Senegal - Third Structural Adjustment Program Project

DowucnO(f The World Bank FOR OFFICIAL USE ONLY c Report No. P-4498-SE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 35.0 MILLION AND A PROPOSED SPECIAL AFRICAN FACILITY CREDIT OF SDR 31.1 MILLION TO THE REPUBLIC OF SENEGAL FOR A STRUCTURAL ADJUSTMENT PROGRAM (SAL III) May 4, 1987 IThis 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 EQTJTVALENTS Currency Unit = CFA franc (CFAF) US$1, no0 CFAF 314 (March 1987) CFAF 1 million = US$ 3,185 (March 1987) SYSTEM OF WEIGHTS AN) MEASURES: METRIC Metric US Equivalent 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 miles (mi) 1 square kilometer (km2) = 0.39 square mile (sq mi) 1 hectare (ha) = 2.47 acres (a) 1 metric tor (t) = 2,205 pounds (lb) 1 kilogram (kg) = 2.2046 pounds (lb) FISCAL YEAR July 1 - June 30  FOR omCaL UsE ONLY REPUBLIC OF SENEGAL THIRD STRUCTURAL ADJUSTMENT CREDIT (SAL III) Table of Contents Page Credit Summary ......e..............e.. .a.. (i)-(ii) 'PART I - THE ECONOMY .1........................... 1 Background ............*............... ........ 1 Recent Developments .......... ......... 2 The Structural Adjustment Process ................ 4 Long-Term Prospects ........... . . ...... ..*.a . .. * 6 The Adjustment Scenario ...........a............ o 7 PART II - THE GOVERNMENT'S STRUCTURAL ADJUSTMENT PROGRAM ... 10 Tntroduction .....ba........a... a ....... ..* 10 A. Public Resource Management ........ .......... 11 A.1 Parapublic Sector Reform .......ut ....... 11 A. 2 Public Investment Programming .......... 16 A .3 Public Finance ......................... 19 A..4 Information Management ............. .. ... 24 B. Production and Private Investment Incentives .a.a.. aa.. aa.. aa...a..aa..aa..aa 25 B,1 Agriculture ..; ......................... 25 B.2 Industry, Trade and Labor .............. 30 C. Financial Intermediation ..*.e ............ 37 PART III - SOCIAL ASPECTS ...................... ....... 40 A. Social Dimension of Adjustment . ............ 40 B. Population Policy . .......................... 42 L This document has a rstricted distribution and may be used by recipients only in the Peormace of their official duties. Its contents may not otherwise be disclosed without World Bank antharization.  Table of Contents (cont.) Page PART IV - THE PROPOSED CREDITS ...... ................ . 42 A. Financing ........................... .. 42 B. Monitorable Actions ........................ 44 C. Management of the Program and Technical Assistance .................. 46 D. Procurement and Disbursement 47 E. Coordination with the IMF... 48 F. Benefits and Risks .... *9** ............... 48 PART V - BANK OPERATIONS IN SENEGAL ....................... 49 PART VI - RECOMMENDATION . ........ ... ............. . 52 Text Table Table I - Projections Summary Table II - Key Indicators of Public Enterprise Sector ANNEXES Annex I - Country Data Amnex II - Status of Bank Operations Annex III - Supplementary Data Sheet Annex IV - Letter of Development Policy Annex V - The Adjustment Scenario Annex VI - Use of IMP Resources Annex VII - Development Management Project Annex VIII - Matrix of SAL III Program  ti) REPUBLIC OF SENEGAL STRUCTURAL ADJUSTMENT PROGRAM Credit Summary Borrower: Republic of Senegal Amounts: IDA Credit: SDR 35.0 million (US$45.0 million equivalent) SPA Credit: SDR 31.1 million (US$40.0 million equivalent) Special Joint Financing: SwF 12.0 million (US$8.0 million equivalent) Terms: IDA and SAF Credits: Standard Special Joint Financing: Non-reimbursable grant Description: The Credits would support the second phase of Senegal's Medium-Term Adjustment Program (1985-92). This Program aims at establishing the conditions for self-sustained growth by progressively withdrawing the State from direct involvement in production and promoting private sector initiative and investment, and achieving greater efficiency of public resource management while restoring internal and external financial equilibria and creditworthiness. The second phase of the Program is described in the Government's Letter of Development Policy (Annex TIV). It is a logical follow up of the first phase, including measures, some already taken, (i) to increase the efficiency of public resource management and restore public savings through an acceleration of the Parapublic sector reform, institutionalization of the reform of public investment programming, strengthening of public finances, with particular emphasis on increasing revenues, and improving information management; (ii) to extend the reform of incentives to private investment, production and export in agriculture, industry, trade and employment; and (iii) to rehabilitate the financial sector, restore the liquidity of the economy and improve financial intermediation. The ongoing Technical Assistance II and Parapublic II Projects and the proposed Development Management Project would assist in implementation of the Program. The foreign exchange provided under the Credits would be used to finance essential imports.  (ii) Risks: The nain risks associated with the proposed operation are (i) the possibility of weaker than expected response from the domestic and, particularly, foreign private sector; (ii) the pressure of certain political parties and interest groups to postpone certain reforms with the approach of national elections in February 1988; (iii) the uncertainty of world prices for the main export commodities and the vagary of climatic conditions; and (iv) the possibility that Senegal's institutions and Government's implementation capacity may be overtaxed by the comprehensive nature of the reform program. Estimated Disbursements: The credits would be disbursed in three tranches, the first for US$33.0 mlllion equivalent, upon effectiveness, and the second and third tranches, each equivalent to US$30.0 million upon satisfactory overall implementation of the Program. Performance reviews would be carried out in October-November 1987 and February-March 1988. Disburse- ments of both credits are expected to be made over a 13-month period ending in June 1988. 1M2T: IBRD 18499R There Is no separate Staff Appraisal Report  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT AND A PROPOSED SPECIAL AFRICAN FACILITY CREDIT TO THE REPUBLIC OF SENEGAL FOR A STRUCTURAL ADJUSTMENT PROGRAM 1. I submit the following report and recommendation on a proposed Develoy-Aent Credit of SDR 35.0 million (US$45.0 million equivalent) and a proposed Special African Facility Credit of SDR 31.1 million (US$40.0 million equivalent) on standard IDA terms to the Republic of Senegal to help support the second phase of the Government's structural adjustment program (SAL III). In addition, I recommend that IDA administer a proposed Special Joint Financing non-reimbursable contribution of SwF 12.0 million (about US$8.0 million equivalent) by Switzerland. PART I - THE ECONOMY 2. The latest Country Economic Memorandum entitled "Senegal: An Economy Under Adjustment" (No. 6454-SE) was distributed to the Executive Directors on February 13, 1987. Basic country data are given in Annex I. Background 3. Even in the context of Sub-Saharan Africa, Senegal confronts an unusual development challenge. While it inherited a r-elatively well-equipped physical and social infrastructure at independence (1960), Senegal has since then experienced the lowest GDP growth rate (2.3 percent per annum) of any African state not affected by war or civil strife. As in most other African countries, Senegal's population growth is high and rising (currently estimated at 3.0 percent) and demographic factors will continue to absorb most of the growth in real incomes for some time to come. In 1985, Senegal had an estimated per capita income of US$370 1/, roughly half that of Cameroon or C&te d'Ivoire, placing it squarely in the ranks of the lower income countries. 4. Despite considerable efforts at modernization, the Senegalese economy has not yet escaped its dependence on traditional mainstays: millet cultivation, cattle raising and fishing for domestic consumption and groundnut and fishing production for export. Moreover, this traditional economy is in stagnation, as is much of the modern sector. Both rural and urban average incomes are lower in real terms than in 1960, and nearly half of Senegal's resource-poor and open economy is highly vulnerable to climatic vagaries and adverse movements in international commodity markets. Lacking the rich agricultural potential or mineral resources of other 1/ Based on the Bank's Atlas methodology.  -2- countries on the West African coast, the nation's growth prospects are more modest than those of some neighboring countries. 5. Another important feature of the economy is the high concen- tration in Dakar and the coastal belt of most modern sector employment, commercial facilities and social services, resulting in important urban- rural and inter-regional disparities in employment opportunities and consumption patterns. The economy is also characterized by widespread government participation or regulatory controls, although this is now changing. The sluggish economic performance of the 1960s and 1970s witnessed only a small structural shift of employment from agriculture towards industry. Slow growth has also limited domestic savings and prolonged dependence on foreign aid. Recent Developments 6. Following the sharp decline in real output in 1984 caused by the severe drought of 1983/84, the Senegalese economy experienced a moderate recovery in the past two years. However, in spite of the estimated 3.8 percent GDP growth in 1985, the average annual economic growth rate in the first half of the decade fell to under 