VZCZCXRO7609
PP RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHDK #1298/01 3151455
ZNR UUUUU ZZH
P 101455Z NOV 08
FM AMEMBASSY DAKAR
TO RUEHC/SECSTATE WASHDC PRIORITY 1411
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHAD/AMEMBASSY ABU DHABI 0073
RUCPDOC/USDOC WASHDC
RUEHLMC/MCC WASHDC
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 03 DAKAR 001298 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EBB/IFD/ODF, A/EPS AND AF/W 
ABU DHABI FOR OTA/GRIFFERTY 
TREASURY FOR RHALL AND DPETERS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV EAID SG
SUBJECT:  IMF MISSION HOPES FOR U.S. SUPPORT ON SENEGAL'S PSI AT 
REVIEW BOARD 
 
REF:  DAKAR 1246 AND PREVIOUS 
 
DAKAR 00001298  001.2 OF 003 
 
 
¶1.  (U) This cable is sensitive but unclassified and should not be 
shared outside of approved USG channels. 
 
¶2.  (SBU) SUMMARY:  Senegal's Policy Support Instrument with the IMF 
faces a critical Board Review and assessment in December.  The 
Mission carrying out the second review of the program has returned 
to Washington and hopes to better understand the USG's likely 
position on maintaining the IMF's current engagement with Senegal. 
Work is continuing on a new memorandum of agreement between the IMF 
and Senegal's Ministry of Finance, but needs to be completed by 
November 30.  Key issues still on the table include verifying the 
current budget gap needing immediate financing to pay arrears to the 
private sector, and also near-term corrective measures to be 
implemented by Finance and Treasury officials.  We would like to see 
a stronger commitment to strict public finance control and 
management from the highest levels of the GOS, but also assess 
tremendous risk to reform efforts should there be any gap in active 
IMF engagement in Senegal.  END SUMMARY. 
 
PERSONAL APPEAL FOR U.S. SUPPORT 
-------------------------------- 
¶3.  (SBU) On three occasions during his latest two-week mission to 
Senegal, the IMF Mission Chief for Senegal's Policy Support 
Instrument (PSI) program Johannes Mueller asked Ambassador Bernicat 
and Econ Counselor for our assessment of the "sense in Washington" 
for continued support for the IMF's engagement with Senegal. 
Mueller was up-front on noting the ongoing difficulties with the 
program, but he also highlighted real progress towards a new 
memorandum of agreement that would include strict conditionality. 
Mueller returned to Washington by November 10, and by November 11 or 
12 will be in discussions with IMF Administrators on this latest 
(the second) program review.  Mueller mentioned that IMF officials 
may want to consult with appropriate Treasury and State officials. 
 
¶4.  (SBU) In brief, Mueller requested USG support for the program 
(or some program) at the December IMF Board review for a number of 
reasons: 
 
-- a failure in the program would be taken as a "slap in the face" 
to the GOS, particularly at this time when the IMF is actively 
helping middle-income countries climb out of financial crisis; 
 
-- a negative review could lead to the dismissal of Finance Minister 
Diop, who is viewed as a knowledgeable and helpful interlocutor, and 
a key player for implementing important public finance reform; 
 
-- any break in an IMF program with Senegal would likely have 
disastrous consequences by allowing continued abuse via 
extra-budgetary spending and would stop the current momentum towards 
improved accountability and reform; 
 
-- the IMF's progress with the Finance Ministry on improving 
Senegal's 2009 budget framework and application could be lost. 
 
IMF, MINFIN STILL WORKING ON A PLAN TO RESCUE SENEGAL'S BUDGET 
--------------------------------------------- 
¶5.  (SBU) At the end of his two-week assessment visit, on November 
7, IMF Mission Chief Johannes Mueller briefed a large assemblage of 
donors on the status of the second review of Senegal's PSI program. 
Earlier in the mission, Mueller and IMF ResRep Alex Segura briefed 
Ambassador Bernicat privately and with a select group of other key 
Chiefs of Mission, both to provide some additional insight into the 
review and negotiations with Finance Minister Abdoulaye Diop, and 
also to ask about the likelihood that Washington and other Capitals 
will continue to support Senegal's program. 
 
