Senegal - Private sector assessment

Report No. 11317-SE Senegal Private Sector Assessment June 22, 1994 Industry and Energy Division Private Sector Strategies Division Sal,elian Department Corporate Planning Department Africa Region and Africa Regional Department, International Finance Corporation FOR OFFICIAL USE ONLY MI CROGRAPHICS Report No: 11317 SE Type: SEC Documet of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of the' official duties. Its contents may not otherwise be disdosed without World Bank authorization  CtnURNC MEDUIVAUENTS Cunriy Unit CFA Franc (CFAF) US Sl.0 563.00 CFAFl iMon - USS1,785.71 SDR 1.0 US S1.38 ABBRVIATIONS AND ACRONYMS AEF Afiica Entrrs Fund AGETIP Agp e dExdcution des Travaux dntt Pubic AMSCO AfianMaemearnt Srvice Company APDF Aflica Pojec Devoopment Fa-iliy ASACE Agence Sn6galaise 4Assuance-C a raEl,tatien BCEAO Banque Camrle des Etats de rAiique de fOuet BIAOS Baque kntiona pour IAfrique Occidetale BICLS Banque Wtuationade pow le Commeroe at rhuatric au Sen4d BNP Banque Nacnale de Paris * Char.be de Commons d'dstre et d'Agriculture C . CComptoir Comenarl at dustniel du S&iga1 C5L:S Cene Intnmational do Commerce Extirieurdu S&n4gal CLS Cr6dit Lyonnas du Sdgal CM Chambre des Mdtios CNES Cnseil National des Employeurs duSigal CNPS Conseil Naional du Patronat du Sogl 0SS Conpag'i Sucike S&6ngalaise DIFZ Dakar Intnatioal Free Zone EEC European Economic Community FDt Fortin Direct Iveme I7NE Fonds National do rEnergie F'tJMOA FPsO M&alliques do lThust-Ahicain MTOA Manufacture de Tabac de FOuest-Afficain NPI NuveUle PoiNtu Industrielle NSOA Nouvelle Savonnerie Ouest-Aficaine OPCE Offlie des Posis a de la Caisse dEpatgae PBE PrOl4venent au Budgs do lEquipament PE Public Enteprise QR Quantitative Restrictions SAD SocA6t Aficaine des Dnwgent SAF Savonnerie Africaine Fakbry SAL Stuctura AdjusbteLoan SAR Socidt6 Aicaine de Raffinage SECAL Sector Adjustment Loan SENELEC Societ6 S&fgalaise de Distribution dElecticit6 SFZ PointsEnterprise Franc SGBS Societ6 G6rale de Banques au So6gal SIPARCO Soci&6 Industrielie de Padrfmie et do Cosmffique SIPL Socidt6 IndustieUe des Produits Laitias SIPOA Soct6 de Pharmacie de IOuest Aficain iPS Soci6t Industrielle de Pptie au S&ngal SME Small and Medium Enterprise SNCDS Soci&t6 Nouve8le des Conseevies du S&el SOCAS Soci&6 Alimentare S&fgalaise SOC(CYIM Socit6 Commerciale des Cimenis SODEFITEX Soci&t6 de D6veloppement des Fibrs Texiles SODI SociWt6 de testion de Domames Indstrls SOB Stdaemnt of Eediture SONEPI Sox&t6 Nationale dEbdes at de Prnwotion ndatniele SOSEFIL Socite n6laise do Fllterie SOTEXKA Soci6t des Texiles do Kaolack SPIDS Syndicat Professionnel des Idustries d S&Sn6gd STS Socit6 Textile du S&gl UEMOA Union Economique et Montaire Ouest-A icaine UMOA Union Mon6taire Ouet-Africaine UNACOIS Union Nationale des Co et des Industil du S4ndal  FOR OFFICIAL USE ONLY TABLE OF CONTENTS SENEGAL PRIVATE SECTOR ASSESSMENT PREFACE................................................................................................................. EXECUTIVE SUMMARY ............................ii L ECONOMICBACKGROUND ............................ A. Sectoral Structure ............................I B. Performance and Reforms ...........................2 IL PRIVATE SECTOR PROFILE .............5 A. Public/Private Sector Interface .5 B. Overview of the Private Sector .6 C. Corporate Ownership Structure ......................8...8 D. Business Groups .10 E. Potential Role for the Private Sector .11 BOX 1: Agricultural Diversification and Private Sector Role ...................... 13 M. CONSTRAINTS TO PRIVATE SECTOR DEVELOPMENT ............................... 14 A. Market Rigidities and a High-Cost Economic Structure .14 BOX 2: The Cost of Conventions Spsiiales. .18 B. Government's Commitment to the Reform Process .22 BOX 3: Cascading Impact of Import Taxes .26 C. Ineffective Legal System for Private Sector Activities .27 M doamt ba a resicld didon and may be wed by tecipe onl in tbe pda z fthd offcia dutie Its contnts may not otha* be discosed vn*Ou World %&nE athotiat  D. Inadequacy of Financial Services ....................................................... 30 E. Weakness of Institutional Support ....................................................... 33 BOX 4: A Public Sector Role Performed by the Private Sector: the Example of AGETIP ....................................................... 