Rapport_Senegal National Competitiveness Report (SNCR) - Anglais version finale.pdf

8/10/2019 Rapport_Senegal National Competitiveness Report (SNCR) - Anglais version finale.pdf

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ACKNOWLEDGMENTSThe Senegal National Competitiveness Report (SNCR) has been prepared under the supervision of the

Technical Committee of the Accelerated Growth Strategy (SCA) chaired by the Minister of State, Minister ofEconomy and Finance, with the support of the United States Agency for International Development (USAID).

This first report was prepared by a team convened by the Permanent Secretariat of the SCAs Steering andMonitoring Committee, the Center for the Study of Development Policy (CEPOD) and USAIDs EconomicGrowth Project implemented by International Resources Group (IRG) pursuant to the terms of contractno 685-1-00-06-00005-00. Technical coordination was provided by international experts of J.E. AustinAssociates, Inc. (JAA) based in Washington D.C. and specializing in competitiveness issues.

Acknowledgements are also due to competitiveness specialists, coordinators and representatives of SCApilot grappes, chairpersons and representatives of working groups of the Presidential Council on Investment,

APIX S.A. as well as the various representatives of the civil service, private sector, civil society and academiawho contributed to the preparation of the SNCR, 2011 edition.

This report should be cited as followed:

Ministry of Economy and Finance of Senegal. Senegal National Competitiveness Report, April 2011.

DisclaimerThe authors views expressed in this publication do not necessarily reflect the views of the United States Agency for InternationalDevelopment or the United States Government.


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TABLE OF CONTENTS

PREFACE OF THE PRIME MINISTER 9

STATEMENT FROM THE MINISTER OF STATE,MINISTER OF ECONOMY AND FINANCE 10

LIST OF ACRONYMS 12

EXECUTIVE SUMMARY 14

INTRODUCTION 17

COMPETITIVENESS 20

1- CONCEPT OF COMPETITIVENESS 22 2- DETERMINANTS OF COMPETITIVENESS 22 3- CHALLENGES OF COMPETING IN THE GLOBAL ECONOMY 24 3.1 THE GLOBAL COMPETITIVENESS REPORT (GCR) 24 3.2 SENEGALS PERFORMANCE IN THE GCR 25

SENEGALS RECENT ECONOMIC PERFORMANCE 28 1- OVERALL PROSPERITY 30 2- STRUCTURE OF THE ECONOMY 34

3- INTERNAL AND EXTERNAL BALANCES 39

THE STATE OF SENEGALS COMPETITIVENESS 48

1- LEGAL AND REGULATORY BUSINESS ENVIRONMENT 502- EXPORTS 57

3- INVESTMENT 63

4- EMPLOYMENT AND HUMAN RESOURCES 705- INFRASTRUCTURE 786- BANKING AND FINANCE 85

ENTREPRENEURSHIP AND NEW BUSINESS FORMATION 90

COMPETITIVENESS DIALOGUE AND PILOT GRAPPES 95

TOWARDS A BETTER UNDERSTANDINGOF NATIONAL COMPETITIVENESS 98


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PREFACE OF THE PRIME MINISTER

The advent of the third Millennium asserts the globalization of economies and the worlds full entrance intothe information and knowledge society. The accelerated progress in the information and communicationstechnology field has turned the world into a global village where the individual is gradually acquiring thestatus of global citizen. In this context, entities such as the Region, Province, State or Country progressivelyorganize themselves to form major blocs.

Globalization is accompanied by winds of freedom which encourage citizens to aspire for greater democracy,equity, justice, peace and economic rights. Governing authorities consequently have a duty to address theselegitimate aspirations.

In Senegal, His Excellency Mr. Abdoulaye Wade, President of the Republic, immediately upon taking office in2000, defined a prospective vision intended to put our country on the road to an emerging economy deeply

rooted in the principles of freedom, democracy, peace, prosperity and social justice.

As early as 2002, the Presidential Council on Investment (CPI) was established and recognized as the leadingframework for dialogue between the Government, through its various departments and the private sector.It helps identify and lift barriers to the development of private investment as well as competitivenessconstraints. Senegal is hence one of the first countries in Africa to establish such an operational partnershipbetween the public authorities and business managers, for growth and sustainable development.

The following National Competitiveness Report was initiated in this regard, under the provisions of article26 of Framework Act # 2008-03 of January 8, 2008 on the Accelerated Growth Strategy (SCA). It createsthe conditions for a fruitful public-private dialogue by providing stakeholders with a comprehensive array

of information and analyses to serve as a basis for discussions and to facilitate strategic decision-making.This reference document should contribute to heightening awareness on the concept of competitivenessand facilitate its ownership by all economic actors in Senegal particularly through a broad communicationcampaign.

I commend the Minister of State, Minister of Economy and Finance, Chairman of the SCA TechnicalCommittee, for this excellent initiative which, each year, will be a valuable asset to the update of theCPIs activity program and that of the SCAs industry clusters. I would also like to take this opportunity toacknowledge the pertinent and substantial contributions of members of the SCA Technical Committee, fromboth the public and private sector.

The National Competitiveness Report is now a permanent working tool for the implementation of the Presidentof the Republics vision of a prosperous Senegal.

His Excellency Mr. Souleymane Ndn NDIAYEPrime Minister of the Republic of Senegal


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STATEMENT FROM THE MINISTER OF STATE,

MINISTER OF ECONOMY & FINANCE

In 2009, I directed the Technical Committee of the Accelerated Growth Strategy to begin work on preparingthe first National Competitiveness Report of Senegal.

The Center for the Study of Development Policy (CEPOD), in charge of coordinating the Technical Committee,and the Permanent Secretariat of the SCAs Steering and Monitoring Committee were instructed to supervisethis assignment with the technical and financial support of USAID and the assistance of the strategyconsulting firm J.E. Austin Associates.

Competitiveness has become a key issue in the world today. For businesses, a permanent loss of competitiveness

is synonymous with bankruptcy. For countries, a loss of competitiveness, no matter how brief, is felt throughpressures on the quality of life and living conditions.

It is the duty of the Government, in collaboration with its partners in the private sector, civil society and inthe higher education and research fields, to monitor the determinants of the competitiveness of businessesand regions and to guide, at the national and local levels, the strengthening and allocation of resourcesavailable for growth and sustainable development.

The issue of diversifying the economic fabric in particular, challenges the Government and the private sector,and compels them to pursue efforts to improve the economic efficiency and productivity of industries andproduction factors. Better yet, public authorities and the private sector should together discuss and combinetheir efforts for a faster and more sustainable growth of productive employment in the formal sector.

The main challenge faced by our country is that of maintaining the appropriate pace to constantly providethe assurance of its integration in the global economy. By taking the initiative to draft this first NationalCompetitiveness Report, Senegal is positioning itself on the starting block of nations that seek to play theirpart in current and future global developments.

The option taken to thoroughly review the countrys economic situation in light of the key factors thatdetermine the competitiveness of a nation such as the quality of its macroeconomic framework, the state ofthe microeconomic environment of businesses, infrastructure, investments, exports and the human factor,motivates the writing of this first national competitiveness report of Senegal.

Based on 120 indicators with data gathered from about twenty national and international sources, the firstedition of the SNCR compares Senegals performances to those of neighbouring countries as members ofthe same regional integration bodies or because they embrace similar ambitions for economic emergence.The evolving performance of Senegal over time was also measured, particularly over the 2000-2009 period.

Quantitative data such as the number of inhabitants of a country, GDP, workforce, export revenues,investment flows, etc were collected.

Qualitative data were also collected, for instance to gather the opinions of business leaders on all or part ofthe elements for a world-class business environment.

With or without the SNCR, this information exists on a piecemeal basis and is partially assembled ininternational reviews such as those being published by the World Economic Forum since the 90s.

This SNCR highlights the progress and efforts made to reduce gaps in the infrastructure sector as well as


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to improve export logistics and enabling environment. These are some of the strengths that need to besustainably transformed into assets in order to attract additional private investment flows and increaseexports.

