Cablegate: Senegal's Fy07 Budget Relys On Hipc Savings and Domestic

DE RUEHDK #0588/01 0740741
P 150741Z MAR 07





E.O. 12958: N/A

DAKAR 00000588 001.2 OF 004

1. Senegal's FY2007 (January 1 - December 31) budget expenditures
of CFAF 1.519 trillion (USD 2.978 billion) represents an overall
increase of 7.9 percent over the 2006 budget. For 2007, the
Government of Senegal is anticipating revenues of CFAF 1.048
trillion (USD 2.0 billion) from domestic sources, CFAF 69.3 billion
(USD 135.8 million) from HIPC and other debt relief savings, and
CFAF 262 billion (USD 512 million) from donors. The Government
counts on bridging a USD 22 million financing gap with additional
assistance from bilateral donors. For 2007, the civil service wage
bill, is the largest category for expenditures at CFAF 310.0 billion
(USD 607.8 million), reflecting an average 16 percent increase in
salaries. By sector, expenses (including personnel costs) for
education will take up the largest chunk of Senegal's budget: 41
percent of the operating budget at its disposal, or USD 1.1 billion.
Spending on health services is targeted for about 10.6 percent of
the operating budget or CFAF 84.5 billion (USD 169 million),
slightly higher than the nine percent established as a benchmark by
the World Health Organization. Entering 2007 the GOS owes goods and
services suppliers at least CFAF 56 billion (USD 112 million).

2. Having won reelection, President Wade will likely intensify his
"budget allocation by decree" style, with insufficient transparency
on either public spending decision-making or actual budget
allocations. Senegal has not carried out a comprehensive
expenditure review since 1997. At a time when Senegal is without an
IMF monitored program, we are also concerned about Senegal becoming
re-burdened with new public debt. END SUMMARY.

3. Calling it "challenging", Senior Minister for Economy and
Finance Abdoulaye Diop announced Senegal's FY2007 (January 1 -
December 31) budget on December 15, 2006. The GOS projects total
expenditures of CFAF 1.519 trillion (USD 2.978 billion), an overall
increase of 7.9 percent over the 2006 budget, including expenditures
derived from the HIPC and multilateral debt forgiveness initiative
amounting to CFAF 69.3 billion (USD 138.6 million). This increase
is mainly due to a steady increase of 15.1 percent in the operating
budget, an increase for the Treasury Special Accounts (STA) and a
6.2 percent increase on capital expenditures. A planned 16.4
percent increase in salaries and benefits and a 15.1 percent
increase in all other operating expenses will push the cost of
running Senegal's 40 Ministries and its executive, judicial, and
legislative branches to CFAF 726 billion (USD 1.452 billion). The
GOS must also deal with a projected current budget deficit of CFAF
22 billion (USD 44 million).

4. The Special Treasury Accounts (STAs) -- special funds to support
various government commitments, including investment guarantees,
water and environment funds, and the national retirement funds among
others -- increases (12.9 percent), making it the second largest
budget item, and includes a 10.2 percent increase in the GOS's
contribution to the national retirement fund.

5. Within the STAs, the "Caisse Autonome d'Amortissement" (CAA) --
the debt service fund for servicing internal and external debt -- is
budgeted to decrease 26.1 percent over 2006 to CFAF 88 billion (USD
172 million), in large measure due to numerous debt rescheduling and
debt forgiveness from both multilateral and bilateral donors.
Servicing its external debt will consume 4.6 of Senegal's total
budget (both current and capital expenditures). Also, overall
budget allocations to the following will decrease: "Conseil d'Etat"
(Supreme Court) 17.8 percent, Ministry of Women, Family, Social
Development and Women's entrepreneurship (26.1), Ministry of
Maritime Transport (19.0), Ministry of Youth (10.1), Ministry of
Agriculture (17.2), Ministry of Urban Development (87.5), and
Ministry of SMEs (51.1).

