Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 15874

IMPLEMENTATION COMPLETION REPORT

REPUBLIC OF SENEGAL

ECONOMIC RECOVERY CREDIT(CREDIT NO. 2582-SE)

June 26, 1996

Country Operations DivisionWestern Africa DepartmentAfrica Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTSMonetary Unit: CFA fratic (CFAF)

USS1.00 (I990) = CFAF 272USSI.00(1991) = CFAF282USSI.00(1992) =CFAF 265USS1.00(1993) = CFAF283US$1.00 (1994) = CFAF 555USS1.00 ( 1995) -CFAF 499

WEIGHTS AND MEASURESNletric Ssstem

FISCAI YEARJuly I -June 30 (until Jtine 30. 1991)

JnIv 1-December 31 (18 months), for fiscal vears 1991/1992Janiuar, I -December 31 (from Januan 1, 1993)

ABBREVIATIONS 'AD ACRONY'MS

AGETIP : ge 7oo cd c'.cc tarit des tI-,c culrs dinlt/e/il Ilic r/e Irte le so00s emp/li/rn

(Public Works and Etnplc' ntent Project)BCEAO : unq,re centrde des Elulr.Idc I tfique d, IOtrest (Central Bank)BMOP : Bzrreuzr 'jr/u Acrin d Oewr me P-riuaire (Port Labor Office)

CFA : Cenrrterutcactfin rci,cr-e fi icufure (African Financial Cornmunitm)

CNCAS Cause ntct-imttjc' de credir qperi-ule srb/golacse (Agricultural Bank)

CPSP : dcx.ce c/per/qt orr eir c Jr stailhrcsa,tiour des pri.

(Fund for Price Equalization and Stabilizatiot)CRJ Cr'rtttc d, rsfru-mccjuru/a/rce (Legal Reform Commitrtee)DDI Direcct),,, dc (a derie ec dc I ic est/ssetwcewr

(Directorate of Debt and Investrnent)DPS D: remr r del p,mr/srr,r esr/et deJ ctcisriquce

(Directorate of Forecasting and Statistics)ESAF ,Enhanced structural adjustment facilit, (IMlF)FSP FotlcI/,ci,cr dcc sleer p;ri e (Pric ate Sector Foundation)

GDP gross donrestic productG&NFS : goods ard con-factor ser, icesG&S : poods and serc icesGRCC : Groupe de refle,xrtn stcr 1, crornrpirlile er la crnissance

(Competitir coess Rev iec, Group)ICS : Ittducstrie.schi/niqnes cdc.Se/egal (Chemical Comnpany)ONA : Office urin,mrcI dccssauinissewnel,c (National Sanitiation Office)PASA Progupr rne dcajnsltener seciorielpuar, /cgricul-re

(Agricultural Sector Adjustment Program)PASCO : Pr-mjer d cai/r-em strncrrcr el cf de conrp/tivt/e

(Priate Sector Adjustment and Contpetitieness Credit)PDRG Prile direcce-r do dc/ce/ ppencewtt inclegre c/e (c Ri e gapche

(Master Plan for Integrated Deselopment of the Left Banik of the SenegalRiser)

PFP : Policc Frameccork PaperPSACC P: rate Sector Adjustment and Competitiveness CreditETI P : Prog,upcmne e,, ,iecl d incesfissencents publics

(Three-Year Public Investment Program)PFEER : Real effectise eschange rateSENELEC Sociele nccrioncale d c/ee itc ie/c .S/eegal (Poser Company)SODEFiTEX : Sociue e d/c elopp/.;rpet.ci des fib,es textiles (Textile Company)SONACOS : Socicte ntior,rcale de crrncrrrererc/hsurio, des cr//agineux du Sen/gal

(Groundnut Oil Company! )SONES Sociele -tationltae des earu du Senegal (National Water Company)

SONEES : Soc/cte ncariuo,u/e d'expl/cccaricir des eate du Sen/gal(National W'ater Supply Company)

UEMOA : Union coar...niq,le el ...... /ta/re o,esl-africaine(West African Economic and Monetar, Union)

VAT Value-added tax

IMPLEMENTATION COMPLETION REPORT FOR OFFICIAL USE ONLY

REPUBLIC OF SENEGAL

ECONOMIC RECOVERY CREDIT(Credit No. 2582-SE)

TABLE OF CONTENTS

PREFACE...

SUMMARY EVALUATION ........................................... j..

PROJECT BACKGROUND.

EVALUATION OF OBJECTIVES AND DESIGN ............................................ ii

PROJECT RESULTS AND SlJSTAINABILITY ............................................ i jj

BANK PERFORMANCE ........................................... iV

BORROWER PERFORMANCE ........................................... iV

SUMMARY OF OUTCOME AND FUTURE OPERATIONS ........................................... iV

LESSONS LEARNED ........................................... V

PART 1: PROJECT IMPLEMENTATION ASSESSMENT ............................................ I

1. PROJECT BACKGROUND ............................................ I

II. PROJECT OBJECTIVES AND DESIGN ........................ ......... ..................... 2

Ill. ACHIEVEMENT OF PROJECT OBJECTIVES ...................................... 3A. Macroeconomic Results. 3B. Social Safety Net ...................................... 4C. Continuation of Dialogue between Senegal and the Bank . ............................................. 5

IV. MAJOR FACTORS AFFECTING THE PROJECT .............................................. 5

V. SUSTAINABILITY OF RESULTS ............................................. 6

Vl. PERFORMANCE OF THE BANK. 6

VII. PERFORMANCE OF THE BORROWER .............................................. 6A. Preparation and Implementation ............................................. 6B. Disbursement and Procurement .............................................. 7C. Audits. 7

VIII. ASSESSMENT OF OUTCOME .............................................. 7

IX. FUTURE OPERATIONS ............................................. .8

X. KEY LESSONS LEARNED .. 8

PART 11: STATISTICAL ANNEX .. 9

PART III: BORROWER EVALUATION ............................................. 16

MAP

| This document has a restricteJ distribution and may be used by recipients only in the performance of theirI official duties. Its contents may not otherwise be disclosed without World Bank authorization.

IMPLEMENTATION COMPLETION REPORT

REPUBLIC OF SENEGAL

ECONOMIC RECOVERY CREDITCredits 2582-SE

PREFACE

This is the Implementation Completion Report (ICR) for the Economic RecoveryCredit (ERC) in Senegal. for which an IDA credit Cr. 2582-SE was granted for the amountof SDR 18.2 million (US$25 million equivalent). This credit was approved by the Boardof Executive Directors on March 17, 1994, and made effective on March 24, 1994. Asupplement (Cr. 2582-1-SE) was also made effective on January 9, 1995 with a grant ofSDR 2.3 million (US$3.2 million equivalent) from Fifth Dimension Program funds. Thecredit was fully disbursed in two tranches on March 29, 1994, and January 13, 1995. Boththe credit and the supplement closed on December 27, 1995.

This ICR was prepared by Abdoulaye Seck of the World Bank Resident Mission inDakar (AF5SN). The Borrower contributed to the preparation of the ICR by submitting itsevaluation of the project execution and achievements. The ICR was reviewed at BankHeadquarters by the Country Operations Division, Western Africa Department, and byEmmerich M. Schebeck, Projects Advisor of the same Department.

The ICR is based on the Report and Recommendation of the President to theExecutive Directors (Report No. P-6273-SE), material in the project files, the CountryAssistance Strategy for Senegal (Report No. 13909-SE), and findings of the projectcompletion mission of December 11 -17, 1995.

IMPLEMENTATION COMPLETION REPORT

REPUBLIC OF SENEGAL

ECONOMIC RECOVERY CREDIT

Credit 2582-SE

SUMMARY EVALUATION

PROJECT BACKGROUND

1. In the mid- 1970s. Senegal initiated a policy of public sector expansion, following aseries of good harvests and a period of high prices for its export commodities. By the endof the decade, however, lower phosphate prices and a decline in groundnut production hadresulted in a general state of both domestic and external disequilibrium.

