IMF MISSION SHARES POSITIVE BRIEF WITH SKEPTICAL DONORS

UNCLAS SECTION 01 OF 03 DAKAR 000442

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TAGS: EFIN ECON EAID SG
SUBJECT: IMF MISSION SHARES POSITIVE BRIEF WITH SKEPTICAL DONORS

REF: 07 DAKAR 1591

DAKAR 00000442 001.2 OF 003


SUMMARY
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1. (SBU) On April 9, an IMF mission shared with donors its mostly
positive assessment of Senegal's economy and the first review of
Senegal's Policy Support Instrument (PSI). Mission head Johannes
Mueller claimed that Senegal's GDP growth increased from 2.3 percent
in 2006 to 4.8 percent in 2007, largely due to buoyant services and
construction sectors, and despite a poor agricultural production.
He stated that Senegal could achieve 5.5 to 6 percent growth in 2008
and sustain that level for the medium term. Much of this optimism
is based on the assumption that the recapitalization of Senegal's
industrial giant, ICS, will soon be concluded, resulting in
significantly higher production and export of phosphates and related
products. 2008 inflation should be around 4.5 percent, but could
move down to historic levels of around 2 percent in the coming
years.





2. (SBU)
Mueller also emphasized the need for greatly increased fiscal
discipline and transparency, and, due to a larger than expected
budget deficit, the government needs to reduce expenditures while
better focusing on priority sectors. Mueller was complimentary to
the GOS for meeting the strict conditions laid out for starting the
PSI, noting that problems revealed in the government's payment
systems were likely due to a "misunderstanding." While recognizing
progress made by the GOS in moving forward on the PSI, many donors
expressed skepticism at the prospects for significant economic
improvement in the coming year, citing in particular problems in the
agriculture sector and the country's ability to head off
significantly higher inflation. Donors also pointed out that even
the optimistic economic assessment for Senegal in the medium term
falls well below the country's stated goals as outlined in its
much-touted Accelerated Growth Strategy (AGS). The team's concerns
about the fiscal impacts of a new Special Economic Zone, were
somewhat allayed. End Summary.

THE OPTIMISTIC IMF
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3. (SBU) An IMF team visited Senegal March 25 through April 10 to
review the country's economic performance and efforts to maintain
progress on non-disbursing PSI, which was signed in November. IMF
Team leader Johannes Mueller provided briefings to key donors at the
beginning and end of the mission.


4. (SBU) In reviewing the state of the economy, Mueller found that
2007 had been reasonably good. He estimated real GDP growth for 2007
at 4.8 percent, while the inflation averaged 6 percent. For the
medium term, starting 2008, Mueller predicted that GDP growth should
be in a range of 5.5 to 6 percent, as a result of buoyant service
and construction sectors, and the positive resumption of ICS's
activities. Inflation is projected at 4.5 percent in 2008 and 2
percent for the medium term. Mueller also predicted that Senegal
will be well positioned to mobilize increasing amounts of foreign
direct investment. However he noted some risks associated with the
international environment and the current turmoil in the financial
markets. The IMF team downplayed the fact that it views the drivers
of growth to be in the construction, public works,
telecommunication, and transport sectors, but these are not the same
sectors targeted by Senegal's AGS, which also hopes to achieve
higher than 7 percent sustained growth.


5. (SBU) Mueller said that the external current account deficit
will slightly deteriorate from 10 percent of GDP in 2007 to some 12
percent of GDP in the medium term. However Senegal's balance of
payment deficit is expected to be covered by foreign direct
investment, with a minimal impact of the country's debt
sustainability. He noted that the fiscal deficit will be grow
temporarily from 3.5% of GDP in 2007 to 4.8% in 2008 because of a
previously unaccounted for stock of unpaid invoices and expected
increases subsidies for key consumer goods. Mueller expressed the
view that temporary subsidies are likely necessary for maintaining
social stability, but that the IMF will monitor the evolution of
subsidies closely to ensure the country's debt viability remains on
track. Given these budget constraints, Mueller claimed that the IMF
is pushing Senegal to find new avenues for reducing expenditures.