¶6.  (SBU) Mueller departed Dakar without a final text for a new 
memorandum of agreement between the GOS and the IMF, but he told the 
donors that additional information should be available in the coming 
week after additional verification of Senegal's internal debt and 
concluding agreement on new "corrective measures."  The report needs 
to be completed no later than November 30 for the IMF Board's 
review.  According to Mueller, the agreement needs to focus on three 
priorities: 
 
-- setting five to ten "immediately needed" corrective measures, 
which will be drawn from the current review and the sixty-plus 
recommendations presented by the recent IMF investigative mission 
(Mueller was not willing to specify what these measures will be). 
[Note:  the Minister of Finance has agreed to share the 
 
DAKAR 00001298  002.2 OF 003 
 
 
investigative mission's report and recommendations with the donors 
who comprise the Public Finance Working Group, who are the donors 
that provide direct budget support and/or technical assistance to 
the Ministry of Finance.  We are not a member of this group, but 
hope to get a copy of the report.  End note]; 
 
-- resolution of some ongoing data collection problems in order to 
verify budget gaps and inappropriate expenditures.  [Note:  the 
IMF's current estimate of Senegal's internal debt is based on 
expenditures from 2008 only.  The IMF hopes to finalize its 
assessment for 2007 within a couple of weeks, and then continue its 
review into Senegal's expenditures from 2005-2006, which admittedly 
could dig up additional fiscal irregularities and debt.  End note]; 
 
-- Senegal needs to have made credible progress on financing its 
budget gap by the end of the year.  Mueller was somewhat vague on 
what this meant exactly, at first saying that Senegal needed to 
complete its financing, but later acknowledging that there is likely 
not enough time to secure new credit and make all necessary payments 
on the arrears owed to the private sector before the end of the 
year. 
 
THE BUDGET GAP IS STILL A MOVING TARGET 
--------------------------------------- 
¶7.  (SBU) Mueller admitted that they may not be able to verify 
exactly how big the 2008 budget gap is, how it evolved, or who is 
owed money.  However, the IMF is apparently focusing on only the 
most critical impacts of the deficit, the debts owed to the private 
sector ("instance du payment").  At the most recent briefing he 
stopped using the term "arrears."  Earlier on November 7, at the 
periodic review of the GOS-Donor Consultative Group process, MinFin 
Diop claimed that the Senegal's internal debt (for purposes of the 
IMF review) was CFA 174 billion (approximately USD 350 million). 
Mueller noted to the Ambassador that he expects the target figure to 
be around CFA 225 billion. 
 
¶8.  (SBU) For his part, President Wade has recently claimed that 
Senegal's internal debt is "only" CFA 130 billion, while business 
associations and the press have fixed on a figure of CFA 300 billion 
(which is reportedly the amount of a loan the government is trying 
to negotiate with France to pay "much of" the private sector 
arrears).  Recently, a former Finance Minister in the Diouf 
administration has claimed the real internal debt is more than CFA 
500 billion.  As reported in reftel, some of our contacts at the 
Ministry of Finance and Treasury have apparently been tasked with 
figuring out how to raise close to CFA 475 billion. 
 
REPORTS AND OPTIONS FOR THE BOARD 
--------------------------------- 
¶9.  (SBU) Mueller was pragmatic in discussing the difficult review 
that will face the IMF board, scheduled for December 18.  There is 
no certainty that the Board will give a positive review.  If a 
negative review is put forth, it would apparently be a first for a 
country under a PSI.  It may be possible that the board will decide 
that the second review was not completed, and then the future of 
Senegal's PSI would rest entirely on the third review, which will 
take place in March, 2009.  There is also the possibility of 
discussing a near-term transition from the PSI to a traditional 
Poverty Reduction and Growth Facility (PRGF), which could perhaps 
include some disbursement of fiscal support (around CFA 30 billion 
was bandied about).  Mueller expressed rightful concern that such a 
shift in program could leave Senegal with no program for a matter of 
months, potentially opening a window for new abuses of the country's 
Treasury. 
 
¶10.  (SBU) According to Mueller, a strong case could be made that 
Senegal meets the criteria for the IMF's new Exogenous Shock 
Facility (ESF) since the country clearly suffered a major budget hit 
with last summer's increases in energy and food prices -- although 
the fiscal shock was exacerbated by the GOS's non-removal of energy 
and food subsidies, a step now almost completed.  There was some 
speculation that Senegal might benefit from around CFA 30 billion is 
assistance under an ESF, but Mueller was clear that no country under 
a PSI has yet been considered for this assistance, and it might not 
be possible. 
 
