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Cablegate: Senegal Economic Snapshot: Great Harvest Does Not

DE RUEHDK #3185/01 3571506
P 231506Z DEC 05





E.O. 12958: N/A


1. SUMMARY: Quarterly Ministry of Finance statistics for the
last trimester confirm that the strongest contributors to
economic growth continue to be government capital investments
and remittance-fueled consumer spending. The banking
sector,s contribution to facilitating formal sector capital
investment is muted. While a hike in energy prices was an
external economic shock, the impact in lowered growth and
higher inflation was less than might be expected, in part
because the Government has been slow to pass through fuel
price increases. Senegalese fish, phosphoric acid, and
peanut exports all face difficulties. END SUMMARY.

2. Since Senegal,s economic statistics are robust by
regional standards, the Ministry of Finance,s quarterly
update usefully and somewhat reliably profiles business and
economic trends. With this in mind, we offer an annotated
summary of the most recent edition as a thumbnail sketch of
economic trends and business developments.

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3. The report begins with the news of most interest to
Senegal,s business community -- the state of the harvest.
The report predicts an increase over last year of 36 percent
for the peanut harvest, 17 percent for cotton, and a 1.5
million ton grain harvest, 40 percent above last year,s. A
full page is devoted to pluviometric data, noting that
rainfall in Dakar was up 311 percent compared to 2004.

4. At first glance, statistics suggest a linkage between
favorable rainfall and a 40 percent increase in volume
commodity exports over the first nine months of 2004.
However, the increase is largely an artifact of the launch of
mandatory online customs form filing for imports and exports.
Senegal,s principal exports are fish, phosphoric acid, and
peanut oil, and the second trimester statistics for all three
suggest trouble ahead.

5. The artisanal fish catch fell from 97,044 to 90,302 tons,
further confirmation of long-term decline in a sector
employing over one million people. However, the introduction
of licensing and somewhat stricter enforcement of fishing
limits may have had an impact on tonnage, a fact possibly
explaining why the catch actually climbed in the outlying
cities of St. Louis and Kaolack. Some pirogues may have
shifted operations away from the Thies region, the center of
Senegal,s fish industry and a focus for enforcement.
Industrial fishing, about a fifth of artisanal activity, fell
ten percent over the same period in 2004.

6. The troubles of Industrie Chimique du Senegal (ICS)
(septel), the phosphorous mining SOE, are evident in a 38
percent fall in activity at ICS,s two mines. ICS is
currently the subject of down-to-the-wire discussions between
an Indian syndicate and the Senegalese government on an
Indian takeover before ICS is forced to foreclosure on up to
180 million USD in debt.

7. The statistics suggest that things are no better at
Sonacos, a recently privatized peanut and vegetable oil
processor. During the second trimester, reports of both a
bumper crop and suggestions that Sonacos would be unable to
buy more than a fraction of the crop pushed prices down 83
percent, compared to the same period in 2004. Despite a 76
percent increase in processing volume, export value fell 21
percent. Globally, the report notes that peanut oil sells
for eight percent less in August 2005 than in August 2004.

8. Although the 39.6 percent boost in exports is a mirage
created by better customs policing, the positive impact on
government finances is undeniable. Direct and indirect tax
revenue climbed 22.1 percent and 13.6 percent, respectively,
over the same period a year ago. The state took in 664.4
billion CFA francs (CFAF) against 581.6 billion CFAF.
Customs duty revenue jumped from 114.3 billion to 133.3
billion CFAF. With this in mind, we note that Senegal
recently sold its customs software package to Kenya, an
interesting example of intra-African high tech trade.

9. The report shies clear of the politically sensitive
connection between the rise in oil prices and GOS fiscal good
times. During the four months covered by the report, the
value of petroleum imports jumped 48.7 percent over the
previous trimester. Although oil imports fell 18 percent
from year to year, the 145 billion CFAF in oil imports and 72
billion CFAF in gas imports during the first nine months of
2005 were close to 20 percent of Senegal,s total imports.

