Document of The Wor ld Bank

For Official Use Only

Report No. 25943

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A

PROPOSED PRIVATE SECTOR ADJUSTMENT CREDIT

IN THE AMOUNT OF SDR 30.2 MILLION

(US$45 MILLION EQUIVALENT)

TO

THE REPUBLIC OF SENEGAL

February 20,2004

Private Sector Development Unit Africa Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank Group authorization.

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CURRENCY EQUIVALENTS

Currency Unit = CFA Franc (CFAF) US$l = CFAF 515 (asofJanuary31,2003)

GOVERNMENT FISCAL YEAR

January 1 - December 3 1

ABBREVIATIONS AND ACRONYMS

AGOA ART CAS CEM CET CFAA CPAR EU FIAS FNR HIPC IMF P R E S METR PPP PRGF PIC PER PRSP PSAC SENELEC SME SONACOS SONAGRAINES USAID us0 WAEMU

African Growth Opportunity Act Agence de Regulation des Te'le'coms, The telecom Regulator Country Assistance Strategy Country Economic Memorandum Common External Tariff Country Financial Accountability Assessment Country Procurement Assessment Review European Union Financial Investment Advisory Services Fonds Nationale de Retraite, pension fund for civil servants Highly Indebeted Country Initaitive International Monetary Fund Institution de Pre'voyance Retraite du Skidgal, pension fund for private employees Marginal Effective Tax Rate Private Investment Promotion Project Poverty Reduction and Growth Facility Presidential Investor Council Public Expenditure Review Poverty Reduction Strategy Paper Private Sector Adjustment Credit The electrical public utility Small and Medium Enterprise The public groundnut processor The liquidated public seed distribution company United States Agency for International Development Universal Service Obligation West Africa Economic and Monetary Union

Vice President : Callisto Madavo Country Director : John McIntire Sector Manager : DembaBa Task Team Leader : Iradj Alikhani

FOR OFFICIAL USE ONLY

... - 111 -

REPUBLIC OF SENEGAL: PRIVATE SECTOR ADJUSTMENT CREDIT

TABLE OF CONTENTS

Page No.

I . THE COUNTRY CONTEXT.. ... 11. THE PRIVATE SECTOR ADJUSTMENT PROGRAM ..........................................................

A. Private Sector Development Strategy ....................................................................... B. Tax Reform .............................................................................................................. C. Edible Oi l Sector Reform ........................................................................................................................ 6 D. Postal Services Reform ..................................................................................... 8 E. Pension Reform ....................................................... 12

111. THE PROPOSED CREDIT 16 A. Objectives ............................................................................................................................................. 16 B. Link to the CAS, Poverty Implications and Social Impact .................................................................... 16 C. Credit Features and Implementation ...................................................................................................... 18 D. Coordination with IMF and Donors .........................................................................................

IV . BENEFITS AND RISKS .......................................................................................................................... Benefits ......................................................................................................................................... Risks.. ........................... ............................................................................................................ .23 Lessons Learnt From Past Bank Experience ........... .................................................. 24 A. Past adjustment loans .............................. ................................................ 24

................................................................ 1

.................................... ................ ..............................................................................................................

B. Other Lessons ........................................................................................................................................ 25

Tables

Table 1 : Senegal Post Office - Key Indicators ............................................................................................................. .9 Table 2. Senegal: Extemal Financing Requirements, 2001-06 .................................................................................... 22

Aiiiiexes

ANNEX A ....................................................................................................................................................... ANNEX B ..................................................................................................................................................................... 29 ANNEX C ..................................................................................................................................................................... 32 ANNEX D ................................. ......................................................................................................................... 34

......................................... ...................................... ............................................................ 35

ANNEX G .................................................................................................................................................................... 47 ...................................................................................................... ; .....................................

MAP 32252

This document has a restricted distribution and may be used b y recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

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Republic of Senegal: Private Sector Adjustment Credit

Borrower:

Amount:

Terms:

Program Objectives:

Credit and Program Summary

Republic o f Senegal

SDR 30.2 mi l l ion (equivalent to US$45 million)

Standard IDA terms with 40 years maturity

The proposed Private Sector Adjustment Credit (PSAC) i s an integral part o f the Bank Strategy set forth in the Country Assistance Strategy (CAS) for Senegal presented to the Board on April 17, 2003. The objective o f the Credit i s to support the Government o f Senegal in the implementation o f subsector reforms aimed at improving the investment climate and accelerating private sector growth and employment. The private sector adjustment program thus supports the Government’s Poverty Reduction Strategy, through improving the investment climate and implementing key sector reform by: (i) supporting the implementation o f a private enterprise tax regime that stimulates investments through a level playing field and lower taxes, and allocates user fees for the private sector promotion purposes for which they are levied; (ii) restructuring the edible o i l sector by improving the competitive environment in which i t operates, through the elimination or reduction o f pol icy distortions associated with non-tariff bamers and other domestic protection mechanisms, and o f public interventions; (iii) reforming postal services by introducing greater competition in the sector, restructuring the postal enterprise so as to enhance its sustainability and to create an autonomous financial subsidiary that would provide savings, and payment and transfer services; and (iv) bringing changes to the pension system to make it financially sustainable and to improve its corporate governance. The last two reforms entail substantial financial restructuring, involving clearance o f arrears, that would need to be financed by the public budget. In the same vein, the proposed tax reforms, while revenue neutral or enhancing in the medium-term, may entail short-term revenue shortfalls. The proposed Credit aims to provide budget resources through counterpart funds generated by balance o f payment support i t provides, and thus help ensure that social and poverty alleviation programs are not disrupted.

Credit Description: The proposed Credit includes actions in four priori ty reform areas: (i)

taxation; (ii) edible o i l sector; (iii) postal services; and (iv) pensions. The first tranche o f the proposed four-tranche operation would help initiate these

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reforms. The other three floating tranches would support specific reforms in each o f the above areas, except in the edible o i l sector that wi l l be fully covered by the f i rst tranche. A pol icy matrix spelling out the objectives o f the proposed credit, measures already taken, measures to be taken under the credit, and proposed timing i s provided as Annex F.

Benefits

Risks

The private sector pol icy and institutional reforms will lead to permanent improvements in the investment climate. They wil l also stem the fiscal losses and contingent liabilities related to postal services and the pension system, through one time financial restructuring and sector reforms aimed at ensuring financial sustainability. The poor will derive direct and indirect benefits from the reforms through employment and revenue generation opportunities, the elimination o f regressive taxes, and improved access to postal and financial services. Formal sector workers will also benefit from improved social protection. Expected induced effects o f the reforms involve the mobilization o f te rm resources by the pension scheme and the financial services o f the post office. Once recycled through sound financial intermediaries, these would help finance viable private investments, including SMEs. Finally, by strengthening fiscal balances and contributing towards a lasting improvement in the investment climate, the PSAC would help mitigate certain risks identi@ in the CAS and increase the probability o f achieving the high case scenario triggers.

The proposed PSAC includes an ambitious reform agenda that may be resisted by vested interests and may be undermined by political concerns. The first risk i s therefore imperfect implementation o f the reforms, which would undermine their sustainability. This risks have been mitigated a number ways. First, for the past three years a series o f diagnostics studies have been undertaken that have helped strengthen the analytical basis o f the reforms. Second, a broad participatory process has been followed to ensure stakeholder buy-in, including at the highest level o f policy-making. Finally, the specific conditions are, to the extent possible, focused o n outcomes and selective, covering the most critical aspects o f the reforms. The relative simplicity and focus o f the project design i s thus strength. The second risk is institutional in nature. To avoid the risk o f imperfect implementation due to lack o f capacity, insufficient analysis and absence o f consensus, the parallel PPP operation provides considerable assistance in the design and implementation o f the reforms. The third category o f r isk i s specific to the four areas o f reform within the program. One such r isk concerns the privatisation o f the groundnut operator, which is very advanced and i s not expected to materialize. Other risks are considered manageable and are mitigated through a combination o f upfront actions being taken, implementation support provided by IDA and consensus building in favour o f the reforms.

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Estimated Disbursements The credit wil l be disbursed in four tranches.

Schedule of Disbursements Category

US$ mill ion FY04 FY05 FY06

Annual Cumulative 8.5 25 .O 45.0

Financing Plan The tentative financing plan i s as follows: (i) IDA, US$45 million; and (ii) Government U S $3 0.0 mil l ion.

IDA PROGRAM DOCUMENT ON A PROPOSED PRIVATE SECTOR ADJUSTMENT CREDIT

TO THE REPUBLIC OF SENEGAL

I. THE COUNTRY CONTEXT

1. Since the devaluation o f the CFAF in 1994, Senegal’s GDP has been growing at 5 percent per annum, accelerating to 6.5 percent in 2003, resulting in GDP per capita growth o f over 2 percent during this period. This was in sharp contrast to the decades since independence when GDP per capita had, on average, actually been falling. Inflation, as measured by the consumer price index, has averaged just over 2 percent over the last four years. Fiscal deficit, excluding grants, was only 2 percent o f GDP in 2002. The current account deficit, excluding grants, has been in the range o f 6.5 percent o f GDP over the past three years, sustained by donor assistance, including funds under IMF’s PRGF, the Wor ld Bank’s Trade Reform and Competitiveness Credit and debt rel ief under the HIPC initiative. A s detailed below (para. 7) project debt service ratios now appear sustainable. Reforms in areas such as trade, the financial sector, ownership o f public enterprises, and telecommunications have been under implementation for some years and seem to be gaining momentum. Progress in the social areas, while somewhat halting in the past, promises to pick up speed, assisted by the Government’s Poverty Reduction Strategy. The PRSP was sent to the Bank and the Fund in M a y 2002. The Bank’s Board, in i t s discussion o f the Joint Staff Assessment on December 23, 2002 concluded that the PRSP was an adequate basis for concessional lending from IDA.

2. However, th i s picture o f a stable, low inflation, growing economy, poised to substantially reduce poverty, could be deceptive for a number o f reasons. Analysis conducted for the Country Economic Memorandum (CEM) for Senegal, issued in 2003, shows that despite strong GDP growth, the response o f exports to the devaluation has been lackluster, sustainability o f commodity exports such as f i sh and groundnuts is fragile, long- term trend in manufacturing productivity (both labor and total factor productivity) has been one o f stagnation and even decline, and surveys o f the investment climate conducted by the Foreign Investment Advisory Services (FIAS) suggest that a series o f important obstacles need to be removed before private investment will take off. Since 1994, growth o f GDP seems to have been driven mostly by internal demand, recovering from stagnation preceding the devaluation, rather than being based on external competitiveness stemming from growth in productivity, a much more favorable exchange rate and an improved investment climate.

3. One view would be that the full effect o f the reforms has not yet been felt. This may well be true and recent surveys indicate that incidence o f poverty has declined by about 10 percent over the past decade. Still, over 50 percent o f the population remains poor and the history o f Senegal’s political economy does not leave much room for complacency. Earlier reforms, that started in the mid-l980’s, were mostly reversed or undermined by early 1990’s. Powerfbl vested interests thus fought to retain their privileged status in areas

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ranging from corporate governance, to patron-client relations in the civ i l service, to elite biases in the education and health systems, to social protection that was financially unsustainable for even the relatively small formal sector o f the economy. I t i s the intention o f the Government’s reform program to re-channel the energies o f these often competent and energetic elites from rent seeking and defense o f the status quo, to job-creating generation o f wealth.

4. Backsliding in the reform program would likely have two negative macroeconomic outcomes. First, the recent growth trend would weaken and GDP growth rate could again have trouble keeping up with the rate o f growth o f population. It would be virtually impossible to reduce poverty and improve the lives o f the majority o f Senegalese in such a case. Second, i t would be much harder to sustain macroeconomic stability. Tax revenues would be down due to slower growth. SENELEC, the public power company, may continue to perform poorly and require further subsidies. Contingent liabilities o f the pension system could snowball. As donors realized that the reforms are stalling, foreign assistance would be reduced. Senegal’s authorities would have to choose between higher inflation and austerity.

5. Finally, the external environment i s currently unfavorable to Senegal. The world economy has slowed down considerably in the last two years and the near-term trends are highly uncertain. This i s putting a damper on both the volumes and prices o f Senegal’s exports. Extreme volatility o f o i l prices in the recent period has not been helpful. Tourism, one o f the few promising avenues for j ob creating export growth for Senegal, i s having trouble recovering from the 9/11 shock. Finally, with the CFAF being tied to the euro, the 30 percent weakening o f the dollar vis-a-vis the euro over the last two years has not helped Senegal’s competitive position.

6. Debt should not be a problem in the future if a strong reform program is pursued. The net present value o f debt-to-export and debt-to-revenue ratios (169 percent and 263 percent, respectively, in 2002), two years after the HIPC decision point, were st i l l above sustainability thresholds o f 150 percent and 250 percent, respectively (CAS, March 2003, Annex 16). However, exports, output and revenue are expected to recover th is year and next, bringing the various ratios back into sustainable range. Debt service to export ratio, after a spike in obligations on non-Paris Club debt in 2004, should be back below 10 percent by 2005 and, therefore, manageable.

7. In sum, Senegal’s reformers face an array o f obstacles. They have accomplished much, but the road to rapid, sustained, poverty-reducing growth i s still long. The reformers will need unambiguous political support and considerable human and financial resources to carry their task to a successful conclusion. IDA’S Country Assistance Strategy is designed, in partnership with the Government and other donors, to help Senegal’s authorities to succeed in their reform efforts. This Credit, as well as its companion Private Investment Promotion Project (PIPP, Cr. 3762, approved on M a y 20,2003) are crucial pillars o f DA’s overall support strategy.

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11. THE PRIVATE SECTOR ADJUSTMENT PROGRAM

A. Private Sector Development Strategy

8. The private sector development program has benefited from strong analytical and strategic underpinning. In the late 199Os, the Government decided to prepare a private sector development strategy. T o this end, with the support o f the World Bank and other donors, a consultation process was launched. In mid-1999, a draft strategy was presented to and endorsed by all stakeholders. In parallel, detailed diagnostic work was undertaken with the technical collaboration o f the World Bank. The resulting output included three studies o f the investment climate (in collaboration with FIAS), as wel l as studies and diagnostics o f infrastructure reform (Country Framework Report), pensions, trade policy (Integrated Framework), tourism, the financial sector (Financial Sector Assessment Paper, FSAP), the postal sector, and macroeconomic and poverty issues (Country Economic Memorandum). Following extensive public consultations driven in large part by these studies, the Government has elaborated a detailed reform program in support o f its private sector-led development strategy. In this context, Senegal i s embarking on major and innovative reforms aimed at enhancing i t s investment climate and improving the viability o f pensions, which may become an example for the rest o f W e s t - A k a .

9. Reflecting recent work, the Govemment’s private sector development strategy i s detailed in a sector policy letter submitted to the World Bank on April 3, 2003 (see Annex E). The overall objective o f this strategy i s to help achieve and sustain steady private sector-based GDP growth o f about 8 percent per annum (pa.), resulting in increased formal sector employment, which for the past 5 years has remained stagnant, at around 200,000 jobs. The strategy envisages that this economic growth would be sustained by appropriate policies and development o f certain sectors, such as: (a) construction; (b) extractive industries, petroleum, gold, i ron ore etc.; (c) tourism; (d) export-oriented manufacturing, especially garments, in part stimulated by AGOA, (e) trade services sectors, in particular based on Senegal (especially the Dakar region) becoming a Gateway to West-Africa; ( f ) information technology and related value-added services; and (g) SMEs, especially those involved in subcontracting activities, services, agribusiness, and artisanal activities.