Based on the findings of the report and its conclusions which will certainly be emphasized throughout the

dialogue process to discuss the major issues of the report, the main challenge put to national economicactors is to succeed in maintaining an on-going reform mechanism. Focusing on priority reforms will ensure,in particular, the promotion of profitable agricultural and aquaculture farms, the enhancement of fisheriesand agricultural products and the organization of the traditional textile and tailoring sectors.

This is the challenge of this first report. Subsequent editions will assess the progress and measure the impactof initiatives taken to meet this challenge.

His Excellency Mr. Abdoulaye DIOPMinister of State, Minister of Economy and Finance


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13LISTE DES ACRONYMES

LMI-SSA Lower-Middle Income Sub-Saharan African States

LPI Logistics Performance IndexMDES Mouvement des Entreprises du Sngal (Senegalese Companies Organization)

MDG Millennium Development Goals

MDRI Multilateral Debt Relief Initiative

MIT Massachusetts Institute of Technology

NCC National Competitiveness Council (Croatia)

NCR National Competitiveness Reports

OECD Organization for Economic Cooperation and Development

OIC Organization of the Islamic Conference

PCE Projet Croissance Economique (Economic Growth Project)

PDEF Programme Dcennal pour lEducation et la Formation

(Ten-Year Education and Training Program)

PEJU Programme Promotion de lEmploi des Jeunes en Milieu Urbain

(Program for the Promotion of Urban Youth Employment)

PPD Public-Private Dialogue

PPP Purchasing Power Parity

PRSP Poverty Reduction Strategy Paper

PSI Policy Support InstrumentRCA Revealed Comparative Advantage

REER Real effective exchange rate

SCA Stratgie de Croissance Acclre (Accelerated Growth Strategy)

PAMU Programme dAmlioration de la Mobilit Urbaine (Program to Improve Urban Mobility)

PRSE Plan de Redressement du Secteur de lEnergie (Energy Sector Recovery Plan)

SME Small and Medium Size Enterprise

SNCR Senegal National Competitiveness Report

SNCS Socit Nationale des Chemins de Fer du Senegal (National Railroad Society of Senegal)

TFP Total factor productivityUNESCO United Nations Educational, Scientific, and Cultural Organization

UNOCOIS Union Nationale des Commerants et Industriels du Sngal

USAID United States Agency for International Development

VAT Value-Added Tax

WAEMU West African Economic and Monetary Union

WB World Bank

WDI World Development Indicators

WEF World Economic Forum


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Increased competitiveness holds the key to raising Senegals growth rate over the 7% mark that the country

established, in its Poverty Reduction Strategy Paper (PRSP), as necessary to have a meaningful impact on apoverty rate that stands at around 50%. Competitiveness is defined as the ability of a nation to increasinglymeet the test of international markets while increasing domestic prosperity. It is not determined simply bythe ability to sell more, but rather by the productivity (value of output per unit of input) with which aneconomy uses its human, capital, and natural resources. Productivity depends on value (such as uniquenessor quality) and efficiency. In short, competitiveness is an economys ability to achieve sustained productivitygrowth that contributes to a high and rising standard of living for its people. Competitiveness grounded inproductivity, in turn, drives sustained economic growth. Senegals overall relative productivity growth hasremained low over the last decade, resulting in stagnating economic growth under the period of 2006 to2010 and unchanged levels of poverty.

This report aspires to explain this low productivity trend, while also providing unbiased, fact-basedinformation to stimulate the discussion about how to generate strong growth and better competitivness.The report, prepared by a team under the direction of the Technical Committee of the Accelerated GrowthStrategy presents an analysis of Senegals competitiveness standing by assessing Senegals performanceon about 120 indicators (quantitative and qualitative measures of performance) as compared with a set ofselected benchmark countries and groups of countries. The indicators, when examined collectively, providesome insight into where Senegal has performed well and where there remains room for improvement. Theseindicators provide a snapshot of Senegals current economic situation and performance on the key driversof productivity growth, including: the quality of the countrys business, legal, and regulatory environment;exports; investment; human resources and workforce; physical and technological infrastructure; and bankingand financial system.

The report highlights areas of good performance as well as importantconstraints in Senegals competitiveness performance. Key conclusionsin the report include the following:

Low levels of productivity can be explained in part by structural challenges in Senegals economy. Less thanhalf of Senegals workforce in 2009 was employed in manufacturing and services accounted for 84% of total

Gross Domestic Product (GDP), while the 53% remaining was employed in agriculture collectively accountedfor only 16%. Although agriculture was the primary contributor to GDP growth in 2008 and 2009 (at 51%and 40% respectively), the agriculture sector in its current state is unlikely to be the basis for sustainableincreases in GDP going forward. In fact, from 2000-2009, agriculture made up only 6% of overall contributionto GDP growth. Productivity in the sector is about one-fifth that of the manufacturing and services sectors.This is largely due to levels of informality which, at 98%, are twice as high as the manufacturing andservices sectors. In addition, despite recent efforts in mechanization, Senegals agricultural production stillrelies heavily on outdated techniques and features a prevalence of smallholder family farms. To raise theoverall performance of the sector, the country recently launched the REVA plan (Government AgricultureDevelopment Program), the Accelerated Growth Strategy and the Major Agricultural Offensive for FoodSecurity.

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EXECUTIVE SUMMARY

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In recent years, Senegal has taken important steps to improve its business enabling environment withthe creation of the Presidential Council on Investment, the establishment of a one stop shop for businessregistration and the reduction of corporate tax rates. However, in the opinion of business leaders, asconveyed in the World Bank Doing Business Report, sustained efforts are still needed to improve the legaland regulatory aspects of business. The administrative burdens for paying taxes, the inefficiency of contract

enforcement, the time and cost involved in registering property, and the strength of minority shareholderprotections against misuse of corporate assets by directors for their personal gain, increases costs and riskto businesses and prevents them from having access to world-class services, and hinders investment andcompetitive business performance. It has discouraged entrepreneurship and new business formation andresulted in large numbers of informal firms, which have labor productivity levels that are only 7% to 10%that of formal ones.

Senegal has a competitive framework for exports, including the absence of taxes on exports, low shippingcosts, relatively open markets and favorable logistics which are an asset for the country. Despite a significant

increase of exports (32% in volume terms at constant 2000 US$ prices and 23% in volume terms at 1999CFA Francs prices) between 2000 and 2009, exports represented on average only 26.7% of GDP annuallyduring that period compared to more than 40% of GDP in most benchmarks. The country has seen itsshare of world exports fall by about 8% in volume terms during that period. This may point to an issue withinsufficient levels of production, coupled with the underlying competitiveness of Senegals export productsand services.

Despite high levels of gross fixed investment, averaging about 26% of GDP, between 2000 and 2009, Senegalhas not seen an accompanying increase in productivity levels or GDP growth. Indeed, the marginal capitalproductivity remained weak during this period. The lack of productivity growth appears to be a consequenceof 73% of all gross fixed capital formation investments made predominantly in non-productive construction(including public and private civil engineering, housing construction, infrastructure building, and industrialconstruction). While the lack of impact on productivity levels may be, at least in part, a function of thechoice of infrastructure in which to invest; it may also be a result of an enabling environment and supportingindustries not sufficiently well developed to allow the investments that have been made in productiveinfrastructure to have an immediat positive impact on economic growth and productivity. Foreign directinvestment, an important source not only of capital but also knowledge and skill transfer represented onaverage about one-third of the Lower-Middle Income Sub-Saharan African States (LMI-SSA) median andabout half of the Economic Community of West African States (ECOWAS) median in flow between 2005and 2009. Remittances, which have ranged from 3 to 17 times greater than Foreign Direct Investment (FDI)over the last decade are a more important source of inflows from abroad but have not been invested in

productive activity, as only about 5% of remittances in Senegal are used in productive investments.

