Document of

The World Bank

FOR OFFICIAL USE ONLY

Ct~. 2 090 -S C-Report No. P-5185-SE

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED DEVELOPMENT CREDIT OF SDR 62.4 MILLION

TO

THE REPUBLIC OF SENEGAL

FOR A

STRUCTURAL ADJUSTMENT PROGRAM(SAL IV)

JANUARY 17, 1990

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 EQUIVALENTS

Currency Unit - CFA franc (CFAF)US$1.00 m CFAF 316 (November 14, 1989)

CFAF 1 million - US$ 3167 (November 14, 1989)

SYSTEM OF WEIGHTS AND MEASURE: METRIC

Metric U.S. Eauivalent

1 meter (m) . 3.28 feet (ft)

1 kilometer (km) . 0.62 miles (mi)1 square kilometer (km2) - 0.39 square mile (sq mi)1 hectare (ha) . 2.47 acres (a)1 metric ton (t) 2,205 pounds (lb)1 kilogram (kg) - 2.2046 pounds (lb)

FISCAL YEAR

July 1 - June 30

ABBREVIATIONS AND ACRONYMS

ACC : Agent Comptable Central (Central Accounting Agency)BCEAO : Banque Centrale des Etats de l'Afrique de l'Ouest (Central

Bank)BCH : Bureau d'Organisation et Methodes (Bureau of Organization and

Methods)COUD : Centre des Oeuvres Universitaires de Dakar (University

Services)CP : Contrat-Plan (Contract Plan)CSP : Cellule du Secteur Parapublic (Parapublic Sector Cell)

CSS : Compagnie Sucriere Senegalaise (Sugar Factory)DCS : Direction Centrale de la Solde (Central Payroll Directorate)

DFP : Direction de la Fonction Publique (Civil Service Directorate)

DGID : Direction Generale des Imp8ts et des Domaines (Tax Department)

DIRE : Delegation a l'Insertion, a la Reinsertion et a l'Emploi

DRSP : Delegation a la Reforme du Secteur ParapublicEP : "Etablissement Public'LDP : Letter of Development PolicyPAGD : Projet d'Appui a la Gestion du Developpement (Development

Management Project)PE : Public EnterpriseUMOA : Union Monetaire de l'Ouest d'Afrique (West African Monetary

Union)SAR : Societe Africaine de Raffinerie (Oil Refinery)SME : Small- and Medium-Scale EnterprisesSOCOCIM : Societe Commerciale des Ciments (Cement Company)ZFID : Zone Franche Industrielle de Dakar (Industrial-Free Zone)

FOR OFFICIAL USE ONLY

REPUBLIC OF SENEGAL

FOURTH STRJCTURAL ADJUSTMENT CREDIT (SAL IV)

Table of Contents

Credit and Program Summary . . . . . . . . . . . . . . . . . . . . . i

I. THE ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . 1Recent Developments . . . . . . . . . . . . . . . . . . . . . . 1Prospects and Financing Needs . . . . . . . . . . . . . . . . . 4

II. THE GOVERNMENT'S STRUCTURAL ADJUSTMENT PROGRAM ANn BANK SUPPORT 6The Government's Medium-Term Program . . . . . . . . . . . . . . 6Bank Support to the Government's Adjustment Effort . . . . . . . 7

III. SAL IV PROGRAM 1989-92 . . . . . . . . . . . . . . . . . . . . . 9A. Public Finances and Investment Programming . . . . . . . . . 9B. Incentives for Private Sector Development . . . . . . . . . . 12C. Parapublic Sector Reform . . . . . . . . . . . . . . . . . . 22D. Civil Service Reform . . . . . . . . . . . . . . . . . . . . 32E. Social Dimension of Adjustment . . . . . . . . . . . . . . . 39

IV. THE PROPOSED OPERATION . ... . . . . . . . . . . . . . . . . . . 40iinancing and Management of the Program . . . . . . . . . . . 40Benefits and Risks . . . . . . . . . . . . . . . . . . . . . . . 46

V. BANK GROUP STRATEGY AND OPERATIONS . . . . . . . . . . . . . . . 47

VI. COORDINATION WITH THE IMF . . . . . . . . . . . . . . . . . . . 50

VII. RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . 50

Text Tables

Table 1 : Main Economic Indicators . . . . . . . 3Table 2 : External Capital Requirements and Sources.. 5Table 3 : Government Trrnsfers to Public Enterprises . . . . . . . . 22Table 4 : Civil Service Wage Bill Indicators . . . . . . . . . . . . 33Table 5 : Civil Service Staff Reductions . . . . . . . . . . . . . . 35Table 6 : Financial Impact of the Civil Service Reduction Program. . 38

Annexes

Annex I - Economic Indicators; Balance of Payments;Status of Bank Group Operations . . . . . . . . . . . . . 1-5

Annex II - Supplementary Project Data Sheet . . . . . . . . . . . . 1

Annex III - Matrix of SAL IV Program . . . . ... . . . . . . . . . . 1-8

Annex IV - Government's Letter of Development Policy . . . . . . . 1-50

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

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REPUBLIC OF SENEGAL

FOURTH STRUCTURAL ADJUSTMENT CREDIT (SAL IV)

Credit and Program Summary

Borrower: Republic of Senegal

Amounts: IDA Credit: SDR 62.4 million (US$ 80 million equivalent)Swiss Government: SwF 10 million (US$6.3 millionequivalent)

Cofinancing: African Development Bank (AFDB): UA 30 million (US$35.3million) Swiss Government: another SwF 10 million (US$6.3million equivalent). Other donors, namely Belgium, France,and Japan are expected to contribute about US$ 56 millionequivalent to the program as cofinancing.

Terms: IDA Credit: Standard with 40-year maturitySwiss: Non-reimbursable contribution credits and grants

ProgramDescription: The proposed adjustment program extends the process of

structural reforms begun in 1985 and supported by twoprevious Structural Adjustment Credits (SAL II and SALIII), as well as by the IMF Enhanced Structural AdjustmentFacility (ESAF). The proposed credit would support theGovernment's strategy, detailed in its medium-termeconomic program (1985-92), to promote private investmentand exports, to improve the efficiency of public sectcrresource mobilization and allocation, and to alleviatepoverty. The ultimate objective is sustained growth, withequity, ver the medium term.

While significant progress has been made towards financialstabilization, public rssource management improvement, andeconomic liberalization, Senegal is still faced withimportant structural issues that need to be resolved.Resolution of such issues is a prerequisite for the neededsupply response. The proposed SAL IV key policy areas,which represent a consolidation and a deepening of policiesinitiated under the previous SALi, are: (i) private sectorincentives, i.e., reduction in the costs of production(especially labor and energy) and further improvemernt ofthe incentives system and the regulatory environment; (ii)public sector resource management, i.e., reductions in bothcurrent spending for civil service wages and transfers toparastatals, improvements in investment programs and therevenue base; and (iii) minimization of the social costs ofadjustment.

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The SAL IV program will be supported by the ongoingtechnical assistance provided for civil service reform(Development Management Project) and industrialrestructuring (Industrial Restructuring Project); and bythe proposed TA component of the public enterprises reform.In addition, the Government is formulating, with IDAsupport, a series of SECALs, notably in the banking,agriculture and transport sectors. Because a soundfinancial sector is important to the development processand to macroeconomic performance, the SECAL banking reformswill be implemented simultaneously with the SAL. TheGovernment is also undertaking an Employment CreationProject with Bank support which is focused on reducing thesocial costs of adjustment in the short term.

EstimatedDisbursements: It is expected that the total amount of US$184 million

equivralent would be disbursed within 24 months. The IDAcredit and the Swiss grant would be disbursed in threetranches and would finance the CIF cost of eligible generalimports. The first tranche of SDR 25.0 million from theIDA credit and the entire US$6.3 million equivalent fromthe Swiss contribution, would be based on crediteffectiveness, expected January 1990.

Disbursement of the second and third tranches, each beingSDR 18.7 million of IDA credit, would be cortingent onsatisfactory progress in program implementation. It isenvisaged that release of the second and third tranche willbe effected by December 1990 and December 1991 afterapplicable performance reviews.

Disbursement of the entire credit is expected to becompleted within 24 months of certifying crediteffectiveness.

!H: BIRD 18499R

There is no separate Staff Appraisal Report

INTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS

ON A PROPOSED DEVELOPMENT CREDITTO THE REPUBLIC OF SENEGAL

FOR A STRUCTURAL ADJUSTMENT PROGRAM…---------------------------------------------------------__ --------------

1. I submit the following report and recommendation on a proposedDevelopment Credit of SDR 62.4 million (US$ 80 million equivalent) onstandard ThA terms to the Republic of Senegal to help support the secondphase of the Governmentvs structural adjustment program (SAL IV). Inaddition, I recommend that IDA administer a proposed Special JointFinancing non-reimbursable contribution of SwF 10 million (about US$6.3million equivalent) by Switzerland.

I. THE ECONOMY

2. The latest Country Economic Memorandum entitled "Senegal: AnEconomy Under Adjustment", No. 6454-SE, was distributed to the ExecutiveDirectors on February 13, 1987. Basic country data are given in Annex I.

Recent Developments

3. Adjustment of the Senegalese economy became unavoidable at theend of the 1970s, during which a combination of poor financial and economicpolicies plunged an already weak economy into a severe crisis. In 1980, afirst attempt to stabilize the financial situation and create the basis forgrowth did not yield satisfactory results. Renewed efforts were launchedin 1984 with, as key objectives, the re-establishment of a viable balanceof payments and public finance positions, the promotion of privateinvestment and production in agriculture and industry, and greaterefficiency in the management of public sector resources.

4. The policies pursued since then have contributed to a reductionin the fiscal deficit, the strengthening of the external sector position,the dampening of inflationary pressures, and an acceleration of incomegrowth. Thus, the overall fiscal deficit, on a commitment ba: .zs andexcluding grants, was reduced from 5.8 percent of GDP in 1983(84 to 2.6percent in 1987/88. A reversal of this trend, however, zcurred during1988/89 and a deficit resulted which reached 4.0 percent of GDP. Detailsof factors which contributed to that development are provided hereafter.The external currert account deficit, excluding official grants, decreasedsharply from 17.3 percent of GDP in 1983/84 to 9.6 percent in 1988/89.Inflationary pressures were also considerably dampened by the decline inthe GDP deflator from an annual average of about 12 percent in 1983/84 toaround 2 peecent in 1988/89. A low inflation rate has enabled Senegal to

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regain some competitiveness in fore gn markets; however, the country'sexports continue to be impaired by the high cost of production.

5. Adjustaent efforts have also led to a revival of the economy.Between 1984 and 1988, real GDP grew by 4.3 percent, on average, comparedto a long-term growth trend of less than 2.5 percent during the precedingtwo decades. Growth has been drivent principally by a good performance ofthe agricultural sector. This results from favorable price incentives,particularly for groundnuts, which are the key cash crop, and several yearsof good rainfalls. As a result, the production of groundnuts and ..erealshas expanded at an annual rate of about 10 percent during the past fouryears. The fishing sector has also experienced significant growth; fishexports have become Senegal's largest export earner since 1985. There are,however, signs of resource depletion, particularly for the high-valuepelagic fish species. While the recovery in groundnut production hasstimulated the oil-processing industry, o,her manufacturing industries haveremained depressed because of a combination of factors, such as the poorinvestment climate, high cost of production factors (particullarly labor andenergy), a rigid labor market, and stiff competition from imports followingthe trade liberalization measures introduced in steps since 1986. Theservice sector, which accounts for over half of GDP, has performed well inspite of the declining share of Government services.

6. While the liberalization process has introduced some degree ofvitality in the more competitive manufacturing sub-sectors, the economy ingeneral is still adjusting to the opening up of its market to foreigncompetition. One of the important short-term consequences of thisadjustment is the rapid expansion of the informal sector, particularly intrade and commerce. Development of the informal sector has helped togenerate employment and income but has not yielded much additional publicrevenue because activities in the sector generally escape taxation and mostGovernment regulations.

7. With the population currently growing at 2.9 percent a year,higher GDP growth in the past few years has helped reverse the gradualdecline in real per capita income which was experienced in the period 1960-84. While there is no clear evidence of the impact of the adjustmentmeasures on overall income distribution, they have had a quantifiableimpact on specific groups. Reforms in agricultural incentives, mostparticularly higher producer prices for major commodities such asgroundnut, have benefitted rural populations. The impact on groundnutproducers has been lessened somewhat since the recent reduction in theproducer price of this commodity following the reduction in world prices.By contrast, reforms in the parapublic sector and the liberalization of theeconomy have had an initial negative impact on urban employment andincomes.

8. Demand-management measures implemented since 1984 have succeededin reducing the gross domestic expenditure, especially total consumption,which exceeded GDP during the first half of the eighties. As a result,domestic savings, which were negative in earlier years, recovered to 7percent of GDP in 1988. Prudent demand management, which is crucial foravoiding real exchange rate appreciation where there is a fixed exchange

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rate regime, and a succession of good harvests, have contributed to adecreased inflation rate. Growth in the level of nominal wages has alsobeen moderate although by comparison with countries in the saue GDP bracketas Senegal, the wage level is quite high.

Table 1: MAIN ECONOMIC INDICATORS, 1984-89

1984 1987 1988 1989(eat1mat.)

National Income and Prices (X p.&.)GDP at constent prices -4.6 4.0 6.1 -1.8CDP doflator 18.3 2.7 2.1 1.7

External Sector (X P.&.)Export volume, fob -6.6 -0.8 14.7 9.8Import volume, cif 0.1 -6.1 -8.9 1.6Terms of trade (USS terms) 14.7 8.1 -7.5 7.1

Other Koy Indicators (X of GDP) ̂/Budget balonce (commitment basis, excl. grants)-6.8 -2.6 -8.2 -8.5Current accound doficit for fiscal year -17.8 -11.8 -10.2 -9.6Current account balance (oxcluding grants) -17.1 -10.2 -9.4 -8.8Budget doficit for fiscal year -6.8 -2.8 -2.C -4.0Gross Investment (real term) 15.4 16.8 14.6 16.8Daomstic savings (real term) 8.4 6.2 ?.1 9.1

Debt7uliic MLT debt (8m) 1629.1 8087.6 8288.2 8894.6Debt sorvice/exports k 12.8 80.7 24.2 cl 26.7 g/

_T Xovarnment finance date In Annex I were converted teo a calondar year basis by summing one-

half of the value" of two condscutive fiscal years.b/ Refernce here In to exports of goods and all servico and workers' remittances; debt

service on all debt, Including public and private, IMF, and short-term debt. ReschedulingIs taken Into account.After debt reechedulinps In 1988 and 1989.

9. In spite of these improvements, the Government's fiscalsituation remains fragile, as evidenced by the significant shortfall infiscal revenue in 1988/89. The combination of a weak economy and socialdisturbances related to the border conflict with Mauritania caused taxrevenue to fall in absolute terms by 5 percent compared to the level in thepreceding year and 13 percent compared to the projected level. As aresult, tar. revenue represents only 13.4 percent, a modest proportion ofGDP by international standards. The shortfall in tax revenue hasnecessitated the increase in certain tax rates. The Government budget alsorelies heavily on the tax of petroleum products whose domestic prices havebeen kept unchanged since world oil prices reached a peak in the early1980s. Petroleum tax revenues accounted for about one-fourth of totalGovernment revenue in the last few years. Excessive reliance on petroleumtaxes introduces a high degree of uncertainty in the budgetary situationand also imposes a heavy burden on the economy by maintaining high

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petroleum product prices averaging 2.5 times world prices. Despite theimprovement in the overall budgetary situation, Senegal is still highlydependent on direct budgetary assistance from abroad to cover currentexpenses, including the servicing of foreign debt and the repayment ofarrears. This situation complicates the management of the Government'sfinancial operations and increases its vulnerability vis-a-vis externaldevelopments. This has led to recurring crises in the country's servicingof its foreign debt.

10. The external current account deficit has been improving steadilyin the past five years, essentially on account of containment of importsvalue which was made poss'ble by declining unit prices for key commodities.As a share of GDP, total nominal imports of goods and services decreasedfrom 54 percent of GDP in 1982 to 35 percent in 1988. Growth in nominalexports of goods and all services has lagged behind that of overall GDP,causing its GDP share to fall to 26 percent in 1988, compared to 35 percentin 1982. After a rapid increase in the early eighties, total long-termpublic debt outstanding has been rising at a slower rate than nominal GDP,reaching US$3.3 billion or 66 percent of GDP in 1988. Due mainly to eightsuccessive debt reschedulings by Paris Club members, the debt service ratiohas remained manageable at 24 percent in 1988. Without reschedulings, theratio would have exceeded 30 percent in that year.

11. Overall, real GDP is expected to suffer a decline of 1.3 percentin 1989 due primarily to a drop in agricultural production caused by anuneven distribution of rainfall. The important shortfall of fiscal revenueduring 1988189 has added much strain to an already tight budgetarysituation. Spending for materials, maintenance, and investment has beenlowered while the Government has encountered delays in settling its arrearswith domestic suppliers, banks, foreign donors and firancial institutions.

Prospects and Financing Needs

12. Assuming quick and full implementation of the policy reformsunder the proposed operation and those developed by the Government in itsfourth Policy Framework Paper 1989/90 to 1991/92 which was discussed by theCommittee of the Whole on December 1, 1989, the performance of the economyachieved in the recent past would be sustained. Real GDP growth would,after registering a decline in 1989, increase to an average of 3.8 percentover the period 1990-97, representing an increase of nearly 1 percent percapita. Gross domestic investment (in particular, private investment)would increase gradually, from 14.5 percent of GDP in 1988 to almost 18 percent in 1997, primarily because of positive private sector response toimprovements in the policy environment. Investment w;Juld be financedincreasingly from domestic savings. The latter is projected to almostdouble as a proportion of GDP during the same period, reaching 12 percentin 1997. Finally, while private consumption would register a reasonableincrease on a per capita basis starting in 1990, public consumption wouldgrow only marginally, reflecting the deliberate deceleration in governmentrecurrent expenditure.

13. Overall fiscal deficit (excluding grants) is projected to turninto a surplus in 1992, and then remain positive thereafter. This is made

possible through better resource mobilization and prudent spending.Senegal's domestic revenue effort (ratio of current revenue to GDP) isexpected to reach about 21 percent (with an elasticity of 1.1) withoutimposing an excessive burden on the private sector. This would be achievedthrough better tax collection, further rationalization of the tax system,and expansion of the tax base. The low increase in total expenditure ismade possible by a combination of factors: improvement in investmentprogramming, which focuses on highly productive projects; reduction inGovernment transfers to parastatals; and containment of the civil servicewage bill through several measures, including cutbacks in the number ofcivil servants.

14. The current account deficit, excluding official grants, isprojected to decrease by nearly half during the period as a result ofhigher export growth (essentially in manufacturing, horticulture, andservices). Imports are projected to increase at the same pace as GDP,reflecting the investment requirements; increase will occur faster duringthe second half of the period than the first. Imports of intermediate andcapital goods, in particular, are projected to increase with theimprovement of the incentives system and the restructuring of theindustrial sector. Foreign exchange reserves are expected to accumulate tosafer levels, equivalent to 2-3 months of imports for the normalfun' -ioning of the economy.

Table 2: EXTERNAL CAPITAL REQUIREMENTS AND SOURCES, 1989-97(in US$ million)

Total Annual1989-97 Average

FJnancinR Requirnts 7687 848Current Account,dfict (excl. official grants) 460a 600Public Debt Amortization 2088 230IMF Repurchases 846 88Change In Reserves/Operations Account 873 76

Identifie Financ!na 8467 719Official Grants 2244 e49Public ULT Loan Disburgements 3817 402IMF Purchases 168 18Debt RelIef pj 10 12Other (not) 843 38

Financing Cap 1120 124

Source: Annex I!/ Debt relief relates only to 1989.

15. The external capital requirements necessitated by this scenarioare shown in Table 2. The cumulative financing requirements during theperiod 1989-97 is projected at US$7.6 billion. This comprises US$4.5billion of current account deficit (excluding transfers), US$2.4 billion ofdebt amortization (including IMF repurchases) and US$0.7 billion of changes

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in reserves. The latter reflects the need t.. rebuild the level of reserveswhich plunged drastically in 1987-88. Over one-third of the identifiedfinancing would be in .t.e form of official grants, consistent with the needto reduce the debt service burden. The unfilled gap is projected toaverage 15 percent of total financing requirements which is quitemanageable given the declining debt service.

II. THE GOVERNMENT'S STRUCTURAL ADJUSTMENT PROGRAM AND BANK SUPPORT

The Government's Medium-Term Program

16. In response to Senegal's prolonged and deteriorating economicsituation in the late 1970s and early 1980s, the Government formulated aMedium-Term Economic and Financial Rehabilitation Program (PAML is itsFrench acronym) for the period 1985-1992, which was presented to the firstConsultative Group in December 1984. The main objectives of the programweres to achieve an average 1 percent real GDP per capita growth per year;to redress the financial imbalances; and to improve the institutional andincentives environment in order to promote the development or the privatesector whereby less involvement of tile Government in the economy would beneeded. Specifically, the overall budget deficit was to be eliminated, theexternal debt problem resolved, and the Government's ,.arge domestic arrearspaid off. A much moire efficient public investment program was to beinstituted which would concentrate on rehabilitating infrastructure andexpanding key public services. Furthermore, the private sector was to beencouraged through the improvement of the regulatory environment, higherproducer prices and better export incentives. PAML established broadeconomic policy objectives in each of these areas in the form of an overallplan with sectoral strategies. A much more detailed agenda for the firsttwo-year phase was developed during 1985 and eventually formed the programsupported by the donor community, including the Bank and the IMF. Inaddition, the Government prepared the first Policy Framework Paper (PFP),for the period 1987/88 to 1989/90, which has been updated annually anddiscussed with the Bank and the IMF.

17. According to its most recent PFP, for the period 1989/90 to1991/92, the Government intends to provide a more favorable and balancedmacroeconomic environment to sustain economic growth. This objective willbe achieved through controlling growth in public spending, limitinginflationary pressures and removing structural bottlenecks to economicgrowth and to increased private sector activity. In line with thisobjective, the Government intends to: (i) achieve a turnaround in thebudget position (from a deficit to a surplus), taking into account agradual reduction in the flow of external budgetary assistance; (ii)strengthen further public investment programming with an emphasis onefficiency and the directly productive sectors; (iii) enhance industrialdevelopment through appropriate incentive measures, including reductions inproduction costs; (iv) promote and diversify agricultural production; (v)accelerate the reform of the public enterprise sector tarough

rehabilitation, privatization, and; liquidation; and (vi) implement thereform program of the banking sector. These planned measures are expectedto have a gradual impact, as discussed above, on economic performance overthe medium-term. The external financing requirements are also consistentwith the projections discussed earlier.

Bank Support to the Government's Adjustment Effort

18. Previous Bank experience with policy-based lending in Senegalcomprises three Structural Adjustment Loans (SALs) approved in November1980, January 1986, and May 1987. A Program Completion Report (April 1984)and a Program Performance Audit Report (May 1985) reviewed the experiencewith SAL I. The OED report on "The World Bank and Senegal, 1960-1987"(November 1988), inter alia, analyzed the Bank's experience with all threeSALs in some detail. A Program Completion Report for SALs II and III (June1989) is also available.

19. SAL I, which was one of the first SALs approved by the Bank,supported the initial steps of the reform process in the parapublic and theagricultural sectors, and also dealt with improved production incentivesand investment policy. The program met most of its objectives in the areasof parapublic sector management and production incentives, but ran intodifficulty in the implementation of policies concerning fertilizer and seeddistribution. As a result, the second tranche of the credit was cancelledin June 1983. In addition, exogenous factors sucE as droughts and terms-of-trade losses which worsened the economic situation had contributed tothe failure of SAL I to meet its objectives. By mid-1984, the economicsituation in Senegal had deteriorated further, prompting the Government toformulate its medium-term adjustment program (PAML) which was a Bankprecondition of both the organization of the first Consultative Groupmeeting for Senegal and the resumption of lending for structural adjustment(SALs II and III).

20. The two SALs supported reforms presented in the Government'smedium-term program (PAML). The main reforms initiated under SAL IIconsisted of improvements in the industrial incentives system through theNew Industrial Policy (para. 21); liberalization of agricultural inputsupply and rice marketing through the New Agricultural Policy (para. 21);and improvement in the management of public resources. Most of the reformssupported under SAL III represented a continuation and a deepening of thoseinitiated under the preceding SAL. Additional actions included initialmeasures to improve financial intermediation, the rehabilitation of threepublicly-owned banks (BNDS, USB, and BCS), the formulation of a populationpolicy and an action program, and the alleviation ojf the adversetransitional impact on employment caused by structural adjustment.

21. Generally, SALs II and III have been successful because most ofthe agreed actions have been implemented by the Government and the creditshave been fully disbursed. Significant progress has been achieved underSALs II and III, subject to the provisos that the complexity of the reformprogram and the extensive number of measures involved, taken together withthe limited administrative capacity of the Government, have delayed actionsin some areas. The budget and current account deficits have been reduced

and per capita growth in the economy has resumed. In public resourcemanagement, improvements have been made in streamlining the tax system, inreducing domestic arrears and subsidies, in adopting a three-year rollinginvestment plan reflecting better priorities and, to a limited extent, incontaining the civil service wage bill as a percentage of current spending.In the parapublic sect3r, the divestiture process has been initiated byearmarking 26 public enterprises for sale (actually offering 10) and byliquidating 9 others. Major achievements under the New Industrial Policyhave included the removal of quantitative import restrictions and pricecontrols on manufactured goods, the rationalization of the system ofprotection, and the revision of the investment code to eliminate the biastowards capital-intensive projects. Under the New Agricultural Policy,fertilizer imports have been decontrolled, input subsidies reduced, and therole of the state rural development agencies significantly curtailed.

22. In spite of the many achievements, the adjustment process is farfrom complete and Senegal still faces a number of severe financial andeconomic constraints which have yet to be effectively tackled. The supplyresponse thus far from the private sector, especially in terms of newindustrial investment and exports, has been weak and ceteris paribus, isexpected to remain so because of high production costs and because of labormarket rigidities and deficiencies in the regulatory environment. Muchdeeper reforms are still needed to address these problems and to providethe correct incentives to private sector development. These reforms shouldcontribute to the real exchange rate depreciation that is needed to renderSenegalese enterprises more competitive in international markets,particularly given that many of Senegal's competitors have been undergoingdevaluation-led adjustments. These measures need to be supported byeffective rehabilitation of the banking and financial systems.Furthermore, serious weaknesses persist in the management of publicresources, especially the allocation between wage and non-wage expendituresand the financial performance of the parapublic sector. Unless theseweaknesses are tackled, the probability of reaching the goals ofeliminating the budget deficit and restoring public savings is not veryhigh. It should be politically feasible to adopt the necessary reforms,though on the basis of past experience in Senegal, particular care has beentaken, firstly to line up support against opposition from powerful vestedinterest groups (such as civil servants and labor unions), and secondly toavoid overestimating the Government's capacity to implement reforms andunderestimating the time needed to prepare and implerant the necessaryactions. In order to do this, SAL IV focuses on relatively fewer areasthan previous SALs and supports a limited number of critical actions. Thishighlights the importance of the SECAL and hybrid operations in the Bank'sstrategy of adjustment towards Senegal. These operations are essentialinstruments for the mobilization of both the sectoral ministries and thenumerous cofinanciers in of support of needed reform.

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III. SAL IV PROGRAM 1989-92

23. Since Senegal, as a member of the West African Monetary Union(UMOA) and, thus, of the CFA franc zone, cannot take unilateral action toadjust the nominal exchange rate, the maintenance of tight fiscal andmonetary policy to bring about the reduction of the fiscal and externaldeficits are critical to the achievement of real exchange ratedepreciation. Under SALs II and III, a series of demand-managementmeasures were undertaken to reduce the fiscal deficit and to domesticinflation relative to that of major trading partners and, thus, to triggera real depreciation. These measures have been partly successful, helpingto reduce the resource gap and the inflation rate--the real effectiveexchange rate depreciated in real terms by about 11 percent between 1986and mid-1989. At this rate of improvement, however, demand-managementmeasures alone will not generate a sufficient real exchange ratedepreciation to initiate a supply response and, thereby, an increase inexports in the near term. Additional measures will need to be introducedunder SAL IV to reduce the costs of production in general, and to createadditional incentives for exports.

24. The adjustment package proposed under SAL IV consists of alimited number of fundamental policy reforms accompanied by technical andmanagerial steps to implement them. These are: (i) the improvement in theproduction incentives system through a reduction in the taxation burden ofthe corporate sector, the containment of costs of production, and theelimination of labor market rigidities; (ii) the rationalization of publiccurrent expenditure by ways of downsizing the civil service and increasingits productivity; and (iii) the rationalization of the public enterprisesector through a drastic reduction of all Government subsidies (direct andindirect) and through aggressive privatization. Some of the proposedreforms will have a deflationary impact on the economy.

A. Public Finances and Investment Programming

Public Finance

25. Within the context of its continuing financial stabilization,the Government intends to further improve the budgetary situation and torestore public savings. It has set the target of a reversal of thebudgetary position from a deficit of 4.0 percent of GDP in 1988/89 (on acommitment basis) to a surplus of 0.9 percent by 1991/92. As a corollary,the Government expects to reduce its reliance on direct foreign budgetaryassistance and, at the same time, to service its external debt obligationswithout recourse to debt relief. To achieve this target, the Governmentwill have to: (i) contain current spending, essentially through a reductionin the civil service wage bill and in transfers to parastatals; and (ii)mobilize additional domestic resources. The Government's macroeconomicpolicy objectives and reform program are spelled out in the Letter of

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Development Policy. Overall macroeconomic performance will be taken intoconsideration before the release of the second and third tranches.

26. The key budgetary issue in Senegal is the high civil servicewage bill in relation to Government revenues, large transfers and subsidiesto the parastatal sector, and sagging tax performance. In spite of effortsto minimize nominal wage increases and to reduce the size of the civilservice, wages and salaries represent more than half of both currentexpenditures and domestic revenues, including non-tax receipts. Thisreflects the inefficient management of the civil service. Furthermore, thecivil service in Senegal is too large by comparison to employment in themodern sector, which is one-third its size, and by comparison to countriesat Senegal's GDP level. As a result of the wage bill, few resources areleft for maintenance and operating expenses, leading to low productivity ofGovernment services. A reform plan for the civil service is discussedbelow (Section D). Transfers to parastatals have also been a major drainon budgetary resources, without the benefits of cost-efficient services tothe economy. The Government's two-pronged effort to resolve this issuewill focus, on the one hand, on the privatization of a large number ofparastatals whose management can best be handled by the private sector and,on the other hand, a systematic reduction of subsidies, both direct andindirect, to remaining ones (Section C). Measures will be taken to improvethe sectoral allocation of public resources in the context of the publicinvestment programming exercise discussed below.

27. On the revenue side, the Government intends to continueimplementing the tax reform measures initiated under SAL III, and to widenand improve the structure of the tax revenue base. More specifically, theGovernment has, on the basis of the recent IMF/World Bank study, adopted anaction plan with a view to reducing the dependency on windfall profits frompetroleum imports and identifying other sources of revenue withoutovertaxing the modern sector. These sources ares (i) improvement of taxadministration and collection, particularly in the Customs Department bythe computerization of customs clearance procedures; (ii) assessment of taxarrears and their recovery through a better information management system;(iii) gradual extension of the value-added tax to commerce and services;(iv) launching of measures to tighten the taxation of the informal sector;(v) expansion of the tax base with the completion of the ongoing fiscalcadaster of the Dakar region and the reform of the land property taxregime; and (vi) elimination or renegotiation of exemptions to the commontax regime as they currently apply to certain enterprises (public andprivate) through the system of "special agreements".

28. The Government has recently reviewed its tariff structure andlevels, given both the sharp decline in customs revenues in the secend halfof 1988/89 and the difficulties experienced by some manufacturingsubsectors from increased competition since the adoption of tariff reformin August 1986. In consultation with the Bank and the IMF, the Governmenthas adopted measures which are consistent with the thrust of the tradereform introduced under SALs II and III, but which provide short-termalleviation measures to help public finances and Senegalese manufacturing.The customs duty rate ("droit de douane") has been raised across the boardfrom 10 percent to 15 percent. Exemptions from various import duties have

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been agreed to on an exceptional basis for a period of two years to July1991 for three sectors (textiles, batteries, and matches). Thestrengthening of the Customs Administration is expected to contribute to anincrease in revenues over the SAL IV period. An action plan has beenprepared by the Government, including, inter alia, measures to preventfraud and to improve valuation methods through the imposition of minimumduties across a wide range of imported products. The Government hascommitted itself to the full implementation of the plan in its Letter ofDevelopment Policy.

Public Investment Pro ramming

29. The realization of a public expenditure program consistent withsectorial policies and strategies is an important Government objective overthe medium-term. Support was provided under the previous two SALs toimprove the investment component of public expenditures. The second three-year rolling public investment program (PIP) for the 1988/89-1990/91period, in consultation with the World Bank, marks a clear improvement incomparison with previous planning exercises, especially in terms of themacroeconomic framework, sectorial coverage, financial profile, and projectevaluation. A satisfactory review of the next two PIPs will be a conditionof second and third tranche release, respectively. The current PIP for1989/90-1991/92 has been reviewed by the Bank and found satisfactory.

30. There remains, however, room for substantial improvement inprocedures and a need for institution building, both of which theGovernment will address under SAL IV. Three areas of reform have beenidentified that would enhance the quality of the public investment program.First, there is a need to consolidate progress achieved so far in theprogramming, preparation, and monitoring of public investments. Morespecifically, this concerns: (i) the methodology and approaches to projectpreparation, implementation, and monitoring; (ii) the strengthening of thelinks of the PIP with sectorial development strategies; and (iii) thesystematic evaluation of recurrent costs associated with all investmentsincluded in the PIP. Project preparation guidelines that have beendeveloped for directly productive projects will be standardized andsupplemented by similar guidelines for other types of projects. Moreimportantly, the Government will ensure the systematic adoption of theseguidelines as a key criterion for project selection. To make a moreeffective use of the experience acquired in earlier projects in the designof new ores, efforts will be expended to provide regular and timelymonitoring of projects, in terms of both physical and financialimplementation. The Government will, in the preparation of successivePIPs, review sector priorities which will serve as the basis for sectorialallocation of resources. Finally, the Government will apply the analysisof recurrent cost implications of the PIP, focusing first on the foursectors of transport, health, education, and urban development and watersupply. This will ensure that a coherent link is established betweencapital outlays and operating and maintenance expenditures.

