The World Bank Equitable and Resilient Recovery in Senegal (P172723) Document of The World Bank FOR OFFICIAL USE ONLY Report No: PGD177 INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED DEVELOPMENT POLICY CREDIT IN THE AMOUNT OF EUR 267.9 MILLION (US$300.0 MILLION EQUIVALENT) TO THE REPUBLIC OF SENEGAL FOR THE FIRST EQUITABLE AND RESILIENT RECOVERY DEVELOPMENT POLICY FINANCING May 4, 2022 Macroeconomics, Trade And Investment Global Practice Western and Central Africa Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information. . The World Bank Equitable and Resilient Recovery in Senegal (P172723) Republic of Senegal GOVERNMENT FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of February 28, 2022) Currency Unit US$1 = Euro 0.893 ABBREVIATIONS AND ACRONYMS ABP Annual Borrowing Plan PCG Partial Credit Guarantee BCEAO Central Bank of West African States PCI Policy Coordination Instrument (Banque Centrale des Etats de l’Afrique de l’Ouest) CNDP National Public Debt Committee PEFA Public Expenditure Financial Assessment (Comité National de la Dette Publique) CPF Country Partnership Framework PER Public Expenditure Review DSA Debt Sustainability Analysis PFM Public Financial Management DPO Development Policy Operation PPA Policy Performance Actions DSSI Debt Service Suspension Initiative PPP Public Private Partnership EHCVM Household Survey (Enquête Harmonisée PRES Economic and Social Resilience Program sur le Conditions de Vie des Ménages) (Programme de Résilience Économique et Sociale) ENES National Labor Force Survey (Enquête PSE National Development Plan (Plan Senegal nationale sur l'emploi au Sénégal) Emergent) GDP Gross Domestic Product PSIA Poverty and Social Impact Assessment GOS Government of Senegal RNU National Social Registry (Registre National Unique) GRID Green, Resilient and Inclusive SBA Stand-By Arrangement Development ICT Information and Communication SCD Systematic Country Diagnostic Technology IDA International Development Association SCF Standby Credit Facility IFC International Finance Corporation SDR Special Drawing Rights IPF Investment Project Financing SDFP Sustainable Development Financing Policy IMF International Monetary Fund SOE State Owned Enterprise JET Jobs and Economic Transformation TA Technical Assistance LDP Letter of Development Policy TOT Terms of Trade MCC Millennium Challenge Corporation UHC Universal Health Coverage MENT Ministry of Digital Economy and VAT Value-Added Tax Telecom MFB Ministry of Finance and Budget VC Venture Capital MSME Micro, Small and Medium sized WAEMU West African Economic and Monetary Enterprise Union MTDS Medium-Term Debt Management WB World Bank Strategy MTRS Medium-Term Revenue Strategy WBG World Bank Group PAP Priority Action Plan WSME Women led Small and Medium sized Enterprise Regional Vice President: Ousmane Diagana Country Director: Nathan M. Belete Regional Director: Abebe Adugna Dadi Practice Manager: Theo David Thomas Task Team Leaders: Markus Kitzmuller, Thomas Bossuroy, Federica Marzo . The World Bank Equitable and Resilient Recovery in Senegal (P172723) REPUBLIC OF SENEGAL EQUITABLE AND RESILIENT RECOVERY IN SENEGAL TABLE OF CONTENTS SUMMARY OF PROPOSED FINANCING AND PROGRAM .................... ERROR! BOOKMARK NOT DEFINED. 1. INTRODUCTION AND COUNTRY CONTEXT ...................................................................................5 2. MACROECONOMIC POLICY FRAMEWORK....................................................................................7 2.1. RECENT ECONOMIC DEVELOPMENTS................................................................................. 7 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY.............................................. 10 2.3. IMF RELATIONS ............................................................................................................................ 15 3. GOVERNMENT PROGRAM ........................................................................................................15 4. PROPOSED OPERATION ............................................................................................................16 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION .......................................... 16 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS .................................................. 18 4.3. LINK TO CPF, OTHER WORLD BANK OPERATIONS AND THE WBG STRATEGY ............................. 37 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS ............................... 37 5. OTHER DESIGN AND APPRAISAL ISSUES ....................................................................................38 5.1. POVERTY AND SOCIAL IMPACT .................................................................................................... 38 5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS ................................. 41 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS .......................................................................... 41 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY .................................................................. 43 6. SUMMARY OF RISKS AND MITIGATION .....................................................................................43 ANNEX 1: POLICY AND RESULTS MATRIX ..........................................................................................46 ANNEX 2: IMF RELATIONS ANNEX .....................................................................................................49 ANNEX 3: LETTER OF DEVELOPMENT POLICY.....................................................................................52 ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE ..................................................64 Page 1 This operation is led by Markus Kitzmuller (Task Team Leader (TTL) and Lead Economist, EAWM1), Thomas Bossuroy (Co-TTL and Senior Economist, HAWS2), and Federica Marzo (Co-TTL and Senior Economist, EAWPV). The team comprises Ernest John Sergenti (Senior Economist; EAWM1), Alexandre Henry (Economist; EAWM1), Mahugnon Stanislas Cedric Deguenonvo (Consultant; EAEM1), Felix Oppong (Economist; EAWM1), Maria Elkhdari (Consultant, EAWM1), Samer Matta (Senior Economist, EAWM2), Djibrilla Karamoko (Senior Health Specialist, HAWH3), Moussa Dieng (Economist, HAWH3), Mustafa Zakir Hussain (Lead Energy Specialist, IAWE2), Manuel Luengo (Senior Energy Specialist and Program Leader, IAWDR), Carlos Rodriguez-Castelan (Lead Economist, EAWPV), Prospere R. Backiny-Yetna (Senior Economist, EAWPV), Paula Tavares (Senior Private Sector Development Specialist, DECWL), Mountaga Ndiaye (Senior Procurement Specialist, EAWRU), Diego Rivetti (Senior Debt Specialist, EMFMD), Leif Jensen (Senior Economist, EMFTX), Arthur Foch (Senior Digital Development Specialist, IDD02), Mark Dutz (Lead Economist, AFECE), Laurent Olivier Corthay (Senior Private Sector Specialist, EAWF1), Meriem Ait Ali Slimane (Senior Private Sector Specialist, EAWF1), Laurent Gonnet (Lead Financial Sector Specialist, EAWF1), Graciela Miralles (Senior Economist, ETIMT), Aneliya Muller (Young Professional, IDD02), Helen Martin (Senior PPP Specialist, IPGPP), Gabriela Inchauste (Lead Economist, ELCPV), Julieth Pico Mejia (ETC, ELCPV), Fatou Fall Samba (Senior Financial Management Specialist, EAWG1), Enagnon Eric Adda (Senior Public Sector Management Specialist, EAWG1), Nicolas Kotschoubey (Senior Environmental Specialist, SAWE1), Helene Bertaud (Lead Counsel, LEGAM), Mohamed El Hafedh Hendah (Senior Procurement Specialist, EAWRU), Hamoud Abdel Wedoud Kamil (Senior Education Specialist, HAWE2), Mame Safietou Djamil Gueye (Senior Social Development Specialist, SAWS4), Setou Mamadou Diarra (Consultant, HAWE2), Miriam Muller (Social Scientist, EAWPV). Micky O. Ananth (Operations Analyst, EAWM1), Theresa Bampoe (Program Assistant, EAWM1), Coumba Fall Diack (Team Assistant, AWCF1) provided excellent admin and operational support. The operation is prepared under the guidance of Nathan Belete (Country Director, AWCF1), and Theo Thomas (Practice Manager, EAWM1). The team benefitted from the comments and suggestions from Luc Lecuit (Operations Manager, AWCF1), Johan Mistiaen (Practice Manager, EAWPV), Michel Rogy (Practice Manager, IDD02), Consolate Rusagara (Practice Manager, EAWF1), Charles J. Cormier (Practice Manager, IAWE2), Jehan Arulpragasam (Practice Manager, HAWS2) and Edouard Al-Dahdah (Lead Country Economist, EAWDR). The peer reviewers were Enrique Blanco Armas (Lead Economist, EECM2), Johannes G. Hoogeveen (Practice Manager, EMNPV), and Aline Coudouel (Lead Economist, HSASP) at Concept stage, and Aline Coudouel (Lead Economist, HSASP) and Aurelien Kruse (Lead Country Economist EFI, EAWDR) at Decision stage. The World Bank Equitable and Resilient Recovery in Senegal (P172723) SUMMARY OF PROPOSED FINANCING AND PROGRAM BASIC INFORMATION Project ID Programmatic If programmatic, position in series P172723 Yes 1st in a series of 2 Proposed Development Objective(s) The development objective of this programmatic DPO is to enable equitable growth and sustainably increase resilience of households, firms and fiscal accounts. Organizations Borrower: REPUBLIC OF SENEGAL Implementing Agency: Ministry of Finance and Budget, Republic of Senegal PROJECT FINANCING DATA (US$, Millions) SUMMARY Total Financing 300.00 DETAILS International Development Association (IDA) 300.00 IDA Credit 300.00 INSTITUTIONAL DATA Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Overall Risk Rating Substantial . Page 3 The World Bank Equitable and Resilient Recovery in Senegal (P172723) Results Indicator Name Baseline Target RI1: Health insurance coverage rate (percent) [49] [2020] [75] [2023] RI2: Total number of beneficiaries of social programs drawn from RNU [250,000] [2020] [400,000] [2023] (number). RI3: a) Increase in share of female-led firms awarded public procurement a) <8 [2020] a) 10 [2023] (percent) b) 0 (2020) b) 40 (2023) b) Share of girls remaining in school after pregnancy (percent) RI4: Number of fiscal risk assessments and MTDS implementation [0] [2019] [2+2] [2023] reports published (number) RI5: VAT revenues (percent of non-oil GDP) 6.7 [2019] 7.0 [2023] RI6: a) [0] [2019] [50] [2023] a) Number of certified startups (number) b) [0] [2019] [5] [2023] b) Number of certified and professionally managed startup financing mechanisms (number) RI7: Fixed broadband penetration rate (in % of population) 0.94 [2019] 4 [2023] RI8: Average cost of electricity supply (current prices; USc/kWh) 21.0 19.0 [2020] [2023] RI9: Percent of PPP transactions reaching commercial close that are 0 [2021] 100 [2023] implemented in accordance with the new PPP law and decree (percent) . Page 4 The World Bank Equitable and Resilient Recovery in Senegal (P172723) IDA PROGRAM DOCUMENT FOR A PROPOSED CREDIT TO THE REPUBLIC OF SENEGAL 1. INTRODUCTION AND COUNTRY CONTEXT 1. The proposed operation provides US$300 million equivalent of IDA credit financing to the Government of Senegal (GoS) to support structural reforms for equitable and resilient growth post COVID-19. It is the first in a series of two programmatic development policy operations (DPO). The development objective is to enable equitable growth and sustainably increase the resilience of households (Pillar 1), firms and fiscal accounts (Pillar 2). The program consists of policy reforms that will (a) boost the resilience and productivity of human capital by sustainably and equitably broadening access to healthcare, social assistance, and economic opportunities for women on the labor market (Pillar 1); and (b) boost macro-fiscal resilience and private sector participation for productive jobs by improving debt management and equitable tax revenue mobilization, while boosting the growth potential of the private sector, focusing on access to finance, and competitive private sector participation economy-wide and in the digital and energy sectors (Pillar 2) 1. 2. Pre-COVID-19 growth was high but non-inclusive, characterized by the slow pace of poverty reduction and persistent inequalities. Real gross domestic product (GDP) growth averaged around 6.2 percent between 2014-2019, boosted by investment, private consumption, and a favorable external environment (low commodity prices, high demand in key export markets and strong remittance inflows). However, the incidence of poverty declined by only 5 percentage points (ppts), from 43 percent in 2011 to 37.8 percent in 2018/9 (Household Survey, Enquête Harmonisée sur le Conditions de Vie des Ménages, EHCVM 2018/2019) 2. As such, Senegal’s track record falls short of the top 15 performing Sub-Saharan African countries, which recently reduced poverty rates between 1 and 3.4 ppts per year. 3 Notably, inequality has not improved over the same period, with a Gini coefficient stable at 0.35 and persistent spatial and socio- demographic disparities, including by gender. 3. The COVID-19 crisis interrupted years of strong economic performance and led to a temporary increase in poverty. Growth slowed from 4.6 percent in 2019, to 1.3 percent in 2020 (-1.4 percent in per capita terms) but is estimated to have rebounded to 6.1 percent in 2021. However, the COVID crisis led to larger current account and fiscal deficits, resulting in higher public debt levels. Services and export growth declined as tourism and transport suffered a standstill and key markets shut down. Lower remittances and labor income loss subdued private consumption. As a result, the poverty incidence is estimated to have increased by 2.1 percentage points in 2020, equivalent to 357,000 additional poor 4. Moreover, spatial inequalities increased as growth drivers were concentrated in urban areas, while rural areas remain more 1 The structure of the operation reflects the Jobs and Economic Transformation analytical framework (JET) for IDA19 which articulates how labor productivity (Pillar 1), markets creation and connectivity to jobs (Pillar 2) and macro-fiscal sustainability (Pillar 2) are necessary to trigger inclusive structural transformation and job creation. 2 Poverty indicators are official poverty numbers and are computed using Senegal national poverty lines. The 2011 poverty survey has many differences with the 2018 survey, but poverty numbers have been made comparable. 3 Between 2005 and 2015 poverty reduction in several countries in Sub-Saharan Africa exceeded 1 percentage point per year—e.g., Tanzania (2.6 ppts); Rwanda (1.5 ppts) and Ghana (1.3 ppts). Over this same period, Senegal only reduced poverty at an annual rate of 0.43 percentage points and only by 0.65 ppts per year between 2011 and 2018. Source: World Bank staff calculations using PovCalNet 2020 harmonized surveys and Macro Poverty Outlook Fall 2019 for the evolution between 2011 and 2018. 4 The 2.1 percentage points is the net impact of the shocks. Poverty incidence was 37.8 percent in 2018 and would have decreased to 36.1 percent in 2020 without the pandemic. Because of the pandemic, poverty incidence increased to 38.2 percent, so the total impact of the shock amounts to 2.1 percentage points. Page 5 The World Bank Equitable and Resilient Recovery in Senegal (P172723) vulnerable to shocks as social safety nets remain nascent. 4. Key structural vulnerabilities hold back Senegal’s potential for resilient and equitable growth. On the one hand, insufficient and unevenly distributed human capital and structural inequalities constrain labor supply. Existing social programs remain insufficient to protect lives and livelihoods efficiently from large- scale health or climate shocks. The universal health coverage (UHC) program, supposed to ensure vulnerable informal workers, is not financially sustainable and access to quality healthcare is weakened by an uneven supply of drugs and qualified practitioners across the country. The social protection system is well established but is not yet leveraged as a platform to boost the equity and efficiency of shock responses and social spending across sectors. Low labor productivity is an important barrier to equitable growth and inclusive structural transformation. On the other hand, stifled by insufficient competition and inadequate financing, the private sector has been unable to generate enough productive jobs to keep up with high demographic growth, and formal employment only benefits less than 6 percent of total workers (Labor Force Survey, Enquête nationale sur l'emploi au Sénégal, ENES, 2018). Finally, the crisis aggravated emerging fiscal vulnerabilities, underlining the importance of transparent, effective fiscal and debt management as a foundation of inclusive growth. 5. The war in Ukraine and the subsequent terms-of-trade (ToT) shock will have a sizable negative impact on the economy, disproportionally affecting the poor. Real GDP growth is projected to decline to 4.4 percent in 2022, compared to a pre-shock forecast of 5.5 percent, as higher food and energy prices, trade disruptions, and greater uncertainty cause private consumption and investment to decline. The same transmission channels will add to a surge in average inflation to 4.5 percent in 2022, which has been building up since the end of 2021. With y-o-y February core inflation already running at 6.5 percent, and food inflation at 10.6 percent, pre-existing food insecurity will be increase. Additional disruptions could drive up food, transport, and energy prices even more, disproportionately hurting the poor and vulnerable. 6. The fiscal deficit is projected to increase to 6.8 percent of GDP in 2022, from 4.8 percent before the start of the war in Ukraine. While the Government is contemplating additional measures to mitigate the impact of the ToT shock, it has already suspended customs duties on oil, rice, and sugar to limit the rise in the prices of these foodstuffs, with an estimated fiscal cost of 0.4 percent of GDP. In addition, expenditures are forecast to increase by 1.6 percent of GDP, led by an increase in fuel subsidies. The authorities are also considering targeted subsidies for electricity and water consumption to support the poor and most vulnerable. 7. The resulting financing gap of US$530 million will need to be filled with a mix of additional domestic and external concessional borrowing to avoid short-term liquidity pressures and an increase in the risk of debt distress (from moderate to high). With the tightening of global and regional financial markets, the interest rates paid on domestic debt and external Eurobonds are expected to rise. As such, the current DPO would help fill a portion of the financing gap, in combination with potential support from the International Monetary Fund (IMF) 5 and other donors, and from other financing instruments that would likely rely heavily on domestic borrowing. 8. The proposed DPO series will operationalize the Jobs and Economic Transformation (JET) framework to build a bridge from crisis management to an inclusive structural reform agenda. As illustrated by the 5 Note that, already before the current ToT shock, the IMF had planned to lend Senegal a total of US$425 million (1.5 percent of GDP) in 2022. Page 6 The World Bank Equitable and Resilient Recovery in Senegal (P172723) JET analytical framework, in the context of a growing labor force and urbanization, increasing productivity and creating markets are the key preconditions to trigger inclusive economic transformation and growth, together with an effective labor market and macro stability. While focusing on both the supply and demand sides of labor, the proposed adapted framework emphasizes the concept of resilience and its importance to prepare the country for a stronger and more equitable recovery. 9. The macroeconomic policy framework is adequate for the proposed operation. Growth recovered in 2021, driven by a strong return of private consumption and investment, and is expected to strengthen over the medium-term despite the temporary shock from the war in Ukraine, bolstered by the coming onstream of gas production. The Government is committed to gradually returning to the 3 percent fiscal deficit West African Economic and Monetary Union (WAEMU) convergence criterion, including through the implementation of a Medium-Term Revenue Strategy and expenditure rationalization. Public debt is sustainable. Monetary policy remains prudent and anchored in a credible monetary union framework. The macroeconomic policy framework is anchored in the IMF Policy Coordination Instrument (PCI) program and Stand-By Arrangement (SBA) and Standby Credit Facility (SCF). 2. MACROECONOMIC POLICY FRAMEWORK 2.1. RECENT ECONOMIC DEVELOPMENTS 10. In 2021, growth rebounded to reach 6.1 percent (3.3 percent in per capita terms) compared to 1.3 percent in 2020. On the demand side, growth was driven by the strong recovery in private consumption and investment following the easing of containment measures. Private consumption and investment grew by 6.0 percent and 7.9 percent respectively in 2021, compared to respective growth rates of 2.2 percent and 1.7 percent in 2020. Net exports improved thanks to the recovery of global demand and an increase in extractive and manufacturing production by 32.3 percent and 13.2 percent. On the supply side, industrial production and services recorded strong growth of 10.9 percent and 5.7 percent, respectively, while the agriculture sector experienced a contraction of 1.0 percent following record growth of 12. 8 percent in 2020. As a result of the increase in demand, inflation reached 2.2 percent in 2021, while the average prices of food fell slightly. This decrease is explained by solid agricultural production 2020-2021, which made it possible to supply local markets and limit the rise in prices in the first half of 2021. However, from July 2021, inflationary pressures intensified, particularly through energy and food prices. Table 1. Contributions to GDP Growth from the Supply and Demand Side (percent) 2018 2019 2020 2021 2022p 2023p 2024p GDP at constant prices 6.2 4.6 1.3 6.1 4.4 8.5 10.6 Demand side: Private Consumption 4.7 3.8 2.2 6.0 4.0 6.1 8.9 Public Consumption 3.5 7.5 2.6 5.4 11.5 10.4 7.8 Private investment -3.1 6.4 13.8 5.5 0.6 25.1 9.2 Public investment 19.5 11.3 1.7 4.9 4.1 -1.8 3.8 Net exports -0.8 7.9 -20.2 6.7 1.6 9.9 9.2 Exports, Goods and Services 8.2 14.7 -13.2 14.7 9.1 16.9 16.0 Imports, Goods and Services 9.0 6.8 7.0 8.0 7.5 7.0 6.8 Supply side: Agriculture 8.1 4.3 12.8 -1.0 5.1 5.4 6.5 Industry 6.5 5.0 -0.4 10.9 5.3 10.0 12.8 Services 5.4 4.3 -0.1 5.7 3.8 8.7 10.8 Source: April 2022, Word Bank Group (WBG) staff estimates and projections, Senegal authorities and IMF. Note: Supply side contributions to GDP include proportional net indirect taxes. Page 7 The World Bank Equitable and Resilient Recovery in Senegal (P172723) 11. The current account deficit widened from 10.9 percent of GDP in 2020 to 11.8 percent in 2021. This is explained by an increase in the trade deficit, which rose from 18.6 percent of GDP in 2020 to 19.2 percent of GDP in 2021, reflecting an increase in exports of goods and services (+1.5 pp of GDP) that only partially offset that of imports (+2.3 pp of GDP). Benefiting from favorable price developments, the main contributors to the increase in exports are non-monetary gold, food products, phosphoric acid, and refined petroleum products. As for imports, the increase is largely due to the increase in the oil and food import bill by 22 percent and 7 percent, respectively, between 2020 and 2021. These two categories alone accounted for 34 percent of imports in 2021. The CAD was financed by strong hydrocarbon related FDI and development assistance. 