Although Senegals labor productivity was, in 2008, about 37% higher than the ECOWAS median and 30%higher than Ghanas, it was still about 70% lower than the LMI-SSAs median and one-fifth of Tunisias.Furthermore, its growth rate declined consistently from 2003 to 2008 and puts Senegal at risk of beingovertaken by countries with currently lower labor productivity levels. The low levels of productivity are afunction of a large (unproductive) informal sector stemming from low levels of job creation in the formalsector. In addition, the Senegalese workforce is not currently equipped with the skills needed by the privatesector, and Senegalese firms appear to be doing little to compensate for this through in-house training.

High dropout rates during and after primary school have limited the pool of available skilled labor. Rigidregulation of the labor market does not encourage the hiring of new workers while unemployment andunderemployment of graduates are an additional factor of brain drain.

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Infrastructure represents an additional potential source of competitive advantage for Senegal, particularly inlogistics and telecommunication. Despite Senegals recent high levels of spending on physical infrastructure,the cost and quality of electricity supply and the poor quality of road and railroad infrastructure remainmajor obstacles to enhanced competitiveness, even if progress has been noted these last few years in roadinfrastructure.

The size and depth of Senegals financial system improved considerably during the past decade. However,access to financing is still being perceived as the most problematic factor for doing business in Senegal. Thepolicy framework for financial system providers (including lack of access to reliable credit information andweak legal rights), and the high rates of nonperforming loans make lending more risky for banks. The smalland medium size enterprises (SMEs), have difficulties to access to the financing due to the hight cost ofcredit whith is necessary to achieve and sustain growth.

Senegal has several frameworks and structures in place to support a productive public-private dialogueprocess on competitiveness. The Presidential Investment Council (Conseil Presidentiel de lInvestissementor CPI) and the grappes (clusters) of the SCA are the primary vehicles for public-private dialogue in thecountry. Although the CPI) has influenced important reforms that contributed to Senegals attractivenessand competitiveness. Sustained efforts will maintain the momentum for an appropriate managementof major reforms identified and ensure the monitoring of their implementation. Regarding the grappes,periodic assessments will support the development of industry clusters organized around value chains withhigh potential.

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INTRODUCTIONCompetitiveness reports assess a countrys competitiveness performance, typically by using a set of

comparator countries as a frame of reference. Competitiveness reports are designed to provide non-partisan,objective, fact-based input that policymakers and other stakeholders can use to make informed policychoices. Importantly, they also serve to generate wide discussion among the public sector, private sectorand academia about the importance of competitiveness in laying the foundations for current and futuresustained economic growth.

The publication of the national competitiveness report of Senegal is a requirement under Article 26 ofFramework Act # 2008-03 of January 8, 2008 on the Accelerated Growth Strategy (SCA) which states as animperative: 1) the benchmarking of the competitiveness of businesses, subsidiaries, economic zones and ofthe country; 2) the undertaking of studies on the factors determining competitiveness; 3) the propositionof measures to improve competitiveness; and 4) the writing of a report and the organization of an annualforum on national competitiveness. To date, Senegal relies on international indexes alone, such as the WorldBank Doing Business (DB) and the Global Competitiveness Report (GCR), to measure its competitivnessperformance. While useful, these offer neither the detail nor the analysis necessary to understand whatis driving Senegals performance, analysis that is urgently needed to provide direction for policy reform.Adding to the urgency is the fact that the reform effort in Senegal, after a successful push two years ago,has since slowed considerably.

The SNCR was prepared at the request of the Government of Senegal and under the technical supervisionof the SCA Technical Committee. The Committee is composed of the Presidents and Vice-Presidents ofthe Grappes (Clusters), the Presidents of the Working Groups of the Presidential Council on Investments(Conseil Presidentiel de lInvestissement or CPI), the Director General of APIX SA, the Director of Forecastingand Economic Studies (Direction de la Prvision et des Etudes Economiques or DPEE), the Coordinator in

charge of tracking the Poverty Fighting Program, the Director of the Center for the Study of DevelopmentPolicy (Centre dEtudes de Politiques pour le Dveloppement or CEPOD), and the Permanent Secretary of thesteering and Monitoring Committee of the SCA.

The SNCR identifies opportunities as well as impediments to national growth and gives Senegal theopportunity to confront and resolve many of its binding constraints to business growth and competitiveness.The report provides the most current, credible data describing Senegals competitiveness. It comparesSenegals competitiveness performance against other countries in the region and globally to provide acontext for understanding Senegals relative competitive position. The report also provides a framework forinterpreting this data, highlights areas of strong and weak performance, and suggests interpretations andimplications for Senegal. It is also intended as an input into and stimulus for ongoing dialogue within and

between public and private sector leaders.

The first step of the SNCR was to develop an analytical framework which would serve as the basis for selectingdrivers of competitiveness most relevant to countries at a similar stage of development as Senegals. On thisbasis, primary indicators (or measures of performance) that would tell a relatively objective and accuratestory of Senegals current state of competitiveness were identified. In identifying the indicators to be used,several important questions were considered:

Does the indicator have diagnostic value? That is, does it provide useful information aboutthe underlying economic events that gave rise to it?

Is the indicator internationally accepted?

Is the indicator updated on a regular basis (preferably annually)? Data must be updatedregularly in order to allow for a regularly updated competitiveness report.


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Is the indicator available for a wide cross-section of countries? This has important implicationsin terms of being able to benchmark Senegals performance against other countries.

Is the quality of the data good? Does it come from reputable sources?

Is the indicator relatively straightforward and easily understandable?

Does the indicator provide information or insight that the other indicators do not?

This process led to the selection of primary indicators, each of which explains or reveals something aboutthe underlying economic factors that it measures. Indicators contribute to and reinforce one another andmust therefore be examined as a coherent whole rather than being viewed separately. Secondary indicatorssupplement the primary indicators mentioned above. Secondary indicatorsdo not meet all of the criterialisted. These are frequently drawn from national sources and provide additional detail on local conditionsand help to interpret the primary indicators. A total of 120 indicators from over 20 sources were used.

The next choice involved which comparator countries or groups of countries against which to benchmarkSenegal. To ensure comparability, the target group was limited to those countries that shared key aspects ofSenegals economic profile. Characteristics for selecting individual countries included:

Population between 6-30 million people

Gross National Income per capita at or above $970

Average Gross Domestic Product (GDP) growth of at least 4.8%

An agriculture sector comprising 6-20% of GDP.

The sample includes both sub-Saharan African countries and best-practice countries from different areasof the globe with a level of development to which Senegal aspires. The final selection included Bulgaria,Costa Rica, Cote dIvoire, Ghana, South Korea, Malaysia, Tunisia, and South Africa. Two regional groupmedians were selected as points of reference: the Economic Community of West African States (ECOWAS)1and the Lower-Middle Income Sub-Saharan African States (LMI-SSA)2; the High-Income Organization ofEconomic Cooperation and Development (HI-OECD) was used as a best-practice group.3

The report is organized as follows:

Section 1 explains competitiveness, including its determinants, and contains a discussion of the Global

Competitiveness Report (GCR) and Senegals overall performance in it.

Section 2 reviews Senegals recent economic performance, looking at measures of overall prosperity,productivity, poverty and inequality, the structure of the economy (agriculture, manufacturing, and services),and internal and external balances (such as inflation, budget deficits and debt, and remittances).

Section 3 explores Senegals competitiveness, looking in turn at the quality of the business legal andregulatory environment, exports and investment, human resources and workforce, physical and technologicalinfrastructure, and banking and finance.

1 ECOWAS countries include Benin, Burkina Faso, Cape Verde, Cote dIvoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria,

Sierra Leone, and Togo, in addition to Senegal.2 LMI-SSA countries include: Angola, Cape Verde, Cameroon, Congo, Cote dIvoire, Nigeria, Sao Tome and Principe, Lesotho, and Swaziland.3 HI-OECD countries include: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland,Ireland, Italy, Japan, Korea, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, theUnited Kingdom, and the United States.


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Section 4 looks at entrepreneurship and new business formation and the importance it will have for Senegalgoing forward.

Section 5 assesses the quality of public-private dialogue in Senegal and briefly examines the grappes, orpreliminary target sectors, that Senegal has identified.

Section 6 concludes the report by looking at areas that still need to be explored to better understandSenegals competitiveness.

