SEIZING THE OPPORTUNITY SENEGAL | ECONOMIC UPDATE - JUNE 2024 Seizing the Opportunity  1 © 2024 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank. 2024. Seizing the Oppor- tunity. Senegal Economic Update, June 2024. © World Bank.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. SEIZING THE OPPORTUNITY Table of Contents Acknowledgments iii Executive Summary v Chapter 1. The State of the Economy 1 1.1. Recent developments 2 Moderate global and regional economic growth in the face of ongoing monetary policy tightening and challenging financing terms 2 The Senegalese economy remained resilient in 2023 despite heightened domestic, global, and regional turmoil, coupled with high inflation 2 Amid declining inflation, the monetary stance remains accommodative, while the financial sector has so far remained resilient 5 Fiscal and debt vulnerabilities have increased in the context of tightening financing conditions, high energy subsidies and improved revenue performance 7 External accounts improved but vulnerabilities remain elevated due to lower exports 10 1.2. Outlook, risks and opportunities 13 The medium-term outlook is positive with a solid recovery driven by the extractive industry, a commitment to macro-fiscal stability, and the implementation of key structural reforms 13 Rising risks cloud the outlook 17 1.3. Taking a closer look: Energy subsidy reform 18 Chapter 2. Spotlight on Senegal’s Development Agenda: Poverty and Equity in a Context of Multiple Crises 21 Senegal’s poverty incidence stagnated over 2018/19 to 2021/22 but the number of poor has increased, reflecting the fact that growth has not necessarily reached the poor 22 Inequality declined due to declining household consumption, while the pace of poverty reduction is falling behind that of regional peers 24 Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Chapter 3.  Income Tax (PIT) 29 Tax revenue has increased steadily, but levels remain low and dominated by indirect taxes 31 3.1. Collected PIT revenue has stagnated, while informality hindering its redistributive capacity 32 The PIT as a share of GDP has stagnated over the last decade with narrow tax base undermining its performance 32 The progressivity of direct taxes contrast with its low incidence among high income households 35 Job and business informality for high income earners hinders the redistributive capacity of direct taxes 38 3.2. Policy options to increase revenues from direct taxes without increasing poverty or inequality 40 Enforcing the filing of direct taxes could bring triple wins by increasing revenue while reducing both poverty and inequality 40 Focusing on high net worth individuals could bring substantial revenues 42 Policies to Improve tax administration capacity 44 References 46 TABLE OF CONTENTS i SENEGAL | ECONOMIC UPDATE - MAY 2024 List of boxes Box 1.1. Impact of hydrocarbon in the economy 9 Box 1.2. Progress as of December 2023 in Senegal’s six-step plan for energy subsidies reform 15 Box 3.1. The WAEMU regional fiscal framework 30 Box 3.2. Personal income tax design in Senegal 33 Box 3.3. How to detect high earners in a context of imperfect information 43 Box 3.4. Digital IDs in Senegal. Practices and how to improve linkages 44 List of figures Figure 1.1. Recent economic developments 3 Figure 1.2. Inflation, its drivers and liquidity levels in the banking system 6 Figure 1.3. Fiscal and debt vulnerabilities have risen, but debt is deemed sustainable 11 Figure 1.4. Developments in Senegal’s external sector 14 Figure 1.5. The energy reform is expected to bring substantial fiscal savings 19 Figure 1.6. The energy reform was needed as subsidies are inefficiently targeted 19 Figure 1.7. The energy reform requires stronger compensation measures to fully compensate its effects on poverty 20 Figure 2.1. Poverty incidence and GDP per capita, 2018–2021 22 Figure 2.2. Growth incidence curves by geographical location 23 Figure 2.3. Monetary poverty indicators 2018–2021 by area of residence 23 Figure 2.4. Poverty indicators by region (EHCVM 2021) 25 Figure 2.5. Gini (consumption) inequality index, 2018–2021 26 Figure 2.6. Trends in monetary poverty using the $3.65 (PPP2017) international poverty line by area of residence, 2018–2021 27 Figure 2.7. International extreme poverty rate ($2.15 & $3.65, PPP2017), 2018–2021 27 Figure 3.1. PIT revenue collected in Senegal compared to peers 34 Figure 3.2. Effect of fiscal interventions on poverty and inequality in 2018–19 36 Figure 3.3. Relative incidence of direct taxes and contributions 37 Figure 3.4. Distribution of direct taxes and contribution across income deciles 37 Figure 3.5. Percentage of formal jobs and formal non-agricultural business 39 Figure 3.6. Percentage of jobs/non-agricultural business by deciles 39 Figure 3.7. Incidence of direct taxes among households who pay direct taxes or made social security contributions 39 Figure 3.8. Additional revenue gains from enforcing filing of direct taxes 41 Figure 3.9. Incidence of direct taxes among households who pay direct taxes by decile 41 Figure 3.10. Effect of enforcing tax filing and increasing the coverage of direct transfers 42 List of tables Table 1.1. Policies defined by the energy subsidy reform in Senegal 19 Table 2.1. Consumption inequality indicators in Senegal 2018–2021 26 Table 2.1 WAEMU convergence criteria (adopted in 2015) 31 Table 3.1. Status on PIT reforms implementation of the MTRS 35 ii TABLE OF CONTENTS SEIZING THE OPPORTUNITY Acknowledgments The Senegal Economic Update monitors significant recent EAWPV). Rajiv Kumar (Senior Economist), Oyebola M. economic developments in the country, highlighting the Okunogbe (Economist, DECHD), and Emilija Timmis key structural challenges Senegal faces in its pursuit of inclu- (Senior Economist) were the peer-reviewers of this report. sive and sustained growth, and analysing policy options. Coumba Fall Diack (Team Assistant) and Theresa Bampoe (Senior Program Assistant) provided valuable This report is prepared by the World Bank’s Macro­ admin support. economics, Trade and Investment (MTI) Global Practice team of the led by Helene Aminatou Ba (Economist) The findings, interpretations, and conclusions expressed and Wilfried A. Kouame (Senior Economist), including in this report do not necessarily represent the views of Prospere R. Backiny-Yetna (Senior Economist), Daniel the World Bank and are entirely those of the authors. Valderrama Gonzalez (Economist), Aissatou Diallo (Con- sultant), and German Andres Gallegos Vargas (Consul- Comments and questions on the content of this report tant). The team benefited from the guidance of Hans are welcome. Please contact Helene Aminatou Ba (hba1@ Anand Beck (Practice Manager), Edouard, Al-Dahdah worldbank.org) and/or Wilfried A. Kouame (wkouame@ (Lead Country Economist), Daniela Marotta (Lead worldbank.org). Requests from the media can be directed Economist) and Gabriela Inchauste (Lead Economist, to Seydina Alioune Djigo (sdjigo@worldbank.org). ACKNOWLEDGMENTS iii SEIZING THE OPPORTUNITY Executive Summary Mounting international and regional uncertainties will Income Tax (PIT) in Senegal has untapped potential to require proactive actions to uphold hard-won socio- increase tax revenue – a stable source of revenue for economic gains of the past decade. Political uncertain- macro­ economic stability and long-term development. ties linked to the presidential election affected economic This Senegal Development Update, therefore, focuses on activity during the second half of 2023 and in 2024Q1. (i) poverty and equity in a context of multiple crises, and Furthermore, international and regional financial markets (ii) options to boost tax revenue collection through the have tightened, resulting in further deterioration of fiscal personal income tax. and external imbalances. There is an urgent need to build fiscal space and enhance Senegal’s capacity to absorb shocks and address development challenges. Fiscal consolidation Recent economic developments efforts will require an adjustment of 3.6 percent percentage Senegal’s economy increased in 2023, driven by the points of GDP over 2024–25 to meet the West African resilience of the primary sector. Real GDP growth is Economic and Monetary Union (WAEMU) regional con- estimated at 4.3 percent – 1.5 percent in per capita terms vergence criteria of a fiscal deficit ceiling of 3 percent of in 2023 – slightly above the 3.8 percent growth rate reg- GDP. To achieve this, Senegal will have to accelerate the istered in 2022 and above initial projections of 4.1 per- implementation of its Medium-Term Revenue Strategy (MTRS) to yield higher tax revenues and rationalize public cent. Political tensions, along with higher inflation and expenditure while preserving essential investment and monetary tightening, disrupted the tertiary sectors and pro-poor spending. Pro-active efforts to address increasing delayed some investments. On the demand side, invest- macroeconomic imbalances, accelerate revenue mobiliza- ment growth decelerated, reflecting businesses delaying tion, maintain a prudent borrowing strategy and proactive investments, while declining purchasing power associated debt management, and ensure steadfast implementation of with high led to a relatively contained private consumption. structural reforms will be crucial to help Senegal achieve its On the supply side, the tertiary sector decelerated due pri- national development ambitions. marily to reduced commercial activities in restaurants and hospitality, information and communication technologies Raising tax revenues provides fiscal space to advance (ICT), and a downturn in financial and insurance services development objectives and plays a pivotal role in with the impacts of social unrest and political tensions. improving the living conditions of Senegalese. Senegal’s Despite challenges in the extractive sector, Senegal’s sec- poverty incidence stagnated over 2018/19–2021/22 while ondary sector thrived with the positive contributions of the absolute number of poor increased, reflecting the fact cement production. that growth has not necessarily reached the poor. Inequality has declined but only because consumption by poorer After reaching a record high of 9.7 percent in 2022, households fell less than the consumption of the better off, inflation declined to 5.9 percent. Declining interna- while middle-income households experienced an increase tional commodity prices and the normalization of supply in consumption. Furthermore, the pace of poverty reduc- chains drove the decline in headline inflation as external tion is falling behind that of regional peers. Tightening factors, such as the depreciation of the FCFA against the financing conditions have led to higher public borrowing US dollar in 2022 and its pass-through via imported and costs in the short and medium term, highlighting the local prices, eased. Most administrative measures to cap urgent need to accelerate domestic revenue mobilization prices on certain food items, including rice and sugar, to finance Senegal’s development ambitions. The Personal remain in place to combat inflation and ease the cost of Executive Summary v SENEGAL | ECONOMIC UPDATE - MAY 2024 living. Pressures from energy prices, including electricity, gas, To counter inflation, the Central Bank of West African and other fuels (which increased by an average 10 percent States (Banque Centrale des États de l’Afrique de l’Ouest, in 2023) weighed heavily on inflation. BCEAO) has raised its policy interest rates by a cumu- lative 150 basis points since mid-2022 to 3.5 percent Fiscal consolidation envisaged in the 2023 budget for liquidity calls and 5.5 percent for the marginal lending law materialized, but fiscal deficit was higher-than- facility. Still, the monetary policy stance remains broadly expected. The fiscal deficit narrowed to 5.1 percent of accommodative. Inflation in the region (average of 3.7 per- GDP in 2023 from 6.6 percent in 2022, remaining cent in 2023) is still above target, and foreign exchange slightly above the 4.9 percent of GDP target set in the reserves have been on a downward trend, estimated at 2023 Budget Law. Tax revenue increased to 19.4 percent of 3.5 months of imports at end-2023, down from 4.3 months GDP – about 1.2 percentage point above its 2022 level, at end-2022. Credit growth accelerated from 29.3 percent owed primarily to higher revenue collection on taxes in 2022 to 32.3 percent of GDP in 2023. The financial on goods and services and higher personal and corporate sector has shown resilience despite multiple crises, and income tax. Public expenditure remained similar to its domestic, regional and global uncertainties, posting 2022 level at 26.6 percent of GDP. Measures to support declining non-performing loans. purchasing power1 (0.6 percent of GDP) and energy sector subsidies encompassing outstanding arrears (4.2 percent of Outlook, risks and challenges GDP at end-September 2023) continue to weigh on fiscal con- solidation efforts. As a result, public and publicly guaranteed The outlook remains broadly positive, but it hinges on debt increased from 75.6 percent of GDP in 2022 to 80.8 per- a solid commitment to macroeconomic stability. The cent of GDP, in 2023 – equivalent to 17.2 percentage points growth outlook relies on the implementation of Senegal’s of GDP above pre-pandemic (2019) levels. Senegal remains development agenda focused on improving economic at moderate risk of public debt distress, with limited mar- opportunities and social inclusion. The outlook also relies gins to absorb potential future shocks. Per its medium-term on the tapering of current domestic and global geopolitical debt management strategy, Senegal intends to increasingly tensions, resumption of the global economic recovery and reorient market financing towards the regional market trade in the medium run, and improved regional stability. due to tighter financing conditions on the international The government will have to commit to restoring macro­ bond market with decade high monetary interest rates in economic stability and build buffers to enhance debt sus- advanced economies.2 tainability by implementing a revenue-based policy and rationalization of public spending. This will demonstrate The current account deficit (CAD) improved signifi- a strong commitment to fiscal consolidation starting in cantly, increasing international reserves. The CAD is 2024, aiming to achieve WAEMU’s fiscal target of 3 percent estimated to have improved from 19.9 percent of GDP in by 2025. Short-term growth is expected to accelerate to 2022 to 14.5 percent of GDP in 2023, primarily driven 7.1 percent in 2024 and average 7.7 percent in 2025–26. by the resumption of trade with Mali and a gradual Poverty (the international extreme poverty line, defined as reduction in service imports in the hydrocarbon sector. $2,15 per day in 2017 PPP) is expected to fall to 8.7 percent The CAD was financed from foreign investments, remit- in 2024 (1.1 percentage points lower than in 2023) driven tances, and partner support, with reserve withdrawals also by real per capita growth in agriculture, where 57 percent covering the gap, which strained the BCEAO’s reserves. of the poor are employed, and a reduction in inflation, 1 The measures include the payment of compensation of FCFA 15 billion (US$22 million) due to millers, payment of subsidy to paddy rice importers (FCFA 30 per kilogram; US$0.046 per kilogram), a subsidy of 32 FCFA (16.5 percent of the price) on the kilogram of paddy rice aimed at supporting local producers, and tax exemptions on fatty substances applied to importers. 2 Senegal Medium-term debt management strategy https://www.sentresor.org/publication/strategie-de-gestion-de-la-dette-a-moyen-terme-2023-2025/ vi Executive Summary SEIZING THE OPPORTUNITY especially among food items. Despite headwinds, poverty The poverty gap and the squared poverty gap declined reduction should continue in the medium term, reflecting slightly in urban areas while rising slightly in rural areas, improved economic opportunities, especially for the youth. where poverty levels are already higher. As a result, the living standards of poor households have generally not Overall, domestic, regional, and global uncertainties are deteriorated in urban areas, while they have been deterio- high, tilting the risks to the downside. The context of rating somewhat in rural areas. a poly-crisis and their negative effects on the national eco­ nomy still prevail. Protracted global geopolitical tensions Poor Senegalese are still concentrated in rural areas with are leading to persistently higher-than-expected inflation a relatively high concentration in the groundnut basin. and could result in higher poverty and an even more aggres- Senegal had 17.4 million people in 2021/22, 6.5 million sive monetary stance, further constraining government of whom living below the poverty line. Three quarters financing, and exacerbating debt vulnerabilities. There are of poor people still live in rural areas, as it was the case regional security and political uncertainties with severe in 2018. The regions of Diourbel, Kaolack and Thiès in socio-economic implications, including the risk of the Alli- the groundnut basin are home to almost one third of the ance of Sahel States (ASS)’s withdrawal from ECOWAS, country’s poor, due to the combination of being regions which will impact exports to Mali, constituting 20 percent with large population and high average poverty rates. On of Senegal’s total exports. Social discontent, stemming the other hand, Tambacounda and Kedougou in the east potentially from the phasing out of energy subsidies could of the country have respectively 9 percent and 2 percent of endanger the envisaged fiscal consolidation. At the same poor people, despite the very high poverty rates that time, delays in effective fiscal consolidation could severely characterize these regions. In fact, each region, except for affect debt sustainability and growth. Kedougou (because of its small population), is home to at least 5 percent of the poor. Consequently, if the objective of policies is to reduce the number of poor, the targeting Spotlight 1: Poverty and equity in a of anti-poverty programs must be directed to all regions, context of multiple crises including Dakar. Senegal has coped relatively well in the context of The observed decline in consumption per capita was multiple shocks, with the poverty incidence remaining mostly felt by better-off households. Between 2018/19 relatively unchanged at 37.5 percent in 2021/22 from and 2021/22, average per capita consumption fell by 37.8 percent in 2018/19 despite the Pandemic. Poverty 1.6 percent per year, while it grew slightly for the poorest incidence (using the national poverty line) is stable in urban 40 percent of the population, with an annual growth rate and rural areas but with contrasting regional trends.3 There of 0.11 percent. As a result, there was a gain in shared has been a marked reduction in poverty in the Senegal prosperity of almost 1.3 percent, i.e., which means that River Valley (center) and in eastern Senegal bordering Mali, the average consumption of the poorest 40 percent of the and a slight increase in the south in Casamance. While population has moved closer to that of the population as middle-income brackets experienced a gain in real con- a whole by an average of 1.3 percent per year. However, sumption per capita, both the poorest and the better-off it is important to note that this increase in shared pros- experienced declines in consumption, with the better- perity results from a decline in consumption of better-off off experiencing greater declines in consumption. This trend households rather than from a real gain in consumption resulted in a decline in inequality, with the Gini index for the poorest. In fact, households in the bottom 10 percent dropping from 35.1 percent in 2018/19 to 33.4 percent of the distribution, including in rural areas, experienced in 2021/22, suggesting a slight improvement in inequality. losses in consumption. 