2. Four structural adjustment operations undertaken with the Bank between 1981 and1994 failed to solve the problem of high production costs in the Senegalese economy.With the economic recession of the mid-1980s. the country's lack of competitivenessbegan to worsen when Senegal could not utilize a parity change to respond to twoexogenous shocks: (i) deterioration of the terms of trade and (ii) appreciation of theFrench franc against the dollar. By the end of 1993, the CFA franc was overvalued by anestimated 40%. In August 1993, the Government launched a stabilization program knownas the Emergency Plan which failed because of the glaring overvaluation of the CFA francand a lack of external financial assistance. By then, it had become clear that nothing shortof a global adjustment strategy could bring about a sustainable recovery in growth andreduce poverty. On January 12, 1994, Senegal and its partners in the franc zone realignedtheir currency, changing the parity of the CFA franc from 50 to 100 CFAF per FF.

EVALUATION OF OBJECTIVES AND DESIGN

3. The Economic Recovery Credit (ERC) was designed to provide emergency supportto the post-devaluation reform program. This program was also supported by an IMFstand-by arrangement in the amount of US$63.3 million, converted into an ESAF inAugust 1994, at which point the Bank and the IMF approved a Policy Framework Paper(PFP) covering the period 1994-97. The ERC aimed at containing the adverse effects ofthe devaluation while continuing to implement necessary sectoral and structural reforms to

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ensure improved competitiveness. The objectives of the Economic Recovery Credit wereto:

(i) support the Government's reform program, outlined in its Statement ofEconomic and Social Policies dated February 23, 1994, and more particularly themeasures aiming at minimizing the negative social impact of the devaluation in theshort term;

(ii) provide the necessary financial assistance during the transition period in whichfollow-up operations were being prepared; and

(iii) continue the policy dialogue between the Government and IDA.

4. The ERC was conceived as a single tranche operation with all conditionalitiesfront-loaded. This design was influenced by the fact that budgetary support needed to bemade available rapidly in order for the Government to consolidate the gains of thedevaluation and respect its financial program.

5. The objectives of the credit were clearly defined and consistent with theGovernment's economic policy reform program. The credit's scope and timing wereappropriate and responsive to the country's circumstances and priorities. It contributed tothe Government meeting most of its financial requirements and implementing measures toensure real depreciation and improve the country's competitiveness.

PROJECT RESULTS AND SUSTAINABILITY

6. The objectives of the ERC were generally met. The results are likely to besustainable provided that the Government remains committed to the reforms introducedunder the ERC.

7. Appropriate budgetary and monetary policies contributed to the Government'ssuccess in controlling inflation. Average annualized inflation in 1994 was below theprogram goal, while the REER had depreciated by an estimated 36.3% by December 1994.This significant gain in competitiveness paved the way for a recovery in exports and aresumption of growth. GDP growth in real terms in 1994 was 2%, lower than projectedbut a net improvement over 1993 (-2.1%). Increases in producer prices for oil-qualitygroundnuts and cotton allowed rural incomes to increase by 32.5%. Devaluation of theCFA franc by 50% made it possible to simplify and reduce tariffs, giving impetus to futurereforms.

8. On the social front, a temporary subsidy of CFAF 15 billion was allocated to limitthe upward movement of prices for such products as rice, wheat flour, pharmaceuticalproducts, and books (education sector). However, the effect of the social safety net

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appears to have been weakened by the urgent nature of the program, which did not allowfor sufficient time to organize appropriate targeting mechanisms.

BANK PERFORMANCE

9. Overall Bank performance in identification, preparation, and appraisal wassatisfactory. The Bank responded appropriately to an emergency situation requiringurgent measures. However, as it was a one tranche operation with all conditionalitiesfront-loaded, supervision by the Bank following credit effectiveness was weak. In spite ofthis, negotiations on the Sixth-Year and Seventh-Year PFPs, as well as those on thePrivate Sector SECAL, gave Bank staff the opportunity to ensure that the authorities weremaintaining their reform efforts.

BORROWER PERFORMANCE

10. The Borrower's performance was satisfactory. The Borrower complied with alllegal and financial covenants including the submission of the audit report received by theBank in October 1995. The Government encouraged dialogue with those affected by thereforms by setting up a tripartite Devaluation Management Commission; it was thus ableto develop a consensus on the reform program and prevent social unrest. An open andhealthy dialogue with the Bank and the IMF was maintained and all agreed reforms wereundertaken.

SUMMARY OF OUTCOME AND FUTURE OPERATIONS

11. The outcome of the ERC is satisfactory. Following the devaluation, the programsupported by the ERC resulted in a depreciation of 36.3% of the REER, a major gain incompetitiveness that paved the way not only for Senegal's export recovery but also itsresumption of growth, which reached 2% in 1994. Higher producer prices increased ruralincome and thus contributed to poverty alleviation. The social safety net could have beenmore effectively targeted, although the measures achieved in the ERC mitigated the impactof the parity adjustment on the most vulnerable groups in the population. Finally, thedevaluation and the ensuing fiscal reform process acted as powerful stimuli for structuralreforms in Senegal.

12. The ERC, by creating a favorable environment, prepared the way for subsequentoperations. The Private Sector Adjustment and Competitiveness Credit and theAgricultural Sector Adjustment Program, approved by the Board in February and June1995 respectively, aim at increasing the competitiveness of Senegalese enterprises bypromoting real competition. An adjustment program to address administrative reforms

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and the budgetary process and improve the efficiency and the capacity of Government tocarry out policies is being considered for FY98.

LESSONS LEARNED

13. Three lessons can be drawn from implementation of the ERC:

First, Government's firm commitment to the reform program was a keyelement in the success of the operation.

Second. budgetary support in a single-tranche disbursement was asatisfactory response to an emergency situation. Because the credit was tied toadjustment measures on which the Government was firmly committed, IDA wasable to provide financial assistance when needed, thus laying the ground for thepreparation of subsequent and more comprehensive adjustment lending.

Third, as far as poverty reduction is concerned, specific mechanisms fortargeting vulnerable groups should be identified beforehand so that the impact onsuch groups can be maximized. Geographic targeting combined with establishedprograms, such as food or cash-for-work, could be considered to have a strongerimpact on the poor.

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IMPLEMENTATION COMPLETION REPORT

REPUBLIC OF SENEGAL

ECONOMIC RECOVERY CREDITCredits 2582-SE

PART I: PROJECT IMPLEMENTATION ASSESSMENT

Project Identity

Program Name: Economic Recovery Credit (ERC)Credit Number: Credit No. 2582-SEAmount: SDR 18.2 million (US$25 million equivalent)Terms: IDA Credit: Standard with 40-year maturityBorrower: The Republic of SenegalDate approved: March 17, 1994Date effective: March 24, 1994Date Closed: December 27, 1995

1. PROJECT BACKGROUND

1. In the mid- 1970s, Senegal initiated a policy of public sector expansion, following aseries of good harvests and a period of high prices for its export commodities. By the endof the same decade, however, lower phosphate prices and a decline in groundnutproduction had resulted in a general state of both domestic and external disequilibrium. Inthe 1980s, the country began to receive major bilateral and multilateral assistance insupport of various stabilization and structural adjustment plans. In particular, the WorldBank funded four structural adjustment programs and two sector adjustment operationsbetween 1981 and 1994. Weaknesses coupled with hesitations in instituting structuralreforms were to push Senegal into a serious crisis situation.