2 percent. Given that provisional GDP estimates in Senegal have tended to be generally over optimistic, the actual growth performance may even be lower than depicted by the above figures. Abundant and well-distributed rainfall during the 1985-86 cropping season led to a record grain harvest of 1.25 million tons, or 77 percent more than previous year's level. While groundnuts have done less well, there was at least a reversal in the trend toward a reduction in the area devoted to groundnut cultivation. Combined with higher yields, the larger area under cultivation raised groundnut production by about 20 percent in 1985-86. The improved agricultural perforuwnce also led to a rebound in industrial production which registered a real growth rate estimated at 4 percent in 1986, the first significant expansion since 1983. Overall, real GDP is estimated by the Government to have grown by 4.6 percent in 1986. 7. Senegal's inflation performance has improved noticeably in the past three years. Helped by a sharp decline in the import prices of rice and petroleum, the substantial strengthening of the CFA franc vis-a-vis the US dollar, and the continuation of tight domestic credit and monetary policies, inflation, measured by the GDP deflator, declined to an estimated 7.5 percent in 1986 compared to 13.3 percent in 1984. But while the general price trend has been decelerating since 1982, domestic inflation still remains high, compared to that of France and Senegal's other industrialized trading partners in Europe. In view of the rigidity of the exchange rate regime, a further reduction in the rate of inflation remains an important policy objective. 8. In line with the Government's past interventionist role in the economy, price controls remain an important feature in Senegal, although the system has become much more flexible in recent years. In its pursuit of a policy of economic pricing (verite des prix) since 1980, the  -3- Government has progressively reduced subsidies and sharply reduced the coverage of price controls. Currently, prices are fixed directly by the Government for a limited number of goods and services considered to be of strategic importance. For a number of other goods and services, price increases either must have prior agreement of or notification to the Ministry of Commerce. Finally, maximum profit margins, varying between 20 and 40 percent, are set for a number of imported commodities. Under its structural adjustment program, the Government will review the setting of agricultural producer prices in light of the findings of an on-going agricultural price and incentive study. Subsidies on fertilizers will also be gradually eliminated. In the industrial sector, the Government has undertaken to remove controls on prices and profit margins for industrial goods for which quantitative restrictions on imports are being lifted. 9. The Government sets the nominal minimum guaranteed wage rate (salaire minimum interprofessionel garanti - SMIG) which, however, applies only to a small percentage of the labor force. Host workers in the modern sector receive wage rates which are largely determined by collective conventions with trade unions, and which tend to be much higher than the minimum level and exceptionally high compared to other countries, even at a more advanced stage of development. On the other hand, wage rates in the informal sector, because of the surplus rupply of unskilled labor, tend to be much lower than the legal minimum. 10. A particularly important achievement has been the major turnaround in the Government's fiscal performance, a key element of the adjustment effort; the overall fiscal deficit, on a commitment basis and including grants, was reduced from the equivalent of some 8 percent of GDP in 1982183 to 3.5 percent in 1984185, and it is estimated to have been brought down further to some 2.3 percent in 1985/86. Because of the stagnation in economic activity and weaknesses in tax administration, this progress was achieved mainly through containment of expenditures and generation of extraordinary revenues accruing to the National Energy Fund and the CPSP, the Government's commodity price stabilization agency, as a result of the sharp fall in world prices of petroleum and cereals. These exceptional revenues, which compensated for the poor performance in ordinary revenues, cannot be assured in future years. The Government, however, was able to reduce the level of domestic arrears and to meet its debt obligations, injecting in the process a total of CFAF 73.6 billion into the economy over the last three years. II. After increasing by more than 20 percent on average per year during the 1981-84 period from the very low level to which they had fallen in 1980 thanks to much improved commodity prices, Senegal's export earnings fell significantly in 