3 The national poverty line is 369,666 FCFA per person per year in 2021/22, rising from 333,441 FCFA in 2018/19. Data come from the EHCVM (Enquête Harmonisée sur les Conditions de Vie des Ménages). Executive Summary vii SENEGAL | ECONOMIC UPDATE - MAY 2024 The average growth rate of the poorest was less nega- insufficient to boost Senegal’s ability to address the devel- tive than that of the better-off, which led to a decline opment needs of its population and fostering resilience in inequality at the national level and also in urban against uncertainty. Limited and increasingly constrained and rural areas. At the national level, the Gini index, one fiscal space hinders productive investment and efforts to of the best-known inequality indicators, fell by 1.7 Gini ensure resilience against future shocks. Like most low- and points, from 35.1 in 2018/19 to 33.4 in 2021/22. While middle-income countries, Senegal relies heavily on indirect the average per capita consumption of the richest 20 per- taxes, constituting 71 percent of total tax revenues in 2021, cent represented 5.5 times that of the poorest 20 percent in although reliance on trade taxes for revenue collection 2018/19, this ratio declined to 5.2 in 2021/22. However, has declined. There is an opportunity to strategically lever- this decline reflects a loss in consumption (in real terms) age the direct tax system to enhance domestic resource among better-off households, largely in urban areas, rather mobilization. than the increase of consumption of the poorest. Inequality The PIT yields little revenue, and its contribution to has declined in both urban and rural areas. total tax revenue has stagnated over the past decade due to a narrow tax base and lack of reform momentum. Spotlight 2: Options to raise tax revenue The PIT has increased over the past 3 decades, but it yields from personal Income Tax (PIT) little revenue at 2.8 percent of GDP in 2021, much lower than the Organization for Economic Co-operation and Improving domestic revenue mobilization (DRM) is Development (OECD) average of 8.3 percent of GDP critical for Senegal to achieve its development ambi- although better than the average of WAEMU (0.82 percent tions. Between 2014 and 2019, Senegal was one of the of GDP) and ECOWAS (1.38 percent of GDP). The most dynamic economies in Sub-Saharan Africa (SSA). contribution of PIT revenue to total tax revenue was GDP growth averaged 6 percent over 2014–19, one of stagnant at 15 percent between 2010 and 2021 despite the highest in SSA, and real GDP per capita increased by several reform attempts, while aspirational peers success- 17.9 percent during the same period. To finance its devel- fully increased the contribution of PIT revenue to total tax opment ambitions, it is imperative to sustain investments revenue over the same period. The tax base remains narrow in human capital and infrastructure, and boost productivity. with a limited number of taxpayers filing tax returns and Insufficient revenue has often reduced Senegal’s ability low levels of formality. The levels of formality for both to improve and sustain growth and invest in people, and jobs and businesses are particularly low, with worrying revenue shortfalls have meant resorting to debt accumula- signals of deterioration in 2022, with only 12.5 percent tion, raising fiscal vulnerabilities and limiting fiscal space of wage workers being formal as the post-COVID-19 to absorb shocks. recovery seems to have brought lower quality jobs. In fact, only one-third of workers in the top-income decile and less Senegal’s tax revenue growth and buoyancy steadily than one-fifth of businesses, are formal. The low and even improved over the past decade, surpassing its peers, decreasing levels of formality erode the tax base, weakening but revenues remain below their potential. Tax revenue the capacity of PIT to contribute to tax revenues. The PIT was stagnant at around 15 percent of GDP over 2010–18 system faces low compliance, in the absence of a strong before increasing gradually to 16.8 percent in 2020 and data-driven approach. 18.2 percent of GDP in 2022—its highest level ever. This compares with an average of 15.7 percent of GDP for SSA Accelerating tax administration and policy reforms countries, 13.6 percent of GDP for Lower Income Coun- on PIT can help boost domestic revenue mobili- tries (LICs), and about 34 percent of GDP for OECD zation efforts. Informality, narrow tax base, and lim- countries).4 However, this relatively good performance is ited enforcement hinder the capacity of direct taxes to 4 https://www.oecd.org/tax/tax-policy/revenue-statistics-highlights-brochure.pdf viii Executive Summary SEIZING THE OPPORTUNITY increase revenues and redistributive pre-fiscal inequalities. customs processes and expanding the tax base. However, Apart from PIT, other direct taxes on capital, property and more can be done to enforce filing of personal income taxes. rents are subject to low and non-progressive tax rates. Taxes Microsimulations show that clarifying the legal framework on capital, property taxes, and taxes on profits for small for tax declaration on all sources of income and enforcing firms—CGU are subject to low and non-progressive tax tax filing would increase revenues without increasing schedules, limiting the redistributive capacity of direct taxes. poverty and inequality. Digitalizing the tax administration The MTRS 2020–25 implementation and ongoing revenue to reduce the cost of compliance, improve taxpayer moni- administration reforms have strengthened tax mobiliza- toring, strengthen enforcement, data, and an evidence-based tion capacity, thanks to efforts toward digitalizing tax and approach could yield revenues closer to their potential. Executive Summary ix Chapter 1: The State of the Economy SENEGAL | ECONOMIC UPDATE - MAY 2024 1.1.  Recent developments country-specific challenges, including increased business input costs in Nigeria and an acute energy crisis in South Moderate global and regional economic Africa. The region’s overall economic momentum was growth in the face of ongoing monetary policy dampened, with the combined growth of its three largest tightening and challenging financing terms economies—Nigeria, South Africa, and Angola—averaging just 1.8 percent, influenced by decreased growth among Global economic growth slowed for a second consecu- metal-exporting countries and falling global metal prices. tive year in 2023 amid continued tightening of mone- The region’s economic landscape was further strained by tary stance and credit conditions. The global economy sustained conflicts, particularly in Sudan, and new out- experienced its second consecutive year of slowdown, with breaks of violence in Chad and Niger, leading to height- growth dipping to an estimated 2.6 percent, down from ened regional instability. These conflicts, coupled with a 3 percent in 2022.5 This growth deceleration was primarily slower post-pandemic recovery affected by reduced external driven by the extended impact of stringent monetary demand and stringent domestic policies to curb inflation, policies aimed at curbing high inflation, alongside tighter significantly impacted economic activity. Despite a slight credit conditions and diminished trade and investment moderation, inflation in SSA remained high, influenced activities. Recovery trajectories varied significantly across by the prior year’s surge in food and energy prices, under- regions, with advanced economies showing more resilience lining the ongoing challenge of balancing growth with and stronger growth dynamics than emerging markets and inflation control amid persistent poverty and external developing economies (EMDEs). EMDEs faced ongoing vulnerabilities. challenges related to the pandemic’s lingering effects and elevated debt burdens. Despite lessening, inflationary pres- sures persisted, particularly in terms of food and energy The Senegalese economy remained resilient prices, which remained stubbornly high across many in 2023 despite heightened domestic, global, advanced economies. Even as monetary tightening began and regional turmoil, coupled with high to ease, real policy interest rates continued to be elevated, inflation slowing the pace at which inflation could return to target levels. The year also marked a significant downturn in global Economic activity accelerated in 2023 owing to a dyna- trade growth, reaching its lowest point in five decades, mism of the primary sector. Real GDP growth is estimated in part due to a contraction in goods trade and a slower- at 4.3 percent (1.5 percent in per capita terms) in 2023 from than-anticipated recovery of services trade. Moreover, 3.8 percent in 20226 and above the initially projected level geopolitical tensions and recent conflicts added layers of of 4.1 percent (1.4 percent in per capita terms) and below complexity, disrupting essential shipping routes and ampli- Senegal’s aspirational peers (Figure  1.1.a). Political fying the risk of further inflationary bottlenecks. tensions coupled with higher inflation and mone­ tary tightening, disrupted the tertiary sectors and led to Economic growth in Sub-Saharan Africa (SSA) slowed reductions in growth in investment. On the demand side, from 3.7 percent in 2022, to an estimated 2.9 percent private investment growth fell to 7.1 percent from 20.8 per- in 2023. This moderation in growth was driven by a mix of cent reflecting businesses delaying investments due to 5 World Bank (2024). Global Economic Prospects, January 2024. Washington, DC: World Bank. doi:10.1596/978-1-4648-2017-5 6 The Senegalese authorities have revised down the 2022 growth data to 3.8 percent (1.2 percent in per capita terms) from 4.2 percent (1.4 percent per capita), revealing a less robust economy than initially estimated. This adjustment is primarily attributed to growth rate revisions in exports. Per the revisions, exports growth underperformed at 3.5 percent – more than 2 times lower than previous estimates of 8.1 percent. The latter was attributed to the decline in gold production (−7.6 percent year-on-year) and a slowdown in agricultural production (0.3 percent year-on-year). 2 Chapter 1: The State of the Economy SEIZING THE OPPORTUNITY Figure 1.1. Recent economic developments a. Senegal real growth remained below peers in 2023 . . . b. . . . due to adverse shocks that affected the services sector . . . 12.0 12.0 10.0 8.0 10.0 6.0 8.0 4.0 2.0 6.0 0.0 –2.0 4.0 –4.0 2.0 –6.0 –8.0 0.0 2019 2020 2021 2022 2023e 2024p 2025p Senegal –2.0 WAEMU 2019 2020 2021 2022 2023e 2024p 2025p SSA excluding Nigeria, South Africa, and Angola Structural peers Agriculture Industry Services Aspirational peers Net taxes GDP d. However, despite a contraction in mining, the industry sector thrived c. . . . and a sharp decline in annual gold production. with the positive contributions of cement . . . 14,000.00 100.0 12,000.00 80.0 60.0 10,000.00 40.0 8,000.00 20.0 6,000.00 0.0 4,000.00 –20.0 2,000.00 –40.0 2015 2016 2017 2018 2019 2020 2021 2022 2023 0.00 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Mining Electricity Construction e. . . . while the agriculture production rebounded and emerged as a positive driver of growth. 5,000 4,000 3,000 2,000 1,000 0 Millet Sorgho Mais Rice Fonio Arachide Coton Niebe Sesame 2017–2021 2022 2023 Source: World Bank staff calculation, ANSD, Ministry of Economy. Chapter 1: The State of the Economy 3 SENEGAL | ECONOMIC UPDATE - MAY 2024 political uncertainty and persistent inflation. Private con- port and auxiliary activities fell by 6.7 percent, and road sumption growth also increased marginally to 4.1 percent transport declined by 6.8 percent over the same period. in 2023 from a growth rate of 3.5 percent in 2022 as consumers contained spending due to declining purchasing The secondary sector thrived with the positive contri­ power associated with high levels of inflation and concerns butions of cement production, despite challenges about the future direction of government policy and the in the extractive subsector. Gold production, which overall economic environment. accounts for 50 percent of the extractive production, witnessed a significant downturn, registering a 15.5 per- On the supply side, the tertiary sector is estimated to cent (year-on-year) decrease in 2023 compared to 2022 have experienced a slowdown in 2023. The tertiary (Figure 1.1.b and c), attributed to lower global demand sector decelerated from 5.1 percent in 2022 to 4.2 percent and depleted reserves. Additionally, labour strikes against in 2023, due primarily to decreased commercial activi- changes in regulations for recruitment processes at the ties, reduced performance in information and commu- region’s mining companies further hampered production. nication, restauration, and a downturn in financial and This decline follows a preceding year of contraction, with insurance services. Following social tensions, the authori- gold production experiencing a −7.6 percent (year-on-year) ties imposed restrictive measures on the internet, urban, decline in 2022 compared to 2021, primarily due to lower and maritime transport during the first nine months of market demand.7 Similarly, phosphate production faced 2023, impacting trade, telecommunications, and trans- contraction in 2023, declining significantly by 20.4 per- portation sectors. The general activity index in the ICT cent compared to 2022.8 This fluctuation in phosphate sector declined by −6.5 percent (year-on-year) in 2023 production reflects industry-specific challenges and fluc- compared to 2022, grappling with the aftermath of social tuations in market demand. Cement sales rose by 8.7 per- unrest in June 2023 that led to the suspension of access cent in the first nine months of 2023, compared to the to mobile internet and restricted television signals. The same period in 2022, boosted by strong domestic demand restaurant and hospitality service sectors experienced a with the implementation of major public infrastructure significant downturn, with activity declining by 19.8 per- projects, notably the Bus Rapid Transit, the program to cent between the first and second quarters of 2023. This is build auto-bridges to alleviate traffic congestion on major primarily due to a pronounced underperformance in the arteries, the continued development of the Diamniadio hotel industry, which saw a sharp of 28.3 percent decline, urban hub, as well as social housing programs. affected by the adverse impact of the social unrest. On an annual basis, the sector recorded a 3.4 percent decrease in The buoyancy of the primary sector played a positive activity in the second quarter of 2023, with both the hotel role in overall economic growth in 2023. Total cereal and restaurant segments contributing to this downturn, production increased by 16 percent increase (year-on-year), registering declines of − 3.4 percent and −3.3 percent reaching 4,255,352 tonnes,9 reflecting a strategic shift respectively. Furthermore, in the second quarter of 2023, towards more intensive farming practices. Millet produc- the financial and insurance activities sector experienced tion rose by 23.3 percent, while sorghum and rice also a quarterly decrease of 1.1 percent, primarily driven by reported gains of 22 percent and 8 percent, respec- a sharp decline of 39.4 percent in auxiliary financial and tively. The agricultural sector also benefitted from the insurance services. Meanwhile, in the transportation sector, performance of groundnut production, expected to rise by 7 This negative trend emerged after a remarkable upswing in gold production in 2021, boasting a substantial +72 percent year-on-year increase relative to 2020. 8 This decline followed a modest 0.8 percent year-on-year increase in 2022 compared to 2021 and a more robust 3.7 percent year-on-year increase in 2021 compared to 2020. 9 The National Agency of Statistics’ report on the 2022/2023 agricultural campaign. 4 Chapter 1: The State of the Economy SEIZING THE OPPORTUNITY 15 percent year-on-year, as well as from the dynamism sector’s practices attributable to efforts under the National of seed cotton (+7 percent increase year-on-year). These Livestock Development Plan (PNDE). positive developments could be attributed to a combina- tion of factors including a favourable weather conditions Amid declining inflation, the monetary stance and supportive government policies as part of the Agricul- remains accommodative, while the financial tural Program for Sustainable Food Sovereignty (PASAD) sector has so far remained resilient through improved irrigation systems and the increase in the budget envelope. The latter enables—among others—the Annual inflation eased at 5.9 percent in 2023, from provision of subsidies for high-quality seeds and fertil- 9.7 percent in 2022 – but remains above the 3 percent izers, which may contribute to improved agricultural regional target. As in many SSA countries, headline productivity, although the exact impact on yields can inflation in Senegal eased in 2023 compared to 2022 vary based on several factors. The impact of these policies (Figure 1.2.a). Declining international commodity prices was further amplified by the introduction of Commu- and the normalization of supply chains contributed to the nity Agricultural Domains, improvements in agricultural reduction in inflation, with food prices having a declining infrastructure and the adoption of advanced technologies, contribution to inflation by 3.8 percentage points. Elec- which together have significantly enhanced horticultural tricity, gas, and other fuels were the main drivers of infla- production and the sector’s overall productivity. tion, with a 10.6 percent increase in the prices of these products (Figure 1.2.b). Price caps on essential food The fisheries and breeding sector demonstrated a staples and fuel subsidies constrained further upward pres- substantial recovery. Production in the fisheries sector sure. The inflation rate in Senegal remains more than twice increased by 4.5 percent year-on-year in 2023, driven by the 3 percent upper bound of the BCEAO’s 1–3 percent a 6.3 percent year-on-year upswing in artisanal fishery, target and above the 3.7 percent average of the WAEMU coupled with a 1.3 percent year-on-year rise in industrial region10 in 2023 (Figure 1.2.b) – it is lower than regional production during the same period. This positive trajec- non-WAEMU peers, including The Gambia and Ghana. tory stands in stark contrast to the sector’s struggles in 2022, which was marked by an overall growth contrac- High inflation has cast a shadow on poverty reduc- tion of −5.8 percent year-on-year, and a contraction of tion, affecting disproportionately the poorest. Poverty −13.9 percent year-on-year,in fish production. Artisanal measured at the international extreme poverty line11 is sector benefited from more favourable weather condi- estimated to have remained stable at 9.9 percent in 2023 tions, which led to substantial fishing efforts. Similarly, from 10 percent in 2022. While the expansion of agri­ the breeding production sector recorded an improvement culture, which employs a significant part of the labor in its growth rate, at 3 percent year-on-year in 2023, con- force, likely improved household welfare in rural areas, trasting with the modest 0.3 percent year-on-year growth the lower-than-expected economic recovery coupled with in 2022 compared to 2021. This positive momentum higher prices eroded households’ purchasing power, follows a contraction of −3.8 percent year-on-year in 2021 counteracting this effect. The national poverty trend results compared to 2020. The noteworthy upturn in 2023 indi- from increased poverty in urban areas (0.03 percentage cates a promising shift towards increased productivity points), while the poverty rate slightly decreased in rural areas within the breeding production industry, which could (−0.3 percentage points). Spotlight 1 provides an update on indicate that the subdued growth in 2022 appears to have Senegal’s progress in reducing poverty and improving shared been surpassed, reflecting potential adjustments in the prosperity in the context of multiple crises. 10 The West African Economic and Monetary Union (WAEMU) aims to maintain regional stability and convergence through various monetary policies, including a central bank inflation target of less than 3 percent. This target is crucial for ensuring price stability across member states, which is a key factor for economic harmony and regional integration. 11 $2.15 per capita per day in 2017 PPP. Chapter 1: The State of the Economy 5 SENEGAL | ECONOMIC UPDATE - MAY 2024 Figure 1.2. Inflation, its drivers and liquidity levels in the banking system a. As in many countries in SSA inflation in Senegal is easing. . . . b. . . . but still remains above Central Bank’s target . . . 