Senegal - Trade Reform and Competitiveness Credit Project

Document of the World Bank FOR OFFICIAL USE ONLY Report No. P 7391 SE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ONA PROPOSED CREDIT IN THE AMOUNT OF SDR 75.7 MILLION (US$100 MILLION EQUIVALENT) TO THE REPUBLIC OF SENEGAL FORA TRADE REFORM AND COMPETITIVENESS CREDIT August 22, 2000 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = CFA Franc (CFAF) US$1 CFAF 719 (as of August 22, 2000) GOVERNMENT FIScAL YEAR January I - December 31 ABBREVIATIONS AND ACRONOYMS AfDB African Development Bank AGETIP Agence d'execution des travaux d'interet public (Public Works and Employment Agency) AOF Afrique Occidentale Fran,aise (French West Africa) BCEAO Banque Centrale de l'Afrique de l'Ouest CAPAS Coordinated African Programme of Assistance on Services CAS Country Assistance Strategy CFA Communaute Financibre Africaine CFAF CFA Franc DSA Debt Sustainability Analysis ESAF Enhanced Structural Adjustment Facility EU European Union FF French Franc FIAS Foreign Investment Advisory Service GDP Gross Domestic Product HIPC Highly Indebted Poor Cbuntries IBRD International Bank for Reconstruction and Development IDA International Development Association IFC International Finance Corporation IHSDP Integrated Health Sector Development Program IMF International Monetary Fund IMS Investment Marketing Services NHDP National Health Development Program NPV Net Present Value PDS Parti democratique senegalais (Senegalese Democratic Party) PNLP Programme national de lutte contre la pauvrete (National Poverty Alleviation Program) PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction Strategy Paper RER real exchange rate QEFA Quality Education for All SAL Structural Adjustment Loan SAR Societe africaine de raffmage (National Oil Refinery) SDR Standard Drawing Rights SECAL Sector Adjustment Loan TCI Compensatory Import Levy TDP Temporary Protection Surtax TRCC Trade Reform and Adjustment Credit VAT Value Added Tax WAMU West African Monetary Union WAEMU West African Economic and Monetary Union WBI World Bank Institute Vice President Callisto Madavo Country Director Cadman Mills (Acting) Sector Manager Emmanuel Akpa Task Team Leader Nancy Benjamin  REPUBLIC OF SENEGAL FOR OFFICIAL USE ONLY TRADE REFORM AND COMPETITIVENESS CREDIT TABLE OF CONTENTS Page No. C REDIT SUMMARY ..........................I I. INTRODUCTION.I 11. THE COUNTRY CONTEXT ..........................I A. GENERAL BACKGROUND.I B. POLITICAL BACKGROUND .........................2.....2 C. THE ECONOMY..3 C. 1I. Past Economic Performance , .....3 C.2. Recent Economic Developments.,3 C.3. External Debt ............................................. , ...5 Ill. SENEGAL'S ADJUSTMENT PROGRAM ................................... S5 A. GENERAL BACKGROUND.5 B. COMPONENTS.5 A. S OCIAL DEVELOPMENT .................................................. .. . 7 C.l. Poverty.7 C,2. Education.7 C.3 . Health 7 C.4. Fiscal Gap and Financing of the Adjustment Program 8 IV. THE PROPOSED TRADE REFORM AND COMPETITIVENESS CREDIT................................................................9 A. OBJECTIVES.9 Bl. BACKGROUND.9 C. LINK TO THE CAS, POVE RTY IMPACT ANDLO ...............................................RIA....11l C). Fisca TRADE AND Fia COMEIIVNgS ofh A jsmen Program ............................................... zzvs*.. **z*.. P<|>.*4.*i>D@.ow@j........................... DV. THE POOE TRADE RFR AND COMPETITIVENESS REFORM........PROGRAM.........12.. E. PROGRAMCOMPON ENTS1 ..2,,.................9 F. CREDIT FEATURES AND IMPLEMENTATION ................. 13 F.I. Conditions of Tranche Release .............. 14 F.2. Conditions for Second Tranche Release .............. 14 F.2. 1. General Conditions .................................................4.................... ....... 14 F.2.2. Specific Conditions for Release of the Second Tranche .14 V. BANK GROUP OPERATIONS .16 A. PAST ADJUSTMENT LOANS.16 B. THEEPORTFOLIO.17 C. IFC AND MIGA.17 Vl. COLLABORATION WITH IMF AND OTHER DONORS..18 VIl. R ECOMMENDATION ...................... 18 ANNEXES A. Poverty and Social Development Indicators B. Key Economic Indicators C. Status of Bank Group Operations D. Supplemental Credit Data Sheet E. Policy Matrix F. Senegal at a Glance G. Govemment Letter of Development Policy This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.   REPUBLIC OF SENEGAL TRADE REFORM AND COMPETITIVENESS CREDIT CREDIT AND PROGRAM SUMMARY Borrower: Republic of Senegal Amount: SDR 75.7 million (US$100 million equivalent) Terms: Standard IDA terms with 40 years maturity Program Objectives: The proposed Trade Reform and Competitiveness Credit (TRCC) is a key instrument of the Bank's strategy as identified in the 1997 CAS to aid the Government in regional integration, maintaining macroeconomic stability, and promoting private sector development. The objectives of this credit are to improve the competitiveness of the Senegalese economy by liberalizing trade, facilitating trade and tax procedures, and supporting regulatory programs that promote competitive pricing of public utility inputs to the productive sector. This adjustment program supports the Government's Interim Poverty Reduction Strategy Paper (IPRSP) which incorporates a number of social sector targets and a commitment to promote growth and employment through development of the private sector. Given the temporary revenue shortfall caused by the sequenced introduction of tariff and tax reforms, the proposed credit aims to provide budget support to ensure that this shortfall not lead to disruptions in social sector programs, and to support institutional reforms that will reduce administrative burdens on the private sector. Credit Description: In the interest of integrating Senegal more into the regional and international economies while improving the private sector environment, the Government has cut tariffs, reformed the VAT, and has committed to reform its customs and tax administration. The reform program also aims to improve competitiveness by supporting regulatory programs that promote competitive pricing of public utility inputs to the productive sector. The first tranche of the proposed two-tranche operation would help finance implementation of the tariff and tax reform, adjustments in customs and tax procedures, and the establishment of performance criteria for these reforms. The proposed second tranche would continue to support an adjustment program establishing full data links between the customs and tax departments with single taxpayer dossier, demonstrating progress on published performance criteria, and developing the legislative framework defining the governing principles of the regulatory system for public utilities and infrastructure.  ii Benefits: The trade liberalization and proposed institutional reforms will reduce costs, improve competitiveness, and reduce obstacles that hinder the private sector and discourage foreign investors. In the IPRSP, the Government has centered its strategy for poverty reduction on expansion of the private sector, and has committed to reduce unemployment in advance of the Completion Point and presentation of its PRSP. Further, by helping to finance a temporary revenue shortfall due to trade liberalization, public spending in the social sectors can be maintained to meet IPRSP targets. Risks: The proposed credit is subject to two risks: (i) Several of the competitiveness measures rely on a single, integrated modernization plan for Government data systems which could encounter difficulties in implementation; and (ii) Some economic entities may try to regain import protection they have lost. Factors that mitigate these risks include: (a) the fact that integrated customs and tax information systems have been successfully installed in a number of developing countries; and (b) the regional obligations of WAEMU members restrict their recourse to increasing import protection, and the authorities' use of public awareness to build support for the measures would help withstand pressure from interest groups seeking a reversal. Project Appraisal Document: There is no separate project appraisal document. Estimated Disbursements: A first tranche of SDR 37.85 million (US$50 million equivalent) will be disbursed at Credit effectiveness. A second tranche of US$50 million equivalent will be disbursed once specified conditions have been met. Financing Plan: 100% IDA Financing.