Senegal: Recovery in sight

Senegal’s economy has shown signs of recovery in 2011. Efforts to strengthen economic growth and improve financial planning have been put in place, and the country is performing well under International Monetary Fund (IMF) support mechanisms.

In a March-April 2011 review, the IMF Executive Board concluded that Senegal’s performance under its policy support instrument (PSI) was “satisfactory” and that its economic recovery continues. Senegal’s second three-year PSI came into effect in December 2010. The PSI framework is designed for low-income countries that may not require IMF financial assistance but still seek counsel, monitoring and endorsement of their policies.

Senegal maintained a positive GDP growth rate during the economic downturn, averaging 2.7% between 2008 and 2009. However, decreased demand and lower prices had an impact on most productive sectors. In addition to lost potential output during the recession, structural weaknesses in the economy, particularly linked to infrastructure and energy supply, contributed to slowed growth.

Signs of recovery first appeared in 2010, as GDP growth surpassed initial estimates to reach 4.2%, primarily driven by telecommunications, transport and the financial sector. The IMF estimates GDP growth will be 4.5% in 2011, as manufacturing, tourism and external demand pick up. Progress so far can be seen in a number of areas, including the services sector, which is a major driver of the economy.

Tourism, a key source of external receipts, was hard hit by the global economic crisis, although it has begun to recovery more recently, if somewhat unevenly. The number of tourists arriving at Léopold Sédar Senghor Airport reached 35,064 in March 2011, according to data from the National Statistics and Demographics Agency (Agence Nationale de Statistique et de la Démographie, ANSD). While this is down from 52,129 in January 2011, total tourist arrivals in the first quarter were up by 11.6% year-on-year. Economic activity in the hospitality sector (hotels, bars and restaurants) recorded a 23% increase in the first three months compared to the same period in 2010.

ANSD also reported an 8.9% rise in activity in the transport sector compared to the first quarter of 2010 and a 7% increase in telecommunications and postal services. While mining still contributes a relatively small portion of GDP, Senegal’s natural resources in minerals such as gold, hematite and magnetite ores mean it is well positioned to benefit from rising metals prices in international markets. In line with this, work was restarted in 2010 at one of the country’s largest projects, ArcelorMittal’s $2.2bn Faleme iron ore development, which had been suspended in 2009 due to concerns over the global slowdown.

However, while growth is returning in several areas, Senegal’s economy faces significant obstacles related to electricity shortages and rising commodity prices. As the IMF April 2011 review made clear, both of these areas will require significant investment from the Senegalese government and its partners to support long-term economic growth.

Frequent electricity shortages have long been a problem for Senegal. The government launched the Plan Takkal in January 2011 to restructure the energy sector and to provide the short-term investment necessary to get the nation’s primary provider, Société National d'Éléctricité du Sénégal (Senelec), back on its feet. According to Reuters, Senegalese officials reported in May that the current energy crisis costs Senegal approximately 2 %age points of foregone economic growth each year.

The government estimates that its total investment in the energy sector will reach CFA650bn ($1.4bn). As part of Plan Takkal, Senegal signed a contract with US-based APR Energy to provide an additional 150 MW of energy at a total cost of CFA36.25bn ($77.8m). According to a project summary received by Reuters, the first 20 MW of additional capacity is expected to come on-line by July 2011 and the full 150 MW within 167 days thereafter.

Infrastructure investments such as this will require Senegal to incur a higher fiscal deficit in the short term, exceeding the government and IMF’s goal of 4% of GDP. The IMF’s April PSI review concluded that large-scale investment in the energy sector as well as other financial sector and tax reforms are necessary to ensure sustainable growth, and offered a waiver for the assessment of the fiscal deficit target. However, while there is some room for a temporary increase, fiscal consolidation and a prudent approach to borrowing in the medium term will be critical to bringing the deficit down to a sustainable level. Senegal’s deficit widened to 4.9% in 2009, up from 3.7% in 2007, raising concerns of overextension and highlighting the importance of keeping a lid on expenditure.

In addition to energy sector concerns, consumer prices increased in the second half of 2010, driven primarily by higher global food and fuel prices. Inflation rose from 1.2% in 2010 to 3.7% by February 2011 and is expected to reach up to 3.9% by year-end. As national elections approach in 2012, President Abdoulaye Wade’s government reduced the prices of commodities such as sugar, rice, soap, tomatoes, oil and milk by 15% in February and introduced agricultural input subsidies in May. Many African countries are facing a similar decision to divert funds for new subsidies or risk civil unrest as food prices have risen almost 30% year-on-year, nearing 2008 peaks that sparked protests across the continent, while oil prices have also shot up sharply, increasing more than 55%, according to World Bank figures.

Therefore, while rising prices for both food and energy continue to present obstacles to recovery, increasing domestic electricity production and new economic and fiscal management programmes look set to help position Senegal for growth in 2011 and beyond.