DAKAR 00003185 002 OF 002

10. While windfall oil import tax revenue is reflected in
government income, parallel damage to government accounts
lags behind and does not appear in this report. Last month,
the Government announced it would provide 18 billion CFAF in
direct fuel purchase subsidies to Senelec, Senegal,s power
parastatal. SAR, Senegal,s parastatal oil refinery, has
also been operating at a loss and will require an injection
of capital. The report is relatively sanguine, reflecting
the views of the Statistics Bureau Director, on the potential
inflationary impact of energy price hikes, noting only that
transport costs were up 4.3 percent over the previous
trimester and up 2.7 percent for the year.

11. Unfortunately, the statistics do not tell the whole
story of energy price impact. While the overall rise in
price at the gas pump was muted (due to SAR absorbing part of
the cost), private transit operators (minibuses) used the
hike in price to justify overhauling their pricing structure.
Whereas in the past, Dakar,s urban poor could ride into
downtown for one fare (100 CFA), currently they pay a
separate fare for each leg of the trip. Transport costs have
doubled or tripled for many workday riders.

12. Returning to the larger picture, the report illustrates
how post-HIPC Senegal is transitioning from a national budget
heavily dependent on donor funds to three-legged financing --
tax revenue, principally import/export tariffs and the TVA;
HIPC debt relief service payments; and increased government
borrowing. This diversification will pick up steam in 2006
as the Wade administration moves aggressively to put the
shovel in the ground on its &Grand Travaux8 major
infrastructure projects. According to the report,
governmental borrowing for the first nine months of 2005
stood at 95.8 billion CFAF against 74.6 for the same period
in 2004. However, most borrowing appeared to be at &soft8
concessionary terms, principally loans from the African
Development Bank, Islamic Development Bank and other donors.
On average, government borrowing terms were an interest rate
of 1.96 percent, with a grace period of 5.6 years, and a
30-year term for repayment.

13. Elsewhere, the report confirms Senegal,s relatively
solid macroeconomic health. Debt service is manageable at
28.7 billion CFAF (of which 15.4 billion CFA is in interest
payments) for the trimester. For the first nine months of
the year, debt repayment has declined 5.7 percent from the
same period in 2004 and represents 11.1 percent of receipts.
The report does not take into account debt cancellation
according to G-8 Multilateral Debt Relief Initiative terms.

14. The report,s analysis of the banking sector is less
encouraging. As mute evidence of the shrunken role the
formal sector plays in Senegal,s economy, total lending
rests at just 1,000 billion CFAF for the trimester, up 73
billion CFAF as credit unions push out financing for the
harvest. A full 76 percent of lending is short-term,
illustrating the difficulty many businesses have in borrowing
to grow their business. This ratio is trending higher
(compare, for example, to 61 percent in 1997) even as the
number of banks and variety of financial services here grow.
Possible explanations include strong growth in consumer
borrowing and/or a continued structural deficit in the
intangible support (accountants, legal assistance, land
titles, etc.) needed to facilitate business expansion.

15. Telecommunications and construction are the two
industrial activities that ensured solid continued economic
growth of around five percent despite an external energy
shock. Notwithstanding fears of a real estate bubble,
construction starts seemed limited only by cement production
constraints. Building was up 8.4 percent for the year and
14.7 percent for the same period. The category &Transport
and Communications8 grew 25.5 percent over the same period
in 2004. Elsewhere, however, overall industrial production
was down one percent for the year.

16. COMMENT: This quick statistical walk around the block
confirms the truism here that remittances are the hidden
motor to Senegal,s economy. In this snap shot, exports were
not a key factor in economic health. Although manufacturing
and service activity was largely flat, two important sectors
hugely dependent on overseas spending -- housing and phone
calls -- did very well. The other large contributor to
overall economic activity, government spending, seems to be
increasingly buoyed by the tax revenues spun off by consumer
goods imports. END COMMENT.

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