Senegal: Clearing a path for growth

Provided it can overcome the obstacle posed by its ineffective and costly electricity sector, Senegal’s improving fiscal health will help to underwrite a spurt in GDP growth over the medium term. A May 2012 IMF review of progress under Senegal’s Policy Support Instrument (PSI) – a three-year framework for economic consultation and planning – concluded that the country has made positive moves toward reforming state finances and management.

With an increasingly efficient public sector, the economy stands to benefit from substantial investment in infrastructure in the coming years.

In the past few years, under Senegal’s PSI, the government has already begun to implement measures to reduce the size of the public sector, reign in spending and improve governance. Today, much of the excessive public expenditure stems from fuel subsidies introduced under former president Abdoulaye Wade, which are expected to reach CFA150bn ($280.67m) in 2012, or 2% of GDP, if unchanged. Following the May review, IMF officials recommended that the government abandon these fuel subsidies outright, in favour of new measures “that are more efficient and better targeted to the poorest segments of the population,” according to an official statement.

Provided that the government can maintain responsible fiscal management, several factors point to economic growth in 2012. The IMF estimated that continued strong global commodity prices and considerable investment in infrastructure would support GDP growth of up to 3.9% in 2012, nearly double that of 2011. Inflation is expected to be moderate, at 2.5% throughout the year.

Foreign investment – and the economy as a whole – have been buoyed by the smooth political transition following new president Macky Sall’s victory in the second round of presidential elections on March 25. Many investors adopted a “wait and see” stance, as violent pre-election protests and political uncertainty threatened to derail Senegal’s long tradition of political and economic stability. A CFA30bn ($60m) treasury bond issued in January, shortly before protests erupted against Wade’s decision to run for a third term, was only 73.5% subscribed.

Since the election, growing confidence in the economy is in part reflected by the improving performance of Senegalese bonds. A smaller, CFA15bn ($28.07m) bond issued in February was slightly oversubscribed. The yield on Senegal’s $500m eurobond fell by 56 basis points the day after the presidential election, where Wade’s early concession to Sall hinted to a smooth transition – the biggest drop since the debt was sold in May 2011. The bond yield dipped a further five basis points to reach 7.44% by the end of March, according to data from Bloomberg.

The improved performance comes as welcome news for an economy that saw a less-than-impressive 2011. Economic growth was held back last year by several factors, including repeated electricity cuts and a poor performance from the agricultural sector. Drought in the Sahel region, which extends across several countries along the southern edge of the Sahara Desert, is estimated to have reduced Senegal’s agricultural output by 25% in 2011. Combined with uncertainty and a general economic slowdown in the lead-up to the March presidential elections, GDP growth fell well below the IMF’s original projection of 4.5%. Recent statistics from Senegal’s National Agency of Statistics and Demographics (Agence Nationale de la Statistique et de la Démographie, ANSD) indicate that growth only reached 2% over the year. Higher food and transport costs, due largely to rising global commodity prices, also contributed to push inflation up to 3.4%.

As a result, Senegal will need to sustain higher levels of public spending in 2012 to re-stimulate economic growth and provide assistance for those affected by the drought. To account for the necessary adjustments to government finances, the IMF revised its target for the 2012 fiscal deficit from 5.6% up to 6.4% of GDP – slightly above the 6.2% fiscal deficit incurred in 2011.

The key challenge for Senegal in 2012 will be to balance high levels of investment in the infrastructure needed to strengthen growth and improve the power supply, while at the same time maintaining a manageable fiscal deficit.

IMF officials have indicated that by reducing public spending in other areas and postponing certain non-critical investment plans, keeping the deficit below 6.5% of GDP is a feasible goal. The government, under new president Macky Sall, has reaffirmed its commitment to improving governance and maintaining fiscal responsibility; the government’s ability to follow through will be critical to the long-term health of the economy. The head of the IMF mission to Senegal, Hervé Joly, warned in an official statement that “in the absence of remedial measures, the deficit could exceed 8% of GDP” in 2012.

It is possible that slow economic recovery in the US and the ongoing crisis in the eurozone may result in a drop in global risk appetite, which may erode some of the incentive to invest in emerging African markets. However, Senegal’s potential for expansion in key industries such as communications, construction and agriculture, high levels of investment in infrastructure and confidence in the political transition bode well for economic growth in 2012.