senegal stabilization, partial adjustment and stagnation...senegal stabilization, partial adjustment...

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Report No. 11506-SE

SenegalStabilization, Partial Adjustmentand StagnationSeptember 24, 1993

Office of the Chief EconomistAfrica Region

FOR OFFICIAL USE ONLY

M4ICROGRAPHICS

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CFAF/US$

Year AW Averge Had Period

1985 449.3 378.11986 346.3 322.81987 300.5 267.01988 297.9 303.01989 319.0 289.41990 272.3 256.51991 282.1 259.01992 264.7 275.4

FYscal Year for Government of Senegal

July 1 - June 3n = Up to June 30, 1991July 1 - December 31 (18 months) = For FY 1991-92lanuay 1 - December31 = Statting January 1, 1993

Acronyms

AGETlP Agence d'Bxdcution des Travaux d'Inte Public contre to Sous-Emploi (Public Works andEmployment Project)

BCEAO Banque Centre des Etats de l'Afriquc de l'Ouest (West Africa Central Bank)BIAOS Banque Intenationale pour l'Afiique Occidentale - Senegal (Commercial Bank)BICIS Banque Internationale pour le Commerce et l'lndustrie du S6negal (Commercial Bank)BNDS Banque Nationale du Ddvelppenent Sdndgalaise (National Development Bank of Senegal)BSK Banque Senogalo-kowitienne (Commercial Bank)CPA Communaut6 Fmnanciere Africaine (African Financial Community)CNCAS Caiss Nationale de Credit Agricole du Senegal (Agricultural Credit Bank of Senegal)CNTS Confederation Nationale des Travailleurs SdndgalaisCP Contrat-plan (Contrc Plan)CPSP Caise de P uation et de Stabilisation des PrixDIRE DEgation I l'Insertion, a la Rdinsertion et I l'EmploiDRSP DElegation I la R6forme du Secteur ParapublicEFF Extended Fund FacilityESAP Exended Stucurl Adjustment FacilityPSECAL Financial Sector Adjustment LoanIDA Inernational Development AssociationIMF Itmenational Monetary FundNPW Nouvelle Politque IndustrielleODA Official Development AssistanceOED Operations Evaluation DepartmentONCAD Office National de Coopradon et d'Asistance pour Lb DeveloppementPAGD Projet I l'Appui I la Gestion du Ddveloppement (Development Management Project)PAML Medium-Term Econonic and Financial Rehabiliation ProgrmPE(s) Public Enterprisc(s)PPP Policy Fmework PaperPIP Public Investment ProgamPREP Plan Moyen Terme de Redrasemnent Economique et Financier (Medium-tenrm Recovery Plan)QR(s) Quant:tqtive Restriction(s)REER Real Effective Exchange RateSAP Structural Adjustment FacilitySAL Structural Adjustment Loan (Credit)SECAL Sector Adjustent Loan (Credit)SMIG Salaire minimum inatprofessionel gsaanti (Minimum Wage)SOFISEDIT Soci&6 Fmanciere Sdn6galais pour Ic D&vcoppement de lIndustri et du TourismeSPA Special Prgram of AssistanceSSA Sub-Sahan AfricaTSECAL Transport Sector Adjustment LoanUMOA Union Mondtaire Ouest-Africaine (West African Monetary Union)USB Union Sndgalaise de Banque (Commercial Bank)

FOR OMCIAL UE ONLY

kThia ro,iozt ka prpmd bY. MusOpha'Rouls (APRCE, wAih e

Thisreport revie wus eegl' atustet unot psna4r0UoDasc sinc 1980 fua, thifonis fear Sene

dOaUlt*htO4its irst adse progIram. The report da&ahaiyon sevea on the vnous st*Jep8 of h

adj uusoimats. 4.vdo~ents Senegal's paziulryrelatcingt implement.ingm poucyaein,m haszbeens m hised Seneg, alid oes,m wiell Iind moetryandosan irTe Mde, pricing and Aetrade,anfinanci5a 5b setrplces, bteln poody in driprov ted cutry's copetiiveness. Thedeltisrvesw1policy pursued by Senega ha wnot poduced Seve the moes results tageted in

sthe 4yenme' mediumterm s flnanch progsramadPliy Fh ~~ramhewo ~rk Papers Ihed aetlay policyha le~d to severe fsc.ab Pl compression epandcts in pbipnigi

hsreporit areview Snaequaegadm'nstradutiven cpreforhanc sinerl 1980te the yearectSenegalolaunchdits fstradjustmicesant program.ible re portifcuseas oen thrsed varoussteps ofthteiienladjusmet process harodsig tot iplemuen theepceercation adomcrenmicnd setoerea

bez men rixeld. asenearslt,eprshv o performed well oeayadcei, poesicin andux trade, andcomancie agector plcieapiprs, but porlyat inmrvingmethes coutry'st competitienesshe fThedefbliationar plcyhpursed by fasenegagle handos not provdceden the modsts resu lts tageed_

defdlationary policy has led toseverefiscalmpression and cutse i cs ingw

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Theintdcuernaadutmnprcs has no produced thsrbto n a e expcte depreci ations ony n the pofregal

of their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization.

Table of Contents

Executive Summary

I Background and Overview 1

U Dedgn and Impetaon of the Adjustnent Progam 7

A. Macoeconomic Policy and Management 7B. Pricing and Trade Policies 16C. Institutional and Other Policies 25D. Summary 41

m Macroeconomic Outcomes of the Adjustment Program 47

A. Macroeconomic Stabilizaon 48B. The Compedtiveness of te Economy 53C. The Supply Response 56D. Summary S8

IV Seetoral Outcomes of the Adjustment Program 59

A. Agricultura Sector 59B. Industra Sector 62C. Public Enterprises Sector 67D. Social Sectors and Income Distribution 68E. Summary 71

V LAmons Learned and Reo dations 73

BIbliographIy 81

Boxes

1 Lessons Leaned and Recommendations Xl2.1 Framework for MoUtay Policy in UMOA Countaies 122.2 Government Ownersip: Two Differt Approches

to the Revision of the Labor Code 242.3 Senegal vil Sevie Volutary Dqep Program:

A Policy Failure After A Good Start 40

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Executive Summay

Introdudon

1. This study evaluates Senegal's adjustment performance since 1980, theyear Sene_ launched its first adjustment program. In the early years of the decade(1982-85) little structurl adjustment took place and this is referred to as the stabilizationor pre-adjustment period. The second half of the decade witnessed some structuralchanges in the economy, and is refaered to as the period of partal adjustment. Theevz!uation covers the government's reorm program in its entrety, and is not limited toBank-supported lending operations. The report focuses on the variou steps of theadjustment pkocess- from deign to implementation-and on macoeconomic and sectoradjustment impacts. The methodology used to evaluate the impact of adjustment oneconomic performance is the "before and af" approach.

The Financia Crisis and Govermm's Response

2. Senegal is a small, semi-arid Sahelian nation with a population of 7.6milion. It is predominan aly ral with limited naual resource endowments. At thecurrent exchange rate, the 1991 income per capita of US$720 places Senegal at thebottom of the lower-middle-income economies. At independence in 1960, Senegalinheited a relatively well-developed physical and socal infrastructure due to theprominent role Dalar played in the large French West Afrcan colony as a whole.Senegal has enjoyed a high profile in Afican affairs because of its lively democraticsystem and its highly vocal press. This has helped Senegal mobilize substantial exralresources over the years. Seneal has had a long traditon of African socialismnresultg in widespread govenment participation in the real economy and regulatorycontrols of the private sector.

3. In the first two decdes following indepedence (1960-80), Senegal'seconomic perform0c was poor, even by Sub-Saharan Afrca standards. Senegaleerienced the lowest GDP growth rate of any African state not affected by war or civilstrife. GDP grew on average by 2.1% in real tem per anum, compared to apopulation growth rate of 2.8%. In 1981, all key economic indicators reflected seriousfinancal and strucr imbalances: the fiscal deficit stood at 12.5% of GDP (or around10% if interet payments were excluded), the curent account deficit reached 25.7% ofGDP (or about 22%, if interest payments due were excluded), the inflaion Ste soaredto 12%, the tem of trade index dropped by 12% from its 1975 level, savings werenegative, and total consmption exceeded GDP. Te total stock of debt represented overtwo-thirds of GDP and the debt service represented nearly one-fifth of total eWorts.

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4. The need for structul economic changes in Senegal can be traced to theearly years of independence when Senegal lost its lae Fnch West Afrcan makeLKey economic indicators pointed to macrenomic imbalances in as early as 1966, whengroundnut exports suddenly lost their preferential French market and had to compete inthe world market. The ovesized public sector was also characterstic of the Seneeseeconomy at that time. Government was slow to mcognize the need for strucural changes.During the short-lived commodity boom in tfie second half of the 1970s, the governmentresponded by borrowing heavily on commercial terms, extpecing a return to morefavorable terms of trade.

5. In the late 1970s, the government began to recognize the shortcomings ofits ambitious public sector development plans and nationaliaton policies, and inDecember 1979 it announced its medium-tenn recovery plan for 198084. This programsought to staibilize the internal and etal financial situation, raise public savings,increse investment in dte productive sctors, libealize trade, and reduce the state rlein the economy. This first attempt at stabilizing the financial sitation and creating thebasis for growth did not, however, yield atisfcory results because the reforms wereonly partally carried out. Renewed efforts were launched in 1984 with the onizationof the first Consultative Group (CG) meeting for Senegal, and with the financial supportof the donors of the second phase of the adjustment program for 1985-92. Thegovernment's reform effort has been supported since 1980 by six Bank adjustment andsector operations, and by a seies of IB arrangements, including a three-year ExtendedStructural Adjustment Facility (ESAF). A total of five Policy Framework Papers (PFPs)were approved by the Bank and the IMF Boards between 1986 and 1991.

6. Senegal has been a recipint country of the Specal Program of Assistance(SPA) since its establishment in 1988. The adjustnt program in Senegal has beengenerously supported by the donor community, either directly or as co-finciers ofBakMP opeaons. In 1991, Senegal per capita ODA reached US$84 (or 12% ofGDP per capita), over twice the average for SSA. Between 1981 and 1991, budgetarysupo to Senegal accounted for nearly two-thirds of tetal net disbursement of officialdevelopment asitn (ODA) which, in turn, accounted for 4.3% of the total amountreceived by Sub-Sabaran Africa.

Design and equendng of the Rfonm Program

7. The intenal adjusment strategy that Senegal adopted relied on policiesot tan devaluation to restore growth, and internal and external lance. Thesepolicies conisted of deflary monetary and fiscal policies (demand managementpolicies), second-best trade policies (high tariffs and export subsdies), and s lreforms. The laUtter reforms are deigned to lbealize market and prices, reduce the sizeof the public sector and rationaize its activities, and encourage private sector investmentand development. Reospectively, the internal adjustment policy proved to be more andmore difficult and complicated to imp t. This shows clearly the importance of theexchange rate as one of the major adjustment tools. It is not certain that the Senegaleseeconomy could get out of its long recession without a more flexible exchange rate policy.

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Und the internladjutme strategy, if competiivenesst i achieved, it will be &chievedin the fina phe of the adjustment process rater than at the beginning when adepreiation of the red exchange ate is part of the adjustment progrm.

8. Chronologically, the reform pwgam focussed on economic stabiliaton(I.e. reducing the Intnal and extal imbalances and lowering the inflaon rate);agricultul marketng l n; inprovement of public sector management,incuding pubic enterprise and civil service; wage and labor market deegulation;popultion growth, bang ctor uc g; and tasport sector alion. Thesequencing and coheence between these varous components of the reform program havebeen closely montored through the PFP process. Apart from the exchange rate issue,the adjustment program desg would have been comprehensive had the human resourcessector, particduy edu , been fuly addrssed.

9. Notwittanding that the design of the adjustment program componentshas improvd over time as Senegal gined more experience in adjustment, the sequencingOf the rerms has had some setious flaws. The decision to liberae extenal tradebefore esabishing an efective t administratin, eliminatig labor rigidities, andreducing the cost of production, refiects insufEfcient cn given to the sequencingof rforms. Similarly, the decision to proceed with the civil servce departr programbefore establishig a robust datase on wages and civil sermats, and a monitoringsstem, also refects a defciency the sewquencing of reforms. Banking sector reform,although well implemented, should have been carried out earlier had the seventy of thecris been kom. Finally, the pv on of public enterprises ought to have beeninitiated once a good regulatory and incentives framework was in place to encourageprvate so develt.

Gvowwtn Cbmmlte

10. Govenment's comitent to the reform program seems to depend ondtee lky elemets: the degree to which a conseu exist among the various interstgroups, the stength of instion in charge of formlatig and coordating the reformproam, and the nate of the refms thmselves-the more poically and sociallydifficut, the more reluctant government is to fully implementing them. Over timre, thegovernment has teded to more widely consult interest pardes on policy measures andto debate tese mea publicly. A case in point is the revision of the labor codewhi involved exnsive discusons between the government, labor unions andemployer ion, and, more recently, the discussion of the higher education sector.Nowithnding this efot, the involvement of the private sectuor in the design of thereform proam has been far from satsactoy.

11. Th momentum of the goverment's c to the refbrm programseems to have been lost folowing the 1988 elecdon when the technocrats' influence waswealkned as a resut of poliical pressre. During 1986-88, a com team of technocrtswere instumental in the implment of refom. Senegal was leas successful in its

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refrm implementain where vested interest was strong and leaderip was weak Thiswas the case in the agicultual pricing reform program, in the libealization of tie labormarket, and in refomaing higher education. The lack of Weement between thegovernment and the key donors, including the Bank, on the agricultural SECAL, whichhas been under prepaation for over three year., is a good example relectig the pointdiscussed above. To deal with the govemment's weak commitment to the adjustmentpirt-nften, government implemented the reforms in form rather an in

substance-recent adjustment opertions supported by the Bank put heavy e.. phasis onup-front conditionality.

Implementaton of the Rform Program

12. Overall, Senegal's performare in implementing its adjustment programhas been mixed. This evaluation is carrico out by major policy categories and by majorseucors of the economy. Senegal performed well in monetay and credit policy, pricingand trade policy, and financial sectr policy-the latter being an area where Senegal wasone of the first countries in the CFA zone to undertake such a far reaching reform. Twocaveats are in order here. First, the government began in recent years reversing itsimport potecdon policy, and second, govemment was not aggresve in recovring thebking sector bad debts owig to its hesitancy to pursue t arge debtors. Theunfinished financial reform agenda is mainly in monetary policy where there is a needto shift to a market-based system of money and credit management.

13. Senegal's performance has been exceptionally poor in improving thecountry's competitiveness in the world market. The real exchange rate has appreciatedby at least 20% in foreign currency terms during the partal adjustment period, i.e. since1985. The labor market has been only marginally lelized libealization of hiringpraces, and part relauation of the constraints on the use of temporary employmentcontracts). A new draft labor code, which diminates the rigidities in the labor market,has been prepared by government in close consultation with labor unions and theemployers' association but has yet to be enacted into law. As a result of the peristenceof the rigidities in the labor market, labor costs remain a serious impediment toinvestment, growth and competitiveness.

14. On the fiscal front, the government achieved its main objective ofdiminating the budget deficit by 1990, but the situaon reversed soon thereafter. During1986-90, the government imlemented a wide range of tax reforms designed to simplifythe tax struc (namely by introducing a global personal income tax and a single taxon corpoate income), modenized the tax astation system, and mobiLized resourcesby widening the scope of the value-added tax. The government also introducedxeniture control measures, pardcularly in the area of public investment. Govemment

tended, however, to focus on short-term financial considerations, such as reliance onwindfall revenue from petroleum and nce imports and the intoducton of numerous, ad-hoc tax measures ather than on structural issues. Revenue mobiization and resourcealocation were done at the expense of ompetitives and long-term growth, a reflectionof the aeceive preoccupation with the short-term. In expendires, government reduced

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investment (below appropriate levels for replacement) and asocatins to O&M, butproted wages and salaries, thus jeopadizing future growth and employment. In sum,the required fundamental restucturing has not been achieved. The key fiscal reformsleft to be implemented are ngening the t administration, particulaly customs,reducing dependence on rvenues from petoleum, redg the wage bill, controllingtansfe to PEs, and raising investment and O&M.

15. A review of the implementation of the sector reforns also reveals a mixedperformance. The implemenion of the agricture reform program has bees limiitedto the liberalizadon of domestic tade, price decontrols on most comma :s, andelimination of input subsidies. On the other hand, rice import controls remain a majorissue and producer prices for cash crops, namely groundnuts and cotton, continue to haveno direct relation to world prices. Liberaization of the domestic market for mostcommodities has been a necessary, although insufficient conditions to turn agriculturaproduction around. The appreiation of the ral exchange rate and the unfavorable termsof trade for groundut oil and cotton, remain major obstacles to agriculturaldevelomet. A comprehensive reform program addressing the competitiveness of thegrundnuts, cotton, and rice sectors is urgently needed.

16. The implemention of the industrial reform program has been verylimted. What was supposed tohave been a comprehensive and well-sequenced programtuned out to be only y implemented. The policies effectively implemented werethe liblizaion of domestic and international tade, and the decontrol oA most domesticpices. In recent yes, however, government started reversing its trade policy primarilyfor fiscal reasons, but also to protect industry and to compensate for the appreciation ofthe real exchange rate. Crocial reforms such as labor deregulation, improvement in thelegal and dmive environment, reduction in the cost of energy, and export subsidyschemes were not only partly implemeted, but were implemented late in theadjusment process. Among the measures implemented to improve the regulatoryenvironment were the revision of the investment code and the smplification ofinvestmn procedures. The industri program, conceived as a comprehensive reformprogrm, was finally reduced to price and trade liberaliztion.

17. The implemenion of the PE sector reforms has been uneven.Goverment lqidated 21 PEs and privafized, totaly or parily, 26 others, togetherrepreenting 42% of the total number of PBs. These PEs represet only 19% and 11%,repectively in tems of assets and gov ent equity. Divestiture, which is nearlycomplete in the financial sector, is far from being so in the non-financial PEs. Theprogress made in the divestitre program is very recent-th-uart of the PEsprivatized and liquidated, which ransled into about 80% of their assets and govemmentequity have been achieved sice 1989. A total of ten PEs (out of 27 planned) have beenrestructured. And, a total of 24 (out of 44 planned) contact plans and letters ofmission' have been signed between government and selected PEs. The use of contractplas bas imprved transparency and accoulit of the two contracting parties-nota small achievement-but has encountered major problem in its financial implications.On the financial front, the government implemented the refoms in "lette but not in

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spirit.* Te govement rduced direct subsdes to PEs but the benefit of this reformwas deftd when the PBs crtousy sought financing through commercial overdraftsand gSermment guantees This loophole was corectd in 1990 by prohibiting tis typeof fLa_ing; this in tutn was defeatod by te PEs through the accumuladon of arear.Ihe settement of these arre between government and PEs has ben carried out twicein a comprehsive manner and the problem seeu to be slightly less acute now becauseof the introducdon of concurret preventive measures.

18. In the human resources sector (education and health), only a limitednumber of reforms have been implemented. The unfinished reform agenda includes artwu',tion in the imbalances between primary education and higher education, andbetween basic health care and a curtve hedth system. Reforn programs for highereducation and health are currently under active considration by the government.

19. Figure 1 presents the major reforms undertaken during the period 1980-91and those not yet undertaken. Pending reforns needed to inprove the competitivenessand allocation of resources include the depreciation of the nrd exchange rate, theadoptton of indiect instruments of monetary control, the eliminaton of rigidities in thelabor market, the impwvement in the legd and adminive fiamework, and the controlof the wage bill. A com ve reorm program addressing the groundnuts, cotton,and rice subsectors is urgendy needed. Finally, major reforms are also needed todevelop the human capital in Senegal.

Mocroeconomlc Oucms f the A4jw men

20. At best, Sened has acheved mixed macoeconomic results during theadjustment period. It esentiaUy achieved financil stabiization with stagnation of theeconomy-per capita income has registered only a slight increase. Furhermore, evenwhere positive results were achieved, they do not compare favorably with the expecedmodest results of adjustment, as envaged in five consecutive PFPs. Ihe key factorsexpaining this mixed pefmance are the poor refor mplementaion, real exchangerate appreyation, and external shocks (weather conditions and terms of trade).Nonethles, Snegal is now better off than it was in 1981, but it is still faced witipoliy disttons which seriously undemine the country's longer term prospects.

21. By 1990, Senegal eliminated its fiscad deficit (the primay deficit hasalready been eliminated as early as 1980, and cut its exten imbalance by two-tirds

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Flue Is Jliaam.tiMoa Satus ofMor PeRy Rfodbnmsfa Se&pi, 1960.9

80 62 84 *6 8 90 91 1

Fiscal PolicyRationalize tax system XXXXXXXX XXX XXXX Iloprove tax administration XXXx 2Introduce cost recovery 3Control wage bill xIxOXXoXooXX I///I 2loprove pubtic investment programing XX XxI:1x::2111XXui[ 4Reduce PE subsidy 2lmprove debt nanagement XX I 1

Monetary and Financial PoliciesAdopt flexible int. rate & credit policy XXXX IEstablish bank supervison body XXXX 1Restructure the banking sector XX XXI7x JXXXXXXX 1Develop capital market 3Shift to indirect instru. of monetary control 3

Reat Exchange Rate PolicyAdopt deflationary policy 3

Domestic Prices and Trade LiberalizationDecontrol prices XX XXXX XX XlajLiberalize input & cereals output marketing XX XXXXXXXXXXX ib1Reduce fnput subsidy XX XIIIIIIIIXX 1 IEliminate monopolies (special aoreeents) 3Reduce cost of production XXXX 2

Labor Market LiberalizationDeregulate aog setting system 3Deregulate labor market XX XX 2

External Trade LfberalifationEliminate non-tariff restrictions XXXXXXXX /1/U//Il IC/Reduc tariff categories and levels XXXXXXXX I/I/lW 1c/loprove export incentives xx XXXX XXXXI//I 2

PEs Reform ProgramRestructure key enterprises --------- Ilarplement divestiture program XX XX XXXXXXXX 4Rationalize supervision system XXXX XXXX 1Use performance contracts 2

Enablfng Environment ReformSimplify legal & adcin. procedures 3Improve investment incentives XXXX XXXX 1iReform civil service XXXXXX 2

Other reformPopuattfon control XX 2Reform education sector 3Reform health sector 3Reform rice, cotton, & groundnut sectors 3Adopt social safety net measures XXXX xxXX 2

XXC Policy UVISUMaNIGOs. n MIUA261 III Pocy R . I _ .

2 Not oflSc"ny bnplnsttd.Pdos on 14 how eman coonolled. 3- NGt bmpinted.

bl.ice muts mannar oonulebd. 4- Coadnum.Kof Giadual policy revmnld

Souxc: SA Ta S.

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(current account deficit dropped to nearly 8% of GDP). This was achieved throughdemand conmprsson in private consumption,o investmetl, and expenditure on priorityarea. The, intuation rat dropped to leas than 3%, onec-fourth of what it was during thecrisis period. This stabifliztion, particularly in the fiscal area, renains fiagile, andunless additiona strucutua reforms in civil service and tax collections are introduced, itwill not be Nsusaned and may lead to a deterioration in long-team growth of the economyand in the competitveness of Senega. As a result of the lack of significant stucuralreform on the fiscal side, Senegl continues to rely on large petroleum revenues (to thetune of 22% of tax revenue) and large external resources to finace its budgetary deficit.Improemenat in the current accunt was largely due to a sharp decline in prices since1986 for the country's m4jor import items-petroleum products and rice-and to importcompression associated with low investment (at around 13% of GDP) and growth.Export performance has been. erratic with an overal downward trend.

22. Competitiveness of the Senegalese economy has not improved during thepartia adjustment period. The real exchange rate has significantly appreciated and thecost of production has remained high. Furthermore, the frequent changes in tarff andtaxaton policies and the distortions entailed, together with the poor implementation ofexport subsidies, have smnt the wrong signals to an already weakeed and uncompetitiveindustria sector. The Gambias rapid trade liberaliztion, combined with its uniquegeographic location vis-k-vis Senegal, has further exposed the Senegalese mranufacturingseCtor to stiff competition.

23. The averap annual economic growth rate was 3.2 % during the period ofparia stuctural adjustmet (1986-91) compared to 2. 1% in the first half of the decadein relation to population growth rat of 2.9% to 3.2%. This stagntion in per capitaincome shoud be cautiously interpreted given the poor data qualit of national accounts,particularly for the period under paria adjousmet. In spite of its relatively small shaeof GDP?, agricltur, whose promnewas largely determined by weather conditions,continued to have a major impact on overall growth thrugh the multiplier effect on therest of the economy. While there has been some improvement in public investment

progammng,there has been litte diversification in the structure of the economy.Furdthemor, the level of investmnent has dropped to below the minimum level forpreserving existigifratutt assets in Senegal let alone for accelerating growth.

Sectr Outcwome f the Adjusvnent

24. During the partial adjustment period 1986-91, agiutrlproduction(including forestry, livestock and fishery) registered a modest inraeof 2.9% perannum. The increase in production was largely due to favorable weathe conditions inspite of a drop in cultivated land. While there is indication that interna terms of trademay have shifted slightly in favor of agriculture and away from industry, this shift shouldbe interpreted with caution as it is not statstically robust. Production of food cropsincreased faster than cash crops, lagely as a result of an expanson of subsistance

agriultre,interal tradelbrliain and producer price differentials in favor of foodcrops. Because of both good harvests and favorable domestic cereal prices, cereal

ix

imports (rice and wheat) drop dgnificantly during the partal adjustment period. Ona per capita basis, cerel consumption declined by 1.7% annually durin the partialadjustment period. This decline does not however imply a drop in food consumption asSenegal has likely incased fish and vegetable consumption. Indicators of productionincentives and efficiency show st among the ceals, diough millet and maize have aconsideably higher comparative advantage than rice, they have barely adequateprotection to sustain production for local consumption because of RER overvaluation.Far too many resources have been devoted to irrigated rice production, a sector whichhas yet to be sigmficantly reformed. Of the cash crops, cotton had a higher comprativeadvantage than groundnuts but received barely enough protection to maintain production.The prospects of the agrcultunl sctor remain dependent on the real exchange raepolicy, the terms of trade for cash crops, and thie climate conditions.

25. Regarding the manufacng sector, production increased in real termsfaster during the parial adjustment period than during pre-adjustment, owing to a vibrantinformal sector. There has been a supply shift from formal to informal sectors as aresult of trade liberali combined with the lack of progress on the real exchange ratedepreciation, energy cost reduction, and labor and wage libealization. Rigidities in amore liberalized policy environment have led to serious difficulties for large-scale firmsthat had previously benefitted from protection against imports and local competition. Thefew large industries that did well were mining, chemical, and energy-industies thatgenerally were not diretly affected by the reforms. The partial reform progam led tosome of the manufacuring sector. It resulted in both the establishment ofa few new firms-mainly small-scale exporft-rented agro-industries,-and the closing ofnon-performing ones. Small-scale enterprises are more dynamic than medium- or large-scale enterpises. SSEs may have compensated for the decline of large firms in spite ofthe weak demand growth in Senegal since 1986. A substantial share of small firms havemanaged to increase investment, output and profits. Manufactuing firms thatsuccessflly expanded after 1986 were relatively more flexible in changing the output-mix, purchaing new equipment, and adopting an export-oriented strategy. Overall, themanufacturng sector has been party restructured with medium- and large-scaleindustries still operating under ptcion. Partly because of the reversal of tradeliberalization policies, and pardy because of dynamic small-scale enteis, Senegal hasnot experenced a major de-industraization as defined by the rapid shrinking of itsindustrial base-though there has been a shift from the formal to the informal sectr.This shift, however, does not provide a satsfctory bwse for Senegal's long-term growthand employment.

26. The public enterprise sector is now smaller (see para 17) and most liklymore efficient than before the adjustment program. There is some evidence ofimprovement in internal mgement of some PEs as a result of their increased financialautonomy (as in the case of sociWts nationales") and the curtaiment of the role of thesupersoy agencies. For some key enterprises, such as the power company, the portauthority, and the railway authority, there seems to be some improvement in theirfinancial and management performance. However, to provide a definite answer to thequestio of efficiency, more detailed information on individual enterpises is needed.

x

27. Despite sagnant and decning real per capita public extpenditures oneducatlou and health duing the 1980s, pimary education and basic healtfi statw hasslightly improved and regional differences have nanowed. In education, the governmenttrained teacher salarie, allowing more teaches to be hired. Teachers in

administrative postons were re-deloyed and major innovations were introduced inprimary education such as mixed-grd classes and double shifts which allowed moreefficient use of classroms and teachers. In health care a reallocation of resources infavor of pdmary health care, increased private and donor financing, and the increasedeffectiveness of peventive health services contributed to the overall improvement. Itshould be noted, however, that thse achievements in social indicators ae not only poorin comparison with counties at Senegal's level of income but, more importantly,represent short-term gains which camot be sustained given the current pattern and levelof resource allocations to the social sectors.