12. As of mid-March 2022, more than 1,457,116 individuals (8.5 percent of the population) were vaccinated with at least one dose. The national strategy envisages vaccinating 60 percent of the population by mid-2022. Senegal began its COVID-19 vaccination campaign in February 2021 with the Chinese Sinopharm vaccines. In 2022, the country expects an additional 13.8 million vaccine doses from COVAX (AstraZeneca, Moderna) and from African Vaccine Acquisition Trust (AVAT) (Johnson and Johnson), financed by IDA, having received its first doses of the Johnson and Johnson vaccine (158,000) procured through AVAT in September 2021. Despite a multitude of communication and awareness campaigns, and the engagement of traditional and religious leaders to encourage acceptance, vaccine hesitancy remains important. As of May 3, 2022, only 6.5 percent of the population was fully vaccinated (having received two doses of vaccine), compared to an average of 16.7 percent in Africa. The Government continues to strengthen its communication and engagement efforts to combat vaccine hesitancy. Table 2. Key Macroeconomic Indicators (2018 – 2024) 2018 2019 2020 2021p 2022p 2023p 2024p Real economy and prices GDP ( FCFA billions) 12,840 13,710 14,098 15,318 16,377 17,677 19,550 Real GDP growth 6.2 4.6 1.3 6.1 4.4 8.5 10.6 GDP Deflator -0.8 2.1 1.5 2.4 3.2 3.0 2.0 CPI (year-average) 0.5 1.0 2.5 2.2 4.5 2.9 2.6 Government financial operations (percent of GDP, unless stated otherwise) Revenues 18.9 20.1 19.8 18.8 20.9 22.3 22.8 Expenditures 22.6 24.1 26.0 25.0 27.7 26.2 25.8 Primary balance -1.7 -2.0 -4.2 -4.2 -4.7 -1.7 -1.0 General Government Balance -3.7 -3.9 -6.3 -6.2 -6.8 -3.9 -3.0 General Government Debt 61.5 63.1 67.8 72.5 73.1 69.7 64.5 Domestic public debt 11.4 10.9 14.5 15.1 15.5 15.4 14.8 External public debt 50.1 52.2 53.3 57.5 57.6 54.3 49.7 External sector (percent of GDP, unless stated otherwise) Current Account Balance -8.8 -8.1 -10.9 -11.8 -12.7 -8.5 -4.8 Balance of goods and services -15.1 -14.0 -18.6 -19.2 -19.9 -16.1 -11.2 Imports, Goods and Services 38.8 38.7 39.3 41.5 44.8 42.7 42.4 Exports, Goods and Services 23.6 24.7 20.7 22.2 24.9 26.6 31.2 Income (net) -2.6 -2.8 -2.4 -2.4 -2.0 -1.4 -1.8 Current transfers 8.9 9.0 10.2 9.9 9.2 9.0 8.2 FDI 3.4 3.8 7.1 7.8 7.9 6.2 4.5 Terms of Trade 2.5 -4.8 5.3 5.7 -1.4 2.8 -0.5 Other memo items GDP nominal in US$ (millions) 23,131 23,386 24,518 27,069 … … … Exchange Rate (per USD, average) 555 586 575 554 … … … Source: WBG staff estimates and projections as of April 2022, Senegal authorities and IMF. Notes: 1/ debt level, debt service and government revenue include preliminary data covering the broader public sector. 2/ Domestic debt includes government securities issued in local currency and held by WAEMU residents. Page 8 The World Bank Equitable and Resilient Recovery in Senegal (P172723) 13. The fiscal deficit remained high and almost unchanged in 2021, at 6.2 percent of GDP, as compared to 6.3 percent in 2020. Current expenditures were 16.4 percent of GDP in 2021, down from 16.9 percent in 2020, but still above their pre-crisis level of 15.7 percent. The increase in recurrent expenditure since 2020 is explained by COVID-19 related spending, such as salary increases, the hiring of new health personnel, and subsidies to affected sectors. Moreover, an unanticipated increase in the prices of imported petroleum products in the second half of 2021 led to significant budgetary subsidies to maintain fixed prices for end consumers. Public investment remained above its pre-crisis level in 2021, at 8.6 percent of GDP, reflecting the Government’s desire to support economic activity during the crisis as well as the continuation of investments in the hydrocarbons sector. While the sharp increase in expenditure in 2020 was partly offset by strong donor mobilization, donor support was lower in 2021, with grants falling from 2.3 percent of GDP in 2020, to 0.8 percent in 2021. The G20 Debt Service Suspension Initiative (DSSI) added 0.5 percent of GDP in support. 14.Tax revenues did not recover to their pre-crisis level in 2021, standing at 16.4 percent of GDP, compared to 17.4 percent of GDP in 2019. That said, tax revenue was revised upwards during the year, as the economy recovered and because of improved customs management and mobilization of domestic resources. The two main sources of tax collection in 2021 were internal taxes on goods and services and direct taxes, representing respectively 50 percent and 33 percent of total tax revenue. Table 3. Key Fiscal Indicators (2018 – 2024) 2018 2019 2020 2021 2022 2023 2024 (percent of GDP, unless stated otherwise) Total Revenues and Grants 18.9 20.1 19.8 18.8 20.9 22.3 22.8 Tax Revenues 15.5 17.4 16.5 16.4 18.2 19.6 20.2 Direct Taxes 5.0 5.5 5.3 5.4 5.7 6.6 7.0 Taxes on Goods and Services 7.9 9.0 8.5 8.2 9.7 9.9 10.1 Taxes on International Trade 2.3 2.7 2.4 2.5 2.5 2.8 2.8 Other Taxes 0.3 0.3 0.2 0.3 0.3 0.3 0.3 Grants 2.0 1.6 2.3 0.8 1.8 1.9 1.7 Other 1.4 1.1 1.1 1.6 0.9 0.9 0.9 Expenditures 22.6 24.1 26.0 25.0 27.7 26.2 25.8 Current Expenditures 14.5 15.7 16.9 16.4 19.4 16.3 15.3 Wages and Compensation 5.3 5.3 5.6 5.4 6.0 6.3 6.3 Goods and Services 2.4 2.0 2.0 1.9 2.1 2.3 2.3 Interest Payments 2.0 1.9 2.1 2.0 2.1 2.2 2.1 Current Transfers 2.7 4.9 6.0 4.9 6.0 4.0 3.6 Other Expenditures 2.2 1.5 1.3 2.1 3.2 1.5 1.1 Capital Expenditures 8.0 8.4 9.1 8.6 8.3 9.9 10.5 Primary Balance -1.7 -2.0 -4.2 -4.2 -4.7 -1.7 -1.0 Overall Balance -3.7 -3.9 -6.3 -6.2 -6.8 -3.9 -3.0 Government Financing 3.7 3.9 6.3 6.2 6.8 3.9 3.0 Net acquisition of financial asse 1.3 -2.1 1.2 2.5 -0.1 0.0 0.0 Net incurrence of liabilities 5.0 1.8 7.3 8.2 6.7 3.9 3.0 Domestic -2.5 -1.2 4.0 3.0 3.6 0.6 -0.2 Foreign 7.5 3.0 3.3 5.2 3.0 3.3 3.2 DSSI 0.2 0.5 Sources: WBG staff estimates and projections as of April 2022, Senegal authorities and IMF. 15. The central bank has maintained an accommodative monetary policy stance since the onset of the COVID-19 crisis. Senegal’s monetary and exchange rate policies are managed by the Central Bank of West African States (Banque Centrale des Etats de l’Afrique de l’Ouest, BCEAO), which maintains a peg between the CFA Franc and the Euro. Its reserves have remained stable since 2019 at an estimated 5.8 months of Page 9 The World Bank Equitable and Resilient Recovery in Senegal (P172723) imports of goods and services in 2021 (compared to 5.6 months in 2019) thanks to donor support and Eurobond issuances. To support the regional economy and COVID-19 related extra spending, the BCEAO implemented a series of monetary and macroprudential measures from March 2020, including policy rate cuts to 2.0 percent and refinancing operations of three-month COVID-19 bonds. 16. Banking activity revived in 2021 along with the economic recovery, and the financial sector remains sound. In the first eight months of 2021, bank loans increased by 3.6 percent compared to 1.5 percent in 2020. In addition, while the banking system was exposed to some of the most pandemic-affected services sectors, including hospitality, transport, and retail, gross non-performing loans (NPLs) to total loans declined from 13.3 percent in December 2020 to 12.9 percent at end-August 2021. Loan-loss provisions also improved, increasing from 61.8 percent in 2019 to 69.1 percent in 2021. Hence, despite the pandemic- induced economic downturn, the banking system has remained resilient. 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 17. The economic rebound will be interrupted, with GDP growth estimated to slow to 4.4 percent in 2022 (down from a pre-crisis forecast of 5.5 percent), before resuming strongly as hydrocarbon production comes online. The growth deceleration in 2022 compared to the previous year is explained by a drop in private consumption and private investment, negatively affected by inflation induced by the war in Ukraine. Growth should, however, be sustained by an acceleration in public consumption to support the economy and positive developments in the mining sector, which should boost extractive production, with the discovery of new gold and phosphate mines (including a price outlook which was recently revised upwards). Investment will be supported by the finalization of the large Sangomar and GTA hydrocarbon projects. In 2023-2024, growth could average 9.5 percent, driven by the expected start of hydrocarbon production. Inflation is expected to peak at 4.5 percent in 2022, due to trade disruptions exacerbated by the invasion of Ukraine, with energy and food prices rising the most. Over the medium-term inflation should decline to 2.6 percent. Figure 1. GDP growth - pre and post war in Ukraine Projections GDP growth (%) 15.0 10.0 5.0 0.0 2020 2021 2022 2023 2024 Pre crisis forecast Post crisis trends Source: WBG staff estimates and projections as of April 2022, Senegal authorities and IMF. 18. The external position is expected to deteriorate further in 2022 before improving substantially over the medium-term with the onset of hydrocarbon production. External pressures will persist in 2022 as the current account deficit (including grants) deteriorates to 12.7 percent of GDP with the rise in world commodity prices due to the war in Ukraine as well as from capital imports linked to the hydrocarbon Page 10 The World Bank Equitable and Resilient Recovery in Senegal (P172723) sector. Although exports to Russia and Ukraine are limited, the induced increase in the price of imports of food and petroleum products and investments in the hydrocarbons sector should strongly contribute to the deterioration of the trade balance. In 2022, Senegal remains a net importer of hydrocarbons. The additional cost linked to increased oil prices could amount to nearly 2 percent of GDP. However, exports of gold (about 15 percent of total exports) and phosphate (about 6 percent of total exports) are expected to benefit from higher production combined with higher international prices, mitigating negative pressures on the trade balance. In the medium term, once hydrocarbon production is commissioned, the pressure on the current account will significantly ease thanks to export surpluses. The current account deficit should decrease by two thirds compared to previous years to reach 4.8 percent of GDP in 2024. Whereas oil and gas projects will be almost exclusively supported by FDI, the rest of the CAD will be financed by a mix of concessional financing and commercial borrowing (Table 4). Over the medium term WAEMU reserves are expected to decline to about 4.5 months of imports. Table 4. Balance of Payments Financing Requirements (2018-2024, percent of GDP) 2018 2019 2020 2021p 2022p 2023p 2024p Financing requirements -10.8 -9.4 -13.1 -14.0 -15.3 -10.4 -7.0 Current account deficit -8.8 -8.1 -10.9 -11.8 -12.7 -8.5 -4.8 General government amortization -2.0 -1.2 -2.2 -2.2 -2.5 -1.9 -2.2 Financing Sources 10.8 9.4 13.1 14.0 15.3 10.4 7.0 FDI and portfolio investments (net) 10.4 4.2 8.8 10.4 10.1 6.8 6.1 Portofolio investment 7.0 0.4 1.7 2.6 2.2 0.6 1.6 Direct investment 3.4 3.8 7.1 7.8 7.9 6.2 4.5 Capital account balance 1.9 1.6 1.0 0.8 1.5 1.3 1.2 Private (net) -0.3 -2.3 -4.6 -2.4 -2.1 -0.6 -0.6 General government disbursement 2.5 5.7 5.0 3.8 4.3 4.2 3.3 Errors and omissions 0.3 1.3 2.1 2.2 0.0 0.0 0.0 Change in reserves (- = Increase) -4.0 -1.1 0.7 -0.9 1.4 -1.3 -3.1 Source: Senegal authorities; IMF and WBG staff estimates and projections as of April 2022. 19. The fiscal deficit is expected to increase to 6.8 percent in 2022, in response to inflationary pressures triggered by the war in Ukraine. Although revenues from taxes on goods and services are projected to increase, this increase will be offset in 2022 by the suspension of customs duties on oil, rice, and sugar to limit food price inflation, with an estimated fiscal cost of 0.4 percent of GDP. Grants are expected to increase to 1.8 percent of GDP in 2022, before stabilizing around 1.5 percent from 2023. Unexpected current expenditure, notably an increase in fuel price subsidies, will weigh on the deficit. With the average price of a barrel of oil now 20 dollars above projections used during the preparation of the budget, the additional cost from oil subsidies is estimated at about 2 percent of GDP. Even if public investment spending adjusts over the course of the year, these unexpected pressures will come on top of additional spending related to teacher salary increases decided in February 2022, estimated at 0.6 percent of GDP. 20. As a result, a significant financing gap of 2 percent of GDP has opened for 2022 (Table 5). Current estimates suggest that expenditures will increase by 1.6 percent of GDP, while revenues will fall short of budget by 0.4 percent of GDP. This gap would be filled by a combination of additional funding from this DPO operation and other sources, including domestic financing on the regional market (Table 3). That said, downside risks prevail, and the financing gap may grow as the terms-of-trade shock unfolds and new fiscal measures are taken to cushion the impact on households and firms. Page 11 The World Bank Equitable and Resilient Recovery in Senegal (P172723) Table 5. Financing Needs and Sources for 2022 December 2021 April 2022 Difference Billions Percent Billions of Percent Billions Percent of CFAF of GDP CFAF of GDP of CFAF of GDP Total Revenues and Grants 3525.1 21.3 3429.4 20.9 -95.7 -0.4 Tax revenue 3,078.2 18.6 2,982.5 18.2 -95.7 -0.4 Non-tax revenue 149.0 0.9 149.0 0.9 0.0 0 Grants 297.9 1.8 297.9 1.8 0.0 0 Total Expenditure 4,319.6 26.1 4,537.9 27.7 218.3 1.6 Current expenditures 2,813.5 17.0 3,178.6 19.4 365.1 2.4 Capital expenditures 1,506.1 9.1 1,359.3 8.3 -146.8 -0.8 Overall balance (including grants) -794.5 -4.8 -1,108.5 -6.8 -314.0 -2.0 Budget Financing Gap in FY22 Pre-Crisis Financing Need 794.4 4.8 External Financing (net) 328.6 2 Domestic Financing (net) 103.1 0.6 World Bank DPO 108 0.7 IMF SBA/SCF 254.7 1.5 Post-Crisis Additional Financing Need 317.5 2.0 World Bank DPO Top-Up 72 0.4 Other (incl. domestic financing) 245.5 1.5 Residual Financing Gap 0 0 Source: Senegal authorities; IMF and WBG staff estimates as of April 2022. 21. From 2023 onwards, the fiscal deficit is expected to decline, as current expenditures fall back to their pre-pandemic levels and tax revenues increase. Continued tax revenue mobilization efforts – supported by the Medium-Term Revenue Strategy (MTRS) – will also help to rebuild fiscal space. More specifically, tax expenditure rationalization through an improved targeting of value-added tax (VAT) exemptions as supported by this DPO series, while preserving the consumption of the poorest households, will generate additional revenues, contributing to the consolidation. Starting in 2023, hydrocarbon-related tax revenues will gradually contribute to strengthen resource mobilization. Over the medium term, current expenditures are expected to decline, driven by a fall in subsides and grants with the withdrawal of COVID related expenditures. Investment spending will gradually resume its initial trend, representing around 10 percent of GDP over 2023-2024. Consequently, the fiscal deficit is expected to converge to the WAEMU criterion of 3 percent of GDP by 2024, putting the debt-to-GDP ratio on a downward trend after 2022. The fiscal impacts of the reform program supported by the DPO series are included in these fiscal projections. 22. According to the joint World Bank-IMF Debt Sustainability Analysis (DSA) of December 2021, public debt remains at moderate risk of external and overall debt distress, with limited scope to absorb shocks in the near term. External debt indicators mostly remain below their thresholds under the baseline scenario, except for the external debt service to export ratio, which breaches its risk threshold in the first year of the baseline reflecting the front-loading of debt service payments brought about by the Eurobond buyback operation in 2021. However, under sensitivity analyses, three of the four external debt indicators breach their threshold, indicating potential vulnerabilities under adverse conditions. These include a slower global recovery that would hit Senegal’s main export markets or in case delays were to occur in the development of the hydrocarbon sector. For overall public debt, the PV of debt-to-GDP remains below its Page 12 The World Bank Equitable and Resilient Recovery in Senegal (P172723) threshold under the baseline scenario, and debt service is projected to average about 16 percent of total revenues and grants over the next five years. Stress tests indicate that Senegal is most vulnerable to a growth shock, which underscores the importance of reforms to strengthen the country’s medium-term growth potential, combined with prudent fiscal deficits supported by enhanced domestic resource mobilization efforts. Figure 2. Debt Sustainability Analysis Source: World Bank-IMF DSA (December 2021). Notes: 1/ The extreme shock is a one-time depreciation. /2 The extreme shock is 1 standard deviation negative shock to export growth. 23. The Government continues to improve debt management and transparency. First, Senegal will seek to return to the pre-crisis fiscal policy targeting an average fiscal deficit of 3 percent of GDP for the central government and the elimination of below-the-line spending. Considering Senegal’s high debt management capacity and access to regional and international capital markets (under normal circumstances), total nominal public debt would be monitored under the IMF PCI and SCF/SBA to ensure a downward trajectory of the debt-to-GDP ratio over the medium term. Coordination of debt management functions and data coverage would be improved through the recent activation of the National Public Debt Committee (Comite National de la Dette Publique, CNDP) to facilitate the coordination of public debt management, whose responsibilities are now split among various entities. The committee will be responsible for examining all new external debt proposals of the central government and public entities, as well as projects financed through Public Private Partnerships. A CNDP procedures manual is to be developed. Given the expanded debt perimeter, the Government will continue ongoing work to expand coverage of the fiscal accounts to the full public sector, with the move towards general government as an important intermediate step. In terms of mid-term strategy, the 2021-2023 Medium-Term Debt Management Strategy (MTDS) highlights that the share of concessional borrowing is expected to gradually decrease, provided market conditions are adequate. 24. Senegal participated in the DSSI. As part of the DSSI, Paris Club Creditor Countries accepted to provide Senegal a time-bound suspension of debt service of 0.2 percent of GDP in May-December 2020 and 0.5 percent of GDP in January-December 2021. This debt moratorium was used to support spending on COVID- 19 related health or economic relief, which the authorities have committed to closely monitor with transparent reporting. There is strong complementarity between this operation and the Policy Performance Actions (PPA) under the Sustainable Development Financing Policy (SDFP). Page 13 The World Bank Equitable and Resilient Recovery in Senegal (P172723) 25. Senegal successfully implemented the PPAs under the FY21 SDFP by end FY21 and is continuing with the three reforms areas under the FY22 SDFP. FY21 PPA-1 supported the establishment of a framework for the publication of the annual borrowing plan (ABP) and defining its scope, timing, preparation procedures, and accessibility (part of Prior Action 4). Senegal is continuing with this reform in FY22, by instituting a mechanism to publish quarterly debt bulletins, including information on state-owned enterprise (SOE) 6 and Public Private Partnership (PPP) debt and assessments of the implementation of the MTDS and the ABP. FY21 PPA-2 supported the adoption of an accelerated VAT credit refund procedure (Prior Action 5), to be supplemented with the FY22 SDFP by the reduction of tax expenditures, including selected VAT exemptions (Trigger 6. Finally, FY21 PPA-3 centered around the development and formal adoption of a detailed fiscal risk-assessment methodology for (i) the granting of public guarantees and on- lent loans to SOEs and (ii) the monitoring of SOEs’ credit risk (preparing Trigger 4 on the publication of a fiscal risk assessment for 2022, part of the FY22 SDFP). 26. The outlook is uncertain and subject to significant downside risks. The context of the war in Ukraine and its developments during 2022 introduces major uncertainties regarding growth prospects for Senegal. In the short term, it is through the prices of staple foods that the impact of the war will be felt. Higher prices for oil and agricultural commodities (particularly cereals such as wheat), could further subdue private consumption. Higher transport prices and supply difficulties for construction materials could affect the transport and construction sectors, particularly via port and re-export activities with neighboring countries. Tighter than expected financial conditions in international markets and tensions in international trade could put pressure on financing the current account deficit. In the medium-term, lower-than- projected hydrocarbon prices could weaken the macro-economic framework from 2023 onwards. Senegal is also exposed to coastal erosion and climate shocks (floods, droughts, and associated health hazards), which could affect key sectors such as tourism and reduce agricultural productivity. Security concerns, such as spillover from the Sahel, could have repercussions on investment and tourism. Finally, the appearance of a new variant of COVID-19 could impose new regional and global restrictions, weighing on economic activities in Senegal. From the point of view of budgetary risk, a significant increase in expenditure to cope with the consequences of the invasion of Ukraine, particularly linked to the increase in the price of basic products, could widen the fiscal deficit further. 27. The macroeconomic policy framework is adequate for the proposed operation. Growth recovered in 2021, driven by a strong return of private consumption and investment, and is expected to strengthen over the medium-term despite the temporary shock from the war in Ukraine, bolstered by the coming onstream of gas production. The Government is committed to gradually returning to the 3 percent fiscal deficit WAEMU convergence criterion, including through the implementation of a Medium-Term Revenue Strategy and expenditure rationalization. Public debt is sustainable. Monetary policy remains prudent and anchored in a credible monetary union framework. The macroeconomic policy framework is anchored in the IMF PCI program and SBA and SCF. 6 At end-2020, SOE debt stood at US$1,576 million (or 6 percent of GDP), down slightly from 6.5 percent of GDP in 2020. In addition, SOE represented 9 percent of total debt in 2020, 54 percent of which was external debt. Page 14 The World Bank Equitable and Resilient Recovery in Senegal (P172723) 2.3. IMF RELATIONS 28. Senegal is currently under a three-year PCI and an 18-month SBA/SCF program (worth SDR 453 million or about US$650 million). Both programs are expected to end in December 2022. The PCI is articulated around three main pillars: (i) achieving high, sustainable, and inclusive growth; (ii) consolidating macroeconomic stability through prudent fiscal policy; and (iii) managing the oil and gas sector in a sustainable and transparent manner. In January 2022, the IMF Board completed the fourth review of the PCI and the first review under the SBA/SCF, enabling the immediate disbursement of SDR 129.4 million (US$180 million equivalent). Despite the challenges from the COVID-19 pandemic, performance with the end-June PCI objectives were broadly satisfactory, and all quantitative targets but one (the ceiling of the share of single-sourced procurement contracts) were met. Both programs remain on track. The World Bank team is coordinating closely with the IMF, regularly exchanging views on the adequacy of the macroeconomic policy framework, downside risks, and the status of the structural reform agenda. 