1985. Although export volume recovered strongly in 1986, much weaker commodity prices, particularly that of groundnut oil which has fallen by almost 50 percent during 1986, caused export earnings in 1986 to be no higher than their 1983 level of about CFAF 220 billion (US$575 million). On the other hand, the major fiscal adjustment of the recent past together with a rather depressed economy have combined to reduce the volume of all imports since 1983. The decline in nominal  -4- imports was particularly noticeable in 1986 as lower international prices of petroleum products and grains reduced the import bill by 15 percent. As a result, the trade deficit declined to about CFAF 71 billion, or about half of the previous year's level. 12. The favorable trend in the trade balance was, however, offset by a substantial deterioration on the services account, attributable to much higher interest payments on external debt. Lower international interest rates and growth in tourism receipts helped to reverse the situation in 1986. Consequently, the current account deficit (excluding official transfers), which amounted to CFAF 166 billion (US$505 million), or 18.8 percent of GDP, in 1982, widened during 1983-85 but fell to CFAF 127.5 billion (US$368 million), or 10.8 percent of GDP, in 1986. While Senegal's balance of payments continues to register an overall deficit in most years, requiring recourse to exceptional financing, the improving trend which began in 1983 has persisted. 13. Between 1981 and 1986, Senegal's total public debt outstanding increased 2.5 times to reach US$2.2 billion in 1986, or nearly 70 percent of GDP. Bilateral loans accounted for aluw'st half of Senegal's total debt as a consequence of a larger share of total disbursements but also of the repeated rescheduling exercises. Including the last Paris Club agreement (November 1986), total debt relief obtained from all sources until the end of fiscal year 1986-87 is estimated to amount to CFAF 177 billion. Thanks to this debt relief, the debt service ratio has remained manageable, although it rose from 10.8 percent in 1981 to 21.1 percent by the end of 1986, and all arrears on Senegal's external debt have been settled. The Structural Adjustment Process 14. Adjustment of the Senegalese economy became unavoidable at the end of the 1970s, when a combination of poor financial policies, over-ambitious investment programs, excessive external and internal borrowing, worsened terms of trade and successive droughts plunged an already weakened economy into a severe crisis. In December 1979, the Government announced its Medium Term Program for Economic and Financial Adjustment (PREF), which was worked out wlth assistance of the Bank and the IMF. It was designed to stabilize the financial situation and create the basis for stronger growth over the period 1980-84. Policies adopted in the context of the PREF helped facilitate the mobilization of balance of payments support and budgetary aid to Senegal and were the basis for an IMF Extended Fund Facility (EFF) for SDR 184.8 million, approved in August 1980, and a combined Structural Adjustment Credit/Loan (IDA, SDR 22.9 million; IBRD, $30 million), approved in December 1980. Macroeconomic performance, however, quickly got off track for a variety of internal and external reasons, including recurrent droughts both in 1980 and in 1981, and results were mixed for both the SAL and the various IMF programs which accompanied or followed it between 1980 and 1983. 15. Although the structural adjustment program supported by the first SAL met most of the objectives in the areas of parapublic sector  - 5 - management, production incentives and investment policies, it ran inito difficulty in the implementation of policies concerning fertilizer and seed distribution. After a long and difficult dialogue on agricultural policies, the second tranche of the loan was cancelled on June 30, 1983. Difficulties were also experienced with Fund programs. At the request of the Government, the EFF finalized in 1980 was cancelled in September 1981 and replaced by a stand-by arrangement of SDR 63 million for fiscal year 1981/82 which was successfully implemented. The next stand-by program (for 1982-83) was not, however, completed due to the Government's reluctance to strictly implement agreed measures in a pre-electoral period and to a sharp drop in the export price for groundnuts which caused major losses to the CPSP. 16. At the request of the Government, the first meeting of the Consultative Group (CG) for Senegal was organized by the Bank in December 1984. At this meeting, the donors endorsed Senegal's medium-tenm adjustment objectives and broad policy framework for the period 1985-92. Following the CG meeting, the Government prepared and discussed with the Bank & three-year action plan for 1985-87 with specific policies and reform measures to implement the objectives outlined in the medium-term adjustment program. The main objectives of the program are to reestablish a viable baZance of payments and public finance situation, to strengthen the incentive policy -by progressively withdrawing the State from direct involvement in production activities and promoting private sector initiative and investment-- and achieve greater efficiency of public sector resource management. The first phase of this program was supported by a second Structural Adjustment Credit (SAL II) in the amount of $70 million and an 18-month stand-by arrangement for SDR 76.6 million which was approved in early 1985. 