FOREIGN ASSISTANCE IMPACT OF GLOBAL FINANCIAL CRISIS ON

UNCLAS SECTION 01 OF 03 DAKAR 000105

SIPDIS

DEPT FOR AF/W, AF/EPS, F/PCRAWFORD, EEB/IFD/OMA AND EBB/EPPD

E.O. 12958: N/A
TAGS: EAID EFIN ECON SOCI KMCA SG
SUBJECT: FOREIGN ASSISTANCE IMPACT OF GLOBAL FINANCIAL CRISIS ON
SENEGAL

REF: A) Dakar 0062, B) 08 State 134905

DAKAR 00000105 001.2 OF 003



1. Summary: In response to Ref B request, Post submits the
following information on the possible impact of the global financial
crisis on assistance programs in Senegal. Ref A and previous
reports have outlined the general impact of the global financial
crisis on Senegal's broader economic conditions. Much of our
concern about the possible impact on USG assistance is derived from
new limitations on the host government's ability to fulfill its
obligations as an effective partner for our development and military
assistance. The GOS's difficulties with budget management
exacerbate the problem. At the same time, many of our programs,
including significant new funds for agriculture development are
designed to help the country cope with global economic downturns.
In this regard, a new approach from Washington permitting greater
flexibility in the programming of assistance money would be
beneficial. End summary.

THE ECONOMIC REALITIES IMPACTING ASSISTANCE PROGRAMS
-------------- --------------

2. Senegal's difficult current economic conditions will likely make
the implementation of donor assistance somewhat more difficult.
These conditions are the result of the combination of influences
which are broadly exacerbated by the global financial crisis, and
include:
-- the government's large internal debt;
-- current and projected GDP growth below five percent;
-- very tight commercial bank liquidity;
-- a limited market for new treasury bond issuances;
-- a significant drop in foreign remittances;
-- Senegal's lack of value-added exports; and
-- the government's funding decisions which may be influenced more
by political than economic considerations.


3. Economic slowdown, especially in Europe, the U.S., and China
will directly impact Senegal's economic fundamentals. Senegal's
national budget and its population are highly vulnerable to price
fluctuations in food and petroleum products. At the same time, the
country's domestic economy rests on a thin foundation, with peanuts,
phosphates, cotton, seafood, and tourism accounting for the large
majority of export earnings. As discussed in Ref B, remittances
are another very important source of foreign currency, household
income, and anti-poverty relief. Some estimates calculate that
these transfers account for more than 10 percent of GDP, but the
country is already noticing a marked drop-off in remittances as the
employment market slows in the U.S. and Europe.


4. Senegal's high dependence on foreign assistance is another key
variable for Senegal's economic performance, middle-class income,
and over-all development capacity. Under the GOS' 2009 budget
framework, the Ministry of Finance is anticipating that aid will
account for 29.3 percent of the country's total budget, an increase
from the 2008 target of 26.1 percent. Any tightening of official
development assistance not only in Western capitals, but also from
China and Middle East countries, will have a direct correlation on
Senegal's bottom line.

POSSIBLE IMPACT ON USG BILATERAL ASSISTANCE
--------------

5. The impact of the global financial crisis on Senegal in and of
itself will likely have little direct impact on USG bilateral
assistance. The GOS's ability to function as an effective partner
due to its own budget and capacity constraints could prove
challenging in the near term. While Senegal's current budget
difficulties are mostly caused by its large internal debt, any
additional shock from the global financial crisis will exacerbate
the problem. This could decrease public expenditures in sectors the
USG is supporting and hinder some of our foreign assistance programs
and priorities. For example, under an innovative arrangement, USAID
is financing the construction of middle schools throughout the
country, but requires that the GOS reimburse the account for the
cost of the construction. Even in spite of a significant current
budget deficit, the government has been able to hold up its end of
this arrangement, but with any additional squeeze on resources,
future financing of these schools could become increasingly
difficult.


6. Another hallmark of USAID's programs in Senegal is the promotion
of sustainable exploitation of natural resources by local rural
communities under the "Wula Nafaa" project. This effort, however,
depends on rural poor to be financially stable enough to take a
long-term view towards their natural resources. We are concerned
that the effective and accountable stewardship of resources promoted
by the project will be threatened when families are faced with
increasing hunger and diminished incomes. If the response is a
return to unregulated charcoal production and the unsustainable
harvest of tropical timber, Senegal's already diminished forest
resources could fall to critical levels.

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COMMUNITY/GRASS-ROOTS PROGRAMS
--------------

7. With Senegal's budget facing renewed pressure, the government's
commitment to decentralization could flag. Because local elections
are scheduled for March, it is likely that there will be a flow of
politically-motivated project funds to regions and constituencies
outside of Dakar. However, beyond that, we suspect that the
national ministries and agencies will use their political influence
to protect their budgets and that the flow of money to local
governments could diminish. Under this scenario, the need for
grass-roots assistance will increase so that enhanced U.S. foreign
assistance money for the Ambassador's Self-Help Fund, the Democracy
and Human Rights Fund, and the Peace Corps, could pay additional
dividends.

SLOWING AGRICULTURE DEVELOPMENT?
--------------

8. The financial crisis's impact on our growing agricultural
development and commercial capacity-building programs is uncertain.
New programs currently under development by USAID seek to solve some
of the very problems that can be anticipated from the global
financial crisis. For instance, USAID Senegal has just received an
additional USD23 million of FY09 funds from the Global Food Security
Response to higher food prices. A continued, consistent response at
this level will greatly assist Senegal to weather some of the
potential negative impacts of the financial crisis - particularly
food security.


