A World Bank Country Economic Report PUB- 212 Senegal: Tradition, Diversification, and Economic Development November 1974 FlE COPY Senegal: Tradition, Diversification, and Economic Development This report was prepared by the economic mission which visited Senegal in February and March 1972, and includes comments made by the Government of Senegal in December 1972 and March 1973. Mission chief and coordinating author Heinz B. Bachmann enjoyed the support of general economist Louis Cur- rat, industrial consultant Georges Delhove, PMWA agronomist Uberto Fontana, demographer Joseph Gholl, statistician Cynthia Miller, PMWA agricultural economist Mohamed El Moghazi, general economist Jacqueline Noel, fiscal consultant Sylvain Plasschaert, plan organizer Nimrod Raphaeli, and secretary Marie-Therse Bellot. The mission chief and coordinating author is responsible for the scope and overall conclusions of the report. WORLD BANK Washington, D.(- Copyright 0 1974 by the International Bank for Reconstruction and Development. All rights are reserved. The World Bank issues country economic reports in two series. This report is a working docu- ment and is, as such, part of an informal series wholly based on materials prepared for restricted use within the Bank. The text is not meant to be definitive, but is offered so as to make some results of internal research widely available to scholars and practitioners throughout the world. The Bank has a continuing program for expanding and strengthening the quality of all social and economic statistics used in its operations and research activities. Some of these data are published routinely in the WVorld Bank Atlas, the World Bank Annual Report and Trends in Developing Countries. Other statistical series maintained by, the Bank and used almost ex- clusively by Bank staff are published only infrequently. 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Individual titles currently available may be obtained in clothbound and paperback editions from bookstores, The Johns Hopkins University Press, or its agents: Economic Growth of Colombia (1972-ISBN 0-8018-1389-1 /0-8018-1397-2) Nigeria: Options for Long-Term Development (1974-ISBN 0-8018-1602-5 / 0-8018-1603-3) - iii - Table of Contents Page No. LIST OF TABLES .................................... vii COUNTRY DATA ...................................... xiii MAPS .. follow xiv ABBREVIATIONS ..................................... xv EQUIVALENTS AND FISCAL YEAR .............. ......... xviii SUMMARY AND CONCLUSIONS ................ ........... xix PART ONE: PAST DEVELOPMENTS AND THE PRESENT SITUATION 1....... I. The Country and the People .... ........... 1 II. Growth Experience 1960-1971 ................... 7 III. Government Response to Senegal's Growth Prob- lems 1960-1971 ............................... 22 The framework of Government's intervention in the economy ............................ 23 Assessment of Government policies .... ...... 25 Public development efforts .... ............. 25 Public finance management (current opera- tions) ..................................... 29 Financing of public development outlays .... 33 Public enterprises ..... .................... 34 IV. Money and Credit .............................. 38 Institutions ............................... 38 Working Rules of the BCEAO .... ............ 38 Determinants of the money supply .... ....... 40 Sectorial distribution of credit .... ....... 42 Credit financing ........................... 46 Interest rates ............................. 46 V. Human Resources ............................... 50 Population ................................. 50 Employment ................................. 52 Education .................................. 56 Health conditions .......................... 60 - iv - PART TWO: MAJOR ECONOMIC SECTORS, PAST DEVELOPMENTS AND OUTLOOK .... 62 VI. Rural Sector ......................................... 62 Agriculture ....................................... 62 Livestock ......................................... 68 Fisheries ......................................... 72 VII. Modern Sector ........................................ 79 Industry .......................................... 79 Power and Water ................................... 82 Tourism ........................................... 84 PART THREE: PROSPECTS AND CREDITWORTHINESS ......................... 92 VIII. Overall Economic Growth .............................. 92 Introduction and main conclusions .... ............. 92 Detailed projection of economic growth .... ........ 94 Growth at current prices and growth of per capita revenues ......................................... 101 IX. Expenditures and Savings ............................. 104 X. Balance of Payments and Foreign Trade .... ............ 108 XI. Planning and Public Investments ...................... 113 The Third Plan .................................... 113 Future development planning ....................... 115 Financing of future development outlays .... ....... 121 XII. Terms of Foreign Financing and Creditworthiness ...... 130 ANNEX 1: AGRICULTURE ... . .138 A. Overall Situation .and Past Growth .138 Importance of Agriculture in Senegal's Economy .138 Factors Determining Agricultural Output .140 B. Major Crops: Their Determinants and Prospects .142 Foodcrops . .142 Groundnuts . .144 Other crops . .148 Arabic Gum . .150 C. Overall Outlook for the Agricultural Sector .150 ANNEX 2: MANUFACTURING INDUSTRIES . . .152 A. Macro economic Trends .152 B. Factors Determining Industrial Growth .155 Productivity level and Productivity Increase .157 Wages ............................................... 158 Credit . ................................................. 158 Exports to Developed Countries ........ .. ............ 158 C. Government Policies ........ .............. ........... 159 Investment Code ......................... ............ 159 Promotion of Senegalese Inudstry .......... ... ....... 161 D. Future Developments and Conclusions ...... .. ......... 163 ANNEX 3: THE TAX SYSTEM OF SENEGAL ............................. 165 A. Summary and Conclusions ............................. 165 B. Description of the Tax System ............ ... ........ 169 Direct Taxes ...................................... 169 Indirect Taxes ....................... ............. 184 The System of Tax Incentives ............ ... ....... 202 C. Appraisal and Suggestions for Improvement .......... . 206 Functions of a Revenue System ..................... 206 Appraisal of Senegal's Tax System ..... ............ 208 Suggestions for Improving the Tax System .... ...... 214 Possible Revenue Implications of the Suggested Changes . ......................................... 228 ANNEX 4. PLANNING METHODS AND PLAN IMPLEMENTATION ...... ....... 231 Summary and Recommendations .............. ... ........ 231 A. Introduction ........................................ 233 B. The Planning Machinery .................... .......... 234 C. The Methodology of Planning ...... ................... 238 D. Recommendations .................. ................... 243 The Control of Plan Implementation ................. 246 The Directorate of Planning ......... .. ............ 248 STATISTICAL APPENDIX .251 - vii - LIST OF TABLES Text Tables I : Sectorial Composition of Public Development Outlays II : Financing of Public Development Outlays 1 : Major Growth Sectors 2 : Groundnuts, Prices, Production and Proceeds 3 : GDP at Current Market Prices 4 : Per Capita GNP at 1971 Prices 5 : Major Foreign Trade Indicators 6 : Balance of Payments Estimates 7 : Breakdown of Public Expenditures 8 : Central Government Revenues, Expenditures, and Savings 9 : Financing of Public Development Outlays 10 : Financing of Public Enterprises Investments 11 : Public Enterprises, Savings Net of Current Subsidies 12 : Monetary Developments 13 : Sectorial Distribution of Short Term Credit 14 : Sectorial Distribution of Medium and Long Term Credit 15 : Interest Structure Before and After the January 1973 changes 16 : Modern Sector Manpower: Estimated Breakdown by Qualification, 1970 17 : Breakdown of the Modern Sector Manpower by Origin and Qualification, 1970 18 : Mission Projection of Employment in the Modern Sector by Nationality 19 : Approximate Mission Projection of Total Employment 20 : Growth of School Enrollment 21 : Projected Growth of Major Agricultural Products 22 : Rates of Growth of Agriculture and Livestock 23 : Livestock Production Targets, 1971-1980 24 : Mission Projections of Fisheries Production 25 : Manufacturing Industries 26 : Air Arrivals in Senegal by Country of Origin 27 : Investments per Job Created 28 : Hotel Financing 29 : Mission Projection of GDP at 1971 Prices 30 : Groundnuts: World Market Prices and Producer Prices 31 : Manufactured Consumer Goods: Average Annual Growth Rates at Constant Prices 32 : Mission Projection of GDP at Current Prices 33 : Mission Projection of Per Capita Revenues 34 : Private Savings and Investments 35 : Expenditures and Savings 36 : Balance of Payments Projection 37 : Mission Projections of Foreign Trade 38 : Third Development Plan, 1969/70-1972/73: Public Outlays 39 : Mission Proposals for Public Development Programs Beyond the Third Development Plan - viii - 40 : Public and Private Gross Fixed Capital Formation 41 : Financing of the Proposed Public Development Programs 42 : Mission Projection of Public Savings 43 : Mission Projection of Central Government's Current Revenues and Expenditures 44 : Projection of Gross Foreign Aid Inflow 45 : Long Term Mission Projections of Public Savings, Foreign Aid and Debt Service 46 : Foreign Debt Service Ratios Under Different Blends of Foreign Loan Aid and Different Growth Rates of Exports of Goods and Services 47 : Impact of Different Future Foreign Borrowing Conditions on Net Public Savings 48 : Long Term Mission Projection of Terms of Foreign Aid Inflow Annex Tables Al : Role of Groundnut Production in Government Revenues and Foreign Trade A2 : Farmers' Short-Term Debit, 1970/71 A3 : Growth of Major Agricultural Products, 1970-1980 A4 : Role of the Manufacturing Sector in the Senegalese Economy A5 : Value Added in the Manufacturing Sector A6 : Domestic Production and Consumption of Manufactured Consumer Goods, Excluding Groundnuts A7 : Domestic Production and Consumption of Textile and Clothing A8 : Taxes on Imports into Senegal A9 : BIC: Companies A10 : BIC: Individuals All : General Income Tax (IGR) A12 : Yield from Modern Income Taxes A13 : Yield from Old Direct Taxes A14 : Current Budget Revenues, FY65-FY72 A15 : Actual Import Duty Burden on Selected Groups of Imported Goods, 1969 A16 : Shifts in Composition of Imports, 1964, 1969, 1970 Al7 : Taxes on Import Trade A18 : Taxes on Imports Al9 : Revenue on Export Trade A20 : Export Duty on Major Exported Goods A21 : Taxes on Domestic Production (Excise Duties) A22 : Rate Pattern of Inheritance Taxes A23 : Selected Developing Countries: Tax Ratios and Indices of Tax Effort 1966-68 A24 : Aggregate Effective Tax Burden from Modern Income Taxes on Individuals without Children at Selected Net Income Levels A25 : Distortative Effects of Deductability of IGR at Selected Net Income Levels - ix - A26 : Conservative Estimate of Revenue Impact of Suggested Statutory Changes Statistical Appendix Tables 1.1 : Total Population 1.2 : Population by Region 1.3 : Breakdown of Wage Earners by Activity and Qualification in the Cap Vert Area 1.4 : Breakdown of Wage Earners by Activity, Qualification and Nationality in the Cap Vert Area 1.5 : Breakdown of Registered Unemployed by Qualification 1.6 : Employment Projection in the Modern Sector by Qualification And Nationality 1.7 : Projection of Local Manpower Demand in the Modern Sector 1.8 : Health Facilities by Region, 1968-69 1.9 : Medical and Paramedical Personnel 1.10 : Education: Recurrent Expenditures 1.11 : Primary Education, 1969/70 1.12 : Secondary General Education 1.13 : Enrollment in Technical and Professional Schools, 1970/71 1.14 : Enrollment at University and Similar Institutes, 1971/72 1.15 : Socio-Economic Indicators 2.1 : National Accounts - Gross Domestic Product at Current Prices, 1959-1971 2.2 : National Accounts - Gross Domestic Product at 1971 Prices, 1959-1971 2.3 : National Accounts - Rural Sector, Value Added, Current Prices, 1959-1971 2.4 : National Accounts - Rural Sector, Value Added, Constant Prices, 1959-1971 2.5 : National Accounts - Agriculture, Value Added, Current Prices, 1959-1971 2.6 : National Accounts - Agriculture, Value Added, Constant Prices. 1959-1971 2.7 : National Accounts - Agriculture, Cereals - Surfaces, Yields, Production, Prices and Value Added - 1959-1971 2.8 : National Accounts - Agriculture, Starches and Vegetables - Surfaces, Yields, Production, Prices and Value Added - Cur- rent Prices, 1959-1971 2.9 : National Accounts - Agriculture, Cotton and Groundnuts - Surfaces, Yields, Production, Prices and Value Added - Current Prices, 1959-1971 2.10 : National Accounts - Livestock, Production, Prices, Value Added, Current Prices, 1959-1971 2.11 : National Accounts - Livestock, Production, Prices, Value Added, Constant Prices, 1959-1971 2.12 : National Accounts - Fisheries, Production, Prices, Value Added, Current Prices, 1959-1971 2.13 : National Accounts - Fisheries, Production, Prices, Value Added, Constant Prices, 1959-1971 - x 2.14 : National Accounts - Public Utilities, Manufacturing, Production at Current Prices, 1959-1971 2.15 : National Accounts - Public Utilities, Manufacturing, Value Added at Current Prices, 1969-1971 2.16 : National Accounts - Public Utilities, Manufacturing, Value Added, at 1971 Prices, 1959-1971 2.17 : National Accounts - Groundnut Processing, Production and Value Added, Current and Constant Prices, 1959-1971 2.18 : National Accounts - Mining, Production and Value Added, Current and Constant Prices, 1959-1971 2.19 * Expenditure Account on GDP, 1961-1971 2.20 : Gross Domestic Investments, 1959-1971 2.21 : Gross National Product/Domestic and National Savings 3.1 : Balance of Payments, 1968-71 3.2 : Foreign Trade - Adjusted - 1965-1970 3.3 : Exports by Commodity Group, Mission Estimates, 1959-70 3.3 : Contd. 3.4 : External Trade, Exports by Commodity Group, Mission Estimate in Value, 1959-71 3.5 : External Trade, Exports by Commodity Group, Mission Estimates in Value, 1959-71 3.6 : External Trade, Exports by Commodity Group, In Percentage Mission Estimates, In Value and in Percentage of the Total, 1959-71 3.7 : External Trade, Exports by Commodity Group, Custom's Statistics In Value, 1965-71 3.8 : Export Volumes by Commodities 3.9 : External Trade, Imports by Commodity Group Mission Estimate in Value, 1959-71 3.10 : External Trade, Imports by Commodity Group, Mission Estimate in Percentage of Total, 1959-71 3.11 : External Trade Import Volumes by Commodity Group Customs Statistics, 1964-70 3.12 : Agricultural Statistics - Value of Major Agriculture Related Goods, 1964-1970 3.13 : Agricultural Statistics - Quantity of Imports of Food, Beverages and Tobacco, 1964-1970 3.14 : Foreign Trade by Monetary Zones and Commodity Groups in Value Customs Statistics, 1965-70 3.15 : External Trade: Foreign Trade by Monetary Zone and Principal Countries Mission Estimates, 1965-70 3.16 : Total Inflow of Foreign Public Aid, 1966-71 3.17 : FAC Aid to Senegal, Commitments and Disbursements, 1961-71 3.18 : FED Aid, Commitments and Disbursements, 1961-71 3.19 : CCCE Aid to Senegal, Commitments and Disbursements, 1961-71 3.20 : Foreign Investment Aid by Sector and Donor, 1963-1971 3.21 : Foreign Technical Assistance by Sector and Donor, 1963-1971 4.1 : External Public Debt Outstanding as of December 31, 1971 4.2 : External Public Debt as of December 31. 1973 5.1 : Fiscal Statistics Central Government Current Budget Revenues, 1965/66-1971/72 - xi - 5.2 : Fiscal Statistics Central Government Current Expenditures - Economic Classification - 1962/63-1970-71 5.3 : Fiscal Statistics Central Government Current Expenditures - Functional Classification - 1962/63-1971/72 5.4 : Fiscal Statistics Central Government Current Expenditures - Functional Classification - 1962/63-1972/73 5.5 International Comparison of the Functional Breakdown of Central Governments Expenditures 5.6 : Operations of the Tresor, 1967-72 5.7 : Fiscal StatisticS, Savings of Public Enterprises, 1966/67-1970/71 5.8 : Fiscal Statistics, Public Investments and their Financing, 1967/68-1970/71 5.9 : Public Plan Outlays 1961-1969 5.10 : Third Development Plan: 1969/70-1972/72 Public Plan Outlays. 6.1 : Monetary Statistics - Monetary Survey, 1964-1971 6.2 : Monetary Statistics - Analysis of Outstanding Medium and Long Term Credit, 1963-1971 6.3 : Monetary Statistics - Analysis of Outstanding Short Term Credit, 1964-1971 7.1 : Rural Sector Statistics - Groundnut Cultivation, 1947-1972 7.2 : Rural Sector Statistics - Comparative Evolution of Groundnut Prices and Fertilizer Costs, 1961/62-1971/72 7.3 : Rural Sector Statistics - Quantities of Fertilizer and Selected Equipment Distributed to Farmers: 1961-70, and Planning for 1972 7.4 : Rural Sector Statistics: Number of Pirogues 7.5 : Rural Sector Statistics: Trawler Fishing 7.6 : Rural Sector Statistics: Tuna Production 7.7 : Rural Sector Statistics: Central Government Current Expenditures on Fisheries - Budget 8.1 : Road Transport 8.2 : Railway Traffic 8.3 : Port of Dakar: Commercial Traffic 8.4 : Secondary Ports: Commercial Traffic 8.5 : Air Traffic 9.1 : Annual Minimum Wages Paid in the Public and Private Sectors 9.2 : Official Minimum Monthly Salaries 9.3 : Real Annual Wages in Various Sectors - xiii - COUNTRY DATA - SENEGAL ARFA POPULATION DENSITY ,700 ha 4 0iflflon (aid-1972) per ki2 20 Rate of rovth: 2.2 s (frm 1965-1972) per kbrs of arabe lend 34 POWflATION cLA4AcTrIRrSTICS HllLTH rn-dr Rirth Rate .. er 1,0CC) 44.0 (1970) 7piltion per physician 17,500 (1970) CnA,o Snath R.,e (per 1,000) 22.0 (1970) Population per hospital bed 710 (1970) T.fWn Mortality (per 1,000 live births) 156 (1968) TNCOME DISTRI1 JTION DISTFIBISIION OF LA4D OWINERSHIP I or national inco;ne, lowest 75 percent (rural population): 27 % owned by top 10$ of osn ra aiddle nli percent (urben population) 60 $ osned by maflest 10% of owners highest 1 percent (foreigners) 13 ACCESS TO) PIPED WATER ACCESS TO USKTRICITY E of population - urbn % of population - urban - rural -rural 'II ~lrr7ITT EDUCATIOY 1971 Calorte intake a. % of recuirements 2.300 /day /capita AdTul sioy r tre t% 5-10 (1970) Per capit protein intake esti,nated high comted to other arrican countries Primary *ehool enrollment 4: (1970) GNP PER CAlPITA in 1971 iROI; DOMrrESTIC PROPLJCT IN 1969/71 ANNtUAL RATE OF GRCOWT (5, constant prices) US S . mm. 1960-65 1965_70 1 ri, at Market Prices 86} 100 2% _ 20.14% ron Tuestic Investment 165 19.1 45/2 1l$ L2 2 L2 rlrosr National Saving 96 11.2 -5% Z3 3.3$ 42% Current Account Balance - 69 B.c - 8%/4 230% Kxports Of Goods, NFS 202 23.4 9%% -18% T.p,u,,, of r(ode, N1S 257 29.8 .A 1t4 OIIT'IIT, LABOR FORCE AND PRODUCTIVITY IN 1970 a Addd (GDP factor cost) Labor Fbrce V.A. Per Worker k,ric,lt.re 232 31.0 1.2 73 195 42 Iodustry 130 17.3 0.1 6 1,44G 314 Servines 387 51.7 0.2 14 1,i647 360 Unenip nycd , . 0.1 7 -- -- Total/Average 7 I6 0 10', 'TNM'WNT FINAJCE Senoral Sovernent Central Goverrment (CFAr IQnj 0 ODP (CFAF biltof0nJ % of 0GDP (CPA? billtim) 4 of TDP 197Zl#I 170'7 l7ri 1367/1 7 i977 Cur,eruI. Feceipts 40.7 18.4 18.5 LO.7 18.4 38.4 19.5 Curr-tt Expenditure 38 0 17.2 17.1 358 C 17.2 35.4 17.1 Current Surplus 5.1 L5 2.3 L5 1 8 LS *' .n 3.5 1.7 CepiLsl Expenditures 14.1 6.14 7.2 1' 44. 10.7 external Assistance (nst) 5.6 3.9 4. 1/ The Per Capita GNP estimate is at 1970 market prices, calculated by the same conversion technique as the 1972 World Atls. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 2/ Excludin stocks. ,q69G1-, ,5 It "-870 T Tncluding surpluses of special funds nd savings of public enterprises. not available not applicable - xiv - COUNTRY DATA - SENEGAL MOfNEY. CREDIT AND PRICES ( IFAF 12 e on's20ersg ) Money and Quasi Money 30.5 32.0 34. 379 Bank Credit to Public Sector -1.4 -0.d - 0.5 Bark Credit to Private Sector 35.6 38.6 39.o (Percentages or ielex Nmbers) Money and Quasi Money as % of rDP 12.9 15.0 14.7 14.6 ens-rl Price Tndex (1961 . 100) 105.7 119.0 123.6 13i.4 Annual Percentage changes in: leneral Price Index T 2.1 4.4 3.9 6.3 :overroeenn Deposito T - 57 33'5 Bach credit to Priv-te Sector a 4.8 -0.6 . d3 ; 1 0 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERArE 1968-71) 1969 1970 l US $ MIn 4 (Miflions US) Gruoudnuts and Groundnut cpur-tl or bode, WPS 183 240 204 Products 66 7 4. 9 Tmp-orts or (bods, aNS 236 253 281 Miscellaneous Manufactured Products p7.4 22.O cede deficit _ 13 _ Food.beverages, tobacco 24.8 13.3 ,!crest Paments (n.t) - 11 - 1L - 14 All other cmn,odities 34.1 20y1I Witt-ro' Remittances TOTAL 163O 10U.O Frctor Pyents (net) ) 17 17 19 TreT sfers )- EXTERNAL DEBT, DECEORE 31. 1971 B-nucce on Current Account - 42 - 10 - 72 (i-cluding transfers) US $ il lri-aLe loig ten cpitatl (net) 9 5 7 >rt ete short ten capital (net) - 2 - 4 ) Mediu- ad Long-ten. Credits, Public 167.8 icid1 Grento 13 17 ) Non-Outranteed Prints MLT Loans 22 9 41 Total Outstanding ad Disbursed Amortisation 4 I - 3 ) Other (net) 1 2 DEBT SERVICE RATIO for 1971 . 4 rs and Oiniss2on2 2 22 25 31 70 ease in reserves (-oincrease) 7 - 21 - 2 na Reserves June 30 25 30 40 Reserves 7 - 14 IE OF EXCHANGE IDRD/rDA LENDING. July 31. 1973 (Million US J$_ .'_j O_snAc-ber 71 '1t'CFAF 27 .IBr L >1 1 0 * ns$ od0036 Outstunding N Disbursed I6. s- zn:cr 71 through Jannary 731ttang (-i. tdisbor-ed ,r. t i ^ * crAs 2')n.79~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1~9 1 PAF 1.0 * US $ 0.0039 b-iruery 73 4 1.0 = CFAF 230.2 RAF 1.0 iOS $ 0.0043 amt acailable to-t applicable Western Africa Regional Office August 15, 1973 HR AA~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~M A U RI TA N - A SPANISH ~IlRA LIBYAER SENEGAL . RAINFALL AND POPULATION Pa MAURIT'ANIA 400 ~~~~~~~~~~~~~~MALI ---Reg,monl boundaries NR f - -- -- Depatnmental boand-es 0 N r -S-4RIAI., 'I k * National capital GUIEA ( ,,L .I' * RgiOns! capdIts - ISAL'GIN r-'4 yI) N SEI o Depcartmentol capitals ..'OASRT EOEL. /I Rivers Si C L,uis uCM Inlenmultenl Streams - f - S~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~AHOMEY C' ~~~~~~~~OQ ~~~~~tto i, EQ.GLIINEA J~S. 20 AS 00 80 o~~~~~~~~~~ ~ ~ ~ , **5nd5 l~~~~~~~~ & ~ Motaomr KILOMETERS R /E G I 0) N 0 20 40 AS " L,nguere60 MI'LES ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Kebeme r ------- Atlantic R E G I 0 -N ~-->-.\ I - Tiv5OaOnC0 ,-- x)- D I O U R B REGION OF 0 F-C *Thies M'~~~~~b.cke -T,~ a Ocean 0MBor Geno IRG'Qi O,JS N -S L U -1- 1 5-~~~~~~~~~~~~~~F R EQ I ON O FMA .1 -FnndiOuSW, Koolse 0K.ffnn- 4 5 ~~~~~~~~~ -I Knuni~~~~~~~~~~~~~opentnwm Nioroo~ Tombcou~nds S,iE N E G A L- Roinfell in Millimeters 0 HO1,OO0 people ~IV B K t'-- J~ (.\ O~~~~0 R I E N 'T "A L 0Vel!ingora - i8I, I 5,.0,'aupi -~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 K8 R E G I 0 N O F \C. A S AM A yjN C E N/0mKL-0 L ~~~~~~~Aftl0LNAL PA RK Ri,el ~~~~~~~~~~~~~~~~~~~~Kedougso. 5*,guifn hor - CAP SKIRRINS G asop .Lf~ IA GU ASS , uIN M AURITAN I ; t~RIAIAj 1-' s_ SENEGAl _ ) IMALI / NIGER SENEGAL Sd- ' TRANSPORTATION INA LIBERI f rr | / _ GRAVEL ROAD A t/-tic DAHOMEY CAMEROON, 0 Ce co EGGIIINEA!_ I ? r ----- EA-RTH ROAD EO) GUNA A_ED1.11~ _____________________________ -,--+-4--,-I-l- ~~~~~~~~~~~~~~~~~~~~~~RAILWAYS ST -LOUIS FC) FERRIES WOO" PERMANENT RIVER NAVIGATION 6' © - \ > P @ INTERNATIONAL AIRPORT M A\ Mt ataB -e-/C a I(o BONTtb Mbor P s-Me9 SEU0ALY 0 P -15 // t e b-G.,.gX , > CA°!-F5 No pb P'lo, ?X DAKAR44g ......... endcDapc Fj,ss O ......................................K D.Ibi~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I It /D A \IDtttE ) BATA i _H / 50rcl j / ~~~~~~~~~~~~~~ ~ ~ ~~ ~~~~~ ~ ~~VE INGARA>b r I~~~~~~~~~~~NTINA PAK .k [}wl.,,X f/{hS l, _- R T U G U E SE G U I NH EB A@0Gfb G:i I;, _, 13 1 16 1 '4 1 4 [7 1 f ' s~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~G 0N - xv - ABBREVIATIONS AOF: Afrique Occidentale FranJaise (Federation of French West Africa colonies) BCEAO: Banque Centrale des Etats de ltAfrique de ltOuest (The Central Bank of the West African Monetary Union UMOA) BEI: Banque Europeenne d'Investissements (European Investment Bank) BNDS: Banque Nationale de Developpement du Sen6gal (National Development Bank of Senegal) BUD: Bud Antle, a California based vegetable growing company CAPA: Compagnie Africaine des Produits Alimentaires (sugar mill} a subsidiary of the Raffineries de Saint Louis, a French sugar processing company) CAR: Centre dJanimation rurale (extension service centers) COCE: Caisse Centrale de Cooperation Economique (a French public institution providing loans at concessional terms to developing countries) CEAO: Communaute Economique de llAfrique de lOuest (West African Economic Community) the successor organization to UDAO CEP: Centre des Etablissements Publics, the accounting office centralizing public enterprises accounts CER: Centre d'expansion rurale (extension service center) CFAF: (CFA Franc) Communaute Financiere Africaine Franc the currency of the West African Monetary Union (UMOA) CFDT: Compagnie Frangaise pour le Developpemnt des Textiles, a French company specializing in the promotion of cotton production in Francophone Africa CSS: Compagnie Sucriere Sen6galaise (Senegalese Sugar Corporation), a privately-owned company developing a sugar plantation and mill in Northern Senegal E: (in tables) estimates EC: European Communities FCA: Economic Ccmmission for Africa - xvi - FAC: Fonds d'Aide et de Cooperation a French public institution providing grant and soft loan aid to developing countries FED: Fonds Europeen de Developpement an institution of the European Communities providing grant and soft loan aid to developing countries associated with the European Communities GFCF: Gross fixed capital formation IDRC: International Development Research Center, a Canadian public institution providing assistance to developing countries IPPF: International Planned Parenthood Federation, a private foundation active in faidly planning programs in developing countries IRFED: Institut de recherches et de formation en vue du developpement harmonise, a French consultant firm specialized in development problems OAV: Organisation Autonome de la Vallee, a Senegalese public organization in charge of some irrigation projects along the Senegal River OHLM: Office des Habitations a Loyer Mod6re (low cost housing office), a Senegalese public enterprise ONCAD: Office National de la Cooperation et de l'Assistance pour le Developpement, a Senegalese public enterprise in charge of groundnut marketing and of supply of agricultural implements to groundnut farmers OPTS: Office des Postes et Tel6communications du S6negal (Post and Telecommunications Office), a Senegalese public enterprise OSA: Office S6negalais de l'Artisanat (Senegalese handicraft Office), a public institution RCF: Regie des Chemins de Fer, the public railway company RTS: Regie des Transports du Senegal, the former public urban bus company, now dissolved SAED: Societe dtAmenagement et d'Exploitation des Terres du Delta, a Senegalese public enterprise in charge of developing small holder rice production in the delta of the Senegal River - xvii - SATEC: Societe d'Aide Technique et de Cooperation, a French semi-public consultant firm, specializing in extension service activities in developing countries SDRS: Soci6te de D6veloppement Rizicole du S6n6gal, a Senegalese public enterprise that was in charge of a mechanized rice irrigation project on the Senegal River. Most of its installations were taken over by CSS SODAICA: Societe de Developpement Agricole et Industriel de la Casamance, a former Senegalese public enterprise in charge of rice production in the Southern part of Senegal, now dissolved SODEVA: Societ6 de Developpement et de Vulgarisation Agricole, a Senegalese public enterprise, particularly in charge of extension service activities in the groundnut basin, receives technical assistance from SATEC SOFISEDIT: Societe Financiere Sen6galaise pour le D6veloppement Industriel et Touristique, a semi-public Senegalese Development Bank to be established in 1973 SONA.GA: Societe Nationale de Garantie. a Senegalese public enterprise in charge of assisting Senegalese traders SONEPI: Societe Nationale d'Etudes et de Promotions Industrielles, a Senegalese public enterprise in charge of assisting small and medium Senegalese owned manufacturing enterprises SOSAP: Societe Senegalaise d'Armement de Peche, a semi-public Senegalese enterprise engaged in tuna fishing UDEAO: Union Douaniere des Etats de l'Afrique de l'Ouests the West African Customs Union, being replaced by CEAO UNFPA: United Nations Fund for Population Activity UMOA: Union Monetaire Ouest Africaine The West African Monetary Union, composed of seven Francophone countries in West Africa USB: Union S6n6galaise des Banques, a commercial bank with majority Government participation. - xviii - EQUIVALENTS Currency Unit: CFA Franc (CFAF) Before August 11, 1969: US$ 1.00 CFAF 246.85 CFAF 1,000 - US$ 4.05 August 1969 - December 1971: US$ 1.00 CFAF 277.71 CFAF 1,000 - US$ 3.60 December 1971 - March 1973: US$ 1.00 - CFAF 255.79 CFAF 1,000 - US$ 3.91 WEIGHTS AND MEASURES: 1 Metric Ton (t) - 2,205 lbs. 1 Kilogram (kg) - 2.2 lbs. 1 Kilometer (km) - 0.62 mile 1 Meter (m) = 3.28 feet GOVINMbENT OF SENEGAL FISCAL YEAR July 1 to June 30 SUMMARY AND CONCLUSIONS Overall economic development Since 1960, the year Senegal achieved independence, economic develop- ment has slowed and laggedbehind population growth. This slackening was largely the result of an artificially high standard of living which Senegal had inherited from colonial rule and the loss of its central position in Colonial French West Africa. This standard of living was based in part on the employment of a large number of expatriates occupying high-paid positions in the private sector as well as the public; it was out of keeping with Senegal's economic potential and low level of education. Adaptation to reduced political, administrative and economic cir- cumstances was difficult. It was aggravated by the loss of preferential prices in the French market for groundnuts, Senegal's most important cash crop and export item, in 1967/68 at a time when world market prices were parti- cularly low. During the early 1960s these difficulties were compounded by a fall in services and public administration (particularly French public administration) which had accounted for over half of Senegal's GDP at the time of independence. As a result, private investments and construction declined .activities. During the second half of the decade, the rural sector was seri- ously affected by the fall in groundnut prices, and by a series of years of unusually adverse weather. These conditions caused a sharp fall of groundnut production, from a peak of over 1.1 million tons in 1967 to 500,000 tons in 1972. Meanwhile, output of major foodcrops (millet, rice,and corn) increased very slowly and was insufficient to cover local demand. Overall, economic growth during the 1960s averaged about 3.4 percent at current prices and 1.4 percent at constant prices. In the early years after independence, the government's response to the adjustment difficulties was insufficient and often ill conceived. The marked depression in the modern sector of the economy and the knowledge that groundnut prices would have to be reduced, should have induced the government to implement rapidly a program of public investments concentrating on quick- yielding projects in directly productive sectors, particularly agriculture. However, the inherited ponderous administrative apparatus was not geared to respond quickly to new situations, and government policies remained strongly administrative and not development-oriented. Adhering to preindependence policies, the First Development Plan (1961-64) coincentrated on investments for social and transport infrastructure, including housing, urban water supply and administrative buildings. Investments in rural sectors accounted for less than 20 percent of total development outlays and concentrated on expensive and technically premature irrigation projects along the Senegal River, which did not yield satisfactory results for almost a decade. - xx - Table I: SECTORIAL COMPOSITION OF PUBLIC DEVELOPMENT OUTLAYS Transport Adminis- Rural Industry Infra- Social tration Total Sector Services structure Services Housing /1 Buildings per Year (percent) (percent) (percent) (percent) (percent) (percent) (CFAF billi^ 1961-64 18 6 26 12 28 10 9.7 1964-68 37 8 19 16 15 5 9.9 1968-71 40 5 18 11 25 1 14.4 /1 Including urban water supply. In the private sector, government was remarkably successful in its policy of stimulating import substitution industries, resulting in a nearly 6 percent annual growth of manufacturing output in an otherwise almost stag- nating economy. At the same time, it succeeded in keeping the growth of prices and salaries low. However, import substitution was accompanied by high import protection, which resulted in less favorable terms for local farmers and in a negative impact on budgetary revenues. During the second half of the 1960s the governments development policy became more energetic and more successful. While this response came too late to have a significant impact on the economy at the time producer prices for groundnuts had to be reduced, it is starting to show results and will stimulate future economic growth. The size of the public investment program was increased considerably as a result of improving absorptive capa- city. The investment program became more directly development-oriented, with the share of investments in directly productive sectors increasing to 45 per- cent during the Second Plan as well as the Third. As a result, rural sector investments more than tripled between 1961-64 and 1968-71. Conception and quality of rural investments improved markedly. Rural diversification (cotton, rice, tomatoes) was successfully started and for rice production the shift toward the more promising southern regions is producing encouraging results. At the same time, first steps were undertaken to cope with the problem of the overpopulated groundnut basin, by introducing modern labor-saving produc- tion methods for groundnuts and millet, and by stimulating and organizing rural migration toward the low density regions in the southeast. Taking advantage of the general increase in world market prices the government took a series of drastic measures at the beginning of 1971 to sti- mulate groundnut output. Particularly, producer prices were raised more than 25 percent and, abetted by fair weather conditions, this action resulted in a nearly 50 percent increase in output, when compared with the very low 1970 crop. Producer prices were kept unchanged through 1972. - 1*1 - The slight fall in rural production during 1965-70 had little effect on the modern sector of the economy (particularly manufacturing) which ex- panded more rapidly than it did during the first half of the 1960s. Because of a 14 percent annual increase in exports of manufactured products, manu- facturing output increased by some 7 percent per annum at constant prices or more than twice as fast as local consumption. By 1970, 20 percent of local manufacturing production (other than groundnut oil) was exported, accounting for almost 40 percent of Senegal's total exports (as compared to 23 percent in 1965 and 17 percent in 1960). The substantial expansion of manufactured exports in the last few years reflects Senegal's improving external competitive position and, to some extent, its relatively more developed industrial base compared to its neigh- bors. At the time of independence the country had been plagued with a high- cost price structure. Since then, government policies aimed at curtailing price and salary increases to about 3 percent per annum have allowed many Senegalese industries, such as textiles and shoes, to start competing suc- cessfully in export markets. Furthermore it has made Senegal more competitive in tourism, which has expanded rapidly since 1971. Thus, at this time, the need for a devaluation appears less urgent, particularly as long as world market prices for groundnuts remain at their present high level. The sharp increase in groundnut export prices since 1968, together with the partial recovery of the volume of groundnut production, led to a sizable growth of GDP at current prices after four years of little growth. In the 1968-71 period, GDP increased by more than 8 percent per annum. A substantial amount of the increase was channeled into investments; the incre- mental savings ratio rose to a high 18-percent and the average savings rate went from 12 percent in 1968 to 13.5 percent in 1971. Nevertheless national savings have not kept pace with the almost 14 percent annual growth since 1968, in investments spurred by increased absorptive capacity in the public sector and a generally more optimistic business outlook in the private sector. Higher foreign aid and a dramatic reversal in private capital flows (from a net outflow reaching 6 percent of GDP in 1968 to a net inflow of over 2 percent of GDP in 1971) have reduced the widening resource gap. Moreover, the recent rise in the Central Bank rediscount rate from 3 percent to 5 percent, and the accom- panying increases in commercial banks' rates on deposits and savings, are expected to make local resources more available for investments by stimulating local savings, but more importantly by reducing the outflow of liquid assets by foreign companies. Furthermore, it may stimulate foreign borrowing by local Senegalese banks as well as by foreign companies operating in Senegal. However, the magnitude of this change may be limited because of the recent rise in interest rates in foreign money markets. Improvements since 1968 in the overall economic situation were in- terrupted in 1972 by the most severe drought in sixty years. The drought caused a sharp fall in rural production not only of groundnuts but also of all other crops, and seriously decimated livestock herds. Preliminary estimates suggest that GDP stagnated in current terms and declined in real terms. - xxii - Substantial emergency food aid has been necessary to prevent widespread mal- nutrition. These events demonstrate how strongly Senegal's economy remains dependent on weather conditions, despite increasing diversification during the last few years into regions less affected by drought and expension of activities not dependent on weather (manufacturing)tourism). Total per capita GNP averaged CFAF 61,600 in 1969-71 (US$220 at the exchange rate prevailing before December 1971 but $268 at the exchange rate during the first quarter of 1973). However, this figure includes the services of foreigners. Senegal remains a poor country; 75 percent of the population are active in the rural sector and have an average income of less than CFAF 23,000 (US$82 or $99). It is estimated that during the 1960s per capita GNP of the entire Senegalese population (excluding foreigners) declined by nearly 7 percent, to about CFAF 54,500 in 1969-71 (US$195 or $237 respectively). This drop was much lower for the rural population (3 percent), but greater Ur'banites (21 percent) because urban migration sharply increased urban unemployment. The disparity between the two segments of population narrowed slightly from 1:8 to 1:6.6. The drought will somewhat widen the gap again in 1972. Government policies have generally not directly dealt with income distribution problems. The current budget is not used as an instrument to reallocate revenues. However, the substantial change in emphasis in the public investment program since the mid-1960s and, more importantly, the increase in groundnut producer prices are helping to improve rural incomes. On the other hand, government policies to stimulate import substitution industries have brought increased prices for manufactured goods consumed by farmers, and consequently have had a negative impact on income distribution. Public finance management From a development point of view, Senegal's past budget policies are open to criticism even though the government's management was financially sound. This achievement was noteworthy, considering the very difficult over- all economic situation and the oversized civil service inherited from colonial times - when all of French West Africa was administered from Dakar. In spite of adverse structural changes in the tax base as a result of a sharp fall in highly taxed imports, revenues kept about pace with GDP growth. Current expenditure for growth was only slightly higher. However, for political and social considerations the government was unable to reduce its excessive bureaucracy significantly. For these reasons, Senegal, in spite of a satis- factory tax effort (20 percent to 22 percent of GDP), was unable to generate higher levels of public savings. Nevertheless, savings reached the equivalent of about one-seventh of revenues and over 2 percent of GDP, high for West Africa. Public savings would have been higher if public enterprises had performed more satisfactorily. While combined receipts of public enterprises average over 30 percent of the government's budget revenues, cash surpluses (even excluding amortization) have remained virtually nil. In addition, they have often rendered poor services to the economy, because of unsatisfac- tory management and lack of supervision. - xxiii - Present Situation and Outlook in Major Economic Sectors Agriculture plays a central role in Senegal's economic life. About 70 percent of the labor force is engaged in rural activities. Although this sector accounts for only 30 to 35 percent of GDP (at factor costs), its leverage on the economy is considerable through its impact on exports and the size of the domestic demand for locally produced goods and services. Agricultural production is largely determined by climatic and soil conditions. Rainfall is marginal in many parts of the country and--even more importantly--subject to large annual fluctuations, while Senegal's soils are generally poor and their fertility in critical equilibrium. Another limiting factor is overpopulation in the groundnut basin, though there is no shortage of cultivable land in Senegal as a whole. It is estimated that about two-thirds of the cultivable land is not formed, and most of it is in the southeastern region and outside of the groundnut basin. Still another factor has been heavy dependence on one crop, groundnuts. This crop accounts for 60 percent of agricultural value added and for about the same portion of the country's total exports. Groundnut prices are subject to marked fluctua- tions on the world market. All factors suggest that Senegal's agricultural strategy should focus mainly on three objectives: (1) make agriculture less dependent on the vagaries of rainfall; (2) decrease overpopulation in the groundnut basin; and (3) reduce dependence on one crop. Development of the southern and southeastern parts of the country will at the same time limit the impact of serious droughts, reduce overpopulation in the center and allow crop diversification. In addition, a comprehensive strategy to develop water resources should be initiated, encompassing irrigation, groundwater utiliza- tion and reforestation. Such a plan will help efforts to increase diversifi- cation into rice, vegetables and other crops. In the short- and medium-term, groundnuts will continue to form the bulk of rural products. To increase productivity in this sector will remain a high priority. Rational choice of alternatives open to Senegal in agriculture is hampered by the lack of a comprehensive study to indicate the competitive advantages the country might enjoy in the cultivation of selected crops in diverse areas. Such a study based on trends in world market prices ought to be undertaken without delay. In the livestock sector, Senegal has made little use of its advant- ages in spite of favorable conditions. This poor performance is explained in part by insufficient budget allocations (about 1 percent of the government's current budget). Livestock industry suffers from a lack of adequate production infrastructure, extension services and commercialization. More research and pilot operations will be necessary to establish a satisfactory livestock policy and to lay the basis for faster growth. This step should be taken quickly, for the livestock industry can also provide the basis for the develop- ment of the largely underpopulated southeastern region. - xxiv - Fish production has been growing at about three times the rate of total GDP during the last decade, because of rapid expansion of both tradi- tional canoe fishing (80 percent of total production) and modern fisheries. According to recent surveys, fish resources are abundant in Senegal and fish- ing has a promising future if stocks are managed wisely. The government's objective is to secure a larger portion of fishing benefits for the country; in the modern sector, public investment efforts aim at "Senegalizing" modern fisheries by increasing the number of Senegalese-owned boats; in the tradi- tional sector, there is a need for intermediate size fishing boats which can fish further away from the coast and help avert overexploitation of inshore stocks (accordingly, Senegal has recently extended its fishing rights by 200 km beyond territorial waters). Improvement of institutional arrangements will be important to avoid the past problems encountered by introducing more sophis- ticated and more costly types of equipment in the traditional sector. Those projects will have to be supplemented by providing infrastructure (jetties, store rooms, etc.), in the fishing zones and by facilities for transporting fish to the major centers of consumption and processing. Satisfactory growth of manufacturing production (6 percent to 7 percent per year excluding groundnut processing) was supported by heavy import substitution in the first half of the 1960s decade, and by a rapid increase in exports in the latter part. The fact that Senegalese industry was able to make this adjustment successfully is certainly an encouraging sign for the future. Increase in exports took place mainly neighbor-countries with which Senegal forms a customs union that provides substantial reciprocal tariff advantages. This union was particularly profitable to Senegal which had a sizeable lead over its partners in industrial development. Even though this lead is narrowing, Senegal expects to continue benefitting from increasing demand for its manufactured products by the other members customs union members. Establishing of a specific coordinating body in West Africa as planned in the framework of Communaute Economique de l'Afrique de l'Ouest (CEAO) would help. The future of Senegalese industry lies in exports to developed countries, particularly the European Community where Senegal enjoys tariff advantages. A few firms have already been successful, but obstacles, African countries, make transition from African-oriented to world-oriented exports difficult. Quality standards of the world market are above those of the African market and require production assets commonly in short supply--skilled labor and managerial ability. Moreover, in order to be competitive, most products must be manufactured in quantities to which local entrepreneurs are not accustomed and for which substantial investments are required. Also, Senegal industry must resolve considerable inefficiencies under the protection of high tariffs, and it must deal with oligopolistic situations created by the Investment Code. - xxv - If Senegal is to make a breakthrough in the markets of developed countries, actions must be taken in the manufacturing sector in training, marketing and increasing competition. Technical and managerial training, important in raising quality and productivity, can be improved and expanded by reorientating the education system toward more vocational training. Marketing can be improved through the efforts of Societe Nationale d'Etudes et de Promotions Industrielles (SONEPI); and the government's increasing awareness that improved competition is a prerequisite for making manufac- turing more aggressive and more export oriented, offers promise of action. During the last decade, very generous treatment of foreign investors was probably justified, because Senegal's painful adaptation process had made the country a rather unattractive place for new private investments. However, the more favorable overall economic outlook will now allow government to harden gradually its conditions concerning foreign companies without scaring away investors, and to reduce the monopolistic advantages conceded to many enterprises. Moreover, the Investment Code could stimulate exports directly and import policies could more systematicaly reduce oligopolistic situations by improving import competition and by enlarging sources of imports through nondiscriminatory import policies. In addition, a wider international dis- tribution of foreign investments in manufacturing and services, including banking, would help to open up new export markets. The government has already made some progress in this respect, but a more determined and systematic policy will be necessary in the coming years. Promotion of small- and medium-sized locally owned enterprises has been a matter of concern to the government. Together with increasing "Sene- galization" of foreign-owned companies, promotion of local enterprises is regarded as a means to increase employment of Senegalese nationals and to enlarge their participation in the decision making process in the private sector. SONEPI, a semipublic organization was created a few years ago to provide assistance to local enterpreneurs in the fields of training, marketing, project preparation, financial guarantees and financial participation. Despite its limited resources, it has performed well and further expansion of its activities should be encouraged through collaboration with SOFISEDIT, the semipublic development bank the government plans to establish. After a long period of slow growth, tourism has expanded rapidly since 1970, but has been hampered by the lack of hotels. However, as a result of increasing interest of both the government and foreign private operators, hotel construction is booming. The number of rooms was expected to double between 1970 and 1973, and further increases in hotel capacity are planned for the second half of the 1970s. Because of its mild winters and attractive sandy beaches, Senegal has a potential for tourism which could be developed into a new source for economic growth and employment. It is estimated that by the 1980s tourism could contribute about 4 percent of GDP and equal 15 percent of total employment in the modern sector. First priority for new investments should be given to the development of the Petite Cote, for which a physical master plan has already been prepared. - xxvi - Education and Employment A low level of education is a major handicap to faster economic growth. Even though enrollment rates have substantially increased during the 1960s, primary education remains limited to little over 40 percent of school-age children and total education (primary, secondary and vocational), to about 26 percent. Because of budgetary limitations, the government has for the time being given up its target of reaching universal primary education within the foreseeable future. Instead, it is focusing on improving quality of education and on better adapting the present education system to the most urgent needs of the economy. The trend in education has to be oriented more towards technical training. Rural education has to be expanded and improved so that farmers can make efficient use of improved techniques. The basic education reform, enacted in 1969, has these aims, Its implementation, how- ever, has been slow. Reform of secondary education (20 percent of primary school-leavers) was enacted in late 1972; its final design and implementation is hampered by the lack of a detailed manpower survey. Informal (much less expressive) rural education is still at an early stage. It is designed to provide practical training in agriculture and livestock to about 80 percent of primary school leavers and its aim is to integrate the rural population into their environment as well as to increase their productivity. Unemployment, which is primarily an urban phenomenon, is estimated at about 110,000 persons, or more than 50 percent of total employment in the modern sector. It averages about 7 percent of Senegal's total labor force. Considering the fact that the rural sector accounted for nearly three-quarters of total employment in 1970, and that employment in the modern sector is not likely to expand by more than 4 percent a year, only an improvement in rural sector employment can alter the situation. Special efforts thus become nec- essary to make rural activities more attractive and more rewarding, parti- cularly to the younger generation. The mission proposes that the current budget give high priority to the rural sector as well as to public develop- ment outlays. Prospects and Creditworthiness As previously mentioned, a serious drought hit Senegal in 1972, causing a sharp fall of rural production and a substantial loss of livestock. For agriculture, this catastrophy is not expected to have a long-lasting effect; assuming normal weather conditions, the year 1973 should show a rebound of output to normal levels. Unfortunately, the livestock sector will suffer for several years as growth of livestock herds to former levels will necessarily take time. However, the smaller importance of this sector (7 per- cent to 8 percent of GDP) limits its depressing impact on the total economy. In fact, World Bank projections indicate that overall economic growth during the next several years should accelerate to 4 percent to 5 percent per annum in constant prices (from the 1969-71 average). In part, this rise represents a recovery of progress lost during the recent groundnut crisis. Now that producer prices have been raised, groundnut production should rebound to - xxvii - formerly attained levels. In addition, economic growth will accelerate as the government's diversification efforts bear fruits and as competitive posi- tion for exports of miscellaneous manufactured goods improves. The expected above average growth in fisheries, tourism and export industries will enhance Senegal's longer term balance-of-payments situation. It will make the country less dependent on groundnuts and their susceptibility to the vagaries of weather and to sharply fluctuating world market prices for oils and fats. The projections are based on an expected fall of world market prices for groundnuts to about E82 per long ton by 1980. On the basis of present marketing costs, such a fall could be absorbed almost entirely by ending pay- ments into the Groundnut Stabilization Fund, while farm gate prices would have to be reduced only marginally. In consequence, the impact on producers would remain limited, and appreciable negative reaction would be expected from farmers. However, there would be a substantial loss of public savings, which, for the last few years, consisted of more than one-third of the sur- plus of the Government Stabilization Fund. A growth rate of less than 5 percent annually (at constant prices) might not seem very high, in view of the success of government efforts and the improved international competitive position of the private sector. How- ever, the country's limited economic potential (natural as well as human) makes it difficult to foresee a rore rapid growth over the next ten to twenty years. Though the rural sector has possibilities for diversification as yet not fully developed, they are limited, as in all sahelian countries. The expected rather rapid development of fisheries and tourism can compensate partly for the lack in agricultural potential. However, in these more advanced sectors, human factors will be the more serious drawbacks in the short- and medium-term, and even more so, in manufacturing. At present, 85 percent to 90 percent of Senegal's population is illiterate, and trained employees in the modern sector, although better qualified than those in most other African countries, are few in number. With the present school enrollment rate and the predicted slow increase, given budgetary and other restrictions the number will remain small for some time. Thus, the extent of rapid diversifi- cation is limited, and Senegal will remain heavily dependent on groundnuts for many years and subject to the affects of the uncertainties in world markets for groundnuts. For public finance the outlook for the next four to five years is depressed by the expected fall in groundnut prices. The decline will most likely wipe out surpluses of special funds within three or four years, so that public savings are not expected to increase significantly. In the short term this drop can just about be offset by increasing budgetary savings, which are expected to grow from about 4.5 percent of current revenues in 1969-71 (but over 11 percent in 1961-64) to 9 percent in the 1973-76 period. To achieve such an improvement will demand a determined effort by the government, On the fiscal side, the already high revenue to GDP ratio excludes drastic improvements, although further improvement Qf tax collection can result in - xxviii - some increase. The government has made considerable progress in this field by making use of sophisticated computer techniques. The mission projects a growth in budgetary revenues somewhat higher than GDP. On the expenditure side, there is obviously room for economics. However, even if government carries out the austerity measures recently announced for nondevelopmental services it will be very difficult to keep growth of total current expenditures to less than about 7.5 percent per annum. There is an urgent need for increased outlays in such high priority sectors as agriculture (extension services) and maintenance. Furthermore, expenditures for materials and supplies have to be increased in several sectors, like health and education, where past insufficient budget allocations have hampered satis- factory functioning of important services. For the first time since independence, in addition to budgetary savings some limited savings of public enterprises are expected for the 1973-77 period. In the past, performance of these enterprises has been highly unsatisfactory, but recently the government has taken more determined steps to improvement by gradual reorganization of all important public enterprises. In the later part of the 1970s, public finance is likely to improve again. By then, the expected continuous increase in budgetary savings will have more than offset the fall in special fund revenues from groundnuts. Public savings are projected