17. Under SAL II the Government has initiated significant reforms in the following areas: (i) the industrial incentive system; (ii) establishing a sound basis for agricultural development through the liberalization of input supply, the reorientation of the rural development agencies ("desengagement") and the specification of a cereals policy; (iii) liberalization of the rice trade; (iv) strengthening programming and budgeting of public investment and undertaking a reform of parastatal enterprises; (v) limiting the growth of current expenditure, including the civil service wage bill; and (vi) improving public debt management. The excellent progress achieved under SAL II was spelt out in the September 12, 1986 memorandum on the release of the second tranche, which took place seven months after approval of the credits, and is summarized by sector in subsequent sections of this report. 18. The Government, in close cooperation with the Fund and the Bank, has set out its basic structural adjustment policies and objectives in a Policy Framework Paper, 1987-90 (SecMB6-1143) discussed by the Board on October 30, 1986. The Policy Framework Paper reiterated key strategies adopted earlier, such as the promotion of private sector initiative and the achievement of greater efficiency in public resource management. It also provided the basis for the finalization last November of a new one-year  -6- stand-by arrangement for SDR 34 million and a three-year, SDR 40 million Structural Adjustment Facility with the IMF (para. 128), and for a second phase of structural adjustment to be supported by the proposed credits. 19. While preparing and implementing structural adjustment programs in Senegal and neighboring countries on a bilateral basis 2/, the Interaction among the policies followed in these countries has emerged as an important issue, particularly with respect to custom tariff and agricultural producer prices. Consequently, we are beginning to take a multi-country, coordinated approach to structural adjustment, especially for Senegal, Gambia, Kauritania and Mali. Long-Term Prospects 20. Senegal's long term prospects critically depend an the success of its adjustment program to establish the conditions for self sustained growth and maximize the use of its limited resources. While structural adjustment is a necessary condition for the long term development of the country it is not, however, sufficient. Because of the modest endowment of the country in natural resources, which is aggravated by the desertification process, the links between improved policy environment and institutional setting and faster growth are far from assured. The long-term prospects for groundnut oil, the main commodity export of the country are uncertain. There is considerable potential to develop other agricultural products, particularly cash crops for export in the newly irrigated areas in the Senegal river valley and cereals in rainfed areas; however this will take time and experience with Senegal's agriculture shows how difficult it is to identify and implement high return projects. Expansion of the maritime fishing industry which has been very rapid, becoming the second source of foreign exchange earnings, is now constrained by a depletion of certain high value stocks. The long-term growth of the mining sector is dependent on the life of the rock phosphate reserves, estimated to last for only 15 years, and on market conditions. Manufacturing development towards export should become an Important source of growth in the future, but it is constrained by the relatively low productivity and high cost of labor and the keen competition on world markets. The reduction of rigidities in the labor market which will be sought under the Industrial Reforms component of the adjustment program will contribute to reduce the real cost of labor; this is, however, only a partial response to this problem. There is considerable potential to develop tourism, again provided that labor costs are reduced. 