Senegal - Second Agricultural Credit Project

CIRCULATING CGP Y TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1232a-SE REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF SENEGAL FOR A SECOND AGRICULTURAL CREDIT PROJECT June 7, 1973 This report was PrePared for official use only by the Bank Group. It may not be p quoted or cited without Bank Group authorization. The Bank Group does not accept responsibilty for the accuracy or completeness of the report.  RATE OF EXCHANGE Currency Unit CFA Francs (CFAF) US$1 C CFAF 230.02 CFAF 1 = US$o0.o43 CFAF 1,000 - US$4.3 CFAF 1,000,000 = US$4,344  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF SENEGAL FOR A SECOND AGRICULTURAL CREDIT PROJECT 1. I submit the following Report and Recommendation on a proposed credit to the Republic of Senegal for the equivalent of US$8.2 million on standard IDA terms to help finance a Second Agricultural Credit Project. PART I: THE ECONOMY 2. A report on the current economic position and prospects of Senegal was distributed to the Executive Directors on June 10, 1970 (Report AW-15a). A Bank economic mission visited Senegal in March 1972, to assess the current economic situation and prospects. The following paragraphs reflect the findings of that mission. Country data are given in Annex I. Economic Potential 3. Endowed with few natural resources, Senegal has only limited possi- bilities for economic development. Agricultural conditions are generally poor, particularly in the groundnut basin where the bulk of the population lives. The south and southeast offer better prospects for development of a variety of agricultural products, but groundnuts still account for the cash income of most of the rural population and for nearly half the country's export earnings. Although there are certain definite possibilities for devel- opment of new crops and new sectors, diversification will take a long time. The economy will continue to be affected by the vagaries of the weather and by fluctuations in the world market price of groundnuts. 4. Apart from agriculture, the main possibilities for economic develop- ment are fisheries, tourism and manufacturing. Thanks to rich resources off the coast, fish production has been growing rapidly. International tourism to Senegal has started to develop only in recent years, but prospects for further expansion of this sector are promising. Senegal developed its manu- facturing industry earlier than other West African countries and its indus- trial labor force is one of the best in Africa. Past Development 5. During the early 1960's, Senegal's economy remained stagnant. The growth of GDP in real terms was minimal (1 percent a year) and per capita income may have declined, though at about US$250, it is higher than in most other African countries. Two factors were primarily responsible for this slow growth. First, independence caused Senegal to lose its privileged posi- tion as the center of French West Africa. This resulted in the loss of  - 2 - export markets for manufactures as domestic industries developed in other West African countries. At the same time, departure of most of the French civilian and military personnel resulted in declining demand for services and locally produced goods. Second, the Government was slow in attacking the country's difficult adjustment problems. The heavy administrative apparatus could not respond quickly to the new situation and government policies stressed administration rather than development. The First Davelopment Plan (1961-64) concentrated on investments for social and transport infrastructure, including housing, urban water supply, and admi- nistrative buildings; investment in rural sectors accounted for less than 20 percent of total development outlays, though it included the initial organi- zation of the country's agricultural programme. 6. The second half of the 1960's saw more energetic development policies by the Government. There was a considerable increase in the public investment program, made possible by substantial improvements in absorptive capacity of the public sector. The program became more directly development-oriented with the share of investments in productive sectors increasing from 24 to 45 percent during the Second and Third Plans. Rural investments improved in quality, and tripled between the First and the Tlird Plan. Rural diversifi- cation, mainly for cotton, rice, and tomatoes, was successfully begun. 7. The change in the Government's development policy, however, came too late to have a significant impact on the economy until after 1968. Falling producer prices for groi dnuts and exceptionally bad weather in 1968 reduced groundnut production by 50 percent and even production of millet and other major food crops remained insufficient to cover local demand. In the modern sector, though, the Covernment did succeed in stimulating import substitution, and this partly offset the loss of export markets for manufactured products. Manufacturing output grew at 6 to 7 percent annually. 8. Since 1968, a number of factors have combined to bring about an 8 percent annual growth of GDP (in current prices). Sharp increases in world market prices for groundnuts after 1968 permitted a 25 percent increase in producer prices in 1971 and this, combined with other measures designed to stimulate groundnut output, helped to restore agricultural production. In addition to these measures the Government's agricultural diversification efforts started yielding benefits in rice, cotton, and vegetable production. The modern sector of the economy continued to expand, partly due to a marked increase in exports of manufactured products averaging 14 percent a year, which reflected Senegal's improving competitive position. At independence, the country had been plagued with a high cost structure which seriously hampered economic growth. Since then, however, Government policies have been aimed at containing price and salary increases, which then allowed local in- dustries (e.g. textile and shoe manufacturing) to start competing successfully in export markets, and contributed to the rapid growth of the tourism sector. It is estimated that salary and price increases may have averaged 3 percent per annum ir. recent years.  -3- Public Finance and Foreign Aid 9. These overali economic trends are reflected in the condition of public finances which deteriorated throughout most of the 1960's. By 1968/69, public savings had declined slowly but continuously to virtually zero. Reve- nues stagnated because of the decline in imports, the most important element of the tax base. Thus, keeping the tax ratio at roughly 20 percent of GDP was quite an achievement. But current expenditures grew, albeit moderately, at 3 to 4 percent annually thus eroding the current account surplus. 10. After 1968/69, a recovery of public savings was made possible because of better tax collection, increased tax rates, and substantial sur- pluses of the groundnut stabilization fund following the rise in groundnut export prices. In 1970/71, public savings represented 7 percent of current revenues. Yet locally-financed public investment continued to exceed savings by a wide margin, as it had throughout the 1960's, and this resulted in a steady decline in Treasury deposits. 11. Senegal has benefited from a large inflow of foreign aid, mostly on concessionary terms. Between 1966 and 1970, foreign aid financed about 65 percent of public investment and averaged US$30 million per year. This cor- responds to US$8.8 per capita annually, mainly financed by the European Economic Community (40 percent) and France (30 percent). The World Bank Group and Germany contributed, respectively, 13 and 10 percent of the total. Foreign aid concentrated on infrastructure and on directly productive projects in the rural sector. Also important was technical assistance, mainly in education, which amounted to US$29 million annually, mostly financed by the French Government. Prospects 12. A severe drought in 1972 seriously affected agricultural output. Groundnut production may have declined by 45 to 50 percent. The impact of the drought on overall economic growth and public finances cannot yet be precisely assessed, but there can be no doubt that the economy has suffered a serious setback. 13. In coming years, the economy will probably grow faster than in the past decade, largely as a result of on-going efforts to diversify agricul- tural output and to expand fisheries, tourism, and industrial exports. Medium term prospects would be more favorable were it not for the fact that ground- nut prices are expected to fall from their present level of over