III. ECONOMIC TRENDS AND OUTLOOK SENEGAL IS A MOSTLY SEMI-ARID COUNTRY WITH A POPULATION ESTIMATED AT 7.9 M IN 1993. ITS ECONOMY IS DOMINATED BY AGRICULTURE, PARTICULARLY BY GROUNDNUT (PEANUT) PRODUCTION. THE MODERN SECTOR INCLUDES FISHING, PHOSPHATES, AND CHEMICAL INDUSTRIES. SENEGAL'S ECONOMY IS HIGHLY VULNERABLE TO DECLINING RAINFALL, DECERTIFICATION AND CHANGES IN WORLD COMMODITY PRICES. HISTORICALLY, POPULATION GROWTH OF NEARLY 3 PCT HAS ROUGHLY MATCHED GDP GROWTH. IMPORTS ARE DOMINATED BY FOOD (28 PCT IN 1993) AND BY PETROLEUM PRODUCTS (10 PCT). FRANCE SUPPLIED 33 PCT OF 1993 IMPORTS, WHILE THE U.S. SUPPLIED 7.8 PCT. SENEGAL RAN A MERCHANDISE TRADE DEFICIT IN 1993 EQUIVALENT TO 6.4 PCT OF GDP. SENEGAL DEPENDS HEAVILY ON FOREIGN ASSISTANCE, WHICH IN 1993 REPRESENTED ABOUT 35.2 PCT OF CENTRAL GOVERNMENT BUDGET REVENUES, OR CFAF 171.5B (USD 606M AT THE AVERAGE EXCHANGE RATE IN 1993). SENEGAL HAS WORKED WITH THE WORLD BANK AND THE IMF SINCE 1981, SEEKING ADJUST ITS ECONOMY. ITS PROGRESS HAS BEEN ERRATIC. IN THE 1990S THE ACCUMULATED EFFECTS OF INCOMPLETE REFORM IN ECONOMIC AND FINANCIAL POLICIES, FINANCIAL INDISCIPLINE, ECONOMIC SETBACKS, DELAYS IN THE IMPLEMENTATION OF SOME MEASURES, REDUCTION OF DONOR BUDGET ASSISTANCE, AND ADVERSE EXOGENOUS FACTORS GREATLY SLOWED THE ECONOMY. INTERNATIONAL INSTITUTIONS WARNED THAT BECAUSE OF HIGH DOMESTIC FACTOR COSTS, SENEGALESE GOODS WERE UNCOMPETITIVE INTERNATIONALLY. FINANCIAL AND STRUCTURAL DISEQUILIBRIA WORSENED IN 1992, AND GROWTH BECAME WEAK AND ERRATIC. BUSINESSES BEGAN TO ANTICIPATE A POSSIBLE DEVALUATION OF THE CFA FRANC, THE VALUE OF WHICH HAD REMAINED FIXED AGAINST THE FRENCH FRANC SINCE 1948, AND BUSINESS ACTIVITY SLOWED MARKEDLY. POLITICAL CONSIDERATIONS RELATED TO THE PRESIDENTIAL AND LEGISLATIVE ELECTIONS IN 1993 LED THE GOVERNMENT TO POSTPONE FURTHER ADJUSTMENT EFFORTS. REVENUE COLLECTION REMAINED WEAK, THE CIVIL SERVICE WAGE BILL ROSE SHARPLY , AND BETWEEN MID-1992 AND DECEMBER 1993 THE GOVERNMENT ACCUMULATED EXTERNAL AND INTERNAL PAYMENTS ARREARS OF CFAF 134B, EQUIVALENT TO 8 PCT OF GDP. SENEGAL'S ECONOMY CONTRACTED BY 0.8 PCT IN 1993. THE GOVERNMENT IMPOSED INTERNAL AUSTERITY MEASURES IN AUGUST, 1993, INCLUDING A 15 PCT CUT IN THE SALARIES OF CIVIL SERVANTS. IN JANUARY 1994 SENEGAL AND THE 13 OTHER COUNTRIES OF THE CFA FRANC ZONE DEVALUATED THEIR