31. Second, while the PIP has been officially incorporated in theoverall budget since July 1987, for practical purposes, the capital andrecurrent components of the budget are still prepared independently of each

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other, with the domestic contribution to the capital budget determined as aresidual. The absence of a coordinated approach to the preparation of thecurrent and investment budgets heightens the risk that too many newprojects will be started without sufficient operation and maintenancefunding for their upkeep, leading to a premature deterioration of thecapital stock. By promoting close coordination between the agenciesconcerned (particularly the Ministries of Finance and Economy, and ofPlanning and Cooperation), the Government will rationalize the preparationof the budget. This will be supplemented by a more rigorous financialmonitoring of capital expenditures. These measures will help integrate theannual investment program in the normal budgetary and expenditure controlprocedure.

32. Third, technical ministries at present generally lack theinstitutional capacity to identify, prepare, and monitor their respectiveprojects. This places an undue burden on the Ministry of Planning andCooperation, which hinders its main functions of overall projectcoordination and screening and formulating sectoral policies. TheGovernment will take steps to strengthen the analytic capacity of technicalministries and gradually transfer to them the responsibility for projectidentification, preparation, and monitoring to the technical ministries.This will first be achieved in the rural development, education, health,infrastructure and industrial sectors with support from the DevelopmentManagement Project (Cr. 1910-SE).

B. Incentives for Private Sector Development

Background

33. In the past, the Senegalese economy has suffered from heavydistortions favoring public sector and import substitution activity,limiting diversification in the export sector and restricting the role ofthe private sector, especially in the goods-producing sectors. Thesedevelopments were shaped by government policies which remained largelyunchanged until about 1980. These policies resulted, inter alia, in thecreation of a high-cost, largely inefficient, industrial sector whichenjoyed substantial protection and to an appreciation of the real exchangerate that has further eroded the external competitiveness of Senegal. Themain elements were: (i) high nominal tariffs on final products, translatinginto high rates of effective protection (averaging 100-150 percent) givenlow tariffs on inputs; (ii) significant quantitative restrictions onimports; (iii) an inappropriate investment code with relatively high ratesof corporate taxes; (iv) labor policies restricting mobility andencouraging high levels of real wages (estimated to have averaged doublethe wage level in neighboring countries during 1986, with a minimum wagehigher than in Portugal for example); (v) special agreements of anessentially ad hoc nature under which about 27 companies in the industrialsector benefitted from specific protection regimes (over the period 1979-86), the latter special agreements with four such enterprises cost theGovernment some CFAF 115 billion (US$360 million) in cumulative terms inforegone revenue; and (vi) subsidization of inefficient public sectorenterprises.

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Performance under Previous SALs

34. With the support of both the Bank and the IMF, Senegal hasintroduced a number of major policy changes in recent years, with theobjectives of: (i) increasing incentives for exports relative to those forimport substitution; and (ii) liberalizing the environment for privateenterprise development in the context of the New Industrial Policy of 1986.

35. The major accomplishments of the reforms which have beensupported by three previous SALs fall into three broad categories. First,in the area of trade regime, a series of export promotion measures havebeen adopted, starting from the introduction of a duty drawback scheme andof export subsidies on fob value under SAL I. Under SAL II, the subsidieswere rationalized and extended to the equivalent of 15 percent of valueadded. Under SAL III and the IDA financed Industrial Sector RestructuringProject (Cr. 1868-SE), measures were taken to strengthen the exportinsurance agency (ASACE). An action plan is to be undertaken to improvethe functioning of the export promotion agency (CICES). The system ofimport protection was radically revised under SALs II and III, which hasled, since August 1986, to lower levels of protection and greaterharmonization of tariffs--those on finished products average 40 percent,those on inputs average 20 percent, and average rates of effectiveprotection have been reduced by 25 percent. These measures weresupplemented by the phase out of most product-specific duties, theelimination of distortions introduced under the reference price system forvaluing certain imports ("valeurs mercuriales"), and the progressiveelimination, completed by 1988, of all quantitative restrictions, exceptthose covered by special agreements.

36. Second, in the area of investment incentives, a new InvestmentCode was promulgated in July 1987 which introduced automatic tax advantagesdeclining over the eligibility period, eliminated biases in favor ofcapital intensive investments, offered advantages to small- and medium-scale enterprises, and provided for streamlined administrative proceduresthrough the establishment of a one-stop window ("Guichet Unique"). Aninitial effort in the area of labor code reform comprised measuresinstituted to eliminate the need to hire through the Government's laboroffice and to allow firms greater freedom to renew fixed-term laborcontracts. A series of supporting actions were taken, in particular in theagriculture sector under SAL II, to improve the overall businessenvironment through price liberalization and the liberalization of thedistribution system. Under SAL III, the Government decided to abandon theprinciple of special agreements with new enterprises and undertook torevise the existing agreements. In November 1987, a special committee wasformed to prepare an action plan for the renegotiation of some agreementsand the phase out of the others over a three-year period. Detailed auditsof CSS (sugar), SAR (petroleum refining) and SOCOCIK (cement) have beencarried out.

37. Third, the process of industrial restructuring was started,under which the Government was expected to divest its interest in mostproductive industrial enterprises in order to restrict negative impact on

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the private sector. Financial sector restructuring, under which two majorbanks were to be restructured and banking supervision strengthened, wasalso expected to encourage private sector development.

38. It is not yet possible to undertake a full a posteriori analysisof the impact of the above measures. Nonetheless, there are grounds forbelieving that, albeit necessary, such measures alone will be insufficientto achieve the Government's underlying goals of sustained increases inindustrial output and employment by means of improved productivity andincreased competition. The trade reform measures certainly favor a morecompetitive business environment and have removed distortions emanatingfrom the previous high rates of effective protection for certainindustries. However, additional reform measures are needed to removemarket rigidities, particularly for labor. Domestic producers have beenunable to adapt quickly to the new competitive environment. The exportpromotion measures have had a limited impact on increasing and diversifyingexports. Furthermore, relatively little attention has been paid to thediscouraging impact of high effective corporate tax rates which, thus far,have not changed under the reform program. This problem is not felt,however, in the informal sector which largely escapes the tax system.Accordingly, the shake out of existing enterprises may be more severe thanfirst expected and the creation of new ones slower and more arduous thananticipated.

39. Further action, supported under SAL IV, is needed to stimulateprivate sector investment and output growth by helping to overcome thecontinued constraints on private sector productivity growth and on theability of the private sector to compete in the liberalized domestic andexport markets. Further action is also required to reduce the high costsof production that have persisted through the initial phases of adjustment,mainly because of insufficient progress on labor and energy reform. Thesetwo areas will be given increased attention in the measures proposed underSAL IV to create improved incentives for the private sector.

40. Support through the SAL needs to be complemented by a morethorough reform of the banking system. The Government has realized thatthe magnitude of the banking sector problems surpass its capability to dealwith them with its own resources and may risk undermining the anticipatedpositive impact of various incentives supported under the adjustmentprocess on private sector development. A financial restructuring plan hasbeen prepared and was presented to the donor community in November 1987.As a result, a Financial SECAL has been prepared and approved by the Bankin December 1989. The main components aret (i) rehabilitation of bankshaving potential, and the merger (with new private capitalization) orliquidation of other bar,ks; and (ii) reform of the banking supervisionsystem and financial sector policies under the control of the Government,in harmony with a broader program of reform of the BCEAO at the level ofUMOA which was agreed in July 1989.

Program Envisaged under SAL IV

41. The main reforms contemplated in this component are fivefold:(i) render labor market conditions more flexible with a view to reducing

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costs; (ii) reduce the input and infrastructure costs to industry (energy,transport and telecommunications); (iii) improve the investment climatethrough simplified administrative regulations, appropriate fiscalincentives, and elimination of distortions; (iv) improve incentives forexport-oriented investments; and (v) pursue the process of reform ofspecial agreements.

42. Labor conditions. The high cost of labor and the relativeinflexibility of the labor market have been identified, in studies preparedunder SALs II and III, as two of the principal constraints on productivitygrowth and private sector development. Under SAL III, only very limitedreforms could be introduced because of the Government's inability toovercome deep-seated opposition to any reform of the existing laborlegislation. It was possible to reach agreement on the liberalization ofhiring practices, i.e., the abolition of the requirement that allrecruitment be made through the Government. However, the attempt to relaxthe constraints on the use of temporary employment contracts, considered animportant instrument for enterprise development, was only partiallysuccessful--the maximum period for such contracts was extended from 6months to 1 year. The strategy for pursuing and deepening labor reformunder SAL IV has had to be carefully considered to ensure the supportrather than the opposition of those groups which have frustrated pastattempts at reform. Consequently, the program of reforms and appropriatejustification have been discussed extensively with employers and unionsduring the preparation of SAL IV.

43. The Government's policy is to confront the problem of laborrigidities on two levels and to establish a framework for action to bringabout reductions of the wage level and of labor costs in general. In theshort-term, the Government has agreed to take two actions which willincrease employment flexibility. Firstly, in terms of the applicationdecree of Article 35 of the Labor Code, existing enterprises will enjoy, inthe form of an increase in activity ("surcrolt d'activit4"), unlimited useof temporarv contract labor. The decree was signed into law by thePresident of the Republic of Senegal on September 15, 1989. Secondly, interms of a modification to the Investment Code, eligible enterprises willbe able to hire their workforce on the basis of temporary employmentcontracts for a period of up to 5 years. Furthermore, small- and medium-scale enterprises (SMEs) as defined in the Investment Code, i.e.,investment in the range of CFAF 5 to 200 million (US$15,000 - 650,000),employing at least 3 persons (about 40 percent of existing formal sectormanufacturing enterprises (SMEs) comprise this group), will henceforth beexempted from prior Government authorization for dismissal of employees.These advantages will be extended to all enterprises located in the ZoneFranche Industrielle de Dakar (ZFID) by virtue of a modification in itsstatute. These modifications were approved by the National Assembly onOctober 5, 1989 and promulgated on October 12, 1989. Therefore, theGovernment has respected the agreement that the above measures, that is thepublication of the application decree and the enactment into law of therevised Investment Code and ZFID statute, would be enacted before Boardpresentation.

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44. The above-mentioned measures also encompass changes in theliability for wage taxation for new and expanding firms. Under the revisedInvestment Code, eligible firms will be exempt from the general payroll tax("contribution forfaitaire") which is equivalent to 3 percent of nominalwage cost. Furthermore, these firms will benefit from a wage subsidy,equivalent to income taxes that would normally have to be paid by theemployers for all new employees. This benefit is, however, available onlywhen a minimum of 50 new jobs have been created, or for every new employeebeyond this level for expanding existing firms. As no employment thresholdapplies, however, in the case of SMEs as defined by the Investment Code,SMEs will benefit from the wage subsidy for all new employees hired. It isthus anticipated, given that typical employment levels for SMEs in Senegalare in the range 40-50 persons, that most enterprises will benefit fromthis incentive. The benefit, however, does not apply to the existingworkforce, other than in the ZFID where the statute modification specifiesthat all enterprises are covered. The value on average of this benefit isestimated at 12 percent of nominal wage cost for eligible employees.Although the impact on average overall wage costs in the economy will bemore muted, it will increase over time as the number of new employeesincreases relative to the number of established workers. The impact willbe reinforced by the above-mentioned measures on increased employmentflexibility which are expected to lead to lower wage costs and higherproductivity.

45. The Government intends to take other measures to encourage thefuture reduction in the level of real wages, and, thus, to increase thecompetitiveness of the Senegalese economy. Formal sector wage negotiationis highly institutionalized, with annual collective bargaining of wageagreements in 27 separate industry groupings. The agreements presently inforce include complex structures ("bar&mes de salairesn) of minimum wagesfor different occupational categories and levels, which reduce wageflexibility. Together with employers and unions, the Government plays animportant role in wage determination--firstly, through determining theminimum wage (SMIG) which is both reference price and floor price for allindustry level negotiations, secondly, acting as an arbiter to ensureagreement between the two parties to the bargain, and thirdly requiring allenterprises, regardless or not of their participation in collectivebargaining, to implement any wage agreement reached. The Bank and theGovernment have agreed that studies should be undertaken of Senegal'scomparative wage level and structure in order to inform the bargainingprocess and that clear signals should be given that wages have to fall inreal terms. This latter effort would also be necessary to reduce the gapbetween formal and informal sector wages (estimated as, at least, a factorof 3) which presently acts as a major disincentive to the growth of small-scale enterprises and which also hinders any significant employmentexpansion in the modern sector, especially for export-oriented enterprises.To this end, the Government has made an undertaking, as agreed, to freezethe SMIG at its present nominal level for a period of at least the next 3years, before Board presentation. The Government has further agreed in itsLetter of Development Policy to a review by the tripartite commission (seebelow) of the wage setting system, inter alia with a vi9w to initiallyreducing labor costs and moving towards market determined wages throughreducing Government intervention and making collective bargaining

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voluntary. Terms of reference for the review of the wage setting systemwere agreed during negotiations. The Government will adopt measuressatisfactory to the Bank to implement the recommendations of this reviewbefore second tranche release.

46. In the medium-term, additional labor market reforms would bedesirable to streamline existing legislation and to improve industrialrelations practices. Steps will be taken under SAL IV to initiate thefundamental review of existing labor legislation. The Government hasagreed to establish a tripartite commission (i.e., with employer and unionparticipation) which will examine the existing labor legislation andindustrial regulations so as to identify new policies to encourageproduction and employment in the modern sector. The Government intends toseek technical assistance from the International Labor Office (ILO), whichhas helped in the elaboration of terms of reference, to support thecommission's work. The process will be started under SAL IV and isexpected to solidify the practice of realistic negotiations of wages andconditions and to promote dialogue among the social partners. Theprincipal areas to be tackled by this commission were agreed atnegotiations and have been reflected in the Government's Letter ofDevelopment Policy.

47. Production Costs. The cost disadvantages suffered by producersin Senegal vis-a-vis competition from elsewhere do not emanate solely fromthe problems in the labor market mentioned above. Infrastructure costs(mostly energy, transport, and communications) perceived to be higher thanjustified by market conditions are also problematic. Problems also arisefrom the pricing policies per se and from low service-quality which imposesa variety of additional costs on producers.

48. Studies have been conducted in the energy sector with a viewfirst, to determine appropriate price structures for petroleum productsbearing in mind, inter alia, the overall fiscal position of Senegal(para.27) and economic criteria within the sector, and second, to reducethe price of intermediate products of which the savings could be passed onto industrial consumers as lower electricity tariffs. These studies,undertaken in the context of the February 1989 IMF/Bank mission on taxationissues, cover the system of procurement, refinement, and distribution ofpetroleum products (including an operational audit of SAR) and the fiscalaspects of petroleum product pricing. On the basis of these studiAq, it isproposed that a new system be adopted in two phases for energy pricing. Asa first step, a simpler and more transparent structure for petroleumproduct prices is to be introduced. Ex-refinery prices are to be set atimport parity and adjusted quarterly. Prices to distributors will bederived from ex-refinery prices by adding an import duty, a value-added tax(VAT), a specific petroleum product tax (contribution to the Energy Fund)and a fixed handling fee to be paid to SAR and to be negotiated with therefinery. As a second step, domestic prices of intermediate products (fueloil and diesel oil) will be lowered by eliminating the special taxation ofthese products; electricity tariffs will be adjusted automatically throughthe existing indexation formula. Because the special treatment to thephosphate sector will be removed at that time, the net tax loss isestimated to be small relative to the reductions in energy prices to the

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industrial sector. These reductions, ranging at current internationalprices from about 18 percent for high voltage electricity rates to 45percent for fuel oil, are likely to have a significant impact on industriesand services which are heavy energy consumers, e.g., textiles and hotelswhere electricity may account for up to 10 percent of total operatingcosts. A major beneficiary of these measures would be the cement industry,where energy accounts for about 60 percent of total operating costs.

49. The first phase was to proceed immediately with the preparationof an amendment to the SAR special agreement. In order to help theGovernment negotiate a reasonable handling fee, the Bank has agreed tofinance technical assistance to the Ministry of Industrial Development(MDIA), and consultants have been hired. Negotiations with SAR andagreement on a provisional handling fee to be charged (US$ 2.25/barrel)have been concluded on December 26 1989. The new transparent pricing andtaxation system for petroleum products, including the provisional handlingfee to SAR, will be introduced by decree on January 1, 1990. Agreement hasbeen reached that the Government will finalize the estimate of the handlingfee in consultation with the Bank no later than January 31, 1990 and thenew figure will be introduced in April 1990, at which time the Governmentand SAR will work out the adjustment for the first quarter. The secondphase, that is the reduction of intermediate product prices, will takeplace only after the fiscal impact of the first phase has been evaluated.The Government will implement by July 1990, in consultation with the Bankand the IMF and depending on the fiscal impact of the new structure asevaluated in the fourth quarter of 1989/90, a reduction of fuel oil anddiesel prices and, thus, a reduction of electricity prices as a conditionof the second tranche release.

50. The quality and cost of telecommunications services are becomingincreasingly important factors in the development of the industrial andservice sectors of the economy. A number of improvements have beeneffected since 1986, pursuant to a tariff study, to ensure that servicecharges more rationally reflect both cost structure and demand. On thebasis of this study, a revised tariff was introduced in July 1989 whichreduced national and international call charges by 20 percent during offpeak hours. The impact of this reduction on demand is to be monitoredcoa.tinuously over the next year. If justified on the basis of thisexperience, further reductions and structure revisions will be introducedafter July 1990. These revisions, which may include the introduction of athird-charge band for semi-busy hour calls, could further decrease thecommunication costs of enterprises. The potential benefit is likely to bethe greatest for export-oriented industry and services, and for heavy datausers, for whom communications costs may be 3-4 percent of total operatingcost.

51. Management improvement and the reduction of the cost oftransport are the principal factors under examination in the proposedTransport Sector Adjustment program (SECAL). Studies of the level andstructure of port charges of the Port Autonome de Dakar (PAD) are beingundertaken, with a view to both reducing cost to Senegalese importers andexporters and increasing the attractiveness of Dakar as a port oftransshipment. It has been estimated that, on average, transport costs are

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equivalent to 25 percent of the final cost of imported and exported goods.Greater efficiency and lower costs would have an appreciable impact on thecompetitiveness of Senegalese industry. The Government is to prepare atimetable for the adjustment of tariffs. An action plan satisfactory tothe Bank will be prepared aad implemented as a condition of the TransportSECAL.

52. Investment Climate. The measures supported under previous SALs,specifically the reform of the Investment Code, have been insufficient tocreate any substantial improvement in the climate for new investments inSenegal. While the Code, as revised in August 1987, has helped toeliminate previous capital intensity biases, not enough has been done toimprove the efficiency of administration and Government regulations or toreduce the total tax burden faced by enterprises. In the preparation forSAL IV and as part of an extensive program of fiscal reform that theGovernment is implementing with the assistance of the IMF, the level andcomposition of corporate taxation has been studied with a view toidentifying reductions in the tax burden on enterprises to levelsconsistent with government policy to encourage emplcyment and investment.From January 1990, revisions to the general tax code are expected to beintroduced which include the creation of a separate corporate tax at aninitial rate of 35 percent. The reforms will reduce the tax to be paid,inter alia, through the suppression of the "Pr6lbvement au Budget de1'Equipement (PBE)". Furthermore, the reform will lead to the eliminationof the double taxation of dividends, which was a disincentive to new equityinvestment through the introduction of a single personal income tax at amaximum rat_ of 50Z. In pursuance of the objective of reducing laborcosts, wage subsidies equivalent to the tax payments for new employees areto be introduced for eligible firms under the Investment Code (para. 44).The aforementioned study has estimated for example that this latter measurewould (assuming straight line depreciation, deduction of investmentexpenses against tax, and an inflation rate of 7 percent), reduce themarginal effective tax rate on an investment in Senegal with a real returnof 20 percent, from 32 percent to 21 percent. This tax rate is verycompetitive relative to other sub-Saharan African countries. TheGovernment has prepared a plan of action for the implementation of allthese measures together with a timetable for the study of further actionsto be taken during the SAL I- period. Consequently, the Government hasrespected the agreement to examine the study's recommendations and toprepare a plan of actions satisfactory to the Bank, before Boardpresentation. As part of the overall performance review, progress in theimplementation of the action plan will be evaluated at the time of thesecond and third tranche releases. The Government will complete thefollowing specific actions before second tranche release: establish aseparate corporate tax at 35 percent; eliminate the PBE; and establish asingle personal income tax at a maximum rate of 50Z.

53. The development of the private sector is seriously hampered bythe poor regulatory environment. Legal constraints which are mostimportant in labor matters and administrative constraints which relate topoor attitude and inappropriate organization in key ministries and agenciesare among the main reasons for the poor environment. In addition to themeasures related to labor market conditions (paras. 42-46) and civil

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service reform (paras. 94-103), additional measures have been identifiedand are to be implemented under SAL IV. A plan of action has been preparedfor %he strengthening of the customs administration, in view also of theneed to improve revenue collection (para. 28). Having established the one-stop-w2rdow ("Guichet Uniquen) to improve the processing of applicationsfor investment code benefits, the Government is to ensure that alldepartments respect the agreed procedures and timetable for submission ofapprovals. A Bank-commissioned consultant study of the regulatcryenvironment for the private sector has just been completed and exploresways to simplify administrative controls and procedures, and thus to reducecosts of the private sector. The Government has prepared a plan of actionbased on this study, which provides for the restructuring of the fiscaladministration (Directioui Generale des Imp6ts et des Domaines) to createinter alia, a simplified and more transparent structure and improvedoperating procedures, including relations with the tax payer. Othermeasures include actions to improve information for investors, simplifyfiscal texts, centralize formalities for company creation, and rationalizevarious other procedures including registration for SMEs and licensing forself-employed professionals. The Government has also agreed as part ofthis plan to review and evaluate, on an annual basis during the SAL IVperiod, the impact of the reduction of regulatory constraints and of thevarious incentives on new investment. The Government has as agreedprepared an action plan, satisfactory to the Bank, before Boardpresentation. As part of the overall performance review, progress in theimplementation of the action plan will be evaluated at second and thirdtranche release. The implementation of the restructuring of the DirectionGdn6rale des Imp6ts et des Domaines and the streamlining of operatingprocedures in a manner satisfactory to the Bank will be a condition of thesecond tranche release.

54. Trade Regime. The program envisaged under SAL IV is essentiallyfocused on further encouragement of exports. The main thrust of thereforms is to reduce the cost of production to export activities and toimprove the special tax and incentive package available so as to increasethe international competitiveness of Senegalese enterprises. The principalmeasures will be: (i) introduction of greater flexibility of laborconditions; (ii) preparation of an action plan to improve the working ofthe industrial free zone; (iii) enhancement of plan effectiveness andextension of the concept to other free areas; and (iv) review of theadministration and effectiveness of the export subsidy and the dutydrawback scheme for exports with a view to improvement.

55. An industrial-free zone (ZFID) has existed since 1974 but hasnever been a real success. At present, there are 10 enterprises employingabout 600 persons in ZFID. Fiscal incentives are offered which aresomewhat more attractive than those available in general under theInvestment Code. However, ZFID suffers from poor location and a heavyadministrative structure, and is subject to national wage and laborlegislation. The Government has taken action on this latter point throughthe recent modification of the ZFID statute indicated above (para. 43). Anumber of other reforms have been proposed by an internal Government study,with a view to ensuring that ZFID enterprises enjoy in all areas at leastequivalent incentives to those available outside (non-discrimination) and

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also benefit from additional export incentives. Notably, the reformsproposed include measures to: (i) streamline the ZFID administration andconfirm its autonomy from Government; (ii) improve access to the localmarket; (iii) confirm eligibility for the export subsidy scheme; and (iv)introduce "free points" in Senegal where eligible enterprises could benefitfrom the advantages of the ZFID statute. Following recent agreement on theprincipal recommendations of this study, the Government has prepared r planof action satisfactory to the Bank for the implementation of variousmeasures. Given that the measures to be introduced should lead to anincrease in enterprises operating in the ZFID, the Government has agreedwith the Bank on necessary safeguards for environmental protection. Aspart of the overall performance review, the implementation of the actionplan will be evaluated at second and third tranche release. The Governmentwill publish decrees to confirm the eligibility of ZFID enterprises for theexport subsidy scheme and to enable the establishment of "free points".

56. As part of the Government's strategy to encourage exports, anexport subsidy scheme and a duty drawback scheme for exports wereintroduced under previous SALs. A study undertaken to review theeffectiveness of the schemes indicated that the impact was considerablyreduced by substantial delays and uncertainties related to the payment ofthe subsidies and the reimbursement of import duties. Because of weakscheme administration, these instruments are considered, outsideGovernment, exceptional benefits rather than guaranteed incentives toexport. Thus, exporting enterprises do not take those schemes into accountin developing cost structure, and the impact on improved competitiveness isminimal. Simplification of procedures and documentation required fromexporters was recommended to ensure timely payments of benefits and toreinforce the effectiveness of the incentive to export. Many of theadministrative delays currently experienced are expected to be reduced as aresult of the strengthening of the customs administration. Furthermore,and given that the Government has recently decided for revenue reasons toincrease again some import tariffs on a temporary basis (para. 28), apossible increase in the funding of the export subsidy scheme would have tobe considered to increase the relative attractiveness of the export marketfor enterprises. The Government has committed itself in its Letter ofDevelopment Policy to implementing the recommended reforms to the exportsubsidy and duty drawback schemes.

57. Special Agreements. Under SAL IV, the process of re.'gotiationand phase out of the special agreements will continue. Accordingly, forall existing agreements, other than the three cases cited below, there willbe no extensions beyond the present expiration dates. in the future, allenterprises would benefit only from advantages conferred under the generaland relevant special regimes provided for in the Investment Code. Thefollowing agreements have been reached with regard to three particularcases:

(a) A revision to the SAR agreement is to be prepared, bearing inmind the introduction of a new structure for petroleum productprices. This revision would eliminate the provision of aguaranteed profit to SAR. All other advantages would be phasedout by 1992;

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(b) A program of actions leading to the revision of the agreementwith CSS is to be included under the proposed AgriculturalSector Adjustment Program; and

(c) An operational and financial audit of SOCOCIM has been completedand an action plan for the implementation of the auditrecommendations, including the revision of the pricing formulafor cement, has been discussed with the Bank at negotiations.Imr., -iention of the plan is to be monitored as part of theoverall performance review. The SOCOCIM special agreement willbe amended and the pricing formula revised in a mannersatisfactory to the Bank.

C. Parapublic Sector Reform

Background

58. At present, there are 85 public enterprises (PEs) in Senegal, ofwhich about 25 can be considered as non-commercial or administrativeentities. The PEs account for about 29 percent of total investment in theeconomy, 17 percent of total employment and only 7 percent of GDP. TheGovernment's equity in the sector doubled over the period 1982-87, reachingCFAF 218 billion in 1987 or 71 percent of total PE equity. The financialperformance of the non-financial parapublic sector has been poor and hasresulted in a growing net budgetary burden, reaching more than CFAF 14billion in 1988/89. This figure, which represents 6 percent of revenuesand 75 percent of the overall budget deficit, is only partial and does notinclude either other explicit transfers (such as loans from the Treasuryand debt servicing), or implicit transfers (such as tax exemptions, loanguarantees, foregone interest on arrears, preferential interest rates, anddistortions from price controls) which are both large and increasing.

Table 8: GOVERNMENT TRANSFERS TO PUBLIC ENTERPRISES

-------------------------..------------------------------- __----------------- _------------

Year Amount paperiod CFAF b

---------------------------------------------------------------------- __-----__-----------

Direct Government transfers (net) 1988/89 14.2Operating subsidies 1988/89 12.3Equipment subsidies 1988/89 1.9

Indirect transfers (including private and public) 1984/89 80.0of which tax and Import duty exemptions 68.0of which Financial preferential treatment 18 0

Cross-debt arrears (owed to the Government)As of end-1988 41.4During 1987-88 18 6

Accumulated Overdrafts to 'Etablissoments Publics 6/1989 16.7Estimated annual increase 2.0

Banking borrowings 1987 188.0(as percent total credit to the economy) 1987 41.1

Sources S:negal Parapublic Sector Review 1989; and iniotry Economy and Finance

- 23 -

59. A further effect of the PE deficits is the growing pressure onthe banking system. Over the period 1985-87, the parapublic sector's sharein credits to public and private enterprises was about 95 percent of long-term loans, 15 percent of medium-term loans and 25 percent of short-termloans. In 1987 PE borrowings from the banking system amounted to CFAF 188billion or 41 percent of total credit to the economy. These percentagesare far in excess of the sector's contribution to GDP. A large number ofthese loans are non-performing and have thus contributed to the crisis inthe banking sector (para. 40).

Performance under Previous SALs.

60. The process of parapublic sector reform in Senegal reallystarted in 1985 when the Government adopted a new policy for the sectorsupported by SALs II and III. The two main objectives of the new policyare the withdrawal of the Government from enterprises which the privatesector could manage better, and the improvement in the efficiency of thosePEs that would remain under Government control. These were to be achievedprincipally by: (i) pursuing privatizatior. or liquidatior of selected PEenterprises; (ii) improving the management and performance of the remainingPEs, inter alia, through contract plans; (iii) instituting simplified PEsector control procedures; and (iv) improving the quality of PE sectoranalysis.

61. Under SAL II, the Government prepared a list of 26 enterprisesto be privatized, began the process of restructuring and withdrawing fromthe rural development agencies, decided to liquidate nine enterprises,merged two export promotion agencies, and reduced direct operatingsubsidies to the sector by 5 percent in 1986/87 compared with 1985/86. TheGovernment also contributed to the preparation of contract plans forselected enterprises, improved the sector data base, reconciled cross-arrears between the state and the sector up to the end of 1985, andcompleted a number of important studies of the sector. Under SAL III, tenenterprises were put up for sale, liquidations of nine non-viable PEs werecompleted, direct operating subsidies to the sector were decreased in1987/88 and 1988/89, to 85 and 70 percent respectively of the 1985/86level, and preparation of PE contract plans continued with some preliminarymeasures to enforce financial discipline in their implementation. Inaddition, cross-arrears up to the end of 1986 were determined, a plan tophase out a priori controls over PEs over a two-year period was agreedupon, and a study of the supervisory agencies was completed.

62. The above steps have established a framework for reforms, buthard decisions with respect to a meaningful reduction of the role of theGovernment in the sector have yet to be taken. The performance of thesector as a whole has continued to deteriorate. Institutionalstrengthening has not resulted in the reduction of the budgetary burden.However, the previous SAL-supported policy reforms were really begun in1986 and it is too early for any major impact to be apparent. Theprincipal achievements of the earlier SALs includes (i) the improvement ofthe information base on the sector; (ii) the formulation of policy measures

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on the basis of sound analytic work; (iii) the strengthening of localauditing and management consulting capacity; and (iv) increased awarenessamong PE managers and Government of the need for PE reforms and of thesteps needed to achieve those reforms.

63. A number of major issues, however, remain unresolved. Theburden of the PEs on public finances is one of the most urgent problemsfacing Senegal today. The measures to reduce direct operating subsidieshave not brought about the necessary improvements. Enterprises have foundother means of maintaining their activities at existing levels withoutimproving efficiency. Enterprises have exploited opportunities forincreasing reliance on indirect subsidies, have increased their overdrafts,and have built up arrears. The ability of Government to define and tocontrol the extent of this problem has been constrained by institutionalweaknesses in the Ministry of Finance which is responsible for managingfinancial relations with the PE sector.

64. While the contract plans (CPs) have done much to improvetransparency and mutual responsibility, and to highlight some of theshortcomings in the Government's financial maniagement, their working hasbeen hampered. The Government has consistently committed itself beyond itsfinancial means in the CPs signed to date and its inability to honor itscommitments is threatening the credibility of the CP process. Many of theGovernment's reform objectives, such as subsidy reductions, have not beenincluded in the CPs and the limitations on available budgetary resourceshave not been taken into account before commitments were made.

65. Despite the decision announced in October 1987 to offer 10enterprises for sale, progress on the realization of privatization planshas been disappointing. To date, shares of only 3 of these enterpriseshave actually been sold. The political uncertainties, the poor investmentclimate and the absence of a serious financial squeeze on PEs wereimportant delaying factors, but the privatization program as originallyconceived has had several shortcomings. Some of the PEs selected havestructural and other problems that make them unattractive to potentialinvestors in their present state and the steps necessary to prepare themfor sale were not fully thought through. On the other hand, many goodpotential privatization candidates were not on the list. The approachadopted showed little flexibility and good privatization opportunities mayhave been missed. The decision that the Government maintain a share inenterprises which are purely commercial or industrial in nature proved tobe a disincentive for many potential investors. The logisticalarrangements and expertise available for handling the privatization programwere, at least until late 1988, inadequate.

66. Finally, the present system for monitoring and controlling theparapublic sector is complex and inadequate. The system as it stands leadsto duplication of effort, overlapping of responsibilities, and results inconflicting recommendations for action to Government. This is slowing downthe collection and analysis of data. and the formulation and implementationof the reform program. This has long been acknowledged in Senegal andconfirmed by studies but no effective action has been taken to resolve theproblem.

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Proposed Reforms under SAL IV.

67. Thus, there is still a clear need for a comprehensive, but wellfocused, reform program for the PE sector in Senegal. The new sectorpolicy and the reforms initiated under the previous two SALs provide theframework for the needed measures. The measures to be taken under SAL IVrequire a deepened reform effort and concentration on certain priorityareas. There are essentially two inter-related policy decisions which needto be taken and implemented: (i) drastic cuts in the amount of direct andindirect subsidies; and (ii) a reduction in the number of enterprises toremain under Government control.

68. Financial Relations between Government and PEs. To achieve therelated objectives of reducing the budgetary burden of the parapublicsector and of increasing the sector's efficiency through greater financialdiscipline, the Government has agreed: (i) to reduce explicit subsidytransfers; (ii) to eliminate overdraft facilities; (iii) to settle cross-debts; and (iv) to eliminate all implicit subsidies other than thosecovered by special agreements or the Investment Code.