3. GOVERNMENT PROGRAM 29. Since 2014, the Plan Senegal Emergent, which is now in its second implementation phase, is the overarching strategic framework for the long-term economic and social development of the country. The Plan Senegal Emergent (PSE), adopted in 2014, aims at achieving an emerging market status for Senegal by 2035 and has three strategic axes: (i) transforming the structure of the economy to support strong and sustainable growth; (ii) expanding access to social services and social protection and preserving the conditions for sustainable development; and (iii) responding to the requirements of good governance, through institutional strengthening and promoting peace, security, and African integration. An evaluation of the first five-year Priority Action Plan (PAP) for 2014-2018 (PAP 1) highlighted important progress but also pointed to constrained competitiveness and structural transformation due to persisting structural weaknesses, including lower-than-expected contributions to growth from exports, infrastructure, and private investment (subdued due to heavy tax administration and labor market regulations). Importantly, the need to increase efforts to reduce spatial and social inequalities was highlighted. The PSE is now in its second implementation phase 2019-2023 (PAP 2) with key measures spanning from export promotion, infrastructure expansion, and sustainable management of natural resources to improved business environment, public administration, and social services. 30. In response to the COVID-19 crisis, the Government published a revised PAP 2A, (Accelerated) reflecting a stronger emphasis on building systemic resilience via endogenous, national private sector- led growth drivers, an early warning system, and a dynamic digital economy. Related climate adaptation and mitigation considerations will support delivery of the country’s recently submitted first Nationally Determined Contribution (NDC). 7 These measures built on the Economic and Social Resilience Program (Programme de Resilience Économique et Sociale, PRES) implemented in 2020 to combat the COVID-19 crisis, which focused on saving lives, protecting livelihoods, and supporting the post-pandemic recovery. The main vehicle for the PRES was a dedicated solidarity fund at the BCEAO, named FORCE-COVID-19 (7 percent of GDP), geared towards upgrading the health system and containing the economic fallout of the pandemic, including by providing targeted support to vulnerable households and firms. It featured four 7 Senegal ’s first NDC (Gouvernement du Sénégal (2020). Contribution déterminée au niveau national du Sénégal, accessible at https://www4.unfccc.int/sites/ndcstaging/PublishedDocuments/Senegal%20First/CDNSenegal%20approuv%C3%A9e-pdf-.pdf Page 15 The World Bank Equitable and Resilient Recovery in Senegal (P172723) pillars: (i) health sector support (including supply of medical and pharmaceutical products); (ii) social resilience; (iii) private sector and jobs; and (iv) supply of food and fuel. The program was financed by a mix of donor contributions, the central government budget, and voluntary private sector donations. Box 1. Climate change as a threat to economic growth and poverty reduction Like most countries, Senegal is highly vulnerable to climatic shocks and externalities, and these are likely to become more prevalent over time as climate change intensifies. Sea level rise, changing precipitation patterns, more prevalent drought, and coastal erosion create significant challenges, with 60 percent of the population living in the coastal zone 8 and 70 percent of the population employed in the agriculture sector 9, which is primarily rain-fed. Having both a great need for investment and innovation to improve resilience and a great urgency for action, Senegal ranks among the bottom third of most vulnerable countries to climate change according to the Notre Dame Global Adaptation Initiative (ND-GAIN) Country Index. Droughts and floods have intensified in recent years, and climate change is expected to further exacerbate the extremes of weather patterns and natural hazards facing Senegal. All the weather-related disaster categories of Think Hazard! (i.e., floods, water scarcity, extreme heat, and wildfire) are high for Senegal. In 2017 alone, coastal flooding induced costs of 1.4 percent of Senegal’s GDP while coastal erosion amounted to 3.3 percent of GDP 10. Ninety percent of Senegal’s industrial establishments and 68 percent of GDP are based in the coastal zone 11. By 2080, sea level rise will place three fourths of the coastline at high risk of coastal erosion 12. The total cost of infrastructure disruptions (additional costs to firms) in the power, water, and transport sectors in 2019 because of climate-related hazards was US$342 million, or 1.8 percent of GDP 13. In the longer-term, if average world temperatures were to rise by 3°C from pre- industrial levels, Senegal’s GDP is expected to decrease by 1.3 percent by 2030 and 3.9 percent by 2050 14. Some scenarios suggest that climate-related impacts could dramatically increase the number of poor and erase decades of poverty reduction efforts: under high climate change stress, poverty rates could double as soon as 2030, mostly via food price, production, and health impacts. The effects would be disproportionately felt by the more vulnerable: poor non-agricultural and urban households and female-headed households. 4. PROPOSED OPERATION 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION 31. The proposed operation is fully consistent with the second PAP 2 for 2019-2023 of the PSE and its accelerated version (PAP 2A), which aims at generating the conditions for Senegal to become an inclusive emerging economy by 2035. Table 6: Correspondence between proposed pillars and PSE, phase 2, Strategic Objectives (S.O.) # DPO Pillars PSE Strategic Objectives Boosting the resilience and Increase the productivity of the economy (S.O. 15 Pillar 1) via improving 1 productivity of human capital labor productivity (e.a.1.5.1) Improve population health (S.O. 2.1 Pillar 2), Promote social protection (S.O. 2.9 Pillar 2) 8 https://www.wacaprogram.org/country/senegal 9 https://climateknowledgeportal.worldbank.org/sites/default/files/2019-06/SENEGAL_CSA_Profile.pdf 10 http://documents1.worldbank.org/curated/en/822421552504665834/pdf/The-Cost-of-Coastal-Zone-Degradation-in-West-Africa-Benin-Cote- dIvoire-Senegal-and-Togo.pdf 11 https://www.wacaprogram.org/country/senegal 12http://documents1.worldbank.org/curated/en/537811468305337766/pdf/837830WP0P12030Box0382112B00PUBLIC0.pdf 13 Hallegatte, Stéphane, Jun Rentschler, and Julie Rozenberg. 2019. Lifelines: The Resilient Infrastructure Opportunity. Sustainable Infrastructure Series. Washington, DC: World Bank. doi:10.1596/978-1-4648-1430-3. License: Creative Commons Attribution CC BY 3.0 IGO. 14 World Bank. 2020. The Next Generation Africa Climate Business Plan: Ramping Up Development-Centered Climate Action. World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/34098 License: CC BY 3.0 IGO. Page 16 The World Bank Equitable and Resilient Recovery in Senegal (P172723) Improve the quality of public services (S.O 3.1 of Pillar 3) Reduce gender inequalities (S.O. 3.3 Pillar 3) Accelerate the demographic transition (S.O. 2.7 Pillar 2) Increase the productivity of the economy (S.O. 1.5) via more inclusion of women in the production process (e.r.1.5.3) Boosting macro-fiscal Improve access to quality infrastructure (S.O. 1.3) 2 resilience and private sector Increase public investment and expenditure efficiency (S.O. 1.2 Pillar 1) participation for productive jobs 32. The development objective of the program is to enable equitable growth and sustainably increase the resilience of households, firms, and fiscal accounts. The Policy and Results Matrix in Annex 1 summarizes the proposed prior actions, triggers, and results indicators. Figure 3 offers a conceptual framework for the operation, building on the World Bank’s JET framework. The operation rests upon two complementary pillars aiming to strengthen labor supply (productive and resilient human capital – Pillar 1) and labor demand (competitive and connected markets – pillar 2). It adds to the framework an emphasis on resilience and preparedness to shocks and on fostering the necessary conditions for private sector led, equitable growth, notably including prudent debt and fiscal risk management. 33.The proposed DPO series directly builds upon and complements achievements from the previous Multi-Sectoral Structural Reforms DPO series (P170366) – and related supplemental financing – aimed at boosting competitiveness by means of building the foundations of a dynamic, innovative, and inclusive economy. Notably, as a result of reforms under the previous program, energy services will become more affordable through: (i) a profound transformational shift in the energy mix towards natural gas and renewable energy with significantly lower costs and lower carbon emissions; (ii) adopting an institutional framework for the gas sector, including a new law and establishing a gas aggregator as a subsidiary of SENELEC and (iii) strengthening the methodology used by the regulator to determine the required compensation to promote the financial viability of the sector, as well as the harmonization of end user tariffs between urban and rural consumers, which should facilitate energy access. Ongoing efforts and complementary reforms, working with other donors in the sector, should advance sector resilience and sustainability. Further, supported by an IDA Investment Project Financing (IPF) operation, the GoS is continuing to implement policy, legal and regulatory instruments forming the Gas-to-Power Strategy. Ultimately, it would complement reform efforts related to ongoing initiatives, such as the Compact with Africa, which focus on private sector development and business environment reforms. Page 17 The World Bank Equitable and Resilient Recovery in Senegal (P172723) Figure 3. Proposed Results Framework Source: World Bank Staff. 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS Pillar 1: Boosting the resilience and productivity of human capital 34. Pillar 1 of this DPO series supports policies and institutional reforms to boost the resilience and productivity of human capital for households and individuals. In the past decade, Senegal has implemented large scale and ambitious social programs. Two pillars of the national social protection system were incrementally established: a National Social Registry (Registre National Unique, RNU) covering 30 percent of the population (or 550,000 households) and a large cash transfer program covering 18 percent of the population (or 300,000 households). Moreover, GoS has designed an ambitious UHC program, combining free access to healthcare for eligible segments of the population and a subsidized community insurance scheme. 35.Reform sequences 1 and 2 under Pillar 1 will institutionalize and consolidate Senegal’s core social programs by (i) anchoring them into law (the RNU in DPO1 and the cash transfer and UHC programs in DPO2); (ii) supporting difficult but critical legal actions to ensure the financial and technical viability of these programs (a unique information and budget management system in the health system in DPO1 and the recertification of cash transfer beneficiaries in DPO2); (iii) expanding the reach of social programs ( by Page 18 The World Bank Equitable and Resilient Recovery in Senegal (P172723) mandating the use of the RNU for targeting social spending across sectors in DPO1 and improving access to quality health products across areas in DPO2); and (iv) making the programs responsive to climate- related shocks (through the creation of a climate shock-response program in DPO2). 36. Pillar 1 also supports legal reforms to enable women to accumulate greater human capital through education and contribute more productively to the labor market (reform sequence 3). Reforms of the labor code will reduce barriers to the entry of women into the formal sector, and reforms to enable women-led firms to gain better access to public procurement contracts, thereby enhancing their economic potential. The program also supports reforms to remove key constraints to girls’ education, such as new regulations to strengthen the right of girls to attend and reintegrate themselves into school during and after pregnancy. Those structural reforms will benefit all women and girls, improving their agency and decreasing their school dropout rates due to early pregnancies. Prior Action 1: To reinforce the sustainability of health insurance, the Recipient has decided to progressively deploy in all public health structures a unified information system for case management and financial monitoring of the Universal Health Coverage. Trigger 1: To increase access to health services for the most vulnerable, the Recipient has (i) submitted to Parliament the draft law on the UHC program that regulates its operation, financing, enrollment requirements and associated gratuity schemes; and (ii) adopted a revised statute for the National Supply Pharmacy that facilitates the purchase of drugs on international markets. 37. The COVID-19 pandemic has shown the importance of a functioning health system with a broad reach. The UHC program was launched in 2013, and an autonomous agency, the Agency for Universal Health Insurance (Agence pour la Couverture Maladie Universelle, ANACMU), was established to implement the program in 2015. The Government aims to expand the coverage of health services to the entire Senegalese population, and the ANACMU currently oversees a social health insurance scheme dedicated to including members of the informal sector and a non-contributory free healthcare scheme for vulnerable groups such as pregnant women, the elderly, and children under the age of five. The program relies on a well-developed network of community-based health insurance schemes at the commune level, with a mandate to facilitate the enrollment of beneficiaries and to subsidize direct payment in case of illness of their members. 38. Nevertheless, important challenges remain, including weaknesses in the management capacity of the UHC program, the voluntary enrollment process, and the risk-pooling mechanisms that jeopardizes the financial sustainability of the program, as well as the frequent stockout of certain essential medications. To improve efficiency and sustainability of the UHC program, policy reforms in the following areas are essential: (i) deploying an integrated management information system for UHC to improve financial sustainability through tighter case management and accelerated invoicing processes; (ii) adopting a law to revise the current voluntary enrollment scheme to ensure better health insurance coverage by reducing adverse selection and ensuring a higher, more efficient level of risk-pooling of community-based health insurance schemes (i.e., by balancing the number of healthy vs. less healthy individuals who purchase health insurance); (iii) providing a new legal status for the National Supply Pharmacy (Pharmacie Nationale d’Approvisionnement, PNA) as an autonomous agency, which would improve its capacity to procure basic health products on the international market and to transport and store them at the Page 19 The World Bank Equitable and Resilient Recovery in Senegal (P172723) recommended temperatures. These reforms will contribute to greater efficiency of public expenditures in the sector by improving the government’s capacity to track financing needs and funding flows toward healthcare facilities, rationalize the enrollment process into the UHC program and control costs, and procure drugs and medical supplies at lower costs on the international market. 39. These reforms will strengthen and be supported by other important areas of dialog and operations. They are closely linked with the reform area on social protection, as beneficiaries of the flagship safety net program are automatically enrolled in the health insurance scheme under the UHC program. They will also contribute to the objectives of the reforms on women economic empowerment by helping to build a healthier, more productive female labor force. These reforms will be accompanied and supported by the World Bank-financed Investing in Maternal, Child and Adolescent Health (ISMEA) Project (P162042) and through analytical work, technical assistance (TA), and other financing. 40. As a result of these measures, the health insurance coverage rate is expected to increase from 49 percent in 2020 to 75 percent in 2023. This will be possible due to the increase in the number of people that will be enrolled in community-based health insurance schemes (healthy and less healthy individuals) and improvements in the quality of health services, including through a reduction in the number of pharmaceutical stock-outs. Prior Action 2: 2.To improve equity and efficiency of social expenditures, the Recipient has established a regulatory framework for the Unified Social Registry which is becoming the mandatory targeting tool for all social policies, including climate and other shock-response programs, and has regulated its use by ministries and agencies. Trigger 2: To protect human capital of the most vulnerable, the Recipient has adopted (i) a ministerial arrêté establishing and regulating the national Cash Transfer program (PNBSF) and creating a new climate shock-response program; and (ii) a ministerial arrêté triggering the process of re-certification of PNBSF beneficiaries. 41. Senegal’s growing social protection system is essential to promote equity and resilience. The RNU was built over time and now includes over 550,000 households, which represents about two thirds of the poor. In addition to the Ministry of Social Protection, an increasing number of sectoral ministries and agencies (including agriculture, health, education, culture, and the food security agency) and humanitarian non-governmental organizations (NGO) have started using the registry to target social programs. Current social protection programs include a national cash transfer program providing regular consumption support and sensitization activities on human capital protection to the 300,000 poorest families, a productive program to help beneficiaries develop and diversify their livelihoods for greater climate resilience, and a shock-responsive assistance to households affected by climate-induced shocks, such as food insecurity, floods, and fires. 42. After much operational progress, institutional deepening has become critical for the social protection system. A presidential decree designating the RNU as the main targeting and coordination instrument for social programs across sectors (including shock-response programs triggered in case of climate-induced or health crises) will promote its use across sectors, in a context where many social policies and programs remain poorly targeted or regressive (Social Protection Public Expenditure Review (PER), 2017). The decree will also improve the reliability and effectiveness of the RNU by defining its main functionalities, utilization protocols by Ministries and agencies across sectors, and data-sharing procedures. So far, the responses to Page 20 The World Bank Equitable and Resilient Recovery in Senegal (P172723) shocks have been demonstrably efficient from an operational standpoint but lacked institutional consistency and predictability. A clearer institutional framework for regular and shock-responsive cash transfer programs will ensure that chronic poverty and vulnerability to climate shocks are being addressed in a coordinated, efficient manner rather than on an ad-hoc basis. An established program will allow adjusting coverage and benefit amounts to the budget allocated by Government. The average yearly cost of shock response programs (floods, fires, droughts) is estimated at about US$3 million based on recent experience. The recertification of beneficiaries of the main cash transfer program will support equitable targeting over time. 43. The expected results of the reform sequence will be considerable progress in the equity of social programs in Senegal and their potential to foster resilience and climate adaptation. Specifically, the total number of beneficiaries of social programs drawn from the RNU is expected to increase from 250,000 in 2020 to 400,000 in 2023. Moreover, vulnerable households will have access to stronger, more equitable social programs that build their resilience, support their consumption, and protect them when shocks hit. These reforms will also complement (i) reforms planned in the health sector by protecting human capital from shocks and strengthening the targeting mechanisms of social policies, including the UHC program; and (ii) reforms on female labor force participation, by promoting women empowerment and stronger human capital for the poorest. These reforms will be accompanied and supported by the World Bank- financed Safety Net Project (P133597) and associated programmatic Advisory Service Analytics (ASA) (P174074) through analytical work, TA, and financing of certain activities critical to successful reforms, such as an intersectoral workshops on the RNU and large communication and outreach activities on the recertification process. Prior Action 3: To reduce discrimination against women in the labor market, the Recipient has (a) removed restrictions to work based on pregnancy and lactation; and (b) approved and transmitted to its National Assembly a draft amendment of the Labor Code (article 142bis) for the prohibition and sanction of pregnancy-related considerations when recruiting, dismissing, or transferring a woman to another position. Trigger 3: To increase access to economic opportunities for women, the Recipient has revised the Public Procurement Code (decree) to introduce definitions and measures to facilitate women-led enterprises access to public procurement. Trigger 4: To increase girls’ chances to complete their studies in a safe and healthy environment, hence improving their chances in the labor market, the Recipient has further enhanced and implemented girls’ rights to education. 44. Women and girls in Senegal do not have the chance to invest in and use their human capital along their life cycle to the same extent as boys and men. Despite recent improvement in enrollment, Senegalese women are still systematically less educated than men, with the share of working age women (age 15-64) with no education still 10 ppts higher than for men (EHCVM 2018/2019). Moreover, only 4.3 percent of women complete secondary school, compared to 11.5 percent for adult men, with this gap being more pronounced in rural areas. One of the root causes of this persistent gender gap is early marriage and pregnancy, widespread in the country particularly among rural, poor women. Almost one woman in ten aged 20-24 declared themselves married before the age of 16 (Demographic and Health Survey, DHS, 2018), with important consequences for secondary school attendance, maternal health, and labor market Page 21 The World Bank Equitable and Resilient Recovery in Senegal (P172723) outcomes. Women who wed underage are 5.4 percent more likely to be inactive than those who marry later in life, and 10 percent less likely to get a formal salaried job. In general, women’s activity rate, earnings and agricultural productivity are lower than men by 22, 62 and 50 ppts respectively, and their underemployment rate is 22 ppts higher. Only 12 percent of the wage gap is explained by observable characteristics, suggesting discrimination is widespread (2018). 45. The proposed set of reforms aims to remove the constraints to accessing human capital and economic opportunities for women by improving the legal framework, which in its current form enables the persistence of these gender inequalities. The right of girls to continue to attend school while pregnant is currently denied by a 2007 Ministerial Order (Circulaire n°004379/ME/SG/DEMSG/DAJLD 15), which forbids girls from attending school during pregnancy and instructs schools to reintegrate them only after they give birth. Schools are also not perceived as safe spaces, and currently there are no mechanisms to effectively protect girls from abuse. Finally, the Labor Code today does not prohibit gender discrimination in employment, does not protect pregnant employees from dismissal, and contains restrictions against women working in certain sectors of the economy. Such legal gaps persist despite the country’s ratification of several international conventions 16. 