to increase slightly faster than GDP from a low 1.6 percent of GDP in 1975 to 2.1 percent by 1980. Based on the above projections, financing of public investments uight create some problems in the coming years. The Third Development Plan, (which ended in mid-1973), did foresee public development outlays of CFAF 125 billion; but real plan expenditures are not likely to have exceeded CFAF An billion, largely because of limits in absorptive capacity. No firm plan goals have yet been established for the Fourth Plan (1973/74-76/77). The economic mission concluded that a public investment program of CFAF 88 billion during that period would be a reasonable goal. A program of this size which seems consonant with the improving capacity to prepare and implement projects, is essential if Senegal is to advance the diversification of its economy and to achieve satisfactory growth despite falling world market prices for its major export crop. The program would raise public investments from a level of about 5 percent of GDP during the 1960s to an average of 6.3 percent during the Fourth Plan. The Fourth Plan should concentrate heavily on directly productive investments, particularly in the rural sector, and in manufacturing and tourism. In view of the difficult financial problems likely to be caused by the expected fall in groundnut prices and the urgent need to provide increasing employment in agriculture as well as in the modern sectors of the economy, an effort has to be made to stimulate ecoeconomic growth through a large program of quick-yielding projects. Therefore the mission proposes that the share - xxix - of such projects be raised from the present 45 percent to 50 percent to nearly 60 percent (50 percent rural sector, 10 percent industry and services, includ- ing tourism). It seems possible and justifiable, however, to reduce the share of future outlays for housing and urban water supply from 24 percent to 15 percent of total development outlays, without reducing the absolute amounts earmarked for this sector. Completion of the Lac de Guiers water supply pro- ject has sizably reduced the need for further huge investments in this sector, while reorientation of housing policies toward more economic units will provide houses for an increased number of people at lower costs. For trans- port infrastructure a slight reduction in its share from 17 percent to 14 percent would seem possible, and for education the 10 percent might be kept constant, because many key elements of the recent education reform will first have to be tested in a pilot phase, before they can be implemented on a large scale. Table II: FINANCING OF PUBLIC DEVELOPMENT OUTLAYS (annual averages in billion CFA francs at current prices) 1969/70-70/71 1973/74-76/77 1980 Actuals Bank Projections CFAF % CFAF % CFAF % Local resources Gross public savings 5.2 38 5.7 26 10.7 30 Debt amortization 1.2 9 2.8 12 2.9 8 Net public savings 4.0 29 2.9 14 7.8 22 Treasury financing 0.5 4 0.5 2 0.5 1 Total local resources 4.5 33 3.4 16 8.3 23 External aid Grants 4.9 36 7.5 34 9.5 26 Loans (gross) 4.3 31 11.1 50 18.4 51 Total gross external aid 9.2 67 18.6 84 27.9 77 Total development outlays 13.7 100 22.0 100 36.2 100 (percent of GDP) 5.7 6.3 7.1 - xxx- The expected slow increase in public savings and the limited possi- bilities of deficit financing that would not endanger Senegal's precarious foreign exchange situation or restrict credit to the private sector make funding of the Fourth Plan difficult. To finance an investment program of nearly CFAF 90 billion in the face of very limited public savings, would demand a gross public capital inflow of almost CFAF 19 billion per year (resulting in a net inflow of CFAF 16 billion). The prospect of future foreign aid suggest that this goal can be achieved. Between 1966 and 1971, gross public capital inflow increased rapidly from CFAF 5-6 billion per year in the mid-1960s to CFAF 8-9 billion by 1970. Bilateral sources other than France (United States, Germany, and others) stepped up their aid from CFAF 1.2 to 4.1 billion per year, or from about 20 percent to 40 percent of total. Financial aid from the European Community remained at about 30 percent of total, though the share of France declined from 40 percent to 23 percent. World Bank Group disbursements more than doubled from CFAF 0.4 to 1.1 billion per year. In addition, foreign technical assistance, mainly for education, has averaged CFAF 10-12 billion per year (nearly 75 percent of which is provided by France). Over the next five to eight years, public capital inflow is expected to continue to expand rapidly, based on the programs of the European Communities (Third Fonies, Europeen de Development, FED), miscellaneous bilateral aid donors (Canada, Italy, Belgium, oil producing countries of the Arab world, etc.) and the World Bank Group. For most donors, except the Bank Group, the expected sharp increase in disbursements will result from an increase in new commitments. This substantial inflow of external aid will have to continue to be at relatively soft terms, if it is not to create serious debt service pro- blems. The terms had hardened, as the proportion of grant aid declined from 85 percent of total foreign financial aid in 1964-66 to 75 percent in 1966-67 and 55 percent in 1969-71. During the period of the Fourth Plan, this ratio is likely to drop to about 40 percent. Financing of the remainder on conven- tional terms would lead to unmanageable balance of payments and budget dif- ficulties within the next fifteen to twenty years. Bank projections indicate that a borrowing blend of the nongrant aid of about 50 percent at IDA type conditions, 40 percent at IBRD type conditions and 10 percent suppliers' credits is about the hardest, consistent with the balance of payments and fiscal outlook. Based on these conditions, the foreign debt service ratio would increase from the current 3 or 4 percent to about 7.5 percent by 1980, to almost 11 percent in 1980 and to 16 percent in the year 2000. In the short- and nedium-term, budget limitations will be more serious and projections indicate that debt service charges will absorb nearly two-thirds of gross public savings by 1980. -xxxi - As indicated in Table II, gross public savings cum Central Bank advances can be expected to average about 20 percent of public development outlays over the period of the Fourth Plan. HIowever, nearly half of these savings will be used to amortize the foreign debt; therefore, in the next four to five years the net contribution Senegal can make towards the financ- ing of new public investments is not expected to average more than about CFAF 3.4 billion per year, or about 16 percent of public investments. Thus, on average, foreign lenders will have to finance 84 percent of project costs. For most projects this would be more than the foreign cost component and consequently part of local costs will have to be included in foreign financing. However, the projected low public contribution toward financing' of public investments substantially underestimates the government's total development effort during the period of the Fourth Plan. In the coming years, the government ought to make available considerably more resources for current development outlays than it did in the past. Current budget allocations for development purposes in the rural sector and road maintenance alone (ex- cluding social sectors) will likely have to be increased by more than CFAF 2.5 billion per year above the normal growth of current expenditures. On this basis the government's share in financing total public development out- lays during 1973-77 would average about 25 percent net of amortization and 37 percent including amortization payments. Senegal's poverty, its limited resource base, the need to accelerate diversification to dampen the impact of a renewed fall in groundnut prices, and its recent strong efforts to overcome serious economic difficulties warrant increased external assistance at concessional conditions. Senegal's economic performance has markedly improved in the last five years: overall savings and investment rates have risen sharply; a heavy tax effort (20 per- cent to 22 percent of GDP) has resulted in considerable public savings in spite of an oversized administration; the composition of public investment has become much more growth-oriented and thanks to a tough price and salary policy the economy's international competitive position has improved. Most importantly, Senegal has proven that it can absorb a higher level of foreign assistance based on its improved ability to prepare and implement projects. Toward the end of the 1970s, when public finance and balance of payments are expected to improve, Senegal may be able to accept somewhat harder condi- tions from foreign lenders. PART ONE: PAST DEVELOPMENTS AND THE PRESENT SITUATION I. The Country and the People Senegal is a country of about 4 million people, located in the most western part of the sahelian belt that extends across Africa between the Sahara desert in the north and the tropical forest regions in the south. It is a poor country with limited economic resources. The average per capita revenue of about US$250 is somewhat misleading, for it includes the high incomes of the small expatriate population and high foreign aid. The rural sector which constitutes 75 percent of Senegal's population has a per capita income of little over $80 and the indigenous urban population, about $550. As in all sahelian countries, agricultural potential is severely limited by sparse rainfall concentrated in one short period of the year and by poor soils. In addition, no substantial mineral resources are as yet exploitable. However, there is good potential for the fishing industry and increasing possibilities for tourism and manufacture. In the modern sectors of the economy, development is hampered by the low level of education and training. At present, 85 percent to 90 percent of Senegal's adult population is illiterate, and even though the Senegalese worker has the reputation of being one of the best in Africa, lack of a well-trained and experienced medium and higher level work force is a handicap for accelerated expansion of activities in the modern sectors of the economy. Senegal covers an area of some 76,000 square miles (200,000 square kilometers). Four rivers traverse the country from east to west. In the north, the Senegal River which forms the boundary with Mauritania is navigable up to 500 miles depending on the season. The Saloum River in the central part of the country provides access to the port of Kaolack. Most of the Gambia River lies in the territory of The Gambia, the former British colony which forms a long and narrow enclave in Senegalese territory. The Casamance, near Senegal's southern border with Guinea-Bissao and the Republic of Guinea, is used for river transport and leads to the port of Ziguinchor. The country is extremely flat. Only the most eastern parts, along the Malian and Guinean borders--over 250 miles from the coast--are more than 100 meters (300 feet) above sea level. Therefore, seawater washes far up- stream and creates problems, particularly during dry season when water levels in the rivers are low. Irrigation along the lower parts of most rivers becomes technically difficult and expensive and double cropping prohibitive; irri- gation of most rivers upstream has to contend with high parallel embankments. Nevertheless, there has always been limited traditional-type irrigation along the Senegal and Casamance rivers. Modern irrigation has not until very recently been a success,better techniques have made possible of a limited number of economically viable projects. - 2 - Senegal's vegetation and climate are typical of the sahelian zone: the kind and growth of vegetation is sharply limited and determined by a long dry season (up to nine months in the north, seven months in the extreme south) and by sparse rainfall (varying from 140 to 600 inches, 350 to 1,500 am). Subtropical forests exist only in Casamance, the country's most southern region. The center of the country is characterized by open forest and changes gradually to pure grassland in the north. Annual rainfall fluctuates considerably, particularly in the center and the north, making agriculture and livestock breeding risky and hazardous. From the end of World War II to 1967, rainfall followed an astonish- ingly regular four-year cycle of one very good year, one year of very low precipetation and two years of average amounts. However, since 1968, condi- tions have substantially deteriorated: droughts have occurred every second year, instead of every fourth, and have become much more severe. Only 1966 and 1970 should have been years with below-average rainfall but,in fact, Senegal suffered substantial droughts in 1966, 1968, 1970 and 1972, the last being the most severe. Rainfall conditions in 1972 were the worst in fifty to sixty years and were responsible for an almost 50-percent decline in agricultural production and for severe losses in the livestock industry, necessitating emergency imports of basic foodstuffs (particularly millet) to prevent severe famine in 1973. In the north and the center of the country, agricultural potential is particularly limited by climatic conditions. In these regions, millet is the traditional basic food crop, supplemented by home-grown vegetables. Groundnut cultivation was introduced; in colonial times, the prevailing light soil was well-suited to this crop and rainfall sufficient in average years. Today groundnuts are by far the most important cash crop. Despite a substantial drop in the last five years, production, marketing, and proces- sing of groundnuts still account for 14 percent of GDP and 40 percent of exports (compared to 21 percent and 67 percent respectively at the beginning of the 1960s). The north and central areas have also some potential for vegetable cropping and livestock breeding. In the southern and southeastern regions, the potential is somewhat better. Rice, grown mainly along the Casamance River and its tributaries, is a traditionally important basic foodstuff. There are also good prospects for cotton and corn as well as groundnuts, and on a smaller scale, for crops like tobacco, bananas, and pineapples. In addition there are possibilities for extensive cattle raising. Unfortunately, for historical reasons (and for health hazards), these regions are sparsely populated and have had little infrastructure until recently to exploit their agricultural potential. In the recent years, iron ore and copper deposits have been dis- covered in the eastern part of the country along the Malian border. However, determining the economic viability of their exploitations will require sub- stantial research. Petroleum explorations have been going on for almost ten years, concentrating more and more on offshore locations. As yet, they have not yielded positive results. Thus, at present, geologic exploita- tions are limited to two phosphate mines, contributing little more than 1 percent of GDP. The West African coast of Senegal and its neighboring countries is extremely rich in fish, thanks to the favorable marine environment created by the collision of warm and cold ocean streams (similar to the circumstances found on the Peruvian coast). Dakar, with its excellent port, is well situated to serve as a center for the exploitation of these resources, and consequently fisheries have developed rapidly in the last five years. The mild and sunny climate from November through May and the long sandy beaches together with its central geographic position make Senegal increasingly attractive for tourism. Dakar is located about halfway between Europe and the major cities on the east coast of South America and it is the gateway for air traffic from North America to Africa. As a result, Dakar has been an important center for international air traffic for many years with good connections to Europe, and North and South America. In addition it is the first major port of call in West Africa for ships "en route" from Europe or the United States to western and southern Africa and the Middle East and as a result has become a location for major ship repair installations. Senegal's population increases at a rate of some 2.2 percent per year. For a developing country the population is not excessively young: some- what more than 40 percent of total population are below the age of 15. On average, there are three dependents per active man (15 to 65 years old). Overall population pressure is not vefy high, 54 per square mile, and many of the best agricultural regions are still sparsely populated. However, population is very unequally distributed: over half of Senegal's inhabitants live in the three central regions which constitute only 16 percent of the country's total area. In the last decade, population in this area has quickly approached the saturation point, based on the manpower needs of present culti- vation techniques. Even excluding urban population, density in these three regions reaches almost 90 per square mile while in the two most southern regions, despite much better agricultural potential, it barely reaches 20 per square mile. Migration from the north and center towards the south and southeast began long before independence, but was not strong enough to achieve a sig- nificant improvement in distribution. The reasons for the slow pace are not clear. Lack of infrastructure, particularly village water supply, is an important bottleneck; in many parts of the southeast, the ground water level is too low for traditional well construction. Problems of land tenure have arisen, migration has sometimes resulted in serious conflicts between live- stock herders already settled in certain areas and newly arriving farmers. Health hazards are another factor, for some parts of the sparsely settled areas are infected by malaria and river diseases. Furthermore, the different soils and climate of Eastern Senegal require settlers to change their tradi- tional cropping practices. Another deterrent to rural migration is the extended tamily system. Rural migration in the past was largely organized by religious leaders (marabouts); the one attempt by Government, combining resettlement with heavy mechanization, was not successful. Recently, govern- ment, assisted by an IDA credit, has again tried to stimulate and improve migration to the southeast. More important is migration from the countryside to the urban centers, particularly to Dakar, the capital (600-700,000 inhabitants), to the main regional centers (all under 100,000 inhabitants). It is creating serious employment and housing problems (discussed in detail in Chapter V). Senegal's population is predominantly rural. Some 75 percent of the country's inhabitants make their living in agriculture and raising livestock; and another 5 percent, in fishing. Almost 70 percent of total population live in villages of less than 10,000 inhabitants. Rural popu- lations still follow a traditional way of life, even though they have been for several decades exposed to a monetary economy. Economic activities in the rural sector are based on small family enterprises without salaried labor. Only in fisheries is 25 percent of value added produced by enterprises with modern equipment. Land holding patterns are mostly traditional. There is no private land ownership outside urban areas, and the right to assign land for cultiva- tion is vested in the village chiefs. With the exception of the overcrowded groundnut basin, rural production is not limited by land availability. Output is primarily limited by production techniques. While these have gradually improved, they remain predominantly traditional. Low productivity reflects the absence of formal education and practical training (the literacy rate outside urban areas probably is no more than 3 percent to 4 percent) and the limited amount of capital available for investments. Traditional techniques keep an active adult from cultivating more than about four to five acres (one and a half to two hectares) of groundnuts or millet and some- what less of rice. With the help of a draft animal, this figure might be doubled. Depending on the size of the family and on the use of animals, farms average seventeen to twenty-one acres (seven to eight hectares) and rarely exceed 35 acres (15 hectares). Despite the preponderance of a rural economy, Senegal has a relative- ly well-developed manufacturing and service industry. It has a higher number of trained and experienced employees in industry and services than most other African countries. Because of Dakar's former position as capital of the Federation of French West African Colonies (AFO) modern industries and services developed earlier in Senegal than in most neighboring countries. In 1960, manufacturing accounted for about 10 percent of GDP in Senegal, but for only 6 percent in the Ivory Coast and 5 percent in Cameroon. The number of employees in industry and services was 30 percent higher in Senegal than in the Ivory Coast. This head start led to the early formation of a class -5- of employees who in the last fifteen to twenty years adapted to the require- ments of mhodern enterprise and acquired on-the-job training and experience, despite little formal education. However, since independence the number of employees in the private sector has hardly increased. The size of this relatively experienced and well-motivated labor force has therefore remained limited; a sudden growth in industry and services would quickly use up the few reserves that exist. There is a serious shortage of experienced middle and high level native Senegalese work force in the private as well as in the public sector; much of the staffs in these sectors are still manned by expatriates. Even though its population is composed of about half a dozen major tribes, speaking different languages, Senegal is a relatively homogeneous country and there are few, if any, serious tribal tensions. This harmoney largely explains the country's remarkable political stability during the first decade after independence. However, relations between the younger and the older generations are somewhat strained. For a time, there was considerable tension between the politicians and high level civil servants who led Senegal into independence and became the governors of the country and the younger generation of technicians and students. The young "cadres" in the civil service had become more and more disillusioned and shunned politics, and the students turned increasingly violent. However, during the last three or four years, the government has courted the younger generation, on which it depends increasingly for technical skill. Young technocrats have been integrated in increasing numbers into party and government positions and have been given a voice in the formulation and implementation of govern- ment policies. This important change explains the marked increase and improvement in government development efforts and strategies during the second half of the 1960s. In Senegal's villages the generation clash has not yet been re- solved. The younger generation is less and less ready to accept the tradi- tional rule of the old and the family. An increasing number of young people leave their villages and drift toward the big towns (where they add to the high number of unemployed) to escape a way of life they are not able to change. Together with this movement goes the breakup of the traditional family into smaller units, less dependent on the head of the family. This trend has economic consequences, for traditional agriculture was based on the large family which worked together as one unit under a central command. Such change might well speed farm mechanization. Senegal's industrial and services sectors are characterized by foreign ownership and management. Many of the important companies in manu- facturing, banking and trade are subsidiaries of French companies with their center of decision-making located in France. Smaller companies are owned by foreigners living in Senegal. For large and medium-sized companies, foreign ownership is predominantly French and for smaller commercial enter- prises, Lebanese. There are very few companies of other nationals active in Senegal. Production of groundnut oil is the most important manufacturing sector and almost entirely oriented toward export to Europe. Other important sectors are textiles and the 1pioduction of such foodstuffs as canned fish, flour and sugar . Traditionally, tnese goos 'are almost exclusively sold in the local market or exported to neighboring Francophone African countries. Recently, efforts have been made to increase such exports to other countries. Handicrafts and road transport are predominantly Senegalese-owned, but most other services, including commerce, banking and tourism, are largely in the hands of foreigners. II. Growth Experience 1960-1971 During the first decade after independence (1960-70), economic growth in Senegal was disappointingly slow. 1/ At current prices, GDP increased at an average rate of 3.4 percent a year, but by less than 1.4 percent at constant prices. Economic growth in real terms did not kept pace with population growth, and per capita GDP declined by about one per- cent annually. This unsatisfactory trend was attributable to several factors; but basically, it was the loss, in the first seven years after independence, of the many privileges Senegal enjoyed during colonial times and allowed it to attain an artificially high standard of living. This standard was not commensurate with the country's limited economic potential and general low level of edu- cation. It was based to a large extent on the hiih number of expatriates occupying most middle and higher level positions In both the private and the the public enterprises. While the modern sector profited from Dakar's position as capital of A.O.F. and as the center for services and manufacturing industries for the whole of French West Africa, the traditional sector profited from the high groundnut prices guaranteed by France. Therefore, independence inevitably triggered a painful and far reaching adaptation process. The government's response was slow and insufficient. Economic growth was depressed for almost a decade. overall economic growth was not significantly different between the first and second half of the decade. It was somewhat slower during the second period. However, a more detailed analysis of growth in the main sectors, as presented in Table 1, does reveal differences between the first and the second half of the 1960s that reflect the problems of adaptation Senegal had to face. In the 1960-65 period French public administration activities in Senegal declined by over half or by about 4 percent of total GDP. Dakar had ceased to be the capital of AOF and had lost its heavy concentration of French civil and military personnel. The decline was not fully compensated by the increasing activities of the Senegalese government, and the relative importance of the public sector fell from about 20 percent to under 16 percent of GDP, a rare phenomenon in a developing country. The reduction in French public administration was paralleled by a similar drop in private servize activities, reflecting the loss of Dakar's privileged position as center of private services for all of French West Africa. 1/ For lack of reliable data, detailed assessment of macro-economic growth has been limited to the 1960-1971 period. -he severe 1972 drought year remains outside the scope of this analysis. -8- Table1: MAJOR GROWTH SECTORS G D P (billions OFAF at 1971 prices) Average Annual Growth 1959/61 1964/66 1969/71 1960-65 1965-70 Rural Sector groundnuts 27.8 32.0 23.1 2.8% - 6.0% ot'hers 36.8 43.2 51.4 3.3% 3.5% Total 6h.6 75.2 74.5 3.1% - 0.2% Industry 20.9 28.8 36.2 6.6% 4.7% Construction and Services 65.2 67.1 73.6 o.6% 1.9% Public Administration Senegalese 24.8 29.1 32.2 3.2% 2.0% French/ a 17.3 7.9 3.7 - 17.0% - 16.OX Total 42.1 37.0 35.9 - 2.7- - o.6% Indirect Taxes 22.0 24.6 25.1 2.3% 1.3% Total GDP 214.8 232.7 245.3 1.6% 1.1% Total GDP private sector only 172.7 195.7 209.4 2.5% 1.1 /a fprench administration in Senegal, including armed forces, but excluding technical assistance, which is considered part of the Senegalese administration. Source: Senegalese national accounts and mission calculations. As a result the number of well-paid expatriates living in Senegal fell and with local purchasing power leading to a further drop in the service and manu- facturing industries. Moreover, the curtailment of French colonial adminis - tration had a long-lasting depressive effect on construction, because it created a surplus in office buildings as well as in urban residential housing. Thus, activities in the service and construction sectors were slow for almost eight years. The value added in public administration, construction, and services (at constant prices) was 3 percent lower in 1965 than in 1960. Since these three sectors accounted for over half of total GDP (at factor costs), the fall was the main cause of the unsatisfactory overall economic development during the first half of the 1960s (even though the two other major sectors of the economy, rural production and industry, expanded at satisfactory rates). Production in the rural sector increased by more than 3 percent annually (at constant prices). Based on the prevailing traditional production methods and low standards of education, such growth was satisfactory. Since the rural sector is oriented either toward autoconsumption (basic foodstuffs) or toward exports (groundnuts), it was little affected by falling revenues of the urban areas. Growth in agricultural output was primarily due to a (5.6 percent a year) expansion of areas under cultivation of basic foodstuffs; in contrast areas of groundnut production expanded at a rate of 2.5 percent. The rapid increase in areas under cultivation was stimulated by the growing use of ox-drawn and modern equipment. Sales of modern implements grew rapidly until 1963, spurred by improved agricultural credit, and by increasing cash resources of farmers from high producer prices for groundnuts. 2/ (These prices were kept at the high level until 1967.) However, the increase in cultivation led to an increasing utilization of less favorable land and consequently to slow improvement of yields (+0.2 percent annually) despite satisfactory weather and increasing use of fertilizer. Livestock production increased less rapidly (+2.4 percent annually), suffering a serious setback in 1962 when a prolonged drought took a heavy toll from herds. Fishing overall expanded very slowly (1.4 percent annually) partly owing to a poor tuna crop in 1965 Traditional fishing, however, rose by 2.6 percent a year. Value added in industry (including mining and public utilities) increased at 6.6 percent a year (at 1971 constant prices), despite an almost static urban demand and increasing difficulties in exports to neighboring countries. Before independence, Senegal's relatively well-developed manufac- turing industry was largely based on satisfying the demand of its own urban population (including the expatriate population with its high purchasing power and the French army) and on exports to other French territories in West Africa. Because of its high cost structure, the industry was in no position to export outside this protected market. 2/ Made possible by the high groundnut prices paid by France, under a special agreement. - 10 - The market shrank markedly after 1960. Local demand suffered from the drop in the number of expatriates and French army personnel and export to other African countries became increasingly difficult because of the grow- ing protectionism of these countries. In addition, two neighbors major client: for Senegal's manufactured goods, encountered serious foreign exchange dif- ficulties. As a consequence, exports of manufactured products (other than groundnut oil) increased by only 1.5 percent a year. In fact, nearly half of the growth in manufacture came from increasing production of substitutes for imported goods. Within five years after independence, locally manufactured consumer goods had increased their share from 62 percent to more than 73 percent of local consumption of such products. This change made it possible for the manufacturing sector to expand production almost three times faster than the growth of local demand. Since the contribution of manufacturing to Senegal's economy is small (less than 10 percent of GDP in 1960), its fast expansion had only a limited impact on overall economic growth. Furthermore, most of the industrie- received very liberal tax concessions which reduced their share to government revenues to almost zero. As in many other countries, increasing substitution of native goods for imported ones led to a net fall in public revenues. During the 1965-70 period the change in the economy took a different tack. French public administration had become less and less important and, its continued curtailment ceased to be a major determinant of overall economic growth. The loss was almost completely offset by increased activity of the Senegalese public sector. (Total public administration reached its lowest point in 1968 and since then has expanded slowly.) At the same time, the construction and service sectors improved somewhat. By about 1968 the over- capacity of the early 1960s was absorbed and the long period of no growth in these two sectors came to an end. Public administration, services and con- struction in the period increased their value added at an average of about 1 percent annually. Though this rate was still very slow, it was progress, compared with the fall during the preceding five years. In fact, between 1967 and 1970, their value added increased by an average of 3.7 percent a year at constant prices. However, at the time when the adaptation problem in the public and private service sectors had finally been overcome, Senegal experienced serious difficulties in its rural sector, particularly in agriculture. Output in agri- culture declined by over 5 percent a year, a drop that could not be compensate' by substantial growth in livestock and fisheries. The cause of the decline was primarily the fall in groundnut production. In 1969-71 it was almest 30 percent lower than 5 years earlier. At the same time, growth of basic foodstuffs slowed down markedly to less than 1.5 percent annually (as compared to about 6 percent during 1960-65). Acreage and yields for foodstuff cultiva- tion did not increase and declined for groundnuts. This sudden change in performance of Senegal's most important sector was the result of a combination of three adverse conditions: bad weather lower producer prices for ground- nuts, and changes in groundnut marketing. - 11 - Weather conditions were unusually severe during this period, with droughts occurring every two years instead of every fourth year. The last two droughts were particularly severe, affecting not only groundnuts but also cereals, which normally suffer much less from dry spells. In addition, farmers had become more financially vulnerable than in the past because of their increasing credit purchases of agricultural equipment and implements. Unfortunately, such investments had little positive impact on production during drought years, and the farmers were unable to repay the increased debts. Producer prices for groundnuts were lowered by about 18 percent for the 1967 crop and kept at this level for three years. This cut was necessitated by the phasing out of French and EEC price supports for Senegalese groundnuts. At the same time, fertilizer subsidies were reduced in line with reduced EEC subsidies. For the 1970 crop, producer prices were raised substantially, even somewhat above the pre-1967 level, and fertilizer prices were reduced markedly again. A change in groundnut marketing was introduced in 1967. That year's crop was the first to be marketed entirely through cooperatives; over one- third of total production had been handled by private (mostly foreign) trading companies. Even though this anticipated reform was implemented gradually over several years, its establishment had a disturbing impact on groundnut marketing for several years. Though a result of the final suppression of private trade and of a 10 percent increase in total crop the volume of ground- nuts marketed by cooperatives increaped by 75 percent in 1967/68 compared with the previous year (Table 2) the managerial capacities of the cooperatives and of the groundnut marketing organization could not adequately cope with the many problems that arose. Distribution and control of the large amounts of cash necessary to pay farmers on the spot created particular problems. From the start farmers did not receive prompt payment. At first, they wanted for cash; later when in an attempt to expedite payment government notes replaced cash farmers encounterd considerable delay in converting the notes to cash. Farmers in urgent need of cash at the time of groundnut marketing complained bitterly. Individually, the three adverse conditions would not have been unmanageable. Together they created a very difficult situation in the rural sector and led a sharp drop of groundnut production (even in good rainfall years) and a markedly slower growth in the output of other crops. Farmers found it less and less profitable to cultivate groundnuts; they refused to buy costly implements which would further increase their indebtedness; and they concentrated on production of basic foodstuffs to replenish stocks fallen to a dangerously low level because of bad weather conditions. Growth of industrial production suffered little from the serious depression in the agricultural sector. The somewhat slower overall develop- ment was primarily the result of a fall in groundnut processing and of Table 2: GROUMDNUTS, PRICES, PRODUCTION AND PROCEEDS 1962/63 t963/64 1964/65 1965/66 1966/67 1967/68 1966/69 1969/70 1970/71 1971/72 1972/75 (estimates) Export Prices (decorticated) World market prices (cif Europe): (1) i: per long ton A -a r. n.r. n.r. n.r. n.r. 67.o 85.3 92.2 105.6 99. 140 (2) CFAF/kg n.r. n.r. n.r. n.r. n.r. 38.4 44.3 55.6 71.0 64.7 81 (3) French Guarantee price CFAF/kg ciT 52.5 52.5 49.5 48.5, 48.5 - - - - (4) EEC price support CFAF/kg cif - - 3.0 1.0 0.5 4.2 _ _ _ (5) Total export price CFAF/kg cif 52.5 52.5 52.5 49.5 49.0 42.6 44.3 55.6 71.0 64.7 81 (6) CFAF/kg fob 47.5 47.5 47.5 44.5 44.0 37.6 39.2 5o.6 66.o 59.7 76 (7) Producer price CFAF/kg fob 21.5 21.5 21.5 21.5 20.5 17.6 IT.9 18.4 21.2 23.7 23.1 (8) Marketed roduction M T000 , decorticated! 53.3 54.7 58.7 68.9 51.5 58.9 41.9 41.6 28.0 50.4 27.0 _ (9) Total proceeds (billion CFAF) 25.3 26.0 27.9 30.7 22.7 22.1 16.4 21.0 18.5 30.1 20.5 S of which: (10) accruing to farmers 16.4 16.8 18.0 21.2 15.1 14.6 10.7 10.9 8.5 17.1 8.9 (11) accruing to government 4.1 4.3 4.7 2.6 1.7 1.6 1.7 6.1 7.0 8.0 8.6 (12) marketing costs 4.8 4.9 5.2 6.9 5.9 5.7 4 4 3 5.0 3 Remarks: (5) Total export price - total of lines 2 through 4. (9) Total proceeds = line 6 x line 8. (10) Accruing to farmers = line 7 x line 8 x 1.43 (conversion factor from undecorticated to decorticated groundnuts). (11) Accruing to Govt. rough estimate, calculated as residual between line 9 and lines 10 + 12. It includes export taxes on groundnuts, oil and cakes as well as surplus of the groundnut stabilization fund. (12) Marketing costs partially estimated, based on ONCAD figures. N.B: The breakdown between proceeds accruing to government and marketing costs is a rough estimate only. In as fox as marketing costs might be underestimated, government revenues are over estimated. Furthermore, the breakdown between proceeds accruing to farmers and those acecring to government does not take into account transfers from government to farmers like the special seeding bonus in 1971/72 or the takeover of farmers debts by government in 1970/71 and 1972/73. l a n.r. = not relevant. Source: Mission estimates, based largely on BCOAO figures. - 13 - reduced growth in mining output (The phosphate mines had encountered serious technical difficulties). In fact, manufacturing other than groundnut pro- cessing expanded faster than it did in the previous five years. This expansion was almost entirely due to a sharp increase in exports of manufac- tured products, averaging 13-14 percent per annum at constant prices. Produc- tion for the local market expanded at about the same rate as it did in the past, because the somewhat faster growth in local demand was offset by a marked slow-down in import substitution (arising from increasing difficulties in finding acceptable substitutes). Therefore, more than 35 percent of the increase in local manufacturing production was for export trade and only 15 percent for import substitution, about the reverse of the previous five- year period statistics. The remaining 50 percent was absorbed by increasing local demand, stimulated by renewed growth in the urban sectors. Increases raised the share of exports from about 15 percent of total manufacturing production (excluding groundnut oil) in 1960 and 1965 to over 21 percent in 1970; with the groundnut oil it reached about 30 percent. Despite this im- pressive export performance, manufacturing has remained comparatively small: excluding groundnut processing, it accounted for less than 10 percent of GDP in 1971. The share of the entire industry sector amounted to about 15 percent of GDP. Therefore, Senegal's overall economic performance during the 1960-70 period remained dominated by the rural sector and services. Table 3: GDP AT CURRENT MARKET PRICES FOR SELECTED YEARS (in billion CFA francs) 1959 1964 1968 1971 1972 CFAF 165.4 201.0 204.5 260.4 260 Average annual growth 4.0% 0.4% 8.4% 0% While analysis of GDP at constant prices shows Senegal's economy at near standstill in the second half of the 1960s, this picture changes quite significantly if economic growth at current prices is analyzed, parti- cularly since 1968. In fact, the nearly 50 percent increase in world ground- nut prices between 1968 and 1971 (which continued in 1972 and in early 1973) resulted in a high 8.4 percent average annual growth of GDP at current market prices, as compared to 3.5 percent at constant prices. Compared to the 1964-68 period, when the fall in Senegal's export prices resulted in four years of economic doldrums the growth represented a very significant change. It reflected in a marked improvement in the overall economic climate of the country. In 1971 and in the beginning of 1972, for the first time since independence,the private sector had a clearly optimistic business outlook fostered by the good p - 15 - 1971-72 groundnut crop and by increasing exports of manufactured products. The severe drought in 1972 interrupted this favorable trend, causing a sharp fall in rural production. However, the marked increase in groundnut prices, together with satisfactory growth in most nonrural sectors, prevented a substantial decline in GDP in 1972 (estimated as almost the equal of 1971). The sudden large growth of GDP between 1968 and 1971 was accompanied by a significant increase in savings and private investments and by a change in private capital flows from a high net outflow in 1968 to a large net inflow in 1971. Additional details of this growth are offered in Part Three of this report. Table 4: PER CAPITA GNP AT 1971 PRICES (in CFA Francs) Average 1959/61 Average 1969/71 Senegalese population: rural 23,500 22,800 urban 189,800 149,000 Total 58,400 54,500 Foreigners 547,600 666,700 Total population 68,300 61,600 Source: Statistics Appendix 2.21, mission estimates. Since independence GNP per capita of Senegal's total population has declined by about 1 percent a year in constant prices. In 1969-71 it averaged about $220 at the exchange rate prevailing before December 1971 3/ or nearly 10 percent less than in 1959-61 (Table 4). However, excluding foreigners who are estimated to account for little more than 10 percent of GNP, per capita revenue averaged about $195 4/. The mission estimates that in 1970 incomes of the nearly 3 million farmers and traditional fishermen averaged only $82, and for the 1 million native urban inhabitants it averaged $550. In the last decade, per capita GNP of the Senegalese population declined by some 3 percent in the countryside but by over 21 percent in towns. The disparity in incomes of the two segments of population declined slightly from 1:8 in 1960 to about 1:6.5 in 1970. These differences are not excessively high compared with those in many other developing countries, particularly 3/ At the exchange rate, prevailing during the first quarter of 1973 it would correspond to US$268. 4/ At the exchange rate, prevailing during the first quarter of 1973, it would correspond to US$237. - 16 - since national account data tend to by far underestimate value added in rural areas. On the other hand, the discrepancy between incomes of Senegalese and foreigners has widened, to a large extent because though many of the lowest- paid foreign employees left the country after independence (including most of the military and lower level civil servants), many high-level high-paid employees remained and salaries of foreigners in Senegal tend to keep abreast with those in Europe. In the rural sector, GNP per capita increased slightly until 1965, but fell greatly thereafter as a result of the groundnut crisis and the unsatisfactory weather during 1965-72. In urban areas, the fall in average per capita revenues was mostly due to high migration to towns, even though urban industries, particularly construction and services, had grown very slowly. This influx resulted in increasing urban unemployment. On the other hand, incomes of regularly employed Senegalese in urban areas have probably increased somewhat in real terms in the last decade. Average salaries seem to have grown by about 3 percent a year, and the cost of living index by 2.5 percent to 3 percent. Government policies in the past have not dealt directly with income distribution problems and the current budget is not used as an instrument to reallocate revenues. Lack of detailed information makes analysis difficult, but considered assessment suggests that the current budget is more or less neutral. The bulk of current expenditures seem to benefit the modern sector of the economy, but from this sector comes the bulk of government revenue. The rural sector was not substantially taxed until very recently, when the sharp increase in world market prices for groundnuts was only partially passed on the producers. 5/ On the other hand, the development budget by increasing emphasis on rural investments may tend to lessen income disparities between town and countryside. During the Third Plan 80 percent of public investments were made outside Dakar and directly or indirectly improved the standard of living of the rural population. Senegal's economy is heavily dependent on foreign trade. Between one-third and one-half of value added in the traditional sector is accounted for by export crops and over 90 percent of the mineral production and 30 per- cent of the total manufacturing output are exported. Together, exports totalled about 21 percent of GDP in 1960 and 17 percent in 1970. Consequently, changes in export possibilities and in export prices have a significant impact on almost all sectors of the economy. Shrinking export markets for manufac- tured products after independence and the loss of preferential groundnut prices in France after 1967 markedly hampered economic growth in the last decade. Fortunately, the more than 50 percent increase in world market prices for 5/ This problem is discussed in some detail in Annex 3. - 17 - groundnuts between 1968 and 1972 6/ allowed restoration of producer prices in 1971, led to better than 8 percent annual growth of GDP at current prices, and resulted in very substantial extrabudgetary revenues for the government the last few years. Exports of manufactured products increasing since 1968 have largely helped to keep local manufacturing production growing despite sluggish local demand. From 1960-65, groundnut exports increased slightly while exports of other commodities lagged. At the same time, imports declined somewhat as a result of the recession in services, construction, and public administration, the drop in investments, the falling number of expatriates living in Senegal, and the increasing substitute of native products for imports. As a result the foreign trade balance improved substantially. Foreign exchange reserves, however, declined rapidly over this period. (Lack of reliable balance of payments data hampers a clear assessment of these contradictory trends.) Apparently, the decline in investments led to a considerable fall in foreign capital inflow, and the depressed overall economic outlook spurred repatria- tion of private capital. During the second half of the 1960s, the trend was reversed. Ex- ports were hit hard by the groundnut crisis, despite a sharp increase in world groundnut prices and a substantial increase in exports of other products. On the other hand, starting in 1967 imports increased very rapidly, particularly imports of semifinished products and of investment goods (to fill demands of increasing local investments and the growing service sectors). The resulting large foreign trade deficit was partly financed by a higher inflow of foreign aid but, more importantly, by a renewed inflow of private foreign capital, mitigating the decline in foreign reserves. The slow increase in Senegal's exports during the 1960s (1.4 percent a year at current prices or no increase at constant prices) was the result of two very different trends: a drop of over 30 percent in exports of groundnuts and groundnut products, and an increase of over 100 percent in exports of other products (7.9 percent a year), especially manufactured goods. These trends reflected a profound modification in the composition of exports. From exports of about 70 percent groundnuts and groundnut oil, 15 percent manufactured goods, and 15 percent other export products in 1959/61 they changed respectively in percentage to 40:40:20 by 1970. The clear move away from exports of unpro- cessed products and exports of semifinished and finished goods was strengthened by the steady increase in exports of groundnut oil compared with the drop in exports of unprocessed nuts. By 1970, about 75 percent of Senegal's total exports including groundnut oil, consisted of industrially processed products. The considerable increase in exports of nongroundnut products, particularly in the last five years, seems to indicate a significant improvement in Senegal's international competitive position. This progress came largely as a result of the government's successful policies in the last decade to limit increases in salaries and prices and it has helped to offset the sharp fall in groundnut exports. 1/ Peak prices at the beginning of 1973 were almost 100% above 1968 prices. - 18 - 'Pable 5: MAJOR FOREIGN PRADE INDICATORS Overall Developments ^xports Imports Trade Balance At current prices billion annual billion annual billion percent of CFAF growth CFAF growth CFAF imports 1959-61 3f.2 46.8 - 10.6 22.6% 1.o64-66 4o.o 2.0. 45.7 -0. ;Y - 5-7 12.5~ 1969-71 42.7 0.94 60.7 5.8v' - 19.0 31.3i Composition of Exports 'percent of total exporus) Rural raw products Minerals ManuPactured goods Miscellaneous Ground- Others Total Ground- Others Total nuts nut oil 1959-61 31.9 11.0 42.9 2.5 36.4 16.6 53.0 1.6 1964-66 25.8 3.5 29.3 6.4 38.6 23.0 61.6 2.7 1969-71 8.1 6.8 14.9 9.2 32.5 38.0 70.5 5.4 Composition of Imports (percent of total exports) Investment Consumer goodsad intermediate goods goods Food Manufactured Total Raw Intermediate Total 1959-61 37.L 32.8 70.2 6.1 10.3 16.4 13.4 1964-66 38.3 32.2 70.5 7.1 11.3 18.4 11.1 1969-7' 31.2 26.1 57.3 8.8 15.5 24.3 18.14 Source: Statistical Appendix tables 3.2 - 3.9. - 19 - The composition of imports changed little during the 1960-65 period, but very markedly thereafter. Imports of food and manufactured consumer goods declined slightly during the first half of the 1960s, when higher imports of basic foodstuffs (rice, wheat, sugar) more than compensated for the decline in imports of sophisticated food and beverages for the expatriate population. Imports of investment goods dropped as a result of the marked fall in invest- ments. During the second half of the 1960s, however, imports became increas- ingly investment-oriented, despite a slight increase in food imports (in absolute terms) as a result of two bad agricultural years. Between 1966 and 1971 imports of investment goods and semifinished products (many of which used in construction) increased by an annual average of 22 percent, and their share of the total imports, expanded from 24 to 34 percent suggesting a marked increase in investments. Imports of raw materials increased at a com- paratively low rate, since most of Senegal's manufacturing industries use in- digenous raw materials (groundnuts, cotton, and fish). No reliable balance of payments data are available for the period before 1968; and the official data for the last four years, contains a sub- stantial amount of estimates. Table 6: BALANCE OF PAYMENTS ESTIMATES Current operations Capital operations Changes Ser- Non- in Bil- Trade vices factor Techni- Public Private foreign lion bal- bal- ser- cal assi- capi- capit- assets CFAF ance ance vices Total tance /a tal al /b Total 1968 - 8.5 2.9 -3.7 - 9.3 6.5 7.6 - 9.9 4.2 - 5.1 1969 -16.7 3.3 -3.1 -16.5 6.4 9.0 - 3.6 11.8 - 4.7 1970 -14.3 7.0 -3.8 -11.1 5.9 7.0 4.0 16.9 5.8 1971 -29.3 6.0 -4.0 -27.3 6.7 11.3 8.8 26.8 - 0.5 /a Including a small amount of other public transfers. /b Primarily net errors and omissions. Private transfers and private capital almost net out in most years. Source: Statistical Appendix Table 3.1. Current operations were heavily influenced by the two bad groundnut crops of 1968 and 1970 that caused the sharp fall of exports during the following years. In addition, the good crop in 1971 triggered unusually high imports, and worsened the trade balance in that year. The steady improvement of the services balance, however reflects an increase in transportation activities with Mali and Mauritania, in bunkering services, and in tourism. The most remarkable changes, have occurred on the capital side. In fact, the figures suggest a striking reversal in private capital flows -- from a high net outflow in 1968 (and somewhat less in 1969) to a substantial private capital inflow - 20 - in 1971 7/. This change ties in with the high growth of private investments in the same period, as reflected by the considerable increase in imports of construction materials and investment goods and the generally more optimistic business outlook since 1971 caused by the sharp increase in groundnut prices. As mentioned previously, there is not enough information to explain the discrepancies between changes in the foreign trade balance, which improved greatly between 1960 and 1965 but deteriorated markedly in the second half of the 1960s, and between changes in foreign exchange reserves, which declined quite regularly until 1969. However, the last eight years indicated a very clear and close correlation between the fall in Senegal's net foreign exchange holdings and the reduction of government deposits with the banking system. During this period credit to the private sector, and the circulation of money showed no expansion (Chart 1). This phenomenon reflects the slow growth of GDP, particularly in the modern sector, as well as the lack of growth of private investments until the late 1960s. Under these conditions the continuous and very substantial draw-down of public deposits with the banking system almost inevitably led to a similar decline of net foreign assets. 8/ Both government deposits and net foreign exchange reserves were virtually exhausted by 1970. As expected in a developing country of the size and the level of development of Senegal, government deficit spending neither stimulated local production or could be absorbed by an increase in GDP and by expansion of monetary circulation. Instead, it spilled over into imports and created increasing balance of payments deficits. A factor that hastened this development was the fact that in the first half of the decade public in- vestments financed through deficit spending concentrated largely on projects with a very long term impact on economic growth. 7/ The Official balance of payments data do not indicate much change in private capital movements, but show very sharp changes in net errors and omissions. It can be assumed, however, that the bulk of net errors and omissions concern private capital movements. 3/ Discussed in more detail below under "Financing of Public Development Outlays." CHART 1: SENEGAL: MONETARY DEVELOPMENTS 150_ _ _ __ _ _ _ _ _ __ Monthly July - DO.n*er 1962 -100 C\redits to the Private Sector 125 100 _ ' .. .............. ......................... ,.M,'**--' and Ou Money 75__ _ _ _ _ _ [ | |\. | t X jt ~~~~~~~~~~~~~~~~~~~Governffent Depoits with the Banking Sstem ll 50 _._' Net Foreign Assets 1 * 25 _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ 0 _.