69. The Government has agreed on the basis for defining the programof direct subsidy reductions to be implemented under SAL IV. TheGovernment has decided: (i) to use budgeted figures for 1988/89 as thebasis for the subsidy reduction program after extending the coverage to allPEs and administration entities; (ii) to make a distinction between thetreatment of operational subsidy for commercial versus non-commercial PEs;and (iii) to treat investment subsidies separately from operationalsubsidies. Operational subsidies to commercial PEs, 11 PEs as defined bythe Government (list B), which stood at CFAF 0.9 billion in 1988/89, willbe eliminated altogether over the SAL IV period. The rationale for thispolicy action is that commercially-oriented PEs should be able to generateadequate revenue on their own. Operational subsidies to non-commercial PEs(list A, excluding COUD) will be reduced from CFAF 10.0 billion in 1988/89to CFAF 7.4 billion in 1991/92. The rationale for this policy action isthat although subsidization of certain enterprises providing economicbenefits without commensurate financial cash flows is justified, there is aneed to ensure the efficient use and the most effective allocation ofscarce budgetary resources. COUD, which is expected to receive anoperational subsidy of CFAF 3.4 billion in 1989/90, is to be treatedseparately pending the preparation of a restructuring program to bedeveloped by June 1990, the implementation of which will be covered underthe proposed Human Resources SECAL. The Government has agreed that totaldirect subsidies will not exceed the following amounts: (a) for commercialPEs CFAF 0.6b for 1989/90, CFAF 0.3b for 1990/91 and zero for 1991/92; (b)for non-commercial PEs CFAF 9.9b for 1989/90, CFA7, 9.1b for 1990/91, andCFAF 7.4b for 1991/92. These agreements are to be respected as conditionsfor second and third tranche release.

70. With regard to equipment subsidy, the Government has agreed inprinciple that these subsidies, which amounted to CFAF 2.4b in the budgetof 1989/90, will be converted to long-term loans or equity injections forPEs. On the budget side, equipment subsidies will be subject to the same

- 26 -

procedures and criteria applied to the rest of the public investmentprogram. While these changes may not directly and immediately affect thelevel of budgetary expenditure, they are likely to improve the budgetarysituation in subsequent years. Budgetary improvements will materialize asenterprises begin to repay the government for the loans or as they begin,in the case of profit-making enterprises, to remit dividends to theTreasury. The new arrangements will, furthermore, put the pressure on PEmanagers to bear the cost of borrowing, which, in combination withrecommended institutional reforms, should result in efficiency improvementsat the enterprise level. The Government has issued a circular confirmingthe adoption of the new policy on equipment subsidies.

71. The Government recognizes that operational subsidy reductionsshould not be considered in isolation from the question of overdrafts.Overdrafts, which are in effect a cross-subsidization between the 18aetablissements publics" (EPs) whose finances are presently controlled bythe Ministry of Finance's Central Accounting Agency (ACC), have beenincreasing just ds the subsidy reductions under SAL III were being carriedout. Ten out of the eighteen EPs have accumulated overdrafts whichamounted to CFAF 16.7b by end June 1989, up from CFAF 12.2b one yearpreviously. The rate of increase in the overdrafts in the first six monthsof 1989 corresponds to an average annual increase of about CFAF 2.Ob.These overdrafts are used by their recipients largely to finance workingcapital, including salaries. This practice, which is facilitated by theexistence of the ACC, has adverse but delayed repercussions on the budgetand on the efficiency of PEs. As the recipients of overdrafts areadministrative type EPs (such as COUD and ISRA) that are in no position torepay them, the ultimate responsibility of settling these overdrafts restswith the Government as the owner. As a result, the temporary budgetaryrelief, resulting from actions te reduce operational subsidies to PEs atone point, is offset by budgetary imbalances at a later point. On theenterprise side, the practice of cross-subsidization has the addeddisadvantages of encouraging cost inefficient behavior on the part of therecipients of overdrafts, and discouraging profit-making enterprises fromstriving to maximize their revenue. To remedy this situation, theGovernment has taken action as agreed, through its circular of August 18,1989, to discontinue from July 1989 the practice of allowing EPs to haveoverdrafts with the ACC, and to freeze accumulated overdrafts as of thatdate. The Government has also agreed to transform the overdrafts intolong-term loans in July 1990 and to write-off by July 1991 that portion ofthe corresponding debt which cannot be repaid.

72. Arrangements will be made for timely disbursement of subsidiesallocated in the national budget to allow the EPs to finance their workingcapital requirements. The Government also agreed to speed-up the processof transforming all commercially-oriented EPs under the ACC into autonomoussocietes nationales (SNs) and will transfer all non-commercial EPs underthe ACC to the central administration by June 1990. The combined financialeffect of the agreed actions on the reduction of subsidies and theelimination of new overdrafts is estimated to be CFAF 5.5b, or 39 percentof the 1988/89 amount (excluding COUD), over the SAL IV period.

- 27 -

73. Cross-debts between the Government and PEs were identified forthe period ending 1986 as of mid-1987. The persistence and the magnitudeof the cross-debt problem have perverse effects on the financial managementof PEs and create severe cash flow difficulties for particular enterprises.Attempts to settle them began under SAL III. As a result of these efforts,the amount of undisputed 1986 cross-debts owed by the Government to PEs haddeclined, upon settlement, from CFAF 40b to CFAF 32.9b by the end of June1989. Similarly, undisputed 1986 cross-debts owed by PEs to the Governmenthave declined, also upon settlement, from CFAF 59b to CFAF 55.7b by the endof June 1989. On balance, therefore, PEs continued to owe the GovernmentCFAF 22.8b as of the end of June 1989.

74. Despite these efforts, the process of settling outstanding 1986cross-debts has been modest and slow. There is yet a long way to go insettling 1986 undisputed cross-debts. The 1986 disputed cross-debts andinter PE cross-debts are unidentified. Moreover, net cross-debts havecontinued to accumulate since 1986 and have increased by an additional CFAF18.5b owed to the Government as of December 1988. The Government has takenthe first steps in the direction of defining actions to prevent therecurrence of that problem. These measures include the establishment of aclearing house to track future cross-debts and the development of measuresto control government consumpticn of services from the main creditor PEs,i.e., SONEES (water), SENELEC (electricity), and SONATEL(telecommunications). PE management performance on debt recovery will beone factor in determining bonus payments for managers under the proposedincentive system. The Government has prepared a comprehens-e action planto settle all cross-debts as of end 1989 and proposed measures whichinclude action to be undertaken at the enterprise level to prevent therecurrence of cross-debts. As part of the action plan, the Government hasagreed before second tranche release to: (a) cancel all undisputed cross-debts between Government and PEs, and among PEs as of December 31, 1989;(b) write off all debts of non-commercial PEs to the Government as ofDecember 31, 1989; (c) budget in 1990/91 for at least one third ofuncompensated debts owed to PEs as of December 31, 1988; (d) settle alldisputed cross-debts between Government and PEs as of December 31, 1989;and (e) assure at least one third of debts owed to Government by commercialPEs as of December 31, 1988 have been settled. The Government hasfurthermore agreed before third tranche release to: (a) budget in 1991192for at least one third of all debts owed to the PEs as of December 31,1989; and (b) assure at least one third of all debts owed to Government bycommercial PEs as of December 31, 1989 have been settled. Prior to secondtranche release, the Government and the Bank will review the procedures putin place to prevent the recurrence of cross-debts, and the Government willadopt any additional measures required.

75. The consultant study on indirect subsidies, which was preparedin 1987 and financed under the second parapublic TA project, estimated thecost to the Government in terms of foregone revenue of the indirect subsidytransfers to all public and private enterprises to be as high as CFAF 80bper year during the period 1984/89. Most of these subsidies, CFAF 58bequivalent, were attributed to privileges accorded by the specialagreements and the Investment Code. The second largest component ofimplicit subsidies, about CFAF 18b, was attributed to financial

- 28 -

transactions, including interest rate differentials for loans on-sent bythe Government to PEs and Government guarantees of PE borrowing. Action isbeing taken on privileges accorded under the special agreements whereby theGovernment has agreed to renegotiate several of the most important cases(see para. 54) and not to pursue any new agreements. With regard to theimplicit subsidies associated with the preferential access to credit forPEs, two actions have been agreed to and implemented by the Government percircular dated August 14, 1989. Firstly, the Government has stated thatall externally-funded loans to PEs will be on-lent by Government atcommercial interest rates, except where the donor agency has a conditionfor on-lending at a concessionary interest rate. Secondly, the governmenthas abolished the policy of Government guarantees of domestic loans to PEs.The impact of these combined actions will be to reduce the distortive andcrowding-out effects of the current credit allocation policy. Themeasures, furthermore, will contribute to increasing the transparency andproper scrutiny of allocated subsidies. The Government, thus, has takenaction on eliminating these implicit financial subsidies.

76. Privatization and Liquidation. With the reduction in the amountof direct and indirect subsidies, PEs will be forced to adjust to marketconditions, and to improve their financial performance. This change willhelp to accelerate the process of liquidation of PEs which are unviablefrom both economic and financial perspectives. The Government has,furthermore, accepted that most viable PEs of a commercial or industrialnature could be more efficiently managed in the private sector and could bebetter able to exploit market opportunities. To accelerate the process ofdivestiture, a number of accompanying measures will have to be put in placeunder SAL IV. These will include the use of appropriate expertise toexecute the necessary preparatory 7fork for sale, the formal involvement ofthe private sector in advising Government on privatization, and theestablishment of capital markets to broaden the range of financialinstruments available for privatization. The Government has prepared asatisfactory strategy paper for future privatization which addresses interalia, questions related to such issues as incentives (fiscal, monopoly),foreign participation, minimum government ownership, and liquidation in theevent the prospect for sale is not good.

77. A detailed program of privatization of 30 PEs, to be implementedover the period of SAL IV, has been agreed to by the Government. Of thesePEs, 20 were on the list of candidates for privatization agreed tooriginally under SAL III. A timetable for the preparation and formal offerfor sale in a manner satisfactory to the Bank has been agreed to by theGovernment as follows: 8 PEs by Board presentation; 9 PEs by the secondtranche release; and 13 PEs before the third tranche release. The overallperformance review at second and third tranche release will includeprogress on the privatisation of PEs offered for sale and actions to betaken by Government for PEs remaining unsold.

78. The Government has agreed to liquidate at least ten PEs duringthe SAL IV period. A recent study has identified 12 candidates forliquidation. Of these, preparations for the liquidation of three PEs areadvanced, and two more PEs are being proposed for liquidation. More PEswill be added to the list of potential liquidations if attempts to

- 29 -

privatise them are unsuccessful. As a condition of the second trancherelease, liquidation decrees of five PEs are to be signed and operationshalted. A list of at least five additional PEs for liquidation would beapproved by the Government by June 1990 and liquidation decrees are to besigned and operations are to be halted as a condition of third trancherelease.

79. The enterprises earmarked for privatisation during the SAL IVperiod account for over CFAF 18b of Government participation in equitycapital or around 11 percent of total Government equity in the PE sector.Around 7,500 people are employed by these enterprises or about 25 percentof total employment in the sector. The first group of enterprises to beliquidated will account for about an additional CFAF 2b of Governmentequity participation and will affect another 1,000 employees. The secondgroup of enterprises for liquidation will account for an as yetundetermined supplementary reduction. Operational subsidies to all theenterprises scheduled for privatization or liquidation amounted to aroundCFAF 660 million in 1988/89 or about 5 percent of total operationalsubsidies to the sector. The enterprises are mostly industrial orcommercial in character and include hotels, banks, and manufacturing, agro-industrial, housing and construction, distribution, and ship-repairentities.

80. The percentages of total Government equity capital and totaloperating subsidies accounted for by PEs to be privatised or liquidated arerelatively small because the enterprises with the highest Governmentinvestment and operating subsidies are those which will remain in theGovernment portfolio. For example, Government equity in the power utility(SENELEC) alone accounts for over CFAF 60b, 36 percent of the total, andover 90 percent of total operational subsidies are transferred to non-commercial PEs which are not candidates for privatization in the short-term.

81. The Government has associated the private sector in theimplementation of the privatization program. A letter was sent by theGovernment in July 1989 to the employers' organization, the ConseilNational du Patronat (CNP), inviting the CNP to nominate two private sectorrepresentatives to the Consultative Committee on the Public EnterpriseSector. The reconstituted committee will meet regularly to discuss theprivatization program and other aspects of PE reform. It was agreed thatspecialist outside advice would be secured by the Delegation a la Reformedu Secteur Parapublic (DRSP) for the entire period of SAL IV to helpimplement the privatization program. Such help will be indispensable forthe program's success. This will mean in practice that the DRSP willcontinue the process already begun of employing qualified consultants tohelp at all stages in the privatization process of individual PEs, and willmaintain the presence of full-time privatization advisors in the DRSP. Atpresent, the British Government is planning to provide short-termassistance in the evaluation of privatization efforts to date and inproviding practical advice for implementation of the program. The Canadianand French Governments are financing two full-time privatization advisorsto the DRSP and the Bank's Second Parapublic Technical Assistance Projectis financing international consultants to work on individual

- 30 -

privatizations. The SAL will include a TA component to continue thesupport for the PE reform after the closure of the TA project in December1989 (see below.)

82. A study, to be financed by the Bank, on the potential forcreating a secondary market for shares in private sector enterprises, willbe completed by June 1990. Terms of reference were agreed upon during theappraisal. Action satisfactory to the Bank will be taken on therecommendations of the study before December 1990.

83. Enterprise Rehabilitation. A timetable, formally agreed to bythe Government and the Bank, for the preparation of rehabilitation programsor signature of contract plans (CPs) has been prepared. Based on theexperience under the previous SALs, these CPs will include all subsidyreductions, cross-debt settlements, and financial transactions with theGovernment for each enterprise and performance incentive bonuses for PEmanagers. No CPs will be effective until the resources in the Governmentbudget have been identified to finance the stated obligations. Therefore,CPs will have to be renegotiated on an annual basis to reflect thebudgetary situation. The Government will honor all commitments during theSAL IV period. The DRSP will advise on measures that need to be taken atthe enterprise level to ensure compliance with CPs. These actions areexpected to increase the utility of CPs as an instrument for encouragingperformance improvement of PEs and for ensuring efficient allocation ofscarce budgetary resources to where they are most needed.

84. The Government will sign CPs by the June 30, 1990 with OHLM(housing), PAD (Dakar port), RCFS (railway), OPCE (post office), andSONATRA (transport). The signed and effective CPs are to be submitted tothe Bank to ensure that the agreed upon measures for subsidy reduction andcross-debt settlement have been taken into account. The overallperformance review at second and third tranche release will include anassessment of the Government's honoring its commitments under these CPs.

85. Legal and Institutional Reforms. In addition to the abovemeasures for rationalizing the PE sector, there are a number of legal andinstitutional changes which need to be made with the objective of improvingthe institutional framework for PE sector reform. These changes include:(i) strengthening the DRSP as the only agency outside the Finance Ministryresponsible for formulating, managing, and monitoring the reform program ofthe parapublic sector in Senegal; (ii) strengthening the "Cellule duSecteur Parapublic" (CSP) in the Finance Ministry by giving it theauthority and responsibility for overseeing the financial relations betweenthe Government and the PE sector and for operating the financial managementinformation system; (iii) curtailing the roles of the other supervisoryagencies to a posteriori monitoring of compliance with legal requirements;(iv) eliminating special controls on mixed-companies in which Government isa minority partner; and (v) improving the composition of PE Boards ofDirectors.

86. The Government has agreed that, for the PE reform program to besuccessful, the DRSP must be provided with the financial and manpowerresources it needs for the entire period of SAL IV. This includes local

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and external resources. The DRSP will establish a PE sector informationsystem which will be operational by March 1990. It is proposed that thissystem be used, among other purposes, for the operation of the incentivessystem for PE managers aimed at rewarding those managers who achieve theirestablished targets. The DRSP will be responsible for the overallmanagement of the privatization and liquidation program and the preparationand monitoring of rehabilitation programs and contract plans for those PEsremaining under Government control. The DRSP will also carry out criticalstudies on the PE sector to monitor the progress and update the content ofthe PE reform program. It will be responsible for overseeing theimplementation of the legal reforms of the PE sector.

87. The Government has also agreed that the CSP will be strengthenedto enable it to monitor all financial transactions between the Governmentand the PE sector. The CSP will be in charge of the implementation ofmeasures aimed at preventing the recurrence of the cross-debt problem. TheCSP will also manage an information system on PE financial transactions,which will be compatible with and linked to the system managed by the DRSP,and which is also expected to be operational by March 1990.

88. In line with the need to streamline the institutional framework,the Government has agreed to take action, to include the preparation of amodification of the PE Sector Law 87-19, with the objective of achievingthe following results:

(a) Removal of the provision in the law which permits the signing ofa decree to impose the whole range of special controls whichapply to majority State-owned PEs on those SEMs in which theGovernment is a minority partner, and also on private sectorcompanies which have received financial support from theGovernment;

(b) Elimination of the right of veto on PE Board decisions by theFinancial Controller of the Presidency (CFP);

(c) Limitation of the role of the Organization and Methods Office ofthe Presidency (BOM) in the PE sector to responding to specificrequests from PEs Boards of Directors;

(d) Limitation of the activities of the Audit Commission (CVCCEP) toits role of a posteriori auditing of PE accounts so that theCVCCEP is not involved in providing organizational or managementadvice to PEs except insofar as it concerns their accountingsystems;

(e) Closure of the Centre des Etablissements Publics (CEP) whichincludes the Agent Comptable Central (ACC) and the ContrOleurdes Operations Financieres (COF) which will imply thetransformation of all Etablissements Publics (EPs) of acommercial or industrial nature into independent SocietesIJationales (SNs) and the inclusion of all administrative typeEPs in the central administration; and

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(f) Reconstitution of PE Boards of Directors so that at least twoBoard members are required to be selected for their expertise,not for their ex officio positions in the administration nor fortheir representation of special interest groups.

89. A copy of the modified drafts, or new texts, will be submittedto the Bank for examination and comments, and agreement will be reachedbetween the Bank and the Government before submission of the text to theNational Assembly.

90. Technical assistance needs. PE reform in Senegal has beensupported by the Bank's Second Parapublic Technical Assistance (TA) Project(Credit No. 1398-SE), due to close in December 1989. In order to maintainthe momentum of the proposed reforms, the Government has agreed with theBank that up to US$4 million out of the amount of the credit from SAL IVwill be affected to TA requirements. About 25 percent of this amount (US$1million) will finance the continuation of the functioning of the DRSP andof the CSP (paras. 86-87). This will include the cost of localconsultants. The remainder (US$3 million) will finance consultants andtechnical assistance necessary for the preparatory work and implementationof the privatization and PE rehabilitation programs.

D. Civil Service Reform

Background and Performance under Previous SALs

91. The high cost and the poor performance of the civil service haveposed major constraints on the Government's ability to manage the economy.A first attempt was made in 1976 to reorganize the central ministries(Ol'op4ration organigramme") with a view to downsizing staff, reducing wagecosts, and improving efficiency. The program had to be abandoned becauseof resistance from some ministries. From 1982 onwards, in the face ofmounting fiscal deficits, the Government has been taking steps to maintaina ceiling on the number of civil servants, to freeze salaries, and toimprove the management of the civil service. These measures have beensupported by SAL II and SAL III.

92. Under SAL II, the Government froze the number of civil servantsat the level of July 1985, that is, just over 70,000. Under SAL III, thefirst steps were taken towards reducing civil service numbers by holdingpersonnel to their June 1987 level of 68,000 Although the wage billremained roughly constant in real terms during SAL II and SAL III, it wasreduced in 1988/89 to 51 percent of operating expenditure and to 46 percentof revenue. Targets under both SALS were met; however, the resultantreduction in the wage bill was too modest in both absolute and relativeterms to have a major impact on the budget.

93. The Government has recognized that further progress on civilservice reorganization and cost reduction depends to a large extent onimproving the quality of management of a number of civil servicedepartments and agencies. Under SAL III, a number of actions wereinitiated to strengthen personnel management, specifically through thefirst staff census in April 1987, the study of the reorganization of the

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central ?ayroll agency and of the civil service directorate, and a reviewof procedures and policies. However, progress in implementing thesemeasures and in defining the required follow-up actions has been slow.

Table 4: CIVIL SERVICE WAGE BILL INDICATORS

…_________________________________________-_______________________________

1984/86 1986/88 1986/87 1987/88 1988/89------------------------------------------------------------- __------------

Wage bill (CFAF, billions) 106.8 111.8 119.8 122.8 126.1Real growth (percent) -3.2 2.1 -0.4 -0.2Wage bill as percont ofTotal current expenditures 49.1 60.7 61.6 60.0 50.4(SAL III targets) 62.0 61.0Current exp. *xcl. debt 61.7 82.4 82.0 61.8 82.2Revenues (excl. grants) 62.8 61.1 47.7 48.8 46.8

Total civil servants 87034 88843 88131 67100 68649

Proposed Reforms under SAL IV

94. In order to improve the efficiency and motivation of the civilservice and reduce the wage bill, the Government is committed toimplementing a comprehensive reform program which will include arestructuring of key ministries and a substantial reduction in the numberof staff. During the SAL IV period, there will be a net reduction in thenumber of civil servants by 4,806 (7.2 percent of the total numbers at theend of June 1989), and a reduction of the annual wage bill from theoriginal projected level of CFAF 131.6 billion in 1989/90 to CFAF 126.8billion for the same period, and CFAF 125 billion thereafter. In theprocess, the number of civil servants per 1,000 people would be reducedfrom the current 9.0 to 7.7 by June 1992, a ratio comparable to that ofother African countries with better resource endowments than Senegal. Thesavings from these reductions will help, inter alia, finance incentives forgood performance and increase overall civil service efficiency. The threemain components of the reform program are: (i) reduction in the number ofcivil servants through a program of administrative restructuring andvoluntary departures; (ii) management of the wage bill within a tightlydefined ceiling; and (iii) further institutional reforms to increase civilservice efficiency.

Staff Reductions

95. Although the Government has long considered the downsizing ofthe civil service to be a politically delicate undertaking, it nowrecognizes that staff reductions are crucial to improve the allocation ofscarce domestic resources and to increase the efficiency of the civilservice. These reductions are expected to be achieved primarily through amajor restructuring of the administration, leading to the reorganization,or in some cases elimination, of certain departments, and to the"privatization" of others, i.e., all those that can generate revenues.Implementation will be by means of a voluntary departure program (see

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below). This program will be open to staff from all ministries, with theexception of the teaching staff in the Ministry of Education, medical staffin the Ministry of Health, military personnel in the armed forces, as wellas the police.

96. Gross Reduction. The Government's proposed measures areexpected to result in 8,642 gross staff reductions by June 1992. Detailson the expected reduction during the next three years are given in Table 5and summarized below:

(a) Restructure the administration and reduce the number ofministries from 26 to 15; this will be followed by anorganizational audit of all ministries to identify additionalredundant positions. About 2,850 positions will be eliminatedby this measure, 1,400 (49 percent) of which by June 1990; thisrepresents 33 percent of the total planned gross reduction overthe period;

(b) Implement an early retirement program for staff aged 48 years orover. Approximately 1,450 persons will be affected, all of themby June 1990: this represents 29 percent of the gross reductionsprojected during the 'irst year, and 17 percent of the totalgross reduction over the period;

(c) "Privatize" selected government services; 1,309 staff,representing 15 percent of the total gross reduction, will beaffected by this measure. The bulk of the first-year reductionwill come from the privatization of road maintenance services,consistent with the policy reforms of the Bank Transport SECALcurrently under preparation. In addition, the Government willstudy the feasability of privatizing hospital and relatedservices, which would release an additional 1,279 positions fromthe civil service.

(d) Eliminate from the payroll those civil servants identified asirregular in a second staff census, which is conservativelyestimated to involve 370 civil service positions during thefirst year. This recently completed census of the ministries ofeducation, health, rural development, and equipment wasundertaken by the Government after the first census of theentire civil service, started in 1987, unearthed more than 5,000irregular employees; and

(e) Facilitate normal retirement which is expected to release closeto 2,700 positions over the SAL IV period, equivalent to 31percent of the total gross planned reductions.

97. Recruitment. Senegal has one of the lowest primary schoolenrollment ratios in Africa, and health coverage is deficient as well. Inorder to increase the country's educational capacity, a total of about1,900 primary school teachers are expected to be hired, equivalent to halfthe projected total recruitment. The other recruitments involve mostlyhealth personnel and graduates of Government training schools. The

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practice of automatic hiring of graduates from these schools will ceasecompletely in June 1992 in order to accomodate the class entering in thefall of 1990.

Table S CIVIL SERVICE STAFF REDUCTIONS, 1989/90-1991/92

1989/90 1990/91 1991/92 Totl D Oistrib. (X)

Total Reductions 4.932 2.666 1.155 8.642 100.0Program DeparturesRestructuring 1,400 1,000 460 2,860 88.0Early retIreent 1,460 0 0 1,460 16.8Privatlzation 718 696 0 1,309 16.1OtherIrregularities 870 870 4.8Attrition 999 959 706 2,663 80.8

Total Recruitments 1 400 1 281 1 166 8 836 100.0Educatron *436 *i8 7Y 'i 49.9Other 966 se0 ass 1,923 60.1

(as percontage ofprogram departures) (27) (38) (80) (34)

Net Reductions 8.682 1.274 0 4.808

Total Civil Servents 63,017 61,748 81,748

98. The Government has agreed, in principle, to bar from recruitmentany former civil servant who benefits from the departure program, and tocarry out recruitments in a manner consistent with the staff reductioneffort in each of the three years. A ratio defined as the "number ofrecruits (excluding teachers) divided by the number of program departures"meets this concern. Teacher recruitment is excluded from the definition ofthe ratio to safeguard staffing needs in the education sector. Based onthe Government's program summarized in Table 5 above, this ratio averages34 percent for the SAL IV period (ranging between 27 percent in 1989/90 and80 percent in 1991/92). The Government is committed to limit recruitmentsin the education sector to 435 in 1989/90, 681 in 1990/91 and 797 in1991/92. Respectively as conditions of second and third tranche releasethe aforementioned ratio will not exceed 27 percent for 1989/90 and 38percent for 1990/91. If, however, the total number of program departuresduring 1989/90 is lower than anticipated, the Government is nonethelesscommitted to a minimum net reduction of 564 staff, a reduction consistentwith the recent downward trend. The Government will evaluate theperformance of the first phase of the voluntary departure program beforeSeptember 30, 1990, and, in the event of significantly lower numbers of,iepartures than projected, will take all necessary additional measures int:onsultation with the Bank in order to ensure the success of the program.The adherence to the aforementioned ceilings on recruitment and staffreductions will be conditions for the second and third tranche releases.

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Wage Bill Management

99. Overall objectives. Effective July 1, 1989, civil servicesalaries which had not been adjusted since 1983 were increased by CFAF3,000 per employee, or about 2.5 percent of the average salary. Specialadditional increases were granted at the same time to education and healthsector staff. This total wage adjustment of CFAF 4.5 billion is inaddition to the wage increases due to automatic promotions, estimated atCFAF 2 billion. As a result, the total wage bill (defined as the sum ofall base salaries, indemnities, family allowances, retirement fundcontributions, hospital and transportation benefits, and variable elementssuch as overtime, backpay, and advances) would have increased from CFAF125.1 billion in 1988/89 to CFAF 131.6 billion for 1989/90 without otheraction by the Covernment. The Government is committed, however, to reducethe wage bill to CFAF 126.8 billion in 1989/90, without resorting toaccumulating arrears, and to maintain it at or below CFAF 125 billion in1990/91 and 1991/92. This last commitment is a condition for the secondand third tranche releases. The long-term goal is to maintain the wage billbelow 40 percent of revenues.

100. Wage bill management measures. In addition to staff downsizing,a number of policy decisions and improvements in the numagement of the wagebill components make these reductions possible; successful implementationis a condition for the second and third tranche releases:

(a) There will be no salary increase until June 1992, with theexception of performance incentive bonuses, which may becomeeffective in July 1991 at the earliest if certain conditions aremet (see below). These bonuses, to be determined by a studyundertaken within the framework of the Development ManagementProject (PAGD), w.ll be independent of the base salary, andtheir total amount determined in consultation with the Bank;

(b) All potential economies on the wage bill (defined as thedifference between the above-mentioned ceilings and the actualwage bill before any action is taken on arrears settlement,Government contribution to the compensation package, andincentive bonuses) will be allocated as follows, in this orderof priority: (i) settlement of backpay arrears (the currentamount of backpay arrears is unknown, but will be determined inApril 1990 when the career situation of all civil servants isfully updated. A timetable for the settlement of these arrearswill then be established.); (ii) Government contribution to thefunding of the separation packages; and (iii) performanceincentive bonuses, to be implemented on July 1st 1991 at theearliest. Of these economies, savings from the civil servicereductions alone are estimated at about US$ 36 million on acumulative basis for the three-year period (Table 6);

(c) Computation rules for all indemnities will be rationalized andconsolidated in order to avoid the cumulation of benefits;

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(d) The Government's contribution to the civil service retirementfunds will be reduced from 20 percent to 15 percent of the basesalary; and

(e) The current system of reimbursement for hospitalization andtransport costs will be modified in order to rationalizepayments and eliminate irregularities.

Institutional Reform

101. In order to achieve the wage bill and staff level targets duringthe SAL IV period and sustain these achievements beyond 1992, theGovernment has identified the following critical measures:

(a) Upgrade the status of the Central Payroll Agency into aDirectorate;

(b) Improve the structures, administrative procedures, and thequality of staff of the new Central Payroll Directorate, theCivil Service Directorate, and the personnel units (DAGE, SAGE)in the sectoral ministries;

(c) Introduce a standardized automatic information processingcapability at the Civil Service Directorate and the CentralPayroll Directorate; and

(d) Review the current training policy and the role of Governmentpre-service training schools.

Some of these measures have been defined under the PAGD; actualimplementation would require firm political commitment because ofbureaucratic vested interests and inertia. To ensure effectiveimplementation of reform measures envisaged under this component, theGovernment will accelerate the adoption of a new organizational chart andstaffing level for the Central Payroll Directorate, the Civil ServiceDirectorate, and the sectoral personnel units. It also plans todecentralize the personnel computerized data processing to the level of thePayroll and Civil Service Directorates, instead of having personnel datatreated by the Computer Data Processing Directorate of the Ministry ofEconomy and Finance. Progress in implementing improved organizationalcharts and staffing patterns of the Civil Service and Central PayrollDirectorates, and key sectoral personnel units, and a computerized dataprocessing system will be reviewed at second and third tranche release.

Modalities of departure and financing of separation packages

102. Modalities of departure. The voluntary departure program isexpected to be implemented in January 1990. It will be open to all civilservants (with the exception of those mentioned in para. 95) with a minimumof 5 years of government work. Those younger than 48 years will be offereda fixed compensation package, consisting of 60 months of salary (basesalary plus indemnities) for the lowest pay grades (D and E), and 48 monthsfor all others; those aged 48 to 55 will be eligible for early retirement,

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and awarded compensation equal to 75 percent of the number of monthsremaining before they reach age 55, with a maximum of 48 months of salary.In addition those civil servants losing their position as a result of therestructuring will be placed on administrative leave ("mis a la dispositiondu Ministere de la Fonction Publique') until their voluntary departure, orreassignment, while those working in units to be privatized will beoffered 12 months of salary as compensation for the loss of their civilservice status. For both voluntary departures and early retirements, staffwill have six months during which they will be entitled to the separationpackage: they will be granted full compensation if they decide to leavewithin the firat four months of the program, and only half of thatcompensation if they leave on the fifth or sixth month. Payments of theseparation packages will be made from a special Fund ("Fonds de Reserven),to be created to that effect in January 1990.

103. Financing the Incentives for Departure. To minimize politicalresistance, the Government stresses the voluntary character of tuLe staffreduction program and the importance of providing attractive incentivepackages. The total cost of the packages is estimated at US$ 69 million.The Government, in cooperation with the Bank, has mobilized donor supporttowards that end. As of now, some US $ 65 million have been secured,either specifically earmarked from Lhe donors such as France (US $ 15.8million) and the African Development Bank (US $ 2.4 million) or through theuse of counterpart funds to SAL IV financing. It is worth mentioning,however, that the economies resulting from the reduction program wouldoffset the full compensation cost in about five years from the date ofimplementation of the program.

Table 6: FINANCIAL IMPACT OF THE CIVIL SERVICE REDUCTION PROGRAM(millions of US dollars)

1989/90 1990/91 1991/92 Total

Financing requireents 42.0 19.6 7.7 69.8

Economies on wage billIncremental savings 8.4 !/ 1.8 0.0Cumulative savings 3.4 16.6 17.8 86.2

p/ Reprosenta *conomies during the lost quarter of the fiscal year; for theyear as a whole, these economies would amount to CFAF 18.6 billion.

Managing the reform program

104. The Government has agreed that the primary responsibility forcoordinating the implementation of the civil service reform component willrest with a special interministerial committee ("Comite de Pilotage"),composed of a limited number of senior officials representing relevant keyministries, and placed under the direct chairmanship of the Minister ofState. This committee is to be created shortly, and its life limited tothe duration of the program.

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E. Social Dimension of Adiustment

105. Over the medium-term, the reforms anticipated under SAL IV,combined with those initiated under the previous two SALs, are expected tolead to better use of public resources (including adequate provisions forbasic needs fulfillment), efficient and active involvement of the privatesector in the development process, lower inflation rates and, consequently,real increases in per capita income of the order of one percent per annumin combination with higher employment growth. Both urban and rural averageincomes are expected to increase. While the proposed adjustment programfocuses primarily on directly productive activities, other Bank activities(particularly those in the pipeline such as the Human Resources SECAL andthe Employment Project), along with parallel initiatives of the NGOs, aretackling important social issues such as employment and basic needsfulfillment. It is, however, anticipated that the reform program willcreate real transitional costs for the economy and for certain groups insociety, mainly in the form of job losses as the civil service, publicenterprises, and financial inetitutions are restructured or abolished.

106. To minimize the adverse short-term impact of the structuraladjustment process on specific socio-economic groups, the Governmentundertook under SAL III, a series of measures focused on creating jobs.Thus, a National Employment Fund (FNE) and the "Delegation & l'Insertion, ala Reinsertion et a l'Emploi" (DIRE) were created in 1987 to ease thetransition of laid-off workers in the parapublic and industrial sectors andto stimulate voluntary resignation from the civil service. Unemployedgraduate students and immigrants returning from abroad are also eligiblefor assistance under this fund. To date, the fund has created over 1,000new jobs at a cost of US$5 million. The Government undertook, with theUNDP/Bank support, the development of a monitoring system of the evolutionof socio-economic conditions under structural adjustment, the first phaseof which is progressing well. A study fund was also established for socio-economic studies that will identify projects and programs to minimize thecost of adjustment for the most vulnerable groups.

107. Under SAL IV, the Government will consolidate and reinforce theabove measures (including a survey of former civil servants to monitortheir reinsertion in the private sector) and focus on job creation becausethe proposed adjustment operation will lead to more substantial employmentcutbacks in the civil service, the parastatal sector, and the bankingsector than was the case under the previous SALs. Firstly, the Governmentwill review its experience with the FNE/DIRE program with the view ofexpanding the program if deemed successful. Draft terms-of-reference forthis review have been agreed to with the Government and the study isexpected to be completed shortly. An action plan will then be developed bythe Government and agreed upon with the Bank. The action plan willinclude, among other things, the reinforcement of the monitoring system andthe involvement of additional financing institutions in implementing theprogram.

