SENEGAL MEETS DEADLINE BUT PROBLEMS REMAIN AHEAD

C O N F I D E N T I A L SECTION 01 OF 05 DAKAR 001432

SIPDIS

STATE FOR AF/RSA, AF/EPS, AF/W
PARIS FOR ECON AND AFRICA WATCHER
ABU DHABI FOR TREASURY/GRIFFERTY
TREASURY FOR OTA RHALL, DPETERS
STATE PLEASE PASS MCC

E.O. 12958: DECL: 12/16/2028
TAGS: EFIN ECON EAID PGOV KCOR FR SG
SUBJECT: SENEGAL MEETS DEADLINE BUT PROBLEMS REMAIN AHEAD
OF IMF BOARD REVIEW

REF: A. DAKAR 1431

B. DAKAR 1298

C. DAKAR 1140

D. DAKAR 0588

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Classified By: DEPUTY CHIEF OF MISSION JAY T. SMITH, FOR REASON 1.4 (B)
AND (D).


1. (C) Summary: Senegal's Finance Minister, Abdoulaye Diop,
has been scrambling to meet the prior actions and find new
financing to cover the country's internal debt in advance of
the IMF Board's judgment on the country's Policy Support
Instrument (PSI) second review, scheduled for December 19.
With some foot-dragging, the three prior actions were likely
fulfilled. Diop has succeeded in raising useful money from
treasury bonds, the sale of telecomm stocks, and likely from
the IMF's Exogenous Shock Facility (ESF). Other sources of
money are more problematic, including a large,
non-concessionial loan from France. Diop is apparently under
significant pressure from the Presidency to move forward
dangerously on raiding public pension funds. The IMF's
Resrep is not sure the Board will agree with the staff's
recommendation that the second review is completed. Despite
misgivings, we remain very concerned about the negative
consequences that could ensue should the program fail,
including the risk that Senegal would ignore the reforms
already in place if there were no active IMF program. Given
that the GOS is technically on track with its PSI, we
recommend against a vote for non-completion, unless we are
convinced, which is not currently the case, that such a move
would inspire greater political will for reform from
President Wade and his closest advisors. Approval of the
review should be accompanied by strong and cautionary
statements by both the IMF and the USG. End summary.

MEETING THE PRIOR ACTIONS
--------------

2. (C) On December 3, IMF Resrep Alex Segura briefed Econ
Counselor on the GOS's efforts to fulfill the "prior actions"
and reach agreements to close the current budget deficit in
advance of the December 19 IMF Board decision on the second
review of Senegal's Policy Support Instrument (PSI). Segura
(protect) explained that the Ministry of Finance had likely
succeeded in meeting the requirements for the three prior
actions, but Segura was dismayed by the continued political
pressure being applied to the process. For the first item,
on the evening of November 28, which was the deadline,
President Wade signed a decree forbidding ministries or other
government entities from receiving advances from the treasury
before pay orders are properly processed. This action is
designed to eliminate (or at least greatly reduce) the abuses
that led to massive extra-budgetary spending and the large
stock of unpaid bills owed to private contractors from a wide
range of ministries.


3. (C) Segura related, however, that the initial draft
decree contained broad language that would have allowed a
huge range of exemptions. Another draft included language
that would have allowed the decree to be ignored by a further
decree from the President. Segura claimed he had to push
back hard on these blatant attempts for loopholes, at one
point explaining to Finance Minister Diop that the decree
could be signed with the improper language, but it would no
doubt be rejected at the IMF review. The final version
includes four reasonable exemptions and even those need prior
approval from the Finance Minister before funds can be
disbursed from the Treasury.


4. (C) The second prior action relates to misreporting by
the GOS in 2007 under the PSI's first review. To meet this
requirement, the Ministry of Finance was required to publish
updated budget data, including reconciliation tables, on its
website, which it has done. These tables for the first time
indicate the income received by Sudatel for its telecoms
license -- indicating that the money came into the treasury
in two payments of approximately USD 100 million each.
Unfortunately, the revised data does not make clear exactly
how the Sudatel money was used, but Segura believes about

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half of it was used to pay debts to the private sector, based
on corresponding decreases in arrears. He is less confident
that the remaining funds were put to good use.