9. At the same time, our agriculture and natural resources
management goals are focused on improving local production,
processing, and trade capacities that ultimately require private
sector investment. Should further analysis indicate that new private
investment will not keep pace with the development program, USDA and
USAID programs in the agricultural sector (which are just beginning
to ramp up) may need to be modified somewhat. Under this scenario,
USG money may be required to target less capital-intensive sectors,
or perhaps to use funds to make targeted capital investments where
they are lacking.


10. The current USAID portfolio already has programs in place that
will help address potential impacts of the financial crisis.
However, the large amount of earmarks on the USAID budget removes
flexibility for USAID to take into account unseen effects of the
financial crisis that are not already being addressed.


11. As the regional Foreign Agricultural Service Officer points
out, our broader policy positions could also be impacted. For
example, in the cotton sector, the U.S. is supporting privatization
and reform across West Africa (Senegal is in fairly good shape,
relatively speaking) and these efforts are challenged by huge local
debts that will likely grow in the midst of the current financial
crisis. The slowdown in world economic growth has diminished world
cotton demand, which has exacerbated an already delicate financial
situation by lowering cotton revenues and increasing private and
state-held debt in this and other key employment sectors.


12. Governments across the region as well as international donors
(including the World Bank) have consistently bailed out the cotton
sector since, politically, a sector that employs tens of millions
across the region cannot be allowed to fail. Senegal's "cotton" may
be "peanuts," where a lack of capital in the agro-processing sector
threatens the income of thousands of peanut farmers, and millions of
dependent family members. The current financial crisis changes the
calculation on this dynamic. The price tag for propping up these
sectors has grown significantly, while their structural deficiencies
make future bailouts a very poor investment. Should Senegal (and
other countries) face a new rural economy crisis and an accompanying
deterioration in social stability, the employment/poverty aspect of
the equation could well go beyond the financial and political cost
to governments and donors. U.S. policy interests related to reform,
fiscal responsibility, free trade, and free and open economies could
also prove more difficult to achieve


13. In addition, Senegal is on track for a Millennium Challenge
Corporation Compact designed to build rural infrastructure that will
positively impact the country's agriculture sector. This model of
investing in infrastructure is a good example of how bilateral
assistance could actually have a greater relative impact for
investments in irrigation and roads given the current difficulties
for the government in raising funds through treasury bonds or via
local financing.

U.S. MILITARY ASSISTANCE
--------------

14. We also note the possibility for a negative impact on our
military training and cooperation as the global financial crisis may
compound the difficulties which Senegal faces in sustaining its

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troop contributions to UN Missions. Senegal recently committed
itself to increasing its troop commitment from 2,218 to 2,413.
While existing programs such as the Africa Contingency Operations
and Training Assistance, Sudan Supplemental Funds, and UN equipment
stipends cover most all of Senegal's operational support expenses,
Senegal will likely continue to struggle to maintain its U.S.-origin
equipment used in these UN operations because we expect that the GOS
discretionary budget will be very tight and concessional financing
to address the government's internal debt will remain difficult for
the country to secure. Maintenance of U.S.-origin weapons and
trucks is particularly expensive for Senegal since there are no
distributors for those spare parts in West Africa. If Senegal's
defense budget is reduced, as will likely be the case, the Armed
Forces will struggle to maintain those items which are already
suffering significant wear and tear from UN operations, particularly
in Darfur.

POSSIBLE IMPACT ON OTHER DONOR ACTIVITIES
--------------

15. Our contacts at other Embassies and development agencies are
uniformly concerned about the possibility that ODA budgets will
decrease in 2009. As with our programs, there is widespread concern
that the GOS will not be able to partner as fully on assistance as
previewed when programs were developed. We anticipate that direct
budget support by a number of donors will be subject to review in
capitals, not only due to belt-tightening, but also because Senegal
has struggled to keep on track its IMF Policy Support Instrument and
prove that it is taking much-needed reforms in fiscal management and
accountability.


16. In addition to ODA assistance, Senegal benefits from an
alphabet soup of NGOs providing development and anti-poverty
assistance. Many of these are implementing partners for donors, and
even more are operating their own programs via charitable
contributions. We anticipate that a significant number of these
organizations will cut back on projects and staff as a direct
consequence of the global economic downturn.

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

17. It is difficult to predict with any certainty the eventual
impact on Senegal of the global financial crisis, but many of our
programs already exist to help build safety nets for the rural poor
by improving education, natural resource management, and improved
agricultural systems to increase food security. As Washington
agencies develop plans for adjusting our foreign assistance to meet
new challenges presented by the global economic downturn, we hope
that a couple of key considerations are brought to the table.
First, as noted above, Post's ability to adjust our programs to meet
new and perhaps unanticipated problems in anti-poverty goals and
government budgets are often hindered by the lack of flexibility in
many USG foreign assistance programs. The majority of USAID and FAS
funds are earmarked by Congress or Washington agencies to be
programmed under a fairly narrow band of activities. These agencies
effectively design and implement programs in response to specific
constraints and are appropriately targeted. However, greater
Post-implemented flexibility on funds would be beneficial. Second,
Washington policymakers should continue to push governments in
developing countries to improve their fiscal performance by
enhancing transparency and accountability and focusing national
budgets on key priorities. This is not only a question of good
policy, but also of maintaining responsible partnerships by making
the most of their internal resources.

BERNICAT