Recognizing the importance of micro, small, and medium-sized enterprises to Senegals economy, the reporthighlights areas in each section where the enabling environment has a specific bearing on new businessformation or the performance of small and medium size enterprises (SMEs).


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COMPETITIVENESS


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COMPETITIVENESS1- Concept of Competitiveness

The World Economic Forum (WEF) defines the competitiveness of a country as the set of institutions,policies, and factors that determine the level of productivity of a country. The level of productivity, in turn,sets the sustainable level of prosperity that can be earned by an economy and further indicates how morecompetitive economies tend to be able to produce higher levels of income for their citizens.

The term competitiveness is relevant at the firm, sector, or economy level. At the firm level, competitivenessrefers to the ability of a business to produce goods and services efficiently for sale on domestic andinternational markets. Common measures of firm-level competitiveness include profitability, market share,and exports. Sector-level competitiveness refers to the ability of a sector to capture a dominant marketposition by selling products and services that are of high quality and priced competitively. This can be

measured by a sectors share of the total economy and its share of domestic and international sales.

The SNCR is concerned with competitiveness at the level of the national economy. For the purposes of thereport, competitiveness is defined as the ability of a nation to increasingly meet the test of internationalmarkets while increasing prosperity in the domestic market. It is not determined simply by the ability tosell more, but rather by the productivity (value of output per unit of input) with which an economy uses itshuman, capital, and natural resources. Productivity depends on value (such as uniqueness or quality) andefficiency. In short, competitiveness is an economys ability to achieve sustained productivity growth thatcontributes to a high and rising standard of living for its people. Competitiveness grounded in productivity,in turn, drives sustained economic growth.

Competitiveness should be fundamentally understood as a process of creation and innovation. It is notabout the simple abundance of natural resources or reliance on cheap labor; nor is it about competitiveexchange rates that offer short-term advantages in selling products that cost little to produce. ProfessorMichael Porter of Harvard Business School has drawn a distinction between the inherited advantages asnatural resources and the created advantages such as skilled labor and sophisticated infrastructure thatform the backbone of a truly competitive economy. Frequently, the term comparative advantage will becontrasted with the term competitive advantage to distinguish advantages endowed by nature with thosecreated or nurtured by people.

This process of productivity improvement is driven by a series of enablers. These include domesticinvestment; exports, which allow a country to escape the limitations of its (often small) domestic market;outward investment, which also enables international growth; imports and inward investment, which arekey sources of technology, skills, and other inputs; and innovation, which is often driven by information andcommunication technologies (ICT).

2- Determinants of Competitiveness

For most of human existence economies were highly dependent on inherited factors of competitiveness.That is, a countrys wealth was determined largely by either its strategic location or natural endowments.For example, Argentina, an agricultural economy that featured open markets, was one of the 10 wealthiesteconomies in the world as recently as 1913; now it is 59th in the world in GDP per capita. As more countriesindustrialized, however, attention turned to other, created factors as drivers of competitiveness. The firstwas macro-stability.

There has long been consensus on the importance of macro-stability as a foundation for competitivenessand for economic growth. Macro-economic stability, such as low levels of inflation and reasonably balanced


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budgets; legal stability, including clear, transparent rules and regulations; political stability; and socialstability are key elements of the business climate. They reduce risk and uncertainty for an economys firms,giving them the confidence to make investments in the future and thereby raise productivity levels.4However,while macro-stability appeared to be a prerequisite to economic growth and competitiveness, it becameevident that countries with equally stable (or unstable) environments featured dramatically different levels

of economic performance.

Stability is an essential but insufficient condition for sustained economic growth and competitiveness.Professor Michael Porter argues that, in order to achieve and sustain competitiveness, a nation should alsohave adequate micro-level foundations in terms of sophistication of company operations and strategy, thequality of the microeconomic business environment, and the state of cluster development.5

The reinforcing nature of these three elements is illustrated in Figure 1 below.

4 Some evidence suggests a two-way relationship between political and social stability and economic growth; that is, economic growth can be asimportant a contributor to political and social stability as they are to economic growth.5 For more on Porters theories of competitiveness, see The Competitive Advantage of Nations (1990) and On Competition (2008).

Figure 1: Determinants of Competitiveness

Macroeconomic, political, legal, and social

Endowments(natural resources, location)

Microeconomic competitiveness

Sophisticationof company operations

and strategy

Quality of themicroeconomic business

environment

State of clusterdevelopment

The sophistication of company operations and strategy are important because country-level productivityis really the aggregate of the productivity of a nations enterprises. A firms productivity, in turn, depends

on the sophistication of its operations and strategy. A favorable microeconomic business environmentacts as an incentive for firms to continuously improve, innovate, and diversify; in other words, to investin and strengthen competitive advantage in the marketplace. To facilitate this process, a country mustdevelop a conductive regulatory and institutional framework and business/investment climate; adequateadministrative, physical, and technological infrastructure; accessible financial resources; a workforce withskills appropriate to firm needs; and suppliers of necessary services and materials to produce sophisticatedgoods. Clusters, or networks along value chains or geographically proximate groups of interconnectedcompanies and associated institutions in a particular field, allow companies and economies to become morespecialized, productive, and innovative. Clusters have been shown to account for a disproportionately highshare of a nations traded goods. The specialization that clusters feature is especially pronounced at thesub-national level.


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3- Challenges of Competingin the Global Economy

One of the reasons that competitiveness has gained currency is the process of globalization. In a less integratedworld, countries were able to rely on protectionist measures such as subsidies and import substitution toartificially support local firms. In a world of open economies, where markets are not local or even regionalbut global, protectionism has ceased to be an alternative for countries serious about building a competitive,thriving economy that provides a real opportunity to lift the standard of living for its people. This is particularlytrue for small countries such as Senegal that lack a local market of enough size and scope to self-supportvibrant economic activity. Wide recognition of the importance of competitiveness as a driver of prosperityhas fueled interest in the topic and a host of international initiatives have sprung up in response. These includethe IMD Competitiveness Institute, the McKinsey Global Institute, and several initiatives by the World Bank(WB), including the Doing Business Report, the World Governance Index, Logistics Performance Index (LPI),and a number of major knowledge management initiatives. One of the best-known and most useful initiativesfor understanding competitiveness is the World Economic Forums (WEF) Global Competitiveness Report.

3.1 The Global Competitiveness ReportThe World Economic Forum publishes the GCR, an annual report that aims to reflect the business operatingenvironment and competitiveness of over economies worldwide. The GCR is the most comprehensiveattempt made to date to illustrate how the determinants, enablers, and enhancers of productivity andcompetitiveness can be used to explain competitiveness through composite indicators. Based in large parton an Executive Opinion Survey, the GCR primarily captures perceptions of a countrys business leaders of thecountrys overall performance on factors (indicators) related to the countrys ability to lift productivity levels.The indicators are grouped into 12 pillars of competitiveness. These include institutions, infrastructure,macroeconomic stability, health and primary education, higher education and training, goods marketefficiency, labor market efficiency, financial market sophistication, technological readiness, market size,business sophistication, and innovation.6The 12 pillars are further condensed into three categories. Pillars

1-4 (institutions, infrastructure, macro-economic stability, and health and primary education) collectivelymake up a countrys Basic Requirements. Pillars 5-10 (higher education and training, goods marketefficiency, labor market efficiency, financial market sophistication, technological readiness, and market size)are collectively known as Efficiency Enhancers. Pillars 11 and 12 (business sophistication and innovation) areknown as the Innovation and Sophistication Factors.