46.The proposed reforms comprehensively address the root causes of limited female human capital and productive roles in the economy, by increasing girls’ chances to stay in school, reducing discrimination, and opening-up economic opportunities. Prior Action 3 (DPO1) and Trigger T3 address constraints to access economic opportunities in the formal labor market and are expected to increase opportunities for women in more sectors of employment, reduce inequalities contributing to the wage gap and protect women via the reform of the Labor Code. In addition, they will enable women-led firms to access economic opportunities, via amendments to the Public Procurement Code to enhance access for women-led enterprises and accompanying awareness campaigns. Reforms will include streamlining tender documents and procurement processes to better target and identify Women led Small and Medium sized Enterprises (WSME), outlining a package of positive actions such as the technique of quotas in terms of demand for information and prices, subcontracting and warranty waiver to support WSMEs, building WSMEs awareness and competencies in applying to public procurement. 47.The second Trigger (T4) addresses constraints to human capital accumulation for all girls, tackling the issue of early pregnancies and their effect on school attendance through (i) enhanced access to education for all girls via the adoption of a Presidential Decree establishing the right of girls to continue their education while pregnant and to be reintegrated into school after pregnancy; setting up incentives for school attendance for vulnerable girls to lift the economic and/or social constraints affecting the transition from primary to lower secondary, where most of the drop-outs take place; and creating a safer environment at school by adopting a Code of Conduct for school staff. 48. Not addressing women’s unequal access to human capital and economic opportunities imposes significant costs on the economy and society. Today, Senegal may be losing 5 percentage points (ppts) in 15 In 2007, Senegal adopted Circulaire n°004379/ME/SG/DEMSG/DAJLD on "Management of Marriage and Pregnancy in Schools," which directs schools to temporarily suspend girls from education until they give birth for "security" reasons. To return to school, girls must show a medical certificate proving that they are ready to return to school. Girls can obtain these certificates by visiting local health clinics or hospitals. 16 The Convention of the Rights of the Child Rights (CRC) and International Conventions on the Elimination of all forms of Discrimination Against Women (CEDAW) among others. Page 22 The World Bank Equitable and Resilient Recovery in Senegal (P172723) potential growth every year or 2.2 ppts in potential per capita GDP growth 17 due to low female labor force participation, with significant implications for poverty reduction. Actual figures would likely be higher, if one includes the consequences of women’s lower access to human capital (resulting in their overrepresentation in informal, unpaid, and poorly paid sectors) and the gender wage gap. Importantly, besides direct economic gains, improving women’s access to human capital is essential for the well-being of their children and families (including the latter’s health and education outcomes) 18, contributing to breaking the intergenerational transmission of poverty. In Senegal today, early marriage and pregnancies 19 result in a 9 percent reduction in labor earnings in adulthood, but also a 3.5 ppt increase in under-five mortality and an increase in total fertility for women by 17 percent to 26 percent, depending on the age of first birth. In addition to the improvements in individual well-being for women, the reforms are likely to have an indirect impact on child well-being, poverty reduction, and the strengthening of the resilience of households and their capacity to contribute sustainably to inclusive growth. 49. The proposed measures are in line with current government efforts and strongly complement ongoing World Bank projects tackling the same constraints. The reduction of gender inequalities is one of the strategic objectives of the PSE PAP 2, as is the acceleration of the demographic transitions, both confirmed in PAP 2A. Furthermore, important synergies exist with ongoing World Bank projects. In particular, the We-Fi project provides TA and training to facilitate access to public procurement for women; the Investing in Maternal, Adolescent and Child Care Project has an adolescent health component including the implementation of a childcare training to keep girls in secondary schools, as well as technical and life skills trainings for girls out of school, and community awareness activities to prevent early marriage and pregnancy. 50. These measures are expected to lead to the following outcome results over the medium-term. Female-led firms awarded public procurement contracts is expected to increase from less than 8 percent in 2020 to 10 percent by 2023, while the share of girls remaining in school after pregnancy should rise from 0 percent in 2020 to 40 percent in 2023. Moreover, the proposed reforms will likely contribute in the longer term to reduce child and maternal mortality and to accelerating the demographic transition, two result indicators of the PSE. Pillar 2: Boosting macro-fiscal resilience and private sector participation for productive jobs 51. Pillar 2 of this DPO series supports reforms to strengthen the foundations of private sector-led and job creating recovery, to set the country on a more sustainable and equitable growth path. Macroeconomic stability and resilience supported by transparent, prudent, and effective fiscal and debt management are necessary conditions for maximizing Senegal’s potential for recovery and medium-term, sustainable, and inclusive growth. With fiscal space constrained, the effective crowding in of private investment and private sector contributions to short-term recovery and long-term inclusive growth are essential. Therefore, reforms supported under this pillar aim to strengthen government capacity to manage debt and fiscal revenues and expenditures efficiently and in a transparent manner and to improve private 17 Simulations on potential growth indicate that if female labor force participation (FLFP) was as high as for male workers, growth in Senegal in 2020 would reach between 10 and 11 percent (depending on assumptions over TFP), up from 6 percent. Such simulations are based on a timeseries up to 2019. Data from ENES 2018 and National Accounts, World Bank Staff calculations. 18 WDR on Gender Equality and Development 2012; Klasen 2002; Bicego & Boerma 1993; World Bank 2011; Klugman et al., 2014; Diamond, Newby & Varle 1999; Levine et al. 2008, Wodon et al. 2017. 19 Both phenomena are closely interrelated as shown by (international) evidence (World Bank, 2018; for Senegal, Marchetta and Sahn, 2015; Kirdar, M., Dayıoğlu, M., and Koç, 2009). Page 23 The World Bank Equitable and Resilient Recovery in Senegal (P172723) sector liquidity flows. Particular attention is paid to efficient fiscal and debt management, strengthening procedures on effective VAT refunds, and rationalization of VAT expenditures to seek equity and boost revenue collection. Reforms designed to empower private sector contributions to job creation and growth are two-pronged: First, the relevant regulatory and institutional framework for inclusive access to financing for MSMEs will be created. Second, market competition among firms and in the information and communication technology (ICT) telecom, digital economy, and energy sectors will continue to be strengthened in the medium-term. Prior Action 4: To improve effective debt management, the Recipient has created a framework for the mandatory annual monitoring of the implementation of the multi-annual MTDS, which describes the scope, timing, procedure, and disclosure of the annual implementation report, and adopted and published its MTDS for 2021-2023 and validated the borrowing plan for 2021 (covering all domestic and external debt under the control of the central government). Trigger 5: To improve fiscal risk management, the Recipient has (i) developed and adopted (by arrete) a detailed risk-assessment methodology for the granting of public guarantees and on-lent loans to SOEs and monitoring of SOEs’ credit risk; and (ii) included an analysis of macroeconomic and specific fiscal risks as an annex to the Multi- year Budgetary and Economic Programming Document (DPBEP) sent to Parliament. 52. Public debt is sustainable, yet the recent increase from low to moderate risk of external and overall debt distress underlines the importance of prudent and transparent medium-term debt management. According to the joint World Bank-IMF DSA of December 2021, public debt remains at moderate risk of external and overall debt distress, with limited scope to absorb shocks in the near term. External debt indicators mostly remain below their thresholds under the baseline scenario, except the external debt service to export ratio, which breaches its risk threshold in the first year of the baseline reflecting the front- loading of debt service payments brought about by the Eurobond buyback operation in 2021. However, under sensitivity analyses, three of the four external debt indicators breach their threshold, indicating potential vulnerabilities under adverse conditions. 53. Therefore, the proposed reforms aim at boosting effective and transparent fiscal and debt management, including strengthening the capacity to assess fiscal risks from SOEs and PPPs. The identification of the Prior Actions and Triggers are in line with the reform agenda supported through the Sustainable Development Financing Policy (SDFP) under IDA19 and the IMF PCI. a. DPO1 (Prior Action 4) establishes effective and transparent implementation of debt management by (i) creating (by arrete of the Minister of Finance and Budget no. 009518 dated March 31, 2021) a framework mandating annual monitoring defining the scope, timing, procedure, and accessibility of the annual implementation report (FY21 PPA); and (ii) adopting (produced by the Public Debt Directorate - Direction de la Dette Publique, October 2020, validated by decision from the Public Debt Committee CNDP (dated 29 December 2020) and publishing the new MTDS for 2021-2023 (covering all domestic and external debt under the control of the central government) and the validated ABP for 2021 (reflected in Budget law no. 2020-2033 for the Budget of 2021 dated December 20, 2020, in Official Gazette of December 24, 2020). Such reporting represents best practice, outlining progress in the implementation of the multi-annual debt strategy. It compares the main cost and risk indicators Page 24 The World Bank Equitable and Resilient Recovery in Senegal (P172723) to the MTDS targets and explains the reason for any significant deviation. The ABP for 2021 translates the MTDS into nominal amounts for the domestic and external debt instruments to address financing needs. In addition, Senegal prepares and publishes a complementary, transparent issuance plan covering all marketable debt allowing for sufficient flexibility to adapt to changing market conditions. b. DPO2 (Trigger 5) supports the setting up of a strong framework for fiscal risk assessment (including the adoption of a methodology) and inclusion of a first analysis of macroeconomic and specific fiscal risks (from SOEs, state liabilities) as an annex to the multi-year DPBEP sent to Parliament. Notably, the GoS will develop a detailed risk-assessment methodology (FY21 PPA) for (i) the granting of public guarantees and on-lent loans to SOEs and (ii) monitoring of SOEs’ credit risk. This methodology should inform possible risk mitigation measures (such as the charging of a guarantee fee, the establishment of budgetary provisions or the creation of a default reserve fund) and feed the document presenting an annual assessment of the risks posed by contingent liabilities (FY22 PPA). 54. The targeted outcome of increased transparency and quality of debt management and budget planning complements other WBG and donor efforts. Strong and transparent debt management not only reduces costs and fiscal risks attached to borrowing, but also sends an important signal to all stakeholders, including creditors and investors. Over time this should enhance the government’s capacity to actively manage those risks and provide signals back to help discipline fiscal policy. With the support of development partners, the authorities developed a comprehensive Public Financial Management (PFM) Reform Strategy to strengthen fiscal discipline, credibility, and effectiveness of the PFM system. Progress has been reflected in the 2019 Public Expenditure Financial Assessment (PEFA). Furthermore, the WBG has supported policy dialogue, jointly with the IMF, in the context of the preparation of an Evaluation of Fiscal Contingent Liabilities (P164596) and a Medium-Term Revenue Strategy (P173565). The IMF is also providing a three-year, phased TA program on effective management of future oil and gas revenues. Prior Action 5: To increase efficiency of VAT administration, the Recipient has included in its budget law the acceleration of the VAT credit refund procedures. Trigger 6: To increase efficiency of tax expenditure, the Recipient has eliminated (selected) VAT exemptions mainly consumed by the wealthiest part of the population and not subject to a high substitution effect. 55. High tax expenditure is a major constraint for the mobilization of tax resources in Senegal, which is currently well below the regional target of 20 percent of GDP. The differentiated tax treatment of specific sectors, activities, and regions is widespread, increasing complexity and reducing the fairness, efficiency, and effectiveness of the tax system. As a result, tax expenditures account for 39.6 percent of total tax revenues and more than 6 percent of GDP (MTRS 2020). Tax expenditure on consumption tax sources accounts for 60 percent of the total, with a considerable number of exemptions on consumer goods considered socially sensitive. Nevertheless, and because of the limited tax base on income tax, VAT remains the most important source of income, accounting for about 40 percent of total government revenues and contributing around 8 percent of GDP in revenue. Furthermore, as stated in the 2020 MTRS, the current VAT refund process is a major concern for the private sector, constraining its liquidity. By law, a request for excess credits must be examined by the revenue authorities within two months, while in practice, the Page 25 The World Bank Equitable and Resilient Recovery in Senegal (P172723) deadlines for restitution may be somewhat longer. 56. The objective of the tax measures is to reform the VAT system to make it more efficient by improving the interface with firms, and by broadening the VAT base while preserving equity, i.e., preserving the purchasing power of the most vulnerable. To do this, the proposed reform focuses on the VAT credits refunds process and on VAT exemptions. These reforms are closely aligned with the MTRS. 57. In DPO1 (PA5) the VAT credit refund process has been streamlined (through adoption in the 2021 budget law), targeting a refund period of 30 days. The prompt return of excess VAT credits is critical to maintain overall confidence in the VAT system, including for voluntary compliance efforts. Firms are remitting VAT revenues they have collected on behalf of the revenue authorities, and in situations when they have paid more VAT on inputs than is due based on their outputs, an immediate liquidity constraint materializes. To ease this constraint, international best practice targets a refund within 30 days. Since excess credit situations open opportunities for fraud, prompt refunds need to be backed up by sound tax auditing, including a robust risk-management framework. The Government has now established a sufficient audit framework, to refund excess credits more quickly (MTRS, 2020). Two dimensions are covered: (i) setting up via a ministerial Circulaire 20 an accelerated VAT refund procedure; and (ii) increasing and consolidating the efficiency gains achieved by generalizing the accelerated VAT credit refunds system to all complying firms. Based on an evaluation of refunds prepared by the Government in August 2020, the refund period will target a maximum of 30 days for taxpayers who have completed their VAT declaration satisfactorily. The reform process was completed by its inclusion in the 2021 Budget law. While Prior Action 5 might adversely impact VAT revenues in the short term, VAT as share of non-oil GDP is expected to increase in the medium term from greater private sector taxpayer compliance, increased confidence in the tax system, and the program of tax expenditure rationalization supported by the second operation of the series. 58. DPO2 supports tax expenditure rationalization through an improved targeting of VAT exemptions, while preserving consumption of the poorest households. VAT is a broad-based tax, and it has proved difficult to target exemptions to the consumption patterns of the poorest households. While exemptions on basic food items, for example, may have a relative higher impact on the poorest households, the absolute monetary support to middle- and higher-income groups is much higher, due to higher consumption levels. Such poor targeting of exemptions implies a relatively large VAT revenue loss. In addition, recent international and national studies analyzing the impact of VAT and its exemptions on the distribution of household wealth show that the added value of exemptions to support redistribution (i.e., to protect the most vulnerable) is limited in economies where informality of purchases is high and where this is a function of household wealth. This appears to be the case in Senegal, with a rate of informality of purchases of about 80 percent. The evidence also suggests that fiscal gains depend on the type of VAT. For example, a 12.5 percent increase in VAT proceeds (0.71 p.p. of GDP) could come from the removal of food exemptions, while a 2 percent increase in VAT proceeds could come from the removal of electricity VAT exemptions (Figure 4). Possible candidates include the removal of VAT exemptions on electricity and water consumption, by restructuring the tariffication grid (applying the exemption only to consumers whose electricity consumption does not surpass the social tranche limits); the removal of the exemptions for imported luxury rice; and exemptions on inputs for the cement industry. In total, these reforms should 20 Circular 018 MFB/DGID of 17 April in response to COVID-19. Page 26 The World Bank Equitable and Resilient Recovery in Senegal (P172723) result in an increase in collected VAT of XOF 20 billion (0.15 percent of 2019 GDP). Figure 4. Expected increase in VAT revenues due to the elimination of exemptions, as a percent of current VAT revenues and percentage points (p.p.) of GDP Source: World bank Staff calculations based on EHCVM 2018/2019 and administrative data. 59.The expected results of these reforms are to support the growth recovery in the short term and permanently improve the efficiency of VAT collection in an equitable way in the medium term. In the very short term, the prior action of DPO1 will support the private sector, severely affected by the COVID- 19 crisis with an injection of liquidity. The mainstreaming of the accelerated repayment of VAT credits, by reducing repayment times to internationally competitive levels (at or below 30 days) will improve taxpayer relations with this core private sector group, strengthening confidence in the tax system and, as a result, help to increase total tax revenue collected. As regards the tax expenditure component with DPO2, it will help increase VAT revenues, while protecting the most vulnerable parts of the population. Both actions will also contribute to strengthening macro-fiscal resilience by generating more fiscal space. As such, it is expected that VAT revenues will increase from 6.7 percent of non-oil GDP in 2019 to 7.0 percent in 2023. The dialogue around the implementation of the trigger for DPO2 will also include possible compensatory measures as necessary. Prior Action 6: To increase access to finance for startups, the Recipient has adopted a regulatory framework for the promotion and financing of startups pursuant to which, as a matter of general principle, public financing shall be combined with and leverage private resources for the financing of startups. Trigger 7: To facilitate the financing of MSMEs in an inclusive manner, the Government has: (i) implemented partial credit guarantee (PCG) schemes via a guarantee fund (Fonds de Garantie des investissements Prioritaires, FONGIP) (via decree); and (ii) strengthened the regulation facilitating insolvency resolution (via decree). 60. Access to finance is key to enabling entrepreneurial start-ups and MSMEs to create more and better jobs, including for the poor. Senegal has a US$1 billion gap in terms of access to finance for MSMEs, with Page 27 The World Bank Equitable and Resilient Recovery in Senegal (P172723) needs for both debt and equity finance. 21 Across WAEMU, Senegal is the country where firms report being the most financially constrained. The main barriers are lack of competition in the banking sector, lack of credit infrastructure, a poor legal framework, and insufficient public interventions. For example, Senegal does not have a PCG scheme nor a public-private venture capital (VC) fund to create a pipeline of start- ups. In addition, financing mechanisms are numerous and scattered, requiring rationalization, and opportunities to take advantage of e-wallet usage are still minimal, with only 7 percent of the adult population having received an e-payment from the Government. Finally, despite a few digital initiatives such as EcobankPay, 22 digital financial solutions are not widespread. 23 61. Moreover, key supply-side components of the MSME finance market are still missing in Senegal: venture capital firms for start-ups and efficient PCG schemes. These areas usually correspond to market failures in nascent SME finance markets. Since PCG schemes do not emerge spontaneously, governments are often prompted to establish either public or private-public PCGs. There is an abundant literature on the economic benefits of well-governed PCGs. Their primary role is to incentivize financial institutions to finance new markets that they may otherwise deem too risky. PCGs are also used as powerful counter- cyclical tools to cushion economic downturns (when banks are particularly more averse to credit risks) and to accelerate credit growth in times of economic recovery. The same considerations govern the establishment of public and hybrid public-private VC firms for start-ups. In small markets like Senegal, there is limited appetite from the private sector to spontaneously establish VC firms. In both cases, the role of the public sector is not to substitute the private sector but rather to: (i) demonstrate that “frontier” markets perceived as high risk can be profitable and, subsequently, (ii) start crowding in, through smart partnerships, private money. 