VZCZCXRO9830
PP RUEHMA RUEHPA
DE RUEHDK #0442/01 1071520
ZNR UUUUU ZZH
P 161520Z APR 08
FM AMEMBASSY DAKAR
TO RUEHC/SECSTATE WASHDC PRIORITY 0330
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/USDOC WASHDC
RUEHLMC/MCC WASHDC
RUEHZK/ECOWAS COLLECTIVE

UNCLAS SECTION 01 OF 03 DAKAR 000442 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EB/IFD, AF/EPS AND AF/W 
PLEASE PASS AID/AFR/SWA AND AFR/WAA 
 
E.O. 12958: N/A 
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 
------- 
¶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 
------------------ 
¶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 
 
DAKAR 00000442  002.2 OF 003 
 
 
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 
------- 
¶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 
 
DAKAR 00000442  003.2 OF 003 
 
 
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