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Senegal (Republic of)

Publication Date: 22-Dec-2000

Analyst: Navaid Farooq, London (44) 20-7847-7106; John Chambers, CFA, New York (1) 212-438-7344

Credit Rating B+/Stable/B

Rationale

Outlook

Comparative Analysis

The ratings on the Republic of Senegal are constrained by:

l A low level of development, with per capita GDP of less than $500, and deficiencies in the social and

physical infrastructure. Low educational standards, high poverty, and other weak human-development

indicators reflect the subsistence nature of Senegalese agriculture, which employs more than one-half of

the labor force. Infrastructure deficiencies, especially in power generation and transportation, also constrain

growth prospects.

l High general government debt at 92% of GDP, well above the 'B' median, and all other 'B+' rated peers

except for 137% in Lebanon. However, a favorable debt structure--nearly all government debt is external

and concessional--mitigates both the economic burden and liquidity risk of government debt. As a result,

general government interest payments amount to less than 8% of revenues. Senegal's external public

finances are less vulnerable to volatile investor confidence than are the external public finances of many

peer credits.

The ratings are supported by:

l Senegal's membership of the West African Economic and Monetary Union, with an independent central

bank (Banque Centrale des Etats de l'Afrique de l'Ouest, BCEAO) responsible for monetary policy and

issuance of the Communauté Financière Africaine (CFA) franc, the zone's local currency. The CFA franc is

pegged to the euro and receives a guarantee of convertibility (although not of the exchange rate) from the

French Treasury. These institutional arrangements, the strong support from its eight member states (Benin,

Burkina Faso, Guinea-Bissau, Côte d'Ivoire, Mali, Niger, Senegal, and Togo) for more than four decades,

and the prudent conduct of monetary policy by BCEAO itself have yielded several benefits to the zone. It

has produced low inflation (estimated at 2% per year in 2000 and 2001 for Senegal). It has maintained the

currency as a store of value compared with the currencies of many other emerging markets. It has rendered

the zone less vulnerable to external liquidity pressures. And it has also reduced the uncertainty of one

variable (the exchange rate) for domestic agents. As such, Standard & Poor's views the creditstanding of

the zone as greater than the sum of the collective member states.

l Cautious domestic macroeconomic management and structural reforms. Continued financial and technical

support from the official community and external constraints imposed by the monetary zone should ensure

policy continuity. Further reforms of public enterprises will allow a more efficient allocation of resources and

improve the business environment.

In March 2000, Senegal underwent its first political transition from one party to another since independence in

1960, when Abdoulaye Wade of the Parti Démocratique Sénégalais won the presidential election. The outlook

reflects the expectation that President Wade's government will adhere to its program of structural reforms, which

includes selling many state assets, unifying value-added tax, simplifying investment regulations, and restructuring

the public pension fund. The country's political institutions, coupled with the stability of macroeconomic conditions,

set Senegal apart from some other sovereigns in sub-Saharan Africa. Steady adherence to President Wade's

reform agenda should lead to significant debt relief under the Highly Indebted Poor Country Initiative (HIPC),

thereby improving Senegal's external debt profile.

l Senegal's high debt stock is mitigated by its favorable structure and low servicing costs.

l Being part of a monetary union supported by France distinguishes Senegal favorably from its peers.

Page 1 of 10 [22-Dec-2000] Senegal (Republic of)

28/12/2000 http://www.ratingsdirect.com/cgi-bin/gx.cgi/AppLogic+GetArticle?fullGraphics=true&Print=Yes ....At first glance, Senegal would seem to compare unfavorably with its peers in the 'B+' category. Its per capita GDP

of $470 is about one-fifth of the 'B' median of $2,340, although only about one-half of the $1,000 in Bolivia

(B+/Stable/B) and $1,010 in Papua New Guinea (B+/Stable/B). Senegal's general government debt, at 92% of

GDP in 2000, exceeds the 'B' median by one-third and is higher than all other 'B+' countries except for 140% in

Lebanon (B+/Stable/B). Its net public external debt at 194% of exports in 2000 is nearly 4 times (x) the 'B' median

and higher than all of its peers except for 202% in Bolivia.

