrected, revised budget legislation for 2008 ("loi de finance
rectificative"),which is currently being reviewed in the National
Assembly. Also, according to Mueller, Senegal's 2009 budget will
for the first time fully conform to the IMF-approved macroeconomic
framework, and should significantly control the discretionary
spending among line ministries. The 2009 budget should also
significantly reign-in investment spending -- which was source of
much of the extra-budgetary commitments made by ministries and
agencies in past years.


14. (SBU) Mueller claims that in theory Senegal has a good
framework and internal control mechanisms available, including
effective tracking and audit software and systems. However, more
work needs to be done, along with additional donor technical
assistance, in order to better utilize these systems. He
underscored that the recommendations presented by the IMF
investigative team are a good starting point. A similar team may
return to Dakar in November 2009, to help the Ministry of Finance
and the Treasury achieve a "global standard" in public finance
management and control.

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

15. (SBU) The IMF, and particularly Segura, deserves credit for
doggedly digging up fiscal irregularities created, and buried, by a
number of ministries and senior government officials. However, we
are not yet convinced that the IMF has discovered all of the budget
holes or the depth of Senegal's fiscal crisis. That said, the IMF's
current focus on the private sector arrears, along with strong
measures to improve future fiscal accountability is perhaps the best
course available. While we would hope to see some effort to enforce
accountability, and also public statements of determined political
will from not only the Finance Minister but also President Wade to
protect the country's public finances, that is likely a goal too
distracting from the immediate need of getting money into the
private sector and banks before the economy completely stalls.


16. (SBU) Though serious questions still need to be asked of
Mueller and Minister Diop on the yet-to-be-finalized memorandum and
the next steps, we hope that there will be no suspension or gap in
the IMF's program (PSI or PRGF) with Senegal. Many of the budget
manipulation practices that have so greatly impacted the country's
Treasury were first instigated during the time that Senegal had
completed its previous PRGF but had not yet signed on to the PSI.


17. (SBU) Apart from the current crisis, there remains much that
the MinFin needs to institute to bring control back to Senegal's
public finances: implementing mechanisms for greater transparency,
assuring protection against extra-budgetary commitments, slowing the
continued expansion of "black" budgets at the presidency and some
other ministries, assuring full conformity to the GOS' own public
procurement codes, committing to a renewed commitment to proper use
of HIPC and MLD relief, assuring against high levels of new debt,
and improving utilization of current fiscal systems. Technical
assistance by donors will continue to play a key role.

BERNICAT