Strong in the Face of Pressure

Senegal, along with most sub-Saharan countries, is struggling to limit the impact of the international financial crisis on its economy, though unlike many developed nations it should avoid recession and maintain growth, thanks to a package of prudent measures taken by the government.

Despite suffering little exposure to the toxic assets of the subprime market that brought so many developed economies into crisis, Senegal has been unavoidably hit by the ripple effect of the global financial crisis.

In its regional economic outlook for sub-Saharan Africa, issued in late April, the IMF warned that the progress made by Senegal and other countries in the region - progress that included lowering inflation to single digits, averaging growth of 6% and strengthening fiscal reserves - was now at risk of being weakened by the downturn.

The report said that tighter global credit and investor risk aversion had caused capital outflow and made trade finance more costly. The economic slowdown was also likely to increase credit risk and non-performing assets, weakening the balance sheets of financial institutions and corporations, the study said.

According to the IMF, remittances from nationals living overseas, which represent around 7.5% of Senegal's GDP are also falling. With the economies of many host countries slowing, this could have a powerful impact on Senegal, reducing its flow of foreign earnings at a time when most is needed.

However, Senegal's economy should continue to expand at an enviable rate over the coming year, due in large part to a series of policies aimed at protecting the country's financial wealth mitigating the worst effects of the crisis. Following a visit by an IMF delegation to Dakar in early April, the fund's mission chief for Senegal, Johannes Mueller, said that in the midst of the current global environment, the government's efforts to normalise financial relations with the private sector were commendable, with the stock of unpaid bills - which at one point totaled more than $500m - having been sharply reduced over the last few months, which he said should help shore up economic activity.

While the IMF has predicted that there will be a drop in foreign direct investments (FDI) and a potential tightening of credit, the picture its report painted for the immediate future of the Senegalese economy was by no means bleak. The country should see real GDP growth of 3.1% this year, actually higher than the 2.5% recorded in 2008, while the outlook is even better for 2010, when GDP should expand by 3.4%.

Further comfort can be found in the IMF's expectations for inflation. With commodities prices falling, consumer inflation should only increase by 1.1% in 2009, doubling to a still moderate 2.2% the following year.

Though the fund predicts Senegal's value of exports as a component of GDP will fall this year and next, dropping to 21.3% this year and 22% in 2010 against the 2008 level of 24.9%, the costs of imports will fall by an even steeper rate, says the IMF. Last year, the imported goods and services accounted for 47.4% of GDP, but this will drop to 41.1% this year and ease even further to 40.1% the next. By 2010, Senegal's trade balance will have returned to near pre-crisis levels, though still running a substantial deficit, the IMF said.

"In the same vein, the authorities made good progress in strengthening their public financial management systems to help enhance budget planning, execution and monitoring, and prevent a recurrence of the payment delays. For the period ahead, they intend to pursue additional reforms in this area, as well as to promote private sector activity," said Mueller.

While the global slump in commodity prices will affect Senegal's export earnings, it has brought about a sharp fall in the cost of certain vital imports, particularly in rice, one of the staples of the local diet.

Though commodity prices are now well off their peaks of last year, Senegal has embarked on a programme to strengthen its food security, aiming to reduce its reliance on imports and its exposure to future price shocks. In May last year, as food costs spiralled, President Abdoulaye Wade launched a project to promote higher agricultural production through investments in rural infrastructure and support to boost yields through the use of more efficient methods.

The short-term objective of the programme is to increase rice production from its average harvest of 100,000-200,000 tonnes a year to 500,000 tonnes, and become self-sufficient in food production by 2015. If successful, the ambitious programme would relieve the country of one of its biggest expenditures for imports, as it currently has to meet some 80% of its rice needs from overseas.

Though it is impossible for Senegal to avoid the effects of the global recession, careful fiscal management, mixed with measured spending reductions and investments in key sectors such as agriculture, will help mitigate the worst of the crisis and give the country's economy a platform from which to build in the future.

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