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Cablegate: Imf Mission: Mixed Marks, but Ready to Support Senegal's

VZCZCXRO6931
PP RUEHMA RUEHPA
DE RUEHDK #1591/01 2121334
ZNR UUUUU ZZH
P 311334Z JUL 07
FM AMEMBASSY DAKAR
TO RUEHC/SECSTATE WASHDC PRIORITY 8908
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHLMC/MCC WASHDC
RUEHZK/ECOWAS COLLECTIVE

UNCLAS SECTION 01 OF 02 DAKAR 001591

SIPDIS

SIPDIS
SENSITIVE

STATE FOR EB/IFD, AF/EPS AND AF/W
AND PASS AID/AFR/SWA
USAID FOR AFR/WAA
TREASURY FOR OIASA/IDB: EBARBER
USDOC FOR 3136/OIO/MDBO
AND FOR 4510/IEP/ANESA/OA: PMICHELINI

E.O. 12958: N/A
TAGS: EFIN ECON EAID SG
SUBJECT: IMF MISSION: MIXED MARKS, BUT READY TO SUPPORT SENEGAL'S
POLICY SUPPORT INSTRUMENT (PSI)

DAKAR 00001591 001.2 OF 002


1. Summary: A visiting IMF team led by Johanness Mueller provided
an end-of-mission briefing for donors on July 26 to inform them of
the state of the ongoing negotiations of a new program with Senegal.
Mueller termed FY 2006 a "difficult year," and said that, while
Senegal is still struggling to adjust to the energy crisis, the
economy may recover in 2007 thanks to the resumption of ICS
operations and

the buoyant service and construction sectors. Mueller emphasized
the need for greatly increased fiscal discipline, reduced levels of
domestic internal debt, and reduced level of expenditures to focus
on priority sectors. He noted that Senegal would need to weigh all
costs and benefits in deciding to seek PSI status. He praised the
new GOS for its spirit of cooperation and openness and said the IMF
board would probably approve Senegal's PSI by September. End
Summary.

2. The IMF team visited Senegal July 12 trough July 26 to negotiate
a new program with Senegal. Mueller provided an end-of-mission
briefing for donors on July 26. Embassy representatives from
France, United Kingdom, Japan, Germany, Italy, Belgium, Switzerland,
Canada, Holland, Spain, The European Union, World Bank, African
Development Bank, Kuwait, India, and the U.S. attended the IMF's
July 26 out-briefing.

2006 A "DIFFICULT YEAR"

3. In reviewing the state of the economy, Mueller said that 2006
had been extremely difficult. He estimated real GDP growth for 2006
at 2.1 percent and year-end inflation at 3 percent. Mueller blamed
the energy crisis, the presidential and legislative elections held
in February and June 2007, and the ICS crisis for having further
deteriorated the macroeconomic situation in 2006.

4. For FY 2007, Mueller predicted that GDP growth should be around
5.4 percent and 5.1 percent for the upcoming year 2008 - as a result
of the buoyant service and construction sectors and the positive
resumption of ICS operations, with inflation increasing at 5
percent. Mueller stated, "we are less concerned about macroeconomic
issues, and most of our discussions with GOS officials focused on
budget policy, good governance and transparency."

A HOST OF PROBLEMS, BUT...

5. Mueller reiterated a familiar litany of looming problems that
the GOS must deal with promptly and decisively. He enumerated
several priorities:
-- getting GOS institutions operating effectively,
-- prioritizing investment projects and increasing spending on
poverty reduction, health, education, and agricultural sectors,
-- containing the budget deficit at 4.7 percent of GDP in the medium
term,
-- containing the wage bill which increased significantly in FY 2006
and FY 2007,
-- limiting subsidies to the energy sector,
-- eliminating the outstanding internal debt in the short term and
reducing payment arrears,
-- initiating a structural reform on budget by strengthening good
governance and transparency in public spending,
-- reinforcing procurement laws, regulations and procedures to
ensure transparency and good governance,
-- formulating the role of the private sector in the development
process,
-- strengthening measures to limit the number of agencies, and
-- speeding up the financial sector reforms in cooperation with the
BCEAO to establish a legal and regulated framework for SMEs and
MSIs.

GOOD SPIRIT OF COOPERATION

6. Mueller praised the GOS's cooperation and open-ness and stated
"we have received documents with outstanding information and
reliable data that demonstrated GOS willingness to quickly conclude
a program with the IMF." With regard to the previous
administration's misreporting of some bilateral arrears, Mueller
said his team had held "very fruitful discussions" with the new GOS
officials. He said that he had obtained all the data he needed and
would take this back to IMF management to decide next step. He
complimented the GOS for its "excellent spirit of sharing

DAKAR 00001591 002.2 OF 002


information," and said that the Finance Ministry and IMF were
"struggling together" to get a clear picture of the GOS's arrears
position.

7. Mueller indicated that his team has received - for the first
time - reliable information on APIX and ANOCI regarding their
tenders and contracts. He noted that the GOS is open to revising
the institutional architecture of the new airport project and
changing the status of APIX.

8. Mueller supported the re-establishment of a recent dialogue
between the World Bank, the African Development Bank (AFDB), and the
Islamic Development Bank (IDB) with Senegal to speed up the energy
sector reform. He said that without a reform of the energy sector
it would be difficult for Senegal to meet the requirements of any
program with the IMF. He also encouraged the AFDB's cooperation
with Senegal on issues related to the accelerated growth strategy
process, the improvement of the business climate, and the discussion
on the energy sector reform in cooperation with the WB, and the
IDB.

SENEGAL WANTS A PSI

9. In a later conversation with Senegal's IMF Resrep Alex Segura on
July 30, post learned that the GOS has now formally requested the
institution of a PSI program with the IMF. The IMF team would
review and submit Senegal's proposal to its Headquarters for
approval, then once approved the document would be transmitted to
the IMF Board of Directors which might take the final decision by
the end of September. Though there is no major difference within
the two programs (PSI and PRGF), the PSI seems to be less flexible
and more constraining than the PRGF and it also focuses more on
economic growth and structural reforms.

10. COMMENT: Mueller was repeatedly complimentary of the GOS on
its spirit of cooperation and openness, though any new program with
the IMF could bring back donor confidence and raise Senegal's
credibility. It is not surprising to see Senegal adhere to a PSI
program that could ease the way toward government borrowing from
commercial lenders or expanded bond issuance. While we expect donor
support is likely to be forthcoming, Senegal will have to commit to
deeper economic reforms that will improve the business climate and
establish transparency in the procurement and budget allocation
process. Senegal might be eligible to defend its position in the
October 3-4 Paris Club Consultative Group meeting in Paris, should
the IMF Board approve its new PSI.

11. (U) Visit Embassy Dakar's intranet site at:
http://dakar.state.gov/htdocs/section/econSec tion.aspx and embassy
Dakar's Sprint Web site at http://www.state.sgov.gov/p/af/dakar

SMITH

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