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED TRADE REFORM AND COMPETITIVENESS CREDIT TO THE GOVERNMENT OF SENEGAL I. INTRODUCTION 1. I submit for your approval the following report and recommendation on a proposed Trade Reform and Competitiveness Credit (TRCC) to the Republic of Senegal for SDR 75.7 million (US$ 100 million equivalent). The credit would be on standard IDA terms with 40 years maturity and a 10-year grace period. The Government is in discussions with the African Development Bank (AfDB) regarding the possibility of AfDB cofinancing of this adjustment program, which would add to the total amount of financing. 2. The TRCC would finance an adjustment reform program that supports the Country Assistance Strategy (CAS) and the Interim Poverty Reduction Strategy Paper (IPRSP). The program, which promotes trade liberalization along with the simplification of trade and tax procedures and more competitive prices for utility inputs, will improve competitiveness and create a more attractive environment for the private sector and for foreign investment. IT. THE COUNTRY CONTEXT A. GENERAL BACKGROUND 3. Senegal is a small, semi-arid Sahelian nation with limited natural resource endowments. The country's development prospects are constrained by handicaps such as scarce rainfall and land availability. Droughts are recurrent due to the southward shift of the 400 mms isohyet. About half of the country receives less than 400 mm of rainfall per year, which is the minimum required for rainfed crops. This rainfall pattern is common to most Sahelian countries and is linked to global factors over which there is little control. One-fifth of the land was considered arable in the second half of the 1980s, but as a result of the rainfall pattern and demographic pressure the availability of high quality land is becoming more acute. Senegal's population of about 9 million is growing at a high rate of 2.9 percent per year, contributing to forest cover loss. This is detrimental to soil fertility, which is estimated to be declining by 3 to 5% a year, while forestry resources are decreasing by 1.2% a year. Other adverse environmental factors include the salinization of agricultural land in low-lying coastal areas. 4. Although Senegal's hostile natural environment and high demographic pressure strongly indicated open economic polices as the key solution for the country, the country pursued until 1994 inward-looking policies that maintained its economic growth rate (2.3 percent average annual GDP growth rate from 1960-1993) below the population growth rate (2.6 percent annual average over the same period). While Senegal has been experiencing sustained strong growth since 1994, its gross domestic product was US$4.8 billion in 1999, equivalent to a per capita  2 of about US$520, placing Senegal in the low-income country group. Senegal's social indicators still compare poorly to other Sub-Saharan African countries. And yet, the country has advantages including a strategic location as the closest point of Africa to America, a proximity with Europe, and all its western part bordered by the Atlantic Ocean. But this potential is yet to be realized. 5. In 1994 two major events took place simultaneously, dramatically changing the general picture described above: a major devaluation of the local currency and the decision by Senegal and the seven other country-members of WAMU (the West African Monetary Union) to create a customs union. The devaluation provided a window of opportunity to implement far-reaching trade reforms. With a Common External Tariff (CET) in place since January 2000, Senegal has its lowest tariff ever which gives the country a unique chance to improve the overall efficiency of its economy and boost exports. The purpose of the proposed TRCC is to assist the country to capture all the benefits of these positive changes while mitigating potential transitional costs. B. POLITICAL BACKGROUND 6. For many years, Senegal has enjoyed a reputation of being a rather sophisticated country. Dakar's legacy at independence in 1960 as the capital of the former Afrique Occidentale Fran,aise (AOF) colony included a relatively well-educated elite and a good infrastructure base. Other key features supporting this reputation include the country's political stability, a relatively independent judiciary, general respect for human rights, and a dynamic and independent critical press. The only major concern has been a separatist group, the Democratic Force Movement of the Casamance (MFDC), which has claimed the independence of the southern region of the country since 1983. Senegal is the only cotmtry in West Africa, which has never experienced a military coup. The first president, Leopold Sedar Senghor, was the first African head of state to voluntarily leave office before the end of his term. His successor, Abdou Diouf, authorized unlimited political parties and private media at a time when democracy was not common in Africa. Under the leadership of President I)iouf, Senegal was also the first African country to engage in economic reforms sponsored by the World Bank and the IMF. 7. However, increasing political openness throughout Africa and the country's poor irmplementation of its economic reform program discounted Senegal's image considerably in the 1990s. In addition, the unbroken rule of the Socialist Party since independence in 1960 came to be at odds with positive political developments in other regions of Africa. This fueled political opposition, and the outcomes of legislative and presidential elections - favorable to the Socialist Party - were violently contested in 1988, 1993, and 1998, as it became clear that the majority of urban citizens were in favor of the opposition. 8. During presidential elections held on February 28, 2000, a large coalition of parties - under the slogan Sopi (change in Wolof) and the leadership of Abdoulaye Wade of the Senegalese Democratic Party (PDS) - forced the ruling Socialist Party to a first-ever second round. Mr. Wade ultimately defeated President Diouf. The peaceful transition that concluded the electoral process helped Senegal improve its profile greatly throughout Africa and on the larger international stage. At the same time, the new President faces daunting challenges in satisfying the urgent needs expressed by the majority of Senegalese while maintaining  3 macroeconomic balances. A new government was put in place in April 2000 and legislative elections are scheduled for 2001. C. THE ECONOMY C.1. Past Economic Performance 9. At independence in 1960, Senegal inherited a relatively well-developed economy, with adequate productive capacity and significant physical and social infrastructure. Between 1974 and 1978, a combination of good rainfall and high world prices for groundnuts and phosphates led to a short-lived export boom which fueled high levels of public spending. When the boom ended after 1978 as a result of recurrent droughts and a substantial deterioration in the terms of trade, the Government turned to heavy borrowing to maintain past spending levels, thus creating significant macroeconomic imbalances. By 1981, the fiscal and the current account deficit reached 12.5 and 27.5 percent of GDP, respectively, and the inflation rate soared at 12 percent. The first attempts to correct the imbalances were made very difficult by Senegal's membership in the CFA Franc Zone, which requires unanimous agreement on action by all members and France before any change to the parity of the common currency. The CFA Franc had been pegged to the French Franc since 1946 at a fixed rate of CFAF50 for FF1. To improve its competitiveness, Senegal was only able to resort to difficult deflationary policies by reducing aggregate demand. However, the appreciation of the French Franc in the mid-1980s and the large real depreciation achieved by many competitor countries and trade partners since 1985-86, combined with negative terms of trade shocks, led to an increasing overvaluation of Senegal's real exchange rate. The limits of the internal adjustment strategies become increasingly obvious, although in a last attempt Senegal adopted several measures in August 1993 to deepen the deflationary policies, including a 15% cut in public sector wages. Inflation was low at -0.7 percent in 1993 resulting in a real exchange rate (RER) depreciation of 3.4 percent, which was still not enough to restore the competitiveness of the economy, as the overvaluation of the CFAF was estimated at about 40 percent at end-1993. The overall fiscal deficit and the external current account deficit worsened, with the fiscal balance (excluding grants) declining from a 0.2 percent surplus in 1991 to a 4.2 percent deficit in 1993, and the current account balance (excluding transfers) sliding from a deficit of 8.3 percent of GDP to 10.3 percent over the same period. Substantial arrears were accumulated, bringing the total stock of arrears to a record level of 13.8 percent of GDP. The economic growth rate was -2.2 percent in 1993, representing a decrease of per capita income of about 5 percent. By this point, it had become clear that Senegal, along with the other WAMU countries, had reached a deadlock, and they decided to change the parity of the CFAF from 50 CFAF/FF to 100 CFAF/FF as of January 12, 1994. C.2. Recent Economic Developments 10. The devaluation of the CFAF in 1994 represented a major step towards launching a broad development agenda aimed at accelerating growth. This agenda includes fiscal and monetary stability and structural reforms aimed at liberalizing the economy, fostering private sector development, and supporting social sector development. The policy reforms pursued since early  4 1994 have led to a marked recovery of economic activity and a significant improvement in Senegal's financial position. 