21. These problems are compounded by the high rate of population growth and unsuitability of the education system to the needs of the economy. Thus, to provide the basis for establishing a long-term development strategy and to optimize the use of investment resources the 2/ Structural adjustment programs are under implementation in the Gambia and under preparation in Mauritania.  Government has decided tr, include in its program a study of Senegal's long tern development prospects, constraints and opportunities. The study would be conducted jointly by the Government and consultants, financed under an on-going T.A. project. The Adjustment Scenario 22. In spite of the major constraints to the country's growth potential mentioned above, the Government has forcefully made the case for a long-term economic growth rate rtgnificantly higher than the 2.3 percent annual growth Senegal has managed to achieve in the past two decades. This stronger growth would be based on the diversification of agricultural production for export and the domestic market, stronger linkages between a more efficient industry and the rest of the economy and promotion of industrial exports. However, faster growth can only be sustained by a reversal of some of the past tre:ids in the economy. For these reasons, Senegal's long-term prospects critically depend on thc success of its adjustment program to create a stronger economic base for long-term development. 23. As set out in the Policy Framework Paper which was agreed with the Bank and the IMF, the basic long-term objective of the Government's structural adjustment program is to lay a firm foundation for the resumption of sustainable growth with equity. More specifically, it aims to achieve an average annual growth rate of real GDP of about 3.5 percent per annum over the remaining years of this decade, a rate which would allow a gradual improvement in real per capita income. The prerequisites for attaining that objective are an incentive environment which stimulates private investment and maximizes production and a management of the economy which o?timizes public resource utilization and promotes domestic savings. 24. In agriculture, adjustment with growth is to be achieved primarily through policies aimed at increasing food self-sufficiency. Thus, over the next ten years, agricultural output is projected to grow at approximately the same rate as the overall economy. This projection is based on the growth targets adopted in the Cereal Development Plan, which was endorsed by donors at a meeting on agriculture held in Dakar in June 1986. According to this plan, total cereal production is projected to reach an average of 1.4 million metric tons between 1991 and 1995, implying an average annual growth rate of almost 5 percent. This relatively ambitious growth target assumes that agricultural reforms will continue to receive high priority in order to assure minimum acceptable rural incomes and provide adequate incentives for farmers to improve farming techniques and that liberalization of marketing arrangements will be pursued. The development of irrigation infrastructure in the Fleuve region is expected to contribute greatly to achieving the above target. The rapid growth in cereal production will, however, occur partly at the expense of groundnut, the production of which is projected to recover from recent low levels and stabilize at the level achieved in the early 1980s, or about 825 thousand tons on average in the 1987-95 period. This recovery is  predicated on the maintenance of adequate price incentives to farmers and to the projected recovery in groundnut oil prices in the next several years. 25. In industry, current policy reforms and the proposed restructuring of a number of sub-sectors are expected to provide the basis for stronger growth in the industrial sector. Starting from a small base, the production of manufactured goods is expected to expand at a rate of about 3.5 percent in the second half of the 1980s, accelerating to about 5 percent in the first half of the next decade. Most of the increase is expected to originate from modern small-scale enterprises in the private sector. By contrast, the mining sector is projected to lag behind GDP because of both demand and supply constraints on phosphate expansion. Industrial output as a whole is thus forecast to grow at about 4 percent on average until 1995. Finally, the services sector, which currently accounts for almost 40 percent of GDP, will experience slower growth due mainly to the conscious effort to restrict the size of the Government. 