10. The letter envisages the implementation o f the strategy will be based on the following themes: (i) improving the investment climate, notably through legal and judicial capacity building, business environment enhancement, administrative barriers and tax reforms, trade facilitation, infrastructure regulation, and a stronger private-public consultative process; (ii) facilitating private participation and enhancing competitiveness, broadening private participation in economic activities, and increasing the productivity o f the local private sector; and (iii) stimulating sector investment, both domestic and foreign, and implementing policy reforms in the areas o f pensions, the information technology sector, postal services, tourism and culture, and the edible o i l sector.

11. The aforementioned PPP supports the implementation o f the strategy and its sustainability by financing capacity building and investments. However, the

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implementation o f some o f the actions requires up ftont, difficult policy reforms as well as a significant amount o f financial restructuring that burdens the Government’s budget. The PSAC supports the implementation o f key reforms in areas described below and helps alleviate their fiscal burden, though counterpart funds generated from the balance o f payment support provided under the Credit.

B. Tax Reform

12. Theprevailingpolicy regime. The tax regime is an important element o f any country’s investment climate. Investment in Senegal i s deterred by excessively high tax rates combined with a multitude o f taxes and/or user fees, and complex administrative arrangements, resulting in one o f the most intricate tax regimes in the sub-region. The tax- related administrative barriers and complexity o f the tax regime contribute to a daunting system that lacks transparency and encourages rent seeking. Furthermore, the cost o f administering small taxes may exceed what is transferred to the treasury, and user fees are . often not utilized effectively or for the purpose they were intended. To encourage private investments, the Government has, over time, implemented a number o f overlapping exemption regimes detailed in the Marginal Effective Tax Rate (METR) study undertaken by FIAS in December 2000. These regimes not only further complicate the tax system, but also result in an uneven playing field for private firms.

13. The Government has recognized the importance o f reducing tax-induced economic and administrative distortions. To this effect under the recently completed Trade Reform and Competitiveness Credit (Cr. 3419), it has implemented a number o f important reforms in the area o f tariffs, value-added tax (VAT) and business taxation. Specifically, on January 1, 2000 Senegal implemented the last step o f the West Africa Economic and Monetary Union (WAEMU) Common External Tarif f (CET) reform. This involved reducing tariff spreads, merging two import taxes into one while lowering the rate on a third, reducing the number applicable rates to four. Tariffs on goods traded within the region have been largely eliminated. The new tariff code corresponds to international best practice. In September 2001, the Government also unified VAT rates into a single 18 percent rate, which has helped broaden the tax base. On the administrative side, important measures have been, or are, being implemented in the area o f trade facilitation to simplify customs clearance. Similarly, the adoption o f a single taxpayer number and related electronic information sharing has improved the interface between the tax authorities and businesses.

14. Government Strategy. Due to i t s geographical location and relatively good human capital, Senegal is well positioned to support sustained higher rates o f GDP growth. To achieve this objective, the country would have to exploit i t s potential as a gateway to other West-African countries, and to develop its tourism and export potential, especially under AGOA and EU’s “Everything but Arms” initiative. The Government recognizes this potential and has made improvements in investment climate, including alleviation o f administrative barriers and tax reform, one o f the cornerstones o f its growth strategy. The commitment in favour o f tax reform i s clearly stated in the aforementioned Private Sector Development Strategy letter and further elaborated in the Government’s tax reform action

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plan (document on file). Further, tax reform was one o f the four topics for rapid follow-up selected during the f i rst meeting in November 2002 o f the Presidential Investor Council (PIC), a high-level public/private partnership and dialogue instrument supported by both Bretton Woods institutions. The Government’s reform strategy and action plan is based on FIAS’s study and the contribution o f working group that was set up under the auspices o f the PIC.

15. While recognizing that certain tax and investment incentives issues need to be consistent with the current discussions with WAEMU, the Government i s determined to implement an ambitious tax reform agenda based on three broad principles:

0 The incorporation o f specific incentives into the Tax Code, decrease top rates and reduce the number o f taxes, resulting in a reduction o f the METR from 45 percent to no more than 28 percent when the investor does not use any tax incentive regimes (based on FIAS 2000 methodology). Rationalization o f the tax regime would also create a more favourable environment for micro-enterprises and the informal sector, thus facilitating their formalization.

0 The elimination and/or redirection o f minor, but important taxes, fees and levies that would help stimulate or address the needs o f certain sectors and private activities. Areas o f reform would include tourism taxes and levies, allocation o f cultural royalties, and the vocational training tax (Contribution Forfaitaire h la Charge de Z’EmpZoyeur), CFCE set currently at 3.0 percent and 6.0 percent o f formal sector wages, respectively for national and foreign employees. In this context, the CFCE will be harmonized at to 3.0 percent (the WAEMU norm) and one-third o f its proceeds will be reallocated to the matching grant facility, which i s being established under PIPP in order to help enhance the productivity and competitiveness o f local private f i rms.

0 Rationalization o f the exception regimes, which would involve the elimination o f certain exemptions and consolidation o f other benefits (especially for exporters) into a single regime or into the general tax system. In this context, provisions o f the investment code regarding waivers o f the consumption tax and import duties would be streamlined to ensure the consistency o f the code with the CET and the VAT laws. Given the importance o f tourism in the economy and i t s h tu re growth, hotel operators would be supported through accelerated depreciation o f investments or similar schemes.

16. Proposed PSAC Program. While supporting the implementation o f a comprehensive tax reform program, the PSAC will focus on reducing the METR to levels l o w enough to stimulate private investments and to encourage formal activities without using specific tax exemption regimes. In addition, the CFCE, a key user fee, will be redirected towards i t s intended use. Many o f the tax reforms identified by stakeholders do not individually have a significant impact on fiscal revenues and collectively short term revenue losses should not exceed a gross amount o f US$10 mi l l ion equivalent, and a negligible net amount,

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considering recent increasing trend in tax revenues. Nevertheless, the Government intends to sequence the reform package in a manner that does not undermine the budget and broad macroeconomic stability. For instance, the proposed income tax reform and reduction o f top rates must go hand-in-hand with a corresponding elimination o f exemptions and improved tax administration. Possible short-term fiscal shortfalls are taken into account through the adjustment support the overall macroeconomic program. Capacity building for implementation o f the reforms is being provided through PIPP.

C. Edible Oil Sector Reform

17. Sector setting and recent performance. About 30 percent o f the Senegalese population directly on indirectly derives part o f their livelihood fkom the groundnut sector. The overall liberalization efforts pursued by the Senegalese Government in the 1990s, and more recently in 2001 with the divestiture o f the seeds distribution subsidiary o f the monopolistic groundnut processing public enterprise (SONACOS), have encouraged some efficiency gains. Nevertheless, as reflected by two failed privatization attempts in the latter hal f o f the 199Os, many sector policy issues are unresolved and significant distortions remain:

0 The processing activity (groundnut oil) i s protected through a complex system o f trade barriers (duties and surcharges based on reference pricing, informal quota and domestic taxes o n imports o f processed o i l and close substitutes) and special privileges (exemptions etc.). The cost o f this protection, a regressive tax on edible o i l products that tends to affect the poor proportionally more, has been estimated at around CFAF 25 bi l l ion p.a. (about US$4 per-capita at the current exchange rate).

0 In part due to distorted incentives, there has been l i t t le upstream or downstream diversification. As a result, marginal farmers, including some with more economically viable altematives, have continued to produce groundnut. Upstream, Senegal has become the leading exporter o f groundnut oil, a niche market. There is, therefore, limited scope for significantly raising exports without affecting wor ld prices.

0 Farmers, o n the one hand, may be taxed through l o w producer prices that are needed to compensate for inefficiencies in the processing unit (SONACOS). On the other hand they and the sector benefit from implici t or explicit subsidies o n inputs, financing and so on. A study o f the net effect o f this complex system i s that farmers by and large are neither taxed nor subsidized. SONACOS, however, benefits from an effective rate o f protection on value-added around 600 percent.

0 In the past, as identified in the FSAP, the banks have been significantly exposed to the edible o i l sector. Without a de-facto government guarantee, as wel l as subsidized lines o f credit, donor-funded guarantee funds and interest rate subsidies (which distort the financial sector), some o f the financial intermediaries

might have been significantly distressed. Two factors are now contributing to a reduced risk and the exposure o f banks to the sector. In the short-term, production has fallen by about 75 percent, with similar decrease in financing needs. In the medium-term, the introduction o f private operators, with adequate working capital, and the dismantling o f the distortions should enable the banks to improve lending policies and compete for creditworthy businesses.

0 Government has had to cover an overall sector deficit o f about CFAF 70 bi l l ion (USSlOO mil l ion at the then prevailing exchange rate), accumulated during in 2000 and 2001. Given the tight fiscal constraints faced by Government, the public financing o f the sector cannot be sustained without undermining other priority expenditures and poverty alleviation programs. More recent figures indicate that total sector deficits have been substantially eliminated for 2000/2003. The main area where Government intervention i s needed relates to when drought conditions prevail. For instance, resulting falling farm revenues prompted public provision o f seeds for the 2003/2004 campaigns. The cost o f the program i s estimated at around CFAF 5.1 bi l l ion (approximately U S $ l O million).

18. Government Strategy. The objective sought by the Government is to ensure that the sector operates on sound, sustainable financial footing and in a competitive economic environment, where the private sector i s responsible for commercial activities. The most recent step towards this goal was taken in late 2001, when SONAGRAINES, the public enterprise responsible for distributing seeds was divested. To help formulate its reform strategy and supervise consultants undertaking various studies, during 2002 the Government established two working groups in which the stakeholders are represented. The first group works o n preparing the divestiture o f SONACOS. The second focuses on the various elements o f the protection regime and downstream diversification issues. These reforms, especially reduction o f protection together with the divestiture o f SONACOS to a private operator, are scheduled to be completed by June 2004. They should help ensure that the market for edible o i l is contestable and becomes competitive over time, as i s the case o f the rice sector liberalized in the late 1990s.

19. One result o f this work was the formulation o f a sector reform strategy, outlined in the Government’s Edible Oil Sector Policy Letter, and dated M a y 23,2003 (letter on file). The strategy calls for the following broad actions to be taken: (i) elimination o f trade policy, and other regulatory and financial sector distortions; (ii) divestiture o f SONACOS; (iii) complementary sector reforms, involving diversification o f production in groundnut producing areas as wel l as possible downstream measures to meet untapped demand; and (iv) clearance o f accumulated liabilities, currently estimated at under CFAF 10 billion, through a one-time financial restructuring o f the sector.

20. Proposed PSAC Program. The PSAC will focus on the elimination o f the most serious trade policy and domestic distortions. In view o f the critical importance o f this sector’s reform, additional World Bank support to this important sector reform will be channeled through two projects other than the present one: (a) the PPP would provide technical assistance and advisory services for the divestiture actions, development o f a new marketing system and implementation o f the reforms; (b) the ongoing Agriculture Services Project

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(Cr. 3219-SE) would help put into place a private seed distribution system and undertake a study o f diversification options in groundnut producing areas. It is expected that diversification objectives would be supported by a future IDA Credit, under preparation.

D. Postal Services Reform

21. The Sector Setting. Postal services worldwide represent the most accessible means o f communication for al l populations. They cover both traditional mai l services and basic financial services such as money transfers, savings accounts, and giro accounts. In addition, the physical infrastructure goes far beyond the main urban centers, reaching out to rural and remote areas where no other service provider i s present. It is usually acknowledged that postal services play a significant role in terms o f economic and social integration. Long a monopolistic sector, postal services have gone through a major transformation, due to both the diversification o f their services (express and al l kinds o f value-added paper-based communication services) and the influence o f new technologies in their production systems. Today, countries are progressively allowing more and more competition in the sector, together with the implementation o f a strong regulatory framework, translating into increased private sector participation, enhanced sector growth, and job creation.

22. In Senegal, the postal sector is still organized in a monopolistic way, although three types o f actors are today operating in the sector:

The historical postal operator, L a Poste, maintains 135 post offices, and i s the most widespread financial network in the country (by comparison, there are 73 bank branches). I t has about 1,700 employees who distributed about 18 mi l l ion letter items in 2001. I ts annual revenues reached CFAF 7.9 b i l l ion in 2001.

The international express carriers who operate under a license from the historical postal operator are represented by DHL, Fedex, U P S , and other local operators. Their contribution to the sector i s difficult to capture as no off icial data about their activities are collected.

The private operators who intervene in an informal way are represented by: (i) single-person or small organizations who operate on a geographically restricted part o f the segment, their economic significance is believed to be limited, and (ii) by larger organizations (typically the utilities) who internally organize the distribution o f their bills. For the latter, their activities have a financial impact o n L a Poste, as international benchmark shows that utility bi l ls represent a significant portion o f the overall business volume o f the historical postal operators.

0

0

0

23. L a Poste was transformed into a State-owned corporation in 1995 (Soci&t& Nationale de La Poste). The company has since been experiencing difficulties rooted in sub-optimal sector organization and the absence o f solid corporate govemance structure. The analysis o f the latest balance sheets and studies o f cross debts between L a Poste and the Treasury led to the assessment o f an excessive net financial indebtedness (CFAF 12 billion, equivalent to about US$20 million). L a Poste is only partially responsible for this situation. In 1995 when it was incorporated, Government as sole shareholder provided a social capital o f only

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CFAF 2.9 bi l l ion wi th a negative working capital, and did not reevaluate the assets. One o f the reasons why L a Poste has accumulated debt against the Treasury is related to the lack o f sufficient working capital and the subsequent need to rely on the State treasury to finance i t s operations. K e y performance indicators are highlighted in table 1 below.

Table 1: Senegal Post Office - K e y Indicators

1,700 employees 135 post offices

Number o f letter items handled annually 12.6 m i l l i on Monopoly o n letter up to 1 kg

1999 2000 2001 (projected) 2002 (projected) Total revenues (CFAF bil l ion): 6.7 6.6 7.9 Def ic i t (CFAF bil l ion): -13.8 -4.4 -0.2 -0.1 Traditional postal (mail, express mail, parcels) and financial services (checking accounts, savings books, money orders, payments): postal services represent about ?4 o f the revenues, financial services about !A.

Comparative Performance (access, volumes, productivity) Senegal I vo ry Coast Gabon Guinea

Km2ipost office 1,500 1,750 5,140 3,900 InhabitantsiPost Off ice 72,000 88,200 23,300 129,400

Letterslemployee p.a. 7,919 26,728 9,841 25,585

Lettersiinhabitants p.a. 0.66 1.48 5.63 0.36

Monopoly threshold (kg) 1 .o 2.0 1 .o 1 .o

24. In 1998, corporate govemance issues and weak financial controls worsened the situation. Over the 1998-1999 period, L a Poste accumulated financial deficits o f almost CFAF 20 billion. In 2000, the Government o f Senegal took actions to stabilize the institution and committed itself to an in-depth sector reform, starting with the change o f General Director to improve corporate govemance and increase private sector-oriented management. As indicated in the table above, while the deficit was stabilized, the performance o f the postal entity compares poorly with that o f others in the region.