37 F. Business Environment and the Incentive Regimes for Investors and FExporters .37 BOX 5: The Dakar Industrial Free Zone and the Points Francs 40 IV. PROPOSALS FOR A STRATEGY FOR PSD . .43 A. The Recent Devaluation and Private Sector Supply Response .44 B. Proposals for World Bank Group Strategy .46 BIBLIOGRAPHY .48 This report was prepared by a joint WB-IFC team comprising Messrs. Hung Nguyen, Yi Shao (AF5SE), and Abdelkader Allaoua (CAFDR), Dileep Wagle (CPLDI), with contributions from Jean- Francois Dupuy (LEGAF), David Jones (AF5SE) and Jan-Hendrik van Leeuwen (consultant). It draws on the findings of a joint WB-IFC mission in March 1992 and existing reports. The mission is grateful to UNIDO for the support provided in the field by a team comprising Messrs. Gerard Latortue, Morike Konare and Djibril Ndiaye. IFC's contribution, which was coordinated by Mr. Dileep 'Wagle, Private Sector Strategies Division, reflects inputs from the Corporation's Investment and Capital Markets Departments, and FIAS. On the Bank's side, Mr. Hung Nguyen is the Task Manager, and Mr. Paul Ballard (AFTIE) the Peer Reviewer. Mr. Setaput Suthiwart-Narueput (AF5IE) was responsible for processing the report from Yellow to Green Cover and Ms. Ana Novaes (AF5IE) from Green to Gray Cover. Ms. Katherine Marshall is the Department Director, Mr. F. Laporte is the Lead Economist and Ms. Silvia Sagani the managing Division Chief. Secretarial support was provided by Messrs. Melakou Guirbo, Ross Pfile and Ms. Patricia Biggs.  PREFACE The purpose of this Report is to provide the basis for strengthening the policy dialogue on private sector development with the Govermnent of Senegal and formulating a World Bank Group strategy. This Report is not itself a strategy document, but its information and analysis provide a vital input to strategy fonmulation. To this end, the Report is designed to provide an analytical description of the private sector and the role it currently plays in the economy; a diagnosis of the policy, institutional, and other factors that constrain efficient private economic activity; and an identification of major issues and priority areas for action by the Government of Senegal and for World Bank Group assistance to overcome these constraints.  i EXECUTIVE SUMMARY A. THE NEED FOR PRIVATE SECTOR DEVELOPMENT 1. Background. Senegal is a Sahelian country with limited natural resources. While Senegal's GDP per capita in 1991 was estimated at US$720 which placed Senegal at the level of middle-income countries, its social indicators-including life expectancy, rate of primary school enrollment, and infant mortality-are at the lower end of the range recorded in Sub-Sa1iran Afiica. 2. Senegal's economic performance during its first 30 years since independence (1960-1991) has been disappointing. Population grew at 3% per annum, while GDP grew at only 2.5%. At the sectoral level, Senegal's agricultural base has been steadily deteriorating because of the effects of poor weather and resource management, while industrial production grew a+ 4.5% per annum between 1960 and 1985, and at 4.1% between 1986 and 1991. Export perfor,r uce during this period compared unfavorably with most other West African countries, and averaged only 2.4% growth per annum. 3. Senegal's adjustment efforts date back to 1980 and were supported by four Bank macroeconomic adjustment operations (SALs) in 1980, 1986, 1987, and 1990, and by two sector adjustment operations (SECALs), including one in the financial sector in 1989 and another in the transport sector in 1991. These adjustment operations met with a degree of success in stabilizing macroeconomic conditions and in partially liberalizing the economy. In 1986, a series of liberalization measures including the removal of quantitative import restrictions and price controls on manufactures were introduced under the New Industrial Policy and the New Agricultural Policy. Notwithstanding these measures, the supply response of the private sector has remained weak, particularly in terms of new investments and exports. A fourth SAL was introduced in 1990 which focused on the removal of labor market rigidities, the reduction of government subsidies, and the implementation of a more aggressive privatization program. 4. Sources of Future Growth. Given its predominant position in the Senegalese economy and the poor performance of the public enterprise sector, sustainable economic growth in Senegal n.ust come from the private sector. The private sector contributed about 87% of +he country's GDP in 1987, and largely consists of the rural and informal sectors which together employ 90% of the work force. Growth is unlikely to come from the public enterprise (PE) sector. While the PE sector accounted for around 29% of total investment and 17/o of employment, it contributed only 7% of GDP. Overall PE financial performance has been poor,  iii with 1986 aggregate losses of CFAF 23 billion (equivalent to approximately US$ 66.4 million at the average annual exchange rate then prevailing). 5. While the private sector provides the greatest potential for economnic growth in Senegal, its failure to play a more positive role in stimulating the growtl of the economy can be attributed !3rgely to the rigidities and inefficiencies of the highly dirigiste system of economic management by the Governiment, which have resulted in skewed incentives and poor resource allocation. The potential for private sector growth-given the proper enabling environment-is reflected in the dynamism of the informal sector in Senegal. By contrast, the formal private sector, which has operated since independence under the shelter of protection and restrictive market-sharing arrangements, has been characterized by decreasing productivity and competitive efficiency, high costs, and slow growth. The devaluation of the CFAF in January 1994 was a necessary condition to restore competitiveness and export-led growth. B. PROFILE OF THE PRIVATE SECrOR. 