In addition, to allow for more relevant comparisons in competitiveness performance, the GCR groupscountries into three stages of economic development. The first is the factor-driven stage, where countriescompete on things like cheap labor and natural resources. In the second stage, known as the efficiency-driven stage, competitiveness is attained through increases in product quality and efficiency enhancements.At the final stage, known as the innovation-drivenstage, competitiveness depends upon the creation of

new and unique products and services. The three categories into which the 12 pillars are divided above areroughly aligned with these three stages of development, suggesting that certain factors are more relevantto countries depending upon their stage of development. A countrys stage of development is taken intoaccount by the GCR rankings in the relative weights assigned to a countrys performance on each factor. Forexample, for factor-driven economies, a countrys performance on basic requirements is assigned a greaterweight than its performance on innovation and sophistication factors. Conversely, the innovation andsophistication scores for innovation-driven economies are weighted more heavily, while their performanceon basic factors is assigned relatively less weight. Figure 2 summarizes the GCR pillars of competitivenessand those pillars considered the most relevant for different types of economies.

6 Please refer to the WEF GCR for more details on the indicators and the methodology.


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25COMPETITIVENESS

Source : Rapport sur la Comptitivit dans le Monde 2010-2011

Local business leader perceptions of Senegals competitiveness have significantly deteriorated over thepast year.

3.2 Senegals Performance in the GCRSenegal is considered a factor-driven economy by the GCR. In the 2010-2011 GCR, conducted across 139countries, Senegal ranked 104th, a decrease of 12 spots from its rank a year earlier after it had improved from96thto 92ndover the course of the prior two years. Senegals overall rank on the GCR relative to comparatorcountries is presented in Figure 3.

Figure 3: Global Competitiveness Rankings 2010-2011

Figure 2: The 12 Pillars of Competitiveness

Source: Global Competitiveness Report, 2010-11

Source: Global Competitiveness Report, 2010-2011

Basic requirements Institutions Infractructure

Macroeconomic stability Health and primairy education

Efficiency enhancers Higher education and training Good market efciency Labor market efciency Financial market sophistication Technological readiness Market size

Innovation and sophistication factors Business sophistication

Innovation

Key forfactor-driven

Economies

Key forefficiency-driven

Economies

Key forinnovation-driven

Economies

Senegals rank on infrastructure was driven by deterioration in the perception of the quality of roads (loss

of 13 ranks), quality of electricity supply (loss of 12 ranks), and quality of air transport infrastructure (lossof 10 ranks). Another key driver was the introduction of a new indicator (mobile telephone subscriptions, onwhich Senegal ranked a poor 113th), which drags down Senegals overall rank on that measure and makescomparison with the prior year more problematic.


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Goods market efficiency, on which Senegal fell 24 places, was primarily a function of a fall of 39 spots onagricultural policy costs and 33 on customer orientation, as well as more moderate declines in the businessimpact of rules on FDI, the extent and effect of taxation, and anti-monopoly policy and related measures ofthe intensity of local competition and the extent of market dominance.

Senegals ranking in terms of business sophistication7, where it fell 20 places, is mainly due to the lessfavorable perception business leaders have of (i) the level of cluster development, (ii) the quality and quantityof stocks of local suppliers, and (iii) the extent of marketing.

The pillars for higher education and professional training (on which Senegals ranking fell 12 places) andhealth and primary education (loss of 10 places) were also contributors to the countrys overall ranking fall.This is shown in Figure 4. Senegals numerical score fell substantially in both infrastructure and businesssophistication and moderately in higher education and professional training as well as goods marketefficiency. This is shown in Figure 4.

Senegal performed best on innovation, on which it ranked an impressive 55thglobally, followed by institutions

(76th

). The report will employ some of the sub-indicators of the GCR as they contribute to the analysis.

Figure 4: Global Competitiveness Pillars: 2009-2010 and 2010-2011Rankings for Senegal

Source: Global Competitiveness Report, 2009-2010 and 2010-2011

Senegals rank on 7 of the 12 GCR pillars deteriorated from 2009-2010 to 2010-2011, and it didnot improve markedly on the others. It is noteworthy that, although Senegal has performed relativelywell on the innovation factors in the GCR, it has done less well on the basic factors and efciencyenhancers that may be most relevant to its current stage of development.

7 Business sophistication concerns the quality of a countrys overall business networks (measured by the quantity and quality of local suppliers and theextent of their interaction as well as the quality of individual firms operations and strategies).


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The GCR is a useful tool for understanding the drivers of competitiveness and for measuring a countrysprogress from year to year on key indicators. As such, it is an important source of information for thisreport. The GCR does have its limitations, however. Perhaps most importantly, the opinion-based nature ofthe survey instrument means that drawing comparisons between countries is not straightforward; opinionscan be colored by attitudes, and some countries are inherently more optimistic or pessimistic than others.

Additionally, interviewees tend to be disproportionately large firms; SMEs tend to be less well representedin the survey sample. For these reasons other sources of data (particularly hard data) are used throughoutthe report where they are available.


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Crditphoto:APIX


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SENEGALS RECENT ECONOMIC

PERFORMANCE


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SENEGALS RECENT ECONOMIC PERFORMANCE1- Overall Prosperity

Senegal achieved an important milestone in July of 2010 when it was ofcially classied bythe World Bank as a Lower-Middle Income Country. In spite of this important achievement,however, Senegals per capita income remains slightly lower than the average for all sub-Saharan African countries. Senegal suffered low GDP growth from 2000 through 2009relative to both ECOWAS and LMI-SSA comparator countries. Senegals GDP growth rate,which, at just under 4% over that period, is well below the 7% threshold set in the lastPoverty Reduction Strategy Paper (PRSP). Increased GDP growth will be necessary in orderto reduce poverty, which is estimated at 50.7% in 2009.

In July of 2010, Senegal was classified by the World Bank as a Lower-Middle Income Country, officiallygraduating from its status as a Low-Income Country.8 This important achievement, however, masks slowGDP growth in recent years and GDP per capita that lags behind many other African countries. SenegalsGDP per capita in 2009 (Purchasing Power Parity or PPP, constant 2005 US$), according to the World BanksWorld Development Indicators (WDI), was $1,637. Its rate of growth declined from 2005 to 2009, laggingbehind ECOWAS and LMI-SSA median comparators over that period. In fact, the median rate of growthin LMI-SSA countries over that period was over three times Senegals. Senegals performance on GDP percapita and annual growth of GDP per capita are illustrated in Figure 5. Figure 6 illustrates Senegals annualGDP per capita growth rates since 2000 relative to comparator countries. It is notable that GDP growthper capita in Senegal, although on the same trajectory as most of those countries through 2004, sloweddramatically beginning in 2006 and, stagnated during 2006-2009.

Source: World Bank World Development Indicators, 2010

Senegals GDP per capita is slightly lower than the LMI-SSA average, and GDP per capita growth over theperiod from 2005-2009 has been less than a third of the LMI-SSA median.

8 Based on the GNI per capita of $996 using the Atlas Method.

Figure 5: Relationship between GDP per Capita (PPP, Constant 2005 International $)and Real GDP per Capita Growth (5-year averages 2005-2009)


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31SENEGALS RECENT ECONOMIC PERFORMANCE

Figure 6: Indexed Growth in GDP per Capita PPP, 2000-2009(constant 2005 international $)

Figure 7: Senegal Annual Real GDP % Growth, 2000-2009

Source: World Bank Development Indicators, 2010

Source: World Bank World Development Indicators 2010

Although GDP Per Capita in Senegal grew at a similar rate to comparator countries from 2000-2004,growth has attened out since 2005, leaving Senegal lagging behind nearly all the comparatorswith the exception of Cote dIvoire from 2006 to 2009.

GDP growth has gradually deteriorated between 2003 and 2009, falling by two thirds.

Senegals GDP growth has trended downward over the last decade, as shown in Figure 7.


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9 Evaluation based on investigations of the progress made in the strategy for growth and poverty reduction in Senegal, by Yetna, Camara, Ndoye,Ndiaye, Tsimpo, and Wodon, May 26, 2010.10 Senegal Poverty Reduction Strategy Paper, IMF Country Report No. 07/316, September 2007.

11 Felipe, Kumar, and Abdon: Using Capabilities to Project Growth, 2010-2030 the Levy Economics Institute of Bard College, Working Paper No. 609,August 2010.12 The Gini coefficient measures the degree to which income is distributed equally (or unequally) across a country. Lower Gini coefficients signify lowerdegrees of inequality; while higher coefficients suggest higher levels of inequality. As a frame of reference, many Latin American and African countrieshave Gini coefficients in the 50s, while the top performers (Japan and the Scandinavian countries) have a coefficient of around 25.