25. Government Strategy. The objectives pursued by the Govemment are stated in the Letter o f Postal Sector Policy o f April 17, 2003, signed joint ly by the Minister o f Culture and Communication and the Minister o f Economy and Finance. They can be summarized as follows:

Improve overall sector perfomance through a progressive sector liberalization and increased private sector participation.

Modemize the legal and regulatory framework and strengthen sector regulation.

Safeguard the right to basic communications for al l citizens through a funding mechanism to support the cost o f universal postal services obligations.

Transform the historical postal operator into a modem and performing corporation through the definition and implementation o f a new corporate strategy.

0

0

0

0

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0 Promote the sustainable development o f postal financial services in order to improve access o f the population to basic financial and savings services, and channel these savings towards private investment needs.

26. The Government o f Senegal recognizes that the key success factors to attain these goals are two-fold:

(i) Improvement o f corporate governance. In 2000, a new General Director was designated with a clear mandate to turn L a Poste into a profitable and sustainable entity. The Director has a strong private sector background (accounting and banking) and his designation illustrated the strong choice made by the Government in favor o f L a Poste to improve i t s corporate governance and develop market-oriented management; and

(ii) Clarification o f the financial relation between the State and the postal corporation. In 2002, an assessment o f the cost o f L a Poste’s universal service obligations (USO) and o f the arrears owed by the Government was prepared by an independent consulting firm mandated by the Ministry o f Economy and Finances, which concluded that the annual U S 0 burden for L a Poste i s CFAF 1.3 billion, and that arrears owed to L a Poste over the 1993-2002 period amounted to CFAF 13.1 billion.

27. Since 2001, a number o f Government decisions and practical steps, supported by the World Bank and other donors, have been undertaken, illustrating the strong Government’s commitment to the postal sector reform. The key steps include the following:

0 June 2002: First report on postal sector diagnostic and preliminary recommendations.

October 2002: Report on assessment o f the cost o f the postal public service missions supported by L a Poste and State arrears to L a Poste.

November 2002: Transfer o f CFAF 2.3 b i l l ion included for L a Poste in 2003 budget and the actual transfer was undertaken during the 2003 financial year.

April 2003: Letter o f Postal Sector Policy, signed by both Ministers o f Economy and Finances, and Culture and Communication.

February 2003: Feasibility study relative to the development o f postal financial services and a creation o f a subsidiary in the form o f a postal bank.

February 2003 : New corporate strategy drafted.

0

0

0

0

0

28. The Letter o f Postal Sector Policy contains a timetable and performance indicators that establish the framework for follow-up actions. These include the drafting o f a new postal sector law and its presentation to Parliament, now scheduled for March 2004. Another measure concerns the implementation o f an adequate regulatory framework. The most practical institutional arrangement would be for postal regulation responsibilities to be delegated to the existing telecom regulator (ART). The multi-sector approach toward regulation i s often considered the most appropriate institutional arrangement for Africa.

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Senegalese stakeholders M h e r recognize that postal regulation is not expected to require h l l t ime attention. Thus, by attributing this responsibility to an existing agency the duplication o f institutions i s avoided and economies o f scale are derived. The draft postal law adopted by Government on February 5, 2004 envisages that ART will regulate postal services.

29. To address corporate govemance issues, a presidential decree o f 2000 mandates that the postal financial services be separated from L a Poste and handled as a subsidiary. A consultant report highlights how th is can be made feasible and sustainable. The proposed approach differs from the total divestiture o f financial services, tried in other countries (e.g., M a l i and ivory Coast) with limited success. It i s intended to capture synergies that exist between the postal and financial activities, while maintaining a similar institutional culture and avoiding the situation in the past, where mobilized resources have financed the postal deficit. The Government strategy calls for the new financial subsidiary to concentrate on providing payments and savings services. By acting as a wholesaler, the entity will recycle resources it mobilizes through sound, strong micro-finance institutions.

30. The new corporate strategy calls for a redundancy plan that wil l touch about 200 staff. A preliminary cost assessment o f this is an amount o f CFAF 2 bi l l ion (about US$4 million), taking into account legal allowances and a 30-month special retirement bonus. This bonus was based on 50 months for SONATEL, the telecom operator; L a Poste and SONATEL share the same unions. The net cost o f retrenchment i s expected to be lower once staff indebtedness towards the company (1 6 months o f salary on average per staff) is deducted.

3 1. The net total cost for the Government to complete financial restructuring o f L a Poste is estimated at CFAF 14 bi l l ion (about US$22 million, after the settlement o f cross-debts). This investment is expected to lead to a significant reduction o f the postal fiscal burden as soon as in 2004, when L a Poste would break even. After recapitalization, implementation o f a new corporate strategy, capacity building enhanced through the PIPP project, reorganization o f L a Poste with strong market-oriented subsidiaries, L a Poste will be geared towards improved performance, profitability and sustainability. There will remain the compensation for the postal U S 0 to be paid by Government. A s L a Poste improves its productivity and operational performance, U S 0 would be provided in a more efficient way and at a lesser cost. A performance contract between the State and L a Poste, based on the corporate development plan and spelling the roles and responsibilities o f each party as wel l as performance indicators, would provide the right tool to define an incentive for L a Poste to improve its productivity over time. In addition, the reorganization o f the postal sector, with progressive liberalization and adequate regulation, should translate into faster growth o f the sector, improved postal services offered to businesses, and employment creation.

32. Proposed PSAC Program. The proposed operation will support: (i) ongoing reforms aimed at introducing more competition in postal services, strengthening corporate govemance, and restructuring the postal corporation so as to improve its sustainability and i t s service quality; and (ii) implementation o f the required financial restructuring o f the operator. Specifically PSAC supports the improvement o f the postal legal and regulatory

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framework, financial restructuring o f L a Poste, the implementation o f the corporate strategy, to be monitored through a performance contract, and the creation o f the subsidiary for financial services.

E. Pension Reform

33. Sector Background. Over the last few years, the Government o f Senegal has made reforms in its formal pension system a priority. Evidence o f this can be seen in the positive steps taken in early 2002 to curtail deficits in the civ i l service pension scheme, through changes to the benefit formula, contribution rates and the retirement age. The public discussions that took place prior to these changes and subsequent interest o f key stakeholders has created significant momentum for further reforms in this area.

34. The motivation for the reforms goes beyond fiscal policy, although there i s now increased awareness about the size o f the unfunded pension liability. A second, more direct cause for concem is the increasing recognition o f the failure to provide adequate pensions to formal sector workers not in the civ i l service. In particular, the workers contributing to the Institution de Prkvoyance Retraite du Sknkgal (PRES) have watched pension levels stagnate and are receiving a low or negative implicit rate o f return o n their contributions. This has reduced the credibility o f the scheme despite the perception that there i s an increasing demand for instruments to ensure old age income security. This situation presents a major obstacle to other public policy objectives, such as extending coverage o f social insurance institutions to new groups o f workers and expanding the size o f the formal sector in general.

35. In addition to the primary social function o f the pension system, it is clear that Senegal’s economy, like most others’in the region, suffers from a dearth o f long-term savings and institutions that can intermediate these effectively. Under the right conditions, pension reserves could contribute to long-term growth by providing long-term hnds for capital investment. While this effect cannot be expected without parallel reforms in other areas, some regional in nature, the alternative o f continued reliance on short-term savings and extemal assistance does not seem viable.

36. The emerging vision o f reform, highlighted in a day-long conference o n February 1, 2003 that brought together the social partners for consultation with the two Ministers responsible for the sector (Labor and Budget), involves two phases. The f i rst phase involves a series of parametric reforms within the current institutional framework that would lead to two outcomes. First, the measures would make the overall pension system more sustainable. This would mitigate the crowding out o f other expenditures due to pension liabilities and improve the overall fiscal position o f Government. Second, the recommended measures would remove the high degree o f uncertainty that pervades the pension system. In the past, these ad hoc changes to key parameters have introduced “policy r i sk ” to what should be a secure mechanism for long-term savings. Tying the development of pension levels to objective indices, rather than political decisions, also

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removes the inequities that arise when workers with identical contribution histories receive very different benefits.

37. Government strategy. The Government’s pension reform strategy i s described in the sector policy statement dated June 6,2003 (document on file). The Government o f Senegal and the Board o f Trustees o f the P R E S are currently discussing a package o f parametric reforms that would eliminate the uncertainty o f the past regarding pension calculation and indexation. These measures, which could be adopted fairly rapidly include:

0 Shift to automatic indexation o f benefits to earnings growth until the cumulative increase o f benefits has reached 50 percent o f earnings in real terms (compensation for past erosion o f real benefits) at which time pensions in progress would be price indexed.

0 Index al l other parameters to wage growth permanently.

0 Index the ceiling o n earnings subject to contributions to salary growth.

0 Gradually increase the normal retirement age to 60.

38. In addition to these changes, there are two fundamental pol icy issues being discussed which relate to the finances o f the scheme. The first is the governance o f the P R E S scheme and in particular, the process by which reserves is being invested. There appears to be strong commitment to revise the governance towards increasing transparency and improving investment performance.

39. A second issue, inherited by the current government, i s the need to deal with pension arrears accumulated in the mid-1990s. The arrears stem from unpaid contributions o f state enterprises and agencies some o f which have been liquidated. The one-time payment o f these arrears, once their true magnitude is established would require a significant budget outlay o f about CFAF 22 bi l l ion (about US$38 million). Until it is resolved however, the accounts o f P R E S will remain uncertain and, importantly, the pension rights o f thousands o f workers, for whom contributions were never made, will remain in doubt. While the resolution o f this problem i s urgent, i t is necessary to ensure that the sudden increase in P R E S reserves, that would be implied, are accompanied by the measures needed to improve the investment process and to otherwise ensure that these savings are effectively managed.

40. In summary, the first phase o f reforms involves a series o f parametric reforms and changes to the way the P R E S scheme is managed, in particular with regard to its investment policy and practices. In this context, the clearance o f Government arrears and crediting o f workers’ pension rights would complete the rationalization o f the P R E S pension policy and set the stage for a second phase o f reform. It is important to note that the implementation o f these policy changes requires a series o f concrete steps including improvements to the existing information system, professional advice regarding investment

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policy, changes in accounting rules and practices as well as regular independent audits and training o f Board members and staff. These, along with other activities required to successfully implement the policy changes described here are being supported under the pensions sub-component o f the PPP.

41. The second phase o f reform has two main components. The first area involves redefining pension policy that currently treats c iv i l servants and private sector workers differently. There are clear arguments for the integration o f the two existing formal schemes, although this policy may be gradually applied (for example, applying only to new civ i l servants). Integration would facilitate labor mobility, improve equity and would likely reduce overall administrative costs. However, it i s clear that the f i rst step in this policy is to ensure that the P R E S scheme represents a viable altemative.

42. Within this phase o f the reform the future role o f the private sector in overall pension provision. Proposals have emerged from various stakeholders ranging from an increased role for voluntary private pensions to a partial privatization o f the mandatory scheme. As in the case o f integration, the Government o f Senegal believes that systemic reforms must be constructed after the existing schemes are stabilized and credibility is restored. A systemic reform would require careful preparation over several years, especially with regard to institutional design. Questions to be answered upfi-ont include the choice between a mandatory and a voluntary system, the regulatory environment, coverage, treatment o f c iv i l servants, fund management rules, and the financing o f the transition.

43. There appears to be strong commitment to the two-stage pension reform process that has emerged after more than a year o f discussion among the social partners. The Minister o f the Budget and the Minister o f Labor are actively leading the reform efforts. The Chairman o f the P R E S Board is also strongly supporting reform. The Government and P R E S have both requested continued World Bank assistance toward designing and implementing the pension reforms with the understanding that th is is a multi-year process. Furthermore, Senegal is a leading member o f a pension reform initiative in Africa supported by the Bank Group. In short, the conditions for policy change, as wel l as implementation o f these policies over a 3-5 year period seem favorable in Senegal. In conjunction with pension subcomponent o f the PPP that would support a series o f activities that wil l be crucial toward implementing these policy changes, the proposed PSAC would provide financing that would allow the government some fiscal room as i t cancels i t s outstanding arrears with PRES.

44. In order to provide guidance and continuity to a reform process that affects at least three distinct programs - the Fonds Nationale de Retraite (FNR, the pension scheme for c iv i l servants), the P R E S and the Caisse de Securite Sociale, social security - the Government would establish a Social Security Commission. This commission would, among other responsibilities, provide oversight to the Boards responsible for investing social security reserves. It would ensure that independent audits were performed regularly, draft policy positions based on studies commissioned for this purpose, provide information to the public and oversee the implementation o f policy decisions related to consolidation and integration

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where appropriate. It would also take the lead in related areas o f social security reform, such as social assistance pensions and health insurance. The Commission would include independent members with a professional background in relevant areas such as insurance, finance and accounting.

45. The Government intends to undertake Phase 1 o f the reform process quickly, in particular, the changes to existing parameters o f the P R E S scheme. Over the next four years, the following measures would be taken:

a.

b.

C.

d.

e.

f.

g-

h.

1.

By mid-2003 - the passage o f parametric reforms to the P R E S scheme including indexation o f key elements o f the benefit formula, contribution ceiling as wel l as a gradual increase in the retirement age.

During 2004 - the creation o f a Social Security Board to oversee the governance o f social security reserves and the rationalization o f the different elements o f the system as wel l as overall reform process.

During 2004 - the introduction o f a new investment pol icy statement and processes for the P R E S .

By end o f first quarter 2004 - the resolution o f existing arrears and the reflection o f contribution-based credits in the accounts o f P R E S affiliate.

By end-2004 - development o f a plan to eliminate redundant activities between social security institutions.

By end-2004 - development o f pol icy proposal regarding the role o f private pensions in the overall system.

By mid-2005 - completion o f pol icy review o f the feasibility and desirability o f an integration o f the two existing formal pension schemes.

By end 2005 - implementation o f plans to rationalize and integrate social security institutions.

By end 2006 - implementation o f pol icy regarding role o f private pensions in the overall system including tax treatment and regulatory oversight.

46. Proposed PSAC Program. The proposed operation, which follows up o n the conclusions and recommendations o f the FSAP, will support an ongoing and multi-phase reform process that would completely restructure the existing pension system in Senegal. Specifically, hrther to FNR reforms in 2002, the PSAC supports the shift to automatic indexation o f key parameters o f the pension scheme and an increase in the retirement age as immediate measures applied to the P R E S scheme. This would be followed by the resolution o f outstanding arrears in a way that restores pension r ights to a significant group

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o f workers and clarifies the status o f the P R E S balance sheet. This measure would follow the introduction o f a new investment policy and set o f processes designed to protect the P R E S reserves and make the pension scheme more sustainable in the long run. In addition, medium-term institutional reforms, including the consolidation o f certain activities to reduce administrative costs and eliminate duplication would be studied and implemented where appropriate. Policies regarding the role o f mandatory or voluntary private pension provision would be formulated and implemented through new legislation and regulation as necessary. The program would support the oversight o f this fimdamental set o f changes to the pension system by a new Social Security Commission, which would be in charge o f design and implementation o f the reforms.