Due to the nature of this debt, however, which is concessional and extremely favorably structured, a more

appropriate measure of the country's overall indebtedness is debt-servicing costs. General government interest to

revenues is only 7.5% in 2000 (6.9% when taking into account interest service relief, which Senegal receives for

having passed the HIPC decision point. This is lower than all of its peers except for 6.4% in Bolivia and 6.8% in the

Dominican Republic (B+/Stable/C), and is less than one-half the 'B' median of 16.3% in 2000, and will decline to

6.6% (including debt relief) next year. The situation is similar for external debt service; this burden (excluding short-term

debt) amounts to 11.0% of exports in 1999, falling to 10.7% in 2000, and 9.5% in 2001, including debt relief

that has already been committed. In comparison, only the Dominican Republic has a lower ratio of external debt

service to exports, at 5.2%, with the 'B' median at 21% in 2000, and Brazil (B+/Positive/B), the highest, with 80.5%.

Moreover, this ratio will continue to decline as Senegal receives further debt relief. Therefore, despite having a

large stock of debt, the actual carrying costs are below those of nearly all of the country's peers.

The tight monetary policy of BCEAO has also given Senegal low rates of inflation, which has not exceeded 2%

since 1997. This record compares very favorably with its peers, which have all experienced higher levels of

inflation. In addition, Senegal's consistent growth of more than 5% per year also compares favorably with its peers

(bar the Dominican Republic), and the country is expected to achieve 5.3% growth in 2000 and at least 5.0% in

2001. Overall, while Senegal has forfeited the financial flexibility that an independent monetary policy could bring, it

benefits from lower inflation and less external liquidity stress.

In sum, therefore, Senegal is rated comfortably at the 'B+' level when one balances the high debt stocks with the

low debt servicing costs, low GDP per capita with cautious economic management and membership of a monetary

zone that has the support of a top-rated country, France (AAA/Stable/A-1+).

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Political Environment

l Senegal underwent its first democratic transition from one party to another in 2000, with the election of

President Wade.

l The reform and privatization program has faced delays since late 1999 due to the electoral campaign and

the change of government, and it is unlikely that it will be back on track until after legislative elections in

March 2001.

l While the regional situation is unstable, this has limited impact on domestic stability and the conduct of

politics in Senegal.

The Republic of Senegal has a bicameral legislature and a strong presidency. In March 2000, Senegal underwent

its first democratic transition from one party to another since independence from France in 1960. The Parti

Socialiste (PS) had ruled the country since independence, although opposition parties have been allowed to

contest elections since 1978. President Wade, in March 2000, became the third president of Senegal, following

Abdou Diouf, who became president in 1981. Mr. Diouf had been prime minister under Leopold Senghor, the

country's first president. Unlike previous elections, which had been marked by both accusations of electoral fraud

and violence, the 2000 presidential elections were judged by international observers to be mostly fair and free.

The transfer of power was smooth, and represented a crucial test for democracy in Senegal. President Wade

appointed a cabinet composed of fellow opposition leaders that had supported his candidacy. This cabinet is

transitional and is likely to change following legislative elections in 2001.

The political transition from what was a de facto one-party state to a multiparty democracy has been complicated

by PS' control over the legislative bodies. Legislative elections in 1998 gave PS 93 of the 140 national assembly

seats and all seats in the senate in 1999, following a boycott by the opposition. Faced with a PS-controlled

legislature, President Wade decided that new legislative elections would have to be held if his cabinet was to pass

any measures through the national assembly. Under Senegal's constitution, the president cannot dissolve

parliament unless it passes a no-confidence motion in the government. It is unlikely that the PS-controlled

legislative bodies would vote for a no-confidence motion as this would result in new legislative elections, in which it

would probably lose it majority. By calling for a referendum on the abolition of the Senate and to hold early

legislative elections, President Wade may be able to circumvent the national assembly.

The current schedule calls for the referendum to be held sometime in early January, followed by legislative

elections in March. The referendum will also contain provisions for handing more power to the prime minister,

reducing the presidential term to five years from seven, and allowing only two terms for one president.

As such, Senegal is in the midst of an extended electoral campaign, which influences all government actions. In the

run-up to the 2000 presidential elections, reforms and privatizations fell behind schedule, and the previous

government took a number of populist measures, including raising civil servant wages and freezing domestic petrol

prices. While the new government has taken some corrective steps, it has not kept pace with the schedule agreed

to under the IMF program. Retail petrol prices were increased by 15% in September, but the automatic price

adjustment mechanism, which tracks international prices, has not been re-instated. Many decisions might be

Page 3 of 10 [22-Dec-2000] Senegal (Republic of)

28/12/2000 http://www.ratingsdirect.com/cgi-bin/gx.cgi/AppLogic+GetArticle?fullGraphics=true&Print=Yes ....postponed until after the legislative elections. Despite the slower-than-expected pace of reforms, Senegal passed

the HIPC Initiative decision point in June 2000.

