On January 31, Lagarde gave a speech to a group of delegates in state-capital Dakar, praising the efforts made so far by the country and alluding to the forthcoming fulfilment of Plan Sénégal Emergent (PSE). The PSE, which was unveiled in 2014, has an initial period of economic development until 2018, which is then followed by a development phase lasting five years. The plan involves the attainment of middle-income status for the developing country, an ambitious, if not overly-optimistic task.
The PSE focuses on two main areas required to promote faster economic development; growth drivers and structural reform. Increasing exports and greater foreign direct investment are penned by the IMF as being particularly important for the continued expansion of the economy. “This plan, in my mind, in terms of having a strategy which is in line with the needed structural transformation, the needed higher growth and so on, is a plan that makes sense. It’s the appropriate direction,” says Dr Amadou Sy, Senior Fellow in the Africa Growth Initiative at the Brookings Institute.
Although GDP growth improved to 4.5 percent last year, Senegal is still behind other sub-Saharan African countries that have achieved around six percent over the past decade
Senegal does indeed show promise for economic growth, particularly as the state has a number of invaluable advantages, such as its democratic stability and geographic location. Experts suggest that Senegal even has the potential to become a regional hub for trade and tourism; but the correct mechanisms that would facilitate this economic evolution are not currently in place. Furthermore, unless the state enforces the necessary reforms, its GDP growth will continue at its current disappointing level. “The problem is the implementation because this is a structural transformation agenda, and transformation means that you will have winners and losers. It’s a political economy problem”, explains Dr Sy. In addition to such long-standing obstacles, a new host of challenges may now face the Senegalese state, which is far less ‘adjustable’.
Improving macroeconomic stability and fiscal management were stressed as essential areas for development, so that increased public investment does not turn into burdening debt, as has been the case for other developing countries. In order to achieve this difficult balance, the IMF has suggested that Senegal improves its mechanisms for public spending and public investment management, akin to the processes adopted by countries such as India and Sri Lanka. Yet, this is not strictly the case. Although India and Sri Lanka have exhibited economic growth, both countries face overhanging debt, a national debt of $959bn and a total debt of $55bn, respectively. A burden of this kind is likely to strangle a state in the long-term and limit its potential. Such may be the case for Senegal if it becomes entrapped by insurmountable foreign loans and tied to the whims of its debtors.
Increasing exports is another key area suggested by the IMF, whereby the facilitation of foreign direct investment and more accommodating policies can position Senegalese businesses within the global market. Currently the leading exports are gold, refined petroleum, phosphates and fish; commodities which all have potential for expansion. Again, the IMF points to other developing countries that have achieved success through concentrating their efforts on increasing exports; thereby making this a viable option for Senegal also. Yet, there are several risks that ensue from opening up an unconsolidated economy and becoming dependant on a few select commodities. This was illustrated in 2013 when Senegal’s GDP growth rate slowed to 2.4 percent as a result of a 24.5 percent drop in gold exports from the previous year. This significant decline was caused by the drop in international prices.
There is yet another, more dangerous problem in establishing an economy which is driven by the export of primary goods; by adopting this economic model, there is an increased likelihood that Senegal will limit its future development and capabilities. In following the dictates of a comparative advantage for primary goods, such as fish, gold or petroleum products, Senegal can never evolve into a high capital society. Furthermore, such a model cannot continue to expand at the same rate as global economic growth. The transition of the labour force will be another complex challenge, particularly as this stratagem, which is being encouraged by external parties, presents prohibitive coordination failures. Therefore, reliance of this kind may bring greater income to the state in the short-term, but it comes at the cost of growth for future generations.
Making growth inclusive
Senegal’s improved level of gender equality was praised by Lagarde, which has been achieved through legislation mandating equal representation in political institutions. Taking such steps to enhance the country’s level of social inclusion practices and its human capital is vital for its sustainable development. Dr Sy explains the importance of investing into urban areas also, particularly given the growing population, “This combination of urbanization, the demographic trends, and youth trends; it’s something that really needs to be addressed right now.” Job creation also requires focus as currently there is a mismatch of education and available employment. According to the World Bank, Senegal spent 21.9 percent of its budget in 2014 on national and higher education, but many graduates with excellent credentials are unable to find suitable work. “We need more vocational training, more STEM training, and we need the ministers of education, and so on, to sit down with the private sector and say, let’s look forward and see what are the jobs of the future for this country,” Dr Sy tells World Finance.
