VZCZCXRO6078
RR RUEHPA
DE RUEHDK #0933/01 1080850
ZNR UUUUU ZZH
R 180850Z APR 06
FM AMEMBASSY DAKAR
TO RUEHC/SECSTATE WASHDC 4868
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHDC
RUEHLMC/MCC WASHDC
RUEHZK/ECOWAS COLLECTIVE
RUEHNR/AMEMBASSY NAIROBI 1169
RUEHGV/USMISSION GENEVA 0706

UNCLAS SECTION 01 OF 06 DAKAR 000933 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EB/IFD/ODF, AF/EPS AND AF/W 
TREASURY FOR OFFICE OF AFRICA - PETERS 
NAIROBI FOR ECON - BAIN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EAID MARR SG
SUBJECT: SENEGAL: 2006 BUDGET CONTINUES TO FOCUS ON THE 
SOCIAL SECTOR 
 
 
DAKAR 00000933  001.2 OF 006 
 
 
¶1.  (SBU) SUMMARY: Senegal's 2006 budget allocates more 
money to the social sector (education and health), and 
relies on CFA francs (CFAF) 43.1 billion (USD 78.3 
million) in savings from the Heavily Indebted Poor 
Countries (HIPC) debt relief initiative to reduce poverty, 
which affects nearly 57 percent of the population.  The 
2006 budget projects domestic revenue of CFAF 926 billions 
(USD 1.68 million) -- 9.1 percent higher than the 2005 
budget revenues.  The 2006 projection assumes a broader 
tax base, which the Government of Senegal (GOS) 
optimistically projects will increase by 21.1 percent to 
reach CFAF 508.2 billion (USD 924 million) or 54.8 percent 
of total internal revenue.  Budgeted expenditures for 2006 
are CFAF 1,407.8 billion (USD 2.56 billion) -- just over 
9.1 percent higher than 2005 budget level, leaving a CFAF 
22 billion (USD 40 million) gap, which the Senegalese hope 
to close with additional grants and foreign loans.  About 
22.3 percent of Senegal's 2006 budget revenues will come 
from foreign transfers, a slight drop from 2005 levels. 
The budget estimates 2006 GDP growth to remain at 5 
percent, a number that is significantly below the 7.5 
percent growth needed to alleviate poverty and boost 
economic development by 2015, as envisioned in the 
government's Accelerated Growth Strategy.  Moreover, some 
economists are predicting that energy shortages could cut 
2006 GDP growth to just three percent.  END SUMMARY. 
 
HEFTY INCREASE PLANNED IN EXPENDITURES 
-------------------------------------- 
¶2.  (U) The 2006 budget projects total expenditures and 
net borrowing of CFAF 1,407.8 billion (USD 2.56 billion), 
including expenditures financed with HIPC resources of 
CFAF 43.1 billion (USD 78 million), an increase of 9.1 
percent from 2005's CFAF 1,293.0 billion (USD 2.34 
billion).  This is mainly due to a significant, 17-percent 
increase in other expenditures, which include subsidies of 
CFAF 9 billion to Sonacos (the recently privatized peanut 
oil plant), CFAF 25 billion for social welfare spending 
(to include subsidies for butane gas bottles), a seven 
percent increase in the civil service wage bill, and a 4.7 
percent increase in GOS's contribution to capital 
investment.  The operating budget, which excludes debt 
service and capital investments, for 2006 has been set at 
CFAF 628 billion (USD 1.14 billion), up 12 percent from 
¶2005.  New measures include CFAF 9 billion (USD 16 
million) to hire 5,000 school teachers, health workers and 
Ministry of Justice officials; CFAF 29 billion (USD 52 
million) for operating costs; and CFAF 34.4 billion (USD 
62.5 million) in other expenditures. 
 