108. Secondly, a significant effort is being deployed by the Bank andthe donor community in the design and implementation of innovative jobcreation programs that support SAL IV adjustment efforts. At the

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initiative of the Government, a donors' conference was held in Paris in May1989 to marshall support for the Government's Program of Action for YouthEmployment. This program consists of a large number of small projects,most of them in urban infrastructure maintenance and rehabilitation, with

the potential of creating nearly 45,000 jobs over a 4-5 year period.Funding for about half of the program's approximate cost of US$100 millionhas already been identified. The proposed program management is noteworthyfor its flexibility, autonomy, and ability to activate quick administrativeand financial decisions. A key part of the program is the Bank's PublicWorks and Employment Project (Cr. 8032-SE), a US$20 million projectpredicated on identifying repair, rehabilitation, and maintenance in mostlyurban areas, which can be undertaken by small contractors who use labor-intensive methods. The construction subsector has been targeted by theproject because of its relatively low skill requirements and flexiblehiring patterns, and because of the large volume of potentialrehabilitation works already identified. In addition to the short-termbenefit of creating paid employment and, thereby, easing the initialemployment costs of adjustment which fall primarily on the urban poor, theproject aims at increasing the long-term skills of both small contractorsand their temporary employees. Projects will be approved by the programmanagement unit provided they meet the key eligibility criteria ofreadiness for execution, labor-intensity, high economic benefit, and skillenhancement.

109. Thirdly, to protect particularly vulnerable groulps of thegeneral population from the potential adverse effects of the expenditurecontainment measures included in SAL IV, the Government has agreed that itwould monitor public expenditure programs in the education and healthsectors to ensure that adequate resources are made available for primaryhealth and primary education. *he statistical data base required as aninput to this exercise will be provided by the household income andexpenditure survey financed in part under the ongoing DevelopmentManagement Project, which will begin in earnest by February 1990. Initialresults should be available by September 1990 to facilitate estimates as tothe demand for health and primary education services by both the urban andrural poor. On the basis of these preliminary estimates, the level,pattern, and adequacy of public expenditures in these subsectors will beexamined and expenditure reallocations proposed for the 1991/1992 budget.The Government will complete the required analysis and makes satisfactoryproposals for necessary expenditure reallocations to be included in the1991/1992 budget.

IV. THE PROPOSED OPERATION

Financing and Management of the Program

110. Borrower and Credit Amount. It is proposed that theGovernment's adjustment program be supported by an IDA credit on standardterms of the equivalent of US$ 80 million, and by a Special Joint Financing

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non-reimbursable contribution of US$6.3 million equivalent fromSwitzerland, to be administered by IDA. The borrower would be theGovernment of Senegal. Because of past experience with slow implementationof reforms in Senegal, the proposed credit would be disbursed in threetranches, the first becoming available upon effectiveness (February 1990),the second tranche to be released in December 1990, and the third, inDecember 1991. The dates for the second and third tranches are, however,indicative and would depend on satisfactory progress in implementing thewhole program. Disbursement of the entire credit is expected to becompleted within 24 months of the date of effectiveness. Additionally, anumber ef other donors have expressed interest in cofinancing SAL IV underthe Special Program of Assistance (SPA) for debt-distressed countries. TheAfrican Development Bank (AfDB) has officially indicated its intention tocofinance the adjustment program. It is expected that the total resourcesto be provided to Senegal over the period 1989-91 would be the equivalentof US$ 184 million, sufficient to cover all financing requirements.

111. Procurement and Disbursement. Procurement procedures have beendesigned to permit rapid use of funds while ensuring efficiency andaccountability in the process. It is proposed that eligible imports bypublic agencies and by the private sector exceeding US$ 2 million would besubject to international competitive bidding (ICB). Procurement by publicagencies for items costing below the threshold will follow standardgovernment practices found to be acceptable in the past. Eligible importsbelow the threshold by private entities would be procured in accordancewith normal commercial practices, and wherever possible, quotations fromeligible suppliers from at least two countries would be sought. Singlesource purchasing would only be used for proprietary equipment or wherecompatibility with existing equipment requires standardization.Procurement documentation would be maintained for ex-post review by theBank.

112. The Government is concerned that underinvoicing of imports isbecoming a major problem having negative consequences on revenue collectionand on protection of local industry. There is by contrast no major problemwith overinvoicing as Senegal has no exchange control restrictions forcurrent transactions. Verification of imports has been limited in the pastto physical inspection for quality and quantity by the Customs Department.The Government however intends to continue the process of strengtheningcustoms services under SAL IV through a series of actions, includingcomputerization and an increased role for the valuation office, tofacilitate price verification of imports and improve collection of customsrevenue (para. 28). The Government has agreed to evaluate the impact ofthese measures with the Bank by September 1990, further to which additionalactions, including the appointment of expert certification agencies, may betaken.

113. The proceeds of the credit would be used to reimburse 100percent of the CIF cost of eligible general imports. Public and privatesector imports would be eligible, except for:

(a) Negative list;

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(b) Imports of goods under contracts costing less than US$5,000equivalp-.t;

(c) Imported goods already financed under bilateral or utilateralcredits; and

(d) Imported goods purchased on the local market. Procurement ofpetroleum and food imports would be limited respectively to 20%at maximum of the total credit amount.

114. The Government will establish a Special Account at the CentralBank (BCEAO) to facilitate disbursements. At effectiveness, an initialdeposit of US$ 10 million equivalent would be made. This account would bereplenished regularly on the basis of fully documented reimbursementapplications in excess of US$500,000 or on the basis of statements ofexpenditure (SOEs) for expenditures below that amount. The Central Bankwould indicate on the SOEs the nature and origin of the goods, as well asthe payment date, and would maintain all relevant supporting documentation(invoices, evidence of shipment, customs declarations, evidence of payment)for review' by Bank supervision missions. Expenditures under the IDA creditwould be in accordance with normal IDA rules. Retroactive disbursementwould be permitted for an amount not exceeding 20 percent of the totalcredit amount for eligible imports procured no earlier than four monthsprior to credit signing. Expenditures covered by the Swiss contributionwould be subject to rules established under the Umbrella Agreement betweenthe Swiss Government and IDA.

115. Management and Monitoring of the Program. The SAL IV programwill be implemented by the various agencies involved in the reform process,under the overall responsibility of the Office of the President. Theexisting Inter-ministerial Committee is chaired by the President of theRepublic and supported by a technical body ('Le Comite de Suivi desProgrammes de Politique Economique") which has proved to be effective incoordinating and monitoring the preparation and execution of the program.In addition, frequent contacts with Government through the Bank residentmission staff and supervision missions would facilitate continuousmonitoring of the program's progress. Under the Development ManagementProject and the Industrial Sector Restructuring Project, technicalassistance and training is being provided to strengthen the institutionalcapacity of certain agencies involved in the reform process. Bank staffwill also coordinate with the IMF to ensure adequate monitoring of keyeconomic policies and indicators.

116. The Government has agreed to provide the Bank with quarterlystatus reports on the implementation of the various measures under SAL IV.The content and format of these reports have been discussed atnegotiations, and will cover, inter alia, the following: (i) civil servicedepartures and recruitment by ministry; (ii) civil service wage bill,separating base salary from indemnity and bonus payments; and (iii)subsidies and other financial transfers from t..e Government to the publicenterprise sector. The Central Bank will arrange for annual audit reportsby auditors acceptable to the Bank within 12 months of credit effectiveness

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and annually thereafter. The audit reports will include an opinion on theoperation of the Special Account and the use of PEs.

Monitorable Actions

117. The policy measures to be taken under the proposed SAL IV, asdetailed in the Government's Letter of Development Policy (LDP) and inAnnex III, are of two types--firstly, those at the core of the adjustmentprogram (.'.e., without which there would be little justification for theprogram izself) and, secondly, those accomparying measures dealing mostlywith the overall macroeconomic framework in which the reform program has tobe implemented and with processes, procedures , and secondary actionsrelated to the various components of the program. Hence, tranche releasewill depend upon both a satisfactory review of overall performance underthe adjustment program and upon the completion of a specified list of coreactions. The LDP, in which the Government declares its commitment to theproposed program, forms the basis for SAL IV and hen-e for the performancereview. Considerable emphasis will be placed on the overall macroeconomicstability (essentially, reduction in both the budget and the currentaccount deficits and prudent monetary policy) in deciding on tranchereleases. Unforseen critical events (such as droughts, shortfalls inGovernment revenues, adoption by Government of policies jeopardizing theadjustment effort) and the Government's policy responses will also be takeninto account in assessing the overall economic performance and thereforetranche releases. A list of the core actions is presented below; the othercomplementary measures are given in the LDP (Annex IV) and in Annex III andwill be reviewed with the Government during negotiations.

118. The following actions have already been taken by the Governmentunder the proposed program:

(a) Approval by the National Assembly and enactment into law inOctober 1989 of the modified Investment Code and the Industrial-Free Zone Statute regarding labor conditions and wage costsubsidies (para. 43);

(b) Freeze of the minimum wage (SMIG) at its present nominal levelfor a period of at least the next three years (para. 45);

(c) Completion of negotiations with SAR on a provisional handlingfee to be paid to the refinery and publication of a decreereflecting the new transparent pricing and taxation system forpetroleum products (para. 49);

(d) Reduction in telecommunications call charges by 20 percentduring off peak hours from July 1989 (para. 50);

(e) Preparation of an action plan simplifying and reducing the taxburden on enterprises to levels consistent with governmentpolicy to encourage employment and investment (para. 52);

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(f) Preparation of a plan of action to strengthen the customsadministration and to improve the administrative ernvironment(paras. 28 and 53);

(g) Publication of a decree limiting for two years (until July 1991)the preferential import duty treatment for three sectors:textiles, matches, and batteries (para. 28);

(h) Mobilization of additional domestic resources through anincrease in the customs duty rate ("droit de douane") from 10percent to 15 percent, the establishment of a system of minimumduties ("minimum de perception"), and the simplification andwidening of the VAT system (paras. 27 and 28);

(i) Adoption of a satisfactory three-year rolling public investmentprogram for the period 1989/90 to 1991/92 (para. 29);

(j) Completion and adoption by the Government of a comprehensivestrategy towards privatization of the parastatal sector (para.76);

(k) Elimination of new overdrafts for PEs avd of the CentralAccounting Agency (paras. 71 and 88);

(1) Adoption of an action plan and begirnning of the process for thesettlement of cross-debts of PEs, including those between PEsthemselves. Adoption of measures to prevent the recurrence ofcross-debts (para. 74);

(m) Issuance of a circular to PEs abolishing government guaranteesof domestic loans and stating that new foreign loans will be on-lent to PEs at commercial interest rates (para. 75);

(n) Completion of audits, preparation of prospectuses and formaloffers for sale of eight PEs (para. 77); and

(o) Preparation of an action plan to restructure the civil service,and public announcement of the decision to implement the reformprogram. (para. 94)

119. The following are the core actions to be taken by the Governmentas conditions of second and third tranche release:

Second Tranche:

(a) Review the wage setting system with the view to initiallyreducing labor costs and moving towards market determined wages,and adopt measures satisfactory to the Bank inter alia to reduceGovernment intervention and make collective bargaining voluntary(para. 45);

(b) Simplify the tax system and reduce the tax burden on enterprisesto levels consistent with Government policy to encourage

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investment and employment through the establishment of aseparate corporate tax at 35 percent, the elimination of the"Prelevement au Budget de l'Equipement" (PBE), and theestablishment of a single personal income tax at a maximum rateno higher than 50Z (para. 52);

(c) Simplify fiscal administration through the restructuring of thetax department (DGID) and the streamlining of operatingprocedures to increase transparency (para. 53);

(d) Reduce fuel oil and diesel prices starting July 1, 1990 in amanner satisfactory to the Bank once the fiscal impact of thenew pricing and taxation system has been evaluated during thefourth quarter of 1989/90 (para. 49);

(e) Prepare and adopt a three-year PIP satisfactory to the Bank forthe period 1990/91-1992/93 (para. 29);

Cf) Reduce direct subsidies to commercial PEs to less than CFAF 0.6billion by June 1990 ar.d budget for no more CFAF 0.3 billion infiscal year 1990/91. Reduce direct subsidies to non-commercialPEs (excluding COUD) to less than CFAF 9.9 billion by June 1990and budget for no more than CFAF 9.1 billion in fiscal year1990/91 (para. 69);

5g) Cancel all undisputed cross-debts, settle all disputed cross-debts, write off all debts of non-commercial PEs to Governmentas of December 31, 1989; include in the 1990/91 budget at leastone third of all debts owed by the Government to the PEs, andassure settlement of at least one third of all debts owed bycommercial PEs to the Government as of December 31, 1988;

(h) Complete audits, prepare prospectuses and make formal offeringof sale of nine (9) PEs. Sign liquidation decrees and ceaseactivity of at least five PEs (paras. 77 and 78);

(i) Limit the wage bill in nominal terms and without incurring payarrears to CFAF 126.8 billion by June 1990 and budget for CFAF125 billion in 1990/91 (para. 99). Implement wage billmanagement measures (para. 100); and

(j) Recruitment of civil servants, other than teachers, should notexceed 27 percent of total voluntary departures in 1989/90. Foreducation, recruitments in 1989/90 should not have exceeded 435by June 1990. If, however, the total number of programdepartures during 1989/90 is lower than anticipated, there willbe nonetheless a minimum net reduction of 564 staff by June 1990(para. 98).

Third Tranche:

(a) Prepare and adopt a three-year PIP satisfactory to IDA for theperiod 1991/92-1993/94 (para. 29);

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(b) Eliminate direct subsidies to commercial PEs by June 1991.Direct subsidies to non-commercial PEs (excluding COUD) shouldhave been reduced to less than CFAP 9.1 billion by June 1991 andbudgeted for no more than CFAF 7.4 billion in fiscal year1991/92. (paras. 69 and 71);

(c) Include in the 1991/92 budget at least one third of all debtsowed by the Government to the PEs and assure settlement of atleast one third of all debts owed by commercial PEs to theGovernment as of December 31, 1989;

(d) Complete audits, prepare prospectuses and make formal offeringof sale of thirteen (13) PEs. Sign liquidation decrees andcease activity of at least five PEs (paras. 77 and 78);

(e) Wage bill in nominal terms and without incurring pay arrearsshould have been CFAF 125 billion by June 1991. The budgetedwage bill for 1991/92 should not exceed CFAF 125 billion (para.99). Implement wage bill management measures (para. 100); and

(f) Recruitment of civil servants, other than teachers, should notexceed 38 percent of total voluntary departures in 1990/91. Foreducation, recruitments in 1990/91 shtould not have exceeded 681by June 1991 (para. 98).

Benefits and Risks

120. Benefits. As discussed earlier, the proposed program isexpected to maintain internal and external equilibria achieved under SALIII, help restore creditworthiness, and improve the conditions forsustained growth and employment creation. In particular, the revision ofthe role of the Government in the economy (from an interventionist to aregulatory stance) and the reform of both the banking and public enterprisesectors will encourage the private sector to grow and expand. GivenSenegal's poor natural resource endowment, the proposed program is anecessary but not a sufficient condition for long-term development.However, without the proposed reforms, there would be little prospect formaintaining a positive per capita income growth and for the country toremain current in its debt servicing.

121. Risks. Two major risks could undermine the success of SAL IV.First, weak administrative capabilities in Senegal could cause delays inpreparation and implementation of the program. There are a number of TAprojects in place--two financed by IDA (PAGD and PE) and one financed bythe IMF on fiscal policy. Second, short-term costs, particularly loss ofemployment, may put the Government in difficulty with various oppositiongroups and parties. There may be considerable pressure from interestgroups, such as the civil servants, the parapublic enterprises, and laborunions, to postpone reforms. Some remedial measures have been included inthis program. Overall, these risks are not, however, unexpected and arewithin manageable bounds. In addition, the program has been designed to

- 47 -

require the implementation of a limited number of critical actions, most ofwhich would be undertaken upfront to ensure the Government's earlycommitment to the adjustment process.

V. BANK GROUP STRATEGY AND OPERATIONS

Country Assistance Strategy

122. Bank strategy in Senegal has two broad and interrelatedobjectives. The first objective is to assist the Government in the medium-term in rectifying structural imbalances in the economy which are thecumulative result of internal and external shocks as well as policydistortions over several years, compounded by the fixed exchange rateregime. The means employed have been to improve the incentives environmentand to promote greater efficiency in economic management. The primaryinstrument to support this objective has been adjustment lending,buttressed by appropriate technical assistance operations. The secondobjective is to promote a sustainable level of long-term growth anddevelopment. The instruments designed to address this objective aresector-based rehabilitation/investment projects, within an appropriateframework of sectoral policy reforms.

123. The country's development strategy, as spelled out in the mostrecent Policy Framework Paper for 1989/90 to 1991/92, lays heavy emphasisin the short-term on improving incentives for private investment;rehabilitating the banking system and deregulating the financial sector;and improving resource utilization and expenditure control in the publicsector. These objectives are supported by the policy reforms described inthis report and by a Financial Sector Adjustment Credit which is beingprocessed in parallel with SAL IV. Together, these two operations areexpected to improve the utilization of existing production capacity and,thus, to improve the competitiveness of Senegalese industry. Furthermore,they would increase the volume of and improve the quality of public andprivate investments and, thereby, enhance growth prospects in the medium-term. Beyond 1992, the Government recognizes the need to rebuildproductive capacity, even as the earlier stabilization and structuralreforms continue. Thus, the public investment program for that futureperiod includes major projects in energy distribution, in water supply, andhighway rehabilitation and maintenance, for which IDA financial assistancehas been requested. The proposed lending program in the period beyond1990/91 is thus balanced between investment programs in urbanir.rastructure and services (sanitation, water, energy) and policy-cum-investment operations which focus on further private sector development, onthe environment, and on human resources development.

124. Bank assistance strategy is not predicated on Senegal changingthe nominal exchange rate. Such a decision cannot be taken unilaterallygiven Senegal's membership in UMOA and in the CFA Franc Zone. To achievethe depreciation of the real exchange rate which is required to increasethe external competitiveness of the Senegal economy, appropriate demand-

- 48 -

management policies, together with additional measures to reduce productioncosts and to encourage production of tradables, must continue to beimplemented over an extended period of time. The envisaged adjustmentperiod may, therefore, be longer and more difficult and the export responseslower than would be the case if the nominal exchange rate could bedevalued. Nonetheless, Senegal is expected to be able to meet itsobjectives over the medium-term, provided it consistently applies thoserequired policy measures which are being supported through SAL IV.

Bank Group Operations, Past and Future

125. As of September 30, 1989, the Bank Group had approved 88operations in Senegal for a total of about US$916 million, consisting of 57IDA credits (including three Special Fund credits), 20 Bank loans, two SFAand nine IFC operations. To date, 39 credits and the 20 loans have beenfully disbursed. Of the 24 active projects, 5 are in agriculture or ruraldevelopment, 4 in industry and energy, 6 in infrastructure, 3 in humanresources; there are also 6 TA and adjustment operations. The Small RuralOperations II Project (US$16 million) was approved in March 1989. Asdiscussed above, Bank assistance will focus heavily on adjustment for thenext few years, particularly at the sectoral level.

126. In the area of Structural Adiustment, the SAL II and SAL IIIoperations have been for the most part successfully completed. A fulldiscussion of Lhe experience with these operations is offered in paragraphs18 to 20. The proposed SAL IV operation will build on the experience ofSALs II and III, but will support a relatively limited number of criticalactions, described in sections III and IV of this report. A technicalassistance project is supporting the formulation and implementation of thevarious action programs included in the SAL operations, with measures toimprove the management of public investment, public debt, personnelinformation and career development, management of economic information, andthe development of a policy formulation capacity.

127. While some measures aimed at the reform of the banking system ofSenegal were supported under SAL III, the dimensions of the crisis in thefinancial sector were initially underestimated by IDA and the Government.A subsequent IDA-financed study of the causes of the problem found that 8of 15 banks, either wholly or partly owned by the Government and includingthose banks to be rehabilitated under SAL III, were effectively bankrupt.They had nonperforming loans of CFAF 233 billion (or 15 percent of GDP) outof a total loan portfolio of CFAF 323 billion and debt outstanding to theBCEAO of CFAF 167 billion. The sharp deterioration in the financialposition of the system was attributed to poor management as well as toinappropriate policies, at both the BCEAO and Government levels. The studydrew particular attention to the following problems: (i) the negativeimpact of mandatory credit ceilings per bank and per sector on good lendingpractices; (ii) interference by the Government in lending decisions; (iii)lax supervision of banks leading to disregard of prudent financial ratios;and (iv) laxity in the application of refinancing policies. These problemsare being tackled under the Financial Sector Adjustment Credit.

- 49 -

128. The next phase of reforms in the agricultural sector will besupported by the Bank under a separate Agricultural Sector AdjustmentCredit (ASECAL). This phase will be characterired by policy development inarens complementary to the thrust of the improvements made to date. Theoverall aim of the Agriculture SECAL is to support more efficiency andprice responsiveness in agriculture, a decrease in government controls, andthe elimination of subsidies. In particular, the reforms to be pursuedwill be: (i) in the cereals subsector--further review of the system ofprotection with the overall goal of encouraging the production andtransformation of coarse grains in which Senegal has a comparativeadvantage (i.e., millet and sorghum), diversifying production into othercrops such as maize, and further liberalizing the rice market; (ii) in thegroundnut subsector--action planning to redace losses in processing andprivatization of confectionery groundnut operations, and revised protectionagainst imported oils as a precursor to the eventual elimination of allsubsidies; (iii) a full review of the agricultural credit system; and (iv)the development of appropriate land tenure and land management regimes toencourage resource conservation and long-term private investment,especially in the Pleuve region. Measures to reduce losses in the cottonsubsector and to promote diversification for exports would also be pursued.

129. The two other sectors where important reforms are to be pursuedare transport and human resources. Major improvement is being sought inthe planning, operations, and management of the transport sector inSenegal. A dialogue has been established with the Government since apolicy review meeting with the Bank in 1986. Broad agreement, as includedin the Declaration of Transport Policy, has been reached on the need forreforms in three main areas: (i) improved investment planning in thetransport sector with a target of at least 80 percent of investment in thesector earmarked for infrastructure maintenance and rehabilitation, and astronger emphasis through 1991 on repairing the dilapidated highwaynetwork; (ii) increased mobilization of sector resources through improvedefficiency, cost control, and revised tariff policies which are expected tobe especially vital in the railways and ports subsectors; and (iii)strengthened sector management through a series of institutional reforms,including revising the legal status and increasing the autonomy of therailways parastatal. Improved transport efficiency is a key factor in theprocess of increasing market responsiveness in the economy and redu_ingcosts of production for agriculture and industry. The envisaged Governmentinvestment program for the period 1989-93 provides for an increasing rolefor the private sector, with a minimum of one-third of future roadmaintenance to be contracted out.

130. The development of the human resource potential of Senegal is ofhigh priority if the growth possibilities created by structural adjustmentare to be capitalized. The Government, in consultation with the Bank, hasidentified a number of areas where policy reforms are required: (i)population policy--legal and regulatory changes are envisaged to counterbiases in favor of large families and against womer, and a revised priorityinvestment and action program is to be implemented; (ii) health--totalexpenditure is expected to grow in real terms to improve, inter alia, the"field effectiveness" of health services and to implement an essential drugdistribution program; and (iii) education--spending will be refocused on

- 50 -

basic and primary education with a target increase in enrollment ratiosfrom the present 56 percent to 65 percent by 1995, and the autonomy oftechnical and professional schools will be increased to cater to demandsother than those of the Government services. The Bank expects to supportthis program through a Human Resource Development SECAL.

VI. COORDINATION WITH THE IMF

131. The proposed SAL IV is a critical element both in theGovernment's strategy and in the overall program of structural reform forSenegal supported by the IMF and other donors. The program has beendeveloped in close collaboration with the IMF staff, and is consistent withand reinforces the current ESAF program which amounts to SDR 145 millionand was approved on November 21, 1988 for a three-year period. The IMFstaff concluded negotiations with the Government on the second-yeararrangement under the ESAF in August 1989, and got Board approval in earlyDecember. The Bank staff participated fully in those negotiations. Priorto ESAF, the IMF had successfully implemented a SAF and a series of stand-by agreements. The Bank will continue to work closely with the IMF inmaintaining macroeconomic stability and to ensure consistency in policyreforms.

VII. RECOMMENDATIONS

132. I am satisfied that the proposed Development Credit would complywith the Articles of Agreement of the Association.

133. I am also satisfied that the proposed Special Joint FinancingAdministration Agree.nent for the non-reimbursable contribution fromSwitzerland would comply with the procedural arrangement between theGovernment of Switzerland and the Association for cooperation in theCofinancing of Specific Development Projects or Programs dated April 9,1987.

134. I recommend that the Executive Directors approve the proposedDevelopment Credit and that the Association act as Administrator of theproposed Special Joint Financing non-reimbursable contribution fromSwitzerland.

Barber B. ConablePresident

Attachments

January, 1990Washington, D.C.

7ANIA1.d dcl 13SNOYG GBONIAL: SMAL PMPV AM (1967-93 DATA FRtl lIW * . 8/SO)

SamAl. - JET e3@l1C ?iOICATOR aJ 11/13/00

Actual~~~~~~~~--- -- -- -- -- -- -- ----- -----r-oced---

UseS (MP groebh rae. 4.84 -0.0 25.2 2.6 -4.6 5.6 4.8 4.0 0.1 -1.5 4.6 a.l 6.6 .8. 5.6 5.0 8.6 8.6Reel ad ro th veto -8.5 -1.7 14.9 2.2 -5.8 8.9 8.9 8.2 8.2 -1.4 8.4 4.4 4.1 4.8 4.0 4.0 4.0 8.9meal @W pa. u.ite from"h Tae. 4.9 -4.4 11.7 40.6 -4.0 1.0 0.8 1.2 2.8 -4.2 1.4 1.5 1.2 1.8 1.1 1.0 1.0 1.0Reel Prig.Comaau. $NWe. .l9e growt ruse -1.6 0.? 6.5 -1.9 -11.0 4.4 0.9 17.4 40.1 -4.2 5.6 1.9 1.5 0.0 -0.6 .0.6 0.1 -1.1

Long-term peabla. am 2J1 (is 6l mIImto) 665.0 106.6 2214.9 1494.7 &816. 197.0 2466.4 8167. 80166114 SU4-S 866611.0 S65.5 57M10 6610.5 4660.7 41166.6 WE79. 411111.5LT pubIce OW~Eapeirbe goods & eorv. S_J 16. 96.0 127.6 146.5.5 5 81.1 M65. 18.4 160.0 SI.* =.S 112.8 101.41 .191. 18. 176.6 166.0 W-*.LI u pAis 00W0P 81.5 40.7 46.1 60.6 411.1 71.1 65.7 66.7? 611.2 .0 67. 1 04.2 62.2 60.7 W.0 VA. 86.4 66.4LT phibl. due. service (I millipe.) 119.0 90.9 46.1 66.9 651.61 66.8 607.4 Sn't( 849.7 462.9 661.8 864. 8640.1 864.6 880.6 296.8 374.9 U.1LT phil. ch DaA er,ic.UEspota 0G5 4J 19.61 .6. 4.1 5.5 6.7 10.1 19.61 21.7 10.8 27.4 24.8 22.6 19.1 1.0.4 14.5 18.0 10.1 .6.LT public Dbel servic./62P 6.0 8.? 1.? 2.0 8.0 8.4 5.5 6.0 7.0 6.1 7.. 6.9 0.9 5.1 4.8 4.0 8.4 2.9LT Ph8.o lab.rrelfSp.rbe 03 AL/ 8.8 8.9 8.8 4.0 8.8 4.6 9.2 8.9 9.8 9.9 8.8 7.8 0.0 8.1 4.4 8.8 8.4 8.0LI phibl. lnier.eIb/6 1.9 1.7 1.8 1.7 1.1 1.6 1.6 2.4 2.6 2.9 2.8 2.2 1.6 1.6 1.4 1.3 1.1 1.0

Gacwe ioueetm&Waop 18.8 28.0 14.7 18.2 15.4 18.11 14.8 1.8. 14.5 I15.3 151.6 15.6 18.4 18.5 16.2 10.7 16.7 11.7Domesic.e.vigeaIMP .0.5 -1.71 1.7 8.1 6.4 1.0 6.9 8.2 7.1 6.1 6.6 6.8 7.6 0.2 9.0 0.7 10.4 21.1Ibliml 660Iaa/Uap -4.5 4.04 -1.6 -1.9 0.5 -1.0 1.4 2.0 2.9 4.9 5.2 8.1 5.1 6.6 7.0 6.0 9.1 12.0Ibrelmel .ellcAlsm eavevI rube Cur. ) 1.7 1.6 0.2 0.8 -0.6 .0.9 1.1 0.1 0.2 -1.5 0.1 0.0 0.0 0.2 0.4 0.6 0.4 0.0Public lome.tueb/66P 6.0 4.4 4.0 4.0 4.2 4.1 4.8 4.5 . . . . . . .

Privet.e ims.etwomba/UP O.9 10.5 10.1 t0.7 10.4 9. 10.8 1. . . . . . . .

Pr&..bie &*WsIrn eevisge/406P . . . . . . . .. .- . .. . ..

PhI l.frluuta lnecutmI ratio 410.6 43.0 519.7 57'.6 40'.9, 44.0, 41.8 42.4 .- . . .. . . .

t 8 lJ 814 4.0 6.2 7.8 8.4 5.0 4.9 4.9 4.7 8.0 8.9 4.2 4.8 4.4

Governmen.t revenue. evei.ars.ate/P 21.1 20.7 16.4 16.4 19.4 18.51 la.I ISA 16.6 17.5 16.2 108. 19.4 10.4 19.4 19.4 19.4 19.404.erueb *sp.sd.& not leedieeJ6 610.1 51.5 27.0 26.6 24.0 81.6 21.3 ?ul.s 20.0 21.0 20.8 29.1 17.6 281.0 18. 18.4 18.2 15.1I2441.1 C- or Surplus W/GOP 7_J -0.1 -10.9 40.1 -7.2 45.5 -4.2 -4.2 -2.6 -8.2 -14.8 -2.1I -0.3 1.6 1.4 1.11 1.1 1.2 1.8(semio 1bei. aeci gereate)

Moe$ W soeth robe of NamS 4J -4.6 9.1 4.6 9.0 -7.2 -12.7 8.0 12.0 5.6 -1.2 5.6 4.4 4.4 5.0 6.1 8.2 1.4 8.5Exports P8/62 4J1 . .7 61.6 26.7 60.7 29.7 26.0 26.2 017. 21.4 17.4 27.2 27.8 11.4 27. 16.2 26.6 29.1 29.0Reel .rcwth rubc of MME 4_J 7.6 18.8 -4.4 8.8 -.9. -6.9 -8.2 45.8 -2.5 0.4 6.0 4.7 4.1 8.8 8.8 5.4 a'8 8.8leport SES/00 4Lj 44.7 51. 48.1 45.5 41.8 87.1 66.7 47.2 48.7 44.5 45.0 45.3 45.4 45.8 411.6 52 60 46.0 A WCurteai eccaebm beleace (S6 ciii) S_J 426.8 -656.4 -447.6 -448.4 -410.9 -480.4 -412.7 -470.8 -466.8 -4811.5 -480.7 -4561.5 -5161.2 -824.1 -146.8 -540. -612.81 -466.1Current a.cowmei/P 8J/ -17.7 -26.9 -17.4 -16.1 -17.7 -i1.6 -16.4 -10.2 .9.4 -.0. 40.4 4.5 40.5 .4.1 -7.7 -7.8 40.4 .4.6Current. accoaub bale"". (6 mill.) 6J1 -86.1 -401.5 -268.6 -2617.6 -272.8 -517.4 -410.7 -257.0 -2166.18 -104.1 -i911.4 -105.4 -269.8 -214.2 -2166.0 -266.0 -271.4 -246.2Curr.nb mccount/W6 6J .18.0 .16.7 -10.8 iI1.1 -11.7 -12.4 -11.0 ~. -5.8 -8.2 -. 9 -3.7 -4.0 -4.4 .-4.3 -4. 1 -4.0 -8.3 -2.6Nercd. Terms at traed Indee (1960.100) 100.0 12262 104.7 107.2 122.6 124.2 142.4 1461.6 188. 0 248.5 41.46. 147.4 145.6 146.9 142.0 156.9 140.0 159.9

(in UN4 term.)

1-J All figure. are p.ucceibepee. eel... othuruine sepcifimed.2J/ PullI;c ond publicly. juereeled debt autobeading and disbursed.S_J Pice-your ewers"e. one Spoor Sao.4_J oeri.sd f roe conetent 1960 price. dete (traed date from Ntft.onal Acceunte for 2960-166 mad f rom Women. of Puicente for 1967-97).SJ Ecciuding official trunefere.6J Includine offivial tresefero. 1 7_J Deficit or eurplue an commitment basis..0 ej include. morkur. r.emtteaceIQ

x

0

Un

SE4L - ULAM P PAENTS Annex IPige 2 of 5

(6 milIIons at Current Prices)

Actual ProIl . Projections

1oo low68 1964 18 1964 1967 196 199 1990 1992 19e7

A. Eaport oat *o A WS 606. 948.3 900.4 06.0 1027.0 1168.8 LS01.1 188.7 1468.6 1789.1 2811.51. Nerchendi.. (PU 481.7 606.6 897.0 481.0 611.0 On8 1 760.5 847.4 928.8 1120.1 1917.22. Mon-Feeor services 86.1 841.0 802.6 821.0 416.0 492.8 810.7 621.8 6831.8 618.9 894.