28. Has Senegal succeeded in reducing poverty and in protecting the mostvulnerable groups of the socety during the reom process in the 1980s? This is adifficult question to answer in the absence of hard data. However, it can be argued thatpoverty may have worsened in Senegal during the 1980s as a result of economicstagnation which, in turn, is a reflecton of the of the intenal adjustment stategy thatSenegal chose to follow. Had Senegal fully implemented its adjustment program,including a substantial RER depreciaton, poverty would most likely have bee reduced.This study has also found that the cost of stabilizaion and partial adjustent has notfillen di onately more on the poor than on other social groups. T.here has beenslight ipvement in the rural-urban terms of trade in favor of the runl sector. Thisis due more to the drop in utban incomes than to increases in nual incomes. Public wageeamers had declining real income over the 1980s, with incomes of the unsilled labordeclining less rapidly than those for skilled labor. Thus there has been a move towardsa less skewed wage income distribution.

29. The impact of adjustment on employment is hard to assess given the scarcity ofdata It is etmated that about 8% of tota employment in the modern sector would havebeen lost since 1986, largely in the modern manu sector and the civil service.Most job losses in manu ing were due to the liquidation of a few companies whichwere bound to be closed with or without adjustment reforms. There is evidence that theloss of employment in the modern sctor was offset by job creation in the informalsector. The social safety net progams have contributed marginally to an increase inemployment.

Lessons Lrned and Recmmendaons

30. IBMTrATMoF INTERNAL ADltSDm . The deflationary policy pursuedby Senegal has not produced even the modest results tageted in the government'smedium-term financial program and PFPs. In retospect, the deflationary policy has ledto severe fiscal ession and cuts in public spending in priodity areas; inadequateadminitative capacity has sevey limited the effectiveness of second-best tradepolicies; and no credible income policy has been pursued. Consequently, the internal

id

adjustment process has not produced the expected depeiatn in e real exchange rateand, as a result, eWorts have not performed well, domesfic industry could not competeagainst cheap imports, and private invesment has at best stgnated. Senegal still needsto achieve a rapid, substantial, and sustained depciation in the real exchange rte.

31. The financial stabilizadon achieved so far is fragile and does not providethe basis for long-term financial equilibria and sustined growth. It has inceasinglyrelied on higher taxation at the exense of competitiveness and has led to a reduction ininvestments, in operations and maintenance expendiu, in expenditure on humanresource development (mainly primary education and health care), and in the provisionof adequate public services-all crucial elements for longer-term growth anddevelopment. The small increase, if any, in per capita income and slightly favorablesocial indicators are essentially modest, short-term achievements which are far frombeing satiscory for a meangful development of Senegal

32. PUBLC SBTR MANAGBNT. This has improved somewhat, butmisallocation of public resources remains a problem. Wages and salaries continue to bedispoportonate with respect to expenditumes on maintenance and operations andinvesment, and unless the size of the civil service wage bill is reduced drastically, thefiscal situation as well as the productivity of the civil service sector will deterioraterpidly.

33. While inter-sector allocations appear satisfactory, intra-sector allocationsrmain a problem in agriculture, education and health. Expenditu on irrigation weremade at the expense of extension and research services, those on higher educaton weremade at the expense of primary education, and those on a health curative system weremade at the expense of preventive health care. Inluding the agricultural sector, wherea proposed goverment sector reform program has been under discussion with the Bankand major donors for the last treeyears, the adjustment process has yet to deal with thesocial sectors -n a more comprehensive manner. Given the scarcity of resources inSenegal, alternative ways for the govemment to deliver social services have to be found.

34. More vigorous state enteprise sector-shrinking is imperative. The recentprogress in privatizing public enterprises in Senegal, which can be attributed to a changein govemment stategy towards being prAgmatic while avoiding the syndrome of 'softbudget,' (e.g. subsidies) should continue vigorously. It is recommended that keycompanies, including the gromdnut processing company and the utlity companies, benext in the privatization pmcess.

35. ADDICION TO BUDwETARY AssisTANCE. Senegal has become addictedto budgetary external assistance which accounts for the posponement of hard economicand social changes such as the doinsizing of the ciil service, the adoption of a newlabor code, and the restructuring of the agricultural rice sector. The lack of realsancdons by donors, including the Bank and the Fund, has been a major factor inSenegal's slow progress in adjustment. Further adjustment support for Senegal should

xii

be selective and conditional on the implementaton of up-front key policy meures.Over ime, extenal asie hould shift back to investment.

36. THE ENARLNG ENVIRONMENT FOR THE PRIVATE SBCTOR. Whilemacroeconomic stabilization and relaitve price reforms are necessary, a healthy busnessenvironment is essential to a quick recovery of private investment and growth. Theenabling environment is determined by the following elements: the degree of certaintyabout government policies, the quality of the legal and regulatory framework, the stateof physical infrastructure, and the efficiency of labor and financial markets. Whileprogress has been made in all four years, only in the financial sector has it been fullysadsfactory. In the case of trade policy and civil service reform, policies were reversedin recent years. The deficiency of the labor market, the civil sevice and the regulatoryenvironment (namely the judiciary system) are the most important areas needing rapidreform.

37. GovE,NmT ComrMENT. For any reform progran to be successfullyimplemented, it must be accompanied by consensus-building efforts among the variousinteres groups. This has not always been the case in Senegal. The government's resolveto take actions agreed under the program has weakened over the years, as the adjustmentprogram became increasingly biting and decision-makers became reluctant to oppose theinterest groups (rligious groups, civil service, labor unions) who stood to lose most fromthe reforms.

38. THE ADJUsTmeNr PRocES Am SEQUENCiNG. This process has provento be more complex than stabilization. The packaging and sequencing of the reformmeasures are as crtical as the policy content of the adjustment program itself. As sutedin paragraph 9, the sequencing of the reforms has been seriously flawed in the areas ofreal exchange rate policy, labor markets, the privatization of PEs, the wage billreduction, and the civil service reform. These flaws could be largely corected if the realexchange rate depreciates, and if the regulatory environment and the institutional capacityimprove.

39. In desiging the adjustment program, it is imperative to take into accountthe longer-term objectve of poverty alleviation and the temporary social costs ofadjustment. In Senegal, this was done on a trial and error basis rather than as part ofthe overall macroeconomic framework. This deficiency was due to lack of infornationabout the people expected to suffer the most from the reforms-a shortcoming which willbe overcotme with fte results of the ongoing household surveys.

40. A summary of the major lessons learned and recommendations is presentedin Box 1.

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Background and Overvew

Introducton

1.1 This study evaluates Senegal's adjusument perfonrance since 1980, theyear Senegal launched its first adjustnent progrm. The evaluation covers thegovenment's reform program in its entirety, and is not limited to Bank-supportedlending opeaions. In reality, given the Bank's long association with structuraladjustament in Senegal, ar- the IMF's long association with stabilization, an evaluationof the government's reform program is almost synonymous to an evaluation of WorldBank/MP adjustment lending operations. The report focuses on the vaious steps of theadjustment process-from design to implementtion (Chapter 2), and on themacroeconomic and sector adjustment impacts (Chapters 3 and 4). Lessons learned fromthe Senegalese adjustnent experience are discussed in Chapter 5. This study is one ofseveral country case studies being prepared by the Africa Region in parallel to theAfrican Adjustment Study currently under preparation by the Policy ResearchDepartment (PRD).

1.2 This report draws on the findings of several recent studis on economicdevelopments in Senegal, particularly those related to the adjustment exience (seeBibliography). Three studies are worth ngling out: *The World Bank and Senegal,1960-87' (1989d); 'Senegal Maeno mic Update Report (1993a); and wenegalPublic Expenditre Review' (1991b).

1.3 The present chapter gives a brief background on the perormance of theSenegalese economy during the period 1960-80. It highlights the oriin of the financialimbalances that led to a serious cisis in the late 1970s, and consequently to the adoptionby the government of the adjustment program for the decade of the 1980s. The 1980sconisted of two distinct sub-periods. The first half of the decade (1980-85) was a periodwhen litle structral adjustment took place, and, for that reason, is referred to as thestabilization or pre-adjustment period. The second half of the decade witnessed someefforts towards the reform of the economy, and is referred to as the period of partidaladjustment (or adjustment for short).

1.4 The methodology used to evaluate the impact of adjustment on economicperformance (n Chapters 3 and 4) is the 'before and after approach. The main flawof this approach is that it relies on the assumption that other things are being held equalwhich is highly implausible. To complement this approach, it is suggested that futurework focus on othr methodologies which have been followed in the literate. The'control group' approach allows, in principle, to overcome the inability of the 'beforeand after apprach to distinguish the dfect of adjustment per se and the effect of otherfactors. It compares the performance in adjusting counties with performance in arefrence group of non-adjusting counties to esimate what would have happened in theadjusting counmtes had adjustment not taken place. The control group approach would

2

be the most appropriate approach for this kdnd of analysis, but the lack of reliable dmeseries data precludes any attempt to quantify the impact of the reforms.

lhe Emic Sening

1.5 Senegal is a small, semi-arid Sahelian nation with a population of 7.6million, predorinny rmal, and with limited natural resource endowments. Themainstays of the traditional economy remain millet cultivation and nomadic cattle ramsingfor domestic consumption, and groundnut cultivation for exports. The modern sectorincludes fisig, phosphates, chemical industres, and tourism, and is concentrated inDakar and on the coastal belt. At the current exchange rate, the 1991 income per capitaof US$720 places Senegal almost at the bottom of the lower-middle-income ecnomies.

1.6 At independence in 1960, Senegal inherited a relatively well-developedphysical and social infrastucture due to the prominent role Dakar played as the capitalof the large French West Afrcan colony. Senegal has enjoyed a high profile in Africanaffairs and has been, until recently, the only Sahelian country with a lively democraticsystem, including a vocal press. This has helped Senegal mobilie substantial externalresources over the years. Seegal has had a long tradition of 'African socialism'resulting in widespread direct government intervention in the economy, and regulatorycontrols. Cultural values still play an important role in social, economic and politicalspheres.

1.7 During the first two decades following independence (1960-80), Senegal'seonomic performance was on the whole poor, even by Sub-Saharan Africa standards(Table 1.1.) GDP grew on average by 2.1% per amum compared to a populationgrowth of 2.8%. Senegal experienced the lowest GDP growth rate of any African statenot affected by war or civil strife. This period can be divided into four distinct sub-periods. Until 1966 when Senegal lost the preferental tment accorded to itsagicdultal exports to the EEC, the economic management was relatively sound and theeonomy grew at about 3.5% p.a., surpasing the population growth rate. Between 1967and 1974 when the world oil price quadrupled, GDP grew by only 1.3% p.a., andgroundnut producton fell by almost half. During this period, Senegal actively pursueda n lion policy and an industrial import-substitution policy. During the thirdperiod, 1974 to 1978, the average GDP growth rate was roughly the same as population,largely explained by favorable weather conditions and a very favorable terms of trade,reldting from higher world prices for phosphate and groundnuts.

1.8 During the fourth period, 1978 to 1981, Senegal experienced two majordroughts together with a substantial fall in groundnut world prices and, corespondingly,a GDP growth rate of 0.8% p.a By the end of this period, aU key economic indicatorsreflected serious financial and st rl imbalances. The fiscal deficit and the currentaccount deficit reached 12.5 % and 25.8% of GDP, respectively. Savings were negadveand total consumption exceeded GDP. The inflation rate soared to 12% and the tennsof tade dropped by 12% between 1975 and 1982. The total stock of debt represented967.4% of GDP and the schedled debt seri represented 18.5% of total ports of GNFS.

3

TWs 1: MUMMAo k&AW 196041

RSWGM"& Rat. (%) shaawefGDlP(

196i70 19M70 19I75-80 1060 1970 198

GDM 2.5 23 1.8 100.0 100.0 100.0GDP par capIta 0.2 .OS -1.0 - - -Prdmay Secmort 3.0 0.9 1.0 24.3 24.1 17.8Export GNY4 0.1 6.0 -0.7 39.6 27.4 32.1Up" of GNPS 0.2 7.4 1.4 40.6 32.0 51.4ODI 1.4 4.4 0.6 15.6 IS.7 12.60Ds 2.1 5.2 -2.8 14.6 11.1 -6.5GovanCOnto 0.8 S.3 5.8 17.3 14.9 20.4PMAW Corpti o 3.0 2.6 2.7 68.1 74.0 863

tnflatlonte (GDP deflor) ... 7.4 9.1 ...REER (198S-100) ... 5.6 -3.2 ...Fbcal defict bl ... ... ... ... -0.6 -12.SCurmnaocouJt dieict e/ ... ... ... ... 410.4 -25.8Debt vice scheduled ... ... ... ... IA 7.4

ai Inluding aqlcul, Uveac fatry ad fierqbI On a c - bais A and ecluding ra8c/xludn officiltanfr-Ekiber not railal or not aplicble

Soue: World D data Sfl ad aff e_mes.

1.9 The need for strucural economic c in Senegal can be traced to the earlyyears of independence when Senegal lost its large French West African market, andended up with oversized industies and public sector. The key economic indicapointed to macroeconomic imbalances as early as 1966, when groundnut epot suddenlylost their guaranteed French market and had to compete in the world marlkts.Government was slow to recognie the need for strucual changes. To make materworse, the government responded to the short-lived commodity boom in the early yearsof the second half of the 1970s by borowing heavily from foreign commci banks inexpectaton of a return to more favorable terms of trade. The 1987 Country EconomicMemorandum observes that wadjustment became unavoidable at the end of the 1970s,when a combination of poor financial and investment policies, woened terms of tradeand successive droughts plunged an aleady weakned economy into a severe crisis.0

The Goverwn a's Response to die Financi Cisis

1.10 In the late 1970s, the govemment began to recognize the sotcomings of itsambitious public sector development plans and na lion policies and in December1979, it announced its medium-term program for economic and financial adjustment,

4

known by its French acronym PREP (Plan a moyen terme de redressement economiqueet financier), covering the perod 1980-84. This program was designed in closecollaboration with the Bank and the Fund and sought to stabilize the financial situation,raise public savings, increase investment in the productive sectors, liberalize trade, andreduce the state role in the economy. This first attempt at stabilizing the financialsituation and creating the basis for growth did not, however, yield satisfactory resultsbecause of lack of implementation of agreed adjustment measures. The IMP three-yearExtended Fund Facility (EEF) arrangement, which was approved in August 1980, wasshifted to a simple one-year stand-by a year later, which in turn was canceled in 1983.Something similar happened to the Bank's first structual adjustment loan-it wasapproved in 1980, but its second tranche was cancelled in 1983.

1.11 Renewed efforts were launched in 1984 with the same broad policy objectives inmind. The first meeting of a Consultative Group (CO) for Senegal was organized by theBank in December 1984, after which Senegal prepared a medium-term adjustmentprogram for the period 1985-92 which was endorsed by the donors. This was followedby a second CG organized in 1987. The government's adjustment effort has beensupported since 1980 by four Bank SALs (1980, 1986, 1987, and 1990) and twoSECALs (financial sector in 1989, and transport sector in 1991), and by a series of IMParrangements (EFF in 1980, followed by five standbys, a two-year SAP and a three-yearESAF). Senegal, along with Kenya and Turkey were the first countries to receive anadjustment credit or loan from the Bank. A total of five Policy Framework Papers(PFPs) were approved by the Bank and IS Boards between 1986-91. Senegal has beena recipient country of the Special Program of Assistance since its establishment in 1988.The adjustment program in Senegal has been generously supported by the donorcommunity, either directly or as co-financiers of Bank opeaions. Between 1981 and1991, adjustment support to Senegal accounted for nearly two-thirds of total netdisbursement of official development assistance (ODA) which, in tun, represented 4.3%of the total amount received by Sub-Saharan Africa. This contrasts well with the smallweight of Senegal in SSA as measured by the shares of its population (1.5%) and grossnational product (GNP) (0.3%). In 1991, net aid flows per capita to Senegal amountedto US$84 or 12% of GDP per capita.

Senegal Database

1.12 The analysis of Senegal's economic performance is complicated by significantweaknesses in the country's databas. The recent Macroeconomic Update Report (1993a)points out that official s.tastics are paricularly weak. Senegal's national incomeaccounts sistics continue to experience long delays in publication. Some evidence forthe poor data quality are presenied here. There are unexplained discrepancies betweenthe performance of agriculture and industry as measured by crop output or productionindices and the national accounts figures. The composition of sectoral output raisesserious concern. The tertiry sector in Senegal accounts for over 60% of GDP, a figuremore likey to be found in industal economies than in developing countries, particularlyat Senegal's level of development, which ranges from 35% to 50%. As much as 40%

5

of total GDP b on exralions of data obtained from old baseline surveys.Finally, agie's cotribution to nominal GDP seems to be overestated due to thepactie of valuing local coare gains at official prices while official purchases accoutfor less tha 10% of total output Senegal's balas.ce of payments data, parcularly dataon mradi exports, as show major siortcomings. Consequenty, th figumunderlying the analysis in this report awe peliminary esmat and may be subject tosgnifict alteations. This challenges the accuracy of Senegal's actal economicpeomance, which may in fact be much lower than the official figures.

2

Design and Implementaion of the Adjustment Program

2.1 This chapter 1' deals with te desin and implementation of policy reforms inSenegal during the 1980s. The intnal adjusment stgy that Senegal adopted rliedon policies othe ta exchange rate adjustment to restore growth and internal andexternal balance. These policies consed of dexlationr monetary and fisc poliies(demnad management policies), second-best trade policies igh tariffs and exortsubsidies), and structual refonns. The latter reforms ae designed to liberalize marketsand prices, reduca the size of te public sector and rationalize its activities, andencourage private sector investment and development. Retrospectively, the interaladju*ement policy proved to be more and more difficult and complicated to implement.This shows clearly the importance of the exchange rate as one of the major adjustmenttools. It is not certain that the Senegales economy could get out of its long recessionwthout a more fleible exchange rate poLicy. Under the intemal adjustment strategy,If competitivene is achieved, it will be achieved in the final phase of the adjustmentprocess rather than at the beginning when a depreciation of the real exchange rate is partof the adjustment program.

2.2 This chapter is organized in four sections. Section one covers fiscal, monetaryand exchange rate policies; secton two covers pridng and trade polices as well as laborand wage policy; and section three covers key sectors in the economy (financial, publicentepises and social sectors) as well as the institutional and legal frameworl Finally,sectn four provides a summary assesment of the adequacy of the reform program inSenegal in terms of ooverage and sequncing, and the progress made in implementation.

A. Macroeconomic Policy and Management

Fisca Poliy and M

hntr"oduct ki

2.3 As in most countries undergoing adjustment programs, fiscal policy was used inSenegal as a primary insument for reducing aggrgate demand and conecting majordisequilbria in the economy. The frmework for fiscal policy in Senegal is, however,affected by several facts which not only complicate the design of the refonn program

jI A longer version of this chaptr make up the enir report wrien by tbio author wi& coauthor Brian Ngoentitled Mesig and of Adjusmeat Pograms in SenegaL.

8

but also render the assessment of the peface more intricate. Some of these factorsare spedfic to Senel; others are reated to the nles that rguate fiscal and monetarypoUces within the West Afican Monetary Union (mown by its French aconym UMOA)of which Senegal Ii a member.

2.4 Becs. Senpl belongs to UMOA-which among other tins regulatesthe money suply by a4ustng crits-Senegal has relied on fiscal policy for its

I4ustmmt effort. While the French Tresury's "operations accounte provide UMOAcountries the 8une of fincing balce of payments shortfa, safeguard featuridopted by the Banque Cetae des Ea de l'Afrdque de l'Ouest (BCEAO) (the regionalcental bank) to prvent monetary expansion impose a statutory act wherby themaximum level of BCEAO advances to the Senegalese Govemment may not exceed 20%of the previous year's ordinary budgetary receipts. While there are several sources ofleakge to this overdraft rule, the rule does impose a limit on the financing ofgovment deficits from the central bank. Thus, while Senegal's membership in UMOAmay help limit th reat dof inflaton, the system is prone to liquidity ctises.

2.S The stcu of the public sctor in Senegal further complicates theman_gement of public finances. In addition to the consolidated central governmentoperains, the Treasuy maintains divers specia and corespodent accounts. Untilchanges intoduced in July 1991, these accounts were not int into the budget andwe not subjected to normal budgetauy procedures. Thus, the lack of effective controlon these accounts could cause large yearly variations in the Treasury's liabilities vis-i-visthese accounts. The design and management of fiscal policy was also more complexbecause of the close assocation of key fiscal measures with the industrial policy,parcularly those related tf tariff reforms and production costs.

2.6 Some of the policy conflicts reflect the constant prccpation with theshort-tum and, to some extent, a conflict of objecdt among donors, particularlybtwen t DIP, wbih gave p to issues of stabiliztion and thus theoverwheing cono about rvue mobilizmon at tbe exense of growth promotion,and W od k which put geater empha on longer-term issues such as reducingtbe costg k inpu and th corpt tax e. Also large inflows of official assistancefom m l agen and bilate donors (Prance in partcular) made it possible forSenegal to postpone "hard-budget" choices (see paras 3.10 and 3.11).

Desgn of the Rgfbnn Prgram

2.7 The reform of fiscal policy in Senegal covers a broad range of objectives,the most im ant of which is to inWoe govemmm nces. Senegal began thedecade of the 1980s with in ovUrall budget deft (on a payment order basis andeluing grat) of 12.5% of GDP (dmary defict of about 10% of GDP) and a totalpublic aedture of about 32% of GDP. The civil ce wage bill, by far the largestepedtre item. accounted for 40% of total ependi. A key fiscal objective wasto nance the buoyany of the tax ytem to increase revenue. Following the

of an ItP fiscal mission which visited Senegal in May 1985, the

9

government adopted a fiscal reform program aimed at modernizing the tax system,creating a more effective and less distord tax regime, and widening the tax basn.

2.8 The government also pursued a restricted expenditure policy. Itrecognized the need for a two-pronged approach-to control the wage bill and to limittransfers to the Public Ent:prise (PE) sector. Measures were takm to contain the wagebifl either within a ceiling or as a share of total expenditures, and to reduce the numberof civil servants. These measures (such as the avoidance of general salary mereases andthe limitation of advancements and promotions of civil servants) were mostly ad-hoc innature and not until 1990 did the government adopt a coherent civil service progam (seepam 2.85). Another important component of the fiscal reform was to improve thefinancil performane of public enterprises so as to reduce the budgetary burden of thatsector and to increase the sector's efficiency (see para 2.69). With a few exceptions(road maintenance and primary school teachers recruitment under SAL IV), no specificmeasures to protect key social sectors, to provide adequate exenditures on opetionsand mainteance, and to protect a core public investment program were built into thereform program.

2.9 Another important objective of the fiscal reform progam was to improvete pubikc inwesment program (PIP) by adopting a thre-year urollingw PIP. This wasdone in 1986 and has since ben updated on a yearly basis. The objectives of the PEPreform package were to: make investment projects consistent with the macoeconomicfamework and sectorial priorities; improve project prepation and appraisal; monitorsystemadcally the physical and financial aspects of project implementation; incorporatethe investment budget into the government's overall budget (keeng recurrent cost andindbtedness implications in mind); and strengthen technical ministries' capcity toidentify, prepare, and monitor their respective projects.

2.10 The third fiscal objective was to improve the extenal debt managementsystem. A computeaized debt management system was established with IDA-financedtchnical assistance to provide data on outstanJing debt, arrears, and scheduled debtevice and to issue computerized payment orders. To improve the strre of its

exnal debt, the government also implemented several measures to discontinuecommercial borowing, curtail public guarantee to private borrowers, and stop thetansfer of proceeds from debt relief negotiated by the government to the final borrowers.

implmeadon of the Rform Program

2.11 The implementation of the fiscal reforms varied across policy areas. Since1986, the government has initiated wide-ranging tax reforns. A general tax code wasintroduced in early 1987 aimed at changing specific dties to an ad-valorem basis, andwidening the scope of the value-added tax (VAI) to trzde and constrution sectors. TheVAT was genelized to sevices and the transport sector in 1991 and VAT rates worerevised to simplify and reduce the rate structure. Refrms of foreign trade taxatioi,included simplifying the tariff struct-c annd the lifting of QRs (see pam 2.29). InSeptember 1989, the govemment instituted a withholding tax on professonal and

10

propety income, a glob tax on personal income-replacing a variety of sctedular taxes,and, in Januay 1990, it placed a single tax of 35% on corporate income. Another effortto widen the tax base consisted of corapledng the fiscal cadastre for the Dakr region;follow-up meases to institute the tAx have, however, suffered much delay. Finally,efforts were continuing to be made to raise tax revenue fiom the informal sector.

2.12 In parallel to reforms aimed at modenizing the tax system, sevel othermeasures were introduced to mobilize additional revenue. , The design andimplementaton of this plethora of new measures was particularly taxing to the- limitedadministrave capacity and the government tended to focus efforts on short-termconsideions rather tan on structural issues. The new measures also resulted inadditionaldistortions to an already ratier elaborate tax system. The predominance ofshort-term revenue considerations over longer-term growth promotion measures haveprevented a meaningful reduction in the energy cost and the sustainability of the customtariff harmoniztion and reduction.

2.13 The implementadon of measures aimed at reducing the size of the civilsevice and controlling the wage bill encountered serious slippages (see pam 2.86) andas a resdt the wage bill st represented the lion share of government revenues andrecurnt expenditures. The lack of significant progress in the control of transfers (directand indirect subsidies) to the PEs reflects the complex situafon in this sector and the lackOf commitment of those in chwge of the reform to undertake politically sensitivedecons to reduce the amount of transfers from the budget to this sector (see pam2.74).

2.14 Management of the PIP has improved, particularly in eliminating conflictsbetween capital investment and sector strategies. Prtects are also generally betterprepared. Institutional capacity buiding must continue to be strengthened or elseprogress achieved so far will be iheatened. To do this, the cpacity of technicalmisties to identify and prepare projects in their respective sectors must be strengthenedand coordination between services in charge of the PIP and Treasury staff enhanced sothat recurrent cost and debt implications of the PIP are clearly reflected in the budget.Without this coordination, there is a high risk of insufficient allocation of operatons andmaintenance for new projects and, consequently, poor project economic rates of retun.

21 /iorwt maae introduced in the lat three Yas include: Oi a S percent ine in coms duty tax(Au 1989); (0) the Intrduction of minimum assosed tan imports (September 1989) and their extnionto a much largr group of commodite (July 1990); ( an increase in a number of stamp duties (by between50 and 100 percent) and an nreaed excise tax on cigaettes, alcoholic beverages, tobacco products, softdrinks, coffee, and tea (August 1990); (v) an inoduction of an ad-valoem toms fee of 3 percen (August199I) (v) a reduction of deferrd customs payments (1990.91); (vi) an Ireaso in personal income tax ratesby S pret (Ocber 1990) wAich was later rescinded becae of strng polica resitnco; (vii) an incrsein raes and covee of stamp t and fees (August 1990); (viii) the inrduction of a tax on sugar (March1991); ( tho tion of a transaction fee of S pe¶cent on sales of used motor vehicles and of 2 percent fornw vebicles Mach 1991).

11

2.15 As discussed in Chapter 3, the financi position of the governmentimproved duing the 1980s, though not without serious problems left to be resolved.Poor tax adminion was magnified by the need to design and implement numerousnew taxes within a short time perod. Equally important, the decision to proceed withthe liberzaion of the economy before the establishment of an effective taxadministration and before subiliaion results were conolidated reflect insufficientconsiderion given to the sequencing of the reform program. Oter reform measureshave seen their impt drastically reduced because of poor implementation. For instance,efforts to combat under-invoicing through computeized customs declaration have so faryielded few significant results because concrete efforts to improve the funcioning of thevalue assessment section, without which under-invoicing remains mostly undetected, havenot been rigorously undertakn. Recent experience with the Societe general. desurveilance offer some hope for improving customs receipts. Deficiencies in revenuemobilization and in controlling the wage bill affected the other expenditue items whichfiurther undermined the success of fiscal adjustment.

Monetay Policy

Design of Monetary Policy

2.16 Within the institutional framework described in Box 2.1, Senegal'smonetary policy aims at three objectives: to manage overall demand to correct extnalimbalances; to gain a competitive advantage by keeping the level of inflation below thatof major trading partners; and to strengthen the management of liquidity and reinforcebank supervision. While the first two objectives mentioned above were achieved mainlythrough restrictive credit policies, a more comprehensive set of measures was undertakenin the banldng sector including the introduction of market-detemined interest rates.

