The West African nation shows promise for faster economic growth, particularly with regards to its highly educated population, level of political stability and advantageous geographic location. Although conditions are favourable, growth has been slow over the past decade due to a number of varying factors, including adverse business conditions and poorly managed public spending. The IMF’s Plan Sénégal Emergent (PSE) was unveiled in 2014 in order to provide a much-needed impetus to the economy and improve the areas that have held back the country’s development thus far. Implementing structural reform, increasing exports and encouraging foreign investment are key measures cited by the IMF for achieving the goals laid out in the PSE. The IMF’s comprehensive strategy will run until 2023, during which time it aims to guide the developing nation to achieve middle-income status.
Experience of other countries across the world suggests that Senegal’s ambition to rise to an emerging economy status within the next two decades is achievable
The IMF’s Senior Desk Economist for Senegal, Alexei Kireyev, spoke to World Finance about how the Senegalese economy is fairing and its prospects of becoming an emerging economy.
What are the most important areas of reform for Senegal at this stage of its economic development?
The most important areas of reforms are specified in the authorities’ recent development strategy, the Plan Sénégal Emergent (PSE). The plan aims for Senegal to become an emerging market economy by 2035 by making it a hub for West Africa. The PSE is articulated around three pillars: (1) higher and sustainable growth in the range of seven to eight percent, based on foreign direct investment (FDI), export-driven structural transformation and widening the circle of opportunity to provide space for SMEs; (2) human development and social protection; and (3) improved governance, peace, and security. The PSE calls for continued fiscal consolidation, constrained public consumption, and increased public saving to generate fiscal space for higher public investment in human capital and public infrastructure. It also envisages structural reforms to attract FDI and boost private investment.
To reach these objectives, 2015 must mark a turning point from the mediocre growth of the past to the higher, sustainable, and inclusive growth envisaged by the PSE. The PSE presents a unique opportunity to disentangle from lacklustre policies of the past and to unlock a broad-based and inclusive growth that will make Senegal an emerging economy. Economic policies and structural reforms included in the PSE should allow Senegal to achieve and sustain high and inclusive growth. Economic and social emergence requires the maintenance of a sound economic framework and the acceleration of reforms to enhance productivity and improve the business environment whilst improving public service delivery and raising the quality of public spending.
How can Senegal increase its export revenue?
The PSE identifies the path to success. Senegal can increase export revenue by crowding in private investment, including foreign direct investment, and improving the business climate to provide space for SMEs. In pursuing this goal, Senegal could learn from African middle-income countries that have succeeded in this transformation (Cape Verde, Mauritius and Seychelles), and foster joint action in West African Economic and Monetary Union (WAEMU) to achieve emerging market status. Moreover, the key differences between those countries that reached the middle-income status and those that just built debt and still have little to show for it is in the openness to FDI, facilitation of the entrance and growth of SMEs, and orientation to globally competitive production, particularly exports. Senegal’s many strengths include an open society and democratic traditions, political stability, a well educated labor force, a solid civil service and a good geographical location to export to the two largest global markets, the EU and the US. With the right policies, Senegal should be able to attract investors seeking platforms for global production, including those who may delocalise from China as costs of production rise.
Why has Senegal’s economic growth in the past decade been slower than other countries in sub-Saharan Africa?
Senegal’s growth was less favourable than that of fast-growing sub-Saharan Africa (SSA) countries, although it has been better than in a number of WAEMU countries. Also, Senegal’s growth was strong enough to ensure a modest increase in per capita income, but it has fallen short of the authorities’ target under successive poverty reduction strategies and has been much lower than that of fast growing SSA economies such as Cape Verde, Ethiopia, Rwanda, Tanzania, and Uganda.
The PSE provides a good diagnostic for this unfavourable outcome. It points out that the main contributors to below par growth have been a poor business climate and the low quality of public spending. The business climate handicaps new entrants, whether SMEs or FDI, through the lack of clarity on the rules of the game and too much emphasis on ex-ante authorisations instead of ex-post compliance. This has limited the rate of diversification of the economy and worked against increasing the value added per worker through insufficient integration into global value chains. Consequently, growth has been too dependent on public investment, which in turn has proved to be of low quality with a significant share more akin to public consumption than capital formation. Remittances have been significant but in the absence of an attractive regulatory framework have fueled private consumption rather than an expansion of SMEs. At the same time, the majority of population, in particular in rural areas have not been provided the incentives or the means for more active personal contributions to development or to improve their productivity.
A growth accounting exercise confirms this analysis of the PSE and suggests that growth is mostly explained by factor accumulation, rather than by increased productivity. Total factor productivity (TFP) actually declined before the mid-1990s, and again since 2006. It grew only modestly during the decade of robust growth (1995–2005). A number of factors could explain this poor productivity performance. First, the TFP decline in the past five years coincides with the deterioration of Senegal’s doing business and governance indicators, which could have affected the productivity of both public and private investment. Second, large and increasing remittances might have been invested in sectors less likely to spur growth (such as housing and informal trade). In addition, delays in critical reforms, such as the reform of the energy sector, and slow reforms of the public financial management and the business environment have also had a negative impact on growth. Finally, a series of exogenous shocks starting in 2006 (i.e., food and fuel global prices, global financial and economic crisis, the electricity sector crisis, and drought in the Sahel, and more recently regional security tensions and the Ebola epidemics), have led to growth deceleration.
The good news is that the authorities have begun to go from the diagnostic in the PSE to action to address these bottlenecks by measures to improve the quality of spending and to create a better business climate. These reforms need to be broadened, deepened and accelerated to reach the seven to eight percent growth achieved by fast growing economies in Africa and elsewhere and targeted under the PSE.
What risks exist for Senegal in opening up its economy more so to foreign investment and the global market?
The goal of a seven to eight percent annual growth is feasible for Senegal in the medium term but would require a broadening, deepening and speeding up of structural reforms as well as constraining public consumption to create the fiscal space for implementation of PSE-related projects. In parallel the quality of public spending will need to be raised, particularly for public investment. However, the danger for Senegal is that the required reforms are neglected whilst emphasis is on increased spending. The IMF encourages the authorities to broaden and speed efforts to improve Doing Business rankings and to identify regulatory changes required to attract investors who may currently hesitate to invest in Senegal. Accelerating electricity generation projects may require reconsideration of accountability and project responsibility. Reform implementation could be facilitated by peer learning arrangements with successful comparator countries which the fund could facilitate. None of the countries that have gone down this path have failed to unlock high growth but many countries have faltered by failing to embrace openness and have ended up with debt instead of growth.
What lessons can Senegal learn from other developing economies?
Experience of other countries across the world suggests that Senegal’s ambition to rise to an emerging economy status within the next two decades is achievable. Historically, countries that have embarked on important investment programmes have experienced mixed fortunes. Those that have embarked on ambitious structural reform to unlock foreign direct investment and create space for SMEs have become emerging economies. Those that ramped up public spending without sufficient accompanying reforms have just built up debt with little improvement in per capita income. Unleashing Senegal’s growth potential would require strong action on supply constraints, such as the regulatory framework and cultivation of a business climate friendly to FDI and small and medium enterprises (SMEs), together with investment in human capital and infrastructure; reduction in inequality by expanding private employment opportunities in the formal sector and broader access to education and health services; and planning for adverse shocks to ensure adequate fiscal space to sustain the PSE investment plan. Senegal can work with countries that have moved on the path to emerging economy status to adapt to its specificities the institutional and policy reforms that enabled these countries to move from low-income status. Again, it is encouraging that the authorities have begun to embark on this path.