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Cablegate: Imf Resrep Speaks Out On Senegal's Budget Problems

VZCZCXRO3206
PP RUEHMA RUEHPA
DE RUEHDK #0661/01 1581452
ZNR UUUUU ZZH
P 061452Z JUN 08
FM AMEMBASSY DAKAR
TO RUEHC/SECSTATE WASHDC PRIORITY 0608
INFO RUEHAD/AMEMBASSY ABU DHABI PRIORITY 0051
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MCC WASHDC
RUEHZK/ECOWAS COLLECTIVE

UNCLAS SECTION 01 OF 03 DAKAR 000661

SIPDIS
SENSITIVE

DEPT FOR AF/W, AF/EPS, EB/IFD
ABU DHABI FOR TREASURY/GRIFFERTY
TREASURY FOR RHALL AND DPETERS

E.O. 12958: N/A
TAGS: EFIN ECON EAID PGOV SG
SUBJECT: IMF RESREP SPEAKS OUT ON SENEGAL'S BUDGET PROBLEMS

REF: A) 07 DAKAR 1591, B) 07 DAKAR 1515

DAKAR 00000661 001.2 OF 003


1. (SBU) Summary: During recent press interviews, IMF Resrep Alex
Segura underscored growing concerns about Senegal's critical budget
deficit. He stated that the deficit (currently estimated at more
than USD 300 million) could weaken the economy and speculated that
the government could have difficulties paying civil servants'
salaries if corrective measures are not taken soon. Segura also
publicly highlighted the problem of the GOS's stock of unpaid bills
to private suppliers of goods and services. He asserted that these
arrears could "destroy" the private sector. In response, Prime
Minister Soumare convened a special cabinet meeting on May 16 to
address the country's public finances. The same day, the Finance
Minister described the financial situation as "difficult but
manageable" and said concrete steps would be taken to bring public
spending back in line. He also announced plans for issuing
approximately USD 260 million in treasury bonds to pay the
government debt. End Summary.

IMF RESREP OUTSPOKEN ON BUDGET DEFICIT
--------------------------------------
2. (U) In an interview published May 16 by the daily "le
Quotidien," IMF Resident Representative Alex Segura made an unusual
public critique of Senegal's public finances, pointing out that the
budget is in serious deficit. He claimed that Senegal could face
severe difficulties in paying civil servant salaries and meeting
other financial obligations in the coming months if no drastic
measures are taken. Segura pointed to GOS subsidies as the main
culprit in the budget deficit, especially those targeting energy and
food. He added that the budget deficit is especially difficult
because of the GOS's surprising accumulation of unpaid bills owed to
the private sector, which amount to an estimated CFA 150 billion
(USD 357 million). Senegal's Policy Support Instrument (PSI) with
the IMF caps such arrears at CFA 30 billion (USD 71 million).
Segura's critique was direct: "The accumulation of unpaid bills to
the private sector is a clear indication that Senegal is not capable
of supporting its current level of spending. It is therefore
sacrificing the growth of its private sector in exchange for the
expansion of subsidies."

3. (U) Regarding subsidies, Segura was equally blunt: "This is
unacceptable and unsupportable." He noted that the recent
elimination of customs duties and VAT on certain imported food items
(especially rice), as well as longstanding subsidies on cooking gas
and electricity, cost the budget much as CFA 200 billion, which is
equal to 3.5 percent of GDP.

4. (SBU) Segura also blamed extra-budgetary spending as another key
factor in Senegal's current budget crisis. A number of Ministries
have signed contracts or taken on other funding obligations not
previewed in the budget and without the approval of the Ministry of
Finance. We have learned from our sources that the biggest
perpetrators have been the Ministry of Infrastructure, with more
than CFA 70 billion (USD 166 million, largely for contracts over the
past two years to support last March's Dakar Summit of the
Organization of Islamic States), and the Ministry of Interior (for
programs also related to the OIC summit as well as the 2007
presidential and legislative elections), and the Presidency with an
estimated CFA 2 billion (USD 4.7 million). The President frequently
travels - at least twice a month - accompanied by staff members in a
leased aircraft.

5. (U) Segura urged the government to implement "courageous and
effective" measures to face its budget deficit and restore
macroeconomic stability. Segura's proposals include a combination
of a CFA 20 billion (USD 47 million) cut on the operating budget and
CFA 70 billion (USD 166 million) cut on the investment budget,
representing eleven percent of the FY08 operating budget and 5
percent of total expenditures. He warned that the IMF "won't
support a country with a huge budget deficit, a high level of unpaid
bills to private suppliers, and a lack of commitment . . . to
stabilize the macroeconomic situation."

6. (U) In his May 16 interview and subsequent public statements,
Segura underscored his support for the Minister of Finance,
Abdoulaye Diop: "Minister Diop did not create this situation; he has
our support and that of many donors," said Segura. He recommended
that Diop be given full authority to take corrective measures and to
monitor Senegal's financial commitments and expenditures.

GOS CRITICISM BUT ALSO ACTION
-----------------------------
7. (SBU) The government's initial reaction to Segura's public
scolding was defensive. "We know that the budget situation is
critical, we understand that the unpaid bills to the private sector

DAKAR 00000661 002.2 OF 003


are problematic, but Segura has challenged our credibility by
releasing the content of a working document - not yet completed - to
the press," commented a senior official from the Finance Ministry.
The tone was more "virulent" among the ruling PDS party supporters
and some senior officials from the Ministry of Finance who asked the
Government to consider Segura as "persona non grata" for trying to
"set fire" to the country. According to one contact, Prime Minister
Soumare was so upset he wanted to take action to "PNG" Segura, but
he soon backed off that idea.