2.17 In September 1989, Senegal adopted, with other members of the UMOA,a comprehensive reform of monetary policy instruments designed to replace theadministive controls over money and credit with an indirect and market-orientedsystem of monetary instruments. In particular.

(a) the preferential rediscout rate was abolished; the centralbank's refinancing rate was set above the money marketrates-at levels slighy gher tan those for the Frenchfranc-and bank were given more flexibility indetermining their rates on deposits and loans;

(b) conditions for acce to centr bank rinancing weretightened and crop credit will be refinanced by the centralbank only if it is within general refinancing limits andunder the overall credit ceiling of the commercial bank;

(c) rigorous controls were placed upon state guarAntees forborrowing of public and private enteprises. Government-

12

guaranteed non-performing loans will be Imputed to theoverall credit ceiling set for the government;

(d) the system of secoral credit allocatn was elimnted andprior autoization will be used only as qualitative creditcontrol instrument; and

(e) the BCEAO's bank inspection and supervision were sharplyreinforced with the creation of the union-wide banksupeMision body (Comssion banWcaire).

u gu l a8t 4E t&Nf N, Gu Na Ibj Dls.~ 19ZVO

S E !~~~~~~g . .... . .

~~~~~~~~~~~~~~~~~~~~~~~~~~~. .. g .. .. .

4qatoIV*EeN o$tD m4Sofb E>o~a

- !;~ 4as'~~aq

13

2.18 In a subsequent phase of reforms, the introducdon of reserve sis envisaged. Duing the transition period, the conduct of monetary and credit poicywill contnue to rely maily on intre te policy and overall credit ceilings.

Implemetadon Of dX RfornM Progr8m

2.19 The heavy involvement of the BCEAO, and the need to re-etablishconfidence in the banking sector, after the ailing banks were liquidated, led to a forefuland timely implementaton of monetary and credit policy reform. With minordiffeences, most of these reforms applied to all members of the union, thus givin moreimpotance to their implementation. The reforms have led to a sounder environmentwhere government interference in the proces of credit allocation is limited. Thegovernment's reliance on bowng from the bankng sector has been cured due tostricter controls on government's borwing tough sate-owned entepris.

2.20 The BCEAO's adherence to a restictive monetary policy in the Last fewyears has improved Senegal's extra accounts. a This policy has, however, severelycons*tained domestic credit to the rest of the economy. During 1986-91, crdit to thenon-government sector (excluding crop credit and the refinancing of ONCAD debt)increased on average by only 0.7% per year (in terms of money supply at the begininof the year); in real tms it declined substantially. The money supply (M2) has folbweda similar trend although the decline has been less severe. As a result of these trends, theratio of M2 to GDP which measures the degee of fnancial deepeniq has fallen from0.28 in 1984 to 0.23 in 1991 (see Table 2.1).

2.21 The BCEAO polic appeared, in the context of the fixed exage rate,appropriate to maintain a ssaiable external position, particularly given the lack ofsuccess in contrling the fiscal situation. it is questionable that this policy can bemaintained without an adverse impact on the growth of the economy. This issue will

at n view of its sianc in ft dermInato of money and credit policy, dveopment of Segl's otexterna poston warrants a brief descit at this Jure. h oxternal at positio boga to saIlie n1989 following wide flucuon expienced durt 1983488 ac cout of a mared Ih theexternl curmt acount betwe 1983 nd 1985, folowed by sinfat privat capil outhowi 1987 nd1988. As a result, Senel's egav position In t operations account rubed a peak of CPA? 97.2 blinin Jun 1986. The ddetioration of Senga's eral acounts tbrough 1985 smmed from high Im t, adirect refction of fte hig lvol of ovell demand. A stgficat improvement in th exteral acco bein 1986.

Mst of ths improvemet ca be atrbuted to the pursuit of strict mneary polcy. Tbefiscal situato,which improved significantly from 1982 through 1987, worsened during the peod 19870. As hw inTable 2.1, BCEAO's nt oims on the Govermen declned shaply 1 1987. Teso d.vel fnt reflet dheavailability of lager extl budgetary asistace In support of the country's strctua a4stment program.The was o evidence of efforts to reduce net leding to the govenment, irrepecv of th dstatu oyldefined in the BCEAO's ro and regulons which mits total advances to theo Goem t to 20 perc offical revesaus collwcted h tho previous year. This development was even mao nlo if oe ca0sa thoseries of measures desgned to curta government borrwig via the proviion of guammos for borrwing bypubli entep from the banin sector.

14

Tabb 21: Sumaof Monday Indicaor(Annal cho I % uept MGDP)

Cred to Mono NOnalr RualOYer GvRnem /g Ecoomy I (M2) Ig GD?P M4/ODP

1984 5.5 2.0 5.2 8.1 0.281985 7.5 8.6 4.5 13.4 0.261986 1.6 1.3 11.2 12.S 0.261987 -1.7 3.5 0.2 6.1 0.241988 2.3 9.6 0.5 7.3 0.231989 -7.2 1.3 10.3 0.1 0.251990 -5.2 8.6 -4.8 7.0 0.221991 0.6 -4.3 5.8 2.5 0.23

It Change in p_erntag of the money ulmf;y at the begining of the peiod.

Source: Senegal - Mwacmwonomic Update Report (SA Table 48), June 1993.

be discussed in more detail in the next secdon of tis rep. The policies have also beensuccessful in controlling fte rate of domestic inflation which has stabilized at below 3%in recet years. Better control of inflation has helped Senegal recover a cerin degreeof competitiveness.

2.22 One of the results of the monety and credit sector reform has been thelibealiztion of the interest stcte. By eliminating the preferntial discount rat-which formerly applhed to agriculture, the eot sector, small- and medium-sizedcompanies and residential constrction-and the libealiation of margins andcommissions, lending rates for prime borrowers curntly stand at 16% to 18% while theinflaton rate remains at less than 3%. Banks' lending continues to reflect the prefeenceof short-term trade-related activities at the expense of longer-term investment projects,thereby undermining the growth prspects of the economy. Between 1985 and 1991, theshare of short-term lending increased from 60% to 67% of cumulative bank lending,while loans to industial proects have fallen from 22% to less than 15%.

2.23 The conduct of monety and credit policy in Senegal has been desinedand implemented in a firm, timely and consstent manner. These measures have helpedin keeping infladon low, curtailing overall domestic demand, providing the basis for amore robust banking sector and restictng government intervention in the allocation ofcredit. They have not, however, succeeded in creating tie foundadons for sainablegrowth.

IS

-_ UME

.-ea.w of t 1A.%A, SecgaJ has enjoyed, since 1948, a convertible4 -' M t fa p *ith thec Frnc h frac (CFAF 50 per French franc).

4^ >.a.. > . 4.ULV s AZtu t smpkru and transferability of capital. The.. **. ,, +., ,> ; s- S rnA& biiils duwn t an implicit effort to depreciate the

1e4&49 fS~44 #w , 4U M*Aftf WOM-CU

-'t -^v4m t 9dn, Senegal has witnssd a swing in its terms.i .,;-cA -,... £ . r. d h..h infUitary rtes and low productivity gains.

*} 1t~' ii .+: *+t .2--iv ; < i mir by 4.5% per year compared to Senegal's." 'L .s ; *-- 2* t ->< , eclrwxI vsnce. This development, together with

z$48 J :> . ^$.&, t XfN..< utof nonCFA neighboring countries and the>', .A- .f. l, ' _' W¶, htc ,+i 46a, eicvcrely eroded Senegal's competitiveness

%"$V UA tflwt V."&~ Ra3 JIM - 100)

T;m oxf Rrim.e 8awe 'GDP)

-5.2-14.5

4 ;,.-19.3.4.4+ r: u -12.3

-12.3.4Ly .* % 9.5

-11.2

IA s 8 t .8 -5.6)ts 44 1 ls -5.0

V<i- I s S i X -5.2-4.7

£4 IA .4.9

.... . .... o. _ ... I - .zhat" defu. byiw -S *,-. . .. .,W..CAgo .,, 4*AW.g&4is iJO.& &s- r Sea s .w 20 awe imota nt Imdiztg

16

2.26 The movement in the real ecffeve exchange rate (EER), a commonlyused measure of compedtivenesss, h that, in the 1980s, while the competitivenessof other developing countries (SSA, Lati America, heavily-indebted middle-incomecounties) was improving, that of the CFA zone, including Senegal, was actallyworsening despite implementaton of intnal adjustment progams. Table 2.2 indicatesthat the REER has depreciated (in foreig currency tems) by 14% during 1980-84 andthen preciated by 20% during 1985-91. The appreciation of the REER during thesecond half of the 1980s is due to the appreciation of the French franc vis4-vis the U.S.dollar and the Naira. The real exchange rate vis-k-vis Ghana, Nigeria and China, againstwhich Senegal has to compete on export markets, have substandally arat,paicularly since 1985. v'

Real Exchange Rate and Balance of Payments

2.27 The reationship between the real exchange rate and the trade ba e, canbe observed in Table 2.2. In Sbenea, while the REER appreciaed by 20% between1985 and 1991, the trade baance had improved by 6 percentage points of GDP. Acloserlook atthe disaggpgated data provides an explanaonin ine withtheory. ITheimprovement in the btade balance was due to a drop in exports by nearly 5 percentagepoints of GDP in line with expectations, and a drop in official imports by 1 percentagepoints of GDP. The latter was a direct result of drastic cuts in public expenditreprograms, partcularly investment, and low growth.

B. Pricing wad Trade Policies

Internaional Trade Reform

Background

2.28 The stategy for industral development in Senegal had historically concentatedon import substitution, with the exception of a few industries engaged in exports of fish,phosphates and groundnuts. This strtegy had reached its limitation by mid-1980s, andhad, because of the underlying policy of high import protection, discouraged thedevelopment of exr and encouraged frauduent imports. Untl the refoms whichbegan in 1986, import protection was carried out using extensively non-tariff restions(quandtative restrictions (QRs), monopolies, prior inor authtion) and high and

/ Conmtitiveness is mesurd by the movement of reve prices. k is becoming increaingly obvious,particularly from the expe of the newly idustriizd economies, hat no simple definition ofcompetitivenesswould suffice. Thecmpevenssofan economyisnotjustatfunctoof itswgesandpri¢es(relative to other countris), but also greatly influenced by non-price fawtors in a changing and increasiyintegrated world. These factoes include the ability to absorb, use and develop techndogy to reduce productioncots8, improve product quality, and innovate new Products; and maket sgy and oarrngements coveigwch diverse ficts as pacAgig, sales netwo and after-sales service.

! World Bank (1992d), p. 42, Table 3.3.

17

uneven nominal tariffs. To improve the compedtiveness of the industrial sector, thegovernment embarked in 1986, as part of a comprehensive industral reform progm onthe rationaliation and libealizaion of its tWade policy.

Design of the Refonn Program

2.29 The trade reform program, whose objective was to harmonize effectiveprotcon, was designed to be implemented over a two-year period (July 1986-July 1988)ira the following sequence. In 1986, govemment decided to (a) freeze the number ofproducts subject to quotas, (b) eliminate QRs for a list of goods not produced in Senegaland for categories of goods of one sub-sector, (c) reduce import duties for 15 groups ofproducts (from 90% to 65%), and (d) strengthen the export subsidy and drawbackschemes, thus ensuring equivalent incentives across manufacturing sectors. In 1987, thegovernment decided to (a) eliminate most QRs as well as all reference prices (valeursmerwaks), except in cases where under-invoicing or dumping practices werecommonly observed, (b) narrow further the tadff rates band, and (c) strengthen furtherthe key institutions dealing with industral exports through the restrcturing of the exportinsurance agency and the center for external trade. The main objective of these refonnswas to reduce the excessive tariff protection and to consolidate the tariff structure withina limited band (consisting of four customs duty rates).

2.30 Contay to the experience in non-CFA countries, the removal of QRs wasnot followed immediately by high tariffs, because the protection level in Senegal wasalready high enough and any additional increase would only intesify the degree of fraud,given the peculiar geographic locadon of The Gambia. This being said, it can still beargued that the sequencing and pace of trade reforms were less than optimal in Senegal.The implementation period (24 months) was too short to allow the manufag firmsto be well prepared (in tenns of restrcring, rehabilitation and tWaining) in the face ofstiff external competition. Another major sequencing problem was the implementationtiming of the critical accompanying measures. The industrial policy reform called fora substantial reduction in the cost of production in Senegal through the liberaliztion ofthe labor market was 2.42 - 2.45), the reduction in energy costs (para 2.37), and theimprovement in the regulatory environment. In retrospect, the labor market issue wasnot effectively addressed, the energy cost was only slightly reduced three years aftertrade was completely liberalized, and the regulatory environment was only recentlyaddressed in a meaningful way.

mpkemenadon of he Reform Program

2.31 The implemetation of trade measures aimed at opening up the economyproceeded hlrgely on schedule. However, because of the lack of implementation of theaccompanying measures needed to reduce the cost of doing business in Senegal, andbecause of ignificant real exchange rate depreciation in competing countries (includingThe Gambia), the industrl sector faced stiff competition over a rather short period fromimported goods, thus reslting in a decline in production. The decline was particularlysevere for light manufes such as texties, shoes, batteies and matches. Under the

18

pressure emanating from these industies, the government reintroduced several protectionmeasures in mid-1989, including tariff exemptions for imported inputs needed in theproduction of texiles, matches and batteries.

2.32 The government reversed its protection policy by raising customs tariffs,party to restore prton for sub-sectors threatened by external competition and partlyto increase tax revenues. It should be recalled that government experienced majorrevenue shortalls in fiscal year 1988-89 not necessarily because of trade liberlization.Cusoms duties (dros de douane) were raised from lo% to 15% in 1989 and a lev of3% was Imposed on most imports a year later (tmbre douanier). As a result, theaverage nominal duty rate, which declined from 60% in 1985 to 35% in mid-1988, wasrAised to the current level of 43%. Moreover, to combat under-invoicing, thegovernment introduced minimum customs tax assessments on a large number of importsand broadened the use of reference prices. Thus, the manipulation of tariff rates for thepurpose of revenue mobilization and protection, and the introduction of minimumcustoms assessments, basically reversed most of the tariff reforms achieved between 1986and 1988. In fact, Senegal's protecdon system may have become more complicated by1992 thn it was durng the pre-reform period.

2.33 Table 2.3 provides rough estimates 9' of the effective rates of protectionover the perod 1985-90 and shows clearly the reversal in government trade policy. Onaverage, the effective protection rates decined from 165% in 1985, before the reformsbegan, to 89% in mid-1988, when most QRs were eliminated and nominal tariffs wereat their lowest levels. They, however, increased to 98% in 1990 as a result of thechanges discussed above. In addition to these higher protection rates, recent changesrintroduced wide distortions in the incentive system among some industrial sub-sectos.The same table shows no conclusive edence about the impact of the trade reforms oncustoms receipts. Customs receipts incsed by nearly 13% in nominal terms between1985 and 1987, declined by that much during 1988 and then increased by 16% perannum between 1989 and 1991. The increase during the latter period seems to resultfrom the effort to reduce tax exemptions rather than from tariff increases.

Domestic Trade Lirlz

2.34 As with other African countries, Senegal intensified, in the 1960s and1970s, direct government intervention in agriculture and manufacturing pricing andmarkets. The adjustment effort during its first phase attempted to reverse this situationand had achieved some success. in agriculture, greater attention was paid to pricingpolicy as a means of stimulating production and shifting incomes in favor of ruralproducers.

{I Thea rates were caulat iging the ipact of QRs and assuming that value added averages were 20%of the value of Snal outputs and usig prevailig nomnal tariff rates for final goods and intermediate materials.If aoe assumes a larger vabue added ratio (say 30%), the average effctive protection rates would besutantaly higher 235% in 1985, I2% in 1998 and 132% in 199.

19

Table 23: Swal t ?mtotedaa Indleaos

1985 1986 1987 19f8 1989 1990 1991

AvOtagBERP(%) 165.4 111.0 111.0 89.3 94.6 97.7 ...CuMm Receipts (CFAP) 73.4 80.0 83.4 74.3 91.1 104.1 115.0Effcive Tasff Rates(%)a/ 18.1 23.0 25.6 23.0 25.2 28.6 30.3

a) Customs meceipwriiot" of goods CIPSoutcw: Macreconomic Update (SA Tables 29, 43, 54), Jun 1993.

Subsidies and Producer Prices

2.35 By the end of 1988, major subsidies in the agricultual sector were reducedor phased out, producer prices of food crops were slightly raised, producer prices of cashcrops were slightly reduced, and the input distribution markets hberalized. Fertilizersubsidies were eliminated for all commodities except cotton. Producer prices forgroundnuts, cotton and nce, remained, in spite of some adjustnent from fime to time,d-linked from the world market prices. Z' A major study on agrcultural pices andincentives was undertaken in 1988, but its recommendations were never implemented,in particular, the proposal to adjust the groundnut producer price to world market price.The groundnut producer price was nevertheless reduced in 1988 for budgetary reasons.

Conswner Prices

2.36 Prices of all consumer goods, but sixteen items, had been decontrolled in1987 and 1988 and the office in chage of price controls was abolished in 1990. Formanufactued goods, prices were decontrolled in tandem with the eIinination of QRs.In addition, an effective price information system was set up for local ceals. In thecase of the consumer price of rice, the goverment reduced the price further than wasdesirable. T he consumer items for which prices remained under control were sugar, salt,tea, wheat, flour, pharmaceutical products, cement, electicity, petroleum products,wat, tansporation, broken rice, tomatoes and tomato concentrate, and cooking oiLThe govenmment's rationale for keeping prices of these items under contml was for socialand so-caUled strategic reasons.

2.37 In energy, the government instituted, in 1991, a simpler and moretransparent pricing and tation system for petroleum products. Under this system, ex-

7/ Durig the 1980s, groundut prices wer raised hre tim and reduced tice, coton raiSed thre tines,and rice raised three times and parialy reduced twice. At the same time, fte world prices of these thcommodities declined.

20

refinery prices were set at import parity plus a fixed lundling fee paid to the refinerycompany (SAR) to account for the relive inefficiencies under which it was operating.Prices to distrbutors were derived from ex-refinery prices by adding import duties andtaxes. As a result, domestic prices were reduced in July 1991 (for the first time since1986) by 5% to 25%, with the higher reductions applying to indutial petroleum inputs.The distrbution of peteum products and their pnces are yet to be deregulated.

Market Dereguladon

2.38 Most restnctions on domestic marketing of cereals other than rice wereremoved in 1986, thus creating a well-functioning market with many participants. Therole of the rumal development authorities (SRDRs) was drastically curtailed, the publicenterprise handling input supplies (SONAR) was liquidated, and import controls onfertilizers were phased out. The distribution and collection of groundnut seeds, and theprimary markeing of groundnuts were privatized. The monopoly on skins and hides ofthe public enterprise SERAS was abolished (and the enterprise was later privatized).Other reforms envisaged by govemment included the limitation placed on marketintervention of the food security commission (CSA), the separtion of the rice opeationfrom the Caisse de p6rEquation et de stabilisation des prix (CPSP), and participation ofprivate importers in rice importation and trade. Of these actions, the only measureeffectively implemented was the first one. In the rice sector, the government felt theneed to manage the distorted domestic prices to justify almost complete control of theactivity by the public sector. In 1987, the following actions were introduced in thegroundnut sector: the reduction of domestic primary marketing costs and the introductionof the private sector into the area of marketing. The sugar sector, consisting of a privatecompany (CSS), enjoys a monopoly of production and imports under a long-termconvention with govemment which rns to year 2000. The rice sub-sector remainedinefficient and distorted the whole domestic cereals sector in favor of rice, to thedetriment of locally produced maize, sorghum, and millet which cost far less to produce.Another key action was the abandonment by government of the principle of specialagreements (convendom spddales) (see para 2.90).

Labor and Wage Poliy Reform

Background

2.39 At the start of the labor and wage reform process in 1986, the modernsector labor market was heavily regulated by govenment ' and suffered from a highlyadverarial system of industrial and labor relations. Hiring and firing prctices as well

IV Govrnment was an active parwer in tripatite annual bargaining by which basic wage levels were determinedfor 27 industy group. (agrilWul and domestics were excluded). Governmt acted as both an arbiter betweenthe unons and employers, and as an enforcer in the wage agreements published by decree and applicable to allemployers, regadless of wehr they ptcpd i negoiaions or no Industy wage scales wete 8et inrefeeo to the minimum wagp (SI wvich government reises on an ifreqTent basis.

21

as wage settg were regulated by the government through vanoius labor laws, inpardcular the labor code, which has been in eistence since 1951, the 1981 collectivebargaining system, -and the civil service statutes. Whereas, these regulations wereintended to advance woroers' welfare, they had instead resulted in higher productioncosts, low productivity, limited investment and job creation. In effect, government hadan income policy which was contry to its Intemal adjustment strategy. The costs fornot refonning the labor market are particularly high, given the rapid deterioration in thecompetitivity of the Senegalese economy.

2.40 In Senegal, as in other African countries, wages in the modern sector areinfluenced largely by wages paid by the government, which is the mwjor employer(employing 68,000 out of a total moden sctor employment of 131,000 in 1986). 12Real civil service salaries and wages in the modem sector had declined during 1980-85,but remained relatively high in comparison with other countries (see para 3.11). Tocompensate for this, salary and wage supplements and benefits had increased dramaticallyover time, representing 25-30% of compensation in 1986. J At the level of the entireindusal sctor, Svejnar found that total fictor productivity had declined annually by 5-7% during the 1980-85 period. IV

2.41 Becaue of their inability to lay off workers without passing hough anelaborate and time-consuming process of government aroval, employers resorted moreto tmpoar and less to permanent workers. Even the recourse to temporary labor wasassocated with difficulties. The labor unions, which fought for the country'sindepedence, remamned influental though their position wealkned since 1976 as a resultof the reintroduction of trade union pluralism. W The tripartite system (unions-employers-government) was characteizd by deep mistust, especially between theunions and employers. In the civil service, the government policy of guaranteeing jobscurity (through, for insance, automatic hiring from taining schools) and wage secunty(by dissodating wages and salaries from performance) had signifitly contributed toa large and less productive civil service.

2/ Wile bonuses and ncenve paymonb vse negotated freey, the 'convention collective', agreed an March1981 bdwen the unio and the employers, established the rights of workers to a wide range of additionalbenefits whoem calculation was ̂ lrly rgdly defined by various S¢tors, including basc wage and length ofemployment, and which are important i total work remuneratiom

IQ/ See Berg (1990) p. 12.

W According to a 1986 survey quoted by Svejaar and Tomrll (1988) p. 113, averwg wages for unsklwodrers we about 20% hier t the SO with teo non-ag eloment of remuneration approaching 30%of total compna_tin 1985, the aveage anal wage and benofits in the civil service was about CFAF 2.86millon, of which benefits reprented CPAF .725 million or 25%. See Dennis (1991).

W See SveJnar and Terrd (198) P. 113.

IY See Ka and Van de Wail (1992) pp. 52 and S3.

22

Design and ImpkemenW.6n fRVfIWms

2.42 Improved functioning of the labor market was idendfied as a majorelement of adjustmet in Senegal. Strong labor market rigidity, high wages and lowproductivity were impediment to new invesment and employment creation. However,only limited reforms were implemented, namely, the abolition of the labor office in 1987and, consequently, the liberalizaon of hiring practies, and the partid rlaxation ofconstraints on the use of temporay employment contracts (the maximum period for suchcontracts was extended from 6 to 12 months.) An attempt to revise critical prvisionsin the labor code had failed and the modified code was not approved by the NationalAssembly due to deep-seated vested union interest and fear of triggenng social unrest onthe eve of the 1988 general election.

2.43 Furthermore, the use of temporary labor was significantly relaxed in 1989.For all firms, the maximum period for such contracts was extended to 5 years, and infirms in the industrial free zone and those benefiting from the investment code, thepeiod was unlimited. The general payroll tax (comrnibuonforfakore) of about 3% andthe income tax nomally paid by employers were both eliminted in 1989 for new andexpanding firms. A tripartite Committee made of government, employers' associations,and labor unions was formed in January 1990 to examine existing labor legislation andindustial regulations. Therefore based on an in-depth study of the labor market inSenega conducted by ILO in 1990, the government decided that a complete revision ofthe labor code would be preferable to the modficaton of a few articles of the code. Tomaximi the chance of success for adopting a new labor code, t.e government tookconcret steps to inform and educate the public and the unions on the importance ofliberalizing the labor market. The labor code has now been revised and submitted to theNational Assembly for raification. Among the Iey changes made in the labor code isthe delinkdng of the differant industry specific wage scales from the miimum wage(SMIG), the encouragement of collective bargaining at the firm level, and the quasi totalliberalizon of firing paces.

2.44 In the case of the public sector, govemment has also dedded to abolishthe automatic recruinent from training schools in 1990, downsize the civil sevicethrough a voluntary deparure program, rationalize the wage benefits, and frez theminimum wage (SMG). With the exception of the latter, which also apples to theprivate sector, none of the other measures have been effecdvely implemented. Legallabor market rigidities are sfill present in Senegal though compliance wit themn isbecoming less effecdve with the expansion of the informal sector. In the civil sevice,real average salaries have declined by 30% durng the first penod and then increased by24% during the second period under considation. As indicated in Table 2.4, it ishighly paid civil servants who saw their real wages decline fster than those paid thelast. In other words, the salary differential in the civil service has narrowed from 1:8in 1980 to 1:6 in 1990. Wages in the infomal sect" are believed to be a third ofprevailing wages in the formal sector.

23

l eb 2As Sewa fl. Wages and Slaris IndIes (1980 - HO)W/

ava Senwa~ Sdare

Year A/ SUIG Miunim Maxinwn Average £t

1980 100 100 100 1001981 99 94 94 941982 91 88 81 851983 94 8S 74 811984 85 76 66 78198S 78 70 59 701986 74 66 55 721987 77 69 58 771988 78 70 59 811989 85 76 59 861990 85 76 60 881991 87 ...

Change 1985-80 -21.7 -29.7 -41.3 -29.9Change 1990-85 8.6 7.4 0.4 24.2

ao Deflated by consumer prce hidex fb the avenage Senegales. &imUiy.b- irsad year 1980/81 is shown under calendar year 1980.c/ The difrnce botween the earnings (represened by tds column) and rtes data (by the previous 2 columns)

can be explained by promotions and fringe benofits.

Soes: SmgalMacroeconomic Update Report (SA Tables 22 and 24), June 1993; and Senegal- An Economyunder Austment, Report No. 6454, 1987, p. 89.

2.45 The paral approach to labor market reforms proved ineffective. Althoughthe compreensive and less contational approac foUowed recently has yet to yieldresults in the context of the intrnal adjustment strategy pursued by Senegal, it provedto be usefu in tum of public awareness and ownership of the reform program (see Box2.2).

1: Ip ZAtrfk 141tk.f~~~AirI tit~~~~~~~~~~&

25

C Instiutional and Other Policies

Finandal Sector Reforms

Introducion

2.46 Prior to the 1989 baning reform program, Senegal's baning systemconsisted of fifteen banks, eight of which were publicly owned banb, five controlled inone way or another by the government and two fully foreign-owned banks. IV In1987, eight of the fifteen banks were in distress, of which four were government-controlled development banks. BIAOS and USB also figured among the distressed banks.

2.47 Of aU te reforms undertaken by Senegal in the 1980s, the banking sectorreform which involved inter alia the closing of seven of the country's fifteen bank, mustbe considered-except on the issue of debt recovery-the most successful reform. Thisachievement owed a great deal to the very active role of the BCEAO whose views onbank restructuring were very close to those of the foreign donors involved in theoperton. Also, after some hesitation at the start, the government showed great politicalcourge in closing several of the country's development banks with its accompanyingnegative impact on employment. Commonality in approaches and close coordinationamong donors played an important role in the success of the reform. It is importnt tonote that Senegal was one of the first countries in the region to undertake such asignificant reform of the financial sector.

The Oigin of the Crisis

2.48 Senegal's baning sector crisis is due to an array of factors. Some arespecific to the management of the bank which is generally poor and ls internalcontrol on lending decisions. Oher factors include excessive government interferenceranging from, pressure to lend to uneconomic public enterpises, to forced creditallocation (parucularly for agriulture), and an inadequate legal framework-all of whichmade it difficult for banks to take legal action to collect bad debts. Unfavorableeconomic conditions such as droughts, adverse shifts in the terms of trade, appredatingreal exchange rates, and heightened competition brought about by the rapid lilizationof the economy have reduced the borrowers' ability to service past loans, furtherexacerbaing the situation. Finally, the Senegalese bankdng sector's problems were, to

151 Among the development ban, thea Baqu Nationdl du D6veloppement S6pgamie or BNDS, was thecount's laugest bank in wms of total assets. The three lsrgest bank in terms of no-govwrment deposae aociatd with fore bank, primarily French beaks; they are SGBS, BTAOS, and BICIS. The UnionS6&gaise de Banque (US), in which the stae has a myority shar-holding, is asociatd with French CreditLyonnais which xercises managerial contol. The remainu banks are in size; most were created asspecialized bank: housig bnk (HS, dusy and toism (SOFSED1), and ag&uture (CNCAS).

26

some extent, due to weaklesses in the credit policy and to the rules and regulations ofUMOA.

2.49 The past readiness of the government to guarantee the borrowing ofuneconomic public enterprises has greatly undermined the system. Of the CFAF 144billion of bad debts held by failing banks, more than 20% were loans guaranteed by thegovenment. These loans represent a way for the government to circumvent the 20%rule limiting its borrowing from the Central Bank. These loans were considered risk-freebut had a de-stabilizing effect on bank balance sheets once the government failed tohonor its guarantees. Furthermore, the complexity of the legalframework in Senegalmade it difficult for bak to take legal action to collect bad debts. The national creditcommittees' discretionary power to fix bank-by-bank credit ceilings had also given riseto large-scale government interference in the banking system to the benefit of the weakestbanks who were provided with higher credit ceilings than for healthy banks, therebyprolonging the existence of sick banks at the expense of healthy ones.

2.50 The management of crop marketig credits was another major source ofthe problem. Crop credits are short-term advances that finance the full collection cost ofagricultural products from producer through final sale. Since reimbursement is generallyexpected within the year, they have not been subject to credit ceiigs. Serviced onlysoadically, these non-reimbursed crop credits have tended to accumulate, becoming amajor burden on the banking system, absorbing a good part of annual increases in creditceilings, and crowding out the productive sector. ONCAD, Senegal's defunct groundnutmarketing and processing agency, is a case in point. Its dissolution in 1982 left BNDSholding non-reimbursed claims totaling CFAF 94 billion. The major local banks wereobliged to take up shares of the outstanding balance. Thus ONCAD's refinancing notonly crowded out other borrowers in 1982, but has remained a source of balance sheetproblems for the banks involved.