S. Import. of sod a WS 1214.7 19.9 1186.7 112*.0 1484.0 1448.0 18.8 182.1 1719.4 2061.1 3210.01 erchanadie CFB) 878.1 917.8 61u.9 790.0 1010.0 948.0 1009.4 1Oi1.t 114.0 1411.7 224.42. Non-Factor Services 39.6 874.6 889.8 868.0 424.0 800.0 824.1 88. 8 878.8 669,4 983.6

C. Regorec Balance -47.9 -8.1 -286.8 -W1.0 -407.0 -277.8 -262.8 -22S.4 -2.8 -842.0 -398.8

0. Not Feor Income -96.6 -96.7 -312.9 -148.4 -281.7 -22S.4 -287.4 -289.9 -227.8 -209.0 -141.11. Faca., leipta 26.7 28.8 18.7 18.6 17.8 20.0 20.1 20.1 27.9 89.6 76.42. Fah Payment. 12.2 1J24.2 16.6 160.0 249.0 248.4 237.8 260.0 288.7 248.6 217.8

(Interet payments) 87.0 41.8 81.6 42.9 97.7 11.8 1*0.4 149.0 138.4 11S.4 90.2

E. Nat Current Trarfer. (periv.) -19.6 -1.6 0. L 17.0 26.0 8. 81.4 63.1 32.0 34.7 44.81. Current Recelpt. 76.0 89.2 84.8 62.6 62.1 74.9 76.2 78.9 81.6 94.2 .04.0

a. workars' reittnce. 74.8 i.1 s0. 4 22.2 .. 74.9 76.2 7i.9 81.6 94.2 104.0h. othor current trans. 1.0 4.1 8.9 60.4 .. 0.0 0.0 0.0 0.0 0.0 0.0

2. Current Payment 98.8 60.6 8 4.0 80.8 86 1 44.J 4.8 4..8 48.7 89.4 S9.4

F. Current Aceont sblance -26 . -448.4 -410.9 -480.4 412.7 -470.8 -488.8 -431.3 -480.7 -816.2 -498.1(ova .official transfer*)

0. Long-Torp Capitol Intlow 421.1 408.8 871.7 379.0 462.0 888.4 811.6 807.0 448.4 378.4 616.11. DIrct Inveatment 12.9 -46.8 27.2 -8.8 -2.0 -84.1 -72.9 -16.1 4.0 28.2 86.72. Official Capital Orunt 140.2 157.6 186.7 138.0 202.0 218.0 208.0 2S7.2 261.8 249.9 249.98. Nat UT iLane (M data) 191.7 802.1 16.8 168.8 286.4 197.0 179.4 87.9 193.1 10.8 309.8

a. Diuburemnte 818.4 8lO.1 204.0 212.1 87.r7 866.8 410.0 85t.8 448.1 889.9 478.4

b. RepaymWe 126.7 18.0 84.7 4.8 118.8 1J9.6 280.6 268.8 2885.0 28i.6 168.94 Othor LT Infloe (not) 77.8 -19.6 86.6 66.0 2. 0.0 0.0 0.0 0.0 0.0 0.0

H. Total Other Item (not) 07.6 21.6 13.0 66.8 124.8 171L.6 15.9 216.1 -18.0 0.0 0.01. Nat Short Tom Cap Itl tI. 66.8 29.8 91.7 81.7 0.0 -8.0 0.0 -18.0 0.0 0.02. Capital Flowa NAL4. 0.0 . 0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.08. Err'., end Omimalo. -26.7 -1.4 -16.8 -8.4 72.8 171.6 166.9 216.1 0.0 0.0 0.0

IVIVLL u.SLAM (04) -48.8 -19.7 -28.1 -18.1 -8.2 66.6 2.2 91.8 -17.8 -187.8 121.0

I. cianps. In Not smarv 4i.8 W 19.7 26.2 18.1 6.2 -6ti. 6 -2.2 -91.8 -91.4 -44.8 -140.81. Nat Cradit from 1P 87.2 12.6 4.2 40.8 6.2 -17.8 16.6 18.1 4.8 -0.9 -7.72. Other t_arv Chonge. 9.2 7.1 22.0 -27.2 0.0 -89.1 -21.0 -104.9 -98.7 -8.7 -102.8- indiae incrase)

J. Additional finaning required 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 106.7 102.4 19.8(afi ll rop not of aintixationed lntareet Vap)

CCont'd on neat page)

Annex I

SOAL& - BALANCE 0PPAflES Page 3 of 5

QAE llilona at Current Prices)

Actual Peal IM. Projections

iwo ieu 19ee 4 es9 ieee ie17 to" ie9e 1990 1m e199

Shasre of QDr (Current t8) I

1. Re.ource %lang. -18.7 -14.0 -12.4 -12.8 -10.9 -6.0 -8.8 -4.8 -4.6 -8.6 -4.82. Total Interest r1ym-t 1.9 1.7 2.2 1.7 2.6 2.8 2.6 8.0 2.6 1.9 1.03. Currest Aocount blanc -17.7 -18.1 -17.7 -17.6 -16.4 -10.2 -9.4 4.6 -8.4 -8.5 5.

4. LT Cm*ulItl InfIa (lIne 0) 14.2 16.4 16.0 14.6 12.9 7.7 6.0 6.1 6.4 6.2 7.0S. Net CraiIt fro the DP 1.8 0.8 0.2 1.6 0.2 -0.4 0.4 0.0 0.1 -0.7 0.4

Meaccandum Item:MlP Cal 1. of Current U81) 2970.0 2408.0 2124.0 2664.0 8740.0 4899.4 4979.7 4994.6 86.7 608.4 8616.6

Foreln EIhcango Rfarvea:

1. Int'I. Rerves (VFS lid) 6.0 12.2 0.7 S.1 0.4 9.2 - -

2. od (end yr Landn prlis) 17.0 11.2 9.6 9.4 11.7 18.7 - -

3. Cra" Raeere mncl. Gold 28.0 2S.4 13.8 14.5 21.1 22.9 - -4. ro Re in Mnth& Iort GfS 0.2 0.2 0.1 0.2 0.2 0.2 ---

Eacheon Rates (AFAM)t

1. Ibn. Off. X4b-e (VS rh) 211.0 361.1 487.0 449. 8 46.0 800.8 - - -

2. Rel 6. X-f-at (101100) 100.0 92.0 94.0 108.0 112.0 108.0 - -

0. X-46. for QN Consaesl.n 211.0 861.1 487.0 449.8 046.3 800.5 - -

Annox I

Page 4 of 6

STATUS OF WORLD BANK OPERATIONS IN SENEGAL

I. Statement of Bank Loans and IDA Credits (as of September 30, 1989)_____ ____ ____ _____ ____ ____ _____ ____ _-__ _____ ____ ____ ____

Amount In US1 million(lose cancollotions)

Undis-Credit No. Year Borrower Purpose Bank IDA burned

-- -- -- - -- -- -- - - -- - --- - - -

A. Thirty-nine (89) credita closed 420.57

C11080-SEN 1961 SENECAL Forestry 9.30 2.42C11766-SEN 1982 SENEGAL Agricultural Roeserch 19.60 0.74C1i100-SEN 1988 SENEGAL Rural Health 16.00 3.68CF6130-SEN 1984 SENEGAL T.A. for Urban Mgmt A RehMb. 2.96 0.26C13980-SEN 1984 SENECAL Pnrapublic II T.A. 11.00 1.065C14060-SEN 1984 SENEOAL Eastern Senegal Rural 16.10 5.11C14690-SEN 1984 SENEGAL Dakar Port III 2.65 0.82C1U540-SEN 1986 SENEGAL Water Supply II 24.06 1.95C17100-SEN 1986 SENEGAL Energy Sector Rehab. 20.00 12.24C17140-SEN 106B SENEGAL Telecom II 22.00 17.08C17850-SEN 1967 SENEGAL Primary Education Dov. 12.00 9.11CISSSI-SEN 1988 SENEGAL Irrigation IV 88.60 29.28CI1SSO-SEN 1988 SENEGAL Industry Sector 83... 28.78C18840-SEN 1968 SENEGAL Municipal Housing Dev. 46.00 40.26C19166-SEN 1086 SENEGAL T.A. for Development Mgmt 17.00 18.65C18021-SEN 1989 SENEGAL SAL III 5.56 6C19920-SEN 1989 SENEGAL Small Rural Ops. II 16.16 13.87

B. Seventeen (17) ongoing credite 806.76 179.76

C. Twenty (20) Loans cloed 129.88

Tot l 129.83 726.27of which repaid 62.62 14.92

Total held by Bank A IDA 76.71 711.86

Amount sold 5.76of which repaid 8.26

Total Undisbursed 179.76

Annex I

Page 5 of 6

SI. Statemnt of SFC Investment (as of September S, 1989)---- ----- -------------------

Amount In US8 millionEquity

Fiscal Year Obligor Type of Business Loan Investment Total

1967 Societe IndustrelII* d'Engrais Fertillser Plant 2.46 1.01 8.46du Senegal (SIES)

1972-74 BUD Senegal Vogetable Export - 06.4 06.4

1974 SOFISEDIT Development Finance Co. - 0.84 6.34

1980 Banque do IHnbitat du Senegal Money A Capital Market - 6.40 .046

1980 Societe Hoteliere du Beracholi Tourism 8.0o - 8.00

1982 Industries Chimiques du Senegal Fertilizer Plant 26600 - 26600

19084 Afrlcan Seafood Fish Proessolng Plant 3.29 0.91 4.20

1986 SOTIBA-SIMPAFRIC Print Manufacturing 3.20 - 8.20

1968 Industries Chimique du Fertilizer Plant 12.60 0.15 12.15Seneal It ---

Total Gros Commitments 46.94 8.71 52.65

Less Cncel lations, Terminations,Repayments, Sales and Losses 82.84 1.86 84.19

16.06 1.86 18.46Total Com It ment held by IFC

Annex IIPaRe 1 of 1

Supplementary Proiect Data Sheet

Timetable of Key Events

- Time taken to prepare the programs 17 months

- Initial discussions with IDA: June 29-July 12, 1988

- Preparation Mission: November 7-24, 1988

- Appraisal Mission: July 3-21, 1989

- Negotiations: November 27-December 11, 1989

- Planned date of effectiveness Febuary 1990

SEAL: SJCTURAL ADJUST4T CRIOIT (SAL IV) POLICY MATRIX 04-Jan-90 Page 1 ANNEX III

RE AtEAS A O£ J8TIVES STATUS A RtEtET ACTION SAL IV ACTION PR1RA TIDrC CIONDrION FOR

I. MA OSCWIC AND FISCAL MANAGEET

1. Financial Stabilization. Continue to - Nttble progr_es hao been _d- in recent 1. Redres the budgetary position (on a co_sit_mnt basis and excluding Overalliprove the Government's fiecal and years auch that the budget deficit ant external grants) from a deficit of 4.01 of ceP in 1988/89 to: Perfor_ncocurrent ccemrt operatione. from 8.2b of MP in 190883 to 2.63 of CP in * -2.89 of MP in 198/90 6/90

1987/8 and the current account deficit frou * -1.53 of GDP in 1990/91 6/9117.43 to 10.2b over the am period. The Reduce the current aceent deficit (excluding grant.) from 9.6$ of MP Overall

inflation rate declined aharply. to: Performnce

* 4.6S of MtP in 1989/90 6/90* -6.9$ of GDP in 1990/91 6/91

2. Current E-peditore. Reduce the See civil service and PEn section. Se civil ervice an PEn sections.

wog bil and iprove a loeatiownbetween ge and rm-waeexpeditorne so a* to increaee theproductivity of civil service.Reduce tranfer to parmett la.

S. Revenue lbi lination. Iprove reveu - A tariff refos - adoptied in Augut 1966 2. R_eD the import duty eptionan inputs to textiles. batteries, 7/91 Oera llperfor_nce a_ redue relIance on and a tea reorm ma. initiated under SAL III. and _tchd industrie.. Perfor_nceexceptional resources (pofibt from including the eteniain of the valuE added;_pot of rice and petrolem) by tax (VAT) to n_w _mbeectore and theobifting awe stable reveue baee. simplification of direct taxation for

individuals and copanies. Further to a sharpdecline in cueto_ collection. In the- second-half of Ff69. on an esceptional and temporarba;s, tariffs have been raised by o percontagpoints acros the boerd in September 1969for a t-year period.

- A plan of action ma developed on the basis S. leplesnt the ic ta xnd administration action progrea. in Continuous Overall

of a otudy of the omest ta system end partiular extend VAT to services and comrce. and roduce the Performance

administration in collaboration with the DIF underinvoicing of iports by introducing a minima duty onad the WDrld Bnk. The study aime at Ci) underinvoiced item.

reducing the dependence on taxation on enrg

an (;i) identifying other sources of revenue 4. l_eettion of an action plan to prove custom administration. 9/90 Overall

withut averteing the indrn mectar (July particularly the valuation sections an the coputerization of Performace

1969). "custom clearnce procedres to reduce freud.

S. Taks t-o of arres nd r-inforc the m_chaies of thwir Continuous Overall

- Iplementation of tea administration _raeurm recovery through o teuberixation of informtion. Performance la >

siming at improving tax collection. Thees t S

sers., particularly those in the area of tQW :

cuetoes, were identified under SAL 1II. x

4. Public Investment Programing - Basic principl es of project planning and e. Isprove the proparatioa of the three-year rolling public invetment 0 t-4- Consolidate the process of preparation are ell established (3 PFIP, have prograa by consolidting PrIP with recurrent budget and better

budgeting already undrw y to boen *atidefctorily reviewed by the Bank defining sector strategies. and adopt for each year an investsantachieve greater efficiency of including that for 1980/90-1991/92). Studies progrm in consultation with M.

public investment, are under way to take into consideration the o 1990/91-1992/98 6/90 Trnche* II

SENEGAL: STRUCTUtAL ADAJUSTMET CRED1T (SAL IV) POLICY MATRIX 04-Jan-90 Page 2 ANB III

F3M AtEiAS A OBJETIVE STATUS A RECT ACTION SAL IV ACTION PROURAN TDmoC COrITION FOR

recurrent coet impact of the PTIP in four * 1991/92-1993/94 6/91 Trench- III

mactors (Education. Haalth, hydraulic&, and

Traneport). A guide for project unalymia

(for productive projects) have bon

completed nnd is being disseminated.

S. Financial Sector. Improve the financial The Oovernment is currently implementing a

intermwdi-tion procee.. financial _ector reform program with the

eupport of IDA, France and USA.

II. PRIVATE S1r0R DCNIVYE

1. Removal of labor mrket rigidities and - Two aspects of labor code hav- been changed 1. Expand significantly poeeibility of using fixed term contracts by 10/8° omrd Pr_nt

reduction in labor cost3. under SAL II which allo employers to (i) hire (a) paeing application d eree to the Labor Code to cover *isiting

without using the 'Service de la Main firaa which ara expanding; (b) modifying the Investment Code to allow

d'Oeuvre; and to (ii) expand eomewhat use of firma to use renewable fixed term contract. of up to S year. and

fi id-term emloyment contracts. exec t SlE from prior muthorieation for layine off workers, and (c)

modifying the ZFIM statute to enable enterpriee to benefit from

mot favorable conditions under the investmnt code.

2. Reduce labor cost by freezing the 9410 for 3 yeara and exempting 10/89 Board premnt.

certain enterprima from both weontribution forf-tai t* and

payment of incom taxes on their xployae.

3. Review the country's wage matting *ystes with the view to e 9/90 Tranche It

tbo rds market doterained wage. Participation of employers and labor

organizations will help solidify practice of realistic negotiation.

and dialogue aong social parterners.

2. Reduction in production coat. other - A number of etudixs have been completed 4. Amend the special agreement with SMR on termo and conditions acceptable 12/89 Board Preent.

than Labor, in the energy *ector. They cover audit to IDA and publ;ih a decree to that effect reflecting a new transparent

of SAR, t h

e system of procurement, refi- pricing and tacation asyste for petroleum products. Under the now

ning and distribution of petroleum pro- system, ac-SMR prices will be met at import parity and adjusted

duct., and the fiscal aspect of petro- quarterly. In addition. SAN will be paid a handling fee to be

leua pricing and taxes (DIF/Bnk atudy). negotiated with the tao parties concerned.

S. Reduce, in consultation *ith the World Bank and I. energy price.

a First phase 7/90 Tranche II.

a Sub-equent actions 1990/91 Overall Performance

- Offpeak telecomomnicationo charges reduced e. Reduce further telecomunict;ons prices for peak and aei-busy 6/90 Overall 0 I

by 201 from July 1, 1989. hour periods, and tariffs for the port of Dakar. Performnce 1 H

- A study is underway to formulat

appropriate tariff, for the port of Dakar.

SEBAL: STRUCTlRAL AOJUSTME5T CREDT (SAL. IV): POLICY MATRIX 04-Jan-90 Pag. S AhDNt III

RE9 AREAS A O8JECTIVES STATUS A RECIT ACTION SAL IV ACTION PROM TIMING CQNDITION FOR

3 Iprowvent in investment incentive. - Establishment of one-atop services for 7. Study and implement _* ures aimed at simplifying the administrative

and in the roeultory environment. inveetors (Ouichot Unique), regulations for doing bue;neae in Senegal and for the strengthening offiecal administration (Dcm).

* Prepare plan of action bs*ed on the findings of the study. I1/89 Board Preent.

a Implement plan of action. Continuous OverallPerformance

* Restructure DOID and improve oporating procedures. 9/90 Trenche 11

8. Prepare and implent an action plan for reducing the arginal 12/89 Board Present.

effective ta- rate, followine the findings of the corporate teestion

study and the implomentation of the new direct tax structure.

* Implement plan of action Continuous OverallPerformnce

a Eatabliah single personal income ta, separate corporat tax and 1/90 Tranche II

eliminate P8E.

4. Prmotion of exports. - Duty drawback eche" ,ond export subsidiee 9. Revise legislation af ZFI and improve adiinistration to eliminate

introduced under SAL I and rationalized under constraints to its eapansion.

SAL II. a Iple_ent action plan. 7/90 OverallPerformnce

10. Review effectiveness of duty drawa scheme and administration 12/90 Overall

and structu4- of export ubsidy scheme. Implement findings of tho Performance

review.

5. Special Agreements. 11. Impleant a plan of action revising the SOCOCIH epecial agreement, in 6/90 Overall

particular the pricing system. Performnce

---------------- ---------------- ------ __ __ ----------- ----------- ------ - - - -- - - - -- - - - -- -- - -- - _ _ -- - - - - - - - - - - - - - - ---_ - ------ - -- -- -__ _ _ _ _ -------- __ __ _ .-___-____- __-______- _

III. PARAPWLIC SWTOR REFW (PEa)

1. Subsidy Reductions. Improved - A program of direct operating subsidy 1. Elimination of direct operational subsidy to commercial PEn and

financial relations between the State reductions has ben agreed under SAL III Reduction of direct operational subsidy to no-comrcial PEa

and the Paropublic Sector and and implemented according to the folloeing (excluding COUD). The budgeted and actual total asount should not

reduction of the burden on public schedule: eacoed:

finances. 196/87 59 reduction aim-a-vis 195/86 amounts CFAF 9.9 billion for 89/90 for non-commrcial PE

2987/88 1SS reduction vi-a-via 1988/816 *sounta CFAF 9.1 billion for 90/91 for non-commarcial PE- 7/90 Trenchb II

1908/89 30t reduction via-a-vis 198/8t amounts CFAF 7.4 billion for 91/92 for non-commerci;l PE- 7/91 Trench. III

1909/90 SW0 reductio vi-a-vi; 1988/86 amounts CFAF 0.6 billion for 89/90 for co_ercial Pr=

CFAF 0.8 billion for 90/91 for commercial PEn 7/90 Tranch* II >

CFAF 0.0 billion for 91/92 for commercial PE& 7/91 Tranche III

- Covernment has i;ued circular discontinuing 2. All future Capital increases should b- either in the form of long- Continuous Overall

practice of ewuipmnt subsidies. As of July term loan. or euity injections as appropriste and should be eubjected Performance

1989. practice of allrming EP to have to the some criteria as the roet of the PTIP. 0

overdrafte has been discontinued.

3. Transform stock of overdrafts as of June 1989 into longer ters loen 7/90 Overall

and write off the part that cannot be paid by non-commerc;al Performnce

Sit3AL: STRUCTURAL ADJTMT CREDIT (SAL IV): POLICY MATRIX 04- Jan-90 Page 4 EX III

Rhl4 MEAS A OBJrVIES STATUS A ET ACTION SAL IV ACTION PROGRA TDhDO CONDITION FOR

antarpris .

Croes-d-bts between the PEa and the Statr 4. Develop an action program -atiafctory to the Bank to *ettle 12/89 Boardwere dtemrinad up to the end of 186. all crome-debta as of December 1989. The program ahould includ* PramntatianTimatable h_a been establi hed for their measures to prawnt tho recurrence of crom--debte.settlemeant.

Oovernment l miinated indi rect financial 5. Cancel all undisputed cro-s-debte, sectl- all disputed cros-debte, 9/90 Trmnch- I1subsidije through (a) abolishing Covernment write off all debts of non-commercial PEa to Covernunt as of Decembergusrentoe on PE dommrtic borroming and 31, 1989; include in the 1990/91 budget at loast one third of all(b) charging comwreial interest rates an debts owed by the Government to the PEa, and *-ur- settlement of aton-lent foreign debt. leat one third of all de'%* owed by comeercial PEa to the 4overnment

ma of Oecember 31. 1988.

6. Include in thu 1991/92 budget at leset one third of all debts owed 9/91 Trenche IIIby the Covernent to the PEe and *asure settleaant of at least one

third of all debts owed by crovercil - to the Government *a of

December 31. 199.

2. Privatization. Withdrawal of the - The liquidation of 7 SEM& and 2 7. Completion of all preparation and formal offer for a-Ie in aState from non-etrategic PEa by Etabl i tne Publice asu finalized in March mnner eatiafactory to the Bank of:means of privatization and 1988.liquidation. SIDEC. VACAP. SAIH, SERAS, SNSS. SERDI (Projsct). SOED. 12/89 Board

- 26 SBta were selected for privatization SENHT Prentationand 10 were announced for eels in October1987. Shares in two of the companies on the SIPOA. SINAE5, WAM, DAR NARDIE. DAWEt, SODEIE, Projet 9/90 Trenche IIlist and in one other company ere aold end Fruitier iboro. CNCAS, BICISthose of a fourth company ware offered forsale in the third quarter of 1989. . S0TE , SICAP. S, SODDA, SOEZI. SWOIH. SODISA. SODDCA. 9/91 Tranche III

SONPI, SI", SEPFA. SOWDIS. SMACOS- Government has andored a strategy forprivatization aimed at withdrawal from all 8. Liquidation*non-strategic PEa.

Liquidation decrees eigned. employees laid off and all 6/90 Trench. II- Covernment h-a decided on five PEs for operations stopped for five anterprises to be liquidated.liquidation.

Signature of liquidation decree for aecond group of at least 6/91 Tranch* III5 PEn. employs laid off and all operations stopped.

9. Undertake study and act on recomendation for the creation of 12/90 Overal secondary market for shares. Performance

S. Rehabilitation of PEe. Maintain - Etebli_se*enta Publics (EP) wmre converted 10. Rehabilitetion progra_m and contract plans

efficiency and performnce of those to Societes Nationalas (SNa) in 1987. Include all subsidy reductions, cross-debt. settlement and other Continuou- Overall JoPED to reain under Covornment control improving their *nagesant autonomy. financial transactions with Government in the CPs. Performnce Xby meansaof rehabilitation plans and the contraet-plan (CP) aechanism. - Rehabilitation program were prepared for .No CP will be in force without identification of reseourc- in Continuoua 0 i

SOTRAC. SONTEL, SONEES and SiLEC. the current and following y-r'- national budget to finance the_ 1If neceary. CP *;ill be renegotiated annually, according to the c

- CPs were signed for SOTRAC,SONATL, SNEES, budgetary resources available.SEILEC. and Lettrs, de Missieons (LM) were

SENE3AL STRUClURAL ADJUSMENT CFtEDIT (SAL IV): POLICY MATRIX 04-Jun-90 Pago 5 ANNIX III

REFORM AJEAS A O8JECTIVES STATUS & RIF4 ACTION SAL IV ACTION PROGRAM TIMING CONDrrION FOR

signed for SOAI. SODEVA, SODETIFC-,'SAieD, Propari programs and begin implementation for MIS, ORTS, ITA, 6/90 "O'D I I

and SGIIVAC. SICAP. OHL4. PAD and RCFS Perform-nce

- obnagemnt audit- *uor copletod for Sign CPu for 1.1 PAD. RCFS. OPCE and SONATRA. 6/90 Overall

aelected PEa. PerformnceSubminsion of revi-ed CP consistent with agreed _e-srus to 7/90 Trancha IIreduce subsidies and a*ettl ersoe-debt-.

All new CP* to incude performance incentives bonue. for PE Continwous Overallmanagare. Performance

Honor all financial obligations of Oovernaent within the CPl. Continuous

, The OR!P will advis. on the n eesery measuree at enterpri-e level Continuous Overall

progr_ to ensure coapliane with agruemente. Performnce

4. Sector honagnt. Legl and - The Contrat-Plan Cell was upgraded in June 11. Strengthen ir,titutional fraemor for PE reform.

Institutional Reform. 1987 to the Dlgtion of Parapublic SectorReform (CfSP) and bas recently been provided - Maintain the staffing and financing of the delegation for PE reform Continuous Overal I Perf.

with nem promises and additional staff. (ORSP) to allow it to continue formulting, mnaging and monitoringthe PE reform program and to mnage a perforence incentive systm forPE mnagers.

- Retain apecialist advice in the form of long term TA and ahort

term consultant. to help with audit.. evaluations, negotiation and

oeet of PEe to be privatized.

- Studioe on the o;nniistion and functions 12. Strengthen parapublic cell in ministry of Finance to enable it to 3/90 Overall Perf.

of the supervieory agencies -ere completed in monitor ill governmnt/PE financial transactions. Cr-t. anMarch 1988. informtion syst- which will work aloegaide that of the DRSP and be

compatible with it. Design and implemnt system.

13. Amnd and publiah parapublic sector law (87.19) so as to: 6/90 Overll

Eliminate special controls on eissd sconosy PEe (SEM) in Perform_nc

hich governennt i a minority partner and on primate sectorcompanies receiving financial support froa Government.

Eliminate the right of veto on PE board deci-ions by FinancialController of the Presidency (CFP).

Limit th. role of the Office of Organization andMethod. (OM) in the PE sector to re ponding to mpecific

request from the Bards of Directors.

Restrict the role of the Audit Comi_sion (CVCCEP) to I

a posteriori auditing of PE account.. x

Transform all commercial public establishment. (EP) into 0 t-

mocietee nationslos (SN), and turning all *i-;nistrative and M1non-coamercial EP to the central administration. Closing down O

the e ntre for public establi ihment (CEP) which includes thecentral accounting agency (ACC) and the controller of financial

SE82AL: STRXTURAL ADJSTIENT CEDIT (SAL IV): POLICY MATRIX 04-Jan-90 Page a AIX III

IWlq AREAS A O8JETIVES STATtS & RtECT ACTIXN SAL 1V ACTION PROGAM TD4DM CONDrTITW FOR

Op*roetone (ClP).

Modify the coeposition of oll PE boards of directors to

include in each case at least two pereone nominated because of

their capabilities and qualifications and not because of their

positions in the administration or their rapr e_ntetion of

intereet grouPe.

14. Full impleernt.etion of cloeura of ACC/COF and change to ill PE 12/90 Oveall

Board of Directors. Performance

V. CIVIL SERVICE REFO

1. Dverall obJective. 1. Prepare an action plan in coneult:tion with MA to reduce the sag 11/89 Negotiations

bill and iprove civil sorvice mnagement. The plan is to include

in particular the _eaaur 4e cribed below. In *ddition, the

Qovemrnant ia co_itted to _intain. beyond 1992. the number of civil

ervente below 1991/92 levels, and the sag bill below 405 of revnue..

2. Staff reduction No now hiring. except for replsceeant 2. Reduce the number of civil aervanto through a progras of

rediction. and reductions in the number of intake froa adinistrative restructuring and voluntary departure..

training schools. A numer of studies have

been completed by the Oov*rnment. naely the l plement the restructuring plan reucing the nuaber of 3/90 0ovrall

July and Nov_ber 1989 Ob report, which ainistris. froe 26 to 13. Performance

focus on the restructuring of the currentadministration. Reduce the number of civil servants by about 4.300 through 6/91 Overall

voluntary departure, restructuring and early retiresnt by Performance

June 19.

Privatize elected services thue reducing the civil er,ice by 12/91 overall

*another 1.300 staff. Performance

Eliminate from the payroll *Il irregulr ceses identified by the 6/90 O0erall

second *taff canes. Performance

Enaure that recruitment does not *xceed the following:

- 43 schoolteachers, and 7M of progres departures in the non- 6/90 Tranche II

education sector for 1989/90. At a minimum, there will be

364 net staff reductions by June 1990.

- 661 schoolteachers, en3 of program departures in the non- 6/91 Tranche III r .D

education *ectora for 1990/91. lb3Q :

- 797 achoolteacher. and 805 of program departures in the non- 6/92 owvrall X

education * ctors for 1991/92. Performance ra'

0)1-4

3. Ws" bill reduction. Staff Cenau- coepleted in 1987 and updated S. Control the cage bill end improve its esnagesent. 1

in 1989. Audit of composition of wage bill O

co pleted in Soptembr 19e9. K ep wage bill at or below following ciling- without incurring

backpey arrears as of July 1, 1989:

SEBNAL: STRUCTURAL ADJSTM4BT CREDrIT (SAL IV): POLICY MATRIX 17-J,n-90 P.ge 1 A JII

1 AAS A *8JE1WTri STATUS A RteCET ACrIN SAL IV ACrICN ROaWRAD TIMIM CODITION FOR

- Realize CFAF 126.8 billion in 1989/90. and budget no more than 6/90 Tranche II

128 billion for FY 1990/91.- Realis. CFAF 125 billion in 1991/92. and budget no more then 6/91 Tr,nch- III

126 billion for FY 1991/92.

Update the administrative status of all civil servants. determine 4/90 Ov-rallthe total amount of back pay adjustments required, and set a Performncetim_tablo to clear them.

Reduce Governments -ontribution to the Employue Pension Furida 7/90 Overallfrom 20f to 161 af bhe salary. Performanc*

* No esry incross_ until June 1992. with the exception of Continuous Overallperformnce incentivo bonuses to bh determined independently Perfor_ncefrom the base salary index.

Allocate all economies on the wage bill (defined as the Continuous OveraIldifference between the sbove-mentioned e ilinge and the actual Performanceeage bill *inus arrears *ttlesent. government contributione to

the eperaftion package, end incentir bonuse) to tho following.in that order: *ettl- pay arrearm; contribute to separationpackgea; end increase bonum_.

4. Iprove civil service management lMjor groundwork has been completed under the 4. Adopt end implemnt all institutional asasres required to carry outsystes_ end monitor the reform progrm. Development lanagxsnt Project. This include the reform.

organizational study of Civil ServiceDirectorast, completion of a payroll processing Adopt teats redefining the rolee and functions of the sectoral 4/90 Overallsystem (3/89), revise of civil service personnel unite (DAE and SAG. Perform_ncepolicies and _etoral personnel unite (S/89).The status of the Central Payroll Agency was Implement now rewultons governing National Training Schools 9/90 overallraised to that of Directorate in Septesber (Eeole- Nationals. de Formation), in particular those putting an Performnce1989. end to automtic recruitmnt in the civil ervice.

brmonise special sttutes with the gneral statute of the Civil 7/90 OverallService, end define tha n_ indemnity nd bonue system (in Performanceconsultation with the Bank on the principle of fixed swounteindependent of the be" salary).

*mpl_ent organizational chart and staffin9 for the Central 4/90 Overall la P.Payroll Directorate MM5) and the Civil Service Directorate (FP); Performnce D :and computerize DCi operations. tD

Eatabliehment of an Inter-sgncy Steering S. Manage the Civil Service Program. -Committee in Nov. 1987, and a task force on 0°HAutomatic Data Processing in Sept. 198. Establish a Steering Comitte (Comite de Pilotage) to monitor 1/90 Overall Parf. -

the re-tructuration and voluntary departure prgram.

--- - - - - - - - -- - - - - - - - - - -- - - - - - - - - -- - ---- - - ---- - - - - - - - - -- - - - - - - - - - -- - - - - - - ---- - - - - - - - - -

SENBAL: STRUCrLPAL ADJUSTMT CRtDIT (SAL IV): POLICY IATRIX 17-Jan-90 Paeg 1 AIeM III

tEF AEAS A OJErTIYS STATUS A ReCE9T ACTI1N SAL IV ACIaON FEDORAM TlIC C0WITION FOR

V. SOCIAL DIPSEIONS OF ADJ.s1

1. Job Creation end Poverty Alleviation. - Creation of the Deleation a l'Inrortion 1. Review experience with tho RE/DIRE program with a vie of 12/80 Overall P rf.

a la Reinertion at a l'plo; (DIED) expanding the progra if doemd sueee_ful.

Estebli;h,ent of a National Employment

fund (RE) and of a Special Ebloyant Fund. - lplse_nt a public works and employment project in urban ares Continuous E mpIymnt

with donora eupport. Proct

2. based on eatimtee of demand for health and primary education 6/90 Overall

ervicsee by urbxn and rural poor. propoe otiefaectory reallocation 6/91 Performance

of public expenditures in thes suboectors to be incorporated in

1990/91 and 1991/92 budgets.

2. Population Policy and Hmun Re wurcee. - Statemnt of population policy was - Revise existing lgal documnt related to family code planning 12/89 Owerals Perf.

prepared under SAL II. ^n adjustment and economic rights of women.

program for the human resources eoctor

i being formulated. - Prepare and implement actions contained in the lR SEAL according Continuous lt SECAL

to the timtable set in the SEAL.

S. Monitoring the impact of stuctural - Financing wa arranged in order to - Establi h the surey unit at the Directorata of Statistics to design Overall Perf.

adjutmant. establieh a pormnent survey capacity and the pormnent houeeold survey.

to carry out socio-economic studies

Methodology of the urvey was ogred with - Establish regional offices to carry out dota collection, a

Directorate of Statistics. Sampling frame.

and classification of households into socio- - Set up a data analysis unit to produce results on the standards of

economic groups v" comp,'ted. living of households.

- Identify eocio-economic studies related to hou-ehold behavior 12/39

so as to forsualtn projects related to vulnerable groups.

M D00

O 0P1tl.

