POST'S PERSPECTIVE ON SENEGAL'S IMF PROGRAM REVIEW ON JUNE

UNCLAS SECTION 01 OF 04 DAKAR 000760

SIPDIS

SENSITIVE

DEPT FOR AF/W, AF/EPS, EB/IFD
TREASURY FOR RHALL AND DPETERS
ABU DHABI FOR OTA

E.O. 12958: N/A
TAGS: ECON EFIN PGOV ETRD EAID SG
SUBJECT: POST'S PERSPECTIVE ON SENEGAL'S IMF PROGRAM REVIEW ON JUNE
19

REF: Dakar 748

DAKAR 00000760 001.2 OF 004



1. (SBU) Summary: Senegal's Policy Support Instrument (PSI)
program with the IMF will be presented for its 3rd Board review on
June 19. We understand that the IMF Staff recommends a positive
review. Post continues to believe it is essential to keep the IMF
engaged in fiscal reform efforts through the PSI and that, absent a
positive review that is unlikely. That said, the performance from
the government, especially related to the political will to conform
to the program, has not been stellar. From all appearances, Finance
Minister Diop, recently departed Budget Minister Sow (Reftel),and
their key staff were committed and effective in bringing the
gQernment's budget slippages into some order. They also held the
line against requests for treasury advances and other non-conforming
processes, often likely in the face of strong political pressure.
IMF Resrep Segura was very active, and at times outspoken, in his
efforts to assure that the government met the program's specific
criteria. At the same time, it is not clear why the government
failed to submit a revised budget in a timely manner, why it was not
able to arrange new external financing, and why the independent
audit of extra-budgetary commitments in 2007 and 2008 was not
completed. As the IMF is offering new financial assistance under
its Exogenous Shock Facility (ESF),hopefully it will also gain new
assurances of very high-level political commitments to the program.
This will especially be necessary should the IMF pursue additional,
much-needed reforms for the fourth review, including fiscal
responsibility from Senegal's energy sector. End summary.

THE GOOD NEWS
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2. (SBU) The IMF Resrep for Senegal, Alex Segura, and his staff,
were apparently once again scrambling to assure that the GOS
fulfilled the program criteria under Senegal's Policy Support
Instrument (PSI). Some of the most important criteria were met
quickly following the December review, including, Segura believes,
the total discontinuation of the treasury advances that created a
massive stock of arrears owed to the private sector in 2008. These
and other "budget slippages" appear to be largely contained.
However, there are indications that since the end of March there
have been some increase in arrears. This may be due to payment
difficulties due to unexpectedly lower customs and tax receipts as a
result of the global economic slowdown. Also encouraging, compared
to a year ago, the GOS has drastically reduced the number of
single-source or other non-competitive public tenders, and the
government reportedly has now passed a Presidential Decree
establishing an investigative unit within the Regulatory Agency for
Public Procurement (ARMP),which was one criterion that had not been
met as of the end of May.

STILL TROUBLING
--------------

3. (SBU) The IMF Staff report recommends a positive Board Review on
June 19. While it may be that Senegal has again met the letter of
the program conditions (in part due to IMF flexibility),there were
a number of issues that apparently caused Segura heartache, based on
our conversations with him and a number of sources. Segura was
working until the "last minute" to put pressure on senior officials,
particularly in the Presidency, to assure that these basic measures
were met.


4. (SBU) In the run-up to the third review, the GOS agreed to an
independent audit of extra-budgetary spending and commitments in
2007 and 2008. The report was to have been completed by the end of
March and then released publicly by the end of May. It is not yet
finished and the IMF has apparently extended the deadline to the end
of June. The reason for the delay is that "ministries and agencies"
were not being cooperative. Segura reported that he had to visit
President Wade personally and present a list of unresponsive
Ministries in order to move the process forward. The lack of a
report not only undercuts any claim of responsiveness by the GOS
broadly under the PSI, but it will also create new fiscal
difficulties as a yet undetermined number of unpaid prior year
contracts will likely need to be paid where the supplier acted in
good faith with GOS offices. The results of the audit will
therefore play a role in Senegal's likely requirement for another
budget revision later in the year.