62. The objective of this reform sequence is to improve access to financing for startups. The first operation (Prior Action6) focuses on the adoption of the implementing decree of the Startup Law. The decree clarifies the principles and mechanisms for the selection, certification, and funding of startups (Prior Action 6). After its adoption by Parliament on December 27, 2019, a law relating to the creation and promotion of startups in Senegal was put into effect on January 6, 2020. Article 12 of this law states that the endowment mechanisms of funds of public and private origin for the financing and growth of startups, as well as fund management methods will be set by decree. The Government has adopted (by decree) the regulatory framework for (i) the establishment of the fund for the endowment of public and private financing for the creation and growth of startups and (ii) fund management rules for the selection, certification, and funding mechanisms of startups when co-financing with the private sector. With this decree, the Government has established a new efficient and transparent mechanism to select and certify startups and principles that the financing mechanisms should follow (i.e., transparency, accountability, and regular monitoring and evaluation. It also stipulates that fund managers must be professionally recruited and that public funding mechanisms will favor co-investment with the private sector to maximize finance for development. 63. DPO2 (Trigger 7) will continue the reform sequence with the following measures: (i) a decree to establish and scale up PCG schemes through a sustainable MSME guarantee fund at the FONGIP and (ii) 21 https://www.smefinanceforum.org/data-sites/msme-finance-gap 22 EcobankPay is a pilot program initiated by Ecobank that seeks to equip thousands of merchants with virtual electronic payment terminals, which in turn allows Ecobank credit allocation based on payment records. See Ndiaye (2020), a case study on EcobankPay for the DSOG study. 23 For a summary of main barriers to more abundant and diverse financing and needed policy interventions, see the DSOG study. Page 28 The World Bank Equitable and Resilient Recovery in Senegal (P172723) regulations to facilitate insolvency resolution. These measures are a continuation of efforts to improve access to finance. Support to an MSME guarantee fund through FONGIP would also help support farms and firms without access to sufficient collateral. While more efforts are needed to develop a fully functioning insolvency regime, the Government plans to strengthen regulations and guidelines to facilitate a quicker conciliation process for firms that face solvency problems in the more unpredictable post-COVID-19 environment. As a result, scarce resources would no longer be locked in unproductive zombie businesses but rather could be reallocated to more productive businesses able to grow and create more jobs, including for lower-income workers, which would also increase financial inclusion. 64. These reforms are supported by recent developments in the financial sector and by assistance from the World Bank and other donors. Senegal’s first hybrid public-private fund, Oyass, is about to be established, supported by the Senegal JET, and Recovery Program (P174757) and by the German Development Bank - KfW. To ensure that Oyass can attract private investors, the Joint Capital Market Program (J-CAP) of the WBG has been supporting for the past two years efforts to modernize the venture capital and private equity regulatory framework at the regional capital market regulator, Regional Council for Public Savings and Financial Markets (Conseil régional de l’épargne publique et des marchés financiers, CREPMF). As a result of this TA, since January 1, 2022, WAEMU has a new framework aligned with international best practices. Regarding the PCG scheme, the World Bank has been working closely with FONGIP to (i) design and implement a governance structure that puts it at arms-length from the Government and (ii) improve its technical capacity in various domains (credit application screening, risk management, etc.). Other development partners are also supporting this effort, including the Italian Agency for Development Cooperation and KfW. 65. As a result of these measures, the number of certified startups is expected in increase from 0 in 2020 to 50 in 2023 and the number of certified startup financing mechanisms from 0 in 2020 to 5 in 2023. The de-risking mechanisms supported by this program should also support the financing of new technologies and businesses capable of creating more and better jobs, especially for low-income workers. Based on a representative sample of micro-sized informal and semi-formal farms and firms in Senegal, there is a statistically significant and strongly positive correlation between having a loan and higher entrepreneurial profits. 24 Moreover, reducing barriers to access to finance should also have a positive impact on women empowerment: according to the same representative sample, only 4.9 percent of women-owned businesses used mobile banking in 2018, compared to 7.5 percent of men-owned businesses. While the 24 Out of 517 firms, only 26 or 5 percent have a loan (and only 27 firms use mobile banking, highlighting the equally low usage of digital financial services). Traditional loans have been extended across all size groupings in the data (52 percent of the sample are self-employed with no employee firms, 33 percent have 1 or 2 employees, 11 percent have 3 to 5 employees, and only 4 percent have more than 5 employees). While 24 percent of the 37 formal firms in the sample have a loan, 7 percent of semi-formal firms and only 1 percent (4 out of 289) informal firms have a loan. Informal firms have neither registered with any local authority nor with the national revenue authority, do not pay local or municipal taxes, and are not registered for VAT or sales tax, while semi-formal firms have one to three of these indicators of formality. Having had vocational training is an important correlate of having a loan: while only 2.5 percent of entrepreneurs without vocational training have a loan, 26 percent of those with vocational training have a loan (15 of 58 firms, suggesting scope for significantly more loans being extended according to this criterion). See Atiyas and Dutz (2020), “Digital technology use among Senegalese informal micro-entrepreneurial firms—with a focus on youth and gender dimensions”, World Bank. Page 29 The World Bank Equitable and Resilient Recovery in Senegal (P172723) rate is very low in both cases, there is an even bigger upside potential for women. 25 Prior Action 7: To facilitate the further delegation of the management of the state-owned fiber optic assets to the private sector, the Recipient has enacted the law authorizing the establishment of a new holding company and adopted the regulations authorizing the transfer to the new company of: (i) the assets of State Informatics Agency (ADIE) and (ii) the State-owned fiber optic assets. Trigger 8: To leverage the state-owned fiber optic assets and facilitate an equitable access to ICT services, the Recipient (MENT) has adopted an Arreté (in accordance with Article 58 of the 2018-2028 Act) authorizing the private "concessionaire" of digital assets to operate as a "wholesale infrastructure operator". 66. Senegal has been steadily losing its leading ICT position in the region over the past 10 years due to poor performances in expanding access to broadband, especially outside of the Dakar area. At the same time Senegal has significantly invested public funds in a large public fiber optic network that is largely underused, despite significant potential demand. The strategic network, under the responsibility of the ADIE, includes close to 4,000 kilometers of optical fiber, in urban and rural areas. ADIE lacks the technical and financial resources needed to manage and commercialize this network effectively. This strategic asset is thus severely underused creating a shortfall for government revenues and constraining telecom operators interested in leasing access to the network to carry rapidly growing data traffic. During the COVID 19 crisis, GoS has defined a priority action plan (PAP 2A) which i) identifies the reduction of the urban/rural digital divide and the expansion of access to internet as a priority, and ii) commits to make more efficient use of the ADIE network by fully “concessioning” this network to a wholesale private operator. 67. The objective of this reform sequence is to increase digital inclusion in the broadband subsector. As part of previous DPO series, the Government has committed to fully achieve the implementation of the concession of the State-Owned ADIE fiber optic assets to a private operator under a concession contract. Ministry of Finance and Budget (MFB) launched an international call for tender end-2019 and pre-selected 4 bidders in January 2020. The GoS /MFB and Ministry of Digital Economy and Telecom/MENT) is being supported by an international consultant to conduct an audit of the ADIE network and prepare the final bidding document to be shared with the pre-selected four bidders. Given the delays in the audit, MFB is of the view that the end-2019 international call for tender is now outdated and needs to be relaunched once the audit mission is completed. The MFB then transferred the responsibility of the audit mission to the MENT who is the line ministry of ADIE. In parallel, GoS decided to create and operationalize a national holding company that will own the State’s fiber optic assets (currently managed by ADIE) and sign the concession contract with the preferred bidder (with support from a transaction advisor to be recruited and which would be financed under the Senegal Digital Economy Acceleration IPF Project (P172524) whose financing is currently in preparation with MENT). Despite government commitment, the ADIE reform is complex (requiring important political decisions and technical works). 68. Under DPO1, the program supports – as Prior Action 7 – the establishment of a national holding company and the transfer to this company of the State’s digital infrastructure as well as the rights and obligations of ADIE. Significant progress has been made in 2021 and 2022. First, the GoS decided that the 25 And it makes a big difference in terms of better jobs: businesses that use mobile banking have significantly higher per-owner entrepreneurial profits, by almost a factor of 10, relative to those that don’t use mobile banking: the unconditional means are 5 367k XOF month versus 592k XOF per month. Page 30 The World Bank Equitable and Resilient Recovery in Senegal (P172723) new public holding company would substitute for the ADIE, which would be dissolved. Second, and in line with this decision, the Parliament and President promulgated in December 2021 a law authorizing the creation of the new public holding company (named SENUM) and the transfer to SENUM of the State’s digital infrastructure as well as the assets of ADIE. Following the promulgation of this law two decrees were passed in February 2022 with one adopting the SENUM’s bylaws and the other implementing the transfer to SENUM of the State’s digital infrastructure. Furthermore, a joint decree signed by both MFB and MENT approved the transfer to SENUM of the ADIE assets. The transfer of both the State and ADIE assets to SENUM will be effective upon SENUM full operationalization. This operationalization process is ongoing and implies several procedural steps required (capitalization, registration, and nomination of governance bodies). In the Letter of Development Policy (LDP), the Government is committing to finalize this process by June 2022. To fully achieve this prior action, the law as well as the two decrees and the joint arrêté are pending their publication in the Government official Gazette. 69. Under DPO2, the program would support – as Trigger 8 – the final execution step of the ADIE reform. The trigger refers to the adoption by GoS/MENT of an arrêté (as per art. 58 of Law 2018-2028) approving the legal authorization of the private “concessionaire” to operate as wholesale infrastructure operator in Senegal. The approval by GoS/MENT of the legal authorization to the private wholesale operator of the previously transferred digital assets would allow the benefits of the trigger to be realized in the marketplace. Indeed, with its legal authorization, the private “concessionaire” could launch its investment plan and would be able to start commercializing services to the market. 70. By the end of the program, these actions are expected to strongly increase competition on both wholesale and retail broadband markets, lowering prices and expanding access to broadband services. The main beneficiaries of the reform will be telecom operators (FREE and EXPRESSO, especially), ISPs (ARC, WAW and Africa Access) and their clients (business and household end-users). These operators and ISPs will be able to rent wholesale access to the ADIE fiber assets to commercialize retail fiber packages and other broadband services to businesses, government, and households all along the ADIE 4000km network, including in the most lagging and rural regions (Casamance and the groundnut basin). The biggest impact is expected to be seen on the fixed broadband market where currently only SONATEL is operating. The fixed broadband penetration rate (in percent of the population) is expected to increase from 0.9 percent in 2019 to 4 percent in 2022. Trigger 9A: To further improve transparency of decision making in the electricity sector, the President has signed decrees associated with the Electricity Code that strengthen the use of competition and improve transparency of decision making related to procurement. In case governance shortfalls cannot be fully addressed through implementation decrees, the Recipient’s Council of Ministers will adopt and submit to the National Assembly revisions to the Electricity Code. Trigger 9B: To reduce costs and increase sector sustainability, the Government will adopt decrees that implement the Gas Code defining the legal and regulatory framework for investment in the midstream and downstream segments of the gas subsector. 71. The World Bank has been working on reforms in the energy sector of Senegal over several years. Most recently, a DPO series of three operations was concluded in December 2019 – with structural reforms to eliminate subsidies and promote financial sustainability of the power sector within five years, Page 31 The World Bank Equitable and Resilient Recovery in Senegal (P172723) and to promote policies and measures to achieve universal access by 2025, which is five years ahead of the target set in Sustainable Development Goal - SDG7. The most binding constraints addressed were the high costs of electricity, poor reliability of supply, and regulatory bottlenecks to increasing electricity access. The approach to structurally reducing costs and increasing financial sustainability is particularly transformational – by supporting the GoS to radically change its energy mix from a sector that is 83 percent reliant on expensive, imported and carbon intensive Heavy Fuel Oil (HFO), to a sector that is a mix of lower cost and lower carbon renewable energy (31 percent), natural gas (54 percent), and coal (15 percent - from existing plants) by 2026. A Gas-to-Power Strategy, a new gas law (known as the Gas Code) and significant institutional arrangements were developed under the DPO series to support investors to advance natural gas investments. A least cost plan was also prepared under the DPO series, and investments that are consistent with this least cost plan are needed to achieve the results of the reform program. 72. The GoS has now revised its electricity law (known as the Electricity Code), which strengthens the investment framework regarding renewable energy investment and implementation of the least cost plan. The World Bank has been working with the GoS over the period from October 2020 to June 2021 to strengthen important requirements in the draft law relating to governance. In parallel with the World Bank’s dialogue, the United States Millennium Challenge Corporation (MCC) was also working with the GoS on the new electricity law in areas of investment planning, unbundling, third party access, and competitive procurement, and included the law as a condition for effectiveness under the Senegal Power Compact with the GoS. The MCC gave “no objection” to the law as it met its requirements. 73.While the adopted electricity law 26 introduces important requirements related to the implementation of the least cost plan and third-party access, it has gaps on governance, transparent decision making, and the role of the private sector in new power generation. The new Electricity Code is regressive on governance by creating a legal basis in the sector for negotiated deals, unsolicited proposals, and unlimited State ownership in Independent Power Producers (IPP) that did not previously exist. In doing so, it does not provide the required checks and balances to ensure confidence in decisions in the sector. 74. Recognizing the GoS sovereign decision to include negotiated deals, unsolicited proposals, and State ownership in IPPS in the Electricity Law, the World Bank proposed key transparency elements in the decision-making process to codify the required checks and balances. These key elements are to: (i) limit the circumstances under which a negotiated deal is allowed, with transparency of key commercial terms, an approval role for the regulator and narrowed circumstances under which the State can overrule the regulator; (ii) require unsolicited bids to proceed to a tender process and increase transparency regarding any bonus awarded to the project initiator; (iii) increase certain transparency provisions regarding State and regulatory decision making in these areas; and (iv) prioritize private sector investment in IPPs and limit SENELEC’s (the State owned utility) share to a non-controlling stake. 75.The GoS has committed to working with the World Bank and MCC to address the governance shortfalls of the Electricity Law. The World Bank held high-level discussions with the GoS and MCC on how to address governance concerns about the Electricity Law. As a result, the GoS agreed to work with both the World Bank and MCC through a tripartite committee that will provide advice on finalization of the implementation decrees and, eventually, on an amendment of the Electricity Law, as needed, to address 26 Published in the Official Journal, 5th August 2021. Page 32 The World Bank Equitable and Resilient Recovery in Senegal (P172723) gaps in governance. The GoS commitment is reflected in the LDP attached to this program document. 76.Trigger 9A requires the adoption of implementing decrees and, if necessary, an eventual amendment of the Electricity Code that together strengthen governance related to new generation. By doing so, this trigger supports least cost investment with the objective of reducing supply costs and increasing sector sustainability. Through the LDP, the GoS defined its commitment to adopting implementing decrees and making changes to the new law aimed at strengthening the use of competition, improving transparency of decision making and strengthening the role of the private sector in new generation in case the legal framework does not address adequately these aspects and it does not provide the deemed results. The expected result is a clearer framework for decision making and more stringent requirements for negotiated deals, while also strengthening the independence of the sector regulator. The impact would be to increase the use of competitive processes for new generation and, in the case of negotiated deals, raise the bar on requirements for transparent justification, including economic benchmarking. It would also progressively lead to greater diversity of generation ownership. Ultimately, this reform program should lead to lower supply costs than otherwise, which could either be reflected in lower State subsidies for the sector or in lower tariffs or both. 77.The GoS is also continuing to implement policy, legal and regulatory instruments forming the Gas-to- Power Strategy and supporting the investment program required for the transformation of the energy mix. In particular, the Gas Code requires specific secondary legislation and regulatory instruments – and these are being prepared. 78. Trigger 9B requires adoption of decrees that implement the Gas Code that was adopted as a prior action to the previous DPO series. It supports further development of the legal and regulatory framework for investment in gas in Senegal’s midstream and downstream segments with the objective of reducing costs and increasing sector sustainability. Prior Action 8: To create an effective framework for private participation in delivering priority public investments and services, the Recipient has enacted a new PPP law to unify and clarify the legal and institutional framework for PPPs; strengthens PPP processes; and sets out policies to promote local participation in PPPs; and adopted its implementation decree. Trigger 10: To complete and operationalize the PPP legal and institutional framework, the Recipient has (i) issued the complete set of Ministerial Orders (Arrêtés) referenced in the PPP Implementing Decree, and (iii) established in practice the PPP unit (Unité Nationale d’Appui aux PPP, or National PPP Support Unit- UNAPPP). 79. Senegal has a long history of delivering public services under public-private partnership (PPP)s— however, gaps remain in the PPP framework, and the governance record of PPPs has been mixed. PPPs have been used extensively in energy generation and urban water provision since the 1990s, and to a more limited extent in ports, road, rail, and airports. Many of these investments have benefitted from WBG technical and financial support, including a PPP for operation of a new Bus Rapid Transit system that is now nearing contractual close. More recently, PPP-like structures have been used in education for vocational training centers, with support from the World Bank, and to deliver new healthcare investments 27. 27In recent healthcare contracts the partnership is more of a public-public nature, the investor being the sovereign investment fund FONSIS. Page 33 The World Bank Equitable and Resilient Recovery in Senegal (P172723) Nonetheless, the inconsistencies and gaps in the PPP framework remain a challenge. The PPP Law of 2014 has not been applied in practice, with key institutions set out in the law not operational. Moreover, this law applies to a subset of PPPs, while others are governed by public procurement law under “delegation of public services”, and/or sector-specific legislation—creating a proliferation of responsibilities and processes. This has both limited the potential use of PPP, and left room for variability in the quality of project processes. The track record of governance of PPP projects in practice has been mixed. Weak public sector capacity has led to over-reliance on private developers to prepare projects without a system for appraisal on the public investment merit of such proposals, and at times on direct negotiation rather than competitive procedures. 80. There is strong political will to mobilize private sector investment to complement available public financing to deliver the PSE PAP2, creating a strong impetus for PPP reform. This is particularly so in the context of the COVID-19 crisis, with the need for public investment for recovery coinciding with expanding demands on the public purse to mitigate social impacts—although care is needed to ensure the fiscal costs and risks of PPPs are well recognized and managed. The PAP2 targets investment of an estimated US$3.8 billion under PPP. Besides continued private investment in energy generation, sectors in which new PPPs are in preparation or being considered include digital development, particularly for fiber assets; roads and urban transport; water and sanitation; solid waste management; urban infrastructure and housing; agricultural infrastructure; healthcare; education; and government buildings. Considering these ambitions and recognizing past challenges, the MEPC has been charged with reforming the PPP program. 