2.51 Because of the division of responsibility between BCEAO (responsible forinspecton) and national authorities (responsible for overseeing the implementation ofcorrective measures), control of banking opeations was ineffective. Some banks had notbeen visited by the BCEAO for several years. Even in cases where BCEAOrecommended sanctions, the government often did not comply. Ai a rewlt, prudentialrles have eroded. Problems began to emerge as banks were under political pressure tomake loans to failing public enterprises via government guarantees and BCEAOrediscount facilities.

2.52 Furthermore, there were no applied accounting standards and prudentialrles applying to liquidity positions were increasingly being disregarded. Since BCEAOdid not enforce sanctions on banks which continued to credit accrued but unpaid interestby non-performing loans, ailing banks' balance sheets may have portrayed a strongerbalance sheet than was acwally the case. Instead, problem banks had preferential accessto BCEAO rediscounting as well as to higher credit ceilings, which allowed their balancesheets to deteriorate even more. The BCEAO also perpetuated problem banks throughone of the mechanisms of the money market whereby healthy banks, with excess liquid

27

deposits, were constrained by restrictive credit ceilings, and forced to lend their excessliquidity to sick banks. Consequently, liquidity problems only surfaced when banks werefinally unable to honor checks drawn upon them. The distressed banks resorted toborrowing from BCEAO. However, in 1988 BCEAO stopped providing them withadditional refinancing facilities and their operations came to a halt. Table 2.5summaizes the financial situation of the Senegalese bankdng system as of September 30,1988.

Table 2.: Summa Sun of te Banking Systm, 16(CFAF billio)

Distrewed Bank Soud Bab TOaW

LOan Porfolio 323 166 489No*-Perfmg Loans 233 6 239Caphal and Reserves 36 29 65BCEAO Refinancing 167 30 197

Source: Senegal Fnacial Secor Adjustment Program, World Bank (1989a), p. 4.

2.53 The severe liqwdity cnsis which hit the distressed banks rapidly affectedthe other banks. By late 1987, the Senegalese economy was forced to operate pracdcallywithout the benefit of bank intermediation. Furthermore, BCEAO's consolidation onconcessional terms (15 years, including three years' grace, at 3% interest) of most ofBCEAO's clims on the banks to be restructured or liquidated was not sufficient toreestablish confidence in the system. A more drastic reform was necessary, affecting thedevelopment banks where government's interference has been the heaviest.

Design of the Reform Program

2.54 In October 1987, the government consulted the IMP, the Bank, andbilateral donors (France and the United States) with a view to restructure the aiiagbanks. BCEAO saw the extensive banling crisis in several member countries in late1988 as an opportunity to restcre the banking sector and to lay a foundation fordeveloping modem, responsible capital markets. While the restrucurng or closing ofthe ailing banks was the more spectacular aspect of the reform, more important changestook place in the policy affecting the banks' opertions in general.

2.55 The reform program consisted of six key measures:

* a drastic restucturing of distressed banks which, with the injection ofadditional capital, would experience a positive net worth and meetminimum capital adequacy requirements (BIAOS, USB);

* a closing of distressed banks for which no substantial injection of newcapital was expected (BNDS, SOFISED1T, SONAGA/SONABANQUE,ASSURBANK, BSK);

28

* a sharp reducton of abusive pratces such as forced crop credits andgovernment guarantees on parastatal borrowing, and a reduction ofgovernment ownership of banks to less than 25%;

* substantial reforms in credit policies and in bank legislation, supervisionand praces (bank-by-bank credit ceilings, sectoral credit targets, pnorauthorization mechanism, interest rate policies);

* recovery of bad debt; and

* studies of grass-roots mutual credit schemes.

2.56 The government of Senegal, after two years of attempting to save most ofthe development banks, adopted in June 1989, a comprehensive strategy to restructurethe banking system. The strategy consisted of maintaining only banks that, afterrestctug, could become profitable, solvent, and liquid; reducing governmentinterference in the banks management through privaizaon and by limiting thegovernment's equity share in banks to a maximum of 25%; and developing a globalfinancing plan with projected anmual govemment contributions compatible with thegovernment budget.

2.57 When shareholders agreed to rehabilitate the banks under their control, therestructuring would include restoration of the banks' financial situation throughshareholder equity or quasi-equity contributions to offset losses and recapitalize the banksTo a level compatible with sound banking standards. In addition, staffing would bereduced, costly branch networks pruned and changes in management introduced. Whenthe financial requirements for rehabilitating a bank are beyond the resources of itsshareholders, as in government-owned or controlled banks, the balance sheet would besplit into a "sound balaice sheet' representing the performing loans and a "liquidatingstucture" representing non-performing assets. This procedure would apply to fivegovernmet-ntrolled banks.

2.58 The enviaged reforms would sharply restrict the abuse of crop credits andgovermment guarantees on paLascta borrowing which, in the past, jeopardized bankprofits. They would also provide a market-oiented determination of interest rates(patterned after Paris rates), and would widen banking margins-all of which shouldimprove bank profitability. In 1989, the UMOA Council of Minsters decided tointroduce measures that would make the bank-by-bank credit ceilings allocations moreflexible. The system of targeted credit objectives going to sectors degnated as"priority" was eliminated. The prior authorzation mechanism required for loansexceeding CPAP 70 million was raised to CFAF 300 million. The Council of Ministersagreed that the BCEAO would (a) channel all rediscountng needs through the moneymarket, which it would continue to intermediate at the administradvely determined rate;and (b) meet demnud for borrowing in excess of money market deposits through a last-resort facility of the central bank.

29

mnplememadon of dte &form Prograam

2.59 Two banks associated with private Senegalese inveto whose foreignmajority sheholders wanted to stay in business during the restructuring period wee:BIAOS (65% is owned by the French BIAO Group) and MASSRAF (partly owned bySaudi Arabian interests). The government also closed four of the five develomt bankmand two commercial banks in which it has majority ownerhip. In addition, it took stepsto prevent the recurrence of past practces by reducing its capital share (diely andindirectly) in all banks except CNCAS where no sutnable buyer can be found, to amaximum of 25%, which is less than is required to be a blockdng minority. In short,with minor exceptions, the bank restructuring process was completed more or less onschedule.

2.60 BCEAO has been responsible for making changes in the banling legsalationand supevsion. It has succssfully implemented the proposed reforms as discussedabove (para 2.58). To reform prior Bank supervision procedures, first, a UMOA zone-wide control commission was established October 1, 1990 with supra-national authority.Second, banling laws and reiations were revised to prevent the recurrence of pastexcesses and to bring them in line with practices in other countnes. The BCEAOobtned support from France and the IMF to strengthen its inspecon department.

2.61 In contrast to the government's prompt and courageous decision to closeseveral bankls, efforts toward debt recovery were weak and errAtc. As of the end of1989, government esmates indicate that approxiantely CFAF 32 billion (about US$100million) of tie CFAF 144 billion (about US$450 million) of non-performing credits ofthe banks to be resuctured can ulimately be recovered over the period 1990-93. Tbisamount would repay depositors whose assets were frozen at the time of restucuring andpermit the government to sevice the debt it undertok to carry out the reform program.In this connection, the government established a recovery agency, stffed in part bypersonnel laid off by the restrucred banks, whose task is to recover the bad lams ofthe restructured ban through seizre of debtors' assets, loan rescheduling, and otherarrangements. To recover the bad debt and to ensure progress, a data bank of aUldelinquent debtors of the banks being restructured was prepared by an independentauditor. Progress on recovery has been folowed by a Blue Ribbon Committeeestablished by the Minister of Finance.

2.62 The adoption of the above meas have taen longer than was necessary.Government's hesitancy to pursue the arge debtors accounted for the lack of success Inthis critical area. The implications of these developments are more ignificant than theforegone revenue from debt recovery. They explain, in part, the reluce of bankto commit important sums for long-term investment projects.

2.63 The total cost of tie reform of the banking system was estimated at CFAF275 billion. Of this, about CFAF 198 billion has already been secued through aconsolidation of CFAF 146.5 billion from BCEAO on concessional terms, a sectoraadjustment loan of CFAF 31.7 billion (IDA plus cofins), and the recovery of bad

30

debts, estimated at CFAF 20 billion. The remaining CFAP 77 billion is epted to becovered through a further consolidation from BCEAO and the continued recovery of non-performing loans.

2.64 To develop a nationwie network of grase-roots mutual credit institutions,the Minisy of Finance, with the Canadian govement, has gathered information tobetter understand their succeses or failures with the view to create mutualist insdtutionsin urban areas not covered by these initatves and work out an action plan for a banlangsystem.

Publc Eneprise Sector Reform

Background

2.65 The government's PE sector had expanded in the 1970s thuoughnationaizaton and the creaion of new agencies. For a host of fctors, including softbudget constraints, lax hiring policies and the lack of performance incentives formanagers, the sector became increasingly deficient and reforms became critically needed.

2.66 In 1986, the sector as a whole (ir luding the baning sector) consisted of85 enterprises, of which 25 were clasifie- as non-commercial or administmiveentities. I5/ The sector accounted for 29% si total investment in the economy, 17%of total employment and 7% of GDP. Net loss of the sector (after taxes and beforesubsidies) represented about 2% of GDP and 9% of government revenue. Thegovernment's equity share in the sectr represented 72%. The financial performance ofthe non-financial PEs was poor, resulting in financial losses and correponding budgetarysubsidies. In addition to these budgetry transfers, the sector enjoyed other explicttransfers, such as loans from the Treasury and debt servicing, and impLcit transfers, suchas tax exemptions, loan guaantees, preferential interest Mates, and distortions from pricecontrols. These enterpnses accounted for the bulk of the credits to the economy (95%of long-term credits, 15% of medium-term, and 25% of short-term over the period 1985-87.) A large number of these loans were non-performing and thus contrbuted to thebankdng sector crisis.

2.67 The PB sector reform in Senegal dates back to the late 1970s IV, but in1986 became part of government's medium-term economic and financia rehabilitationprogram (PAML), supported by three SALs, a Financial SECAL and a second TAproject. The objectives of Senegal's reform policy in this sector are no differt thanthose pursued by other countries: i.e. government's withdrawal from enterprises which

V ITh iorm on t sectr comes fom th Preides Report of SAL IV, p. 22 and the 1989 ParapublicSector Review. t may not be Sly con¢_te wilh SA Table 6 which includes additional emall, administrativeagencies and agencies that were alredy Uquidated.

Iil A Public Enerprie Seowr Review in 1977 led to a sories of refoms apported by the Furst ParapublicSect TeAhnics Al Project (PPTA1). At its completion 1983, a seond project (PPTA2) wasiatd.

31

the private sector could mmage better, and improved efficiency of the PBs that remainunder government control. Until 1985, the government strategy had not been clearlyarticulated and raffimed the end of the nationaliation policy, the strong ex-antesupervision of P1s and the establishment of a system of "program contracts' (comrat-plan (CP)), a new feature that was intended to equip individual PEs with a medium-termstrategy and to clarfy the relationship between the government and individual PEs. 'In 1985, the government adopted a clear strategy which was frther detailed in 1989.The strategy consisted of the following elements: privatization and liquidation of selectedPEs, improvement in management and performance of the remaining PEs, simplificatkoof the wctor control procedures, steamlining of the relationship between the govemmentand PEs, and improvement in portfolio management information.

Design of the Reform Program

2.68 Although the Senegalese were late in formulating a clear PE sectorstrategy, the sector reform program has been comprehensive, based on detailed analyticalwork. Two sector reports were prepared by the Bank in 1981 and 1989 which providedgovernment with an overall framework for the reforn, and led to the government'sformulation of a comprehensive sector strategy. A number of audit reports and specificpolicy stdies J' were also carried out. Two specific Bank TA projects were approvedin 1977 and 1983 which focused essentially on institutional building and informationmanagement, targeting both the enterprises and the supervisory agencies.

2.69 The divestiture strategy has somewhat shifted in recent years. Up until1986, the government focused on privadzing non-performing PEs, and on tackling theprivadzation directy. This changed in 1981 aad more importantly since 1990, whengovernment strted with profitable enterprises and strengthened the process ofpratiazaton which, as a result, becane more tansparent. To achieve dte objectives ofreducing the budgetary burden of the PE sector and increasing its efficiency throughgreater financial discipline, the govemment hardened the budget constraints oncommerciaUy-oiented PEs (reduction of operating subsidies, settement of cross-debts,elimination of implicit subsidies, and elimination of overdaft facilities) thus forcing thePEs to restrucre or get liquidated. The elimination of overdrafts was deemed necessaryto close a loophole that PEs exploited while complying with the reduction in directsubsidies. One important shortcoming in the design of the reform program is the largenumber of small enteprises to be privatzed (which detrated the energy of theadminisaon from focusing on major entees) and the large number of contractplans to be signed in a mlatively short period. In tms of sequencing, it can be arguedthat privatization was attempted much too early. The regulatory and incentives

iZ/ In addition to tbese two policy decisions, the govenment also agreed under SAL I to return to the privatesector small and medium-sized units h the productive sector and to close units tat vwre fud to be nonviable.

/ Those studies addressed such major policy isues as indirect subidy levels, crossdeb and specialconventions or concesions.

32

framework must be reformed first to create a favorable environment conducive to privatesector investment.

2.70 The emphasis on PE reform in Senegal's adjustment program was notmisplaced. It was consistent with the findings of the World Bank Second Report onAdjustment Lending that the public sector reform progmm aimed at reducing the publicsector fiscal deficit should have high priority in most adjusting countries. J'However, the design of the PE sector adjustment program was charactrzed by too muchexplicit conditionality which, given the institutional nature of the reforms and the lackof financial support as specfied in the CPs, proved to be difficult to implement duringthe course of adjustment.

2.71 On the institutional and legal front, the government approach was sound.It consisted of the creation and later the strengthening of a focal parastatal agency(DRSP), the only agency outside the Finance Ministry rsosible for formulatng,managing, and monitoring the reform program of the PE sector. This central agency wasalso responsible for contract plans supervision; strengthening the PE unit in the Treauyby gmng it the authority and responsibility for overseeing the financial relations betweenPEs and government; curtiling the roles of the other supervisory agencies to a posteriorimonitoring of compliance with legal requirements; and improving the composition of PEBoards of Drectors on the basis of skdlls rather tham political considention.

Implemenation of the Refoim Program

2.72 The implementation of the program has been uneven across the three maincomponents and over the years, good to fair on the legal, institutional and rehabiltationfront; fair to poor on the financial side; and, until quite recently, poor on the questionof privatization. Implementation of most PE reforms has been plagued with significantdelays; a dlear indication of the complexity and the institutional rature of the issues andthe inappropriate sequencing of the reform, as well as the lack of government wil intackling tough reforms, particularly those having an impact on the Treasury and vestedinterests.

2.73 The Government has changed the law on the organization and control ofthe PE sector, but the decrees required for its enforcement are yet to be issued. Theagencies in charge of implementing the progam have been streamlined and rationalized.A total of 24 (out of 44 planned) contract plans and "lettes of mission' betweengovernment and selected PEs have been signed. While the adoption of CPs has improvedtransparency and accountability of the two contracting parties, which is not a smallachievement, it has run into problems with the financial implication of the CPs. As JohnNellis noted, 'tariff regimes have been specified, investment programs stated, non-commercial operations costed out and compensation arrnged for, and opeing subsidiesset-but in case after ca the govemment has proven unable or unwilling to honor thefinancial commitments agreed upon; and the agreements have had to be repeatedly and

l9 RALT , pam. 1.27.

33

extensively revised, or fallen into abeyance." ly Concemning the restructuring andrehabilitaton component of the reform program, a total of 10 PEs (out of 27 planned)have been completed.

2.74 On the financial front, the government has implemented the reforms in"letter but not in spirit." Indeed, while the govemment reduced direct subsides to PEs,PEs have resorted to commercial bank overdrafts and government guartees forborrowing, thus precipitating the financial crisis of the banking system, and accumulatingarrears when the overdraft facilities were no longer possible (see SA Table 7). Thesettlement of cross-debt amars between government and PEs has been carried out twice(on the basis of stock awrears at the end of 1986 and 1989), but the problem reappearedagain, though to a lesser extent, because of the concurrent implementation of preventivemeasures. The magtude of the arrears at the end of 1989 was large and their impacton the PEs working capital and tax payment was significant. The settlement of thesearreas was a complex undenakmng I' which cannot be peated indefinitely, andunless preventive measures, similar to those adopted in 1991, are put in place, theproblem will occur again. As a good start, the government focused on the three utilitycompanies (water, elecicity and telephone) with apparently some encouraging success.

2.75 The performance of the divestiture program for both financial and non-financial PEs is shown in Table 2.6 and Figure 2.1. Over the entire reform period,government has liquidated 21 PEs and privatized (totally or partially) 26 others, togetherrepresAing 42% of the total number of PEs in the sector. In terms of assets andgovernment equity, these PEs represent only 19% and 11% of the sector, respectively.The disproportionate percentages between the number of PEs privatzed and lquidated,and the size of their assets and equity, reflect the fact dtt the tmree utility companies(electricity, water and telephone) were not part of the divestiture progmam. They aloneaccount for 33% of the sector's assets and 46% of government equity. A breakdown ofthe PE sector between financial and non-financial sub-sector shows that the divestitureprocess is 80-90% complete in the financial institutions and far from being complete inthe non-financial PEs (36% in terms of numbers, 12% in terms of assets, and 6% interms of government equity).

2QI John Nolliu, Public Enterprise Refm in Adjustment Lending," Working Paper No. 233, World Bank,August 1989.

UI The process of cross-debt settlement cowst of identification and verification of the debt, negotiation ofa settloment ageement between the concerned partie, and reflection of the terms of the agreement in the booksof the concerned parties. At the end of December 1989, toal debts owed by non-financial PEs (60 of them)to government anmunted to CFAF 57.4 billion and debts owed by government to PEs amounated to CFAF 48.9billion. After the muul cancellation of debts and wvtofhs, and enterprises liquidated and privatized, totaldebt owed by PBs to government dropped to CFAF 5.6 billion (or 9.8% of the oriil amount) and debtsowed by governmet to PEs dropped to CFAF 1.2 biUion (or 2.5% of the otiginal amount). These remainigdebts are being settled over a period of three years, with only a few exceptions. Concerning the cross-debtbetween the PEs themselves, about 80 agreements bad been signed as of October 1991 and about CFAF 8bilion (representing 60% of the total debt) had been settled.

34

Ta.. 24 S.aqm Acted .lvdh I ,op.1, 19.9,

GovL GM~ EACtOe O3Wcou AM.ber And& E4rd,y sr% of

Noo-fioiSub4SotoW 36 12 6 38Pilvatlze 21 9 5 40LLquWdazd IS 3 1 33

RUSub-eotow 79 as 79 44P$vathsd 36 46 31 32LlpIdaWd 43 42 4a 57

TctaIP Secto 41 19 11 41Pdvaiftd 23 12 6 37LiuIded 19 6 4 48

of which:MATVd 25 10 5 37

PSECAL 6 4 4 51

ToelIFSW"r 100 100 10o 71Nom-maPw 88 91 94 74FiAon 12 9 6 49

Note: Dato may not add uap due to xouadb.Suma: SA Tab 6.

2.76 The progres made in the divestiture program is very recent. About 75%of the total number o; PEs privaized and liquidated and 80% of their assets andgovemment equity took place dunng 1989-91. There are seeral reasons for this recentpoive development: fte focus on profitable compaes, the budgetary financial squeemon PEs, the impement in the transpaecy of the privatzation process, and theappointment of a dynamic and pragmatic head of the PE reform implementation agency.Had the govearment not idsted on certain conditions (higher prices and no reduction inpeonnel), and had the private sector enabling environment (including the developmentof a secoday market) been in place, the priva ion perforance would have beenmuch better.

35

figue 2.1: Senegal P1E Divtiture Progrm

Number of PEs (%) Number of PEa (%)

Nogn-SnaAali PE Flnarciat PE btI PE awto Tote PE 6octor

64

Assets (%) Assets ( d)

HowfliwWal PE fulanda PE Tota PE es Tetai PE xectorPtZ~~~~~~~od t8c0

4'

Source: SA Table 6.

36

Social Sector Polides

2.77 The primay objective of the adjustment program in Senegal has been toincrease per capita income and to generate employment, and, in doing so, improve thesocial conditions (namely, nutrition, primary health care and basic education) and reducepoverty. A more active and direct approach to raise the standards of living of the poorhas been pursued modestly since 1987 in the context of Bank supported adjustmentoperations (including the first Human Resources SECAL approved in 1991). Theseoperations establish mechanisms to create jobs to minimize the adverse short-term impactof adjustment, and to secure adequate provisions in the budget for basic needsfulfillment. To further improve the standard of living, Senegal has adopted an actionplan to control growth rate of the population which has yet to be fully implemented.

Job Creadon Programs

2.78 In 1987, a National Employment Fund (FNE) and a government agencyin charge of insertion and re-insertion (DIRE) were created under SAL m to ease thetransition of laid-off workers in the parapublic and industrial sectors and to stimulatevoluntary departures from the civil serice. A recent evaluation study of this program,which was conducted by the Bank concluded that the cost effectiveness of theemployment fund has been mixed. Only 1,500jobs were created between 1988 and 1991at a cost of US$11,000 each, which is relatively high given the magnitude of theunemployment problem in Senegal.

2.79 A major component of IDA's Public Works and Employment Project(AGET) has been to identify rehabilitation and maintenance work needed in urbanareas to be undertaken by small contractors using labor intensive methods. The projecthas been very successful in creating 2,000 person-years temporary employment over atwo-year period. Apart from creating short-term employment, thus easing the initialemployment costs of adjustment, the project has helped to increase the long term skldlsof both small contractors and their temporary employees.

Public &penditure Restuxturing

2.80 While the adjustment effort has focused on improving the composition ofthe investment program since 1986, it is only recently at emphasis has been placed onrestructunng the govemnment budget to ensure allocation of adequate resources to pdimaryhealth care and primary education. The voluntary departure program has been designedin such a way as to preserve adequate recruitment of primary school teachers and toprotect allocations to social sectors during budget cuts. Results of the recent PublicExpenditure Review (PER) indicate that while the health sector benefitted fromrestucturing of expenditre in favor of primary health care during the 1980s, not muchrestructuring took place in the education secto.

37

Tbe 2.7: S&ml Rcawo ARM to Socil Sect, 1960-90Rel Indas, I910-100)

AnudAwr % Chnge1980-S 1986-90 T0o Ann4a

Towa REumnt Expenditure 108.2 98.5 -9.0 -1.9of whch: Education 96.3 96.5 0.2 0.0

domgw) 88.7 at 95.5 7.7 I.S(zwags) 96.4 102.1 dl 5.9 1.1Health 90.7 71.6 -21.0 4.6(wargs) 90.1 773 dl -14.2 -3.0

Totad Iveseabs 85.1 b/ 58.7 -31.0 -7.2of which: Eucation 83.1 b 64.1 -24.6 -5S.5

Health 85.1 bt 82.0 -3.6 -0.7

Wsges as % of sector ecunvue expeaditureEducation 70% c/ 74% d/ 5.9 1.1Roaotm 68% c/ 73% dU 8.6 1.7

Baolmenta by level of educaion (000)Prlnwy S09 662 30.1 S.7Secoadagy &Tetisry 123 176 43.1 7.4

Anna aves fo the folowirg periods: al- 1983-5,bl- 1981483, cl-1981, dI- 1989.Soue: Mahcoeooado Updde Rpot (SA Table 44), Higher Educton Repot, and PM.

2.81 In the health sector, real recurrent exeditres were the hardest hit anddropped by 21% between the first and the second halves of the 1980s (Table 2.7). Totalamount allocated to the health sector under the recurrent budget has fallen considerablyfrom 0.9% of GDP in 1980 to 0.6% in 1988. The balance between salaries and wages,and mateials and supplies, cotinued to deteriorate, with the ratio rising from 2:1 in1982 to 3:1 in 1989. The PER report notes that there is ample evidence that theadequacy and quality of health delivery services in the public sector have detenoratedsignificany over the last decade. One positive development in health expenditure hasbeen, however, the increase in the share of total health sector expenditures (recurrent andinvestment) on primary health care from 48% in 1981 to 62% in 1989. Related to thisis the improvement in the regional balance of per capita health expenditures.

2.82 In education, recurrent expenditures remained constant in real terms duringthe 1980s. However, higher education experienced an increase at the expense of primaryeducation. This was compounded by the fact that non-wage recurrent expenditures weresqueezed hard, dropping to just about 10% of the wage cost. As a result, the quality ofeducation services deteriorted at all levels. Expenditures in the sector were excessivelyweighted towards higher education during the latter part of the 1980s. These figures donot fully measre the failure of educafion policy because they mask the inefficiency ofhigh wastage and failure rates, especially at the university level. Cost per student showvast disparities, with costs at the university level 18 to 20 times the cost of elementaryeducation.

38

situtional and IAIg Refo=ms

2.83 A number of institutional and legal reforms, such as the revision of thelabor code and tie improvement in the public sector management, including PEs, havebeen discussed above. This section focuses only on the reforms that have not beencovered elsewhere in the chapter, namely the public administration reforms and theprivate sector enabling environment.

Cil Service Reform

2.84 Senegal inherited a large public administration from the days when Dakarwas the capital of the French West African colonies. Z' The high cost and theincreasingly poor performance of the civil service (owing to inadequate operatingexpenses) 2 have posed major challenges to Senegal since at least the mid-1970s. Afirst attempt to address these issues was made in 1976 when the government decided toreorganize the central ministries (operation organigramme') with a view to downsizingstaff, reducin3 wage costs and improving efficiency. The program had to be abandonedbecause of resistance from some ministies. Since 1982, the government has taken stepsunder its adjustment program to maintain a ceiling on the number of civil servants, tofreeze salaries and to improve the management of the civil service. These measures havebeen supported by SALs II-IV, an IDA technical assistance project (PAGD), and a seriesof IM arrangements.

2.85 The most far reaching attempt at reforming the civil service has beenunderaken by the government since 1990. The government designed a comprehensivereform program to restructure key ministries by reducing staff, through a voluntarydeparture program, insttuting measures to control the wage bill and improve personnelmanagement. A number of studies were commissioned under the PAGD to facilitate thedesign and the implementation of the reform program. If implemented, ihese measureswould have reduced the number of civil servants by 7.2% by June 1992, and bring theirrato to the population from 9 per thousand to 7.7-a ratio compamable to other Africancountries with better resource endowments. The nominal wage bill would have also beenreduced by 8.7%, from CFAF 125 billion in 1988-89 to CFAF 115 billion in 1991-92.Both targets were not achieved and the acuala outcome moved in the opposite directon.

2.86 The government implementation performance has been mixed. Theadmnistration was restructured in March 1990, reducing the number of ministries from23 to 15 by eliminadng or merging some departmets. Key departments, such as the TaxDepartnent (DGID) and the Customs Department (DGD), were strengthened. The

21 This swction draws heavily on the SAL IV Presidenst Report, pp. 32-38, as well as the various supervisionreports, the latest of which is dated October 28, 1991.

2I Dakar emerged from being the capital of Frnch West Afica as having the bes trained civil servats inthe region and the highest paiU, as Senegal kept complete wage parity between African and French employees.In the eatly 1960., the civil servants had seven times the averagp income of peasant households and twice thewag of skilled industrial workers. See Ka and Walle (1992), p. 6, footnt 2.

39

voluntary departue program was introduced with an initial sucess and resulted in thedepartue of some 3,745 staff from the payroll (see Box 2.3). On the other hand,government was unable to control recruitment and the wage bill. As of Jtlne 1992, thecivil sevice personnel stood at about 64,000, or 4% higher tha programmed, and thewage bill for the year reached CPAF 130 billion, or 13% higher than planned. Inaddition, the amount of "rppel In arrea continued to increase, contry to the spiritof the adjustment program. The management information system, providing data on staffand payroll, has not been completely instaled.

2.87 The implementation of the program was not without problems. Thegovernment, instead of carrying out a well-designed organizational audit for whichresources were made available by the donors, as origially planned, resorted to ad-hocprocedures. As a result, the administraion was paralyzed for some time. No systmaticfollow up took place on what has become of th staff who left the administtion. Themost serious setback of the voluntay depares program was the inabilit of thegovernment to control recruitment. After the first round of dqetures in June 1990,government had recruited as many as those who had left. This is a clear indication ofthe lack of coordination between minisie and the lack of a reliable monitoringinformation system, two key elements of the civil service reform program and thePAGD. The importance of having adequate institutional capacity to implement thereforms is crucial to the success of the program.

Regulatory EWvronnment

2.88 The regulatory enment has improved somewhat under the adjustmentprogram but more remains to be done. The fundamental issue is attitude-civil servantsmistrust" the private sector. Adminis regais are cumbersome and lack

efficiency. The main achievements in Senegal were in incentive systems. Theinvestment code was revised twice, the latest in 1987, with the view of diminating thebias aganst labor intensive investment, introducing automaticity in benefits, eliminatingthe special regime, and streamning the administative procedures for investmentappwrval through the establishment of a one-stop window (guichet unque). Theformalities involved in setting up an enterpse (including the Commercial Code) havebeen streamined and simplified to allow for quicker and more efficient governmentevaluation of private sector investmt pications. A March 1991 law allows theautomatic approval of all such requests, if not acted upon within 30 days.