DEBT SERVICE BURDEN DECREASES 
----------------------------- 
¶3.  (U) The GOS increased budgeted expenses under the 
"Treasury Special Accounts" (TSA) by two percent.  This 
category consists of special funds to support various 
government commitments, including investment guarantees, 
water resource management and environmental resource 
funds.  As opposed to previous years, this year the 
majority of TSA represent relatively small amounts that 
are financed by earmarked taxes.  Other important 
categories such as the "National Retirement Fund and the 
"Caisse Autonome d'Amortissements" (CAA) (the account used 
to service public debt) have been withdrawn from the TSA 
and are now part of the general budget, a positive move 
towards greater transparency.  In 2006, expenditures out 
of the CAA are budgeted at CFAF 119 billion (USD 216 
million), an increase of seven percent over 2005 levels. 
The G-8 debt relief package initiative, other debt 
forgiveness, debt rescheduling and tight controls on new 
debt issuance within Senegal's IMF program have all 
contributed to the reduction of Senegal's debt service 
burden. 
 
OPERATING BUDGET DOMINATED BY PERSONNEL COSTS 
--------------------------------------------- 
¶4.  (U) Current expenditures (Table 3) for 2006 have been 
set at CFAF 627.8 billion (USD 1.14 billion), up 12.2 
percent from the 2005 level of CFAF 559.1 billion (USD 
1.02 billion).  The breakdown of the budget by economic 
categories (Table 4) reveals the predominance of personnel 
 
DAKAR 00000933  002.2 OF 006 
 
 
costs (42.4 percent) in the government's operating 
expenditures.  Though the wage bill is expected to 
increase by seven percent due to plans to hire teachers 
and health workers, completing the GOS's HIPC commitment 
to recruit 15,000 workers between 2003-2006), as well as 
workers for the Ministry of Justice, its ratio over tax 
revenues (29 percent) remains within the limits 
established by the IMF program, which caps the GOS's 
personnel costs at 35.5 percent of total revenues (CFAF 
926.5 billion or USD 1.68 billion under 2006 revenue 
projections).  (COMMENT: The GOS's wage bill might be 
underestimated and might not include the recent salary 
increases for magistrates.  END COMMENT.)  Of the CFAF 
43.1 billion collected from HIPC savings, CFAF 4.1 billion 
and CFAF 4.4 billion will be used respectively to improve 
the operating expenditures for education and health.  The 
remaining CFAF 34.5 billion will be used for building more 
schools (CFAF 5 billion), more health centers (CFAF 4 
billion), infrastructure projects (CFAF 10 billion), 
agriculture projects (CFAF 4.7 billion), family welfare 
projects (CFAF 3 billion), sewerage projects (CFAF 3 
billion), environmental projects (CFAF 2.3 billion), trade 
projects (CFAF 1,1 billion) and increasing available 
credit to women in rural areas (CFAF 1 billion). 
 
¶5.  (U) An examination of the budget allocations by 
function (Table 5, para 17) clearly highlights GOS's 
efforts to improve and sustain education and health and 
further the poverty alleviation process by empowering 
local communities.  The Ministry of Education will 
continue to have nearly 40 percent of the operating budget 
at its disposal, 42 percent (CFAF 106.8 billion or USD 194 
million) of which will be spent on personnel costs, while 
devoting 17 percent (CFAF 44.1 billion or USD 81 million) 
to building new classrooms, broadening access to primary 
education, and hiring new teachers. 
 
¶6.  (U) While health spending as a percentage of the 
budget declined somewhat in comparison to 2005, health 
spending remains significant at 10.5 percent of the 
operating budget or CFAF 80.5 billion (USD 146 million), 
which is higher than the nine percent established as a 
benchmark by the World Health Organization.  Twenty six 
percent or CFAF 21.1 billion (USD 38 million) of health 
allocations will be spent on personnel costs, while 34.5 
percent will be used to build hospitals and fund 
additional health workers. 
 
¶7.  (U) The Ministry of Armed Forces' budget allocation 
increased by 18.4 percent, reflecting a 115 percent 
increase in program funding (training exercises, building 
and equipment) and 33 percent in supplies.  Despite these 
increases, the military's share of the operating budget 
remained essentially constant at 9.2 percent due to its 
disengagement from the Casamance region.  The budget for 
the Ministry of Interior also increased by 15.6 percent to 
take into account the preparation of the upcoming 
presidential and legislative elections.  To further the 
decentralization process, the GOS appropriated CFAF 17.4 
billion (USD 32 million) for decentralization.  Justice 
and Environment are the apparent big winners with 
increases of 68 percent and 61 percent in their respective 
budgets.  The increases are largely for personnel and 
investments in the new court house, which is set to open 
in 2007, and deforestation projects.  The Ministry of 
Economy and Finance's budget also went up. 
 