81. Prior Action 8 focuses on creating a strong legal foundation and strengthening governance of PPPs in Senegal across sectors through a PPP Law and Decree. The new PPP Law (Law no. 2021-23 related to the public private partnership contracts dated March 2, 2021, in official Gazette dated March 15, 2021) rescinds the 2014 PPP Law and supersedes relevant provisions in the Public Procurement Code, to establish guiding principles for the use of PPPs; unify and clarify the legal and institutional framework for PPPs; strengthen PPP processes; and set out policies to promote local participation in PPPs. The PPP Decree provides detail on how the provisions in the law will be put into practice, legally establishing key institutional structures, and developing processes in more detail. Together, the PPP Law and Decree establish key elements of good governance such as a requirement for robust evaluation of all proposed PPPs, including those emerging from private sector proposals - requiring, among other elements, assessment of economic, social and environmental benefits and impacts, and analysis of fiscal sustainability based on financial analysis of the proposed PPP; decision-making responsibilities including a gatekeeper role for the MFB; competitive procurement as the default procedure for all PPPs, as well as criteria and approvals processes for using “exceptional” procedures such as direct negotiation; and a commitment to transparency in the form of publishing key terms of PPP contracts. Notwithstanding this progress, certain gaps remain in the broader governance of PPPs. As the PPP Law excludes certain regulated sectors— namely, energy, mining, and some ICT activities 28— to avoid inefficient overlaps, it will be central to ensure 1. clarity as to the applicable legal framework and 2. that provisions governing PPPs at the sector level are 28The PPP Law does not apply to PPP contracts governed by sector-specific legal and regulatory frameworks in the following sectors: Energy, Mining, and ICT activities governed by the license and authorization regime of the Electronic Communications Code. In the latter two cases, the contractual types in question do not overlap substantively with PPPs as defined under the PPP Law, although there is overlap of terminology. Page 34 The World Bank Equitable and Resilient Recovery in Senegal (P172723) harmonized as closely as possible with the broader PPP framework, while reflecting sector specificities. 82. The new legal framework needs to be completed and complemented with investment in institutional capacity to deliver high-quality PPPs—Trigger 10 consists of further actions to these ends. A set of ministerial orders (arrêtés) are needed to nominate roles and establish institutional elements defined in the PPP Decree; establish thresholds for application of some key policies; and set out further detail of certain procedures. The establishment in practice of the PPP Unit (Unité Nationale d’Appui aux PPP, or UNAPPP) as a repository of expertise that can help contracting authorities develop and implement PPPs will be an important step towards building awareness and capacity to bring well-structured PPPs to market. The Procedures Manuel of this unit will serve to further clarify PPP process requirements and embed key program principles such as competition and transparency throughout the project cycle. Further support from the WBG to operationalize the PPP program is in place through a P4R operation (P174757) and TA program (P173897) that will support the development of a robust PPP pipeline and operationalize a PPP Support Fund that will set aside dedicated resources for PPP project preparation to take priority projects forward, as well as build the broader capacity needed across government to enable effective coordination and leadership of PPPs in practice. Coordination with the MFB to manage the fiscal implications of PPPs will be particularly important. 83. The expected result from these reforms is the faster and/or more cost-efficient roll out of public investments through PPP than would otherwise be possible. As noted above, the PAP2 targets an estimated US$3.8 billion to be mobilized through PPPs, although more work is needed to refine the PPP pipeline (which may highlight additional opportunities in the sectors mentioned above). Given the long lead time to prepare PPP projects well, most of the impact of these reforms will be felt beyond the timeframe for this DPO. Table 7: DPO Prior Actions and Analytical Underpinnings Prior Actions Analytical Underpinnings Pillar 1: Boosting the resilience and productivity of human capital National Health Financing Strategy: Toward UHC, 2017; Policy Note on the UHC Program, 2019. Prior action #1 The UHC program needs reforms to attain financial sustainability, such as a change in the level of risk pooling, stronger MIS systems and tighter targeting of gratuity schemes. Note on the Equity of Social Spending, World Bank 2019; Social Protection PER, World Bank 2018; Using Adaptive Social Protection to respond to Shocks, World Bank 2018. (P153183) Prior action #2 Apart from the National Cash Transfer program, the main social programs are poorly targeted and benefit wealthier segments of the population; generalizing the use of the Social Registry would dramatically improve equity of social spending. The social protection system delivers rapid, transparent, and efficient responses to climate and other shocks. Marzo, Atuesta (2018), Systematic Country Diagnostic (SCD) background study; Literature Review produced under the WE-FI project; Women Business and the Law - briefing 2019; Marchetta et Sahn 2015 (paper); World Development Report (WDR) 2012 on Gender. Prior action #3 The economic empowerment of women is critical for inclusive growth as it results into a more optimal resource allocation and higher factor productivity, while favoring development outcomes in general, particularly for children health and education. In Senegal, lower human capital, high sectorial segregation, and strong discrimination are all factors disincentivizing the productive Page 35 The World Bank Equitable and Resilient Recovery in Senegal (P172723) participation of women in the economy. Pillar 2: Boosting macro-fiscal resilience and private sector participation for productive jobs Joint World Bank-IMF Debt Sustainability Analysis January and June 2020; DEMPA (2018); 2019 World Bank Evaluation of Fiscal Contingent Liabilities (P164596) and a Medium-Term Revenue Strategy (P173565); 2019 Public PEFA. Prior action #4 Strong and prudent debt management is needed over the medium term to reduce vulnerabilities; fiscal risks from SOEs and PPPs are substantial and need to be assessed/managed. Senegal Medium Term Revenue Strategy (2020); The impact of the tax system on poverty and inequality in Senegal (section on VAT exemptions). World Bank. Draft August 2020. Bachat, Gadenne, Jensen (2020). “République du Sénégal Remboursement des crédits de TVA Diagnostic initial” World Bank Draft 2014. Prior action #5 VAT mobilization and collection can be improved through improving admin and the rationalization of poorly motivated tax exemptions. Improvements in the audit processes of the VAT refund requests allow for quicker decisions on approval of refunds to private sector. Digital Sources of Growth (2020) Prior action #6 Ndiaye (2020) - a case study on EcobankPay for the DSOG; Senegal Country Private Sector Diagnostic (CPSD) 2020; DE4A Diagnostic in Senegal (FY19) and ICT Policy Note for FY19 (P168261), with International Finance Corporation (IFC) inputs/cooperation; Comparative analysis of the PPP options of the ADIE network (P157222), with IFC inputs/cooperation; WBG 2018, Senegal: Better Markets for all through Competition Policy. Dutz et al. (2012), “Competition and innovation-driven inclusive growth”, Chapter 7 in de Mello and Dutz (eds.), Promoting Inclusive Growth: Challenges and Opportunities, OECD and World Bank. Dutz et al (2018), The Jobs of Tomorrow: Technology, Productivity, and Prosperity in Latin America and the Caribbean. Prior action #7 In a dynamic market setting, market-leading levels of productivity and output growth are set by innovation, including the adoption of best-available technologies. The telecommunications sector, as a significant enabler of economy-wide growth, is characterized by stringent regulatory restrictions, legacy market power issues by the dominant operator Sonatel (Orange), and insufficient pro-competition regulations. This is adversely affecting broadband prices and usage, jobs growth and consumers’ welfare. Senegal PPP Program Support TA (P173897, ongoing); Senegal Country Private Sector Diagnostic (CPSD) 2020; ECOWAS Regional InfraSAP (P171771) 2020; Building PPP Capacity in the UEMOA region (P157587) 2018; Cadre PPP pour la participation du secteur privé dans le secteur routier au Sénégal et développement d'une stratégie d'investissement dans les transports urbains à Dakar, 2020 (completed under Dakar Bus Rapid Transit Pilot Project, Prior Action #8 P156186). A solid legal and institutional framework is a key foundation for a successful and well-governed PPP program. The current framework in Senegal presents inconsistencies and gaps that have undermined the successful use of PPPs to deliver priority public investments and services. Page 36 The World Bank Equitable and Resilient Recovery in Senegal (P172723) 4.3. LINK TO CPF, OTHER WORLD BANK OPERATIONS AND THE WBG STRATEGY 84. The proposed DPO supports the World Bank’s Senegal Country Partnership Framework (CPF) 29 for 2020–2024, the World Bank’s Green, Resilient and Inclusive Development (GRID) strategy and ultimately achieving the Twin Goals. The CPF reflects Senegal’s Strategic objective of becoming an equitable middle- income economy by 2035. Consistently, this DPO series is closely aligned with the three pillars of the CPF, which focus on making growth more inclusive, competitive, and sustainable. A key success factor of the CPF is to support the development of a healthy, skilled, and productive population that is well prepared to contribute to the growth process (Pillar 1), with an accent of women and youth. Along with these investments in human capital, the CPF also focuses on job creation and increasing competitiveness to support a private sector-led, diversified, and inclusive economy (Pillar 2). Finally, the CPF proactively mitigates sustainability risks, including those related to enhancing public sector transparency and accountability (Pillar 3). By focusing on women empowerment and paying attention to climate-change impacts the DPO is also consistent with cross-cutting themes of gender equality and climate change risk management. The DPO intends to support a rebuilding better approach, directly linking to the GRID approach to recovery through health, social protection, and L-market access reforms (Pillars 1 and 2 of GRID) and boosting private sector access to markets and finance as well as fiscal and debt sustainability (Pillars 3 and 4 of GRID). The operation also addresses several of the priorities outlined in the SCD for Senegal 30, including weak competitiveness in the private sector, inefficiency of social spending resulting in weak human capital, gender inequalities and social norms limiting the productive potential of women. The DPO advances these priorities by focusing on improving the efficiently and targeting of social spending, favoring human capital accumulation and use among women and improving the business environment to unlock the private sector potential to create more jobs. Finally, the proposed reform program supported by this DPO series will enable gains in poverty reduction and shared prosperity, the twin goals of the WBG, while fostering dynamic and equitable growth. 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS 85. The proposed reform program has been conceived in close collaboration with development partners and in consultation with key stakeholders, seeking strong complementarities. Notably, fiscal policy and debt management, as well as private sector and social protection reform are highly consistent with IMF engagement under the PCI. Close collaboration with the IMF in the context of the DSSI and preparation of DSAs or the MTRS provides a constant platform for technical exchange. Health sector reforms were discussed with the Japan International Cooperation Agency (JICA) (complementary to their budget support operation) and are based on the national health financing strategy, which was developed and validated with the participation of all stakeholders, including the private sector and civil society. Social protection reforms were discussed and coordinated with partners involved in the sector, including through budget support operations, such as the European Union and the German cooperation. Labor market and private sector reforms are complementary and mutually reinforcing Senegal’s engagement under Compact with Africa, led by Germany. The process leading to the drafting of the Startup Law and Decrees by GoS was initiated by the Policy Heckathon of 2018, facilitated by the World Bank, where more than 60 players of the entrepreneurial ecosystem in Senegal were brought together to develop the Startup Act (covering the 29 Report No. 143333-SN 30 World Bank 2018. Page 37 The World Bank Equitable and Resilient Recovery in Senegal (P172723) Law and Decrees). In developing the PPP Law, the MEPC consulted and received comments from stakeholders, which included potential private sector investors and expert advisors, as well as development partners. Girls’ protection measures under Prior Action 3 have been discussed and agreed with United Nations International Children's Emergency Fund (UNICEF), who is providing extensive TA in this domain. Ultimately, frequent consultations with the European Union (EU) and bilateral partners assure synergies across policy areas including fiscal and debt management as well as social protection. 5. OTHER DESIGN AND APPRAISAL ISSUES 5.1. POVERTY AND SOCIAL IMPACT 86. The reforms supported by this operation are likely to significantly contribute to poverty reduction over the short and medium term, including by avoiding surges in chronic poverty due to shocks. The proposed program addresses major constraints to broad-based productivity growth and inclusive economic activity. With an estimated increase in the poverty incidence by 0.4 percentage points rather than a decrease of 1.7 (in the absence of the pandemic), the headcount may have increased to approximately 38.2 percent at the end of 2020, eroding a significant share of the progress achieved since 2011 (when the poverty rate stood at 43 percent). Inequality, on the other hand, stagnated with a Gini of 0.35, just as in 2011. Among the transmission channels, the most impactful have been the losses in labor income and food price inflation. The disruption in basic service provision may lead to long-term impacts on human capital and therefore productivity, particularly among women, undermining the objective of inclusive growth. 87. Under Pillar 1, Prior Actions 1 and 2 will likely increase the efficiency, sustainability and targeting of social spending, with direct positive impacts on poverty and climate resilience. Such efficiency gains will likely allow for the expansion of the national social protection programs (Programme Nationale de Bourses Familiales, PNBF) and universal health coverage (Couverture Maladies Universelle, CMU), both enabling households to protect and insure against risks, while improving their chances to reduce, the cost of coping ex-post. Furthermore, the institutionalization of the Unique Social Registry (USR), the backbone of both programs targeting, and of the PNBF (under Prior Action 2), will allow the improvement of targeting other social programs 31, including those that are currently regressive or not sufficiently pro-poor, as well as the protection of these building blocks from political swings and uncertainty, all strategies recommended to improve the risk management capacity 32. International and emerging domestic evidence suggest a strong potential impact of both programs on poverty reduction, with limited negative effects on labor market participation or productivity (see full Poverty and Social Impact Assessment, PSIA, for references). An incidence analysis conducted with most recent household survey data available (2018) shows that they are the most pro-poor, best targeted, and with the highest potential to reduce monetary poverty among all social programs (Figure 5). While an additional GDP point allocated to the CCT program would decrease poverty by between 1 and 2 percentage points 33, the same, coupled with an improved targeting may boost 31 Public Expenditure Review of Social Protection in Senegal. The World Bank (2018). 32 World Development Report (2014). 33 Depending if the increase concerns the amounts distributed (-1p.p.) or the number of beneficiaries (1ppt). Page 38 The World Bank Equitable and Resilient Recovery in Senegal (P172723) poverty reduction up to 4.5 ppts 34. Figure 5: Incidence of main social programs in Senegal (shares of programs benefits by deciles of total expenditure) Source: World Bank Staff calculation based on ECVMH 2018/2019 and administrative data provided by the GoS. 88. By improving access to human capital, Prior Action 3 will favor increased, fairer, and more diversified access to economic activities for women, building up their resilience but also boosting productivity. One important ingredient for women’s economic empowerment is access to the labor market, which is largely determined by the level and quality of their human capital. In turn, a more efficient allocation of labor and capital is a precondition for economic growth, poverty reduction, and shared prosperity. Not only that: abundant international evidence also shows that besides the direct economic grains, women’s economic empowerment is instrumental in promoting the development and wellbeing of their children, families, and community (see full PSIA for details). By acting on the legal framework, the proposed reforms will contribute to the increase in age at first birth, reducing pregnancies among the 13 to 16 years old and resulting in better health for all girls and their children, enhanced school attendance and learning outcomes and higher returns for their labor market trajectory. It will also contribute to reduce overall fertility, bringing the country closer to its demographic dividend. Widespread in Senegal, early marriage and pregnancies are strong determinants of secondary school dropout as well as inactivity and low productivity in the labor market. Furthermore, this PA will directly tackle gender issues in the workplace, favoring more sectorial diversity, women’s formal employment and opening opportunities for women-led businesses. 89. Measures included under Pillar 2 are also expected to have direct effects on poverty, notwithstanding that stronger macro-fiscal resilience has the potential to impact poverty indirectly via additional financing of pro-poor expenditure. A sound and sustainable macro-fiscal framework is an essential precondition to any inclusive growth and poverty reduction, while it also contributes to build the resilience of the system. Past crises have tough us that macroeconomic preparation could shield economies from negative effects, with virtuous countries experiencing smaller declines in growth rates in the aftermath of the 2008 international crisis than they did following the 1997 East Asian crisis. The same beneficial effect of macroeconomic preparation seems to have occurred in many other low- and middle- income countries (WDR 2014). Besides, sufficient fiscal space allows for countercyclical policies, for the 34 This scenario includes 1 additional GDP point allocated to the CCT and resulting into both an increase in the number of beneficiaries (under a perfect targeting assumption) and of the amounts transferred. Page 39 The World Bank Equitable and Resilient Recovery in Senegal (P172723) expansion/maintaining of social expenditure to support those hit by crisis. So, while Prior Action 4 (for DPO1) won’t have any direct positive impacts on poverty and Prior Action 5 (for DPO1) has a negative direct effect, they will enable the country to strengthen its foundation and its financing capacity to continuing supporting poverty reducing expenditure. Prior Actions 6 and 7 are likely to generate positive impacts on poverty as increased competition will lower prices of consumption goods and enable firms to grow and create more good quality jobs. In the specific case of Prior Action 7, although the ICT sector is capital intensive, promoting higher competition may create direct jobs, as well as unleash the economic potential of other economic sectors that will benefit from lower prices, better quality of service and enhanced connectivity to markets. More importantly, the expansion of broadband internet access is expected to reduce poverty through better labor market outcomes, worker productivity and financial inclusion 35. Finally, in a context of rising inequalities, particularly in rural areas and between urban and rural areas, this prior action is expected to decrease the digital divide and better connect remote areas. 90. While VAT exemptions are regressive and have little redistributive value, their elimination (Trigger 6) needs to be well tailored to avoid shifting the tax burden on the bottom 40 percent. Recent studies 36 demonstrate that the rationale of VAT exemptions as social exemptions is weakened in the context of high informality and negative Engel curves for informal purchases (with the informal share of purchases decreasing with welfare). This seems to be the case in Senegal where the share of informal purchase is as high as 80 percent for the bottom of the distribution (90 percent for food items). On this basis, simulations suggest that eliminating selected exemptions, egregiously regressive and with limited substitution effects, would generate a significant increase in the fiscal space, minimizing the impact on the bottom forty percent. Emerging candidates from the PSIA analysis point to school tuition (particularly for tertiary education), rent, water and electricity as well as imported basic goods as potential candidates. The poverty impacts of such reform would be relatively limited, with an increase in the number of poor by 976 individuals in the case of electricity, and 2,730 for water (see table below). The World Bank will be providing TA to the Government not only to identify the exemptions to eliminate, but also to design and implement the appropriate compensatory measure to protect the most vulnerable. Table 8: Simulated impact of VAT exemptions elimination by category. Poverty headcount Category Change (p.p.) Number of new poor (simulated) 1 Food 38.81 0.15 22,930 2 Transport 38.71 0.05 7,206 3 Newspapers 38.66 0 0 4 Gas 38.68 0.02 2,730 5 Rent 38.66 0 0 6 Education (tuition) 38.66 0 0 35 Based on data from 14 African countries, including Senegal, a recent study shows that increased internet capacity and speed have a significant 3.1 to 13.2 percent increase in employment, which likely occurs both through responses affecting firm entry, productivity and exporting. Other research shows that internet adoption can improve labor market outcomes and worker productivity. Using data from the World Bank Enterprise Surveys for Kenya, a study finds that computer ownership, internet use, cellphones and generators lead to growth in value-added per worker in female-owned firms.54 The use of mobile broadband has also been linked with positive financial inclusion outcomes in Sub-Saharan countries.55 Internet availability, in conjunction with mobile phones and tablets, can lead to the emergence of innovative financial inclusion instruments. An assessment in Ethiopia uses these technologies to predict the likelihood of loan repayment, eliminating collateral requirements for underbanked borrowers (from Multi-sector Structural Reform DPO for Senegal, PSIA section). 