In devoting expenditure into densely populated cities and STEM training, the promotion of manufactures and high technology becomes more feasible. Currently, the foundation for this transformation exists; the Senegalese population is well educated and the ICT sector shows promise. Yet despite their extreme importance in boosting the sustainable development, these pivotal areas were not mentioned in Lagarde’s speech; a worrying sign in this ‘philanthropic’ partnership.
Challenges to growth
Although GDP growth improved to 4.5 percent last year, Senegal is still behind other sub-Saharan African countries that have achieved around six percent over the past decade. Accelerating to seven or eight percent, as specified by the SPE, requires a sizeable impetus from the government and foreign investment. The World Bank attributes this sluggish growth to disappointing production rates in industry and mining, as well as factors beyond control, such as low rainfall and poor cereal harvests. Another issue which is slowing Senegal’s potential for development is its highly unstable energy sector. The recent upgrade of power stations seeks to boost the industry, but recovery is modest. As such, the lack of dependability on electricity supplies remains burdensome to the business sector, the population and in effect, the economy.
It is far more realistic that foreign actors will invest in the energy sector rather than in social enterprises, but currently the flow of international capital is very slow, as is the case for the rest of Africa. This is due to a number of reasons; not only a general reluctance to invest in African nations, but also the lack of the necessary logistical framework and transportation. Investing in these areas, can boost the standing of Senegal within the region, support a more robust and reliable energy sector and catalyse so many other potential areas for growth also. Therefore, in providing assistance to Senegal, it is crucial for the IMF to encourage investment into energy, rather than its current export focus, if Senegal is to achieve much-needed coordinative development.
Senegal’s construction industry is doing especially well, as regional investors are drawn by the relative security of the state
Last year’s GDP growth can be attributed to the progress made in the business climate of the secondary sector, particularly in industries such as meat processing and leather manufacturing. According to a report by the African Economic Outlook, the construction industry is doing especially well, as regional investors are drawn by the relative security of the state. Investing in these industries can further drive GDP growth, but the social and environmental implications must also be considered. For example, despite promise in the real estate market, the Senegalese public and local councils are against the recent property boom as locals are being out-priced and the ‘protected’ coastline is being developed upon. Including the Senegalese people in development is something that both the state and multi-lateral organisations must keep at the forefront of their strategy, as it is absolutely vital for securing enduring growth.
The IMF is assisting Senegal in its efforts for economic development by providing fiscal assistance and expertise, but there is an impending question of whether this is the best mode of practice for the long term. The IMF purports an existence based on bailing out struggling countries, but what their conditions mean for the future of an economy can be even more detrimental than its current path. For example, by evolving Senegal into an export driven economy and enforcing a less stringent financial market, it may become more exposed to international fluctuations and setbacks. Meanwhile, the impact to the primary sector and the labour force can lower wages, raise unemployment and ultimately, deepen poverty. As developing states turn to mass yields of selected products, the over-exploitation of land and natural resources is frequently overlooked factor, with devastating future implications. If this tragedy does occur in Senegal, then the likelihood of international players and multi-lateral organisations coming to the rescue is somewhat unrealistic.
Among the recommendations made in the speech given by Lagarde, learning from others was at the forefront. The IMF chief emphasized the need for Senegal to not make the same mistakes as other economies attempting to reach middle-income status. Yet, the irony of this statement is that if Senegal carefully scrutinises the economic and social impact that IMF fiscal assistance has led to, they will see widening inequality, unrepayable debt and cutbacks in social programmes, to the detriment of both the population and economy. Instead, if the state was to focus on regional integration and enhancing cross border trade, long-standing growth can be achieved. As a continent, there is so much possibility and potential that can be achieved through a greater pan-African vision, yet this approach to development is often disregarded by the international community. Rather than promoting economic growth in this way, the Senegalese economy is now bound to the requirements and restrictions of the IMF until 2025 when the SPE comes to an end and far beyond that also. By shackling itself to supranational organisations and ensuing debt, Senegal may have fallen prey to the fancies of the global elite and could become another African victim of modern day colonialism. Yet, without receiving loans from external sources and pouring investment into the necessary mechanisms, a budding economy cannot grow; the poignant catch 22 of development economics.