111. THE PROPOSED CREDIT

A. Objectives

47. The objective o f the Credit i s to support the Government o f Senegal in the implementation o f subsector reforms aimed at improving the investment climate and accelerating private sector growth and employment. The private sector adjustment program thus supports the Government’s Poverty Reduction Strategy, through improving the investment climate and implementing key sector reform by: (i) supporting the implementation o f a private enterprise tax regime that stimulates investments through a level playing field and lower taxes, and allocates user fees for the private sector promotion purposes for which they are levied; (ii) restructuring the edible o i l sector by improving the competitive environment in which i t operates, through the elimination or reduction o f pol icy distortions associated with non-tariff barriers and other domestic protection mechanisms, and o f public interventions; (iii) reforming postal services by introducing greater competition in the sector, restructuring the postal enterprise so as to enhance i t s sustainability and to create an autonomous financial subsidiary that would provide savings, and payment and transfer services; and (iv) bringing changes to the pension system to make it financially sustainable and to improve its corporate governance. The last two reforms entail substantial financial restructuring, involving clearance o f arrears, that would need to be financed by the public budget. In the same vein, the proposed tax reforms, while revenue neutral or enhancing in the medium-term, may entail short-term revenue shortfalls. The proposed Credit aims to provide budget resources through counterpart funds generated by balance o f payment support i t provides, and thus help ensure that social and poverty alleviation programs are not disrupted.

B. Link to the CAS, Poverty Implications and Social Impact

48. The Board discussed the current CAS covering FY03-05 on April 17,2003. The CAS proposes a strategic and selective approach that emphasizes World Bank support to the growth pillar o f the PRSP. Reflecting the importance o f the private sector in stimulating and sustaining growth that would alleviate poverty, about 25 percent o f IDA resources under the base case scenario o f the CAS are allocated to the present investment operation, as well as a complementary PPP project. Both projects have been programmed under the

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l ow case C A S scenario. The PSAC would support key policy reforms in the areas o f tax, edible oil, pensions and post office reforms, while at the same time providing budget resources through counterpart f h d s generated to alleviate the incremental fiscal impact o f these reforms. Actions supported under these projects wil l help Senegal meet investment climate-related CAS indicators and triggers for the higher case lending scenarios. These two operations therefore alleviate the risk o f CAS growth objectives and related targets not being met.

49. As reported in Senegal’s PRSP, the household survey conducted in 2001 estimated that 54 percent o f the Senegalese population consumed less than 2,400 calories per adult equivalent per day. This puts Senegal’s current headcount index o f poverty at just over 50 percent o f the population. Participatory surveys also carried out in 2001 are broadly consistent with this number. According to these surveys 65 percent o f households felt they were poor in 2001 and 23 percent considered themselves extremely poor.

50. The goal o f the PRSP i s to cut the headcount index to 25 percent o f the population by 2015, thus meeting its poverty reduction Millennium Development Goal (MDG) o f 27 percent. Assuming the elasticity o f the poverty rate to per capita GDP growth to be -0.89 (as used in the PRSP), per capita growth will need to average 3.5 percent per year if the MDG target o f 27 percent is to be attained by year 2015. This means an average GDP growth rate o f 6 percent p.a. (2 percentage points below the PRSP annual GDP growth target o f 8 percent) Poverty/growth elasticity was more l ike -0.3 for the period 1994-2001. Thus GDP growth through year 2015 will not only have to be a full percentage point above that achieved for the period since the 1994 devaluation (which itself was one o f the highest rates achieved since independence), i t will also have to be three times more poverty reducing (labor absorbing).

5 1. If the goals o f an average GDP growth rate o f 6 percent p.a. and a poverty/growth elasticity o f - 0.89 are achieved, then most o f the other MDGs can also be achieved by 2015, assuming the prevailing correlations between poverty reduction and improvement in various MDGs. In such a scenario, and it i s the one presented in the PRSP, prevalence o f underweight children could be cut well below 10 percent, universal primary education and gender parity in schools could be achieved, and almost all children could routinely be immunized. However, given the abnormally high starting point, for Senegal’s per capita GDP, infant, under5 and maternal mortality rates, achievement o f MDGs in these areas would have to wait until 2020-25. Higher growth rates would enable MDG targets to be reached sooner.

52. The PRSP builds its action program on four pillars: (i) wealth creation through economic reforms and private sector development; (ii) capacity building and development o f service delivery; (iii) improvement in living conditions o f the poor and vulnerable groups; and (iv) implementation o f the poverty reduction strategy and monitoring or outcomes.

53. The wealth creation strategy i s to achieve high, sustained, employment-generating growth. The focus i s on rural development and the development o f small and medium-scale enterprises, especially in agricultural processing, which are thought to be particularly labor-

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intensive and have strong linkages to the rural sector. The PSAC and i t s companion PPP are strongly focused on speeding up growth through measures to improve the investment climate and build capacities in the public sector. These would help sustain further improvements in the investment climate and hence in the dynamism o f the Senegalese economy in the longer run. This involves building up the capacities that: (i) help create markets - such as improving property/control r ights on land, and the enforcement o f contracts; (ii) enhance the ability to put into place regulations that improve the contestability o f markets - such as entry and exit, regulatory regimes and the capacity o f the judiciary to enforce i t s legal rulings; (iii) enable the Government to provide stability to the economy - such as sound fiscal and monetary policies; and (iv) strengthen the public sector’s ability to improve the access o f the poor to key services. The PSAC and the PIPP support specific direct interventions in the first three o f these areas and support the fourth (service delivery to the poor and vulnerable) indirectly by helping speed up growth and through it tax revenues which can be used to increase service delivery to the poor.

54. There are, however, some major risks. Inelastic response o f poverty reduction to higher GDP growth since 1994 remains modest. Some 70 percent o f the poor households in Senegal live in rural areas. Future trends in poverty reduction will depend importantly on growth in agriculture and on the movement o f labor to off-farm activities and industries (including tourism) in the urban sector. Raising productivity in a drought-prone country with substantial arid and semi-arid areas i s a complex matter, prone to failure. The route out o f poverty will more likely be for the population to move to urban areas, or even emigrate if they can, than for them to stay where they are. The speed o f transition will depend on how quickly the demand for labor can be expanded in urban areas. Pressures on Dakar as the portal not only for Senegal, but also for the entire region, will increase rapidly, making extra demands on the capabilities o f the public sector to manage Senegal’s transformation from a predominantly rural to an urban-based society. The PSAC and the PIPP could provide important support to this transformation.

C. Credit Features and Implementation

55. Credit amount, Tranching and Key Actions - The Borrower will be the Republic o f Senegal. The proposed amount o f IDA financing i s US$45 mi l l ion equivalent. The amount is considered adequate to support the momentum o f private sector reforms in Senegal. The credit wil l be on standard IDA terms. The proposed Credit in the form o f an adjustment credit will be disbursed in one fixed tranche o f US$8.5 mi l l ion (the refinancing o f a PPF o f US$500,000 i s included in the overall Credit amount) and three floating tranches, supporting tax, postal and pension reform. The tax floating tranche will be o f US$7 mi l l ion equivalent. The second floating tranche (postal services) will be o f US$9 mi l l ion equivalent, and the last floating tranche (pensions) will be o f US$20 mi l l ion equivalent. The proposed multi-tranche structure i s designed for simplicity and to allow Senegal the flexibility o f accelerating the reform program in selected areas, thus giving the Government the possibility to disburse the Credit more quickly, if needed.

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56. First Fixed Tranche - The Government has conducted or intends to conduct prior to Credit effectiveness (all actions but the two o f the actions indicated below have been taken prior to Board presentation) a series o f actions that constitute the basis for the disbursement upon effectiveness o f the first tranche o f US$8.5 million. The reason for the effectiveness conditions relates to the normal review process o f laws by the Borrower, which has been prepared but will only be completed by April 2004. These actions are the following:

0 Taxation: a detailed action plan and associated timetable acceptable to IDA for the reduction o f the METR and other tax reforms has been approved by the Minister o f Finance.

0 Edible Oil: (a) elimination o f distortions - Government has decided to eliminate the excise tax and to harmonize the import surcharge on edible oils and Government has prepared a detailed action plan and associated timetable acceptable to IDA for the elimination and/or reduction o f other distortions associated with trade and domestic policies; and (b) application decrees related to the elimination o f the surcharge and excise tax shall have been issued by Government (effectiveness condition).

0 Postal Services: (a) improved legal and regulatory environment -postal law acceptable to IDA has been prepared (effectiveness condition); and (b) financial restructuring - Government has presented a recapitalization scheme acceptable to IDA and has formally agreed to cancel cross-debts o f about CFAF 12 billion.

0 Pensions: (a) improved financial sustainability - parametric reforms in a manner acceptable to IDA implemented through the introduction o f automatic indexation o f benefit parameters and ceiling for contributions for P R E S and FNR; and (b) financial restructuring - satisfactory plan produced to resolve the arrears issue and to credit the accounts o f the affected workers.

57. Floating Tranches - The general conditions before release o f the floating tranches relates to maintaining satisfactory macroeconomic performance and satisfactory implementation o f the private sector strategy. More specifically, the Government: (i) would provide evidence that the macroeconomic framework i s consistent with the objective o f macroeconomic stability, as per indicators agreed with IDA; and (ii) progress has been achieved in carrying out the program outlined in its letters o f sector policy. Specific conditions for each tranche are as follows:

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(a) Tax Reform:

0 Even playing field and incentives - (a) METR for industry reduced to a maximum o f 28 percent in the absence o f any tax exemption regimes; and (b) elimination o f specific exceptional tax regimes, including inconsistencies between the TEC and the VAT, but excluding exceptional tax regimes for certain exporters, the extractive industry sector and the tourism sector, as agreed with the Association.

0 Utilization o f user fees - CFCE harmonized to 3 percent and at least one percentage point allocated to the existing matching-grant scheme.

(b) Postal Services Reform:

0 Improved legal and regulatory environment -effective transfer o f responsibilities for postal regulation to ART.

0 Clarification o f relationship between L a Poste and its shareholder, Government - Performance contract acceptable to IDA entered into between the Government and L a Poste.

0 Creation o f the postal financial services subsidiary - Creation o f a corporate subsidiary o f L a Poste specifically responsible for the operation o f the financial services previously carried out by L a Poste.

(c) Pension Reform :

0 Corporate governance - establishment o f a consultative commission responsible for overseeing the reform o f Senegal’s social security system and associated governance requirements in respect o f the management thereof, with: (i) terms o f reference acceptable to the Association (ii) members appointed with qualifications and experience satisfactory to the Association, and (iii) staff consisting o f suitably qualified persons in adequate numbers;

0 Rationalization o f schemes - preparation o f a report for consolidating the existing pension programs, and implementation thereof..

0 Private provision - New private pension policy developed and implemented.

0 Financial restructuring - Arrears to P R E S paid by Government resulting in the restitution o f affected workers’ r ights

58.Disbursement - The Borrower will open an account in i t s Central Bank. Upon notification o f release for the tranche, the Association will deposit the proceeds o f the Credit in this account at the request o f the Borrower. The support to balance o f payments provided under the Credit is not intended to finance certain categories o f products. If after deposit in

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this account, the proceeds o f the Credit are used for ineligible purposes (Le., to finance goods or services in the standard negative list), the Association will require the Borrower to refund the amount to the Credit Account. The project steering committee already set up under the PIPP would be responsible for monitoring use o f funds and report any improper use o f funds.

59. Auditing and Other Fiduciary Considerations. The Association reserves the right to seek an audit o f the accounts related to the Credit. In addition, given that Bank financing co-mingles with the Borrowers’ general resources, improving the transparency, accountability and effectiveness in the management o f public resources would be key to fiscal sustainability, and a pre-condition for a possible h tu re PRSC. The ongoing Public Expenditure Review (PER) dialogue would help the Government improve public expenditure management and ensure that programs implemented under the PRSP are adequately planned and funded. However, i t is also essential that public sector management ensure transparency and accountability. The action plan for improving these areas has been derived from the PER, the Country Financial Accountability Assessment (CFAA) and the Country Procurement Assessment Review (CPAR): these reports have been completed and submitted to the Government. I t should also be noted that the audits o f certain key institutions, including L a Poste and pensions, is a requirement under PIPP and will be financed by that project.

60. Implementation and Monitoring - The reform program under this Credit will be implemented and led by the Ministry o f Economy and Finance, working closely with other l ine Ministries and other stakeholders. To ensure greater stakeholder commitment and ownership in the conception and implementation o f the reforms, the Borrower wil l devolve to the PIPP Steering Committee the responsibility to oversee PSAC reforms. This committee would be responsible for monitoring whether or not expected output and outcome are being attained and, if necessary, recommend remedial actions to avoid slippage. Given the overlap between this project and PIPP, the Project Management Unit o f the latter wil l also be responsible for preparing quarterly reports on progress made towards meeting tranche conditions.

61. Environmental and Social Aspects - The PSAC has been classified as a category “C” project. The environmental concems and impact under the PSAC are expected to be extremely limited as most o f the project concems policy reforms. No major environmental impact i s expected in the case o f SONACOS, which will be divested as a going venture. Nevertheless, funding under PIPP i s available to assess environmental impact, if any. Similarly, the social impacts o f the project are expected to be largely positive through the direct and indirect employment generation and improved postal and pension services for the rural poor and formal sector employee.

62. CZosing Date - The expected closing date o f the Credit wil l be December 3 1 , 2005 or such later date as the Association shall establish.

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Extemal f inancing requirements Current account defici t Amort izat ion

D. Coordination with IMF and Donors

-222 -290 -237 -301 -287 -293 -219 -224 -234 -280 -298 -298 -66 -77 -64 -6 1 -5 8 -60

63. The Wor ld Bank and the IMF are in a partnership to support the implementation o f Senegal’s development strategy, as outlined in the PRSP. The details o f IMF-World Bank relations are provided in the CAS (annex 14), which underlines collaboration on structural measures in specific sectors, notably edible o i l (groundnuts). The reform program supported by the proposed Credit is consistent with the I M F ’ s PRGF program. IMF Staff has been consulted during project preparation and has provided their inputs to the technical work underpinning the project. In this context a special coordination effort has been made to ensure the harmony o f objectives sought under reforms o f taxes, the edible o i l sector, postal services and pensions, with those under the PRGF program. The issue o f the fiscal impact o f the private sector reforms has also been discussed extensively with IMF Staff. Both institutions recognize that these reforms may result in a largely one-time fiscal impact, which will be more than compensated by the alleviation o f the fiscal burden o f the subsectors concerned in 2004 and beyond. Further, IDA financing during the adjustment period for sector reform should help the Government maintain its priority on social spending, as defined in the PRSP.

Table 2. Senegal: External Financing Requirements, 2001 -06 (In billions o f CFA francs)

I 2001 I 2002 I 2003 I 2004 I 2005 1 2006 I

Sources: Senegalese authorities; and staff estimates and projections. 1/ Without IMF (- = increase).

64. The reform program proposed i s thus consistent with the Government’s overall macroeconomic program. Other donors, including USAID, France, and the EU are providing important technical assistance in al l four areas supported by the PSAC. These donors have contributed to the preparation o f the PSD strategy and are expected to support the implementation o f the reform program. Furthermore, donors, including the EU and the

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African Development Bank (project approved in December 2003), have ongoing or planned support to the Government’s macroeconomic program that are additional to the PSAC and contribute towards closing the balance o f payments gap, see table 2 above.