The decision point is reached once a country has had a three-year policy track record. Once the decision point is

passed then the country receives interim debt relief. After fulfilling the conditions for its floating completion point, it

then receives substantial debt relief that should reduce the debt burden to a sustainable level. Criteria attached to

the floating completion point usually include macroeconomic performance, structural reforms, and poverty

reduction.

Since the elections, the national assembly and senate have rarely convened. This lack of governmental activity is

due to two main reasons: the current government is a transitional one and following upcoming legislative elections

there will be a reshuffling of the cabinet; the new government is bound to go through a period of acclimatizing to

being in power. This acclimatization is also taking place within the administration itself, as the government has

been in the hands of one party for the past 40 years. Furthermore, it is still not certain if these elections will be held

as the president has been wooing PS national assembly members in a bid to obtain a majority, which would allow

him to avoid holding a referendum and new legislative elections. Despite the defection of some PS members, the

referendum is still scheduled for January.

The make up of the current cabinet reflects the coalition that supported President Wade's candidacy, but also

contains some technocrats brought into key roles: Moctar Diop was brought in from the IMF as minister of economy

and finance; Cheikh Gadio, who worked with the World Bank, was appointed foreign minister; and Moustapha

Niasse, who came third in the first round of the presidential elections, and subsequently backed President Wade's

candidacy, was appointed prime minister. Mr. Wade left PS in the 1970s, and Mr. Niasse left in 1998.

There are two major parties in the coalition, the Parti Democratique Senegalais (PDS)--the president's party--and

the Alliance des Forces de Progrès (AFP)--the prime minister's party. After the legislative elections in March 2001,

it will become clear which party dominates the government or, in the likeliest scenario which parties will make up

the ruling coalition.

Since 1994, Senegal has engaged in an adjustment and reform program, with the support of two IMF programs,

aimed at liberalizing its economy, controlling the deficit, selling off state assets, and promoting the development of

the private sector. Whatever the outcome of the March elections, it is unlikely that the new cabinet under President

Wade will reverse the economic and fiscal policies that previous PS governments had pursued. This is because

President Wade and his party are more in favor of private sector-led development and economic liberalism than the

PS. The appointment of Mr. Diop as minister of economy and finance indicates that the new government is not

likely to depart substantially from its adjustment and reform program and embrace macroeconomic policies that are

less sound than those of its predecessor. Finally, to receive HIPC debt relief Senegal must enact a number of

reforms. Nevertheless, President Wade did make a number of campaign promises, aimed mainly at increasing

employment, although he did state in the election that he would not support any wage increases.

Barring a severe loss by President Wade's party in the legislative elections, and more interventionist parties gaining

a majority, the government's economic policy should continue along the lines of the previous government, although

with more emphasis on job creation. Initiatives expected in 2001 include the harmonization of VAT, the

rationalization and privatization of public enterprises, simplification of investment regulations, reform of the National

Retirement Fund (FNR--the pension fund for civil servants), and improving the efficiency of the legal system.

The government has already undertaken an audit of the public enterprises, set up a foreign investment promotion

agency, and improved tax administration efficiency. It must be noted, however, that there has been reform slippage

since late 1999, and even though President Wade was elected in March 2000, it is unlikely that the reform program

will be back on track until March 2001 at the earliest. There will most probably be further delays to reform, as it is

unlikely that any one party will obtain a majority in the upcoming legislative elections, and the formation of a

coalition may prove time-consuming.

Compared with its neighbors, Senegal is a stable country, although there is persistent internal unrest in the

southern region of Casamance. Senegal is an ethnically diverse country; 44% of the population are Wolof, 24%

Poular, 15% Serer, 4% Diola, 3% Mandingo, and 10% others. About 95% of the population is Muslim; Christians

and animists make up the rest. In many respects, religion has been 'Senegalized', as the Koran has been

translated into Wolof (70% of the population speak Wolof) and Islamic fundamentalism is minimal. Relations

between the religious groups are cordial, as demonstrated by mixed marriages and the lack of any religious strife.