___X__x,___ 1/ Exdudiing SDR's -10 0 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 World Bmnk-7661 - 22 - III. Government Response to Senegal's Growth Problems 1960-71 The preceding analysis of Senegal's overall economic growth dur- ing the first decade of independence revealed that the two major problems quickly confronted the country. (a) The loss of its privileged position as the center of public administration, private services and manufacturing indus- tries for French West Africa. This deprivation caused a long and profound stagnation in the modern sectors of the economy and resulted in a considerable fall of private investments; (b) The loss of preferential markets for groundnuts in France and the phasing out of EEC groundnut subsidies. These circumstances led to a 20 percent decline in export prices and forced the government to cut producer prices consider- ably. The impact of this measure, aggravated by bad weather and difficulties in the marketing organization, led to the sharp recession in the rural sector during the second half of the decade. Both problems ment readapting Senegal's economy from an artificially high standard of living to a level more in keeping with the country's own limited indigenous resources. Though the problem originated outside its con- trol the government could not avoid them, and it was one of the major tasks during the years after independence to reduce their depressing impact on the economy. It is from this view point that the mission has analyzed government policies of the last decade. In addition to these two serious short-term problems, the govern- ment was faced with a series of basic structural deficiencies: (a) Low standard of training and education, particularly in rural areas. This drawback makes it difficult and time- consuming to initiate changes, such as introduction of new techniques and diversification of production in the rural economy. (b) High disparity in the quality of life between rural and urban inhabitants, because of considerable difference in per capita revenues and in infrastructure (schools, health facilities, electricity, and so on). This disparity has stimulated urban migration and added to urban unemployment. (c) Increasing population pressure in the center of the country. This factor has contributed to the much slower pace at which new areas were placed under cultivation during the second - 23 - half of the 1960s (because of a growing lack of available good land in some major areas) and to the stunted growth of yields (because of a dangerous fall in fallow periods). (d) high cost structure of the modern sector that had made Senegal one of the world's most expensive countries at the time of independence. This structure seriously hampered Senegal's chances of compensating for the loss of well- protected African markets by increasing exports of manufac- tured products to other parts of the world. (e) Heavy burden of an inherited large colonial civil service which after independence was excessive for the needs of Senegal and which neither structurally or conceptually was oriented to development. The Framework of Government's Intervention in the Economy In spite of the considerable intervention of public authorities in the economy, the government's basic economic policy has been one of free enterprise. While this position might have been somewhat equivocal until the end of 1962, the government's attitude toward the private sector since then has been unmistakable. Gradual nationalization of groundnut trade remains a major exception, and the recent nationalization of water distribution and electricity production is not inconsistent with a free enterprise economy. The following describes the government 's major means of participating in the economy. Budget policies (current budget as well as development budget) have been the government's most important instruments for shoping the economy. Its current expenditures have averaged nearly 15 percent of GDP and its direct investments have come to about 30 percent of Senegal's total capital formation. Obviously, budget policies have exercised their greatest influence in sectors traditionally directly under government control (like education, health, and comunications) but they have also played an important role also in the rural sectors. Senegalese farmers because of their very traditional mentality, limited training, insufficient information, and lack of resources, develop little initiative without outside help. Public investments and current budget outlays (extension service) have consequently helped speed not only agriculture, but also the livestock and fisheries industries. Public enterpirses have become increasingly important during the 1960s. Their total turnover exceeds 10 percent of GDP (about half of which for groundnut marketing), and their investments average 7 percent to 8 percent of Senegal's total capital formation. In the rural sector, public enterprises handle groundnut marketing, part of extension services, and agricultural credit as well as distribution of agricultural implements and equipment. To a minor extent, they are involved also in agricultural production, particularly rice, cattle raising, and fishing. In addition to the role they play in the rural sector, they are important in transport, housing, and promotion of small local - 24 - enterprises. In transport, public enterprises are in charge of post and tele- communications, the ports, airports, railway, and some limited coastal shiping. Road transport, however, is predominantly in private hands. Two public enter- prises are active in housing and are responsible for a substantial part of residential construction. Three public or semipublic enterprises have been created to promote Senegalese enterpreneurships and crafts (studies, training, advice, guarantees, and credit). The public sector has not been very active in banking, except in rural credit. Investment Code and tax policies are the government's main means of influencing the industrial sector. The power to grant or withhold substantial advantages gives it an important voice in the establishment of new enterprises as well as in the expansion of existing companies. These advantages cover not only taxes but also customs tariffs and proved protection to a local manufac- turer and allow taxfree imports of investment goods and raw materials. Annex 3 assesses in detail the Investment Code and the various incentives it stipulates and offers proposals for possible improvements. Price and salary controls have been an important instrument of govern- ment policies, particularly in agriculture and manufacturing. Long before in- dependence, government enjoyed an export monopoly controlled producer prices. In manufacturing and trade, prices have been regulated since World War II; effectively on the production and wholesale level, somewhat less so on the retail level. The government's power to stipulate minimum salaries in all sectors, on which the entire salary scale is based, is very important. It was used to prevent excessive increases, a factor that contributed in keeping local prices and costs in check. As a member of the West African Monetary Union, the government is limited in influencing credit and monetary policies. It participates in the deliberations of the Union and abides by the decisions. It does, however, as a member of the local monetary committee, periodically proposes a ceiling for Central Bank rediscount operations to Union headquarters. The semipublic Development Bank (BNDS) has not functioned satisfactorily for several years, depriving the government of an important instrument of influence (except in agricultural credit). For the same reason, the government has never had a true balance of payments policy, since provision of sufficient foreign ex- change to finance imports is the responsibility of the multinational Central Bank (Banque Centrale des Etats de l'Afrique de l'Ougst. - 25 - Assessment of Government Policies Confronted after independence with a sudden sharp recession in the modern sector of the economy and informed about the EEC decision to reduce groundnut prices by 1967, the government would have been well advised to initiate a major development program without delay. This program would have focused on projects in directly productive sectors, projects that have a short gestation period and could diversify the economy into activities less affected by the unavoidable adaptation difficulties. Thus, the government would have followed a policy of tackling the immediate problems of economic stagnation before grappling with fundamental long-term development. In view of Senegal's limited economic potential, this policy would have meant a vigorous effort to stimulate and diversify rural production while little would be done for other sectors. In manufacturing, the high cost structure seriously limited possibilities to offset falling exports to the highly protected West African markets; and in tourism time was not yet ripe for a major expansion. Most available information suggested that in the first four to five years after independence, the government did not follow such a policy, or at least not vigorously enough. In fact at the time of independence, public authorities appeared not fully aware of the serious difficulties Senegal had to face. However, government policies improved markedly during the second half of the 1960s, but the improvement came too late to have a major impact before the fall of groundnut prices. Public Development Efforts During the first half of the 1960s, government policies remained largely administrative and were not sufficiently development-oriented. Obviously, the ponderous oversized administrative apparatus inherited from colonial times was little geared to respond quickly to a new situation. In accord with pre-independance policies, the current budget continued to focus on general administration and social services (80 percent of total current expenditures) and the public development outlays remained strongly oriented to "classical" public investments in transport infrastructure, administrative buildings, water supply, and housing. Less than 10 percent of current ex- penditures and less than a quarter of public investments were in directly productive sectors (rural industry, and services). Thus, despite a sub- stantial increase in public investments in the first five years after in- dependence, public outlays for quick yielding projects remained very limited. To bypass the slow bureaucratic work style of the central administration, government shifted part of the development effort to a number of newly created public enterprises, particularly in the rural sector, and endowed them with substantial administrative and financial autonomy. However, lack of experi- enced staff soon created serious difficulties, financial as well as technical, and many of these enterprises did not fulfill the role assigned to them. This failure forced public authorities to introduce tight controls and, in fact, to reincorporate some of these enterprises into the overall bureaucratic system. - 26 - Table 7: BREAKDOWN OF PUBLIC EXPENDITURES Current Budget Expenditures (Central Government) General Social Economic Public works Debt Average services services services maintenance services Total % CFAF ------------------------- Percentage --------------------------- billion 1961-64 46 34 8 10 2 100 24.8 1964-68 45 35 10 9 1 100 30.2 1968-71 44 36 10 8 2 100 34.9 Public Development Outlays /a Rural Industry, Transport Social Admin. Average devel. services infrastr. services Housing bldgs. Total % CFAF ------------------------ …ercentage ---------------------------- billion 1961-64 18 6 26 12 28 10 100 9.7 1964-68 37 8 19 16 15 5 100 9.9 1968-71 40 5 18 11 25 1 100 14.4 /a Central Government's Development Budget and foreign financial aid. Source: Statistical Appendix: Tables 5.8, 5.9, 5.10. In addition to the insufficient volume of public outlays for directly productive projects, the quality, nature, and geographical distribution of public investments were open to serious criticism. The government apparently assumed that the substantial improvements in transport infrastructure would stimulate rural production; but it required more direct government interven- tion and the increased production failed to materialize. At the same time, too much of the few direct interventions in agriculture were concentrated on technically difficult and very expensive rice schemes in the Delta and along the Senegal River, when the same amount of investments could have achieved much more in the south. Furthermore, little was done to ease the problems of the over-crowded groundnut basin. In education, high amounts were invested, without first rethinking the real needs and requirements of the country. Rural training received little attention and despite much discussion and planning did not make much progress in the last decade. Low priority given to agriculture did not help to reduce migration to urban areas. It continued unabatedly at a time when urban employment did not grow or even declined, - 27 - because of lagging construction and service activities. In consequence, government policies were not successful, either in coping with the short-term economic depression or in contributing much toward solving Senegal's structural problems. Much of these shortocmings arose from the lack of well-trained and experienced staff in the economic sectors (planning, project preparation, ex- tension services, and so on. At the time of independence, Senegal was over- staffed with civil servants, but only in low- and middle-level general administrative positions, while in almost all technical services, including education, there was a serious lack of experts. This shortage could not be fully compensated for, even by the very substantial foreign technical assist- ance program. In the private sector, government policies concentrated on two points: nationalization of groundnut marketing and stimulation of import substitution industries. The first of these measures was only partially successful because of its serious negative impact on groundnut production; but import substitution had more success. It made manufacturing the fastest growing sector during the 1960-65 period (and thereafter) in spite of increas- ing export difficulties to neighboring countries and lagging local demand. However, starting from a small base, and considering the very limited local market, manufacturing could not have more than a marginal impact on overall economic development. Its satisfactory growth could not prevent a substantial fall in average urban incomes and certainly could not compensate for the lack of public efforts in the rural sector. To attract new foreign enterprises into an unprospering economy heavily affected by the unavoidable acdaptation process after independence, the government had to offer generous concessions concerning taxation and import protection. Thus, the new enterprises paid very little taxes but obtained substantial import protection and often a virtual monopoly position on the local market. In consequence, growth of manufacturing contributed to the serious plight of budgetary revenues, by reducing revenues from import taxes without creating much new local tax revenue. Furthermore, it contri- buted toward keeping local prices high and toward strengthening the entre- preneurs' mentality of monopolization and of little competitive aggressiveness that was already present before independence. It made entrepreneurs little inclined to develop and fight for new export markets as a substitute for the loss of markets in neighboring African countries. However, despite considerable import substitution, the government succeeded in keeping increases in prices and salaries low. In the long term, this achievement was probably one of the government's most important in this period, but it had little impact on Senegal's international competitive posi- tion during the first half of the 1960s. During the second half of the 1960s, public development efforts became more vigorous and more successful. These endeavors are not shown so much in the current budget, which continues to be heavily oriented to general - 28 - administration and social services to the neglect of economic services and maintenance. In fact, insufficient budget allocations for such high priority sectors as agriculture (extension services and project preparation) and main- tenance have become serious bottlenecks for faster economic development. Furthermore, lack of budget allocations for materials and supplies has in- creasingly hampered satisfactory functioning of important services such as health and education. However, the development budget (including foreign aid) reflects a remarkable improvement in the public effort, particularly toward the end of the decade. Total actual development outlays during the Third Plan (1969-70 to 1972-73) are expected to be about 60 percent higher than those of the First Plan and nearly 50 percent above the Second Plan. Even more important, however, was the marked improvement in sectorial alloc- ation during the Second and Third Plans, which gave about 45 percent of total outlays to projects in directly productive sectors (particularly agriculture). This percentage, is high compared with most other African countries. As a result, public development outlays in the rural sector alone increased almost four times between the First and the Third Plans, from less than CFAF 1.7 billion to CFAF 6.3 billion annually. At the same time, intrasectorial priorities and quality of projects substantially improved. More emphasis was given to developing the promising southern and southeastern regions and to diversifying production (rice, cotton, and tomatoes). Furthermore, the problems of the groundnut basin were tackled more seriously through implement- ation of an intensive program of extension service and agricultural credit in the groundnut basin itself (programme agricole) and in the beginning of a policy for public migration into the Terres Neuves. The increasing focus on directly productive investments came too late to have a major impact on the economy before groundnut prices had to be reduced. Otherwise, the groundnut crisis might not have been so pronounced. If projects like the "programme agricole", cotton development, and rice cultivation (Societe d'Amenagement et d'Exploitation des Terres due Delta, SAED, Casamance) had been initiated two or three years earlier (in 1960-61 instead of 1963-64), they could have reduced substantially the depressing impact of falling groundnut prices. However, these efforts will definitely have a stimulating impact on future economic growth. The growing volume and improving quality of public development out- lays reflect Senegal's increased absorptive capacity. There is no doubt that the quality of the Senegalese civil service has considerably improved in the last decade, particularly in the middle and higher echelons. The growing number of well-trained young technicians joining the civil service has reduced the shortage of technical competence. At the same time, it has somewhat changed the strongly bureaucratic and administrative mentality of the staff. Nevertheless this mentality is still deeply rooted in Senegal's civil service; this rigidity is one of the reasons why public administration is yet not fully playing its role as a major force behind economic development. The recently instituted administrative reform might improve that situation. It - 29 - is intended to give increased responsibility to public authorities in the field (i.e., to those civil servants with the day-to-day problems of develop- ment). The problems of public enterprises have remained largely unsolved. There was little improvement in their financial and technical performance, despite growing awareness by the government of this need. Management problems still plague many of the enterprises, which not only constitute a burden to the Tresor, but also fail to fulfill properly their role in the development process. One of the most serious shortcomings was the failure of the Ground- nut Marketing Board and the cooperatives to replace private trading companies quickly and efficiently. This delay resulted in a high cost to the entire economy. Furthermore, better organization of the distribution of farm im- plements would have stimulated their increased use. Unsatisfactory functioning of the railway is creating other serious problems; it forces traditional heavy users of the railway (phosphates and groundnut producers) to utilize other more expensive means of transport. Last but not least, the serious shortcomings of the Development Bank have deprived the country for years of an important instrument to foster economic growth, particularly to help and encourage medium and small local entrepreneurs. For the private sector, there was little change in policies in the second half of the decade. Government continued to encourage creation of new import substitution industries. Most important, however, was the pursuit of its tough price and salary policies, one of the major achievements in the government's economic policies of the last ten years. Even if the GDP deflator of 2.1 percent a year in the 1959-72 period (2.25 percent if groundnuts are excluded) might tended somewhat to underestimate price increases in the modern sector where imports play a major role, there can be little doubt that prices increases have been small in Senegal in the last decade. 9/ At the same time, salaries have increased only by an estimated 3 percent annually including not only the increase in basic salaries but also the advancement of employees within salary levels'. These rates are low compared with those in most in- dustrial countries. The wage-price policy has considerably improved Senegal's international competitive position; it has enabled local manufacturing indus- tries to expand exports at a high rate over the last three to four years and has laid the basis for future expansion of tourism. Public Finance Management (Current Operations) From a development point of view, the emphasis and quality of Senegal's budget policies were open to substantial criticism, particularly for the first half of the 1960s but from a strictly financial point of view the government's financial management was sound. Though the government could be held partly responsible for unsatisfactory economic growth in the past decade because it did not react vigorously enough to overcome the serious economic depression after independence, its financial performance was respons- ible given the difficult overall economic situation. 9/ The consumer price index for moderate income African families has increased by an annual average of 2.6 percent during the 1967-1971 period and that for European type families in Dakar by 3.5 percent. - 30 - Nevertheless the government could not avoid an almost continuous decline of budgetary savings since independence, because budgetary revenues did not increase as fast as current expenditures and in fact grew even slightly less than GDP. However, total government revenues (special funds included), increased somewhat faster than GDP, and their share rose further from an already high 20 percent in 1961-63 to 21 percent by the end of the decade (22 percent, communal taxes included). This rise was no mean achieve- ment in view of the fact that Senegal's tax basis eroded considerably in this period, because of: (a) the shift in agricultural production from easily taxable groundnuts to basic foodstuffs; and (b) the decline in imports of highly taxed manufactured consumer goods and sophisticated foodstuffs. As a result of the groundnut crisis, groundnut production declined from two-thirds of total agricultural value added at the time of independenc.- to little more than half by 1970. This decline was absolute decline, because production of other crops (most of which are not marketed and thus virtually untaxable) increased by nearly 60 percent. In addition, the better than 20 percent fall in export prices in 1967-68 forced the government to reduce tax rates on groundnut exports and as a result the reduction brought lower tax revenues. At the same time, imports of manufactured consumer goods (yielding over 26 percent of total government revenues in 1960-63) declined by some 12 percent in absolute terms, partly because of falling local demand after the departure of many expatriates and partly because of increasing import substitution. Despite the fact no native substitutes were developed, imports of the sophisticated and highly taxed foodstuffs, mainly for the remaining expatriate population (coffee, butter, alcoholic beverages, and so on) fell by 25 percent between 1959 and 1965, and remained 15 percent below the pre- independence level in 1971. The government tried to compensate for these losses by introducing turnover taxes on the rapidly expanding local manufacturing production and by increasing rates on most direct' and import taxes. As a result the growth of revenues from the new and additional taxes, exceeded GDP growth by a wide margin (5.5 percent versus 3.2 percent annually). However, it was not suf- ficient to achieve a satisfactory overall growth of tax revenues, particularly because the very large tax increases together with the already high tax structure encouraged serious tax evasion. In fact, many indirect taxes were raised so high that they led to marked increases in smuggling. The tax base for direct taxes has remained small, as in most developing countries. It was further limited by the government's policy of offering liberal tax in- centives to newly established priority enterprises. These incentives were probably justified, because at the time the prolonged serious depression did not make Senegal a very attractive place for large new foreign investment and because of the petition among African countries for foreign capital. Nevertheless, a more careful analysis of whether such substantial concessions were necessary to attract these investments would perhaps have saved the Government a considerable amount of tax revenues. Table 8: CENTRAL GOVERNMENT REVENU3, EXPENDITURES, AND SAVINGS Annual averages in OFAF billion Avrrage Annual Growth 1961-1963/64 1961/65-676e. 1968/69-1970/71 1962-63 1965-70 1962/70 Budget revenues Import taxes on manufactured consumer goods 7.8 6.9 7.2 -3.3% 1.2% -1.2X Groundnut taxes 3.8 3.1 2.0 -5.7% -13.6% -9.6% Other budget revenues 20.8 25.9 30.2 6.1% 4.6% 5_5 Total budget revenues 32.4 35.9 39.4 2.8% 2.7g 2.8% Revenues of special funds 1.0 0.9 3.9 -2.9% 54% 21.5% rotaal Revenues 33.4 36.8 V.3 2.7S 4.9% 3.8% in % of GDP 20.2% 20.3% 21.0O Current Budgetary expenditures 24.8 30.2 3LS 5.4% 4.34 5.0% /a in % of GDP- Lb 15.0% 16.7* 16.9A Current budget surplus 7.6 5.7 4.5 in ' of GDP - 4.6%4 3.1s 2.2% in X of total revenues 22.8U 15.5% 10.4% GDP at factor costs 165.2 181.1 206.5 2.5* 4.1.1% 3.2% Z. At factor costs. / b Excluding revenues of special funds. Source: Statistical Appendix tables 5.1-5.3. - 32 - While regular tax revenues rose substantially less than GDP, revenues of special funds (e.g., the Groundnut Stabilization Fund) increased sharply in the 1968-71 period. These funds were fed partly by special taxes on imports and exports partly by commercial profits, and, more importantly, by the Groundnut Fund. The almost 50 percent increase in world market prices for groundnuts since 1968 (when Senegal sold at world market prices for the first time) 10/, , accompanied by a less than 20 percent increase in producer prices, resulted in high profits for the public groundnut market monopoly (Office National de la Cooperation et de l'Assistance pour le Development, ONCAD). These probets were transferred largely to the Groundnut Fund which in turn deposited them with the Tresor. The price increases more than offset the fall in groundnut tax revenues that followed the reduction in tax rates. In fact, it was estimated that during 1969-71 over one-third of value added in groundnut production (at world market prices) accrued to the government and less than 64 percent to groundnut farmers. Overall, government revenues from groundnuts averaged more than 18 percent of value added in agriculture making agriculture one of the highest taxed sectors in the country in the last three years. Even though revenues of the special funds were only partly tax revenues and were not formally included in the current budget, economically they fulfilled the function of taxes. Their yields were largely used to fin- ance development outlays through the Tresor (administrative of all government financial operations). From a point of view of liquidity an increase in de- posits of these funds with the Tresor was as good as budgetary savings in financing public investments. Current budgetary expenditures have increased faster than budgetary revenues and GDP. However, a growth of about 5 percent a year (or about 2 percent to 3 percent at constant prices) is not excessively high for a newly-independent country that had to take over the functions formerly carried out by the colonial abdicator. Nevertheless the government's current expenditure policies are open to criticism. The government has not been able to transform the current budget into an effective instrument of economic de- velopment. The budget has remained typical of an administration concerned primarily with administering a country rather than with developing it. In addition, government has not been able to reduce significantly the excess number of civil servants inherited from colonial times. At the time of independence, Senegal's budget was comparatively high. It was about 12 per- cent above that of the Ivory Coast, even though the Ivory Coast is a country with a 30 percent higher population and had an 18 percent higher GDP. For political and social reasons a large number of civil servants formerly working for Afrique Occidentale Francoise (AOF) were incorporated in Senegal's national civil service between 1958 and 1960 and have remained ever since. Unfortun- ately most of the inherited "excess" civil servants were not those Senegal needed after independence, they were not planners, engineers, teachers, or extension service agents, and they were difficult to retrain. Thus, to meet the special needs of independence, the number of public employees continued to grow rapidly, the already oversized civil service notworthstanding. 10/ Almost 100%, if the spring 1973 peak notations are included in the analysis. - 33 - The high number of civil servants was partly responsible for the failure to change emphases in the budget. The excessive cost of civil servants' salaries limited not only budget savings and possibilities for increased public investments but also government's flexibility in reorienting current outlays. Faced with falling budgetary savings the government serious- ly tried to cut on current expenditures; with little possibility to reduce personnel expenditures, it reduced other outlays, like materials and supplies. As a result, it hurt particularly development-oriented services and services which operated outside the capital. Financing of Public Development Outlays While the government followed a conservative policy concerning current operations, it was somewhat less orthodox in financing its develop- ment expenditures. This approach caused increasing public finance difficulties, and by June 1971 almost complete exhausted the treasury of liquidity. The net deposits of the Tresor with the Central Bank where it keeps the bulk of its funds serve as a yardstick to measure the liquidity position of the Treso;, as indicated in Table 9 the deposits declined from a high of CFAF 12.7 billion in June 1964--and an average of about CFAF 9 billion during 1962/63--to less than CFAF 0.5 billion in June 1971 or about five days' current budget expend- itures. They totalled virtually zero at the end of 1971 and at the end of 1972. Table 9: FINANCING OF PUBLIC DEVELOPMENT OUTLAYS, 1961-1971 (billion CFA francs) Annual Average Flows Net Govt. Deposits with the Local resources Foreign Total de- Banking net public local treasury resources velopment System/b savings/a borrowing advances total outlays/a 1961-64 4.2 1.3 0.8 6.3 3.4 9.7 12.7 1964-68 3.6 - 1.3 4.9 5.0 9.9 4.3 1968-71 3.2 0.4 1.4 5.0 9.4 14.4 0.5 /a net of debt amortization, but including most public enterprises, townships and all special funds. /b in contrast to the other data in this table, these figures do not represent annual flows but total deposits (stocks) at the end of each period. Net flows can be calculated as difference between two consecutive stocks. Source: Statistical Appendix Tables 3.20, 5.1-5.10. - 34 - The persistent exhaustion of treasury liquidity resulted primarily from the fact that government was spending more on development outlays than it had in the form of foreign aid, public savings, and long-term local borrow- ing. Deficit spending financed about 10 percent of total public development outlays over the past decade. This relatively limited amount of deficit spending was justifiable in view of the serious overall economic stagnation after independence. A World Bank report had even earlier recommended a some- what faster run-down of treasury reserves to speed up public investments. In itself, the fact that Senegal has depleted its treasury liquidity does not present an unmanageable problem; under the rules of the West African Monetary Union, the government can borrow from the Central Bank up to 15 percent of previous year's budget revenues or about CFAF 6 billion at the present time. However, such borrowing may have a restrictive impact on Central Bank lending to the private sector and thus hamper private investments. As mentioned earlier in the last seven to eight years foreign exchange re- serves have fallen in step with the depleted treasury deposits in the banking system and reached the zero mark at about the same time. If this close cor- relation were to continue, heavy future government borrowing from the Central Bank could result in further pressure on foreign exchange reserves, which in turn would very likely cause the Central Bank to become more restrictive in its credit policies for the private sector, a very unwelcome prospect. This tightening might have already happened over the past few years, as foreign exchange reserves approached depletion. It was likely that government deficit spending policies were partly responsible for slow growth of credit to the private sector. The substantial increases in development outlays, paralleled by a decline in public savings, has markedly changed the financing pattern of public investments. During the 1961-64 period, almost two-thirds of these investments were financed by local sources while, in 1968-71, this share fell to about one-third. Public Enterprises The unsatisfactory financial management of many public enterprises has greatly aggravated the liquidity problems of the Tresor. With total current receipts 11/ averaging about 30 percent of the central government's current budget revenues and with investments accounting for more than 20 percent of total public development outlays, the financial situation of public enterprise has a substantial impact on the overall financial position of the public sector. As shown in Table 10, public enterprises were able to finance on the average only 7 percent of their investments out of their own cash surpluses while a high 44 percent had to be financed by the Tresor. In the last four years, 12/ almost of all the Tresor's deficit financing (an average of CFAF 1.3 billion per year out of a total of CFAF 1.4 billion) was for public enterprises, particularly for the railroad and the urban bus company. 11/ Excluding enterprises engaged in the groundnut sector. 12/ Information on public enterprises is scarce before 1967. - 35 - Table 10: FINANCING OF PUBLIC ENTERPRISES INVESTMENTS (yearly averages 1967/68-1970/71) Total savings/a Budgetary Financing Foreign Total net of subsidies subsidies by the Tresor aid investments Billion of CFAF 0.2 0.8 1.3 0.65 2.95 Percent 7 17 44 22 100 Note: Table 10 data excludes enterprises engaged in the groundnut sector (ONCAD, BNDS, SODEVA). /a Before depreciation. Source: Statistical Appendix Table 5.7. As shown in Table 11, public enterprises as a whole have registered slight savings (before amortization but net of subsidies) of about CFAF 0.3 billion a year during 1966/67-1970/71, mostly due to the constant surpluses of the Dakar Port, the Postal Services, and the Accident Insurance Fund. These enterprises have more than offset the losses of the administrative agencies, the urban bus company, the agricultural enterprises, the Family Allowances Fund, and the low cost housing agency (OHLM). 13/ Excluding administrative agencies, which fulfill mainly cultural functions, savings of public enterprises have averaged about CFAF 0.6 billion a year. Recent trends do not show any marked deterioration in their financial management except a slight decrease in overall amortization, mostly due to enterprises in deficit. The most striking occurence in recent trends is the increasing deficit of the Family Allowances Fund as its payments increase faster than its revenues from contributions. Unless the rates are raised soon, the fund will run into very serious deficits within the next year. Poor performance of the OHLM should improve with assistance from the IDA-financed low-cost housing credit and its budget balanced. The financial situation of the railway is expected to improve with from the second world Bank-IDA railway project. The recent decision to turn over urban bus transport to a semiprivate company should help treasury finances. The new company, it is hoped, will need no further treasury support after the small advance it received soon after take- over. It would seem difficult, however, to improve quickly the condition of the rural sector enterprises, which have registered losses of about CFAF 0.1 billion a year. The recent liquidation of two of them may bring some positive results. - 36 - Table 11: PUBLIC ENTERPRISES, SAVINGS NET OF CURRENT SUBSIDIES (in billion CFA francs) 1966/67 67/68 68/69 69/70 70/71 Railroad 0.12 -o.o6 0.04 0.04 0.01 Urban Bus Service(RTS) 0.01 -0.13 -0.12 -0.19 -0.10 Dakar Port 0.29 0.35 0.47 0.46 0.49 Post & Teleccn. (OPTS) 0.33 0.38 0.36 0.47 0.54 Agricultural Agencies -0.05 -0.08 -0.14 -0.31 -0.09 Low Cost Housing (OHIM) -0.92 -0.11 -0.09 -0.08 -0.08 Accident Insurance Fund ) ) ) 0.19 0.20 ) 0.56 ) 0.43 ) 0.27 Family Allowance Fund ) ) ) -0.13 -0.19 TOTAL 0.34 0.78 0.79 0.45 0.78 Administrative Agencies A -O. 44 -0.47 -0.55 -0.56 -0.57 TOTAL GROSS SAVINGS -0.10 0.31 0.24 -0.11 0.21 Depreciation -1.18 -0.95 -1.48 -1.05 -1.o6 TOTAL NET SAVINGS -1.28 -o.64 -1.24 -1.16 -0.85 /A Radio, theater, student dormitories, etc. Source: CEP - 37 - The Retirement Fund, 14/ suffers similarly to the Family Allowances Fund, from insufficient contributions and consequent deficits in current operations. In recent years increasing deficits have gradually reduced the reserves kept with the Tresor by about CFAF 0.9 billion a year. The deficits started after 1966-67 when the government and other public employers cut their contribution from 15 to 10 percent of salaries paid and the number of pensioners increased as a result of a reorganization of certain services. These deficits constitute a serious burden on the Tresor; to the extent that they are due to the reduction in government contribution, they should be covered by the current budget. Though this step will not improve the overall condition of the Tresor, it will be in the right path. In most cases, unsatisfactory performance of public enterprises was partly due to poor management. Furthermore, supervision and control of these enterprises by the responsible ministries (technical ministries and Ministry of Finance) were often inadequate. The government has been aware of these problems. It has tried for years to ameliorate the performance of public enterprises but without success. Reorganizations and changes in management have been frequent. Very often the government's approach has been too formal: problems were considered solely from an accounting viewpoint without regard to the more fundamental difficulties of policies and management. However, the government has very recently taken more determined steps. The most important enterprises are being reorganized as part of a general restructuring of public administration, and ministerial control improved. Furthermore, the World Bank is actively assisting Senegal in this respect through several loan and credit operations to public enterprises, which include substantial institution-building elements. 14/ Which is not considered a public enterprise, but has its funds also deposited at the Tresor. - 38 - IV. Money and Credit Institutions Senegal is a member of the West African Monetary Union (ULIOA), established in 1962 and composed of seven countries with a common Central Bank (BCEAO). The Central Bank Board of Directors--composed of two represent- atives of each of the seven member countries and six French representatives-- is responsible for formulating the monetary and credit policies executed by the National Monetary Committees. 15/ Besides the BCEAO, banking and credit institutions in Senegal include four commercial banks, a public de- velopment bank (Banque Nationale de Developpement du Senegal, BNDS), and a credit institution for car purchases. Two public funds have been established recently. The first, managed by Societe National d'Etudes et de Promations Industrielles, (SONEPI) guarantees credit to and participates in small Senegal- ese industrial enterprises. The second, managed by Societe Nationale de Garantie (SONAGA), plays the same role for small local commercial and road transport businesses. The Tresor acts as a financial intermediary in the public sector, particularly by extending credit to public and semipublic institutions and by receiving deposits from them. To a limited extent, the Tresor also advances credit to private individuals and companies. Working Rules of the Banque Centrale des Etats de l'Afrigue de l'Ouest (BCEAO) France guarantees the convertibility of the CFA franc into the French franc, without limitations, at a fixed exchange rate. Capital movements and remittances are therefore free, and there are no import controls from the Franc-zone. Foreign reserves for the zone are pooled, and individual members may have a negative position in relation to the Monetary Union operations account with the French Treasury. Senegal has always maintained a positive balance in the operations account. The operations account for the entire zone has always been positive. Should it become negative (in which case the deficit would be financed by France), restrictive measures would be taken by the Board to reestablish the balance of payments equilibrium for the zone. The advantages of such a system are mainly the following: the pooling of reserves gives greater flexibility to the individual countries in the management of their economic affairs and the maintenance of convertibility at a stable exchange rate encourages private foreign investments in these countries. However, an inherent effect of this system is to place the burden of external stability on credit policies. It is of great import because the possibilities of using fiscal policies in demand management are limited. Consequently, the Central Bank faces the difficult dual task of satisying the financing needs of the economy and at the sometime discouraging 15/ A summary of the working rules of BCEAO follows below. - 39 - local resources from leaving the country (except for the normal flow of expatri- ate remittances and investment income payments). The difficulty is a function of the balance of payments situation of the individual member country of the Bank (in spite of the pooling of reserves, since no one country could run a large external deficit at the expense of the entire memberships of the Bank over an extended period of time) and therefore varies from country to country and frp, time to time. The major instruments of monetary policy used in the West African Monetary Union are the qualitative and quantitative control of credit exercised by the BCEAO through the global rediscount ceiling determined for each country, the individual ceilings for each bank and for each borrower, and the detailed study of each individual credit application. In order to ensure that the fi- nancial resources of the individual countries are used internally, the redis- count ceiling on a country-by-country basis is defined as the difference be- tween the projected needs of the economy and its internal resources. The same rule applies to the calculation of the rediscount ceiling for each in- dividual bank. The needs and resources of each economy are established by the local monetary committee (which is composed of representatives from the Govern- ment and the Central Bank) in consultation with the local credit institutions. The short-term (credits of less than two years) and medium-term (credits of two to seven years) ceilings are determined separately in order to prevent the use of short-term credit for long term operations, and vice versa. They are revised every six months in accordance with new developments in the respective economies. Proposed uses of short-term credit which are not considered justified by the local branch office of the Central Bank are excluded from the individual bank's rediscount short-term ceiling.- The bank may still decide to finance these proposals, but it will have to do so from resources other than those used as a basis for the calculation of the rediscount ceiling. The ceiling for an individual bank cannot exceed 65 percent of its financing needs ( 50 percent for banks which do not participate in the financing of agricultural crop commercialization). Provisions are made for adjusting ceilings in re- sponse to new developments occurring between two scheduled revisions of the ceilings. To determine the medium-term ceiling, the Central Bank accepts for rediscount a sum of credits for each individual bank which does not exceed the medium-term commitment potential of this bank, defined as the sum of the bank's own capital (excluding immobilizations and cumulated losses); long-term and medium-term liabilities (minus term loans which are not rediscountable); and 20 percent of short-term liabilities. This definition applies to commercial banks. A somewhat more favorable definition applies to development banks. Moreover, the individual bank's balance sheet must satisfy the liquidity ratio, defined as the relation of liquid and semiliquid (six months) assets to short-term (six months) liabilities. In order to encourage the extension of re- discountable credit, rediscountable assets are included in the numerator, and - 40 - the liquidity ratio was raised from 70 percent in 1965 to 75 percent in 1970. In addition, the minimum capital of commercial banks must be at least equal to eight percent of their total uses. Each individual borrower is also assigned a credit ceiling. The short-term ceiling is a function of the financial equilibrium of the borrower, which is defined in terms of working capital financed by his own resources and in terms of the ratio of borrowed funds to his own resources. A commercial bank is not permitted to grant customers' excessive credit; the customer must also satisfy the Central Bank that it has used suppliers' credit facilities to the fullest extent possible. The following rules apply for obtaining medium-term rediscountable credit: - those described above for obtaining short-term rediscountable credit; - the operation to be financed be approved by the Planning Ministry; - priority be given to financing local expenditures and only to that part of foreign expenditures which cannot be financed by suppliers' credits; - a rediscountable maximum of 65 percent of investments for agricultural or industrial operations, 80 percent for housing having a social character and of 50 percent for other operations; - a minimum of 20 percent of the project cost to be financed by the promoter's own funds; - the use of the funds to be strictly controlled in order to ensure allocations to the intended purpose. These rules reflect the fact that the equilibrium of the balance of payments has to be achieved through the credit mechanism, using the freedom of imports and capital movements to offset the lack of flexibility of fiscal policies, exchange rates and interest rates. Determinants of the Money Supply Between 1965 and 1971 money supply 16/ increased at an average annual rate of 2.9 percent. During the 1965-68,period, though the money supply re- mained virtually constant it decreased as a percentage of GDP from 15.4 percent 16/ All references to money supply and its determinants are based on twelve- month averages, because of the marked seasonality in monetary and credit developments linked to the groundnut crop. - 41 - in 1965 to 14.0 in 1968. Between 1969 and 1971, however, money supply expanded at an average annual rate of 6.5 percent, and the ratio of money supply to GDP returned again to about 15.0 percent. The unchanging money stmply during the 1965-68 period was the result of the interaction after very limited increase in credit to the private sector, offset by a steady decrease in net foreign assets as time deposits and other items increased marginally, and the compensation of these deflationary factors by a continuous decrease in government deposits with the banking institutions. The faster growth of money supply in the 1969-71 period, is related to a series of events: a sharp drop in government deposits in 1969, a rapid in- crease in credit to the private sector in 1970, and a marked increase in foreign assets holdings in 1971. The following table summarizes these develop'- .nts: ments: Table 12: MONETARY DEVELOPHENTS, 1964-1971 (CFAF billion) Outstanding 1964 1965 1966 1967 1968 1969 1970 1971 Foreign assets 8.52 6.01 5.60 5.38 2.74 -0.61 -0.10 3.90 Government credit -10.77 -8.48 -7.12 -6.17 -4.32 -1.36 -0.75 -0.46 Private credit 34.82 36.47 35.38 33.21 34.87 35.61 38.56 39.00 Other items/a -3.62 -4.62 -4.47 -3.88 -4.08 -3.32 -5.44 -7.13 Money supply/b 28.95 29.38 29.39 28.54 29.21 30.32 32.27 35.31 Changes 1965 1966 1967 1968 1969 1970 1971 Foreign assets -2.51 -0.41 -0.22 -2.64 -3.35 0.51 4.00 Government credit 2.29 1.36 0.95 1.85 2.96 0.61 0.29 Private credit 1.65 -1.09 -2.17 1.66 0.74 2.95 0.44 Other items/a -1.00 0.15 0.59 -0.20 0.76 -2.12 -1.69 Money supply/b 0.43 0.01 -0.85 0.67 1.11 1.95 3.04 /a Including time deposits. /b Approximately half demand deposits and half currency in circulation. Source: Statistical Appendix Table 6.1. - 42 - Sectorial Distribution of Credit The slow increase in money supply (except for 1971) and in credit to the private sector reflected the poor economic performance of the 1960s. To some extent, however, these conditions were the results of economic policies. Apparently credit policies were restrictive during this period owing the deteriorating balance of payments (manifested by the sharp decline of Senegal's net foreign assets). Many bankers and entrepreneurs in Senegal believed that the credit policies were too restrictive in the sense that entrepreneurs were willing to borrow even at higher rates but were unable to find financing. The effectiveness of credit restrictions was partly re- duced, however, by commercial bank borrowing from their headquarters in Paris. In fact, foreign liabilities of commercial banks increased by about CFAF 3.5 billion between 1968 and 1971. The prevailing low interest rates in Senegal (as compared to those in France) could not stimulate this kind of borrowing; the increase had its origins in the restrictions imposed by the Central Bank on credit expansion through the rediscount ceilings. The fall in interest rates on international markets since 1971 together with the recent increase in interest rates in Senegal may again make it more attractive for banks in Senegal to borrow from their headquarters abroad. 17/ As a major consequence of these restrictions the limited credit was given mostly to minimum risk borrowers--the larger foreign-owned firms and state agencies. Only little amounts were extended to small Senegalese entrepreneurs. Credit outstanding to Senegalese entrepreneurs in 1970 re- presented less than 20 percent of the total credit supplied by the commercial banks, the BNDS, and the Tresor (customs bills). Thus lack of credit as well as lack of training, has made it difficult for the small Senegalese entre- preneurs to play a more important role in the industrial sector. Efforts to correct this situation have been made through the commercial banks, the BNDS, SONEPI, and SONAGA. Results, however, remain limited. Starting in late 1970, the BNDS concentrated its activities in the agricultural and agroindustrial sectors, while the Union Senegalaise de Banque, a commercial bank with the government as the major participant, was given the main responsibility for making available long-term credit to the industrial sector. SONEPI also helped by establishing in early 1971 a par- ticipation fund and a guaranty fund, both aimed specifically at promoting small Senegalese enterprises. Each fund was endowed with CFAF 25 million, which was almost entirely committed by the end of 1971. These sums were too limited to make a substantial contribution, but it was a first helpful step. Another guaranty fund was created recently with the establishment of SONAGA to help small local commercial businesses and road transport enterprises obtain financing. In 1971 the government organized an additional semipublic develop- ment bank, Societe Financiere Senegalese pour le Developement Industriele et Touristique (SOFISEDIT), to specialize in credit for manufacturing and tourism. The World Bank Group was asked to help finance of this new bank, which, it was hoped, would work closely with SONEPI and SONAGA in their respective sectors. 17/ The very recent increases in interest rates in international money markets would negate partly this effect. - 43 - Only short-term (zero to two years) and medium-term credit (two to seven years) are rediscountable with the Central Bank. In 1971, short-term credit represented about 84 percent of total credit outstanding, but medium- and long-term credit accounted for 11 percent and 5 percent respectively. 18/ This distribution did not change much in the past six years (1966-1977), Unfortunately, restrictions on loan maturity forced entrepreneurs to amortize their fixed assets in a shorter period of time than economically justified, thereby increasing their costs, decreasing their competitiveness on the international market, and hindering the stand of new projects. There were indications that loan maturity restrictions had in fact prevented the establish- ment of new industrial enterprises and thereby helped support a monopolistic structure in some industries. The Caisse Centrale de Cooperation Economique (CCCE), French public institution, has somewhat eased this problem by extending long-term loans to the semipublic and private sectors. Such long-term credits amounted to about three times the sum extended by the banking institutions. Traditionally, CCCE's main channel for destributing longer-term funds into small and medium enterprises was BNDS, the semipublic .development bank set up for this very specific purpose by the government and CCCE. However, unsatisfactory function- ing of BNDS for several years led CCCE virtually to stop its support. This deprived BNDS of its most important source of long-term capital and sharply limited its medium- and long-term lending. For very large projects, CCCE lends directly to semipublic or private companies. Between 1966 and 1971, such loans amounted to a total of CFAF 2.7 billion, 95 percent of which went to the Taiba Phosphate Company. Short-term credit to the economy by the banking institutions and the Tresor (customs bills) remained stable between 1965 and 1971. Its sectoral distribution, however, was affected by the bad groundnut harvests of the late 1960s; short-term financing requirements for production and commercialization of oils and fats dropped by about CFAF 4 billion in 1965-71, and short-term credit to other sectors increased by about CFAF 5 billion or at about 4.2 percent annually. These developments are summarized in Table 13. 18/ Quarterly average of credit extended by the commercial banks, BNDS, and the Tresor. - 44 - Table 13: SECTORIAL DISTRIBUTION OF SHORT-TEIRM CREDIT 1965-71 (Percenti) 1965 1966 1967 1968 1969 1970 1971 Agriculture, including credit to cooperatives 1.0 0.6 0.4 1.0 3.1 2.2 2.6 Industry 22.8 23.5 26.2 19.4 26.2 28.4 28.2 Oils and fats t1.6 12.9 14.1 6.4 10.5 12.4 12.3 Others 11.2 10.6 12.1 13.0 15.7 16.0 15.9 Public works and housing 4.5 3.3 3.4 3.4 5.4 6.2 5.4 Transportation 3.1 3.2 3.1 3.0 3.7 3.6 3.8 Trade 67.4 67.8 64.6 70.6 58.7 56.3 55.5 Oils and fats 36.2 39.2 36.2 40.7 24.9 23.9 21.9 Others 31.2 28.6 28.4 29.9 33.8 32.4 33.6 Services 0.5 0.7 1.0 0.9 1.0 1.2 1.2 Financial institutions 0.7 0.9 1.3 1.7 1.9 2.1 3.3 Total declared credit 100.0 100.0 100.0 100.0 100.0 100.0 100.0 of which: Oils and fats (47.8) (52.1) (50.3) (47.1) (35.4) (36.3) (34.2) Others (52.2) (47.9) (49.3) (52.9) (64.6) (63.7) (65.8) Note: Calculations are based on quarterly averages, including credit extended by the Commercial Banks and the BNDS. Source: BCEAO The trade sector transacted for most of the short-term credit. Its share fluctuated between 55 to nearly 70 percent of the total, depending mainly on the requirements of groundnut commercialization. Excluding oils and fats trade, this sector accounted for about 29 percent to 33 percent of declared credit, with no marked trend apparent. The industrial sector (ex- cluding the oils and fats production) has been the major beneficiary of the increase in short term credit; credit to this sector increased at an annual rate of 9.0 percent from 1965/66 to 1970/71. The other major beneficiaries of the redistribution of credit were the financial institutions (mainly loans consumers for), agriculture (both directly and through the intermediary of - 45 - the cooperatives), and services (chiefly hotels and restaurants). However, the share of these sectors in total short-term credit remained very small indeed (7.1 percent in 1971). Medium and long-term credit by banking institutions and the CCCE increased by about 20 percent between 1966 and 1971 (3.8 percent a year), mostly owing to rise in CCCE credits to the semipublic and private sectors and to IDA agricultural development credit channeled through BNDS. Table 14: SECTORIAL DISRIBUTION OF MEDIUM AND LONG-TERM CREDIT 1965-71 (Percent) 1965 1966 1967 1968 1969 1970 1971 Agriculture, including 2.8 2.5 2.7 2.4 12.3 11.3 10.2 credit to cooperatives Industry 58.6 55.4 57.0 54.0 55.2 60.1 60.6 Housing 28.9 24.4 24.5 27.9 22.4 17.6 17.7 Transport 1.0 2.0 1.8 1.8 1.4 1.5 2.2 Commerce 2.0 8.7 5.2 5.2 1.9 3.5 3.6 Services 6.7 7.0 8.8 8.7 6.8 6.0 5.7 TOTAL DECLARED CREDIT 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Note: As of September, including credit extended by the Commercial Banks, the BNDS and the CCCE. Source: BCEAO The industrial sector also benefitted most from the increase in medium and long-term credit in recent years. Its share increased from 59 percent to nearly 61 percent of the total declared medium and long-term credits. Out- standing loans to the housing sector decreased in absolute terms in recent years; and its share dropped from 29 to a little more than 24 percent before 1968 to almost 18 percent in 1971. The agricultural sector (including credits to cooperatives) markedly boosted its share from nearly 3 percent to 11 percent of the total, mostly owing to an IDA credit channeled through BND5 to cooper- atives for the improvement of traditional agriculture. Without the intervention of the CCCE and IDA, medium- and long-term credit probably would have remained at a standstill or even decreased between 1965 and 1971. In view of the difficult balance of payments position in the late 1960s, it was unlikely that the BCEAO could have satisfied these credit needs through rediscounting. As for long-term credit, it could have hardly existed without external aid, since the rules of the BCEAO did not permit rediscounting of long-term loans. These factors draw attention to the importance of continued external aid to satisfy the long-term credit requirements of the economy. - 46 - Credit Financing Short-term rediscounting with the BCEAO follows a seasonal pattern, because BCEAO refinances a large part of the groundnut crop. Therefore changes from year to year are strongly influenced by the groundnut harvest. Further- more the importance of BCEAO intervention depends on the extent of bank's ability to finance credit and on the overall credit ceiling for the country. In 1965-71 the BCEAO rediscounted about 40 percent of short-term credit ex- tended by commercial banks and the BNDS. This ratio, the highest in the Monetary Union, fluctuated between 35 percent and 47 percent during this period. The customs bills accounted for about 3 percent of total short-term credit extended to the economy. The BCEAO rediscounted 40 to 50 percent of medium-term credit ex- tended by commercial banks and the BNDS, again a high percentage (in comparison to other member countries') and close to the maximum of 50 percent allowed by the BCEAO rules. Long-term credit, as previously pointed out, relies largely on foreign financing directly extended to the semipublic and private sectors, or channeled through the BNDS. In 1967-71 the credit through the BNDS ac- counted for about 30 percent of the total. Interest Rates The high ratios of rediscounting with the BCEAO reflect the low capacity of local banks to finance credit from their own resources and, there- fore, the relatively poor savings performance of the economy in the 1960s. To some extent, however, the banks' own resources suffered from the low interest-rate policy and periodic rumors of devaluation, both of which encouraged private individuals to transfer their savings abroad and firms to keep their liquid balances in Senegal to a minimum. Furthermore, low interest on deposits did not stimulate the Senegalese population, to save or more generally, induce a change in saving habits or in the attitude toward financial assets. The interest rate structure in the UMOA countries is by international standards low, both on the debit and credit side. The difference between international market rates and the U1OA rates, however, has narrowed in recent years, because of the fall in interest rates on the international market and very recently because of an increase in interest rates in the UMOA. It might be argued that since the rate of inflation in Senegal is lower than in many other countries the difference between the "real" international market rates and those in Senegal is smaller. However, many borrowers have a choice of raising loans in Senegal or abroad (France), and for them the nominal cost is most important. Senegal's participation in the French zone and the free convertibility between the French franc and the CFA franc should make it necessary for Senegal to take into account the level and structure of interest rates prevailing in France. Other factors, however, also affect the situation in Senegal, and to this extent the interest rate structure ought to differ from that in France. For example, investors and money managers tend to con- sider the risks to be higher in Africa than in Europe and, therefore, expect the interest rate level in Africa to be somewhat higher. -- 47 - Table 15: INTEREST STRUCTURE BEFORF AND AKER THE JANUARY 1973 CHANGES (percer!tages) old interest rates new interest rates 1. Credit rates Demand deposits 0 -2.5 0 -3.75 Time deposits 0 -4.5 2.5-6.5 Bills (bonds de caisse) 3.5-4.5 4 -6.5 Savings accounts 3.25 4.75 2. Debit rates redis- non redi8- redis non redis- 2. Debit rates &oLvle 000, _,, - cc;i.