25.0 14 15.0 20.0 12 15.0 10.0 10 10.0 8 5.0 6 5.0 0.0 4 –5.0 0.0 –10.0 2 –15.0 0 Jan-2019 May-2019 Sep-2019 Jan-2020 May-2020 Sep-2020 Jan-2021 May-2021 Sep-2021 Jan-2022 May-2022 Sep-2022 Jan-2023 May-2023 Sep-2023 –5.0 –10.0 Consumer price inflation in Senegal 2015 2016 2017 2018 2019 2020 2021 2022 2023 Food inflation in Senegal Non-food inflation in Senegal CPI Foods and soft drink Consumer price inflation in SSA Energy Core inflation The liquidity levels in the banking system is below that of Cote c.  d'Ivoire but close to the regional average despite BCEAO’s interest rate hikes. d. Average interest rates on loans granted by banks remain high. 33.0 8.00 31.0 7.00 29.0 6.00 5.00 27.0 4.00 25.0 3.00 23.0 2.00 21.0 1.00 19.0 0.00 Jan-18 Jun-18 Nov-18 Apr-19 Sep-19 Feb-20 Jul-20 Dec-20 May-21 Oct-21 Mar-22 Aug-22 Jan-23 Jun-23 Nov-23 17.0 15.0 Mars. Juin. sept. Déc. juin. Déc. juin. Déc. juin. Déc. Juin Dec Juin Dec Juin BCEAO policy rate 2017 2017 2017 2017 2018* 2018* 2019 2019 2020 2020 2021 2021 2022 20222023 Marginal lending rate Average interest rate on loans granted by banks Senegal Cote d'Ivoire UEMOA Average rate of remuneration on deposits with banks Source: World Bank staff calculation, UEMOA-Titres, 2024, BCEAO. Monetary policy reforms remain accommodative, but rates rose by a cumulative 150 basis points since the start the tightening of financing conditions hold potential of 2022 to 3.5 percent for liquidity calls and 5.5 percent for accelerating growth. Senegal’s monetary policy, guided for the marginal lending facility, the monetary stance by the Central Bank of West African States (BCEAO), remains broadly accommodative with rates remaining low prioritizes reducing inflation and maintaining the stable enough to spur strong economic growth. In the context peg of the FCFA to the Euro. Although, the policy interest of regional and global turmoil, the monetary stance was 6 Chapter 1: The State of the Economy SEIZING THE OPPORTUNITY necessary to contain the impact of several macroeconomic out compared to the deposits they receive, was 82.16 per- risks, including regional uncertainties, continued inflationary cent in June 2023, which is relatively stable compared to pressures, and constrained external financial conditions. 2022’s ratio of 80 percent. However, despite the recent In response to financial stability risks stemming from bud- stability, there has been a steady decline in the credit to getary constraints among the Union’s member states and deposit ratio since 2019, when it was 97.4 percent before liquidity challenges in the government securities market, the pandemic. This downward trend could suggest that BCEAO conducted two buyback operations on the sec- banks have become more conservative in their lending ondary market in 2023. These operations amounted to practices or increasing deposit taking. about FCFA 2 billion for all member states of the Union, with FCFA 437.1 billion allocated to the State of Senegal. Fiscal and debt vulnerabilities have increased in the context of tightening financing conditions, Senegal’s financial system has so far proved resilient, high energy subsidies and improved revenue despite multiple crises, domestic, regional and global performance uncertainties. NPLs12 continued their downtrend and have stabilized 10.1 percent in June 2023 (compared to The fiscal deficit narrowed to 5.1 percent of GDP in 9.3 as of December 2022 and 11.5 percent in December 2023 – slightly above the target of 4.9 percent, due to 2021) – remaining slightly higher than the WAEMU higher-than-expected domestic revenue. In its effort to region average of 8.7 percent. The provisioning ratio in align with the WEAMU target of a 3 percent fiscal deficit Senegal, which indicates the percentage of NPLs covered by 2025, the government revised its ambition for its fiscal by funds set aside to absorb potential losses, has been deficit goal for 2023 to 4.9 percent of GDP from 5.5 per- steady at 64.5 percent as of June 2023.13 This suggests cent of GDP in the initial Budget Law. These fiscal con- that banks are consistently prepared to cover a significant solidation efforts were expected to be driven by higher tax portion of potential losses from non-performing loans. The revenue collection with the implementation of the MTRS liquidity levels in the banking system are still relatively high, and streamlined public expenses and energy subsidies. although below that of Cote d’Ivoire (Figure 1.2.c). Liquid However, high-frequency monthly fiscal data reported a assets make up 23 percent of total assets as of June 2023, fiscal deficit of 5.1 percent of GDP at end-2023 thanks to which is close to the regional average of 23.6 percent. How- higher-than-expected domestic revenue. With efforts made ever, there may be liquidity challenges at individual banks, in containing expenses, total expenditures stagnated at and banks continue to depend heavily on central bank 26.6 percent of GDP in 2023 while total revenue and funding to maintain their large securities portfolios, which grants are estimated to reach 21.6 percent of GDP in accounted for 22 percent of their assets in 2022 according 2023, from 21.6 percent of GDP in 2022, thanks to higher to the WAEMU Financial Sector Assessment Program. tax revenue and grants. Credit to the private sector maintains a strong recovery Tax revenues, estimated at 19.4 percent of GDP in pace. After credit to the economy grew by 6.9 percent 2023 – 1 percentage point above the target in the 2023 in 2021 and by a substantial 26.1 percent in 2022, the initial budget law. Direct taxes are estimated at 6.9 percent proportion of credit to the private sector relative to the of GDP in 2023, from 6.3 percent of GDP in 2022. During country’s GDP also increased, rising from 29.3 percent the first half of the year, there were increases in corporate in 2020 to 32.3 percent in 2023. The total credit to total tax payments from firms in the secondary sector. This was deposit ratio, which measures how much banks are lending fuelled by a significant rise of +25.4 percent year-on-year 12 Gross NPLs are loans on which borrowers are failing to make payments. 13 In addition, the NPL ratio for Microfinance Institutions in Senegal has also improved, reaching 7.3 percent as of June 2023, down from 9.5 percent in 2021. This improvement suggests that the microfinance sector is also experiencing a reduction in the proportion of loans that are not being repaid on time. Chapter 1: The State of the Economy 7 SENEGAL | ECONOMIC UPDATE - MAY 2024 in corporate income tax in the construction sector (BTP). should have been capped at 2.7 percent of GDP in 2023 However, the performance of this sector was moderated and 1 percent of GDP in 2024. Energy subsidies are by a contrasting trend in the second half of 2023, where anticipated to be even higher in December 2023 follow- there was a 3.1 percent year-on-year decline in corporate ing the revision of electricity tariffs in November 2023 income tax paid by the telecommunication sector. Regard- to ease consumers’ financial burdens from the January ing indirect taxes, taxes on goods and services are estimated 2023 increase with the removal of the third consumption at 9.5 percent of GDP in 2023, a 0.6 pp increase from tranche. 2022, reflecting vigorous of domestic VAT and consump- tion tax collections. Tax on international trade also under- Total public debt surged to 80.8 percent of GDP in performed in 2023 at 2.6 percent of GDP from 2.8 percent 2023 – from 76.0 percent in 2022 – and Senegal remains of GDP in 2022, mainly due to poor agricultural sea- at moderate risk of external and overall debt distress son of the previous year and declining gold exports. with very limited capacity to absorb shocks. This increase Ambitious tax reforms are needed to improve domestic is primarily due to over-financing of the 2023 budget revenue mobilization to reach the non-oil tax revenue at 4.6 percent of GDP – positioned as a debt strategy target of 20 percent of GDP by 2025. The tax system to hedge against potential financing challenges in early remains complex with a narrow tax base and high tax 2024 particularly surrounding the presidential election rates, encouraging avoidance and discouraging formal- to ensure the smooth functioning of the administration ization. In addition, VAT suffers from multiple rates and and ensure timely debt service payments throughout exemptions that weaken its neutrality and efficiency. January–April 2024 – which contributed to higher debt Moreover, auditing practices could be strengthened to level in 2023. With external debt estimated at 60.0 percent broaden the tax base (cf. Chapter 2). Grants are estimated of GDP in 2023, the depreciation of the CFA franc against at 1.0 percent of GDP in 2023, relatively unchanged the US dollar led to the revaluation of the CFA value of from 2022. outstanding external debt, contributing to higher external debt service (interest payment). According to the latest Public expenses remained stable reflecting higher wages and interest payments along with arrears in energy joint WB IMF Debt Sustainability Analysis (June 2023), subsidies. Total expenditures are estimated at 26.6 percent the debt profile is vulnerable to a slowdown in economic GDP in 2023, similar to its level in 2022. The increase in growth and a deterioration of external conditions. Exter- wages, interest payments and arrears in energy subsidies was nal debt indicators mostly remain below their thresholds somehow offset by relative decline in goods and services under the baseline scenario–except for a one-off marginal and current transfers. Wages are estimated at 7.0 percent breach in 2026 for the debt-service-to-exports indicator. of GDP in 2023, from 6.6 percent of GDP in 2022, However, under sensitivity analyses, all four external debt following an increase in the workforce and salary revalua- risk indicators breach their threshold. The present value of tion while interest payments are estimated at 3.1 percent public debt to GDP marginally breaches the risk threshold of GDP in 2023, from 2.2 percent of GDP in 2022. in 2023 under the baseline scenario while the present value Furthermore, direct subsidy compensations for the energy of debt to revenues is also projected to gradually decline. sector, including outstanding arrears, amounted to FCFA Per its medium-term debt management strategy, Senegal 792 billion (4.2 percent of GDP) as of September 2023, intends to increasingly reorient market financing towards equal to the estimated amount of energy subsidies in 2023 the regional market due to tighter financing conditions if no energy reforms and roadmap were implemented on the international bond market with decade high mon- (Box 1). With the adoption of that roadmap, energy subsidies etary interest rates in advanced economies.14 Out of total 14 Senegal Medium-term debt management strategy https://www.sentresor.org/publication/strategie-de-gestion-de-la-dette-a-moyen-terme-2023-2025/ 8 Chapter 1: The State of the Economy SEIZING THE OPPORTUNITY Box 1.1. Impact of hydrocarbon in the economy Noteworthy oil and gas discoveries in Senegal, spanning from 2014 to 2017, reveal reserves exceeding 400 million barrels of oil and more than 40,000 billion cubic feet of gas. Among these discoveries, the GTA field, poised to commence production in 2025, unveils reserves of approximately 1 billion barrels of oil and 40 trillion cubic feet (Tcf ) of gas. Addi- tionally, the Sangomar field, set to begin production in mid-2024, boasts recoverable oil reserves of 560 million barrels, along with 2.4 trillion cubic feet of natural gas. The Yakaar Teranga field is expected to contribute to the domestic market with 150 million cubic feet per day of natural gas. These discoveries hold the potential to significantly boost the GDP growth of the Senegalese economy, playing a pivotal role in realizing the country’s aspirational development objectives. Nominal GDP is expected to increase by 12.8 percent in 2024 as oil starts flowing from Sangomar. Real growth is projected to surge from 3.8 percent in 2023 to 7.1 percent in 2024 and further 9.7 percent in 2025. The fiscal revenues derived from oil and gas are expected to contribute an additional 1 percent of GDP, on average, over the production period from 2024 to 2045, significantly bolstering Senegal’s fiscal resources. Public investment, financed by these revenues, is expected to substantially increase, allowing more investment in public infrastructures and human capital. Exports of hydrocarbons are anticipated to flourish, leading to a substantial improvement in the current account. On the supply side, in addition to the anticipated boom in the industry sector, the tertiary sector (including services, insurances, transportation) may experience positive spillover effects from hydrocarbon exploitation. Furthermore, the agriculture sector could benefit from increased fertilizer production. Oil and gas fields discoveries could also contribute to the country’s goal of achieving Universal Access to Energy. The gas from the Yakaar Teranga field is expected to serve the domestic market, strengthening the energy mix and allowing electrification extension networks in rural and peri-urban areas. It is expected to also fuel the implementation of the gas-to- power strategy, which ultimately should lead to cheaper electricity, increased competitiveness, and spurred growth. This can reduce energy subsidies (see Section 1.3 for a closer look at energy subsidy reforms) creating space for social policies, greater supply of reliable and cheaper energy can improve household living conditions and reduction of inequalities in rural areas, improve education and health outcomes. However, the discovery of oil reserves can present risks and lead to over-optimism regarding the potential for economic growth, as stakeholders may anticipate substantial revenue inflows and increased foreign investment. This exuberance must be tempered by the reality of the ‘resource curse,’ where countries like Ghana have experienced fiscal challenges, including budget mismanagement and increased debt due to premature spending and borrowing based on expected oil revenues. Moreover, economies like Nigeria have shown how reliance on oil can lead to broader economic volatility, with fluctuating oil prices causing instability in government revenues and exchange rates. Without a well-structured and transparent approach to managing these resources, their utilization may not result in a significant economic transformation. Effective management of hydrocarbon revenues is crucial for achieving Senegal’s development objectives, given that managing oil and gas resources can present challenges and exacerbate governance issues. While hydro- carbon production may initially boost real GDP growth, it may not automatically translate into increased inclusivity and income for most vulnerable groups of population, whose productivity often remains low. The government must, therefore, strategically implement reforms to channel hydrocarbon resources into programs that create a new paradigm of benefits for factor productivity and economic diversification. Allocating these resources to investments in education, youth skills development, and technological advancement for Small and Medium Enterprises can enhance labor productivity gains, contributing to higher long-term inclusive growth. Chapter 1: The State of the Economy 9 SENEGAL | ECONOMIC UPDATE - MAY 2024 Senegal’s outstanding public debt in 2023, 20.8 percent increased stringency compared to the corresponding of GDP is estimated for domestic debt (from 19.6 percent period in the previous year. The average cost of resources of domestic debt in 2022) and 60.0 percent external debt raised by WAEMU’s member states rose across various (from 56.5 percent of external debt in 2022). External maturities, encompassing both Treasury bills and bonds. debt of the central administration’s predominantly consists For instance, Senegal’s 3-year bond yields increased by of multilateral and commercial debt (Eurobonds and other almost 200 bps between September 2022and September commercial debt). As of September 2023, the y/y increase 2023 (Figure 1.3.d) while 5-year bond yields increased in external debt was primarily driven by commercial debt by 180 bps, over the same period, due to the sustained (24 percent), export credits (+20 percent), and multilateral high demand in the market amid a backdrop of more con- debt (+13 percent). Domestic debt is largely comprised strained global financial conditions. Furthermore, since the of Treasury bonds. In terms of maturity, long-term debt end of October 2023, Senegal has been issuing 1-month represents 99 percent of the central administration’s total Treasury bills on the regional market at elevated rates debt, compared to 1 percent for short-term debt. To reduce and conducted five auctions of 1-month Treasury bills debt vulnerabilities, Senegal has undertaken debt manage- (T-bills) on the regional market, amounting to a total of ment operations to mitigate risks associated with the external FCFA 135 billion (0.7 percent of GDP) – first short-term debt profile and does not plan to tap the international bond maturities since the COVID-19 shocks, which generated market in the near term. urgent financing needs. These recent operations were justified by the government’s decision to overfinance the Debt servicing has increased, representing one-third of 2023 budget in anticipation of potential financial market total revenue. Interest payments on public debt increased constraints during the upcoming presidential elections. to 3.1 percent in 2023, compared to 2.2 percent in 2022, However, the yields on these bills have been notably driven by increased interest payments on both external high for such a short maturity, reaching 5.81 percent in (+52 percent) and domestic debt (+29 percent). To meet December – a substantial increase, with yields surging by existing debt obligations, Senegal allocated an additional 350 basis points compared to the 1-month Treasury bill budget to interest payments on debt in 2023. Addition- from 2020. The shift towards issuances at lower matur- ally, heightened borrowing by state-owned enterprises ities, coupled with the resultant heightened yields, could (SOEs) further contributed to the escalation of debt levels significantly elevate the debt level, thereby escalating the with SOEs’ debt, driven by substantial debt-financed invest- risk of debt distress. ments, including PETROSEN’s expenditures to support Senegal’s hydrocarbon industry. Finally, government mea- sures to support both firms and household purchasing External accounts improved but vulnerabilities power15 amounted to FCAF 113 billion in 2023 (0.6 percent remain elevated due to lower exports of GDP) added to the fiscal deficit in 2023. Debt service is projected to remain substantial, averaging more than 30 per- The external position is estimated to have improved. cent of total revenues and grants over the next five years. The current account deficit (CAD) is estimated to have narrowed to 14.5 percent of GDP from 19.9 percent of Tightening financial conditions resulted in an increase GDP in 2022 driven primarily by the resumption of trade in T-bond and T-bill yields. The increase in BCEAO’s with Mali in 2023 and a gradual reduction in service policy rate since June 2022 has resulted in yields rising imports in the hydrocarbon sector. The CAD was financed in most WAEMU countries. In the first half of 2023, through a combination of foreign direct investments overall conditions on the public debt market exhibited (7.4 percent of GDP), portfolio investments (7.4 percent 15 The measures include the payment of compensation of FCFA 15 billion (US$22 million) due to millers, payment of subsidy to paddy rice importers (FCFA 30 per kilogram; US$0.046 per kilogram), a subsidy of 32 FCFA (16.5 percent of the price) on the kilogram of paddy rice aimed at supporting local producers, and tax exemptions on fatty substances applied to importers. 10 Chapter 1: The State of the Economy Figure 1.3. Fiscal and debt vulnerabilities have risen, but debt is deemed sustainable a. in 2023, Senegal’s fiscal deficit remains high, above target . . . b. . . . due to lower taxes collection . . . 30.0 0.0 60.0 –1.0 25.0 –2.0 20.0 40.0 –3.0 15.0 –4.0 –5.0 10.0 –6.0 20.0 5.0 –7.0 0.0 –8.0 2019 2020 2021 2022 2023e 2024p 2025p 2026p 0.0 2019 2020 2021 2022 2023e 2024p 2025p 2026p Revenue Expenditure Grants Other taxes Overall fiscal balance Taxes on international trade Direct taxes c. . . . high interest payment and high level of energy subsidies. Public debt has been rising very fast driven by high external debt . . . d.  50.0 90.0 80.0 40.0 70.0 • 60.0 30.0 50.0 20.0 40.0 30.0 10.0 20.0 10.0 0.0 0.0 2019 2020 2021 2022 2023e 2024p 2025p 2026p 2018 2019 2020 2021 2022 2023p 2024p 2025p 2026p Current expenditures Wages and compensation External debt (%GDP) Goods and services Interest payments Domestic debt (%GDP) Current transfers Capital expenditures Total public debt (%GDP) . . . while average yields of bonds issued by Senegal in the regional f.  e. . . . following the trend of the fiscal deficit market have been rising. 