COMMON CURRENCY BY 50 PCT AGAINST THE FRENCH FRANC. MAJOR TRENDS AND OUTLOOK THE DEVALUATION OF THE CFA FRANC WAS AN EXPLICIT CONDITION SET BY THE IMF AND THE WORLD BANK FOR RESUMPTION OF THEIR FINANCING FOR ECONOMIC ADJUSTMENT. FRANCE SUPPORTED THIS APPROACH IN THE MONTHS BEFORE DEVALUATION. LESS THAN A MONTH AFTER DEVALUATION, SENEGAL BECAME THE FIRST COUNTRY IN THE ZONE TO AGREE UPON THE TERMS FOR A NEW ONE-YEAR STANDBY PROGRAM, AIMED AT CONTAINING INFLATION, REDUCING GOVERNMENT EXPENDITURE, AND ENCOURAGING GROWTH LED BY THE PRIVATE SECTOR. IF SUCCESSFUL, THE PROGRAM WILL LEAD TO A THREE-YEAR ARRANGEMENT UNDER THE ENHANCED STRUCTURAL ADJUSTMENT FACILITY (ESAF). ON MARCH 3 PARIS CLUB OFFICIAL CREDITORS GRANTED SENEGAL A 10TH DEBT RESCHEDULING, POSTPONING USD 214M IN OFFICIAL DEBT PAYMENTS COMING DUE OVER THE FOLLOWING TWELVE MONTHS. FRANCE CANCELLED ALL BILATERAL DEBT. CREDITORS GRANTED SENEGAL "TRINIDAD TERMS," WHICH MAY INCLUDE A 50 PCT REDUCTION OF THE CONSOLIDATED DEBT (THE OPTION CHOSEN BY THE UNITED STATES). SENEGAL'S POLICY REFORM PLAN FOR 1994-1996 INCLUDES STRICTER BUDGET CONTROLS, ELIMINATION OF MOST GOVERNMENT SUBSIDIES, REDUCTION OF CUSTOMS DUTIES, EFFORTS TO CONTROL INFLATION, REDUCTIONS IN THE NUMBER OF STATE-OWNED ENTERPRISES, VARIOUS MEASURES TO IMPROVE THE EXTERNAL COMPETITIVENESS OF THE ECONOMY, AND CONTINUATION OF STRUCTURAL REFORMS. GOVERNMENT OBJECTIVES ARE TO REACH A REAL GDP GROWTH RATE OF 2.7 PCT IN 1994, FOLLOWED BY 5.0 PCT IN 1995 AND BY 5.5 PCT IN 1996; TO LIMIT THE AVERAGE INFLATION RATE TO 39 PCT IN 1994, TO 8 PCT IN 1995 AND TO 2.5 PCT IN 1996; AND TO HOLD THE EXTERNAL CURRENT ACCOUNT DEFICIT, EXCLUDING OFFICIAL TRANSFERS, TO THE EQUIVALENT OF 11 PCT OF GDP IN 1994, REDUCING IT TO 8.5 PCT IN 1995 AND TO 7.5 PCT IN 1996. POTENTIAL OBSTACLES INCLUDE POPULATION GROWTH OF NEARLY 3 PCT PER YEAR, HIGH UNEMPLOYMENT, AND THE DIFFICULTIES OF DEALING WITH THE VESTED INTERESTS OF LABOR UNIONS AND OF OTHER ECONOMIC ACTORS. PRINCIPAL GROWTH SECTORS GROUNDNUTS: GROUNDNUT PRODUCTION ENGAGES 65 PCT OF CULTIVATED LAND AND PROVIDES REVENUES FOR MORE THAN ONE MILLION PERSONS. PRODUCTION HAS FLUCTUATED AND REVENUE FROM EXPORTS HAS FALLEN STEADILY OVER THE PERIOD 1990-1993, REFLECTING WEATHER CONDITIONS, LOW WORLD PRICES AND INAPPROPRIATE AGRICULTURAL POLICIES. AFTER INCREASING TO 844,000 MT