__l Short term special credit ih.5-6 9 6.5-7.25 11 local enterprises -- 6-9 -- 8-11 export credits 5-6 9 7-8 11 other credits 5-6.5 9 7.5-9.5 11 Medium term productive credit and low cost housing 5.5-6.25 8-8.5 7.5-8.25 11 other housing 7.25-7.75 8-8.5 9.25-10.75 11 N.B. Debit rates do not include commissions, which raise these rates by an average of one percentage point. / a For public produce marketing companies, priority enterprises and for advances on stocks. Lb For locally owned enterprises without access to rediscount. Source: BCEAO - 48 - Until the end of 1972 the level of interest rates in Senegal was lower than that in France. The advantage of obtaining financing in Senegal rather than in France has increased markedly since 1967 because of two events. The first was the change in the Central Bank discount rate in France, which after having fluctuated between 3.50 and 4.00 percent during the period 1960- 67 rose sharply to 6.00-8.00 percent during 1968-71, while the discount rate in Senegal remained at 3.50 percent. The difference in rates can be taken as a measure of the financial advantage of borrowing in Senegal. The second event was the fall of use net foreign assets of banking institutions in Senegal, which after having reached a peak of CFAF 12 billion in 1963 dropped to a negative level of CFAF 0.6 billion in 1969 and then recovered to only CFAF 4 billion in 1971. This fall might have contributed to the devaluation rumors which in turn increased the desirability of borrowing locally; and the con- cern of the Central Bank over balance of payments and capital outflows might have detracted from the use of credit as a development tool. In January 1973 the BCEAO's rediscount rate was raised by two at it percentage points to 5.5 percent. At the same time, most interest rates (credit as well as debit) were increased by about an-equal amount bringing them to about the level in France. While these interest rates continue to be low compared with those in most developing countries, the increase represents an improvement. In all liklihood the increased rates will have an influential impact on mobilization of local resources, the balance of payments, and, thus, on the amount of new credit to the economy controlled by the Central Bank through its rediscount policy. More specifically, this increase in interest rates is likely to decrease the importance of capital outflows and the financing of foreign operations with local resources, because of three prospects. The first is the probability that an interest rate structure equal or higher than that in France will induce importers to turn toward foreign financing of their oper- ations. In the past few years the opposite term seems to have taken place. This change will free some local resources for other short- or longer-term operations. Second, local banks will find it more attractive to borrow from their head offices to finance nonrediscountable operations. Finally, the outflow of funds because of the difference in interest rates between France and Senegal will probably decrease, and foreign-owned enterprises might some- what change their present policy of keeping liquid balances in Senegal to a minimum. However, an increase in the interest rate of 2 percentage points is not likely to be a sufficient incentive for private European and Lebanese residents to alter significantly their preference for keeping savings and balances abroad. As for Senegalese nationals, it is generally agreed that their rate of savings is very low, even for the middle and upper classes. Whatever savings do accumulate are manifested usually innonfinancial forms; cattle, housing, and land. In these circumstances, it is expected that in the short run, a small change in interest rates will have a negligible effect on financial savings. In the long run, however, higher rate might encourage the necessary institutional developments and encourage personal preferences to hold finan- cial assets. - 49 - The amount of the recent increase in interest rates might not have been sufficient to achieve a thorough change. Nonetheless, the increase did reflect the fact that for the first time the UMOA interest rate structure became flexible to better respond to the changing conditions of the money and capital markets. The problem, however, is not only one of letting interest rates adjust to these conditions but also of creating a larger number of financial instruments, with different maturities, which would offer attractive terms to savers while channeling long-term funds into the banking system. In the past the system of monetary arrangements in the West African Monetary Union placed central reliance on credit policy for the maintenance of external equilibrium. Other instruments, such as direct control of trade and capital movements, of changes in the exchange rate, and of changes in discount and interest rates, were not used. Since credit controls alone are not sufficiently malleable to ensure external equilibrium and to satisfy the needs of an economy with balance of payments difficulties, the recent decision to introduce higher and more flexible interest rates is clearly desirable for both short term balance of payments adjustments and long term development objectives. - 50 - V. Human Resources Population According to the first preliminary estimates of the 1970 sample census, population in Senegal was 3,755,486 in July 1970. This figure, how- ever, seems to underestimate real population, and it is expected that the second and third round of counting will result in somewhat higher numbers. The only information available in 1972 from this census was size of popula- tion, age distribution and marital status by regions. Information on fertility, mortality, migration, housing, and occupation will be published by mid-1973. More detailed information will have to await the full census scheduled for 1974 with assistance from the United Nations (Unitea Natione Fund for Population Activity, UNFPA; Economic Commission For Africa, ECA). Total population in- cludes about 50,000 (2 percent) non-Senegalese residents, mostly French and Lebanese. Growth rate is estimated at about 2.2 percent a year for the 1960 decade. This average hides the large contrast between the towns and the country- side, because of differences in birth and death rates; but more importantly it conceals the astonishingly large internal migration from countryside to towns. It is estimated that in towns population grows by 4 percent to 5 percent a year; but in certain regions it increases by no more than 1 percent. In Dakar, population growth (natural and migration) is 5 percent a year; its natural g growth alone is about 3.8 percent. Birth rates are estimated about a high 45 per thousand; death rates, 20 per thousand, a significant part of which is attributable to deaths of children below the age of 5. Family Planning. Because of the low population density (except in the groundnut basin) and the dominant role of traditional agriculture where output is closely related to the number of persons working in the fields, popu- lation control has not been a serious concern for the government. On the contrary, population increase was generally regarded as a stimulus to economic growth. This attitude slightly changed in the late 1960s when the government became aware that (i) a reduction in the population growth was necessary to achieve higher per capita income; (ii) continuous population increase compro- mised the achievement of universal primary education, led to increasingly difficult problems of employment and housing in urban areas and consequently resulted in aggravating social problems. Nevertheless, no significant action was taken, because the tradition-oriented population in Senegal was strongly opposed to birth control. Traditional leaders (including the "marabouts") who play an important role in government decisions of this kind were not con- vinced yet of the necessity to slow population growth. Population control was not mentioned in the Third Plan and probably not much will be said about it in the Fourth Plan. The present position of the government is that the first step in meeting future population challenger is to study current population problems using survey and census results, In the meantime, little positive action is being taken. The government has dis- solved the private Family Planning Association of Senegal, and planns to stop 51 - all other similar private ventures claiming that such activities must be under its guidance. It envisages the establishment of a government-controlled Family Planning Association, but as yet it has taken no action. Nonetheless, the government has submitted a request to the United Nations Fund for Population Activity (UNFPA) for assistance in organizing a family planning program. It has also taken a liberal position toward sale of contraceptives and has per- mitted a private family planning project financed by the Pathfinder Fund and International Planned Parenthood Federation (IPPF) to operate actively in Dakar. As mentioned in Annex 3, Senegal's tax system provides substantial benefits to large families. Nearly half of all direct taxation allows large reductions for children. Such a system was used in France and justified at a time when the French government tried by all means to stimulate population growth. However, in the Senegal of today, where it is generally agreed that population growth should be slowed down, these allowances should be reconsidered. Urban Development. Urban concentration is high in Senegal. The urbanization rate a mounted to 29 percent in 1970, compared with 18 percent in the rest of Africa. This rate has its roots in Dakar's former position as capital of colonial French West Africa. To help save this function the Cap Vert area of Dekar attracted a large number of modern businesses. Nearly 80 percent of industrial enterprises, 66 percent of all salaried employees and 50 percent of civil servants are still concentrated in the Dakar area. In the last decade, population in urban areas has been increasing by 4.5 percent a year, compared with 2.2 percent for the country as a whole. This trend is due to the usual factors which cause the shift to urban areas (higher salaries, more job opportunities and better social facilities), rein- forced by the difficulties encountered by the agricultural sector in the 1968-1972 period. The Dakar area is a privileged one in Senegal, not only because of its GDP per capita but also because of its large social and education facili- ties, the number of doctors, nurses, hospital beds, telephones, electricity subscribers and school enrollments, are considerably higher in Dakar than in the rest of the country. However, it must be noted that Dakar's social infra- structure, such as the central administration, the university, technical schools, and hospitals are used by the entire country. Health and diet condi- tions are known to be better in Dakar and the considerably lower death rates in the Cap Vert reflect these advantages. It is estimated that Dakar, which accounts for about one-fourth of Senegal's total population, absorbs about one-half of central government current expenditures. If urban population continues to grow (at double the national growth rate), it will reach 1,790,000 in 1980. This total includes an increase of nearly 200,000 in the urban labor force; employment in urban areas, however, is not expected to increase by more than 100,000. About half of the increment in the urban population will be either unemployed or part-time workers. More- over, the urban increase will make it particularly difficult to provide suit- able housing. Consequently, every effort should be made to reduce urban mi- gration to raise the level of rural incomes and to increase nonrural employment - 52 - opportunities in villages. special importance. Rural nonformal education becomes......... Employment Total labor force can be estimated at about 1.6 million persons. No recent information exists on occupation structure L9/. According to the 1960 census, 84.4 percent of the labor force was employed in the primary sector, 6.5 percent in the secondary and 10.6 percent in the tertiary. Since 1960, because of the continuous migration into Dakar and other urban centers, it is probable that the relative importance of the primary sector has slightly decreased. On this basis, it can be estimated that in 1972 about 80 percent of the labor force--more than 1,300,000 persons--were active in the traditional sectors as self-employed or unpaid family workers mainly in the rural sector (about 1,200,000),and in traditional handicraft and trade (125,000). Employ- ment in the modern sector is estimated at about 200,000, 20/ only 13 percent of the active population. It probably has decreased somewhat in the last decade, owing to the reduced importance of Dakar as a French administrative and economic center and the departure of most of the French army. Approximately 7 percent of the active population, about 110,000 persons, are unemployed. Employment in the modern sector can be broadly divided into three categories: (1) civil service and public sector employees (63,000); (2) workers employed in industrial enterprises and modern service (85,000, of which about 1,000 are in liberal arts and 20,000 are domestic servants); (3) self-employed, part-time family workers in workshops, petty trade and service activity (50,000). Detailed information on the educational background of the labor force is not available. The level of education of the agricultural population is known to be extremely low, with an illiteracy rate estimated at well over 90 percent. About 95 percent of the total labor force consists of farmers and unskilled workers. Senior and middle echelon (university level or equivalent experience, high and middle school level or equivalent experience) and skilled laborers account for about 5 percent. The percentage of senior staff is es- timated at about 1 percent of total labor force and the percentage of middle level worker at about 3 percent, of which about half are expatriates. j2/ More accurate information on employment will be available after the release of the reuslts of the 1970 sample census which includes questions regarding occupation, level of education and so forth. 20/ Including domestic servants. - 53 - Table 16: MODERN SECTOR MANPOWER: ESTIMATED BREAKDOWN BY QUALIFICATION, 1970 ('000 persons) Public Sector Private Sector Total Sen. EX. Total % Sen. Exp. Total % Sen. EXP. Total % Senior staff/a 5.8 2.5 7.3 11.5 1.4 4.8 6.2 7.3 7.2 6.3 13.5 9.3 Middle staff/b 26.0 0.5 26.5 41.9 11.6 3.2 14.8 17.4 37.6 3.7 41.3 27.8 Skilled/ unskilled 29.5 - 29.5 46.6 40.7 3.3 44.0 57.8 70.2 3.3 73.5 49.5 Domestic servants - - - - 20.0 - 20.0 23.5 20.0 - 20.0 13.4 Total 61.3 2.0 63.3 100.0 73.7 11.3 85.0 100.0 135.0 13.3 148.3 100.0 "Manpower" taken as regularly employed only, excluding self-employed and casual family workers. /a University level or equivalent experience. /b High and middle school level or equivalent experience. Source: Ministere de la Founction Publique. Despite a substantial drop in the expatriate population since inde- pendence (from about 60,000 to some 45,000) as a result in part of increasing "senegalization" efforts, foreigners still hold more than 10 percent of all positions in the modern sector, excluding domestic servants (Table 16). They are particularly numerous in senior staff positions (47 percent), for which local skills are seriously in short supply. Their number is much smaller among middle level staff (9 percent), even less among skilled and unskilled laborers (4.5 percent). There is also a significant difference in the numbers of expatriates in the private and in the public sectors (17 percent versus 3 per- cent, excluding domestic servants). The high proportion of expatriates in the private sector, particularly at the top level, reflects both the large number of expatriates in executive positions and the existence of a large foreign entrepreneur class in both industry and trade. A great many modern enterprises in trade, services and industry are in the hands of Europeans, mostly French. Smaller enterprises are owned by Lebanese. The strong tendency among quali- fied Senegalese staff to join public administration instead of the private sector has not helped. However, it has allowed a more rapid "senegalization" of the public sector. Most recently, this preference has changed somewhat, and an increasing number of young "cadres" seek employment in private enter- prises. The change should help expedite the government's efforts to promote senegalization through its technical and financial assistance to Senegalese entrepreneurs. - 54 - Table 17: BREAKDOWN OF THE MODERN SECTOR MANPOWER BY ORIGIN AND QUALIFICATION, 1970 (percentages) Public La Private Total Sen. Exp. Total Sen. Exp. Total Sen. Exp. Total Senior staff 79.3 20.0 100.0 22.3 77.7 100.0 53.3 46.7 100.0 Middle staff 98.0 2.0 100.0 78.2 21.8 100.0 91.0 9.0 100.0 Skilled/ unskilled staff 100.0 0.0 100.0 92.5 7.5 100.0 95.5 4.5 100.0 Total 36.8 3.2 100.0 82.6 17.4 100.0 89.6 10.4 100.0 /a Administration only. Source: Ministere de la Fonction Publique. As in most developing countries, unemployment in Senegal is primarily an urban phenomenon. Although there are no reliable statistics and the concept is unclear, unemployment is known to be large in Senegal and to grow at a faster rate than the total labor force. The only statistics available are those of the registered job seekers in the Dakar area (50,000 as of June 1971). Report- edly, there are at least 60,000 other unemployed who are not registered. There- fore, the total number of unemployed exceeds 100,000, more than 50 percent of total employment in the modern sector (but only about 7 percent of total labor force). The breakdown of registered unemployed by qualification shows that there are applicants for all job categories, but that unemployment is highest among low level staff. (See Statistical Appendix, Table 1.5.) Based on its macro-economic projection of future growth, the mission has made a rough projection of employment in the modern sector for the next decade. Under the assumptions that construction and services will increase by about 5 percent a year manufacturing industry by 7 percent, public adminis- tration (including public enterprises) by 3 percent (particularly in develop- ment oriented services, and productivity in manufacturing by 2 percent a year, employment in the modern sector will be about 217,000 in 1980. This total re- presents a 3.2 percent average annual increase during the 1970s. - 55 - Table 18: MISSION PROJECTION OF EMPLOYMENT IN THE MODERN SECTOR BY NATIONALITY ('000 persons) 1970 1980 Sen. Exp. Total Sen. Exp. Total Public sector /a 61.3 2.0 63.3 83.4 1.7 85.1 Private sector 53.7 11.3 65.0 96.6 10.7 107.3 Domestic servants 20.0 - 20.0 25.0 - 25.0 135.0 13.3 148.3 205.0 12.4 217.4 /a Central government, local administrations, and public enterprises. Employment of Senegalese nationals is expected to increase somewhat faster than total employment as a result of increasing Senegalization particularly in the private sector (90 percent instead of 83 percent in the private sector, 98 percent instead of 97 percent in the public sector) with an annual growth rate expected to average about 4.3 percent. Though this growth rate is substantially above the growth of total population, it is below the esti- mated growth of urban population. In consequence, as shown in Table 19, total unemployment might continue to increase substantially during the 1970s. Table 19: APPROXIMATE MISSION PROJECTION OF TOTAL EMPLOYMENT ('000 persons) Actuals Low Rural Growth/a High Rural GrowthL./ 1970 1980 Annual growth 1980 Annual growth (Percent) (Percent) Rural sector 1,200 1,400 1.6 1,500 2.2 Traditional handicraft 125 155 2.5 155 2.5 Modern sector: salaried 150 220 3.9 220 3.9 self-employed 50 75 4 75 4 Unemployed 110 190 5.6 90 Total 1,635 2,040 2.2 2,040 2.2 /- Continuation of past trend. /b In line with total population growth. - 56 - Because of the preponderance of rural occupations the solution of Senegal's employment problem necessitates a substantial increase in employment in the rural sector. If employment in that sector continues to increase much more slowly than total population, as a result of the heavy unabated migration to urban areas, the unemployment problem cannot be solved. Should rural employ- ment not expand by more than 1.6 percent annually (as it did in the past), em- ployment in the modern sector would have to increase by more than 9 percent per year to absorb all unemployment in Senegal by 1980. This increase is obviously not possible. On the other hand, if it were possible to boost rural employment in accord with total population growth, unemployment could probably decline somewhat not only in relation to total employment (from 7 to 4.5 percent) but also in absolute number. It would remain, however, at a high 30 percent of modern sector employment. Special efforts to stimulate rural production and rural employment during the Fourth Plan are thus a precondition to any improve- ment of the unemployment. While a farmer's cash income amounts to about CFAF 10,000-40,000 a year, salaries of the urban local population average about CFAF 250,000- 300,000 and 2.0-2.5 million for expatriates. There are large discrepancies in salaries paid in the modern sector. MSinimums range from about CFAF 100,000 a year for an unskilled laborer to CFAF 275,000 for a skilled worker, and about CFAF 700,000 for a foreman. The minimum salary for an engineer amounts to about CFAF 900,000 a year; for a chief executive, CFAF 2.5-4.5 million. The wide differences reflect the serious shortage of highly qualified personnel. There can be little doubt that at the time of independence, salaries for un- skilled laborers were comparatively high and might have been possible to re- cruit all such labor at a lower cost. The relatively high salaries have con- tributed to the lack of growth in employment in the modern sector by encourag- ing entrepreneurs to introduce more capital-intensive techniques. Such actions were abetled by the French social legislation of the 1950s. In the last decade, as salary increases were kept to a minimum the situation improved. Neverthe- less it is believed that the imbalance will continue to a certain extent. Education Low level of education is a major deterrent to future economic growth. About 85 percent to 90 percent of Senegal's population is illiterate. Though there is a force of trained employees in the modern sector who are better qualified (they have been much longer exposed to modern work)methods) than those in most other African countries, their number is small. With the present primary school enrollment rate of little more than 40 percent of all school age children, it will remain limited for some time. In the first decade after independence the government made a substantial effort to increase enrollment (Table 20). Between 1960 and 1970/71 the number of students increased by better than 9 percent per year in primary schools and about 19 percent in secondary schools, 13 percent at the University, and 7 percent in vocational and technical schools. As a result, the schooling rate for primary school children about doubled from 22 percent to 42 percent; it increased from 12 per- cent to 26 percent of all school-age children (secondary and vocational students included). Expansion of education was very rapid in the first half of the 1960s, - 57 - but has slowed significantly since 1966. Present rates appear to be about the maximum for formal education, because of budget limitations, and the government's decision to postpone indefinately its original target to reach universal primary education within the near future 21/. Table 20: GROWTH OF SCHOOL ENROLLMENT, 1960-70 1960 1962 1964 1966 1968 1970 (a) in '000 students Primary schools 106.9 149.2 185.6 218.9 248.7 257.8 Secondary schools 8.7 12.0 18.9 25.4 38.0 48.9 Vocational schools /a 2.9 4.3 4.4 5.2 n.a. 5.6 University of Dakar 1.4 2.0 2.4 3.5 2.9 4.7 (b) school enrollment rate (percentages of the corresponding age groups) Primary schools 22 29 35 39 42 42 Secondary schools 2 2 4 5 7 8 Vocational schools 0.6 0.9 0.8 1 1 E 1 Average 12 17 20 23 26 26 /a Senegalese nationals only. Source: "Situation Economique," 1963 through 1970. In 1971/72, government's recurrent expenditures on education amounted to about CFAF 10 billion, about 24 percent of total expenditures or 4 percent of GDP, excluding foreign aid. If French assistance specifically to the University of Dakar and all other foreign teaching assistance (also largely French) are included, total estimated cost of education in Senegal runs about CFAF 12 billion, a high 5 percent of GDP. These expenditures have risen rapidly in recent years -- 6.5 percent a year (1965/66-1971/72) compared to 3.4 percent for total central government recurrent expenditures. Personnel expenditures, largely due to the growing recruitment of more qualified teachers, increased by more than 10 percent a year. This rise has led to a steady dete- rioration of the expenditure ratio of teachers material to personnel. The ratio fell by half from 2:10 in 1967/68 to 1:10 in 1970/71. In constant prices, material expenditures have even slightly decreased. As a consequence, some pupils do not have the most elementary equipment (books, pencils, and the like), particularly in schools outside the capital. Though further expansion in enrollment will be seriously curtailed in the 1970s, improvement of the kind and quality of education needs a high priority. What is urgently needed is a better adaptation to the most urgent requirements of Senegal's economy. This reform will have to fulfil two basic objectives: 21/ The 1961-1964 First Development Plan had hoped to achieve universal - PriMary education between 1970 and 1975. - 58 - (a) orient the "modern streams" of education more technical training in order to enlarge the local labor force and improve its quality, and to produce foremen and managers in order to speed senegalization of existing enterprises and encourage establishment of Senegalese-owned businesses; (b) expand and improve rural education in a manner that will enable farmers to make efficient use of all of the improved techniques and implements available to them; and in a manner that will keep rural children from turning away from the rural sector and adding to urban migration. The education system in the past was, too largely patterned on the French system and geared primarily for an elite rather than for children destined for manual labor. The goal was to prepare children for entrance into the university, with little concern for the 90 percent of students unable or uncapable of joining. In its overall approach, the education system tended to bias children against manual work, particularly in agriculture, and influ- enced a high percentage of rural school children to leave the countryside and migrate to urban areas, without providing them with the technical training necessary to find satisfactory employment in modern manufacturing or services. As a consequence, this system contributed substantially to the increasing number of urban unemployed. Aware of these deficiencies, the Government enacted early in 1969 a basic reform designed to produce a better balance in the education system between formal and practical education, between enrollments in the lower and the upper secondary levels, and between technical and general education. A summary of the main features of the reform follows: (a) curtailing primary education from six years to five; (b) directing the best 20 percent of primary school-leavers into secondary education (after a year of preparatory studies) and the remaining 80 percent to informal training (Practical Middle Education, EMP); (c) dividing secondary education (grades 7-13) into three curricu- lums--classic (6.7 percent), modern (43.3 percent) and techni- cal (50.0 percent)--all preparatory for entrance into a univer- sity. After four years (at the end of middle secondary school) changes from one curriculum to another and changes from secondary school to more practical training leading to a diploma in voca- tional training will be permitted; (d) reducing the number of repeaters; (e) maintaining the primary enrollment rate at about 40-45 percent (its current level). - 59 - Basically the reform should lead to an upgrading of technical education con- sidered until now as second rate education and tend to make the general educa- tion system less literary and more technical. This change should increase the number of technical and sciences graduates from the University of Dakar, a main objective of the government. Originally scheduled for 1969, the reform at the primary and general secondary level (classic and modern secondary education) was not enacted until October 1972. The reform of technical secondary education was still pending at the end of 1972 and its preparation not very advanced. Most of the educa- tion programs were still under revision. No accurate appraisal of the implica- tions of the reform has been made as yet in terms of enrollments and flows; output and absorption by the labor market; costs and finances requirements (buildings, number of teachers); and serious discrepancies, for both political and technical reasons, still exist. Education planning is hampered by the division of the responsibilities among four ministries 22/. Most planning is undertaken by interministerial commissions appointed to study a particular aspect of education, but there is no strong planning unit corelating education and manpower for a long-term program to determine both the country's manpower requirements and the financial needs of the government. The lack of a detailed manpower survey is apparent. For example, there appears to be no economic justification for limiting access to second- ary education to 20 percent of primary school-leavers. In fact, the decision is still open whether it should not be 30 percent. Those two percentages are based more on past experience, when only 20 to 30 percent of the primary school-leavers went to secondary schools, than on a systematic assessment of manpower requirements for the next decade. A detailed study of future needs of the labor market is an indispensable prerequisite to define targets of the education reform in both quantitative and qualitative terms. Without carefully assessing the anticipated needs of the economy, the Government risks investing high amounts of scarce resources in educating young people who will not be able to find the kind of employment for which they were trained. Ap Apropos, the mission has estimated that by 1980 the demand for graduates from secondary schools and universities might average about 4,000 per year, and that the education system will produce 6,000 to 9,000, even assuming only 20 percent of primary school-leavers go into secondary schools. Special attention should be given to achieving an acceptable equili- brium between formal and informal education. Practical Middle Education (EMP), particularly in the rural sector, should favor integration of the rural popula- tion in their environment, contribute to improving their productivity and con- sequently reduce urban migration through an increase in the rural standard of living. EMP is not the first approach to the training of rural population in Senegal. Different approaches have been made in the past with more or less 21 Ministry of National Education, Ministry of Higher Education, Ministry of Human Promotion, and Ministry of Youth and Sports. - 60 - success. These include (a) "Centres d'Animation Rurale" (CAR), the ILO/FAO- supported establishment of specialized centers, where farmers are trained as "animateurs" to disseminate among neighbors the knowledge acquired and its use on their own farms; (b) the groundnut/millet scheme in the groundnut basin (SATEC/SODEVA providing intensive extension service); (c) "Centre d'Expansion Rurale" (CER); and (d) the experimental rural radio education programs. Me- thods of both the "animation rurale" and the SODEVA extension service have been questioned. Moreover, there are signs of overlapping and of competition between individual services for the farmers' attention. These short comings have spurred the government authorities to search for a more permanent insti- tution for rural nonformal education (ENP), particularly for school age youths. The EMP approach is still not well defined. EMP was originally de- signed to deal with all children who had completed primary education but could not move on to secondary schools, but the President of the Republic subsequently stipulated that it should be limited to the rural sector. It was then proposed that EMP would rely on 1,300 post-primary centers of 80 pupils each to provide four years part-time education supplemented with practical work outside the school; thereafter this proposal was abandoned because of its high costs (CFAF 1.1 billion a year, or about 16 percent of total education budget), and it was decided to design a totally new method of integrating EMP more tightly with rural development. The new method would employ three mobile instructors from the "animation rurale" for each "arrondissement" to teach rural youths modern methods of cultivation. It would do without the construction of new buildings and would use mostly the idle physical and human resources of CAR. Thus re- current costs would not exceed CFAF 600 million a year. More recently, it was decided to expand EMP to the entire 11-14 age group; primary school leavers will be used to teach illerate youths to read and write and the illiterator will be to instruct the leavers in practical rural affairs. This revised version of EMP will work together with the rural radio program, the functional literacy plan, and the agricultural extension services. The exact costs of this version have not yet been calculated. IRFED 23/ will do some preliminary experimentation of this revised system in a selected area from October 1972 to October 1973. Its implementa- tion will gradually expanded and provide indispensable information on programs, reaction of the villagers and costs of the operation. Health Conditions Absence of comprehensive data makes it difficult to appraise health conditions in Senegal. In the past decade the government has allocated to health about 5 percent of its equipment budget (about CFAF 200 million a year) and an increasing percentage of its recurrent expenditures (from 7 percent in 1963/65 to 10 percent in 1971-72). As a consequence the number of doctors, nurses and beds per inhabitant has increased substantially. In 1970 there were about 1.4 hospital beds per 1,000 inhabitants and 17,500 inhabitants per physician. The number of consultations and hospital patients has also grown Z3d Institut de Recherches et de Formation en vue du Developpement Harmonise. - 61 - considerably and the overall mortality rate has decreased. Infant mortality, however, remains high (about 170 per 1,000 live births) in Senegal, compared with other African countries (average 156 per 1,000 live births), largely arising from nutrition which severely reduces resistance to infectious. Dis- ease such as malaria and measles, the chief causes of infantile death. Health facilities are heavily concentrated in the Dakar area (3.7 hospital beds per 1,000 inhabitants, compared to an average 0.9 in the rest of the country; 5,700 inhabitants per physician compared to 40,000 in the hinterland). These facilities are on the whole better equipped to suffer less from current budget allocations. This favored treatment makes possible in part the better health services for the Dakar area and enables many health facilities to provide services to the entire country. Protein and calorie intake for the country as a whole or for urban areas are not known. The few figures available concern three small areas in Sine-Saloum and show a calorie and protein intake inferior to standard require- ments 24/. Nutrition appears to fluctuate widely over the years, falling con- siderably below minimum requirements in drought years but in average years the concern is one of quality more than of an actual lack of food. Senegal has undertaken large vaccination campaigns primarily against smallpox, yellow fever and measles; their success have varied, depend- ing on the nutrition available. The government has also initiated several programs to fight malaria, but their effectiveness were limited by insuffi- cient drugs and lack of personnel. River blindness is geographically contained within Senegal Oriental along the Gambia River and the Faleme valley (tributary to the Senegal River) with concentrations of 95 percent in certain areas. Owing to increasing gov- ernment efforts, the number of cases being cured has steadily risen from about 500 in 1961 to 2,500 in 1970. Future action by the government will be directed primarily the countryside (construction of more dispensaries and local hospitals). The mission recommends that special attention be given to the basic problem of nutrition about which little is known. Better nutrition, obviously, is a precondition for improving the health of most of Senegal's population. 24/ Actual calories intake 2,000 per capita, versus standard requirements of 2,400; actual protein intake 56 grams per capita; versus standard require- ments of 60 grams. - 62 - PART TWO: MAJOR ECONOMIC SECTORS, PAST DEVELOPMENTS AND OUTLOOK VI. Rural Sector This chapter analyzes the role of the rural sector in the Senegalese economy including the factors that determined growth over the past decade and those that will determine future growth. In addition, a list of ideas or possibilities for projects has been worked out in some detail for agri- culture and in somewhat less detail for livestock and fisheries. However, no attempt has been made to design a comprehensive long-term rural sector strategy, because lack of basic information concerning key elements in the rural economy (particularly cost of production and hours of work required for different crops, in different areas, with different techniques, and so on). Nonetheless the increasing importance correctly given to rural development and rural diversification urgently demands a comprehensive study to determine the long-term strategy the government should pursue. The World Bank has volunteered to assist the Senegalese authorities in this pursuit. Such a study would evaluate Senegal's competitive advantages in the cultivation of diversified crops. It would consider the world market prices likely in the next ten to twenty years as well as the limited possibilities open to Senegal of the kind of crops it can cultivate (partly with different techniques) in dissimilar areas of the country. More specifically, the study would attempt to find answers to questions like the following: (a) whether or not in the medium and long-term rice production will be more profitable than groundnut, and if so, whether the major effort should be semi-irrigated rice in Casamance, or fully irrigated rice along the Senegal River; (b) is it economical to stimulate migration into the southeast (and what should be the predominant cropping pattern in the newi settlements) or would it be more advantageous to solve the problems of the overpopulated groundnut basin through intensive vegetable production near Dakar. Obviously, in this analysis, when the risk of serious droughts is a consideration, particularly when comparing the relative advantages of upland cultivation versus irrigation. The results of this study would not only help the government arrive at a long-term stra- tegy for agriculture but also provide a base to review the pricing policies for groundnuts, rice and other major commodities. Without such a comprehensive analysis, all government actions in the rural sector (including the list of project ideas at the end of this chapter) will follow a piecemeal approach. Agriculture25/ Past develppment and future outlook. The rural sector (livestock, forestry and fisheries) plays the central role in Senegal's economy. About 70 percent of total labor force is engaged in its activities. Although this sector supplies only 30 to 35 percent of the GDP (at factor costs), its leverage on the whole economy is considerable through its impact on exports and the size of the domestic market for locally-produced goods and services. 25/ More details on agriculture are included in Annex 1. - 63 - Most of this impact comes from a single crop--groundnuts--the production of which is heavily influenced by climate. This crop accounted on average for about 60 percent of value added by the agricultural sector between 1960 and 1970 and more than 70 percent of Senegal's total exports. Climate and soil conditions remain the most important determinants of agricultural productivity, particularly the amount and distribution of rainfall. In 1966, 1968, 1970 and 1972, it was exceptionally dry, the worst in the past fifty to sixty years. These unfavorable conditions brought severe consequences for agricultural production. Cultivated soils are generally poor and their fertility-always critical. Too little fertilizer at least in the southern part of the ground- nut basin, has resulted in a gradual impoverishment of the soils in the past decade; in the northern, more drier areas, the advantages of fertilizer use are not clearly established and are open to some doubt. Better but more clayey soils are found in eastern Senegal. However, lack of infrastructure and the necessity to adopt the traditional cropping methods to the more clayey soils has limited the influx of population into this region. Only 15 percent of Senegal's land is cultivated, most of it within 200 km of Dakar. It is estimated that about twice as much land is cultivable. Population density varies greatly with regions. In the overpopulated groundnut basin many land holdings are very much below optimum size. Given the high positive correlation 26/ between the size of land holdings and production per farm worker, this factor plays a significant role in limiting agricultural productivity. Economic and financial conditions in the rural sector are also important determinants of the yearly fluctuations in agricultural production and in its composition. An increase in the price of agricultural inputs (fertilizer equipment) along with a decrease in groundnut producer prices after 1966 led to a substantial fall in the capacity and willingness of the rural population to adopt more intensive production methods. Thus, use of fertilizer for groundnuts, millet, sorghum, and rice, which had increased 25 percent annually between 1962 and 1967 (to 62,000 tons in 1967) dropped dramatically to 13,000 tons in 1970. Similarly, in 1970 the purchase of agricultural equipment fell to less than 50 percent of its 1967 peak level. Growth in agriculture has been hampered also by the low priority in the central government's current budget. Current expenditures for agri- culture accotnted for not more than 4 to 6 percent of total current expendi- tures in recent years. Extension services suffered from a lack of funds, particularly for personnel and equipment, even though that part of extension service (SODEVA, SAED, and so on) was financed by foreign aid or the develop- ment budget. It is generally agreed that the rural population reacts positively to production incentives and new techniques that raise productivity. However, new techniques often require more care and involve more risks than traditional ones. This need emphasizes the importance of extension services for their role in close supervision and guidance and in the timely distribution of inputs. After five years of severely depressed agricultural production caused by lack of rainfall, low producer prices for groundnuts, and unsatis- factory marketing arrangements 1971 was a good year. A substantial increase - 64 - in producer prices introduced in 1971 and favorable weather conditions helped push the 1971/72 groundnut crop up to 920,000 tons (from less than 600,000 tons in 1970/71), and as a result farmers' incomes from groundnut production more than doubled between 1970/71 and 1971/72. This prosperity increased the farmer's willingness to purchase and use additional agricultural equipment and implements. However, in 1472 the most severe drought in many decades resulted in a sharp fall of production to about 500,000 tons. Since producer prices remained high, this fall was not expected to produce a long depressive effect. Future groundnut production will be influenced more by groundnut prices (therefore by the international market) than by weather conditions. Furthermore gradual opening of the Eastern and Southeastern regions and the increasing use of fertilizer and other improved agricultural methods, including draft animals, will stimulate growth. At present prices farmers' income per ton of groundnuts is marginally higher than it was in the first half of the 1960s and about 30 percent above its lowest point (1968). Based on the experience of the 1960s, it is believed that the present level is more than adequate to insure a normal remuneration to farmers, provided terms of trade between the agricultural sector and the rest of the economy do not change markedly. However, it is estimated that bv 1930 world market prices will be about 20 percent below the 1971 level, -- a fall from I104 per long ton Nigerian groundnuts, shelled, c.i.f. European ports in 1971 (but over h140 at the beginning of 1973) to some E82. This change corresponds to a fall from CFAF 36.7/per kilogran unshelled,at the producer level in Senegal to CFAF 26.1/per kilogram. Almost all of the fall can be absorbed bv ending payments to the Groundnut Stabilization Fund, and the remainder by a minor reduction in producer prices from the present CFAF 23.1/per kilogram (unshelled) to about CFAF 22/per kilogram. On these assumptions, it is estimated that groundnut production could increase at about 10 percent a vear until 1975. Two thirds of the increase would come from a rebound in the area cultivated (to the level reached in 1968), and the rest, from an increase in productivity. For 1975- 80, in view of the slight decrease in producer prices and the need to open up new areas to augment cultivation, the areas under cultivation and produc- tivity are expected to increase at only 0.5 percent and 1.5 percent a year respectively, yielding an annual rate of increase in production of 2.0 percent. Production could thus reach 1,280,000 tons (unshelled) by 1980 as compared to 920,000 tons in 1971. More likely the average will be not less than 20 percent, even if normal (four-year cycle) climates prevail. However, should world market prices for groundnuts fall substantially below b82 per long ton, Senegal would face a very difficult crisis. Assuming the price would fall another 20 percent to about a67/per ton shelled, c.i.f. London, the country would have three basic choices: - 65 - (a) to decrease producer prices to about CFAF 16/per kilogram, their action would very likely cause a sharp fall in production) (b) to subsidize production of groundnuts by maintaining the producer price at or near the present level, this measure would very likely absorb most public savings during the 1970s and would create unmanageable public finance difficulties) or (c) to revalue the CFA franc. Starting with the Second Plan (1965/66-1968/69), attempts have been made to diversify agricultural production by the cultivation of rice, cotton, edible groundnuts, tomato, and recently, sugar cane. Although the prospects for most of these crops are good (little is known about sugar cane cultivation as yet), they will represent only a small proportion of agricultural production in the 1970s. Table 21: PROJECTED GROWTH OF MAJOR AGRICULTURAL PRODUCTS TO 1980 Rate of Shares in Value added by the Growth Agricultural Sector Prices 1960-70 1971-80 1959-61 1971 1980 Groundnuts current -0.9 0.5 65.0 56.9 42.5 Millet/sorghum constant 3.8 4.6 15.5 21.5 23.1 Rice constant 3.5 17.5 3.7 4.0 12.1 Vegetables constant 2.7 5.3 6.4 7.4 8.3 Sugar constant - - - - 3.2 Cotton constant infinite 16.2 - 1.2 3.2 Others constant 2.0 1.9 9.4 9.0 7.6 Agricultural sector 0.8 3.8 100.0 100.0 100.0 Source: Mission estimates. Table 21 summarizes the mission's projections of growth in the agricultural sector for the 1970s. These prospects are based on the following assumptions: (a) groundnut world market prices will decrease by about 20 percent between 1971 and 1980 to a level of E82); - 66 - (b) rice and millet production will increase at 17.5 and 4.6 percent annually (based on past experience, on an increased use of agri- cultural inputs and on the contribution of projects underway or in the worker) (c) Senegal will not produce more than about half of the targeted production of sugar cane between 1972 and 1980 (in view of the technical uncertainties); (d) vegetable production by individual farmers will continue to grow at about 3 percent to 4 percent a year (the industrial farm project may up this rate of growth to over 5 percent during the 1971-80 period; and (e) Senegal will increase its cotton production from 21,000 to 51,000 tons during 1971/72-1974/75 (in keeping with present plans). Rainfall conditions will remain a major factor determining agri- cultural output in the 1970s. The two-year cycle which replaced the four- year cycle (three years of normal rainfall and one year of unfavorable) condition) since 1965 points up the need to define and implement a global or African multinational policy toward water utilization, irrigation and soil protection. It will have to consider possibilities of large scale irrigation along the Senegal River in cooperation with OMVS 27/ as well as irrigation possibilities in Casamance and ground water use in other parts of the country. Projects and development possibilities. The agricultural credit project for groundnuts financed by the Bank has only been partially successful. Growth targets for groundnut production were not reached thus far because of the negative factors,(drought, low producer prices, unsatisfactory marketing arrangements), and the reorganization of the public groundnut marketing monopoly Office National de la Cooperation et de l'Assistance pour le Develop- ment (ONCAD) did not advance as fast as expected. Nevertheless the project achieved a substantial and satisfactory growth in the use of modern farm implements in the groundnut basin and a marked improvement of cropping techniques. There can be no doubt that without the project the fall in groundnut production would have been worse. Future government efforts in the groundnut sector should be guided by the following considerations: (a) improvements in the operation of agricultural cooperatives; (b) improvements in the transportation system; 27/ Organization pour la Mise en Valeur du Fleuve Senegal, a multinational organization to study and implement a program of economic development in the Senegal River valley. It is comprised of Senegal, Mauritania, and Mali. - 67 - (c) better training of the Senegalese supervisory staff in ONCAD's regional agencies; (d) development and intensification of groundnut cultivation in areas in which the ecological and human factors are especially favorable (areas south of the groundnut basin); (e) analysis and assessment of the entire range of agricultural problems, including the problem of crops other than groundnuts (millet, rice, and the like), to make it possible to propose technical solutions better geared to the difficulties actually encountered by farmers; (f) preparation of new agricultural extension service projects in the main groundnut areas, and based on the conclusions of this study; (g) in the long run, a reduction in congestion in the groundnut basin through land-settlement programs in less densely populated areas ("Terres Neuves"). No sufficient effort has been made to raise the productivity of traditional cereals (millet, sorghum, maize) either through extension service programs or by agricultural research. Even though agricultural research has not yet succeeded in producing any highly productive varieties, more modest ways to improve yields should be promptly investigated and developed. At the same time marketing facilities should be improved. The potential benefits of such measures would be increased production of cash crops (groundnuts and cotton) and a reduction in cereal imports. Since cereals react more favorably to fertilizer and other modern inputs than do groundnuts, modernization of cereal production by reducing the time farmers have to devote to growing cereals for their own consumption might make it possible to increase the time they have for cultivation of groundnuts. For rice-growing, ana analysis of development projects undertaken in recent years leads to the following beliefs: (a) no major expansion can be expected in rainfed upland rice- growing since yields are too uncertain and too dependent on the vagaries of rainfall; (b) cultivation of rainfed rice in bottomlands and on lower slopes is much more likely to be attractive to farmers; and (c) a high quality extension service for irrigated rice, as the Chinese experience has shown will encourage farmers to adopt sophisticated techniques to obtain very high yields, sufficient to reimburse the cost of relatively expensive irrigation facilities. - 68 - On these observations, the following recommendations are suggested: (a) upland rice growing should not be pushed, unless current research produces rainfed upland varieties with a higher yield and a shorter growing cycle than those now available, (b) current projects for the development of rainfed rice should be redesigned and the emphasis laid on cultivation of rainfed rice in bottomlands and on lower slopes rather than upland; and (c) new development projects for irrigated rice should be considered for the medium-term even if the investment cost per hectare is relatively high. In the short-term, however, priority should be given to improvement of areas now being cultivated, in which major primary investments have already been made, particularly in the Senegal River valley (SAED, OAV). For the new sector of market gardening, possibilities depend largely on the arrangements between Bud Antle (BUD) and the government and may permit expansion of small vegetable production. Cotton production has developed very satisfactorily in the last decade and prospects for future growth are pro- mising. The European Development Fund is extensively involved in this sector. Nevertheless, further substantial expansion might require increased foreign aid and help from other sources. Both human and ecological factors appear to be conductive to growing tobacco (expecially by irrigation). A current program should shortly be able to meet the limited demand of local industry for "brown" tobacco. Development of high quality tobacco would require a thorough study of technical needs and export prospects. Livestock Livestock has been a stabilizing factor in the agricultural sector in the 1960s (as indicated in Table 22). Table 22: RATES OF GROWTH OF AGRICULTURE AND LIVESTOCK (average annual growth rates) 1959-65 1966-71 1959-71 in current prices Agriculture proper 5.6 - 2.8 Livestock 4.3 8.5 6.4 In constant prices Agriculture proper 5.8 -1.7 1.9 Livestock 2.4 2.4 2.4 Source: Statistical Appendix Tables 2.1 and 2.2. - 69 - The rate of growth in livestock in constant terms has been very steady in the 1960s, while agriculture's rate moved erratically during these years. Furthermore, livestock prices increased much more rapidly during the second half of the 1960s than during the first half, alleviating the difficult financial condition of the rural sector from 1966 to 1970. Cattle account for 60 percent to 65 percent of total livestock pro- duction and goats and sheep for 23 percent to 25 percent. The rest derives mainly from pigs and chickens, the production of which increased about twice as fast as that of total livestock in the past decade (5 percent annually). The prices of cattle, goats and sheep jumped 60 to 80 percent between 1967 and 1971. This price jump can be explained by a food shortage during the drought years in Senegal and by the decrease in livestock in Maritania (Senegal's main supplier) following the 1968 and 1972 droughts. Senegal has a large insufficiency of meat and other animal products. Exports of hides and skins, live animals, and meat accounted for less than 1 percent of the total value of exports in the past four years. Imports of meat (mostly unrecorded and in the form of cattle on the hoof, coming from Mauritania) were estimated at about CFAF 1.3 billion in 1968 (3 percent of total recorded improts). Senegal has also a large shortage of milk products, imports of which amounted to about CFAF 2 billion in 1971 (3.3. percent of total recorded imports and up from CFAF 1 billion in 1962). In spite of favorable conditions (sahelian climate, unemployed agri- cultural lands estimated covering 30 percent of the country, and large local demand for meat), Senegal has not used its comparative advantage in livestock. Performance in the past decade has been poor. Between 1959 and 1971, the cattle herd increased at about 2 percent a year to an estimated 2.65 million head. About 8 percent of the herd is slaughtered annually. In the same period, sheep and goats increased at about 3 percent a year, while the annual offtake rate was an estimated 25 percent. 