90.0 0.0 8.0 80.0 –1.0 7.0 70.0 –2.0 6.0 60.0 –3.0 5.0 50.0 –4.0 4.0 40.0 –5.0 3.0 30.0 –6.0 2.0 20.0 –7.0 1.0 10.0 0.0 –8.0 0.0 2018 2019 2020 2021 2022 2023p 2024p 2025p 8/14/2020 8/14/2021 8/14/2022 8/14/2023 Total public debt (% of GDP) 1 year maturity 3 year maturity Fiscal deficit (% of GDP) 5 year maturity (continues) Chapter 1: The State of the Economy 11 SENEGAL | ECONOMIC UPDATE - MAY 2024 Figure 1.3. Fiscal and debt vulnerabilities have risen, but debt is deemed sustainable (Continued) g. Financing conditions in CIV, Senegal, and Benin were the most favorable, albeit still above pre-pandemic levels. Average Yields on 3 year T bonds 12 10 8 Percent 6 4 2 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23 Jan-24 BEN CIV MLI NER SEN Other WAEMU BFA Source: World Bank staff calculation, Ministry of Finance, UEMOA-Titres, 2024, BCEAO. of GDP), remittances (10 percent of GDP in 2023), commodity prices. Export growth in 2023, particularly along with external credits, budget support, and financing in key product categories such as gold, phosphoric from development partners. acid and fish products, was weaker than expected. The downturn in exports is explained by the expected drop The trade balance improved to 18 percent of GDP in in foreign sales of phosphoric acid (43.9 percent decline 2023, from 26 percent of GDP in 2022, on the back year-on-year), titanium (26.5 percent decline year-on- of lower import bills. Imports of goods decreased from year), zircon (a 30 percent decline year-on-year) and gold 38.8 percent in 2022 to 36.4 percent in 2023, along with (8.6 percent decline year-on-year). These declines were service imports (from 14.1 to 7.3 percent of GDP), par- mitigated by higher foreign sales of cement (40.57 per- ticularly related to hydrocarbon services. Senegal’s main cent increase year-on-year) along with the resumption imports include food products, refined petroleum, rice, of exports to Mali, as well as horticultural (25.2 percent crude oil, equipment and cars. The main origins of the increase year-on-year) products. country’s imports in 2023 were China, France, Russia, the Netherlands and India. Export value is expected to Terms of trade improved slightly in 2023 despite high have fallen to 20.2 percent of GDP in 2023 from volatility. Export price indices increase in the first 22.2 percent of GDP in 2022, primarily due to declining quarter (+13.8 percent), driven by growth in machinery global commodity prices. Senegal’s exports are dominated and horticulture prices. However, growth moderated to by gold, zirconium, cement, frozen fish and petroleum 4.2 percent in the second quarter, with a slowdown in oils, which together account for over 60 percent of total horticultural and mineral products. This declining trend exports. Other marketable products include frozen fish, in export prices persisted into the second half of the year. phosphoric acid, titanium, and ground nuts. The main Conversely, import price indices experienced volatility, destinations for Senegal’s exports remain Mali, Switzerland, with an 18.7 percent increase in the first quarter, but India, China, and Australia. Export value is expected to have growth slowed significantly thereafter, reflecting decreases fallen to 20.2 percent of GDP in 2023 from 22.2 per- in mineral and food products’ prices. A slight recovery was cent of GDP in 2022, primarily due to declining global observed in the fourth quarter, particularly in transport 12 Chapter 1: The State of the Economy SEIZING THE OPPORTUNITY equipment prices, indicating some sectoral recovery and face significant challenges, which could be exacerbated by potential shifts in the global market. Towards the end of potential capital volatility related to FDI reallocation, and 2023, a slight uptick in the terms of trade reflected an trade, as a consequence of a slowdown of economic recovery improvement in export conditions and a favourable shift in key trading partners. Persistent political instability in in import prices (Figure 1.4. c). the region and the risk of social discontent linked to the high cost of living with high inflation and phasing out of The capital and financial account, impacted by mixed energy subsidies (see Section 1.3 for updated progress in trends, is estimated to have decelerated, with project phasing out energy subsidies), as well as delayed invest- grants rising, direct investment declining, and remit- ment and further monetary tightening, could cloud the tances showing a slight reduction. The capital and finan- outlook. The decision by AES to exit the Economic cial account are estimated to show a deterioration, with Community of West African States (ECOWAS) adds an expected decrease to 17.8 percent of GDP in 2023 another layer of uncertainty with potential impact on the compared to 19.6 percent of GDP in 2022, indicating a financial and monetary sectors. slight reduction in the total volume of capital flows into the country. This decline is primarily influenced by a decrease Assuming political stability, prudent macro-fiscal in the financial account to 16.5 percent of GDP in 2023, policies, steadfast implementation of key reforms and compared to 18.8 percent in 2022, pointing to a decelera- the beginning of hydrocarbon production, the econ- tion in direct investment, which is estimated to decline to omy should expand robustly in the medium term. 7.4 percent of GDP from 9.6 percent of GDP a year prior Growth is anticipated to average 7.4 percent in 2024–2026, as a result of political instability and uncertainty. Conversely, boosted by hydrocarbon production and exports (Box 2). grants are estimated to experience a positive shift, increasing The secondary sector is poised for robust growth, primarily to 1.2 percent of GDP in 2023 from 0.7 percent of GDP in driven by the significant contributions from the hydro- 2022. Remittances are expected to stabilize at 10.1 percent carbon sector, coupled with sustained positive spillover of GDP, down slightly from 11.5 percent in 2022. This effects in other sectors. Several factors should contribute slight decline in remittances could be attributed to challenges to this dynamic baseline outlook, including the gov- in global economic conditions which might affect the dis- ernment’s commitment to improved transparency and posable income of expatriates. transformative reforms. The extractive sector is also set to benefit substantially from the establishment of Senegal’s The BCEAO’s external reserves fell to 3.5 months of regional mining hub. A refined regulatory framework imports at end-2023 from 4.3 months at end-2022. is expected to expedite the execution of the sub-sector’s Foreign exchange reserves have been on a downward trend, revival strategy, emphasizing the acceleration of gold, estimated at 3.5 months of imports in 2023, down from zircon, and phosphate mining alongside the relaunch of the 4.3 months at end-2022, suggesting that the BCEAO may integrated Falémé iron ore mining project. Gold mining need to continue tightening in 2024. is expected to receive a considerable boost through the expansion of reserves at Sabodala Gold Operation (SGO), the initiation of production at Sored Mines, and the imple- 1.2.  Outlook, risks and opportunities mentation of a project promoting artisanal and small- The medium-term outlook is positive with a scale mining. Furthermore, the effective commencement solid recovery driven by the extractive industry, of mining at the Niafarang zircon deposit, boasting an a commitment to macro-fiscal stability, and the annual production capacity of 54,000 tonnes of heavy implementation of key structural reforms minerals, is poised to strengthen the extractive activities. Additionally, the manufacturing of agri-food products The macroeconomic outlook remains favourable, but in 2024 is expected to exhibit increased vigor compared uncertainty and risk are high. With heightened global to the previous year, benefiting from the dynamism of and regional instability, the Senegalese economy is set to agricultural production and the livestock sub-sector. Chapter 1: The State of the Economy 13 SENEGAL | ECONOMIC UPDATE - MAY 2024 Figure 1.4. Developments in Senegal’s external sector the current account deficit widen in recent years but should a.  . . . on the back of a strong improvement of the Trade Balande b.  improve in the medium term . . . thanks to hydrocarbons exports and declining services imports. 60.0 0.0 16.0 0.0 14.0 50.0 –5.0 –5.0 12.0 40.0 –10.0 –10.0 10.0 30.0 8.0 –15.0 –15.0 6.0 20.0 –20.0 4.0 10.0 –20.0 –25.0 2.0 0.0 –25.0 0.0 –30.0 2010 2012 2014 2016 2018 2020 2022 2024 2026 2010 2012 2014 2016 2018 2020 2022 2024 2026 Exports, GNFS Imports, GNFS Service exports Service imports Current account balance Current account balance Trade balance Export Price Indices Experience a Year of Volatility Across Key d.  c. the terms of trade remains stable Sectors in 2023 . . . 160.0 140.0 155.00 120.0 105.00 100.0 80.0 55.00 60.0 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Global export index Global export index Products of chemical industries Global import index Common metals and structural work Terms of trade Machine and equipment e. and sharp fluctuations in import price indices, culminating in sector-specific recoveries. 170.0 150.0 130.0 110.0 90.0 70.0 50.0 Jan-15 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Products of the food industries Products of chemical industries Transport equipment Global imports index Source: World Bank staff calculation, ANSD, BCEAO. 14 Chapter 1: The State of the Economy SEIZING THE OPPORTUNITY Box 1.2. Progress as of December 2023 in Senegal’s six-step plan for energy subsidies reform Senegal started phasing out energy subsidies in mid-2022 with a 15 percent increase in the price of premium fuel in June 2022, and the removal of VAT exemptions for medium and high consumption tranches of electricity in the 2022 supplemental budget, while shielding lower-income households in the social tranche. In January 2023, the government announced a six-step roadmap to gradually eliminate energy subsidies by 2025, and increased prices for both fuel and electricity as a first step to implement the roadmap. 1.  Upward adjustment of selected energy prices and measures to be taken to mitigate the impact of these increases on vulnerable households (starting January 1, 2023) The goal is to keep overall energy subsidies within the 2023 budget envelope of 2.7 percent of GDP. The read- justment of electricity prices should result in avoided subsidy of FCFA 99.7 billion (0.6 percent of GDP) for the government budget, while the increase in fuel prices is expected to reduce the fuel subsidy need by FCFA 158.5 billion (0.9 percent of GDP). Update: On January 1st, premium fuel and diesel prices rose by FCFA 100 per liter each, reaching FCFA 990 and FCFA 755, respectively. Despite remaining below international market prices, the reform coincided with a decline in global prices, reducing government spending on fuel subsidies. Regarding electricity, the government adjusted tariffs as of January 1, 2023, while preserving tariffs paid by those consuming less than 150 kWh per billing period, i.e., 1,159,146 households or 48 percent of Senelec’s total customers. However, following consumer protests over high electricity prices, the Govern- ment abolished the third consumption block (households whose electricity consumption exceeds 250 kWh) of pre-paid electricity for residential customers. Subsidy rates for this block was close to zero and even negative for non-residential customers, suggesting that those customers were cross subsidizing some residential customers. This abolition, effective from December 1, 2023, allows customers exceeding 250 kWh to fall within the second consumption block, saving over 13 FCFA per kWh. Although the authorities did not disclose the fiscal burden of this measure, it is anticipated that government subsidies will increase to enable Senelec to recover some of its costs. 2.  Review the fuel pricing formula and electricity rate structure (by end of 2023) Fuel: The government will review the current fuel pricing formula to ensure that prices at the pump reflect developments in international markets. The review will address (i) the different elements of the price structure; (ii) the reference price, a smoothing mechanism for adjusting prices to avoid large variations, and the frequency of price adjustments; and (iii) the composition and powers of the technical committee in charge of price setting. Electricity: To reduce the need for subsidies in the electricity sector, the government intends to (i) revise the electricity tariff structure gradually eliminating subsidies and (ii) complete a financial audit of Senelec by the end of 2023 to strengthen its financial situation. Update: A comprehensive review of the current pricing formula for petroleum products (gasoline and diesel) is under- way to ensure that pump prices accurately reflect international market developments. The authorities have sought tech- nical assistance from the IMF in this area. The government is committed to proposing and introducing a new electricity tariff structure that incorporates a social tariff specifically designed for vulnerable groups (IMF structural benchmark, Sep- tember 2024). The authorities have also requested technical assistance from the World Bank to finalize an audit of the electricity company (SENELEC) (IMF structural benchmark, May 2024), which will help obtain an updated assessment of the sources and structure of both variable and fixed costs in the electricity sector. (continues) Chapter 1: The State of the Economy 15 SENEGAL | ECONOMIC UPDATE - MAY 2024 Box 1.2. Progress as of December 2023 in Senegal’s six-step plan for energy subsidies reform (Continued) 3.  Strengthen the cash transfer system (by end 2023) This reinforcement will focus on: (i) the re-certification of the Single National Register (RNU) data for the 558,000 house- holds already registered; (ii) the addition of 412,000 vulnerable households identified for the most part through community-based targeting; and (iii) the migration to digital payment of cash transfers. Update: The government revalued the resources devoted to the National Family Security Grant Program (Programme national de bourse de sécurité familiale – PNBSF) and increased the number of beneficiaries in 2023. The quarterly transfers given to households through the PNBSF program increased from FCFA 25,000 to FCFA 35,000 per house- hold, benefitting a total of 350,000 households. The management mechanism is also expected to be strengthened through the digitalization of payments to beneficiaries. 4.  Launch a communication campaign (first half of 2024) The government will launch an effective communication campaign to increase public support. This campaign will inform the public of the disadvantages of the existing subsidies and the benefits of the reform. 5.  Reduce the subsidy envelope to no more than 1% of GDP (2024 budget) Update: The 2024 budget law approved by the National Assembly, reflects a gradual phasing out of untargeted energy subsidies with a commitment to limit them to 1 percent of GDP in 2024. However, potential outstanding unpaid fuel subsidy obligations from 2023 may pose a risk to achieving this target. The IMF advised the authorities to stand ready to increase domestic prices if needed. 6.  Eliminate subsidies (by 2025) Fuel: The price adjustment mechanism will be fully applied, ensuring that premium fuel and diesel prices follow inter- national price trends. Vulnerable households will be partially compensated by cash transfers set up within the RNU. Electricity: Electricity subsidies will be removed, and vulnerable households will be protected either through cash transfers under the RNU or through cross-subsidization by other consumers. The tertiary sector will benefit from the revival of com- of the Regional Express Train (TER) on the Diamniadio – merce and a more favorable international economic AIBD airport axis. Simultaneously, the reinforcement of situation. The sector is set to gain from the indirect effects Air Senegal SA routes and the rehabilitation and upgrad- of oil production in services, particularly in sub-sectors ing of regional airports would consolidate transportation such as commerce, transportation, accommodation and activities. Financial and insurance services are expected to food services, and financial services. The transportation do better in 2024 than 2023, capitalizing on the vibrancy sub-sector is expected to thrive due to the recovery of of the economy to meet the demand, especially for insur- industries and commerce, as well as the commercial opera- ance products, notably in the oil sector, and with the tion of the Bus Rapid Transit (BRT) and the introduction expansion of the transportation sector. 16 Chapter 1: The State of the Economy SEIZING THE OPPORTUNITY Inflation pressures are expected to gradually abate as arrears). Revenue collection should increase, thanks to global headwinds subside. Improvements in supply chains measures that include, among others, the expansion of are anticipated thanks to the good agricultural season, and the tax base with 25,000 new taxpayers in 2024, the digi- the anticipated easing of commodity prices that would play talization of all customs offices, the set- up an Intelligence, a role in alleviating inflationary pressures. Annual inflation Risk and Value Analysis unit, and the identification of is projected to decline below 3 percent as global supply-side new taxpayers through information shared by Electricity disruption subsides and inflationary pressures abate, with and Water Companies with tax authorities, and reform the fixed exchange rate anchored to the Euro. options to raise tax revenue from PIT (Spotlight 2). Poverty is expected to decline amid solid economic The CAD is projected to narrow in the near-term rebound and lower inflation in near term, but efforts thanks hydrocarbon exports. A positive terms of trade might be needed to make growth more equitable. With shock is expected with the beginning of hydrocarbon the stagnation of economic growth in 2023, poverty mea- production and exports leading to an improvement of sured by the extreme international poverty line ($2.15 per the trade balance. The CAD is expected to gradually narrow capita per day in 2017 PPP)- is estimated to have remained and average -6.3 percent over 2024–26 with hydrocarbon stable (see Spotlight 1 for an update on poverty and equity exports and supported by fiscal consolidation and lower in the context of multiple crises). In the near term, poverty public investment, continued efforts to improve the invest- is set to decline and reach 6.4 percent16 in 2026 thanks ment climate and boost competitiveness. The CAD is to robust economic expansion with dynamic agriculture expected to be mainly financed by remittances, foreign sector, the expansion of cash transfers, and declining food direct investments and external credit and debt inflows. prices. The solid economic recovery is less likely to benefit poorest households without proactive actions to increase their participation in the growing sectors, enabling them to Rising risks cloud the outlook diversify their income and increased economic opportunity. The baseline outlook is uncertain, with risks tilted to Fiscal consolidation is an upmost priority to lessen the downside. The baseline outlook is subject to consid- fiscal and debt vulnerabilities. Senegalese authorities are erable uncertainty and risks are tilted to the downside. firmly committed to build fiscal buffers and consolidating The context of poly-crisis and its negative effects on public finances to meet the WAEMU convergence criteria the Senegalese economy persist. Risks include additional of 3 percent of GDP by 2025. The MTRS includes a bold delays in hydrocarbon production, regional and global ambition of raising domestic revenue to 20 percent of geopolitical tensions, and lingering impacts of Russia’s GDP by 2025 – about 3 percentage points of GDP over invasion of Ukraine with all its implications for trade and the next 2 years. Although fiscal consolidation is likely commodity prices. Regionally, uncertainties persist with to rely on accelerating revenue mobilization, efforts are widespread socioeconomic implications, including the also needed to streamline public spending by phasing out risk of delayed investments, inflation, and uncertainties energy subsidies (see Section 1.3 for a closer look at energy for the financial and monetary sectors. The January 28, subsidy reforms) and rationalizing public spending while 2024, announcement by Mali, Burkina Faso, and Niger protecting pro-poor and core capital expenditure. The to exit ECOWAS could significantly affect regional fiscal deficit is expected to reach 4.8 percent in 2024 and trade dynamics, particularly for Senegal. With approxi- 3 percent in 2025–2026. Energy subsidies are planned mately 20 percent of Senegal’s total exports destined to to be capped at 1 percent of GDP in 2024 (excluding Mali, this withdrawal has the potential to disrupt not only 16 Using the international poverty rate of USD$2.15 in 2017 PPP. Chapter 1: The State of the Economy 17 SENEGAL | ECONOMIC UPDATE - MAY 2024 trade flows but also the free movement of people, goods, monetary policy and exacerbate fiscal vulnerabilities. services, and capital. The absence of alternative regional or The BCEAO may need to continue tightening in 2024 bilateral agreements could compound these challenges. to bring inflation under control and in the context of Additionally, there is growing speculation regarding the rising uncertainties over the withdrawal of Niger, Mali, future intentions of these nations concerning their mem- and Burkina Faso from ECOWAS and potential spillovers bership in the WAEMU and the possible repercussions to WAEMU. These uncertainties are likely to increase for the shared currency. investors’ risk perceptions leading to tighter financing conditions and putting additional strain on already low Further delay in the commencement of oil production foreign exchange reserves. could undermine the economic rebound in the short term. The Senegalese Minister of Energy and Petroleum, in conjunction with the Mauritanian minister, has Taking a closer look: Energy 1.3.  