Annex IVPage 1 of 50

REPUBLIC OF SENEGAL

LETTER OF DEVELOPMENT POLICY

(No. 3)

FOURTH STRUCTURAL ADJUSTMENT PROGRAM

(SAL IV)

Dakar, December 29, 1989

CONTENTS Annex IVPage 2 of 50

Page

I. THE MACROECONOMIC FRAMEWORK . . . . . . .. 3

1. Economic Policy Objectives . . . . . . . . . . . . . . . . 32. Monetary Policy and Reform of the Banking system . . . . . 33. Strategy for Public Finance . . . . . . . . . . . . . . . . 44. Debt Management . . . . . . . . . . . . . . . . . . . . . . 65. Upgrading of the Economic Information System . . . . . . . 7

II. INCENTIVES FOR PRIVATE INVESTMENT . . . . . . . . . . . . . . . 7

1. Overview and Objectives .... . . . . . . . . . . . .. 72. Improving the Regulatory'and Institutional Environment

for Firms .. . ... . 83. Cost of Factors of Production . . . . 94. Reform of the Trade and Services Sector . . . . . . . . . .115. Improving the Institutional Framework for Investment

Promotion . . . . . . . . . . . . . . . . . . . . . . . . .126. Special Agreements . . . . . . . . . . . . . . . . . . . .13

III. PUBLIC INVESTMENT PROGRAM AND POLICY . . . . . . . . . . . . .13

1. Performance . . . . . . . . . . . . . . . . . . . . . . . .132. Action Plan . . . . . . . . . . . . . . . . . . . . . . . .14

IV. CIVIL SERVICE REFORM . . . . . . . . . . . . . . . . . . . . .14

1. Reform Objectives . . . . . . . . . . . . . . . . . . . . .152. Institutional Reform . . . . . . . . . . . . . . . . . . .153. The Voluntary Departure Program . . . . . . . . . . . . . .174. Personnel Management . . . . . . . . . . . . . . . . . . .205. Rationalization of the Wage Bill . . . . . . . . . . . . .216. Projected Results of the Reform and Long-Term Prospects . .227. Financing and Savings . . . . . . . . . . . . . . . . . . .24

V. REFORM OF THE PARASTATAL SECTOR . . . . . . . . . . . . . . . .26

1. Background and Objectives . . . . . . . . . . . . . . . .262. Improving State-PE Financial Relations . . . . . . . . . .263. Privatization and Liquidation . . . . . . . . . . . . . . .344. Rehabilitation of Enterprises . . . . . . . . . . . . . . .355. Legal and Institutional Framework . . . . . . . . . . . . .35

VI. THE SOCIAL DIMENSION OF THE ADJUSTMENT PROGRAM . . . . . . . .37

1. Assessment and Objectives . . . . . . . . . . . . 372. Action Plan . . . . . . . . . . . . . . . . . . . .. 38

ANNEXES

Action Plan . . . . ... ..... . . 41Table 1: Direct subsidies, transfers and overdrafts to PEs. 48Table 2: Cross debts between PEs and Government and

between PEs and themselves . . . . . . . . . . .49

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SENEGAL

LETTER OF DEVELOPMENT POLICY (No. 3)

I. THE MACROECONOMIC FRAMEWORK

1. Economic Policy Objectives

1. In order to realize its Medium- and Long-term Adjustment Program(PAML) (1984/85-1992/93), the Government is committed to implementing a seriesof economic policy measures to ensure adequate growth of per capita income, amoderate inflation rate, and an improved budgetary and external position.After a sharp fall in the rate of real GDP growth in 1988/89 owing tounfavorable climatic conditions, the growth rate of Senegal's economy isprojected at 4.6 percent in 1989/90 and 3.8 percent for the two followingyears. The inflation rate, measured by the GDP deflator, is expected to be nohigher than 2.5 percent through 1991/92. It is anticipated that the budgetdeficit, on a commitment basis and excluding grants, will decline from 4percent of GDP in 1988/89 to 2.8 percent in 1989/90 and will become a surplusof 0.8 percent of GDP in 1991/92. The current external deficit, excludingofficial grants, will continue to improve, declining from 8.3 percent of GDPin 1989/90 to 6.1 percent of GDP by 1991/92. Finally, it is also projectedthat the balance of payments will be in surplus by 1991/92 and that externalbudgetary financing needs will decline sharply in the medium term.

2. Monetary Policy and Reform of the Banking System

2. The Government will continue to implement a prudent monetarypolicy. The growth of domestic liquidity will therefore be controlled inorder to contain aggregate demand. It is projected that over the next threeyears domestic liquidity will increase 4.7 percent a year on average.Moreover, the expected improvement in the budgetary situation will enable theGovernment to limit the net indebtedness of the State to the banking system,thereby allowing adequate expansion of credit to private sector activitieswithout provoking excessive growth in domestic credit. The conduct ofmonetary policy in the years ahead will also be facilitated by two factors,namely the reform of the banking sector and the reforms in the utilization ofmonetary policy instruments introduced by the Central Bank (BCEAO).

3. The insolvency and illiquidity of the banks originated firstly inthe significant proportion of bad debts held by a number of banks andfinancial establishments, and secondly in excessive operating costs. Thissituation led the Government to introduce a reform program in the bankingsector whose main objectives, set out in the policy statement for the bankingsector, are financial rehabilitation through the restructuring of the sectorand the establishment of a healthy banking environment.

4. All the components of this reform program, which is already makinggood progress, should be in place by the end of 1989. The specific objectivesof the program are: (i) recapitalization of two banks complemented bymeasures designed to reduce operating costs; (ii) the closing of four publicsector banks and one private sector bank, the sound loans being taken over by

Annex IVPage 4 of 50

a new financial institution while the delinquent loans will be passed to acollection agency. These measures are being accompanied by a reduction in theState's share of the capital of these banks to less than 10 percent. Stepswill be taken to strengthen the supervision of the banks and to facilitateloan recovery, while the recent changes within the West Africa Monetary Union(WAMU) should produce a much more flexible approach to monetary policy, basedto a greater extent on the market. The BCEAO will pursue a more activeinterest rate policy designed to stimulate domestic savings and promote thedevelopment of financial intermediation.

3. Strategy for Public Finance

5. During the period of the PAML, the State's financial position hasimproved considerably, this being reflected in a steady decline in its deficiton financial operations (commitment basis) which reached 11.3 percent of GDPin 1980/81 before diminishing to 2.6 percent in 1987/88. This favorable trendhas been the result of: (1) a marked increase in general revenues; (2) asignificant contribution from extraordinary revenues derived from certainimported products (rice and oil); and above all (3) rigorous control ofcurrent expenditure (equipment and supplies) and investment expenditure.Nonetheless, despite these satisfactory results, the public finances continueto be constrained by factors linked to: (1) the volume of external debtservice; (2) the still excessive weight of the wage bill and State assistanceto establishments and enterprises in the parastatal sector; and (3) theexcessive dependence of budgetary resources on extraordinary revenues. Giventhe importance of this issue, emphasis will continue to be placed on bothenhanced resource mobilization and effective control of public expenditure.

a. Resource Mobilization

6. In order to put public finance management on an even sounderfooting, efforts will focus on expanding the tax base to ensure the steadygrowth of total revenue whilst reducing dependence on the extraordinaryrevenues from oil and rice, and also reducing the tax burden on certaineconomic actors. The Government will pursue the implementation of a range ofmeasures intended to modernize and strengthen procedures for theadministration and collection of taxes and customs duties.

7. Improvements in the Tax System As of January 1, 1990 a new corporatetax will be introduced that will replace all the taxes to which companies arecurrently subject. To enable this measure to have its full effect, it hasbeen decided to eliminate the capital budget levy. The tax rate will be 35percent! this will ensure a reasonable level of receipts and will alleviatethe tax burden on companies. Following an evaluation of the reform on June30, 1991 the 35 percent rate may be reduced to 30 percent from the year1991/92 onwards. As regards individuals, a single personal income tax will beintroduced in order to eliminate the double taxation of dividends. In the new

Annex IVPage 5 of 50

income tax schedule the highest effective marginal rate will not exceed 50percent. The reform will be applied from January 1, 1990 onwards. This newtax will be complemented by the introduction of taxes withheld at source onincome from land, shares and bonds, and on professional earnings.

8. To widen the tax base, the value added tax will be applied to allcommercial transactions and services. This new tax will replace the currentsystem of turnover taxes. The introduction of taxation appropriate to eachkind of economic activity is also a central element in the upgrading of thetax base. Hence the business enterprise levy system will be reviewed toreduce distortions in taxation among the various categories of commercialactivities. In addition, the Government will take a series of measuresintended to tighten considerably the taxation of the informal sector. Thetaxation of interest income will also be reexamined with a view to itspossible elimination in light of the results of a study.

9. Computerization will play a particularly important role inrationalizing the procedures for administering and collecting taxes. Thisobjective will essentially be realized by completing the computerization ofindirect taxes and customs clearance procedures, updating taxpayer records andidentifying unlisted taxpayers, deploying new tax collection procedures andmonitoring payment of arrears of taxation. As regards infrastructure, taxcollection centers will be opened in Dakar and other large towns. This step,together with the introduction of the fiscal cadaster for the Dakar urbanarea, will facilitate a more accurate census and permit swifter interventionvis-a-vis taxpayers.

10. Strengthening of Customs services To improve the efficiency of thecustoms administration, the Governnent has prepared an action plan designed tostrengthen the Customs Department. Execution of this plan is scheduled forthe early part of 1990. Its principal elements are: the upgrading of thecustoms service through the introduction of the GAINDE system for computerizedmanagement of customs and trade data; better control over the value ofimports; improved management of special customs regimes; and the introductionof a system to evaluate the impact of customs reforms.

11. The GAINDE system should be brought into service by January 1,1990 at the latest. About nine months after its introduction the Governmentwill review its operation and adopt additional measures designed to optimizethe system's impact. To combat fraud in the form of under-invoicing, theCustoms Department has established a special section whose principalresponsibilities are the preparation and updating of a central database whichwill be integrated into the GAINDE system before the end of 1990. Theresources for this unit, augmented by the creation of the position of customsadvisor in Senegal's embassies in the major supplier countries, will bereassessed before the end of June 1990 with a view to their reinforcement.The introduction of the GAINDE system will permit systematic monitoring ofspecial customs regimes (temporary admission for processing, industrialwarehousing, drawback, and investment code). Before the end of September 1990

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the State will begin a complete survey of warehousing systems and willinitiate a thorough review of the agreements providing for this suspensivesystem. Checks on customs regimes will also be strengthened. Finally, toenhance the process of customs administration reform, the Government will,before the end of 1990, undertake a qualitative and quantitative evaluation ofthe effects of recent changes (raising of import duties and introduction ofminimum import valuations) on customs revenues and on the performance of theprivate sector.

b. Improving the Management of Expenditure

12. The role and weight of the public sector are crucial elements inSenegal's adjustment problems at the present time. This awareness has led theGovernment to adopt as an explicit objective the promotion of "a modest Stateand a modern State." Specific measures designed to reduce the size of thecivil service wage bill and the level of State assistance to public andparastatal sector agencies and enterprises have been prepared and constitutethe principal features of the program. Nonetheless, steps must be taken toensure that sufficient resources are allocated to expenditure on equipment andsupplies, to enable services to function normally.

13. In addition, the management of physical assets will berationalized and a study of the suitability of building a modernadministrative block to accompany the planned restructuring of administrativeservices will be finalized. The operations of special accounts at theTreasury will be brought under closer control through the integration ofcertain accounts into the operating budget.

4. Debt Management

14. The Government will continue to follow a prudent debt managementpolicy in order to limit debt service to manageable proportions. To this endit will limit new nonconcessional borrowing to a minimum and will as far aspossible substitute grants for loans. External financing needs, excludingproject-related financing but including IMF resources, are expected todiminish in such a way that Senegal should be able to service its externaldebt obligations.

15. To provide better information on changes in the public debtsituation, a computerized debt monitoring payment and recording system will beinstalled. The collection of statistics on long and short-term private sectordebt will also be improved. Improved data collection on the guaranteed debt(drawings and settlements) and completion of the review of debt already paidwill permit tighter control of the State's obligations and of amounts due. Aguide to the improvement of debt management will be prepared. Provision willcontinue to be made to ensure annual growth of 10 percent in the allocationfrom the operating budget to the Caisse Autonome d'Amortissement.

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5. Upgrading of the Economic Information System

16. This will entail a continuation of actions already begun with aview to improving both the processing of economic information on the one handand the Government's analytical and forecasting capability on the other. Tothis end, the programs to upgrade the information system on enterprises,foreign trade and the public administration will be pursued so as to permitregular preparation of national accounts.

17. In the area of national accounts, the principal steps include: (i)rapid preparation of interim accounts at current and constant prices; (ii)regular publication of Statistical Centre (CUCI) data; (iii) preparation offinancial accounts for the public administration; (iv) introduction of aprogram to improve foreign trade statistics; and (v) introduction of apermanent system of administrative statistics. As part of the upgrading ofdata processing, a multi-annual forecasting model (three years minimum) forthe public finances will be established following completion of the relevantfeasibility study. A program of household surveys will also be implemented toprovide a better understanding of the socio-economic aspects of the medium andlong-term adjustment program.

II. INCENTIVES FOR PRIVATE INVESTMENT

1. Overview and Obiectives

18. The growth of productive investment, especially in the industrialsector, has slowed somewhat in recent years. Apart from unfavorable worldwideeconomic conditions, the incentives policies in effect were no longer havingpositive effects on firms' behaviour. This, taken together with the pastpriority given to import substitution industries and with the weight ofadministrative constraints on firms' operations (price control, investment andtrade regulation, social legislation, etc.), persuaded the Government in 1986to adopt as part of the PAML a new industrial development strategy designed toraise the sector's productivity and competitiveness. This involved theelimination of quantitative restrictions, the simplification of foreign tradeprocedures, the removal of price controls and a review of the labor code. Theplan brought about a more liberal environment favoring the development ofindustry. Since the financial situation at the time delayed implementation ofthe measures designed to bring about a concomitant decline in the cost ofproduction factors to bring them into line with international levels, majordistortions resulted; currently these are still seriously undermining thecompetitiveness of Senegal's industry, now open to unrestricted competitionalthough confronted abroad by barriers limiting its access to competitivemarkets.

19. The Government's main objectives in this sector are to improveproductivity and increase competitiveness so as to raise output through thereduction or even elimination of the administrative and regulatory obstacleshampering investment and firms' operations.

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20. On the basis of the results achieved over the last two years, theGovernment has taken steps to improve the regulatory and institutionalenvironment for firms and to reduce the costs of production factors.

2. Improving the Regulatory and Institutional Environment for Firms

21. The Government will continue the process-- already well underway-- of easing all the formalities entailed in setting up an enterprise andmaking investments. To this end the Investment Code was revised in September1989 with special emphasis on making the labor regulations governing newenterprises, those established in the Dakar industrial free zone (ZFID) andsmall and medium-sized enterprises (PMEs) more flexible.

22. The strengthening by June 30, 1990 at the latest of the "GuichetUnique," whose functions will be expanded to include the centralization of theformalities involved in setting up an enterprise, is also one of theGovernment' s priorities.

23. In addition, the Government proposes to modify certain regulatoryprovisions no later than June 30, 1990, by simplifying the documentationrequired to establish an enterprise, specifically by restricting the need fora notarized instrument to certain categories of companies only.

24. In the area of company taxation a series of measures has beenprepared which, through the introduction of the single personal income tax forindividuals and of a corporate tax, is designed to simplify both proceduresand legislation. The reorganization and computerization of the FiscalDepartment (DGID), which will take place from January 1, 1990 onwards, willexpedite procedures in the area of fiscal administration. Specifically, it isplanned to introduce a single taxpayer dossier which will limit the number ofagents with whom the taxpayer must interact within the DGID to one. Once thesystem has been in operation for a certain length of time, the Government, inconsultation with its development partners and no later than September 1,1990, will review its operations, and in particular the DGID's procedures, inorder to identify possible corrective measures. The restructuring plan forthe Customs Department is also designed to simplify and accelerate customsprocedures.

25. The following steps will also be taken: preparation of aninvestment guide (March 1990); wider diffusion of legal and fiscal documentsrelating to companies (July 1990); simplification of the conditions forcommercial registration (June 1990); easing of certain formalities, includingthe conditions for practice of the professions (June 1990).

26. The evaluation of the program to increase production, includingboth the elimination of existing constraints and the introduction of a numberof new incentives to firms, will be carried out by an independent expert inJune 1991 and June 1992 to enable the Government to take such measures as maybe shown to be necessary.

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3. Cost of Factors of Production

27. The Government intends to reduce the cost of factors of productionand to introduce a vigorous employment promotion policy by controlling theincrease in labor costs and promoting greater flexibility in the labor market.

a. Technical Factors

28. The various deregulation measures already taken under theindustrial development strategy have helped to improve the environment inwhich Senegalese firms are developing. Nonetheless, these reforms, marked bythe restoration of market prices and trade liberalization, have not allowedthe country's industry to recover its full vigor given the lack ofcomplementary measures required to put Senegalese firms on the same supply andoperational footing as their competitors.

29. Energy. The authorities have decided to put special emphasison the cost of energy, currently a particularly significant handicap. Energyprices will be fixed at a level that will help Senegal's industries to competeon an equitable basis in overseas markets.

30. Consequently the Government has decided, while taking currentfinancial constraints into account, to undertake, in consultation with itsdevelopment partners, reforms in the energy sector that have two maincomponents:

the introduction from January 1990 onwards of a new pricestructure for petroleum products, based on the principle of fixingex-refinery prices as a function of import prices and on atransparent taxation system; to this effect, the special agreementsigned between the Government and the Societe Africaine deRaffinage (SAR) has been amended to define the new ex-SAR pricesetting mechanism, and in particular set the amount of thehandling fee that will be paid to the refinery. This amount hastemporarily been set at US$ 2.25 per barrel for the first quarterof 1990, and will be permanently determined in consultation withIDA by January 31 1990. It will be reflected in the ex-SARpricing structure on April 1st 1990, when the Government and SARwill also make the necessary adjustments for the first quarter of1990;

after an observation period lasting some months, reductions willbe made in the prices of industrial fuels (fuel oil and dieseloil) in order to align them as far as possible with internationalprices, by July 1, 1990 at the latest. Electricity tariffs willbe correspondingly adjusted through the application of the tariffindexing formula.

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31. This major reform will be complemented by other specific measuresdesigned to stimulate the supply of petroleum products at a lower cost; tothis end the Government will examine the conditions for progressivederegulation of petroleum products distribution and transportation operations.Improving the management of SAR and SENELEC will remain a central concern ofthose responsible for the energy sector.

32. Transport. As indicated in the policy statement on thetransportation sector, the Government is committed to reviewing the situationfor all modes of transportation and defining specific measures designed topromote the development of this important sector for economic recovery.Specific steps are planned to improve maritime transport and reducetransportation costs for industry, possibly through tariff adjustments andimprovements in service efficiency.

33. Telecommunications (telephone, telex and telefax). The servicesprovided by this sector have become increasingly important for the modernfirm. The recently completed tariff study has led to the introduction of atariff structure reflecting the real costs of the different services, therebyfacilitating more rational utilization of the network. The Government hasplaced special emphasis on improving service quality after deciding to reduceall rates with effect from July 1989 onwards (201 reduction in off-peak hourson the national and international network).

34. By June 30, 1990 at the latest, and in light of initial experiencewith the tariff adjustments, SONATEL will examine the possibility, first, ofintroducing a "semi-busy hour" tariff and, second, of further tariffadjustments for international communications so as to reduce the pricedifferential between communications originating in Senegal and thoseoriginating abroad.

35. In addition, the Government has also decided to replace, fromJanuary 1, 1990 onwards, the tax currently applied to telephone charges by arecoverable valued added tax (VAT), as part of the overall review of companytaxation.

b. Labor

36. During the first phase of the PAML, in the context of improvingthe industrial environment, the Government took measures designed to easerigidities in the operation of the labor market, specifically through theelimination of the monopoly of the employment service as regards jobopportunities and amendments to the legislation on labor contracts.

37. In September 1989, the Government took important steps with a viewto reducing nominal wages and to enhancing the flexibility of the labormarket. To this end, it decided to freeze the guaranteed minimum wage (SMIG)for a period of three years from July 1, 1989 and made significant reforms inthe regime for small and medium-sized businesses (PMEs), firms in the Dakar

Annex IVPage 11 of 50

Industrial Free Zone (ZFID) and companies recognized under the InvestmentCode. Advantageous fiscal arrangements were also introduced in relation totaxes and charges on wages and salaries.

38. The revision of the Investment Code will henceforward permiteligible companies to benefit from the amendment to the last paragraph inArticle 22 of Law No. 87-25 of August 18, 1987 concerning the Investment Code.This amendment authorizes the hiring of workers in companies recognized underthe Code as additional personnel to perform work resulting from incrementalbusiness as defined in Article 35, para. 4, of the Labor Code, for a maximumperiod of five years. Consequently, firms may during this period makerenewable fixed-term duration labor contracts with their workers.Furthermore, the articles in the Investment Code governing the specific systemfor PMEs have been amended so that the latter do not have to obtain priorapproval for making redundancies caused by economic factors.

39. The provisions of the Investment Code have been extended tocompanies either established in the ZFID already or which may benefiteventually from the specific status of "free company", no matter where theyare established within Senegal.

40. Over the medium term, the Government is committed to pursuing itslabor market reform program, in close collaboration with the social partnersrepresenting labor unions and employers. The Government has therefore decidedto set up a tripartite national commission (State-Employers-Workers) whichwill serve as a framework for consultation and agreement among the socialpartners on an in-depth reform of the regulations governing labor relations.The terms of reference for this commission, which will begin its work onJanuary 1, 1990, will essentially cover the following matters: the wage-setting system, the need for fi'exibility in company management, protection ofworkers, vocational training a:ad redeployment policy, decentralization of thesocial dialogue, rationalizaticn of administrative methods, particularly laborinspection, reforms in recruitment practices for higher-level personnel andthe scope of a possible revision of thd Labor Code. The commission willsubmit its initial conclusions before the end of 1990. The Government willtake the necessary measures in consultation with its development partners inorder to implement the commission's recommendations on reforms in the wage-setting system no later than September 30, 1990.

4. Reform of the Trade and Services Sector

41. The Government will strengthen its program ii support of thissector's development so as to help the firms involved adjust to the neweconomic context.

a. Exports

42. Before June 30, 1990 the Government will introduce an action planin line with the spirit and letter of the new approach being adopted, namely:

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identification of a target group of potential export products; theorganization of seminars on the utilization of the generalized system ofpreferences; and improved operation of the instruments already introduced topromote exports (export subsidy and duty drawback). To this end, a program tosimplify the administrative procedures related to obtaining these latteradvantages, both as concerns the Customs Department and the Treasury, will beprepared and implemented by June 30, 1990 at the latest.

b. Imports

43. In this sector, the Government intends, first, to strengthen theconditions for healthy competition by working more effectively againstsmuggling, dumping and under-invoicing. On this point, while reaffirming itscommitment to the principle of liberaliziag international trade, theGovernment notes that certain competing countries apply quantitativerestrictions (even including prohibition) on products which can be freelymarketed in Senegal. In accordance with GATT regulations, the Governmentreserves the right to take countermeasures in the form of: (i) the applicationof safeguards othor than the traditional quantitative restrictions, on thebasis of strict reciprocity; (ii) the preparation of an adequate strategyagainst dumping and under-invoicing; (iii) the negotiation with donors ofstabilization clauses and trade regimes to be agreed with Senegal during theadjustment period.

5. Improving the Institutional Framework for Investment Promotion

44. In creating the Dakar industrial free zone (ZFID) in 1974, theGovernment had as its objective the establishment of an attractive frameworkto encourage foreign and domestic investors to set up labor-intensive, export-oriented industrial companies.

45. A review of results to date shows that these have fallen far shortof the objectives set at the time. The authorities have consequently takensteps: (i) to strengthen the powers of and respect for the autonomy of theZFID Administration; (ii) to make it possible from January 1, 1990 onwards tosell, without any prior authorization other than the approval of theAdministrator of the ZFID, up to of 40 percent of production on the localmarket, subject to payment of the relevant duties and taxes; (iii) to adopt byJune 30, 1990 the decree restoring the export subsidy for companies in theZFID; (iv) to introduce no later than June 30, 1990 the status of free companyand "free points"; (v) to construct temporary premises; (vi) to strengthenZFID promotion policy through better utilization of commercialrepresentations, the integration of the ZFID into the structures for thecoordination of promotion activities by local investors, and the introductionof a databank and computerized records.

46. Since these measures are expected to increase the number ofcompanies established within the ZFID, the Government will take all thenecessary steps to protect the environment.

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6. Special Agreements

47. The Government has decided to sign no more special agreements withcompanies, and to bring the policy of special fiscal treatment to an end. TheGovernment will not extend existing special agreements. In future allcompanies will be subject only to the provisions of the common regime and theparticular regimes contained in the Investment Code.

48. The special agreement with the SAR will be renegotiated before theend of 1989 to permit integration of the new system for fixing prices andtaxing petroleum products. The special agreement with the CSS will bereexamined as part of the reforms in the sugar subsector as set out in thepolicy statement on the agriculture sector. Following an operational andfinancial audit, an action plan relating to the special agreement with SOCOCIMhas been prepared. An amendment to this special agreement is planned beforeJune 30, 1990 in order to introduce a new formula for fixing cement prices.

III. PUBLIC INVESTMENT PROGRAM AND POLICY

1. Performance

49. Senegal's pre-1985 public investment policy showed its limitationsboth as regards the relevance of the investment projects selected and themobilization of the necessary resources. Since then, the basic objective ofgovernment public investment policy under the PAML has been to increaseinvestment efficiency. Since implementation of the adjustment program began,efforts have been made to achieve this objectively by establishing a three-year rolling plan within the wider framework of the reform of the nationalplanning system.

50. The new economic planning framework adopted by the Higher PlanningCouncil on June 29, 1987 was recently supplemented (as part of the applicationphase) by a study of future trends. This presents a long-term view of Senegal(i.e. over the next 25 years), and provides a basis for the first economicpolicy declaration. This declaration will be based on the various futureoptions available, macroeconomic and financial studies of economiccircumstances in Senegal and abroad, and implementation reviews of investmentprograms. These studies, together with strategy papers relating to importantsectors such as agriculture, transportation, education, health, population,and water management will help improve resource allocation by identifyingsector priorities which will be reviewed annually in preparation for the PTIP(three-year public investment program).

51. For the third PTIP (from 1989/90 to 1991/92), the investmenttarget is CFAF 485 billion, compared with CFAF 469 billion for the previousPTIP. The focus is still on high-yield investments in transportation (20.2percent of the total), agriculture (16.8 percent), and water supply (14.6percent). In transportation, the main objective is to rehabilitate andmaintain existing infrastructure, particularly with regard to roadtransportation. In agriculture, the emphasis is on infrastructure developmentin irrigated areas and, to a lesser extent, in areas producing rainfed crops.

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Investment in water supply is mainly intended to increase the efficiency ofthe existing distribution system in urban areas, and to develop small-scaleirrigation projects in rural areas.

2. Action Plan

52. The 1989-92 PTIP shows considerable progress in a number of areas.Nevertheless, there is still room for improvement -- with regard to bothsectoral consistency and project selection -- if the objective of increasingthe efficiency of public investments is to be achieved. The Government'spublic investment policy will be based on the followinig principles: (i)improving the investment planning, budgeting and monitoring cycle; (ii)incorporating the PTIP into the Government's recurrent expenditure budget.

53. For the preparation of the next PTIP, project identification andpreparation wi11 be decentralized to the technical ministries, i.e. theMinistry of National Education, the Ministry of Rural Development, theMinistry of Public Health, the Ministry of Infrastructure, the Ministry ofWater Resources, and the Ministry of Industrial Development and Crafts. Astudy will be made of the ministries' capacity for performing theseactivities, and on this basis planning units will be established orstrengthened within each of them. These units will take increasingresponsibility for such tasks, particularly -roject preparation. A furtherpriority will be to draw up an appraisal guide for infrastructure and socialprojects. This guide, like the one prepared for production projects, willhelp set standard criteria and models for appraising projects in thiscategory. The price series and deflators to be used in project analysis willbe regularly disseminated, so as to standardize project appraisal. Regularmeetings of the Project Selection Committee will be organized.

54. From June 1990, computerized project monitoring will beintroduced, both for financial aspects (half yearly) and for physical aspects(every six months). In addition, a study for improving project implementationwill be prepared, and an action plan adopted.

55. From the next fiscal year (1990/91), efforts will be made tointegrate the PTIP more fully into the recurrent expenditure budget, so thatit can be an effective instrument of the Government's economic policy. Thiswill require enhanced integration of project planning and appraisal and anappreciation of the PTIP's impact on recurrent costs, together with improvedcoordination of the agencies responsible for preparing the PTIP and the Statebudget.

IV. CIVIL SERVICE REFORM

56. In implementing the second phase of the PAML, Senegal plans tosubstantially improve the allocation of its human, financial, natural andother resources in order to favor the productive sectors. This is the overallcontext of the public sector reform, which must be reflected, as soon as

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possible, in a substantial increase in the efficiency of public administrationand public enterprises as they perform their fundamental tasks, and in aconsiderable reduction in their drain on national resources. The purpose,therefore, of the current reform is to improve the effectiveness of publicadministration, and thereby open up activities and release resources for theprivate sector.

1. Reform Objectives

57. The role played by Senegal's present capital, Dakar, in the Frenchcolonial system in West Africa has given Senegalese public administrators asound, long experience. In addition, the State very soon came to play a majorrole in all aspects of economic and social life, because of the multiplechallenges of development and the evident economic weakness of the localprivate sector. This role should have been limited to one of promotion forthe non-strategic sectors. However the State ended up as the country's mainemployer. Because of the financial crisis referred to above, the delays andproblems characterizing the initial adjustment process in the public sectorresulted in the increasing and exclusive use of available resources for thepurposes of supporting the sector, at the expense of developing the productionof tradable goods and services.

58. In light of this situation, the Government decided to implement apolicy of bringing operating costs under control. This policy began to beapplied in 1984 and was implemented through vigorous measures designed tocheck the growth of the civil service wage bill. This has consisted mainly ofsuspending general salary increases for public employees, and strictlycontaining staff numbers by imposing a restrictive hiring policy.Unfortunately, the wage bill has continued to increase, and salary paymentsrose from 47.3 percent of recurrent expenditures in 1979/80 to 49.1 percent in1984/85 and to 50 percent in 1987/88. Consequently, and in light of the majorconstraints on available resources, it has been found necessary to reform thecivil service in order to pave the way for a more efficient publicadministration and better resource utilization. The resulting action planeomprises three main components: institutional reform, introduction of asystem of voluntary departure, and rationalization of wage bill management.

2. 75citutional Reform

59. The institutional reform has two components: a redistribution ofgovernmental responsibilities, and the "privatization" of certain governmentagencies.

a. The Redistribution of Responsibilities

60. This relates to the Government's restructuring plans, the purposeof which is to achieve effectiveness and efficiency in the organization andmanagement of public administration.

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61. To this end, a three-point action program has been prepared,aiming at: (i) bringing certain agencies together, on the basis of similarityand complementarity of functions; (ii; reducing the number of units (i.e.departments, directorates and other units); (iii) redefining departmentalfunctions, in order to make sectoral integration more consistent. Thisprogram will be implemented between November 30, 1989 and December 31, 1990,as per the following schedule: decision to restructure the publicadministration, and publication of the initial legislation: December 15,1989; placing on administrative leave Government employees affected by therestructuring, between December 31, 1989 and April 30, 1990, such staff beingidentified before the first date.

62. It should be noted that the Government employees affected by therestructuring may be candidates for voluntary departure. The principles ofthe leave of absence system and the modalities governing its application willbe officially published by December 31, 1989 at the latest.

b. The Privatization of Certain Government Agencies

63. The purpose is to reduce the interventionist role of the State andto disengage from certain productive activities of a commercial, orpotentially commercial, nature. To this end, certain agencies will beprivatized, although some of these will have the opportunity to receiveexclusive State contracts for a period not exceeding two years, provided thatthis is justified for strategic reasons. The agencies to be granted autonomyhave al:eady been identified on the basis of the following criteria:profitability, capacity for self-financing, and capacity for self-management.

64. Initially, some of these agencies (i.e. the Maintenance Departmentof the Ministry of Water Resources and the Road Maintenance Department of theMinistry of Infrastructure) will be used t) test the operation. As a resultof the operation itself, 1,309 government employees will be released duringthe program, for which the following actions are planned:

- study of the financial impact and the practical modalities of thistransfer of State-run activities to the newly privatizedenterprises (this will be implemented by February 28, 1990 at thelatest);

study of the new legal relationships among the various partiesconcerned (i.e. the State, former Government employees, and thenew units). The conclusions of this study will be available byFebruary 28, 1990 at the latest;

finally, it has been decided that the two test enterprises willbegin to operate starting in March 30, 1990, and that theremaining enterprises will be established between June 30 andDecember 31, 1990.

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c. Organizational Audit of the New Departments

65. The Government has decided tQ undertake an organizational audit ofthe new ministerial departments, beginning in April 1990, which may result ina staff reduction of 1,450 employees (1,000 in 1990/91 and 450 in 1991/92), onthe basis of the voluntary departure program. This action will bring thetotal number of staff affected by the program (through early retirement andvoluntary departure) to 4,300 employees. The audit will be concluded beforeSeptember 30, 1990.

3. The Voluntary Departure Program

66. In order to streamline government agencies and make theirorganization and management more effective and efficient, an incentive schemehas been prepared to promote the early departure of a considerable number ofemployees. It is based essentially on separation packages, with modalitiesdepending on the age of the employee in question. Those employees with atleast 5 years in the civil service and under 48 years of age will be eligiblefor severance payments, and those 48 and older will be eligible for earlyretirement packages. In addition, the system will be open to staff in allministries, except teaching staff in the Ministry of Education, medical staffin the Ministry of Health, military personnel in the armed forces, and thepolice.

67. Payments for voltntary separation are set within a range in whichthe maximum is 60 months' (i.e. five years) salary, and early retirementpackages are determined according to the number of years remaining beforenormal retirement age.

68. The program is due to begin on January 1, 1990, and should lead toa staff reduction of 4,300 'ployees as of June 30, 1992 under the earlydeparture scheme alone, i.e. not counting scheduled retirements (2,663), theseparation of a further 370 employees as a result of the second staff census,and the departure of 1,309 employees as a result of the privatization program.Consequently, staff reductions over the period in question are expected tototal 8,642.

69. In order to maintain efforts in primary education, the Governmentplans to hire a total of 1,913 teachers at this level between now and June1992. Including other recruitment, mostly health personnel and graduates ofthe national training schools, hirings over the period are expected to total3,836, resulting in a net reduction of 4,806 employees. This would result ina reduction of the number of Government workers from 66,549 on June 30, 1989to 61,743 on June 30, 1992.

70. Former Government employees who have benefited from the voluntarydeparture program will not be rehired by the Government, and recruitment willbe adjusted to departures by means of a ratio for each year of the program.The ratio is based on the rnumber of staff accepting voluntary departure (i.e.