6. Senegal has, among West African countries, an old and relatively well-developed industrial sector, which was once an important supplier to the colonial French West African market. With the gradual breakdown of the West African market block after independence, however, and the development of national industries behind protective barriers, Senegal began to lose its export markets, leaving it with an industrial sector much larger than warranted by the size of the domestic market. Additionally, the large industrial base fostered monopolies, given special legal status through the convention sp&ciale system, which set up barriers to entry and led to a reduction in competition. The convention speciale system came to dominate the market after independence, so that by the mid-I 980s firms under this regime produced 75% of value added in agro-industry (excluding fishing), 68% of textiles and leather, and 90% of construction material. The incentive structure was consequently distorted, with high effective rates of protection (e.g., over 300% for flour and sugar), resulting in a high-cost production and consumption structure. The cost in terms of foregone revenues and high consumer prices has been very high. 7. The large informal sector in Senegal has its roots in the phenomenon of the rural exodus which accelerated following the periods of drought of the last decades. The large numbers of school and university leavers who could not find employment in the formal sector also contributed to informal sector growth. Complex government regulations, controls, and taxation have kept informal operators from transferring to the formal sector. 8. Size and Structure. Private sector activity and employment in Senegal is dominated by the informal sector, particularly in agriculture, trade, and transportation. Informal enterprises are also active in metal works, furniture making, textiles, and leather processing. Only about 2% of Senegal's active work force is employed in the modem private sector, which is centered around such activities as food processing, chemicals, construction, and tourism. As a  iv whole, the formal, modem sector contributed about 26% of Senegal's GDP in 1987 and was estimated to include about 1,000 firms. The sector is controlled by a dozen business groups. 9. Ownership. At independence, key economic sectors were in foreign, primarily French, hands. Despite two subsequent decades of a policy of "Senegalization" which have increased the role of the Senegalese pris e sector, the financial and large-scale manufacturing sectors remain under foreign or state con.ol. Of the ten largest firms in Senegal, for example, only one has a majority share-holding by private Senegalese. 10. Public/Private Sector Interface. Government intervention in the Senegalese economy is extensive and occurs on several fronts. Regulatory controls are pervasive. Direct government participation in the economy is also substantial--total government equity in the PE sector doubled from 1982 to 1987 to reach CFAF 218 billion. The PE sector also "crowds out" the private sector by absorbing a large portion of the credit available, including 95% of long-term funds. II. Previous surveys of the private sector have identified the government s lack of commitment to reform as a principal constraint to the development of the industrial sector in Senegal'. This hostile attitude of the government has been compounded by an absence of transparency in needed administrative procedures and formalities, the multiplicity of government agencies with overlapping areas of responsibility and authority, and frequent visits by the tax authorities, which have increased the costs of conducting business and constrained the development of the industrial sector. C. CONSTRAINTS TO PRIVATE SECrOR DEVELOPMENT 12. Numerous constraints to private sector development still need to be overcome to realize the significant growth potential of the private sector in Senegal. These include (1) market rigidities and a high cost economic structure; (2) a lack of government commitment to the reform process; (3) ineffective investment incentive framework; (4) an ineffective legal system for business activities; (5) inadequate provision of financial services; and (6) weak institutional support systems. 13. Market Rigidities and High Cost Structure. The principal policy-related constraint to the development of private sector economic activity in Senegal stems from the rigidities imposed by the inward-looking and highly monopolistic economic structure in Senegal. The finicky inter pretation of regulations and the attitude of civil servants have led to an atmosphere of mutual distrust and suspicion between the public administration and the private sector.  v Inefficient firms are sheltered behind trade barriers and restrictions on domestic competition, as exemplified by the conventions speciales. The lack of competition in transportation has resulted in vety high freight rates which constitute a major deterrent to the development of exports. High electricity and petroleum costs due to market rigidities in the energy sector and heav" taxation, also have a strong impact on the overall cost structure of the economy. 