11. Real Economy. Average real GDP growth between 1995 and 1999 was 5.2 percent. This is the first sustained increase in average per capita growth since the 1960s. The average performance masks notable differences between the sectors, from 1.7 percent in the rural sector, to 5.6 percent in the services, and a remarkable 7.5 percent in the industry sector. Growth performance in the rural sector was lower due to weather-related conditions, and to some extent to sub-optimal policies. The industrial sector performed well as renewed competitiveness resulted in the recovery of exports in the chemical and fishing industries, as well as strong activity in the import substitution sectors. 12. Fiscal Development. To preserve the depreciation of the real exchange rate, the Senegalese authorities have pursued control of aggregate demand through a strict budget stance. Nominal revenue increased by 68 percent between 1994 and 1999, while nominal expenditures and net lending increased by 44 percent over the same period. As a result, Senegal's overall fiscal deficit, on a cornmitment basis and excluding grants, was brought down from 6.1 percent of GDP in 1994 to 3.5 percent in 1999. All domestic and external arrears were cleared in 1994 and 1995, and were not reconstituted. The share of wages and salaries in total expenditures and net lending declined from 41.4 percent in 1993 to 27.3 percent in 1999. 13. Monetary Policy and Prices. Prudent monetary policy has been pursued at the regional level by BCEAO through indirect instruments. The implementation of sound monetary policies in addition to the strict fiscal stance has helped bring inflation under control. Average inflation was lowered from 32.1 percent in 1994 to its pre-devaluation level of about 2 percent since 1997. 14. External Sector Developments. Effective control of inflation has enabled Senegal to achieve a 35 percent depreciation of its real exchange rate (RER). Continuous good performance on the inflation front has preserved this depreciation so far, leading to a substantial improvement in the competitiveness of the economy. The average annual appreciation of the RER since 1994 has been limited to 1.2 percent. The improvement in competitiveness led to significant growth in exports of fish, groundnut products, phosphates, and tourism services. Although import levels recovered following the devaluation, the external current account deficit, excluding grants, improved in 1999 to -7.3 percent compared to -9.2 percent in 1994. 15. Recent developments in the external sector have been marked by a rise in petroleum prices, which increased by about 20 percent in 1999. The share of oil products in imported goods increased from 12.6 percent in 1998 to 15.2 in 1999. The evolution of petroleum prices partly explained the 1I.1 percent decrease in the terms of trade in 1999. In addition to oil prices, Senegal will need to monitor the development of the Euro currency as it will determine the path of-its RER and the competitiveness of the economy. Indeed, given the country's strong record on the inflation front, movements of the Senegal RER will largely depend on the evolution of the euro, to which the CFAF has been pegged since January 1999 at a fixed rate of CFAF 655.96. As an example of these changed circumstances, it will suffice to note that when the French Franc appreciated against the dollar in 1993, Senegal's RER appreciated by 3.2 percent, but when the Euro depreciated in 1999, Senegal's RER depreciated by 2.0 percent.  5 C.3. External Debt 16. In June 2000, the Boards of the International Monetary Fund (IMF) and the World Bank Group approved a comprehensive debt reduction package for Senegal under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The decision followed a Debt Sustainability Analysis (DSA) undertaken during the period November 1999 to January 2000 which indicated that Senegal qualified under both fiscal and openness criteria. At end-1998, the public and publicly guaranteed external debt of Senegal was US$3.8 billion, with the present value of this debt stock estimated at US$2.5 billion in end-1998 NPV terms, i.e., 305 percent of government revenues or 162 percent of exports (averaged over 3 years). The total debt relief is estfmated at US$452 million in NPV terms, of which US$259 million will be provided by multilateral creditors. 17. The following conditions are required to be met by Senegal to secure Bank and IMF HIPC assistance: (i) completion of a full-fledged participatory PRSP satisfactory to the Bank and the IMF; (ii) maintenance of a satisfactory macroeconomic environment; (iii) improvements in the poverty database and monitoring capacity; (iv) promotion of universal primary education; and (v) increasing health access. Detailed information on the DSA, the breakdown by creditors, and the schedule of debt relief are presented in the HIPC Debt Initiative Decision Point Document (IDA/R2000-103) dated June 2, 2000. HI. SENEGAL'S ADJUSTMENT PROGRAM A. GENERAL BACKGROUND 18. The devaluation of the CFAF in January 1994 was part of a broader agenda to resume economic growth and alleviate widespread poverty in Senegal. In that context, the Government implemented several reforms aiming at maintaining macroeconomic balances, improving the overall efficiency of the economy (trade and price liberalization, restructuring of the parapublic sector), and human resource development. The program has been implemented with the support of an Economic Recovery Credit, and three sectoral adjustment credits in the rural sector, the energy sector, and the private sector. The Government's program received IMF support through a stand-by operation and two ESAFs. The Bank also continues to support the reform program through two major investment operations in the education and health sectors. B. COMPONENTS 19. Trade and tax reform: In the aftermath of the devaluation, the Government implemented trade reform, with tariffs lowered from a pre-reform bracket of 6-124 percent to one of 5-50 percent. Export subsidies were eliminated. A simplification of the VAT took place as well, with the number of categories reduced from six to three. VAT rates were also reduced from a pre-reform range of 0-34 percent to a new range of 0-20 percent. 20. Most of the quantitative restrictions on imports of certain goods were lifted during 1994- 1996 and replaced by temporary import surcharges. Two prior authorizations remain, for  6 imports of gold (for monetary policy purposes), and for second-hand clothing (for health reasons). 21. In April 1998, Senegal anticipated WAEMU's (West African Economic and Monetary Union) first step toward the Common External Tariff, by introducing a four-tier external tariff structure in the range of 5-30 percent, (including the customs stamp), down from a pre-reform level of 5-50 percent. 22. Price liberalization and competition: In 1994, the prices of 24 goods and services - estimated to represent about 12 percent of GDP - were still subject to controls. Between 1994 and 1995, the Government liberalized the prices of 13 products accounting for about 9 percent of GDP. The Government maintained control on the 11 remaining products deemed essential. The privileges granted to public and private enterprises such as monopolies, tax exemptions, and exceptional tariff protection were all lifted in 1994-1995, with the exception of the special agreement of the oil refinery company, which terminated in 1998 in the context of the Energy SECAL. However, some of the companies under the previous special agreement regime still enjoy a high level of protection through tariff surcharges and reference import prices (e.g. sugar). The authorities freed entries to all professions but 28 with potential adverse impact on public health or security. Under the Agriculture Sector Adjustment Credit, the Government liberalized domestic marketing and pricing of all agricultural products, especially rice, at both producer and consumer levels, and privatized the processing of rice. 23. Private sector competitiveness: The Government modified the labor code in 1994 to introduce more flexibility in the labor market through the removal of the prior approval before layoffs due to economic hardship or internal restructuring. The monopoly of the Bureau de Main- d'Oeuvre Portuaire (BMOP) on the hiring of longshoremen was also lifted in 1994. Maritime transportation costs were reduced by terminating the monopoly of Conseil Senegalais de Navigation Maritime (COSENAM) - a parastatal - on shipping activities. The Government also addressed the issues of the high utility costs in Senegal by allowing private sector participation in these sectors. The management of the water company was privatized in 1997, the telephone company.in 1998, and the power company in 1999. 