Casamance is physically separated from most of the rest of Senegal by The Gambia, and the rebellion in the

region, which started in the early 1980s, is a low-intensity conflict and has not proved destabilizing for the country

as a whole. President Wade has made it his priority to resolve the crisis, and a ceasefire, agreed in December

1999, is still holding.

Senegal belongs to the West African Economic and Monetary Union (UEMOA). Other members include Benin,

Burkina Faso, Guinea-Bissau, Côte d'Ivoire, Mali, Niger, and Togo. Apart from sharing the same currency, the CFA

franc circulates in the region, managed by a single central bank, BCEAO. Effective Jan. 1, 2000, this union became

a customs union, and allowed for freedom of movement between members. The members are also harmonizing

their legal systems.

Page 4 of 10 [22-Dec-2000] Senegal (Republic of)

28/12/2000 http://www.ratingsdirect.com/cgi-bin/gx.cgi/AppLogic+GetArticle?fullGraphics=true&Print=Yes ....Economic Prospects

Although Senegal itself is a relatively stable country, the same cannot be said for the region--conflicts in Sierra

Leone and Liberia (neither of which is a member of the UEMOA) have had little or no impact on Senegal, but the

troubles in Cote d'Ivoire present a greater danger. If violence continues and the expatriate community is forced out,

then Senegal might face an influx of refugees. Senegal's relations with its direct neighbors are mixed, and the

country has taken direct action in several; in 1981 Senegalese forces put down a coup in The Gambia, and in 1998

it helped the Guinea-Bissau government during the civil war by sending in soldiers. Relations with Mauritania have

been rocky, with border clashes and the deportation of each other's citizens, but relations with Mali continue to be

good.

l Senegal is a low-income country; per capita GDP is less than $500 and human development indicators are

low.

l Since 1994, Senegal has been implementing an adjustment and reform program, supported by the IMF,

and although reforms have been implemented, progress has not always been steady.

l Economic growth since 1995 has averaged 5.2% and should reach 5.3% in 2000, and at least 5.0% in

2001.

According to official statistics, GDP per capita has been increasing in real terms, despite a high population growth

rate, due to real GDP growth of more than 5% since 1995. Annual GDP amounts to $4.5 billion and the structure of

its small economy centers on the services sector (58% of GDP). The secondary sectors accounts for 21% of GDP

and the primary sector 20%. There is a large and growing informal sector, estimated at 50% of GDP. Human

development indicators reflect the structure of the economy; more than 55% of the labor force is employed in

agriculture, which makes up only 11% of GDP.

Senegal's human development indicators are among the lowest of rated sovereigns, and the country continues to

have a high population growth rate, estimated at 2.6% per year. The current growth rate is expected to continue for

the next 15 years, after which it will decline. If the demographic growth rate remains at this level the population

would double in less than 30 years. Adult illiteracy is 65%, and life expectancy is barely above 50 years for men

and 54 for women. The low life expectancy is due to poverty and the lack of basic health care in rural areas, which

have led to high rates of infant mortality. Primary school enrolment is 70% and female literacy has been improving,

although this had not been a priority as demonstrated by its low level of 26% in 1998. The low human development

indicators are due not only to a lack of resources, but also to rural neglect, spending inefficiencies, and a lack of

effective targeting. Such low indicators are also a constraint on economic diversification and growth. Unlike some

other sub-Saharan countries, Senegal has not experienced high rates of HIV/AIDS due to an effective prevention

program.

Senegal's growth performance changed dramatically following the devaluation of the CFA franc in 1994. In 1991

and 1993, Senegal's economy contracted, and the average growth rate from 1990 to 1994 was 1.3%. From 1995,

growth has been at or more than 5%, and is estimated at 5.3% this year. Growth has been broadly based, coming

from agriculture (due in part to more favorable rainfall) construction, industry, and services--despite the

underdeveloped infrastructure.