IN 1989/90, PRODUCTION OF GROUNDNUTS DROPPED TO 702,600 MT IN 1990/91, AND ROSE TO 727,000 MT IN 1991/92. BY 1992/93 PRODUCTION WAS ONLY 708,200 MT. EXPORT REVENUES FELL IN 1993 TO USD 43.8M. IN 1994, THE SECTOR IS EXPECTED TO EARN USD 96M, AN INCREASE OF 121 PCT, LARGELY DUE TO MUCH BETTER RAINFALL FOR THE 1993/94 GROWING SEASON. DEVALUATION ALLOWED THE GOVERNMENT TO RAISE THE GROUNDNUT PRODUCER PRICES, A FACTOR WHICH MAY ENCOURAGE INCREASED PRODUCTION IN 1994/95. PHOSPHATES: EARNINGS FROM PHOSPHATE EXPORTS HAVE BEEN ERRATIC, OWING TO ABUNDANT WORLD SUPPLIES, TECHNICAL DIFFICULTIES AT THE MINING COMPANIES, WEAK WORLD DEMAND, LOW INTERNATIONAL PRICES, AND LOSS OF THE EU MARKET BECAUSE OF THE HIGH CONTENT OF CADMIUM IN SENEGALESE PHOSPHATES. FROM USD 70.5M IN 1990, EXPORT SALES REVENUES FROM THE PHOSPHATE SECTOR DROPPED TO USD 67.3M IN 1991, TO USD 43.8M IN 1992, AND TO USD 42.0M IN 1993. THE GOVERNMENT PREDICTS THAT EARNINGS FROM PHOSPHATE EXPORTS WILL REMAIN STABLE AT USD 44.3M IN 1994. FISHERIES: THE FISHING INDUSTRY CONTRIBUTED 7.3 PCT OF GDP IN 1993. DURING 1990-1993 FISH EXPORTS -- MAINLY FRESH FISH AND CANNED TUNA -- PROVIDED ABOUT 26 PCT OF EXPORT EARNINGS. FROM CFAF 54.6B IN 1990, EXPORT EARNINGS ROSE TO CFAF 59.6B IN 1991, AND THEN FELL TO CFAF 56.6B IN 1992, AND CFAF 53.0B IN 1993. PROBLEMS INCLUDE AN AGING AND OUTMODED FLEET, A CHRONIC LACK OF CAPITAL FOR INVESTING IN IMPROVEMENTS, DIFFICULTIES IN MEETING THE EU HYGIENE STANDARDS FOR FISH PROCESSING, AND STIFF COMPETITION FROM SOUTH EAST ASIA. THE THREAT OF OVERFISHING CONTINUES TO POSE A REAL RISK. IN 1994, THE SECTOR IS EXPECTED TO YIELD CFAF 112B (USD 188M), AN INCREASE OF 5.6 PCT OVER 1993 IN DOLLAR TERMS. TOURISM: CIVIL UNREST IN THE SOUTHERN PROVINCE OF THE CASAMANCE REDUCED SOMEWHAT THE NUMBER OF TOURISTS VISITING SENEGAL IN THE 1990'S. THE TOURISM INDUSTRY HAS COME TO OCCUPY AN IMPORTANT ROLE IN THE ECONOMY, BRINGING IN GROSS RECEIPTS OF CFA 39.4B (USD 139M) IN 1993. THE HIGH SEASON IS DECEMBER-FEBRUARY, WHEN SENEGALESE WEATHER IS AT ITS MOST ATTRACTIVE. FRENCH TOURISTS MAKE UP THE BULK OF ARRIVALS, BUT EFFORTS ARE BEING MADE TO ATTRACT VISITORS FROM NORTH AMERICA AND OTHER EUROPEAN COUNTRIES. IN THE WAKE OF THE JANUARY DEVALUATION, MAJOR TOUR OPERATORS CUT PACKAGE TOUR PRICES 20-25 PCT. THE GOVERNMENT HOPES TO SEE A 10 PCT GROWTH IN