14. Labor market rigidities have been a key factor responsible for the high costs of producing goods and services. Under the current Labor Code, severe rigidities existed in the hiring and firing of workers. Wage flexibility was also largely absent. Until very recently, the problem was compounded by the appreciation of the real exchange rate. These labor market ;igidities had made labor costs in Senegal much higher than those in non-CFA countries, as much as 56% higher than in Mcrocco, 60% higher than in Malaysia, 370% higher than in Indonesia, and over five times higher than in Nigeria. These large discrepancies have been partly corrected by the recent nominal dealuation of the CFA. 15. NTI reforms also included measures to improve the business environment for the private sector. A revised investment code and a one-stop investment approval window (Guichet Unique) were established in 1987 and 1988, respectively. In practice, the results of these measures have been less than satisfactory. 16. Lack of Continuity in the Government Commitment to Reform. The liberalization of the trade regime was initiated under the NPI. Starting in 1986, quantitative restrictions were to be eliminated over a three-year period and tariffs were to be harmonized and reduced. The reforms were implemented as planned. However, significant back-tracking on tariff reform subsequently took place. This was in part to increase effective protection in the face of a rapid appreciation of the real exchange rate. In late 1988, a system of valeur mercuriales (reference prices) and minimum de perception (minimum duties) provided a large degree of discretionary power to customs officials and allowed for substantive, de facto protection. Subsequent presidential decrees in 1989 and 1990 provided for new tariffs which essentially reverted the customs duty to its 1986 rate. 17. While some progress has been made in privatizing PEs under SAL IV, the pace of the privatization program has been disappointing. Most of the PEs included in the privatization program are marginal units, and enterprises accounting for substantial government equity participation will remain firmly within the public sector. Sale or liquidation of all 40 PEs earmarked will reduce the Government's stake in PEs by only 12%. 18. Incentive Framework. There have been only isolated cases of new foreign investment in Senegal in recent years, while domestic private investment has been concentrated in the small-and-medium enterprise and/or informal sectors. The investment climate has suffered from the long period of anticipation leading up to the devaluation of the CFAF last January, lack  vi of transparen;:y in the implementation of the various invest.nent regimes; poor relations between the private sector and the bureaucracy, labor unions, and high factor costs that have made it difficult to identify profitable investment opportunities. 19. Ineffective Legal System. Senegal's legal system is perceived by most business operators as old, complex, and inappropriate for the realities of the local economic environment. Reasons include the slowness of legal reforms, the amount of regulatory constraints to business activities, and the poor performance of the judiciary system. Access to courts, for example, is cited as one of the major costs of doing business in Senegal. 20. Inadequate Financial Services. Despite the recent reforms in the financial sector, the cost, access, atid availability off credit, particularly term finance, is still a principal constraint to the growth of the private sector cited by private entrepreneurs. Because of the high cost of credit, which can be close to 19% per ;.-uml, the population of eligible productive projects is rather limited. Much economic activity is tierefore channeled into lower risk areas such as trade and commerce. 21. Access to credit is also problematic for smaller enterprises due to several reasons: (1) an exacerbated conservative bias against smaller firms following the past bank liquidity crisis; (2) the crowding effect of PEs mentioned earlier; (3) the impact of bank-by-bank credit ceiling constlaints; and, until recently, (4) the relatively higher attractiveness of investing in risk-free money market instruments. 