Senegal lacks good transport links with its neighbors, which hinders intraregional trade. Trade with other members

of the UEMOA accounts for less than 20% of total trade, with Mali accounting for 8.5% and Côte D'Ivoire for about

3%. Developments in other UEMOA member states also have an impact on Senegal: slower growth in Cote d'Ivoire

is likely to result is lower growth for other UEMOA member states, despite low intraregional trade. There are also

power shortages due to insufficient power generation capacity, which may have reduced GDP growth by as much

as 1% in 1999. With the aim of addressing this problem, in March 1999, the government sold part of SENELEC, the

power generation company, to Hydro Québec. Under the agreement, SENELEC would have a 25-year concession

on generation, transmission, and distribution of power. In return, Hydro Québec was to have invested in increased

generation capacity, but following protests by unions and disagreements over the size of the investment program to

be undertaken, the government and Hydro Quebec decided to break the partnership. There will be some additional

power available in 2001 due to the Manantali dam in Mali, from which Senegal is to receive a portion of the

electricity generated. The lack of electricity is likely to remain a problem, however, and act as a brake on growth,

unless further investment in the sector can be obtained.

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Agricultural production is vulnerable to fluctuations in rainfall and has suffered from soil fatigue; its growth record

bears this out with growth rates of between 16% and contractions of more than 10%. This sector is estimated to

grow by 17% this year. Agriculture is mostly subsistence in nature, with farmers growing a mixture of cash crops

and grain for domestic consumption on smallholdings of land. Moreover, political factors hinder the full exploitation

of Senegal's agricultural potential. The best region for rice cultivation is along the Mauritanian border, but due to

disputes with the Mauritanian government this region cannot be fully exploited. Agriculture in Casamance, which is

a fertile area, is below its potential by the ongoing internal rebellion.

In 1994, following devaluation of the CFA franc, the government started a structural reform process. The program

included: privatizing or liquidating public companies; liberalizing the labor market and prices; reducing tariffs and

other trade barriers; improving the transparency of the public sector--with the aim of reducing the state's role in the

economy and promoting the private sector. The program has accomplished a fair bit, including the sale or

liquidation of nearly two-thirds of the state's portfolio of public enterprises. In 1999 and early 2000, however, in the

build-up to the March 2000 Presidential elections, reforms took second place to politics and the schedule began to

slip. Of the 13 state-owned companies to be sold, only three actually were; reform of the FNR was postponed; and

the automatic adjustment mechanism for retail petrol prices to international prices was discontinued.

The current government has taken a few measures, including placing a number of companies for sale such as

Sonacos, the groundnut oil producer and the Hotel Meridien President, but no suitable offers have been received.

Despite reform delays in 1999 and 2000, it is unlikely that the government will deviate from the sound

macroeconomic policies it has followed since 1994, which have resulted in strong growth. The president favors the

private sector, and the general direction of economic policy was not questioned during the elections.

In the medium term, new sectors of growth are likely to spring up as a result of the African Growth and Opportunity

Act (AGOA) and the Trade and Development Act, which provide for duty-free and quota-free access to the U.S.

market and remove many barriers on exports of textiles to the U.S. This act applies to sub-Saharan African

countries and effectively speeds up the dismantling of U.S trade barriers, giving these countries preferred access

for the next eight years.

l The deficit will be higher than originally expected (1.7% of GDP compared with 1.3%) due to increased

petroleum subsidy expenditures following the refusal by the previous government to pass on price

increases.

l In 2001, the general government deficit should drop to less than 1% of GDP due to higher tax revenues

from the introduction of VAT and improving tax administration, as well as the improved performances of

public companies.

l Senegal will continue to benefit from substantial foreign aid, both in the form of grants and debt forgiveness.

Senegal is the beneficiary of substantial grants, which substantially reduce its fiscal deficit. In 2000, the general

government deficit is estimated at 1.7% of GDP, although excluding grants, the deficit was 4.4% of GDP. Over the

past four years, grants have averaged 2.5% of GDP, or 13% of revenues, and are forecast at 2.2% of GDP or 11%

of revenues for 2001. Grants are included in fiscal calculations as the country has benefited from them for many

years and is set to continue doing so for many more.

Under the IMF programs, Senegal has been able to tighten fiscal discipline, and deficits including grants have not

exceeded 2% of GDP since 1994. The general government deficit, including grants, is projected at 0.8% of GDP in

2001, down from 1.7% in 2000 and 1.4% in 1999. Surpluses of 2.2% and 0.5% of GDP were posted in 1996 and

1997, respectively. Excluding grants, general government deficits were 6% in 1994, 2% in 1997, 3.2% in 1998,

3.5% in 1999, and 4.4% in 2000. The 2001 deficit, without grants, is forecast at 3.2% of GDP.