IV. BENEFITS AND R I S K S

Benefits

65. The private sector policy and institutional reforms will lead to permanent improvements in the investment climate and contribute to Senegal achieving higher sustainable growth. They will also stem the fiscal losses and contingent liabilities related to postal services, the pension system and the edible o i l sector, through one time financial restructuring and sector reforms aimed at ensuring financial sustainability. The poor will derive direct and indirect benefits from the reforms through employment and revenue generation opportunities, the elimination o f regressive taxes, and improved access to postal and financial services. Formal sector workers will also benefit from improved social protection. Expected induced effects o f the reforms involve the mobilization o f term resources by the pension scheme and the post office. Once recycled through sound financial intermediaries, these would help finance viable private investments, including SMEs’ . Finally, by strengthening fiscal balances and contributing towards a lasting improvement in the investment climate, the PSAC would help mitigate certain r isks identify in the CAS and increase the probability o f achieving the high case scenario triggers.

R i s k s

66. The proposed PSAC includes an ambitious reform agenda that may be resisted by vested interests and may be undermined by political concerns. The major risks are therefore imperfect implementation o f the reforms and policy reversal, which would undermine their sustainability. These risks have been mitigated a number ways. First, for the past three years a series o f diagnostics studies have been undertaken that have helped strengthen the analytical basis o f the reforms. Second, a broad participatory process has been followed to ensure stakeholder buy-in, including at the highest level o f policy-making. Third, many o f the reforms, once implemented, would be difficult to reverse. Fourth, the specific conditions are, to the extent possible, focused on outcomes and selective, covering the most critical aspects o f the reforms. The relative simplicity and focus o f the project design is thus strength. Lastly, the PSAC fdly integrates lessons learnt in Senegal and elsewhere and have drawn on these in the design o f the reforms to anticipate possible problems. This strong underpinning constitutes a key risk alleviation instrument.

67. The second risk is institutional in nature. T o avoid the r i s k o f imperfect implementation due to lack o f capacity, insufficient analysis and absence o f consensus, the parallel P P P operation provides considerable assistance in the design and implementation o f the reforms. The third category o f risk is specific to the four areas o f reform within the program. These risks are considered manageable and are mitigated through a combination o f up front actions being taken, implementation support provided

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by IDA and consensus building in favour o f the reforms. The specific risks associated with each reform includes the following:

0 Tax- The fiscal impact may be greater than expected and the proposed reforms may be inconsistent with changes envisaged within WAEMU (investment code reform). The detailed analysis undertaken during project preparation and experience with similar reforms elsewhere confirm that this r isk i s not substantial. The Bank’s supports the WAEMU reforms and available information indicates no apparent contradictions.

Edible Oil- The main inter-related r isks are failed privatization and incomplete implementation sector reform. The up front decision by Government to remove much o f the protection on processing activities and progress to date towards divesting SONACOS should reduce the scope for rent seeking and maximize the likelihood o f success. The removal o f remaining distortions i s an effectiveness condition and should help ensure the sustainability o f the reforms.

e Postal - These reforms are at an advanced stage o f implementation and the r isk o f inadequate implementation seems minimal. The main potential risk would be associated with poor management and inadequate corporate management, which would for instance lead to losses at the savings bank. These risks are expected to be manageable and will be monitored through regular audits and the performance contract.

0 Pensions - Given that the main parametric reforms have been largely implemented the main r isk associated with this component is imperfect implementation o f the systemic reforms and inadequate corporate Governance impacting PRES’ sustainability. Given the commitment o f stakeholders and that various interest groups are present in the oversight o f the scheme, the scope for severe slippage seems limited. Further, monitoring and auditing o f the pensions scheme, till at least 2008 with P P P support, should provide an early waming system that would help identify and redress major problems.

Lessons Learnt From Past Bank Experience

A. Past adjustment loans

68. The World Bank has supported the Government’s reform effort since 1980 through five Structural Adjustment Loans (SALS) , five Sectoral Adjustment Loans (SECALs - in the financial sector, the transport sector, the agriculture sector, the private sector and the energy sector) and an economic recovery credit. The performance o f these operations has been uneven.

69. Approved in 1981, S A L I was suspended shortly thereafter due to incomplete implementation o f the programs, and ultimately cancelled. Under S A L s II and III (1 986 and

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1987), the economy was substantially liberalized and progress was made in investment planning and programming and population policy. Both credits were released and disbursed in full. The design o f S A L N reflected several lessons leamt from previous adjustment programs in Senegal. In particular there was greater reliance on up-front conditionalities. In addition, S A L IV focused on relatively fewer areas than the previous S A L S and supported a limited number o f critical actions. Overall the achievements o f S A L IV fel l short o f the required objectives. Although some progress was made in some areas, much o f it was subsequently eroded. The third tranche was postponed and then cancelled.

70. There are three main lessons from S A L IV and overall adjustment implementation in Senegal. First, the importance o f dynamic leadership o f policy reform should not be understated. Second, the complex nature o f macroeconomic adjustment operations placed substantial burdens on Senegal's administrative capacity, and consequently, there was a recognized need to shift from fewer and more complex operations to a series o f specific and well-focused operations and conditionalities. Third, the implementation o f the reforms had some sequencing shortcomings because o f the difficulty in implementing key measures.

71. These lessons explain the shift to sectoral adjustment operations beginning with the Financial Sector Adjustment Loan (Financial SECAL) in December 1989. The Financial SECAL was a success, leading to a more active role by BCEAO in bank supervision and monitoring, a substantial reform o f credit policies, the liquidation o f seven banks and the restructuring o f two others. The Transport Sector Adjustment Loan (Transport SECAL, 1991), the Private Sector Competitiveness and Adjustment Credit (PASCO, 1995) and the Agricultural Sector Adjustment Credit (AgSECAL, 1995) were also rated satisfactory.

72. The experience o f two recently completed adjustment operations confirms lessons learnt earlier and reflect the challenges and rewards o f implementing such operations. In the case o f the Energy Sector Adjustment Credit (ESAC, 1998), the project was implemented relatively satisfactorily, but post 9/11 economic problems contributed to the unsuccessful privatization o f the electricity company and unsatisfactory developmental outcome. On the other hand, as a result o f selectivity and prioritization o f issues, the Trade Reform and Competitiveness Credit (Cr. 3419) fully achieved i t s objectives.

B. Other Lessons

73. Investment Climate -Through the participation o f FIAS in the design and implementation o f tax and administrative barrier reforms, Africa-wide and international experience i s hl ly reflected in the project. One lesson learnt is that initially promising reforms do not necessarily lead to sufficient improvements in the investment climate. In view o f this, reforms need to be underpinned by surveys and quantitative methods, and monitored vis-a-vis national as wel l as international benchmarks. The other lesson learnt is that the reform process i s iterative, and requires strong stakeholder participation and ownership.

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74. Pension Reform - The conceptual ground for the pension reform in Senegal has been laid through economic and sector work initiated in 2000. The depth and breadth o f the proposed reforms places Senegal among the leaders in Africa. Bank lending in support o f such reforms i s usually through fairly substantial adjustment operations (see for instance the examples o f the Russian Federation, Ln. 4234, and Bulgaria, Ln. 4081). This approach facilitates the necessary financial restructuring, but suffers from the fact that the time frame for adjustment operations is shorter than the one needed to ensure sustainability through appropriate systems and capacity building. There are also examples o f pension reform being supported under investment operations, for instance in M a l i (Cr. 3394) and at the municipal level in Brazil (Ln. 4369 and Ln. 4537). Such approaches are partial, as they tend to respond to capacity building needs, without tackling significant pol icy reforms and required financial restructuring. The PIPP address the former area, while the PSAC focus on the latter two.

75. Postal Reform - A comprehensive review o f the postal sector worldwide shows that mere corporate transformation in the postal sector has not led to performance improvements. In fact, in some instances, unfocused corporatization has led to service deterioration. A comprehensive reform covering the entire sector stands as the best vehicle to provide a conducive environment for change and sector development. In the postal sector, three important components o f reform relate to the definition o f (i) a clear sector policy by which the Government identifies i t s objectives for the postal sector; (ii) an adequate status, organization and a viable financial structure for the historical postal operator; and (iii) a corporate strategy and an adequate capacity building plan, including the diversification from the core activities to leverage the economies o f scale and scope embedded in the postal network. This project addresses al l three o f these needs. Recently, the World Bank has supported a number o f initiatives aimed at either improving and liberalizing post office services, or spinning o f f postal financial services (e.g, Cameroon under Cr. 3359, where important lessons on potential risks have been learned) andor setting up rural savings institutions (e.g., in Tanzania in the context o f privatization o f its commercial Bank). The experience o f Francophone Africa indicates that fully integrated postal and financial services, such as the one in Senegal, are not desirable because cross subsidies between the two tend to run down assets o f the depositors and result in unfunded liabilities. However, there are also limitations to fully separating post office and its related financial services, because different corporate cultures result in incompatibility and loss o f important synergy: such as a situation recently led to the repurchase by the German post office o f i t s formerly privatized financial services. Given these experiences, the project will support a reform process that calls for financial services o f the post office to be made into a subsidiary. Once this objective i s attained, the project wil l also help the financial services develop their resource mobilization and low risk, sustainable lending services, possibly as a wholesaler o f micro-finance.

76. Edible Oil Sector Reform - The reform o f the groundnut sector has been a priority in Senegal since well before 1995. Since then, three IDA Credits have supported this reform without completing the reform agenda. The review o f the experience show that part o f the problem was with the design o f the reforms. Indeed, lessons learnt indicate that when the

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projects (including the recently completed private sector project, Cr. 2759) that focused mainly o n divestiture failed because there were too many uncertainties regarding future sector policies, including trade policy and financing regimes. While some reforms were implemented under sectoral adjustment Credits (Cr. 2738 and Cr. 2681) these were limited by the short timeline o f the operations: important first steps were taken but subsequent reforms were not implemented. The project and the proposed complementary PSAC, together with the ongoing rural development project (Cr. 3219), build on this past experience as well as parallel similar efforts underway in Mali, Benin and, with limited success, Uganda in the area o f cotton reform. The main lessons learnt include the importance o f ensuring the buy-in o f stakeholders, tackling sector policy issues ahead o f or in conjunction with divestiture, formulating the privatization process so as to ensure transparency and maximize potential competition, and providing a safety net and/or alternative activities to affected farmers.

Attachments

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ANNEX A

Senegal Social Indicators Latest single year Same regionl income group

Sub- Saharan Low-

1970-75 igao-aii 1995-01 Africa income

POPU LATlON Total population, mid-year (millions)

Urban population (% of population) Total fertility rate (births per woman)

POVERTY (% of population) National headcount index

Urban headcount index Rural headcount index

Growth rate (76 annual average for period)

INCOME GNI per capita (US$) Consumer price index (1995=100) Food price index (1995=100)

INCOMEKONSUMPTION DISTRIBUTION Gini index Lowest quintile (% of income or consumption) Highest quintile (% ofincome or consumption)

SOCIAL INDICATORS Public expenditure

Health (% of GDP) Education (% of GNI) Social security and welfare (“A of GDP)

Net primary school enrollment rate (% of age group)

Male Female

Access to an improved water source (% of population)

Urban Rural

Total

Total

Immunization rate (% under 12 months)

Measles DPT

Child malnutrition (% under 5 years) Life expectancy at birth (years)

Total Male Female

Mortality Infant (per thousand live births) Under 5 (per thousand live births)

Male (per 1,000 population) Female (per 1,000 population)

Maternal (per 100,000 live births) Births attended by skilled health staff (“7)

Adult (15-59)

380 29

370 71

480 111

470,O 133,l

430 141

1 2 3,4

51 55,4 81,3 42.6

53 63 27

76 88 71

56

52,9 46,4

57 57

22

43 45 52 46,s 45,7 47,4

59 58 60

68 139

91,2 161,6

76 115

504,s 459,4

294 261

CAS Annex 55. This table was produced from the CMU LDB system. 04/28/03 Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment ratios exceeding 100 indicate discrepancies between the estimates of school-age population and reported enrollment data.

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ANNEX B

PRIVATE SECTOR ADJUSTMENT CREDIT SENEGAL

KEY ECONOMIC INDICATORS

Est Projected Indicator 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

National accounts (as YO GDP at current market prices)

Gross domestic product Agriculturea Industrya Servicesa

Total Consumption Gross domestic fixed investment

Government investment Private investment

EXPOITS (GNFS)~ Imports (GNFS)

Gross domestic savings Gross national savings'

Memorandum items Gross domestic product (US$ million at current prices) Gross national product per capita (US$, Atlas method)

Real annual growth rates (%, calculated from 1987 prices)

Gross domestic product at market prices Gross Domestic Income

Real annual per capita growth rates (%, calculated from 1987 prices)

Gross domestic product at market prices Total consumption Private consumption

100,o 100,o 100,o 100,o 100,o 23,O 21,O 20,O 20,O 20,O 25,O 26,O 27,O 29,O 30,O 52,O 53,O 53,O 51,O 50,O

87,O 88,O 87,O 89,O 89,O 16,O 18,O 18,O 19,O 20,O 6,O 6,O 6,O 7,O 7,O

10,O 12,O 12,O 12,O 13,O 34,O 34,O 33,O 30,O 31,O 40,O 40,O 39,O 38,O 40,O

13,O 12,O 13,O 11,O 11,0 12,O 15,O 15,O 13,O 13,O

4651 4387 4620 4746 4358

530,O 530,O 510,O 500,O 520,O

5,1% 5,2% 5,7% 5,0% 5,6%

5,4% 5,4% 6,7% 3,2% 3,6%

2,3% 2,3% 2,8% 2,2% 2,9%

1,4% 2,6% 1,8% 2,9% 1,8% 1,9% 2,8% 2,3% 3,4% 2,4%

100,o 100,o 100,o 100,o 100,o 19,O 20,O 21,O 21,O 20,9 29,O 31,O 31,O 31,O 31,l 52,O 49,O 48,O 48,O 48,O

88,O 87,O 87,O 87,O 90,5

7,O 6,O 6,O 6,O 6,O 13,O 14,O 14,O 15,O 14,O 30,O 29,O 29,O 28,O 28,5 38,O 36,O 36,O 36,O 3 9 3

20,o 20,o 20,o 21,o 20,l

12,O 13,O 13,O 13,O 8,O 14,O 15,O 16,O 15,O 12,O

4593 5079 5456 5903 6372

500,O 480,O 520,O 550,O 578,6

5,6% 2,4% 6,6% 5,6% 5,8%

5,7% 2,4% 7,6% 5,7% 4,2%

2,9% -0,2% 3,9% 2,9% 3,1%

2,7% -0,7% 5,3% 3,5% 2,4% 3,1% -0,8% 6,0% 3,9% 2,8%

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ANNEX B

PRIVATE SECTOR ADJUSTMENT CREDIT SENEGAL

KEY ECONOMIC INDICATORS

Indicator 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Balance of Payments (USSm)

E X P O ~ ~ S (GNFS)~ Merchandise FOB

Imports (GNFS)~ Merchandise F O B

Resource balance Net current transfers Current account balance

Net private foreign direct investment Long-term loans (net)

Official Private

Other capital (net, including errors and omissions) Change in reservesd

Memorandum items Resource balance (% o f GDP at current market prices) Real annual growth rates ( YR87 prices)

Primary Manufactures

Merchandise exports (FOB)

1588,O 1276,O 1401,O 1445,O 1339,O 1375,O 1448,O 1555,O 1666,O 1818,7 986,O 905,O 973,O 1028,O 959,O 992,O 1046,O 1134,O 1224,O 1259,O