28/ Several factors explain this poor performance. An important one is the fact that neither the agricultural nor the livestock sectors have been given high priority by the government. Between 1965/66 and 1970/71, the live- stock sector got only 1 percent of the central government current budget, while allocations to the rural sector as a whole amounted to 5-7 percent. The in- crease in current budget outlays, according to estimates, did not keep pace with the increase in livestock herds, not withstanding the fact that the live- stock growth was considered low compared to Senegal's potential. Inadequate current outlays also hindered extension services in their task to improve livestock raising techniques. Insufficient extension service field personnel 28/ Figures from Direction de l'Elevage; these figures are below those estimated in 1966 by Lacrouts and Tyc. - 70 - and equipment have been major factors in the lack of progress in using improved methods and, therefore, in raising the low offtake and growth rates of cattle, goats, and sheep. However, health standards for livestock have been maintained as a result of substantial aid and the vaccination program has proved successful. These efforts may, unhappily, not suffice to preclude the possibility of mass epidemic. A second factor has been insufficient infrastructure for livestock raising -- that is, a lack of veterinary outposts, wells, firebreaks, and feeding ranches. From 1965/66 to 1970/71, livestock development renewed only 1-3 percent of cental government capital expenditures (but more than 80 percent of its funds from foreign aid). The Third Plan (1969/70-1972/73) included originally twenty-eight projects in the livestock sector for a total of CFAF 2.5 billion. This program was reduced to CFAF 1.6 billion in the Readjusted Plan, a decrease from 2 percent to 1.4 percent of total plan outlays. This action was particularly regrettable in view of the already low allocation in the original Plan and of this sector's potential to help substantially reduce the disparity between urban and rural standards of living. Of equal concern was the fact that by December 1971, more than halfway through the Third Plan, less than one-third of the Readjusted Plan projects had been im- plemented. Indications are that feeding ranches could contribute substantially to livestock productivity. Preliminary experiments by the National Livestock Laboratory and first results in the one private feeding ranch near Dakar in- dicate that per animal gains of up to 1 kilogram per day for three months are possible, increasing the weight to 190 kilogramt to 230 kilogram (carcass) for the Zebu (Gobra) race and to 140 kilogram to 180 kilograms for the N'Dama race from a present average of 120 kilograms. Feeding ranches also improve meat quality, making it suitable for export to the Gulf of Guinea countries. Major factors limiting the supply of animals. suitable for feeding arrive mainly from the shortcoming not only in the field or production (infrastructure and extension services) but also, in the field of commercialization. The need in commericalization is not only to improve communications with the market but also to make commercial credit available to farmers, traders, and butchers. Livestock growers and dealers generally do not furnish sufficient guarantees to obtain regular bank credit and therefore, fall back on credit from the unorganized market at very high interest rates. Individuals and cooperatives of cattle raisers using cattle as collateral, have also been unable to obtain investment credits from the BNDS. Apparently a guarantee system must be devised similar to that for the small entrepreneurs in the industrial sector) to give cooperatives or even individuals access to credit for livestock development. The lack of commercialization channels has given a monopolistic advantage to some intermediaries, and resulted in very low prices paid to the producers (CFAF 35 per kilogram to CFAF 40 per kilogram on the hoof). The low price reamined until the drought of 1968, when they increased to CFAF 50 per kilogram to CFAF 55 per kilogram on the hoof. This increase stimulated production but might remain a short-run phenomenon. - 71 - Prospects for livestock development in Senegal are considered remarkably good by experts. An ambitious program for integrated development of livestock during the 1970s has been prepared by the Livestock Service. It includes production and commercialization infrastructure and a substantial reinforcement of the extension serives. The livestock service estimated that this program of CFAF 5.5 billion should permit reaching very ambitious targets (as shown in Table 23). Table 23: LIVESTOCK PRODIJCTION TARGETS (1971-1980) 1970 1980 L.S./1 IBRD projection Estimates Offtake rate cattle 8% 14-15% 10% sheep and goats 25% 30% 27% chicken 95% 110% 102% pigs 75% 85% 85% Average weight (kilogram per carcass) cattle 120 130 125 1960-70 1970-80 L.S. /1 IBRD projection Estimates Growth rates (annual) cattle 2.0% 2.9% 2.4% sheep and goats 3.0% 3.5% 3.0% chicken 5.5% 7.2% 6.4% pigs 3.0% 1.8% 1.8% /1 Livestock Service. - Assuming an annual population growth of 2.2 percent in the 1970s and an increase in per capita beef consumption of 1.7 percent a year and assuming that the production targets can be reached, the Livestock Service estimates that Senegal will become a net exporter of cattle in the 1970s. This achievement would also reduce imports of sheep and goats from its present level of one-quarter of all such animals consumed in Senegal to about 6 percent by 1980. Senegal would also be self-sufficient in chicken production and would export about 45 per-cent of its pig production. However, for several reasons it is doubtful whether this program can be fully implemented and targets met. The 1972 drought seriously affected the livestock sector, particularly in the country's north and center which has the highest concentration of livestock. Despite the absence of - 72 - reliable estimates, no doubt heavy losses occurred which will hamper development for many years. In addition, experience shows that livestock projects are difficult to implement. Unlike agriculture where technical breakthroughs have been achieved in recent years benefitting crops like cotton and rice, no fully tested satisfactory teclniques or method for developing livestock on a large scale has as yet been found that could be implemented rapidly. In the next few years, Senegal will necessarily have to initiate a series of pilot projects that will hopefully provide the answer. In consequence, development in the livestock sector will necessarily remain slow in the immediate future, but can be expected to speed up substantially toward the end of the 1970s. What is urgent, is a determined government effort during the Fourth Plan to devote more resources, human as well as financial, to carry out the pilot phase, without which no large scale development program can begin. The mission therefore projects that though Senegal will devote more resources to devloping the potential of the livestock sector between 1973 and 1980 than ever before, it will not reach by 1980 more than about half of the targets indicated by the livestock service (Table 23). Accor- dingly, the mission believes that Senegal's cattle production would increase at slightly over 4 percent annually during 1972-80 compared to about 3 percent between 1962/63 and 1970. Assuming an annual increase in consumption of about 4 percent, Senegal would marginally decrease its dependence on cattle imports from 24 percent to 16 percent of total beef consumption. With consumption of sheep and goats projected to increase by about 3 percent annually, Senegal by 1980 will continue to import about 19 percent of its sheep (compared to about 26 percent in 1971), but would become self-sufficient in goats. Senegal, the mission believes could increase its exports of pigs from 70,000 in 1971 to more than 90,000 head by 1980. In summary, value added in the livestock sector could increase at about 4.4 percent annually between 1972 and 1980 (compared to about 2.5 percent in the 1960s), provided that more public resources are devoted to livestock development, particularly for production and commercialization. Fisheries Because of a favorable natural environment, Senegal has abundant fish resources. In recent years, an estimated 600,000 tons of fish have been caught annually in Senegalese waters (about 0.8 percent of world production). This abundance explains why the Senegalese have traditionally been drawn to the sea and why fish is a staple in their diet. Fishing accounts for about 5 percent of GDP and 9 percent of exports, and employs more than 30,000 persons including 2,000 in processing activities. Between 1960 and 1971, production increased by 7 percent per year at constant prices and by more than 15 percent at current prices. Fishing is carried out in two very distinct ways: the traditional sector (including river fishing) totally in the hands of Senegalese provides 80 percent of production; the industrial sector largely French owned covers trawling and shrimp and tuna fishing. While output of traditional fisheries is mostly consumed locally (fresh or traditionally processed), industrial pro- duction is mainly exported canned or frozen. - 73 - Traditional fishing. Traditional sea fishing (180,000 tons, CFAF 8 billion in 1972 is carried on by more than 95 percent of an estimated 27,000 artisan fishermen who operate close to shore in pirogues. Annual cash income of a fisherman is estimated between CFAF 150,000 (without outboard motor) and CFAF 240,000 (with outboard motor) compared with CFAF 90,000 for a worker. Since 1962, pirogue fishing has increased in quantity by 8 percent a year and in value by 16 percent. Although part of this increase is a matter of improved data collection, there has been a real rise in the tonnage caught owing to the enlargement of the fleet from 3,100 boats to 4,400 between 1962 and 1970 and the progressive motorization of the pirogues (from 35 percent in 1965 to 44 percent in 1970). A motorized pirogue yields about 30 tons per year compared to 20 tons for traditional pirogue. The sharp increase in the average value of catches over the last four years is due not only to rising prices but also to the increase of shrimp catches which have a value about ten times higher than that of fish. To improve traditional fishing, the government in the early sixties launched a program for the building of motorized long liners (cordiers) 29/ Compared to traditional pirogues, they have the advantage of carrying larger crews (eight or ten men instead of four or five and larger quantities of fish, and of sailing further out regardless of weather conditions. However, the operation was an almost complete failure, and todate these boats carry out less than 5 percent of traditional sea fishing. River fishing is estimated at about 40,000 t per year, with a value of CFAF 1.5 billion, or about 15 percent of total fisheries production. Of the approximately 1,000 persons employed, only 30 percent are full-time fishermen and the reaminder active as well in agriculture. River fishing is extremely important for the diet of the local population in the Senegal River area (about 400,000 persons). It is totally traditional and only a small number of the pirogues are motorized. About 85 percent of the catch of traditional fishermen is consumed fresh, by the fishermen and by the population along the coast, including Dakar, and a large part of the groundnut basin. A good road network makes possible rapid distribution of fresh fish within a readius of more than 100 kilometers. Traders buy the fish from the fishermen and transport it to the consumers. Often the same traders provide the fishermen with inputs such as fuel and ice, on credit. The remainder of the catch is processed by tradi- tional, archaic methods (dry salted, grilled, smoked, sundried and fermented). The drop in traditional processing from 11,000 in 1967 to 9,500 t in 1970 might reflect decreasing demand for this type of fish product. Industrial fishing. Industrial fishing encompasses not only bottom and surface fishing along the coast, but also ocean surface species. This fishing entails long-distance voyages to follow seasonal migration. It requires 29/ 13-meter cutters with 18 tons gross tonnage, costing about CFAF 5 million. - 74 - heavy ships and large investment, and because of these demands it is a sector largely owned by French nationals. There are three different kinds of indus- trail fishing in Senegal: trawler, sardine, and tuna, in the hands of both French (71 percent) and Senegalese (29 percent) companies. The catch of trawler fishing consists of shrimp, rougets, soles, and lobsters, which ahve large markets overseas. The trend in trawling pro- duction has been erratic. In spite of the steady increase in the number of trawlers (from 5 in 1959 to 72 in 1972 of which 9 are Senegalese-owned) pro- duction remained about CFAF 150 million a year in the first half of the sixties, mainly because of fish stock depletion from overfishing by foreign fleets. The result was a decline in interest for bottom fish and a rise in interest for shrimps. In 1971 shrimp fishing accounted for about 80 percent of total trawling production; and trawler fishing that year reached a peak of CFAF 1.7 billion. Sardine fishing, which started in 1962, contributed only 2 percent to total fisheries production. Catches have been decreasing in the last 3 years mainly because of stock depletion. Four of the five sardine boats operating out of Dakar are Senegalese-owned. Tuna fishing accounts for 15 percent of the value added by fisheries. Recent development have been marked by a sharp increase in production which rose from an average of 10,000 tons per year over the 1960-67 period to a peak of 18,500 tons in 1971. This increase is chiefly due to the activities of Societe' Senegalaise d'Armenent de Peche (SOSAP), a semipublic company established in 1963, with the Senegalese government as majority stockholder and the financial assistance of French public and private interests. SOSAP has helped increase Senegalization of tuna fishing in the second half of the sixties. Until 1966, tuna production was mainly in the hands of French compan- ies operating 60-100 vessels, with onry a part of their catch landed in Senegal. Since then production by Senegalese boats has jumped from 1,800 tons to 11,000 tons in 1971, paralleling the growing of SOSAP's fleet from 5 boats in 1966 to 12 in 1971. At the same time prices for tuna fish doubled from CFAF 50 per kilogram in the early sixties to CFAF 100 per kilogram in 1971. The output of industrial fisheries is largely factory processed products for export. There are 6 factories (mostly French-owned) processing trawler catch and sardines and two tuna processing plants. Shrimps are mostly exported frozen. Up to 60 percent of the Sardinella production is consumed fresh in the country, while most of the remainder is frozen for exports or converted into fish meal. Until recently canned tuna was sold tax fee in the French market under quota (15,300 tons in 1969/70) fixed at an intergovernmental conference between France and the various maritime states of French speaking Africa. The surplus was exported outside the French zone. This agreement was abolished after the 1970/71 campaigns. Total fish processing has an out- put of about CFAF 6 billion a year; it employs 3,000 persons, of which half are on a temporary basis. Fisheries exports which consist mostly of indus- trially processed fish have more than doubled between 1966 and 1971 to about CFAF 3.4 million or 9 percent of Senegal's total exports. - 75 - Past public development efforts. Past efforts of the government concentrated on creation of a Senegalese tuna fleet and modernization of the traditional sector through motorization of pirogues and building of long liners. Substantial foreign assistance to the tuna program has been success- ful in providing Senegal with an efficient fleet. However, efforts favoring traditional fishing, although the most important in terms of employment and value added, have been limited and unsuccessful. The main bottlenecks have been shortage of local resources, bad management, and lack of foreign aid. In the traditional sector the programi of BNDS credits for motoriza- tion and equipment of the pirogues has been limited, because of inadequate re- payments. This handicap severely reduced the motorization program from 3000 pirogues in 1963 to about 2000 in 1970/71. The long liner project was probably the least successful in the fisheries sector. Under the project two cooper- ative ship were had been set up in the early 2960s to build 100 boats for sale on credit to local fishermen. However, the program was abandoned because of inadequate repayments and technical difficulties after 32 long liners had been put in service and the shipyards closed; by 1972 only 12 of 32 boats were operating. This failure was due primarily to lack of technical know-how by local fishermen, lack of repair and maintenance services, sale of boats to non-fishermen, insufficient marketing organization, and inadequate earnings of fishermen who could not reach the break-even point of 90 tons of fish per year per boat. Nevertheless convinced of the technical and economic advantages of long liners over traditional pirogues the government has provided for construction of 18 additional boats in the Third Plan. Increasing depletion of resources close to the coast within reach of pirogues forces traditional fishing to adopt new techniques that permit fishing further out. To be suc- cessful the new program will need serious improvements in organization and management. The Third Four-Year Plan also included programs for total motorization of pirogues and the financing of warehouses, equipment, ice storage and market equipment. All these projects were to be financed by a maritime credit agency within BNDS for which the government had requested World Bank financing. Belgium and Canada have provided the necessary financing for pirogue motorization (CFAF 1 billion, including river fishing), but financing of the long liners program has yet to be found. Related to the pirogues motorization program was the Government's action to expand the cooperative movement in the fisheries sector. In 1971 the 22 suppliers cooperatives with 2,421 members (10 percent of total traditional fishermen) purchased about 600 outboard motors on credits granted by the BNDS. Repayment performance has been adequate. The government now plans to help the cooperatives to enter into the marketing of fish. It is not clear whether the government intends to make marketing cooperatives the replacements for private traders. This move would be of doubtful advantage in a sector which has performed well under free enterprise. Coexistence of both where the fishermen has a free choice between marketing cooperatives and private traders, would probably be the most efficient solution. - 76 - Investments in the modern sector have been substantially higher particularly for tuna fishing which attracted foreign financing. SOSAP was created to assure a steady supply to Senegal's tuna processing plants to help keep them working at capacity. It was financed primarily by FAC, FED, and the USSR; the government's contribution was limited to its capital subscription of CFAF 0.2 billion. Although SOSAP's financial situation is presently tight, largely because of the heavy investments program under completion, the company operates satisfactorily and is expected with the steady increases in prices and catches to improve further. Its operations should yield satis- factory results in the medium term. For trawler and sardine fishing funds came largely from the private sector and very little from public funds. For industrial fishing the third Development Plan included an investment program of about CFAF 4 billion, mainly for the purchase of fifteen new boats by SOSAP (CFAF 3.3 billion), four shrimp boats (CFAF 0.4 billion), and a cold storage cargo ship (CFAF 0.1 billion) and for the creation of a small sardine complex. The plan focused on the most promising activities, and the degree of completion is satisfactory. Six of the tuna boats and the cargo ship have been acquired, and the remaining four tuna boats are under construction. The Plan also included some infrastructure projects, particularly the construction of a new wharf in the Port of Dakar (CFAF 0.6 billion) and of a new cold storage plant in Dakar (CFAF 0.6 billion). Both projects deemed indispensable in view of increased production are under way. The Plan provided also for construction and improvement of several access roads to large fisheries centers (CFAF 0.6 billion); one has been financed by local resources. Government technical assistance to fisheries has remained very limited. There are no extension services for fisheries comparable to those in other rural sectors. The 60 technical agents in the Fisheries Department of the Ministry of Rural Development are concerned mainly with administrative tasks. Although fisheries account for 5 percent of GDP and 15 percent of agricultural production, current government ex,enditures on fisheries do not exceed 0.2 percent of central government's total current expenditures, or 3 percent of the Rural Development Mtinistry's total current expenditures. This amount is obviously insufficient to spur fisheries production. Foreign technical assistance to fisheries consists of three small projects: two from FAO (workshop for repair and maintenance of fishing boats, mainly long liners, and training school for civil servants); and one French project (Thiaroye Fish Research Center). The government's assistance for training in the fisheries sector has been limited to the creation of two schools in 1962: one to train middle level administrative personnel for the fisheries sector set up by the Ministry of Agriculture with the assistance of FAO,30/ and the other to give vocational training to future fishermen and to increase the skills of trained fishermen 31/. 30/ L'Ecole des Agents Techniques et Preposes des Peches de Thiaroye. 32/ Centre de formation professionalle des peches maritimes industrielles. - 77 - The latter program which is under the Ministry of Technical Education is not practically oriented; none of its graduates has yet been employed in the fisheries sector. Its programs are currently under review. The output of the two schools amounts to about ten graduates a year, much below the country's needs. In fact fishing suffers from a lack of skilled labor which not only contributed to the failure of the long liners project but also continues to hamper Senegalization of industrial fishing. Future public development efforts and projection of production. Based on an analysis of past projects and developments, the following seem to be the projects with the highest priority for implementation during the Fourth Plan: 1) Completion of several pending projects of the Third Plan (construction of additional long liners, four shrimp trawlers, and Port of Dakar sales rooms and central markets; the river fishing and roads projects). Topmost priority should be given to the long liners, because of the urgent need for traditional fishermen to fish further offshore to avoid depletion of inshore stocks. The government plans to expand the project by building about 100 additional long liners in the next five years. This program should include efforts to strengthen the extension service (organization, marketing, reapir facilities) in order to avoid repetition of the unfavorable experience of the sixties. 2) Further actions should be taken in favor of traditional fisheries, specifically to improve infrastructure for unloading and distribution of the catches of sea fishing (cold storage plants in major fishing centers, cold storage trucks); to modernize river fishing in order to exploit its potential; and to improve extension services and training of fishermen particularly in the fields of maintenance of motors and other equipment, handling of produce under more hygienic conditions, testing and application of more modern fishing techniques. The Center at Thiaroye has achieved some encouraging progress in this regard. 3) The government should purchase more patrol boats for protecive and controlling fishing in the waters off the Senegalese coast. These activities are indispensable for limiting depletion of stocks. It is estimated that about CFAF 6 billion (US$24 million) should be allocated to fisheries in the Fourth Plan, mostly to the traditional sector. Based on past trends and on achievements possible under outlined development program, it should be possible to reach a 6.6 percent annual growth rate at constant prices in the next decade (6 percent in the traditional sector and 8.3 percent in the modern sector) as compared with 6 percent in the last decade. - 78 - Table 24: MISSION'S PROJECTIONS OF FISHERIES PRODUCTION: 1975 AND 1980 (in billion CFA francs at 1971 prices) Average Annual 1971 1975 1980 Growth Rate Traditional Sea fishing 7,991 10,420 13,220 River fishing 1,451 2,160 2,700 TOTAL 9,442 12,580 15,920 6.0% Modern Tuna 1,508 2,138 2,652 Trawling 1,220 1,797 2,532 Sardinellas 248 602 935 TOTAL 2,976 4,537 6,119 8.3% GRAND TOTAL 12,418 17,117 22,039 6.6% Source: Mission Estimates. The projection assumes both an enlarged fleet and increased yields due to better fishing techniques and better extension services. A 6.6 percent annual increase in production would result in a 13 percent annual growth rate of exports; on this basis, by 1980 fisheries exports should amount to CFAF 10 billion, or 13 percent of total exports. - 79 - VII. Modern Sector Industry 32/ The industrial sector faced serious difficulties in the beginning of the 1960s, because of the loss of the privileged position Dakar enjoyed as the capital of French West Africa, the loss of important export markets for manufacturers in other West African countries, and the lack of growth in the agricultural sector. Nevertheless the annual growth rate in the manu- facturing sector reached 4.7 percent from 1959/60 to 1970/71, or about four times that of the rest of the economy. Excluding groundnut processing (the growth rate of which is determined by extraneous factors), value added by the industrial sector grew at 6.2 percent annually in this period. The dynamic role played by the manufacturing sector in this decade was even more accentuated in the second half of the 1960s, when the growth rate in the rest of the economy was less than 1 percent. Table 25: MANUFACTURING INDUSTRIES BY VALUE ADDED (Value added in billions of CFA francs at 1971 prices) 1959 1965 1971 CFAF Percent CFAF Percent CFAF Percent Groundnut processing 4.48 27 6.02 26 3.24 11 Foodstuffs 4.92 29 5.61 25 7.38 26 Textile, leather 1.87 11 3.33 15 5.45 19 Mechanical, electrical 1.84 11 3.35 15 5.68 20 Chemical 0.48 3 1.27 5 2.16 8 Miscellaneous 3.10 19 3.26 14 4.55 16 Total 16.69 100 22.84 100 28.46 100 Source: Senegalese National Accounts; Industrial Census. It is estimated that less than half of the increase in the industrial production of consumer goods between 1959 and 1971 was due to an increase in domestic consumption of goods already manufactured in Senegal. 33/ The 32/ More details on manufacturing industries are included in Annex I. 33/ More than 75 percent of industrial production consists of consumer goods. The analysis below excludes investment goods to take into account only those industries where import substitution has been taking place. - 80 - rest is attributed to an increase in exports and by import substitution. Whereas import substitution was a major stimulating factor in the first half of the decade, export growth has largely contributed to the expansion of industrial production in the latter part of the 1960s. New export markets were found primarily within the former French West Africa, although some firms, mostly textile plants, have proven competitive in the developed countries' markets. The substantial increase in exports appears to be due to several factors. One was the 1966 revision of the Western Africa Customs Union which benefitted primarily the more industrialized member countries, (Senegal and more recently the Ivory Coast). Although it is not possible to quantify the advantage that this revised agreement represented for Senegal it was certainly a major factor explaining the export boom of the late 1960s. Second, Senegal has a long tradition of industrial production and the Senegalese labor force is considered one of the best in Africa. It is estimated that labor produc- tivity in Senegal may be as high as in Europe for mechanized or repetitive operations requiring relatively little supervision. In contrast, productivity may be lower, and sometimes much lower, than in Europe when skills requiring years of training are involved or when the work pace is not controlled by the machine. Third, indications are that a "capital deepening" process has taken place in the industrial sector since the early 1960s. Between 1962 and 1967 investments in manufacturing increased at about 14 percent a year, reflecting the confidence prevailing among foreign entrepreneurs (mostly French) who control 85-90 percent of the modern industrial sector. Another important factor contributing to the improved competitiveness of the Senegalese industry was the relatively low rate of increase of industrial wages during 1961-71 (an estimated 3 percent yearly). Finally, it is the industrial sector which benefitted most from the increase in short-, medium-, and long-term credit in the past few years in a generally tight credit situation. Although it is difficult to measure the extent to which this last factor contributed to the sector's growth, it certainly had a stimulating impact. The real future for Senegalese industry lies with exports to de- veloped countries particularly the European Community where Senegal enjoys tariff advantages. Although a few firms have already been successful in exporting to these countries, three main obstacles common to most small and medium-sized African countries make the transition from African-oriented to world-oriented exports difficult: (a) quality standards on the world market are above those required by the African market; this requirement puts special pressure on those factors of production typically in short supply -- skilled labor and managerial ability; (b) in order to be competitively priced, most products must be manufactured on a scale to which local entrepreneurs are seldom accustomed and which requires them to make substantial investments; and (c) high tariff protection of the local industry allowed inefficiencies, further stimulated by the Investment Code which favored creation of oligopo- listic situations. - 81 - If Senegal is to make a breakthrough in developed countries' markets, actions in three fields must be taken: training, marketing, and credit avail- ability. Moreover the government must stimuLlate competition in manufacturing. Some moves have already been taken, particularly by Societe Nationale d'Etudes et de Promotions Industrielles (SONEPI) in the fields of training, financial guarantees and participations, project preparation, and the establishment of industrial estates. SONEPI's funds, however, have remained limited and its action is exclusively oriented toward small and medium local enterprises. The following further actions are suggested: (a) training (formal, on-the-job, and through extension services) both at the management and worker level should receive priority; the efforts already undertaken need to be applied on a larger scale; the difficulties for Senegalese entrepreneurs to obtain financing are often linked to insufficient knowledge and ex- perience in management and accounting techniques; training would also improve productivity and make entrepreneurs more aware of market conditions and possibilities: (b) more steps could be undertaken in ensuring that protection of local market does not condone large inefficiencies and that the special advantages granted to the priority and concessionaire enterprises do not lead to detrimental monopolistic situations; (c) the present trend toward greater economic cooperation among the UDAO countries must be encouraged; the market of each individual country is often too small for a modern factory to take advantage of economies of scale; therefore the possi- bility for such a factory to export to the developed country markets is limited from the start, and the local market cannot be used as a trial ground to reach eventually the export market; much of the infant-industry argument for protection therefore is lost; (d) study the feasibility of having a network of Senegalese re- presentatives on the major export markets to promote Senegalese products and to act as intermediaries between the Senegalese entrepreneurs and foreign markets; and (e) streamline export procedures. It is projected that value added in the industrial sector could grow by more than 6 percent annually between 1971 and 1980. These projections are based on an industry-by-industry analysis of past trends and of the factors likely to affect output in the coming years. Canned food (mostly fish), tex- tiles and clothing, leather, and the mechanical/electrical industries are ex- pected to continue to grow at an above-average rate (about 8 percent) in the 1970s. These industries are expected to benefit from the following favor- able factors: - 82 - (a) canned food: optimistic prospects in the fishing industry and proven competitiveness of the Senegalese factories on the export markets; (b) textile and leather: though import substitution possibilities become limited, these sectors will benefit from an increase in domestic consumption, the favorable outlook of the export markets, and an increasing share of domestic value added in production; and (c) mechanical/electrical industries: these industries will continue to benefit from growing local demand and from an increasing share of value added in production, which reached 37 percent in 1971 from 26 percent in 1959. The outlook for mechanical industry would be substantially improved should the tanker re- pair project in Dakar, presently under study, be undertaken. This project seems to offer interesting possibilities of sub- contracting. Power and Water The public electricity system consists of an inter-connected network in the most western part of the country around Dakar, Thies and the Taiba phosphate mines) and nineteen isolated installations in secondary centers. At the end of 1972 installed capacity reached about 115 thousand watts, most of it concentrated in the Cap des Biches power plant outside Dakar. In addition, several industrial plants (mostly groundnut mills) have their own generating capacity (35 MW). Energy consumption has increased at an annual rate of about 9 per- cent during 1961-72 and is expected to grow at 5 percent to 6 percent in the next decade. Energy sales amounted to 320 gigiwatts in 1972. To keep up with increasing demand, a new 27.5 thousand watt thermal unit will be commis- sioned in Dakar in 1975. Another such unit will most likely be needed in 1978 The public electricity supply system has for many years been op- erated by a private company (EEOA) 34/ under a concession granted by the French government before independence. After long and difficult negotiations the Government and EEOA reached an agreement in early 1973 whereby: (i) the physical properties were transferred to a new gov- ernment-owned company for CFAF 6 billion compensation to EEOA; 34/ Electricite et Eaux de l'Quest Africain. - 83 - (ii) the public system will be operated by a new company, owned equally by the government and the former concessionaire. percent The latter will continue to operate the facilities on behalf of the new company for a period of 5 to 10 years for a fee based on the amount of sales; (iii) EEOA wqill lend to the government CFAF 1 billion to finance the 27.5 thousand watt thermal unit to be installed by 1975. Water distribution was nationalized in 1971 when SONEES 351 was created to take over operations from private concessionaire. SONEES suffers from both a lack of qualified staff and overmanning at the unskilled level. Its financial situation is strained, because of the large debt service for the Lac de Guiers project (built in 1971), high accounts receivable and excessive labor costs. Particularly serious will be the problem of financing of the next installments of the Lac de Guiers debt. Water supply and distribution systems exist in 37 cities and secondary centers. Only Dakar and St. Louis have sewerage systems. In rural areas water is supplied by shallow wells and in some locations by deeper wells built by the Ministry of Rural Development. For the year 1972 potable water production amounted to 37.7 million, cubic meters (30.1 in the Cap Vert area and 7.6 in the rest of the country). About one-third of the potable water comes from surface water, including the supply from the Lac de Guiers project, and the rest from groundwater. About 30 percent of the population in the Dakar-Cap Vert area is supplied by connections to service mains and 70 percent depends on water from public fountains. The consumption of the well-to-do population is estimated at about 185 l.c.d. 36/ and for the lower income classes 40 l.c.d. Users of public fountains consume about an estimated 20 l.c.d. During the Fourth Development Plan (1973-1977) the government intends to execute a water supply, sewerage and drainage project for Dakar, based on a WHO/UNDP study (about CFAF 1.5 billion). About CFAF 1 billion might be spent for water supply in secondary centers for which WHO is scheduled to prepare a study under its WHO/UNDP project. CCCE is already financing a CFAF 240 million extension and renewal project for St. Louis, including rehabilitation of the central part of the urban water supply system and construction of two water towers. The government is negotiating with Germany the financing of two other projects: a CFAF 300 million project for water supply to ten villages and six livestock watering places along the Lac de Guiers pipeline and a CFAF 400 million water supply project for livestock and agriculture, including the drilling of 14 wells in the Fleuve and Sine- Saloum regions. Decisions on these projects are expected in 1974. 35/ Societe Nationale des Eaux et de l'Electricite du Senegal. 36/ Liter per capita per day. - 84 - Improvement of sewerage in secondary centers is-very lilkely to be financed by a CFAF 1.5 billion Italian government subsidized stipplier credit (over 2 to 5 years 6 percent to 7 percent). Studies were being made in early 1973 by Italconsult which also has responsibility for the execution of the project then expected to start in Fall 1973. Tourism Tourism assets. Senegal has a number of definite assets for developing international tourism particularly pleasant climate during European and American winters and long sandy beachers offering the possibility to swim, fish and sail all year round. In addition, it is relatively close to Europe and the USA: it enjoys remarkable political and social stability and follows a policy of close cooperation between government and private enterpreneurs. Major areas for beach tourism are the Cap Vert area (which includes the capital Dakar), the Petite Cote with more than 100 kilometers of beaches, south of Dakar) and the Cap Skirring in Casamance, Senegal's most southern region. Other attractions are the Sine-Saloum Islands in the Sine-Saloum estuary, and the 500,000 hectare Game Park of Niokolo-Koba in the Eastern part of the country. The park has a small hotel and two rudimentary camps. Unlike other African countries, Senegal does not intend to depend so much on tourists making a circuit of two or more countries, but more on tourists holidaying only in Senegal for stays at the beaches combined with short excursions to the interior. Dakar is well served by international air traffic from Europe, the USA and South America. It is a frequently used as a stopover point on Europe - South American flights and a center for traffic going to other African countries. The recent decision to enlarge the airport to accomodate 747s should strengthen its competitive position. Senegal has a fairly well- developed internal transport system consisting of a road network totalling more than 9,000 kilometers (of which 2,000 paved), a railway system with a total length of about 1,030 kilometers, some river transport, and a satisfactory network of internal air transport. Excursions, therefore, are not difficult to organize, particularly for tourists based in the Dakar area. About 4,000 entries were registered at the game park of Niokolo-Koba in 1968; of these 3,200 stayed at the hotel in the park for an average of about 3 days. There are two weekly sea-and-river cruises from Dakar to the Casamance along the coast and from Saint-Louis to Podor on the Senegal River. Recent developments. The number of tourists visiting Senegal prior to 1972 was not known accurately for these years the only data available were those of passenger arrivals at the airport and port of Dakar. These figures suggest,that after a long period of slow or virtually no growth tourism increased by about 10 percent a year between 1968-1971, but by 60-70 percent in 1972 when the number of foreign visitors jumped to 70,000 as compared to 40,000 in 1971 (Table 26). While these figures might include some statistical errors, there can be no doubt that tourism in Senegal took a sudden and sharp upturn during the 1971-72 season, as reflected in overcrowded hotels, hectic activities of tour operators and a marked increase in new hotel construction. Nevertheless, the total figure is still small. - 85 - The marked expansion of tourism is clearly related to the recent start of charter flights and inclusive tours, which have brought Senegal within the sphere of the travel market. Until the end of the 1960s foreign visitors were overwhelmingly businessmen, airplane crews and a few package tour excursionists, visiting Senegal as part of a larger African tour. Thus, average length of stay did not exceed three to four days. Beach tourism was limited by the high cost of transportation and hotel accommodation, which made vacations substantially more expensive in Senegal than in the Mediterranean area, the Canary Islands and to a lesser extent, East Africa. However, in recent years tour operators have received the permission, after many years of negotiations, to organize regular charter flights from Europe to Dakar; and achieved very substantial reductions in hotel prices for package tours (averaging about 30 percent). These concessions have made it possible to offer stays of 8 to 15 days in Senegal at prices competitive with Eastern Africa, although prices in Senegal are still about 50 percent higher than those in the Canary Islands. Prices will be even lower in the new holiday village on the Petite Cote ($18 a day). These developments suggest that the monopoly enjoyed in the past by the few hotels of international standing in Dakar helped to keep prices at excessively high levels. The recent substantial expansion of hotel capacity has markedly added to the change. During the 1971-72 and 1972-73 seasons, hotel capacity became a more distressing bottleneck. One of the major European tour operators, active in Senegal, claimed that he could have brought 50 percent more tourists to Senegal, hotel capacity permitting. In early 1972, hotel capacity was about 1,200 rooms with approximately 2,000 beds; of these, some 600 rooms could be considered suitable for foreign visitors. More than 70 percent of the rooms were concentrated in the Dakar area, and the remaining 150 were scattered throughout the rest of the country, particularly in the most promising tourist areas: M'Bour (Petite Cote), Ziguinchor, and Niokolo-Koba. The lack of adequate tourist facilities in the countryside hamper expansion of tourist excursions. Prospects for an expansion of hotel facilities in the near future are good. In the first half of 1973 two hotels in Dakar and a holiday village on the Petite Cote were opened, providing 610 additional rooms. The number of rooms thereby suitable for foreign toursits more than doubled within less than six months. At the same time construction had started on another holiday village of 300 beds at Cap Skirring in Casamance; and two more first class hotels (300 rooms each) were in an advanced stage of planning. Furthermore, several long established hotels in Dakar and elsewhere expanded or improved their installation. TABLE 26: AIR ARRIVALS IN SENFGAL BY COUNTRY CF ORIGIN 1968 % 1969 % 1970 % 1971 % 1972 France 33,922 45.2 27,780 33.1 30,580 33.2 33,922 33.7 Rest of Western Europe 6,700 8.9 7,780 9.2 8,480 9.2 10,405 10.3 Eastern Europe 974 1.3 1,480 1.8 2,610 2.8 4,001 4.0 Africa 2)1,532 32.7 37,250 44.lJ 38,580 141 9 39.376 39.1 Senegal 3,859 5.1 4,490 5.3 5,540 6.o 5,596 5.6 North America 3,190 4.2 3,210 3.8 3,890 4.3 4,606 4.6 South America 1,932 2.6 1,900 2.4 2,390 2.6 2,764 2.7 _ _ TOTAL 75,109 100.0 83,890 100.0 92,070 100.0 100,670 100.0 Estimated number of non-residents 30,000 33,600 36,800 40,300 69,500 (tourists & businessmen) Source: Aeroport Dakar-Yoff Mission estimates - 87 - rospect!s. There can be little doubt that tourism will continue to grow rapidly during the coming years. On the assumption that all pending projects will be realized, the number of hotel rooms suitable for foreign tourists will rise to 3,200 in the second half of the seventies compared to 600 in 1971 and about 1,200 in mid-1973. There will be a full range of tourist facilities with several luxury hotels in or near Dakar, a number of second class tourist hotels, and a few holiday villages. This increase will allow Senegal to attract a wide variety of tourist classes, from luxury to economy. With most of the investments taking place in Dakar's Cap Vert area (87 percent in terms of beds) the lack of proportionate accommodations will remain unclhanged in the countryside. The cost of a construction program for 2,000 additional hotel rooms is estimated at about CFAF 10 billion, with a unit cost per room ranging from US$30,000 for a luxury hotel to US$10,000 for a second class hotel. Although slightly on the high side for luxury hotels, these costs are in accord with international standards. They do not include the cost of the infrastructure required for the increase in tourism. Although no comprehensive estimate is available, it can be assumed based on experiences elsewhere that each invest- ment in a new hotel room requires public investments for utilities (roads, water supply and sewerage, telecommunications, etc), conservation of natural and historic resources, and for promotion, totalling approximately US$5,000 (CFAF 1.3 million). The 2,000 rooms would therefore necessitate infrastruc- ture costs of CFAF 2.6 billion. Based on the assumptions that the hotel construction program will be spread over about a three-year period and that the government will finance not only all infrastructure needs but also one- tenth of the hotel construction, total public investments in the tourist sector would amount to about CFAF 1.2 billion a year for the next three years or about 5 percent of projected total public capital formation. For the year 1975 it seems not unreasonable to expect about 150- 200,000 tourists. Assuming an average stay of 7 days, the 3,200 hotel rooms expected to be available by then would have an occupancy rate of 60 percent. Longer term prospectives for hotel construction are more difficult to assess and should not be contemplated without a comprehensive analysis of demand. However, it should be possible to attract about 400,000 toursits in the early 1980s and 900,000 by the end of that decade. (Kenya gets about 400,000 tourists a year, and 'forocco and the Canary Islands 1 million each.) These possible achievements would require construction of 5,300 additional rooms in the 1975-82 period or 7-800 rooms per year, and 11,700 rooms during 1982-90 (1,500 per year). Annual investments would average CFAF 5.6 billion per year for the first period and CFAF 9.3 billion for the second, or 9 percent to 10 percent of gross domestic capital formation. Public resources might have to finance about one-third of these investments, accounting for 6 percent to 8 percent of total public investments. These are not unfeasible plans. - 88 - In their longer term planning, the Senegalese authorities appro- priately intend to give priority to three areas: the Cap Vert region, the Petite Cote, and Casamance. Efforts in the Cap Vert region will concentrate on the provision of medium- and luxury-class accomodations, mainly for business visitors, airline crews, and itinerant tourists; beach tourism will remain of secondary importance. On the other hand, developments on the Petite Cote and Casamance will mostly consist of tourist facilities designed especially to cater to the air-charter beach-holiday visitors from North and Central Europe during fall, winter and spring. Senegalese authorities feel that the Petite Cote should be developed first, because of its proximity to Dakar, its accessibility and the more limited infrastructure investments required than would Casamance. Combined with attractions of climate, beach, and to a lesser extent scenery these advantages offer favorable prospects for a very fast growth of tourism. In order to avoid haphazard development of tourism in this area, the government in early 1972 commissioned a preliminary physical master plan for the entire beach area. The plan proposes construction of facilities with a capacity of 30,000 beds within 10 years. Though this goal is obviously too ambitious, there can be no doubt that drafting of a master plan and strict adherence to it are important preconditions to satisfactory future development of the Petite Cote. Since it will not be possible to develop the entire region (130 kilometers of beaches) at once, one or two priority areas should be selected on which government and private efforts should be concen- trated in the next years. Training is another field where a considerable effort by government will be necessary, since the projected enlargement of hotel capacity will substantially increase the need for qualified local personnel. At present training facilities for the tourist industry are limited to a state-run hotel school founded in November 1960. This school prepares only low-level kitchen staff and waiters; it graduates more than 13 to 15 a year, but it might soon increase the total to 60 a year. However, the main problem of the tourist industry is lack of qualified middle-level personnel. To satisfy this need the school would have to expand the fields and level of studies offered, to upgrade its staff, and to improve its facilities. Another pos- sibility would be the creation of a Test African multinational training center with UNDP and ILO assistance, in which Senegal would participate. Creation of suclh a center is presently under consideration. For the time being, hotel operators train their employees on the job or for specialized training send them abroad. - 89 - Economic effects of tourism. The effect of the expansion of tourism on the Senegalese economy is difficult to assess, because of lack of basic data such as the amount and nature of tourists' expenditures, the foreign exchange component of tourist consumption and hotel construction, the require- ments in infrastructure, and the number of employees per hotel room. It is estimated that in the past foreign visitors spent about $25 per day for an average stay of 3.6 days, or $90 per trip. On this basis, gross revenues from tourism, which equals gross foreign exchange earnings, increased from about $2.7 million (CFAF 700 million) in 1968 to $3.6 million (CFAF 900 million) in 1971 and approximately $6 million (CFAF 1.5 billion) in 1972. As a comparison, total export earnings averaged CFAF 42 billion at the end of the 1960s. Assuming a slight decline in per capita expenditures (at constant prices) because of booming low cost mass tourism, daily expenditures at current prices might still average about $25 by the early 1980s, but rise to about $30 by 1990, or about $175 and $210 respectively for an average stay of 7 days. Thus, by 1982 gross revenues from tourism might increase to $70 million (CFAF 16 billion) and by 1990 might reach $190 million (CFAF 44 billion). These gains would substantially increase the importance of tourism compared with merchandise exports, from under 4 percent in 1972 to nearly 16 percent by 1982 and more than 26 percent in 1990. Net foreign exchange earnings are not very likely to exceed half of gross receipts, in view of the fact that a substantial share of food and beverages comes from abroad, that specialized management, equipment and supplies have to be imported, and that transfers of factor incomes and profits are apt to be substantial. Thus, the gross figures indicated above will have to be reduced by half to arrive at the net impact of tourism on the balance of payments. Even so, tourism will probably contribute very substantially to Senegal's foreign exchange earnings toward the end of the 1970s. Employment directly generated by tourism can be roughly estimated at 2,000 people in 1973, on the assumption of an average employee-to-room ratio of 1.25:1 for the 1,570 hotel rooms. If secondary employment (guides, internal transport, recreation facilities, souvenirs shops, etc.) is added the total might well be double. While this labor force corresponds only to about 0.25 percent of total employed population 37/, it represents 4 percent of employment in the modern sector of the economy. By 1982 direct and secon- dary employment might increase to better than 20,000 or to nearly 7 percent of modern sector employment. These figures do not take into account conse- quent increases in employment in other sectors, such as agricultnre, fisheries, and services. Indications are that in countries like Mexico and Colombia, virtually self-sufficient in food, the indirect employment generated by lack of hotel room averages two to four in the productive sectors. The effect in Senegal is very likely to be substantially less. On the assumption that in Senegal 37/ See Chapter V under "Employment." - 90 - one hotel room creates directly (primary and secondary employment) 1.8 jobs and indirectly one to two jobs, 2000 additional rooms would provide about 6-7,000 new jobs for a total investment of CFAF 12.6 billion. The ratio between investments in hotels and jobs created would amount to about CFAF 2 million per job and compares favorably with the ratios of other projects under consideration in Senegal at this time. Table 27: INVESTMENTS PER JOB CREATED Employment Investments Investments per Job (CFAF millions) (CFAF millions) (1) Tanker repair project 3,000 25.000 8.5 (2) Chemical industry /a 500 1.700 3.4 (3) Textile industry /a 1,080 2.540 2.4 (4) Food processing /a 2,700 6.160 2.3 (5) Tourism 6,000 12.600 12.1 /a According to Third Development Plan, 1969-73. Fiscal revenues accruing from tourism are an important aspect in view of the significant government investments necessary to create the basic infrastructure on the Petite Cote as well as in other regions. It is essen- tial that the government be able to recover its outlays within a reasonable time. This need has to be kep in mind, when considering tax incentives for private investors in tourism. Furthermore, the natural and other advantages Senegal offers are such that there is no reason why "substantial" tax advan- tages should be granted. Financing of touristic investments. The inadequacy of credit facil- ities in Senegal may have hampered development of tourism. In fact private investors seem to have difficulties in finding enough credit at suitable terms, because Commercial Banks either are not interested, or are limited by the BCEAO'S rediscount conditions. 38/ In the past large investments in the tourist sector were mostly financed by foreign capital. Financing of the hotels recently completed or planned has also relied chiefly on foreign investment in the form of long term borrowing and on funds of the promoters. (Table 28.) Little more than 10 percent is expected to be covered by local medium credit. The Hotel des Al- madies is a special case as it is anticipated that the entire financing will come from funds of its promoters. Foreign financing of the Hotel Cap Manuel is not yet totally covered. While big mostly foreign-sponsored investors can usually arrange satisfactory financing from abroad, smaller promoters with no foreign connections are in a much more difficult situation. 