24. Energy sector: The cost, quality, and availability of energy were major issues in Senegal, and serious impediments to the overall competitiveness of the economy. The Government liberalized the procurement, import, transport, and distribution of petroleum products in 1998. To allow the refinery company (SAR) to adjust to the new environment, the authorities put in place a temporary and declining import surtax on refined products. Petroleum prices were liberalized, adjusting to the fluctuation of international prices. However, soaring international prices led the Government in April 2000 to reintroduce temporary price controls on the petroleum products. The Government also privatized the public power company in 1999. The production and distribution of electricity were liberalized by amending the electricity code.  7 C. SOCIAL DEVELOPMENT 25. The social sectors are at the center of the Government's IPRSP The two main planks of the IPRSP are to increase growth by improving the environment for the private sector, and to improve the efficiency of Government programs in the social sectors. During the transition to liberalized trade, the proposed credit will help maintain financing for social sector programs. Specific spending targets for the social sectors are given in the IPRSP, and performance benchmarks in health, education, and poverty reduction comprise the policy matrix included in the interim document. C.1. Poverty 26. A survey implemented in 1994-1995 indicated that over 58 percent of households are living below the poverty threshold defined in terms of a daily minimum caloric intake of 2400 calories per adult. As the Government has become increasingly aware of the seriousness of the problem, it first launched emergency programs such as the AGETIP projects and the Community Nutrition Project in 1994-1995. The Government subsequently prepared in December 1997 a National Poverty Alleviation Program (PNLP). Key objectives of the PNLP are the promotion of income-generating activities; increased access to social services; an effective information and monitoring system on living standards; and the strengthening of capacities at the grassroots level. Based on this program, the Government developed a comprehensive IPRSP whose first task outlined is an update of the poverty profile to guide the preparation of a full-fledged PRSP by December 2001. C.2. Education 27. A ten-year education program was adopted in 1999 with the ultimate objective of reaching universal primary education by the year 2008. A Quality Education for All (QEFA) Project will support the implementation of the first three years of the ten-year program. Under QEFA, the share of basic education in the total education budget would be raised to 44 percent by 2000 from its current level of 36 percent. The Government also committed itself to hire 2000 primary school teachers annually for at least the next three years. Achieving these objectives will require a sustainable teacher salary plan and control of spending in post-primary levels of education. Reforms in higher education produced significant changes in 1994 such as cost recovery for housing and meals before being reversed in 1997. The Government is working to close the gender gap in the education sector by 2010, while promoting the decentralization of the sector. C.3. Health 28. In 1997, the Government adopted a ten-year National Health Development Plan (NHDP) with the objectives of increasing access to quality health care; improving the health system's financing and management; and reducing the population growth rate through improvement in the management and delivery of reproductive health services. A Sectoral Investment Program, the Integrated Health Sector Development Program (IHSDP), has been designed to cover the first  8 years of the NHDP. The authorities have shown their commitment to the success of the program by regularly increasing the budget appropriations for the health sector. Recruitment of 250 new employees has been in effect since 1998 and it is expected that the share of the health sector in the total recurrent budget will reach 9 percent by 2002, up from a 6 percent level in 1996. C.4. Fiscal Gap and Financing of the Adjustment Program :29. The projection of revenue for 2000 is CFAF 549.6 billion. Total expenditures and net lending are estimated at CFAF 686.5 billion. The overall fiscal deficit on a commitment basis and excluding grants is thus CFAF 136.9 billion. As there are no arrears and expected grants amount to CFAF 84.7 billion, the overall fiscal deficit on a cash basis including grants is CFAF :52.2 billion. Taking into account amortization in an amount of CFAF 64.2 billion, net payment to the domestic economy of CFAF 58.3 billion (payment to the Central Bank)', and project assistance of CFAF 90 billion, a gap of CFAF 84.7 billion remains. Budgetary assistance of CFAF 46.3 billion has already been identified. The resulting residual gap is CFAF 38.4 billion, equivalent to US$63.5 million. The corresponding figures for external financing needs from the balance of payments are in Table 1. TABLE 1 EXTERNAL FINANCING REQUIREMENTS AND RESOURCES (in millions of US$) 1998 1999 2000 2001 2002 Total Requirements 500.8 493.9 599.9 551.3 497.9 Current account deficit before official transfers 322.1 352.7 340.2 310.9 321.4 Debt amortization 100.7 87.5 99.0 102.9 108.8 IMF repayments 60.2 32.6 23.7 29.4 29.2 Change in external arrears 4.6 0.0 0.0 0.0 0.0 Change in net foreign assets 13.1 21.1 136.9 108.0 38.5 Total Resources 500.8 493.9 536.4 491.3 467.9 Official gross transfers 242.2 185.0 194.5 197.3 200.5 Long term public loan 00.6 131.2 220.9 164.4 167.1 Private capital 9.5 158.2 81.4 89.8 100.3 Debt relief 0.0 0.0 0.0 0,0 0.0 Use of IMF resources 48.4 19.5 39.6 39.8 0.0 Other exceptional financing 0.0 0.0 0.0 0.0 0.0 Financing gap 0.0 0.0 63.5 60.0 30.0 Source: Staff estimates I According to WAEMU convergence targets, members should eliminate outstanding balances to the Central Bank by end-200 1.  9 IV. THE PROPOSED TRADE REFORM AND COMPETITIVENESS. CREDIT A. OBJECTIVES 30. The objectives of this credit are to improve the competitiveness of the Senegalese economy by liberalizing trade, facilitating trade and tax procedures, and supporting regulatory programs that promote competitive pricing of public utility inputs to the productive sector. This adjustment program supports the Government's Interim Poverty Reduction Strategy, which incorporates a number of social sector targets and a commitment to promote growth and employment through development of the private sector. Given the temporary revenue shortfall caused by the sequenced introduction of tariff and tax reforms, the proposed credit aims to provide budget support to ensure that this shortfall will not lead to disruptions in social sector programs, and to support institutional reforms that will reduce administrative burdens on the private sector. B. BACKGROUND 31. On January 1, 2000 Senegal implemented the last step of the WAEMU Common External Tariff (CET) reform, reducing the maximum import tax from 65 percent to 20 percent, reducing seven tariff categories to four, combining the customs and fiscal duties, and reducing the statistical tax from five percent (with various exceptions) to one percent on all imports. (See Tables 2 through 4, below) Tariffs on goods from within the region have been eliminated. WAEMU members can apply for three types of safeguard protection measures: a temporary protection surtax (TDP) which declines progressively from a maximum of 20 percent to zero by 2003; a compensatory import levy (TCI) which protects against large fluctuations in world prices; and reference prices, or administratively set customs values. Use of reference prices requires that WAEMU submit a regional list of products in application for a WTO waiver. To date, no definite list has been submitted. Further, WAEMU members are not required to impose safeguard measures requested by other members. Rather, rules of origin can be applied in those cases where safeguard measures differ across countries. 