2.89 In 1980, a series of export promotion measures were adopted, consistingof a duty drawback scheme and export subsdies, and a strengthening of both the exportpromotion agency (CICES), and the export insurance agency (ASACE). Subsidies havebeen extended and the rate has increased from 10% of export value to 25% of valueadded. However, since 1990, govenment has stowpped honoring payments for exportsubsidies because of budgetary difficule. In 1990, efforts at export promotion havecentered on resuscitaing activity in the industrial free zone (ZJi)i). Firms in this zone

* 4* R

"V -� ,*ii...- ��t�It

� LIII jIftf4� !r:I* :. . '. � � AU� W��4#

� - el� �. I�.r

j 'IiiL� it� H

�1010 � I i r

r

41

are now allowed to sell up to 40% of their output on the domestic market. Thegovernment has also set up "free points," granting all the tax advantages of firms in thezone to selected export-oriented enterpnses located outside the zone.

2.90 Special agreements (convendons spNiales) between government and firmsprovided long-term concessons (in the form of a legal monopoly on production andimportation) to firms as an incentive to invest in large projects. These concessions,which were of an essentally ad hoc nature, introduced distortions in the incentivessystem and resulted in substantal revenue foregone for the government. In 1986, therewere about 21 companies, 15 of which are in the industrial sector, which benefitted fromspecific protection regimes. It was estimated that over the period 1979-86, agreementsof the four most important firms cost the government some CFAF 115 billion, incumulative terms, in foregone revenue. Government decided in 1987 to phase out theseagreements by simply letting them expire, and in the case of three major companmes(sugar, petroleum and cement) specific actions were taken to reduce governmentconcessions. Of the 15 industrial firms covered by these agreements, agreements forfour firms should have expired by 1991, five more by 1995, and the remainder by theyear 2000.

D. Sumai7y

Design and Sequencing of the Reform Program

2.91 The design of Senegal's adjustment program lacks, as do programs in CFAadjusting countries, the use of an important policy instrument, the exchange rate. Nothaving the exchange rate as one of the major adjustment tools bad rendered the designof the program complicated and its full implementation difficult to guarantee. Thedeflationary policy that Senegal adopted relied more on demand management, and lesson supply incentives.

2.92 Apart from the real exchange rate policy issue, the design of theadjustment program components has improved over time as Senegal gained moreexpeience in adjustment. There has been a shift from complex macroeconomicadjustment programs to sector-specfic adjustment programs. A seres of specfic andwell focused (rate than fewer and more complex) programs were chosen by Senegalto avoid overburdening its administtive capacity. This was achieved by dividing thewide range of policy changes needed into manageable packages, or SECALs-banldng,agrcultue, human resources, and transport-which were supported by the Bank and keydonors. All but the agncultual operation are currently under implementation.

2.93 Chronologically, the reform program focussed on reducing the internal andexterna imalances, agricultural marketing libliztion, trade liberalition, publicsector management, including public enterprses and civil service, wage and labor marketderegulaton, populaton growth, bankdng sector restrucring, and transport sectorrehabilitation. The sequencing and coherence between these various components of the

42

reform progam have been closely monitored through the PFP process. Had the humanresources sector, particularly education, been fully addressed and the exchange rate beenused as a policy instrument to improve the competitiveness of the economy, the designof the adjustment program wouU have been comprehensive.

2.94 The sequencing of the reforms has had some serious flaws. In additionto the lack of real exchange rate policy, the decision to proceed with the liberalizationof the extnal trade before establishing an effective tax administration, eliminating laborrigidities, and reducing the cost of production, reflects insufficient consideration givento the sequencing of reforms. Similarly, the decision to proceed with the civil servicedeparture program before establislhng a robust database on wages and civi servants, anda monitoring system, also reflects a deficiency in the sequencing of reforms. Thebankdng sector reform, although well implemented should have been cared out earlier,had the severity of the crisis been known. Finally, the privatzation of public enterprisesought to have been initiated once a good regulatory and incentives framework was inplace.

Government Conbminnnt

2.95 Government commitment to the reform program seems to depend on threekey elements: the degree to which there is consensus-building among the interest groups,the strength of institutions in charge of formulating and coordinating the reform program,and the nature of the reforms themselves-the more politically and socially difficult theseare, the more reluctant government is to implement them fully. Over time, policymeasures tend to be discussed widely with concerned parties, and publicly debated. Acase in point is the revision of the labor code which involved extensive discussionbetween the government, the labor unions and the employers unions and more recentlythe discussion of the higher education sector. Notwithstanding this effort, theinvolvement of the private sector in the design of the reform program has been far fromsasfctory.

2.96 The momentum of the government's commitment to the reform programseems to have been lost following the 1988 election when the technocrats' influence wasweakened as a result of political pressure. During the period 1986-88, a core team oftechnocrats was instrumental in the implementaton of reforms and in the progress ofeconomic stabilization and structural reforms. Senegal was least successful in its reformimplementation where vested interest was strong and leadership was weak. This is thecase of the agricultual pricing reform, the privatization of the groundnut marleting andprocessing sector, the libalizaon of the labor market, and the containment of the costin the higher education sector. The lack of agreement between the government and thekey donors, including the Bank, on the agricultural SECAL, which has been underprepaton for over three years, is a good example reflecting the point discussed above.To deal with the government's weak commitment to the adjustment spirit-often, thegovernment implemented the reforms in form rather than in substance-recent Bankadjustment operations put heavy emphasis on up-front conditionality.

43

Implemadon of the Reform Program

2.97 Overall, Senegal's performance in implementing its adjustment programhas been mixed. This evaluation is cared out by major policy categories and by majorsectors of the economy. Senegal performed well in the areas of monetary and creditpolicy, pricing and trade policy, and financial sector policy-the latter being an areawhere Senegal was one of the first countries in the CFA zone to undertake such a farreaching reform. Two caveats are in order here. First, government began in recentyears reversing its import protection policy, and second, government was not aggressivein recovering the banking sector bad debts owing to its hesitancy to pursue the largedebtors. The unfinished financial reform agenda is mainly in monetary policy wherethere is a need to shift to a market-based system of money and credit management.

2.98 Senegal's performance was exceptionally poor in real exchange rate policy,and labor and wage policy, all of which are critical to improving the country'scompetitiveness in the world market. The real exchange rate has appreciated by at least20% in foreign currency terms during the partial adjustment period. The labor markethas been partally liberalized (liberalization of hiring praces, and partial relaxation ofthe constrints on the use of temporary employment contracts). A new draft labor code,which eliminates the rigidities in the labor market, has been prepared but has yet to beenacted into law. As a result of the persistence of the rigidities in the labor market,labor costs remain a serious impediment to investment, growth and competitiveness.

2.99 On the fiscal front, government implemented a wide range of tax reformsdesigned to simplify the tax structure, (namely by introducing a global personal incometax and a single tax on corporate income), modemized the tax administration system, andmobilized resources by widening the scope of the value-added tax. Government alsointroduced expenditure control in investment. Government tended, however, to focus onshort-term financl considerations, such as reliance on windfall revenue from thepetroleum imports and the introduction of numerous, ad-hoc tax measures rather than onstructural issues. Revenue mobilization and resource allocation were done at the expenseof competitiveness and long-term growth. In expenditures, government reducedinvestment (below appropriate levels for replacement) and allocations to O&M, butprotected wages and salaries, thus jeopardizing future growth and employment. In sum,the required fundamental restructuring has not been achieved. The key fiscal reformsleft to be implemented are strengthening the tax administration, particularly customs,reducing dependence on revenues from petroleum, reducing the wage bill, controllingtransfers to PEs, and raising investment and O&M.

2.100 A review of the implementation of the sector reforms reveals also mixedperformance. The implementation of the agriculture reform program has been limitedto the liberalizat of domestic trade, price decontrols of most commodities, andelimination of input subsidies. On the other hand, rice import controls remain a majorissue and producer prices for cash crops, namely groundnuts and cotton, continue to haveno direct relationship to world prices. The liberalization of the domestic market for mostcommodities have been necessary conditions although not sufficient to turn the

44

agricultural production around. The overvaluation of the real exchange rate andunfivorable tem of trade for groundnut oil and cotton remain major obstacles toagricultural development. A comprehensive reform progm addressing overvaluationof the RER and the groundnuts, cotton, and rice sectors is urgently needed.

2.101 The implementation of the industa reform program has been verylimited. What was supposed to have been a comprehensive and well-sequenced programturned out to be only partially implemented. The policies effectively implemented werethe liberalizon of domestic and interational trade and the decontrol of most domesticprices. However, in recent years, government started reversing its trade policy primarilyfor fiscal reasons, but also to protect industry and to compensate for the appreciation ofthe real exchange rate. Crucial reforms such as labor marlet deregulation, improvementin the legal and administrative environment, reduction in the cost of energy, and exportsubsidy schemes were partally implemented, and late in the adjustment process. Amongthe measures implemented to improve the regulatory environment were the revision oftie investment code and the simplification of the investment procedures. The industrialprogram, which was conceived as a comprehensive reform program, was finally reducedto a policy of price and trade liberalization.

2.102 The implementation of the PE sector reforms has been uneven.Govemment liquidated 21 PEs and privatized, totally or partially, 26 others, togetherrepresenting 42% of the total number of PEs. These PEs represent only 19% and 11%,respectively in terms of assets and government equity. Divestiture, which is nearlycomplete in the financial sector, is far from being so in the non-financial PEs. Theprogress made in the divestiture program is very recent-three-quarters of the PEsprivatized and liquidated, which talated into about 80% of their assets and governmentequity have been achieved since 1989. A total of ten PEs (out of 27 planned) have beenrestructured and rehabilitated. Finally, a total of 24 (out of 44 planned) contrct plans(CPs) and 'letters of mission' have been signed between goverment and selected PEs.The use of CPs has improved transparency and accountability of the two contractingparties-not a small achievement-but has encountered major problems in its financialimplications. On the financial front, the government implemented the reforms in 'letterbut not in spirit.' The government reduced direct subsides to PEs but the benefit of thisreform was defeated when the PEs cwirtously sought finacing through commercloverdrfts and government guarntees. This loophole was corred in 1990 byprohibiting this type of financing; this in turn was defeated by the PEs through theaccumultion of arrears. The settlement of these arrears between government and PEshas been carried out twice in a comprehensive manner, and the problem seems to be lessacute now because of the introduction of concurrent preventive measures.

2.103 In the human resources sector (education and health), only a limitednumber of reforms have been implemented. The unfinished reform agenda includes areduction in the imbalances between primary education and higher educatio, andbetween basic health care and a curative health system. Reform programs for highereducation and health are currently under active considerton by the government.

45

2.104 Figure 2.2 preets the major reorms undertaen during the perod 1980-91 and those not yet undertaoen.

46

F4We o2.2l Im$1'n1aDisOlo Stat of MaJor PeRky Retos to Se=ega, 1960

80 82 84 K6 88 90 91 1S

Fiscal PolicyRationalize tax system XXXXXXX XXX XXXX Ilwprove tax administration XXXX 2Introduce cost recovery 3Control wage bill XXXXXXXXXXXX Ill/I/l 2Improve pubifc investment programming XX XXXXXXXXX KXXXXXXXXXXXXXX 4Reduce PE subsidy XXXXXXXXXXXXXXXXXXXXXXXX 2tmprove debt management XX xxxxxxxxxxxxxxxxxxxxxxxx I

Monetary and Financial PoliciesAdopt flexible int. rate & credit policy XXXX IEstablish bank supervison body XXXX IRestructure the banking sector xx XXXYIXXXXX)XXX 1Develop capital market 3Shift to Indirect instru. of monetary control 3

Real Exchange Rate PolicyAdopt deflationary poticy 3

Domestic Prices and Trade LiberalizationDecontrol prices XX XXxX XX Xia/Liberalize lnput & cereals output marketing XX XXXXXXXXXXXX lb/Reduce input subsidy xx XXX XXXXXXXX 1Eliminate monopolies (special agreements) 3Reduce cost of production XXXX 2

Labor Market LiberalizationDeregulate wage setting system 3Deregulate labor market XX XX 2

External Trade LiberaltiationEliminate non-tariff restrictions XXXXXXXX Ic// //I Ic,Reduce tariff categories and levels XXXXXXXX I/C/// / mi-Improve export Incentives XX xXXX XXXX//// 2

PEs Reform ProgramRestructure key enterprises XXXXXXYXXXXXXXXoXXXX 1Implement divestiture program XX XX XXXXXXXX 41Rationalize supervision system XXXX XXXX 1Use performance contracts 2

Enabilng Environment ReformSimpLify legal & admin. procedures 3improve investment incentives XXXX XXXX 1Reform civil service XXXXXX 2

Other refornsPopulation control XX 2Reform education sector 3Reform health sector 3Reform rIce, cotton, & groundnut sectors 3Adopt social safety net measures XXXX XXXX 2

DO Policy Implemnton. IS- Jmpleaintatioa stau.I/Pocy Rv . I - lwlmsacd.

2 -Not affecivey ipememod.at Pries on 14 items rmain contoled. 3 - Not isylnmnted.blUco nRiaete mns controed. 4 - Coninuous.c/Gradual pocy rversa.

Souxe:SA Tabe 5.

3

Macroeconomic Outcomes of the Adjustment Program

3.1 Eight key variables have been selected to measure the impact ofadjustment: three intermediate indicators-budget deficit to GDP ratio, current accountdeficit to GDP ratio, and real effective exchange rate index; and five outcome or"response" indicators-economic growth rate, investment to GDP ratio, savings to GDPratio, export growth, and inflation rate. All these variables are presented in Figure 3.1over the period 1980-91. In addition, Table 3.1 provides a comparison between thecrisis period (1979-81), stabilization period (1982-85), and the partial adjustment period(1986-91) for all of these indicators.

3.2 The government's macroeconomic performance targets have been criticizedby some observers, including the Operations Evaluation Department of the World Bank,as being too ambitious. To respond to this criticism, PFPs projections of the aboveselected indicators have been compared to actual outcomes for the period 1986-91 (seeSA Table 2 and SA Figure 1). 2' While PFPs projected a steady growth of around4% per annum, actual rates have been within an acceptable margin of error in four outof six years. The two years for which actual growth rates diverged significantly fromprojections are 1989 and 1991, a period of poor rains. Projections of savings andinvestment ratios to GDP have been optimistic, with actual values lower by 42% and12% on average, respectively. Inflation has been kept remarkably low given the tightmonetary and credit policy.

3.3 The fiscal deficit as a ratio to GDP fluctuated the most. While PFPsprojected an improvement in the fiscal position by around one percentage point of GDPper year, the actual outcome displayed wide fluctuations. This does not, however, reflecta deliberate over-optimism embedded in the PFPs, but rather a clear indication of poorfiscal refoam implementadon combined with external shocks (see Box 3.1). The currentaccount deficit has been less favorable than those projected, largely because of poorexport performance. Imports as a rapto to GDP have declined to a point consideredharmfid to longer-term growth. The acua export growth rate has been lower by a largermargin than projections. In particular, traditional exports (groundauts, cotton, fish, and,to some extent, phosphate) have been proected at higher rates than warranted by eitherworld market prospects (the case of groundnuts) or the country's potential (the case offish). The poor export peformance is a reflection of the substantial appreciation of thereal exchange rate. In sum, apart from achieving a low rate of inflation, the expectedmodest results of adjustment, as envisaged in five consecutive PFPs, are far from beenfully realized in Senegal, partly because of poor program design and lack of reform

?I Maroeconomic Projectos in Pohicy Framework Papers in the Afica Region," mineo, RasbidFaruqee, AFRCE, World Bank, July 15, 1992.

48

Table 3.1: Mk Idcat, 197O-90(Yarly Avera". Is petcmtage

Pr*Ci Cr*is SbWztdn Pana A#1.19708 19791 198248S 198$9)

Flna Rea*ssGDP wth 2.3 1.8 4.3 3.2GDP percapita gowth 0.5 -1.0 1.4 0.3Pimy sector gowth a/ 0.9 1.0 5.0 3.3ODIGDP 17.7 13.9 11.9 12.8ODSCIlDP 10.5 -1.2 0.6 7.6Export GNFS growth 6.0 4.7 S.S 3.3Inflaton rate (GDP deflator) 7.4 9.1 10.0 2.7

bhateAme RoasaFiscal defioit/GDP b/ -0.6 -7.1 -6.8 -2.9

Primary fiwal deficW/GDP bl .. .. -3.2 -0.0Red idtrest (diswount) teQ03 ./ 0.5 1.0 7.3REER (1985-100) el 101.8 100.1 93.7 122.6Prodtcer price/wodd prices

grounduts .. 0.3 0.5 0.8cotton 0. 0.4 0.4 0.7

Currnt account dcfilokGDP di -10.4 -19.3 -18.2 -10.0Ecludig inte paymenb .. -17.3 -16.3 -7.5

Debt service scheduledlG1P 2.6 7.1 9.2 9.6

a/i ncluding aricutur, litock foesy and fishery. Thm averag owth ate for ih peiod 196491diffen fom the on presentd in Table 4.1 becaue of fte ue of diffnt mothodolog.

bl On a bosmn and excluding grantsol An increae Indcate an appreciationd/ Exchding official tansferse/ For the period 1975-78

Sour.e: World Dank data.

implementtion, pardy because of external shocks, and pardy because of optimiscassumptions.

A. Macroeconomic Stabilizaton

3.4 Overall, Senegal has succeeded in draically reducing its maceoonomicimbalances during the 1980s, particularly since 1983. > The budget deficit (on acommitment basis and excluding grants) was reduced from 8.8% of GDP in 1983 to4.3% in 1990 and was completely eliminated in 1991. If interest payments wereexcluded, the budget position would register a better improvement, from a primary

21/ This sectin dw hveaiy on the recent Bak economc report on Senegal: MAcroeoonomic UpdateJune 199,3.

49

Figure 3.1: Senegal Key Macroeconomic Indicators,1980-91

GDP & Sector Growth (%) Investment, Savings (% of GDP)

30 tA10

O S ts H 5 * O "FZ os {@S

t3 t . . . . . 5\ . . . . . . .,

$ U1 S 3 SS $4 SS 85 S7 SS 99 91 30 81 3 8 SS 358788 I9 90 91

Year T">* 8 $8Sar 8199

-OW +AL-Mrass t-lvstestt^ +8^"V&SO

Public Finance (% of GDP) External Sector (% of GDP)

40. PoO

- e e .. " , _ .......... e-~~~~~4.

*s~~~~~~~~~~~ o .' ... ..@ . . . -e

-so .16

-Fie BaL +BzP*-L We *se a -Czffstra ooa +ap*M of8 OP aN-Ipom of GNP$

Tors of Trade & REBR (8S-100) Inflation, Interest Rates (41)4:ICOR

40 *0

S20 to8 38 SS 73 9~ 130S 23 46 43 83 09

Sa . se

* t * 4 SS eT ST St 94 e

Tem f td &lE (510 'nf Atln Ineet ae %)&I

I 2 33 34 85 34 37 ii 39 90 e1 -o e iS *a Is *4 SS as 87 0i *9 90 91

-T.o" +-taItl 0- *l5bt 11t 1IatoIt Rat 43.a :stogoI t at* -lcot (S-Y*at)

50

deficit of 5.6% of GDP to a surplus of 2.6% over the same period. The current accountdeficit (excluding official transfers) experienced a similar trend-from 18.6% to 7.9%of GDP during the sane period. On average, the internal and external imbalances werereduced by half during the period under review. This stLilization, particularly in thefiscal area, remains fragile, and, unless additional structural reforms necessary toaccelerae and sustain growth are urgently introduced, it cannot be sustained.

Fiscal Improvement

3.5 The manner in which Senegal stabilized its fiscal situation during the 1980sraises serious concerns about the sustainability of its achievements, and the negativeimpact on competitiveness and long-term economic growth. As discussed in Box 3.1,the fiscal improvement was not continuous throughout the period nor was it based on realstructural reforms, a clear indication of the govemment's stop-and-go adjustment policyand lack of commitment to fiscal refonns. A review of the fiscal policy in Senegalhighlights a number of critical issues. The first is the lack of sustainable fiscal reform.Senegal's poor revenue mobilization (i.e. the tax elasticity declined from 0.8 to 0.6during the period under review) S- has caused the adjustment program to focus onreducing public expenditures, often priority expenditures. This situation has becomeincreasingly difficult to sustain as evidenced by the recurring fiscal crises. Nominallylower fiscal deficits in recent years have been achieved through arbitrary cuts in publicspending (including O&M expenditures and direct export subsidies) and ad-hoc revenuemeasures in the absence of a balanced structure between tax and non-tax revenue. Thecontinuation of past policies could indeed lead to a worsening situation as the tax burdenbecomes increasngly more severe to a smaller number of taxpayers, thereby encouragingattempts to "informalize" their economic activities.

3.6 A second issue is the continuing conflict between revenue mobilization andgrowth promotion objectives. The issue stems from the fact that Senegal continues torely heavily on windfall revenues from petroleum (to the tune of 22% of total taxrevenue) and rice imports to finance its current expenditures. This reliance on petroleumrevenues erodes Senegal's competitiveness (domestic petroleum prices are 2.3 timesworld prices) and undermines the stability of the revenue structure given the potentialvolatility in world oil prices. Therefore, increases in fiscal revenues must come fromimproved tax administration efforts and a reduction in exemptions and fraud. With lessthan 14% of GDP, the current tax revenue in Senegal compares poorly with countriesat Senegal's income level-the average for Sub-Saharan Africa is about 16% and for low-middle-income is about 17%.

2I Tax elasticity is defined as the percenage varation in tax revenue expressed in terms of changes in GDP,but excluding the impact of discretionary measures. Several factors accounted for the decline in the taxelasticity. Most noteworthy were the arrowing of the tax base, reflecting a weak economy, and the

infomalton of the economy as the informal economy expanded rapidly away from the stagang formalsector. The reasons for tax variation include hig tunover, dteclining salaries in the formal sector, low businessprofit, and a decrease in imports, adversely affectig tax collection.

51

l i S1 e;9eqbp "I hadjustametWa A $Io.anM i9rw* kV

Sig)epoe to hvQfomsdwel o te 6@e font4uu 19V44 (t m& a dtoe wby@ W*Weltdu itsav nie)o ulwM to Beu aadthe Pt w pd 1o 874t8o yaerfordu w oh drauh. d,* to laqe 4X8* (o

Winbasis d @6 oludlzat te w tde ad wn cwioed us oed $ adswete pobudget tefic , it acbltW I .6 pOwhow!WAbs a -justnan we , l d t and dom In a way onw ing y to hWnmvIq of :enaga),

ti o w ad no po lod buytan gm h. d3us w tg a6i sile by w d Welubr Iitet -nd .P eogr) nd bs rh g ni p*bw y frm 0 4

na of 9 p7erentage p '$ of "D?, otarti 198546) end fi c in . he e ue wlndid frt n the govewuiwot's policy o niulonin dcweae pto of petretuni produtshen wn dd pdfesa decl asply. Curnty

..donasto rces re rseth abO 4tW worl prices. Tb. h.evy4nonphtdust.V5tWOIdO1Io e at*icU

It i ssos cost of po tio and maes the revensuce jectto the volatli ieteum rdprs

.. , ., . . . . .. .. . . . . . - - -~~~~~~~~~-A - ,""

.:Wifdi the wubstata rvueu wndas were iwislyw used to reduce the bamdget d.tlc (unlike In naidl?O whee windfa fom grw were used to Iease eanla d ibo a:

*f trde), 4me wese n~*coinjac_edby aa loprvd fieireeu posiin in spite 4fa nume*dlscre4oaagrwxese:nrdue wder dWte a djutnnpcr TDe shr of tax revenu in GDP de1e fiom 18.1 pern bi ;844o i:43:;~Qn :> 1 9874.miy as mal oUkoIs *hatartstrate gy, atlenbtheX economy. and poo az amosttotpeuaree. npanlulasi ahacustoms depa:.'.. .:tment,:..;..

".>2..s.>......... . S, . . . . . .. . ,, , /.......

Tb.* silii re u * fiscal dafIckistbs jperiodi enwnt~vrslame. indn oitaltl:ib. 1 b tjusd torha h hugei IXbo i* lofebiting~e.taf .ibce i.g na.%utta.

1stn h baitin ytt. So-m5 CPAE: 253 bilin equivaetto 16% of GDPu to 92% of overnmnevmie .n1:98$ <' '..... ,, ere ,ede 'o restru.......tur .e th S,nn sys,,m.: ,

1182 81.0 16/8 OA/8 ;4/ 09 3fl14 00

Jav..... 19.; .' .' .. S " ' ''' -'

:5; ;,nv .. .: . :. .. -.M . i T t -.

64 -,., , .. ; :% 28.1 . 2..: :1 - , ., . I.7 - . . ., 4..~~~~44 4 2* 2 2* ;* 4* -1. ..

1'slwy4 .:c ' 4.6 4.0. 0. .4 0. 4.8X 2.6 1.2 .* 22*

......

' ; i i t i ;lil t ij B> ~~~~~ ~ ~~po0t a-~~~~~na dwotroe Tihere w ilhin _aitr ofthek traut, qWantirebu*a

aid tthe p" n t b ei I *, u tg Xp 1 q

'~~~~~#1ernwttrenaunsdaemajoo~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~eradlUareItean.,~~~~~~~~~~~~~~~~~~~~~~~~~~

52

,. fkioflIt, **m~loto ecron, U4,*WII '*.4 o.nudoW'ams eaeof ge,o 'l au.he:rgm aywtmet.a aytWo oa :." sex,b ^itswp fr i the i pauyt e of oulndtesi194.

.r' tulitie,tu eseene~ wtmenm eoAitb u a tfdi of totl t''ax esou.

l'.y 'a*t4a(

WOOalIAPWVe 4ospad or ndareas tikdi orwBobed

3.7 Third, little PrOgres in the civil service reform has led to a situationwhere the wage bill continues to be a heavy burden on the country's limitedresources. 22' Given the government's budgetary constraint, a significant reductionin the wage bill is vital because the resource savings are needed both to reduce the heavydependence on petroleum revenues and to increase expenditures on basic social sevices(such as primary education and preventive health care) and to maintain the country'sinfrastucture which, due to lack of proper maintenance, is rapidly deteriorating. It iscnbcal, from the long-term growth point of view, to increase the share of investment inGDP. One of the findings of the second review of the Banks own experience withstructural adjustment (RAL It) shows that growth in the private sector is somewhat linkedto mcreases in public investment. For non-wage, non-interest expenditure, there isetainly room for improvements in efficiency and sector reallocation, but in the

aggregate, the level achieved prior to the austeity year (1990-91) could not becompressed further short of adversely affecting the functioning of the economy.

External .ctor

3.8 Allowing for debt relief, a major source of foreign exchange fimancing,the balance of payments has registered surpluses in four out of five years of 1986-90 dueto an improvement in the trade account. The trade deficit which had deteriorated up to1985, has since improved, particularly in 1986 when prices for the country's majorimports (petroleum products and rice) fell sharply. With the exception of phosphates,exports have been stagnant or falling. Between 1982 and 1990, Senegal's two keyexports, fish and groundnuts, increased by only half a percentage point per year in

L7I Even in the abnce of budgetry onatn, the civil servie neesto be downsied to improve itsefficiency as Sonegal inhenitet a large admintrton when Daka was th cpitl of the French West Aricancolonie.

53

volume terms-a dismal performance. w Senegal's trade balance improvement wasthe result of import compreion whi cannot be pursed further without adverselyaffecting long-term growth. The diversified export base, seemingly achieved during thepartial adjustmet period, is more a reflection of key traditional export items having losttheir momentum in recent years tan a vigorous increase in non-traditional exports.

Estmae Fandng Asi'=

3.9 As a result of the lack of significant structural progress on the fiscal side,Senegal continues to rely heavily on external budgetary financing. As discussed in Box3.2, Senegal received generous extenal financial support from the donor community,with little interruption since indqpedence. The amount of externl support increasedrpidly dring the 1980s, especially during the second half, and the terms also becameincreasingly favorable. It is difficult to assess the contribution of external financing tothe overall performance of the economy during the 1980s. One thing is clear, however,the increase in external assistance during the adjustment period (1986-90) was associatedwith a slightly positive per capita income growth, an almost constant ratio of investmentto GDP (this is in spite of the fact that publc investment is donor driven), and highpublic consumption, pardicuarly the wage bill. Had it not been for -soft- exterabudgetary support (i.e. with less stringent conditionality attached), Senegal would havehad to cut its public wage spending dmstically in order to reduce its budget deficit whiledamping infonary pressures.

3.10 From the balance-of-payments side, the increase in extemnal resources canbe jusfied in principal on several grounds: to compensate for the real cost ofadjustment, to offset the deterioration in the terms of trade, and to improve the level ofreserves (i.e. the operations account position). The main objective is to maintain highlyneeded imports to sustain economic development. However, in the case of Senegal, the

justficaion is very weak as both te terms of trade and the value of merchandise exportsimproved dunng the partil adjustment period in comparison with the pre-adjustmentperiod.

B. lhe Competitiveness of the Econory

3.11 As discussed in Chapter 2, the compedtiveness of the Senegalese economyhas not improved during the adjustment period. The real exchange rate has significantlyappreciated and the cost of production has remained high. Real wages and salaries haovedeclined dgnificantly during fte period 1980-85 and then recovered somewhat during thepartal adjustment period and remanWed uncompetitive compared to other countries. In

2W Aunmg tbo main explntory factr for tho poor p mance of dte two export itm, one can menionXt resurce deplo aud the agg fihing Ret in the came of the fisy ector, and the keea vegetable oilbsitution in the case of grount oil.

54

S.$ h , h i blee a dfavotoury for donors since independence, largely for politiaeass. Po ;a long time It has boo ene of the w democracies in Africa. uring th-e 198s, netdlsbummemnt f official develo-me (s ODA) to Senegal Mon: than doubled, reaching $641mIb:ni 1991 or iabiout- 27 e of OGP. Not only did Senegal receivO S much larger sare i per

thanbefor, bt the ap betwn Seneg sad other SubSaharan Afria couties widenedtime. letwen 1980 and 1991, pe capitaL ODA (net of pripal) we fm $59 to $S4 ($111 in

19P(: In the c of Seel d firomn $20 too $37 for Sub-Saun Aicaf Senegal currenty receieseaterum financial upport from 27 donors, with Fan, th0 EEC, -DA, Japan and the USA accounting

r the buk. Of the obA dsb"usmet during the peiod under revinw, grants representd on averageabont 50l multilateral 27%, and technicl assi e 21% of total.

Senegal's debt has stabuild A t :yer aftr e as ga rapid increas between 197943end 19$$-#7. Th. stock of utstandingpublic *nd pUblly'uarnteed debtreacibed $4.0 blionln 1937

; fterdb smclai it fll tio $3.5 bilo at the ed of 199*, eivalent to 64X -of 01)?. Aftrdebt fo'rivees,deb t ilaea nmliatera surc. ow w ruhy equa. Thesrcueand trmntSega debtbaaafr become ore favorable. mediumin*ad long-tm dobt accouts now for 90%

cotumitmeats fell from 5.9% in 1980 to 3.79 in 199s1,0 withe, veraetrit edfom 20yem to 29 years. T average grace period also rose 6om 6t yearo to1ye during the same period.:

}etwe981 and 1991 e¢igtypercent oexter finain was channeled through the intrenth e eit e or i e ) orfornl but supportt(60%). BThelatterbeame

flct ldd half of t 1980s in sppt of tho adju effort Debtnehe~ hic cconte fo hee a3bugetr support,, averaed ab milion annually, or 26

ofttlbdgtfnnig.Senealasbeeltdfo seeal roiunids ofreohdligy bilaterlceditoru(sane 1'arla Catb rmhedulins) and commerial bean Club recedulig)- Total debreahdhu tine bySeegl nceaed austatly duin te Sf,PA'perid and, umlatiey

woGned t $90 ndlio durng he 160.fea Ta .S3aX .~gaO .lw .:d Ber (17 ;:.ss *06'-:

~~~~~~~~~~~~~~~~~~~~to - ";.05w zW f$W.$g$i:::<Sf; Flw xsrns.L lTd*;:: a P c GOPr/ 1989~~~e 234 366 *2 ... ,... ... ,

1.:981.i.: 459 .... .. 416: : 18 .::87 24? : 335 107 . 1.2.19.2 .. :.;497 -e 472:. :198.: 95 I9S5 . 289 93 153198 48 408 99* W 80 194 214 r 91 i2 1

1064 482 444 *15 57 106 222 ~~104 .4.2198 35i2 881 '92 42 ; 4 2 1: 4.0

198 00- 62 .:2 .7 28 ::3.19ss*s 9 , 112. 44

-4148 . .t ; 6 1 110 2-

;$:A0 .,766 478 1 111 318 429 111 .32.: 16 . 7 $4 4 6 67 61 *11 50Q

... .... .. .

55

the industial sector, Berg Z1 observes that "there has been a modest fal in real wagesduring recent years. But... ftis tendency has not been strong enough to convertSenegalese industry from a high-wage to a low-wage sector." The minimum wage(SM[G), a base benchmark for wages in the industrial secr, declined by 22% in realterms during the period 1980-85 and increased thereafter by 9% during 1985-90.

3.12 Data on fctor costs in Senegal are scarce, maing it difficult to makeappropriate comparisons with other countries. El Nevertheless, the findings in recentstudies indicate a substantial lack of competitiveness in Senegal. This lack ofoompetitiveadvantage in Senegal is illustrated by the following examples.

*1 The average labor cost in the Senegalese modern sector is roughlyequivalent to the average civil service salaries is respectively 56% higher

ian in Morcco, 60% in Malaysia, 70% in Tunisia and 370% inIndonesia. Public sector wages in Senegal appear to be even further outof line when compared to per capita GDP. Average public sector wagesin Senegal are almost 12 times per capita GDP (1987 data), which ishigher than in a large number of countries. w Civil service salariesare 13% and 430% higher in Senegal than in eight CFA countries and insix non-CFA countries, respecively. F

3 Case studies indicate that labor costs are significantly higher in Senegalthan in countries with higher income levels. For example, labor cost is100% higher than in Taiand in the tuna-cning industry (an importantmanufacturing activity in Senegal) and 40% higher than in France in thecement industry. W Senegal's share in the world market of cannedtuna exports declined from 12% in 1976 to 2% in 1990 in favor ofThailand which was a newcomer in the world market and which, unlikeSenegal, was txed 24% to enter the European market.

- In the tourism industry, second to the fishing industry in foreign exchangeeaniings, the hotel occupancy rat went from 45% in 1984 to 38% in1989-below break even. The cost of tourism in Senegal compares

291 See Berg (1990) p. 116.

; See ILO Study wEtde sur les co(ts salauiaux et la fixation des salairos au S6ngal, October 1990. Thisstudy was conductd for the governmont of Seaegal in the context of SAL IV.

J/ 9.1 times in the cae of C6te d'Ivoire, S.9 times for Cameroon, 4.8 times for Morocco, 3.S tmes forTuniia, less than 2 times for Martius, Malayda and Ghana.

MThe oight CFA countries are Buria Faso, Chad, Mali, Niger, Togo, Benin, Senegal, C6te d'Ivoire. Thesix non-CFA countries are Zaire, The Gambia, Guinea, Ghana, Mauritna, Morocco. See Berg (1990) p. 1S.

2y See Jean-Paul Barbier, aj4fl*xoso ur la comp6titivitd, comparisons Afrique.Asie,' CCCE, May 1989.

56

unfavotably with Senegal's competitors such as The Gambia, Morocco,Tunisia, Seychelles and Egypt.

Finally, the cost of fuel and electicity involved in the production of a tonof cement in Senegal is 3 imes the level in France. This is pardy due tohigh domestic energy costs which are 2 to 2.5 times world prices. Thehigh domestic energy cost is a result of the heavy budgetary dependancefor revenue on the energy sector. The contribution of the sector to thebudget amounts to 22% of total tax receipts and this is after the July 1991price reduction.

3.13 The frequent changes in import policy and subsequent distortions send thewrong signals to an already weaked and uncompettive induswtrial sector. Moreover,export subsidies, which are critical for offseting the distortion in the economy relatedto high cost of production as well as an overvalued exchange rae, have not been paidover te past two years because of government fiscal cnrsis. It should be highlighted,however, that some industies did adjust to a more open economy by restructuringthemselves and improving their efficiency. As discussed in Chapter 4, some firms haveincreased their labor productivity and changed the composition of their output. ThroughImproved productivity, the refonns have also led to a decline in prices.

C. the Suply Response

3.14 The cornerstone of the stabilization progm in Senegal has been thecompression of demand, priariy through private consumption and investment. Thiscontacdon was more pronounced during the second half of the 1980s than during thefirst half. Gross domestic investment in Senegal had averaged 12% of GDP during 1982-85 and 12.8% during 1986-91, a ratio not conducive to growth and which does notcompe fvoably with either Sub-Saharan Africa (15.5% of GDP) or with what isreed to pret the stock of capital from deteriorating (13% of GDP ). Lowprvte investment can be attributed to the stringent credit policies adopted bygovernment to reduce domestic demand and to the stagnation in the economy. Despitethe sinicant i Vement in fte fiscal position, the government conftnued toexCpeIence negative budgety savings (tax revenues minus curent expenditures),necessi g large budgetay spport from external donors, a situation which is clearlynot viable in the long run. Foreign savings (measured by the current account) wereneeded to finance not only gross domestic investment but also a large proportion ofdomestic consumption. Sluggish growth in private consumption resulted in higherdomestic savings which turned positive in 1986 and now represent 8.8% of GDP. Oneof the most likely explanatory factors for the increase in the savings ratio are positivereal interet rates throughout most of the 1980s.

21/ Wouk (I92d p 32

57

3.15 Notwithstanding the poor quality of national accounts, the average annualeconomic growth rate in the second half of the 1980s, a period of partial adjustment, was3.2%, compared to 2.1% in the first half of the decade. This compares weU with thelong-term historical trend of 2.1% (1960-80), but only slightly higher than the populationgrowth rate of 2.9% -'. Senegal's performance during the first half of the decadewas extensively analyzed in the 1987 Country Economic Memorandum Mf. GDPgrowth was adversely affected by the severe drought of the 1983-84. In spite of itsrelatively small share of GDP, agriculue continued to have a major impact on overllgrowth through the multiplier effect on the rest of the economy. The performance of there sectors of the economy, namely agriculture and manufactring, is discussed in detailin Chapter 4.

3.16 Is the Senegalese economy now more efficient and diversified than priorto the start of partial adjustment? The question of efficiency is difficult to addressbecause of extemal factors and the time lag. Two indicators are used to shed light onthis question: the incremental-capital output ratio (ICOR) and the export growth of themanufacuring sector. The stagnation in the investment ratio to GDP during the period1986-91 was not accompanied by declining economic growth and thusjesulted in asteady improvement in the ICOR. The 5-year lag ICOR went from an annual average of7.9 during the preadjustment period to 3.9 during the partial adjustment period. Tlisfavorable trend could be explained by favorable weathe conditions, excess capacity inmany industries and better slectivity in public investment projects. It is unliky,however, that it can be sustained without major replacement of the old equipment andmachinery. As -with respect to manufacturing exports, there is no hard evidence thatexports inreased in a meaningful way during the period 1986-91, largely because of theoveiraluation of the real exchange rate and the lack of reliability of the export subsidyscheme. The elasticity of non-traditional exports with respect to GDP is esimat at 0.5during the partial adjustment period, compared to 0.8 during the first half of the 1980s.

3.17 There has been little diversification in the structure of the economy duringthe eighties. The share of the primary sector in GDP remained almost unchanged, withthe drop in the shares of agriculture and forestry offset by the increse in the share oflivestock and fishing during the second half of the decade. The share of the secondarysector (essentially the informal sector) increased by less than a full percentage point ofGDP at the eense of the terUary sector (essentially the government services) during thesame period. The increase in the share of the infornal sector, both in manufaturing andservices is, to a certain extent, a good indication of the large number of constaints stilfaced by the formal sector.

aZ/ This is an average rate for the priod betwen the last two populaio cOus held in 1976 and 1988.For moro recent yeas, the populatn growv rate is esdmatd at 3.2%.

fW Soo World Bank (1987a).

58

D. Summiay

3.18 Senegal emerges as having achieved mixed results during the partaladjustment period. Furthermore, these results do not compare favorably with theexpected results of partial adjustment as envisaged in five consecutive PFPs. In part, thisis becu of poor reform implementation, real exchange rate appreciadon, externalshocks, and optumistic assumptions embedded in PFPs. Moreover, compared to whatSenegal should be aiming at, the results were not encouraging.

3.19 Senegal reduced by half its macroeconomic imbalances during the 1980s,especialy since 1983, through demand compression in private consumption, investment,and public expenditures on priority areas. Stabiliztion, particularly in the fiscal area,remains fgle and uness additional structur reforms in civi seice and tax collectionsare introduced, it will not be sustained and may lead to a deteioration in the long-temgrowth of the economy and in the competitiveness of Senegal. As a result of the lackof sgnificant strctural progress on the fiscal side, Seneg continues to y on largepetroleum revenues (22% of tax revenue) and external sources to finance its budgetarydeficit. Improvement in the current account is lagely due to a sharp decline in picessince 1986 iar the country's major import items (petroleum products and rice) and toinport compression associated with low investment and growth. Export performance hasbeen erratic with an overall disappointing trend.

3.20 Competitiveness of the Senegalese economy has not improved during theadjustment period. The real exchange rate has appreciated significantly and the cost ofproduction has remained high. Furthermore, the frequent changes in tariff and taxationpolicies and the distortions entailed, together with the poor implementation of exportsubsidies, send the wrong signals to an already weakened and uncompetitive industrialsector.

3.21 The average annual growth rate in the second half of the 1980s, period ofpartial adjustment, was 3.2% compared to 2.1% in the first half of the decade in relationto a population growth rate of 2.9% - 3.2%. This limited growth should be cautiouslyinterpreted given the poor data quality, parcularly for the period under adjustnent. Inspite of its relatively small share of GDP, agriulture, whose performance was largelydetermined by weather conditions, continued to have a major impact on overall growththrough the multiplier effect on the rest of the economy. While there has been someimprovement in the public investment proramng process, there has been littediversification in the streture of the economy. Furthermore, the level of investment hasdropped to below the minimum level required for prerving existing infrastructure assetsin Senegal, let alone for accelerting growth.

4

Sectoral Outcomes of the Adjustment Program

4.1 This chapter assesses the impact of the adjustment program on key sectorsof the economy, namely agriculture, manufacturing, public enterprises, education andhealth. Other sectors such as tourism and fisheies are not examined here due to lackof data. An attempt is also made to evaluate the impact of adjustment on povertyalleviation and income distibution. While the chapter does not address explicitly thegrowth potential in each sector of the economy, it becomes clear that this potential isconstrained by a number of factors, both economic (real exchange rate appreciation andlabor market rigidities) and non-economic (cumbersome administrative and legalframework and *adversary" attitude of the government towards the private sector). Ina more conducive environment to growth and employment, and given Senegal's favorableassets (close proximity to Europe and America, skdlled labor, and good climate), thecountry's growth prospects seem to lie in non-traditional agriculture, light manufacturing,and services (such as tourism and data processing, etc.)

A. Agricltral Sector

Introduion

4.2 In contrast to most African countries, the agricultural sector (includingforestry, livestock and fishery) in Senegal accounts for a modest share of GDP (20%).Agriculture, however, enjploys about 60% of the labor force and provides a living forover two-thirds of the population. It also accounts for a large portion of foreignexchange earnings, with groundnut export earitin (US$110 million in 1991) rankingthird to fish exports and tourism earnings. Although declining in relative importance,groundnuts account for about 60% of farm cash income.

Impact of the Reform Program

4.3 During the second half of the 1980s, total agricultural productionregistered a modest increase of 2.9% per annum. This performance contrastedsignificantly to that of the early 1980s, which was poor, largely due to poor-to-averagerains. In volume terms, food crops and cash crops production increased on average by2.9% and 1.4% annually, respectively. Being primarily rain-fed, the agricultural sectorin Senegal depends most on climatic conditions. This is reflected in the downward trendin total cultivated acreage. Acreage under food crops production has remained almostunchanged, whereas acreage under export crops production has sharply declined (Tle

60

4.1). Increased production and a drop In acreage has resulted in high yields. Yields perhectare have increased on average by 3.0% per annum for food crops and 3.7% forenxpot crops. The extent to which the increase is due to improvement in the quality andavailability of inputs as well as in technology is not known. There is evidence that thesefactors could not have Dlayed an important role. For example, fertlizer use, a key input,dropped from 75,000 tons in 1980 to 25,000 tons in 1990.

4.4 Given the strong land populaion pressure, the total food crop area musthave declined significantly on a per capita basis during the 1980s. Barring anytechnological improvement, this implies a deterioration in labor productivity. In percapita terms, cereal consumption has declined in Senegal from 242 kg during pre-adjustment to 222 kg dunng pardal adjustment. While cereal production and cereal aidremained unchanged, cereWal imports declined signuficantly. The decline in cerealsimports (rice and wheat) seems to be constent with the emphasis placed by thegovernment (through relative prices) on the production of domestic cereals, namelymillet, sorghum and maize. It is also a reflection of a good harvest as well as continuedcontrols on rice imports.

4.5 The decline in cereal consumption does not however mean a decline inper capita food consumption as Senegal is believed to have increased its fish andvegetable consumption quite considerably in recent years. Fish production increased onaverage by about 6% a year during the 1980s. Data on vegetable production is notavailable, but there has been a significant effort on the part of government, farmers andNGOs to increase the number of wells in rural.

4.6 The shift toward food crops (mainly millet and maize) and away fromexport crops (mainly groundnuts) has been more pronounced in te second half of the1980s. This can be explained by the favorable price differential between food crops andexport crops due to government policy measures undertaken in the 1980s. Thegoverment adopted a policy aimed at raising producer prices of key commodities,causing producer prices for food crops to increase faster in real terms than cash crops.While producer prices for food crops increased by a total of 6.7% during 1986-90compared wift 1980, producer prices for export crops increased by only 0.7% (Table4.1). This insignificant increase in producer prices for export crops is a reflection of thegovernment's decision in 1988 to reduce the producer price of groundnuts from CFAF90 to 70 per kg as a result of unfavorable world prices. Within the food sector, the ratioof millet to nce prices moved only ightly in favor of milet, reflecting the lack ofimplementation of the government food 'self-sufficiency' policy.

4.7 Although Table 4.1 indicates a slight shift of the internal terms of tradeto the primary sector (agriculture, livestock, fishing, and forestry) and away from thesecondary sector (manufacuring, mining, conshtuction, and energy), this shift should beinterpreted with caution as it is not statisticaly significant and data on prices are notalways reliable. The shift, if any, in the internal terms of trade, combined with decliningreal urban wages (para 3.12) has led to improved rual incomes compared to urban

61

TAblUs. Sowed Key Agkdwa Jlawo, 1980-

Annual Average gO, s s

1MW JME.91 Toa An"a

Pdmr Scor VA (CFAP bonatant 1987 plc)*/Totl secor 259.8 308.9 18.9 2.9Ajculture subetor 150.8 163.8 8.6 1.4

Agrictur Production (000food ops b/ 813.2 965.4 18.7 2.9expt c / 773.8 838.8 8.4 1.4

TOtall teap 000, ha)food rops W 227. 1211.9 -1.3 .0.2expot cos ol 1010.0 882.6 -12.6 -2.2

Real Pr nue Pric (1980G 100)food crpsb/ 10.A 106.7 1.2 0.2expot ocl 102.8 100.7 -2.0 A0.4

Food 1nhwtedIValu (8, 4 227.0 257.0 13.2 2.5voume (000, t) 476.0 420.0 -11.8 -2.5

Food Aid (M0, t) o/ 133.9 157.8 17.8 3.3Export crops c/

vaue (S, n) 114.0 127.0 11.4 2.2volume (MO,t) 241.0 316.0 31.1 5.6nrl tenm Of tra (1987-100) 94.3 97.0 2.9 0.6

Cueal a r Cqp( 241.8 221.8 8.3 -1.7Prducion 138.1 138.7 0.4 0.1inspota $80.9 60.4 -2S.3 -5.7Ai 22.7 22.7 -0.3 -0.1

Noss Proco Coeffiolat gt Dometic Resoue Cos h/muillt (ower v"e) 1.3 0.9maize (casaae) 1.6 1.0Rice (upper le) 2.0 1.0Coon (aterm Senl 1.1 0.9Grundnuts (v.bain) 1.8 1.3

a/fhe m tr cude agculure, ivestocks fisin and frty wb4sctoa. Por th a ulur bor, twfira peiod cov 1981-5.

bI USAID ddaa for mi, swohm, maie and paddy. I_ea daa dffr film PAO da esentially for 1981 wherFAO daa ovw a hier gure (by 244,000t) for mil sorjhum. lus, ccording to FAO data, fioproduction avmeage 855,400 t for 19808 and 963,200 for 1986-90. thI reprs_ a totl chaeof 12.6%, or 2.4% per amL

c/ Oil grundauts, confgxwecny oundnut, ad comm.d/ Rico, wheat, odher foodst. Vaoum rs only to loa wheat.c1 FAO dae oeing cereea and rie paddy.fI GDP ddab of primsar sor oer eaconda sor.

Pdrmy or inchda eagiulwr, lvstock, fide 5 , forety.Secndr eto Inclue grudnut oi, amnn, cosucton, eaery and oe.

g/ Coefficet cakl ated for Dakar usin 198647 wodd pries and semi4ntensiveto-.

h/ Ratio cdau for Dals using 198849 wodd pnces and semi-intensvetchooy.

Soures: Segal Macroeconomc Update Repot, 1993Housman Nd Jonme, Senegal' Stucr of Poteon nd CoerntivAdvantage it Cereal and Export Ctop Produ n, 3191.

62

incomes. Yet the increase in rural incomes was not sufficient to offset the decline infarm cash incomes when compared to the 1960s and 1970s. The real value of marketedoutput in 1986-90 had falen by 38% compared to the 1960s, due to te dramtc shifttward food crops and away from groundnuts. This undermines the ability of ruralpopuatos to use adequate inputs in their production, as illustrated by the significantdrop in fertilizer use, and to maintning thir demand level of manufactured goods andserice.

4.8 Indicators of production incentives and efficiency such as nominalprotecton coefficients (NPC) and domestic resource costs (DRC) have been calculatedfor five major crops ' (millet, maize, rice, cotton, and groundnuts) for 1987-89.The study 4 concludes that among the cereals, millet and maize have a considerablyhigher comparative advantage in many producing areas than rice which receives moreprotecdon than it needs to sustain the present level of production. On the other hand,given the appreciation of the RER, millet and maie have barely adequate protecuon tosutain production for local consumption in many producing areas. Of the cash crops,cotton has a higher compamtive advantage than groundnuts but receives barely enoughprotection t maintain production, whereas groundnuts receives quite substantialproteon. The most important finding is that far too many resources have been devotedto irrigated rice production, a sectr which has yet to be sgnificantly reformed despitesverl attempts. The recent changes in world market pnces of the same commodictesmentioned above do not alter in anyway the conclusions reached in this report.

B. Indstrial Sector

Introducton

4.9 The industrial sector value-added (comprising manufachtring, construction,mining and energy) was 4.2% per annum higher during 1986-91 than 1980-85 and itsshare in GDP went from 17.0% to 18.2% during the same period (rable 4.2). Themanufacturing sub-sector, which cuendtly accounts for over two-thirds of the sector'svalue added, has experienced decelerating growth since independence: 6.1% per yearduring 1960-70,5.3% during 1970-80, and only 1.2% during 1980-85. The sub-sector'sgrowth is mostly attributable to import substitution which reached its limit by mid-1980s.Employment in the manufactring sector more than doubled between 1960 and 1985 (3%p.a.), with most of the increase happening during 1960-75. Thus, by mid-1980s themanufcturing sector lost its momentum for growth and employment for a host offactors.

VI If the domestic price is higher than the border price becuse of tariffs or import controls, i.e. NPC higherthan one, then domestic producers benefit from protectionist policy. If the opposite is true, then the domesticprice is lower than the border price due to import subsidies or price controls. This implies taxation of domesticproduer. If the DRC is less than one, the crop activity is making good use of domesi resources to gonerateor Sav a unit of foreig exchange. In this case, thern is a comparative advantge siac the county earns ormyes forig ece through production

1 See Jones and Hoen (199).

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4.10 Setor constaints were well identfied prior to adjustnent reforms. Theyconsistd of the inefficiency of import-substitution strategy conducted in a non-competitive environment characteized by a cumbersome regulatory framework, distortedincentives system, a small intena market, and high factor costs particularly labor andenergy. These constaints were combined with Senegal's inability to resort to exchangerate adjustment policy which proved to be crucial, particularly in more recent years,when the real exchange rate appreciated substanilly. In 1986, Senegal embarked on anew indutial policy (known by its fiench acronym NPI) whose main objective was tointroduce a more competitive industrial structre and enable the private sector to play anincreasng role in growth and employment. To improve the competitiveness ofSenegalese firms, the government decided on an intemnal libetion strategy whichfocuses on reducing the costs of key inputs, including petroleum and electricity.

Impact of the Refom Program

4.11 It is difficult to assess the impact of the adjustment reforms on theperformance of the industrial sector for the following reasons: the reform progrm hasonly been parally implemented, the adjustment period has been too short, and theexteal conditions, cha d by the substantial depreciation in the currencies ofcompeting countries with Senegal. The discussion below covers the manufacturing sector(essentally the modern sector) and is based on the findings of a number of recent studies,including two Bank studies. I Key industrial sector indicators are presented in Table4.2.

4.12 Overall, manuring production was 5.0 to 5.5% (depending on themethodology used) a year higher in 1986-91 than 1980-85. Ihis increase is most likelyaccounted for by the informal sector, notwithstanding the lack of robust data. Theinformal sector became vibrant as a result of a shift in supply from the formal to theinformal sector. Production in the modern sector declined on average by 5 percentagepoints between 1982-85 and 1986-89, with production of the 30 major industrial productsdeclnng by 34%. The industies that did well were mining, chemicals, andenergy-industries that were generally not directly affected by the reforms. On the otherhand, the performance of the sector is more positive in terms of turnover. While 14 outof 19 industries surveyed in 1990 showed negative turnover during the pre-adjustmentperiod, only seven industries showed negadve turnover during the partial adjustmentperiod.