announced further delays to the Grand Tortue Ahmeyim subsidy reform (GTA) gas project, located along the maritime boundary between Senegal and Mauritania. The project, initially set The spending on energy subsidies in 2022 led to sig- for a 2022 start, has faced successive postponements— nificant fiscal strain that set up the stage for a subdue first to 2023, then to mid-2024, and now to the final energy reform that took place in January of 2023. Senegal quarter of 2024. This has led to a revision of expected subsidizes fuel and electricity cost through (i) fixed prices revenue from hydrocarbon production, underscoring the on petroleum products and gas and (ii) regulated electric- urgent need for diversification and enhancement of reve- ity tariffs that are set below the cost-recovery price. The nue streams. Financial conditions are also tightening, rais- fiscal cost of energy subsidies went from less than 1.3 per- ing alarms about future funding availability and potential cent of GDP in the 2019–21 period to almost 4 percent financial constraints. of GDP in 2022. The sudden increase resulted from the soaring oil prices triggered by the war in Ukraine. The Climate-related risks are evident and could hold back unsustainable debt gave the momentum needed to imple- Senegal development ambitions. The impacts of climate ment a comprehensive reform to both fuel and electricity shocks are increasingly pertinent to the economic outlook. subsidies. In January of 2023, the government of Senegal Senegal is grappling with the impacts of climate change, increases the price of premium gasoline, diesel, and including higher temperatures, unpredictable rainfall electricity tariffs for high-consumption households. This patterns, and more frequent occurrences of floods, droughts, reform aimed to generate 1.4 percent of GDP in fiscal and locust invasions, compounded by the threat of rising savings—CFAF 258 billion), with 0.9 and 0.5 percent sea levels. In response to these environmental challenges, of those savings coming from lower fuel and electricity the Bank is actively supporting Senegal in its efforts subsidies, respectively. to build climate resilience and promote cost-effective, low-carbon development strategies. Current initiatives This energy reform includes a comprehensive set of include projects focused on coastal adaptation, flood risk complementary policies. In particular, the reform management, water security, climate-smart agriculture, increases the price of premium gasoline, diesel, and waste management, and the sustainable management of electricity for high-consumption households. A wide natural resources within the fisheries and forestry sectors. range of compensatory measures accompanied these price Notably, progress is being made in urban mobility with hikes: First, the government aimed to protect the most the introduction of the Dakar Bus Rapid Transit (BRT) vulnerable households by keeping fixed prices of other system in 2024. energy commodities such as LPG, boat gasoline, and electricity for low-consumption households. Second, Persistent high inflation in advanced economies the government planned to increase the coverage and could drive further global and regional tightening benefits of the main cash transfer program—PNBSF. As 18 Chapter 1: The State of the Economy Figure 1.5. The energy reform is expected to bring substantial fiscal savings Panel A. Fiscal impact of energy subsidies Panel B. Fiscal impact of the January 2023 energy subsidies reform (percent of GDP), 2019–2022 (percent of GDP), 2023 5 5 4.3 4.3 4 4 Percent of GDP 2.9 Percent of GDP 3 3 2 2 1.3 1.2 1 1 0.3 0 2023 without reform 2023 with reform 0 2019 2020 2021 2022 Axis Title Electricity Fuel Electricity Fuel Source: Bank staff calculations based on government estimates. Table 1.1. Policies defined by the energy subsidy reform in Senegal Sequential Reduction of Subsidies Compensation Measures Communication • Upward adjustment of • Freezes prices for LPG, kerosene, boat gasoline gas and • Launch a selected energy prices by electricity for Kwh consumed under the first consumption communication January of 2023 block campaign • Review the pricing formula • Strengthen the cash transfer system (coverage and benefits) by end of 2023 • Extension of the social registry to 1 million households, • Complete elimination of which is in progress, covering not only the entire poor energy subsidies by 2025 population but also the vulnerable • Subsidizing transport sector Figure 1.6. The energy reform was needed as subsidies are inefficiently targeted Panel A. Effect of subsidies on Poverty and Inequality Panel B. Absolute Incidence of fuel and electricity in 2022 0.5 0.4 39.5 40 0.24 Percentage of total spending on energy subsidies 0.1 32.7 0.0 30 E ect of energy subsidies –0.5 20 –1.0 –0.9 10 –1.5 –1.4 –2.0 –1.9 0 Change in poverty Change in inequality 1 2 3 4 5 6 7 8 9 10 (percentage points) (Gini points) Deciles of disposable income per-capita Electricity Fuel Total Electricity Fuel Source: Bank staff calculations based on EHCVM 2021–22 and policy parameters available in November of 2023. Notes: The figure shows how disposable income inequality (poverty) changes after considering energy subsidies (i.e. fuel and electricity))and value added exemptions of electricity consumption. Change in poverty headcount use the national poverty line. SENEGAL | ECONOMIC UPDATE - MAY 2024 Figure 1.7. The energy reform requires stronger policy aims to translate into a higher redistributive capac- compensation measures to fully compensate ity of the fiscal system. its effects on poverty Energy subsidies have been an inefficient instrument 0.8 0.70 to reduce poverty and exacerbate pre-existing inequal- ities. In 2018–19, energy subsidies reduced poverty by Di erence between reform and 0.6 percentage points in Senegal (World Bank 2024).17 0.40 0.4 In 2022, this effect was even higher, with subsidies reduc- ing poverty by 1.4 percentage points. The increase in the baseline importance of subsidies being explained by the core role of subsidies in preventing the erosion of household’s 0.0 purchasing power due to a decline in oil prices. However, energy subsidies have been proven to be an inefficient –0.15 way to protect low-income households. In 2022, between –0.4 –0.32 32–39 cents of each dollar spent on energy subsidies (Elec- Change in poverty Change in inequality tricity and Fuel) was being received by households in the (percentage points) (Gini points) top decile of income distribution. This inefficiency results Cutting down energy subsidies in subsidies increasing the pre-existent levels of income inequality, with inequality increasing by 0.24 Gini points. Source: Bank staff calculations based on EHCVM 2021–22 and policy parameters available in November of 2023. The regressivity of energy subsidies is mainly explained Notes: The figure shows the change in disposable income inequality by high-income households having higher access to and poverty (measure by the national poverty line) across different scenarios. the electricity grid and more energy-intensive assets (e.g., cars, tractors, air conditioning) than their low-income counterparts. a consequence, the benefit of the cash transfer program Additional compensation measures are needed and increases by 40 percent, by FCFA 10,000. As the exact are financially feasible. The cost of the compensation increase in coverage is unclear, we assume it will increase measures simulated here is expected to be 35.6 billion by one-third before 2025 (100,000 families). By October FCFA,18 most of it coming from increasing coverage of of 2023, the number of beneficiaries increased by 54,000. PNBSF by one third. This cost is less than 15 percent of Third, to boost public support, the government plans to the reform’s expected fiscal gains—258.2 billion FCFA, invest in a communication campaign that explains the suggesting that the stronger compensation measures are reason for the increase in energy prices and how this financially feasible. 17 This figure corresponds to the impact of removing subsidies on consumable income. See World Bank (2024). Africa Poverty and Inequality Flagship. 18 This cost is explained by: i) increase in the amount of the PNBSF transfer from 100,000 to 140,000 (CFAF 12 billion), ii) increase of PNBSF beneficiaries by 100,000 families (CFAF 14 billion), and iii) Transport subsidies (CFAF 9.6 billion), which are computed by the share of fuel subsidies that goes into public transportation—1.8 percent of fuel subsidies. This estimate does not consider implementation costs of these policies. 20 Chapter 1: The State of the Economy Chapter 2: Spotlight on Senegal’s Development Agenda: Poverty and Equity in a Context of Multiple Crises SENEGAL | ECONOMIC UPDATE - MAY 2024 Senegal’s poverty incidence stagnated over Figure 2.1. Poverty incidence and GDP per capita, 2018/19 to 2021/22 but the number of poor 2018–2021 has increased, reflecting the fact that growth 38 1,550 GDP per capita (constant 2015 US$) has not necessarily reached the poor 37.8 Poverty incidence (%) Poverty incidence stagnated over 2021/22 and 2018/19 37.5 in Senegal despite the context of multiple shocks. The country has coped well, with poverty incidence (using 37 1,450 the national poverty line) remaining quasi-stable at 37.5 percent of the population in 2021/22 compared to 37.8 percent in 2018/1919. Poverty incidence is stable in both urban and rural areas, but with contrasting regional 36 1,350 trends. There has been a marked fall in poverty in the Senegal 2018* 2019 2020 2021* 2022 River Valley (center) and in Eastern Senegal bordering Poverty GDP per capita Mali, and a slight increase in the south in Casamance. Real per capita consumption declined among the poorest and Source: World Bank calculations based on EHCVM 2018/19, EHCVM 2021/22 and data portal (https://data.worldbank.org/). the better-off while middle income brackets experienced Note: Poverty rates in 2018 and 2021 are computed using EHCVM a gain in real per capita consumption. This trend resulted 2018/19 and EHCVM 2021/22. in a decline in inequality, with the Gini index dropping from 35.1 in 2018/19 to 33.4 in 2021/22. annual inflation was 1 per cent in Senegal; but consumer Economic growth slowed down with the COVID-19 prices rose by 2.5 percent in 2020, 2.2 percent in 2021 and shocks after several years of above SSA average per- 9.7 percent in 2022. A combination of lower growth and formance. The period 2018–2022 coincided with the high inflation had a negative impact on household living implementation of the second phase (PAP-2) of the Plan conditions. Senegal Emergent (PSE), which aimed at accelerating struc- tural transformation to help Senegal achieved the status of Average households’ consumption declined with sig- an emerging economy by 2035. Senegal’s ambitions were nificant differences between urban and rural areas. hindered by multiple shocks over 2018–2022 including Nationwide per-capita consumption growth declined by the COVID-19 pandemic, the spillover from Russia’s inva- 1.6 percent, with most of the decline felt by more affluent sion of Ukraine, rising political instability, and domestic households. The growth incidence curve (GIC) at the political tensions. Average annual GDP per capita growth national level (Figure 2.2, left panel) shows negative was around 1.4 percent between 2019–2022, compared growth rates for all households that belong to the top with 3.7 percent in 2014–2018 (Figure 2.1). Moreover, quintile of the consumption distribution, with declines GDP growth, driven by growth in services didn’t translate in consumption ranging between −1.6 and −5.1 percent into consumption per capita growth. The period was also between the 61 and the 99 percentile of the consump- marked by high inflation. From 2011 to 2019, average tion distribution. The national average masks substantial 19 Data used on this note comes from two rounds of the WAEMU Harmonized Household Survey known by its French acronym EHCVM (Enquête Harmonisée sur les Conditions de Vie des Ménages). The two rounds of the survey were fielded in October 2018–July 2029 for the first edition, and November 2021–August 2022 for the second one by the NSOs of the 8 WAEMU member states (Benin, Burkina Faso, Côte d’Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo) as part of a World Bank regional project implemented by the WAEMU Commission and the NSOs of the WAEMU member states. The two rounds of the survey are comparable, changes in survey design, questionnaires and poverty measurement between the two rounds are small. For Senegal the sample size of each round is 7100 households, representative at the national level, urban/rural and at the regional level. 22 Chapter 2: Spotlight on Senegal’s Development Agenda: Poverty and Equity in a Context of Multiple Crises SEIZING THE OPPORTUNITY Figure 2.2. Growth incidence curves by geographical location a. National b. Urban c. Rural 20.0% 20.0% 20.0% 10.0% 10.0% 10.0% 0.0% 0.0% 0.0% –10.0% –10.0% –10.0% –20.0% –20.0% –20.0% C1 C11 C21 C31 C41 C51 C61 C71 C81 C91 C1 C11 C21 C31 C41 C51 C61 C71 C81 C91 C1 C11 C21 C31 C41 C51 C61 C71 C81 C91 National (constant price 2018) Urban (constant price 2018) Rural (constant price 2018) Average growth (national) Average growth (urban) Average growth (rural) Source: World Bank staff calculation based on EHCVM 2018/19 and 2021/22. heterogeneity across urban and rural areas. In urban areas that the targeted social assistance provided during the (Figure 2.3, center panel), consumption growth was largely period may have helped these households to mitigate negative, with an average decline of 2.3 percent over the effects of the negative urban consumption growth. the period, driven mainly by declines in consumption In rural areas (Figure 2.3, right panel), on the other of the better-off. Poorest urban households experience a hand, consumption growth declined by 1.5 percent over positive and strong consumption growth, which suggests the period, oscillating around this value for poor and Figure 2.3. Monetary poverty indicators 2018–2021 by area of residence a. Poverty headcount b. Poverty gap c. Poverty severity 70 20 8 60 15.3 15.7 6.3 53.6 53.3 5.9 15 6 50 37.8 37.5 10.3 10.2 4.0 40 3.9 29.9 29.7 10 4 30 7.6 2.8 6.8 2.4 20 5 2 8.7 8.9 10 1.4 1.1 0.4 0.3 0 0 0 National Dakar Other Urban Rural National Bissau Other Urban Rural National Dakar Other Urban Rural National Bissau Other Urban Rural National Dakar Other Urban Rural National Dakar Other Urban Rural 2018 2021 2018 2021 2018 2021 Source: World Bank calculations based on EHCVM 2018/19 and EHCVM 2021/22. Chapter 2: Spotlight on Senegal’s Development Agenda: Poverty and Equity in a Context of Multiple Crises 23 SENEGAL | ECONOMIC UPDATE - MAY 2024 non-poor households. This timid and slightly negative Kedougou) and the south (Sedhiou, Kolda). In spite of growth rate in rural areas sheds light on why poverty has the high incidence of poverty in the east and the south, not declined in Senegal. As most of the poor still live in about one-third of the poor population lives in the regions rural areas, inclusive growth policies that boost household of Diourbel, Kaolack, and Thiès in the groundnut basin income of rural habitants is needed to effectively continue (Panel b of Figure 2.4). Moreover, poverty is still a rural reducing poverty in Senegal. phenomenon, as three-quarters of the 6.5 million of people who live below the poverty line reside in rural areas. This However poverty indicators remained relatively stable implies large social gains for anti-poverty programs that are despite the COVID-19 pandemic and other 2018–2022 localized around the groundnut basin. Also, it suggests crises, reflecting resilience among households. The that regions far from Dakar need more substantial invest- national poverty line is 369,666 FCFA per person per ments to ignite a virtuous cycle of economic growth that year in 2021/22, rising from 333,441 FCFA in 2018/19. tackle the high incidence of poverty in these regions. Nationally, the percentage of the population living below the poverty line is stable, at 37.5 per cent in 2021/22 Inequality declined due to declining household compared to 37.8 per cent in 2018/19 (Figure 2.3). This consumption, while the pace of poverty reduction trend of a stable poverty headcount is recorded in both is falling behind that of regional peers rural and urban areas. The poverty gap, which measures the depth of poverty by looking at the average con- Inequality declined as a result of an overall declined sumption deficit of individuals living below the poverty welfare, not an increase in the livelihoods of the poorest line, remained stable at around 10.2 percent. The rela- households. As mentioned before, average consump- tive stability of poverty headcount was accompanied tion growth was negative, with middle-income house- by a 9 percent increase in the number of poor between holds experiencing growth in consumption, while both 2018/19 and 2021/22, with the number of poor people high- and low-income households experiencing declines increasing both in urban areas (12.1 percent) and in in consumption. High-income households experienced rural areas (7.5 percent). The squared poverty gap, which declines in consumption that were above the national measures the severity of poverty by putting greater weight average. This pro-poor decline in consumption resulted on those furthest below the poverty line, also remained in a reduction of inequality across the board. At the stable around 4 percent. The squared poverty gap tend to national level, the Gini index fell by 1.7 Gini points, decline slightly in urban areas, and to rise slightly in rural from 35.1 to 33.4 during the 2018–2022 period (Fig- areas, where poverty levels are already higher, reflecting ure 2.5). Similarly, the average per capita consumption the fact that the situation of poor households has not of the top 20 percent, which represented 5.5 times that deteriorated in urban areas, whereas it may be tending to of the bottom 40 percent in 2018/19 declined to 5.2 in deteriorate somewhat in rural areas. Among other factors, 2021/22 (Table 2.1). Similarly, inequality declined in high demographic growth (around 2.9 per cent per year) Dakar (1.6 Gini points), other urban areas (3.2 Gini points) due to persistently high fertility (4.1 children per woman and rural area (0.5 Gini points). However, these decline on average, according to the 2018/19 DHS) contribute to in inequality results from an erosion of purchasing power of the increased number of poor. the better-off household rather than from the increase in real consumption of the poorest households. Although the incidence of poverty is high in areas far from Dakar, a high share of the poor lives in the Despite a marginal decline in inequality between urban groundnut basin. The incidence of poverty across regions is and rural areas, the disparities are still high in favor correlated with economic opportunities, which are strongly of urban areas. Dakar represented 22.2 percent of associated with the distance of each region to Dakar. Panel a Senegal’s population in 2018/19 and 22 percent in of Figure 2.4 shows a poverty incidence of around 2021/22, but Dakar’s share in total consumption dropped 60 percent for the regions in the east (Tambacounda, from 33.2 percent to 30.8 percent over the same period. 