Senegal - Trade Reform and Competitiveness Project

Report No. PID9366 Project Name Senegal-Trade Reform and Competitiveness Region Africa Regional Office Sector Trade Policy Reform Project ID SNPE55471 Borrower(s) GOVERNMENT OF SENEGAL Implementing Agency MINISTRY OF FINANCE Avenue Carde, Dakar, Senegal Phone: (221) 821 03 78; Fax: (221) 822 41 95 Environment Category C (Not Required) Date PID Prepared July 26, 2000 Projected Appraisal Date August 4, 2000 Projected Board Date October 3, 2000 Country and Sector Background 1. Senegal is a small, semi-arid Sahelian nation with limited natural resource endowments and high demographic pressure. Although these factors 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). Senegal attempted to adopt trade reform measures in the late 1980s, but this was made very difficult because of the overvaluation at that time of the CFA Franc. While Senegal has been experiencing sustained strong growth since 1994, its gross domestic project was US$4.8 billion in 1999, equivalent to a per capita GNP 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. 2. 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. 3. 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. 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. 4. 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 (precions tarifaires) on a number of goods. These were eliminated between September and December 1999. 5. 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. 6. 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. Objectives 7. 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 -2 -  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. Description (i) Key policy and institutional reforms to be sought: 8. Trade liberalization: The CET has been implemented and the precisions tarifaires have been removed. The Government has already renounced the regionally approved list of goods for TDP. It is committed under its I-PRSP to minimizing all other import protection measures before reaching the completion point in its debt relief program. 9. 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 databases among the customs offices and among the customs, tax, and treasury departments, as well as with Trade Point, a mixed public/private entity that has pioneered the implementation of electronic clearing of trade documents. 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. 10. Tax facilitation: The tax department plans to increase the tax base, reduce the number 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, for example 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. 11. Regulation of utilities: The Government intends to consolidate its regulatory expertise into a single regulatory board. From this platform the Government can establish basic principles affecting all regulated utilities, such as introducing pricing formulas that encourage greater efficiency and lower costs of production, which should benefit both consumers and producers. (ii) Benefits and target population: 12. The main target is the private sector and those who will benefit from expanded employment creation. 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 HIPC completion point and presentation of its PRSP. Financing 13. The proposed IDA credit of an equivalent of US$100 million is tentatively scheduled to be disbursed in two tranches, following the Bank's simplified disbursement procedures for structural adjustment operations. After an initial tranche disbursed on effectiveness, an additional tranche would be disbursed based on satisfactory progress in the implementation of -3 -  the program. Implementation 14. The project will be implemented by the Ministry of Finance. The Minister has issued a strong policy statement on modernization, data pooling, and information sharing among the customs, tax, and treasury departments. 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 and tax departments, to pilot this adjustment program. Program of Targeted Intervention (PTI): Y Environment Aspects (including any public consultation) 15. The proposed credit is not expected to have any negative environmental impact. The credit has been placed in Category C, which does not require an environmental assessment. Contact Point: The InfoShop The World Bank 1818 H Street, NW Washington, DC 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the InfoShop week ending July 28, 2000. - 4 -