BROADER TAX BASE AND INCREASED REVENUES 
--------------------------------------- 
¶8.  (U) The operating budget, the first of three basic 
components of Senegal's fiscal plan (Table 1) projects 
total general revenues of CFAF 1,344.2 billion (USD 2.44 
billion) in 2006, an increase of 9.3 percent over the 
previous year.  The GOS estimates it can reach this goal 
by increasing tax revenue by 9.1 percent to CFAF 876 
billion (USD 1.5 billion).  The GOS envisions meeting that 
goal through more effective collection of existing taxes 
and a broadening of the tax base, especially of the value 
added tax (VAT).  (COMMENT: Broadening the tax base has 
been an important element of Senegal's IMF Poverty 
 
DAKAR 00000933  003.2 OF 006 
 
 
Reduction and Growth Facility (PRGF) program, to which 
Wade's government is committed.  The Ministry of Finance 
is encouraging the informal sector and property owners to 
register their businesses and pay taxes with the "slogan" 
of one tax paid could contribute to the education of a 
full generation of kids.  END COMMENT.) 
 
¶9.  (U) The budget shows a continued decline in Senegal's 
dependence on duties, which are expected to fall 11.8 
percent in 2006 even as customs collections increase. 
Duties will drop from 16 to 13 percent of total tax 
revenue, despite the planned establishment of import 
duties of 25 percent on palm oil and 15 percent on the 
import of other vegetable oils.  (COMMENT: Discussions are 
ongoing between the World Bank and the GOS as these duties 
are inconsistent with WTO commitments.  END COMMENT.) 
Other indirect taxes such as VAT and consumption taxes are 
set to increase by 13.4 percent, reaching almost 57 
percent of tax revenues.  Despite the 25 percent reduction 
of the corporate income tax, GOS projects that direct 
taxes (e.g. income and corporate taxes) will increase by 
4.2 percent.  Direct taxes still account for less than a 
quarter of tax revenues. 
 
¶10.  (U) Non-tax revenues, which include revenues from 
maritime activities, industrial enterprises, miscellaneous 
services and investments, are expected to decrease by 3.6 
percent in 2006, following the termination of counterpart 
payments for the fishing agreement with the EU (to be 
renegotiated by May 2006).  (COMMENT: The GOS expects to 
revise the 2006 budget to reflect the changes in non-tax 
revenues once the new fishing agreement with the EU is 
signed and once the third cellular telephone 
telecommunications license is sold.  END COMMENT.) 
 
FOREIGN AID REMAINS STABLE OR INCREASES 
--------------------------------------- 
¶11.  (U) In contrast, CFAF 417 billion (USD 758.1 million) 
in external revenue is expected to be collected from 
donors.  Of this amount, CFAF 293.0 billion (USD 532.7 
million) will come from foreign sources to support GOS 
investment program; CFAF 75 billion will come from 
debenture loans; CFAF 37 billion will come from 
multilateral/bilateral programs; and CFAF 12.6 billion 
will derive from budget grants. 
 
¶12.  (U) Foreign assistance is expected to remain stable 
at 22.3 percent (Table 2, para 17) of overall government 
financing in 2006.  The projected need for foreign 
assistance is CFAF 315.0 billion, with CFAF 22 billion to 
cover the financing gap, and CFAF 293 billion for the 
government's investment program.  The Government hopes to 
bridge the CFAF 22 billion gap through a variety of 
bilateral and multilateral grants and loans. 
 
PUBLIC INVESTMENT PLAN DEPENDS ON FOREIGN INVESTMENT 
--------------------------------------------- ------- 
¶13.  (U) For 2006, the government investment plan is set 
at CFAF 613.3 billion (USD 1.13 billion), compared to CFAF 
575.9 billion (USD 1.04 billion) in 2005 -- a 6.4 percent 
increase.  The investment budget assumes that GOS 
resources of CFAF 320.3 billion will be supplemented by 
external financing of CFAF 293.0 billion.  In 2006, 
foreign financing will cover just 48 percent of the 
investment program, with 65 percent as loans and the rest 
as grants.  The 2006 investment program focuses 
particularly on social services infrastructure (roads, 
water, health and education) at 64 percent of total 
investment, followed by the service sector (tourism, 
trade, transport and telecommunications) at 19 percent. 
The primary sector (agriculture) will receive 13 percent, 
and the manufacturing sector (industries and mining) three 
percent of total investment. 
 