Senegals distribution of wealth compares favorably with comparator countries and ECOWAS andLMI-SSA medians.

Figure 8: Gini Coefcient, 1992-2007 (Latest available data)

Source: Human Development Index, 2009

An important effect of low GDP growth has been the failure to impact poverty levels. According to a 2010working paper by researchers from National Statistics and Demographic Agency (Agence Nationale de laStatistique et de la Dmographie or ANSD) and the World Bank,9overall poverty rates in Senegal, at 50.7%,have changed little since 2005, when they stood at 50.8%. The paper also showed that poverty levels inrural areas, at 63%, are higher than in urban areas (38%) and particularly Dakar (30%). Poverty is also more

widespread among households headed by people with low educational levels, and increases with householdsize.10Senegals current rate of growth is insufficient to lower poverty levels substantially; according to thePRSP, rates of growth greater than 7% are required to achieve sustainable poverty reduction. In October of2010, the International Monetary Fund (IMF) estimated projected growth rates of between 4% and 4.7%through 2013, but these are still well short of the countrys targets. Senegals rate of growth in recent yearsis also likely well below its potential. A recent study estimated Senegals GDP growth potential up to 8.2%between 2010 and 2030.11

Although Senegals distribution of wealth is better than most benchmarks, one of the countrys greatchallenges will be to achieve sustained economic growth in a way that benefits all Senegalese. Inequalityin Senegal, as measured by the Gini coefficient,12was 39.2 over the period from 1992-2007, according to

the Human Development Index, placing Senegal 65th

over that period of time out of 142 countries for whichdata were available. The Gini coefficient for Senegal and comparators is shown in Figure 8.


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Nearly half of the countrys wealth is concentrated in the top 20% of the Senegalese population,

while the bottom 20% owns only 6%.

Figure 9: Wealth Distribution in Senegal, 2005 (Latest available data)


Although this level is modest by regional standards, the latest data from the WDI show that the top 20%of the population owns nearly 46% of all of the countrys wealth; while the bottom 20% has only 6%. Acomplete breakdown of wealth distribution in Senegal is shown in the pie chart in Figure 9.


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34 SNCR

Senegals relative productivity in agriculture and industries has remained almost unchanged over

the past 10 years while it declined by 12% in the services sector.

Figure10: Evolution of Relative Productivity in Senegal by Sector, 2000-2009

Source: SNCR Team Calculation based on ANSD Data, 2010.

13 Relative sector productivity is calculated as follows: Sector share of total GDP/Labor share of total employment.

2- Structure of the Economy

Senegals low GDP growth can be explained in large part by Senegals low levels of productivity,which have remained virtually unchanged over the last 10 years. Low levels of productivity,

in turn, can be explained in part by the structure of the Senegalese economy. Between2000 and 2009, on average, less than half of Senegals workforce (that part employed inmanufacturing and services) accounted for 84% of total GDP, while the 51% employed inagriculture collectively accounted for only 16%. The much higher level of informality inthe agriculture sector, a low degree of mechanization and a high dependence on irregularrainfall likely contribute substantially to the lower levels of productivity in agriculturethan in the industries and services sectors.

Subsequently, phases of signicant GDP growth have been more often driven by the servicesector, as during the 2000-2007 period; in 2008 and 2009 growth was mainly drivenby agriculture when the overall performance of the economy was poor. Challenges to befaced by Senegal include maintaining the dynamism of the service sector, improving theproductivity of the agricultural sector and strengthening ties between the agriculturaland industrial sectors.

Competitiveness grounded in productivity drives sustained economic growth. Senegals productivity growthstagnated over the last decade. The evolution of relative productivity in Senegal, by sector, is shown inFigure 10.13


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Although the bulk of Senegals labor force works in agriculture, the vast majority of the countrysvalue added is driven by the services sector. More developed countries, like South Africa, tend to

feature a substantial portion of their labor force concentrated in the services sector. Even in manyless-developed countries with an equally high labor concentration in agriculture, such as Ghana,agriculture makes a greater contribution to overall value add in the economy.

Figure 11: Output and Employment Composition, % of total employment, % of GDP

Source: World Bank World Development Indicators 2010. Senegal data derived from ANSD, National Accounts

Productivity of the agriculture sector is low both in comparison to Senegals manufacturing and (particularly)services sectors and to agricultural productivity levels in other countries. For example, the part of the workforce employed in agriculture is about the same in Senegal and in Ghana; but agriculture contributes twiceas much to the GDP of Ghana as it does to the GDP of Senegal.

The low relative productivity of agriculture is pulling down the overall productivity of the economy. However,the relative productivity of agriculture grew by 37% between 2007 and 2009, and the sector was theprimary driver of Senegals GDP growth in 2008 and 2009 (contributing 51% and 40%, respectively). Thiswas a marked difference from 2000 to 2007, when services accounted for 73% of GDP growth on average.The Major Agricultural Offensive for Food Security (or GOANA), launched by the President in 2008, coupledwith above average levels of rainfall, have contributed to the agriculture sectors recent performance.Nonetheless, agriculture, as it is currently practiced, is unlikely to drive growth going forward becausethe countrys agriculture sector remains highly dependent on irregular and unpredictable levels of rainfall,and productivity in the sector as a whole is low. Furthermore, measures of contribution to GDP growthare somewhat distorted by performance in the prior year; as a poor year in terms of agricultural outputcan inflate the sectors contribution to growth in the following year, a two-year period is inadequate to

measure a sustainable contribution to GDP growth. In fact, the agriculture sector contributed a mere 6% toGDP growth on average from 2000 to 2009.

Although about 51.5% of Senegals workforce was employed in the agriculture sector from 2000-2009,the sector accounted for only 15.6% of gross value added. The services and manufacturing sectors, whichemployed about 48.5% of the workforce, accounted for 84%. Although the percentage of the Senegaleseworkforce employed in agriculture has fallen to its current levels from 80%-85% in the 1960s, the percentageof the workforce employed in agriculture remains substantially higher in Senegal than in comparatorcountries with higher levels of GDP, such as South Africa.

This suggests a number of challenges. How does Senegal maintain the dynamism of its services sector? How canthe country raise the level of agricultural productivity? How can Senegal strengthen inter-sectoral linkages,in particular between agriculture and industry?


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36 SNCR

The structure of Senegals economy has changed little in the last 10 years, with agriculture accounting

for a little less of GDP and services a little more.

Figure 12: Senegals GDP Structure, 2000-2009

Source: SNCR Team Calculation Based on Data from ANSD

Employment in the agricultural sector is dominated by activities with low productivity, such as

subsistence farming and livestock; industrial and export agriculture, with higher relative productivity,makes up a much smaller share.

Source: SNCR Team calculation based on data from ANSD, National Accounts August 2010

Figure 13: Breakdown of Total Agricultural Employment, Average 2005-2009

Senegals output and employment composition, relative to Ghana and South Africa, is presented in Figure 11.Lower productivity in agriculture is explained in large part by the nature of agricultural activities. From

2005 to 2009, on average, 39% of agriculture in Senegal consisted of subsistence farming, with livestockaccounting for 33%. The more productive industrial and export-oriented activities, meanwhile, account forjust 19% of total agricultural employment. This is shown in Figure 13.


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The agriculture sector is dominated by informal activity. The contribution of informal activity inagriculture value-added is more than twice that of industries and services.

The gap between value added in the services sector and the other sectors has been widening since2000

Figure 14: Formal and Informal Sector Contribution to Total Value-Added,2005-2009 Average

Source: SNCR Team Calculations based on data from ANSD National Accounts, August 2010

Source: SNCR Team Calculations based on data from ANSD National Accounts, August 2010

Figure 15: Senegals Value-Added by Sector, 2000-2009 (Current CFA Francs)

Low productivity in agriculture can be further explained by the degree to which it is dominated by informalactors, which were characterized by labor productivity levels just 10% that of the formal agriculture sectorin 2009. Furthermore, between 2000 and 2009, the labor productivity of the formal agriculture sectorgrew more than 10 times faster than that of the informal agriculture sector. This is in part because theagricultural sector, primarily composed of smallholders (family farms), relies heavily on the use of traditional

production techniques. The contribution of the informal sector to total value-added in agriculture relativeto manufacturing and services is shown in Figure 14.