8. (U) In reaction to Segura's interview, Prime Minister Soumare
held an emergency cabinet meeting on the afternoon of May 16 to
reassure the Senegalese on the budget situation. Deputy Minister of
Finance in Charge of the Budget, Ibrahima Sarr, and his senior staff
members along with Segura attended the meeting. In a press
conference following the emergency meeting, Deputy Minister Sarr
adopted an optimistic view and noted, "we have no problem in meeting
our financial obligations to pay the salaries of our civil servants.
I think our current situation is under control and we can stop the
'fire' anytime." Segura reiterated his earlier remarks, stating, "I
confirm that the budgetary situation is critical and alarming."

9. (U) On May 22, the Prime Minister signed an administrative note
to urge all the Ministries -- except for the Ministries of Health,
Education, and Water -- to significantly reduce their level of
spending on goods and services (from their FY08 operational budgets)
and also limit their investment budgets in an effort to meet the CFA
70 billion in cuts proposed by Segura. The PM also reiterated the
primacy of the Finance Ministry for controlling expenditures, and
the need to pay all expenditure obligations in a timely manner.

DEBT FOR BILLS
--------------
10. (U) Shortly after Segura's press statements, MinFin Diop
confirmed the existence of budget difficulties but stressed that
Senegal has several tools and measures to bring the situation under
control. He downplayed any perceived tension with the IMF: "our
relations with the IMF are excellent and based on trust and mutual
understanding." Diop also announced plans to issue new treasury
bonds worth CFA 110.8 billion (USD 264 million) before September.
These issuances, reportedly with around 30 percent as treasury bills
targeting the regional CFA zone, and 70 percent as government bonds
targeting local banks, apparently have been given the green light by
the IMF and will be used to pay off the government's arrears. Diop
also made a point of allaying fears about nonpayment of civil
servant salaries. He noted monthly fiscal revenues of CFA 90
billion (USD 214 million) are sufficient to cover the country's
monthly wage bills of CFA 28 billion.

11. (SBU) In a June 4 meeting with the Charge, Budget Minister Sarr
claimed the first issuance would take place before June 20. He also
claimed that CFA 70-80 billion would be sufficient to cover the
arrears, leaving CFA 30-40 billion as a "cushion" for the treasury.
Even with the new debt financing, Senegal's budget relies on donor
budget support of CFA 102 billion (USD 243 million), and this money
is not yet forthcoming. According to Sarr, he is pleading with the
World Bank, the EU, and France to speed up disbursement of their
pledged budget support.

CONCERN ABOUT SUBSIDIES
-----------------------
12. (U) Segura also raised his concern about "routine" government
subsidies for certain food items, cooking gas, and electricity,
which could cost the government a combined CFA 170 billion in 2008.
With the newer subsidies on rice the total could reach CFA 200
billion (USD 476 million). The budget is also impacted by the
recent suspension of duty and VAT on rice and other items. Segura
asserted these measures produce little benefit for truly poor
households (who already can't afford such items), but and have
created a major disequilibrium in public finances. Segura, as well
as the broader donor community, has pointed out that despite these
subsidies and other protections, Senegal generally pays more for
electricity, gasoline, rice, milk, sugar, and cooking oil than many
of the other countries in the sub-region.

REACTION
--------
13. (SBU) The IMF Resrep was aware that his interview would raise
the hackles of the government (he granted it to one of the most
consistently anti-government dailies). Segura told Econ Counselor
that he did so with the support of IMF headquarters as an admittedly
attention-grabbing measure to highlight the need for swift GOS
measures to address the looming budget crisis. There were serious
calls by PDS officials and some in government to "kick out" the
Resrep, but calmer heads prevailed - with the understanding that

DAKAR 00000661 003.2 OF 003


donors largely approved of Segura's actions. Many officials at the
Ministry of Finance were privately pleased by Segura's actions,
which should help bring expenditures mostly back under their
control. One senior MOF official said, "it had to be done."
Hundreds of businesses waiting to be paid are undoubtedly also
appreciative of this public challenge to an untenable situation.

COMMENT
-------
14. (SBU) Segura's interview was a necessary exercise to force the
government's hand on the budget deficit, reimburse unpaid bills, and
pursue economic reforms within the PSI program. However, the
government did not turn over easily and it is not assured that this
marks the beginning of a new commitment by the Wade political
machine to assure sound fiscal management is a top priority. We
heard that officials from the Budget Ministry tried to undermine the
government's commitment to immediate budget cuts, first by trying to
target health and education spending (and perhaps foist the blame on
the IMF), and then by substituting a different document at the last
minute, apparently hoping the IMF would not go through with its
threat to suspend its program. Fortunately, the IMF stuck to its
guns and, we hope, real budget discipline will follow. The IMF is
not blameless in this saga. The accumulation of unpaid bills was
widely known, and the IMF failed to fully follow the trail last fall
when it gave the GOS a pass on that prior action (Reftels). When
the full scope of the problem came to light, the IMF had to rescue
its own reputation, not just companies in the long payment queue.

SMITH

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