EARNINGS IN 1994. GOVERNMENT ROLE IN THE ECONOMY THE SENEGALESE GOVERNMENT IS STILL FAR AND AWAY THE COUNTRY'S LARGEST EMPLOYER AND CONSUMER AND PLAYS A DOMINANT ROLE IN MUCH OF SENEGAL'S ECONOMIC ACTIVITY. DESPITE MEASURES TO PRIVATIZE STATE-OWNED COMPANIES, IT STILL HAS MAJORITY PARTICIPATION IN THE AGRO-BUSINESS INDUSTRY, TELECOMMUNICATIONS, TRANSPORT, MINING, AND THE ELECTRICITY INDUSTRY. SENEGAL OFFERS TAX HOLIDAYS AND TAX-FREE EXPORT PROCESSING ZONES TO ENCOURAGE FOREIGN INVESTMENT. ADMINISTRATION OF THESE ADVANTAGES HAS BEEN INCONSISTENT; THE HEAVY TAX BURDEN ON THE FORMAL SECTOR IS A SIGNIFICANT BARRIER TO INVESTMENT. SENEGAL'S STRATEGY IS TO ATTRACT FOREIGN INVESTMENT BY LIMITING FACTOR COST RISES, CONTROLLING INFLATION, AND PROMOTING INDUSTRIAL OPPORTUNITIES IN THE "FREE ZONES" AND AT A HIGH-TECH "SCIENCE CITY" ("TECHNOPOLE") TO BE ESTABLISHED WITH ASSISTANCE FROM THE AFRICAN DEVELOPMENT BANK. IT IS TOO EARLY AS YET TO PREDICT THE OUTCOME OF THESE EFFORTS IN THE WAKE OF DEVALUATION. BALANCE OF PAYMENTS SITUATION OVER THE PERIOD 1990-1993, SENEGAL'S BALANCE OF PAYMENTS DETERIORATED DRASTICALLY. THE MERCHANDISE TRADE DEFICIT INCREASED BY NEARLY 41 PCT. ON THE EXTERNAL ACCOUNT, HIGHER IMPORTS COUPLED WITH POOR EXPORT PERFORMANCE LED TO A WIDENING OF THE CURRENT ACCOUNT DEFICIT (EXCLUDING GROSS OFFICIAL TRANSFERS) FROM 3.2 PCT OF GDP IN 1990 TO 10.0 PCT OF GDP IN 1993. THE ACCUMULATION OF EXTERNAL ARREARS WAS ESTIMATED AT USD 132M, AND THE OVERALL DEFICIT BEFORE EXTRAORDINARY FINANCING WAS 4.3 PCT OF GDP (USD 255.6M). FOR 1994, THE GOVERNMENT COUNTS ON EXCEPTIONAL FINANCIAL ASSISTANCE FROM DONORS ESTIMATED AT USD 500M AND THE PARIS CLUB DEBT RESCHEDULING TO ELIMINATE EXTERNAL PAYMENT ARREARS (USD 292.7M). THESE FACTORS ARE EXPECTED TO REDUCE THE FINANCING GAP TO 3.6 PCT OF GDP. TRADE AND INVESTMENT BARRIERS SENEGAL TRADES PRIMARILY WITH WESTERN EUROPE. IT BUYS RICE AND WHEAT FROM NORTH AMERICA AND ASIA AND SELLS TO A FEW SPECIALIZED MARKETS. FRANCE IS BY FAR THE LARGEST TRADING PARTNER FOR BOTH IMPORTS (35 PCT IN 1992) AND EXPORTS (30 PCT IN 1992). OTHER MAIN SOURCES OF IMPORTS ARE NIGERIA (PETROLEUM PRODUCTS), THAILAND (RICE), THE UNITED STATES (RICE, MILK, CLOTHING, TOBACCO), SPAIN AND JAPAN. PRINCIPAL EXPORT MARKETS, OTHER THAN FRANCE, INCLUDE INDIA, SPAIN, AND MALI. THE GOVERNMENT OFFICIALLY