5. (SBU) The government was apparently required to pass a
supplementary (revised) budget that protected social spending by
June 5. This deadline was extended to June 12, and the IMF
apparently accepted that the budget has been presented to the
National Assembly (having been approved by the Council of Ministers)

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but not actually passed by the legislature. [Comment: This is less
worrisome than it might appear in that the National Assembly is
dominated by President Wade's PDS party and will undoubtedly pass
the budget -- perhaps before the end of June. The IMF is also
apparently reluctant to impose criteria that require legislative
action. End comment.] Still, political players both inside and
outside the National Assembly could still try to manipulate this
budget. The actual final text and funding priorities will need to
be verified as part of the next review.


6. (SBU) More troubling than the delay in passing a budget are
reports that officials close to the President and his son (Minister
Karim Wade),initially presented a budget that was outside the
framework agreed to with the IMF. This apparently included
significant cuts in social spending. Moreover, the total amount of
budget cuts was not sufficient to meet the current funding gap. Our
sources tell us that Segura and his staff noticed these
discrepancies and insisted that the budget be revised. In the end,
the IMF apparently allowed some social spending to be reduced, given
the need to cut CFA 30 billion (USD 61 million). The revised budget
also shifts some resources in order to meet Senegal's CFA 55 billion
commitment to build its new toll road, a project that has also
received financing from the World Bank, the African Development
Bank, and the French Development Agency (AFD),and is supposed to
have a major contribution from a private concessionaire. This item
was not included in Senegal's original 2009 budget.


7. (SBU) Most donors understood that before the third review the
GOS needed to secure new financing of up to CFA 200 billion in order
to close its current budget gap. The government originally wanted
to sell a portion of its shares in the telecom company Sonatel to
raise these funds. However, that deal fell apart in April when
Sonatel's union and others strongly objected to the government
ceding its controlling share of the company to France Telecom. We
understand that the current GOS plan is to use its Sonatel shares as
collateral for new commercial financing within the West Africa
Economic and Monetary Union (WAEMU) region. To achieve that, the
GOS apparently received a waiver on its public procurement
regulations in order to sign a contract with the Moroccan firm BMCE
Capital to act as an investment consultant in helping to raise
funds. It is not clear why the waiver was needed or if the IMF has
reviewed the contract, but the details of the steps to fill this
budget gap are not in place for the Board Review. [Note: BMCE
Capital has played a similar role for a number of President Wade's
high profile projects. End note.] The IMF, through its Exogenous
Shock Facility (ESF) and the World Bank are apparently also offering
new financing to the GOS.

TOUGH QUESTIONS SHOULD BE ASKED AT THE REVIEW
--------------

8. (SBU) Post understands that the IMF Staff Report, the result of
the March 23-April 2 IMF Mission, recommends a positive review and
approval. While Senegal clearly met most of the program criteria
for this review, the delay in the audit, revised budget, and new
financing in some ways makes this review incomplete, at least
compared to its initial framework. We recommend that Board members
ask some tough questions:

-- Why was the audit of external budget commitments not completed?
(Post believes the government had sufficient time to contract for
the auditing firm and that ministries and agencies had sufficient
time to respond to the inquiry, if they were motivated to do so.)

-- Why was the revised budget delayed? In formulating this budget,
what were the government's priorities? What steps did it take to
protect important social spending (health, education, sanitation)?
Given the other financing coming on line, does the GOS really need
to provide funds for the toll road at this time? Couldn't it
negotiate with the donors to reschedule its contribution?

-- Why couldn't financing be concluded to help close the current
budget gap and provide the Board with a better sense of the state of
Senegal's finances for the next six months? If a consultant was
necessary, how does that contract qualify as an "emergency" for
public procurement waivers? How can the Board be assured that the
government is getting the best value for its money in a transaction
like this?