1896,O 1568,O 1733,O 1806,O 1734,O 1747,O 1833,O 1952,O 2102,O 2515,2 1268,O 1176,O 1288,O 1375,O 1342,O 1356,O 1422,O 1517,O 1639,O 1839,8

58,O 179,O 172,O 159,O 198,O 181,O 205,O 202,O 195,O 379,2 -308,O -292,O -332,O -361,O -395,O -372,O -385,O -397,O -436,O -696,5

-336,O -185,O -216,O -292,O -284,O -270,O -253,O -266,O -308,O -317,3

-5,O 107,O 53,O 126,O 36,O 1,0 70,O 75,O 81,O 94,5

339,O 182,O 229,O 252,O 223,O 291,O 197,O 180,O 177,O 242,7

263,O 73,O 163,O 274,O 178,O 217,O 113,O 104,O 87,O 152,7 76,O 109,O 66,O -22,O 45,O 74,O 84,O 76,O 90,O 90,O

57,O 42,O -4,O 0,O 4,O 33,O 34,O 77,O 74,O 73,2

-55,O -147,O -61,O -86,O 22,O -55,O -47,O -67,O -25,O -93,O

-6,6% -6,6% -7,1% -7,6% -9,0% -8,1% -7,6% -7,3% -7,4% -15,O%

7,0% -l,l% 7,9% 10,4% 1,3% -11,5% 6,6% 5,8% 5,6% 3,1% 5,2% -l,8% 2,3% 6,3% 13,3% -17,0% 32,3% 4,2% 4,1% 3,5%

10,0% 4,8% 2,2% 4,0% 5,0% -9,7% -5.8% -2,1% -2,0% -1,6% Merchandise imports (CIF) 5,9% -0,2% 10,2% 5,2% -0,3% 6,4% 6,5% 3,9% 4,9% 5,0%

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ANNEX B

PRIVATE SECTOR ADJUSTMENT CREDIT SENEGAL

KEY ECONOMIC INDICATORS

Public finance (as Yo of GDP at current market prices)e Current revenues 17,3 17,3 17,5 17,5 18,5 17,8 18,8 19,l 18,6 19,5 Current expenditures 13,5 12,7 11,6 12,4 13,7 15,3 12,6 12,l 11,9 12,l Current account surplus (+) or def 3,8 4,7 5,9 5,l 4,9 2,5 6,l 7,O 6,7 7,4 Capital expenditure 7,5 6,2 8,5 4,9 6,2 6,4 7,4 7,9 7,l 8,3 Foreign financing 6,3 3,8 3,8 2,7 1,7 3,7 3,8 1,8 1,6 3,4

Monetary indicators M2IGDP (at current market prices: 24,l 22,9 23,l 24,4 25,4 25,4 25,6 25,6 25,7 28,O Growth o f M2 (%) 11,3 2,4 8,l 12,7 10,7 8,8 8,8 7,O 8,O 8,6 Private sector credit growth / 150,l 213,9 26,5 83,8 125,6 57,2 381,7 314,2 122,6 143,4 total credit growth (%)

Price indices( YR87 =loo) Merchandise export price index 109,7 101,7 101,4 97,O 89,3 104,3 103,2 105,7 108,2 111,4 Merchandise import price index 136,3 128,8 120,8 119,O 123,l 129,4 133,7 137,4 142,l 146,9 Merchandise terms o f trade index 80,5 78,9 83,9 81,5 72,5 80,6 77,2 76,9 76,l 75,8

Real exchange rate 58,O 54,l 55,3 54,O 50,8 50,5 50,2 50,O 49,7 49,5

Real interest rates Consumer price index 2,8% 1,8% 1,1% 0,8% 0,7% 3,0% 2,2% 2,0% 1,8% 2,0% (% growth rate) GDP deflator 1,3% 2,3% 1,3% 1,7% 0,7% 3,0% 5,3% 0,3% 2,1% 1,5% (% growth rate)

(US$/LCU)'

a. I f GDP components are estimated at factor cost, a footnoote indicating t'Data-YR fact should be added. b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Should indicate the level o f the govemment to which the data refer. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

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ANNEX c

PRIVATE SECTOR ADJUSTMENT CREDIT SENEGAL

Operations Portfolio (IBRD/IDA and Grants) As o f February 2,2004

Closed Loans and Credits: 107 Active Credits 18

Original Amount in US$ Millions Difference between Expected and

Actual- Disbursements

Proiect Proiect Name FY IBRD IDA GEF Cancel Undisb. Original Formallv I

ID Revised PO69198 Distance Learning Center 2000 2.1 0.2 0.2 PO41567 PO74059

PO02369

PO4 1528 PO70541 PO67498

PO5 1609 PO47319 PO57996

PO42056

PO46768

PO02366 PO51610 PO02367

PO41566

PO02365

PO55472

P 0 0 2 3 4 6 Total

Endemic Diseases HIV/AIDS Prevention & Control

Integrated Health Sector Development

Long Term Water Sector Nutrition Enhancement Public Services Info-Systems Modernization Private Investment Promotion Quality Education for A l l National Rural Infrastructure

(Map 11)

Sustainable Participatory Energy Mgmt. Sustainable Participatory Energy Mgmt. Transport I1 Agr. Export Promotion Agr. Service & Producers Organizations Social Development Fund

Urban Devt. & Decentralization Program Urban Mobility Improvement Program Water Sector

1997 2002

1998

200 1 2002 2000

2003 2000 2000

1997

1997

1999 1998 1999

2001

1998

2000

1995

1BRI)IIDA * Total Disbursed (Active)

of which has been repaid

of which has been repaid

of which has been repaid

Total Disbursed (Closed)

Total Disbursed (Active+Closed)

Total Undisbursed (Active) Total Undisbursed (Closed) Total Undisbursed ( Active-tClosed)

14.9 30

50

125 14.7 10.1

5 46 50

28.5

5.2

90 8

27.4

30

75

70

100 0.00 777

7.5 7.1 3.0 31.8 8.2

20.3 20.0

135.9 43.9 12.1 5.2 2.1

1.7 1.7 48.2 3.6 20.1 -31.2 19.2 18.0 0.2

4.7 0.6

0.8 0.5 0.4

0.8 0.7

2.2 1.9 0.5

11.3 3.8

73.0 50.3

12.5

26.0 19.8

16.9

71.8 15.4 11.4

61.1 8.7 22.3 15.7

4.7 0.00 509.9 260.1 37.4

291.63 0.0

1,630.77 3 15.52

1,922 40 315.51

509.9 0.00

509.5

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ANNEX c

FY Approval 1996197198 1980 1999 1997 198 1/88 1998 200 1

PRIVATE SECTOR ADJUSTMENT CREDIT SENEGAL

STATEMENT OF IFC's Held and Disbursed Portfolio

As o f 09130103 In Millions U S Dollars

Company AEF SERT BHS Ciments du Sahel GTI Dakar ICs SEF Fanaicha SEF Royal Saly

Committed IFC

Loan Equity Quasi 0.00 0.00 0.00 0.00 0.46 0.00

16.06 2.26 2.81 8.11 1.61 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.28 0.00 0.00

- Partic Loan

0.00 0.00 0.00 0.00 0.00 16.06

0 8.11 0.00 0.00 0.00 0.00 0.00 1.28

Disbursed IFC

Equity Quasi 0.00 0.00 0.46 0.00 2.26 2.81 1.27 0.00 0.00 0.00 0.00 0.00 0.00 0.00

- Partic

0.00 0.00 0.00 9.78 0.00 0.00 0.00

Total Portfolio: 17.34 2.72 2.81 0 17.34 2.72 2.81 0

-34 -

Time taken to prepare project

Preparation Pre-appraisal Appraisal Negotiations Board Presentation Effectiveness

ANNEX D

12 months

February 2003

May 2003 May 2003 and February 2004 March 2004 June 2004

PRIVATE SECTOR ADJUSTMENT CREDIT

Timetable of Key Project Processing Events

Time taken to prepare project

T h i s report i s in large part based on preparatory work for the Private Investment Promotion Project (PIPP), presented to the World Bank Board on May 20, 2003. Following the reception o f the formal Govemment request, project preparation was initiated on an accelerated basis in February 2003. The Credit was f i rs t negotiated in May 2003. Board presentation was delayed by delays in attaining a Board condition. Following extensive discussions between Govemment and the Bank, i t was decided that the condition pertaining to privatization o f the groundnut processor would remain part o f the program, but would not be covered by the Credit. Accordingly, the Credit was renegotiated in February 2004. A multi-disciplinary team from the World Bank Group prepared the project. Key team members included Mmes. All iali (Sr. Counsel), Andress (postal reform), Savane (PSD Specialist) and Jockiane (Program Assistant) and Messrs. Alikhani (Task Team Leader), Badiane, Sarr and Toure (Edible Oil), Miovic (peer reviewer), Morisset (tax reform), Palacios (pensions reform).

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ANNEX E PRIVATE SECTOR ADJUSTMENT CREDIT

PRIVATE SECTOR POLICY LETTER - DATED APRIL 3,2003 (An unofficial Translation)’

I. BACKGROUND

National economies are open to global competition reinforced by their regional, bilateral and multilateral trade agreements. This international environment offers opportunities to support private investments and trade. Since 1994, Senegal has implemented key reforms designed to strengthen i ts economic and social development strategy, and to improve the business environment, the competitiveness o f the economy, attract national and international private investments, stimulate export growth and develop opportunities for employment. The devaluation o f 1994 in the W A E M U zone and the strategic decision to facilitate private participation in the infrastructure sector also supported this strategy. To consolidate structural reforms and achieve an even higher economic growth rate to eradicate poverty, Senegal formulated i t s private sector development strategy based on a participatory process involving: (a) validation o f the strategy by stakeholders in 1999; (b) further revision o f the strategy during 2001-2002; and (c) adoption o f a more comprehensive development strategy aimed at cutting poverty in half by 20 15.

In 1990, the modem private sector was comprised o f approximately 1,000 companies, 264 o f which were in the industrial sector, 69 in the construction and public works sectors and 667 in services (63 o f which were in the hotel industry and tourism). Since 1995, the Senegalese economy grew at a rate o f 5 percent per annum. This i s a good indicator o f the private sector performance. Notwithstanding the decline observed in 2002, the overall modern sector contributes approximately 26 percent o f the country’s GDP versus 61 percent by the so-called informal sector, and employs only 5 percent o f the workforce. This participation o f the private sector in economic activities should not hide the fact that private sector initiatives face major constraints, which prevent them from not only talung a more active role in creating and accumulating wealth, but also in fighting poverty. Therefore, new reforms and a more constructive publidprivate dialogue are crucial in completing the structural adjustment o f the private sector and in reinforcing i t s competitiveness.

11. OBJECTIVES

The promotion o f the private sector and commercial activities i s at the core o f the Poverty Reduction Strategy Paper (PRSP). Creating wealth i s one o f the major goals o f the PRSP, which targets growth with following qualities: (i) strong enough to have a substantial and quantitative impact on national and regional prevalence o f poverty; (ii) relies on sectors having an important and sustainable impact on improving income in rural and urban areas; and (iii) generates employment, promotes investments and exports. In this context, the Government has identified the promotion o f private investment as the tool to stimulate higher growth and creating an equal income distribution.

The Government’s objective for the year 2003 - 2005 i s to achieve an average per annual GDP growth rate o f 7 to 8 percent. This growth i s associated with an investment rate o f 22 percent. Macroeconomic projections that establish the overall consistency o f the strategy predict an average per annum growth o f per capita GDP ranging from 4.5 percent to 5.5 percent, thus extending access to economic opportunities and social services. Per capita income could double

10’. nginal in French, signed by the Minister o f Economy and Finance i s on f i le

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within 15 years, therefore permitting to better distribute the f r u i t s o f growth. These projections re ly o n a series o f assumptions that foresee an increase o f public and private investments in which volume and efficiency will be maximized. The achievement o f these macroeconomic objectives requires a favorable framework for wealth creation la id out in the present Letter. I t s main instruments are the development o f infrastructure and human capital, investment climate reform, deepening o f sector reforms, and the strengthening o f private sector capacities.

111. STRATEGY

T o achieve these important objectives, the Government has identif ied a number o f measures to be implemented through sectoral programs. These programs reinforce and complement results already achieved and existing initiatives. The Government action plan consists o f the fo l lowing steps: (i) improving the efficiency o f State intervention; (ii) facilitating private sector participation and reinforcing competitiveness; (iii) promoting private investment and implementing reforms in a number o f sectors supporting the private sector; and (iv) strengthening institutional and human capacities sustaining the private sector. Within the framework o f the development strategy o f the private sector and the N e w Partnership for Africa’s Development (NEPAD), the fundamental objective o f Senegal o f promoting private investment and accessing foreign markets would be achieved through: (a) improving the business environment; (b) promoting an efficient regulatory framework for private participatory init iative in financing and developing infrastructure services; (c) implementing strategies to develop key sectors; (d) implementing a viable support mechanism for the private sector; (e) promoting a better integration in sub-regional and wor ld economies; and (f) facilitating communication and pol icy interface between the private and the public sector.

3.1. Improvement of the business climate

The Government and the private sector, in consultation with their developmental partners, have adopted the fol lowing strategic actions aimed at improving the efficiency o f the state: (i) simplification o f procedures and reduction o f delays and costs o f doing businesses; (ii) reforming the judic ia l system capacities to improve transparency, speed and accessibility to i t s services; (iii) promoting exports, liberalizing trade, and increasing competition; (iv) adapting labor legislation, implementing provisions designed to promote Senegal’s competitiveness; (v) continuing the privatization process; (vi) reforming public administration to improve services for clients; and (vii) rationalizing and improving the tax environment for businesses.

3.1 .l. Carrying out the simplification of administrative procedures

Despite past efforts, recent studies have shown that procedures in many areas are s t i l l complicated, generate incremental costs, and hinder private investments. Therefore, i t i s necessary to continue to simplify the administrative procedures, in order t o stimulate private investment. More specifically, actions will be taken to improve the operation and the performance o f public land, tax, and customs administrations. In this respect, the Government will continue to work closely with FIAS’ services to simplification procedures and establish a long-term framework to reduce administrative barriers on private investment. This simplification p lan i s in the annex o f the present letter. I t s implementation i s expected, in the short-term, to reduce the delays by 50 percent.

3.1.2. Strengthening Judicial capacities

Private investments and markets can best be developed in an environment governed by a set o f rules that are clear, stable, and respected, and where effective competition i s present. The legal framework should guarantee private property rights and support economic activity. In addition, consistency in the enforcement o f these rules and their effective application are essential to

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ensure competition and support market systems. These should be guaranteed by a fair and developed jud ic ia l system, independent f rom the executive and legislative branches. A Judicial sectoral expenditure program will be defined in 2003. I t s implementation wil l a l low the modernization efforts o f the judic ia l institutions to continue, and promote access to judic ia l services through (i) increasing the human, physical and financial resources o f the judicial system, (ii) adapting legislation to business’ needs, and (iii) supporting efforts to promote business law. The Government wil l continue i t s efforts to harmonize legislations within the framework o f i t s regional and international agreements and in particular with WAEMU, OHADA and the WTO. It wil l also promote alternative dispute resolution settlement mechanisms (arbitration, mediation, and conciliation), in addition to legislation against money laundering which will be developed and enacted.