¶11.  (SBU) In addition, the IMF Board will need to address other 
areas where Senegal has not met its PSI obligations, perhaps calling 
for specific Reports.  These could include admissions by the GOS of 
misreporting fiscal data in 2007, and, perhaps, agreeing to 
non-concessional external financing. 
 
 
DAKAR 00001298  003.2 OF 003 
 
 
MORE NEGATIVE NEWS ON ECONOMIC DATA 
----------------------------------- 
¶12.  (SBU) The impact of the non-payments to the private sector 
continues to drag down Senegal's economic performance.  Mueller 
provided updated, more pessimistic figures for some key indicators. 
The IMF estimates 2008 GDP growth at 3.9 percent (which is still 
better than the GOS's internal estimate of 3 percent), despite an 
estimated 15 percent increase in agriculture production.  In 
addition to the arrears, the continuing underproduction by 
phosphates giant ICS is slowing growth.  Mueller estimates that 
medium term growth should move back to the five percent range (which 
remains well below the target 7-plus GDP growth under the GOS' 
Accelerated Growth Strategy).  2008 inflation will likely register 
at 6.9 percent, but the Mission estimates a drop to 3.3 percent in 
¶2009.  Senegal's balance of payments deficit over the next 12 months 
is estimated at 12-13 percent of GDP.  The country's 2008 budget 
deficit is now estimated at three percent of GDP. 
 
POSITIVE SPIN FOR 2009 
---------------------- 
¶13.  (SBU) Looking forward, Mueller highlighted some positive steps 
being taken as a result of the IMF's engagement.  With IMF 
assistance, the Ministry of Finance finally put forward the 
corrected, revised budget legislation for 2008 ("loi de finance 
rectificative"), which is currently being reviewed in the National 
Assembly.  Also, according to Mueller, Senegal's 2009 budget will 
for the first time fully conform to the IMF-approved macroeconomic 
framework, and should significantly control the discretionary 
spending among line ministries.  The 2009 budget should also 
significantly reign-in investment spending -- which was source of 
much of the extra-budgetary commitments made by ministries and 
agencies in past years. 
 
¶14.  (SBU) Mueller claims that in theory Senegal has a good 
framework and internal control mechanisms available, including 
effective tracking and audit software and systems.  However, more 
work needs to be done, along with additional donor technical 
assistance, in order to better utilize these systems.  He 
underscored that the recommendations presented by the IMF 
investigative team are a good starting point.  A similar team may 
return to Dakar in November 2009, to help the Ministry of Finance 
and the Treasury achieve a "global standard" in public finance 
management and control. 
 
COMMENT 
------- 
¶15.  (SBU) The IMF, and particularly Segura, deserves credit for 
doggedly digging up fiscal irregularities created, and buried, by a 
number of ministries and senior government officials.  However, we 
are not yet convinced that the IMF has discovered all of the budget 
holes or the depth of Senegal's fiscal crisis.  That said, the IMF's 
current focus on the private sector arrears, along with strong 
measures to improve future fiscal accountability is perhaps the best 
course available.  While we would hope to see some effort to enforce 
accountability, and also public statements of determined political 
will from not only the Finance Minister but also President Wade to 
protect the country's public finances, that is likely a goal too 
distracting from the immediate need of getting money into the 
private sector and banks before the economy completely stalls. 
 
¶16.  (SBU) Though serious questions still need to be asked of 
Mueller and Minister Diop on the yet-to-be-finalized memorandum and 
the next steps, we hope that there will be no suspension or gap in 
the IMF's program (PSI or PRGF) with Senegal.  Many of the budget 
manipulation practices that have so greatly impacted the country's 
Treasury were first instigated during the time that Senegal had 
completed its previous PRGF but had not yet signed on to the PSI. 
 
¶17.  (SBU) Apart from the current crisis, there remains much that 
the MinFin needs to institute to bring control back to Senegal's 
public finances:  implementing mechanisms for greater transparency, 
assuring protection against extra-budgetary commitments, slowing the 
continued expansion of "black" budgets at the presidency and some 
other ministries, assuring full conformity to the GOS' own public 
procurement codes, committing to a renewed commitment to proper use 
of HIPC and MLD relief, assuring against high levels of new debt, 
and improving utilization of current fiscal systems.  Technical 
assistance by donors will continue to play a key role. 
 
BERNICAT