-- If the IMF feels that Senegal qualifies for even greater
financial assistance under the ESF, what demands are being placed on
the GOS in return in terms of transparency, accountability, and
commitment to the goals of the PSI?

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-- The former Budget Minister apparently did a highly credible job
in ending the practices of treasury advances that caused so much
difficulty in 2007 and 2008. What assurances has the Board received
that the new Budget Minister will be able to continue to hold the
line against this or other abuses of the Treasury?

-- What has happened with the budgetary float since the end of
March? There are indications that it has increased.

THE FOURTH REVIEW COULD BE EVEN MORE DIFFICULT - IF THE RIGHT
CRITERIA ARE SET
-------------- --------------

9. (SBU) Regarding Senegal's situation vis-a-vis the fourth review
under the PSI, critical economic and budget reforms should be
considered. The Staff Report mentions Senegal's energy sector,
which is costly, unreliable and subject to fluctuating fuel prices.
Senelec's weak financial situation and the continued power shortages
are negatively impacting the government's budget and its ability to
attract and retain investors. In short, the energy sector needs to
greatly improve transparency, accountability, and performance.


10. (SBU) There are growing concerns about backsliding in
governmental accountability. In the drafting of the revised budget,
there was apparently an attempt to dangerously reduce funding to
Senegal's audit court. In addition, though there have been
improvements in the number of government contracts filled under
effective public procurement procedures, there are indications that
pressure continues to be applied on financial control agents to
allow single-source contracts (such as the one for BMCE Capital).
Press reports have indicated this was one of the factors leading to
former Budget Minister Sow's resignation. The Energy Ministry's
plans for a second, new coal-fired plant were derailed by the lack
of a public tender for the operator. This plan to increase badly
needed productive capacity remains in the Ministry's timeline for
2011 -- with no apparent movement towards organizing a public
tender.


11. (SBU) The IMF could also include within the scope of the
program improved practices on land reform, and issuances. On more
than one occasion, government officials have pursued one of
President Wade's "special projects" by offering land to contractors
in lieu of establishing a budget item. The most visible case is the
Statue of the African Renaissance in Dakar, which was reportedly
financed through gifts of land to a middleman. President Wade is
apparently working to pass new laws that would remove much of the
land use control from local governments and centralize it within the
national government.


12. (SBU) In December 2009, Senegal will host the Fesman Festival
of African Arts, which will be a major international event, drawing
comparisons to Senegal's hosting of the Organization of Islamic
States Summit in March 2008. That event is credited as one of the
causes of Senegal's budget crisis last year. Hopefully, the new
controls established as part of Senegal's PSI will preclude any
repeat of similar pressures on the budget.


13. (SBU) All of the above described areas are critical for
Senegal's fiscal health. They will not be easy to address under an
IMF program since they directly impact the portfolios of senior
officials who may choose to be unresponsive, but the odds of them
being responsibly managed absent such international oversight are
even lower.

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

14. (SBU) Senegal's economic situation has likely legitimately
deteriorated since the IMF's last mission. That may account for
some of the disparity in the Staff Report's summary findings and the
broader continued skepticism of the government's performance. To be
more specific, this skepticism rests largely with the lack of a
clear political commitment to meeting the program's goals and
achieving lasting fiscal reform. If there had been high-level
political will directing the government's efforts on this third
review, many, if not all of the problems outlined here could have
been addressed, and in a timely manner.


15. (SBU) However, Post continues to have confidence in the Finance
Minister and his staff, and we believe we should give the new Budget
Minister the benefit of the doubt. One new hurdle for the soundness
of this program will be Resrep Segura's scheduled September
departure. He has been not only very active in following the

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government's response, but also admirably willing to raise his
legitimate concerns in public when the response was lacking.

BERNICAT