2. The structural adjustment programs financed by the Bank failed to solve theproblem of high production costs in the Senegalese economy. The recession and theproblem with competitiveness began to worsen in the mid-1980s when Senegal was notable to use a parity change to respond to two exogenous shocks: (i) deterioration of theterms of trade (-14% between 1983 and 1990); and (ii) appreciation of the French franc

against the dollar following the Plaza Agreement of September 1995. The resultingovervaluation of the CFA franc was accentuated by the devaluation introduced by certaincompeting countries (Nigeria, Ghana. etc.). Between 1981 and 1989. the real effectiveexchange rate (REER) in Senegal was to appreciate by 92% compared to Ghana, 75%compared to Nigeria, and 40% compared to China. By the end of 1993, the CFA francwas overvalued in Senegal by an estimated 40%. This massive loss of competitivenesswas to produce a falling off in exports and a structural deficit in the current accountbalance. The fact that the Government then adopted a highly protectionist trade policy andmultiplied the number of special arrangements in its efforts to mitigate the effects of sucha loss resulted in further productivity loss for domestic enterprises, and a decline incustoms revenue.

3. The overall downturn in activity led to a shrinkage of the tax base, and thus torevenue losses and new downward pressures on education and health expenditures. InAugust 1993, the Government launched a stabilization program known as the EmergencyPlan. Although it consisted of vigorous measures, such as a 15% reduction in the publicsector payroll, and a series of measures to increase revenue (in particular, increases incustoms duties and petroleum product prices), the Plan failed because of the glaringovervaluation of the CFA franc and a lack of external financial assistance. GDP growth in1993 was negative (-2.1%). The budget deficit, on a commitment basis and excludinggrants, was equivalent to -4% of GDP. Payment arrears continued accumulating: CFAF47 billion in domestic arrears and CFAF 174 billion in external arrears, giving a totalequivalent to 13.8% of GDP. The current account deficit grew to -5.6% of GDP, due tothe sharp drop in exports (-7.2%). By this point, it had become clear that nothing short ofa global adjustment strategy could bring about a sustainable recovery in growth and reducepoverty. Effective January 12, 1994, Senegal, in agreement with its partners in the franczone, realigned its currency, changing the parity of the CFA franc from 50 to 100 CFAFper FF.

II. PROJECT OBJECTIVES AND DESIGN

4. Objectives: The Economic Recovery Credit (ERC) was designed to support thereform program introduced by the Government following the devaluation of the CFA francas set out in its Statement of Economic and Social Policies adopted on February 23, 1994.This program also had the backing of an IMF stand-by arrangement, later converted intoan ESAF in August 1994 when the Bank and the IMF approved a Policy Framework Paper(PFP) covering the period 1994-97. The objectives of the ERC were: (i) to support theGovernment's reform program, and more particularly the measures aimed at minimizingthe negative social impact of the devaluation in the short tern; (ii) to provide necessaryfinancial aid for the transition period, while follow-up operations were being prepared; and(iii) to continue the policy dialogue between the Governrment and IDA.

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5. Design: The ERC formed part of the IDA strategy for creating the conditions thatwould ensure a positive post-devaluation supply response. It was intended as a quick-disbursing adjustment operation set up to provide budgetary aid at the appropriate time,and to make funding available for investment operations.

6. Benefits: The ERC was expected to help the Government in managing thetransition following the currency realignment, assisting it in maintaining macroeconomicequilibrium and meeting the immediate social needs of the post-adjustment period. Inaddition, human resources development would be accelerated by increasing access to basicservices and developing opportunities for income creation in both rural and urban areas.

7. Risks: Although there were short-term risks of urban disturbances in the shortterm in reaction to employment loss, inflation, and a decrease in the standard of living, twoimportant factors were expected to help avoid them: (i) the provision of supportingmeasures under the ERC such as a subsidy fund (social safety net) and temporary pricecontrols; and (ii) support from major opposition parties for the economic reform programas the only way out of the crisis.

III. ACHIEVEMENT OF PROJECT OBJECTIVES

8. The ERC accomplished its key objectives. Careful management of overall demandfollowing the devaluation of the currency by 50% made it possible to limit inflation and todepreciate the REER significantly. The Government undertook a series of key macro-economic and structural measures which regained and consolidated competitiveness.

A. Macroeconomic Results

9. After devaluation of the CFA franc, an appropriate budgetary and monetary policyenabled the Government to gain control of inflation and to depreciate the real effectiveexchange rate by 36.3% in 1994. Although the public sector payroll was held below theprescribed figure of CFAF 149 billion, a steeper than anticipated drop in Governmentrevenue, especially from imports, resulted in a budget deficit equivalent to 5.7% of GDPinstead of the 3.6% initially projected. The drop in revenue from imports was aconsequence of the decline in import volume, itself traceable to three factors: (i) somedisplacement of demand toward local products; (ii) accumulation of significant stocks ofmajor products in late 1993 in anticipation of the devaluation; and (iii) a shift in thestructure of imports toward less heavily taxed capital goods. Because of this revenueshrinkage, the country's external arrears could not be eliminated entirely by December1994 as anticipated. The downward trend in revenue flows was mirrored in capitalexpenditures: CFAF 100 billion instead of the CFAF 112 billion projected in the program.Credit policy was equally prudent: after the devaluation, the Central Bank raised itsdiscount rate from 10.5% to 14.5%, with a resulting increase in credit to the economy ofonly 11.2% in 1994, well below the ceiling of 24.4% projected in the program.

-3 -

10. Average annualized inflation in 1994 was 32.1%, below the program goal of 39%,while the REER had depreciated by an estimated 36.3% by December 1994. Thissignificant gain in competitiveness paved the way for a recovery in exports and aresumption of growth. Exports (current francs) showed very significant growth in sectorssuch as tourism (118.3%), fisheries (134.7%), salt, groundnut products (314.2%), andphosphoric acid. In aggregate, exports expanded by 8.1% in real terms in 1994. Inconjunction with a decline in imports, this increase in export business resulted in a currentaccount deficit of -9.3% of GDP, compared to the figure of -10.7% projected initially.There was an equallv clear resurgence in both the cement and textile sectors. GDP growthin real termns in 1994 was 2.0%. lower than projected but a net improvement over 1993(-2.1%).

11. Producer prices for oil-quality groundnuts, cotton, and rice rose by 43%, 29%, and6% respectively. While the upswing in groundnut prices produced higher earnings, theupward trend in cotton and rice prices was not strong enough to have the same impact.Rural incomes are estimated to have increased by 32.5% in 1994 compared to 1993.

12. Prior to realignment of the exchange rate, Senegal had long used second-bestsolutions to offset the appreciation of the CFA franc, and in particular instruments such asexport subsidies and very high import tariff barriers. This was a situation conducive to theproliferation of economic rents, faulty resource allocation, and increased tax evasion.Devaluation of the CFA franc by 50% made it possible to reduce tariffs, which in turnpreserved the depreciation in the REER. Customs duties were thus lowered from a pre-reform bracket of 6%-124% to one of 5%-45%. Standard values and minimum chargeswere eliminated. The number of product categories was reduced from seven to four, andthe customs stamp duty was made uniform. Export subsidies were eliminated. Indirecttaxes were also recast for greater simplicity and lower rates: there are now two instead offive VAT rates; and the new rates are in the 10%-20% range instead of the pre-reformbracket of 7%-34%.

B. Social Safety Net

13. In order to provide against the short-term adverse impact of the devaluation on themost vulnerable groups, a temporary subsidy of CFAF 15 billion was appropriated for usein limiting the upward movement of prices for such products as rice, wheat flour,pharmaceutical products, and books (education sector). Subsidy funds were allocated asfollows: rice prices, CFAF 8 billion; wheat prices, CFAF 2.5 billion; pharmaceuticalprices, CFAF 2.5 billion; and education, CFAF 2 billion. The effect of the social safetynet appears to have been less significant, doubtless because the subsidy arrangements weretoo loosely targeted. Given the urgent nature of the program, there was not enough time toorganize appropriate targeting mechanisms, so that the potential impact on the poorestgroups was diluted. A report on the standard of living survey conducted in Senegal priorto the devaluation estimated that it was 14 times more expensive to alleviate povertythrough a non-targeted approach than through an accurately targeted system. In the

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specific case of the book subsidy. its purpose was defeated when France negotiateddirectly with publishers to keep their CFAF prices for textbooks unchanged. The proceedsof this component of the subsidy were used to ensure payment of the scholarships ofSenegalese students abroad instead.