WELCOMES FOREIGN INVESTMENT, BUT CURRENT ECONOMIC DIFFICULTIES COMBINED WITH HIGH FACTOR COSTS AND HIGH BANKING COSTS HAVE BEEN OBSTACLES; FOR EXAMPLE, THE PRICE OF ELECTRICITY IS ONE OF THE HIGHEST IN WEST AFRICA. LABOR COSTS ARE HIGH WITH AN AVERAGE INDUSTRIAL WAGE ESTIMATED AT 8 TIMES PER CAPITA INCOME, COMPARED TO 4 TIMES PER CAPITA INCOME IN NON-FRANC-ZONE AFRICAN COUNTRIES. THE TIGHT MONETARY POLICY OF THE WEST AFRICAN CENTRAL BANK (BCEAO) SEVERELY RESTRICTS LIQUIDITY AND KEEPS COMMERCIAL FINANCING VERY EXPENSIVE. THE BCEAO DECISION TO INCREASE ITS DISCOUNT RATE FROM 10.5 PCT TO 14.5 PCT FOLLOWING THE CFAF DEVALUATION HAS PROMPTED COMMERCIAL BANKS TO RAISE LOAN RATES TO 25 PCT. LABOR FORCE UNEMPLOYMENT AND UNDEREMPLOYMENT ARE A GROWING CONCERN. THERE ARE ABOUT 100,000 NEW ENTRANTS IN THE LABOR MARKET EVERY YEAR, MOST OF WHOM JOIN THE INFORMAL SECTOR. APPROXIMATELY HALF OF THE TOTAL POPULATION, 3.9M IN 1993, ARE OF WORKING AGE (14-60 YEARS). THERE ARE 67,100 CIVIL SERVANTS AMONG THE 222,739 WORKERS IN THE FORMAL SECTOR AND 1.5M WORKERS IN THE INFORMAL SECTOR. THE GOVERNMENT'S AMBITIOUS 1993 ELECTORAL PLEDGE WAS TO CREATE 20,000 NEW JOBS A YEAR -- FAR FEWER THAN ACTUALLY NEEDED. INTERNATIONAL INSTITUTIONS HAVE LONG INSISTED ON REFORMS IN THE LABOR CODE TO ALLOW EMPLOYERS GREATER FLEXIBILITY IN HIRING AND IN LAYOFFS AND AUTHORIZING WAGE NEGOTIATIONS ON A COMPANY-BY-COMPANY BASIS RATHER THAN ECONOMY-WIDE. A REVISED LABOR CODE WAS PREPARED 1991 BUT WAS NOT CONSIDERED BY THE NATIONAL ASSEMBLY. IN THE STANDBY PROGRAM NEGOTIATIONS THE GOVERNMENT UNDERTAKES TO IMPLEMENT THESE REFORMS BY THE END OF 1994. MAJOR LOCAL AND THIRD COUNTRY COMPETITORS IN SPECIFIC SECTORS FRANCE AND JAPAN REMAIN MAIN COMPETITORS OF THE UNITED STATES IN THE TELECOMMUNICATIONS AND COMPUTER EQUIPMENT SECTORS. FRANCE HAS SUPPLIED THE BULK OF THE EQUIPMENT FOR THE NATIONAL TELECOMMUNICATIONS MONOPOLY (SONATEL). THERE IS A "BIAS" IN FAVOR OF FRENCH SUPPLIERS, GIVEN PREVIOUS PURCHASES AND THE FRENCH TECHNICAL EDUCATION OF MOST OF THE STAFF. COMPETITORS TO THE UNITED STATES IN THE FOOD PRODUCTS SECTOR INCLUDE FRANCE, COTE D'IVOIRE, AND THAILAND, WHICH SUPPLIES 50 PCT OF THE IMPORTS OF BROKEN RICE, THE STAPLE GRAIN FOR URBAN AREAS. INFRASTRUCTURE SITUATION: GOODS/SERVICE DISTRIBUTION SENEGAL HAS A GENERALLY WELL DEVELOPED BUSINESS