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the total of voluntary departures, early retirements, and transfers toprivatized enterprises) and hiring needs in primary education. The ratio isdefined as "the number of hirings (excluding primary teachers) divided by thenumber of employees accepting voluntary departure". Under the program, theratio will be equal to 27 percent in 1989/90, 38 percent in 1990/91, and 80percent in 1991/92. The Government has also decided to set ceilings, and willlimit hirings of teachers to 435 in 1989/90, 681 in 1990/91, and 797 in1991/92. In the event that the number of voluntary departures in 1989/90 wereto be lower than the number projected above, there would nonetheless be aminimum net reduction of 564 staff.

71. Consequently, the overall staff reduction program, which is basedon the voluntary approach, depends essentially on the restructuring ofgovernment agencies; this will bring about a reduction of 5,609 employees byJune 1992, i.e. 3,563 in 1989/90, 1,596 in 1990/91, and 450 in 1991/92. Inaddition, there is a potential reduction of 1,279 staff, corresponding to thenumber of employees in the Centre Hospitalier Universitaire (CHU) hospitalsand assimilated structures, whose possible privatization will be studied bythe Government.

72. The 2,850 employees whose positions are eliminated as a result ofrestructuring in 1989/90 will be be placed on administrative leave betweenDecember 31, 1989 and March 30, 1990. These employees will then receivepayment from the Senegalese counterpart funds for the Civil Service reform(i.e. from the special Reserve Fund to be established in January 1990). Thesame procedure will be applied to the 1,000 employees whose positions will beeliminated as a result of the 1990/91 restructuring, and the 450 affected bythe second organizational audit in 1991/92. In each case, these employeeswill be placed on administrative leave.

73. Severance payments and early retirement packages will bedetermined as follows, in accordance with the draft decree establishing themodalities for departure.

a. Voluntary Departure Compensation

74. These will be available to civil servants under 48 years old withat least five years service. The payment is set at the equivalent of 60months of salary for those in categories D and E, and 48 months for allothers. All severance payments are calculated on base salaries, i.e. thegrade-related salary plus the special supplement corsisting of the residenceallowance and family benefits. The payment will be the equivalent of 12months' salary for all employees accepting positions in the privatizedagencies az,d who did not choose the voluntary departure option.

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b. Early Retirement Packages

75. These are payable to employees who are at least 48 years old.They are to receive payment for the equivalent of 75 percent of the number ofremaining months before they reach the age of 55, with a maximum of 48 months.A subsidy will be provided to enable the civil servants affected to receivetheir full pensions from the age of 55, and other Government employees to drawa prorated pension at the age of 50, calculated in accordance with therelevant legislation and regulations.

76. Severance payments and early retirement packages will only beavailable 6 months after the start of the program: employees acceptingvoluntary separation during the first four months will receive the entirepayment, those accepting it on the fifth or sixth month will receive half, andthose who leave after the sixth month will not be entitled to the package.

77. The degree of overall success of the first phase of the staffreduction program will be evaluated by the Government before September 30,1990. If the number of voluntary departures is significantly smaller thanexpected, the Government will adopt, in consultation with donors, theadditional measures necessary for the success of the program.

78. The realization of the numerical objectives of the program assumesthat the compensation packages as currently designed are in realitysufficiently attractive, and depends in addition on the proper coordination ofthe following actions, which will be taken before the operation begins onJanuary 1, 1990:

- an information and awareness-raising campaign (endingDecember 31, 1989);

- establishment, before January 15, 1990, of a smallSteering Committee in the Secretariat General of thePresident of the Republic, to be responsible foroperating the voluntary departure program;

- establishment in January 1990 of a special ReserveFund to finance the operation; this Reserve Fund willbe sufficiently funded from th.o very beginning;

- appointment in January 1990 of an Administrator forthe Special Reserve Fund (to report to the SteeringCommittee);

- mobilization by the donors of the resources necessaryfor the financing of the voluntary departure program.

79. A reinsertion program will be implemented for those civil servantswith viable projects.

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4. Personnel Management

a. Modernization of State Personnel Management

80. The purpose of this component is to establish proper control overstaff numbers and the wage bill by utilizing management instruments in such away as to establish sound and rational management of State employees. Theaction program is based on the following two main activities:

- The bodies responsible for the administrative and financialmanagement of personnel will be restructured, these being theCivil Service Department (DFP), the Central Payroll Department(DCS), and the SAGEs and DAGEs of the technical ministries. Inparticular, their new organization charts will be established byApril 30, 1990. In addition, individual records will becomputerized, and an autonomous computerized data input andprocessing system will be established at the DFP and DCS levels.This operation will be completed by February 28, 1990.

- Regulations governing policies on hiring and training,compensation, allowances, social charges and benefit programs willbe rationalized, and training schools reorganized.

This action program will be spread over three years and must be executed bythe end of the 1991/92 fiscal year at the latest, the most far-reachingactivities being undertaken between October 1989 and December 1990.

b. Control of the number of civil servants

81. The purpose of this component is to improve personnel management,control the number of State employees, and rationalize the State employeehiring and training system. To this end, an action program has been prepared,consisting of the following components: (i) follow-up on the findings of thesecond joint IGE/BOM staff census; (ii) implementatiot- of the mission reportrecommendations relating to improvements in personnel management in theMinistry of Civil Service and Labor, the Ministry of Economy and Finance(DCS), and the technicel ministries; (iii) periodic scrutiny of changes instaff numbers and monitoring of the administrative status of State employees;(iv) improvements in the employee hiring and training system.

82. This program calls for the following actions:

- Communication (by November 30, 1989) of any anomalies identifiedby the IGE/BOM mission to the Ministry of Economy and Financeand/or Ministry of the Civil Service and Labor, so that they maytake all necessary actions. Such actions should lead to theremoval of a number of employees -- provisionally estimated at 370-- by February 28, 1990.

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Redistribution of personnel management responsibilities among theMinistry of the Civil Service and Labor (MFPT), the Ministry ofEconomy and Finance (DSC) and the technical ministries, and alsoamong the technical ministries, particularly at DAGE and SAGElevels. This action must be completed by April 30, 1991 at thelatest.

Simplification of certain legal and regulatory provisions,particularly those relating to disciplinary and promotionprocedures, in order to increase the efficiency of Governmentpersonnel management. This action must be completed by June 30,1991.

Use of a periodic staff censuo at three-year intervals. The nextwill be performed before June 30, 1992.

Preparation of a study on national training schools, examining thescope of their relationship to the State, their recruitmentmethods, placement policies and the nature of their curriculum.The findings of this study must be made available before April 30,1990, and their implementation completed by September 30, 1990 atthe latest. In particular, the practice of automaticallyrecruiting graduates into the civil service should be terminatedby that date.

5. Rationalization of the Wage Bill

a. Rationalization of wage bill manaRement

83. The purpose of this component is to gain an enhanced understandingof the components of the wage bill (defined as the sum of all base salaries,indemnities, family allowances, retirement fund contributions, hospital andtransportation benefits, and variable elements such as overtime, backpay, andadvances), and to upgrade payroll management. The measures adopted will allowa wage bill ceiling to be set at CFAF 126.8 billion for 1989/90, and CFAF 125billion for 1990/91 and 1991/92, the long-term goal being to maintain the wagebill at a level compatible with budgetary revenues and the overall trend. Themeasures are the following:

Updating of cases now pending in MFPT relating to theadministrative status of employees. It will then be possible toassess the arrears owed by the State in the form of back pay.This updating, together with computerization, will improve careermanagement. This action must be completed before April 30, 1990.

Preparation of a budgetary chart for the DCS. This chErt willallow the comparison of actual payments made on any sub-componentagainst the budgeted projections. The chart for 1989/90 must beprepared by December 31, 1989, and the one for each of the

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subsequent fiscal periods must be prepared by July 31 of thecorresponding fiscal year.

From July 1, 1990, reduction of the State's contribution to theretirement funds from 20 percent to 15 percent of base-salary, inaccordance with a study to be completed by June 30, 1990 at thelatest.

Harmonization of special statutes with the general statute of theCivil Service, and establishment of the system of allowances andbenefits on the basis of lump-sum payments not indexed on basesalaries. This action is to be taken before September 30, 1990.

Completion by June 30, 1990 of a study aimed at improving theexisting system of transportation and hospitalization budgets.

Implementation (beginning December 31, 1989) of all guidelinesresulting from the report on wage bill components and relating tothe internal organization and management procedures of the DCS inthe Ministry of the Economy and Finance.

b. The New Policy on State Employee Compensation

84. The purpose of this component is to improve the pay and workingconditions of State employees, while simultaneously observing themacrofinancial constraints identified above. The following actions willtherefore be taken: (i) preparation of a study on the conditions and paylevels of State employees, to be available by December 31, 1990; (ii)implementation in consultation with donors and by July 1, 1991 of a system ofperformance bonuses, based on the recommendations of this study, and incompliance with the CFAF 125 billion ceiling set for the wage bill.

85. This program will lead to economies on the wage bill, which willbe allocated as follows, in this order of priority: settlement of back payarrears; Government contribution to the separation packages; and performanceincentive bonuses.

86. It should be emphasized that the increases in compensation plannedfor July 1, 1991 will consist exclusively of performance bonuses based onemployees' productivity and output, and that these bonuses will not be indexedto salaries. In any event such an increase will only be granted if theoverail budgetary situation is favourable.

6. Proiected Results of the Reform, and Long-Term Prospects

87. In addition to resulting in a more efficient publicadministration, the proposed reform will bring about the followingimprovements in the number of civil servants and wage bill levels:

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a. Number of civil servants

88. The Action Plan for the Reform of the Civil Service will enablethe State to reduce staff levels from about 70,000 employees at the beginningof the PAML in 1985 to 61,743 in June 1992. In light of the policy ofcurtailing the hiring of graduates from the national training schools (limitedto about 1,597 over the period January 1990 to June 1992) and the hiring ofprimary school teachers (totaling 1,913), the civil service will be reducedsubstantially by 4,806 employees over this period. The proportion of publicemployees to total population will be reduced to about 7.7 per thousand,compared with 10.8 per thousand at the beginning of program implementation,thus bringing it closer to accepted international levels. Staff numbersachieved by June 30, 1992 will not be exceeded, as the number of hirings willnot exceed the number of departures thereafter.

b. The Wage Bill

89. All things being equal, the wage bill (CFAF 125.1 billion as ofJune 30, 1989) was projected to reach CFAF 131.6 billion by June 30, 1990.This projection took account of special payments to health and educationemployees, the general increase in salaries, the hiring of graduates from thenational training schools, and wage drift.

90. This projection was reduced to CFAF 126.8 billion for June 30,1990, in light X. the following factors: a net 3,532 reduction in staffnumbers; stabilization of family benefits at their June 30, 1989 level, as aresult of improved management; a CFAF 3 billion reduction in variable items,resulting from changes in the system of advances; and the stabilization of theState's contribution to retirement funds and hospital and transportationbenefits at their June 30, 1989 levels. Savings achieved through thesemeasures will largely offset total increases in basic salaries (CFAF 4.2billion) due to general salary increases, hirings of school graduates, gradepromotions, and the increase in special payments and indemnities (CFAF 2.3billion).

91. The wage bill will be reduced from CFAF 126.8 billion (June 30,1990) to CFAF 125 billion (June 30, 1991) by means of the CFAF 4.9 billionsavings resulting from voluntary separation, early retirement and the grantingof autonomy to certain agencies; updating of civil service records, and thereductior, in employers' contribution rates.

92. This total saving (defined as the difference between the above-mentioned ceilings and the actual wage bill before any action is taken onarrears settlement, Government contribution to the compensation packages, andincentive bonuses) of approximately CFAF 10 billion per year should make itpossible to settle arrears within the CFAF 125 billion limit imposed on thewage bill. If the settlement of arrears, the Government's contribution to theearly departure program and the overall budgetary sitaation make it possible,this saving should allow civil service salaries to be increased on July 1,

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1991. On the other hand, if total arrears exceed the savings produced as ofJune 30, 1991, the settlement of these will be continued over one or severalfiscal years, thus reducing, or even exhausting, the funds available for theplanned salary increase, which will then be postponed until the followingfiscal year.

7. Program Savings, Costs and Financing

93. Assuming an average monthly salary of CFAF 110,000 and thecompensation packages as described above, the minimum total cost of departureswill be CFAF 22 billion. To this amount one should add the compensation paidto those civil servants in the units to be privatized who choose the voluntarydeparture program. Total savings from staff reductinns alone over the periodfrom January 1989 to June 1992 are estimated at CFAF 11.5 billion, withadditional savings of CFAF 5.5 billion per year after that date. Othersavings will result from the overall improvements in wage bill management (seetable below). In addition to the Government's contribution, the financingrequirements of the program are met by direct contributions from certaindonors and SAL IV cofinancing counterpart funds.

Annex IVPFge 26 of 50

CHANGES IN STAFF NUMBERS AND WAGE BILL.AND COSTS OF EARLY DEPARTURES

1988/89 1989/90 1990/91 1991/92 1992/98 TOTAL

1. STAFF NUMBERS

TOTAL RECRUITMENTS 1400 1281 1155 8886Educrtion 435 681 797 1918Other 986 600 586 1928

TOTAL REDUCTIONS 4932 38834 1156 8842Scheduled retirements 999 969 705 2668Early departures 2860 1000 460 4800

- early retirement 1460 0 0 1460- other 1400 1000 450 2850

Privatisation 713(*) 698 1809Second census 870 870

NET REDUCTIONS 3632 1274 0 4808

TOTAL STAFF 68649 63017 61748 61743

'Recruitment Ratio' (5) 27.1 87.8 79.6 84.8

.....................................................................................2. WAGE bILL (in billions of CFAF).

Variable items 12.2 9.2 3.7 8.7 8.7Retirement fundscontribution 9.6 9.6 7.2 7.2 7.2Other 103.8 108.0 104.8 104.1 104.0Total wage bill 126.1 128.8 115.7 116.0 114.9

Wage bill cetling 128.8 126.0 126.0 126.0

Availablo savings 0.0 9.3 10.0 10.1

Memorandum items: (as)Savings on variable Items 3.0 6.6 0.0 0.0Savings on employers'cortributions 0.0 2.4 0.0 0.0Savings on staff numbers 1.1 4.9 6.6 6.6 17.0

.............................................................................................

8. COST OF EARLY DEPARTURE PAYMENTS (in billions of CFAF)

Voluntary separation 7.6 5.4 2.4 15.6Early retirement 4.8 0.0 0.0 4.8Privatization 0.9 0.8 0.0 1.7Total 13.3 8.2 2.4 22.0

.............................................................................................

4. COST OF EARLY DEPARTURE PAYMENTS (in millions of US8)

Voluntary separation 24.0 17.2 7.7 48.9Early retirement 16.1 0.0 0.0 15.1Privatization 2.8 2.6 0.0 5.8Total 42.0 19.8 7.7 69.3

(a) Includes 31 employees from the M'S6o Agricultural Center, already privatized.

(s) Not mutually exclusive.

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V. REFORM OF THE PARASTATAL SECTOR

1. Background and Obiectives

94. In the parastatal sector, the operating costs of its manyenterprises, covering all areas of economic activity, have become too much ofa burden on public finances. As early as July 1985 this situation promptedthe Government to define a new policy towards the parastatal sector whoseobjectives can be summarized as follows: (i) reducing the size of the sectorby liquidating or divesting enterprises and refocussing its role on itsprimary tasks; (ii) improving the performance of the enterprises byrestructuring them and rationalizing their relations with the State; and (iii)reviewing and reorienting the procedures for supervising the enterprises.

95. In the course of the first three years of implementation of theprogram, the Government, under the divestiture policy, evaluated the State'sportfolio, liquidated seven mixed ownership enterprises and two publicestablishments of an industrial or commercial character (EPICs) and marked 26enterprises for privatization. In addition, the rehabilitation of someenterprises is proceeding by means of contract plans and rehabilitation plans.This effort will be pursued and strengthened during the next phase of theprogram.

96. The reform of ' financial relations between the State and thepublic enterprises now cen. a on preparing an inventory of cross-debts andclaims of the State and the enterprises. Subsidies and financial commitmentsare also being monitored as part of the performance contract plans or similarprograms.

97. The reform of the parastatal sector will continue with thereduction of subsidies and other transfers from the State to the sector, thestreamlining and strengthening of the institutional framework, thecontinuation of the privatization program, continued use of contract plans andthe rationalization of supervisory structures and methods.

2. Imiroving State-PE Financial Relations

98. The Government has adopted an integrated approach to reformingfinancial relations between the State and the enterprises which coverssubsidies, overdrafts, and reciprocal debts and claims as well as financialcommitments made in conjunction with the performance contracts.

a. Policy on Subsidies

99. Indirect subsidies. These are essentially of two kinds: subsidiesof a customs and fiscal nature and subsidies of a financial nature. Thelatter chiefly pertain to the conditions for onlending of resources fromexternal donors and the government guarantees for loans from domestic banks.The main recipients of subsidies of 4 customs and fiscal nature are the

Annex IVPage 27 of 50

private enterprises to which these subsidies are granted under specialagreements with the State. The reduction and even elimination of thesesubsidies is planned through the renegotiation or expiring of all theseagreements.

100. With respect to the subsidies of a financial nature, theGovernment has decided that henceforth any external loan to a commercialenterprise should be passed on at the market rate of interest and thatguarantees granted by the State for local loans would be abolished as ofDecember 1, 1989.

101. Direct subsidies. The enterprises concerned are characterizedmainly by the very rigid manner in which they are managed with respect totariff policies and the markets covered, and also by very high structuralcosts; their profitability suffers accordingly. However, the specificity ofeach enterprise or each group of enterprises requires a case-by-case approach.For this reason the actions aimed at reducing and even eliminating directsubsidies, which amounted to CFAF 12.3 billion during the 1988/89 budget year,will begin with the reclassification of the enterprises into two majorcategories: strategic or noncommercial enterprises (list A) and commercialenterprises (list B).

102. In the case of the strategic or noncommercial enterprises whichproduce public goods and services or whose activity does not generaterevenues, the contract-plan policy will be pursued, rehabilitation plansimplemented and cuts in subsidies will be considered in this context. TheGovernment has drawn up a specific action plan involving cuts in subsidies foreach enterprise in this group (list A). This plan is attached to this Letterof Development Policy. Subsidies linked to the operation of the noncommercialenterprises of the parastatal sector (except COUD) should not exceed CFAF 9.9billion in 1989/90, 9.1 billion in 1990/91 and 7.4 billion ill 1991/92. A planto restructure COUD in order to reduce its budgetary burden will be decidednot later than June 30, 1990 and put into effect on September 30, 1990.

103. The subsidies to the commercial enterprises on list B will bereduced to zero at the end of 1991/92 according to the following schedule:CFAF 0.6 billion in 1989/90 and 0.3 billion in 1990/91.

104. Equipment subsidies will henceforth be converted into long-termloans or capital grants and will have to meet the same criteria and proceduresas all PTIP investments.

b. ACC overdraft strategy

105. Overdrafts from the Central Accounting Agent (ACC) have beenobtained by the public establishments (public establishments of an industrialand commercial or administrative character - EPs). Over the years, andespecially since the implementation of the plan to reduce direct subsidies,these EPs have resorted more and more to overdrafts from the ACC, with the

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result that their cash pOSitiOtL has steadily deteriorated. Thus thecumulative overdraft of all the public establishments amounted to CFAF 16.7billion at June 30, 1989 as against CFAF 4.8 billion at the end of 1984-85.Furthermore, the personnel costs of those eame entities represented 87Z ofthat overdraft in 1987-88. which highlights the trend, observed in recentyears in many of these establishments, towards financing personnel costs bymeans of overdrafts.

106. Analysis of the cost structure of the various enterprises showsthat it is impossible for many of them to repay the advances made. Similarly,the Treasury does not have .he resources to back such oper&tions. Theauthorities have therefore decided to freeze overdrafts at their current leveland transform them into long-term loans, with a view to writing them off asbad debts in July 1991 for those enterprises unable to repey them. Individualaccounts for each of the Pgs have been opened at the Treasury ir. order to makeit impossible for establishments with surpluses to finance the deficits ofthose in difficulty. The public establishments under the ACC system will beturned into either administrative services or autonomous national companies(SNs) by June 30, 1990.

c. Settlement of reciprocal debts between the State and the PEs

107. The establishment of a system designed to reduce and theneliminate the accumu!ition of reciprocal debts between the State and theenterprises in the parastatal sector, as well as among the enterprisesthemselves, is an essential component of the effort to restore the financialrelations between the State and the enterprises in the sector to a soundfooting. This component complements the program to reduce direct and indirectsubsidies and to abolish the overdraft system. The result of this policy whenfully applied will be a drastic reduction of the total volume of resourcesavailable for financing the public enterprises, which will have to adaptswiftly to their new environment. The measures described below, designed tosettle the cross-debts as of December 31, 1986 and December 31, 1988,respectively, should be considered in this overall framework.

108. The attached table provides a provisional view of overall cross-debt situation between the State and the public enterprises, and among theenterprises themselves, up to December 31, 1988. This matrix will be modifiedand made final in March 1990, and will serve as the basis for the completecross-debt settlement plan. In June 1990 the final figures for cross-debts upto December 31, 1989 will be added. Given their volume, the debts between theState and the parastatal sector represent an important source of financing forenterprises that are net debtors vis-a-vis the State. The public authoritieshave therefore decided to adopt measures in order to settle the arrears and,in addition, safeguards to prevent them from occurring again in the future.

109. Settlement plan based on the situation at 12/31/86. The situationestablished as of December 31, 1986 produces a net balance in favor of theState of CFAF 41.4 billion after the update effected in November 1989. This

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evaluation brought to light two major categories of State debts, viz.authorized debts, estimated at CFAF 1.3 billion for the State, andnonauthorized debts estimated at 14.2 billion. A cross-settlement coveringthe authorized debts in their totality was carried out in 1987. Nonauthorizeddebts in the amount of CFAF 5.6 million were settled, after certification, byLmutual cancellation, while direct payments totalling CFAF 840.3 million weremade to the enterprises.

110. With these settlements taken into account, the balance owed by theState amounts to CFAF 7.8 billion, the debts in question being considered asdisputed inasmuch as they have not been certified to date. For their part,the enterprises owe CFAF 50.1 billion to the State. To settle the situationas of December 31, 1986, the measures given below have been decided on, basedon the particular nature of the different categories of debts.

111. With respect to the enterprises owing the State more than it owesthem in debts that are payable immediately (CFAF 55.7 billion at the end ofOctober 1989), the collection centers have been instructed to demand immediatepayment in the absence of a moratorium (for a maximum of three years) or tomake special relief arrangements under the pertinent regulations. Meanwhilethe tax authorities have taken a number of actions aimed at recovery of taxesowed. These measures include: (i) issuing warnings to the enterprises, (ii)withholding amounts due from planned payments, (iii) charging interest onarrears and (iv) issuing notices to third-party debtors. The varioussettlement programs will therefore be established by the agencies concerned,on a case-by-case basis. The debts will be settled in their entirety within athree-year period as from 1989/90.

112. Concerning the debts of public establishments (EPs), most of whichdo not generate revenues and could therefore meet their obligations only withIncreased ass'stance from the State, it has been decided purely and simply towrite them off. This debt category accounts for CFAF 11.3 billion (20.2 -4.5(PAD) - 4.4 (RCFS). In September 1989 all public establishments wererequested to prepare and implement, by March 31, 1990 at the latest,rehabilitation plans designed to adjust their needs to their real resources.

113. As regards the claims of enterprises which owe the State less thanit owes them, an amount of CFAF 7.8 billion is currently deemed in disputeinasmuch as those claims were not certified. For most of those claims, thissituation has existed for almost three years. Mainly involved are claims ofenterprises that have been unable to furnish any substantiating documentation.The Government has therefore decided, after a final deadline set for November30, 1989, to remove them from the State's stock of debt, thus compelling theenterprises to enter them as loss items while allowing them a grace period ofa further three months in which to document them (circular No. 030 PR/SG/DRSPof November 14, 1989). As further evidence is provided, the State willinclude these debts in the settlement schedule referred to above. Should thesituation of those disputed debts be entirely cleared up, settlement wouldoccur in the following manner: mutual cancellation, CFAF 6.7 billion, and

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budget entries, CFAP 1.1 billion. Thus no more than CFAF 1.1 billion willremain outstanding at the end of June 1990, of which CFAF 600 million would bepaid in 1990/91 and CFAF 500 million in 1991/92.

114. In overall terms, the entire stock of debt evaluated as ofDecember 31, 1986 will have received appropriate treatment, either by beingsettled (in the case of certified debts) which can be cancelled mutually orwritten off (in tbe case of debts of public establishments to the State) ol.scheduled for repayment over three years from fiscal 1989-90; this is alreaclybeing carried out with regard to debts to the enterprises not subject tomutual cancellation.

115. Settlement plan based on the situation at 12/31/88. Since it wasnot possible earlier to take immediate measures precluding any furtheraccumulation of arrears, a new calculation as of December 31, 1988 was carriedout so as to introduce those measures on the basis of the updated situation.An update of the reciprocal debts between the State and the parastatal sectoras of December 31, 1988 resulted in '-he identification of CFAF 45.1 billion inState claims on the sector, i.e., on the basis of the debts claimed, a balanceof CFAF 18.5 billion (45.1 - 26.8) in favor of the State. Followingcertification, this positive balance amounts to CFAF 30.5 billion (45.1 -14.3), an amount that will be adjusted downwards as certification proceeds.

116. At the present time, the certified debts amount to CFAF 11.7billion. This sum, which includes the certifications issued since theinventory, carries the rate of debts acknowledged as against debts claimed bythe enterprises to 442 against 15?. This percentage will probably beincreased before the November 30, 1989 deadline set with SENELEC (CFAF 3.3billion claimed) for which the level of certification could reach 100Z.Another case worth mentioning is that of the rural development agencies(SODEFITEX, SODEVA), whose debts consist of arrears under the contract plans.As such they will be subjected to specific treatment in conjunction with therehabilitation plans. At worst, the State will be left with a balance in itsfavor of CFAF 12.9 billion.

117. The Government has announced the following program to clear thesedebts:

Determine the sums that may be subject to mutual cancellation andactually settle all debts which can be dealt with by thisprocedure before anuary 31, 1990.

For debts, without counterpart owed by enterprises to the State,commence negotiations with the SNs, the SEMs and the relevantgovernment department (Fiscal, Treasury, etc.) by December 31,1989, with a view to adopting a settlement timetable. Thesenegotiations will be completed by the end of March 1990 at thelatest. For these debts, a repayment schedule with moratoria of

Annex IVPage 31 of 50

up to a manimum of three years will then be drawn up, pursuant tothe regulations, and entered in the budget of the enterprises withan effective date of not later than July 1, 1990.

Write off the debts of the EPs (public establishments) on January31, 1990.

Decide on the disputed claims on November 30, 1989. These claims,which are not always certified, are to be entered as profit-and-loss items pending certification. The enterprises will thus havebeen given a period of four months to justify the claims.

Settle the State's debts for which there are no counterparts inthree budget installments, the first to be included in the 1990/91budget. The final amounts, which will reflect the result of thearbitration on the disputed debts, will be decided before January31, 1990.

118. Plan for the settlement of cross-debts as of 12/31/1989. Thesituation created by reciprocal debts between the State and the enterprisesand among the enterprises themselves will be updated prior to March 31, 1990and a settlement plan announced prior to June 30, 1990. All these debts willbe settled within three years from 1990/91.

119. Conclusion. The situation regarding all the cross-debts betweenthe State and the enterprises will be definitively resolved at the end of1992/93, i.e. June 30, 1993. The State will have settled, either by mutualcompensation or through appropriate planning for the noncompensated debts, allits debts to enterprises in the parastatal sector. As regards the State'sclaims on these enterprises, those on non-revenue earning publicestablishments will be written off. With respect to the other enterprises(SNs and SEMs), a three-year moratorium will be negotiated with the State soas to schedule repayments over a period compatible with the enterprises'rehabilitation efforts and available resources.

d. Settlement of reciprocal debts among enterprises in the parastatalsector

120. The public enterprises operate in many different sectors of thenational economy, but only SENELEC (electricity), SONEES (water) and SONATEL(telephone) are providers of nationwide services maintaining regular financialrelations with almost all the PEs. Reciprocal arrears among the PEs are atfairly high levels and are adversely affecting the sector's financialtransparency. The Government has therefore conducted a survey of the 24largest enterprises in the sector, for which the balances are significant.This survey revealed that as of December 31, 1988 the total stock of inter-enterprise claims was estimated at CFAF 32.9 billion, CFAF 24.2 billion ofwhich were finally acknowledged by toth parties.

Annex IVPage 32 of 50

121. The discrepancy between debts and acknowledged claims stems from anumber of factors, including reorganisations (the former OPT was transformedinto SONATEL and OPCE), settlements effected on illiquid banks, statementsdrawn up on different dates by the creditor and the debtor, and disagreementsbetween enterprises (SENELEC and ICS). To these factors must be added anydiscrepancies resulting from accounting errors by the various enterprises.

122. The following steps will be taken on the basis of the informationgathered:

Settlement where possible of debts among these enterprises bymutual cancellation not later than January 31, 1990. The Board ofDirectors of each enterprise must give prior authorization to thateffect if necessary.

For the public establishments without sources of revenue, whosecreditors for the most part have debts to the State, offsettingtransactions with the debts of the State can be arranged, providedthat the claims on the public establishments have been certified.The plan for settling this situation will be announced by January31, 1990 and implemented over three years.

- A repayment schedule covering the outstanding debts among theprincipal enterprises (SENELEC, SONATEL, SONEES) and between themand the rest of the sector will be proposed by the CSP to theirboards of directors not later than January 31, 1990, afternegotiations with the interested parties. The settlement programwill be carried out over a three-year period.

- For the cross-debts of the other PEs, which involve rather modestamounts, a repayment schedule will also be available beforeJanuary 31, 1990 and ready for application from that date forward.

123. The settlement program will include the issuance, at market rates,of debt bonds with maturities of two, three or four years, which the debtorenterprises will transfer to their creditors in the parastatal sector inpayment of their arrears. The debt bonds received by the creditors may beused only to pay other creditors.

124. The implementation of these plans will make it possible to placethe financial relations between the State and the sector, and among theenterprises in the sector, on a sounder footing. Nevertheless, it will benecessary to take further steps aimed at preventing the future accumulation ofcross-arrears between the State and the sector and within the sector. Themeasures designed with that purpose in mind are covered below.

e. Establishment of a system to improve the settlement of cross-debts between the State and the parastatal sector and among theenterprises of the sector

Annex IVPage 33 of 50

125. The mieasures envisaged involve both the improvement of theinformation system for making the timely identification of debts and means ofsettlement more automatic and the introduction of performancc indicators andincentives. A number of short-term measures, supplemented by o'hers aimed atthe longer term, have been announced. A group responsible for monitoringfinancial relations with the parastatal sector has been set up in the Ministryof Economy and Finance. It is composed of the parastatal sector unit (CSP),the Treasury, the Budget Department, the Debt Departmentment, the FiscalDepartment, the Customs Department, the Statistical Department, the COF, thePortfolio Department and the ACC. The group will meet each month to reviewthe financial transactions between the State and the enterprises, and will beexpanded every three months to include the Delegation for Parapublic SectorReform (DRSP) and the credit managers of the various ministries. Thesemeetings will review all financial transactions conducted during the relevantperiod between the State and the sector and take appropriate action withdetailed reports to the competent authorities.

126. As one of the main causes of the accrual of arrears was thesluggish procedure for approving subsidies, the Government has decided to makethe DRSP responsible for ensuring the timely mobilization of credit transfers(subsidies) for the enterprises, in order to reduce substantially the lagsnoted in that area.

127. Enterprises with debts to the State will, as expressly providedfor under the applicable regulations, be subject to automatic withholding withregard to all their available resources in banks and at the Treasury. TheTreasury will regularly review these withholding operations at the monthlymeetings of the financial relations monitoring group.

128. Other measures which need further study before implementation arealso contemplated. These include the introductiun of performance standardsfor the public administration, and an official will be assigned this task ineach department. An evaluation system will be introduced for water andelectric power consumption and telephone use. In keeping with overall budgetconstraints, budget allocations to each department will be determined so as tocover possible arrears. A circular from the Minister of Economy and Financewill announce the allocations to the various departments following the budgetdecisions. Monitoring systems will provide for an evaluation of themanagement perfornance of each enterprise head, with the rate of debt recoveryand settlement constituting major elements thereof. In addition, for thosePEs which are programmed to receive subsidies, the possibility will beexplored of having the Ministry of Economy and Finance (MEF) automaticallywithhold planned subsidies for the settlement of accumulated debts.

129. To eliminate any claim-certification or debt-acknowledgmentproblems (a major concern in relation to arrears, especially in connectionwith water, electric power, telephone service and other utilities), thefollowing procedures will be introduc_d in December 1989: (i) To be valid,

Annex IVPage 34 of 50

bills will have to be sent out within 30 days following the period in whichservice was supplipd, and (ii) the consuming agency or organization will havea maximum of three weAks in which to contest a charge. If a charge has notbeen contested after this three-week period, it will be deemed to have beenapproved, and (iii) payment for the service in question must be made at thelatest within the month following the three-week period. When that month haspassed, the supplier will cease to supply or service the ccisuming a3ency ororganization.

130. The State will refuse to approve any new loans to publicenterprises that are in arrears to it. Although a case-by-case approach isnecessary in the analysis of the reciprocal-debts situation, examination andsettlement of the problem will be coordinated in their entirety by theparastatal sector monitoring group created in the MEF. Measures will be takenby June 30, 1990 to ensure that the amounts entered in the national budgetbeginning in 1990/91 are sufficient to cover reasonable and authorized chargesfor public services supplied to government agencies. At the same time,disciplinary measures will be taken against heads of administrative unitswhose excessive spending is due tc lax consumption management.

3. Privatization and Liquidation

131. Privatization of PEs will be pursued with ever-increasingeffectiveness as experience is gained. A new strategy for privatization hasbeen prepared. This strategy is based on the need for total disengagementfrom all nonstrategic enterprises and encompasses all forms of Statedivestiture: sale of shares, liquidation, sale of assets, managementcontracts, leasing-management and contracting of certain activities to theprivate sector, etc. In addition, all measures aimed at financialrehabilitation that are prerequisites for the privatization of enterpriseswill be announced in conjunction with the new strategy.