Page 6 of 10 [22-Dec-2000] Senegal (Republic of)

28/12/2000 http://www.ratingsdirect.com/cgi-bin/gx.cgi/AppLogic+GetArticle?fullGraphics=true&Print=Yes ....Government expenditures have remained broadly constant at 20%-21% of GDP between 1994 and 1999, and in

2000 expenditures increased to 21.6% of GDP and are forecast at 20.6% in 2001. Current expenditures have

declined in importance to less than 60% of total expenditures in 2000 from more than 70% in 1994, while capital

expenditures have gained in importance, increasing to about 40% of expenditures from about 25%--or to 8% of

GDP from 5% of GDP. Wages and salaries have declined in importance to 25% of expenditures in 2000 from more

than 33% in the mid-1990s, or to 5.6% of GDP in 2000 from 7.0% in 1995. This had been due to a policy of

controlling salary increases; the last general salary increase for civil servants came in January 2000, before the

elections, and was the first since 1994. Interest expenditures have declined marginally to 1.5% of GDP in 2000,

from more than 2.0% between 1995 and 1997.

The treasury and correspondent account, which groups transfers to or from the public pension system--FNR, the

post office, other public entities, and local governments, has remained broadly constant at a deficit of about 0.3% of

GDP, or 1.5% of expenditures, except for 2000, when it is estimated to have reached 0.6% of GDP due to larger

deficits in the post office and FNR. The government expects improved performance from the public enterprises

especially the post office, which should be in surplus next year.

The current government is trying to restructure some of the loss-making public enterprises. Political appointees

rather than professional managers had run many of these. The lottery operator has since dismissed 250 people

and will start making dividend payments to the government. The post office deficit has been reduced to CFA5

billion ($6.7million; 0.16% of GDP) and should be balanced by the end of the year. The publicly owned groundnut

company ran into problems when the ex-managing director tried to time the market and failed, leaving the company

with a large inventory. The current managing director is trying to sell this inventory to reimburse the creditor.

Total debt of the public sector, minus debt owed to the government, amounts to an estimated CFA467 billion in

2000, or 14.8% of GDP.

In 2000, due to higher current expenditures, the deficit, including grants, will exceed the original target of 1.3% and

reach 1.7% of GDP. Without grants, the general government deficit is forecast to reach 4.4% of GDP, up from a

targeted 3.4%--due mainly to higher petrol prices. During the electoral campaign this year, the previous

government decided to suspend the automatic adjustment of domestic prices to match international prices. The

incoming government did not reactivate the pass-through mechanism, retail prices were instead increased by 15%

in September, and a cap placed on the subsidy the government would provide this year. The subsidy for petroleum

products amounts to CFA17 billion, or 0.5% of GDP. If this subsidy is used up completely or international prices

decrease sufficiently, then the mechanism will be restarted.

There were also increased subsidies to SENELEC, the power company, due to higher-than-planned butane gas

and other fuel prices. Some of these extra costs were made up through increased revenues and expenditure cuts.

Following the harmonization of UMEOA external tariffs (Common External Tariff--CET) in January 2000, member

states are meant to introduce a single rate of VAT by year-end 2001 to make up for the loss in custom revenues.

The Senegalese government had originally planned to introduce a single rate of VAT at 18% by year-end 2000, but

Public sector debt/GDP 102.3 107.1 103.5 107.5 107.0

*Includes debt service relief under the HIPC initiative.

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28/12/2000 http://www.ratingsdirect.com/cgi-bin/gx.cgi/AppLogic+GetArticle?fullGraphics=true&Print=Yes ....this has been postponed until 2001.

Despite the delay in introducing VAT to make good the expected loss on customs revenues, government revenues

have actually increased. It is thought that this is due to improved tax administration efficiency and a higher volume

of imported goods. The higher volume of goods could be due to two factors; first, the incidence of customs evasion

has dropped due to the lower tariffs; and two, importers would have delayed purchases until after implementation

of the CET.

Higher real estate taxes, a wider tax base, and improved tax administration should result in increased revenues

going forward. In the area of tax administration, the ministry of finance is planning to introduce unique taxpayer

identification numbers and to automate tax collection and improve monitoring of large taxpayers. There are also

plans to simplify the tax code and the process for dealing with delays in contractor payments.

The pension system for public sector employees, FNR, has been affected by the liquidation of public enterprises.