5. (C) One roadblock for this action item was the
requirement that the GOS admit that it was guilty of
misreporting its internal debt to the IMF mission in charge
of the first PSI review. According to Segura, Minister Diop
was loath to put any admission of misreporting into a letter
or official note. Segura related that without this
acknowledgement, the staff review would indicate a lack of
competence on the part of the Ministry. In the end, a letter
was apparently sent with highly nuanced language that Segura
hopes will satisfy the Board.


6. (SBU) The third item is yet to be confirmed: by December
15, Senegal's legislative bodies were required to vote on
Senegal's 2009 budget, which must remain in line with the
framework established with the IMF's approval. The National
Assembly passed the budget on November 18, and the Senate
approved it on December 10. Segura's initial review of the
budget law indicates that it does follow the budget
framework; however, IMF staff in Washington will conduct a
more thorough review to assure the spending guidelines for
the ministries are appropriate.


7. (SBU) Segura admitted that it is unusual for the IMF to
require legislative action in what is an executive branch
program, but the IMF review mission believed this was an
appropriate measure given the government's history of not
following established budgets and the lack of accountability
and transparency that has been the hallmark of the country's
public finances for many years. This measure was also deemed
appropriate since President Wade's PDS party maintains
absolute control of both the National Assembly and the Senate
and is widely believed to act in direct accordance with
Wade's wishes.

FINDING MONEY: GOOD, BAD, AND DANGEROUS
--------------

8. (SBU) For many months, and particularly since the end of
the IMF Mission in November, Minister Diop has been working
non-stop to secure new financing in order to close the CFA
220 billion budget gap in a manner to satisfy the IMF Board,
and also cover the CFA 174 billion-plus in arrears out of
that sum that is owed to the private sector -- which
President Wade promised would be paid by the end of January

2009. Diop's efforts have generated mixed reviews. On the
positive side, the recent treasury bond issuance organized by
the BCEAO on behalf of Senegal (Ref A) was oversubscribed by
CFA 3 billion, with a total sale of CFA 23 billion. Segura
also confirmed that Senegal would likely benefit from
approximately CFA 38 billion (USD 76 million) in support
under the IMF's Exogenous Shock Facility (ESF),however only
half that amount would likely be available for Senegal's
current needs, while the other half would have to wait until
after the 3rd program review in April, 2009. How and when
these funds will actually be disbursed is apparently still
unclear; Segura did not believe that any ESF money had yet
been delivered to countries that qualify.


9. (C) Under the "helpful with caveats" category, France,
through the French Development Agency (AFD),agreed to loan
the GOS Euro 125 million (CFA 82 billion),which was less
than the CFA 120 billion Diop was reportedly asking for, but
more than initial reports. (During the December 3 meeting
with EconCouns, Segura received a call from Diop who was in
Paris negotiating the loan and reported that AFD was only
offering CFA 72 billion.) In reporting the loan, the French
Press Agency noted that it was almost equal to France's
entire foreign assistance package to Senegal in 2007 (Euro
127 million). Most observers believe that a major point in
the negotiations for the loan was to assure that French firms
who are holding unpaid contracts will be paid on a priority
basis. The disbursement of the loan is dependent on both the
IMF Board's approval of the PSI review (and specific approval
of the loan),and the IMF's agreement to disburse the ESF
credit. The loan agreement apparently stipulates that all

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the money must be used to help pay off the government's
internal debt (which would include the money owed to French
firms).


10. (C) Segura shared additional details about the loan,
which are somewhat troubling, namely that the interest rate
is set at 6.2 percent, for five years, but with a two-year
grace period. Since this rate does not meet the PSI's
requirement that the GOS accepts only concessional financing,
Minister Diop will likely need to request a waiver from the
IMF Board. The AFD also only agreed to disburse 70 percent
of the loan in 2008, withholding the other 30 percent until
after the 3rd review. This will make it problematic for the
GOS to both meet its goals for the current budget deficit and
to erase the current stock of arrears by the end of January.