38/ BCEAO' s medium-term credit facilities may be provided for a period not exceeding 7 years, while hotels usually require longer terms (10 to 12 years). Moreover, the amount of credit requested cannot exceed 65 percent of total project costs, but usually is much less than that. - 91 - Table 28: RECENT AND PLANNED HOTEL FINANCING Recently Completed Hotels Planned Hotels Total Cap Cap Excl. Incl. Diarama Teranga Nianing Skirring Manuel Almadies Almadies Almadies Own funds 40% 45% 60% 49% 40% 100% 45% 57% Foreign long term 40% /a 41% /b - 51% /c 60% - 44% 34% Local medium term credit 20% 14% 40% - - - 11% 9% 100% 100% 100% 100% 100% 100% 100% 100% /a CCCE /b BEI-CCCE /c Danish long-term, interest-free loan. To increase local participation in the financing of future tourism projects, the government has included tourism as a concern of the new para- public development bank Societe Financiere Senegalase pour le Development Industriel et Touristeque (SOFISEDIT) to be set up shortly. SOFISEDIT should complement lending by Commercial Banks when long term credits are required. Another function would be the extension of rediscountable medium term credits. The World Bank Group has been approached to supply some of the capital and, possibly a line of credit to SOFISEDIT. - 92 - PART THREE: PROSPECTS AND CREDIT WORTHINESS VIII. Overall Economic Growth Introduction and main conclusions Despite substantial diversification efforts undertaken in the last 4 to 5 years and a liklihood of further progress in the 1970s, production of groundnuts will continue to be a major determinant of economic growth. Though the share of groundnut produce in total GDP will probably fall to not more than 6 to 7 percent by 1980, exports of groundnut products will, even by con- servative estimates, still exceed 30 percent of total exports. Therefore, their impact on Senegal's import capacity and indirectly on investments and public revenues will remain considerable. It is generally agreed that world market prices for groundnuts will not long remain at the exceptionally high level attained since 1969. Though the meagre 1972 groundnut crop in all of West Africa (including Nigeria) is very likely to result in a large additional short term price increase, prices will probably reach a more normal level by about 1975. Based on the information available at this time, the mission's projections of economic growth in the 1970s assume the world market price for shelled groundnuts will fall to about f82 per long ton c.i.f. European port by 1980 (CFAF 47,500 39/). Trhis price compares with an average price of E104-108 in 1971 and 1972, and about M145 during the first half of 1973 (but a range of E62-72 during 1962 to 68). In addition an attempt has been made to estimate the impact of a 20 per- cent lower world market price on future economic growth, balance of payments, and public finance. Mission projections show that Senegal can achieve an economic growth of 4.5 percent to 5 percent a year at constant prices in the next decade, despite despite a probable fall in groundnut prices. The expected rebound of ground- nut production after several very bad years might push growth to somewhat above that level from 1970-75 and to somewhat less thereafter. In current prices growth might average between 7 percent to 8 percent annually. This substantial gain compared with the past decade (1 percent to 1.5 percent annually at con- stant prices, 3 percent to 4 percent at current prices) reflects not only the expected recovery in groundnut production;but also the substantial efforts undertaken by the government to diversify the economy especially in the rural sector, and the stronger international competitive position of manufacturing and tourism resulting largely from successful government policy to keep prices and salaries low. The improvement in the economy has markedly reduced the past over-valuation of the CFA Franc mentioned in earlier Bank economic reports and for the moment, there is no urgent need for a change in parity. 40/ The pro- jection is also based on the attainment of a substantial increase in investments, 39/ At the exchange rate prevailing in Spring 1973. 40/ As mentioned below, this situation might change if groundnut prices were to fall as low as E67. - 93 - private as well as public, and therefore has assumed an incremental investment ratio of nearly 20 percent and total investments of about 18 percent of GDP by 1980. Such an increase is a requisite for a satisfactory rate of economic growth in therefore of falling groundnut prices. Private savings and investments seem to have very sharply increased in the second half of the 1960s from about 5.5 percent of GDP in both 1960 and 1965 to a peak of over 10 percent in 1970. They cannot be expected to continue to expand much faster than GDP during the 1970s. In fact, private investments might ride somewhat less in the first half of the decade while private savings might grow somewhat faster than GDP because the recent increase in interest rates will make it more attractive to keep savings in Senegal rather than to send them abroad. Therefore, the major burden of speeding the development of investments will be on the government, which will be expected to increase public investments from 6 percent to 7 percent of GDP and from 36 percent to 41 percent of total investments. Financing of such a high level will demand a major governmental effort. It can only be achieved if public savings continue to average at least 2 percent of GDP (10 percent to 12 per- cent of budgetary revenues) as they did during 1969-71. This rate will require introduction of tough austerity measures in all ministries not directly con- cerned with development but even then, it will be difficult to reach that rate since the expected fall in groundnut prices is very likely to wipe out the surpluses of special funds that accounted for nearly one third of public sav- ings from 1969-71. Furthermore it will require a substantial improvement in the financial performance of public enterprises. Nevertheless the gap between national savings and investments will probably exceed 6 percent of GDP by 1980. To fill this gap net foreign capital inflow must triple between 1970 and 1980. Part of this substantial increase can be expected from higher private capital inflows, attracted by the more promising general economic outlook. However, the bulk will have to come from public sources; gross foreign aid will have to triple during the 1970s. This amount is the maximum Senegal can reasonably expect and absorb without running into unmanageable fiscal and balance of payments problems. Assuming that the softest blend of aid that the country will receive will be about one-third each of grants, soft loans, and borrowing at conventional terms, such a level of capital inflow would bring about a foreign debt service ratio of about 12 percent by the year 2000. The projected substantial increases in public de- velopment outlays, despite limited public savings, will reduce the share of available local financing to 15 percent to 18 percent of total public invest- ments in the 1970s as compared with more than 30 percent in 1969-71. This shore is very low even for a country where many sources of foreign aid finance up to 100 percent of project costs. However Senegal, by renouncing large proj- ects that have to be financed fully or in most part by local resources will be able to use the bulk of public savings as counterpart funds for foreign- financed projects, and help finance its development program despite limited public savings. This program will not be possible if the world market price for groundnuts falls by another 20 percent to about E67 per long ton. The sub- stantial reduction in producer prices which would become unavoidable under - 94 - these conditions (to about CFAF 16 per kilogram) would probably cause a renewed fall in groundnut production. This misfortune would have a serious impact on production in most other sectors of the economy and particularly on exports; the combination of lower export prices with lower export quantities would re- sult in export values approximately 15 percent lower than projected under the higher price assumption. Even though part of this shortfall would likely be compensated by a slower growth of imports, the deficit of foreign trade and services could reach about 6.5 percent of GDP (as compared to the 4 percent with the higher groundnut prices). Though public savings would be most ad- versely affected by the fall in fiscal revenues from exports and imports cur- rent budgetary expenditures could only be cut slightly -- probably not more than one percent of GDP. Such a high gap between savings and expenditures could not possibly be bridged by increasing the foreign aid, because of insur- mountable requisites. This aid would have to be almost wholly on very soft terms to avoid severe balance of payments difficulties and since limited public savings would not permit a more substantial local contribution it would have to cover financing about 97 percent of project costs. Thus, should world market prices for groundnuts fall substantially below the projected level of L82 per long ton (to a level prevailing before 1969) the government could not avoid taking far reaching measures to prevent serious difficulties in balance of payments and public finance. Imports would have to be curtailed and the public investment program retrenched to compensate for falling exports and government revenues. There measures would further cut overall economic growth below the rates projected (4.2 percent at constant prices, about 6.7 percent at current prices). Such changes would be difficult to carry out without altering the exchange rate to conform with the reduced world market price. This step would allow increasing nominal producer prices to cover raises in imported inputs, and thus probably prevent a serious fall in production. It would also permit spreading the unavoidable sacrifices more equally over the entire population, instead of confining them exclusively to groundnut farmers. Furthermore it would promote competition and expension in foreign trade by stimulating the marketing of exports other than groundnuts and thereby help ease the balance of payments constraints. However, the ef- fectiveness of a devaluation on exports would depend upon the success of keep- ing controles on nominal wages and prices. Detailed projection of economic growth Based on a detailed projection by sectors and by main products, and on a world market price for groundnuts of E82 by the late 1970s the mission foresees a 4.8 percent to 4.9 percent average annual growth of GDP at constant market prices from 1970 to 1980 (5.1 percent in the first half and 4.7 percent in the second half of the 1970s). This forecast is more than three times faster than real growth in the last decade, a decade that suffered severely from problems of adaptation that arose with independence and from the 1967-70 groundnut crisis. These problems now overcome will no longer hamper future economic growth. Though the 1972 drought had a harsh short term impact on the economy, it is not expected to be a significant deterrence to future economic growth. There is no reason why with normal weather conditions agricultural production should not rebound in 1973 and thereafter to acceptable levels, - 95 - particularly when the serious long term depressing impact on development in the livestock sector will have only a limited effect on overall economic growth, because livestock contributes less than 8 percent GDP. There are a number of other factors making for faster growth: the substantial expansion of public investments in the rural sector since 1965 (from an average of CFAF 1.7 billion yearly in 1961-64 to CFAF 4 billion an- nually in 1966-71) and the increasing major impact of the improving quality of these investments on economic growth. Cotton production has now reached a stage where it can make a significant contribution to the economy. Rice produc- tion is expected to expand quickly, after the projects in Casamance move from the experimental stage to full-scale implementation and after the development of methods to grow rice (and other crops) profitably in the Delta. Though the mission is skeptical about possibilities of growing sugar along the Senegal River, it believes the area can quickly develop large scale vegetable produc- tion for export. There is still no satisfactory answer to the livestock prob- lem, but the recent sharp increase in prices might help spur production. Fishing will continue to expand, because of recent government efforts and of high prices in the local and world markets. In summary, the rural sector will continue to diversify very rapidly. As a result of the expected higher growth in the rural sector local demand will increase, and stimulate the modern sector. Furthermore, the im- proved international competitive position will mean more exports of manufac- tured products and provide a basis for rapid growth in tourism. As mentioned previously, at the time of independence Senegal (as most former French colonies in Africa) had a very high-cost economy, partly because of relatively high salaries and social charges (patterned after condi- tions in France), partly because of the strong monopolization of its indus- try protected by high import barriers, and partly because of the artifical ex- change rate of the CFA Franc after World War II. Since then the government's tough, successful salary and price policies have helped considerably to curb increase, and, at the moment, there is no urgent need for a devaluation. This improvement is not yet fully reflected in the internal price level, because the monopolistic structure of the economy favors high prices in the local market. However, the substantial growth in manufacturing exports indicates that com- petition in the world market will become increasingly possible. A more active antimonopoly policy stimulating local competition and exports is now needed to take full advantage of the improvement. The government is becoming increas- ingly aware of this need and is contemplating such measures as a more competition- oriented implementation of the investment code and selective reductions in im- port tariffs. A fall of world market prices for groundnuts to about E67 by 1980 would, assuming that the investment level is not cut, slow overall economic growth to about 4.2 percent a year. Groundnut production would suffer from the substantial reduction in producer prices that would consequently become unavoidable in about 1975 and thereafter. This change would affect most other sectors of the economy, primarily in manufacturing (for a fall in groundnut processing brings a fall in local demand for manufactured products) and in services (transport, etc.). - 96 - Table 2 9 MISSION PROJECTION OF GDP AT 1971 PRICES Actuals Higher groundnut Lower groundnut prices prices 1969-71 1974-76 1980 1974-76 :930 A, Annual averages (in 'Dillion CFA francs) Rural sector Groundnuts 23.1 32.9 38.2 30.0 28.9 Other rural 51.4 69.4 93.3 69.4 93.3 Total rural 74.5 102.3 131.5 99.4 122.2 Industry 36.2 47.9 65.2 44.9 60.3 Construction services 73.6 92.7 115.2 87.6 108.2 Public Administration Senegalese 32.2 35.8 39.4 35.8 39.4 French 3.7 3.0 2.3 3.0 2.3 Total Public Adm. 35.9 38.8 41.7 38.8 41.7 GDP at factor costs 220.2 281.7 353.6 270.7 332.4 B. Average annual growth(in percent) Rural sector Groundnuts 6.0 7.3 3.1 5.3 -0.8 Other rural 3.5 6.7 6.1 6.7 6.1 Total rural -0.2 6.5 5.1 5.9 4.2 Industry 4.7 5.8 6.3 4.4 6.1 Gonstruction, services 1.9 4.7 4.4 3.5 4.2 Public Administration Senegalese 2.0. 2.2 2.0 2.2 2.0 French -1.6 -4.3 -5.5 -4.3 -5.5 Total Public Admin. -o.6 1.5 1.5 1.5 1.5 GDP at factor costs 1.1 5.1 4.7 4.2 4.2 - 97 - Rural Sector. Groundnut production will largely depend on future world market prices. As shown in Table 30 a fall to about E82 per long ton can be almost entirely absorbed by ending payments into the groundnut stabilization funds and by abrogating parafiscal taxes on groundnut exports; assuming that marketing costs will not substantially increase (further rationalization of groundnut marketing will be a prerequisite), a less than 6 percent reduction of producer prices will be necessary. Even though this price fall would create public finance problems by wiping out the past substantial surpluses of ground- nut stabilization funds, it should not have a major detrimental impact on farmers incentives to expand groundnut cultivation. Table 30: GROUNDNUTS: WORLD MARKET PRICES AND PRODUCER PRICES 1971 1975 per kilogram Estimates Projections Basis decorticated: world market price: £/long ton 104.0 82.0 67.0 CFAF/kg 68.0 47.5 38.8 marketing costs /a 11.8 11.8 11.8 export taxes /b 4.5 4.5 4.5 stabilization funds Ic " 18.7 - - producer price 33.0 31.2 22.5 Basis undecorticated: producer price 23.1 21.8 /d 15.8 /d /a Theoretical costs, according to ONCAD calculations; real costs might be higher and stablization fund revenues accordingly lower. /b Excluding export taxes allocated to the groundnut stabilization funds. /c Including export taxes allocated to the groundnut stabilization funds (taxes parafiscals) and the 1/6 of the regular export taxes, allocated to the groundnut stabilization funds. /d Based on the present price agreement between the government and the oil mills; arrives at virtually the same producer price. In the unlikely fall in world market prices to a low of L67, the groundnut sector would then face serious problems. Even if only those taxes on groundnuts allocated to the current budget were retained, producer prices would have to be lowered to under CFAF 16 per kilogram or by more than 30 per- cent. Based on past experience, such a sharp reduction would not only create serious social and political problems but also probably result in a substan- tial fall of groundnut production. On the other hand elimination of all taxes - 98 - on groundnuts would soon lead to serious public finance problems; thus, this path is not a preferred one. Furthermore, even the complete elimination of taxes would necessitate a reduction in producer prices to under CFAF 19 per kilogram. On the basis of the more likely higher price projections, groundnut production is expected to rise rapidly until 1975 (above relatively low level of 1969-71 and, even much higher, if the level of 1972 is taken as a base). These projections assume that rainfall conditions will return to its previous cycle -- no more than one moderate drought every four years. The projections are also based on a recovery from the past groundnut crises and the substan- tial increase in producer prices which now exceed prices paid before 1967. Areas under cultivation are projected to increase by about 4 percent annually to equal the peak 1968 level by 1975. Yields might grow about 2.5 percent to 3.0 percent as a result of increasing use of inputs, better extension services, improved financial condition of farms (their debts when cancelled in 1970), and more attractive producer prices. After 1975, when the recovery factor ceases to be important, growth in areas under cultivation is expected to slow to an estimated 3 percent annually. Over the entire decade, this increased cultivation would mean an average gain of 4.7 percent in groundnut tonnages. However, most of the gain will be depreciated by the expected fall in world market prices, resulting in an average annual growth in value of only 1.4 percent. Lower world market prices would affect producer prices from about 1975. The recovery in production would be followed by slowly decreasing out- put after 1975. Based on the 1966-69 experience the rate of elasticity of farmers reactions to a reduction of producer prices might be about 0.8 in the short-term and might increase to over 1.0 in the long term when disillusion- ment intensifies. Therefore, a lowering of producer price by more than 27 percent would reduce output by 20 percent to 25 percent during the 1970s from an estimated level of 1.16 million tons and 1.28 million tons in 1975 and 1980 respectively under the E82 assumption to 0.97 million tons and 0.96 million tons under the E67 assumption. Lower groundnut production might be partly offset by higher produc- tion of other agricultural crops, as farmers disillusioned by the drop in groundnuts prices might diversify. However, past experience shows little evidence of such change, at least in the short-term. The explanation may be partly in the fact that lower groundnut prices reduce farmers' willingness to use inputs, and consequently the fall in production is largely a fall in yields and not in acreage devoted to groundnuts, the farmers have no time on hand to cultivate other crops. In part, it may be the fact that in the ground- nut basin possibilities of diversification are limited. For the 1970s, the changes in groundnut prices will apparently have only a small impact on the cultivation of other crops. Nonetheless as a result of the government's increasing diversification efforts production of crops other than groundnuts is expected to grow substantially faster than it did in the past. Estimated to expand by some 7.5 percent annually, production of these crops will exceed the value of groundnut output by more than 50 percent by 1980 - 99 - (it was about 10 percent below groundnut output in 1970). This increase is larger due to the expected sharp growth in cereal production (in rice primarily and in millet and corn) technical breakthroughs, after many years of trial in the south of Senegal and in the delta of the Senegal River. Rice will hopefully become a cash crop, as the excess production is marketed in urban areas. It is also anticipated that production of cotton and vegetables will grow increas- ingly in importance. Livestock production is projected to expand by about 4 percent a year. This rate is about 75 percent faster than the last decades, but sub- stantially less than that for many agricultural crops. This growth rate can be achieved only if the government provides more assistance to this sector than it has in the past, particularly in production. Unfortunately, in this sector technical breakthroughs have not yet been achieved, and it is not yet clear how fast to proceed. Though first results of the pilot fattening ranch near Dakar are encouraging, it is not yet certain whether this experimental approach can be successfully expanded to large-scale livestock production. Moreover, results at the bigger ranch at N'Doli have not been very promising. If the recent sharp increase in producer prices continues, it will no doubt help to stimulate livestock production, although the after-effects of the 1972 drought will persist for several years. Overall fishing production is projected to expand by 6.6 percent a year, a rate less than the extrordinary high of more than 11 percent for the last five years. Traditional fishing might grow by slightly less but its growth will still account for nearly 70 percent of the overall incremental increase in the fishing sector. The recent improvement in market prices, to- gether with continuing government efforts to help traditional fishing (sea as well as river should make it possible to achieve such growth. For modern fishing the rate might be about 8.3 percent a year as a result of the increase in the number of its ships and improved installations in the port of Dakar. Industry. Industry (including public utilities and mining) is projected to grow at about 6 percent annually. This expansion is 30 percent faster than the last five years'. The bulk of the increase (70 percent) is expected to come from the manufacturing industries other than groundnut processing; for the latter the rate should be about 7 percent annually or about one percentage point more than that for 1965-70 period. - 100 - Table 31: MANUFACTURED CONSUMER GOODS: AVERAGE ANNUAL GROWTH RATES AT CONSTANT PRICES 1960-65 1965-70 1970-80 Estimated percentages Projected percentages Local production 5.7 5.8 6.9 Exports 4.6 13.7 7.9 Imports -4.7 - 1.8 6.1 Local consumption 2.5 2.6 6.5 Source: Mission calculations. The projected faster increase would be caused by a stepped-up ex- pansion of local consumption as a result of greater overall economic growth, even though import substitution will become insignificant. Moreover, exports of manufactured goods (other than groundnut oil) will continue to run at a relatively high rate. This rate presupposes that Senegal can maintain compe- titive prices despite the fact that it will likely become more difficult to continue the tough price and salary policies in an economy expected to expand much faster than in the past and to continue to suffer from shortage of highly qualified workers. However, maintenance of tough policies will be essential as a precondition for a major breakthrough in exports of manufactured goods into the world market. The government should take a more systematically follow through than it has done in the past a number of other measures to encourage exports. Particularly, Senegal should utilize the Investment Code for such purposes and should adopt a more development oriented foreign trade policy. Another helpful stimulus in opening new world markets would be the wider inter- national distribution of foreign investments in Senegal's manufacturing and services (including banking). Mining output should increase by about 4 percent annually. This rate assumes that no new major mining projects will become operational in the 1970s. Construction and services. Construction activity is expected to increase somewhat faster than total GDP, in keeping with the projected growth of gross fixed capital formation. Expansion of transport will remain somewhat below that of overall GDP, because of the slow rise in transit trade with Mali, the continued fall in transit trade with Mauritania, and the slow expansion of phosphate mining. It will received impetus, however, from the anticipated above-average economic development in the southern and southeastern parts of the country (areas far from Dakar). Construction and services together should increase at about the same rate as total GDP. Expansion of Senegalese public administration activities should not exceed 2 percent a year (4.5 percent at current prices). The slow decline in French public administration ac- tivities while very likely to continue, has ceased to be a major factor in de- termining overall economic growth in Senegal. - 101 - Growth at current prices and growth of per capita revenues GDP at current prices is projected to increase by 7 percent to 8 percent annually, based on groundnut prices of L82 per long ton, and by about 6.5 percent to 7 percent on prices of L67 per long ton. Price projections assume that price increases of locally produced basic foodstuffs will be very low in keeping with past trends and with world market price projections for rice. However, in other sectors a somewhat more rapid rise in prices is fore- seen, because the expected faster overall economic growth will make it more difficult to continue strict price and salary controls. Consequently, the price inflation for total GDP, excluding the groundnuts factor, will average 2.5 percent to 3 percent, compared to about 2 percent in the past decade. - 102 - Table 32: EIISSI3T OROJST13N OF GDP AT CUIRENT PRICES Actuals Higher groundnut Lower groundrut prices Prices 1969-71 1974-76 197= 1974-7; 1980 A. Annual averages (in billion CFA francs) Rural sector uroundnuts 23.5 27.8 30.1 19.4 19.0 Other rural 49.5 77.3 113.9 77.3 113.9 Total rural 73.0 105.1 144.0 96.7 132.9 ndustry 34.9 53.8 82.5 50.4 76.4 Construc-,ion, servic6s 72.1 106.5 152.0 10l.1 142.4 Public Administration Senegalese 31.4 41.2 52.0 4l .2 52.0 French _3.5 3.4 3.2 3.4 3.2 Total Public Adm. 34.9 44.6 55.2 44.6 55.2 GDP at factor costs 14-.9 310.0 433.7 292.8 406.9 Indirect taxes 24.7 39.3 57.4 37.8 53.1 GDP at market prices 239.6 349.3 491.1 330.6 460.0 B. Average Annual Growth (in percenm Rural sect.or Groundnuts -3.7 3.4 1.6 -3.9 -0.4 Other rural 7.0 9.3 8.1 9.3 8.1 Total rural 2.8 7.5 6.5 5.8 6.6 Industry 6.7 9.1 8.9 7.7 8.7 Construction, services h2 8.1 7.4 7.0 7.1 Public Adriinistration Seneg,alese 3.6 5.6 4.8 5.6 4.8 French -13.3 -0.6 -1.2 -O0.6 -2 Total Public Adm. 1.4 5.0 4.3 5.0 4.3 GDP at factor costs 3.6 7.6 7.0 .4 6.8 Indirect taxes 2.6 9.8 8.0 8.9 7.0 GDP at market prices 3.5 7.8 7.1 6.6 3. 5 7. _. 6. _ ._ - 103 - Table 33: MISSION PROJECTION OF PER CAPITA REVENUES 1969/71 1980 Annual Growth High price Low price High price Low price CFAF CFAF % Rural population 22,800 32,900 29,800 3.8 2.7 Urban population 171,800 181,800 173,800 0.5 0.1 Total population 61,600 75,800 71,300 2.1 1.5 Projection of GNP at current prices for groundnuts, but at constant prices for all other sectors, makes possible a forecast of the changes in the standard of living for the 1970s. It shows a bleak picture for the modern urban sector, with virtually no growth in real per capita revenues. Even with an optimistic assumptions that urban population will grow no more than 3.5 percent to 4 percent (which can be achieved only if rural migration to town is slowed considerably), average urban incomes are unlikely to increase by more than 0.5 percent; but if past urban population growth of 4 percent to 5 percent and the concurrent increase in unemployment were to continue average incomes in urban areas would keep falling. On the other hand rural incomes (assuming normal weather conditions) would very likely improve as a result of the expected substantial public development efforts in the rural sector. (See Section D/2). Since raising incomes in this sector is one of the most effec- tive means to slow urban migration and reduce urban unemployment, the narrow- ing of the difference in per capita income between the urban and rural sectors is not unwelcome, even though the projected lack of urban per capita growth might might create considerable social problems in the larger towns, particularly in Dakar. - 104 - IX. Expenditures and Savings Past national account data on expenditures and savings are esti- mates and indicate little more than general trends. 41/ The sharp expansion in local consumption of construction materials and of imports of investment goods suggests a marked increase in investments from 1969 to 1971. In the same period, gross national savings substantially increased, partly high sur- pluses of the groundnut stabilization fund made possible when the world market prices of groundnuts rose dramatically and because of the late and only partial funneling of these surpluses to farmers. However, investments grew faster than local savings, and the gap between the two widened considerably during the last five years. Increased disbursements of foreign aid accounted for part of the rise in investments and at the same time covered a large part of the gap. Most of the growth in investments, however, occurred in the private sector where the investment rate seems to have increased from 6.2 percent of GDP in 1964 to 66 to more than 10 percent in 1967 to 71. Little information is available to explain this remarkable increase. One factor was probably the growing need for renewal, replacement, and major repairs. The modern sector as a result of a depressed economy had apparently in the last decade postponed as long as possible any necessary renewal and modernization of its installations. Consequently, a large backlog of such user for investments had accumulated and finally could no longer be postponed. Probably, of more importance were the investments in manufacturing stimulated recently by a rapid expansion and the improved general business outlook (partly a result of a stronger international competitive position. At the same time, investments in tourism also sharply increased from near zero in 1964 to 66 to about 10 percent of the private in- vestments in 1969 to 71; and construction of office buildings and residential housing expanded as the overproduction of the early 1960s was eventually ab- sorbed. The large growth of private investments after 1968 was accompanied by a marked change in private capital flows -- from a substantial net outflow until 1968 to a considerable net inflow in 1971. - 105 - TABLE 34: PRIVATE SAVINGS AND INVESTMEiTS Billion CFA francs Estimates Mission Projections /a at current prices; % of GDP 1964-66 1969-71 1974-76 1980 CFAF % CFAF % CFAF % CFAF % CFAF 12.4 6.1 24.3 10.1 33.9 9.7 52.5 10.7 Stocks -0.9 -0.4 6.2 2.6 1.1 0.3 3.0 0.7 Total 11.5 5.7 30.5 12.7 35.0 10.0 55.5 11.4 National savings 11.2 5.6 22.7 9.4 33.6 9.6 50.0 10.2 Gap 0.3 0.1 7.8 3.3 1.4 0.4 5.5 1.2 ~~- -__ /a At the higher groundnut price assumptions. Source: Statistical Appendix, Table 2.19. The apparent exceptionally sharp growth (15.3 percent annually excluding stocks) of private investments in the last five years (particularly since 1968) is not expected to continue in the next decade. Nevertheless, private investments will probably expand somewhat faster than GDP (8 percent a year instead of 7.4 percent), with an incremental investment ratio of more than 11 percent for the entire decade. This increment might appear small, but not in view of the projection that a very large contribution to GDP growth will be made through the recovery of rural production to its former level, particu- larly in the first half of the 1970s. This recovery will not involve much new investments. In the 1975-80 period, Gross Fixed Capital Formation (GFCF) is projected to expand considerably faster than GDP, with an incremental invest- ment ratio of more than 13 percent and an average GFCF increase by one percent- age point to 10.7 percent of GDP. This improvement is substantial, compared to the average of only 6 percent in most of the 1960s. It reflects an overall economy on the trend in Senegal, particularly in manufacturing and tourism. Moreover, the preceeding projections do not include the investments tradition- ally made in the rural sector, such as in land clearance, small irrigation works, livestock herds, and housing. Thus, investments (and therefore national savings) are underestimated in import as well as in volume. Financing has not been a problem for private investors in most of the 1960s, when the depressed overall economic situation resulted in a close balance between low private investments and low private savings. However, since 1968 the marked expansion of investments led to a widening gap in re- sources (estimated at better than 26 percent of total private investments, including stocks) and to increasing financing problems. Almost three-fifths of the gap was covered by resumed substantial private capital inflows from abroad after many years of net outflows. Nevertheless, there was an increas- ing scarcity of private capital, particularly for small and medium local - 106 - enterprises with no means for foreign borrowing. In part, this shortage had its origin in the continuous fall of foreign exchange reserves (caused largely by the drop in deposits with the Central Bank), limiting the credit available through the system to the private sector. Improvement is likely in the remainder of the 1970s. The expected slower expansion of private investments will allow savings to catch up with investments particularly in the next four to five years. Furthermore, the recently decided increase in local interest rates should stimulate local sav- ings and make financial investments in Senegal more attractive. As mentioned previously, the much lower interest rates in Senegal than in France (on the credit as well as on the debit side) stimulated transfers of savings and cash balances to France and at the same time discouraged capital inflow. Both tendencies had a detrimental impact on the availability of local credit, par- ticularly for small- and medium-sized local enterprises. The two percentage point increase in the rediscount rate, made effective in January 1973, has resulted in a general rise in interest rates which will: (a) somewhat reduce transferring funds abroad, not so much savings by individual foreigners work- ing in Senegal but particularly cash balances by foreign companies; and (b) stimulate capital inflow by making it more attractive for many of the larger enterprises to seek financing abroad rather than in Senegal for short-term commercial operations as well as for investment purposes. Both factors will increase the availability of local credit for small and medium enterprises, which with little access to credit abroad depend primarily on local banks. However, the positive effects of this increase in interest rates will rely in large part on whether or not the interest rate policy will be sufficiently flexible to react to changes in the interest levels of the international money markets. On this basis, a slight increase in the private national savings ratio is projected. Together with the expected increase in private capital inflow, these resources would supply virtually the entire financing requirements for private investments, without the heretofor need for government contribution. At the same time, however, there will be little room for public borrowing in the local capital market, and future public borrowing from the banking system will have to remain very limited in order not to restrict unduly private borrow- ing. The outlook for public investments and savings is assessed below. A much lower groundnut price (E 67 per long ton) would reduce na- tional savings by about 10 percent in 1975 but by more than 13 percent by 1980. Most of the decline in savings would occur in the public sector. Without a corresponding fall in investments, these changes would open a gap of 8.5 per- cent of GDP by 1980, or over 25 percent more than the higher groundnut price assumption. It is difficult to visualize how such a high gap could be financed. Its implications for the balance-of-payments will be described in the next section. Table 3g EXPENDITURES AND SAVINGS (billion CFA francs at current prices) Hission Estimates Mission Projections Higher groundnut prices Lower groundnut prices 1964-66 1969-71 1974-76 1980 1974-76 1980 CFAF C CFAFF CFAF % CPAF A CFAF % Utilization of GDP Coesunption 182.0 90.2 208.6 87.0 304.3 87.1 421.2 85.7 291.0 88.0 399.0 86.7 GFCF 22.6 11.2 39.7 16.5 55.9 16.0 88.7 18.0 55.9 16.9 88.7 19.3 Stocks La - 0.9 - 0.4 6.2 2.6 1.1 0.3 3.0 0.7 - 0.3 - 0.1 2.3 0.5 Trade + NFS - 2.0 - 1.0 -1.8 - 6.1 11.8 - 3.4 21.6 - 4.4 - 16.0 - 4.8 -30.0 -6.5 TOTAL 201.7 100.0 239.7 l00.0 514.5 100.0 491.3 ioo.o 330.6 loo.0o 460.0 100.0 Financing of Investments GPCF and Stocks La 21.7 100.0 45.9 loo.o 57.0 100.0 91.7 ioo.o 55.6 100.0 91.0 100.0 Gross National Savings 16.5 76.0 27.5 59.9 39.2 68.8 60.6 66.1 33.9 61.0 52.1 57.3 Savings gap 5.2 24.0 18.4 40.1 17.8 31.2 31.1 33.9 21.7 39.0 38.9 42.7 Financing of Savings Gap Net transfers froa abroad 1.4 5.0 2.1 -0.) 2.5 0.5 Net private capital inflow Lb -1.0 4.5 1.0 5.0 1.0 5.0 Net public capital inflow 4.1 9.1 15.8 25.0 15.8 25.0 Changesisn 7oreign 0.7 -0.2 - 1.1 1.2 2.4 8.4 Gross National Savings (% of GDP) 8.2 11.5 11.2 12.3 10.2 11.3 Savings gap (% of GDP) 2.6 7.7 5.1 6.3 6.6 8.5 La Groundnuts and cereals only. Lb Including net errors and oalssions. Lc Minus- Increase in reserves - 107 - Table 36: BALANCE OF PAYMFNTS PROJECTION (Billion CFA francs) Estimates Mission Projections Higher ground- Lower ground- nut prices nut prices 1969-71 1974-76 1980 197L-76 1980 Foreign Trade: exports 40.6 66.8 89.5 61.0 77.4 imports 60.7 88.9 128.3 86.9 124.6 trade balance -20.1 -22.1 . -25- --E7.2 Foreign Services: exports 16.0 22.8 35.7 22.6 35.7 imports 10.6 12.5 18.5 12.7 18.5 service balance X03 17.2 9.9 17.2 Balance of goods and NFS -14.7 -11.8 -21.6 -16.0 -30.0 Factor services - 3.7 - 6.0 - °.5 - 5.7 - 8.9 Current account balance - -T77 -31.1 -21.7 - _ Transfers: private 1- 1. - 4.o - 6.0 - 3.6 - public 6.4 6.1 5.9 6.1 5.9 total __0 2.1 - 0.1 7 7 Net capital: /a private 4.5- 1.0 5.0 1.0 5.0 public 9.1 15.8 25.0 15.8 25.0 total 13.6 :z78 30.0 16.8 30.0 Total financing items 18.6 18.9 29.9 19.3 30.5 Changes in foreign reserves +0.2 +1.1 -1.2 -2.4 -8.4 Pro memoria: gross public capital inflow 10.4 18.6 27.9 18.6 27.9 /a Including 2.6 E+O. Sources: Ministry of Finance and Economic Affairs, Mission Projections. - 108 - X. Balance of Payments and Foreign Trade The balance of payments outlook is cautiously optimistic, assuming that groundnut prices do not fall below f 82 by 1980 and that Senegal can finance a sufficiently large part of its public investments at very conces- sionary terms. Under these conditions the overall foreign balance would remain approximately in equilibrium. Up to 1975, the balance might show a slight surplus, because investments, according to projections will grow some- what more slowly than national savings and groundnut exports will expand quickly at still favorable world market prices. By 1980, it might turn into a small deficit because of the resumption of faster growth of investment com- pared with savings and the slower growth of exports of groundnut products at falling prices. The foreign trade balance is expected to deteriorate only slightly until 1975, but more rapidly thereafter. The balance of foreign services will continue to improve, stimulated by the projected large expansion of tourism and by the planned tanker repair project. Outflow of factor service payments will increase as improvement in the overall economic situation will raise profits of foreign enterprises. The recent rise in interest rates might somewhat slow down this increase. Furthermore, part of the projected in- crease in factor services outflows is more apparent than real. In fact, it includes profits of foreign enterprises reinvested locally, which in the us- ual balance-of-payments presentation are reported at the same time as factor services outflows and as capital imports. Most likely, an increasing part of factor services outflows and of private capital imports will consist of such reinvestments, as the improved business outlook will lead foreign com- panies to reinvest locally a growing patt of their profits. For the same reasons as factor services payments, private transfers to foreign countries will expand, while the inflow of pension payments from France and of transfers of Senegalese workers in Europe is not expected to in- crease significantly. The past substantial surpluses of Government transfers will slowly decline as technical assistance is not very likely to expand much beyond its present high level, but government transfers abroad are likely to grow. Private capital inflow is expected to increase, particularly during the second half of the decade, and the public investment program will demand a con- siderable increase in foreign aid (the prospects of which are discussed in the Section on foreign aid). Should groundnut prices fall as low as E67, Senegal's balance of payments would soon experience serious difficulties. The combination of an expected 25 percent fall in the volume of groundnut exports plus an 18 per- cent lesser price would reduce total export earnings by about 15 percent in 1980. This deterioration might not look unmanageable, however, it would result in a 35 percent to 40 percent higher deficit of the balance of goods and services, even allowing for some drop in imports due to reduced local demand. Unless imports were reduced even more drastically (which seems impos- sible without a substantial cut in investments) or foreign aid were increased - 109 - 16 percent and 30 percent by 1975 and 1980 respectively (which seems unrea- listic and beyond Senegal's creditstanding), the overall balance of payments would very soon reach an unmanageable deficit. Since Senegal's net foreign exchange reserves within the West African Monetary Union are virtually ex- hausted, a continuous substantial balance-of-payments deficit would soon com- pel the Central Bank to apply deflationary measures; this step appears likely since the overall foreign exchange situation of the West African Monetary Union is expected to come under increasing pressure, because of adverse devel- opments in other important member countries as well. The result would almost necessarily be a lower overall investment rate. Crop failures, due to drought or other climatic vagaries, could have an even more serious short term effect on exports and on the entire balance of payments. By 1980 a 50 percent fall in groundnut output (experi- enced more than once during the past drought years) would reduce total exports by more than CFAF 15 billion (17 percent). Ceteris paribus, this misfortune would increase the projected deficit of the balance of goods and services by 70 percent, thus creating an intractable balance of payments problem if foreign aid did not provide an exceptional amount of emergency funds. There- fore, despite the declining importance of groundnuts Senegal will remain heavily dependent on this crop and on the inevitable fluctuations of its pro- duction and world market prices. These facts must be kept in mind in judging Senegal's future creditworthiness and in determining an acceptable level of foreign indebtedness. Exports of groundnut products accounted for about 40 percent of total exports in 1970, and will still account for about 35 percent by 1980 based on the higher price assumption. Recovering from an abnormally low level, exports of groundnut product will increase rapidly in the next few years, but more slowly after 1975 (after the recovery effect subsides). Almost all exports will be in the form of groundnut oil and cakes. Exports of minerals had been limited by technical difficulties in the major phosphate mine and by poor world market prices. These obstacles have now been overcome, and relatively fast growth for a few years will bring production close to total capacity. Thereafter, growth will be slower. Exports of manufactured products other than groundnut oil are expected to expand at 10 percent to 11 percent annually. By 1980 they could slightly exceed exports of groundnut products and account for about 35 percent to 40 percent of Senegal's total exports (as compared to less than 30 percent currently). The bulk of these exports are expected to be textiles and refined petroleum products, but other products as varied as shoes and cement will become increasingly important. Fish and vegetables will prob- ably be the most important of the miscellaneous export products (in the anti- cipation that the recently inaugurated industrial vegetable production will be responsible for the fast growth in the next 4 to 5 years). Total exports are expected to increase somewhat faster than GDP, particularly in the first half of the 1970s, because of the rebound of groundnut and mineral exports and the start of the vegetable project. Export growth will be about in a line with GDP growth in the second half of the decade. These export projections (partic- ularly concerning manufactured products) are contingent upon maintenance of - 110 - Table 37: MISSION PROJECTIONS OF FOREIGN TRADE (billion CFA francs) 1969-71 1974-76 1980 CFAF CFAF annual CFAF annual growth grow1th Higher groundnut price assumption Exports groundnut products 16.6 28.2 11.2% 31.0 1.8% minerals 4.1 5.8 7.2% 7.3 4.7l manufactured goods 12.3 20.0 10.2% 33.9 11.01 miscellaneous 8.6 12.8 8.3% 17.3 6rl% Total 41.6 66.8 9.9% 89.5 6.0/` Imports food, beverages 19.8 19.5 0O.5P 18.7 -0.9% finished consumer goods 13.2 21.8 10.5% 30.7 7.0% raw material/petroleum 7.5 12.7 11.1% 19.5 8.8% investment goods 20.2 34.9 11.5% 59.4 11.2% Total 60.7 88.9 7.9/Z 128.3 7-5% Lower groundnut price assumption Exports groundnut products 16.6 22.4 6.2% 19.2 -3.1% minerals 4.1 5.8 7.2% 7.3 4.7% manufactured goods 12.3 20.0 10.2% 33.7 1l.0a miscellaneous 8.6 12.8 8.3% 17.2 6.1%/ Total 41.6 61.0 8. 0o 77.4 4.9% Imports food, beverages 19.8 19.5 -0.3% 18.6 -0.9% finished consumer goods 13.2 20.5 9.2% 28.5 6.8% raw material/petroleum 7.5 12.0 10.0% 18.2 6.8 investment goods 20.2 34.9 11.5% 59.3 11.2% Total 60.7 86.9 7.4% 124.6 7.4 - ill - Senegal's international price competitiveness. This requirement will demand continuation of strict price and salary control, which might become more diffi- cult in the face of increasing overall economic growth. Imports are expected to increase more slowly than exports but slightly faster than GDP. The slow growth is entirely attributable to the expected slight fall in imports of foodstuffs as a result of rapid expansion of local rice cultivation, and the increasing production of other foodstuffs (millet, corn, meat, milk, bananas, etc.). This shift should make possible a large decline in the relative importance of imports of foodstuffs--from about 33 percent to less than 15 percent of total imports. All other catego- ries of imports are expected to increase much faster than GDP. Imports of manufactured consumer goods are very likely to grow faster than total consump- tion expenditures, because the anticipated increase in per capita revenues together with increasing urbanization should result in an over-proportional rise in demand for manufactured consumer goods. Concurrently, import substi- tution will become less important. Imports of raw materials and petroleum are projected to increase approximately in step with local manufacturing pro- duction in view of the limited possibilities for import substitution in this sector). However, the bulk of Senegal's manufacturing will continue to use and process local raw materials, mainly groundnuts, cotton and fish. Imports of investment goods are projected to increase considerably faster than total investments (11.5 percent compared to 8.4 percent annually) as investments become more sophisticated and more oriented to sectors with a high import component. Possibilities for import substitution remain limited for the next decade. As a result of the likely fall in imports of foodstuffs and a below average growth in imports of consumer goods, raw materials and investment goods will become the dominant imports by the end of the 1980s accounting for more than 60 percent of Senegal's total imports as compared to only 45 percent in 1970. In the 1970s government import policies should deal with three main tasks: (a) reduce the negative impact of the highly monopolistic structure in manufacture by exposing local manufacturing enterprises to increased compet- ition from abroad; (b) continue to encourage more competition in import trade by giving entry to the local market on a nondiscriminatory basis to imports from all countries and by widening the geographical source of imports, (these efforts would help keep prices down and improve Senegal's export possibilities); and (c) consider the possibilities of import substitution for raw materials, intermediary goods, and investment goods in the medium and long term, where economically feasible. These possibilities should not be circumented by grant- ing too liberal long-term import terms for such products. Apropos, though liberal import concessions for raw milk were by far not the only factor for the unsatisfactory achievements at the milk factory in St. Louis, they do dramatize a possible area of conflict between the need to stimulate local production of raw materials and the need to incentives for imports of raw materials by manufacturing enterprises (for example, by milk reconstitution factories). The foreign trade deficit (excluding services) is expected to in- crease substantially in absolute terms, but only slightly in relationship - 112 - to exports and to GDP. In 1969 to 71 it reached a high of 31 percent of imports and 8 percent of GDP. These proportions are projected to fall to 25 percent and b percent respectively by 1975, but should rise again to 30 percent and 6 percent by 1980. These figures are high but not unmanageable, considering the substantial surplus of services and the anticipated high amount of foreign aid (technical and investment). If groundnut prices should fall to L67, the balance of foreign trade would worsen substantially. By 1975, the deficit could reach 30 percent of imports and 8 percent of GDP, and about 40 percent and 10 percent respectively in 1980. This drop would be due to the fact that without a substantial fall in investments imports could not be expected to decline in step with the slumping groundnut exports. In fact, imports of food and investment goods, accounting for more than 60 percent of imports, would barely slacken and the expected slower growth of the other imports, caused by lower local demand, could not help offset the entire fall in exports. - 113 - XI. PLANNING AND PUBLIC INVESTMENT Public investments are carried out in accordance with Four-Year- Development Plans. The Third Plan comes to an end in June 1973, and prepara- tions for a Fourth Four-Year Plan (July 1973 to June 1977) started at the end of 1971. Past plans were primarily public sector investment programs, or four- year public investment budgets. Only a few private investments were included (joint private/public projects and a few major well-known private projects) and macro-economic planning was limited. Though a few general growth targets were established, they were only loosely connected with the investment programs. The Plans have not attempted to provide a comprehensive development strategy, identifying and resolving critical problems in agricultural prices, foreign trade policies, price policies, and the like. The Fourth Plan is not expected to differ substantially inapproved. Lack of basic information (particularly in agriculture) and limited manpower will not allow much more. The Third Plan In its original form the Third Plan (July 1969 to June 1973) had listed total public development outlays of about CFAF 125 billion, almost equally distributed between the first and second half of the Plan period. This sum represented an increase of three times the actual plan outlays during the Second Plan, which totalled CFAF 39 billion in four years. However, before the mid-point were reached, government realized that the Third Plan was too ambitious. In a mid-term revision Plan goals were reduced by 25 percent to CFAF 93 billion. The revision provided a sharp increase in outlays for the second half of the Plan period in an attempt to insure reaching targets origi- nally set for this half. In fact, the revision did not much more than acknow- ledge that Plan implementation had been slow during the first half of the Plan period and that it was not possible to increase the speed in the remaining two years of the Plan. However, overall investment targets for the second half of the Plan period changed very little. They still seem far too ambitious. Despite a marked improvement in absorbitive capacity, it is difficult to visual- ize, the attainment of a more than twofold increase in development outlays with- in two years (from actual outlays of CFAF 13.7 billion a year in the first half of the period, to CFAF 31 billion a year in the 1971/72 to 1972/73 period) par- ticularly in such complex sectors as agriculture and livestock. In consequence, total public outlays will not very likely reach more than about CFAF 58 billion over the entire Plan period (CFAF 14.5 a year); this projection slightly exceeds the figure of CFAF 51.8 billion used by the World Bank as a reasonable Plan target in its 1970 economic report on Senegal. It would still be about 50 percent more than total Plan outlays in the Second Plan, and therefore can be considered a very satisfactory achievement. To add to this accomplishment is the marked improvement in quality and sectoral allocation of plan outlays of the Third Plan over the Second. Table 38: tkIRD DEVELOPMENT PLAN (1969/70-1972/73): PUJBIC, OUTLAYS (Annual averages in billion CFA francs) Original Plan Revised Plan Mission Estimates 1969/70- 1971/72- Total 1969/70- 1971/72- rotal 1969/70- 1971/72- Total 1970/71 1972/73 period 1970/71 1972/73 period 1970/71 1972/73 period Rural Sector 9.8 10.9 10.4 4.4 11.9 8.2 5.8 6.8 6.3 Industry, services 3.4 1.7 2.5 - - - o.6 0.6 o.6 Transport, information 4.5 5.7 5.1 3.0 5.4 4.2 2.3 2.9 2.6 Education, Health 2.9 3.1 3.0 1.2 4.5 2.8 1.4 1.5 1.5 Housing 7.1 5.9 6.5 4.8 5.1 5.0 3.3 3.1 3.2 Studies, miscellaneous 3.5 3.9 3.7 2.0 4.1 3.0 0.3 0.4 0.3 TOTAL 31.2 31.2 31.2 15.4 31.0 23.2 13.7 15.3 14.5 /a 1969/70-1970/71 actuals; 1971/72-1972/73 mission estimates. Sources: Troisi6me Plan Quadriennal de IJ6veloppement Economique et Social, 1969-1973, FPajustement du Troisieme Plan Quadriennal de D6veloppement Economique et Social, 1969-1973. - 115 - The shortfall in plan implementation was primarily the result of insufficient absorbtive capacity or of too ambitious Plan targets which far exceeded absorptive capacity even though capacity had substantially improved). The major bottleneck was project preparation. Because of insufficient advanced planning most projects included in the Plan were still in a preliminary stage of preparation when the Third Plan was adopted. Therefore, time was far too short to get the projects ready for implementation in the first two years; in fact, many of these projects are going into the Fourth Plan, particularly projects in new and difficult sectors like livestock, or in sectors like education where major policy decisions are a precondition for foreign aid. Because of these problems and the fact that project preparation for the Fourth Plan is behind schedule, that is, the first year of the Fourth Plan was be used to terminate projects started in the Third Plan and detailed plan- ning and project preparation was to be concentrated on the three remaining years of the Plan. In contrast, financing of the Third Plan has not been a serious problem and is not likely to become one. High groundnut prices have resulted in relatively high public savings in the first three years and will most likely continue in 1972,73, despite the small groundnut crop. In addition most of the foreign aid necessary to finance the last year of the Plan is already com- mitted, making the speed of implementation primarily a function of absorbtive capacity rather than of financial circumscription. Future Development Planning The Senegalese government is presently engaged in formulating the Fourth Development Plan (1973/74-1976/77). In the Annex on Planning Methods and Plan Implementation, the mission has formulated some proposals on how to improve the techniques of preparing and implementing a Development Plan. Project possibilities for each sector have been discussed above. In this chapter, an attempt is made to formulate a broad outline for public development programs for the next decade, their overall volume, and breakdown by economic sectors. This outline incorporates three main criteria: (a) absorptive capacity for planning and implementation of development project; (b) financial limitations (public savings, foreign aid, and debt burden); and (c) relative priorities of each sector. - 116 - Table 39: MISSION PROPOSALS FOR PUBLIC DEVELOPMENT PROGRAMS BEYOND THE THIRD DEVELOPMENT PLAN (Annual averages in billion CFA francs at current prices) Third Plan Fourth Plan 1969/70-1970/71 1973/74-1976/77 1980 Actuals Mission's Proposal Mission's Proposal CFAF x CFAF z CFAF Z Rural sector 5.8 42 11.0 50 16.5 45 Industry, services 0.6 5 2.0 /a 9 7.0 /a 20 Transport infrastructure 2.3 17 3.0 14 4.0 11 Education, health 1.4 10 2.2 10 4.5 12 Housing, water 3.3 24 3.3 15 3.5 10 Studies, miscellaneous 0.3 2 0.5 2 0.7 2 TOTAL program 13.7 100 22.0 100 36.2 100 /a Including all tourist projects and associated needs (access roads, telecommunications, water and sewage, direct investments in hotels, etc.). Source: Projection of total Plan outlays. An overall investment program of about CFAF 90 billion (or CFAF 22 billion a year) is proposed for the Fourth Plan. This expenditure is considered the maximum possible, because of absorptive capacity and financial limitations. However, at the same time, it is a minimum level if Senegal is to diversify its economy sufficiently and to prevent a new crisis when the expected fall in groundnut prices occurs. It would raise public Plan outlays from a level of 5 percent of GDP in 1960 to 70 (5.7 percent in 1969 to 71) to an average of 6.3 percent during the Fourth Plan. By 1980 this share is projected to increase to 7.4 percent of GDP, making a total public develop- ment outlays of about CFAF 36 billion a year. These proportions are not ex- cessively high. The proposed size of the public investment program is based on the overall volume of investments necessary to sustain satisfactory economic growth as well as on the portion of these investments most likely to be financed by the private sector. - 117 - Table 40: PUBLIC AND PRIVATE GROSS FIXED CAPITAL FORMATION In Billion CFA Francs; Mission Estimates Mission Projections In Percent of GDP 1964-66 1969-71 1974-76 1980 CFAF % CFAF Z CFAF % CFAF % Private investments 12.4 6.1 24.3 10.1 33.9 9.7 52.5 10.7 Public investments: Senegalese admin. 