22. WeAkness of institutional Support. Despite the wide range of support institutions to the private sector, the services they provide are inefficient and ill-adapted to the needs of the private sector, particularly those of SMEs. Existing support institutions include private organizations such as employers' associations and trade unions, as well as chambers of commerce, and investment and export promotion agencies. D. PROPOSALS FOR A PRIVATE SECTOR DEVELOPMENT STRATEGY 23. Senegal has a fairly dynamic private sector, whose potential has been less than fillly utilized. Most indigenous private sector activity has been concentrated in either trade, agriculture or small-scale informal-sector manufacturing. The dirigiste policy pursued by the Government since Independence ensured that most large-scale, formal ("modern") sector economic activity fi-mained the preserve of either the parastatal sector or the foreign-owned private sector. The indigenous private sector has been largely unable .o surmount various barriers to entry, such as 2 Senegal's GDP deflator grew by only 1.8% in 1993  vii the convention sp&iales, legal monopoly arrangements, or the preferred access to credit for SOEs and large-scale enterprises, or the rigidities of the formal labor market. The performance of the modern sector, opArating as it has been behind the shelter of protective tarU.s and restrictive market-sharing arrangements, has been undistinguished, at best. Most industries have operated relatively inefficiently, at sub-optimal 1 els of capacity utilization and at high levels of operating costs. Instead of contributing to the generation of investible resources, parastatals have been a drain of governmental revenues, many of them needing constant operating subsidies. 24. It is fairly clear that if Senegal is to achieve sustainable economic growth, its export sector must attain competitive efficiency. This calls not only for the elimination of those existing rigidities that have been the cause of distortion in resource allocation, and the attainment of macro-economic stability, but for the State to disengage itself ITrom commercially-oriented activities which the private sector could do better, and to actively promote the transition of the indigenous private sector from the informal to the formal, "modern" sector. Many steps have already been taken in this direction under the structural adjustment programs and the "Nouvelle Politique Industrielle", to rationalize the trade and tax regim. es, eliminate price controls, and embark upon a program of privatization of SOEs Results have so far been mixed, some measures have been more successful than others, and in some cases there have been some outright slippages. While the political difficulties of maintaining the pace of reform are understandable, it is clear that this pace must not only be maintained but actually accelerated. 25. The Recent Devaluation and Private Sector Supply Response. With the recent devaluation, Senegal has an unique opportunity to restore competitiveness and export-led growth, taking advantage of its strategic location and its sizable human resources base. Among the sectors with higher potential to growth are fishing, light manufacturing, horticulture, floriculture, services and tourism. The GOS realized, however, that this measure alone will not generate the indispensable supply-respor- - of the private sector, particularly in terms of new investment and exports. The Government with the support of the Bank has prepared a medium-term strategy for the development of the private sector. The main elements of this strategy are the result of a national seminar with representatives of the Government and the private sector convened in mid- January 1994. Senegal's private sector development strategy is based on the following eight components: (i) the strengthening of domestic competition; (ii) the rationalization of direct and indirect taxation, including that of imported goods; (iii) the promotion of export activities; (iv) the improvement of the regulatory and legal frameworks; (v) liberalization of the functioning of the labor market; (vi) the alignment of the factor prices on their economic costs; (vii) the strengthening of the institutional support for the private sector; and, (viii) the improvement of the companies access to credit. 26. The removal of critical market rigidities in the petroleum, energy, and transportation sectors will also be important in alleviating the high cost economic structure faced by firms. Appropriate policy measures to take on the petroleum front include (i) the elimination of the import and refining monopoly of the Societ Africaine de Raffinage (SAR); (ii) the introduction of real competition in the transport and distribution of petroleum products; and (iii)  viii the reduction of taxation on petroleum and increased transparency in the use of the Fond National de I'Energie. With regard to electricity, attention should be placed on improving the management of technical, commeicial, and financial matters in the sector by developing the participation of the private sector in both the management and equity of the sector. The removal of monopolies in the maritime and air transportation sector will also be important. Increased government commitment to reform and the recent establishment of a private sector consultative group to engage in dialogue with the public sector would help to reduce uncertainty caused by frequent changes in government policy. 