3.1.3. Promote export, support liberalization process, and increase competition

The basic principle o f trade liberalization and the strengthening o f competition are related to lifting quantitative restrictions o n imports, encouraging an increase in exports, and lifting restrictions o n investments. The actions needed to promote exports, are as follows: (i) encourage existing businesses to enter new export markets; (ii) promote private investments in activities related to exports; and (iii) develop a consistent strategy to promote exports.

3.1.4 Carrying out the adjustment of the environment and work conditions

Among other reforms, the Government i s planning to improve the regulatory and legislative frameworks for labor and to modi fy them to meet the requirements o f a competitive open economy. The Labor Code was adopted in 1997, as a result o f a consultative process between the Government, the employers, and the workers. The implementation o f reforms provided by the code to promote productivity are hindered by the non-application o f a number o f regulations relative to the f lexibi l i ty o f work, remuneration o f labor, and classification o f professions, which has been implemented only in the hotel industry. With respect t o pensions, the Government i s committed to promote, o n a participatory basis, fair and sustainable retirement systems and social assistance. In the short-term, i t i s also implementing parametric reforms o f retirement plans. In the long-term, the possibility o f systemic reforms and o f implementing institutional reforms of existing systems will be envisaged. In order to promote intensive labor sectors, the Government and social partners will examine the possibilities to support j o b creation through special regimes, such as free zone enterprises.

3.1.5. Carrying out o f the privatization process and the economic regulation

The implementation o f the privatization process and economic regulation should be undertaken after implementing a number o f complementing measures. These would facilitate private sector participation in infrastructures structures and would al low Senegal to benefit f r om the integration and globalization process. In this context, different concessions such as BOT, BOO or BOOT will have pr ior i ty and will be subject to an appropriate legal framework in 2003. In 2002, the Government passed a bill o n the regulation framework for concessions. In order to adequately supervise the public or private infrastructure services, the regulation function wil l be strengthened. To serve the interests o f a l l parties involved (consumers, investors, and the Government) regulatory sectoral institutions equipped with sufficient material resources were established in the energy and telecommunication sectors. In addition, other functions such as postal regulation will take effect in 2003. As for the rest o f the economy, the commission o n competition wi l l operate in full partnership with the consumer movement.

3.1.6. Continue simplification and rationalization of business taxation

The Government plans to integrate tax incentives within common law. The reforms o f business and households taxation will be carried out according to four fundamental principles: (i)

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widening the tax base; (ii) rationalization o f instruments and reduction o f one-third o f the marginal tax rate; (iii) neutrality o f internal taxation between regional products and imports; and (iv) the promotion o f tax complicance. The simplification o f the tax system was init iated fol lowing the currency devaluation. I t was carried out with the harmonization o f indirect taxation o n the WAEMU side when common external tariffs were introduced in 1998. An 18 percent VAT rate was adopted in September 2001. In the course o f calendar year 2003, the Government i s planning to optimize business taxes while promoting investments. These reforms should stimulate investments through the General Tax Code. And finally, some taxes such the vocational training, the tax o n tourism wil l be revised and reallocated.

3.1.7 Improvement of the quality o f labor through professional training

Investing in human capital and particularly in health, basic education, professional and technical training i s crucial to tackling the challenge o f productivity and growth. Ten-year plans and sectoral programs are being implemented to achieve improved health coverage, universal school enrolment, and better develop and channel professional training. To achieve immediate results, emphasis i s placed on developing professional and technical training in order to make the quality o f labor meet investors’ needs. Particularly, the Government will encourage the private sector to play a key role in the design and supervision o f the Professional Development Education Fund and in the reallocation o f the training fee (CFCE) to support business competitiveness.

These different options aimed at improving the efficiency o f State intervention are in l ine with the overall approach o f enhancing the quality o f public service. Within the implementation o f the national program o f good govemance, the administration should significantly improve i t s capabilities in management and service delivery, in order to adapt to change and better address the increasing competitive and global economic environment. The new role o f the administration requires the adoption a re form program that rests on: (i) a strategic vision based o n redefining the administration role which calls for a permanent consultative process with the administration; and (ii) strengthening individual and institutional capacities, particularly in key administrations.

3.2. Establishment of infrastructure services

Within the private sector promotion framework, the development o f infrastructure services will be achieved around two key axes: promoting partnership between the public and private sector; and engaging the private initiative in financing and managing infrastructure services by implementing a technical and economical independent regulatory framework, inspired by the international best practice.

3.2.1. Improvement of the quality and coverage of physical infrastructures

The direction to fo l low in order to ensure quality and coverage o f the physical infrastructures i s outlined as follows:

0 Complete and consolidate the results o f the ongoing transport sector program.

0 Proceed with the liberalization and privatization o f the energy sector.

0 Ensure a sound and sustainable water resource management.

0 Implement policies necessary to secure the privileged position o f Senegal in the area o f telecommunication.

0 Promote the development o f rural infrastructures.

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0 Include the private sector in the financing o f infrastructure through BOT, BOO, BOOT models.

3.2.2. Implementation o f a new telecommunication sectoral policy

Aware o f the importance telecommunication services and o f the role it plays in social and economic development, in 200 1 Senegal adopted a new telecommunication code. This reform facilitated the implementation o f a regulatory authority in the telecommunication sector and established a legislative (legal) framework that promotes a fair and effective competition. Market liberalization commitments given by Senegal to the WTO in 1997 seeks to maximize the development potential o f the sector outlined by the 2001 reform. The Government o f Senegal has recently initiated a participatory process o f proposing a new sectoral pol icy which i s expected to be finalized, at the latest, in June 2003. The new telecommunication pol icy i s being formulated around the fol lowing major objectives:

0 Significantly increase the supply o f telecommunication services and promote access to telecommunication services to as many people as possible and particularly in rural areas.

Provide a good quality o f service at competitive prices, tailored to the needs o f residential clients and to the private and public sector.

0

0 Promote telecommunication services as the crucial economic sector ensuring the growth o f a competitive economy integrated in a global market.

T o achieve these goals, the strategy would rest on the fol lowing initiatives:

Strengthen the liberalization o f telecommunication and further open the competitiveness o f different market segments. In this context, the Government o f Senegal i s also planning to award a new license to a private operator.

Reinforce regulation capacities o f the Agence de Re'gulation des Te'le'communication and development and monitoring capabilities o f the sector pol icy within the governmental authority responsible for telecommunication services.

Adopt regulations o f the new telecommunication code and other statutory instruments allowing the sector to initiate reforms o n strong foundations and to remain dynamic.

Promote the participation and the investment o f the private sector, particularly with the state's disengagement f rom SONATEL, once a l l conditions for i t s success have been met.

Implementing a challenging policy, fo l lowing the creation o f a transparent and competitive funding mechanism, ensuring universal access to telecommunication services, particularly in rural areas. A universal access fund wil l created and in i t ia l ly be supported by funding f rom the Wor ld Bank (50 percent) and by a contribution f rom the Senegalese Government with income generated, for example, by the new license.

3.3. Implementation o f appropriate strategies in the production sector

In order to encourage s igns o f sustained recovery o f key areas and the emergence o f areas o f high potential, the Government has decided to implement an overall strategy supported by sectoral programs. The specific focus areas are agriculture, fishing, textile industry, craftsmanship, tourism, the music industry, information technology, pensions, postal service, and the finance sector.

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Agriculture contributes to nearly 17 percent o f the GDP formation and to 21 percent o f exports. The development and the diversification o f the agricultural production depend on access to national and regional markets, and to opportunities provided by the international demand for quality export production. Specifically, this wil l require to overcome the weahesses o f agriculture by supporting private irrigation services, intensifying and modernizing agriculture, increasing and diversifying farm income, strengthening the role o f peasant organization, their responsibility and their participation to determining policies, and to opening up rural areas. In regard to the groundnut sector that represents one o f the main export products o f Senegal, the reforms will be undertaken to (i) improve the regulatory and the financial framework and to eliminate trade distortions, (ii) promote the privatization o f the Senegalese national company (SONACOS- Soci i t i Nationale de Commercialisation des Oldagineux), (iii) implement additional reforms related to diversification o f production in the area o f groundnut production and to promote the groundnut production export quality, in particular, and (iv) reduce the sector arrears through a financial restructuring program.

The fishing industry i s one o f the major sectors providing hard currency to Senegal. I t contributes almost 38 percent o f exports. In the long run, this contribution will slow down because o f the over-exploitation o f fish resources. The actions taken will allow an efficient and effective management o f access to resources to achieve a long-term preservation o f these resources thanks to a reduction o f the fishing intensity. Harmonization o f the regulatory framework o f the exploitation o f fish resources and those o f i t s next-door neighbors (Mauritania, Guinea, Guinea Bissau, etc) will allow preserving the resources along the coastline. A sector study wil l thus be undertaken and award o f licenses will be made more transparent.

For the development of the mining industry, a favorable regulatory environment wil l be implemented through the adoption o f a mining code during 2003. In order to prevent an adverse impact o f the mining sector, this Code together with the new the environment Code, will include measures to preserving the environment.

The competitiveness of the industry and craft sectors should increase significantly. The strategy calls for supporting small businesses in their efforts to modernize and adapt technology, improve the quality o f their products, and their position in regional and international export markets, and will control their costs.

The services sector will play an important role in achieving the strategy’s objectives. The first, being i t s potential in terms o f contributing to growth, exports, and job creation. The second, being i t s role in contribution to increasing the competitiveness o f small business in other sectors.

Promotion o f the music industry, where Senegal has a comparative advantage. The importance o f art and culture has been established in the PRSP. The development o f artistic and cultural products for the regional, local, and international markets will significantly contribute to economic growth and poverty reduction. Senegal continues to have a leading role in the “World Music” scene and has assets capable o f generating income and creating jobs to fight poverty in both urban and rural areas. However, today the majority o f artists cannot l ive comfortably. To achieve i t s potential, the Senegalese music industry faces many obstacles. By end o f 2003, the Government will undertake a full review o f i t s legislation and legal system with regards to the protection o f copyrights and related rights, and for the management o f royalties by the artists themselves. This comprehensive review wil l lay out the optimal conditions for proposing new laws and a new judicial system that wil l take into consideration the emerging technologies (such as “E-commerce”), and ensuring respect o f copyright in accordance with international laws.

A particular emphasis will be put on tourism, which will continue to be a leading sector, a position that goes beyond i t s economic role as i t conveys the image o f Senegal abroad. The

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implementation o f recommendations derived f rom the consultative process o n tourism wil l improve Senegal’s competitive position. The major directions set for tourism are to reinforce the institutional capacities o f this industry, design a development program for new tourist sites, through private/public partnership, and develop tourism infrastructure. T o achieve these objectives, products need to be diversified (while consolidating resort areas), access to land facilitated, and development o f sites and promotion activities need to be envisaged. The private sector’s participation i s considered at the institutional level, and will p lay a key role in investments strategies. The possibility o f reallocating funds f rom tourism taxes towards the sector development wil l be considered.

I n the postal industry, the Government has drafted a sector pol icy letter for the Socidtd naitonale de la poste outlining i t s business strategic plan. The success o f a postal reform relies o n improving governance and clarifying the relationships between the Government and the postal service. The Government outlined the i t s strategy for developing the postal service in the pol icy letter for the postal sector.

The implementation o f the strategic p lan presented in that letter will allow: (i) improvements o f the overall performance o f the postal industry by slowly opening up markets to the private sector; (ii) reforms o f the legal and regulatory framework and reinforcement o f the sectoral regulatory function; (iii) preservation o f the individual’s right to communicate through an appropriate funding mechanism o f the universal postal industry; (iv) turning the historical postal operator into a small efficient modem business by implementing a strategic p lan al lowing it to survive in a competitive environment; and (v) promotion o f a sustainable development of postal financial service through subsidiary companies to provide a larger part o f the population with access to savings, credit, insurance, and use o f f ixed savings for private investment. At the same time, the Government will continue i t s effort t o strengthen economic regulatory capacities o f the postal industry.

Pension reforms already in place are aimed at sustainably solving the problem of structural deficit that the Fonds National de Retraite (FNR) had previously faced and to increasing coverage o f IPRES. Deep reforms are necessary to provide the population with access to a pension system based on solidarity, fairness, efficiency and sustainability. Therefore, pensions will be subject to parametric reforms so as to ensure their long-term sustainability and improve pension service for the elderly. In doing so, we wil l ensure the restructuring o f these institutions and the strengthening o f their capacities to manage and periodically measure the performance and reporting o f pension plans under their responsibility.

Fol lowing these reforms, the next step would be to implement an institutional framework that would support the introduction o f pension plans through capitalization, whi le avoiding an increase in the contribution rate. A feasibility study o n the merging o f IPRES and FNR will be undertaken. I t requires reforming existing retirement plans and promoting efficient regulatory and monitoring structures. The implementation o f these objectives i s two fold: to create and consolidate opportunities, for a larger part o f the population, to benefit f r om decent pension plans and ensure a controlled contribution o f pay savings to the development o f local financial market.

The financial sector i s expected to benefit fi-om the development o f fully funded pensions. The stability o f the banking sector since 1989-91 has contributed to building a stronger and more reliable foundation and to reinforce competitiveness, diversification o f banking service, demand, and more flexibil i ty o f interest rates. I t i s also important to strengthen the regulatory framework o f banking activities by reviewing commercial laws regarding the development o f financial markets, by addressing the problem o f delinquent borrowers, and by reforming taxation and financial transactions.

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3.4. Implementation of a viable process to reinforce public service commitment to business promotion

In order to take advantage o f synergy among important political and institutional reforms dedicated to improving the business environment and support small businesses, the Government i s planning to put in place institutional measures that are focused, coherent, efficient, benefiting from human and financial resources and operating according to an approach based on results. In terms o f support to small businesses and as a result from the consensus reached between the public and the private sector, the main functions are as follows: (i) promote investment and export; (ii) promote productivity, standardization, and quality; (iii) promote local products; (iv) provide advice-support to small businesses; and (v) facilitate access to financing.

3.4.1. Promotion o f investment and exports

3.4.1. I. Investments

The recommendations brought forward in the framework, o f this activity resulted in the creation in 2000 o f I‘Agence nationale chargde de la Promotion des Investissements et des Grands Travaux (MIX). The decree no 200.562 dated July 10, 2000 on the creation, organization and the operation o f MIX, sets for this agency the following responsibilities: look for and identify investors; promote Senegal, as the investment target; host and jo in investors; facilitate administrative initiatives and procedures; present to the Government a proposal to improve the business’ environment; make trade and economic information readily available; promote public- private partnership; facilitate the implementation o f major infrastructures works. APIX i s also a member o f the AGOA Committee and i s responsible for communicating trade opportunities made available by this American law. APE’S activities are expected to lead to the establishment o f 10,000 permanent jobs by 2008.

The Government wil l continue to provide APIX with its institutional support through the implementation o f a business development plan and the carrying out o f strategic studies on infrastructure, necessary to promote the private sector, develop, and strengthen the Ministry o f Foreign Affairs’ and embassies’ capabilities. This will permit them to better market Senegal’s label and attract direct investments. In order to make the Senegalese diplomacy serve investment, the Ministry o f Foreign Affairs wil l also be helped in setting up a computer network serving embassies and allowing them to play an intermediary role with investors.