132. The sale already underway of the first 10 enterprises will goahead. A detailed program involving 31 enterprises to be privatized has beenprepared by the Government and covers the period 1989-91. The privatizationwill proceed by stages as follows: (i) preparation of audit reports, (ii)compliance with all legal requirements and public sale offers according to thefollowing timetable:

SIDEC, VACAP, SAIH, SERAS, SNSS, SENPRIM, SONED, SENHOTEL inNovember 1989

SIPOA, SINAES, HAMO, DAKAR-MARINE, IRANSEN, SODEHME, PROJETFRUITIER DE M'BORO, BICIS, CNCAS by September 30, 1990

SOTEXKA, SICAP, BHS, SODIDA, SODEZI, SODITH, SODISA, SODIKA,SONEPI, SIAS, SEPFA, SONADIS, SONACOS by September 30, 1991

Annex IVPage 35 of 50

133. With respect to the enterprises to be privatized in the firstwave: in the case of VACAP, if the negotiations with the current partner donot lead to an agreement before December 21, 1989, an open invitation to bidwill be issued by January 31, 1990. For the SNSS the services of a commercialbank will be retained by January 31, 1990 to find a taker. SONED'sreciprocal-debts situation will be resolved by January 31, 1990, and in themeantime bids to purchase the organization will be invited by December 31,1989.

134. A list of 12 public enterprises marked for possible liquidationwas prepared, and a decision to liquidate five of them was taken in November1989. They are SISAC, SNPC, SOMIVAC, SEIB and SGHCV. Signature of thedecrees for their liquidation will be completed by June 30, 1990. A secondgroup of five enterprises will be liquidated by June 1991.

135. In addition, the Government has decided, first, to bring theprivate sector into the design and management of the privatization program byinviting the national employers' council to appoint two representatives to theconsultative council of the parastatal sector and, second, to call whenevernecessary on private bodies experienced in this area to help in theimplementation of this policy.

136. A study on the possibilities of creating a secondary share marketwill be finalized by June 1990 and thz recommendations carried out by December1990.

4. Rehabilitation of Enterprises

137. The rehabilitation of the enterprises remainJng in the State'sportfolio will be pursued by implementing and strengthening the policy ofcontract plans for the enterprises concerned. To that end, a detailedtimetable for the preparation, signature and monitoring of the contract planshas been devised. All the contracts to be negotiated will contain incentivesfor the managers of the enterprises to achieve the agreed financial and othergoals.

138. Concurrently, a statistical framework will be prepared outliningall the State's financial commitments under the performance contracts. Asfrom 1989/90, budget entries will precisely reflect the commitments undertakenin conjunction with the performance contracts.

5. Legal and Institutional Framework

139. The effort to achieve greater rationaliza ion of the supervisorybodies will be pursued. To that end, supervision of parastatal sectorenterprises will be limited to the DRSP and to t-i: Ministry of the Economy andFinance. Consequently, the role of Financial Controller of the Presidency(CFP) and the Commission for the Verification of the Accounts of the PublicEstablishments (CVCCEP) will be limited to ex-post audits, while the

Annex IVPage 36 of 50

Organization and Methods Office (BOM) and other study groups in the parastatalsector will act only at the -squest of the Boards of Directors of the publicenterprises.

140. The authority and competence of the Boards of Directors will bereinforced by the inclusiotL of private sector representatives known for theirprofessional competence. Supervision of mixed economy companies in which theState has a minority interest will be reduced to its simplest form, withemphasis placed on making the directors of those companies totallyaccountable. These SEMs will be subject to the rules of private law inmatters of management oversight.

143. State control over SEMs where the State holds minority shares willbe reduced to the minimum possible, the emphasis being placed instead on thedirectors of these enterprises. These SEMs will be subject to private law formatters relating to their management.

142. In that connection, a number of amendments to Law No. 87-19 willbe submitted to the National Assembly for approval in July 1990. They willprovide for:

Easing of the oversight procedures and modalities set forth inArticles 43 and 44, under which special State controls can beimposed by decree on enterprises in which the State holds aminority interest or on private enterprises which receivefinancial assistance from the State;

Elimination of the veto right of the Financial Controller of thePresidenc:. (CFP) in the boards of directors of public enterprises(Article 37);

Limitation of the CVCCEP's role to ex-post inspection only(Articles 46, 49, 54, 56);

Abolition of the Public Establishments Center (CEP), including theACC and the COF (Articles 22-29, 58);

Mandatory inclusion in the enterprises' boards of directors of atleast two members chosen for their expertise.

143. The Government has decided to implement measures to strengthen theagencies charged with the supervision of the parastatal sector reform, that isthe parastatal sector unit (CSP) in the Ministry of Economy and Finance andthe Delegation for Parapublic Sector Reform (DRSP). The Government will takeall actions necessary to ensure that these agencies have the financial,material and manpower resources to fulfill their functions. In particular,the Government has decided firstly that both agencies will benefit no laterthan March 1990 from having sector information systems established, and

Annex IVPage 37 of 50

secondly that DRSP will have access to the necessary expertise for theimplementation of the privatization program. Financing up to the equivalentof US $ 4 million will be allocated in installments for this purpose.

VI. THE SOCIAL DIMENSION OF THE ADJUSTMENT PROGRAM

1. Assessment and Obiectives

144. Encouraging as the results over the three years of implementationof the PAML have been, there will first, for some years yet, be a continuedneed for a stringent policy aimed at reducing internal demand while theproduction incentives, whose positive effects will be felt only gradually, areput in place. In that context, it is essential to consider the socialdimension of the adjustment policy and thus to take steps to mitigate, in theshort run, the impact of the economic policy measures on the poorest groups,especially urban and rural workers. Looking beyond the short term, it isequally essential to develop analytical tools with which to integrate thesocial dimension into economic formulation.

145. The Government has implemented, over the past two years, a numberof measures designed to reduce the temporary costs of the adjustment policy.They include the creation of the Employment and Redeployment Office and theNational Employment Fund, and the formulation of a population policy. Thesepolicies will be pursued and strengthened to enhance their effectiveness whilespecific measures are put in place to develop Senegal's principal resource:its people. The Government is defining, in conjunction with its partners, amedium-term human-resource development program which combines sector policyand investment measures.

146. The Government's first objective in its intensified focus on thesocial dimension of the adjustment policy is to promote employment, byintroducing major programs such as the large public works project, which seeksto create temporary jobs in infrastructure projects and has the backing of thedonor community. The following actions are also planned in the context of theNational Employment Fund: (i) placement and redeployment in productionactivities of laid-off workers; (ii) the revival of production through thecreation of a PME network; and (iii) an improved match between training andemployment in order to better meet the needs of the economy.

147. Two other objectives are being pursued by the Government: theintroduction of an action plan based on the population policy in order tointegrate the demographic variable better into economic and social developmentstrategies, and the development of human potential through the implementationof appropriate health, education, and social development policies.

Annex IVPage 38 of 50

2. Action Plan

1. Employment Promotion

148. The employment and redeployment efforta will be pursued as part ofthe employment action plan. Accordingly, the experience of the NationalEmployment Fund will be reviewed with the aim of broadening the employmentprogram and speeding up the procedures for financing and decentralizing theDIRE's efforts on behalf of the regions. Projects will be selected forconsistency with the revitalization goals defined by the Government, with aview to creating a PME network in promising activities; occupationalrequalification will be provided through a requalification fund situated inthe ONPF. Traineeships in enterprises will be organized in accordance withthe provisions of the National State/Employers' Agreement. Particular stresswill be laid on matching training and employment over the medium term. Aspart of the same endeavor, a reetructuring of some aspects of the vocationaltraining system will be undertaken, based on a review of existing structuresand the preparation of a training program in collaboration with the ONPF. TheGovernment further plans, through pericdic follow-ups on former Stateofficials and employees, to evaluate the success of their redeployment intothe private sector.

2. Population Policy

149. In keeping with the objectives laid down in the statement onpopulation policy, a priority action and investment plan prepared in March1989 covers the following areas: mother-and-child health; fertility and birthspacing; promotion of women, youth and the aged; preservation of the family;migration, urban development and land use; studies and research; information,education and communication concerning population issues.

3. Realizing Human Potential

150. A special effort will be made on behalf of sectors such aseducation, health and social development. Adequate resources will beearmarked through budget allocations and the three-year investment program tomeet the health and primary-education needs of the poorest segments of thepopulation in urban and rural areas.

a. Education

151. The Government reaffirms its determination to promote elementaryeducation and thereby pursue the goal of universal schooling. A medium-termaction plan covering training and teacher-recruitment needs in the elementaryeducation system will be designed in that connection.

Annex IVPage 39 of 50

152. The following decisions will be taken in light of the foregoingand of wage-bill constraints. Priority will be assigned to national educationin conjunction with measures for redeploying civil servants. Civil servantsthus made available to the Ministry of National Education will be eligible foraccelerated training. Once redeployment has reached its limits, theGovernment, working with its partners, will study ways and means ofmaintaining recruitment in the sector. Ways and means of fostering privateeducation will also be considered. The development of technical andvocational education is also a Government priority. Particular emphasis willbe placed on streamlining training structures and examining their mission.Literacy will be fostered through an integrated approach (functional literacyfor adults and development of elementary education) and a meaningful linkageof functional literacy to vocational training. The expansion of post-primaryeducation will depend increasingly on the means at the State's disposal aswell as the acceptance of cost-sharing by those benefiting from training.However; particular emphasis will be placed on improving the quality oftraining, providing students with a better learrning environment andestablishing a meaningful link between training and national developmentconcerns.

b. Health

153. Improving the population's health status is also one of theeovernment's priorities. Particular emphasis will therefore be placed on thequalitative improvement of health services. The following measures areplanned in that regard: (i) formulation of a national %., 8th policy and reviewof Country Health Programming for Senegal, bearing i.. i_2n .-' -ecentperformance of the economy; and (ii) establishment of a medium-.-term humanresource plan in the health sector.

c. Social development policy

154. Programs identified in relation to social development policy fallunder three main headings. First, the stre3ngthening and restructuring ofGOPEC, responsible for promoting the employment of young people withoutdiplomas in urban and rural areas. Second, the development of a program insupport of the "disadvantaged family" through the financing of smallproductive projects at the family level. Third, support for the communitydevelopment unit charged with establishing a credit system for legallyconstituted rural and urban groups. Such programs will be put in placethrough a Social Development Fund in which operation the Senegaleseauthorities, donors and NGOs will participate.

4. Institutional Development

155. As part of the UNDP project 'Evaluation of the social dimension ofadjustment in Sub-Saharan Africa", analysis and monitoring tools as well as

Annex IVPage 40 of 50

the required statistical base will b- developed with a view to integrating thesocial dimension into the design of macroeconomic policies.

For the Government of the Republic of SenegalThe Minister of State,General Secretary to the PresidencyH.E. Mr. Jean Collin

(original in French signed)

Annexest Action PlanTable 1-Direct subsidies, tranRfers and overdrafts to PEs.Table 2-Cross debts between PEs and Government and between PEs

themselves

Annex IVPage 41 of 50

SENECAL - LETTER OF DEVELOPMENT POLICY--------------------------------------

ACTION PLAN

I. MACROECONOMIC FRAMEWORK

1. Macroeconomic indicators

- Reduce overall fiscal balance (on a commitment basis and excluding grants) to:-2.8 % of COP 08/30/90-1.6 % of GDP 06/30/91

- Limit monetary growth to 4.7 % per year for each year 08/30/9006/30/91

- Reduce current account deficit (excluding grants) to:-8.3 S of CDP 06/30/90-6.9 of GDP 06/30/91

2. Public debt management=_____________________

- Create users' guide to debt management 12/31/89

- Maintain the 10 X annual growth rate in the CAA budget 1989/90 to 1990/91

- Minimise new non-concessional external borrowings continuous

3. Resource mobilization

Improve tax management and collection-------------------------------------

- Implement single personal income tax for individuals 01/01/90

- Implement corporate taxation systemestablish corporate tax rate of 36 % 01/01/90eliminate capital budget levy (PBE) 01/01/90evaluate reform, and reduce rate if justified to 30 X 07/01/91

- Increase investment tax deduction allowances for new companies-study '8/30/91decision 07/01/92

- Decentralize and computerize management of tax arrears 1989/90 to 1990/91

- Implement fiscal cadastercadastral surveys 12/31/89computerization 08/30/90

- Implement source deduction on income from rents, dividends, and capital gains 01/01/90

* Improve tax base and stabilize revenues---------------------------------------

- Extend VAT to trade and services sectorscomplete study 08/30/89*adopt a simplified accounting system 06/30/89*ffectiv, implementation 01/01/90reduced rate 7 %normal rate 20 %higher rate 30 %

Annex IVPage 42 of 50

Reexamine tax (TPS) on debt Interest*tudy 07/01/91decision 07/01/92

* Reinforco Customs Department____________________________

- Implement computerization through the GAINDE system 01/01/90

- Examine the functioning of the GAINDE system, and Implement accompanying 09/30/90moesures

* Improve quality of economic data________________________________

- Establish 1981/82 to 1988/87 financial accounts for public administrations. 12/81/89Elaborate provisional accounts in current and constant prices for 1988.

- Set-up a methodology to improve foreign trade statistics 12/31/89

- Set-up permanent system of administrative statisticsupdate law 68-S9 clarifying and ;-ationalizing Information circuits 1990create macroeconomic data bank 1990conclude study on harmonization of structures 12/81/89

= Implement two surveys of the informal sector 02/28/90

TI. PRIVATE SECTOR INCENTIVES_________________________

1. Improvements in Investment Incentives and In the regulatory environment------------------------------------------------------ __---------------

- Strengthen the uGuichet unique' and centralize all formalities for enterprise 08/30/90creation

- Reorganize the fiscal administration (DGID) and stroamline Its procedures 01/01/90

- Monitor the implementation of the reorganization of DGID and take additional measures if 09/01/90necessary

- Improve Information for investors and prepare an investment guide 03/31/90

- Disseminate edited texts of the tax code and of various other regulations 07/81/90

- Simplify registration procedures for SMEs 08/30/90

- Review and evaluate, on an annual basis, the impact of the elimination ofconstraints and of the various Incentives for new Investors

first evaluation 08/30/91second evaluation 08/30/92

- Eliminate certain requirements (such as need for r,tarrzed certificates) forregistration of limited liability companies 08/30/90

- Liberalize licensing conditions for self-employed professionals 08/30/90

2. Production costs________________

- Amend special agreement with SAR and publish decree reflecting a new transparent 12/26/89pricing and taxation system for petroleum products

- Reduce fuel oil and diesel prices to industry and adjust electricity tariff 08/30/90accordingly

- Establish a firm amount of 'handling fee for SAR. This amount will be reflected 01/31/90In the structure of ex-SAR prices as of 04/01/90

- Introduce further adjustments to telecommunicetions tariffs E1/30/90

Annex IVPage 43 of 50

- Set up a tripartite commission (with employer and union participation) 01/01/90to undertake fundamental revlew of oxisting labor legislation

first set of recommendations 12/31/90review of the wage-setting system In collaboration with the social 09/30/90partners and implementation of Its recommendations

3. Trade regime

- Prepare and implement a plan of actions8or simplifying administrative procedures 08/30/90related to the export subsidy and duty drawback system

4. Investment promotion

- Carry out a study on the modalities for the establishment of duty-free enterprisos 08/31/90outside of the ZFID

implementation of the recommendations of the study 08/30/90

- Publish circular setting out possibility for ZFID companies to sell amaximum of 40% of their output on the local market after payment of importduties and taxes 01/01/90

- Confirm eligibility for export subsidy schemestudy 03/31/90implementation of the study recommendations 08/30/90

- Build factory buildings for lease within the ZFID continuous

- Open Investment promotion offices In major industrial cities abroad 1990

S. Special agreement with SOCOCIM=_____________________________

- Resolve fiscal dispute with SOCOCIM-Industrlesmission by the fiscal administration (DGID) 01/01/90implementation of agreements reached 03/31/90

- Carry out a detailed study on the modalities for establishing a uniform price 03/31/90of cement throughout Senegal

- Carry out a study on the modalities for introducing a new price formula for 03/31/90cement with a margin linked to variable costs only

- Amend special agreement with SOCOCIM to introduce new price formula and 08/30/90establish stabilization system for cement

III. PUBLIC INVESTMENT PROGRAM

- Adopt an appropriate public investment program for each year as pert of the 1990/91rolling three-year public investment program 1991/92

- Decentralize all activities relabed to project identification and 12/31/89preparation

- Prepare project appraisal guide for non-productive projects 12/31/89

- Disseminate price projections for use in project appraisal on a regular basis 12/31/89

- Prepare and review sectoral investment strategies on a regular basis continuous

IV. CIVIL SERVICE REFORM

1. Institutional reform

- Propare texts related to the restructuring of the administration 12/89

- Effectively implement restructuring 12/89

- Establish list of civil servants to be placed on administrative leave as a result of 12/31/89the restructuring

Annex IVPage 44 of 50

- Final choice of departments to be privatized totally, and of those that will 12/81/89be awarded public concession status

- Study the practical modalities and the financiel Impact of the 02/28/90privatization of certain Government services

- Study the legal Implications and requirements of the relationship between 02/28/90the state, privatized firms and former civil servonts working In those firms.

- Create the newly privatized firms 03 - 12/90

- Organizational audit of the new departments 04 - 09/90

2. Voluntary departure of civil servants and State employees…--------------------------------------------------------

- Information and awareness-raising campaign 12/89

- Form the Steering Committee 12/89

- Create the Reserve Fund and nominate Its Administrator 01/90

- Decr- s describing modalities for voluntary departure and early retirement 12/89

- Implement voluntary departure program 01/01/90

- Voluntary departures following organizational audit 07/01/90

3. Personnel management

a Modernization of the State personnel management system

- Computerize Individual files and set-up Independent computer file in the DFP 02/28/90and the DCS

- Implement restructuring of State personnel management agencies (DFP, DAGE, SAGE, DCS) 04/30/90

- Rationalize regulations on recruitment and pay, and restructure national 09/30/90training schools

* Control of the Civil Service size

- Follow-up and take appropriate action on Irregular cases arising from second 11/30/89staff census

- Study national training schools 04/30/90

- Ensure that recruitment does not exceed the following:

. 436 schoolteachers, and 27% of program departures In the non-education 08/30/90sectors for :989/90. At a minimum, there will be 664 net staff reductionsby June 1990

681 schoolteachers, and 38% of program departures in the non-education 06/30/91sectors for 1990/91

. 797 schoolteachers, and 80% of program departures in the non-educati4n 06/30/92sectors for 1991/92

- Redefine personnel management responsibilities between Ministries of 08/30/91Civil Service, Economy and Finance, Technical Ministries, and at the DAGE andSAGE levels

- Simplify legislative and administrative regulations in order to improve State 04/30/91personnel management

- Undertake third staff census 03-08/92

4. Rationalization of the sage bill

- Implement wage bill study recommendations 12/31/89

- Verify all wage bill components 08/30/90

Annex IVPage 45 of 50

- Set wage bill ceilings at:126.8 billion CFAF 1989/90126.0 billion CFAF 1990/91126.0 billion CFAF 1991/92

- Estimate total pay arrears owed by the State, and prepare a settlement plan 04/30/90

- Implement accounting system to check wage bill expenditures vis-a-vis budgeted 06/80/90projections

- Study hospitalization and transport indemnity systems 06/80/90

- Reduce Government's contribution to retirement funds from 20% to 16% of base 07/01/90salary

- Harmonize special statutes with the general statute of the civil service, and 09/80/90redefine indemnities independently of base salary

- Study conditions and pay levels of civil servants and State employees 12/81/90

V. PARAPUBLIC SECTOR REFORM

1. Subsidies

- Implement computerized follow-up system for all financial flows 08/30/90between the State and public enterprises in the 'Cellule du Secteurparapublicl in the Ministry of Economy and Finances

- Implement, on a case by case basis, plan to reduce direct subsidies (s e Table1), i.e. to a maximum (excluding COUD) of:

non commercial enterprises (list A)CFAF 9.9 billion 1989/90CFAF 9.1 billion 1990/91CFAF 7.4 billion 1991/92commercial enterprises (list B)CFAF 0.6 billion 1989/90CFAF 0.8 billion 1990/91CFAF 0.0 billion 1991/92

- Restructure COUD in ordor to reduce its budgetary burden 09/80/90

- Transform equipment subsidies to long-term loans or capital increases starting 11/89

2. ACC overdrafts

- Abolish overdraft system 08/. ./89

- Transform all existing ACC overdrafts to long-term loans after 1 year 09/80/89

- Cane-l all long-term loans that cannot be reimbursed 06/80/91

3. Cross-debts (see table 2)

e Stock as of December 81, 1986

- Mutually cancel all non-disputed cross-debts between the State and the PEs 11/89

- Prepare settlement agreements for outstanding debts owed by PEe to the State. 11/89Settlement will be completed over a three-year period stsrting in 1989/90

- Cancel the debts of those public establishments that do not generate their own 11/89resources

- Implement the settlement programme for all debts owed by the State to the PEs,estimated as follows:

CFAF 684 million 1989/90CFAF 800 million 1990/91CFAf 600 million 1991/92

Annex IVPage 46 of 50

- Eliminate *11 debts owed to the PEe by the State which have not been certified 11/89

e Stock as of December 31, 1988_____________________________

- Update the inventory of cross-debts for the period up to December 31, 1988 12/89

- Settle those debts which can be mutually cancelled 03/90

- Negotiate a programme to settle the outstanding debts owed by PEs to the State 03/31/90implement the settlement program over a three-year period starting in1990/91 07/01/90

- Cancel the debts of the public establishments which do not generate their own 01/31/90resources

- Arbitrate disputed claims 11/30/90

- Settle all debts owed by the State to the PEs over a three-year period, 1990/91starting in 1990/91 (total ostimated at FCFA 260 million) 1991/92

1992/93

* Stock as of December 31, 1989____________________ ________

- Update the inventory of cross-debts including those between the PEs themselves 03/31/90

- Prepare an action programme for settlement of all these debts and implement it 06/30/90over a three-year period starting in 1990/91

PE/PE cross-debts

- Mutually cancel where possible 01/31/90

- Implement a settlement program over a three-year period atarting in 1990/91, 03/31/90with the State acting on behalf of these public establishments unable togenerate their own resources

s Measures to reduce the magnitude of the cross-debt problem and to improvesettlement of debts in the future------------------------------------------------------------------ __---------

Involve the CSP in the process of commitment and disbursement of credits to 1990/91the PE sector

Set up a monitoring committeo including representatives of the State and maJor 03/31/90PEs

Reduce Government consumption of water, electricity and telephone services 08/80/90

Develop an incentive system for PE managers based on their performance in 06/30/90settling and recovering debts

Adopt measures to improve the certification or formal recognition of debts 12/90between the State and the PEs

Refuse all new loans to PEs which are in arrears with payments owed to the State continuous

4. Privatization and liquidation__ __________________________

- Implementation of the new privatization strategy continuous

- Offer for sale Government shares in:SIDEC, VACAP, SAIH, SERWS, SNSS, SENPRIM, SONED, SENHOTEL 11/8SSIPOA, SINAES, HAMO, DAKAR-MARINE, IRANSEN, SODEHME, PROJET FRUITIER DE 09/30/90M'BORO, CNCAS, BICISSOTEXPA, SICAP, BHS, SOD;DA, SODEzI, SODITH, SODISA, SODIKA, 09/30/91SONEPI, SIAS, SEPFA, SONADIS, SONACOS

Annex IVPage 47 of 50

- Liquidate (sign liquldation decrees) of the 6 following enterprises: 06/80/90SISAC, SNPG, SOMIVAC, SEIP and SGHCV

- Liquidate (sign liquidation decrees) of at least 6 other public 08/30/91enterprises

- Complete study and Implement recommendation on the creation of 12/31/90a secondary market for shares

6. Rehabilitation of enterprices

- Prepare program contract plans for OHLM, PAD, RCFS, OPCE, SONATRA 06/30/90

- Prepare recovery programs for NIS, 'Le Solsill, ORTS, ITA, CNTDS, ISRA, SICAP 06/30/90

- Prepare financial restructuring plans for SONEES, SENELEC, SONATEL 12/31/90

- Harmonize all State commitments included in contract plans with the 1989/90, 1990/91,national budget 1991/92

S. Legal and institutional framework

- Modify law 87-19 in order to: 06/30/90limit State control on mixed enterprises in which the State holds aminority stake, and on private enterprises benefiting from State support*eliminate the CF right to veto in Board decisions of public enterpriseslimit the role of the control commission of the CVCCEP to a posterioricontrol of PE accountslimit the role of the SO and other consultancy organizationsto responding to requests from the decision-making bodies of publicenterprises

- Eliminate COF and ACC 12/31/90

VI. SOCIAL DIMENSION________________

- Review the experience of the National Employment Fund with a view toward 12/89expanding the employment program and accelerating financing procedures

- Implement Public Works and Employment Project continuous

- Implement a priority action plan on population continuous

- Study possible modalities of private school promotion 1990

- Design a medium-term plan on human resources 12/31/89

- Design an action plan for the production of family businesses 12/81/90

- Adequately allocate funds In the budget and PTIP to address the health and 1990/91primary education needs of the least-favoured groups of the population 1991/92

1992/93

Annex IVPage 48 of 50

Table 1: Direct subsidies, transfers and Overdrafts to Public Ent.rprises (CFAF millions)

1988/89 1989/90 1990/91 1991/92-- -- -- -- -- -- -- -- - - - - -- - -- -- -- -- -- -- -- -- ----- - ..-- -- -- -- -- -- -- -- -- - -- - - - -

S 0 Total S 0 Total S 0 Total S 0 Total

NON-COMMERCIAL OR STRATEGIC ENTERPRISES (List A)

ONAC 38.3 0.0 38.3 38.3 0 88.8 38.3 0 38.8 38.3 0 38.3ISBEA 27.6 0.0 27.6 27.6 0 27.6 27.6 0 27.6 27.6 0 27.6COUw 1348.0 623.9 1971.9 3412.0 0 3412.0 3412.0 0 3412.0 3070.8 0 3070.8INSEPS 106.7 0.0 106.7 105.7 0 106.7 106.7 0 105.7 O.0 0 0.0INDR 130.0 19.1 149.1 130.1 0 130.1 91.1 0 91.1 0.0 0 0.0SAED 481.9 0.0 481.9 335.4 0 835.4 181.6 0 181.8 189.3 0 189.3INSTITUT ISLAMIQUE 26.8 0.0 26.8 26.6 0 26.6 26.8 0 26.6 26.6 0 25.6CNTDS 180.0 34.1 194.1 160.0 0 160.0 136.0 0 138.0 80.0 0 80.0ORTS 827.1 621.1 1348.2 888.6 5 0 68.6 678.9 0 678.9 413.6 0 413.5ONFP 360.0 0.0 360.0 0.0 0 0.0 0.0 0 0.0 0.0 0 0.0ISRA 940.6 433.7 1374.3 913.0 0 918.0 913.0 0 913.0 467.0 0 457.0PAD 140.9 0.0 140.9 140.9 0 140.9 119.8 0 119.8 98.8 0 98.6RCFS 210.1 0.0 210.1 210.1 0 210.1 210.1 0 210.1 0.0 0 0.0BRGM 95.8 0.0 95.8 79.3 0 79.3 87.4 0 87.4 47.9 0 47.9SAR 78.6 0.0 76.6 63.6 0 63.6 64.0 0 54.0 38.2 0 38.2UNIVERSITE 4601.8 0.0 4601.8 6146.8 0 5146.8 6148.8 0 5146.8 5100.0 0 6100.0SOTRAC 800.0 0.0 800.0 800.0 0 800.0 800.0 0 600.0 400.0 0 400.0UNCM 83.7 0.0 83.7 69.6 0 69.6 69.1 0 69.1 0.0 0 0.0ZFID 88.9 0.0 88.9 73.8 0 73.8 66.4 0 86.4 59.7 0 69.7ENSUT 127.6 0.0 127.6 172.6 0 172.6 172.6 0 172.6 152.5 0 152.6ENS 20.0 0.0 20.0 t0.0 o 20.0 0.0 0 0.0 0.0 0 0.0ORCHESTRE NATIONAL 48.2 0.0 48.2 48.2 0 48.2 48.2 0 48.2 0.0 0 0.0UNIVERSITE MUTANTS 21.4 0.0 21.4 21.4 0 21.4 0.0 0 0.0 0.0 0 0.0ASECNA 198.1 0.0 198 1 184.4 0 164.4 139.7 0 139.7 99.1 0 99.1SODEVA 171.2 0.0 171.2 142.1 0 142.1 108.8 0 108.8 0.0 0 0.0PTA & Others 280.8 0.0 280.0 280.8 0 280.8 280.8 0 280.8 180.8 0 180.8

SUB-TOTAL 11375.8 1631.9 13006.7 13283.4 0 13283.4 12669.3 0 12669.3 10468.8 0 10465.8SUB-TOTAL (ex COUD 10027.6 1008.0 11034.8 9861.4 0 9861.4 9147.3 0 9147.3 7386.0 0 7386.0

COMMERCIAL ENTERPRISES (List 8)

ITA 129.6 116.8 245.3 170.0 0 170.0 102.0 0 102.0 0.0 0 0.0MSAD 44.8 102.4 147.0 44.6 0 44.6 28.8 0 26.8 0.0 0 0.0CEREEQ 18.9 84.0 102.9 17.4 0 17.4 0.0 0 0.0 0.0 0 0.0NIS 2.6 0.0 2.6 0.0 0 0.0 0.0 0 0.0 0.0 0 0.0CICES 106.0 0.0 106.0 71.0 0 71.0 42.8 0 42.8 0.0 0 0.0SONEPI 70.0 0.0 70.0 43.1 0 43.1 36.9 0 86.9 0.0 0 0.0ASACE 144.0 0.0 144.0 0.0 0 0.0 0.0 0 0.0 0.0 0 0.0CNQP 119.9 61.1 181.0 90.8 0 90.6 64.4 0 64.4 0.0 0 0.0APS 56.1 68.2 114.3 48.8 0 46.8 27.9 0 27.9 0.0 0 0.0SONATRA 102.8 0.0 102.8 72.0 0 72.0 61.2 0 81.2 0.0 0 0.0SOMIVAC 130.2 0.0 130.2 68.9 0 68.9 ).O 0 0.0 0.0 0 0.0

SUB-TOTAL 923.6 421.6 1346.0 624.2 0 824.2 360.8 0 360.8 0.0 0 0.0

CRAND TOTAL 12299.1 2063.4 14351.7 13887.8 0 13887.6 12910.1 0 12910.1 10465.8 0 10456.8Gd TOTAL (ex COUD) 10961.1 1429.6 12379.8 10476.8 0 10476.8 9498.1 0 9498.1 7388.0 0 7386.0

…=-=--------------------------=_-====Z=-__- - -GG___ -_======= =2=___= _ __ _--G-==========-

S: subsidies and tronsfers; 0: overdraft.Source: Ministry of Finance

Table 2: ULSPIJTED CROSS ODET BETEEN PES AND COVIET iLv BETvWE PES TFBGELYVES 1088 (;n CFAF .; II; ons)

----------------------------------------------------------------------- _____ _---- __------------------------------------------------- ------------------------------------------------------- ______________-___

DebtoreCroditor. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Total Ovt 1986 Ct lO8 aCd total

1 CPSP - 2948 93 3039 3119 3116 9274

2 SGIAOIS - 0 48 9 57

3 S0aDBIM 2110 - 185 2245 - 22 2267

4 SAED 90 - 908 - 1636 2544

5 SENEL8 C 26 - 124 8 2 16 3 13 282 309 211 17 67 3 812 1893 376 3271 5540

6 SONEES 3 173 - 33 4 11 10 72 19 2 5 31 23 4 390 3282 3672

7 SOIATBL 157 - 10 13 48 a 7 6 8 438 715 6403 4922 12040

8 SHELL 42 11 1794 14 - 1861 - 98W 2697

9 SOINACOS 1132 58 13 - 1201 144 - 1345

10 STRAC - 4 4 177 200 381

11 ICS 389 389 1992 669 3050

12 PAD 9 - 22 9 60 2 102 2Z66 611 3079

13 SPT 2 7 6 10 12 37 19 - 56

14 SASM 11 11 40 202 253

15 cosaE - 61 61 120 79 260

16 C.S.S. 133 27 89 9 2 - 185 10 5 460 - 1231 1691

17 D. NRX!E 27 5 11 - 43 689 657 1389

18 TAIBA -0 - - 0

19 SSP-THSE5 0 12 225 237

20 RCFS 3 13 1 169 41 - 227 188 1006 1421

21 CPCE 66 _ 66 148 97 311

22 SAR 3703 - 3703 42 x 3745

23 GMS 2 7 452 - 461 a 25 486

24 SSPPF-SMLIL 56 56 3 80 139

SIB-TOTAL 4150 3048 96 200 2538 0 298 3716 146 133 0 20 S1S 38 0 0 609 576 275 88 110 34 1286 17872 17064 24178 39114

Oat 1988 10003 - 440 6056 x 9138 38 37 1255 4682 4464 - 20 - 2 1080 30 4415 1130 - 53768

Cat 1988 5156 15 22 635 7881 4604 4038 119 22 877 9763 1629 455 - 6 1149 - 225 668 937 a 95 44860

Crond Total 19309 3061 118 1275 16395 4604 13492 3893 205 2265 14445 6113 S1S 513 0 9 2838 576 630 5174 2177 34 1381 116500

X a Entreprieee non included

Source: Ministry of Finance

0Q 0fD Xx

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Table 2: UNDISPUTED OtSS DST SETIEEN PEa AND COV 4EENT AND BEflEE4 PES T ELVES, 1988 (in CFAF ;Illions)

Debtor.Creditor. 24 23 26 27 28 29 30 31 32 33 34 3S 36 37 Zs 39 40 Totel Cvt 1986 Ct 1988 Cd total

23 ISRA 0 - 486 486

26 LUNASE 0 o - 0

27 SNH-HL 0 18O - 18028 HAND 0 - 4 4

29 SAPCO 0 - - 030 SERAS 0 SO - so

31 SICAP 0 781 634 1415

32 SMEc 0 - 16 1633 SODEVA 0 - 50f 503

34 SODIDA 0 a - 0

35 SONATRA 0 24 66 90

36 SOTEXKA 0 90 - 90

37 VACAP 0 - 45 4538 SEIB - 0 - x 089 SODE08E 0 - a 0

40 SO -D0 54 247 301

SUB-TOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 17872 17064 24178 59114

CGt 1986 11 0 - 371 34 so 80 609 as6 923 116 618 6608 302 356 53768

cat 1988 96 38 902 53 327 937 367 433 496 433 884 260 686 716 a a 12 44860

Crand Total 107 38 902 53 698 971 417 313 1103 1289 a84 1183 602 1336 6608 302 368 116300

X - Entrepriese non included

Source: Ministry of Finance

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