Senegal: Gaining momentum

Reforms introduced throughout 2011 helped ensure Senegal’s economy entered 2012 on stable footing, with an improved power supply and declining inflation. However, the positive outlook is also contingent upon maintaining the political stability that has long been Senegal’s trademark.

Senegal grappled with frequent power cuts in the first half of the year which caused the IMF to revise 2011 GDP projections downwards from 4.5% to 4%. The power supply began to improve in the third quarter, however, with the implementation of the CFA653bn (€ 995m) Plan Takkal, the government programme that seeks to reinforce electricity production by securing fuel supply and increasing capacity with rented facilities.

The programme, which targets a wide range of options for improving energy supply in the coming three years, including mobile power stations and overhauled infrastructure, will continue expanding supply with a new 250-MW coal-fired power plant, announced on January 17, which will be built in partnership with the Korea Electric Power Corporation (KEPCO). The Korean Development Bank and KEPCO will fund the CFA300bn (€457m) project and sell the electricity produced to Senegal’s national electric company, Société Nationale d'Electricité du Sénégal (SENELEC).

The plant will be built as two units, each generating 125 MW, in Sendou, located 32 km outside of Dakar. The additional power will help to reduce electricity costs, although the government’s projection of a 50% price reduction is considered a generous estimate. However, the demand for power will have increased by the time the plant becomes operational in 2015, which has prompted the government to continue planning for a variety of other smaller IPPs to meet national demand, currently estimated at 700 MW.

A portion of the economy’s rosier prospects can be attributed to the improvement in energy supply but a number of other indicators have also helped increase the overall outlook for the coming year. Inflation, for example, declined in the second half of 2011, after spiking earlier in the year due to rising international food and petroleum prices. Year-on-year (y-o-y) inflation fell back to 3% by the end of 2011 and is expected to remain at that level through 2012.

Perhaps more importantly for the overall health of the country’s performance has been the government’s improved fiscal health, which until recently presented something of a complex challenge. However, Senegal’s year-end review under the IMF Policy Support Instrument (PSI) – a three-year framework for economic consultation and planning – indicated that the country is improving its fiscal management despite a high deficit. Due to procedural delays, some energy sector investments were postponed to 2012. As a result, the fiscal deficit was lower than expected in 2011, at 6.2% of GDP.

The government and the IMF have planned for a 2012 fiscal deficit of 5.6% of GDP, which balances heavier investment in energy and transport infrastructure with conservative budgeting in other areas, although the deficit may surpass this figure if infrastructure building proceeds more quickly than expected. While Senegalese and IMF authorities agree that higher fiscal deficits are necessary in the short term to support economic growth, the long-term goal is to bring the deficit to a more sustainable 4% of GDP.

Public finances should also be strengthened in 2012 by the implementation of comprehensive tax reform. A shortfall in 2011 state revenue was due, in part, to high claims on the value-added tax (VAT) and numerous corporate exemptions. Reducing exemptions and reforming the VAT structure will be key elements of the 2012 reform, which is also expected to impact personal income tax. Government officials have committed to proposing a reform package by late September so that it can be included in the 2013 budget.

While the major measures of economic performance appear to sketch an optimistic picture for growth in 2012, Senegal will nonetheless have to allay investor concerns over short-term uncertainty linked to the recent presidential elections. President Abdoulaye Wade, after failing to win a majority during February’s election, lost to former prime minister Macky Sall in a run-off election on March 25.

Should events following the run-off election continue peacefully, however, fiscal management reforms and investment in critical infrastructure bode well for economic growth in 2012.