VZCZCXRO5923
PP RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHDK #0105/01 0271326
ZNR UUUUU ZZH
P 271326Z JAN 09
FM AMEMBASSY DAKAR
TO RUEHC/SECSTATE WASHDC PRIORITY 1770
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHLMC/MCC WASHDC
RUEHZO/AFRICAN UNION COLLECTIVE

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. 
 
DAKAR 00000105  002.2 OF 003 
 
 
 
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 
 
DAKAR 00000105  003.2 OF 003 
 
 
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