9.9 4.9 14.4'A5.9 22.0 6.3 36.2 7.3 French admin. 0.3 0.1 1.0 0.5 - - - - Total investments 22.6 11.1 39.7 16.5 55.9 16.0 88.7 18.0 a This figure is slightly higher than the one given in Table 39 because the time period is not exactly the same. In view of the urgent need to modernize and develop Senegal's rural sector (to continue growth in spite of falling groundnut prices) and to speed up growth in manufacturing and services (tourism) in order to provide jobs for the growing number of unemployed in urban areas, an overall investment ratio of 16 percent to 18 percent of GDP for the next decade is probably a minimum requirement. Private investments, which have sharply increased in 1968 to 71, cannot be expected to continue expanding at the same rate. On the contrary, in the next 5 years, they will probably grow more slowly than GDP, and by 1980 their relative share of GDP is projected to barely exceed the 1970 peak level. Thus, to taise total investments to 16 percent to 18 percent of GDP, public investments will have to increase faster than private GFCF. This acceleration is justified, if in the 1970s high priority is to be given to the rural sector, where government is to play a major role. A some- what faster growth of public investments would partially restore its relative importance compared with private investments to slightly more than 40 percent of total investments. As a result of the recent sharp increase in private investments, this proportion had fallen from 44 percent in 1965 to 36 percent in 1970. On this basis public development outlays would increase by 8.7 percent a year from 1970 to 75 (about 10 percent a year if the two first years of the Third Plan are taken as a base) and somewhat more than 10 percent in the following years. This growth is only slightly faster than the past 5 years', which averaged 8 percent. Thus, in general absorptive capacity should not create major problems. However, in certain sectors it might become a serious bottleneck. In the rural sector development outlays are designed to expand by 13 to 14 percent a year. To achieve this goal will demand a - 118 - major effort by the Senegalese administration particularly by the two Ministries of Rural Development and Planning. Without creating a sectoral planning bureau in the Ministry of Rural Development, capacity to prepare and execute projects fully and effectively will probably not be adequate. Furthermore, higher cur- rent budget allocations for rural sector services will be necessary to increase Senegal's capacity to implement projects in this sector, including funds for consultant services to assist in project preparation. The fastest growth of development outlays is foreseen in the indus- try and services sectors (21 percent annually). However, this growth is not expected to raise major problems of absorptive capacity. From 1970 to 75, the proposed expansion (even though high in relative terms) remains small in ab- solute terms; and in the 1975 to 80 period most of the expected growth will come from two big projects (tanker repair and mining). The relatively fast expansion of proposed education investments, particularly in the second half of the 1970s (15.5 percent a year), could be get some problems of absorptive capacity on the planning level. Education, therefore, should receive second highest priority for the establishment of a sectoral planning bureau. This bureau would have to be an inter-ministerial agency, coordinating education planning in the several ministries presently responsible for this sector. In all other sectors, proposed growth of plan outlays is such that absorptive capacity is not very likely to become a limiting factor. Sectorial allocation of Plan outlays. Sectoral allocation of plan outlays is based on the mission's best judgment on sectoral priorities for the next decade. For several reasons highest priority should again be given to directly productive investments. It is proposed that the share of such investments increase from the past of the 45 percent to 50 percent to nearly 60 percent in the Fourth Plan and to about 65 percent by 1980. In view of the very serious economic and financial problems Senegal will be facing in the next few years (fall in groundnut prices) a major effort has to be made to stimulate economic growth directly through a sufficiently large program of projects capable of yielding results quickly. Limited absorptive capacity might not have allowed such a program from 1960 to 65, when it was urgently needed. This capacity does exist now or can be created quickly by a determined effort. In addition to the short-term difficulties one of Senegal's major problems is the high disparity of incomes between the rural and the urban sectors. This disparity has led to rural migration, to urban centers, and to growing urban unemployment (indicated by the projected virtual lack of growth in per capita income in the urban sector between 1970 and 1980). Again, an attractive policy strongly stimulating economic growth particularly in rural areas is the best solution to this problem. There are other arguments in favor of a relatively high share for directly productive investments. They are negative in so far as they do not speak so much on befalf of directly productive investments but against in- creased investments for several not directly productive sectors like transport, education, and housing. For transport, it is believed that infrastructure is relatively well developed in Senegal, compared to those in most other black African countries; and, at this stage of development, Senegal transport does - 119 - not have major bottlenecks, except for lack of secondary roads in several more remote areas. However, better organization and management are urgently needed in this sector. For education, it is difficult to propose a major increase in Plan outlays before a satisfactory reorganization has been deversed (and has been thoroughly tested) to tackle the country's most urgent education needs. For urban housing, the recently authorized low-cost urban housing proj- ect, financed by IDA, has shown that more can be done with less funds through a basic change in policy. For urban water projects the need will be less urgent after completion of the Lac de Guiers water project, it has been in the last five years. In the next 5 years most directly productive investment ought to be in the rural sector, with second priority given to tourism and the promo- tion of small- and medium-sized local enterprises. The mission proposes that not less than 50 percent of total public development outlays be for rural investments. Modernization of existing agriculture (groundnuts, millet, and rice) and diversification into new crops (rice, corn, vegetables, and fruits) should be given priority. In addition, stimulation of rural migration to the south and southeast is crucial for Senegal's long term development in order to relieve population pressure in the groundnut basin and to make agriculture less dependent on the marginal and widely fluctuating rainfall conditions in the center and the north. For the same reasons, assessment of the possibilities to increase irrigation in the Senegal River valley and in Casamance will be of high priority. After long and very costly experimentation most technical problems seem to have been solved for Senegal's major crops, so that there will be few obstacles in that respect against substantial expansion of development outlays. Nevertheless, where further research is still needed (e.g., for fertilizer) it should be undertaken without delay. For livestock much experimentation still has to be carried out. It should be assigned a priority and undertaken rapidly. Hopefully, in the second half of the decade, this sector may be ready for faster growth. The substantial potential in fishing asks for increased government efforts, particularly in traditional fishing. Gradual transformation of the experienced traditional fishermen into modern fishermen ought to be a goal in this sector. After motorization of pirogues has been completed, in- creasingly the introduction of long liners (cordiers) would seem to be the next logical step. Freshwater fishing also need more attention. However, the propor- tion of rural development outlays, in view of the expected substantial increase in industrial investments in the second half of the 1970s, might be reduced to some 45 percent of total public investments by 1980. For industry and services public investments of CFAF 2 billion annually are proposed, or about 9 percent of total public development out- lays in the Fourth Plan. Of this amount, nearly two-thirds would be for tourism and includes not only investments in hotels, but also in all infra- structure directly related to tourism (access roads, air fields, telecommunication, water, sewerage, etc.). It is assumed, in accord with the government's own views, that most superstructure would be financed by private sources. Second highest priority should be given to the promotion of local small- and medium-sized enter- prises in conformity with the aims of SONEPI. In the second half of the 1970s implementation of 2 to 3 major projects-- tanker repair and mining-- will re- quire markedly higher public investments in the industrial sector. On the - 120-- assumption that the government will contribute about $60 million over five years to the tanker repair project, this project alone would absorb public investments of CFAF 3 billion a year; in addition, some of the mining projects now under studies should be ready for implementation in the late 1970s. At that time tourism is likely to demand more funds then during the Fourth Plan. Thus, industries and services might become the second most important sector for public investments in the years after the Fourth Plan, absorbing up to 20 percent of total public development outlays. Lack of transport infrastructure is not now a prime bottleneck for economic growth. However, the urgent need to stimulate rural migration to the South and Southeast does necessitate some road construction and improve- ment, and in many other areas there is a need for feeder roads. These works should be the priorities for new investments. In addition, it is very import- ant to improve use of the existing transport infrastructure, particularly the railway and the road network. Otherwise, transport might soon become a serious handicap for future economic growth. This undertaking is not so much a problem of new investments but one of better organization and management, even though some increase in rolling stock for rail and road is necessary. Improved road transport for hauling groundnuts is of highest priority. It might demand special credit facilities for the purchase of trucks, and for better repair depots away from urban centers. A 30 percent increase (at current prices) of total public investments for transport investments should be sufficient to fill the needs. However, it would represent a large decline in the rela- tive share of transport and communications in the total investment program; but one must consider that a high percentage of investments in tourism (and in mining) are also investments for transport infrastructure. It is proposed that investment in education and health be increased at the same rate as the overall development program in the Fourth Plan, and somewhat faster thereafter. This allocation reflects on the one hand the need to do more for education in Senegal and on the other the knowledge that no satisfactory answer has yet been found to satisfy the country's education needs. The proposed program is based on the assumption that in the Fourth Plan modern education will expand at its current rate and a pilot project of non-traditional education and training, particularly geared to the needs of Senegal's rural youth, will be implemented. By the end of the Fourth Plan, the project should furnish sufficient practical experience to allow a relatively faster future expansion of non-traditional education and training. Therefore, after 1976/77, a greater increase of education outlays is anticipated. - 121 - Development outlays for housing, urbanization, and water supply were extraordinarily high during 1969/70 to 1970/71, because of the Lac de Guiers project (Dakar water supply). They accounted for 24 percent of total public investments as compared to only 15 percent in the preceding four years. For the next decade, government should not increase its spending on this sec- tor above the 1969-1971 leve. This restraint would bring the share of their sector back to about 15 percent of total public investments during the Fourth Plan. The new orientation to lower cost dwellings (parcelles assainies, OHLM unites supereconomiques) will allow housing of more families at less expense. It was one of the main reasons the Bank participated in the Site and Services project. An additional asssist to housing will come upon the completion of the Lac de Guiers project. There will be less need for urban water supply invest- ments, enabling a higher share of the total to be available for housing. Some limitation of public investments in the housing sector seems to be justified. The closely interrelated problems of unsatisfactory economic development in the rural sector, increasing urban migration, growing urban un- employment, spreading urban slums, and the accelerating need for low-cost housing raises the question whether the last link in the chain is the one that deserves most attention. Smaller public investments for housing might make possible larger development outlays for directly productive projects, which should stimulate economic growth in rural as well as in urban areas and to slow down rural migration to urban centers. Migration could be further slowed by raising the quality of rural life through increased outlays for village water supply, electricity, schools, and health facilities. Obviously, publid investments in these sectors are important related influences in determining the needs of the housing sector. A fall in world market prices for groundnuts substantially below b82 would necessitate higher public development programs to offset the de- pressing impact on overall economic growth. Such an increase would have to concentrate particularly on outlays in the rural sector. However, it is doubtful whether the necessary absorptive capacity could be developed to carry out a very much larger program. Furthermore, financial limitations would ex- clude such an expansion; on the contrary, they would most likely demand a serious reduction in public development outlays. Financing of Future Development Outlays Financing of public development outlays, which has had few problems in the past, will become more difficult during the remainder of the 1970s, even assuming only a slight fall of groundnut prices to b82 per long ton. (Under the more pessimistic price assumption, financing of such a high program as outlined above would be virtually impossible.) Financing will be particu- larly tight during the Fourth Plan, but might improve somewhat thereafter. Three main factors will probably be responsible for the difficulties: limited public savings sharply increasing foreign debt amortization obligations and a substantially higher public development program. Another impediment will be the fact that possibilities for continuing deficit financing will become more limited. - 122 - Table 41: FINANCING OF THE PROPOSED PUBLIC DEVELOPMENT PROGRAMS (Billion CFA Francs per year at current prices) Actuals Mission Proposals 1969/70 - 70/71 1973/74 - 76/77 1980 CFAF % CFAF % CFAF % Local resources Gross public savings 5.2 38.0 5.7 25.9 10.7 29.5 Debt amortization 1.2 8.8 2.8 12.6 2.9 8.0 Net public savings 4.0 29.2 2.9 13.3 7.8 21.5 Treasury financing 0.5 3.6 0.5 2.2 0.5 1.4 Total local resources available to finance new investments 4.5 32.8 3.4 15.5 8.3 22.9 Foreign aid Grants 4.9 35.8 7.5 34.1 9.5 26.2 Loans (gross) 4.3 31.4 11.1 50.4 18.4 50.9 Total foreign aid 9.2 67.2 18.6 84.5 27.9 77.1 Total public development program 13.7 100.0 22.0 100.0 36.2 100.0 Local Resources. Because of the fall in groundnut prices, gross public savings are projected to increase only marginally during the Fourth Plan and to fall substantially as a percentage of total public investments. At the same time, foreign debt amortization will sharply rise so that a much smaller part of gross public savings will be available to finance new public investments. Together with some limited advances from the Central Bank (treasury financing) total local resources available to finance new public investments will be, despite a much higher investment program, about 30 percent smaller in the Fourth Plan than in 1969 to 1971. - 123 - Table 42: MISSION PROJECTION OF PUBLIC SAVINGS (Annual averages in billion CFA francs) Actuals Mission Projections higher lower groundnut prices groundnut prices 1969/70- 1973/74 1973/74- 1970/71 1976/77 1980 1976/77 1980 Budgetary savings 4.0 /a 5.2 9.2 2.7 3.8 Stabilization funds 1.5 - - - - Public enterprises and other funds -0.3 0.5 1.5 0.5 1.5 Total public savings 5.2 5.7 10.7 3.2 5.3 Percent of GDP 2.1 1.6 2.2 1.0 1.2 /a Budgetary savings over this period were exceptionally high owing to the introduction of a tax withholding scheme in 1969 and resulted in extra- ordinary revenues of some CFAF 2 billion in 1969/70. Excluding these special revenues, budgetary savings averaged CFAF 3 billion over the two years. The projected increase of budgetary savings has to be judged on this basis. The projected slow growth of public savings in the next 4 to 5 years, despite a satisfactory growth of GDP, reflects the anticipated fall in world market prices for groundnuts. This deceleration will eliminate the considerable surpluses accumulated by the different stabilization funds in the last four years. The surpluses accounted for about 30 percent of total public savings from 1969 to 1971. Despite the expected rise in budgetary savings and saving of public enterprises, total public savings will increase little during the Fourth Plan. In the second half of the 1970s, improvement is expected but not sufficiently to attain the high proportions of savings to investments of the 1969-1971 period. Budgetary savings are projected to increase from 7.5 percent of budgetary revenues in 1969 to 1971 to more than 8.5 percent in 1973 to 1977 and 10.6 percent in 1980. This projection assumes a substantial incremental savings rate of 11 percent and 15 percent respectively in the two periods. Based on the considerations that (a) most economic services in the government (primarily the Ministry of Rural Development) will neeed considerable additional current budget allocations to increase absorptive capacity in planning and project implementation; (b) maintenance outlays must increase to prevent serious deterioration of roads and public buildings; (c) current outlays for material and supplies have reached a dangerously low level in several - 124 - Table 43: MISSTON PROJECTI1N OF CENTRAL GOVERNMET' S CURRENT REVENUES AND EXPENDITURES in billion CFA francs- average annual growth rate 1969/70-70/71 1980 1970-1980 Revenues Percentage Direct taxes 11.0 23.2 7.8- Import taxes 14.7 34.8 9.0 .ixport taxes 1.7 2.7 4.7 Other Lndirect taxes 9.8 20.0 7.5 Miscellaneous revenue 3.0 5.2 5.7 Total 40.2 85.9 7*9 Percentage Percentage Percentage Expendi zures General services 15.5 41.3 24.9 32.5 4.8 Social services 12.6 33.6 26.1 34.0 7.5 Economic services 3.3 8.8 11.2 14.6 13.C PW.Main enance 2.& 7.5 6.6 8.6 9.C Interest on public debt 0.6 1.6 3.5 4.6 19.3 Miscellaneous 2.7 7.2 4.4 5.7 4.8 Total 37.' 100.0 76.7 100.0 7.4 Balance of closed accounts 2.7 9.2 Provisional accounts (net) 1.3 Total. budgetary savings 4.0 9.2 /a At the higher groundnut price assumptions. - 125 - key ministries (education and health) and will have to be increased substan- tially; (d) interest on public debt will substantially increase in the next years; and (e) chances to increase the tax burden are very limited, the increase in budgetary savings can only be achieved through introduction of strict austerity measures in all but a few key ministries. Mission projections are based on a less than 2 percent annual growth (at constant prices) for about half of all ministries or about 4.5 to 5 percent at current prices; but for economic services (planning, rural development, and industry) current budget allocations ought to increase much faster (13 percent annually). For social services and maintenance, an average growth of 7 percent to 9 percent seems necessary (particularly for materials and supplies) to insure satisfactory functioning. As a result the average growth of total current budget outlays will be about 7.4 percent at current prices or virtually the same as GDP. Though it is substantially more than in the past, to limite this growth further would be difficult without hampering satisfactory functioning of important public services and impeding the neces- sary expansion of absorptive capacity. On the other hand, current revenues can be expected to increase somewhat faster than GDP and current budget expenditures. Senegal's economy of the 1970s is very likely to become more open to taxation. Furthermore, the government is expected to continue improving tax collection and to grant less liberal tax incentives than in the past. The projected 8 percent annual growth of imports of manufactured consumer goods should result in a slightly higher yield of import tax revenues: export tax revenues will expand on a level with the projected growth of groundnut production; and the yields of local turnover taxes will be stimulated by more than 9 percent growth nnticipated in local manufacturing production. Direct taxes will increase with the expected improvement of profits as a result of faster overall economic development. Based on the higher groundnut price projection, current budget revenues are thus projected to grow by 8.5 percent a year during the Fourth Plan and by somewhat less than 8 percent therafter. The Investment Code, the various incentives it stipulates, and proposals for possible improvements are assessed in some detail in Annex III of this report. An analysis of application of the Code in the last decade raises serious doubts of its merits. Though it is generally agreed that foreign investments may bring significant economic and social benefits, it is questionable whether the far reaching tax and other advantages were instru- mental in attracting much private investments. No doubt they are very costly to Senegal! The expected faster economic growth in the 1970s will reduce the need for special incentives; thus it is proposed that in the future much less liberal investment concession be granted. More discretionary power should be given to the Investment Committee and this power should be used with care. In particular, incentives should be granted less automatically; export performance and employment impact should become major criteria to justify concessions; the effective period of a concession should be more limited; and monopoly or quasimonopoly positions should not be granted except in very special circum- stances. Close coordination among West African countries on investment - 126 - incentives would substantially improve the Government's bargaining vosition with private investors and should be initiated without delay. This coordin- ation could be achieved within the framework of Communante Economique de l'Afrique et de l'Ouest (CEAO). A much lower groundnut price would not only lead to considerably lower revenues from export taxes but also reduce yields of most other taxes. Imports of highly taxed manufactured consumer goods would be about 7 percent lower and local manufacturing production about 10 percent lower. As profits throughout the modern sector dropped, yields from direct taxes would suffer. Thus, current budget revenues could not be expected to grow as fast as current expenditures, and budgetary savings would very likely decline in absolute terms. The achievement of satisfactory public savings targets will also depend on a quick thorough improvement of the financial performance of public enterprises including the semipublic pension fund. Poor performance of a few major enterprises (railway, urban bus transport, and low cost housing) and the increasingly serious losses of the pension fund resulted in deficits. The government is well aware that corrective action is necessary -- more so since the state of overall finances does not permit increasing subsidization of public enterprises. Some steps have been taken recently (turning over urban transport to the private sector and stricter supervision of other public enterprises) but more are urgently needed. A sharp increase in public development outlays is expected to reduce the share of local public savings in the financing of public investments from a high 38 percent in 1969 to 1971 to 26 percent and 30 percent respectively in the Fourth Plan and thereafter. These percentages, though relatively still high, can only be achieved through determined government efforts; in particular through budgetary revenues, public enterprises, and current ex- penditure restraints. However, the sharp growth in foreign debt amortization payments in the next decade will substantially cut the net amount of public resources available to finance new investments, particularly during 1973 to 1977. The recent cancellation of the French pre-independence debt brought only slight relief. As indicated in Table 41, net public savings are projected to decline by more than 25 percent in absolute terms in the next four years, from an annual average of CFAF 4 billion in 1969/70 to 1970/71 to CFAF 2.9 billion during the Fourth Plan. At the same time, their relative importance to public investments will probably fall by more than half, from 29 percent to 13 percent. Even by 1980, their relative share might still be very much lower than in 1969 to 1971. In the past insufficient public savings were supplemented by running down previously accumulated treasury deposits with the banking system, pri- marily those with the Central Bank (BCEAO). In the last decade, more than 10 percent of public development outlays (or an average of better than CFAF 1 billion a year) were financed in this manner. Such resorts resulted in a near depletion of treasury reserves by the end of 1971 and at the same time was a major cause of the fall of Senegal's net foreign exchange reserves in the 1960s - 127 - and their virtual exhaustion by the end of the decade. The question arises whether under such circumstances government deficit spending is advisable: The mission analysis that follows concludes that some Central Bank financing of public development outlays should not be excluded in the next decade, but that it should remain very limited in order to avoid a further fall in foreign exchange reserves or an unduly restrictive credit policy in regard to the private sector. Future deficit spending can no longer be financed by running down treasury deposits with the banking system, but only through treasury borrowing from the BCEAO. From an overall economic point of view and impact on inflation and on the balance of payments, this change makes no difference, since it has the same effect whether the Tresor reduces it s deposits with the Central Bank or whether it increases its borrowing from the Central Bank. Thus, future Central Bank borrowing will be nothing more than a continuation of past policies. Legally, under the rules of the West African Monetary Union Senegal has the possibility of borrowing quite substantially from the BCEAO. These rules stipulate that the overall debit position of the public sector compared with the banking system's at no time exceeds 15 percent of total tax revenues collected by government in the previous year. For Senegal, this provision would allow public borrowing of up to about CFAF 7 billion by the end of the Fourth Plan, or an average of CFAF 1.4 billion a year over 5 years. Such borrowing would raise the share of local contribution toward the financing of new public investments by more than half, from 13.3 to about 20 percent. Nevertheless, economic considerations speak strongly against sub- stantial public borrowing from the Central Bank. It is true that in the fu- ture the close correlation between deficit financing of public investments and falling foreign exchange reserves might somewhat lessen. As Senegal's economy is very likely to expand much more rapidly than it did in the past, its capacity to absorb locally an expansion of its credit volume (including govern- ment deficit spending) should improve. Therefore, the part that might spill over into imports to cause a fall of foreign exchange reserves might be less. This improvement should make it possible, compared with the last decades, to expand credit faster without creating serious balance-of-payments problems. However, credit needs of the private sector will increase substan- tially in response to the projected large expansion of production in the modern sector of the economy (groundnuts, manufacturing, imports, and services) and to the accompanying rise in private investments. Thus, to avoid a serious credit squeeze in the private sector which would not be in Senegal's best interest and would certainly slow economic growth, public borrowing will have to reamin limited in the next decade. On the assumption that money circula- ion (including quasi-money) will, perhaps, expand by about 8.5 percent annu- ally (or about 25 percent faster than GDP) and that credits to the private sector will grow about 7 percent a year (a very conservative stimate), total government deficit spending during the 1970s should not exceed CFAF 4 billion (or an average of CFAF 0.5 billion a year) and should not cause serious pres- sure on the balance of payments. Then, within these limits, government should not hesitate to make use of the credit facilities provided by the West Africa Monetary Union. - 128 - Foreign aid. The probable decline in local resources (public savings net of debt amortization and borrowing from the Central Bank) available to finance new public investments from an average of CFAF 4.5 billion in 1969 to 1971 to only 3.4 billion in 1973 to 1977 (but more than CFAF 8 billion by 1980) does not necessarily impede implementation of public development programs of the size proposed. There is a fair chance that sufficient foreign aid can be mobilized to finance them, if the appropriate cautious policies are followed. (The tight financial situation does create a few problems that need careful consideration by the government to avoid serious difficulties). The limtied contribution Senegal can make toward financing new public investments (less than 15 percent during the Fourth Plan; little more than 20 percent by the end of the 1970s) will considerably reduce the country's flexibility to implement new development projects. More than ever before, Senegal will be dependent on foreign aid, and there will be much less pos- sibility to carry out projects largely or entirely financed by local resources. In 1971, when Senegal's treasury reserves rapidly approached depletion, the government overcame the lack of local resources to finance non-foreign aid financeable projects by contracting a CFAF 3 billion loan in Kuwait at supplier credit conditions (8 percent, 3 to 5 years). In the next decade, Senegal will need to limit loans on such conditions of it is to preserve its credit standing. Such loans are not a recommended way to compensate for the lack of local resources. Accordingly, Senegal will have to be very careful in the future to avoid low-yielding and high-risk projects, like sugar scheme, which demand large contributions from the government that cannot be financed by foreign aid on reasonably soft terms. Senegal cannot enter into such deals without soon being faced with serious foreign debt difficulties. Senegal can only hope to attract sufficient overall foreign aid for the next Plan if the limited amounts of public savings are used primarily as counterpart funds for the type of foreign aid that insists on a minimum of local contribution. This approach will particularly require a readjustment of the financing of public enterprises. As mentioned in Part One, in the past 4-5 years the bulk of investments of public enterprises was financed by the Tresor, and only about one quarter by foreign aid. This share will change drastically in the future, becase the Tresor will no longer be able to finance CFAF 1 to 2 billion of public enterprises' investments per year out of its own resources. More efforts will have to be made to attract foreign aid for these investments. Fortunately, many of Senegal's traditional sources of foreign aid do not demand local contributions; but even so, little savings will be avail- able to finance projects entirely with local resources. In some instances, it might be possible to use private investments as counterpart fund for foreign- financed projects (purchase of oxen to stimulate oxdrawn agriculture, etc.), or, perhaps, other aid agencies might finance the local contribution; but these possibilities are usually limited. - 129 - Table 44: PROJECTION OF GROSS FOREIGN AID INFLOW (annual averages in billion CFA francs) Actual Mission Projections 1969-71 1973-77 1950 Grants: France 0.9 1.1 1.2 European Communities 2.8 4.6 6.3 Other Sources 1.4 1.8 2.0 TOTAL GRANT AID 5.1 7.5 9.5 Loans: France 1.5 2.1 3.5 biropean Communities 0.1 0.4 1.0 Gormany, Fed. Rep. 1.2 1.5 2.2 United States 1.2 1.5 2.0 Miscellaneous Other Bilateral Aid 0.3 1.7 3.7 Bank Group 1.1 3 6.o TOTAL LOANS AND CREDITS 5.4 11.1 18.4 TOTAL FOREIGN FINANCIAL AID 10.5 18.6 27.9 Source: Mission calculations. - 130 - On this basis a gross foreign aid inflow of about CFAF 19 billion (US$72 million) a year for the Fourth Plan is not an impossible target, even though it necessitates an inflow increase of 80 percent over the 1969 to 1971 level. Grant aid is expected to rise to almost 50 percent mainly because of an anticipated spurt in help from the European Communities. French aid will be increasingly in the form of soft loans, rather than grants. Nonetheless, of total foreign aid the share of grant aid is likely to decline from nearly half in 1969 to 1971 to about 40 percent in 1973 to 1977. Loan and credit aid, however, is projected to more than double between the Third and the Fourth Plan. A substantial part of this increase is expected to come from bilateral aid donors not previously active in Senegal on a large scale from Italy, Canada, Belgium, and possibly from some of the oil producing countries in the Mediter- ranean and the Near East. There is little doubt that these sources can provide substantial loan funds; but, it is less certain whether it will be possible to obtain the funds at sufficiently soft terms. Such borrowing might turn out to be the most difficult financing problem. France, the Federal Republic of Germany, and the United States will continue to be major lenders to Senegal, partly as sources of supplier credits. A slight increase in loans is also expected from the European Communities, in addition to their generous grant aid. Loans from the World Bank Group to Senegal will expand substantially during the 1970s. As a result of a sharp increase in lending in FY72 and FY73 its disbursements to Senegal will more than triple during 1973 to 1977. They will account for more than 20 percent of Senegal's total public development aid. These loans will make the World Bank Group the second most important source of foreign financial aid; the first is the European Communities (27 percent), the third France (17 percent), and then the Federal Republic of Germany and the US (about 10 percent each). France will remain the most important overall aid donor because of her technical assistance as well as financial assistance. Mtiscellaneous bilateral aid donors might contribute an additional 20 percent of the foreign loans. World Bank disbursements are likely to grow less rapidly in the late 1970s; by 1980, its share of the tatnl financial aid received by Senegal might be in slight excess of 21 percent. XII. Terms of Foreign Financing and Creditworthiness Senegal's sharply increasing dependence on foreign resources to finance its public development outlays makes terms and conditions of future foreign aid especially important all the more so since the average blend of aid is expected to harden considerably as the foreign grant aid grows much more slowly than foreign loans and credits. In the last six years grant aid declined in relative terms from abut 75 percent to 53 percent of total foreign aid disbursements. This trend will probably continue; by 1980 grant aid is expected to account for not more than one-third of total inflow of foreign financial aid and less than 20 percent by the year 2000 (Tables 45 and 48). In the mid-196s, Senegal financed more than 12 percent of its total development outlays with foreign loans and credits; its foreign debt consequently remained - 131 - Tas-e 45: L0o1'.T1?X YI3SIC\ PROJECTI0NS OF PUBLIC SAVI.NGS, iREIGN AID AND DEBT SERVIC5 (in billion OFA francs and percentage of GDP at current prices) Actual HiEier Grounckiut Price Assunrticns 70 -189 2000 7,7X FAF o CFAF 19 CFAF s GDP 24D0 100.0 . 9 100 oo 973 100.0 1,915 a 00 c,0 F-ablic Savings Before interest La 6 2.5 15 3.1 38 3.9 21 4.8 Interest on nublic debt Lb 1 0.4 0.9 It 1.3 13 .6 Net public savings /a 5 2.1 11 2.2. 25 2.6 61 3*A Aimortization of publlc debt Lb 1 3 8 53 Net public savings - available for investments 4 8 17 3 Public Investments 13 5.7 36 7.3 75 7.7 15I 8.0 Foreign Aid 9 28 58 116 EKports of Goods and Services 59 24.6 1Z5 25.5 235 24.2 441 23.0 Net Public Savings Avaiiable for In- vestments in Per- centage of Total Public Investments 32.8 22.2 2Z.7 24.7 Foreli7 1ebt Service In perc.entage oZ' exports of goods and NFS 3.7 5.6 8.9 12.0 In percentage oi gross public savings 33.3 46.7 55.3 58.2 Pro memoria: Foreign Aid Grants 5 10 14 21 Loans and credits 4b U 18 44 95 Ia nclvdir.n a sm31l asrount of borrowing from the Central Bank. a AS3auvina p fore.gn aid blend (net of grants) of: 50'1 IDA-type conditions, 40- IBpD-tt:pe conditirns, 109 suppliers' credit. . ce >-;-. onestimntes. - 132 - very low with a service ratio of only 3.7 percent in 1970 and 5.4 percent in 1971 despite sluggish exports. By 1970 the proportion of foreign loan financing had increased markedly to more than 30 percent. Limited public savings and the falling grant aid will probably raise this share to 54 percent by 1980 and to near 70 percent by the year 2000. Despite a projected large growth of exports of goods and services averaging 7.5 percent to 8 percent thourgh 1980 and 6.5 percent thereafter, the very high dependence on foreign loan aid will increase Senegal's future debt considerably even if loans are obtained on concessionary terms. For a long term view of the impact of foreign borrowing on Senegal's foreign debt service requirements (Table 45), the mission has projected a rate of overall economic growth averaging 7.5 percent in current prices until 1980 and 7.0 thereafter, assuming price increases of 2.5 percent to 3 percent per year. This growth is much faster than the past decades. It presupposes that the government will continue to give priority to productive investments and will further improve the country's international competitive position b keeping salary and price hikes to a minimum. In addition, it requires that world market prices for groundnuts not fall below 182 per long ton. To achieve such growth, public investments will have to expand faster than GDP, increasing from 5.7 percent of GDP in 1970 to about 8 percent in the year 2000. For the same period, total public savings, before interest payments, are projected to grow about twice as fast as GDP, rising from 2.5 percent to near 5 percent of GDP. This increase assumes highly satisfactory financial performance by the government. It is based on a projected growth of budgetary revenues of 7.5 percent a year and on holding the increase in current expenditures (excluding interest on foreign debt) to not more than 7 percent or about on a level with GDP growth. The share of budgetary revenues should then increase from 17.2 percent of GDP in 1970 to 19.2 percent in 1000. In addition, the increase takes for granted substantially higher savings from public enterprises. On these assumptions, total public savings (before debt servicing) would average about 60 percent of total public investments in the year 2000 as compared to 44 percent in 1970. As in 1970 to 1980, financing of private investments should need no contribution from the public sector. A GDP growth rate of 7 percent to 7.5 percent a year in the next 20 to 30 years might not seems very high in view of the successful government efforts to diversity agriculture, stimulate fishing and tourism, and improve the country's international competitive position by keeping price and salary increases at a low level. However, Senegal's limited economic potential (natur- al as well as hauman) makes it difficult to project more rapid economic develop- ment. Though there are possibilities for diversification in the rural sector which have not yet been fully developed, they remain limited (as in all sahelian countries) compared with those of countries in the tropics or in more temperate climates. The anticipated rapid exploitation of Senegal's substantial potential in fisheries and tourism can compensate in part for the smaller contributions of its agricultural resources. However, in these more sophisticated sectors, the human potential will become a serious bottleneck in the short and medium term. It will be even more of a problem in hnanufacturing. As mentioned previously 85 percent to 90 percent of Senegal's population is illerate, and Table 46 FOREIGN DEBT SERVICE RATIOS UNDER DIFFERENT BLENDS OF FOREIGN LOAN AID AND DIFFERENT GROWTH RATES OF EXPORTS OF GOODS AND SERVICES B 1 e n d Export Growth (Average /year) 70 a IDA 60 % IDA 50 % IDA 40 % IDA No IDA 1980 7.8/6.5 X2 4.9 5.4 6.1 7.8 6 X 5.0 5.8 6.4 7.2 9.2 5 5.5 6.4 7.1 7.9 10.2 199C 7.8/6.5 % 5.7 7.1 8.7 10.4 17.7 6 - 7.1 8.8 10.7 12.9 21.9 5 X 8.6 10.7 13.1 15.7 26.7 2000 7.8/6.5 % 7.4 9.5 12.0 14.9 30.1 6 X 9.6 12.3 15.5 19.3 39.0 5 t 12.9 16.5 20.8 25.8 52.2 Remarlcs: 1. The 7.8/6.5% growth rate of exports of goods and services (7.8% up to 1980, 6.5% thereafter) represents the mission's own projection. The two lower growth rates are indicated only to give an idea of the sensibility of the debt service ratio to lower than expected export growth. 2. The borrowing blend indicates the IDA type component only. In additi on, it Js assiimrcJ that 10% of total borrowing will be at supplierst credit terms in all cases except in the 1aC! arid the romaindor at IBRD ty-pe terms. In the last column, 100% IBRD ty-po borrowing is arThuswn(J 3. The 50% IDA blend is considered the hardest possible for Senegal. YisF5 . f>o;t.ioO of' flu-¼re debt servi cc and public savings (Tables 41 and 45)are based on such a blend. - 134 - though there is a stock of trained employees in the modern sector better qualified than those in most other African countries, it is small. W4ith the present primary school enrollment rate of little more than 40 percent imlprovement will not be rapid. Thus the wherewithal for rapid diversification is limited, Senegal will reamin heavily dependent on groundnuts for many years and the uncertain outlook in world markets for this crop will continue to influence the economy. These long-term assumptions show very clearly that foreign loans and credits will need to be on reasonably soft terms if a runaway foreign debt problem is to be avoided by the end of the century. Financing the entire need for foreign loans and credits (total need for foreign public financial aid minus the expecte/inflow of grant aid) at conventional terms would result in a foreign debt service ratio of about 18 percent by 1990 and 30 percent by 2000 (Table 46). Furthermore, it would create foreign debt service obliga- tions exceeding gross public savings by more than 10 percent by 1990 and more than 50 percent by 2000 (Table 47). Obviously, borrowing on such conditions would soon lead to unmanageable public finance and balance-of-payments difficulties. The mission's medium and long term projections (Tables 41 and 45) assume an inflow of foreign loans and credits on the following conditions: 50 percent on IDA-type terms, 40 percent on IBRD-type terms and 10 percent on supplier credits or similar terms. These terms are about the hardest Senegal can afford. Because of its present very small foreign debt, the country's debt service charges will remain low until 1980 no matter what the terms of foreign lending will be. However, it is the longer term projections that are significant. Under the above assumptions (50:40:10), the debt service ratio is deteriorating 40 percent to 50 percent every ten years, exceeding 12 percent of export earnings in 2000 and ceteris paribus reach 16 percent to 18 percent by the year 2010. The relatively high sensitivity of the foreign debt service ratio to changes in the growth of export earnings (indicated in Table 46) is another factor that requires Senegal to be cautious in tis foreign debt manage- ment and that makes too hard a blend very risky. A fall of average annual growth of exports from 7 percent to 6 percent would raise the debt service ratio by about one-third in the year 2000 from 12 percent to 15.5 percent. Continued prolonged droughts, together with a sharp fall in groundnut prices, could well reduce future export growth by one percentage point or more. By itself, a lower groundnut price (E67 per long ton) would not sub- stantially worsen these ratios, provided that foreign debt charges were to remain the same. Exports of goods and services would then be about 10 percent lower than projected above, to make the foreign debt ratio about 13.5 percent by the year 2000. However, these assumptions are unrealistic. Without a corresponding change in the exhcange rate, such a low groundnut price would not allow implementation of the projected investment program because of the lack of local counterpart funds and the unrealistically high capital inflow required. Hypothetically, implementation of the same investment program and the corre- sponding increase in foreign borrowing (to compensate for lower public savings) would raise the debt service ratio to over 12 percent by 1990 -nd near 25 percent by 2000. - 135 - In the short and medium term, however, budget limitations will be a more serious bottleneck than balance-of-payments (Table 47). Increased for- eign borrowing will sharply raise foreign debt service charges, draining public savings. Under the conditions assumed in Tables 41 and 45 (50 percent IDA), debt service payments will absorb nearly half of gross public savings in 1980 and 60 percent in the year 2000 (as compared to one-third in 1970). This drain considerably reduces the part of public savings available to finance new investments. Even though the projected substantial savings effort by the government is expected to lead to an increase in public savings from 2.5 percent of GDP in the past to a satisfactory 4.8 percent by 2000, public savings net of foreign debt service payments will probably improve only marginally from 1.7 percent to 1.9 percent of GDP. At the same time, while total public savings will grow to 50 percent to 60 percent of new public investments between 1980 and 2000, net savings are not expected to exceed 20 percent to 25 percent of such investments. Therefore, a 50 percent IDA blend will demand foreign aid contributions averaging 75 percent to 80 percent of total project costs. Any hardening of terms for foreign borrowing would further raise this proportion; and most likely require a reduction in public investment levels. Table 47: IMPACT OF DIFFERENT FUTURE FOREIGN BORROWING CONDITIONS ON NET PUBLIC SAVINGS (In billion CFA francs) Gross Blend Public Savings/a 70% IDA 60% IDA 50% IDA 40% IDA Zero IDA Debt Net Debt Net Debt Net Debt Net Debt Net serv- sav- serv- sav- serv- sav- serv- sav- serv- sav- ice ings ice ings ice in ice ings ice ings 1970 6 2 4 2 4 2 4 2 4 2 4 1980 15 5 10 6 9 7 8 8 7 10 5 1990 38 13 25 17 21 20 18 25 13 42 -4 2000 91 33 58 42 49 53 38 66 25 133 -44 /a Before interest and amortization of public debt. Foreign borrowing at somewhat harder terms (40 percent IDA-type terms, 50 percent IBRD-type terms, 10 percent supplier credits) would re- duce net public savings available for new investments by nearly 28 percent in 1990 and by more than one-third by the year 2000. Such terms would result in foreign debt service obligations absorbing two-thirds to three-quarters of gross public savings; the savings remaining would limit Senegal's contribution - 136 - to the financing of new investment to 15 percent to 16 percent. The foreign debt service ratio would then reach 15 percent by 2000 (Table 46). Such conditions are clearly too hard. Somewhat softer terms (60 percent IDA- type, 30 percent IBRD-type, 10 percent suppliers credits) would greatly improve the government's capacity to contribute to the financing of new public investments. Its contribution would reach approximately 25 percent in 1980 and would increase to about 30 percent thereafter, as compared to 20 percent to 25 percent under the blend of 50 percent IDA terms. By the year 2000, the foreign debt ratio would be almost 10 percent. Borrowing on these terms would give the government more flexibility, and would definitely be preferable to a 50 percent IDA blend; and ought to be regarded as the hardest that Senegal can accept without putting undue stress on its public finance position. Table 48: LONG TERM MISSION PROJECTION OF TERES OF FOREIGN AID INFLOW 1969/70-70/71 1973/74-76/77 1980 1990 2000 Grants 53 40 34 24 18 Soft loans 19 30 33 38 41 Total soft 72 70 67 62 59 Hard loans 28 30 33 38 41 Grand total 100% 100% 100% 100% 100% At least two-thirds of the public capital inflow needed by Senegal in the 1970s, to carry out its Development Plan should therefore be obtained on concessional terms or on a arant basis. In view of its poverty, its limited resource base, the long and arduous process of development still ahead and its past reasonably good performance in face of serious economic difficulties, Senegal deserves and should receive this type of assistance. Based on what is presently known about the longer term policies of the country's major sources of foreign aid, it seems possible for Senegal to attract foreign aid of CFAF 19 billion to CFAF 25 billion a year, in the next decade at a price not impairing its creditstanding. In addition to being prepared to provide credit at soft terms, for- eign lenders will have to accept the fact that Senegal's ability to contribute to the costs of foreign financed projects will become more limited, particu- larly during the Fourth Plan. In this period, foreign loans should cover an average of 85 percent of total project costs, (except for those projects where local private contributions can be used as collateral or where some current budget expenditures are incorporated into them as local contributions. This tight situation is very likely to ease somewhat in the later 1970s. However, at least for the next 5 to 6 years foreign aid will need to cover a substantial part of local project expenditures. - 137 - Nonetheless the projected low public contribution to the financing of public investments greatly underestimates the government's total develop- ment effort. As mentioned previously, the government ought to make available in the coming years considerably more resources for current development outlays than it has in the past. For the Fourth Plan current budget allocations for development purposes in the rural sector and road maintenance alone (excluding social sectors) will very likely have to be increased by over CFAF 2.5 billion per year above the noraml growth of current expenditures. On this basis the government's share in the financing of total public development outlays in 1973 to 1977 would average about 25 percent. - 138 - ANNEXL: AGRICULTURE A. OVERALL SITUATION AND PAST GROWTH Importance of Agriculture in Senegal's Economy The central role in Senegal's economic life is played by the rural sector and within this sector by agriculture. About 70 percent of the labor force is engaged in rural activities. Although this sector accounts for only 30 percent to 35 percent of GDP (at factor costs), its leverage on the whole economy is considerable through its impact on exports and the size of the domestic market for locally produced goods and services. Of great impor- tance is the fact that most of this impact can be attributed to one single crop, groundnuts, the production of which is largely influenced by climatic conditions. Between 1960 and 1970 this crop contributed on the average about 60 percent of value added by the agricultural sector and more than 70 percent of total exports. The following table measures the importance of groundnut production in government revenues and foreign trade. Table Al : ROLE OF GROUNDNUT PRODUCTION IN GOVERNNMNT REVENUES AND FOREIGN TRADE 1966/67 1967/68 1968/69 1969/70 1970/71 Budgetary receipts from ground- nut exports as percent of total Government current receipts 8.6% 9.9% 6.3% 6.4% 4.9% Value of groundnut exports 1967 1968 1969 1970 1971 as percent of total value of exports /a 63% 60% 44% 42% 31Z% /a Including an estimate for unrecorded exports. To the direct receipts from exports of groundnut products must be added the direct taxes generated by groundnut and oil production and (very important for the last few years) the surpluses of the Groundnut Stabilization Fund, in order to obtain the total impact of this crop on government revenues. In 1971 the share of groundnut exports in total exports is estimated to have reached its all-time low. However, it is expected that groundnut exports could again reach 45 percent of total exports in 1972 as a result of the good 1971 crop. Finally, it is estimated that two-thirds of the monetary income of the rural population comes from groundnut production. - 139 - To the direct receipts from exports of groundnut products must be added the direct taxes generated by groundnut and oil production and (very important for the last few years) the surpluses of the Groundnut Stabilization Fund, in order to obtain the total impact of this crop on government revenues. In 1971, the share of groundnut exports in total exports is estimated to have reached its all-time low. However, it is expected that groundnut exports could again reach 45 percent of total exports in 1972 as a result of the good 1971 crop. Finally, it is estimated that two-thirds of the monetary income of the rural population comes from groundnut production. For these reasons, the two main objectives of government policy in the field of agriculture in the past few years have been to achieve diversif- ication and to lessen dependence of agriculture on the weather by introducing intensive methods of cultivation. These measures have met with varying degrees of success. Between 1959/60 and 1964/65, in constant terms agriculture grew more rapidly than the rest of the economy (5 percent annually as compared to about 2 percent for the economy as a whole). Between 1964/65 and 1969/70, however, as a result of a series of drought years (1966, 1968, 1970) and a worsening financial situation in the rural sector, value added in agriculture fell by about 24 percent in real terms. Through in 1971 the sector recovered most of the lost ground, 1972 it experienced again a sharp depression because of unusually severe drought. A comparison of growth in current and constant terms suggest a worsening in the terms of trade for the rural sector between 1960 and 1968. Since then, however, due to measures taken in recent years favoring the rural economy, the trend was reversed and by 1971 the terms of trade between the rural sector and the rest of the economy were about at the level of 1960 again. Between 1960 and 1968, agriculture accounted for about three quarters of the value added in the rural sector in current prices. This proportion de- creased toward the end of the decade to about 60 percent, as a result of unfavorable climatic and difficult financial conditions which affected ground- nut and food crops more than other rural economic components. Within agriculture, the importance of groundnut in total value added fell from 60 to 65 percent to 50 to 55 percent of the total (in current prices) between 1960 and 1970, mainly for the following reasons: very dis- couraging financial conditions in the rural sector caused the farmers to return to a more traditional agriculture and to give greater priority to food crops. The importance of food crops 1/ in value added by the agricultural sector increased from 26 percent in the first half of the 1960s to about 35 percent in the second part of the decade. Fruits and vegetables account for a fairly constant proportion of the total (8 percent to 10 percent), growing at about 3 percent annually in the past ten years. Although in very rapid expansion since 1967, cotton-growing still contributes only a small proportion of agricultural output. 