11. (C) For another source of funds, the GOS has apparently
sold approximately two percent of its holdings in
Sonatel/Orange for CFA 20 billion. These shares were already
floated on the regional stock market (BRVM, based in
Abidjan),and so the IMF is willing to accept this action.
In a les responsible move, the GOS has reportedly receive a
CFA 23 billion loan from Sonatel, ponying up ts future
dividend payments from its remaining hodings as collateral.
(Note: the GOS now holds a estiated at USD 950 million
worth of Sonatel sock (Ref D). End note.) This transaction
is casing heartburn at the IMF because if the GOS does ot
stay current on its repayment of this loan, Soatel will
withhold dividend payments, which woul unbalance the budget
framework that includes the dividends as projected revenue.


12. (C) More troubling is the GOS,s current efforts to
withdraw government pension and social security funds from
commercial banks. The IMF, the President of Senegal's
Professional Bankers' Association, and the head of Citibank's
local office have all characterized this move as "dangerous"
in conversations with EconCouns. With local banks already
operating on tight margins due to the extremely limited local
(and international) liquidity, requests for these funds from
the government require the banks to call in outstanding loans
from other clients, potentially putting at risk both the
banks' reserves and their clients' balance sheets. Segura
confided that if the government goes though with its plan to
secure up to CFA 50 billion in this manner, it could cause a
run on banks. There is also widespread concern that the
government will not be able to repay these funds, putting at
risk pension and other social benefit payments to Senegalese
citizens.


13. (C) The IMF has confirmed tQraiding pension funds is
not necessary, in fact, it is not included within the PSI
program or the negotiated "action plan" for fiscal recovery.
EconCouns heard Segura tell Minister Diop by phone that he
did not support this action, and offered to help negotiate a
more flexible agreement on the repayment of arrears if other
financing could not be secured. Diop reportedly told Segura
that the goal was now to retrieve only CFA 25 billion from
the social funds, which Segura still views as unacceptable.
Segura related that a message is being sent from IMF
management to Diop requesting that he not tap in to these
social funds. However, Minister Diop is apparently in a bind
because this operation was "negotiated" directly by President
Wade and the president of Senegal's public employee pension
fund, IPRES. Diop does not feel he has the authority to stop
this initiative. Because raising funds in this manner is not
a part of the action plan, there is much concern over what
how this money will be used, particularly as it is being
raised in advance of the stricter public finance framework
that should be in place January 1. Citing the political
pressure that Diop is under, Segura explained that the IMF
might be willing to accept a "symbolic" transaction under
this scheme, perhaps CFA 5-10 billion (USD 10-20 million) or
less than 0.15 percent of GDP, while admitting that even that
amount sets a dangerous precedent. (Note: Press reports have
stated that President Wade's goal is to collect CFA 70
billion from the social funds, which happens to be the same
amount quoted in reports for a new presidential jet,
reportedly a luxury Airbus that recently was the "flying

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palace" of the King of Bahrain. End note.)

WADE DOESN'T WANT TO SIGN
--------------

14. (C) Segura and other interlocutors remain positive about
Minister Diop's efforts and commitment to fiscal reform, but
acknowledge that he could become the "fall guy" if the PSI
review is not completed. There are persistent rumors that
Diop would like to step down, and perhaps retire from
government service, but Wade is putting tremendous pressure
on him to stay. Segura relates that Diop told him, with
conviction, that implementing the action plan and assuring
that Senegal does not become the first country to fail a PSI
program is Diop's overriding goal.