36 Bachat et al (2020) and Marzo and Pico Mejia (forthcoming, 2020). Page 40 The World Bank Equitable and Resilient Recovery in Senegal (P172723) 7 Health 38.89 0.23 35,984 8 Water 38.68 0.02 2,730 9 Electricity 38.67 0.01 976 Source: World Bank Staff calculation based on ECVMH 2018/2019, and administrative data provided by the GoS. 91. Finally, the complementarity across the proposed reforms is likely to generate additional positive effects on poverty and inequality reduction. For instance, Prior Actions 1 and 2 will strengthen the complementary dimensions of human capital protection, generating synergies characterizing the multidimensionality of poverty (monetary poverty, health, and education) and addressing risk management in an integrated way, as recommended by WDR 2014. Similarly, Prior Action 1 will allow for the accurate definition of Prior Action 5 and of possible compensatory measures, as the institutionalization of the USR will offer the possibility of defining and targeting them. Finally, Prior Action 3 will level the playing field for women, allowing them to take advantage of Prior Actions 6 and 7, accessing new financing opportunities and jobs, reducing sectorial segregation to the advantage of high value-added sectors. 5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS 92. The reforms and policy actions supported by the proposed operation are not likely to have significant negative impacts on environment, forests, and natural resources. Reforms to/improvement of UHC (balancing the supply of drugs and qualified practitioners, debt settling agreement, improving international sourcing, transport, and storage of basic health products, and improving the management of qualified personnel), the Labor and Criminal Codes; empowerment for women; improved fiscal and debt management, VAT and customs collection, startup laws and fiber optics competition will not have negative E&S impacts. 93. An increase in UHC and access to health care may have some effect on the environment through a higher overall production of medical waste. The government’s systems and capacity for managing medical waste is weak, with municipal waste often disposed of at unsanitary dumpsites. The capacity for addressing medical waste would thus have to be enhanced over time. 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS 94. Senegal has embarked on major reforms to strengthen the institutional framework of PFM: implementation of the performance-based budgeting in 2020, with budget programs and the gradual deconcentrating of commitment authority to line ministries, in line with WAEMU PFM directive. In 2020, the authorities have developed a new comprehensive PFM Reform Strategy to strengthen fiscal discipline, credibility, and effectiveness of the PFM system. In addition, the 2019 PEFA highlighted the following PFM strengths: (i) the improvement of taxpayers' access to information on their rights and obligations, and the roll out of online tax declaration system which enable greater effectiveness in domestic revenue mobilization; and (ii) the interface of the treasury accounting system with the Central Bank payment system, providing online access to government bank accounts to enhance Treasury management and daily consolidation of cash balances (as a step towards a centralized Treasury Single Account (TSA) operation for improving cash management). Finally, in 2021, fiscal transparency is set to improve via the publication of Page 41 The World Bank Equitable and Resilient Recovery in Senegal (P172723) series of execution report and audit of the Program of economic and social resilience. 95. Despite the above progresses, a number of PFM issues remain to be addressed and include: (i) delayed expansion of the deconcentrating commitment control to all public entities as recommended by the WAEMU PFM directive; (ii) while the budget is published annually, it does not yet include a comprehensive fiscal risk statement including climate change risk, PPP risk and SOE fiscal risk; (iii) significant delay encountered in the operationalization of the new Integrated Financial Management Information System developed with the technical and financial support of the World Bank, (iv) delayed implementation of the 2020-2025 Medium Term revenue strategy, and new PFM strategy action plan. 96. The foreign exchange control environment is adequate. The latest 2018 IMF Safeguard Assessment of BCEAO remains valid, the foreign exchange control environment is satisfactory. BCEAO publishes a full set of audited financial statements. The auditors have issued an unqualified opinion on the 2020 annual financial statements. Improvements continue to be made to move financial reporting closer to International Financial Reporting Standards (IFRS). 97. The credit will follow IDA’s disbursement procedures for development policy financing. Once the financing agreement becomes effective, and upon receipt of a withdrawal application, and provided IDA is satisfied with the program being carried out by the Government and with the appropriateness of the country’s macroeconomic policy framework, the proceeds of the Credit will be deposited by IDA into an account designated by the GoS at the BCEAO, where they will form part of the country’s official foreign exchange reserves. The Government will credit the local currency equivalent in the dedicated treasury account (at the Central Bank) which forms part of its budget resources using the prevailing exchange rate. As a due diligence measure, IDA will obtain confirmation from the Government that : (i) the sum of the proceeds was received into an account of the government that is part of the country’s official foreign exchange reserves (including the date and the name/number of the government’s bank account in which the amount has been deposited); and (ii) an equivalent amount has been accounted for in the country’s budget management system (including the Chart of Accounts name/account number, the date of transfer, and the exchange rate used). Confirmation will be expected within 30 days of disbursement. If the proceeds of the financing are used for ineligible purposes as defined in the Financing Agreement, the World Bank will require the Recipient to promptly refund an equal amount to the World Bank. Amounts refunded to the World Bank upon such request shall be cancelled. The World Bank reserves the right to seek an external audit of the designated account by independent auditors acceptable to World Bank, and the audit report shall be submitted to the World Bank within six months after the deposit. 98. Auditing. The Recipient will (a) report the exact sum received into the Dedicated Account; (b) ensure that all withdrawals from the Dedicated Account are for budgeted public expenditures, except for purposes such as military expenditures or for other items on IDA’s negative list; (c) provide to IDA evidence that the CFAF equivalent of the credit proceeds were credited to the Dedicated Account and disbursements from that account were for budgeted public expenditures. IDA reserves the right to seek an audit of the dedicated account by independent auditors acceptable to IDA. If, after being deposited in this account, the proceeds of the credit are used for excluded expenditures as defined in the IDA General Conditions for IDA Financing, DPO, IDA will require the Recipient to either: (a) apply the corresponding amount to eligible purposes; or (b) refund the amount directly to IDA. Amounts refunded to the World Bank upon such a Page 42 The World Bank Equitable and Resilient Recovery in Senegal (P172723) request will be cancelled. 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY 99. Monitoring and Evaluation (M&E) arrangements remain intact as in previous DPO operations. The MFB is the main counterpart for monitoring program implementation. The WBG and the MFB set up two mechanisms for close follow up and monitoring of program implementation: a high-level Steering Committee, led by the MFB Secretary General, and technical committees, led by a Technical Advisor of the Minister. The Steering Committee, which meets frequently, brings together all involved institutions both at the executive and technical levels, allowing to identify delays and bottlenecks, and to define alternative solutions and responsibilities. The Technical Committees, across all sectors involved (including health, social protection, Labor-markets/women/equality and justice, finance, and economy/private sector), meet on an ad hoc basis. Their meetings alternate with the Steering Committee and follow up on the day-to-day progress in the reform program while identifying higher-level difficulties to be brought to the Steering Committee’s attention. Continued policy dialogue and built in M&E arrangements throughout complementary WBG projects (IPF, Program for Results, TA,) provides for complementary layers of accountability. 100. “Grievance Redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as prior actions or tranche release conditions under a World Bank Development Policy Operation may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, because of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.” 6. SUMMARY OF RISKS AND MITIGATION 101. The overall risk rating of the operation is substantial. Political and governance, macroeconomic, sector strategy and policy, and institutional capacity for implementation and sustainability have increased substantially in the wake of the pandemic and remain elevated. 102. Political and governance risk is rated substantial. Senegal’s political stability is characterized by a coalition in a lively democracy, where the ruling party requires support from numerous smaller parties and the very influential religious leaders, who hold a strong grip on several burning social issues. While good economic results help support the President’s popularity there is also a perception that the benefits of growth are not being evenly distributed. Key sectors – in particular, health and education – visibly increased their mobilizations during 2018 asking for additional public resources. Given the positive response from the Government, and a strong mandate for the Ministry of Community Development Social Page 43 The World Bank Equitable and Resilient Recovery in Senegal (P172723) and Territorial Equity, other sectors may be tempted to follow suite. Key mitigation factors are a transparent budget process, relatively strong fiscal management, and continued policy dialogue (with the WBG and IMF among others) on strengthening sector governance including PFM, regulatory and competition aspects. 103. Macroeconomic risks remain substantial and depend primarily on progress in reining in COVID-19 and the continued impact of the war in Ukraine. The outbreak of new waves of COVID-19 (including in key trade partner economies) would hamper growth in 2022 and flatten the recovery curve. Both fiscal and external deficits would be more pronounced. Delayed oil and gas developments would imply less than expected revenues and growth in the medium term. Deeper revenue cuts and elevated expenditure needs to stem the ToT shock from the invasion of Ukraine could further increase the fiscal deficit in 2022 and delay a return to WAEMU targets. Public debt could increase further, and high levels persist beyond 2022. Volatile commodity prices could pose up and downside risks to Senegal as a net oil importer and gold exporter in the medium-term. Nonetheless, the Government’s comprehensive and determined response to support poor and vulnerable households and firms, while staying committed to fiscal and debt sustainability and supported by BCEAO’s monetary policy tools mitigates these risks. 104. Sector Strategy and Policy risks have been elevated by the COVID-19 crisis and remain high. The financing of social programs was destabilized, as illustrated by considerable delays incurred by the cash transfer program in the payment of quarterly transfers to the poor and vulnerable in 2021. Institutional arrangements remain fragile and volatile in the health and social protection sectors, with repeated changes of anchoring of the main programs in the last five years. The proposed reforms under Pillar 1 will contribute to streamlining and stabilizing social expenses through periods of crisis. The telecommunications and energy sector policy reforms could be affected by repercussions from reduced or delayed investment activity, pressures on prices/tariffs in face of increased economic and social pressures, pressures from vested interests, or changes in profitability and timeline of important gas investment projects. The new PPP framework explicitly exempts key regulated sectors including energy and telecom, leaving transparency and competition aspects to sector regulation and strategy. Continued policy dialogue and engagement, coordinated with the IMF and TFP, will attempt to mitigate risks and assure progress on private sector participation in key sectors. 105. Institutional Capacity for Implementation and Sustainability risks are high. These are characterized by slow bureaucratic processes and coordination issues within the Government and with regulating agencies, as well as bottlenecks at the decision-making level. Delays in implementation and, at times, policy stalling or partially regressing on previously-implemented reforms – as observed during implementation of past DPOs, has become more likely. The close supervision by field-based staff, complementary investment, and TA operations in the same sectors, as well as the proposed budget support to GoS to avoid reallocation of scarce resources and binding of institutional capacity all help mitigate this risk. Notably, Prior Action 2 will induce an increase in data collected while Presidential Decree 2021-1052 related to the Unified National Registry, dated August 2, 2021, contains important provisions on collected data and non-discrimination. Page 44 The World Bank Equitable and Resilient Recovery in Senegal (P172723) Table 9. Summary Risk Ratings Risk Categories Rating 1. Political and Governance  Substantial 2. Macroeconomic  Substantial 3. Sector Strategies and Policies  High 4. Technical Design of Project or Program  Moderate 5. Institutional Capacity for Implementation and Sustainability  High 6. Fiduciary  Moderate 7. Environment and Social  Moderate 8. Stakeholders  Moderate 9. Other  Moderate Overall  Substantial Page 45 The World Bank Equitable and Resilient Recovery in Senegal (P172723) ANNEX 1: POLICY AND RESULTS MATRIX Pillar 1 - Boosting the resilience and productivity of human capital Policy areas DPO1 – Prior Actions (PA) DPO2 – Indicative Triggers (T) Results Indicator (RI) End 2023 Baseline Target 2020 2023 Increasing access to PA1: To reinforce the sustainability of health T1: To increase access to health services for the most basic health products insurance, the Recipient has decided to vulnerable, the Recipient has (i) submitted to and services. progressively deploy in all public health Parliament the draft law on the Universal Health RI1: Health insurance structures a unified information system for case Coverage program that regulates its operation, coverage rate (percent) 49 75 management and financial monitoring of the financing, enrollment requirements and associated Universal Health Coverage. gratuity schemes; and (ii) adopted a revised statute for the National Supply Pharmacy which facilitates the purchase of drugs on international markets. Institutionalizing and PA2: 2. To improve equity and efficiency of T2: To protect human capital of the most vulnerable, consolidating the social expenditures, the Recipient has the Recipient (MDCEST) has adopted (i) a ministerial RI2: Total number of national social established a regulatory framework for the arrêté establishing and regulating the national Cash beneficiaries of social protection system. Unified Social Registry which is becoming the Transfer program (PNBSF) and creating a new climate programs drawn from 250,000 400,000 mandatory targeting tool for all social policies, shock-response program; and (ii) a ministerial arrêté RNU (number) including climate and other shock-response triggering the process of re-certification of PNBSF programs, and has regulated its use by ministries beneficiaries. and agencies. Empowering women PA3: To reduce discrimination against women T3: To increase access to economic opportunities RI3: for more equitable in the labor market, the Recipient has (a) for women, the Recipient has revised the Public ) a) Increase in share of labor market and removed restrictions to work based on Procurement Code (decree) to introduce definitions female-led firms growth. pregnancy and lactation; and (b) approved and and measures to facilitate women-led enterprises awarded public transmitted to its National Assembly a draft access to public procurement. procurement (percent) a) <8 a) 10 amendment of the Labor Code (article 142bis) for ) b) Share of girls b) 0 b) 40 the prohibition and sanction of pregnancy- T4: To increase girls’ chances to complete their remaining in school after related considerations when recruiting, studies in a safe and healthy environment, hence pregnancy (percent) dismissing, or transferring a woman to another improving their chances in the labor market, the position. Page 46 The World Bank Equitable and Resilient Recovery in Senegal (P172723) Recipient has further enhanced and implemented girls’ rights to education. Pillar 2 – Boosting macro-fiscal resilience and private sector participation for productive jobs DPO1 – Prior Action (PA) DPO2 – Trigger Results Indicator (RI) End 2023 Baseline Target 2019 2023 Improving debt and PA4: To improve effective debt management, T5: To improve fiscal risk management, the Recipient RI4: Number of fiscal risk 0 2+2 fiscal risk the Recipient has created a framework for the has (i) developed and adopted a detailed risk- assessments and MTDS [2019] management. mandatory annual monitoring of the assessment methodology for the granting of public implementation reports implementation of the multi-annual MTDS, guarantees and on-lent loans to SOEs and monitoring published (number) which describes the scope, timing, procedure, of SOEs’ credit risk; and ii) included an analysis of and disclosure of the annual implementation macroeconomic and specific fiscal risks as an annex report, and adopted and published its MTDS for to the multi-year Budgetary and Economic 2021-2023 and validated the borrowing plan for Programming Document (DPBEP) sent to Parliament. 2021 (covering all domestic and external debt under the control of the central government). Increasing tax PA5 To increase efficiency of VAT T6: To increase efficiency of tax expenditure, the RI5: VAT revenues revenue and administration, the Recipient has included in its Recipient has eliminated (selected) VAT exemptions (percent of non-oil GDP) 6.7 7.0 strengthening budget law the acceleration of the VAT credit mainly consumed by the wealthiest part of the [2019] liquidity of private refund procedures. population and not subject to a high substitution sector. effect. Empowering the PA6: To increase access to finance for startups, T7: To facilitate the financing of MSMEs in an RI6: a) Number of private sector and the Recipient has adopted a regulatory inclusive manner, the Government has: (i) certified startups digital technology. framework for the promotion and financing of implemented partial credit guarantee schemes via a (number) a) 0 [2019] 50 startups pursuant to which, as a matter of guarantee fund with FONGIP (via decree); and (ii) b) Number of certified b) 0 [2019] 5 general principle, public financing shall be strengthened the regulation facilitating insolvency startup financing [in collaboration combined with and leverage private resources resolution (via decree). mechanisms (number) with IFC] for the financing of startups. PA7: To facilitate the further delegation of the T8: To leverage the state-owned fiber optic assets RI7: Fixed broadband 0.94 management of the state-owned fiber optic and facilitate an equitable access to ICT services, the penetration rate (in % of 4 [2019] assets to the private sector, the Recipient has Recipient (MENT) has adopted an Arreté (in population) Page 47 The World Bank Equitable and Resilient Recovery in Senegal (P172723) enacted the law authorizing the establishment of accordance with Article 58 of the 2018-28 Act) a new holding company and adopted the authorizing the private "concessionaire" to operate regulations authorizing the transfer to the new as a "wholesale infrastructure operator". company of: (i) the assets of ADIE and (ii) the State-owned fiber optic assets. Strengthening the T9A: To further improve transparency of decision RI8: Average cost of efficiency of the making in the electricity sector, the President has electricity supply (current energy sector. signed decrees associated with the Electricity Code prices (USc/kWh) that strengthen the use of competition and improve transparency of decision making related to procurement. In case governance shortfalls cannot be fully addressed through implementation decrees, the Recipient’s Council of Ministers will adopt and submit 21 19 to the National Assembly revisions to the Electricity Code. T9B: To reduce costs and increase sector sustainability, adopt decrees that implement the Gas Code defining the legal and regulatory framework for investment in the midstream and downstream segments of the gas subsector. Fostering private PA8: To create an effective framework for T10: To complete and operationalize the PPP legal R9: Percent of PPP sector participation in private participation in delivering priority public and institutional framework, the Recipient has (i) transactions reaching the economy. investments and services, the Recipient has issued the complete set of Ministerial Orders (Arrêtés) commercial close that enacted a new PPP law to unify and clarify the referenced in the PPP Implementing Decree, and (ii) are implemented in 0 100 legal and institutional framework for PPPs; operationalized the PPP unit (Unité Nationale d’Appui accordance with the new [2021] strengthens PPP processes; and sets out policies aux PPP, or UNAPPP). PPP law and decree to promote local participation in PPPs; and (percent) adopted its implementation decree. Page 48 The World Bank Equitable and Resilient Recovery in Senegal (P172723) ANNEX 2: IMF RELATIONS ANNEX PRESS RELEASE NO. 22/02 https://www.imf.org/en/News/Articles/2022/01/11/pr222-IMF-Executive-Board-Completes-Fourth- Review-PCI-First-Reviews-SBA-SCF-2021-Article-IV-Senegal IMF Executive Board Completes the Fourth Review Under the Policy Coordination Instrument and the First Reviews Under the Stand-By Arrangement and the Arrangement Under the Standby Credit Facility, and Concludes the 2021 Article IV Consultation for Senegal January 10, 2022 Washington, DC: Today, the Executive Board of the International Monetary Fund (IMF) completed the Fourth Review under the Policy Coordination Instrument (PCI) [1] and the First Reviews Under the Stand- by Arrangement (SBA) [2] , and the Arrangement under the Standby Credit Facility (SCF). [3] The completion of the reviews enables the release of SDR 129.4 million (about US$180 million), bringing total disbursements under the arrangements to SDR 258.8 million (about US$360 million). Senegal’s three-year PCI was approved on January 10, 2020 and is built around three pillars: (i) achieving inclusive and private-sector-led growth, (ii) consolidating macroeconomic stability through prudent fiscal policy and sound debt, and (iii) managing oil and gas revenues in a sustainable and transparent manner (see Press Release No. 20/06 ). Senegal’s 18-month SCF/SBA arrangements, for a total amount of 140 percent of quota, were approved on June 7, 2021 to help support the authorities’ COVID-19 crisis response, catalyze additional concessional financing, and strengthen the external position of the WAEMU (see Press Release No. 21/259 ). The authorities are delivering on their commitments regarding the transparency of COVID- 19 spending; they have published detailed budget execution reports, a special audit of the COVID-19 fund and an audit on the regularity of COVID-19 procurement procedures. The final report by the Audit Court on the 2020 budget and COVID-19 spending execution is expected by March 2022. The Executive Board also concluded the 2021 Article IV consultation [4] with Senegal. A strong economic recovery is underway