32. Senegal's recourse to WAEMU-authorized safeguard protection measures has been limited. It has applied for and received WAEMU approval for TCI on various sugar products. An application to WAEMU for eligibility of rice for TCI is still under consideration. Nevertheless, the TCI on rice should allow Senegal to remove the current rice import surtax. TDP remains on tobacco; however, the Government has now renounced a previously submitted and WAEMU-approved request for TDP on a dozen product categories. Senegal also previously used a tariff discounting mechanism (precisions tarifaires) on a number of goods, differentiating tariff rates by end use. These were eliminated between September and December 1999.  10 Table 2 External Tariff Reform and New Tax Measures Tariff and Tax Structure until April 1998 Categories Customs Fiscal Customs Total duty duty stamp Category 1 A: Social, cultural, and scientific products; inputs 0 0 5 0 for agricultural sector. Category 1 B :Cereals 10 0 5 15 Category 11: Equipment; raw materials and input for industries. 10 0 5 15 Category III A: Consumer goods not produced locally 10 20 5 35 Category III B: Manufactured goods competing with locally 10 30 5 45. produced goods Category IV A: Consumer goods with high revenue incidence 10 30 5 45 Category IV B: Luxury goods 10 50 5 65 Table 3 Tariff and Tax structure from April 1998 to December 1999 - WAEMU reform Customs Customs Total Categories duty stamp Category I : Priority products (drugs, medical equipment, 0 5 5 inputs for the pharmaceutical and medical industries, cultural products); computers, communication technology products. Category 2 :Essential goods (mainly cereals); 5 5 10 Vehicles for public transportation and heavy goods vehicles; Raw materials. Category 3: Semi-finished products 10 5 15 Category 4 Consumer goods; private vehicle. 25 5 30 Table 4 WAEMU Common External Tariff after January 1', 2000. Categories CET Statistical Total tax Category 1: Priority products (drugs, medical equipment, inputs for the 0 1 1 pharmaceutical and medical industries, cultural products); computers, communication technology products, butane and kerosene. Category 2 :Essential goods (mainly cereals), Utility vehicles ; Raw 5 1 6 materials; Crude oil. Category 3: Semi-finished products; other industrial inputs; diesel and 10 1 Il fuel oil Category 4 Consumer goods; private vehicle; equipment goods 20 1 21 produced locally; other refined petroleum products. Source: Senegalese authorities  I1 33. WAEMU members are also required to implement a uniform Value Added Tax (VAT) within the range of 16 to 19 percent, and to raise 16 percent of GDP in fiscal revenues. Senegal has chosen to set a VAT rate of 18 percent, compared to the current structure, which taxes most transactions at 20 percent and some at 10 percent. Thus under the new regime, the VAT rate will be reduced on most products and increased on some, while structural improvements in the efficiency of tax administration should help expand the tax base. 34. The fiscal revenue losses from tariff reform are due to be recovered through these reforms in the VAT, but only after several months delay, as the new VAT will be in place only at the end of September 2000. Thus for 2000 the tariff reductions have been estimated to reduce fiscal revenues by about one percent of GDP. In other respects, Senegal's fiscal balances are in line with IMF targets; revenues as a share of GDP exceeded WAEMU standards and IMF program levels in 1999 while expenditures were below target. Thus budgetary support can be expected to help maintain the poverty fighting agenda as originally conceived for 2000 and to fund the institutional reforms that will remove obstacles hindering the private sector and foreign investment. 35. The Government has specified in its Letter of Intent that any remaining financing gap will result in commensurate spending reductions while fiscal balance targets are maintained. Additional funds beyond spending targets would be used to satisfy regional obligations to reduced statutory advances from the central bank. C. LINK TO THE CAS, POVERTY IMPACT AND RATIONALE 36. The proposed credit supports specific CAS goals: regional integration, maintaining macroeconomic stability and private sector development. These same goals have been expressed in Senegal's poverty reduction strategy and included in the IPRSP. 37. Senegal will be keeping its obligations as a member of WAEMU by implementing the commonly agreed tariff and tax reforms. These regional obligations also serve to prohibit tariff increases, phase out tariff surcharges, and limit applications of other safeguard protection measures. Further, regional fiscal requirements - revenue targets, non-negative fiscal balance, reducing internal and external debt by levels and by ratios to GDP - will help ensure that VAT reforms are implemented promptly. By providing financing for a temporary fiscal gap and for implementing changes in tariff and tax administration, the proposed credit will support the fiscal adjustment needed for maintaining macroeconomic stability. 38. Development of new employment through the promotion of the private sector is at the center of Senegal's poverty fighting strategy. Among the greatest obstacles facing the local private sector are the lengthy and cumbersome procedures for approving new investments and imports, and lack of transparency in these requirements. Such obstacles have been identified in a 1997 World Bank report Senegal: The Challenge of International Integration and in a 1999 Foreign Investment Advisory Service (FIAS) report. Both studies noted, for example, that the length of time for imported goods to clear the port in Dakar were substantially longer than in the ports of neighboring countries. A second major obstacle to greater international competitiveness, as noted in the 1997 report, was the unusually high prices charged for public utility inputs to the  12 productive sector, compared to neighboring countries. The presence of regulations hindering competition in some services was also noted as an obstacle to trade and investment in a study prepared under the Coordinated African Programme of Assistance on Services (CAPAS). The Government has noted in its IPRSP the importance of an improved regulatory environment for economic growth, and it has produced an action plan for undertaking recommendations from the FIAS report. '39. Trade liberalization, along with the simplification of trade and tax procedures and more competitive prices for utility inputs will improve competitiveness and make a more attractive environment for the private sector and for foreign investment. D. THE TRADE AND COMPETITIVENESS REFORM PROGRAM 40. The Government's institutional reform program centers around a plan for modernization and electronic information pooling among the customs, tax, and treasury branches of the Ministry of Finance. These directorates, and even offices within these directorates, have operational procedures, which work in isolation, requiring extensive and duplicate paperwork across the different offices. The Ministry of Finance now plans to create a single electronic dossier for each taxpayer, where the same set of information can be accessed by all three branches. This arrangement will create a crucial link between the customs and tax departments, ensuring that all imports cleared by customs are simultaneously entered and handled in the VAT Ibase. The basic characteristics of the taxpayer, exemptions qualified for, and taxes paid will be retrievable by all participants in the system and will not need to be repeatedly demonstrated by the taxpayer. 41. Both the customs and tax departments have sought the advice of Trade Point, a mixed public/private entity that has pioneered the implementation of electronic clearing of trade documents, and of the private sector in planning this new system. In line with structural measures in Senegal's PRGF program, the tax department has committed to set up a large- taxpayer unit and restructure the department along functional lines and to generalize the use of a single tax identification number in all revenue collecting agencies by 2001. 