6. (SBU) Regarding Senegal's performance on meeting PSI
"pre-conditionality," Mueller was very generous in his praise of the
GOS's efforts, noting that it required a number of actions by the
government before the end of 2007, all of which were achieved. He
cited in particular the legislative steps required to change the

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status of Senegal's investment promotion agency, APIX, to assure it
remained fully controlled by the government. He explained that the
government received a "pass" for its work on paying its arrears to
private sector contractors, but that the IMF has recently become
aware of another stock of past due invoices, which Mueller explained
away as likely a "misunderstanding" by GOS officials on what the PSI
required.

STILL MANY AREAS FOR IMPROVEMENT
--------------

7. (SBU) The IMF team outlined a series of priorities that Senegal
needs to address:

-- speed the pace of reforms to improve the business environment,
attract new domestic and foreign investment, and enhance
competitiveness;

-- accelerate financial sector reforms in cooperation with the BCEAO
and make operational the new framework for small and medium
enterprises;

-- prioritize investment projects and increase spending on poverty
reduction, health, education, and agricultural sectors, as well as
improve the quality of those expenditures. (Mueller noted that in
2007 Senegal spent approximately 22 percent of its budget on "social
needs," which was both low and not well targeted);

-- begin implementing a time-phased and gradual economic
liberalization program in compliance with the European Union's
proposed Economic Partnership Agreement;

-- limit subsidies to consumer goods and the energy sector to an
amount not to exceed 0.5% of GDP. (In 2007, energy-sector subsidies
were estimated at up to three percent of GDP);

-- consider a possible introduction of a social transfer mechanism
(cash transfers) that appears to work in certain Latin American
countries, as a way to enable the poor to access to key social
services.

DONORS NOT ENTIRELY CONVINCED
--------------

8. (SBU) Representatives from France, United Kingdom, Japan,
Germany, Italy, Belgium, Switzerland, Canada, Holland, Spain, UNDP,
The European Union, World Bank, African Development Bank, China,
India, and the U.S. attended the briefings and highlighted a range
of concerns, including late payments to the private sector,
inflation pressures, food insecurity, a lawsuit by commercial
creditors to contest the recapitalization plan for ICS, a bleak
outlook for improved agriculture performance, and an overall
insufficient commitment from the GOS to adequately coordinate and
assure the best value for donor funds. Other issues the donors
asked the IMF to follow up on included:

-- high protectionist taxes for some key consumer goods such as
cooking oil and sugar, which are regressive with negative impacts on
the poor. The tax on oil is estimated to increase the cost to the
consumer by some 40%;

-- the need for prudence in light of the IMF's positive response to
President Wade's goal of achieving self-sufficiency in rice
production by 2015, which might not actually fall within the
country's comparative advantage (especially given the limited amount
of readily arable land in the country). There is also concern that
donors have not yet received any GOS document detailing the
government's plan to achieve this goal.

GOOD NEWS ON SPECIAL ECONOMIC ZONE
--------------

9. (SBU) The IMF team had previously expressed significant unease
at the potential fiscal impact of the proposed Special Economic Zone
to be funded by Dubai's Jafza International. Officials with the
zone apparently presented the IMF with a comprehensive plan for
distinguishing between foreign and domestic investment within the
zone, and for companies seeking to only export and production for
the local market. The zone will also be fully walled off with
strict access control to minimize products slipping into a gray
market.

COMMENT
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10. (SBU) The donors greatly appreciated the IMF team's briefings
but are not convinced by the IMF's generally positive assessment of
Senegal's economic performance. Our impression is that the IMF
wants very much for the GOS to succeed in this non-disbursing
program since Senegal is one of the first countries in Africa to

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sign a PSI, and it did so even though it probably could have
benefited from another Poverty Reduction and Growth Strategy (PRGS)
program. Praising the government for the "difficult" task of
changing APIX's status is emblematic. There was not legislative
opposition to the change, just a deep hesitancy by the government to
make it happen. In fact the GOS waited until the last possible
minutes of December 31, perhaps hoping the IMF would not insist on
this requirement. By sticking to its guns on APIX, we hope the IMF
has set the stage for helping the GOS live up to its commitments for
deeper reforms.

SMITH