BUDGET PART OF A STABLE MACROECONOMIC FRAMEWORK 
--------------------------------------------- -- 
¶14.  (SBU) For 2006, the GOS projects continued stable 
macroeconomic growth with a real GDP growth rate of 5 
percent and an annual inflation rate of 2.5 percent due to 
increases in oil and electricity prices.  Strong private 
 
DAKAR 00000933  004.2 OF 006 
 
 
remittances will help maintain the external current 
account deficit at about 7.6 percent of GDP.  The overall 
fiscal deficit, including grants, is expected to increase 
from 3.5 percent of GDP in 2005 to 4 percent of GDP in 
¶2006.  (COMMENT: The GOS's real GDP growth for 2006 is 
likely to fall short of expectations as the result of 
chronic, long and unscheduled power outages.  Septel 
addresses the energy crisis and its economic implications. 
However, some economists predict that annual GDP growth 
may be as low as three percent -- half of what it was in 
2003-2005.  END COMMENT.) 
 
¶15.  (U) Given its track record of stable macroeconomic 
performance since 1994, and considering its upcoming 
"graduation" from the IMF's PRGF on April 27, 2006, the 
GOS would like to continue its close collaboration with 
the IMF through a non-financial Policy Monitoring 
Arrangement, focusing on accelerated growth, poverty 
reduction and deepening fiscal and financial sector 
reforms. 
 
COMMENT 
------- 
¶16.  (SBU) While most donors view the PMA favorably, the 
French fear that any arrangement that does not include 
benchmarks and strong monitoring from the IMF could lead 
to the collapse of Senegal's macroeconomic stability. 
 
¶17.  (SBU) It is difficult to say whether Senegal has 
successfully implemented its post-HIPC debt relief program 
in alleviating poverty.  According to the second PRGF 
progress report published in June 2005, poverty indices 
demonstrate a reduction from 57 percent to 54 percent 
between 2001 and 2004.  Other key measures to be 
implemented in the short- to medium-term, such as reducing 
the rapid population growth rate and the rate of rural-to- 
urban migration, increasing employment and improving 
credit access in rural areas term remain difficult. 
 
¶18.  (SBU) While donor support will likely be forthcoming 
for this transitional period after its graduation from 
PRGF, Senegal will have to commit to deeper economic 
reforms that will improve its business climate.  This will 
be a particularly challenging assignment with the upcoming 
February 2007 elections.  Pressure will undoubtedly mount 
to ignore difficult economic and social reforms and to 
distinguish between spending on government programs and 
political campaign promises.  Wade's government will be 
put to the test in resisting political interference that, 
in past elections years with the former ruling Socialist 
Party government in power, had a severely negative impact 
on the economy.  END COMMENT. 
 
--------------------------------------- 
TABLE 1: 2006 BUDGET (BILLIONS OF CFAF) 
--------------------------------------- 
                         2006     2005   PCT CHANGE 
                         BUDGET   BUDGET   06-05 
------------------- 
¶I.  ORDINARY BUDGET 
------------------- 
¶A.  Total Revenues     1,344.2    1,229.5   9.3 
 
(1) Internal Revenues    926.5     849.2    9.1 
Direct Tax               226.0     200.0   13.0 
Indirect Taxes           650.0     602.2    7.9 
--Of Which: 
---Trade Tax             120.0     136.2  (11.8) 
---Vat                   508.2     448.0   13.4 
---Stamp/Registration Tax 21.8      18.0   21.1 
Non-tax Revenue           42.4      38.9    9.0 
Extraordinary Revenue      0.1       0.1    0.0 
Other Revenue              8.0       8.0    0.0 
 