4.13 In terms of employment, there was a loss of about 5,600 jobs, or 16% ofthe modern sector's total employment, during the period 1986-91. It can be argued thatthe bulk of the losses was due to the liquidation of a few companies which were boundto be closed with or without adjustment reforms. Also, there is evidence that the lossof employment in the modem sector was offset by job creation in the informal sector.While there was an overall decline in the investment level-10 out of 16 industies didreduce their investment during the period of adjustment and capacity utiliation did

41/ The sudies arc: Evaluaton de la ouvele poitique indusile au S66gal,' AFSIB, World Bank, April28, 1992 and -Sman Bntuprem Under Mustment in Senegal, Industry and Energy Departmen, World Bank,March 1992.

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improve-seven out of 16 industries surveyed had a capacity utlizaon above 60%, thelevel achieved in 1985.

4.14 The reform program resulted in both the establishment of new fims andthe closing of non-performing ones. Although hard data is not available, there isevidence (udging from the number of private projects approved by the government'sregulatory agency ) that a number of firms were created during fte partaladjustment period, mainly small-scale export-oiented agro-industies. On the otherhand, between 1986 and 1989, 53 firms were closed, some of which reopened later on.An examination of the six most laugest ones Of reveal that over half of their assetswere bought by similar companies. Thus the reform program had led to somerestructuring of the industrial sector.

T.bb 4.2: Seoqg Key Industrial Indators

Annual Average C7ages in %

198085 1981 Total Annual

Industria Sector

Value added (CPAP billion, in constat 1987 204.1 260.0 27.8 4.2pk)

(as a % of GDP) 17.0 18.2 6.9 1.1

Employment 40,447 a/ 34,886 e/ -13.7 -3.6

Mafacturng Secor *

Producton Indec 100.0 al 95.1 -4.9 -1.0

Value Added (CPA? billion, in contant 1987 144.3 193.4 34.0 5.0pric)

(as a % of GDP) 12.0 13.S 12.5 1.9

Employment (permnnt) 35,681 a/ * 30,059e. -15.8 -4.2

Export Subsidy (CPA?, billion) 8.1 b/ 5.4 f/ -33.3 -7.9

Wages/cost of production (%) 8.2 c/ 10.1 g/ 23.2 4.3

MLT Credits (CPA?, bilion) 24.7 d/ 19.2 e -22.3 -4.9

Effective Prtection Rate (%) 16S c/ 98 hJ -40.6 -9.9

aS = 1982, b/ - 1986, d/ 198S, d/ 19IM, at 19869, f/ - 1987-89, g/ = 1988, hl - 1990* Defined as oil milling plus the category of 'other'.

Source: Macroeconomic Update Report, June 1993.

42 In 1988, the government approved 59 projects totalling CPAF 8 billioa which created 175 jobs (for aboutUS$150,000 per job).

af These are BATA (shoe), STS (textile), SAPAL (tuna), SARDINAFRC (seafod), MANUTENTIONAPRICAINE (vehicle), and TREFIE DE DAKAR (engineering).

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4.15 A Bank survey of 63 enterprises (representing at least 17% of the numberof finns in the sector !) conducted in 1990 suggested that small-scale enterprises aremore dynamc than both micro and medium- and large-scale enterprises. I45 Rigiditiesin a more libealized policy environment have led to serious difficulties for large scalefirms that had benefitted from past protecion against imports and local competition, morethan for the other two categones of firms. This survey shows that small-scale enterprises(SSEs) may have in fact compensated for the decline of large firms in spite of the weakdemand growth in Senegal since 1986. A substantial share of small firms have managedto increase output and profits. In addition, a high proportion of SSEs were post-NPIcreations, suggesting a relatively high rate of new investment at this level.

4.16 To better analyze the firms' adjustment responses, the sample was dividedinto three categories: firms which increased production, those which experienced nosubstantial change, and those which decreased output. For each of these categories,Table 4.3 indicates the share of firms adopting the following measures of response (orflexibility factors): incre.sed imported input, changed product mix, bought newequipment, and adopted an export-oriented strategy. The table shows that manufacturingfirms that succssfully expanded after 1986 were relatively flexible. The study alsoshows that SSEs did prove to be more flexible than others. Thus, while only 34% of theindustries in the sample saw their production increase in 1990, 50% of SSEs did. Theratios are 52% for the sawple and 57% for SSEs in terms of diversification ofproduction, and 52 % and 60%, respectively in terms of new equipment.

Tabe 4.3: D1Mwu1m'm of Fxfliuty Facra by Prdoduim TinE

O,rusyd m Paofe eoe aw PO" Bought new AM

FMAwrde respow ALM mtedal Wha air eupent poiers

hwreaed outpt 34 67 42 39 45Maitauined ouput 24 13 24 19 14Dcreasd output 42 20 33 42 41

Todll 100 100 100 100 100

Number of tsoadents 63 15 33 31 23

Source: Paer and Sd (1992): *SmaB Batpis under Adjugma in Senvel,' Annex 4.7.

_I This is calculated on the assumption that the mnber of modern industries remained at its 1986 level of 367.

4/ Thean are defined in terms of employment micro-etrprises (1-9), sma' sale enterpris (10-49) andmedium and largscae entirprisw (SO and more).

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4.17 According to the same industrial survey, the main factors hindenngproduction were low import prices (the case of 41% of firms in the sample), excessimports (36%), and high domestic competition (26%). Investnent was constrained byhigh interest rates (89%), lack of easy acess to credit (73%), and the high cost of inputs(54%). Also, government's negative attitude towards the privae sector remains a majorobstacle to industrial development (36%).

4.18 Rding the labor factor, the survey found that only 5% of all firmsinterviewed (10% in the case of firms employing 50 or more) consider salaries forqualified workers as too high and that 10% of all firms (19% in the case of those with50 and more employees) consider the labor force a constraint on their operations. 9This is not a surprising since labo regulations do not seem to be enforced except in thecase of well-established firms. This argument should not, however, diminish theimporance of deregulating the labor market, f: n is still a major deterrent factor forpotential investos and for moving from the informal to the formal sector. 47'

4.19 Although the reform of the financial sector has created a more solidbanking system and has restored confidence in it, Senegal's banks have become muchmore risk-averse and show a marked preference for short-term trade-related lending atthe expense of long-term investment lending. Short-term credit now accounts for 70%of total lending-two-thirds of which are for trade finance. Lending to industrialactivities declined from 22% of total credit in 1985 to less than 15% in 1991. Theupshot of this trend is that Seegaes-owned firms, especially small-and medium-sizedones, are finding it much harder to have access to credit to finance long-terminvestments.

4.20 In the formal man ng sector, domestic producers have been unableto adapt qupicldy to the new competitive environment, in which prices are deregulated andtrade is liberalized. The main reasons are the real exchange rate, ovenraluation, thelabor market rigidities, and the high energy cost. Labor costs, for instance, went from8.2% of total cost of industrial production in 1985 to 10.1% in 1988. I While someindustrial firms have closed between 1987-89 foLowing the trade liberalation, severalothers took advantage of the improved incentives system to increase their productivity

46 See Parer and Stel (1992), Annex Tables 4.11-12.

Elf A reent .LO study dismisss, on td basis of limited evidence, te argument thst the wage level is anobstacle to employment creatio The ILO study (1990) is particularly weak on the issue of comparave wagecoss. The compwaisr betwen Seneal, and Mete d'Ivoire and Cameromn is mileadg. t is neithersurpriing, nor ptiularly introlt, that Sonel's wage levels are comparablo to Cameoun and RCL Thereis _e ovidee that suggest that wage levels n CFA countris are significantly higher than i non-CFAcountri_. at the sam lovW of per capita income. The report also observes a pgnificant decline in labor costper unit of 20% over the peiod 1982-87 and concludes that profits should have increased by that much. Thismay not have been the case if, as is quite psble, tbete has been a decline over tine i the labor intsof Soeegalese produo The onclusion of the report that the wage level in Senegal is not an obslace tomnployment creatian does not stand up an the bads of the lmited ece prsented in the report.

I See World Bank (1992a), pam 52.

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and diversify their production. 01 In sum, there is no hard evidence to show thattrade liberlization has led to a major de-indusraizaton in Senegal. There has been,however, some shift from fte formal to the informal sector. This shift does not providea satisfactory base for Senegal's long-term growth prospects.

C. Public Enterprises Sector

4.21 Is the PEs sector now smaller and more efficient than before theadjustment program? The first part of the question is discussed in Chapter 2 and theanswer is yes (see pam 2.101). While the PE reform program has been moving forward,much remains to be done to achieve the govemment's objectve. To provide asatisfactory answer to the second part of the question, detailed information on individualenterprises is needed. At present, only a few indicators on selective companies areavailabie. First, there have been a number of improvements in the inte m n tof PEs as a result of 1) the transformation of all "fablisements publics of acommercial or industdal nature into independent "soxdts nadonales and the inclusnof all administrative type B.Ps in the central adminitation; 2) the curtailment in the rolesof the superavisory agencies; 3) the improvement in the selecdon of PE Boards ofDirectors, and; 4) the genealiation of contract plans. Second, Berg noted, on the basisof estimates of productivity in five key enterprises over the 1980-88 period, thatproductivity has not improved. -V It should be added that since 1988, several positivedevelopments have takn place as a msult of the implementation of key reforms,suggesting an improvement in the financial and management performance of some keyentpries in the sector. To illusate these improvements, iee companies: S6n6lec(the power company), PAD (the port authority), and SNCS (the railway authonty) willbe discussed.

4.22 In the early 1980s, Senelec, was transformed into a 'soci6t6 nationalewith the responsibility of operating and developing the power sector. Its managing boardmembers and managing director were appointed by the government. Silec'sdevelopment projects and taff modifications required government approval. During thepreparation and implementation of the First Energy Sector Rehabilitation Project (1987),a set of corrective measures was prepared and embodied in a Contract Plan between thegovernment and Senelec. These measures were aimed at improving the financialprUforance and management of Senelec. Some positive steps, in particular tadffadjustments, were tamen during the 1980s. On average, elecicity prices doubled

D2J A sample survey of 31 manfacturing firms conduted in 1990 showed tht half of thm had increased theirlabor productivity and changed the compousio of their output. Eigteen non1rofitable fims wore cldbetween 1987 and 1989, but seve of daem have reopened under new ownesip. he impaot on employmentbas generly been nogative, reflecting th sation of the sector and the high cost of labor. Thrughimproved productvity, the refbrms have also led to a decline in prices in about 75% of the _ub-soctexamined. See World Bank (1992d).

iQI Thea ae OPCE (post, SENEC (elticiy), SNCS (railways), SOTRAC (urbantransport), and SONES(wat). See Beg (1990) p. 35.

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between 1980 and 1986, mainly because of a sharp increase in petroleum prices.Subsequently, SMn6lec's fiacial position improved. Nonetheless, implementation of theContact Plan has been disappointng. (i) Payment by the government of administrationelectricity bills is still a problem and has led to setting up cross-debt compensationopeations between SEn6ec and the administion. (ii) The operation of power systemfacilities and customer management is still very weak. (iii) Recent audits indicateproblems in day-to-day management and more seriously, there is a lack of transparencyin several financial transactions. These problems are the managing director'sresponsibility and their persstence shows that the managing board has not fully assumedits role. In conclusion, the results of the Contract Plan have been mixed-slightlypositive from the financial point of view, but with litde improvement in overallmanagement. The Contract Plan has helped identify performance goals that can bemeasured and monitored.

4.23 Contract plans have been signed between the government, PAD, andSNCS. These contract plans proved useful in clarifying responsibilities between thegovernment and the two companies, and in improving the management of thesecompanies. Both PAD and SNCS were transformed into "soch#tds nationades? from"L4tablisseme publcs 2 caractre industral et commerdal and "Mge." The newstructure allowed for greater autonomy of management and has led to improved fiscal andeconomic perormance. The companies gained more freedom to adjust tariff rates tomeet their financial objectives. Govemment has not, however, lived up to itscommitment imder the contract plans to stop interfering in day-to-day managementmatters (for example, personnel and procurement) and to siphon off the excess cashearmarked for heavy maintenance opertons. One positive outcome of the contact plansis improved transparency. Audits of contract plans look at the companies' and thegovernment's compliance and make interference and mismanagement public.

D. Social Sectors and Income Distribution

4.24 Despite stagnant and declining real per capita public expenditures oneducation and health during fte 1980s (Chapter 2), most social indicators in Senegal haveimproved, though the quality of the education and health care has declined. a' Ineducation, overall enrolment increased by one-third between the first and the second halfof the 1980s, with secondary and tertiary school enrolment increasing slightlyfastr than primary school enrolment and female enrolment growing faster than male.As a result, primary enrolment ratio went from 46% to 55% between 1980 and 1988.Regional differences have also narrowed markedly. The incrase in students has beenmatched by a parallel increase in the number of teachers, therefore preserving thestudent-teacher rtio. On the other hand, most student performance indicators (dropout

51/ This section draws an th finding of Berg (1990), pp. 191-206.

2/ University enrolment has increased aignificanfly in i recent past, a reflection paruy of the ireased Iencthof time that studet take to complet a degree. Because of th difficulty of finding employment aftergraduation, students prolong their univerity schoding as log as possible. The University of Dakar is currentlyovercrowded, with an enrolmn_t In 1989 of about 16,50 stdents, twice its cpacity.

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rates, repeition rates) are at or near the levels found in 1980. in the health seor,standar indicators of health statu show a marked improvement in the 1980s. Lifeexpectancy increased from 45 years in 1980 to 48 in 1988, while infant mortautydeclined from 147 (per thousand live births) to 86 during the same period. There hasalso been a sharp decline in the morbidity rates for major diseases in the 1980s, largelyattributed to a successfdul series of vacination campaigns. The share of childrenimmunized went from 17% to 70% during the period under review.

4.25 How can these positive achievements be reconciled with the decline insocial spending? In education, teachers salaries were restrained dunng most of the1980s, thus allowing more teachers to be hired. Teachers in administrative positions(estimated at 1,262 between 1985-1988, and somewhat less than that in 1990 followingthe restructuring of the civil service), were redeployed to teaching positions. Majorinnovations were introduced in primary education such as mixed-grade classes and doubleshifts which allowed for more efficient use of classrooms and teachers. In the healthsector, reallocaion of resources in favor of primary health care resulted in a sharpincreased in the number of posts and health huts* in the 1980s. Private and donorfinancing also increased. User fees became more common during the 1980s, largely asa result of budget cuts. According to the 1991 PER, *the structure of health sectorfinancing has sifted away from government sources to non-govemmental sources withan increased contribution from external financing." In 1989, 33.4% of the sector fundingwas channeled tirough the budget, 11.4% came from local funds (mainly modernnterprises), 17.3% from extral financing, and the remainder 37.9% from private

sources. S Finally, the health status improved due to the icreased effectiveness ofpreventive health services, such as the aninalarial program, maternal and chid healthcare programs, and the expansion program of vaccinations. However, it should bestesed that thesn achievements in social indicators are not only poor in compaisonwith countries at Senegal's level of income but, more importantly, represent short-termgains which cannot be sustained given the current pattern and level of resourceallocations.

4.26 Has Senegal succeeded in reducing poverty and in protecting the mostvulnerable groups of the society during the reform process in the 1980s? This is adifficult question to answer in the absence of household income and expenditure surveyscurrently being generated. However, it can be argued that the extent of poverty inSenegal has remained at best unchanged for two reasons. First, there has been noevidence of a substantal increase in per capita income and consequently employmentgeneraton may have been limited. Second, the adjustment program was not designedwith poverty reduction as an explicit objective, nor did it include, until quite recently,poLicies sefcaly targeted twards the poor. It is worth mentioning that publicresources allocated to the social sectors have declined in per capita terms dunng the1980s.

4.27 Who are the winners and losers of the reform program? Overall, there hasbeen a slight improemet in the rura-urban terms of trade in favor of the rural sectordue more to the drop in urban incomes than to increases in rural incomes (pam 4.6).

DI See World Bank (1991b), Annex 2X p. 63.

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The objecdve of raising rel prices to agricultural producers was only partally achieved.Real producer prices for millet, sorghum, and rice were 7-19% higher in 1989 than in1980, but producer prices for cotton and groundnuts, the main source of farm cashincome, were 5-10% lower. Thus the weighted real producer price for major crops didnot improve. Real consumer prices on the other hand were 20-50% lower for millet,rice (broken) and wheat and this benefitted urban consumers during the 1980s. Realincome declined for public wage earners, with incomes of unskilled labor (those paid ator near the legal minimum wage) declining less rapidly than those for sldiled labor.Thus there has been a move towards a less skewed wage income distribution during the1980s.

4.28 The impact of adjustment on employment is difficult to assess given thescarcity of data. It is estimated that 11,000 jobs could have been lost since 1986: some700 as a result of bank rescring (or 41% of the sector), 800 as a result of PEliquidation (about 3.5% of the sector), 3,800 as a result of civil sevice reforms (about6% of the number of civil serants just prior to the adjustment), and 5,600 as a resultof the New Industrial Policy (16% of the modern sector employment). In the case of thebanng and civil service restructuring, support in the form of project financing helpedmitigate the impact on those losing their jobs. Those who lost ther jobs received onaverage CPAF 5 million (the equivalent of 32 months of alary) .n the case of thebanking sector, and CFAF 4.2 million (38 months of salary) in the case of the civservice. While hard data is not available, it is believed that most of the separation paywas used for consumption or debt repayment. Only a small number of those who losttheir job managed to re-integrate in producdve economic advities.

4.29 Two obsevations can be made regrding the employment trend. First, thenumber of civil servants increased by 16% between 1980 and 1985 and then declined (byotidy 7% between 1985 and 1990, in spite of the implementation of a retenchmentprogram-volumtary departu program). Second there is some evidence thatemployment started to pick up in the manufacturing sector in 1989 just after the declinementioned above. This may be related to some improvement in the incentive system,and the partal reform of the labor market. The social safety net progams may havecontributed marginally to an increase in employment.

4.30 In sum, poverty may have worsened in Senegal during the 1980s as aresult of stgnation or enven low economic growth. This reflects the int adjusmentstategy that Senegal chose to follow. Had Senegal fillly implemented its adjustmentprogram, including a substantial RER depreciation, income per capita would most liklyhave increased and poverty would have been reduced. This study has also found, whichat first may seem to contradict the above statement, that the cost of stabilizaion andpartial adjustment has not fallen disroportonately on the poor more than on other socigroups. This is in line with the findings of Berg, 'The Senegalese exeience ... doesnot support the argument that the social costs' of adjustment fall most barshy on thepoorest, either in its income distribution results or in its predicdons that social sectorspending suffes disoportionately, with long-term negve consequences for thepoor. a V

M/ Be (99), p. 205.

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E. Summary

4.31 During the structural adjustment period 1986-91, agricultural production(including forestry, livestock, and fishing) registered a modest incre of 2.9% perannum during the partal adjustment period over the pre-adjustment period. The increasein production was largely due to favorable weather conditions in spite of a drop incultivated land. While there is indication that the intemnal terms of trade has slightlyshifted in favor of agriculture and away from industry, this shift should be interpretedwith caution as it is not statistically significant. Production of food crops incrased fasterthan cash crops, largely as a result of the expansion of subsistence agricultre, internaltrade liberalizaton, and producer price differentials in favor of food crops. Because ofboth good harvests and favorable domestic cerea prices, cereal imports (rice and wheat)dropped significantly during the partial adjustment period. Indicators of productionincentives and efficiency show that among the cereals, though millet and maie have aconsiderably higher comparative advantage than rice, they have barely adequateprotection to sustain production for local consumption because of RER appreciation. Fartoo many resources have been devoted to irrigated rice production, a sector which hasyet to be significantly reformed. Of the cash crops, cotton had a higher comparativeadvantage than groundnuts but received baely enough protection to maintain production.Prospects for the agricultural sector remain dependent on the real exchange rate policy,the terms of trade for cash crops, and climate conditions.

4.32 Regarding the manufcuing sector, production incsed in real tmsfaster during the parial adjustment period than during pre-adjustment, owang to a vibrantinformal sector. There has been a supply shift from the formal to the informal sectonas a result of trade liberalization combined with the lack of progress on the real exchangerate depreciation, energy cost reduction, and labor and wage liberlization. Rigiditiesin the regulatory environment have led to serious difficulties for large-scale firms thathad previously benefitted from protection against imports and local competition. Ihe fewlarge industries that did well were mining, chemical, and energy-industries thatgenerally were not directy affected by the reforms. The part reform program led tosome rstructuring of the manufctrng sctor. It resulted in both the establishment ofa few new firms-mainly small-scale export-oriented agro-businesses,-and the closingof non-performing ones. Small-scale enterprises are more dynamic than medium- orlarge-scale enterprises. SSEs may have compensated for the decline of large firms inspite of the weak demand growth in Senegal since 1986. A substantial share of smallfirms have managed to incrase investment, output and profits. Manu g firms thatsuccessfully expanded after 1986 were relatively more flexible in changing the output-mix, purchasing new equipment, and adoptng an ewport-oriented strategy. Overall, themanufacuring sector has been partally restutred with medium- and largescaleindusties sill opeting under protection. Pardy becuse of trade liberalization reversaland partly because of dynamic small-scale enteprises, Senegal has not experienced a

72

major do-industialaton as define by the rapid shrnking of its industral bas-ethoughthere has boe a shift from the formal to the informal secr. This shift however doesnot provide a atsfctoy base for Senegal's long-tem growth and employment.

4.33 Tle public entprise sector has smrunk and ihere is evidence to suggestit is more efficient (see para. 2.102). To provide a definite answer to the question ofeffidency, detailed information on individual entapies is needed. While the PE reformpgam has been moving forward, much remains to be done to achieve government'sobjecdves.

4.34 site st_t and decining real per capita public expenditures oneducation and health during tie 1980s, the primy education and basic healti status inSeneal has imprved slightly and regional differences nafrowed. In educaion,government restrained tcher' salaies during most of fte 1980s, thus allowing moreteachers to be ired. Teachers in adminstatve positons were re-deployed and majorinnovaos were introduced in primary educaion such as mixed-grade cla and doubleshifts aLlowed more effcient use of classrooms and teachers. In healti care, arlocation of resources in favor of primary health care, increased private and donorflu'acig sad increased effeciveness of preventive health services were te maincotuto to the Improvement. It sod be noted, however, that these achievementsin socia indcators are not only poor in compariso with countries at Senegal's level ofincome but, more importantly, repent short-term gins which cannot be sustainedgiven the c1nt patten and level of reoe allocations to the social sectrs.

4.35 The impact of adjustnent policies on various social groups has beenmixed. But overall, there has been a slight improvement in the rural-urban terms oftrade in favor of the rural sector. This is due more to the drop in urban incomes thanto ineae in rural incomes. Urban consumers came out beneficial dung the 1980sdue to a drop in real conm price. Public wage eaners had declining real incomeduing the 1980s, with ncomes of unslled labor declining less rapidly than those for

lled labor. Thus there has been a move twards a less skewed wage incomedistibution. Tbe impact of austment on employment is hard to assess given thescaity of data It s eimated that about 8% of total employment in the modern sectorcould have been lost since 1986, largely in the modern manuing sector and the civilservice. Most job losses in manuing were due to the lquidation of a fewcompaies which were bound to be losed with or without adjustment reforms. Thereis evidence that the loss of employment in the modern sector was offset by job creationin the informal sector. The social safety net progams have contributed marginally to anincrease in employment. In sum, while poverty may have worsened in Senegal duiingthe 1980s as a result of economic stgnation, there is no evidence that the cost ofadjustment has faLlen disproporionately on the poor.

5

Lessons Learned and Recommendations

Limitation of internal Adjustment

5.1 The internal adjustment process pursued In Sencegal has notproduced eventhe modest results targeted in the goverment's medium-term financia program and inthe PFPs. To achieve competitiveness, Senegal has attempted to cofrect both extenaland intnal imbalances tough reducing domestic expenditures, adjusting intemal pricesand wages, and adopting second-best trade policies. In retrospect, this deflationarypolicy has led to severe fiscal compression and cuts in public spending on priority areas.Inadequate administratve capacity has severely limited the effectiveness of second-besttrade policies, and no credible incomes policy has been pursued. Consequently, theinternal adjustment process, which has not been fully implemented, has not produced theneeded depreciation in the real exchange rate and, as a result, exports have notperformed well, domestic industry could not compete against imports, and privateinvestment has declined. Freezing nominal wages to maintain domestic inflation belowintrnational inflation to achieve real depreciation over time will not improve drasticallythe competitivity of Senegal. With a 2 percentage points yearly inflation differentialbetween Senegal and its main trading parters, it would take Senegal 15 years to reducerelative production costs by one-third in real terms. Also, austerity progrms cannot besteadily implemented over many consecutive years. The best option available for Seneglis to quicldy and substantily depreciate the real exchange rate.

5.2 The financial stabilizaton ahieved so far by Senegal is fragik and doesnot provie the basis for longer-term sustined growth It has led to the emergence ofcontlict between fiscal imperaives leading to higher taation and competitivenessimperatives requiring a drastic reduction in the cost of production. It has also led to areduction in pubLic and pnvate investment in operations and maintenance expenditures,in expenditure on human resource development, and in the proviion of adequate publicservices-all crucial elements for longer-term growth and development. While gains inincome growth and in the social indicators associated with a more efficient utilization ofcapiltal and a reduction in spending are desirable, these are of short-tern benefit.

Public Sector Managmen

5.3 Pubfic sector management has Improved, but misalocation of publicresources remans a problem. Wages and salaries continue to be disproportionate withrespect to expenditures on maintenance and operations as well as investment and ulessthe size of the civil service wage bill is reduced drastically, the fiscal position as well asthe productivity of the civil service will deteriorate rapidly. Notwithstanding themismanagement of civil service recruitment, the voluntary depatres program had a

74

good start and should be pursued. The cost of the program should be reduced and itsfinancing should come from potentidal savings by reducing the number of civil servantsand not, as was the case under SAL IV, solely from extemal sources.

5.4 Whle inter-sector allocatons appear satifactory, bitro-sector allocationsrmain a problem In agriukure, educion, and health. Expenditures on irrigation weremade at the expense of extension and research services. Those on higher education weremade at the ewpense of primary education and those on health curative system were madeat the expense of preventtve health care. Including the agricultural sector, where a sectorreform program is still under preparation, the adjustment process has yet to deal with thesocial sectors in a more comprehensive manner. A good start in reforming the socialsectos has been made in the health sector under the First Human ResourcesDevelopment Project (approved by the Bank Board in 1991); but little has been done inthe education sector-the sector in urgent need of restucturing. With the completion ofthe PER study and the higher education sector study, there is now a good analytical baseon which the govemment can embark on restructuring fte educadon system. To achievethe social tagets spelled-out in government medium-term programs, a major shift ofresources towards primary education and basic health care should take place. But giventhe scarcity of resources, alternative ways have to be found to deliver key services. Inthis respect, the private sector must be allowed to take an increasingly important role.

5.5 More vigorous stae-enterprise secor-shriing is Weradve. The recentprogress in pnvatizing public enterprises in Senegal can be attributed to a change ingovernment stategy towards being pragmadc. The sategy gave a central role tofinanial discipline of the PB sector through the hardening- of budget constraints (byreducing net fiscal transfers from government to PEs) over pnvatzation. It gave equalemphasis to divestiture and other fom of privaiation such as contrang out andfrnchising. The pnvatzation strategy also gave priority to profitable and viableenterses over those financially unsound. It is recommended that the implementationof this stategy continue vigorously and that key enteprises, including the groundnut oilprcesng company and the utility companies be next in the pivatiation process.

5.6 In desing the ajusmnt program, it is IWerative to take Ino accountthe longer-tenn objecdve of poverty alleiaton and the tmporary socia costs ofadiUkment. In Senegal, this was done in an ad-hoc manner rther than as part of theoverall nmroenomic fmmework In other words, little effort has been made to buildanti-poverty objectives into the ex-ante design of the adjustment program. This waslargely due to lack of information about the people expected to suffer the most from thereforms. With the completion of household surveys which will provide better data onvarious social groups, particularly the poor, the full integration of social aspects into themacroeconomic framework of adjustment will improve.