--------------------------------------------- --------
6. Looking at Senegal's operating budget on the basis of expense
categories reveals the continued high public sector personnel costs.
As a share of the operating budget, the wage bill increased
slightly from 42.4 percent in FY06 to 42.7 percent in FY07,
corresponding to an increase from CFAF 266.3 billion (USD 532.6
million) to CFAF 310.0 billion (USD 620 million), or 31.1 percent of
total tax revenues -- well in line with an IMF proposed target of 40
percent. In reaching this goal, the Government was still able to
grant civil servants a wage increase of 16 percent by limiting new
hiring to school teachers, health workers, and workers in the
Ministries of Justice and Interior. Personnel costs for the
Presidency are scheduled to increase to CFAF 3.1 billion from CFAF
2.7 billion in 2006, and for the National Assembly to CFAF 3.4

DAKAR 00000588 002.2 OF 004

billion from CFAF 2.8 billion in 2006. There is no allocation
listed in the budget for the proposed new Senate. [NOTE: Though it
is not reflected in GOS budget documents, it is widely reported that
in early 2007 President Wade took "special measures" to grant a 50
percent salary increase to Senegal's security apparatus (Army,
Customs, Police, and Gendarmes) in advance of the February 25
presidential elections. END NOTE.]

7. In 2007, other expenditures total CFAF 416.1 billion (USD 815.8
million), an increase of 15.1 percent over previous year. This
increase is mainly due to the savings of CFAF 69.3 billion (USD
138.6 million) from HIPC and multilateral debt forgiveness
initiative (IADM). Of the saving from this debt relief, CFAF 12.9
is targeted to hire new teachers -- actually contract workers -- and
the recruitment of "education volunteers" for the elementary and
high schools, who receive a minimum monthly salary of approximately
USD 260.

8. The remaining CFAF 56.4 billion is projected for building more
schools (CFAF 7.2 billion), infrastructure and drainage projects
(CFAF 9.0 billion), more health and HIV testing centers (CFAF 7.9
billion), agriculture and hydraulic projects (CFAF 17 billion),
rural electrification and mining projects (CFAF 7.3 billion), social
development projects (CFAF 2.05 billion), fishing projects (CFAF 3
billion), animal husbandry projects (CFAF 2 billion), and increasing
available credit to women in rural areas (CFAF 950 million). [NOTE:
In 2006, debt relief savings were initially earmarked exclusively
for education, but much of that allocation was turned towards
"infrastructure investment," including, no doubt "les Grands
Travaux." END NOTE.]

9. An examination of the budget allocations by function highlights
education as the GOS's number one policy priority, though publicly
released figures provide little detail on programmatic
justifications. The Ministry of Education will continue to have 41
percent of the operating (current) budget at its disposal, 49.6
percent (CFAF 106.8 billion or USD 209 million) of which will be
spent on personnel costs, while devoting 16.3 percent (CFAF 42.0
billion or USD 82 million) to building new classrooms, broadening
access to primary education -- especially for girls -- and hiring
new teachers. [NOTE: When the "investment budget" (paras 17-18 is
included, spending on education drops to around 20 percent of
Senegal's total projected expenditures. END NOTE.]

10. Spending on health services is set at about 10.6 percent of the
operating budget or CFAF 84.5 billion (USD 169 million), slightly
higher than the nine percent established as a benchmark by the World
Health Organization. Twenty-five percent or CFAF 21.7 billion of
health allocations will be spent on personnel costs, while 29
percent will be used to build hospitals and fund additional workers,
27 percent on operational cost and 19 percent on medicine. During
the budget debate in the National Assembly, opposition leaders
criticized the GOS for not taking any measures to start up the
activities of new hospitals built since 2004 in Kolda, Fatick and

11. The Ministry of Armed Forces' budget allocation increased by
19.1 percent, reflecting a 250 percent increase in program funding
to support troops and purchase equipment and 155 percent increase in
supplies and investment. Despite these increases, the military's
share of the operating budget remained essentially constant at just
9.2 percent. The budget for the Ministry of Interior increased by
94.8 percent to take into account preparations and administration of
2007 presidential and legislative elections. The Ministries of
Economy, Justice, Foreign Affairs, and Agriculture account for 11
percent of the operating budget. None of the remaining Ministries
accounts for more than one percent of the total operating budget.

12. The operating budget for the Presidency increased by 22.2
percent, to a total of CFAF 14.1 billion (USD 28.2 million), which
is greater than the combined operating budgets of the Ministries of
Industry, Energy, Commerce, and SMEs. Twenty-two percent of the
Presidency's allocation or CFAF 3.1 billion (USD 6.2 million) will
support the personnel costs of the estimated 40 "Minister
Counselors" and advisors, while 57 percent (CFAF 8 billion) will be
used for operational costs and 19 percent for programs. The
"investment budget" planned to support President Wade's 135-plus
special projects, "les Grands Travaux" is cited at CFAF 38.8 billion
(USD 77.6 million).