14. The Government emphasized that it was committed to maintaining expenditures onhuman resources development, the quality of which is considered the best long-termguarantee of growth. Education expenditures in fact rose by 12% in 1994. Priority wasgiven to primary schooling, which absorbed 79.3% of investment spending. Expenditureson health rose by 0.5% in real terms, with the primary health care system absorbing 51%of investment spending in the sector as a whole. In conjunction with the realignment ofthe exchange parity in January 1994, the Government also exempted both social servicesand essential commodities from the VAT.

C. Continuation of Dialogue between Senegal and the Bank

15. Following the devaluation of the CFA franc, a major obstacle to reform wasremoved. The new climate created by the devaluation enabled the Bank to join forces withSenegal to prepare two major adjustment programs to follow up on the ERC, namely, thePrivate Sector Adjustment and Competitiveness Credit (Cr. 2681-SE) and the AgriculturalSector Adjustment Program (Cr. 2738-SE), both approved by the Board in FY95.Senegal's estimated financing needs following the devaluation totaled CFAF 597 billion.However, before the necessary structural reforms could be put into effect, appropriatesteps were needed to secure the success of the devaluation, and it was in this spirit that theERC was designed.

IV. MAJOR FACTORS AFFECTING THE PROJECT

16. The program benefited from high international prices for Senegal's main exportcommodities, namely groundnuts, cotton, and phosphoric acid. Major assistance was alsoprovided by both bilateral and multilateral donors, enabling the Government to cover itssubstantial financing needs.

17. The Government's willingness to engage in dialogue, and its commitment toreform, were determining factors in the overall success of the program. By establishing atripartite Devaluation Management Commission, it was able to develop a consensus insupport of sometimes painful reform measures.

18. The program was implemented through the Ministry of Finance, which possessedthe ability to provide the kind of post-devaluation management required, thanks mainly tothe Options Group set up in October 1992 and supported by an Institutional DevelopmentFund Grant from the Bank.

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V. SUSTAINABILITY OF RESULTS

19. The main results of the ERC are likely to prove durable for four reasons: (i) thetrade policy distortions that previously undermined the competitiveness of Senegal'senterprises were made superfluous by the marked depreciation of the REER; (ii) unlikedeflationary internal adjustment, competitive devaluation generates the kind of growth thatattracts further support; (iii) quite apart from the Government's commitment, major civilgroups, the independent press, and both management and labor associations are in favor ofcontinuing the reform process; and (iv) the adjustment programs prepared by the Bank asfollow-up operations to the ERC should help remove obstacles to strong growth, therebyencouraging the partisans of reform. However, these results are subject to Government'scontinuous commitment to the reform program. Moreover, it should pay attention toadministrative reforms in customs in order to consolidate revenue mobilization.

VI. PERFORMANCE OF THE BANK

20. The Bank's performance was satisfactory during each phase of the program exceptfor supervision. Credit processing was completed in less than three months. The Bankproved itself flexible here, in view of the difficulties it had encountered with previousadjustment lending in Senegal. The emergency nature of the operation explains theBank's flexibility in the a--a of disbursement procedures, which were eased to allow quickrelease of credit funds. The Bank's initial appraisal of Senegal's commitment, and of thebenefits and risks associated with the operation, was carried out correctly. However, as itwas a single tranche operation with all conditionalities front-loaded, follow-up by theBank was weak. In spite of this, negotiations on the Sixth-Year and Seventh-Year PFPs,as well as those on the Private Sector SECAL, gave Bank staff the opportunity to verifythat the authorities were maintaining their reform efforts.

VII. PERFORMANCE OF THE BORROWER

A. Preparation and Implementation

21. Overall, Government's performance was satisfactory. The key objectives of theprogram were accomplished, in particular depreciation of the REER by 36.3%. TheGovernment also encouraged dialogue on the reform program. A committee comprisingrepresentatives of the Government, the private sector, and unions was created to discussthe main issues regarding the post-devaluation reform program. This dialogue was very

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successful in avoiding major social conflicts. However, program implementation wascompromised by disappointing results in restoring revenue flows. Total revenue amountedto CFAF 301.5 billion in 1994 compared to CFAF 395 billion projected in the program.

B. Disbursement and Procurement

22. The proceeds of the Credit were used to reimburse 100% of the foreign exchangecost of eligible general imports. Procurement by public agencies and the private sector ofimports valued at over US$5 million was by simplified international competitive bidding.In the case of contracts below this threshold but over US$5,000, public sector agenciesfollowed standard government practices found acceptable by IDA in the past. In order topermit rapid access to credit funds, no limits were placed on imports of oil or foodstuffs.In the same vein, the cut-off date for retroactive financing was August 15, 1993,sufficiently far back to ensure immediate utilization of the funds. A Special Account wasopened with the Central Bank to facilitate disbursements, and the initial deposit wasrecovered with the release of the first tranche.

C. Audits

23. In October 1995, Government delivered the audit of the credit accounts. A singleaudit was carried out for both credits since the second and last disbursement was made inJanuary 1995, and there were no further developments. The audit was carried out inaccordance with accepted current practice in the profession. However, the Bank expressedthe wish to see subsequent audits conducted according to standards of the InternationalFederation of Accountants.

VIII. ASSESSMENT OF OUTCOME

24. The outcome of the ERC is satisfactory. Following the devaluation, the programsupported by the ERC resulted in a depreciation of 36.3% in the REER, a major gain incompetitiveness that paved the way not only for Senegal's export recovery but also itsresumption of growth, which reached 2% in 1994. The higher producer prices increasedrural incomes and thus contributed to poverty alleviation. The social safety net institutedcould have been more effectively targeted; in spite of that, the measures achieved in theERC managed to mitigate the impact of the parity adjustment on the most vulnerablegroups in the population. Finally, the devaluation and the ensuing fiscal reform processacted as powerful stimuli for structural reformns in Senegal.

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IX. FUTURE OPERATIONS

25. The ERC represents the first generation of post-devaluation measures. It hascreated a favorable environment for the introduction of second-generation measures. Thelatter consist of a structural adjustment and a sector adjustment program, whose objectivesare to increase the competitiveness of Senegalese enterprises by promoting realcompetition. The Private Sector Adjustment and Competitiveness Credit (Cr. 2681-SE),the first of these operations, which was approved by the Board in February 1995, aims toliberalize external trade, eliminate monopolies, reduce factor costs, and reform the labormarket in the interest of greater flexibility.

26. The Agricultural Sector Adjustment Program (Cr. 2738-SE), the second of theseoperations, which was approved by the Board in June 1995, is designed to bring aboutreformis in the agricultural product exports system, liberalization of the rice subsector, andeventual privatization of the production and marketing of products still handled by publicsector agencies.

27. An adjustment program addressing administrative reform and the budgetaryprocess is planned for FY98.

X. KEY LESSONS LEARNED

28. There are three main lessons to be drawn from the implementation of the ERC:

First, Government's firm commitment to the reform program was a keyelement in the success of the operation.

Second, budgetary support in a single-tranche disbursement was asatisfactory response to an emergency situation. Because the credit was tied toadjustment measures on which the Government was firmly committed, IDA wasable to provide financial assistance when needed, thus laying the ground for thepreparation of subsequent and more comprehensive adjustment lending.

Third, as far as poverty reduction is concerned, specific mechanisms fortargeting vulnerable groups should be identified beforehand so that the impact onsuch groups can be maximized. Geographic targeting combined with establishedprograms, such as food or cash-for-work, could be considered to have a strongerimpact on the poor.