27. Legal and judicial reform will require a thougbtful analysis of the institutional and substantive law aspects of the legal franework governing private sector activity with . -view to identifying and -moving key impediments to private sector activity. This analysis would look into issues such as: (i) what legal texts need to be revised, abrogated or introduced; (ii) how to improve dispute settlement practices and the possibility of introducing alternative methods like mediation and arbitration; (iii) access to legal information - legislation, case law and public registries; and (iv) the institutional capacity of the ministry of Justice and other institutions. Improving the provik9on of financial services will involve careful enforcement of banking regulation and supervision to restore confidence in the banking sector and strictly avoid another banking crisis; taking measures to reduce the financial intermediation costs for borrowers, e.g., by ensuring competitive banking practices; and increasing the flow of credit to private sector borrowers, particularly to smaller firms, by privatizing parastatals to reduce their crowding out effects. In the absence of such privatization, the introduction of hard budget constraints for parastatals and the removal of any implicit government guarantees on parastatal borrowing will be critical to reduce such crowding out effects. This will require ensuring that the government will not step in and assume tht obligations of the parastatals should they default on their loans. Other measures to promote the flow of credit to smaller borrowers include encouraging term transformation, improving financial reporting standards and training credit officers to improve the capability of banks to evaluate small borrower risk. 28. Regional Integration. The transformation of the seven countries of the UMOA from a monetary into an economic and customs union in January 1994 offers new possibilities for expanding Senegalese exports and in particular of light manufacturing. The UEMOA treaty opens a market for Senegalese goods of 60 million people compared to 8 million in Senegal. Given its strategic location as a coastal nation and its established industrial base, Senegal is in an advantageous position to exploit this opportumty. Sectors of the economy that could take advantage of this larger market include high yield agricultural products, beverages, light chemicals, plastics and fertilizers, textiles and apparel, construction materials, agricultural equipment, light mechanical and electrical industrial goods and a wide range of consumers goods. The expansion of the Senegalese light industry in the UEMOA regional market should allow the industry to improve its competitiveness in terms of quality and productivity, and in the longer term, to specialize in certain product segments in the industrialized economies, eventually under sub-contracting arrangements or in association with foreign firms. The UEMOA regional market can be seen as a natural first step before the Senegalese light industry is able to compete with the Asian New Industrialized Countries. In addition, the likelihood of a viable and stable  ix macroeconomic environment wIll be enhanced by the UEMOA treaty by: (i) the convergence of fiscal policies embedded in the treaty; (ii) the establishment of a custom union with a common external tariff; and (iii) the harmonization of economic and sectoral policies. 29. Proposals for World Bank Strategy. The World Bank and IFC can jointly assist Senegal in implementing its agenda for reform and promoting private sector development in several ways. The adjustment operations in the past had yielded mixed results and had taught several lessons that will help the design of more successful operations in the future. Among these lessons are the need to build consensus and constituency in the design of the reforrzi program and the need for the Government to show up-front commitment to the reform program. Once the Government is able to implement policies compatible with such a private sector-led growth strategy and improve the overall competitiveness of the economy, IFC could play a greater role in Senegal in the form of loans, equity investment, as well as privatization assistance. 30. The Bank can offer policy advice and technical assistance regarding the implementation of reforms to promote private sector development and to help the supply response to the re,.ent CFA devaluation. The Bank is currently engaged in a dialogue with the Government and the private sector to support the Government's reform program aiming at: (i) promoting private sector development by liberalizing trade and labor markets, removing barriers to entry, increasing compe.tition and lowering the cost of production; (ii) rationalizing the legal environment for th- private sector and make the legal system more responsive to the requirements of the private sector and consistent with the ongoing regional effort to harmonize business laws and other donor supported initiatives; and (iii) providing technical assistance funds to private enterprises in order to facilitate their growth and export prospects. The Government's reform program is based on extensive consultation with the private sector through the Review Group, a consultative group created last February to promote consensus building for the reforms. 