24 Chapter 2: Spotlight on Senegal’s Development Agenda: Poverty and Equity in a Context of Multiple Crises SEIZING THE OPPORTUNITY Figure 2.4. Poverty indicators by region (EHCVM 2021) a. Poverty rate Rate(%) (63.0,66.0] (59.0,63.0] (50.0,59.0] (48.0,50.0] (45.0,48.0] (37.0,45.0] (30.0,37.0) (10.0,30.0] [0.0,10.0] b. Share of poor population S(%) (10.3,11.2] (8.9,10.3] (8.3,8.9] (8.0,8.3] (6.5,8.0] (6.0,6.5] (5.3,6.0] (2.0,5.3] [0.0,2.0] Source: World Bank calculations based on EHCVM 2021/22 (poverty line of 369,516 CFAF per person per year). Chapter 2: Spotlight on Senegal’s Development Agenda: Poverty and Equity in a Context of Multiple Crises 25 SENEGAL | ECONOMIC UPDATE - MAY 2024 Figure 2.5. Gini (consumption) inequality index, Despite declining inequality and poverty, and improved 2018–2021 shared prosperity, the pace of poverty reduction is fall- ing behind that of regional peers. Compared to some of 40 35.1 34.4 33.4 32.8 its peers in the WAEMU region20 (Figure 2.6), Senegal’s 31.5 28.3 27.3 26.8 30 poverty rate is relatively low. As of 2018/19, Senegal had the lowest poverty incidence among the WAEMU countries, 20 when using the $2.15 a day international poverty line. 10 However, by 2021/22, the country has fallen behind Côte d’Ivoire, which had experienced a higher drop in poverty, 0 National Dakar Other Urban Rural although Senegal still has a lower poverty rate when using the lower-middle income poverty line of US$3.65 a day. 2018 2021 Additionally, out of the eight countries in the region, Source: World Bank staff calculation based on EHCVM 2018/19 and Senegal is one of the three that saw an increase in poverty 2021/22. under the $US2.15 per person per day 2017 PPP inter­ national poverty line during the period, because of the The gains have been in favor of both other urban areas drop in consumption of the poorest, as seen earlier in this (0.9 percentage points increase of population share and note. This increase, albeit the lowest in the region, is just 1.1 percentage points increase in total consumption) and behind Mali (5.6 percentage points increase) and Guinea- mostly rural areas (0.7 percentage points decrease of pop- Bissau (4.3 percentage points increase). Some of its peers ulation share but 1.2 percentage points increase in total experienced a moderate reduction in poverty. Compared to consumption). Despite these recent trends, disparities some of its structural peers,21 Senegal’s poverty rate (based on between urban and rural areas are still high. The average the US$3.65 international poverty line) is about 2 percentage per capita consumption of overall urban areas was 80 per- points lower than Kenya’s 2021 rate; and almost 33 per- cent higher than that of rural areas in 2018/19, compared centage points higher when compared to Vietnam’s 2020 to 70 percent in 2021/22. rate. Senegal has room to decrease poverty (Figure 2.7). Table 2.1. Consumption inequality indicators in Senegal 2018–2021 Share of Total Share of Total Consumption Ratios Population Consumption Between Top and (Percentage) (Percentage) Gini Index Bottom Quintiles 2018 2021 2018 2021 2018 2021 2018 2021 National — — — — 35.1 33.4 5.5 5.2 Dakar 22.2 22.0 33.2 30.8 34.4 32.8 5.2 4.8 Other Urban 24.6 25.5 25.6 26.7 31.5 28.3 4.8 4.1 Rural 53.2 52.5 41.3 42.5 27.3 26.8 3.8 3.8 Source: World Bank staff calculation based on EHCVM 2018/19 and 2021/22. 20 As the two rounds of EHCVM were fielded in 8 WAEMU member states, it is possible to assess the evolution of poverty from 2018/19 to 2021/22 across these countries, leveraging that the two episodes of the harmonized survey are comparable. To compare the evolution of poverty across countries we rely on the international poverty lines of $2.15 and $3.65 per person per day in 2017 PPP. 21 Structural peers are defined as countries that have similar structural characteristics (population, GDP per capita, contribution of agriculture to economy, life expectancy, trade composition, and government revenue) to Senegal. 26 Chapter 2: Spotlight on Senegal’s Development Agenda: Poverty and Equity in a Context of Multiple Crises SEIZING THE OPPORTUNITY Figure 2.6. Trends in monetary poverty using the $3.65 (PPP2017) international poverty line by area of residence, 2018–2021 a. Poverty headcount b. Poverty gap c. Poverty severity 55.5 55.5 20 8 60 7.0 16.4 16.8 6.5 50 6 15 36.8 36.3 10.4 10.3 4.1 4.2 40 10 4 30 5 3.7 3.2 2 1.3 15.6 1.1 20 15.0 10 0 0 2018 2021 2018 2021 2018 2021 Urban Rural Urban Rural Urban Rural National National National Source: World Bank staff calculation based on EHCVM 2018/19 and 2021/22 using the international poverty line of US $3.65 per person per day in 2017 PPPs. Figure 2.7. International extreme poverty rate ($2.15 & $3.65, PPP2017), 2018–2021 $2.15 per person per day (2017PPP) $3.65 per person per day (2017PPP) 60 90 Benin 83.1 80 81.2 Burkina Faso 50 50.9 50.6 70 68.6 70.1 Côte d'Ivoire 63.1 60.7 40 60 60.2 Guinea Bissau 56.9 58.8 56.8 56.1 35.0 36.2 53.2 Mali 50 31.2 48.2 30 28.4 26.6 43.4 Niger 40 39.7 38.4 26.0 25.3 37.8 36.3 Senegal 21.7 20 20.8 30 20.1 Togo 15.2 12.7 20 11.5 10 9.9 Kenya 9.2 9.7 (2020, 2021) 10 5.3 Vietnam 3.8 1.5 0.9 (2018, 2020) 0 0 2018 2021 2018 2021 Source: World Bank staff calculation based on EHCVM 2018/19 and 2021/22 using the international poverty line of US $2.15 per person per day in 2017 PPPs. *Note: Poverty estimates for Kenya (2020 and 2021), Morocco (2019, 2021) and Vietnam (2018, 2021) – some aspirational peers for Senegal – correspond to the recent Macro Poverty Outlook (MPO) from AM23. Chapter 2: Spotlight on Senegal’s Development Agenda: Poverty and Equity in a Context of Multiple Crises 27 Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) SENEGAL | ECONOMIC UPDATE - MAY 2024 Improving domestic revenue mobilization (DRM) is poly-crises with the COVID-19 pandemic, Russia’s inva- critical for Senegal to achieve its development ambi- sion of Ukraine, and conflicts in the Middle East have tion. Between 2014 and 2019, Senegal was one of the exacerbated challenges in sustaining public finances most dynamic economies in sub-Saharan Africa (SSA). in SSA countries, including Senegal, underscoring an GDP growth averaged 6 percent over 2014–19, one of the urgent need to accelerate domestic revenue mobilization highest in SSA, and real GDP per capita levels increased efforts. Long-term pressures and development needs are by 17.9 percent during the same period. To finance its also emerging as Senegal faces large gaps in adapting development ambitions, it is imperative to sustain invest- and mitigating the impacts of climate change, on top ments in human capital and infrastructure. Additionally, of addressing structural issues related to youth emigra- there is a need to accelerate structural transformation, tion in search of better economic opportunity, limited requiring a significant mobilization of both private and human and physical capital and low productivity. Global public resources. and regional financial tightening in the aftermath of these crises means Senegal, like other countries, will have to Senegal’s longstanding challenge of boosting domestic mobilize domestic revenue sources to finance its long- revenue collection has been amplified by short-term term development ambitions and sustain the capacity to vulnerabilities in context of multiple crises. DRM is borrow. In this context, establishing a fiscal path through a longstanding challenge for countries in SSA with large a revenue-based fiscal consolidation process to ensure informal economies, complex tax policy not always aligned fiscal and debt sustainability in the medium term, along- with administrative capacity, and limited enforcement side measures on the expenditure side, is the utmost capacity. Insufficient revenue has often reduced countries’ priority for Senegal. As a member of the West African ability to invest in human and physical capital to support Economic and Monetary Union (WAEMU), Senegal inclusive growth and revenue shortfalls have been com- adheres to the regional fiscal framework (Box 3.1), which pensated by debt accumulation, raising vulnerabilities, highlights the imperative of sustaining macro-financial and limiting fiscal space to absorb shocks. The context of stability. Box 3.1. The WAEMU regional fiscal framework The West African Economic and Monetary Union (WAEMU) is one of four currency unions in the world, and consists of eight countries (Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo). The Central Bank of West African States (BCEAO) issues a common currency, the CFA Franc, pegged to the euro, conducts a single regional monetary policy, pools members’ foreign exchange reserves, and helps to supervise the WAEMU’s financial system. Achieving and maintaining fiscal convergence is essential for safeguarding macroeconomic stability and preserving the sustainability and credibility of the fixed exchange rate regime. To this end, a well-designed regional fiscal framework can foster fiscal discipline and improve coordination to prevent member states from running excessive budget deficits. The fiscal stance of one member of the union can impact other members’ fiscal positions through various channels, including trade and contagion effects. These fiscal spillovers can be particularly problematic under a fixed exchange rate since lack of fiscal discipline can deplete international reserves and jeopardize the peg. In this context, the WAEMU regional surveillance framework, adopted in 1996, aims at ensuring the sustainability of national fiscal policies and their consistency with the common monetary policy (including the fixed exchange rate regime). It also envisages a gradual convergence by member countries towards a number of criteria related to macro-fiscal aggregates, 30 Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) SEIZING THE OPPORTUNITY Box 3.1. The WAEMU regional fiscal framework (Continued) including the fiscal deficit, public debt, and inflation (Table B.3.1). Regional convergence was temporarily achieved at the aggregate level in 2019, but the fiscal framework was suspended in 2020 in the context of the COVID-19 crisis. Additional vulnerabilities have also compromised some of the convergence criteria. Debt has accumulated significantly over the past decade due to the accumulation of high fiscal deficits over time, as well as the prevalence of debt-creating operations that were not captured by the fiscal deficit. Sever and Laws (2023)22 however suggests that repeated fiscal slippages and historically large stock flow adjustments contributed to the surge in the WAEMU public debt. The paper calls for an urgent need to reintroduce the fiscal rules and revamping them by introducing a correction mechanism contain surges in debt in the future and an escape clause, which would enhance fiscal discipline and predictability, as well as capturing the extensive extra-budgetary and below-the-line operations and strengthening the enforcement mechanism. Reforms could be carried out to improve the coordination and enforcement mechanisms and enhance public financial management (PFM) to contain stock-flow adjustment, prevent a build-up in fiscal imbalance, and tighten the link between the evolution of fiscal and debt targets. Table B.3.1. WAEMU convergence criteria (adopted in 2015) First Order Criteria of the Convergence Phase Ceiling/Floor Overall fiscal balance (including grants) to nominal GDP ≥−3 percent Average consumer price inflation per year ≤3 percent Total public debt to nominal GDP ≤70 percent Second Order Criteria of the Convergence Phase Ceiling/Floor Wages and salaries to tax revenue ≤35 percent Tax revenue to nominal GDP ≥20 percent Source: Compiled by staff based on information from the Additional Act no. 01/2015/CCEG/UEMOA. Source: David, Nguyen-Duong and Selim (2022). Tax revenue has increased steadily, but levels tax-to-GDP ratio (excluding hydrocarbon) to 20 per- remain low and dominated by indirect taxes cent by 2025. The MTRS focuses on tax base expansion policies and equitable compliance, notably through To accelerate revenue collection, Senegal has set a target the Yaatal project.23 The implementation of the MTRS of mobilizing domestic taxes exceeding 20 percent of helped increase from 16.8 percent in 2020 to 18.2 per- its GDP by 2025. In 2020, Senegal adopted a Medium- cent of GDP in 2022 after stagnating around 15 percent Term Revenue Strategy (MTRS) aiming at raising the of GDP over 2010–18. This performance was primarily 22 Sever, Can and Laws, Athene. Revamping the West African Economic and Monetary Union (WAEMU) Fiscal Framework. IMF Selected Issues Paper (SIP/2023/028). Washington, D.C.: International Monetary Fund. 23 The Yaatal Program is the operational planning of a series of actions launched by the Senegalese tax administration in 2020 to broaden the tax base for the period 2020–2023. The objective is to increase the number of taxpayers from 25,000 to 500,000 by end-2023. Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) 31 SENEGAL | ECONOMIC UPDATE - MAY 2024 driven by corporate income tax (CIT), personal income high-value policies that protect the poor from aggregate and tax (PIT), and customs duties, with respective modest idiosyncratic shocks while fostering their income generation growth of 0.2 percent, 0.4 percent, and 0.1 percent of capacity. Simplifying taxes and targeting high-net-worth GDP . However, concerns remain about the sustainability of individuals could be more effective than raising marginal tax the current revenue levels as the trend is largely attributed rates (Basri et al 202125 and Bergeron et al. 202326). Further­ to cyclical factors such as rising public-sector wages and more, exploring property taxes as an untapped revenue inflation-driven increases in the value of imports. In 2023, source could further improve fiscal system progressivity. the ratio of tax to GDP was estimated to have fallen to 17.3 percent, primarily attributed to lower direct tax col- lection. In 2022, PIT was reformed again with the intro- Collected PIT revenue has stagnated, 3.1.  duction of a new marginal rate of 43 percent for annual while informality hindering its income above 50 million CFA (around 82,000 USD). redistributive capacity Senegal’s tax revenue growth and buoyancy steadily The PIT as a share of GDP has stagnated improved over the past decade, surpassing its peers, over the last decade with narrow tax base but revenues remain below their potential.24 This rela- undermining its performance tively good performance, however, is not sufficient to boost Senegal’s ability to address the development needs of its PIT is imposed on labor income, rental income, population, and fostering resilience against uncertainty. income from capital assets and sale of capital, business Limited, and increasingly constrained, fiscal space con- profits and pension/annuities. As a direct tax, PIT in tinues to hinder productive investment and resilience Senegal is primarily collected through withholding rather against future shocks. Like most low- and middle-income than income tax declarations. PIT is calculated based on countries, Senegal relies heavily on indirect taxes, which six net income categories including (a) salary, pensions, constituted 71 percent of total tax revenues in 2021. and life annuities, (b) property income, (c) industrial and Reliance on trade taxes for revenue collection has declined, commercial benefits, (d) agricultural profits, (e) non- as fiscal transition is underway. commercial activities profits, and (f ) income from mov- able assets, including securities and withheld at the source There is an opportunity to strategically leverage the (Box 3.2). Audits of personal income taxes are limited, direct tax system to enhance domestic resource mobi- and Senegal has not developed a strategy to enhance lization. Direct taxation plays a pivotal role in fostering compliance by high-net worth individuals. a more equitable society, as it allocates the tax burden to citizens and businesses in accordance with their earned PIT yields little revenue, and its contribution to total incomes. Leveraging direct taxes can therefore unlock addi- tax revenue has stagnated over the past decade. PIT tional revenue and increase the tax system’s redistributive collections have increased over the past 3 decades but capacity. Direct taxes have the potential to reduce post-fiscal yield little revenue at 2.8 percent of GDP in 202127 inequality by collecting more revenues for top-income compared to OECD countries (8.3 percent of GDP),28 individuals and empowering governments to invest on although it collects similar levels to other countries in the 24 See for instance, Diagne and Ba. 2019. “How much more can the tax administration collect? Measuring tax potential for Senegal.” MPRA Paper No. 114168 for estimates and discussion on Senegal tax gap. 25 Basri, M. Chatib, Mayara Felix, Rema Hanna, and Benjamin A. Olken. 2021. “Tax Administration versus Tax Rates: Evidence from Corporate Taxation in Indonesia.” American Economic Review, 111 (12): 3827–71. 26 Bergeron, Augustin, Tourek, Gabriel, Weigel, Jonathan. 2023. The State Capacity Ceiling on Tax Rates: Evidence from Randomized Tax Abatements in the DRC. National Bureau of Economic Research Working Paper Series No. 31685. 27 Author’s calculations based on OECD Global Revenue Statistics Database. 28 OECD Global Revenue Statistics Database. 32 Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) SEIZING THE OPPORTUNITY Box 3.2. Personal income tax design in Senegal PIT is supposed to be computed based on overall net income, which encompasses six categorical net incomes: • salaries, wages, allowances, emoluments, benefits in kind, pensions and life annuities: income tax payable on salaries, wages, pensions and life annuities is collected by withholding tax. The declaration and payment are obligatorily made by the employer each year; • property income: it covers income from property rental exceeding 30 million FCFA (approx 49,200 USD). It can be built properties such as factories or unbuilt properties of all kinds including mines and quarries. Property income below this threshold is subject to another property tax. Residents who receive this property income must declare each year the amount of their net taxable income for the previous year. In addition, partners of real estate companies are personally required to declare their share of net property income under the same conditions. However, the withholding tax regime is applied in the case where the tenant is a legal entity; • industrial and commercial benefits: industrial and commercial profits are the profits made by “natural person” and coming from the exercise of an industrial, commercial, artisanal profession or an agricultural profession but also the profits made by mining concessionaires as well as title holders hydrocarbon mining, mining research or exploitation permits. The term “natural persons” refers not only individual operators but also members of partnerships and similar companies, de facto companies, joint ventures and economic interest groups liable to income tax and who do not opt for corporate tax; • agricultural profits: the same provisions as those for industrial and commercial income are applied for agricultural income. However, farmers are exempt from income tax for the sale and handling of crops and hay from the land they own and for the livestock raised there; • non-commercial activities profits: it concerns profits from liberal professions, margins made occasionally on real estate transactions by individuals, and any other income relating to this category apart from capital gains from transfers of transferable securities and social rights, operations stock market transactions carried out on a usual or speculative basis; • income from movable assets: these are income from securities and income from debts, deposits, guarantees and current accounts. Income from movable assets is also withheld at source. The annual net income is made up of all categorical income after deductions for actual expenses, legal allowances, and family composition. A progressive scale is applied to the net total income, excluding income from movable assets, with rates ranging from 20 percent to 43 percent with 7 brackets. All income types are withheld at source, except for rental income from properties, and mixed income from business activity (rents and mixed-income are subject to withholding when the paying source is an incorporated firm). Taxpayers benefit from a tax rebate ranging from XOF 100,000 CFA (160 USD) to 3,180,000 CFA (5,088 USD) depending on family composition. region – WAEMU (0.82), ECOWAS (1.38) – Figure 3.1.29 rate of 43 percent. The calculation system of tax incentives The contribution of PIT to total tax revenue has been stag- for family responsibilities was also redesigned to enhance tax nant at 15 percent between 2010 and 202130 despite several justice. The family quotient approach was replaced by a pro- reform attempts. Senegal reformed PIT to shift it from gressive rate-based formula with minimum and maximum proportional to progressive taxation with a capped marginal thresholds. However, the changes led to challenges in 29 Author’s calculations based on OECD Global Revenue Statistics Database. The ECOWAS and WAEMU average are unweighted and should be interpreted with cautious as data are not available for Benin, Bissau Guinea, Liberia and Sierra Leone. 