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PART II: STATISTICAL ANNEX

Table 1: Summary Evaluation

A. Achievement of Objectives Total Partial Negligible Not applicable

Macroeconomic policvSector policyFinancial sectorInstitutional developmentEconomic activitiesPoverty reduction _

Gender issues i

Other social goals _

EnvironmentPublic sector V

Private sector development __

B. Project Sustainability Likely Unlikely Uncertain

C. Bank Performance Highly Satisfactory Deficientsatisfactory

IdentificationPreparationAppraisal

Supervision ____i

D. Performance of Government Highly Satisfactory Deficientof Senegal satisfactoryPreparation _

ImplementationCovenant complianceOperation i

E. Assessment of Outcome Highly Satisfactory Unsatis- Highlysatisfactory factory unsatisfactory

-9

Table 2: Project Timetable

STEPS Projected date Effective dateIdentification January 15-26, 1994Preparation January 15-26, 1994Appraisal January 15-26, 1994Negotiations February 28, 1994Development Policy Letter _ February 23, 1994Approval by the Board March 17, 1994Signature March 18, 1994STEPS Projected date Effective dateEffectiveness March 24, 1994Disbursement, Tranche I March 29, 1994Project Completion December 30, 1995Closing of Credit June 30, 1995 December 27, 1995

Table 3: Credit Disbursements: Cumulative Estimated and Actual (US$10 )

|_______________________ |Cr. 2582-SE Supplement (Cr. 2582-1-SE)Appraisal estimate 25 3.2Actual 25 3.2Actual as % of estimate 100 100Date of final disbursement March 29, 1994 January 13, 1995

Table 4: Social Safety Net (CFAF billions)

__________________________ Estimated 1994 Actual 1994Rice 8.0 8.5Wheat 2.5 2.0Health 2.5 2.1Education 2.0 2.0Total 15.0 14.6

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Table 5: Matrix of Policy and Structural Measures

MEASURES TIMETABLE REMARKS

1. MACROECONOMIC MEASURES

Realignment of exchange parity. Set at CFAF 100 = FF I. Jan. 12, 1994 Implemented.

11. GOVERNMENT FINANCES

Increase in civil service salaries, returning them to their 1993 Retroactive to Implemented.

level. Jan. 1, 1994

Ceiling of 10% on salary increases. After March 31, Implemented.1994

Ceiling of CFAF 149 billion on civil service payroll. 1994 Implemented.

Containment of number of civil servants at 67,100, therefore 1994 Achieved: 'I'he number of civil servants was exactly

net recruitment of 0. 66,696 as of December 31, 1994. In view ofSenegal's agreements with its development partners,only 40% of those leaving civil service employmentwere rep!aced.

Settlement of external payment arrears (CFAF 174.2 billion). End 1994 Not achieved because of a new accumulation ofarrears. As of December 31, 1994, a total of CFAF45.5 billion remained unpaid, for the followingreasons: reduced public revenue flows; and reducedexternal financing.

Reduction of domestic payment arrears by at least CFAF 32 End 1994 Implemented.

billion.

Increase of CFAF 1 12 billion in central Government capital 1994 Not fully achieved. Final total of investment

spending. expenditure was CFAF 100.2 billion.

Adoption of a revised three-year public investment program 1994 Implemented. The revised PTIP was passed by the

(1994-1996). National Assembly on August 5, 1994.

111. MONETARY AND FINANCIAL POLICYMEASURES

Increase in Central Bantk discount rate, from 10.5% to 14.5%o Jan. 18, 1994 Implemented.

Recapitalization of CNCAS (Agricultural Credit Banik) 1994 Not implemented. the Governmient paid CFAF 600million of its capital subscriptioni arrears.

IV. CUSTOMS TARIFFS AND OTHER CHARGES

Simplificationiofltarifllstructure: reductionofceilingrateto Feb. 15,1994 Implemented.45% and threshold rate to 10%; fixing of stamp duty at 5%.

Flimination of all exemptions except in cases of projects and Feb. 15,1994 Implemented.diplomatic privilege.

Replacement of system of rive VAr rates (0%, 7%. 15%, 20% Feb. 15, 1994 Implemented.& 30%) on non-petroleum products with system of three rates

) (0%,1 0% & 20%).

Extension of VAT to transportation of'certain products (rice, Feb. 15.1994 Implemented.petroleum products, cement).

Replacement of three-rate petroleum product tarift'(0%, 25% Feb. 15,1994 Implemented& 45%) with two-rate tariff (25% & 35%); and replacement offour-rate VAT system (0%. 7%. 20% & 34%) by a single rate(20%).

V. PRICING MEASURES

Increases in producer prices (cotton, 30%°o; groundnuts, 43%; Jan. 18, 1994 Implemented.rice, 6%).

Increases in consumer prices (rice, 33%; flour. 30%; vegetable Jan. 22, 1994 Implemented.oil, 23%; groundnut oil, 24%; sugar. 30%; utility services, 22-30%).

Increases in petroleum product prices (20-30%). Jan. 22, 1994 Implemented.

VI. REFORMS IN PARASTATAL SECTOR

Completion of: SENELEC financial audlit: and study on June 30. 1994 Partial implementation. The SENELEC audit %%as

strategies I-or restructuring of SoNEES. completed in 1995. The SoNEES institutionial study

%%as completed by Junc 30. 1994, and itsrecomm11enidations acted upon: agreceniel1t has beenreached on the Third Water SuppIl Project; thepropert) holding corporationi is already in operation:and the maniagement corporation began operations inFebruarN 1996

Finalizationi of the strategy for SONACOS privatization, End 1994 Not achie'.d. althotigh the process is now well under

way, calls for tenders having been issued in November1995.

Restructuring of CPSP in order to reduce its overheads. End 1994 Not implemented. In the end, this restructuringbecame a component of the Agricultural SectorAdjustment Program. Draft legislation on thedismanitlinig ofCPSP was debated in the NationalAssembly in Deceiliber 1995.

VI]. PROMOTION OF PRIVATE SECTOR

Identilicationi of major regulatory obstacles hindering March 31. 1994 Implemiienited. This became the proceedings ofla

competitioni and blocking increased production (monopolies, seminiar in which the participants were thIe DiscIssion

regulatory instruments). Ciroup on Competitiveness and (Growtlh andrepresentatives of the private and (iovernment sectors.

Vill. SOCIALSULPPORT MEASULRES

Budget appropriation o' Cl'AF 15 billion for establishlimicnt ol' 1994 Implemented partially. Fxpcnditures associated with

social safcty net arrangements. incluiding temporary the social safct) net totaled CFAI: 14.6 hillion.

subsidi/ationl of consuimer prices (rice, CFAF 8 billion: whcat, distributed as iollows: rice. CFAF 8 billion: wvheat,

('AI' hillion basic phiarnmaccutical products. CFAI: 2 Cl:A 1.8 hillion: health. CFAI: 2.1 billion; anid

billion: schoollig costS. CT'AI' 2 billion -with a vie%% to education. ('AF 2 billion.increasinig the enirol[lmenilt rate), anid iifianicing ot'activitiesimplemlntied a i; thc social serv ices dik ision o' AGETIIP.

Accelerationi ol thc schiool construction program and inclusion 1994 Not implemelted.of 'an1 additionial 30(t primiiary-school classrooms. Recruiteniltanid traininiig of the necessary personiniel.