31. For the IFC, a stronger presence in Senegal depends on the success of policy reforms to lift the constraints holding back the development of the private sector. Its Africa Enterprise Fund (AEF) and Africa Project Development Facility (APDF), which finance relatively small enterprises for capital investments and technical assistance respectively, could possibly play a stronger role for this category of enterprises. If the Government is able to implem-nt policies compatible with a private sect6r-led growth strategy and effectively address the constraints preventing firms from attaining competitive efficiency there could well be a greater role for IFC in Senegal in the form of loans, equity investments, and privatization assistance. The sectors that could provide particularly promising opportunities for assistance include small- and medium-sized enterprises, agriculture, fishing, industry, and tourism. 32. While the reform agenda faced by Senegal is a difficult and extensive one, the visible dynamism of its private sector, particularly as observed in the less constrained environment of informal sector enterprises, coupled with the opportunities provided by the proposed regional  x economic integration among the UEMOA countries, would indicate that the rewards from pursuing such a private sector-led growth strategy could indeed be substantial.  PART I: ECONOMIC BACKGROUND A. SECTORAL STRUCTURE 1. Senegal is a Sahelian country with limited natural resources and a population of 7.4 million in 1990. Social indicators such as life expectancy, primary school enrollment rate, infant mortality are at the lower end of the range recorded in Sub-Saharan Africa. In 1991, per capita GDP was estimated at US$ 720, placing Sen,gal at the level of middle-income countries. Productive bases in the Senegalese economy are narrow, with the combined shares of agriculture and industry being less than 40% of GDP. A predominant share of the economy is in the informal sector, which, although dynamic, is characterized by low capital stock and low productivity. In the national accounts, the importance of the informal sector is assessed by subtracting the formal sector's statistics from national aggregates. Based on estimates available for 1988, the informal sector would have generated half of GDP, 90% of employment and one-fifth of investments in Senegal. 2. Agriculture. Almost all Senegalese agriculture is in the informal sector. Agriculture provides 12% of GDP through crop production and 9% of GDP from livestock, mostly from household-level enterprises. Crop production, in particular, tends to be seen as the fall-back occupation for those who can find nothing more remunerative. It is a low-input, low- output, low-income activity, concentrated on very few cash crops - mainly groundnuts and cotton - and a small group of semi-cash crops grown mainly for household subsistence: millet, sorghum and, increasingly, maize and rice. Farming households typically receive a third to two thirds of their incomes from non-agricultural activities. 3. Industry. Senegal has an old and relatively well-developed industrial sector, which was once an important supplier for the colonial French West African market. After independence in 1960, with the gradual breakdown of the West African market block and the development of national industries behind protective barriers, Senegal began to lose its export markets and was left with an industrial sector much larger than warranted by the size of the domestic market. The large ir.dustrial base fostered monopolies, which obtained special legal status through the conventions sp&iales (special agreements) system, setting up barriers to entry and leading to a reduction in competition. The convention speciale system progressively came to dominate the market after independence. By the mid-1980s, firms under this regime accounted for 75% of value added in agro-industry (excluding fishing), 68% of textiles and leather, and 90% of construction material. The incentive structure was consequently distorted, with high effective rates of protection (e.g. over 300% for flour and sugar) resulting in a high-cost production structure.  2 4. The restrictive regime has resulted in a formal industrial sector (especially the manufacturing sector) which is relatively old (average age: 24 years, more than twice the average age of firms in Cameroon and Cote d'Ivoire) and inefficient. Its focus for much of the post- independence period has been inward-looking, being oriented mostly toward import-substitution activity. The dominant industrial sub-sectors in recent times have been food and tobacco, construction and public works, and chemicals. Parastatals have been widely represented in groundnut oil processing and mining (phosphates and iron ore). The informal sector is widely represented in the industrial sector, particularly in artisanal production and construction and public works. Most manufacturing has been concentrated in consumer goods, rather than intermediate and heavy industrial activity, and has encompassed both formal and informal sectors. 