42. Further, the Government has developed a plan to improve the efficiency and the expertise with which it regulates public and recently privatized utilities. An ongoing Country Framework Report and upcoming WBI seminars will provide essential information and technical assistance. FIAS is assisting the Government in formulating its red-tape alleviation program and the Bank group (IDA and MIGA) may provide additional assistance for implementation. E. PROGRAM COMPONENTS 43. Trade liberalization: The CET has been implemented and pr&cisions tarifaires have been removed. The.government has already renounced the regionally approved list of goods for TDP. It is committed under its IPRSP to minimize all other import protection measures before reaching Completion Point in its debt relief program.  13 44. Trade facilitation: The customs department plans to reduce the number and length of procedures required for customs clearance. It will also implement an electronic information- sharing plan connecting data bases among the customs offices and among the customs, tax, and treasury departments, as well as with Trade Point. Further, with the full commitment of the Finance Minister, the customs department will establish specific performance criteria regarding the length of time for goods to pass through the port, and will monitor and publicize performance on these criteria. The Government will undertake these reforms by the end of 2000 and plans to show reductions in customs processing time by the end of 2001. 45. Tax facilitation: The tax department plans to increase the tax base, reduce the nuimber of tax exemptions and related procedures, and introduce a single taxpayer dossier. With the new electronic information-sharing system, the tax department expects to be able to audit their own services, improve transparency, and improve taxpayer services, such as by reducing the amount of time required to settle disputes. The tax department also plans to develop performance criteria along these lines and publicize results as a way to attract new investors. These reforms are scheduled to be implemented during 2001. 46. Regulatory reform: Over the next year, the Government intends to develop the legislative framework defining the architecture of the regulatory system for the public utilities and establishing an effective regulatory regime that is characterized by coherency, independence, accountability, and transparency. 47. Borrower commitment and ownership: These program components are expressed in a detailed plan developed and produced entirely by the Government. The Minister of Finance has issued a strong policy statement on modernization, data pooling and information sharing among the customs, tax, and treasury departments, all of which are included in the Ministry of Finance. The Ministry is committed to establishing and monitoring performance criteria in customs and tax procedures designed to reduce obstacles for the private sector and attract foreign investment. The Government is committed to improving governance and transparency in these areas. Further, the Government has taken a number of early actions in the area of trade liberalization, as noted above. The Minister of Finance is working with other Cabinet Ministers to sustain the initiatives in the IPRSP and to reduce poverty. Moreover, he has appointed a committee, including members from his office and from the customs, tax and treasury departments, to pilot this adjustment program. F. CREDIT FEATURES AND IMPLEMENTATION 48. Credit Amount and Financing. The Borrower will be the Republic of Senegal. The proposed amount of IDA financing is US$100 million equivalent. This amount is considered adequate to support the momentum of trade policy reforms in the Senegalese economy.  14 F.1. Conditions of Tranche Release 49. Conditions for Board Presentation. It was agreed with the Borrower that the Credit would be presented to the Board when performance criteria for processing time in customs clearance and performance criteria for improvement in tax services had been published by the Republic of Senegal. These conditions for Board presentation have been met. 50. Tranching. The credit will be disbursed in two tranches. The first tranche in the amount of US$50 million will be disbursed upon effectiveness. The second tranche will be disbursed tupon compliance with conditions specified below. The second tranche, in the amount of US$50 million, is tied to progress in the adjustment program establishing full data links between the customs and tax departments with single taxpayer dossier, demonstrating progress on published performance criteria, and developing the legislative framework defining the governing principles of the regulatory system for public utilities and infrastructure. F.2. Conditions for Second Tranche Release F.2.1. General Conditions 51. Before release of the second tranche, the Borrower will provide evidence that: (a) the macroeconomic policy framework of the Borrower is consistent with the objective of macroeconomic stability, as per indicators agreed with IDA; (b) import tariff reductions implemented as of Credit effectiveness are not re-imposed through safeguard protection ineasures; and (c) progress has been achieved by the Borrower in carrying out the program as outlined in its Letter of Development Policy. F.2.2. Specific Conditions for Release of the Second Tranche 52. The TRCC second tranche will be released after the following specific conditions have been complied with by the Borrower: (i) implementation of general use of a single taxpayer identification number system; 'ii) implementation of a formal data link between customs and tax administrations that will automatically include all imports in the VAT base; (iii) establishment of full electronic information sharing between the customs, tax, and treasury departments; (iv) development of the legislative framework defining the architecture of the regulatory system for the public utilities and establishing an effective regulatory regime that is characterized by coherency, independence, accountability, and transparency. .53. Disbursements. The Borrower will open an account in its Central Bank. Upon notification of release for the tranche, proceeds of the Credit will be deposited by the Association in this account at the request of the Borrower. If after deposit in this account, the proceeds of the  15 Credit are used for ineligible purposes (i.e., to finance goods or services in the standard negative list), the Association will require the Borrower to refund the Credit Account. 54. Auditing. The Association reserves the right to seek an audit of the account. 55. Implementation and Monitoring. The reform program under this credit will be implemented by the Ministry of Finance. The Minister works with the other Cabinet Ministers to implement the initiatives in the IPRSP and to coordinate efforts to reduce poverty. Further, he has appointed a committee, including members from his office and from the customs, tax and treasury departments, to undertake the technical work in this adjustment program. Technical assistance in trade liberalization and trade facilitation has been offered by WBI and the African Development Bank. IDA/PSD and WBI have offered technical assistance on regulatory reform, and PSD will continue to monitor progress in the context of its privatization and technical assistance operations. FIAS will continue to monitor implementation of recommendations from the FIAS report. 56. Since the 1994 devaluation, Senegal has established a solid track record of macroeconomic stability and steadily improving fiscal conditions, erasing deficits and posting recent surpluses. While Senegal needs to improve on linking public expenditures to program objectives, and on expenditure monitoring, IDA has been supporting these improvements with a strong dialogue on public expenditures. Senegal has adopted a revised procurement code, which was accepted by the Bank in 1999. IDA will conduct a fiduciary assessment mission in late September to agree on a baseline against which progress can be calibrated. 57. The following steps for improving expenditure monitoring and control have been identified. Based on a Public Expenditure Review in 1997-98, efforts in budgeting by objectives are being brought to fruition in two sectors, with plans for expansion to other sectors. Progress in budgeting by objectives will be monitored under the IMF-sponsored Poverty Reduction and Growth Facility (PRGF) program. Further, a new dialogue has begun on comprehensive program-based budgeting in support of the upcoming PRSP. A public expenditure seminar took place in June with plans to continue the work on program-based budgeting and measuring and evaluating the effectiveness of expenditures. These budget improvements will be monitored in the context of the tripartite dialogue on development of the PRSP. 58. The program supported by the credit, although based on trade reformn, will in fact help to improve transparency and good governance. A major advantage of the proposed informnation sharing system is that it reduces the scope for information manipulation and makes corruption more difficult once the number of parties with access to tax records is increased. 