PART III: BORROWER EVALUATION

Republic of Senegal

MINISTRY OF ECONOMY,FINANCE AND PLANNING

Economic Policy ProgramsMonitoring Committee

IMPLEMENTATION COMPLETION REPORT

REPUBLIC OF SENEGAL

ECONOMIC RECOVERY PROJECT(IDA CREDIT NO. 2582-1-SE)

April 1996

INTRODUCTION

The devaluation of the CFA franc in January 1994 was accompanied by thelaunching of a comprehensive adjustment program whose main objectives were to:

(i) achieve an annual economic growth rate of the order of 5% from 1995onward,

(ii) raise the investment/GDP ratio,

(iii) achieve a primary government budget surplus. beginning in 1997;

(iv) improve and strengthen the external competitiveness of the Senegaleseeconomy through structural and regulatory reforms;

(v) reduce the inflation rate to its pre-devaluation level following the sharp risethat accompanied monetary realignment;

(vi) step up poxerty alleviation and human resources development efforts.

In support of this comprehensive adjustment program of the Government.the World Bank granted Senegal an Economic Recovery Credit (ERC) in the amount ofSDR 18.2 million on IDA conditions. In this way, Senegal was able to mobilize resourcesof CFAF 16.3 billion between March 30, 1994 and January 25. 1995.

I. ECONOMIC POLICY OBJECTIVES AND MEASURES

The essential purposes of the ERC were of two kinds:

(i) to minimize the negative social impact of the devaluation in the short term;

(ii) to provide the Government with the necessary financial assistance duringthe transition period of preparation of the change in parity follow-upmeasures.

The economic policy measures to be applied under the ERC for 1994concerned prices, social aspects of adjustment, public finances, monetary policy andstructural reforms.

1.1 Price Policy

Concerning prices, the Government continued its liberalization policy andundertook not to institute any new price control or approval system.

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Oil product prices were revised to reflect world price trends and levelsfollowing devaluation, taking into account also the overhaul of the fiscal and parafiscalduties to which they continue to be liable. These measures enabled the authorities tocontain the rise in oil prices within a range of 20-30%.

Water, electricity and telecommunications prices were raised by 22-30% toreflect the rise in costs.

In the agriculture sector, producer prices had risen 43% in the case ofgroundnuts and 30% in that of cotton. The prices of staples such as sugar, wheat flour,rice, and edible oils increased by between 23 and 33%. These relatively moderate priceincreases were made possible by budget subsidies, tax receipts waivers by theGovernment. and increased support by external partners. The cost of this price risecontainment policy is estimated at CFAF 45.5 billion, of which 70% was borne by theGovernment, 22% by the external donors, and 8% by private enterprise.

With the aim of diminishing the social costs of devaluation, theGovernment, with the support of the donors, set up a social safety net, in the amount ofCFAF 15 billion, designed to limit the rise in the prices of staples and pharmaceuticalproducts and sustain education expenditures.

This package of measures succeeded in holding induced inflation to 32.1%,i.e., below the target of 39%.

For 1995, other price liberalization measures were taken. They relate to theprices of rice, sugar, wheat flour, tomato concentrate, cement, imported or local edibleoils, and fresh tomatoes. The average rate of change in the general price index fell from32.1% in 1994 to 6% in 1995.

1.2 Budget and Fiscal Policy

With respect to public finances, the authorities' action was characterized byoverhaul of the tax system and the pursuit of a stringent expenditure policy withoutneglecting the "priority" sectors (education, health and community services).

The devaluation on the one hand and the entry into force of UEMOA on theother called for appropriate adaptation of the tax system.

This reform had four objectives:

(i) to simplify the tax system and its application;

(ii) to lower duties across the board;

(iii) to widen the tax base;

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(iv) to provide production with reasonable effective protection through tariffmeasures.

The simplification of the tax system included a reduction in the number ofproduct categories from seven to four:

- goods belonging to the social domain;

- capital goods and intermediate products for industry;

- manufactured goods that compete with domestic products;

all products not falling in the above three categories, including luxuryproducts, which are liable to a surcharge of 20%.

This product classification revision was accompanied by revision of theimport duty rates grid. The number of rates was reduced from four to three, with abolitionof the 50% special duty. Those remaining in effect are the lower rate (10%), the regularrate (20%) and the higher rate (30%). The two customs stamp rates in force prior to thereform (12% and 6%) were replaced by a single rate of 5%.

In line with the Government's strategy decisions, a system of overallpreferential taxation is now applied to capital goods imports, while exports are no longertaxed.

In order to promote competition, the Government has abandoned twoinstruments of protection and mobilization of incremental receipts: the minimum liabilityand market value systems.

Domestic taxation has also been overhauled. The number of VAT rateswas reduced from five to two by eliminating the intermediate rate (15%), the higher rate(30%) and the special ra.c (84%). Only the regular rate (20%) and the lower rate (10%)have been retained.

The special duties on cola, tobacco, and alcohol products were set at 30%,while that on cement (2.5%) was abolished.

To replace the nontariff protection measures, the taxation differentialbetween raw materials used by domestic industries and imported products that competewith those of the vulnerable branches was raised from 20 to 30 points.

On the expenditure side, despite the relatively high devaluation rate andexpected inflation rate, overall expenditure grew by 28.6% in 1994, equivalent to less than15% after taking into account public debt interest payments. In the priority sectors,

- 21 -

however, expenditure allocations increased by 18.7% in the case of education, 30.3% inhealth and 21.7% in community and social services.

Other specific measures were taken, addressed to the Government'sfinancial operations:

- Containment of civil service staff at 67,100. This goal was achieved: atDecember 31. 1994 staff totaled only 66,696. A stringent recruitmentpolicy enabled the authorities to hold staffing below the program limit.

- Settlement of outstanding external arrears (CFAF 45.5 billion) anddomestic arrears (CFAF 14.9 billion) in 1995.

- An increase in investment expenditure to CFAF 112 billion in 1994.Owing to financial constraints, this reached only CFAF 100 billion, withpriority going to the productive and social sectors.

- Adoption of a Three-Year Public Investment program (PTIP) in August1994.

1.3 Monetary and Credit Policy

Senegal's monetary policy, like that of the other member countries of theUEMOA, was one of stringency in view of the need to combat inflation. The measuresnecessitated by the devaluation also coincided with the entry into effect of the newmonetary management system adopted in October 1993. This system has the advantagethat it favors market rules over administrative regulation.

In view of the favorable outlook in the anti-inflation effort, beginning in1994, the discount rate was reduced from the 14.5% set in January to 9% in December ofthat year.

Overall, Senegal's negative net external position improved by CFAF 50billion in 1994, against a deterioration of CFAF 31 billion in 1993.

There was an improvement also in the liquidity of the banking system,which was able to acquire Governnent-issued securities in the amount of CFAF 18.3billion while reducing its recourse to central Bank refinancing.

Restructuring of the National Agricultural Bank (Caisse Nationale deCredit Agricole du Sjnegal--CNCAS) took place. The Government took over CNCAS'sdoubtful debts, amounting to CFAF 8.2 billion, comprising CFAF 3.6 billion in loans tosmall farmers and CFAF 4.6 billion in credit to the defunct Fund for Price Equalizationand Stabilization (Caisse de Perequation et de Stabilisation des Prix--CPSP). The resultwas to clean up CNCAS's balance sheet and strengthen its equity position.

- 22 -

1.4 Structural Policies

The structural reforms instituted in support of the devaluation weredesigned to promote the development of private enterprise. They comprised two specificprograms: the Private Sector Adjustment and Competitiveness Project (Projetd'Ajustement Structurel et de Compjtitivite--PASCO) and the Agricultural SectorAdjustment Program (Programme d'Ajustement Sectoriel pour l'Agriculture--PASA).

PASA implements the objectives of the Agricultural Development PolicyStatement (ADPS), which fall into four categories:

- to strengthen agricultural research;

- to develop an appropriate incentives system in order to promote privateinvestment;

- to implement the Master Plan for Integrated Development of the Left Bankof the Senegal River (Plan Directeur de Developpement Integre de la RiveGauche (PDRG) du Fleuve Senegal);

- to diversify agricultural production with a view to export development.

PASCO, whose purpose is to foster healthy competition among enterprises,is concerned with the liberalization and promotion of domestic and external trade.