since mid-2020, driven by industrial production and the services sector, and 2021 growth has been revised upwards from 3 ½ to about 5 percent. The recovery is expected to continue in 2022 and beyond, with a further temporary boost from oil and gas production in 2023–24. The second 2021 supplementary budget incorporates additional exceptional spending related to the use of about two/thirds of Senegal’s SDR allocation (0.9 percent of GDP) to support the recovery and strengthen social protection and the health sector including domestic vaccine production. This, together with additional spending on energy subsidies, will bring the 2021 deficit to 6.3 percent of GDP. Senegal’s public sector debt is projected to reach 73 percent of GDP in 2021 before gradually declining to under 60 percent of GDP. The 2021 current account deficit is projected to widen to 10.6 percent of GDP and decline to about 5 percent of GDP over the medium term. The financial system remained resilient during the pandemic, in part owing to the regional central bank’s (BCEAO) accommodative stance, including additional liquidity provision to banks. Page 49 The World Bank Equitable and Resilient Recovery in Senegal (P172723) The outlook points to sustained stronger activity, as the impact of the pandemic is abating, but is subject to significant uncertainty and risks are tilted to the downside. These include repeated COVID-19 outbreaks, a deteriorating regional security situation, delays in the start of oil and gas production, and a rapid rise of global interest rates. Following the Executive Board’s discussion, Mr. Kenji Okamura, Deputy Managing Director and Acting Chair, issued the following statement: “The COVID-19 pandemic interrupted a decade of high growth and development progress in Senegal. It caused severe hardship for many households, although the impact on the Senegalese economy was mitigated by the authorities’ forceful response. Senegal’s economy is now on track for a robust recovery. “The outlook is favorable provided risks and rising vulnerabilities are well-managed. Risks are tilted to the downside, including the protracted impact from the pandemic, higher oil prices, a volatile regional security environment, slower reform implementation, and delays in the start of oil and gas production. Public debt has risen continuously in recent years and risks to debt sustainability need to be carefully monitored. “The authorities’ reform agenda, supported by the Policy Coordination Instrument, the Stand-By Arrangement and the arrangement under the Standby Credit Facility, remains appropriate to achieve the program objectives of strong and inclusive growth while maintaining macroeconomic stability and containing risks to debt sustainability. “Fiscal policy should remain anchored by a credible, revenue-based consolidation towards a fiscal deficit of 3 percent of GDP by 2024, in line with WAEMU commitments. The communication and implementation of the medium-term revenue mobilization strategy and steps to limit fuel subsidies while protecting the vulnerable are essential in this regard. “Achieving more inclusive growth will also require further improving the business environment, enhancing the social safety net, broadening access to quality education, and addressing youth unemployment. The SDR allocation provides additional policy space to support the health sector and economic recovery. Ongoing reforms to improve public financial management will help strengthen spending efficiency and transparency, particularly for SDR-related spending. “While the financial system remained resilient during the pandemic, long-standing weaknesses will need to be addressed, including deficiencies in the AML/CFT framework, and reforms to promote financial inclusion should be accelerated.” Executive Board Assessment [5] Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the forceful response to the pandemic and the progress of reforms achieved under the Fund-supported programs. Directors concurred that growth fundamentals remain strong, though risks are tilted to the downside. They urged steadfast implementation of the authorities’ reform agenda to set the foundations for strong, inclusive, and sustainable growth. Directors cautioned that fiscal policy should remain anchored by the WAEMU convergence criterion of 3 percent of GDP by 2024. In a context of narrowing fiscal space amid rising public debt, they agreed that a revenue-based medium-term fiscal consolidation would be essential to support macroeconomic stability, contain debt vulnerabilities, and bolster the WAEMU’s external stability. In addition, containing energy subsidies is key to create fiscal space and accommodate other priority spending. In this regard, Directors welcomed that the 2022 budget already includes an increase in social spending. They encouraged the authorities to prioritize concessional borrowing and stressed that enhanced public debt management would help maintain debt sustainability. Page 50 The World Bank Equitable and Resilient Recovery in Senegal (P172723) Directors welcomed the progress on governance measures regarding COVID-19 related spending. They highlighted the need to continue to implement public financial management reforms to improve spending transparency and efficiency, including by reducing recourse to single-source procurement. While Directors noted that a higher share of the SDR allocation could have been used to contain fiscal risks, they emphasized the importance of ensuring transparency and accountability of SDR-related spending. Directors welcomed the authorities’ structural reform agenda. They concurred that accelerating its implementation and achieving more inclusive growth will require measures aimed at improving the business environment, enhancing the social safety nets, broadening access to quality education, and addressing youth unemployment. Directors noted the potential positive impact of the onset of oil and gas production on growth. They encouraged the authorities to finalize the fiscal framework for managing oil and gas receipts ahead of the preparation of the 2023 budget and to communicate revenue projections transparently. Directors agreed that the financial system remains overall sound. They encouraged decisive steps to improve financial inclusion, address remaining pockets of vulnerabilities, and limit fiscal risks from troubled financial institutions. Directors also highlighted the importance of addressing deficiencies in the AML/CFT framework to avoid negative economic repercussions. It is expected that the next Article IV consultation with Senegal will take place within 24 months, in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements. [1] The PCI is a non-financing tool open to all members of the International Monetary Fund (IMF). It enables them to signal commitment to reforms and catalyze financing from other sources. The establishment of the PCI is part of the Fund’s broader effort to strengthen the global financial safety net—a network of insurance and loan instruments that countries can draw on if confronted with a crisis. [2] In an economic crisis, countries often need financing to help them overcome their balance of payments problems. Since its creation in June 1952, the IMF’s SBA has been the workhorse lending instrument for emerging and advanced market countries. The SBA was upgraded in 2009 along with the Fund’s broader toolkit to be more flexible and responsive to member countries’ needs. Conditions were streamlined and simplified, and more funds were made available up front. The reform also enables broader high access on a precautionary basis. [3] The SCF provides financial assistance to low-income countries (LICs) with short-term balance of payments needs. The SCF was created under the Poverty Reduction and Growth Trust (PRGT) as part of a broader reform to make the Fund’s financial support more flexible and better tailored to the diverse needs of LICs, including in times of shocks or crisis. [4] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. [5] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm. Page 51 The World Bank Equitable and Resilient Recovery in Senegal (P172723) ANNEX 3: LETTER OF DEVELOPMENT POLICY Page 52 The World Bank Equitable and Resilient Recovery in Senegal (P172723) Page 53 The World Bank Equitable and Resilient Recovery in Senegal (P172723) Page 54 The World Bank Equitable and Resilient Recovery in Senegal (P172723) Page 55 The World Bank Equitable and Resilient Recovery in Senegal (P172723) Page 56 The World Bank Equitable and Resilient Recovery in Senegal (P172723) Page 57 The World Bank Equitable and Resilient Recovery in Senegal (P172723) English translation of LDP: REPUBLIC OF SENEGAL One People - One Purpose - One Faith ........... MINISTRY OF FINANCE AND BUDGET Development Policy Letter March 2022 Page 58 The World Bank Equitable and Resilient Recovery in Senegal (P172723) This sectoral policy letter includes (I) a review of recent macroeconomic developments in Senegal, (II) public policy directions for fiscal year 2022 and in the context of economic recovery, and (III) follow- up on the multisectoral reforms of previous budget support operations and the Government's commitments regarding the triggers for the next operation. I. Macroeconomic developments 1. In response to the shocks caused by Covid-19, the Government has implemented the Economic and Social Resilience Program (ESRP) with a budget of CFAF 1,000 billion, divided into disbursable expenditures of CFAF 628.4 billion and tax and customs measures that are advantageous to businesses of CFAF 371.6 billion. As of December 31, 2020, the PRES's disbursable expenditures had been disbursed to the tune of CFAF 613.424 billion, i.e., an implementation rate of 98%. This situation reflects the realization of budgetary expenditures of CFAF 603.4 billion and a guarantee of CFAF 25 billion. This initiative has allowed for unstoppable responsiveness, good communication and rapid deployment of resources, with the raising of the technical level of the health sector. In addition, the Government has implemented a promising vaccination campaign with the support of financial partners. These efforts have significantly reduced the impact of Covid-19 in Senegal. 2. The activity indicators at the end of June 2021 signal that the economic recovery has been stronger than expected. In fact, over the first eight months of 2021, the General Activity Index (GAI), which measures non-agricultural and forestry economic activity, rose by 7.0% year-on- year, reflecting the renewed dynamism of the secondary (+17.0%) and tertiary (+5.9%) sectors, mitigated by the decline in the primary sector 37 (-5.6%). Inflation accelerated by 3% in September (year-on-year), driven by higher food prices. Core inflation (excluding energy and fresh food) was 4% month-on-month in September 2020. 3. Budget execution to the end of September 2021 was broadly in line with the LFR targets. Total revenues amounted to CFAF 1983.5 billion, or 66% of the 2021 targets. Tax revenues of CFAF 1,805.6 billion benefited from a good performance by taxes on income, profits and capital gains (CFAF 579.1 billion) and taxes on international trade (CFAF 257.7 billion), while indirect taxes performed slightly below expectations (CFAF 886.8 billion). Total expenditures were executed at CFAF 3060.3 billion, or about 80% of total expenditures. Expenditure execution to the end of September was marked by some savings on the wage bill, overspending on goods and services and transfers, and under-execution of capital expenditure. 4. The banking sector continues to show resilience and finance the economy. Lending to the economy rose moderately by 3.6% in the first eight months of 2021, compared with an increase of 37 Excluding agriculture and forestry. Page 59 The World Bank Equitable and Resilient Recovery in Senegal (P172723) 1.5% in fiscal 2020. The amount and outstanding maturity deferrals granted by banks to their customers and not yet settled stood at 9.4 billion and 25.9 billion respectively at the end of September 2021. The residual principal amount of deferred loans represents 0.5% of the banking sector's loans at the end of August 2021. The gross volume of non-performing loans improved at the end of August 2021, with a gross portfolio deterioration rate of 12.9% compared to 13.3% at the end of December 2020, with the provisioning rate reaching 71.4%. 5. At the end of June 2021, foreign trade showed an improvement in the trade deficit to 707.9 billion compared with 821.7 billion a year earlier. This reduction in the trade deficit is the result of dynamic exports of mining products (+37.5%), groundnut products (+59.6% billion) and chemical products (+22.3%), as well as a moderate increase in imports of intermediate goods (+21.7%) and capital goods (8.6%). Remittances remain resilient with transfer flows increasing by 25.3% year-on-year at the end of June 2021, contributing to a consolidation of the surplus on the secondary income account. In contrast, the services account deficit widened by 65.7 percent in the first half of 2021, in connection with the development of oil and gas projects and the decline in tourism resources, which were hit by the pandemic. 6. At the end of September 2021, the stock of public debt increased by CFAF [1241.5] billion compared with the end of December 2020, from CFAF 9752.9 billion to 10994.5 billion. Central government debt rose from 8903.3 billion to 10045.3 billion, an increase of 12.8%. In terms of composition, the share of external debt fell to 75% (CFAF 7,500.4 billion) against 78% (CFAF 6,946.3 billion) at the end of December 2020, while that of domestic debt increased to 25% (CFAF 2,544.9 billion) against 21.9% (CFAF 1,597.07 billion) at the end of December 2020. As for the debt of companies and other entities in the public and parapublic sector, it rose from 849.67 billion to 949.20 billion, an increase of 11.7%. It is composed of 61.6% (584.373 billion FCFA) of external debt and 38.4% (364.834 billion) of domestic debt. II. Public policies to mitigate the impact of Covid-19 and recovery in 2022 The Government will continue and strengthen the response strategy in 2022, in particular with the acquisition of new doses of vaccines financed by the State and the World Bank for an amount of approximately CFAF 45 billion to ensure the vaccination of the entire population and the provision of health infrastructure throughout the country with the commissioning of four new regional hospitals. The construction of the Polyclinic of the main hospital in Dakar is also planned. 7. As part of the lessons to be learned from the Covid-19 pandemic, the Government has identified two strong axes in its budgetary policy, namely : • accelerate the agricultural development of Senegal and provide it with a solid pharmaceutical industry through a development strategy implemented and supported by the structuring of a plan to revive the sector. The objective is to achieve autonomy in the production of foodstuffs and basic goods, which is a vital issue for a country; and Page 60 The World Bank Equitable and Resilient Recovery in Senegal (P172723) • to respond diligently to the pressing demand, expressed with vigor by a youth that demands solid training, decent and well-paid jobs, a healthy living environment. Thus, the Government has prepared the 2022 budget within a framework of exit from the crisis but also and above all to consolidate the foundations of a resilient economy, which must return to the path of more vigorous and inclusive growth. It is clear that a functioning economy is the only way to have high quality infrastructure, an efficient education system, a robust health system, cultural policies worthy of the name, and significant success in the fight against social inequalities. In turn, these are the same factors that sustain the performance of the economy. In this regard, the Government will strengthen the industrialization acceleration project in order to provide Senegal with internationally competitive industrial sectors, which contribute significantly to GDP growth and job creation. It has the ambition to establish a competitive industry, supported by a strong national private sector, contributing to an inclusive and sustainable development, for an emerging Senegal by 2035. In terms of fiscal management, the budget deficit as a percentage of GDP would decline between 2020 and 2021, from 6.4% to 5.4% (excluding SDRs). It would decline further in 2022 to 4.8%. Fiscal management in 2022 will also be marked by a change of course by shifting the focus to "social infrastructure", to stimulate the development of the education, health and social services sectors, after the significant investments made in capital-intensive sectors (infrastructure and transport and energy services). III. Follow-up of multi-sectoral reforms of previous budget support operations and perspectives on the triggers of the current budget support operation 8. The government reaffirms its commitment to establishing a transparent and incentive-based governance framework for the private sector in the energy sector. To this end, reforms related to governance, organization and financial equilibrium continue to be implemented. The new legal framework is conducive to improving financial viability and good governance with the adoption of the Electricity Code and the Energy Sector Regulation Act in July 2021. This framework brings the following innovations: - development of an integrated least-cost plan approved by decree after advice from the Regulator to improve the sector's planning methodology. This plan serves as a basis for the preparation of generation, transmission and distribution and rural electrification plans and for tariff regulation; - greater private sector participation; Page 61 The World Bank Equitable and Resilient Recovery in Senegal (P172723) - a framework for direct agreement and unsolicited bid procedures, which may only be initiated after the approval of the Regulator, whose missions have been strengthened and who will ensure compliance with the objectives and principles set out in the Integrated Plan at lower cost; - liberalization of the sector with the end of Senelec's exclusive monopoly on the wholesale purchase of electricity and third-party access to transmission networks; - restructuring Senelec into a holding company with subsidiaries in charge of production, transport and distribution-sales activities, in addition to the gas subsidiary already created. This legislative framework, whose objective is to provide affordable energy in quantity and quality in order to achieve universal access by 2025, will be supplemented by implementing regulations (decrees and orders). In consideration of the concerns expressed by the World Bank regarding some of the innovations introduced in the Code, specifically the procedures that derogate from open and competitive bidding - direct agreement, private initiative bidding - and the financial involvement of Senelec in private participation schemes for independent production, The Government agrees to further address these issues within the framework of a tripartite committee (WB, MCC and Government) that will be set up to advise the Government on finalizing the implementing legislation for the Code and the law on the CRSE. In addition, the Government, after a period of implementation and evaluation of the provisions of the aforementioned legal framework, having noted the non-achievement of the objectives of cost reduction and quality of offers, particularly for production investments, could prepare and submit to Parliament specific draft amendments to the Electricity Code and the law on the CRSE. The timetable for the work of the Tripartite Committee in view of the presentation of the revised texts as well as the application decrees to the Government is validated by the working group that was set up in December 2021. 9. Empowering women and facilitating their access to the labor market remains a government priority. This is why the legislative and regulatory framework has been aligned with the best practices recommended by the International Labor Organization, including the working conditions of pregnant women and the prohibition of all forms of gender-based discrimination in the workplace. 10. In accordance with its strategy to strengthen connectivity and reduce territorial inequalities in access to the means of communication, the Government is pursuing the process of commercializing the State's surplus fiber optic capacity, which includes (i) identifying and developing the surplus and (ii) recruiting a concessionaire to operate and commercialize the surplus. To do this, the Government decided to create a company called Société nationale Page 62 The World Bank Equitable and Resilient Recovery in Senegal (P172723) dénommée Sénégal Numérique (SENUM) by Act No. 2021-39 of December 13, 2021, and to transfer to it the optical fiber assets held by the State as well as the assets of ADIE, which it replaces. By virtue of Decree 2022-248 of February 15, 2022, transferring the State's optical fiber infrastructure to SENUM, as well as draft joint order No. 03753 of February 28, 2022, transferring ADIE's assets to SENUM SA, these transfers will be effective upon the creation of SENUM. The Government expects the SENUM to be created, operational and endowed with its fiber optic assets by June 2022. The SENUM will be responsible for pursuing the implementation of the reform by launching the international tender to recruit a private concessionaire to effectively operate the public fiber optic assets. 11. Finally, the law on startups was enacted in January 2020 and its implementing decree was signed and published in the Official Gazette. The approval of the application decree thus facilitates the establishment of the institutional framework for the promotion and labeling of startups and the launch of the fund for their financing. 12. With respect to the implementation of social programs and projects, the government has adopted a regulatory framework establishing the Single National Register as the basis for targeting poor and/or vulnerable households in Senegal. With the entry into force of Decree 2021-1052, social programs, including the exceptional emergency funding granted by the World Bank and other donors for the implementation of the Social Safety Net Support Project, use the UNR as a reference. 13. Like the international community, the Government fully subscribes to the sustainable development financing policy guidelines set for IDA member countries. Senegal is maintaining its prudent debt management and public borrowing policy. The National Public Debt Committee decides on financing applications from the central government and parapublic sector organizations. The medium-term debt strategy, published on the website of the Ministry of Finance, sets out the guiding principles with which the government and its constituent parts must comply in order to maintain the sustainability of the public debt. Finally, budgetary risks are monitored and controlled. They are the subject of an annual declaration annexed to the Finance Act. 14. The government is pursuing its objectives of fighting inequality and aligning with sustainable development financing objectives by reducing tax expenditures (to be completed). Page 63 The World Bank Equitable and Resilient Recovery in Senegal (P172723) ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE Significant poverty, social or Significant positive or negative Prior Actions distributional effects positive or environment effects negative Operation Pillar 1: Objective Prior action #1 No Yes, positive impact Prior action #2 No Yes, positive impact Prior action #3 No Yes, positive impact Operation Pillar 2: Objective No direct impact, positive indirect Prior action #4 No impacts Possible negative impacts of Trigger 5, Prior action #5 No quantified. Prior action #6 No Yes, positive impacts Prior action #7 No Yes, positive impacts Prior action #8 Yes, positive impacts Yes, positive impacts Page 64