59. The proposed Credit is expected to be released in two tranches, over a period of 12-18 months, and will follow the simplified IDA procedures for adjustment operations (February 8, 1996). IDA disbursements will not be linked to specific purchases and, hence, there will be no procurement requirements. In case the proceeds of the Credit are used for ineligible purposes, IDA will require the Borrower to either: (i) return that amount to the account for use for eligible purposes; or (ii) refund the amount directly to IDA, in which case IDA will cancel an equivalent  16 undisbursed amount of the Credit. Although an audit of the deposit account will not be required, IDA reserves the right to require audits at any time. 60. Benefits. The trade liberalization and proposed institutional reforms will reduce costs, improve competitiveness, and reduce obstacles that hinder the private sector and discourage foreign investors. In the IPRSP, the Govermment has centered its strategy for poverty reduction on expansion of the private sector, and has committed to reduce unemployment in advance of the HIPC Completion Point and presentation of its PRSP. Further, by helping to finance a temporary revenue shortfall due to trade liberalization, public spending in the social sectors can be maintained to meet IPRSP targets. 61. Risks. The proposed credit is subiect to two risks: (i) Several of the competitiveness measures rely on a single, integrated modernization plan for Government data systems which could encounter difficulties in implementation; and (ii) Some economic entities may try to regain import protection they have lost. Factors that mitigate these risks include: (a) the fact that integrated customs and tax information systems have been successfully installed in a number of developing countries; and (b) the regional obligations of WAEMU members restrict their recourse to increasing import protection. Public awareness of the expected benefits and population support for the required reforms will offset any pressures from selected industrialists for a reversal. V. BANK GROUP OPERATIONS A. PAST ADJUSTMENT LOANS 62. The Government's reform effort has been supported since 1980 by 4 World Bank Structural Adjustment Loans (SALs), 5 Sectoral Adjustment Loans (SECALs - in the financial sector, the transport sector, the agriculture sector, the private sector and the energy sector) and an economic recovery credit. The performance of these operations has been uneven. 63. Approved in 1981, SAL I was suspended shortly thereafter due to incomplete implementation of the programs, and ultimately cancelled. Under SALs II and III (1986 and 1987), the economy was substantially liberalized and progress was made in investment planning and programming and population policy. Both credits were released and disbursed in full. 64. The design of SAL IV reflected several lessons leamed from previous adjustment programs in Senegal. In particular there was greater reliance on up-front conditionalities. In addition, SAL IV focused on relatively fewer areas than the previous SALs and supported a limited number of critical actions. Overall the achievements of SAL IV fell short of the required objectives. Although some progress was made in some areas, much of it was subsequently eroded. The third tranche was postponed and then cancelled. 65. Three lessons were leamed from SAL IV and overall adjustment implementation in Senegal. First, the importance of dynamic leadership of policy reform should not be understated. In the areas where leadership was weak, reforms made little headway. Govermment support for a measure and public understanding of its importance need to be in place if the measure is to be sustained. In Senegal, repeated effort at structural adjustment in the form of quick-disbursing  17 budgetary assistance has focused Government attention on the availability and release of these funds at the expense of longer-tern development goals. Second, the complex nature of macroeconomic adjustment operations placed substantial burdens on Senegal's administrative capacity, and consequently, there was a recognized need to shift from fewer and more complex operations to a series of specific and well-focused operations and conditionalities which should not be amenable to interpretation. The design should also focus on the process of change itself by addressing directly issues of ownership and consensus building. Third, although the design of the previous adjustment programs improved over time, the implementation of the reforms had some serious sequencing shortcomings because of the difficulty in implementing key measures. An illustration was the attempt to implement a trade reform while the local currency was overvalued. 66. These lessons explain the shift to sectoral adjustment operations beginning with the Financial Sector Adjustment Loan (Financial SECAL) in December 1989. The Financial SECAL was a success, leading to a more active role by BCEAO in bank supervision and monitoring, a substantial reform of credit policies, the liquidation of seven banks and the restructuring of two others. The Transport Sector Adjustment Loan (Transport SECAL, 1991), the Private Sector Competitiveness and Adjustment Credit (PASCO, 1995) and the Agricultural Sector Adjustment Credit (AgSECAL, 1995) were also rated satisfactory. B. THE PORTFOLIO 67. As of March 31, 2000, the World Bank had approved 87 projects for Senegal for a total amount of about US$2.0 billion, consisting of 68 projects for IDA credits of US$1.9 billion, and 19 projects for IBRD loans of US$163.0 million. The current portfolio represents a commitment value of about US$646.1 million with an undisbursed balance of about US$480.1 million. The portfolio is composed of 17 projects in various sectors (agriculture, human resources-- population/health/nutrition/education, infrastructure and urban development, energy, water, industry, and private sector development). The quality of the portfolio has improved significantly in recent years, although improvement is needed in the area of financial accountability, specifically, audits/financial reporting and procurement. C. IFC AND MIGA 68. As of March 31, 2000, the International Finance Corporation (IFC) had five active investrnents totaling about US$26.2 million. They include two financial services; one fishery project; one leather manufacturing operation; and one power project (the first independent power project in Senegal). Two additional investments (power project and mining operation) were approved in 1998 and one investment (cement industry) was approved in 1999; all three new investments are expected to become effective this year. 69. MIGA has not yet issued a guarantee in Senegal. However, Senegalese representatives have participated in several Investment Marketing Services (IMS) in mining, tourism, capacity building of investment promotion agencies, etc. The IMS newsletter routinely features articles on investment prospects in Senegal.  18 VI. COLLABORATION WITH IMF AND OTHER DONORS 70. The reform program supported by the proposed credit is consistent with the IMF's PRGF program. Trade liberalization, full electronic data links between customs and tax operations, reforms in customs and tax administration, and a single taxpayer identification system all coordinate closely with objectives of the PRGF program. Further, financing during the adjustment period for trade liberalization should help the Government maintain social sector spending as specified in the IPRSP, developed jointly among the Government, IMF, and the World Bank. 71. IDA staff have also collaborated closely with other major donors. Their respective programs for aiding Senegal during the transition period after tariff reductions have been discussed with officials from the EU and AfDB, and cofinancing of the adjustment program in this proposed credit is under consideration by the AfDB. IDA staff have coordinated closely with Senegal's other major donors in development of the last CAS and in the preparation and cofinancing of sectoral operations. VII. RECOMMENDATION 72. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association, and I recommend that the Executive Directors approve it. James D. Wolfensohn President By: Shengman Zhang Washington, D.C. August 22, 2000 Attachments  ANNEX A TRADE REFORM AND COMPETITIVENESS CREDIT SENEGAL POVERTY AND SOCIAL DEVELOPMENT INDICATORS Latest single year Same region/income group Sub- Saharan Low- 1970-75 1980-85 1993-98 Africa income POPULATION Total population, mid-year (millions) 4.8 6A4 9.0 627.3 3,536.4 Growth rate (% annual average) 2.9 2.8 2.3 2.2 1.4 Urban population (% of population) 34.2 37.5 46.0 33.3 30.5 Total fertility rate (births per woman) 7.0 6.7 5.5 5.4 3.1 POVERTY (% of population) National headcount index .. Urban headcount index .. Rural headcount index .. .. INCOME GNP per capita (US$) 380 370 520 510 520 Consumer prce index (1995=100) 29 71 106 128 136 Food prce index (1995=100) .. 71 102 INCOMEICONSUMPTION DISTRIBUTION Gini index .. .. 41.3 Lowest quintile (% of income or consumption) ,, .. 6.4 Highest quintile (% of income or consumption) .. .. 48.2 SOCIAL INDICATORS Public expenditure Health (% of GDP) .. .. 2.6 1.5 1.3 Education (% of GNP) 3.8 .. 3.7 4.1 3.2 Social security and welfare (% of GDP) 0.9 1.6 Net primary school enrollment rate (% of age group) Total .. 48 60 .. 86 Male .. 57 65 .. 89 Female .. 40 54 .. 82 Access to safe water (% of population) Total 44 50 Urban .. 63 82 Rural .. 27 28 Immunization rate (% under 12 months) Measles .. 40 65 58 80 DPT .. 54 65 53 82 Child malnutrition (% under 5 years) .. .. 22 Life expectancy at birth (years) Total 42 46 52 50 63 Male 39 44 51 49 62 Female 44 48 54 52 64 Mortality Infant (per thousand live births) 149 104 69 92 68 Under 5 (per thousand live births) 239 173 121 151 92 Adult (15-59) Male (per 1,000 population) 572 586 456 432 235 Female (per 1,000 population) 489 516 385 383 208 Maternal (per 100,000 live births) .. .. .. 2000 World Development Indicators CD-ROM, World Bank  ANNEX B Page 1 of 3 TRADE REFORM AND COMPETITIVENESS CREDIT SENEGAL KEY ECONOMIC INDICATORS Actual Estimate Projected Indicator 1994 1995 1996 1997 1998 1999 2000 2001 2002 National accounts (as % of GDP) Gross domestic producta 100 100 100 100 100 100 100 100 100 Agriculture 20.7 21.9 23.2 21.4 19.5 20.1 19.8 20.2 20.2 Industry 23.1 23.9 25.4 25.7 27.0 28.4 29.3 30.5 31.1 Services 56.2 54.2 51.4 52.9 53.4 51.5 50.9 49.4 48.7 Total Consumption 88.1 88.9 87.2 87.7 87.2 87.4 86.4 85.2 84.8 Gross domestic fixed investment 16.1 14.7 16.3 18.0 18.2 18.8 19.0 19.3 19.6 Government investment 5.0 4.4 6.4 6.4 6.4 6.5 6.6 6.8 6.6 Private investment 13.6 12.3 12.1 11.6 12.1 12.3 12.4 12.6 13.0 (includes increase in stocks) Exports (GNFS)b 34.9 34.5 34.1 34.0 33.0 32.6 33.5 33.7 33.9 Imports (GNFS) 41.6 40.1 39.8 39.7 38.7 38.9 38.9 38.2 38.3 Gross domestic savings 11.9 11.1 12.8 12.3 12.8 12.6 13.6 14.8 15.2 Gross national savingsc 11.7 10.1 12.2 11.6 12.4 11.6 12.8 13.7 14.2 Memorandum items Gross domestic product 3642 4476 4651 4379 4666 4801 5143 5553 5942 (US$ million at current prices) GNPpercapita(US$, Atlasmethod) 431 518 530 530 510 510 560 570 580 Real annual growth rates (%, calculated from 1987 prices) Gross domestic product at market prices 2.9 5.2 5.1 5.0 5.7 5.1 5.5 5.0 5.0 Gross Domestic Income 5.0 3.8 5.4 5.2 6.7 4.4 4.3 4.7 5.1 Real annual per capita growth rates (%, calculated from 1987 prices) Gross domestic product at market prices 0.2 2.5 2.3 2.2 2.9 2.4 2.8 2.3 2.3 Total consumption -0.7 0.1 1.4 2.5 2.6 2.5 0.5 1.0 2.1 Private consumption 0.6 0.8 1.9 2.6 3.2 2.9 1.3 1.1 2.4 Balance of Payments (US$ millions) Exports (GNFS)b 1272 1544 1588 1488 1546 1567 1725 1872 2014 Merchandise FOB 791 968 986 932 971 985 1122 1239 1347 Imports (GNFS)b 1515 1797 1896 1777 1814 1869 2001 2122 2275 Merchandise FOB 1022 1217 1268 1196 1245 1301 1409 1502 1620 Resource balance -243 -253 -308 -289 -268 -302 -276 -249 -261 Netcurrenttransfers 134 110 58 42 54 28 44 20 19 Cunrent account balance 6 -26 -63 -72 -80 -168 -146 -114 -121 (Continued)  ANNEX B Page 2 of 3 TRADE REFORM AND COMPETITIVENESS CREDIT SENEGAL KEY ECONOMIC INDICATORS Actual Estimate Projected Indicator 1994 1995 1996 1997 1998 1999 2000 2001 2002 Net private foreign direct investment 48 -10 -5 92 10 158 81 90 100 Long-term loans (net) 319 339 339 326 310 222 293 259 259 Official 19 48 96 96 118 171 231 38 108 Private 301 291 244 231 192 51 62 221 150 Othcr capital (net, incl. crrors & otnmissions) -133 -221 -216 -213 -215 -178 -107 -137 -171 Change in reservesd -240 -82 -55 -133 -25 -34 -121 -98 -68 Memorandum items Resource balance (% of GDP) -6.7 -5.7 -6.6 -6.6 -5.7 -6.3 -5.4 -4.5 -4.4 Real annual growth rates ( 1987 prices) Merchandise exports (FOB) 1.9 12.0 1.6 1.3 5.8 3.9 5.5 5.5 6.0 Primary 1.8 10.0 0.8 1.0 4.2 3.8 3.5 4.0 5.0 Manufactures 2.0 14.1 2.3 2.0 6.3 4.0 6.0 7.0 8.0 Merchandise imports (CIF) -8.1 3.5 3.0 2.2 10.8 6.0 5.0 5.0 5.0  ANNEX B Page 3 of 3 TRADE REFORM AND COMPETITIVENESS CREDIT SENEGAL KEY ECONOMIC INDICATORS Actual Estimate Projected Indicator 1994 1995 1996 1997 1998 1999 2000 2001 2002 Public finance (as % of GDP at market prices)' Current revenues 17.6 18.3 17.3 17.4 17.4 17.3 16.8 16.8 17.2 Current expenditures 16.0 14.6 13.5 12.7 11.6 12.3 13.2 11.9 12.2 Current account surplus (+) or deficit (-) 1.5 3.7 3.8 4.7 5.8 5.0 3.6 4.8 5.0 Capital expenditure 5.0 5.3 7.5 6.2 8.4 8.4 8.4 8.4 7.7 Foreign financing 10.7 5.0 6.3 3.9 4.1 2.7 4.5 3.1 2.8 Monetary indicators M2'GDP 23.7 23.0 24.1 22.9 23.0 23.3 23.5 23.9 24.1 GrowthofM2(%) 38.9 7.2 11.3 2.4 8.1 8.6 8.4 8.1 8.0 Private sector credit growth -205.3 61.6 150.1 213.9 26.5 -258.2 78.9 117.1 114.0 total credit growth (%) Price indices( 1987 =100) Merchandise export price index 77.5 80.2 91.2 88.1 87.1 88.6 89.5 91.3 93.1 Merchandise import price index 107.3 107.1 125.2 124.9 117.9 121.2 124.8 126.1 124.8 Merchandise terms of trade index 72.2 74.9 72.8 70.5 73.9 73.1 71.7 72.4 74.6 Real exchange rate (US$/LCU)f 53.1 57.6 58.0 54.1 56.2 54.8 53.7 52.6 51.6 Real interest rates Consumer price index (% change) 32.0 3.4 2.8 1.8 1.1 2.0 2.0 2.0 2.0 GDP deflator (% change) 27.7 5.0 1.3 2.3 1.9 2.2 1.7 1.4 1.9 a. GDP at market prices b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.  ANNEX C TRADE AND COMPETITIVENESS CREDIT SENEGAL STATUS OF BANK GROUP OPERATIONS OPERATIONS PORTFOLIO Closed Projects 87 Last PSR Board Date Supervision Rating bI Original Amount in US$ Millions Fiscal Development Implementation IBRD IDA Cancel. Undisb. Year Active Projects Objectives Progress 1995 P035615 COMM NUTRITION S S 0 18.2 0 0.96 1995 P002376 PRIV.SCTR.CAP.BLDG S S 0 12.5 0 3.47 1995 P002346 WATER SECTOR HS S 0 100 0 54.62 1996 P002373 HIGHER EDUC I S S 0 26.5 0 11.18 1996 P035621 P!LOT FEMALE LITERAC HS HS 0 12.6 0 2.85 1997 P041567 ENDEMIC DISEASES S S 0 14.9 0 12.91 1997 P046648 REGIONAL POWER S S 0 10.5 0 4.92 1997 P046768 SUST.PART.ENGY.MGMT. S S 0 5.2 0 3.96 1997 P044383 URBAN TRANS REF TA S S 0 6.6 0 2.78 1998 P051610 AG.EXPORT PROMOTION S S 0 8 0 6.02 1998 P051357 ENERGY SEC. ADJ. S S 0 100 0 74.24 1998 P002369 INTEGR.HEALTH S.DEV. S S 0 50 0 35.38 1998 P002365 URB DEVT & DECEN PRO S S 0 75 0 58.52 1999 P002367 AGR.SRCVES&PROD.ORGS S S 0 27-4 0 24.84 1999 P002366 TRANSPORT II S S 0 90 0 82.19 2000 P069198 Distance Learning Center - LIL 0 2.1 0 2.13 2000 P057996 NAT.INFRA.PROGRAM 0 28.5 0 27.57 2000 P047319 Quality Education For All Program 0 50 0 49.32 2000 P055472 URBAN MOBILITY IMPROVEMENT PROGRAM HS HS 0 70 0 69.62 2000 P067498 Y2K NATIONAL ACTION PLAN SUPPORT PROJECT S S 0 10.15 0 8.98 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.  ANNEX D TRADE REFORM AND COMPETITIVENESS CREDIT SUPPLEMENTARY LOAN CREDIT SHEET Timetable of Key Project Processing Events Time taken to prepare project ...... 9 months Preparation ................... December 1999-April 2000 Pre-appraisal ................... May-June 2000 Appraisal ................... August 2000 Negotiations ................... August 2000 Board Presentation ................... September 2000 Effectiveness Date ................... September 2000 This report is based on the findings of the World Bank missions which visited the Republic of Senegal in May and June 2000 to assist the Government in the pre-appraisal of the Trade Reform and Competitiveness Credit (TRCC). Preparation was interrupted for a period of four months due to the election of a new government in March 2000. Mission members included: Ms. Nancy Benjamin (Mission Leader, Sr. Economist) and Mr. Abdoulaye Seck (Economist). Mr. Emmanuel Akpa (Sector Manager) joined the discussions with the authorities. Mr. Mather Pfeiffenberger (Program Assistant) assisted the June mission.  ANNEX E Page 1 of 2 SENEGAL TRADE REFORM AND COMPETITIVENESS CREDIT POLICY MATRIX POLIcYA AiI PFMD EVALUATtON I. Tax and Tariff Reform & Implement the common external tariff (CET). 2000 * Done IDA