(2) External Revenues    417.6     380.3     9.8 
Budget Grants             12.6      29.1   (56.7) 
-Programs                 37.0      10.3   259.2 
Debenture Loan            75.0      74.0     1.3 
Other External Revenues  293.0     266.9     9.7 
 
 
DAKAR 00000933  005.2 OF 006 
 
 
¶B.  Total Expenditures 1,360.6   1,246.6 
 
Ordinary Expenditures    627.8     559.1 
--Of Which: 
---Salaries              266.3     249.3     6.8 
---Other                 361.5     309.8    16.6 
----Subsidies Senelec/Sonacos 
Capital Expenditure      613.3     575.9     6.4 
--Of Which: 
---Internal (GOS)        320.3     309.0     3.6 
---External (Donors)     293.0     266.9     9.7 
Public Debt              119.5     111.6     7.0 
 
------------------------------ 
II.  SPECIAL TREASURY ACCOUNTS 
------------------------------ 
¶A.  Earmarked Revenue     41.7      40.9     1.9 
¶B.  Liabilities 
      And Entitlements    47.2      46.4     1.7 
 
----------------- 
III.  GRAND TOTAL 
----------------- 
¶A.  Revenues           1,385.8   1,270.4     9.0 
¶B.  Expenditures       1,407.8   1,293.0     8.8 
--------------------------------------------- --- 
¶C.  Financing Gap        (22.0)    (22.4) 
 
 
--------------------------------------------- 
TABLE 2: FOREIGN FINANCING (BILLIONS OF CFAF) 
--------------------------------------------- 
                         GRANTS    LOANS     TOTAL 
 
Financing Gap (Table 1)                       22.0 
 
Total Foreign Investment  101.0    191.8     293.0 
 
Total Foreign Financing                      315.0 
 
 
--------------------------------------------- --------- 
TABLE 3: 2006 BUDGET EXPENSE SUMMARY (BILLION OF CFAF) 
--------------------------------------------- --------- 
 
Overall Budget Summary           CFAF    Pct Of Total 
----------------------           ----    ------------ 
 
Operating Expenses               627.8        44.5 
--Of Which: Financing Gap         22.0 
 
Debt Service/Entitlements        166.7        11.8 
Government Capital Investment    320.3        22.7 
Foreign Capital Investment       293.0        21.0 
-----------------------------   ------        ---- 
Total Budget                   1,407.8       100.0 
 
 
--------------------------------------------- ------------ 
TABLE 4: OPERATING EXPENSES BY CATEGORY (BILLIONS OF CFA) 
--------------------------------------------- ------------ 
 
Expense     Ordinary   New        Total     Pct Of 
Category    Expend.    Measures   Expend.    Total 
---------   ---------  --------   --------    ------- 
Personnel   257.1        9.2      266.3       42.4 
Equipment   168.5       28.7      197.2       31.4 
Programs    129.7       34.5      164.2       26.2 
---------   -----       ----      -----       ---- 
Total       555.3       72.4      627.7      100.0 
 
 
--------------------------------------------- -------- 
TABLE 5: 2006 EXPENSES BY MINISTRY (BILLIONS OF CFAF) 
--------------------------------------------- -------- 
 
MINISTRY/FUNCTION     2006    PCT      PCT OF TOTAL 
                     BUDGET  GROWTH     2006   2005 
-----------------    ------  ------     ----   ---- 
Education            250.0     6.0      40.0   42.0 
 
DAKAR 00000933  006.2 OF 006 
 
 
Health                80.5    -9.0      13.0   15.0 
Agriculture          114.6    -3.4      18.2   21.1 
Infrastructure        94.0   -30.0      15.0   24.0 
Armed Forces          77.6    18.3      12.3   11.0 
Interior              41.5    15.6       6.6    6.0 
Foreign Affairs       28.4     0.4       4.5    5.3 
Economy And Finance  109.2    22.4      17.3   16.0 
Decentralization      32.6     7.1       5.1    6.4 
Justice               20.0    68.0       3.1    2.0 
Environment           24.2    61.0       4.0    2.6 
All Others           535.2    23.0      38.0   33.6 
--------------------------------------------- ------- 
Source:  Data summarized by Embassy from GOS budget 
documents. 
 
JACOBS