INFRASTRUCTURE, ESPECIALLY WHEN COMPARED TO OTHER COUNTRIES IN THE REGION. THE AIRPORT AT DAKAR-YOFF IS ONE OF THE PRINCIPAL INTERNATIONAL AIRPORTS IN WEST AFRICA AND CAN HANDLE ALL TYPES OF AIRCRAFT ON ITS TWO RUNWAYS. DAKAR-YOFF AIRPORT SERVES MORE THAN 24 INTERNATIONAL AIRLINES, SERVES APPROXIMATELY 1.5 MILLION PASSENGERS PER YEAR, AND MOVES MORE THAN 20,000 METRIC TONS OF INTERNATIONAL AIR FREIGHT. IT PROVIDES DIRECT FLIGHTS TO EUROPE AND NORTH AMERICA, AND FREQUENT FLIGHTS TO OTHER AFRICAN COUNTRIES. SECONDARY AIRPORTS ARE LOCATED IN SAINT LOUIS, TAMBACOUNDA, AND ZIGUINCHOR. SENEGAL'S RAIL NETWORK, WHILE SOMEWHAT ANTIQUATED, CARRIES MORE THAN 3 MILLION TONS OF CARGO PER YEAR. IT LINKS SENEGAL'S MAJOR CITIES TO THE CAPITAL, AND PROVIDES SERVICE BETWEEN SENEGAL AND MALI. DAKAR'S PORT CONTAINS MORE THAN 9,000 METERS OF QUAYS AND 43 BERTHS, OF WHICH 40 ARE SUITABLE FOR SHIPS UP TO 40,000 MT. THE PORT IS ONE OF THE FEW IN AFRICA WITH A FLOATING DRY DOCK, A CONTAINER TERMINAL, AND A CONTAINER SERVICE. IT HAS A FISH PIER WITH SITES RESERVED EXCLUSIVELY FOR COLD STORAGE AND REPAIR, AND MAINTENANCE OF FISHING FLEETS. PORT CHARGES ARE HIGH AND SERVICE IS INEFFICIENT; THE VOLUME OF TRANSIT TRADE FOR MALI HAS FALLEN AS FIRMS IN MALI HAVE CHOSEN TO BRING IN A GROWING PERCENTAGE OF THEIR TRADE VIA ROAD FROM COTE D'IVOIRE. MAJOR INFRASTRUCTURE PROJECTS UNDERWAY HIGHWAY AND TRANSPORTATION SECTOR IMPROVEMENTS ARE BEING UNDERWRITTEN BY THE WORLD BANK AND THE EUROPEAN COMMUNITY. THE GOVERNMENT WANTS TO START THE CONSTRUCTION OF THE "CANAL DU CAYOR", A MAJOR INFRASTRUCTURE PROJECT, IN JANUARY 1996. THE PROJECT WOULD BE A VAST UNDERTAKING TO SUPPLY DAKAR WITH WATER VIA A 148-MILE CANAL FROM THE NORTH OF SENEGAL. IT IS PLANNED IN TWO PHASES: A 98-MILE CANAL FOR AGRICULTURE AND THE SUPPLY OF SAFE DRINKING WATER FOR THE DAKAR AREA, ESTIMATED TO COST USD 390M, AND A 50-MILE CANAL FOR AGRICULTURE. CANAL OFFICIALS ARE LOOKING FOR PARTNERS TO PUT UP FUNDS TO SUPPLEMENT MULTILATERAL AND BILATERAL DONORS. ANOTHER AMBITIOUS PROPOSAL IS THE "FOSSIL VALLEYS" PROJECT, WHICH WOULD RE-IRRIGATE MORE THAN 3,000 KMS OF LAND IN THE VALLEYS OF THE NORTHERN FERLO REGION, WHICH WAS DEPRIVED OF WATER DECADES AGO. EARLY ESTIMATES ARE OF A COST OF USD 37M. THE GOVERNMENT IS PREPARING A PRE-FEASIBILITY STUDY FOR A "PLAN OF ACTION" TO BE SUBMITTED TO DONORS.