5. Employment. Employment growth stagnated after about 1975, mostly in response to the rigidities of the country's labor laws, which made it expensive for formal sector firms to hire workers and difficult to fire them. By the mid-1980s, total employment was about two million people, of which industry accounted for only 10%, and modem manufacturing for less than 2% (in terms of number of jobs, 41,500 in 1985). By 1990, the modem manufacturing's share was even lower, the number of jobs provided having fallen to 38,000. In general, the modem sector has not been a major creator of permanent jobs. Industries such as textiles, garments, leather, wood, paper and construction, which might have been expected to generate an increasing demand for labor, have experienced a decline in the level of permanent employment from the mid-1970s onwards. B. PERFORMANCE AND REFORmS 6. Senegal's economic performance during the first 30 years since independence (1960-1991) was disappointing. While the population grew at 3% annum, GDP grew at only 2.5%. After 1985, reflecting perhaps the initial impact of structural reforms, the GDP growth rate improved somewhat to 4.3% per annum, and the overall fiscal deficit declined from 8.8% of GDP in 1983 to 2.6% in 1988. Following the implementation of an austerity program, the budgetary position turned to a surplus of 0.2% of GDP in 1990, but fell to a deficit (1% of GDP) again in 1991. Preliminary data for 1993 show a drop of 0.8% of GDP. The average growth for the 1991-93 period is estimated at 1%, implying a decrease of the real income per capita. With improved demand management, inflationary pressures were brought under control, and the GDP deflator fell from 12% in 1984 to only 1.8 in 1993. 7. At the sectoral level, Senegal's agricultural base has been steadily deteriorating because of the effects of poor weather and poor resource management. Its industrial production increased at the rate of 4.5% per annum between 1960 and 1985, and at 4.1% between 1986- 1991. Manufacturing growth, being largely restricted to import-substitution, occurred rather more slowly (3.3% per annum during 1970-82 and only 0.9% between 1982-85) than that of  3 other industrial sectors (mining, construction and utilities). From 1985 to 1991, the average growth of manufacturing value-added in the national accounts is estimated at 4.5% per year. This growth, however, was entirely due to informal sector activity, as, according to the manufacturing production index, the producticn of the formal manufacturing sector declined. 8. Senegal's export performance was uninspiring during the 1965-80 period, with growth averaging only 2.4% per annum, comparing very unfavorably with the performance of two-thirds of the other West African countries. It improved somewhat after 1980, averaging 8.5% per annum during 1981-84, but slowed to 1.2% per annum during 1985-1991. During 1985-1991, export earnings (goods and non-factor services) averaged 26.2% of GDP, mostly accounted for by fish, petroleum processing, groundnut products and phosphates (together making up 65% of total exports). France was the main market for merchandise exports from Senegal. Most of the growth in exports registered in recent years has been on account of non- factor services, such as travel, insurance and freight. Imports on the other hand consisted to a large degree of manufactures and fuels, also with France being a leading supplier. 9. Senegal's adjustment efforts began in 1980. These efforts were supported with the first structural adjustment credit (SAL), which was canceled because the agreed reforms in the agricultural sector could not be carried out. The Govermnent introduced a new program of structural reforms in 1986, which was supported by three SALs (in 1986, 1987 and 1990). The program included a series of reforms under a Nouvelle Poaitique Industrielle (NPI-New Industrial Policy), comprising (i) liberalization of access to external trade, abolition of quantitative restrictions on imports and rationalization of the system of protection; (ii) liberalization of the regulatory framework for business, including removal of price controls on manufactures and liberalization of internal trade, revision of the investment code and simplification of administrative procedures for investment, and improvements in labor regulations, including the introduction of flexibility in wage determination, hiring and firing; (iii) gradual removal of conventions speciales with selected enterprises; and (iv) revised export incentives and measures to streamline export promotion institutions. The structural adjustment program included other components relating to private sector promotion: liberalization of agricultural input supply and marketing, a tax reform and a public enterprise sector reform, including divestiture of selected enterprises. Finally, a financial sector adjustment operation launched in 1989 restructured the banking system and laid the groundwork for the development of efficient financial markets3. 10. Some of the measures composing the NIP were implemented late, others were never implemented (as in the case of the deregulation of the labor market and the removal of the 3 A more comnplete discussion of adjustment programs in Senegal can be foound in the Bank reports: " Senegal: Stabilization, Partial Adjustment and Stagnation"' Report N