As the number of public employees was reduced, there were fewer contributors to the pension system. To break

even, the contributions of workers would have to increase, but unions have opposed this, leaving the government

with a pension system running deficits; last year, the FNR posted a 0.14% of GDP (CFA4 billion) deficit. The FNR

reforms should have been put in place by year-end 1999, but faced opposition from civil servants, whose

contributions to the pension system would have had to increase. The World Bank and the Senegalese government

are preparing a report on reforming the FNR, which will have to be approved by parliament. The FNR is a

contingent liability to the government, but is limited as accumulated losses through to 2018 are thought to amount

to 11.5% of 2000 GDP.

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28/12/2000 http://www.ratingsdirect.com/cgi-bin/gx.cgi/AppLogic+GetArticle?fullGraphics=true&Print=Yes ....Monetary Policy

External Finances

Senegal reached the HIPC decision point in June 1999. It now has a floating completion point, which hinges on a

number of reforms that need to be implemented. Gross debt relief will be $850 million, about 25% of government

external debt. It was expected that Senegal would achieve the conditions for the completion point by year-end

2001, but due to the reform slippage in 1999 and 2000, this may be pushed back. Senegal has already received

commitments for interim debt relief, for the amount of CFA9.9 billion (0.3% of GDP) in 2000 and CFA21.2 billion

(0.6% of GDP) in 2001, of which CFA8.3 billion is interest relief. These amounts will increase as other creditors

specify the amounts of debt relief they are willing to provide. Nearly all of Senegal's government debt is

concessional, and the average interest rate on external debt in 1999 was 1.8%.

In 1999, general government debt amounted to 90.5% of GDP, down from 96.4% in 1998. Debt stock should

remain broadly constant in 2000 at 92.2% of GDP and decrease to 87.0% in 2001. More than 90% of the general

government debt is external, of which: about 73.0% is multilateral, 10.6% bilateral, 14.0% rescheduled debt, and

most of remainder export credits. The main currency denominations of the external debt are as follows: more than

50% in SDR, 15% linked to the euro, and 11.5% in U.S dollars. As such, exchange rate fluctuations have a marked

effect on the debt stock in CFA franc. General government interest to revenues has been less than 10.0% since

1998, and should decrease to 6.6% in 2001, from 6.9% in 2000, due to increased interest service relief as part of

HIPC (7.5% and 7.8%, respectively, in 2000 and 2001, excluding debt relief). This ratio will decrease as more

creditors commit to interest and principal debt service relief.

l Monetary policy is the responsibility of BCEAO, reflecting Senegal's membership of the West African

Economic and Monetary Union.

l Senegal's low inflation record is due to the tight monetary policy of BCEAO, whose flexibility is constrained

by the fixed anchor of the CFA franc to the euro.

Senegal is in monetary union with seven other West African states, with the CFA franc as its local currency.

Senegal has been a member of the CFA since independence. The CFA zone actually predates independence,

established in 1939 by France, and in 1955, France established BCEAO, as well as another regional bank for its

Central African colonies.

BCEAO is the bank of issue of the CFA franc, and is the sole bank of issue and official external payment channel in

the region. The CFA franc issued by BCEAO maintains parity with the euro, with one euro equal to CFA655.6. It

conducts the zone's monetary policy and centralizes all of the external assets of the member states.

The French treasury provides ("guarantees") authorized intermediaries the free convertibility of the CFA franc. The

guarantee of convertibility, however, is not a guarantee of exchange rate. The French treasury in principle provides

unlimited overdraft facilities to BCEAO accounts to reinforce confidence in the currency. In exchange, BCEAO

agree to hold a minimum of 20% foreign exchange cover for their sight liabilities (excluding the SDRs) and to

deposit at least 65% of their net external assets with an account of the French treasury at the Banque de France.

These requirements, in effect, reduce the need for the overdraft facility and in turn limit the banks' flexibility. If the

overdraft becomes too high, France will take appropriate measures to reduce its impact on France's fiscal stance,

eventually resorting to another devaluation. The agreements between France and its African partner countries were

not changed with France's joining EMU.

Inflation in Senegal has gradually dropped since the devaluation of the CFA franc in 1994, falling from 32% in that

year to just 0.8% in 1999. In 2000, inflation is expected to reach 2%, due partly to higher oil prices, although the full

impact of these higher oil prices has been offset by increased government subsidies. In 2001, the introduction of a

uniform level of VAT will have some inflationary impact, although inflation is expected to remain constant at about

2%. BCEAO maintains a tight monetary policy and acts to reduce any excess liquidity in the market. BCEAO's

monetary policy relies on money market auctions and minimum reserve requirements, based on certain categories

of credits and deposits. In 2000, BCEAO increased the reserve requirements to 9% from 3% to reduce credit

growth. Moreover, UEMOA sets a number of targets for its member states, including inflation of 3%. Inflation rates

for the zone as a whole have been gradually decreasing since 1994; from 38.0% in that year to 3.6% in 1998, 0.2%

in 1999, and an expected 2.0% or less in 2000.