3.4.1.2. Exports

Dispersion o f responsibilities characterizes the export promotion arrangements in place, and in general, th is explains lack o f results. Therefore, the quality and support to the private sector in the promotion o f exports can be maximized through rationalization and coordination o f existing mechanisms through well-defined performance objectives and missions. At the operational level, this rationalization will translate into the development o f a unique structure for promoting exports, whose objective i s to provide information on trade, assist economic bodies, and facilitate and promote export transactions. Similarly, new initiatives are encouraged for the promotion o f local products following similar initiatives or similar campaigns, “buy made in Senegal products”.

3.4.2. Promotion o f quality and standardization

The improvement o f quality, o f which standardization i s one o f the many instruments, cannot be ignored as a major concern in the context o f improving global competitiveness o f national economies. The mechanism to be reinforced through I ’Association Skneguluise de Normalisation (ASN), to significantly improve quality, should serve the following functions:

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improve the standardization system, implement a reliable metrology system, and develop certification mechanisms in compliance with standards (promotion o f a Senegalese label).

3.4.3 A Better coordination of financing initiatives

Based on lessons learned, the Govemment, with the collaboration and the support of i t s development partners will implement reforms to: (i) increase financial depth; (ii) launch new financial products; (iii) put into place credits to encourage business; and (iv) implement credits tailored for rural areas, and (SMEBMI), hotel industry, tourism or similar professions etc.

3.4.4 Rationalization of support mechanism for SMEs

The promotion o f SMEs i s central to the recent creation o f the Agencyfor the Enhancement and Development of SME (ADEPME). In general, to promote SMEs, it i s also important t o streamline the mechanisms already in place and make them functional, efficient and viable. In this respect, the SODIDA (land development agency) privatization process will be accelerated, inclusion o f the Bourse Nationale de Sous-Traitance et de Partenariat Industriel (BNSTP) within the Agency wil l undergo a feasibility study and will benefit f r om a new support pol icy to businesses relative to access to space facilities.

3.4.5. Harmonize funding to support public service missions under structures governed by efficiency and results

The Govemment will ensure that the executing mechanism o f public service missions for the promotion o f private sector's activities meet the fo l lowing requirements: (i) allocate functions and finance missions according to business community's needs; (ii) be streamlined, seek synergies, consistency and complementarity at different layers; (iii) be independent with decision malung power; (iv) be sustainable at the institutional and financial level; (v) keep Government institutions efficient and focused to enable them to accomplish fully their supervision and advisory missions by respecting a balance between public and private representation; (vi) a l low a fair access to their services at the national level; and (vii) implement service contracts with the Govemment based o n operational plans, performance standards, and adequate resources.

T o ensure the sustainability o f structure supporting the private sector, the Government i s committed to exploring, jo in t ly with stakeholders, the possibility o f adopting appropriate measures, including non-financial compensation, through asset transfers and capitalization or financial participation o f the private sector. In addition, a measure to be considered i s t o partially reallocate the Contribution Forfaitaire a la Charge de I 'Employeur (CFCE) that goes to a matching-grant fund made available to businesses that wish to strengthen their technical and management capabilities. This fund will, therefore, represents a viable response to extemal structural assistance needs o f SMEs. The fund wil l also encourage support institutions, labor and professional organization to act as intermediaries and facilitate private sector access.

The strengthening o f small business capacities relies o n i t s leaders to work hard to reinforce internal functions and their adaptability to universal ru le o f management to better adjust t o a national and intemational environment characterized by an increased competitiveness. In this respect, the support mechanism and labor organizations wil l have a stronger role to p lay in the support they will have to provide to business leaders. The introduction o f a social Charter in 2002, offers to a l l business partners, such as the Govemment, management, and labor unions, a potential performing framework enabling the promotion o f performance and quality.

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STRATEGY IMPLEMENTATION

In i t s conception and implementation, the Development Strategy o f the private sector remains consistent with the Government fundamental pol icy with regard to Senegal’s participation in the sub-regional and global economies, to the protection o f the environment, to communication, collaboration, and coordination between the public and the private sector.

4.1. Participation in the global and sub-regional economy

Senegal has always played an active role in the construction o f the regional integration within WAEMU and the CEDEAO and the Organization for Afr ican Union, which became Afr ica Un ion in 2002. I t s leading role was recently illustrated by the creation and the promotion o f NEPAD. T o maintain i t s leading role, the country has to develop a performing communication infrastructure between itself and other countries and has to strengthen the institutional framework to al low the private sector to participate in the regional integration process. The strengthening o f human and infrastructure capital should result in the identification o f better integration conditions and particularly those that proved to be successful in the global economy. Similarly, a development strategy o f the private sector will be implemented within the international agreements o f which, Senegal, i s a signatory.

4.2. Public- private sector consultations

Consultations between the Government, labor and professional organizations will continue in order to: (i) establish a dynamic partnership between the private sector and the Government; (ii) maintain a proper framework to acknowledge and identify the difficulties and problems that the private sector i s facing; (iii) take shared decisions in order to improve the economic and social environment; and (iv) establish a dialogue with the different partners. At first, it would be appropriate to maintain a technical cooperation between the operational levels o f Government and private sector representatives. At the ministerial level, technical committees have to be established in order to periodically examine the problems that hinders private sector initiative. The experience o f the previous Focus Group o n Competitiveness and Growth should be integrated in the future so as to identify the problems requiring immediate attention, reach an agreement between the public and the private sector o n appropriate solutions, and ensure their implementation.

The inaugural meeting o f the Presidential Investors’ Council took place in November 2002. The Focus groups created as a fo l low up o n the conclusion o f the f i rs t Council meeting also of fer new opportunities in defining a new operational framework which will evaluate, implement, supervise, and re-evaluate after the implementation o f proper measures aimed at improving the business environment and the competitiveness o f the private sector. The pr ior i ty o f investors seem to be the simplification o f procedures o n investment, business tax reform, improvement o f mobi l i ty in Dakar, and o f other economic stimulus that can be offered to investors.

The spirit o f partnership, which i s at the core o f the development strategy o f the private sector, also determines the composition o f the private sector supervision and the orientation o f i t s support structures. This spirit i s necessary to steer the strategy, and the programs and projects therein. I t i s strategically important for the implementation o f the development strategy o f the private sector that, o n a yearly basis, a consultative forum invigorates this partnership and provides a venue for assessing the achievements realized by existing structures. Finally, i t i s necessary to have access to means o f communication and to information on economic and social issues in order to keep a l l stakeholder initiatives focused o n the development strategy sector objectives.

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Act ion plan to eliminateheduce trade, domestic and financial sector distortions implemented.

ANNEX F

Distortions reduced (more detailed indicators will be developed once the action plan i s ready) In the context o f 2.1 and 2.2 above, Govemment liabilities in the sector are

PRIVATE SECTOR ADJUSTMENT CREDIT

SENEGAL PSAC POLICY MATRIX AND INDICATORS

Objective/Policy I Current Status

Obj ective/Policy

Actions [ Performance Indicators

reform area 1.1. Eliminate tax-

reform area 3.1. Improve legal and regulatory environment

induced distortions, stimulate investments and implement level playing f ie ld for businesses.

I Draf t postal law has been prepared. law. Sector strategy pol icy letter signed o n April 17, 2003.

Adopt new postal

1.2. Rationalize user fees and ensure they are allocated for the purposes intended.

3.2. Clarify and formalize relationship between

Ta

Transfer regulatory ART effectively regulates authority t o ART, sector

Recapitalization Performance Performance contract scheme and formal contract in place. indicators, including: (i) agreement to cancel number o f “postal outlets’

Current Status

F IAS study (2001) provides basis for reforms. Special committee has been established to finalize action p lan and steer the reforms.

Government has committed to implement the reforms in i t s PSD strategy letter.

Edible Oi Objective/Policy I Current Status

reformarea I 2.1. Government exits the sector as an operator.

Privatization advisers hired in March 2003.

2.2. Implement sector pol icy reforms.

I

Sector pol icy letter and related action plan being drafted and wil l be finalized by mid-may.

Reform Actions

Rationalize tax system and reduce certain taxes, whi le at the same time eliminating exemptions.

Reduce CFCE and reallocate it to private sector capacity building.

Performance Indicators

METR for industry reduced to 28%. Tax exemptions eliminated f rom the investment and/or other codes; special arrangements may s t i l l prevail for export activities. By end-2005 revenue base f rom taxes expanding and revenues increasing. CFCE reduced to 3%. Matching-grant fund become financially sustainable.

Sector Reform

private operator.

I settled.

Provisions o f l aw implemented, including lower the monopoly threshold to 500 grams and a l l operators licensed.

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L a Poste and Govemment

3.3. Improve financial and institutional viability o f Postal Services.

Obj ectiveRolicy reform area

4.1. Enhance Corporate governance.

4.2. Rationalize schemes.

4.3. A l low for private provision. 4.4. Complete financial restructuring o f PRES.

cross-debts being finalized.

Subsidy for “public

responsibilities included in 2003 budget.

good”

Pens Current Status

Sector strategy prepared, covering parametric and systemic reforms.

See Above.

See Above.

Plan to resolve arrears expected to be finalized by mid- Mav 2003.

Create a separate subsidiary for L a Poste’s financial services.

n Reform Actions

Establish new commission to oversee pensions system. Adoption by P R E S o f new investment policy and processes. Proposal for consolidation and/or integration o f schemes developed and implemented. Private pension policy developed. Settle arrears to P R E S .

doubled; (ii) intemet access in 100 post offices; and (iii) 50% increase in productivity in terms o f lettedemployee. Subsidiary created. By 2005: tumover i s 20% higher, number o f accounts and savings collected increased by 50%. Regular audits are undertaken and are unqualified. In the context o f 3.1, 3.2, and 3.3 above, Government liabilities in the sector are settled, cross-debts are cancelled, and the post office i s sustainable.

Performance Indicators

Commission in place, operational and meeting periodically. Investment policy adhered to and audits unqualified.

Pensions scheme consolidatedlintegrated.

Legal framework for private provision in place. In the context o f 4.1 and 4.2 above, Government liabilities to P R E S are settled.

- 4 7 -

ANNEX G

Senegal

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surplus/deficlt

TRADE

(US$ millions) Total exports (fob)

Groundnut Fish Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (1995=100) Import price Index (1995=100) Terms of trade (1995=700)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, local/US$J

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

Wodd Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

I982

17,3 9,3

17,9 -3,5 -7,2

1982

502 128 56

182 984 235 292 137

91 80

113

1982

892 1 277 -385

-1 16 10

-491

365 126

25 328,6

1982

1861 79

166

123 8 2

#REF 263

7 15 0

19 26 3

23 7

16

1992

0,o 0,6

18,9 2.6

-2,6

1992

828 66 60

190 1 355

363 150 175

93 69

104

I992

1 404 1851 -447

-133 34

-545

566 -20

22 264,7

1992

3 634 62

873

210 19 9

#REF 249 -31

0

44 97 16 81 12 70

2001

3,O 2 3

17,8 2 5

-3,9

zoo1

1 009 112 35

250 1 678

359 283 283

79 93 85

2001

1 409 1 852 -443

-88 305

-226

327 -100

584 733,O

2001

3 576 0

1 430

25 1 2

30

#REF 74 0

40 0

0 129 21

108 11 97

2002

2,2 2,6

18,7 5 7

-2.7

2002

1 065 147 37

250 1 847

409 278 313

81 97 84

2002

1486 1 946 -460

-92 320

-232

359 -127

693 718,6

2002

3 559 0

1 490

224 2

32

#REF 84 0

30 0

0 70 23 47 11 36

r ’ 97 98 99 L 0, d21

-GDP deflator -CPI I Export and Import levels (US$ mill.)

zow, I

O2 I ffi 97 98 99 w 01

Exports Himports

Current account balance to GDP (%)

*O T

:omposltlon of 2002 debt (US$ mill.)

,- IBRD E - Bilateral , - IDA D - Other rnultiiateral F - Private ; - IMF G - Short-term

Development Economics 4/24/03

-48 -

Senegal at a glance Sf26103

POVERTY and SOCIAL

2002

GNi per capita {A;Ji/am&M 1WI 460 GNi {Atkcme&%& 1WiWkwt 4.6

Average annual growth. 1996-02

Population f isp 2.7 Labor force fl$ Most recent estimate [latest gear available. 1996-02] Poverty f l i ' o f p q & & " m a t h d ~ < u ~ t Urban population f i ; 'dt&dmakt 45 Life expectancy at birth [ueast 52 Infant mortality {~l&%hMt&,' 68 Child malnutrition fi;'dc?%Wm&.ft 22 Access to an improved water source fi;'dpqWakt?t Illiteracy p d&ackwfit Gross primary enrollment pd-"Aqqepqwam?t 66

Male 71 Female 57

Senegal

Population, mid-year &W?$ 10.0

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992

GDP (1WMhqt 2.6 6 0 Gross domestic investmentlGOP 12.2 14.8 Exports of goods and serviceslGDP 33.0 23.3 Gross domestic savingslGOP -2.5 7.4 Gross national savingslGDP -6.6 5 8

Current account baiancelGDP -19.0 -9.0 Interest paymentslGDP 1.5 0.8 Total debtlGDP 72.1 608 Total debt servicefexports 127 133 Present value of debtfGDP .. 382 Present value of debtfexports 145 9

1982-92 1992-02 2001 /Mw m d ~ w M & t GDP 2.3 4.6 5 6 GDP per capita -0.5 18 2.9 Exports of good5 and services 1.7 81 6.7

Sub- Saharan Low-

Africa income

688 450 306

2.4 2.5

33 46

105

58 37 86 92 80

2001

4.6 18.1

30.4 8.6

13.2

-4.9 1.2

74.7 14.1

46.4 122.0

2,495 430

1,072

1.9 2.3

30 59 81

76 37 95

103 87

2002

4.9 21.0 31.1 11.2 13.0

-8.0 1.3

44.6 124.8

2002 2002-06

1.5 6.3 -1.1 3.6 6.7 2.7

Development diamond'

Life expectancy

T

GNI Per capita

I

Access to improved water source

Economic ratios'

Trade

T

Investment Domestic savings

Indebtedness

STRUCTURE of the ECONOMY

p; d q j Agriculture Industry

Services

Private consumption General government consumption Imports of goods and services

Manufacturing

/MW m d - w W M Agriculture Industry

Services

Private consumption General government consumption Gross domestic investment Imports of goods and Services

Manufacturing

1982

21.7 15.0 10.4 63.3

84.3 18.2 47.7

1992 2001 2002

18.9 19.6 19.6 18.8 20.6 20.6 12.5 13.0 13.0 62.2 59.8 59.8

77.2 76.9 77.6 15.4 14.5 11.2 30.7 40.0 40.9

1982-92 1992-02 2001 2002

1.4 2.3 7.6 -18.5 3.4 6.2 6.1 10.1 3.6 5.4 5.1 10.2 2.2 4.8 4.8 4.8

1.7 3.5 7.0 1.2 2.4 5.7 21.7 1.2 4.5 -5.7 -46.8 -1.3 1.3 2.4 1.4 6.7

Growth of investment and GDP [ X I

50

0

-50

- io0

--GDI -GDP

I I Growth of erpQrt5 and imports [ X I

I *)---Exports -Imports I Note: 2002 data are preliminary estimates. 'The diamonds show four key indicators in the country [in bold] compared with its income-group average. If data are missing. the diamond will

be incomplete.