15. (C) Unfortunately, Diop is not getting much support from
President Wade. Not only are Wade's closest advisors viewed
as largely responsible for the country's fiscal crisis to
begin with, due to poor policies and irresponsible draws on
the treasury, but Wade is apparently trying to distance
himself from the responsibility for the solution. Segura
related in confidence that Wade had on more than one occasion
called IMF Managing Director Strauss-Kahn to demand support
for Senegal and its reform efforts. In reply, Strauss-Kahn
requested a letter from Wade, confirming his commitment to
the PSI and fiscal reform. Wade reportedly replied that he
would not do that, as it was not the proper role of a
president to write to the IMF, and besides, if things did not
go well, he (Wade) "should not be blamed." However, we
heard, but have not confirmed, that French Economy Minister
Lagarde did require and receive some sort of letter from
President Wade confirming his commitment to sound fiscal
performance as a condition of the AFD loan.

THE IMF STAFF REPORT
--------------

16. (C) When asked about the likely outcome of the IMF
Board's decision on the 2nd review, Segura admitted that he
was not sure. He stated that, personally, he thought Senegal
deserved approval (a completed review),but with,
undoubtedly, a strongly worded statement. He claimed that
there was much debate in the drafting of the Staff Report on
whether or not to recommend approval, and that the report
was, in it's own way, quite critical of the GOS's performance
and honest about the continuing difficulties. In particular,
Segura shared the conditional language in the recommendation:
"staff recommends, on balance, completion of the second PSI
Review. While the seriousness of the budgetary slippages
made it difficult to arrive at this recommendation, the
authorities' corrective actions and program commitments are
sufficiently strong to warrant it."


17. (C) If the second review is not completed, in theory,
Senegal would have a final chance to keep the program alive
with the third review, but Segura thought a negative decision
in December would likely be fatal. He did not agree that a
rejection of the staff recommendation would further motivate
the GOS to implement reforms, and would instead put at risk
both further engagement (including by the broader donor
community) on accountability and the credibility of the IMF
in Senegal. Sogue Diarisso, one of Minister Diop's close,
senior confidantes at the Ministry of Finance, also doubts
that a non-approval would create new, positive motivation for
Wade.

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

18. (C) Senegal's PSI is an ugly animal that is increasingly
hard to love. Still, it's the only beast we've got to fully
engage the GOS on indispensable fiscal reforms and the only
independent review of the government's budget performance.
The fact that President Wade is again trying to circumvent
the spirit, if not the letter, of his commitment to lifting
Senegal out of an economic tar-pit, largely of his
administration,s doing, by raiding pension funds and
potentially collapsing the banking system is distressing, to
say the least. At the same time, however, that operation
points to the necessity of having a current IMF engagement

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that can provide some support to the Finance Minister and
maintain independent access to the government's accounts.
Diop is clearly under tremendous political pressure
(including credible reports of threats to his life for
exposing a scheme to circumvent Senegal's public procurement
code when the government made a non-competitive agreement for
a new power plant),but we still believe he is trying to do
the right thing, and would no doubt unfairly be blamed for
any program failure.


19. (C) Technically, the GOS met its prior actions, and
within the narrow confines of the program remains on track.
In this way, the PSI is working as advertised by putting
significant pressure on the government to undertake specific
reforms within a strict timeframe. Under a PRGF it is likely
that the government would have stalled on most of the
measures that have been taken, and the review/reporting dates
might well have been postponed. It falls to the IMF (and
donors) to assure that the required prior actions and the
agreement memos are ambitious and address the real problems.
Missing from the program is a mechanism for assuring
political will from President Wade and his circle for the
spirit of the program -- greatly improving public finance
management and accountability. The big question is, would a
non-completion of the second review help or hurt the effort
to motivate political will?


20. (C) We recommend that the USG vote to concur with the
staff recommendation to conclude the second review. After
that we'll have a better idea if the important new reforms
that were imposed on Wade's administration will be allowed to
be implemented. We would also like to see the Board issue
some pointed language admonishing the GOS for foot-dragging,
and noting that without a public commitment from President
Wade and his entire government, the country will not be able
to solve its economic slide. Washington should echo those
sentiments.
BERNICAT