30 Author’s calculations based on OECD Global Revenue Statistics Database. Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) 33 SENEGAL | ECONOMIC UPDATE - MAY 2024 Figure 3.1. PIT revenue collected in Senegal compared to peers a. Personal income tax to GDP ratio 2021 b. Evolution of PIT as a share of GDP, 1995–2021 25 3.00 2.80 Personal income tax (% GDP) 20 2.60 Personal income tax (% GDP) 15 2.40 2.20 10 2.00 1.80 5 1.60 0 1.40 2 3 4 5 6 Log GDP per capita, constant 2015 USD 1.20 Region average Structural peers 1.00 Aspirational peers 1995 2000 2005 2010 2015 2020 2025 Source: Author’s calculations based on OECD Global Revenue Statistics Source: Author’s calculations based on OECD Global Revenue Database, World Development Indicators and UNU-WIDER Government Statistics Database and UNU-WIDER Government Revenue Dataset, Revenue Dataset, 2021. 1995–2021. capital gains taxation treatment. In fact, capital gains tax annual personal income tax form that consolidates global is paid in instalments, but the 2012 reform caused some income. Withholding tax stands as a discharge from an confusion over those instalments’ computation rules. Con- income tax return. Notably, only 11,000 Senegalese resi- sequently, in 2016, the new tax code was revised to clarify dents out of 11 million adults submit personal income those rules. tax returns each year31 - about 0.1 percent of the adult population – reflecting a significant gap in compliance. The tax base remains narrow as a limited number of Unlike audits for firms, individual audits are infrequent, taxpayers fill their tax returns. According to the tax code, indicating a potentially smaller tax base or insufficient con- all sources of income are pooled together to determine the trol over the existing base. This results in a higher burden on applicable tax rate. This implies that the law imposes an a limited number of taxpayers, contributing to increased integrated income tax de jure i.e., each individual should distortions in the tax system. The legal loopholes, along self-report his/her income each year by submitting an with the withholding mechanisms, make the PIT heavily “Impôt sur le Revenu des Personnes Physiques” (IRPP) form. reliable on wage earners.32 In practice this is not enforced, and PIT relies heavily on withholding rather than income tax declarations. There The absence of a strong data-driven approach has is legal uncertainty surrounding the reporting obligation constrained the expansion of the tax base. Despite the for individuals with multiple sources of income, whether Tax Code mandating an integrated income tax system, subject to withholding or not. The Tax Code lacks clarity practical enforcement has been lacking, primarily due to regarding the legal requirement for residents to submit an the absence of a data-driven approach. Consequently, 31 This represents the number of Senegalese residents over 15 years according to the Senegalese National Demographic Agency, 2023. 32 Bachas et al (2023) estimates that about 250,000 individuals (about 3.1 percent of the adult population) were taxed through withholding only in 2020. About 158 000 of them were wage earners. 34 Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) SEIZING THE OPPORTUNITY this has led to incomplete data coverage, undermining the In 2022, aligning with the Yaatal plan, a new tax bracket overall accuracy and reliability of the database. In addi- was introduced, raising the upper tax rate to 43 percent tion, the systematic transmission of data between the Tax for income above 50 million CFA. The reporting of Administration and the Directorate General of Taxation capital gains or profits from taxable securities sales also has been limited, creating challenges in identifying and became mandatory. Despite these changes, the evaluation addressing instances of non-compliance, resulting in within the MTRS framework of the Senegalese tax system revenue losses for the government. In the 2024 budget revealed persistent challenges that need to be addressed law however, efforts are made to improve tax compliance for an efficient DRM. In terms of income tax policy, through enhanced cross-checking and validation tech- MTRS actions focus on two main guidelines: initiating niques, which includes leveraging data from the survey individuals’ taxation and clarifying business income tax of business rental properties and the national census of procedures. Table 3.1 below shows the level of implemen- taxable properties to identify discrepancies and ensure the tation of PIT reforms included in the MTRS. accuracy of reported income. This results in businesses and individuals largely evading taxation, raising concerns about equity and fairness. Efforts have been made by The progressivity of direct taxes contrast the tax administration to address this issue through syn- with its low incidence among high income thetic tax simplifying procedures for informal businesses. households However, without sufficient support and tax education, enforcing tax compliance in the informal sector remains In addition to contributing more to revenues, direct challenging. taxes have an important role in shaping the redis- tributive capacity of the fiscal system. In 2018–19, Within the MTRS framework, the Senegalese admin- the fiscal system reduced income inequality by 1.8 Gini istration has to take numerous actions and reforms. points, with direct taxes being the most important source Table 3.1. Status on PIT reforms implementation of the MTRS Guidelines Due Date Status Initiating individuals taxation Establish a database of companies’s executives and principal shareholders 2021 Done Centralize information on assets (real estate, securities, vehicles, artworks . . . ) 2021 Not done Introduce a single form for salaries and withholding reports 2021 Done Organize a public awareness campaign to enhance civic responsibility among high taxpayers 2023 Not done Enforce mortgage registration procedure for non-payment of capital or property income tax 2022 Not done Clarify Business Income tax procedures Clarify registration procedures for CGU 2023 Underway Simplify calculation rules of CGU sales figures 2021 Done Review micro-finance institutions and rates rate and threshold 2021 Not done Make Non-Commercial Profits and Industrial and Commercial Profits taxes consistent with 2022 Not done PIT, particularly tax credit for dependents with potential changes to the corporate tax rate Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) 35 SENEGAL | ECONOMIC UPDATE - MAY 2024 of this decline—0.8 Gini points,33 followed by in-kind households in the top decile of the income distribution transfers—0.6 Gini points (Figure 3.2). We expect this devote about 5 percent of their income to pay direct taxes progressivity to have increased by 202234 for at least three and social security contributions (Figure 3.3 and 3.4). reasons: the potential impact that the recent inflation crisis This figure is well below what is found in Kenya—19, may have had on bracket creeping, the recent increase to Namibia—12, and Mozambique—6.1. The low incidence the tax rate applied to income earners receiving more than of direct taxes suggests there is still room to increase the 50 million CFA,35 and the increase in tax compliance due tax burden of top-income households. With Senegalese to changes in the tax administration that took place under workers now subject to marginal tax rates of up to 43 per- the Yaatal program. Moreover, direct taxes have a negligible cent for incomes over 50 million CFA, the government impact on poverty—less than 0.1 percentage points, which needs to look to alternative policies to increase revenue, is several orders of magnitude lower than what is observed such as expanding the tax base and enforcing compliance, for indirect taxes—1.8 percentage points. particularly among top earners. Despite the benefits of direct taxation, the burden of Direct taxation in Senegal hinges on collecting most direct taxes on households’ income is below what is of its revenues from households from the top decile found in other African countries. In 2022, Senegalese of the income distribution – a feature that also limits Figure 3.2. Effect of fiscal interventions on poverty and inequality in 2018–19 All policies 1.0 –1.8 In-Kind transfers Indirect taxes Subsidies Direct transfers Social Sec. Contrib. Direct taxes –0.8 0.04 –2 –1 0 1 2 Change in poverty headcount (percentage points) and inequality (Gini points) Inequality Poverty Source: Author’s calculations based on the fiscal simulation tool for Senegal 2018- v1.2.36 Note: The effect of each policy on poverty and inequality is computed with respect to pre-fiscal income. 33 Two channels explain the observed progressivity of direct taxes in Senegal. First, high income households are more likely to pay their tax obligations than their low-income counterparts. This results from high income households being more likely to work for firms that withhold their personal taxes or because their family businesses are more likely to be formal. Second, even if probability of paying taxes were the same among high- and low-income households, the progressivity of the marginal tax rates would lead to a higher tax burden for the former group of households, making direct taxes more progressive. 34 We estimate the effect of direct taxes on inequality to also be 0.9 Gini points. However, our estimation includes more taxes and different assumptions about formality than the estimates from Gallegos et al (2024). 35 Loi de finance n° 2022–19 du 27 Mai 2022 portant loi de finances rectificative pour l’année 2022. Publication au Journal Officiel N°7533 du 27 Mai 2022 Loi n 2022–19 du 27 mai 2022. 36 Gallegos, Andres, Inchauste Gabriela and Valderrama Daniel. A new assessment of the impact of fiscal policy in Senegal. Unpublished Manuscript. 36 Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) SEIZING THE OPPORTUNITY Figure 3.3. Relative incidence of direct taxes and contributions 25 Direct taxes and contributions as 20 19.1 % of market income 15 11.8 10 6.1 5.1 4.7 4.5 5 1.9 1.2 0 Senegal Mozambique Benin Guinea Gambia Namibia Togo Kenya 2022 2020 2019 2019 2016 2016 2015 2015 Bottom 50% 6 7 8 9 Richest decile Source: Author’s calculations based on EHCVM-2019 and EHCVM 2022 and CEQ income database. Notes: The figure reports the burden of direct taxes and contributions for each decile of market income plus pensions. This incidence is computed as a plutocratic average. We combine direct taxes with social security contributions because estimates on the tax burden for direct taxes are not available for other countries. Figure 3.4. Distribution of direct taxes and contribution across income deciles 100 Share of direct taxes and contributions 90 paid by market income decile 80 70 60 50 40 30 20 10 0 Senegal Mozambique Benin Guinea Gambia Namibia Togo Kenya 2022 2020 2019 2019 2016 2016 2015 2015 Bottom 50% 6 7 8 9 Richest decile Source: Author’s calculations based on EHCVM—2022 and CEQ income database. Notes: The figure reports the distribution of direct taxes and contributions across the deciles of market income plus pensions. This incidence is computed as a plutocratic average. We combine direct taxes with social security contributions because estimates on the tax burden for direct taxes are not available for other countries. Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) 37 SENEGAL | ECONOMIC UPDATE - MAY 2024 revenue collection. In 2022, about 88 percent of the revenues. Moreover, a significant informal economy oper- tax collection was paid by households in the top decile ates outside of the formal tax system, with corporate income of the income distribution (see Figure 3.3). This value is tax contributing to less than 50 percent of total income, higher than what is found in other African countries (e.g., profits, and capital gains tax. The design of policies to reduce Namibia, South Africa, and Kenya), where the top decile informality should focus on the fact that only one-third contributes up to 80 percent of the direct taxes’ revenue. of informal workers would prefer to have a formal job The main difference between Senegal and its regional (Rodríguez-Castelán and Vazquez, 2023)37, in addition to peers is the relatively low share of contributions made labor market entry barriers where they may exist. by the second-richest decile. In countries like Kenya and Namibia, the second-richest decile made up 13 percent The low compliance among top earners suggests that of tax revenues, a much higher figure than what is found there is still an untapped potential to increase both the for Senegal—close to 4 percent. The limited number of revenue capacity and progressivity of direct taxes. For- still high—income households paying PIT hinders the mality of jobs and businesses is associated with higher tax revenue potential for direct taxes. One potential reform compliance. The formality rate of wage jobs and businesses to include other top income households in the social con- is higher among high income households (See Figure 3.5 tract would be increase enforcement and progressivity of and 3.6),38 which not only increase the progressivity of property taxation. direct taxes but also prevent that changes in tax rates affect low-income households. Despite this positive associa- tion between formality and income, there is still room Job and business informality for high income to enhance the redistributive capacity of direct taxes, as earners hinders the redistributive capacity of only one-third of jobs and less than one-fifth of businesses direct taxes in the top-income decile are formal. Therefore, policies that enforce compliance among high worth net indi- The low levels of formality and the subsequent erosion viduals have the potential to increase tax collection and of the tax base underscore the need for policy measures enhance the redistribution of the fiscal system. to reduce informality. The levels of formality for both jobs and businesses are particularly low, with worrying Tax rates on income sources not included in the per- signals of deterioration. In 2018, 15.7 percent of wage sonal income tax, are low and not progressive. Fig- earners had a formal job, defined as a job that made ure 3.7 shows the average tax burden among households social security contributions to pensions. This figure has who pay direct taxes. Focusing on taxpayers helps to iso- become much worse in 2022, with only 12.5 percent of late the effect of informality on the relative incidence of wage workers being formal. This finding suggests that the direct taxes. The figure shows that taxpayers in the tenth post-pandemic recovery has brought lower quality jobs. decile of income distribution spend up to 7.7 percent Much lower levels of formality are found in the case of of their income on direct taxes, while households in the non-agricultural businesses, which has ranged between bottom 40 percent of the population spend less than 4.3 and 4.9 percent during the 2019–2022 period. The half a percent of their income on direct taxes. On the low and even decreasing levels of formality erode the tax other hand, the incidence of other taxes, such as taxes base, weakening the capacity of PIT to contribute to tax on capital, property taxes, and taxes on profits for small 37 Rodríguez-Castelán, C. y E. Vazquez (2023). Labor Informality and Market Segmentation in Senegal. Documentos de Trabajo del CEDLAS N° 320, Octobre, 2023, CEDLAS Universidad Nacional de La Plata. 38 Formal employees are defined as those who contribute to the pensions. Non-agricultural businesses are considered formal if they met one of the following conditions: i) the company has a TIN or a NINEA, 2) the company keeps written accounting books iii) the company is registered in the Trade Register, or iv) business’ workers are registered with the Social Security Fund. All formal businesses pay taxes by filing their taxes. 38 Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) SEIZING THE OPPORTUNITY Figure 3.5. Percentage of formal jobs and formal Figure 3.6. Percentage of jobs/non-agricultural non-agricultural business business by deciles 15.7 40 Percentage of jobs/businesses 15 30 12.5 Percentage of jobs/businesses 30 10 20 14 4.9 10 5 4.3 1 1 0 Bottom 2 3 4 5 6 7 8 9 Top decile decile 0 Wage jobs Non-agricultural businesses Per capita income deciles 2018–2019 Jobs Non-agricultural businesses Source: Author’s calculations based on EHCVM 2022. Notes: Formal employees are defined as those who contribute to the social security. Non-agricultural businesses are considered formal if they meet one of the following conditions: i) the company has a Tax Identification Number or a NINEA, 2) the company keeps written accounting books iii) the company is registered in the Trade Register, or iv) business’ workers are registered with the Social Security Fund. The figure of panel B show the percentage of households receiving formal wages (profits from formal non-agricultural businesses) among the households reporting to receive wage income (profits from non-agricultural businesses). Deciles are computed for the per capita pre-fiscal income or the market income plus pensions. Figure 3.7. Incidence of direct taxes among households who pay direct taxes or made social security contributions 9 8 Percentage of market income 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 Deciles of market income Property tax Capital TRIMF CGU CGF PIT SSC Source: Author’s calculations, based on EHCVM 2022. Note: Property tax corresponds to the tax paid under Contribution Foncière des Propriétés Bâties, which applies to homeowners, and it assumed to be pay by population filing taxes. “Capital” refers to the capital withholdings mentioned in Art. 173 of the Tax Code, which we model as a flat rate over the dividends and financial income reported by the household. TRIMF is a synthetic tax perceived by subnational entities and it is pay through withholding by wage workers making social security contributions. CGU, the Contribution Globale Unique, is a simplified tax for small business with profits up to 50 million FCFA. CGF refers to the Contribution Globale Fonciere (CGF), a tax representative of the property tax when rental income is below 30 million CFA. PIT corresponds to the Impôt sur le Revenu, calculated over wage income, pension income, and rental income -when rental income is above 30 million FCFA, the CGF is replaced by Impôt sur le Revenu-, as well as business income over 50 million FCFA, known as Régime Réel. SSC refers to social security contributions to health. Deciles are computed for the per capita pre-fiscal income or the market income plus pensions. Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) 39 SENEGAL | ECONOMIC UPDATE - MAY 2024 firms—CGU; is relatively low (less than half a percent with tax record data. Our analysis relies heavily on the across all income deciles) and almost flat along the income recently collected household living standards survey – distribution. This is in line with the fact that the tax rates EHCVM 2021–22, which implies that they should be applied to these other revenue sources are subject to low considered a lower bound of potential benefits of enforcing and non-progressive tax schedules, limiting revenues and tax filing. This is because top earners are under-represented the extent to which fiscal policy can reduce inequality. in household surveys and tend to under-report their A confluence of different factors can explain the large income. Obtaining access to tax records is a crucial next difference between the effective tax rates and the tax rate step to accurately quantify the benefits of policies around of the top income bracket, for example: tax allowances, direct taxation. tax discounts due to family composition, low fraction of people earning more than 50 million CFA, the with- Enforcing tax declarations over all types of income holding mechanism that prevents individuals from pool- sources, not only over the ones that are subject to the PIT, ing income sources, among others. An avenue for future will increase tax revenues through three channels: analysis is to disentangle the role of these factors using tax • Increasing marginal tax rates. This effect affects the record data. income sources that are subject to the PIT. Given the progressivity of the current tax schedule, pooling 3.2.  