With the aim of progressively placing all enterprises on an equal footing, sofar as possible, in terms of competition, the Government has: (i) terminated a number ofspecial agreements and protocols; and (ii) revised those remaining in effect in order toeliminate all protection through prior import authorization and progressively abolish thetax and other advantages deriving from these agreements and protocols.

Enterprises that still need it have, however, been given offered temporarytariff protection phased out over three years. Only two enterprises (ICS and SODEFITEX)continue to enjoy the benefits. The evolving enterprises in the tomato concentrate andpolypropylene bags subsectors receive temporary protection phased out over three years.

Freedom of operation has been extended to some 30 economic activities.Only those with possible repercussions on public health and public safety continue torequire prior authorization.

In the area of investment promotion, laws have been enacted which: (i)reduce company formation costs; (ii) permit revaluation of company balance sheets; and(iii) allow the Governrment to sell lands for industrial and commercial use to enterprises.

- 23 -

The free trade zones and points and the customs conditional relief systems have been (orwill be) reviewed with the aim of rationalizing investment incentive policies.

With the object of strengthening the competitiveness of private enterprises,the labor market has been made more flexible through two measures: abolition of themonopoly of the Port Labor Office (Burealu de li .M1ain d'Oeuvre Portuaire--BMOP), andauthorization of enterprises to adapt their workforces to their business volume. Inaddition, measures designed to reduce sea freight and technical production factor costshave been taken (restructuring of the water company, SONEES) or are under way (theelectric power company, SENELEC).

In the case of water, institutional reforms have been implemented.SONEES has been broken up into three entities: (i) an assets management company, whichmanages infrastructure plant (SONES); (ii) a management and operations company,Senegalese Water (Senegalaise des Eaux), and (iii) a National Sanitation Office (OfficeNational d Assainissement--OVA).

In the energy sector, SENELEC has been authorized to procure fuel oil onthe international market, and a study was started in March 1995 on restructuring of thecompany and reduction of its costs.

As part of general parapublic sector reform, the Fund for Price Equalizationand Stabilization (CPSP) has been restructured; the final phase, i.e., its liquidation, wasstarted on March 1 last.

The Private Sector Capacity Building Project (Projet de Renforcement desCapacites du Secteur Prive') is designed to improve the legal and regulatory framework forprivate enterprise development and to strengthen local expertise in the private enterprisefield.

The instruments of this policy are the Private Sector Foundation (Fondationdu Secteur Prive--FSP), the Competitiveness Review Group (Groupe de REflexion sur laCompetitivite et la Croissance--GRCC) and the Legal Reform Committee (Comite deReforme Juridique--CRJ).

The purpose of the FSP is to develop in-house expertise. The CRJ's task isto prepare reforms designed to: (;) provide private enterprise with a secure basis in itsrelations with the public authorities; (ii) set up a commercial register; (iii) reform the lawand the legal professions with respect to enterprises in difficulty; (iv) support the nationalcommission responsible fb. harmonizing and codifying civil law; (v) support the setting upof an arbitration center; (vi) create a new legislative framework for microenterprises; and(vii) promote the law. The GRCC represents a new experiment, furnishing a frameworkfor consultation and agreement between the Government and the private sector concerningeconomic conduct arid reform.

- 24 -

The implementation of these various measures made it possible to achievethe basic objectives of the Economic Recovery Support Project.

The design and implementation of a price policy reconciling true costpricing with cushioning of the social costs of devaluation, of an appropriate budget and taxpolicy, and of a sound monetary policy, together with a policy of appropriate structuralreforms, allowed the authorities to hold the inflation rate below the targets for both 1994(32.1%, against a target of 39%) and 1995 (6%. against 8%). The funds mobilized underthe social safety net, amounting to CFAF 14.6 billion in 1994 and CFAF 14 billion in1995, also helped to cushion the adverse effects of devaluation on the daily life of thepeople. These funds made it possible to limit the rise in the prices of the major staples(rice and wheat flour) and pharnaceutical products and provide support for education.

Overall, the Government has financed price increase containment at a costof CFAF 32.0 billion. The donors contributed CFAF 10 billion and private enterpriseCFAF 3.5 billion.

The second major objective of the Economic Recovery Credit, to providethe Government with financial assistance enabling it to manage the transition period, wasalso achieved. The stresses inherent in the devaluation operation were held in check,allowing the participants in the socioeconomic process to join together in preparing thenecessary structural reforms for recovery of the economy (PASCO, PASA).

II. MAJOR FACTORS IN SMOOTH IMPLEMENTATION OF THEPROJECT

- Favorable environment; disruption due to the devaluation.

- Good project preparation, thanks to the joint (Government/World Bank)mission.

- Soundly-targeted conditionalities.

- Rapid and regular disbursement.

III. PROJECT IMPLEMENTATION EXPERIENCE

The project was designed to provide needed support for the January 1994devaluation of the CFA franc. It accordingly formed a natural and integral part of theprocess of formulating and implementing policies designed to reap the maximumadvantage from the change in parity.

- 25 -

Project design was also assisted by the experience gained in designing thestructural adjustment and sectoral programs set up prior to the devaluation.

As a result, a consensus was rapidly obtained on the short-, medium-, andlong-term macroeconomic and sectoral policies to be implemented in the post-devaluationenvironment.

The fact that the basic decision had already been taken facilitatednegotiation of the conditionalities to be applied in monitoring project execution.

IV. WORLD BANK AND SENEGALESE GOVERNMENT PERFORMANCE

The World Bank acted with diligence and efficiency in project preparationand appraisal. The scheduled disbursements were made on time.

The Government complied fully with the spirit of the measures. Evenmore, it placed special emphasis on the sustainability of the activities implemented. Themacroeconomic and sectoral objectives and policies were accordingly reaffirmed in theEconomic and Financial Policy Framework Paper adopted in 1994 and updated in 1995and in the sectoral policy letters relating to the projects negotiated with the Bank in 1994and 1995.

V. PROJECT IMPLEMENTATION LESSONS

The existence of a large number of conditionalities does not in itself sufficeto guarantee the success of a project.

A joint approach to and perception of both problems and objectives is a keyfactor.

The main new feature in the project identification and implementationprocesses is the priority given to early execution of the basic project measures anddisbursement of the accompanying budgetary assistance.

This procedure prevailed to some degree in the implementation of PASCOand PASA, with strengthening and prior execution of the measures prescribed as criteriafor disbursement of the initial tranches of the associated budgetary assistance.

All of the activities adopted as performance criteria are fully in line with themain objectives of the projects negotiated in 1994 and 1995.

This approach offers certain advantages, including in particular bettercontrol of the critical interval between identification of the project and implementation of

- 26 -

the most decisive measures. On the other hand, it shifts the burden of immediateunderpinning of the macroeconomic and social stability necessary to its implementation tothe other donors.