1/ Millet, sorghum, cassava, rice, maize, niebes, sweet potatoes, beref, fonio, by order of importance. - 140 - Therefore, although much effort is made to diversify agricultural production and to decrease the influence of climatic conditions on the rural sector, the 1960s have only marginally changed the picture of a one-crop country. Given the enormity of the task no rapid change could be expected. However the 1960s have shown some degree of flexibility in the agricultural sector. Production of goodstuffs in constant terms, including cereals, starches and vegetables, has grown at an average annual rate of 3.2 percent between 1959 and 1971, in spite of four drought years, that is, per capita consumption of locally produced foodstuffs increased at about one percent a year on the average. It is only in 1966, 1968, 1970, and 1972 that the per capita consumption of locally produced goods decreased in absolute terms in the rural sector, but not nearly by as much as could have been expected from the severity of these drought years. On a per capita basis, production of locally produced foodstuffs dropped from the 1965 level by about 5 percent in 1966, 15 percent in 1968 and almost 30 percent in 1970. Both 1967 and 1969, however, were higher than 1965 by about 18 percent and 8 percent respec- tively on a per capita basis. It is estimated that imports have reduced the impact of the 1968 drought as measured above by about one half, and that of 1970 by about one third. This calculation takes only recorded trade into account; it is likely that unrecorded trade dampened the impact of the droughts still further. Senegal shows a large deficit in the production of a number of basic food items. Foodstuffs and tobacco accounted on the average for about one-third of total imports between 1962 and 1970. The main deficits are in rice, sugar, wheat, fruit, vegetables, and milk products. The importance of food imports as a proportion of total imports, has tended to decrease from about 38 percent in 1965 to 28 percent in 1970. In absolute terms, food imports remained practically stable in this period, except for 1969 and 1971. This relative decrease in the importance of food imports can be explain- ed mainly by two factors. The first has been the shift from cash crops to food crops in the latter part of the 1960s. As a consequence the impact of the drought years was mainly felt on the export side. Secondly, income elasti- city of food imports being less than that of other items, a slight decrease over time in the relative share of foodstuffs in total imports could be expected. This general tendency is very likely to continue in the 1970s, because of improved prospects for agricultural production and diversification. Factors Determining Agricultural Output Climatic and soil conditions remain the most important determinants of agricultural productivity, notwithstanding continuing efforts made to improve production methods. Among the climatic factors, amount and distribu- tion of rainfall play a central role. The second half of the 1960s (1966, 1968, and 1970) was exceptionally dry, with severe consequences for agricul- tural production. This condition reappeared in 1972 and produced the most severe drought in the last 50 to 60 years. Rainfall, however, is not the only climatic factor determining agricultural productivity; insulation and wind patterns importantly affect the rate of ground erosion. - 141 - A second natural factor determining agricultural productivity is soil quality. Cultivated soils are poor in Senegal and always in critical equilibrium with fertility. Too little use of fertilizer, at least in the southern part of the groundnut basin, has resulted in a gradual impoverish- ment of the soils in the past ten years, especially in the overpopulated areas. However, in the more northern drier parts of the country, the advanta- ges if fertilizer use are not so clear cut and still need careful evaluation. Better soils are found in eastern Senegal but lack of infrastructure and difficulties in adapting the traditional cropping methods in the groundnut basin to the more clayey soils in this region has limited population growth. Only 15 percent of the land is cultivated, most of it within 200 kilometers of Dakar. It is estimated that the cultivable but uncultivated land repre- sents about 30 percent of the country. Population density varies greatly between regions. In the over- populated groundnut basin, it is estimated that a large proportion of holdings are much below optimum. Given the high positive correlation 2_/ between the size of land holdings and the production capacity of a farm worker, since small holdings play a significant role in limiting growth of agricultural productivity. Economic and financial conditions in the rural sector are also important determinants of year-to-year changes in the volume of production and its composition. An increase in the price of agricultural inputs along with a decrease in groundnut producer prices led to a substantial fall in the capacity and willingness of the rural population to adopt more intensive production methods. Thus, the use of fertilizer for groundnut, millet, sorghum and rice, which had increased at an annual rate of 25 percent between 1962 and 1967, dropped dramatically from 62,000 tons in 1967 to 13,000 tons in 1970. Similarly, the purchase of agricultural equipment in 1970 come to less than 50 percent of its 1967 level. In spite of the 1966 drought and the first substantial unfavorable change in the ratio of input costs to groundnut prices in this year, the use of fertilizer and the purchase of equipment continued to increase in 1967, indicating the existence of at least some savings and the willingness of the rural population to use them for production purposes. It is only in 1968 that the downtrend started, to continue until 1970, when drastic financial measures had to be taken to stimulate production. Another limiting factor has been the low priority given by the government to the agricultural sector. This sector received only four percent to six percent of the government's current expenditures in recent years. There is no doubt that the existence services were insufficient, even with the assistance to part of extension services (Societe de Developpmeent et de Vulgarisation Agricole, SODEVA; Societe d'Amenagement et d'Exploration des Terres du Delta, SAED; Compagnie Francaise pour le Developpement de Textiles, CFDT; made possible by foreign aid or by the development budget. It is 2/ C. Ramond, Introduction des themes intensifs dans les exploitations tra- ditionnelles, Centre National de Recnerches Agronomiques, Bambey, 1971. - 142 - generally agreed that the rural population reacts positively to production incentives and to new techniques that raise productivity. New techniques, however, often require more care and involve more risks than traditional ones. This emphasizes the importance of the role of the extension services in supervision and guidance and in the timely distribution of inputs. B. MAJOR CROPS: THEIR DETERMINANTS AND PROSPECTS Foodcrops Foodcrops (mainly millet and sorghum, cassava, rice, maize, niebes, and sweet potatoes) occupied about 55 percent of the total land cultivated in the second part of the 1960s. This increase from about 50 percent in the first half of the 1960s was the result of the marginal shift from groundnut to traditional crop. Of overriding importance among foodcrops is the production of millet and sorghum. These cereals cover 70 percent to 80 percent of the land devoted to foodcrop cultivation, and account on average for 55 percent of foodcrop production. In 1966, 1968, and 1970, the production of millet and sorghum dropped by about 24 percent, 19 percent and 28 percent respectively from their 1965 levels. More than three-quarters of the drop in production was due to a fall in productivity (Statistical Appendix Table 2.7) and less than a quarter by the decrease in the area cultivated. The causes of the fall in productivity are the same as those which affected the whole agricultural sector analysed in preceeding paragraphs. As a consequence, the use of fertilizers for millet and sorghum which had increased at a rate of 50 percent per annum between 1963 and 1967 dropped by more than 50 percent between 1967 and 1970. This dramatic drop in the use of inputs in traditional agriculture has serious consequences. Controlled experiments had shown that the use of fertilizers and other inputs (in particular, draft animals) have a substantial effect on productivity, at least in the areas where rainfall is above a minimum level; for example, for a selected variety of sorghum, the use of fertilizer increases productivity about 80 percent. 3/ Soils already naturally low in fertility rapidly deteriorate in the absence of fertilizer. Of the greatest common is the fact that intensitifcation of methods of production is vital to the income of a large majority of the population in the groundnut basin, because of the high population density. Preliminary estimates, however, by the Ministry of Agriculture indicate that fertilizer consumption for millet and sorghum culvitation will probably increase from 6,200 tons in 1970 to 23,500 tons in 1972 and the purchase of equipment should increase similarly. In spite of the much improved economic situation of the rural population because of the measures taken in 1971 by the government, the increase in fertilizer consumption for sorghum to a level almost twice the all-time high of 1967 appears optimistic. However, these projected increase in the purchase of equipment do not seem out of reach. The measures taken in 1971, will very likely make possible an increase in millet/sorghum production sufficient to cover the needs of the country in the 1970s. 3/ This is much above the response of groundnuts to fertilizer. - 143 - Rice 4/ is the second most important food item. In 1971, consumption of white rice was more than 40 percent highez than the combined millet/ sorghum consumption. Rice consumption increased at a rate of 4.8 percent during 1963 to 71, to a level of 440,000 tons, while rice production, adversely affected by climatic conditions in 1968 and 1970, fluctuated between 90,000 and 156,000 tons during this period; in 1971 it reached only 104,000 tons. In consequence, Senegal had to import between 168,000 and 335,000 tons of rice (paddy equivalent) per annum, representing almost 50 percent of the foreign trade deficit in the 1962-1970 period. An important rice program was launched in the Third Plan with the objective of producing 220,000 tons of paddy by 1972/73. However, delays in implementation has made a downward revision necessary. The original investment program of CFAF 10.7 billion was reduced to CFAF 5.3 billion, and the objectives for 1972/73 lowered to 165,000 tons. Public investments for rice cultivation center in the Casamance and the Fleuve regions (Senegal river valley), where about 95 percent of the rice is grown. Average yield for the country as a whole increased from 1.2 tons per hectare in 1960 to 1.5 tons per hectare in 1969. The droughts of 1968 and 1970 brought productivity down to 0.7 and 1.0 tons per hectare respectively. Yields vary greatly according to the method of cultivation. In Casamance, three methods are being used: cultivation in tidal swamps yields of about 1.2 tons per hectare, rainfed upland cultivation (up to 1.2 tons per hectare but strongly dependent on good rainfall conditions), and traditional cultivation in rainfed swamps tons per hectare). Experiments with new varieties and improved methods have shown however that yields can be increased to about 2 tons per hectare . For rainfed swamp rice for rice cultivated in tidal swamps improvements in cultivation brought yields of higher 3.5 tons per hectare. The continuation of the USAID project responsible for these improve- ments in the Sedhiou department is encured with IDA financing. For fresh water cultivation, the results are even more spectacular, productivity reaching up to 9 tons per hectare with double cropping in experiments conducted by the Taiwan technical assistance mission. In the Senegal River valley, the only possible method is irrigation because of the insufficient rainfall for upland cultivation. Various agencies(as Societe de Developpmenet d'Exploration des Terres du Delta, SAED; Societe de Developpement Agricole du Senegal, SDRS; Organisation Autonome de la Vallee, OAV) have been created to manage rice projects in the Fleuve region. Q Yields vary from 1.5 tons per hectare to 9 tons per hectare depending on methods used, water availability and technical assistance. The Societe de Developpe- ment Agricole du Senegal SDRS, which used to cultivate about 6,000 hectares, limited its activity to 2,300 hectares in 1971 with the progressive takeover of its land by the Richard Toll sugar project. It was dissolved in Spring 1973. (By 1975, the sugar project will have taken over practically the whole Richard Toll area (7,000 hectares). 4_/ Rice production and consumption are expressed in paddy equivalent. 5_/ A detailed description of these agencies' activities is to be found in an internally circulated Bank report, "The Current Economic Situation and Prospects of Senegal," June 8, 1970, Vol. III, Note 1. - 144 - In spite of difficulties, lack of equipment, human resources, and administrative capacity both for project implementation and extension services, rice production is expected to grow at an average rate of 17.5 per- cent between 1971 and 1977 (from slightly more than 100,000 tons to about 275,000 tons), while consumption increases at about estimated 4 percent annually. Nevertheless, because at present internal production supplies only about 25 percent of domestic consumption, this rapid rate of growth in produc- tion will not permit an equally rapid reduction in rice imports. It is estimated that rice imports in 1977 will be close to their average for the period 1967 to 1971, or about 280,000 tons of paddy. Thus, by 1977 internal production will cover about half of the country's total needs. Senegal's potential in rice production, however, is certainly sufficient to satisfy local needs. At the rate of increases forecast for the next five years, Senegal could become self-sufficient in rice production by the mid-1980s. It could attain this goal sooner if the delta dam is constructed; this dam would permit an estimated production of at least 200,000 tons of paddy per annum, or about 70 percent of the quantity presently imported. Other basic foodstuffs, cassava, sweet potatoes, fonio, beref, and potatoes (in order of importance) combined represented from 27 percent to 37 percent of total foodstuff production in 1966 to 1971. Cassava accounts on the average for two-thirds of this production. Its cultivation introduces an element of stability in the level of food consumption by the rural popula- tion, for it is much less sensitive to changes in weather conditions. (Hardiness explains the high proportion of this crop in foodstuffs production in the drought years 1966 to 1968.) Based on the assumption of an increase in wheat imports at a rate of 2.2 percent a year and the maintenance of rice imports at the level of the past five years, it should be possible for Senegal to increase its consumption of basic foodstuffs by about 3.3 percent a year in real terms between 1971 and 1977, or by about 1 percent on a per capita basis. This projection necessita- tes an annual rise in rice production of 17.5 percent, and in millet/sorghum production of about 4 percent. The rice production target has already been discussed. As for millet and sorghum combined increase in production of more than 4 percent per annum appears feasible, in view of past experience and the recent measures to stimulate traditional crops. Groundnuts In order to help explain trends in groundnut production in the past decade, it is necessary to distinguish two clearly different periods. The 1959-1965 period can be characterized as normal: producer prices were satis- factory and stable, climatic conditions were close to what could be expected from the four-year cycle (i.e., one year of adverse climatic conditions fol- lowed by three years of more or less average conditions), cost of fertilizers although increasing (5 percent per annum) was not putting undue pressure on the financial conditions of the farmer; Consequently, farm incomes in- creased regularly by about 6 percent per annum. Production increased from 830,000 tons in 1959 to an all-time high of 1,170,000 tons in 1965. About - 145 - 60 percent of this gain came from the expansion of cultivated land and the rest from increasing yields. In the second period, the latter half of the 1960s, the picture was very different: producer prices dropped by about 17 percent between 1965 and 1967 and then increased again in 1969 (by only 10 percent) and 1971 (by a additional 17 percent); climatic conditions were the worst experienced in the last 50 to 60 years; and cost of fertilizers jumped 23 percent between 1965 and 1967. As a result, farmers' cash incomes from groundnut production fell by over half from CFAF 22.3 billion in 1965 to less than CFAF 10 billion in 1970, and production dropped below 600,000 tons. About 70 percent of the fall in production can be explained by a fall in yields and the rest in the area cultivated. Interestingly, between 1961 and 1967 the area cultivated and the use of most inputs (two variables directly controlled by the farmer) increased without interruption, in spite of a 30 percent decrease in income between 1965 and 1967. In 1968, however, possibly as a consequence of the decline in income, the demand for inputs (groundnut fertilizer, seed dis- tributors, cultivators, groundnut lifters and draft animals) fell sharply. The bad crop of 1968 compounded the financial problem in the rural sector, so that in 1969, both the demand for inputs and the groundnut area cultivated plummeted sharply. Bad weather and yet lower demand for inputs in 1970 explain why the 1970 income from groundnut production represented only 40 percent of the 1965 level. In 1970 the use of fertilizers for groundnut production reached only 13 percent of the 1967 peak. This low was very alarming, particularly because: (1) in 1967 fertilizer consumption for groundnut and millet cultivation was already far below the optimum level; (2) it is estimated 6/ that the use of fertilizer in groundnut cultivation can substantially increase yields if other con- ditions, mainly rainfall, are satisfactory; it was found in some instances that productivity can increase by 2.5 kilograms with a 1 kilogram increase in fertilizer applica- tion (fertilizer use, however, is correlated with the use of other inputs and therefore this increase is only in- dicative). At the end of the 1970/71 short-term debt of the rural population for seeds and equipment amounted to CFAF 4 billion. 6/ C. Ramond, p. 3. - 146 - Table A2: FARMERS' SHORT-TERM DEBT, 1970/71 Unshelled Groundnuts CFAF Million Equivalent ('000 tons) For seeds 3,210 167 For equipment 796 41 Total 4,006 208 Eighty-six percent of the debt for seeds had been incurred in 1969 and 1970. A debt of 208,000 tons could not be reimbursed out of the 1970/71 crop of 583,000 tons. Continuation of the conditions prevailing between 1966 and 1970 could have meant a return to a more traditional agriculture even with an improvement in weather conditions. To reverse this trend, drastic finan- cial measures were taken in 1971: (i) the producer price from CFAF 19.7 per kilogram in 1970/71 to CFAF 23.1 per kilogram, to be applied nationwide; (ii) a bonus of up to CFAF 3 per kilogram was paid to farmers on the production sold in 1970/71; payments would take into account the drought and debt repayment records of the individual farmer; (iii) a bonus was paid to farmers for having planted groundnuts and millet in 1971, (financed by a US$7.2 million emergency grant provided by the European Communities); (iv) the balance of outstanding farmers' debts due at the time were written off (financed by the Groundnut Stabilization Fund). Furthermore, steps were taken to improve the administration of cooperatives and the extension services and to increase the efficiency of Office National de la Cooperation et de l'Assistance pour le Developpement (ONCAD) and reduce its administrative costs. This step to improve ONCAD was undertaken with IDA assistance in connection with the groundnut/millet project (effective June, 1969). Progress in all these efforts have been slow. - 147 - Extension services for groundnut and millet production are furnished by the Ministry of Agriculture, ONCAD, and SODEVA. In June 1971, there were 36 extension service centers, run directly by the Ministry of Rural Develop- ment, with a total personnel of 560. Most of these centers are badly main- tained and about one-quarter of the vehicles are out of order. However, 45 new centers have just been completed or are near completion and the purchase of new vehicles is budgeted for 1971/72 and 1972/73. ONCAD counts 1,760 per- manent staff members in charge of distribution of inputs to groundnut coop- eratives and of groundnut commercialization. SODEVA (succeeding SATEC) was created in 1968 to provide technical assistance services in the groundnut basin, particularly to popularize use of selected seeds, appropriate seeding and harvesting techniques, and fertilizers; to provide extension services in the use of draft animals; and to distribute new groundnut varieties. Due to the reforms of 1971 and favorable weather conditions, the 1971/72 crop reached 900,000 tons, and farmers' income from groundnut produc- tion more than doubled between 1970/71 and 1971/72. This turn of events sub- stantially improved prospects for the purchase of agricultural equipment. The use of groundnut fertilizers, in the southern part of the groundnut basin, with priority given to regions should rapidly reach again their all-time high level of 1967. However, future groundnut production will not only depend on weather conditions, the further opening of the Eastern and Southeastern regions, the increasing use of fertilizers and other agricultural aids (in- cluding draft animals) but also more importantly on groundnut prices and therefore on the international market. At present prices farmers' income per ton of groundnut is marginally higher than it had been in the first half of the 1960s and about 30 percent above its lowest point (1968). The experience of the 1960s indicates that the present level is adequate to ensure normal remuneration to farmers, unless terms of trade between the agricultural sector and the rest of the economy should change rapidly. However, it is estimated that world market prices are very likely to fall in the 1970s from E 104 per long ton (Nigerian groundnuts, shelled, c.i.f. European ports) in 1971 and from more than E 140 in early 1973 to about f 82 by 1980. This fall corresponds to a drop from CFAF 36.7 per kilogram unshelled, at the producer level in Senegal, to CFAF 26.1 per kilogram un- shelled. Almost all of this loss could be absorbed by ending payments into the groundnut stabilization fund. The rest could be absorbed by a slight decrease in producer prices from CFAF 23.1 per kilogram (unshelled) to about CFAF 22 per kilogram (unshelled). If the condition of the groundnut stabiliza- tion fund makes it necessary, it is felt that this price could be reduced even to CFAF per kilogram without provoking a strong reaction by farmers. In these circumstances, it is estimated that groundnut production could increase at about 10 percent per annum up to 1974 or 1975. Two-thirds of this gain would come from an increase in the area cultivated (to the level reached in 1968), and the rest from an increase in yields. For the period 1974 to 1980, in view of the slight decrease in producer prices and the need to open new areas to augment areas under cultivation, the area cultivated and productivity are expected to rise at only 1/2 percent and 1-1/2 percent per annum respectively, yielding an annual rate of increase in production of - 148 - 2.0 percent in this period. Production could thus reach 1,280,000 tons (unshelled) by 1980 as compared to 920,000 tons in 1971. However, move- ments around the average of at least 20 percent can be expected even if normal (that is, four-year cycle) climatic conditions prevail. Other Crops Starting with the Second Plan (1965/66 to 1968/69), attempts have been made at diversifying agricultural production in cultivation of cotton, edible groundnuts, tomato, and recently, sugar cane. Although prospects for most of these crops are good (little as yet is known about sugar cane cultiva- tion), they will continue to represent only a small proportion of agricultural production in the 1970s. Less than one percent of the groundnut cultivated land is used for edible groundnut production which reached an estimated 9,000 tons in 1971, from 1,000 tons in 1964. Modern type cotton production began in 1963. By 1968 Senegal produced about 9,800 tons of cotton and was thus able to satisfy the needs of the local textile industry and to export about 1,000 tons of fibers. By 1971 production reached 21,000 tons, yielding 7,500 tons of fibers, divided into 3,500 tons for local industries and 4,000 tons for export. The success of the cotton operation is largely the result of the favorable natural condi- tions in the south-eastern regions which enable obtaining yields among the best in West Africa), and the quality of the extension services (CFDT). Moreover, cotton growing is much more profitable than groundnut cultivation. Projections of the Ministry of Agriculture indicate that Senegal could in- crease its cotton production from 21,0.00 to 51,000 tons during 1971/72 to 1974/75. This production would yield 19,000 tons of fibers, 4,000 of which would be processed locally and 15,000 exported. Sugar imports varied between 54,000 tons and 68,000 tons in the 1962 to 1970 period. Senegal left the African Sugar Agreement in order to start its own production. The Compagnie Sucriere du Senegal (CSS, a sub- sidiary of the Mimran group) has started a project which includes in its first stage of implementation a plantation of 3,200 hectare of sugar cane in the Richard Toll perimeter, a sugar factory and a refinery. The ultimate goal is to plant about 7,000 hactare, which could yield 60,000 tons of sugar by 1974-75, at which time Senegal could become self-sufficient in sugar production, according to the Mtinistry of Rural Development estimates. How- ever, the project has run into serious technical difficulties. Although first results indicate that, depending on varieties and soil conditions, yields may reach 100 tons per hectare to 150 tons per hectare, it is not certain whether these experiments can be reproduced on a large scale at reasonable costs, because of soil salinity and insufficient water supply from the Guiers Lake to keep salinity at a low level. These difficulties are reflected in the increasing cost of the project, which has increased CFAF 14 billion (US$55 million), or the equal of about one-third of Senegal's average annual gross fixed capital formation. Though the refinery was com- pleted in the fall of 1972 the plantation itself is still at an early stage of development. Therefore, for the time being, the refinery will have to be supplied with imported raw sugar. This project has led to a serious - 149 - dispute between the government and the established Compagnie Africaine des Producto Alimentaieres (CAPA) sugar refinery (a subsidiary of the French Raffineries de Saint Louis), which had substantially enlarged its installa- tions in 1964-65 when it received the status of a priority enterprise. CAPA which closed down operations in August 1972 claims that the establishment of the Compagnie Seucriere Senegalaire (CSS) project constitutes a breach of contract. This dispute could have a damaging impact on the investment climate in Senegal. Vegetable production contributed about 7.5 percent of value added in the agricultural sector in the past decade. Production covers about 4,000 hectare, 70 percent of which is in the Cap Vert area. More than 40,000 persons are employed in vegetable production ensuring income to about 150,000 people). About half of the production is commercialized. Cabbage, onions, tomatoes, and lettuce are the most important vegetables grown. Local production satisfies about two thirds of internal consump- tion. Import substitution began in 1970, especially with onions and potatoes. Senegal also imports large quantities of tomato concentrate; in the 1960s concentrate imports climbed continuously until 1967 (8,000 tons). Since then, they declined (7,000 tons in 1970), because of an increase in local production. An initial tomato project is under way in the Fleuve region on 600 hectares which could produce about 15,000 tons of fresh tomatoes, or the equivalent of 2,500 tons of concentrate. Two more projects are under study in Casamance and Bas-Saloum. A project for vegetable production on an industrial scale is being conducted by Bud-Senegal, a subsidiary of a European-American vegetable growing and marketing group. However, the original plans which called for initial cultivation of 1,200 hectares and a goal of 3,600 hectares has been sharply reduced. In spite of the smaller size, two important problems will persist: 1) the cost of water for irrigation in Senegal is high and could jeopardize profitability of the project; 2) produce too low in quality for export may reach the local market and force prices down, thereby endangering the survial of many of the traditional vegetable growers. Fruit production is on a very small scale. It is estimated to account for about 2 percent of value added in the agricultural sector. Production is in the hards of individual families and is entirely consumed locally. Pro- jects were undertaken in recent years for home grown substitutes for imported bananas, pineapples and avocadoes. In the banana project in Casamance, farmers have been organized into cooperatives, each growing 10 hectares to 20 hectares. Ultimately this project will fill the needs of Senegal, about 6,000 tons of bananas a year. It is estimated that this project will reach the halfway mark by 1972-73. Senegal could also easily satisfy its demand for pineapples and avocadoes. Conditions in Casamance open possibilities to the export as well as the production of avocadoes. Of major significances in a project, now in its planning stage, for the improvement of mango cultivation, the major fruit crop of the country. - 150 - Arabic Gum Senegal's exports of arabic gum have risen from CFAF 88 million to CFAF 1.4 billion (3.3 percent of recorded export earnings) between 1964 and 1970, because not only of an increase in world market prices of about 70 percent but also of a more than nine-fold jumping production. Little is known about the existing stock of arabic gum trees, their conditions, or the methods of exploitation. It is possible however that because of attractive prices the arabic gum tree resources are being overexploited. A study of this sector seems warranted. A French company is experimenting with the possibility of establishing an arabic gum tree plantation in the Ferlo region, and a research center is in the offing with assistance from Canada. C. OVERALL OUTLOOK FOR THE AGRICULTURAL SECTOR On the assumption that more normal rainfall conditions will return, the health of the agricultural sector will depend primarily on groundnut world market prices, and the solution of the technical problems in sugar cane and vegetable production. Our projections are based on the following grounds: - groundnut world market prices will drop to about E 82 per long ton in 1980; - Senegal will be able to produce half of the targeted production of sugar cane between 1972 and 1980; - vegetable production by individual farmers will continue to grow at about 3 percent to 4 percent per annum; indus- trial projects may raise this rate to 5 percent in the period 1971 to 1980. Rainfall conditions, however, will remain the major unpredictable factor affecting agricultural output in the 1970s. The risk of another round of serious droughts, urgently requires the definition and implementation of a global policy toward water utilization, irrigation, and soil protection. The following table projects the mission's estimates of agricultural output in the 1970s based on the above assumptions. - 151 - Table A3: GROWTH OF MAJOR AGRICULTURAL PRODUCTS (1959/61-1980) Shares in Value Added Rate of By the Agricultural Sector Prices Growth 1959/61 1971 1980 Groundnuts current 0.5 65.0 56.9 42.5 Millet/Sorghum constant 4.6 15.5 21.5 23.1 Rice constant 17.5 3.7 4.0 12.1 Vegetables constant 5.3 6.4 7.4 8.3 Sugar constant - - - 3.2 Cotton constant 16.2 - 1.2 3.2 Others constant 1.9 9.4 9.0 7.6 Agricultural sector 3.8 100.0 100.0 100.0 Value added by groundnut cultivation may fall at about 1.5 percent per annum in current terms between 1971 and 1975 (because of the expected drop in world market prices), but physical production will increase at about 6 percent per annum. Between 1976 and 1980, value added in this sector may rebound at an annual increase of about 2.2 percent in both current and constant terms. The table also projects a decreasing importance of groundnuts in the agricultural sector. About half of this decrease arises from crop diversification, a long-term goal Senegal is slowly implementing; the rest from the fall in world market prices. - 152 - ANNEX 2: MANUFACTURING INDUSTRIES A. MACROECONOMIC TRENDS In the years before independence in 1960 Senegal benefited greatly from its position as headquarters for colonial French West Africa (Afrique Occidentale Francaise, AOF). Modern manufacturing (groundnut processing, light consumer goods industries, railways and ship repair facilities) was introduced in Senegal well before World War II. Industrialization accelerated during World War II and in the 1950s, when French entrepreneurs established plants to serve all of AOF. In 1958 the manufacturing sector of Senegal could count on a market of about 20 million people with an aggregate national income about five times Senegal's alone; and the value added by the manufacturing sector represented about eight percent of GDP at market prices. The 1960s, however, brought many difficulties to the industrial sector. With independence, Dakar lost the privileged position it had enjoyed as the capital of AOF and, as a result, important export markets for manu- facturers, as other west African countries developed their own domestic industries. Independence also brought about the exodus of most French civil and military personnel aggravating the depressed demand for locally-manufactured goods. A further deleterious impact on manufactures as well as on the ground- nut oil industry was the lack of growth during this period in the agricultural sector. In spite of these difficulties, the annual rate of growth in the industrial sector reached 4.7 percent during the period 1959/60 to 1970/71, or about four times the rate for the rest of the economy. Excluding groundnut processing (the rate of growth of which is determined by extraneous factors) value added by the manufacturing sector grew about 6.2 percent per annum in the same period. The dynamic role played by the manufacturing sector in this decade was even more accentuated in the second half of the 1960s, when the rate of growth in the rest of the economy was less than 1 percent. Table A4: ROLE OF THE MANUFACTURING SECTOR IN THE SENEGALESE ECONOMY (Average Annual Rates of Growth in Constant Prices) 1959/60-1964/65 1964/65-1970/71 1967/68-1970/71 Manufacturing (excluding groundnut oil industry) 5.8% 6.6% 8.4% Rest of the economy 1.4% 0.6% 1.5% - 153 - Except for the period 1969 to 1971, groundnut oil processing ac- counted for a fairly constant 25 percent of value added by the manufacturing sector. In the past three years, however, this proportion fell as low as 11 percent (1971) because of the fall in local groundnut production. Table A5 indicates the trends in the components constituting the manufacturing sector in Senegal (excluding the groundnut oil industry). Table A5: VALUE ADDED IN THE MANUFACTURING SECTOR (Percent) 1959 1963 1967 1971 Foodstuffs 42 42 31 29 Textile (14 12 16 15 Leather ( 5 5 6 Mechanical/electrical ( 8 15 20 23 Chemical industries 4 4 10 9 Tobacco/matches 12 8 6 7 Construction materials 6 5 4 4 Wood industries 4 5 5 3 Paper/printing 3 3 2 2 Miscellaneous 1 1 1 2 100 To00 100 100 _~ ~~ =h _h h Industrial growth in the 1960s is largely attributed to the textile/ leather and mechanical/electrical subsectors, which accounted for almost 60 percent of the increase in value added in manufacturing. The chemical in- dustries and foodstuffs contributed 25 percent of the total increment in this period. Except for foodstuffs (a sector growing at only 4 percent per annum in the 1960s, most of which coming from the rapid growth of canned food), the sectors cited have also been those growing at the most rapid rates (i.e., 9 percent to 10 percent for the textile/leather and mechanical industries and 14 percent for the chemical industries). It is estimated that about 44 percent of the increase in industrial production of consumer goods between 1959 and 1971 is the result of an increase in the domestic consumption of the type of goods manufactured in Senegal prior to 1959. The balance is attributed to a rise in exports and to import sub- stitution. In the first half of the decade, import substitution accounted for more than half of the balance, but for only about one-third of it in the second half. In the latter part of the 1960s, the increase in exports has largely contributed to the increase in the rate of growth of industrial pro- duction. New export markets were found mostly in former French West Africa, although some firms, particularly in the textile industry, have proved to be competitive in the developed countries' markets. Table A6 illustrates these points. - 154 - Table A6 ! DOMESTIC PRODUCTION AND CONSUMPTION OF MANUFACTURED CONSUMER GOODS, EXCLUDING GROUNDNUTS (CFAF Billion, Annual Averages) 1959-61 1964-66 1969-71 Absolute values (Current Prices) Domestic production 28.4 39.2 57.4 Exports a/ 6.0 9.2 15.8 Imports b/ 15.3 14.7 15.8 Domestic consumption 37.7 44.7 57.4 Factors affecting the increase in domestic production 1960-65 1965-70 CFAF x CFAF % Increase in domestic production 10.8 100 18.2 100 Increase in exports 3.2 30 6.6 36 Estimate of import substitution c/ 3.4 31 3.1 17 Estimate of increase in domestic consumption of previously locally- manufactured goods 4.2 39 8.5 47 a/ Recorded and unrecorded exports, Statistical Appendix, table 3.5 bI Imports of consumer goods, Statistical Appendix, table 3.9. c/ On the basis of the average import content of domestic consumption in the base year, this method assumes that there was no change in the composition of demand over a five-year period or that these changes were offsetting each other in terms of import content. This trend to greater exports is even more marked in the textile/ clothing industry, which contributes about 15 percent of value added in the manufacturing sector in 1971, (up from 10 percent in 1959). Possibilities for import substitution in this sector decreased markedly between the first and the second half of the 1960s as indicated in Table A7. Between 1962-63 and 1966-67 import substitution accounted for 80 percent of the increase in textile and clothing production and; domestic consumption of previously locally- manufactured textile about 35 percent of the increase. In the same period exports declined. Between 1966-67 to 1970-71 the relative importance of these three factors was directly reversed; the increase in exports was the most important factor explaining the growth of local production, because import substitution slowed markedly and local consumption slumped. - 155 - Table A7 DOMESTIC PRODUCTION AND CONSUMPTION OF TEXTILE AND CLOTHING (CFAF Billion, Annual Averages) 1962-63 1966-67 1970-71 Absolute values (current prices) Domestic production 4.4 6.4 7.8 Exports 2.0 1.7 3.7 Imports 5.9 5.4 4.0 Domestic consumption 8.3 10.1 8.1 Factors Affecting the Increase in Domestic Production 1962/63-66/67 1966/67-70/71 CFAF X CFAF Z Increase in domestic production 2.0 100 1.4 100 Increase in exports -0.3 -15 2.0 143 Estimate of import substitution a/ 1.6 80 0.4 29 Estimate of increase in domestic consumption of previously locally- manufactured goods 0.7 35 -1.0 -72 a/ On the basis of the import content of domestic consumption in the base year, this method assumes that there was no change in the composition of demand over a five-year period or that these changes were offsetting each other in terms of import content. B. FACTORS DETERMINING INDUSTRIAL GROWTH The significant increase in exports is the end product of factors about which little are known. Nevertheless an attempt to determine them is made in order to arrive at some preliminary conclusions. West African Customs Union The 1959 Agreement creating the West African Customs Union 1/ (UDAO) established the principle of free trade of primary products within the region. 1/ Including the following countries: Dahomey, The Ivory Coast, Mali, Mauritania, Niger, Senegal, Upper Volta. - 156 - For a manufactured product the UDAO tariff was the equivalent of the tariff levied by the exporting country on the raw materials imported for that product. Although Senegal's much longer experience in the industrial sector than its UDAO partners; was to its advantage, Senegal did not realize as much benefits as it had expected, because of endless controversies about the share of raw materials in a final product. In 1966 the Agreement was modified 2/ and provided that goods originating in one of the member countries would pay 50 percent of the customs duties levied on the same goods originating in the EEC countries, (countries outside the EEC pay higher tariffs). The following table summarizes the import duties levied in Senegal. Table A8: TAXES ON INPORTS INTO SENEGAL Type of Duty Type of Goods Normal Rate Countries a. Customs duty proper rate is higher 5.0-35.0% UDAO and on luxury goods and EEC exempt finished products b. 'Statistics" tax all goods 4.0% tax reduced by half for UDAO coun- tries c. Special tax raw materials 2.1% tax reduced (taxe forfeitaire) food items 2.1% by half for equipment goods 2.1% UDAO coun- luxury goods 30.9% tries other goods 20.6% d. Turnover tax raw materials 0% tax reduced food items 0% by half for equipment goods 0% UDAO coun- luxury goods 33.3% tries other goods 13.5% Although import duties of other UDAO countries are not exactly the same as those levied in Senegal, the formula embodied in the above table is used in all member countries. There is no doubt that the 1966 Agreement also benefited the more industralized countries of the customs union (Senegal and, ?t Special Agreements between member countries slightly alter the modifica- tion in certain applications. - 157 - more recently, Ivory Coast). Although detailed information on its advantage to Senegal is not available, it is strongly felt that they were a major factor in Senegal's export boom of the late 1960s. Another step toward economic integration was taken in April 1973 by the agreement of the UDAO countries 3/ to form a West African Economic Community (CEAO). UDAO remained in operation until the CEAO took over. It is too early to estimate the impact of the CEAO on Senegalese industries but it is expected that the new agreement will be somewhat less favorable. Productivity Level and Productivity Increase As mentioned previously, Senegal has a long tradition of industrial production and the Senegalese labor force is considered one of the best in Africa. However, substantial improvements would be needed before productivity levels reach those of the Far East. Although a detailed comparison between the two regions has not yet been made in terms of labor productivity, it is generally agreed that the social and labor philosophy in the two regions is very different. This philosophy may be conducive to high productivity in the Far East; in Senegal the influence of the protective social and labor code brought to Senegal before independence) somewhat hampers the productivity of a new African country. For this reason, therefore, Senegal exports mostly to neighboring countries with which it forms a customs union and where it is not directly competing with Far Eastern labor. Senegal's labor productivity in mechanized or repetitive industrial operations requiring relatively little control may be as high as Europe's. In contrast, productivity may be lower, in industries where skills require years of training or where machines do not control. Productivity seems to have improved substantially in the 1960s, as indicated by the large increase in output despite the lack of growth of employ- ment. However, detailed information to explain this trend is virtually non- existent. However, there are indications that a "capital deepening" process has taken place in the industrial sector since the early 1960s. Investments in manufacturing since 1962 and more so since 1969, increased considerably, reflecting the confidence prevailing among foreign entrepreneurs (mostly French) who control about 85 percent to 90 percent of the modern industrial sector. It appears therefore that increased use of capital equipment rather than improved labor skills may more likely account for the rise in product- ivity. Clearly this effort could have been undertaken at an earlier date and would have made it possible for industrial exports to contribute to economic growth in Senegal before the end of the sixties. However, it was not 3/ Excluding Dahomey. - 158 - imperative to increase exports in the early sixties, because of opportunities for import substitution; however, by the late 1960s these opportunities had greatly decreased. The problem was compounded at that time in some industries, particularly in textiles, by a decrease in domestic demand arising from serious difficulties encountered in the agricultural sector. These two factors seem to have forced some industrialists to seek other markets. Wages Although little is known about the actual rate of increase in industrial wages, indications are that the annual rate of increase in wages may have been about 8 percent between 1950 and 1961; in the 1960s, however, it may not have reached more than 3 percent per annum. For unskilled and low-skilled categories, it may have been even lower. Senegal benefitted from this low increase in wages. According to most entrepreneurs interviewed, if wages had continued to increase at the rate reached in the 1950s many operations would have become mechanized in the 1960s, throwing more people out of work. (the interviews took place in the groundnut selection process, fish processing, packaging and handling industries. Credit The industrial sector was least affected by the very small increase in short, medium, and long-term credit in the past few years (see Chapter IV Money and Credit). Between 1966 and 1971 the share of short-term credit to industry rose from 23 percent to 28 percent (an increase of about CFAF 2.0 billion), and the share of medium- and long-term declared credit from 55 per- to 60 percent (an increase of CFAF 1.8 billion). These figures are all the more meaningful, because the oil and fats industry as a result of its much reduced level of activity in the second half of the 1960s absorbed only a small proportion of the increase. It is difficult to measure the extent to which the increase in credit of the late sixties contributed to industrial growth, but it was a factor in accelerating the rate of growth. Exports to Developed Countries Senegal's increase in exports --groundnuts excluded-- was mainly in exports to its neighbors. A rumber of obstacles make the transition from African-oriented exports to world-oriented difficult. For one, the quality standards of the world market are much above those required by the domestic market. This fact emphasizes the need for those production talents usually in short supply in Senegal mainly skilled labor and managerial ability. Second in order to be competitively priced most products must be manufactured on a scale to which the local entrepreneurs are not accustomed and for which they would be required to furnish substantial investments. Besides groundnuts, the only Senegalese products usually exported to developed countries have been canned fish and, to a smaller extent, leather and jute bags. In more recent years, Senegal has been able to add textile and clothing to this list. - 159 - C. GOVERNMLENT POLICIES Government policies in the industrial sector have been characterized by 1) the provision of financial incentives to promote investments; 2) a number of measures to protect the local market; and 3) the creation in 1969 of a semi-public organization for the promotion of medium and small local industries. Investment Code The Investment Code, enacted in 1962, was revised in 1965 and in 1972. 4/ It guarantees to foreign investors the free repatriation of their invested capital and earnings on such capital. This guarantee may appear to present little advantage to foreign investors over the one by France offering the convertibility of the CFA franc into the French franc without limitations and at a fixed exchange rate. In fact, the advantage is real in the event the Union Monetaire Ouest Africaine (CUMOA) goes out of existence or changes its rules. Second, the Code grants special advantages to two categories of enterprises: the "priority enterprises" and the "concessionaire firms." Priority enterprises are defined as those investing at least CFAF 40 million or creating employment for at least 40 nationals. These requirements are cut in half for those enterprises settling outside the Cap Vert region. The main advantages offered to priority enterprises are: - exemption from a number of miscellaneous taxes, among them profit tax and license tax (for 5 to 8 years); and from import taxes on investment goods, spare parts, and new materials (for 3 to 5 years); - free land outside the Cap Vert region; - state participation in infrastructure expenditures for water and electricity and special billing rates for water and electricity supply; - easier access to medium-and long-term credit; and - protection of the local market against imports, on the condition that the firm guarantees a given quality at a given price. 4/ A more detailed discussion of the Investment Code is included in Annex 3 of this Report. - 160 - In order to qualify as a "concessionnaire firm," an applicant must fulfill the conditions of a "priority firm" and its investment program be considered especially important for the development of the country. In addition to the advantages offered to a priority firm, the concessionaire firm may be granted long-term (up to twenty years) fiscal or customs duties exemptions, or both. A new investment code adopted in the spring of 1972 extends the fiscal and customs advantages presently granted to large industrial firms only, to agricultural and tourist enterprises and to small- and medium-sized locally owned firms. To benefit from these advantages, this group will have to fulfill the following conditions: - for individual enterprises the owner must be of Senegalese nationality; - for corporations the majority of capital ownership must be in Senegalese hands; and - the investment program must reach at least CFAF 5 million in a period of two years. To date, twenty-four firms have been registered as "priority enter- prises" and sixty-seven as 'concessionnaire firms." They include practically all of the more important firms in Senegal. The cost 5/ of these measures has not been estimated but it appears to be very high. The question arises whether or not such advantages were the only means to attract enterprises or whether a combination of these advantages with other actions (particularly, in the training of personnel, marketing studies, and in streamlining of official administrative procedures) might not have been more effective and less costly. Another question raised by the Investment Code is whether or not the system of priority and concessionaire firms has introduced a bias in favor of larger firms at the expense of the smaller Senegalese enterprises, and whether or not this system has favored the creation of monopolistic or oligopolistic control. In many industries two or three firms control more, sometimes much more, than 50 percent of the domestic production. This is not to say that comnetition is necessarily eliminated (for example, the enamel industry or grain milling appears verv competitive although these sectors each have only two important firms, but experts agree that the industrial climate (including tourism's) is far from being competitive. Several factors appear to have contributed to this state of affairs: 5/ In terms of tax consessions, higher consumer prices, and public sector expenditures. - 161 - - Senegal's industry was originally designed to serve French West Africa and therefore a limited market, with room for only a few firms within each industry; since then Senegal's export market has had the tendency to shrink rather than to expand and the result has been a further limitation on new entries in the industrial field; - both the industrial and the banking sectors have been developed by French companies and the natural tendency is to keep both sectors in French hands. The possible role of the Investment Code in limiting competition in the industrial sector may be of less consequences shortly, because the measures adopted in the Spring of 1972 making it possible for small- and medium-sized firms to obtain the same advantages as the large ones may help not only to increase the number of firms in any one industry but also, as a result, to stimulate competition. Promotion of Senegalese Industry Direct promotion of Senegalese industry is a relatively new for the government. It started in 1969 with the creation of the Societe Nationale d'Etudes et de Promotion Industrielle (SONEPI) 6/, an autonomous semi-public organization under the general supervision of the Ministry of Industry. The primary function of SONEPI is to stimulate and to foster greater Senegalese participation in industrial development. The obstacles run to run the gamut of business problems and therefore SONEPI is active in a number of fields such as training, financial guarantees, project preparation and the establish- ment of industrial estates. SONEPI realized immediately that the single most important obstacle to the promotion of Senegalese entrepreneurship was the lack of training in the fields of general management, accounting and marketing. The first SONEPI experiment in these fields was on an individual basis and its purpose was more to make small Senegalese entrepreneurs aware of the deficiencies in their actions, than to teach them these various disciplines. SONEPI now has adopted this approach on a larger scale through establishment of a Business Preparation Center in Dakar, the purpose of which is the training of entre- preneurs outside business hours. In collaboration with UNIDO, SONEPI also plans creation of a Production Center that will offer a program of practical assistance to entrepreneurs to be carried out in their own shops to increase productivity of workers, equipment and organization. 6/ For a more detailed analysis of SONEPI's activities, see John de Wilde, The Development of African Private Enterprise, December 1971, Annex IX. - 162 - The main report (chapter on Money and Credit) has drawn attention to the difficulties small Senegalese entrepreneurs, generally higher risks than the large foreign-owned firms, have in obtaining credit and to the contribution of SONEPI to the solution of this problem by establishing in early 1971 a Participation Fund and a Guaranty Fund. SONEPI has also carried out project feasibility studies. Some were drafted without knowing which entrepreneurs would be interested. SONEPI has moved away from this approach and is now concentrating on studies of existing enterprises which could profitably be expanded if proper inputs in training, equipment (therefore credit), quality-control, marketing, and extension services were made. One of SONEPI's first actions in this direction has been to organize individual local dyers, on a voluntary basis, into a cooperative 7/. With SONEPI's technical assistance the cooperative has successfully undertaken the training of young workers, markedly improved the dyes' quality and the dying techniques, studied the potential markets locally and abroad, and made individual operations financially viable. A rewarding result of this ex- periment indicates the achievement of a final product suitable for export. Preliminary estimates project that by the end of the 1970s employment by the cooperative could increase ten-fold and productivity three-fold for a product of much higher quality than that possible pre-organization prior to SONEPI's help. Similar actions are planned in other sectors, such as parquetry, smoked fish processing, leather, weaving and art foundry. The SONEPI approach is of interest for two reasons: 1) all of the problems of establishing and operating a business are considered, studied, and resolved together, avoid- ing the pit fall of piece-meal solution; and 2) SONEPI enables the active participation of all entrepreneurs and would be entrepreneurs from start to finish. Another task of SONEPI has been the planning and establishment of estates for small-scale Senegalese industry. The objective of such estates is to provide enterprises with adequate workspace at reasonable rentals in a central location, furnished with water, sewerage and power as well as with common shop facilities, and to make readily available technical advice and assistance. A detailed description of this Program was given in the last Economic Report on Senegal 8/. The 1970 Economic Mission, though fully sup- porting the government's desire to provide improved accommodation to indus- try, had the following reservations about the Industrial Estate Program: 1) it appeared too ambitious in view of the size of industrial employment and the potential of its future growth, especially in regard to the small-scale industries; 2) the cost of the Program made it questionable whether factory 7/ Capital CFAF 1.3 million. Individual dyers CFAF 100,000; SONEPI CFAF 900,000; Foreign Aid Funds CFAF 300,000; Bank Credit CFAP 2.7 million. 8/ "The Current Economic Situation and Prospects of Senegal," Volume V, Industry, June 1970, pp. 32-37. - 163 - accommodations should have been given priority over activities in training, marketing, and financing (which might be the more effective way of promoting Senegalese entrepreneurship); and 3) it was felt that the proposal to locate both artisan workshops and small- to medium-sized enterprises on the same estate could cause difficulties with respect to the apportionment of charges for work space and the application of the labor code legislation. By early 1972 the Senegalese authorities looked into some of the problems and realized that the Dakar project, in particular was too ambitious. This project will probably be reduced by about two-thirds. A revised plan for the entire Prog