75

Eternal Aid Adon

5.7 Senegal's reliance on external budgetary assistance has incrasedsubstantIa over dte years. This relance, combined with the lack of hard donorconditionality, has been a m4jor explanatory factor in Senegal's slow progress Inadjusrnein. External budgetary assistance is viewed by some govemment officials inSenegal as an "entidement" to be counted on for years to come or as a line item in thebudget similar to tax revenues. In the past, the high level of aid had unintentionallyimpeded adjustment. Large sustained flows of foreign aid, with soft conditions, reducedSenegalese political incentive to implement hard reforms. For example, Senegalpostponed real changes in income and labor policy in the agricultural rice sector and inpetroleum tation policy and yet continued to receive quick disbursements from thedonor community, including the Bretton Woods istitutions. This assessment is alsosupported by the findings of the Pcrg study. According to this study'1 , large externalinflows "reduced Senegalese political will to make changes necessary for adjustment andslowed Senegalese political maturation by allowing the postponement of hard economicand social choices." The study adds that 'Senegal is not only aid addicted, but needscontinuing high levels of support to ease the structural changes that were postponed inthe 1980s." This poses a serious dilemma of ODA equity among adjustng countries.it is recommended that further adjustment support for Senegal be selective andconditional on the implementation of up-front key policy measures. Over time, extnalassistance should shift back to investment.

The Enabling Environent

5.8 Whil macroeconomi stabilzation and relaive price irefonn arenecasary, a healy builness environment is essential for a quick recovery of privateinvestnent and growh The business environment is defined in the World Bank ThirdReport of Adjustment Lending (RAL I) as encompassing the degree of cetinty aboutgovernment policies, the quality and sophistication of the legal and egulatoryframework, the state of physical infstrucure, and the efficiency of labor and financialmarkets. As discussed in Chapter 2, while progress has been made in all four areas,only in the financial sector has it been somewhat satisfactory. With governmentpreoccupied with short-term financial crises, fiscal poicies became unpredictable and,in some cases, policies were simply reversed. The mutual distrust between governmentofficials (who traditionally perceived teir role as one of controlling the economy) andprivate businessmen rendered difficult the design and implementation of reforms. Thelegal and regulatory framework, in spite of the progress made in improving the incentivessystem (by revising the invesment code and establishing a one-stop investment window),in reducing the cumbersome control system of the PE sector (shifting controls from a-priori to a-posteiiori), and in reforming the tax administration system, the judiciarysystem is not worling efficiently. The physical infrastrcwt is deterioating as adequateresources for maintenance and operaing expenses are lacldng. The deficiency of the

aI/ Soe Borg (1990), p. 224.

76

labor market and compedtiveness policy are the most important outstanding areas ofreform. Where Senegal has introduced legal changes, fte atidtudes of the civil servantsand, the labor unions towards the private sector have remained hostile. It isrecommended at future adjustment programs focus more on the enabling environment.

Gowvnwent Commitment

5.9 For any program to be successdUy implemented, it has to be owned by thegovernent and must be accompaned by consensus-bulding efforts among the vaiousinterest groaqps. This has not always been the case in Senegal despite the good intentionof the government and donors, including the Bank. The government's resolve to takeacdons agreed to under the progrm has weakened, particularly after the 1988 electionwhen the adjustm.ent program became increasingly biting. Although the commitment toadjustment appears strong at the highest official level, in practice the authorities areincreasinly reluctant to oppose the intrest groups who stood to lose most tifom thereforms. These groups are mainly the labor unions, the civil service, and religiousleaders (marabouts). 2' Towards the later part of the adjustnent process, thewtchnocrats who gained power in the early years of the adjustment process, becomeincreasingly more politicized and less interested in longer-term structural changes.

The Adiustnent Process and Sequencing

5.10 Stabilizaion has been easier than adjustment in Senegal, and the laer isfar from being complete. Although Senegal is classified in RAL m as an intensiveadjusting country, with four SALA, two SECALs, and an BE ESAF program, keysuctural areas (such as higher education, the labor market, the wage bill and the legalenvironment) remain to be addressed. In addition, the real exchange rate remainssinificantly appreciated.

5.11 The packaging and sequencing of the rform measure are as critical asthe poliy content of the adjustnent program usef The seqwencing of the refonns hasbeen seriously flawd In addiion to the lack of a real exchange rate policy, the decisionto proceed with the libealizon of extemal trade before establishing an effective taxadministraion, eliminating labor rigidities, and reducing the cost of production reflectsinsufficient conideration given to the sequencing of reforms. Similarly, the decision toproceed with the civil service deparur program before establishing a database on wagesand civil servants and a monitoring system also reflects a deficiency in the sequencingof reforms. Bankdin sector reform, although well implemented, should have been cariedout earlier, especially if the severity of the crisis was already kmown. Finally, the

56t For more disusso of the lobbies for ad against adjustment see Ka and van de WaUe, 'Tbe PoliicalEcaoomy of A4justmeat in Senegal: 19501991," (mimeo), May 15, 1992, pp. 47-59: 'The govermet chsto avoid a fiol attack on thes groups in the early years of the PAML Although it is tu at Xth pubLcsector was hurt by the general deflationry trend, reforms of the civil service, educato sad the Labor Codewer not oddrd in a sustained manner unDt 1987. The government soemed to have adopted the strategy ofdelaying the most diffi reforms and ftont-loading the easy reforms.'

77

pivatzaton of public enteises ought to have been itiated once a good regulatoy andincentivesframework was in ple.

5.12 A summary of the mjor lessos learned and recommedatons is presentedin Box 5.1.

78

0~~~~~~~~~~~~t* -bmd be *0 fo of

X ': ,'. . ' '''~~~~~~~~~~~~Iny.f '. . b"'h

u s ~~~~~~~~~~~~~~~~~~~~~~~~~. .... . .. I..- ,

*bd * areluy, abxodAy~~~~~~~~~~~~~~~~~~~~~~~......

S52.;55aYt;{5t *- lo X _y ofwi*le ivestent nd gourl

4 t- y. -

g g E |j |S l | | i

=~~ ! . !

g~ ~ ~ ~~ ~ ~~~~~~j | :'.:xSS*j.. . ... 'N~ " 2 \r >; h:

g g s EE E l | | i E E6L

81

Bibliography

Berg, Elliot and Assocats. 1990. "Adjustment Postponed: Economic Policy Reformin Senegal in the 1980s," USAID, Dakar.

FAO. 1990. "The Impact of Stabiliation and Strucral Adjustment Policies on theRural Sector: Case Studies of COte d'Ivoire, Senegal, iUbetia, Zambia andMorocco," FiO Economic and Social Development Paper.

Jones, David and Cindy Holleman. 1991. 'Senegal's Structure of Protection andComparative Advantage in Cereal and Export Crop Ptoduction," AgricultureDivision, Sahel Department, Washington, D.C.: World Bank.

Ka, Samba and Nicholas van de WaLe. 1992. "Study on the Political Economy ofAdjustment in Senegal, 1980-91," (mimeo).

Ne=is, John. 1986. "Public Enteprises in Sub-Saharan Africa," World Bank DicussionPaper No. 1, Washington, D.C.: World Bank.

. 1989. "Public Enterprise Reform in Adjustment Lending," Countryonomics Dqarmnt, Policy, Planning, and Research Working Paper No. 233,

Washington, D.C.: World Bank.

Parker, Ron and William F. Steel. 1992. "Small Entepises Under Adjustnent inSenegal," Industry and Energy Department Workdng Paper No. 55,Washington, D.C.: World Bank

Svejnar, Jan and Katherine Tenrell. 1988. Indusral Labor, Enteiprise Ownershp,and Gowunent Polcies in Senegal. Universi of Pittsburgh.

World Bank. 1984. "Senl - Country Eonomic Memorandum," Report No. 5243-SEWashington, D.C.

. 1985a. "Program Performance Audit Report: Senegl - Strucur AdjustnentLoan and Credit," Loan No. 1931-SE/Credit No. 1084-SE, Washington, D.C.

. 1985b. "Senegal Struct Adjutment Loan and Credit," OperationsEvaluation Departm=t, Program Performance Audit Report, Loan No. 1931-SE/Credit No. 1084-SE. Washington, D.C.

8Ž

1. 986. 'Sene - Firt Structural Adjustment Credit-SAL I,' Report No. P-4213-SE. Washingt, D.C.

-. 1986-1991 'Senegal - Policy Famework Papers," (vadous issues),Waington, D.C.

. 1987a. 'Senegal - An Eoonomy Under Adjustnent, Report No. 6454-SE,Wahngton, D.C.

. 1987b. Senega Second Strctural Adjusment Crodit-SAL II, Report No.P4213-SB, Washington, D.C.

. 1989a. 'Development Credit to the Republic of Senegal for a FinancialSector Adjustment Progam," Report No. P-5183-SE. Washigton, D.C.

1989b. wRepublic of Sea - Parapublic Sector Review,' Report No. 7774-SE, Washigton, D.C.

-_ J1989c. 'Republic of Senegal - Second Strucual Adjustmt Creit (165-SE) and tid Structal Adjusment Credit (1802-SE), Program CompletionReporL Washington, D.C.

19894. *The Word Bak and Senegal, 190-87,' Word Bank OpeaonsEvaluation Department, Report No. 8041. Washington, D.C.

-=_ __, 1990L Development Credit to the Republic of Senegal for a SrcturlAdjustmwt Proam (SAL IM,. Report No. P-S185-SE. Wangton, D.C.

. 1990b. 'Senegal - Agricultural Sector Adjustment Opertion (AG SECAL)niaing o u, Washingtn, D.C.

. 1991a 'Seneg - Fouti Struct Adjustmet Credit (IDA Cr. 2090-S,Rdease of the Second Trche,' Rept No. P-5185-SE, IDA/Sec M91-458.Washington, D.C.

. 1991b. 'Senegl - Public Expenditr Review,' mimeo, Washington, D.C.

.1991c. -SAL IV Spevison Mision Aide Memoi, Waington,D.C.

- . 1992a 'Evaluatio de la nouve polidque industrielle au Sgal," Apdl,1992, mimoo, WashIngt, D.C.

. 1992b. 'Revitaliti Highr Educaon in Senegal: The Challenge ofRdfom,' Report No. 10466-SE. Washington, D.C.

0*~~~~~~O

1. 1. 1. 1111

Xt #IU P

85

STATISTICAL APPENDIX TABLES

87

1980 192 1982 1983 1944 194 1986 1917 1908 1989 1998 1991 8045 149

A. GDP & Sector GrowtA ()

GDr .3.3 -1.2 15.3 2.1 .4.0 3.8 4. 4.0 5.1 -0.4 4.5 1.2 2.1 32

Asdtcufm -18.2 -5.7 24.8 4.8 -17.5 1.0 10.1 2.7 9.6 -10.2 9.8 -2.5 -0.6 3.3

Ma _hct -4.5 123 10.9 1.2 .0.2 1.7 5.4 8.9 10.0 3.1 4.7 1.2 3.6 5.S

S. nvwa ent & Sai*s (as % GD?)

1J_wal 11.9 12.6 12.0 12.6 12.4 10.5 11.7 12.4 12.7 12.7 13.3 13.7 12.0 12.8

SIgs -2.6 *6.7 *0.2 03 9 40.7 63 6.8 7.7 73 8.6 8.8 -1.2 7.6

C a_nmpm tL02.6 106.7 101.2 99.7 97.1 101.7 93.7 93.2 92.3 92.5 91.4 91.2 101.2 92.4

C PubUc Ftnasce (as % GDP)

R1nnuc 23.0 19.4 20.1 19.7 19.4 11.8 17.9 18.8 17.5 16.8 16.9 18.9 20.1 17.8

Eiiadiw 28.S 31.9 28.1 28. 25.2 23.5 21.7 21A 20.1 20.9 21.2 18.7 27.6 20.7

Wages 113 12.1 11.0 10.4 10.3 9.8 9.1 9.0 8.S 8.6 8.2 8.1 10.8 8.6

Fsal balac -5.5 -12.5 48.0 *8.8 -5.8 .4.6 -3.9 -2.6 -2.6 -4.1 .4.3 0.2 -7.5 -2.9

D. EBtUNal Sectr (as S GD?)

Cattt AcowW -18.5 -25.8 -19.6 -18.6 -17.6 168 -12.1 -11.6 -10.8 49.8 -7.5 -7.9 -19.5 -10.0

S=p"of aNm 27.9 32.1 34.2 329 37.9 29.7 26.5 25.0 25.2 26.7 25.2 25.2 32.4 25.6

JWos of GNFS 42.4 51.4 46.5 452 47A 40.9 319 30.6 30.2 31.9 29.9 30.2 45.6 30.0

itaaurgbalae -14.5 -19.3 -12.3 -12.3 4.5 -11.2 .. 4 -5.6 -5.0 -5. .4.7 4.9 -13.2 .4.4

F. Teraw oqf w Ind"x (U8-1W)

TOWs! 94.5 100.7 88.3 85.6 98.4 100.0 105.7 103W5 101.6 106.5 1063 103.3 9.6 104.7

Gawuidmol 83.4 1032 61.0 623 102.7 100.0 55.6 47.1 54.2 73.1 97.5 92.2 85.4 70.5

IW&hmm 68.7 128.6 11.9 107.8 101.5 100 644 96 85.9 57.9 S8.9 58.4 103.9 69.7

RIM 1033 91.0 93.4 919 89.6 100.0 125.7 133.6 120.5 113.9 122.2 119.9 94.9 1226

F. Oder Indicaonw

bnlailamm(%) 11.8 7.8 93 8.8 127 9.1 76 2.0 2.1 0.6 23 1.3 9.9 2.7

Read 1uet n(%) 1.3 2.7 3.0 1.5 -23 1.4 0.9 6.5 7.4 9.6 8.1 8.9 1.0 6.5

ICOR (S-Yawkw 13.8 -24.6 5.2 3.0 6.8 3.7 2.7 53 4.2 3.5 3.3 43 7.9 3.9

Scum: 8mg!- aonsoaioso Upd,, 1w99 1.d 3UD P0b, 1992).

88

? PM PW 1W9 1 PMW PJ 394 195

A. GDP Gm.* Xat (I)ACta 42 4. 5i 40.8 3J t3 23"Pi 4.1 4a 3.7 3.pP)a 4.4 4.2 3. 3JPFPm 4.4 4.2 5. 3. 3.8PFP IV 0.6 44 3.7 3.8 3.8PFP V 3.6 13 5.1 3.7 3.8 3.8

LThFindDo* (dt(z4* Vwa. %6 VQDP) dAma 4.3 4. 44 A1 4.3 0.2 .1.0PPI 43 40. 4 0.7PPP aIA .05 0 1.3PFPM 4.0 0.2 04 1.9 2.7PFP IV .4.0 -2 -1.5 03 23PFPV .4. 0.1 13 18 .2.1 2.2

C Cm" AcWu Dt*d (Mdfa qa UWS % OGDP)Atu 154A 113 -l.4 .10.0 4.4 -8.9 8.4PFPI -13.2 4103 416 .6.6PIIP a 10 -9.2 4.2 -73PIPE -9.9 -9.1 -7.3 -6.5 -5.4PFP IV 94 83 46.9 .6.1 -5.2PFP V -48 -7.2 -6.2 -53 4.4 -3.9

D. I WaawamI (I)Ao 14.12 U . 13.J 1 134 127 133

JlXPI 143 13.7 1 U.8 13.8PIP1 14.0 14.0 14.0 14.0

mPI 14J 14.5 14* 14.9 14.91P IV 15.0 15. 16.2 17.5 17.S

PP MT2. 12.9 12.3 124 12.4 12.S

Afts 41 . 7.1 7I 85 88 8.5FPII S.* : 7 IQ11.1fPIP 8.2 9. Q5 11.5PFP M 10.2 10.6 11.8 13.2 14.1

PFP IV 8.9 0.10 12 14.1 14.7PFP V 83 9.2 9.4 10.1 10. 10.9

F. Export Vollmc Grwth (9)Acul 14.0 2.9. -24 5.7 3.8 -2.8 -3.2PIP 1.4 I1A 73 3.0PIP a 7.9 14. 7.8 6.7PIPm 163 9*. 6.8 6.1 6.5PFPIV 4.0 42 5.7 5.4 5.1PFPV .73 7.9 7.6 7.8 43 3.9

bwi -PslaUsTdkmIaWam dbT £ whkoo ImCy

gf Ha..!dds Yld__* ' dab&Ch

89

SA Tale 3s S _au GDP & IKe Ewald FPam

Y4w MP GMAh rom R'2TM& FandIa& Odwr

M IN-lO0 R4b at Supp, bl Fad,_

197S 7.5 tOo Good

1976 8.9 91 Good

1977 -2.7 102 Aveae

1978 .3.9 106 Good Election

!979 7.0 100 AVeg SBA

1980 -3.3 9S poor EFSAL I

1981 -1.2 101 Avae SBA

1982 15.3 88 Avere SEA

1983 2.2 86 poor SEA/SAL I cae Ecton

1984 -4.0 . 98 Aveae CO

1985 3.8 100 Avetep SEA

1986 4.6 106 Averap SEA/SAP/SAL2

1987 4.0 104 Averag SBEASAP/SAL3/CO

1988 5.1 102 Good ESAP Eloction

1989 -0.4 107 Good ESAP/FSBCAL Bordcr ptoblem

1990 4.S 106 Good SAL 4

1991 1.2 103 Good ESAPMECAL

a/ POWQs" (leatan 600mm of re, Average $dwen 600 and SW0mn), Good (mm tha 80 nm).

b/lSA - Standby au net, SAL - Stuctua A_juus Lam CO - Couttv Group, (K) SAP - (Etended

S_tnal AJuahuerwFacli, FSaul - Plaal Sewr A4 _atment Loan, TSal Tra1po Secor Adjudment Lon.Someo: Ma_raccommc Updde (un 199) an SATa 1.

, .. . .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1

N ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ # '# ^.* VI.i ' ;. . 1.

9o

Sk Tabl 4% &Sqal %An & Im. r1nia &yWm of Comrent Adjuabmest YVogtIn

49 >e4wnw C7.sbag Amwus. . c ihbr of- ' ~~~Date Date Coon* v1 2wha

A DA ($ MU"rn)

SAL! 3/81 6183 60 2

SALU 21X6 6/87 64 2

SALlm 5/87 2/90 85 3

FSECAL 12/9 2/92 45 2

SALIV 2/90 1/92 80 3

TSBCAL 22 1196 3

ToW 349

A. IBP (SDR m#*,s)

Stnby At. 3179 I1

xtded Atr. 8/80 185

Stmdby Air. 9/1 63

Stal-byAir. 11i82 47

Slaod.byA r. 9,83 63

Slady At. tin 77

Stany Art. Ili86 34

SAPI(VW ) 11/86 17

Sand-by An. 10/7 21

SAF (ya2) 1081 26

BSAP (yi) 11/8 60

ESAM( 2) 12/89 43

ESAP (yw 3) 69t 17

TaOal 662

Socru: Woed Bak and DI P iama dwuanmota

a/ Dta ounded up.

- 41

III~~~~~~~~~~~~~~~H

IFLI

III FIEI"

ll

t 0, I t t E jF~I I

8 E E2 t

t~~~~f U a Xa aXWW

92

Refom Measures lmplaentonDate statu

Decontwo met pifes £98 mplmeedDeconto lcal price of nic (Wh proid an adequa dqe of proton for Not Implementedlocal coreab

- Link poduc puic Of grunArt and coUct to WOr pcea, whas enuing Not Implemenedadquate Inentie to produe

- Link doumec peoem product pice to wol prim 1991 Not Effectively Inpl.

* Dertegul Agricuud Marketing- Libealiz domsic martng Of ag lual npus Olnuldtlou ofSONARl) a 1986 bmplemented

cer outpu ohe ftan rice (reduce he rO of foo sec_iy c wmmson- Elind'nte SERAS monopoly on ks and bIdes 1987 n plemetd

Eliinat gttrad y agriuual Input gondntw seeds fertlie sbsi 1980.8649 Implemented- Curail the reol of rural developmA gcies (SAID, Sodagri, SODEVA, Sodofitex, 1980.1986 Implemenued

and Somvac)- Pivatize tbe raudt Oil Procsin Compn, SONACOC# Not Implemented

* Elimne sea aeents (oopoy particulal f sugaa , cemnt, ad petroe Not Implemented

* Reduce Cast of Prducdin- ReduceEnegPac(%-25%),telephoarifspoandlig i991 Not Effively Impi.

E. Labor and Wae Polq

* Liba e Labor Markes- Revise labo" law and regulations (aboB n inesme coe, ZPID chart) to liberalize &981,1989 Not Eftively Impl.

biring wad firiAg polics. Abo g _overnmnt labor office aov- Stop govenment tomat hi policy from tning oolb Not Implementd

* Move Towads Ma*et Deemine Wag* Revise labor laws ad regulatio Not Impleteted- Inplement a nwt remueato syembadon prdviyotc vim Not Implened

F. E al Trade _LheraUdt

* Reduce Non-TarffRedfictons- Eliminat por auhorizaton of impoa, oemite efeace prices 196-1988 Imlementd bl

(Veleus meurials) elmina Impot ba- Eimnt impot monopdy n rce, uWr ad petolm (ogh t revision of spei Not Implened

Sateement

• hntoduce Tadff Reform- Rteduce the nubrof tarff tegoea to four (reduced rate, ordinry rate, increased 1986-1988 ImpeImentd bt

rate and special rate)- Reduce the tadff levels (avage EIP went from 165% in 19 to 89% In 191 - 19"6-1988 lmplemnted b/

the trend reversed subsequenly)

* Improve Eott ncen:tives- Adopt a duty dwback shem 1980. Iplemened .

- Adopt ar4ruqda direct export subsidy 4scheme 0%of export viltr ad coverng a 19S0, 1986 Not Effethiely I.lis of about 100 itemu). Strhe es potpo oa winurance qagiez

G. Pbblic EA ds Ret ::'

* Improve the Fnna Rarloshp BDwee Governnt and Pgs- Reduce In nominal tems govmt diect sbidy to P.. 1.96-1991 Not Effctively bmpt.- Reduceidirect subid (ovdraf, subsidized i ret) 1986-1991 p.- Setle allroate btsn Gaovem t nd PEs 1987,1991 _1ma e- Adopt preventive maus for the recur e ofoes.dsbt Not Efcty Impl.

* Rercr the PE Sector- Implent a diethi progm (to aonly 12% ofle tb- 1980, 86-91 Contiuouw

financil ore towl ae ha ben ethw aquidte orprivatized (partially or ttally). A total of 36 eqds olved.

93

Ret fori MeagnsurJs

- Piva key _utoqile sc as SONAO Qpaadlita, oi pmoasai ai Not lIaUd

Claiy the reaortalbitisotvemtam"" PU 1960,9841 NOat fftetvely 1nMl.vis--vis u odo nch dot tun othof ot__o (to des24 PCs out of 44 planned have beem uisi

- Rehabilitate pbysically and _mnaly key PM. (a totlO f 0 Ph ou of 19*1991 b aplaed27 planned have boen completd so f&)

* Iniprove the Regulatory and Indsttoal aIkreo- Amend extlug lw s Wad reultons 1987,1990 Iu ad* Restrict the role of supervis bodies (Audit Conmillaa, No.) to a 190) iplementd

pomseri role- Transform all commelal public sabllhnut Ino elhetauononaa 199 ilented

or adm_naaivo entities

H. lopro.e the E UaNhg awlvrammn

* Simpliy the cubroe legal ai adIItraie rgatos(cormrll nod Not JiupleieijudicW system)

* Improve inv esttacenlas sys.m.- Revise iwvsmtmend with emhas on bor4ealvet.ahnAlandanm 19",190 k meNd

exports. Exten the gcncp ofe zone (ZIFD to 'pilr %usEstabl. it a onwgdsp wido ( Uniu) to _ y app Wroa ofpateInvstment prjects.

1. Sector Refrms

* Reform th Educatio Seo- Rbiaupr hoh educao sysem tocate eosahto ptigm edeatm Not Iamheted

* Reform the Healt Sector- Reallocate esour to bac hat a ed

* Caotrol Popultion Growt- Adopt a popula poliSy and IlWm the polic 19I8 N Eatvely Imp!.

- Reform the Agriulua Seco- Reform the Rioc, Cotton and Gr _des Smd- Establish a l tenure system N Ib mpmnd

J. Socal Safety Neb

* Adopt socisafstynetmurstorduehtmadmoo f _st 4ame- Establish a nation emplamt xtiad utoasslaid4off wode In sunatpr s 1987 - Implmenpublic w orsp mausi_labar Iftsahiva m_nds. 1990- Retucethwbadeto b eadequatsrow afetnootroesssagSy ee Nurs

and piMy educatio

* inwwe the databason t dm v ml a e _b 196? Cinusurvey)

a1 PiCesa f 14 hems nm 0co01oieb/ Mhereisa ben a gad poliy mel d s 1989

Souces: Wodd Ba* SALc and Secb docunts, Piat FrU work Noter,GivnmtMMdTaium-Term Pogam fr Naoi mic =d ROOM A4utMe JEW)

94

SA Tale 6 Ssd Ael Dlvu te _as 1984091

AI ONWem* tI er AUcV awe* aowsdvu as (CQAF b.. JM$) Awa

* ?4os4naa.al -36 23.0 8.8 38%

1utviasd 21 17X 7.0 40%

lquidatd i5 Si 1.8 33%

* Pimnnebl it 174 7.8 44%

PAvazd 5 9.3 3.0 32%

Liqui"d 6 8.3 4.8 57%

* Tat e47 40.6 16.6 41%

Pdntlasd 26 26.8 10.0 37%

Uquidaed 21 13.8 6.6 48%

Of which

SALIV 28 22.2 8.3 37%

PSICAL 7 11.4 5.9 51%

* Told (P so) 113 217.7 157.0 72%

Noa4auscI 99 197.7 147.1 74%

Fblanc 14 20.0 9.9 49%

Souana: Staff esimdebado. AWS AL dumu

95

SA Table 7s Govemut Transfes to Public FoteimCFAP bi)

19M8I9 1990/91

Diet Govermea TTransfers (net) 14.2 n.a.

Operating Subsidies 12.3 83

(To Commntruis PFs) 0.9 0.1

Equipment Subsidie 1.9 n.a.

lndiect Trwfans (Private and Public) 80.0 a/ n.a.

(rax and Import duty exemptions) 58.0 at n.a.4/

(Franial pefni tratment) 18.0 / nA..dI

Gross-debt Arms (nnafcial PEa)

Owed by PBs to Govermt 57.4 b 5.6 et

i Owed by Govenment to PEs 48.9 b 1.2 o

Accmuate Overdrafts to dtablsen publics" 16.7bl n.aN

a(F4IAtd annual Increa) 2.0 0.0 gt

Bankin Borowws 188.00/ n.aWt

(Aa S of tot crdittoothec <cmy) 41% O.a.

a/ Average for Ihe priod 198449.bI Stock of Deceber 1989.c/ 1987 8to.dl Exaptions liid to only two under the imeD t code and specid agrments (until expitidon

da).et Being sld over a thee-year period.V Settld throh wrte-offs and reachedulips.g/ N4o more overdrafs allowed and the Tear agency dealing with overdtafts (ACC) was closed.-/ As part of Iho financial sctor refonn program, credits to PEa wer tightened; Goverment also

sopped guaanteeig loans to PEs. Crop credits were inchlded as part of the credit ceilings toGoVera_en

Sorces: SAL IV President's Repott (1990) and SAL TV Supervision Aide Memoires.

97

STATISTICAL APPENDIX FIGURE

99

SA Figure 1: Senegal Economic Indicators (Actual vs. Projetions)

FleOs DeficitGOP Growth Rate (%) (oxd. ga- nts, % of GOP)

7 2

2 8 da

-AcludI-Predatd (ow) -fPredl,t0d41M19h) -AdNal Prdated Me) 4-Pr* e d (zl(H h)

Current Account DeftkitInvestrnnt /GDP (%). off. bum., ofGOP). , d

20 -2 _

.4

4 4~~~~~~~~~~~~~~~~-

60: 01 88 U SO 0S so 07 a3 989 90 91

Yew Yew

-Actul Predated (Low) +Predlated (High) -Actual Plteed (Low) +z Predicted (HIgh)

Savtn99fGOP (%) (Expoft Volume Growth ()

4:- 10~~~~

00 OMS 0 0 i 6 5 0 0

Yea You

-ActUalPr.dlcid (Low) +FPvodlOd (High) - Actud ~Ptedtctd (o)+P,.dIeed (igh)a ~~~~~~~~~~~~~~6

4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.

60 7 so so s0 91 166 7 so so so 91

-Actug -Predated (Low) +FPr.deW. (High) -Actual -Piedeted (Lo") +Profjcted (High)

senegal stabilization, partial adjustment and stagnation...senegal stabilization, partial adjustment...

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