In 2009, value addition in services was more than twice as high than in industries and more three timeshigher than in agriculture. The evolution of value added by economic sector is shown in Figure 15.


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Growth in value addition in agriculture has varied much more widely than productivity growth inindustries and services. Since 2007, value added growth in agriculture is much higher than in theother sectors.

Employment in services has grown faster than agriculture over the last 10 years, while employmentin industries has remained virtually at.

Figure 16: Senegals Value-Added Growth by Sector, 2000-2009(Constant 2000 CFA Francs)

Source: SNCR Team Calculation Based on Data from ANSD, Agust 2010.

Source: Team calculations based on data from ANSD, 2010.

Figure 17: Evolution of Labor Force by Economic Sector in Senegal, 2000-2009

In volume terms, value-add grew fairly consistently in services at about 5% from 2000-2007, before droppingsteeply in 2008, and fluctuated moderately in manufacturing, growth in value addition in agriculture hasvaried widely, from a high of over 15% in 2003 and 2008 to a low of -20% in 2002, reflecting the volatilityof the agricultural sector due primarily to the dependence of the agricultural sector on rainfall.

Figure 17 shows trends in employment in each of the three sectors. It is notable that combined employmentin the sectors with higher value addition (manufacturing and services) has not grown any more rapidly thanemployment in agriculture, which is the least productive sector with the least value-added. This is importantbecause, as countries develop, it is most common to see employment gradually shift away from agricultureand into more productive sectors.


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3- Internal and External Balances

Senegal has a history of macroeconomic stability, particularly moderate levels of ination.However, increased levels of spending on capital infrastructure and government salaries

and slower growth in tax revenues have led to wider budget decits since 2007. Althoughthis has been offset in large part by debt relief, these decits are unlikely to be sustainablein the long term. Senegal also suffers from a narrow tax base, with imports and a relativelysmall number of companies bearing a disproportionate share of the tax burden.

As discussed in Section 1 of this report, productivity growth depends in part on a stable macro-economicenabling environment and strong institutions. This includes low levels of inflation, stable monetary policy,relatively low levels of debt, and a tax base that can support much-needed investments in infrastructure andbasic services. It also depends on efficient institutions that base their investment decisions on fact-basedinformation updated regularly.

Implications of the use of a common currency and the peg to the Euro

Senegal and the other seven West African countries are members of the Central Bank of West AfricanStates (Banque Centrale des tats de lAfrique de lOuest or BCEAO).14The currency used by the BCEAO (theCFA franc) is pegged to the Euro. This offers price stability (low inflation) but also the need to take intoaccount the interest rates of the European Central Bank in order to avert capital flight. Through the financialaccounts mechanism, WAEMU member countries are required to deposit 50% of their foreign exchangereserves with the French Treasury. In return, the stability and convertibility of the CFA franc is guaranteedas well as the possibility of an unlimited drawing of funds for imports.

Regarding the potential impact of the exchange rate regime on the competitiveness and growth of

the economy, a strong euro usually translates into a loss of price competitiveness of export products.Nevertheless, in its Article IV of June 2010, the IMF points out that in recent years, the appreciation of theEuro has contributed to a moderate nominal and real effective exchange rate (REER) appreciation. However,a comparison of the current value of the REER and an estimate of its equilibrium value indicates that theREER is close to its equilibrium

Ination

In the past decade, the annual inflation rate in Senegal has remained relatively low, averaging about 2.1%per year, due in part to the currency peg described above. Figure 18 shows that from 2005 to 2009, the rateof inflation remained below the convergence criteria of the WAEMU, which was set at 3%. The exceptionto this was in 2007 and 2008, when inflation reached 5.9% and 5.8%, respectively. This may have been afunction of speculation, especially on food products, compounded by the high price of oil, on which Senegalis highly dependent for electricity generation and fuel for transportation. In 2009, the annual inflation rateturned negative and ended at -0.8%,15mainly because of falling food and energy prices, and the successfulharvest of the crop year 2009-2010. Inflation levels from 2005-2009 are shown in Figure 18 below.

14 The other BCEAO countries include Benin, Burkina Faso, Cote dIvoire, Guinea-Bissau, Mali, Niger, and Togo.15 IMF estimate, Article IV, January 2010.


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From 2005 to 2009, Senegal has kept ination below the levels reached by most LMI-SSA, ECOWASand WAEMU countries.

Figure 18: Ination in Senegal and Comparators, 2005-2009

Source: World Bank, 2010 World Development Indicators

Tax revenues as a percentage of GDP increased by 19% between 2000 and 2007 before decreasing by6% between 2007 and 2009.

Figure 19: Senegal - Tax Revenue as a Percentage of GDP 2000-2009

Source: Team calculations based on data from DPEE, 2010.

Government Revenues

Senegals government revenues are driven largely by a relatively higher tax burden than other WAEMU

countries, levied heavily on imports and a limited number of enterprises. Over the period 2000-2009, fiscalrevenues share of GDP averaged 17.6% in Senegal allowing the country to meet the WAEMU convergencecriteria requirement of at least 17% of GDP. In 2008 and 2009, this share remained stable at around 18%after peaking at 19.3% in 2007. This drop is partly attributable to tax arrears of agencies and other publicentities, recent fiscal stimulus, and a decrease of imports by 15.5% in 2009 as a result of external shockslinked to the economic and financial crisis of 2008 and 200916. Figure 19 shows the evolution of taxrevenue as a percentage of GDP.


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17 The ECOWAS Median excludes The Gambia, Guinea, Guinea-Bissau, Liberia, Niger, Nigeria, and Sierra Leone. The Hi-OECD Median excludes Belgium,Denmark, Finland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Spain, Sweden, Switzerland, and The United Kingdom. The LMI-SSA Medianwas excluded because only limited data was available.18 The tax collection for the large companies is managed by the Centre des Grandes Enterprises (Large Business Center), housed at the Direction desImpts et Domaines (the Senegalese National Tax Authority).

Senegal relies more heavily on taxes on foreign trade (exclusively on imports) than any other comparatorcountry.

Figure 20: Taxes on International Trade, % of Government Revenue, 2009

Sources17: Senegal Data from Direction de la Prvision et des Etudes Economiques, 2010.All other data from World Bank, World Development Indicators, 2010

Senegal remains heavily dependent on taxes on imports.

Figure 21: Senegal: Evolution of Taxes on International Trade,% of Government Revenue

Source: Direction de la Prvision et des Etudes Economiques, 2010

Senegals heavy reliance on taxes on foreign trade for its revenue base is shown in Figures 20 and 21.

Of total corporate taxes in Senegal, a startling 75% is paid by about 15 companies18, and nearly 40% is paid bytelecommunications companies. This is partly due to the under-taxation of the informal sector and certainproduction activities and services, and the complexity of the tax code. Senegal ranked just 170th of 183countries on the WB Doing Business Index on that measure, as this is a major weakness in Senegals legaland regulatory business environment and its worst ranking in the WB Doing Business 2011 (refer to the


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19 For this recapitalization the Government provided CFA Francs 65 billion in 2007 under domestically-financed capital expenditure, while budgetsupport by the World Bank and France in 2008-10 specifically earmarked for the recapitalization is being provided under externally-financed capitalexpenditure.

Public spending in Senegal has increased by 25% from 2003 to 2009 and has remained at over 25%of GDP since 2005.

Figure 22: Government Expenditures, 2000-2009

Source: IMF Article IV Senegal Report (June 2010, June 2008, September 2007, July 2006, June 2003,October 2001).

section on the Legal & Regulatory Business Environment for more details). A review is currently underwayby the Direction Gnrale des Impts et Domaines (Taxes, Land, and Property General Directorate) regardingstreamlining certain procedures.