DAKAR 00000588 003.2 OF 004

--------------------------------------------- ---------
13. Senegal has lowered its overall corporate tax rate from 33
percent to 25 percent, as well as the VAT rate on tourist industries
from the standard 18 percent to 14 percent. At the same time, in
2007 GOS expects to increase its domestic revenues by further
broadening the tax base and strengthening tax collection efforts,
particularly on internal taxes (consumption, services and VAT ) and
direct taxes (income and corporate tax) collected from the formal

14. Total domestic revenue is estimated at CFAF 1,048 trillion (USD
2,096 billion), an increase of 13.1 percent over 2006. This
projection is based on the expectation of increases in the following
areas: CFAF 23.2 billion (USD 46.4 million) in income taxes, CFAF
16.1 (USD 32.2 million) in corporate taxes, CFAF 42.9 (USD 150.2
million) in value added taxes (VAT), and CFAF 32.3 billion (USD 64.6
million) in trade taxes.

15. Non-tax revenues, generally made up of revenues from maritime
activities, industrial enterprises, and miscellaneous services, are
expected to increase by 23.5 percent to CFAF 52.4 billion (USD 102.7
million). External revenues, such as grants, programs, resources
from foreign investment and debenture loans, are projected to
decrease 3.1 percent, from CFAF 417.6 billion in 2006 to CFAF 404.4
billion in 2007 as a result of a projected decrease in foreign aid
for development projects.

16. To meet its projected fiscal gap of CFAF 22 billion, the GOS is
counting on direct budget support from donors in excess of the
already programmed total foreign financing of CFAF 283.6 billion
(USD 567.2 million), which represents 18.6 percent of the
Government's overall budget for 2007. This is down moderately from
22.3 percent in 2006. At the same time, going into 2007 the GOS
admits to be in current account arrears of CFAF 56 billion (USD 112
million) for payments owed for goods and services. [NOTE: Some
private estimates put the government payment arrears at up to CFAF
200 billion. END NOTE.]

17. The "investment budget," called also budget for "development
projects" represents almost 43 percent of total projected spending.
However, the GOS is counting on continued high levels of
yet-to-be-confirmed foreign donor assistance. For FY 2007, the
investment budget calls for Senegal to invest CFAF 390.0 billion
(USD 764 million) of its own funds. [NOTE: The investment budget
is contained within ministry budgets. END NOTE.] Additional
contributions from donors in the amount of CFAF 262 billion (USD 512
million) will be required for the GOS to carry out its planned
activities. This assumes a 10.7 percent decrease in donor
assistance. The GOS projects that donor assistance will be provided
in both grants (35 percent) and loans (65 percent).

18. The investment budget is targeted for a moderate increase of
6.2 percent over the previous year and focuses on public social
services infrastructure (roads, water, health, and education) and
the service sector (tourism, trade, transport, and
telecommunications). Smaller allocations target agriculture and
manufacturing (industries and mining).

19. The GOS should improve its budget and allocation transparency.
This is particularly true for clearly reconciling actual
expenditures with the budget plan, a valid criticism raised by the
political opposition in the national Assembly's debate on the FY
2007 budget. Senegal has not carried out a comprehensive
expenditure review since 1997. There is an inherent lack of
budgetary discipline and accountability that arises from the failure
to reconcile the budget after implementation, and that, in turn,
makes it difficult to trust the budget as an accurate indicator of
overall fiscal policy.

20. This budget clearly reflects President Wade's "top down"
administrative program. While increasing public investment, much of
that will be costs associated with presidential pet projects and the
repayment of political promises with new infrastructure. Similarly,
large salary increases, mostly targeting needed political
constituencies, and the ever-growing number of presidential special
advisors, boards, and councils are a significant drain on the
budget. On the positive side, the focus on education responds to a
clear need to increase the literacy rate and primary school
enrollment in a country where more than 52 percent of the population
is under 15 years old. How effectively these resources are used to
respond to this need is another question.

21. After his reelection on February 25, and efforts to further

DAKAR 00000588 004.2 OF 004

weaken the opposition, President Wade is claiming a strong mandate
to continue with his programs, and his "budget allocation by decree"
style. While Wade is, in many cases, addressing needed public
investments, the opaque deal-making and lack of public audit leaves
the system open for abuse. We are also concerned about the GOS
becoming re-burdened with debt, both to cover the current deficit
and to repay even concessional loans tied to major infrastructure
projects. These are among the reasons that the Mission will
continue to press the GOS to begin negotiations with the IMF on a
new monitored program.

22. For a data summary of Senegal's 2007 Budget and other Senegal
Economic Snapshots, visit Embassy Dakar's unclassified intranet


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