BCEAO is also the banking regulating authority and has acted to maintain the health of this sector. There was a

major restructuring of the banking system in 1989, when seven banks were liquidated. Net nonperforming loans

have declined to 5.7% of total credit in 1999 (or about 1% of Senegal's GDP) from 7.7% in 1998 and 8.4% in 1996,

the earliest year for which statistics are available. Credit to the economy grew by 10.2% last year and is forecast to

grow by 14% in 2000. Most credit is short-term due to the structure of capital at the banks, which do not have

sufficient access to medium- and long-term capital. Total credit to the economy was 16.6% of GDP in 1999 and is

expected to rise to 17% of GDP in 2000.

l Balance of payments is not a rating factor in the usual sense due to monetary union.

l Nearly all external debt is public, making the analysis of foreign debt and external liquidity more of a fiscal

story.

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Senegal receives substantial foreign aid in the form of grants and generous debt treatment.

Due to monetary union, Senegal faces lower balance of payments constraints than it otherwise would;

nevertheless, trade is important to the local economy, with exports representing 34% of GDP and crucial for future

growth. Senegal's current account deficit is estimated at 2.9% of GDP in 2000 and is forecast at 2.3% in 2001.

Senegal's current account is characterized by large trade deficits of between 6% and 7% of GDP, marginally

positive services balance, and substantial official transfers--4.3% in 2000, having declined gradually from 9.2% in

1994. Merchandise exports account for two-thirds of total exports. A few industries account for most goods exports,

with fish accounting for 37%, phosphates and derivative products 19%, and groundnuts and related products 8%. If

fish stocks are not managed in a sustainable manner, which they currently are not, then Senegal's single largest

export industry faces a bleak future. On the other hand, the AGOA provides a bright prospect for future exports if

Senegal is able to attract export industry investment, or the domestic private sector is able to take advantage of

preferential access to the U.S market. On the services side, tourism is the most important industry, accounting for

more than 3% of GDP. The development of tourism remains hindered by the problems in Casamance and the

unstable regional situation. On the import side, goods account for more than 70% of the total--mainly foodstuffs,

petrol, and capital goods.

Senegal's external debt burden is high at 236% of exports in 2000. Most external debt is public, with bank and

private debt amounting to only 19% of exports. Public external debt is nearly all concessionary in nature, which has

meant that despite the high stock, external debt servicing (excluding short-term, which is to banks and the private

sector) amounts to only 10.7% of exports in 2000. Senegal has received generous treatment from its creditors,

especially France, and will in all likelihood continue to benefit from debt forgiveness and future rescheduling. Owing

to several Paris Club agreements, the amortization schedule has become increasingly favorable. In 2001, long-term

debt service to exports is forecast at 9.5%, and when Senegal fulfils the conditions for HIPC completion, then

this ratio will be lowered gradually. Most of Senegal's future public external financing will be concessionary in

nature, which will keep debt servicing charges low.

External Finances

--Year ended Dec. 31--

(% of GDP) 2001 2000 1999 1998 1997 1996

Current account balance (2.3) (2.9) (3.1) (2.6) (1.6) (1.4)

Trade balance (5.3) (6.2) (6.5) (6.7) (6.0) (6.1)

Net foreign direct investment 1.7 1.8 3.1 1.2 4.0 0.2

Current account balance/exports (%) (5.9) (7.5) (8.0) (6.6) (4.0) (3.3)

Trade balance/exports (%) (13.7) (15.9) (17.1) (17.1) (14.6) (14.5)

Reserves/(current account balance + principal payments + short-term debt) 74.9 69.3 49.5 70.6 77.6 60.6

Net public external debt/exports (%) 204.8 193.7 193.2 220.2 173.2 178.0

Debt service (excluding short-term)/exports (%) 9.5 10.7 10.9 14.2 17.1 17.3

Debt service (including short-term)/exports (%) 28.4 29.6 41.5 31.2 30.1 28.3

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