Policy options to increase revenues income sources in the tax declaration will increase the from direct taxes without increasing average tax rate applied to each income source, increas- poverty or inequality ing both the revenues and progressivity of direct taxes. • Adding other income sources. Filing taxes is expected to Enforcing the filing of direct taxes could increase tax compliance on taxes that are not collected bring triple wins by increasing revenue while through withholding, such as: pensions, rental income, reducing both poverty and inequality small business profits and property taxes. This assumes that enforcing tax filing will translate in a self-enforcing This subsection assesses the revenue and distributional mechanism in which adults that were already subject implications of enforcing the filing of direct taxes. There to PIT through withholding or tax filing will start to is widespread agreement that all taxpayers should be filling report their other income sources. PIT in line with YAATAL. As explained before, the law • Reducing tax discounts. Tax discounts due to family imposes a global tax base over PIT, where income sources characteristics (such as the number of dependents) are from labor, business profits, pensions, and rental income progressive, i.e., they are higher for individuals with should be pooled together in a tax declaration to define lower taxable income. Therefore, pooling income the tax rate and the tax discount to which each individual sources will reduce the relative size of tax discounts, is liable for. However, less than 10 percent of individuals increasing the average tax rate of previously withheld file tax declarations, with the majority paying PIT through sources. withholding (Bachas et al. 2023). This section estimates the distributional impact of enforcing tax declarations High-income households would pay the bulk of reve- on all income sources that are subject to direct taxation, nue gains from enforcing tax filing. Figure 3.8 displays which means income sources beyond those included in the deciles and income sources from which the additional the personal income tax, namely rental income, property revenues would come. Most of the additional revenues— income, and profits for small firms with turnover below about 95 percent of them—are anticipated to come from 50 million CFA. households in the top decile of the income distribution, with approximately 57 from rental income, 12 from prop- Our estimates are only indicative of the direction of erty taxes, and 26 percent from labor income. Household the expected impacts and can be improved if combined surveys are not the best instrument to estimate absolute 40 Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) SEIZING THE OPPORTUNITY Figure 3.8. Additional revenue gains from Figure 3.9. Incidence of direct taxes among enforcing filing of direct taxes households who pay direct taxes by decile 100 4 80 (percentage of households) Share of additional revenues Additional taxpayers 60 2 40 20 0 0 Bottom 6 7 8 9 Richest Bottom 6 7 8 9 Richest 50 percent decile 50 percent decile Per-capita market income deciles Per-capita market income deciles Labor Rental income Property Rental income Property tax Source: Author’s calculations based on EHCVM 2022. Notes: Property refers to taxes collected from the Contribution Foncière des Propriétés Bâties, which applies to homeowners, and it is assumed to be paid only by the population filing taxes. Rental income refers to the Contribution Globale Fonciere (CGF), a tax representative of the property tax that is calculated over the rental income. Labor refers to the tax collected from previously withheld labor income and the addition of other income sources such as pensions and profits. Figure 3.8 plots the distribution of additional revenues by decile and income sources. Figure 3.9 plots the addition percentage of households paying tax over a specific income source as a result of the reform. Deciles are computed for the per capita pre-fiscal income or the market income plus pensions. gains from policies targeted at top earners. We assume reve- property. Even when property taxes are not an income nues from enforcing tax filing would increase by 30 billion component of the personal income tax, our exercise assumes CFA, which corresponds to the estimate obtained by Bachas that filing taxes would allow the tax authority to enforce et al. (2023) using tax record data.39 Obtaining access to the payment of all other income sources for which taxes are tax records is the natural next step of this analysis, and it not collected through withholding (e.g., property taxes, would allow a more accurate quantification of the policy- small rental income). Figure 3.9 quantifies the potential induced impacts on both revenue and progressivity of the size of this effect, with the simulated policy increasing the tax system in Senegal. Similar to what has been done in number of new taxpayers paying taxes over their rental other developing countries like Colombia and Peru.40 income and properties. In particular, an additional 0.8 and 2.5 percent of households in the top decile would The main channel behind the additional revenues is the start paying taxes on their rental and property income, increase of taxes from non-withheld income sources. respectively. Notice our estimates assume that increasing We find that the increase in revenues is primarily due to tax filing among people only people filing taxes in the an increase in taxpayers filing taxes over rental income and baseline scenario. 39 Conducting this analysis with household survey leads to an estimate much lower than Bachas estimate, which stress out the need of tax record data to complement this exercise. 40 See World Bank (2023) for the case of Peru and Baquero et al (2023) for the case of Colombia. Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) 41 SENEGAL | ECONOMIC UPDATE - MAY 2024 Enforcing tax filing could bring additional revenues Figure 3.10. Effect of enforcing tax filing and without imposing any social cost in terms of poverty increasing the coverage of direct transfers and inequality. As shown above, the simulated reform is Change in inequality Change in poverty not expected to collect additional revenue from the poorest (Gini points) (p.p.) 50 percent of the population, and therefore, it is not 0.0 Di erence respect to baseline scenario expected to increase the poverty headcount. The impact –0.01 0.00 of the reform on inequality is expected to be negligible (i.e., 0.01 Gini point). This result should be considered a lower bound because, as explained before, our microdata –0.07 is not well suited to illustrate the equalizing effect of poli- –0.1 cies targeting top-earners. It is important to note that this –0.12 policy reform could affect poor population by imposing on them the cost of tax filing. Therefore, the design of this policy should target its enforcement over people identified as potential taxpayer, to minimize the people with zero –0.2 tax liabilities paying the cost of tax filing. Our simulation Enforcing tax filing enforced tax filing over people whose labor income tax Enforcing tax filing + increasing coverage of PNBSF was withheld and therefore who had nonzero tax liability. Source: Author’s calculations, based on EHCVM 2022. Note: The figure reports the difference in poverty and inequality of Repurposing a fraction of the fiscal gains into direct disposable income between the baseline scenario and the simulated scenarios. Compensatory measures refer to an expansion of PNBSF transfers could bring triple wins: more revenues, less such that its cost is equal to a quarter of the fiscal gains obtained from poverty, and less inequality. Figure 3.10 shows the enforcing tax filling. effects of repurposing 25 percent of the tax gains to finance greater coverage of direct transfers, which are International practice varies in terms of the concepts and policies more equipped to reach low-income households. data used to define high net worth individuals (HNWI). Since our estimate on additional tax revenues would Some countries focus on wealth only (e.g., UK and Australia) be downward biased, we use the estimates obtained by and others combine wealth with income (e.g., USA and Bachas et al. (2023), which amount to 30 billion CFA – South Africa). Other criteria used by tax administrations approximately 48 million USD. Figure 3.10 shows that include property valuation and indirect indicators of this complementary policy could expand the coverage of wealth (such as known public figures or consumption of PNBSF to 75 thousand new households, which will reduce durable goods). These criteria are often combined and inequality -by 0.08 Gini points-, and poverty −0.13 per- include income and/or wealth thresholds, although there centage points-, helping to increase the redistributive is no general rule (OECD, 2013). Given the complexity capacity of Senegal’s fiscal system (see Figure 3.10). of identifying, monitoring, and interacting with HNWI, countries often introduce dedicated units. High-income Focusing on high net worth individuals could countries such as the US, the UK, New Zealand, and bring substantial revenues41 Australia have implemented such specialized task forces within their respective tax administrations (Van Vuuren, Focus on the taxpayers at the very top of the income 2016) and low and middle-income countries are increas- and/or wealth distribution – to optimize the limited ingly adopting this practice. A recent example is Uganda: resources of the tax administration, increase PIT rev- its HNWI office recently started with a few hundred enue, and improve the progressivity of the tax system. individuals, selected as follows: “the officials generated a list 41 This section builds on Bachas and al. (2023). 42 Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) SEIZING THE OPPORTUNITY of potential HNWIs, comprising directors of large com- individuals with true income and wealth in the top per- panies under the Large Taxpayers Unit (LTU) and indi- centiles of Senegal’s distribution. There is no consensus viduals whose wealth was publicly known. The list was on an international definition of HNWI, implying that scrutinized by top management in the Domestic Taxes Senegal would have to exploit all sources of data, ongoing Department, who made revisions on the basis of their digitalization processes, and local context to define the own knowledge” (Kangave et al., 2018). Since then, the appropriate threshold (Box 3.3). Potential tax revenue inclusion criteria evolved to a monthly income threshold gains could occur from the declaration of previously of UGX 10,000,000 (2,800 USD). non-declared income, and changes in marginal tax rates due to the consolidation of income sources. Bachas et al Senegal could benefit from detecting high earners in (2023) find that if all income sources were integrated, the a context of imperfect information. Senegal could focus tax administration would have collected an additional on the taxpayers at the very top of the income and/or 30 billion CFA (48 million USD) in 2020, i.e., about 1% wealth distribution. Identifying very rich individuals of total tax revenue and 8.5% of PIT revenue. The main is of primary relevance. The ideal target population are addition comes from the integration of property income Box 3.3. How to detect high earners in a context of imperfect information In the current context of Senegal, Bachas et al (2023) define HNWI individuals within the top 0.1 percent of the national income distribution. With no information on true income, they proxied total income and wealth with observable income and wealth using available data. They consider each data source individually and select the top of the distribution. They first chose thresholds to encompass the top 0.1 percent of the largest administrative data sources on income and wealth, respectively, data on salaries and property values. They then adapt these thresholds depending on the nature of the data (e.g., lower thresholds for dividends since infrequent). This allows them to generate what they refer to as the First List of 558 HNWIs at the very top of the income or wealth distribution (i.e. 0,007% of the national adult population). Impor- tantly, 80% of them do not file PIT currently. The median annual income of this list is 121 million CFA (200,000 USD) and the median wealth is 6.35 billion CFA (10 million USD). The first list considers taxpayers with extremely high income and wealth. To complement this first approach, the second approach enlarges the net to consider any taxpayer whose consolidated income places them in the former top marginal tax bracket, but who does not appear to be currently reporting all revenue sources, when comparing self-reported income with third-party reported income. This second list comprises 1,992 individuals (i.e., 0,02% of the national adult population) with a median yearly income of 21.1 millions CFA (34,000 USD). It includes (1) rich individuals (income eligible for the former highest MTR, i.e., yearly income above 13.5 million CFA – approx 22,000 USD) currently NOT filing the PIT but credibly identified as receiving income from multiple sources and, (2) Rich individuals currently filling the PIT but with discrepancies as compared to available information (PIT-filers not reporting or under-reporting a source of income identified from cross-checks). The cross-validation of tax statements and the merging of data from different sources permitted to generate more complete information on individuals’ total income and wealth and to estimate the potential loss in personal income tax revenue from high earners in Senegal. The authors then integrate income from the third-party sources (salaries, rents from property, dividends) with the personal income tax declarations, for individuals on the two lists of HNWIs. They then recalculate the PIT due on this consolidated tax base, as opposed to what was actually paid or withheld. Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) 43 SENEGAL | ECONOMIC UPDATE - MAY 2024 (which faces no withholding except for business leases), to establish a data-driven approach to expand the tax base to followed by higher rates on labor, and then on other capital identify HNWIs and conduct a pilot intervention targeted income. The HNWI in the two lists (2,550 individuals or before extending a complete framework to all HNWIs. top 1% of the sample) contribute 40% of the total addi- tional collectible revenue (12 billion CFA). Policies to improve tax administration capacity Establishment of a dedicated tax unit for HNWI. Cur- rently, the responsibility of increasing compliance with Strengthen enforcement, data and evidence-based the HNWI population is shared across several depart- approach. DGID can increase PIT compliance and col- ments: the Directorate for Information and Audits, the lect tax revenues by increasing enforcement activity. The Large Taxpayer Unit, and the local tax offices existing in DGID can consider setting up a dedicated team to focus each geographical district who are, in theory, the direct HNWIs – similar to the Ugandan case. The local fiscal interlocutors of individual taxpayers. Because increasing centers could facilitate the identification and contact of compliance with HNWIs requires specific resources, skills, the selected HNWIs by helping to recover their digital and analytical capacity, DGID could centralize these efforts IDs, addresses, and phone numbers. Complementary and these responsibilities in a single unit, which would, interventions could consist of harmonizing practices to of course, work in collaboration with all relevant director- follow-up with taxpayers, register contacts details, and ates. The tax administration can leverage ongoing efforts audit procedures (Box 3.4). All these interventions would Box 3.4. Digital IDs in Senegal. Practices and how to improve linkages Senegal relies on two key digital IDs for tax-related purposes: • NINEA: a unique taxpayer registration number, exists both for individuals (individual entrepreneurship) and corporations. It is delivered by the National Statistical Agency (ANSD). • CNI: National ID Number. The IDs are delivered by the Ministry of the Interior. A CNI is required for the ANSD to create a NINEA for a given taxpayer. The challenge is that many taxpayers are known to the DGID but are not linked to any of these IDs. This is the case for the majority of employees in the États 1024 data (Salaries withheld), for the majority of property owners in the SIGUIL data (Property tax), and for the majority of shareholders and administrators. Furthermore, to encourage interoperability across administrations, the DGID does not directly generate NINEAs, but instead sends creation requests one by one to the ANSD on a web platform. Data quality and merging issues could be mitigated on several dimensions: • Consistency in the use of digital IDs (NINEA, CNI): Providing them in every tax return and other administrative forms and working towards the association of an ID to each taxpayer already known by the DGID would improve the consistency of the reports and would facilitate auditing. • Digitization: data is not always available in a numerical format, which is primordial to cross-checking information. Digitizing data is resource-consuming and has to be done in a timely manner to meet the legal prescription constraints, generalizing the numerical format would be incomparably more efficient. Source: Bachas et al (2023). 44 Chapter 3: Spotlight on Senegal’s Development Agenda: Options to Raise Tax Revenue from Personal Income Tax (PIT) SEIZING THE OPPORTUNITY require the tax administration to invest in the technical overlap between political elites and top earners. To address and human capacity of the tax administration to handle the these potential challenges, the tax administration could increased volume of information from compulsory tax establish a clear communication strategy (letters to tax- returns. This includes upgrading information systems and payers incentivizing them, for instance) around the use hiring diverse professionals with expertise in data analysis to of data and evidence to improve to avoid potential mis- process and manage the data efficiently. Limited resources understandings related to personal targeting. could limit the possibility for the administration to exploit all the data and information submitted and to follow-up Clarify Legal Framework for Tax Declarations: The tax with all individuals, accordingly, implying the need to administration could take a stronger stance on the legal establish a clear strategy. obligation for all income earners to submit a PIT return through a revision of the tax code. The amendment of the Implement Transparent Communication Strategies: tax code could resolve ambiguities between the “final” Develop and execute transparent and engaging communi- nature of withheld incomes and the requirement for a con- cation strategies to enhance tax compliance. This should solidated declaration. Strengthening the legal obligation involve proactive tax education initiatives, clear informa- for all income earners to submit a PIT return should be tion dissemination about tax obligations and compliance accompanied by clear guidelines on declarative obligations benefits, and targeted awareness campaigns through various for all types of income, whether subject to withholding channels to build a trusting relationship between taxpayers or not, to encourage taxpayers to obtain tax identification and the tax administration. The communication strategy numbers and comply with tax laws. could be centered first around the complete list of all income sources that individuals are legally responsible for Strengthen cooperation between tax administration reporting and information on the progressive tax schedule. and financial institutions. 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