- 27 -

SATICALANNEX

Table I

SENEGAL: MAJOR ECONOMIC AND SOCIAL INDICATORS

Estimates Projections1990 1991 1992 1993 1994 1995 1996

Economic Indicators(% annual change unless otherwise indicated)Real GDP 4.5 1.2 2.9 -2.1 2.0 4.5 4.5Real per cap. consumption 0.3 -2.5 1.4 0.2 -5.0 -2.0 0.0G&NFS exports -1.2 2.4 5.3 -4.0 112.0 7.0 8.0G&NFS imports -2.0 0.4 10.3 - 1.0 85.0 6.0 5.0Ext. current account., excl. grants (% of GDP) -8.1 -8.9 -9.6 -10.2 -9.2 -7.8 -6.5Consumer Price Index 0.3 -1.8 0.0 -0.6 32.1 6.0 2.7

National Accounts

GDP at constant prices (CFAF billion) (1) 1511.8 1529.9 1552.4 1497.2 1526.7 1594.7 1666.3GDP at current prices (CFAF billion) 1589.5 1629.0 1661.4 1586.6 2155.1 2426.6 2603.7Gross Domestic Investment (% of GDP) 13.3 13.7 13.4 13.8 14.7 15.0 15.5Private investment/GDP (%) 8.6 9.0 9.3 9.0 10.0 10.0 11.0Gross Domestic Savings/GDP (%) 8.6 8.8 7.2 6.2 8.3 11.0 12.8

External Debt

Outstanding debt (US$ million) (2) 3737.0 3522.0 3529.0 3543.0 3456.0 3480.0 3520.0Debt service (US$ million) 422.0 312.0 199.0 300.0 300.0 300.0 300.0Outstanding debt/GDP (%) 66.4 63.1 60.0 62.5 80.2 71.7 67.6Debt service/G&S exports + private transfers(%) 30.8 25.3 22.3 22.7 19.4 18.1 17.0

Fiscal Indicators

Central government receipts, incl. grants 20.8 20.1 18.9 17.0 18.0 18.1 16.8Central government expenditure 18.8 19.9 21.3 20.0 20.0 18.3 17.5Current expenditure 14.8 14.3 17.0 16.0 15.0 13.0 13.0Capital expenditure 2.8 4.4 5.0 4.0 5.0 5.0 5.0

Population Growth 3.0 3.1 2.9 2.9 2.9 2.9 2.9

Source: DPS, DDI, 1996-98 Economic and Financial Program.

(I) At 1987 prices.(2) Direct government debt and government-guaranteed debt, including IMF credits and Central Bank commitments.

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Table 2

St'NEGAL: BALANCE OF PAYMENTS(CFAF billion)

1991 1992 1993 1994 1995 1996Trade Balance -87.8 -96.5 -107.5 -129.3 -127.0 -127.6

Exports, f.o.b. 226.5 219.0 200.2 440.7 484.1 514.9Imports, f.o.b. 314.3 315.4 307.7 570.0 611.1 642.5

Services (net) -61.7 -57.2 -61.5 -81.3 -78.2 -70.1Credit 164.3 163.1 149.0 316.3 335.2 353.3Debit 226.1 220.2 210.5 397.6 413.4 423.4

Non-Counterpart Transfers (net) 93.1 95.8 89.9 213.4 203.9 163.4Private (net) 3.8 6.9 10.3 29.0 28.4 27.5Public (net) 89.3 88.9 79.6 184.4 175.5 135.9

Current Account Balance -56.4 -57.9 -79.1 2.8 -1.3 -34.3Capital Account Balance 21.2 32.4 0.9 70.6 33.0 48.9

Public capital (net) 26.3 45.3 19.0 35.0 40.8 23.3Private capital (net) -5.1 -12.9 -18.1 35.6 -7.8 25.6

Change in Arrears 5.5 32.2 37.3 -128.7 -45.5Net Errors and Omissions 1.1 -4.4 3.6Overall Balance Before Rescheduling -28.6 2.3 -37.3 -55.3 -13.8 14.6Debt Rescheduling + Exceptional Financing 42.9 12.5 8.1 188.9 72.0 21.8Overall Balance After Rescheduling Financing 14.3 14.8 -29.2 133.6 58.2 36.4BCEAO (net) -14.3 -14.8 29.2 -133.6 -58.2 -36.4Net Operating Account and IMF -9.8 -3.2 31.8 133.6 58.2 -37.4Resources Utilization -4.5 -11.6 -2.6 0.0 0.1 1.0

Sources: DPS, 1996-98 Economic and Financial Program.

Note: For 1994 and 1995, net errors and omissions included in net private capital.

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Table 3

SENEGAL: GOVERNMENT FINANCIAL OPERATIONS(CFAF billion)

1993 1994 1995 1996Total Receipts + Grants 272.6 385.6 439.7 437.5

Of which:Fiscal receipts 220.2 267.8 330.4 364.4Grants 16.7 84.1 73.5 35.0

Total Expenditures 319.8 424.8 444.4 454.5

Current expenditures 249.5 318.6 316.3 326.9Capital expenditures 64.9 100.2 117.7 127.6

Overall Balance (commitments basis) -47.2 -39.2 -4.7 -17.0Adjustments, cash basis 44.4 -160.8 -60.4 0.0Of which, change in arrears 49.3 -160.8 -60.4 --

Overall Balance (cash basis) -2.8 -200.0 -65.1 -17.0

Financing 2.8 200.0 65.1 17.0

External Financing 8.6 186.7 83.6 25.9

Drawdown 40.1 80.9 81.7 66.0Amortization -41.4 -83.1 -70.1 68.5Debt rescheduling + moratorium+ cancellations + deferrals 9.9 188.9 72.0 21.8

Domestic Financing -5.8 13.1 -17.2 -18.9

Banking system -23.9 1.0 -14.1 -8.8Other 18.1 12.1 -3.1 -10.1

Net Errors and Omissions 0.0 0.2 1.3 0.0

Memo: Current Operations Balance 2.7 31.1 83.0 80.6

Sources: DPS, 1996-98 Economic and F;nancial Program.

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MAP SECTION

Former r - \- 1 ~~~~~~~~~~~I6' 1 5 I 4- 1 3 1 2Spsnl5h; rX ~ALGERIA

b2Lj F>K ALGERIA M A U R I T A N I AMAJRrINIA " ~j..Pdor,.SENEGAL

0 SELECTED CITIES AND TOWNS

Du,> ,, M A ' | ~ ORdD9agna RHae 0 (3 REGION CAPITALSTHIse \,:t \_----. t' NIGER Toil Lao NATIONAL CAPITAL

G ' j UNA' REGION BOUNDARIES.5u E\9 ,s g N ° ( G y- - INTERNATIONAL BOUNDARIES

2 ' '8~~OlrvIREv 1t Saint-4 Galoyao 16'-

Louis MpolO ThIo,gneo0Ndi&6b6eO Gondiol Lagbar

LougOa lNioma,e oMbeuleukh6 Matomo0

Sogui

0 Kebemer ODora 0 Lingure RanerouO /Me1,Sge Dorou

IS' 0PirGourey Moustl V6Iingora

Tivaouaneo oNdindi oTicM Fet BoeO0 B. k'

Pikine O Thies OTouba 0ossone

0 0 Sebikhoutone oBambey 0Mb6keDAKAR* Rufiqu (E Diourbel O Koloban,e

OMbar Pay/r Kidiro

Mbou,0 0 0o~n Tosdare KidroFatick(3 oGuinguineo LNdio66ne sleBafol oGoudiri ,

Joal-fodiouto Kaolocke 1 'rse

Sokone Ndo~~Kafaine Konlel Koumpentoum Kotiari 414 K~~~~~~~~~~~~~~~~~~~Noahrne Koungheulo 0Kupclu Nooude

Sakoneo 0 N 0 Koussonar ° MALINioro du Ri '>i

0 'oMka Tambocounda oDalfi (

BANJUL ~~~THE I 0Goinon

GAMBIA nN )-I- - - - ------ Velingarao Med naOKhossonto

13' ,.........../.J Gounasarao M6dnc 0 Sim6nti OMissiraRn 3'DioulOUGlous KId

Kod 0 Mako 0 Saraya LBignonao OMarsossoum

Sedh'ouo ._. - - _ - - - - - - -- - K6d..gouo NoiadiiO 0Ziguinchor®) S , '% _ rd_

GUINEA - BISSAU GUINE (

D 12 -0 The boundaries, colors, denominofao-s and any other -nfor,moton I?

c ___O___________1___________* shown on this map do not imply, cns the part of The World BoriE C. c,i

KILOMETERS any judgment on the legal status of -ny territory or n.y -r,dor'scmenI 1?' 16 15 4 . or cceptrce of such boundories 12-

'-i. I.1 6' _ _14

1MAG3ING

Report No: 15874Type: ICR