26. Whether or not Senegal will succeed in achieving the growth target indicated earlier depends, to a large extent, on its ability to expand its export earnings. With the projected recovery in groundnut production, groundnut oil exports are expected to grow at an average rate of 10 percent in the remaining years of this decade. With the exception of fish and chemical products, growth in the exports of other commodities and more particularly phosphate will remain modest. Overall, total export volumes are projected to expand at about 4 percent per annum during the 1987-90 period. Senegal's export prospects in the early part of the 1990s are, however, clouded by the projected stagnation in groundnut exports, the result of the levelling off of groundnut production. Exports of manufac- tured goods, although growing rapidly, will not yet be sufficiently significant to prevent a slowdown in the rate of export growth (in volume terms) to 2.7 percent in the 1991-95 period. Nevertheless, the combination of a recovery in the terms of trade, the relative success in the substitu- tion of local for imported cereals, the continued containment of non-necessary imports, and the development of an export structure where non-traditional exports play an increasingly more important role is expected to lead to an improvement in the resource gap which is projected to decline from 5.4 percent of GDP in 1986 to about 3 percent by 1995. 27. The above projections suggest some Important conclusions regarding Senegal's external capital requirements. Assuming that new commitments increased moderately in real terms, the projections indicate the need for only modest additional balance of payments financing over the 1987-95 period. While the bunching of scheduled repayments in the next few years will require continuing debt rescheduling for the remaining years of this decade, debt relief should no longer be a necessary feature of the aid package from 1990 onwards. 28. The achievement of these favorable prospects for the Senegalese economy is predicated on the combination of several favorable developments. On the domestic front, they assume that supply responses in agriculture and industry to current reforms will occur relatively rapidly, creating in the  TABLE I Macroeconomic Projections - A Summary Impact of the Structural Adjustment Program Actual Estim. Projections 1985 1986 1987-90 1991-95 Growth Rates (percent) Real GDP 3.8 4.6 3.5 3.5 Primary 8.0 9.8 4.7 3.5 Industry 2.0 4.0 3.7 4.2 (of which Manufacturing 1.3 2.6 3.8 5.2 Services 3.3 3.2 3.0 3.2 Exports of GNFS -12.7 19.9 4.1 2.7 Imports of GNFS -6.8 3.0 2.9 3.1 Share of GDP (percent) Consumption 98.8 91.6 88.8 88.4 Gross Investment 13.7 13.8 13.9 13.7 Budgetary Deficit /a 4.6 3.3 1.5 1.0 Resource Balance lb -13.0 -5.4 -3.8 -3.1 Current Account Balance /b /c -18.4 -10.8 -8.1 -6.7 Overall Balance /b -0.4 0.4 -0.3 -0.1 Memorandum Ites Inflation rate, CPI (X) 12.8 6.1 5.5 5.0 Domestic Saving Ratio (Z) 1.2 8.4 11.2 11.6 ICOR 2.7 5.1 3.9 4.0 External Debt O/S ($m) /b 2002.5 2157.2 2778.2 3804.7 Debt/GDP (Z) 82.8 69.5 60.7 56.3 Debt Service Ratio (Z) 17.4 21.1 26.1 24.7 /a Cash basis 7T End of period 7F Excluding official transfers Source: Senegal - An Economy Under Adjustment, February 1987  - 10 - process the basis for economic growth as well as for stronger exports and import substltutes which, in turn, lead to an improvement in the balance of payments. In agriculture, they suppose not only a rapid development of irrigated agriculture but also a successful diversification into high-valued export crops. In industry, these projections are based on the assumption that the implementation of the incentive policy reforms will create the necessary environment to attract private --both domestic and foreign-- investments. 29. While the reform program has been launched, several constraints remain to be overcome. Institutional rigidities, supply constraints in important sectors and the limited capacity of the economy to re-orient rapidly towarcd export could prove to be serious obstacles to achieving the target growth rates. There is uncertainty, for instance, regarding the speed at which private entrepreneurs adjust to the new industrial environment and foreign investors respond to the new opportunities in Senegal. Given the difficult financial position of Senegal's banking sector, adequate credit availability is by no means assured. In agriculture, the high cost of on-farm infrastructure development could prove to be a significant hindrance to the rapid exploitation of irrigation water in the Fleuve region unless high-valued export crops could be rapidly developed. Last but not least, external factors such as weather conditions and the speed of recovery of international markets for Senegal's traditional exports will also be important. PART II - THE GOVERNMENT'S STRUCTURAL ADJUSTMENT PROGRAM Introduction 30. The proposed SAL III would support the second phase of Senegal's Structural Adjustment. The principal elements of the program for this second phase will be: (i) to increase the efficiency of public resource management and restore public savings through an acceleration of the parapublic sector reform, institutionalization of the reform of public