Government Expenditures

Government expenditures as a percentage of GDP rose from 20% in 2000 to 27.1% in 2009, a 35% increasein ten years. This is due to an increase of more than 2/3 in the capital expenditures to GDP ratio and a 25%increase in the ratio of current expenditures to GDP. Current expenditures accounted for about 62% of allgovernment expenditure between 2000 and 2009.

Particularly notable current expenditures are levels of salary expenses as well as transfers and food andenergy subsidies. Salary expenses as a percentage of GDP increased by 20% between 2003 and 2007, from5.1% to 6.1% of GDP, due to public sector salary increases and Senegals recruitment program of 15,000government officials over three years, originally scheduled to take place from 2003 to 2005 but shifted to2007. Other current expenditures, such as transfers and subsidies, reached 5.6% of GDP in 2008.

Meanwhile, capital expenditures as a percentage of GDP increased by about 37% from 2001 to 2004 withthe implementation of the Program of Improving Urban Mobility (Programme dAmlioration de la MobilitUrbaine or PAMU) from 2000-2007 and by 14% in 2007 with the SENELEC recapitalization19.

Overall trends in Government expenditures are shown in Figure 22.


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The overall budget balance (excluding grants) and the current account balance of Senegals balanceof payment signicantly deteriorated between 2005 and 2009 to reach decit levels higher than

those observed for most comparator countries.

Figure 23: Overall budget balance excluding grants, % of GDP and Current accountbalance, % of GDP, 2009

Source: IMF Article IV Reports of Listed Countries (2007 to 2010)

Overall Budget Balance

Senegals budget balance depends heavily on grants. Overall budget balance excluding grants has greatlydeteriorated in recent years. Its deficit went from an average of 3.3% of GDP between 2000 and 2004 to6.5% of GDP between 2005 and 2009. This is due in large part to higher levels of government investment

expenditures which represented 39.8% of total expenditures in 2009 after reaching over 41% in 2005 anda public sector wages bill close to a quarter of government expenditures over the same period. At the sametime, government revenue as a share of GDP, combined with sluggish economic activity, increased lessrapidly in 2008 and 2009. This situation led to an increased use of bank financing through the issuance ofgovernment bonds on the WAEMU and international markets, the accumulation of payment arrears withregard to government debt owing to the private sector, savings made as a result of debt cancellation underthe Highly-Indebted Poor Countries initiative (HIPC) and the Multilateral Debt Relief Initiative (MDRI) ,disbursements in relation to existing agreements, and new loans from technical and financial partners.

Public borrowing is high within the ECOWAS, including Senegal which has contributed to reduce significantlythe cash assets of the banks.

Figure 23 shows that the budget balance deteriorated gradually in 2005, 2007 and 2009, the overall budgetbalance deteriorated and the current balance improved slightly between 2007 and 2009. An increase ofthe overall budget deficit and the current deficit excluding grants is noted between 2005 and 2007. Thedeterioration of the budget balance is due to several factors, including an increase in public investment,increases in public sector wages, slow growth of government revenues and steady deterioration of the tradebalance. The current account deficit nearly doubled (94%) between 2004 and 2008, a result of increasedimports and increases food and energy prices.

Senegals position compared to benchmark countries in terms of overall budget balance and current accountbalance in 2009 is shown in figure 23.

Substantial levels of remittances have allowed Senegal to finance the current account deficit, as they grewby nearly five times between 2000 and 2009. This is shown in Figure 24.


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Remittances of Senegalese living abroad signicantly increased between 1999 and 2009 to reachclose to 10% of GDP and 40% of exports.

Following debt cancellation operations as part of the HIPC and MDRI initiatives, the outstanding debt asa percentage of GDP declined considerably between 2000 and 2006 but began to trend upward againfrom 2007 to reach over 30% of GDP in 2009.

Figure 25: Senegal Gross Government Debt, % of GDP

Figure 24: Evolution of Senegals Remittance Receipts, Current US $


Source: IMF Article IV Senegal Report (June 2010, June 2008, September 2007, July 2006, June 2003,October 2001). 2008 and 2009 data for Senegal are estimates

20 Remittances refer to Remittances and Compensation of Employees, received (current US$). Since 2000, the share of Compensation of Employees inthis measure has steadily decreased. It went from 30% in 1999 to an average of 8% during the 2004-2008 period.

In spite of the deteriorating overall budget balance, levels of debt (see Figure 25) actually fell by about 70%(from 78% of GDP in 2000 to 22% in 2006) due in large part to the implementation of the HIPC initiative(decision and completion points were reached in 2000 and 2004 respectively) and MDRI (in 2006). However,debt has begun to creep up again, to over 30% of GDP in 2009. This has led the Standard & Poors ratingagency to change the perspective for Senegal from stable to negative.

The important issues of public securities on the regional financial market following the abandonment ofstatutory overdraft from the BCAEAO led to an increase in internal debt.


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Perceptions of Government Effectiveness in Senegal are below the world mean and have trendeddownward since 2002.

Figure 26: Evolution of Senegals Score on the Government Effectiveness Index,2002-2009

Source: World Bank Governance Indicators, 2009

21 The Government Effectiveness Indicator Index is calculated from 17 constituent sources and summarized by the quality of public services, thedegree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the Governmentscommitment to such policies. . Scores range from -2.5 to 2.5. Positive scores indicate better performance than the world mean.

Senegals performance in 2009 on perceptions of Government Effectiveness is below the worldmean , although somewhat better than Cote dIvoire LMI-SSA and ECOWAS median countries.

Figure 27: Performance of Senegal and Comparators on the GovernmentEffectiveness Index, 2009

Source: World Bank Governance Indicators, 2010

Government Effectiveness

Government Effectiveness, as measured by the World Bank Governance Indicators,21has remained below theworld mean since 2002. This is reflected in Figure 26. Furthermore, Figure 27 shows that in 2009, althoughSenegal outperforms both the ECOWAS and LMI-SSA medians as well as Cote dIvoire on the World Banks

measure of Government Effectiveness, it performs poorer than all other benchmarks on this measure.


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In addition, in the 2010-2011 GCR Wastefulness of Government Spending measure, Senegal ranked just104thof 139 economies suggesting that a perception exists that funds are not being spent as well as theycould be.

Although the first part of the 2000-2009 decade featured strong macro-economic performance, the last

half has shed some doubt on Senegals macroeconomic stability, particularly in 2007, as Senegal faced awidening budget deficit, sustained growth in domestic debt, strong inflationary pressures, and a deterioratingcurrent account. These factors will have likely negatively impacted the competitiveness of the economy bydriving up the REER. However, this was probably largely due to factors such as food, energy, and financialcrises between 2007 and 2009. Due in part to a program funded by the Economic Policy Support Instrument(PSI) of the IMF, economic prospects for 2010 point to economic growth of around 4.5%, the return ofmacroeconomic balances, and greater deficit controls.


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THE STATE OF SENEGALS

COMPETITIVENESS


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THE STATE OF SENEGALS COMPETITIVENESS1- The Legal and Regulatory

Business Environment

Senegal has taken some encouraging steps in recent years to improve its legal and regulatorybusiness environment such as the establishment of a one-stop shop for business registrationand the reduction of corporate tax rates. However, after the initial effort in 2008,additional improvements will be necessary to reduce levels of informality and spur domesticand foreign investment. Indeed, according to the World Banks Doing Business Report, thecost and time required to pay taxes, the time required and high costs associated with registeringproperty, and the low level of investor protection increase the risks and costs forbusinesses, prevent access to world-class services and slow down investment, performanceand competitiveness. Furthermore, measures of perceptions of corruption remain high.

Macroeconomic stability is an essential but insufficient condition for sustained economic growth andcompetitiveness. As discussed in Section 1.2, in order to achieve and sustain competitiveness, a nation shouldhave adequate micro-level foundations that are conducive to the sophistication of business operations andstrategies, a high quality microeconomic business environment and the development of clusters, in additionto sound macro-level fundamentals.

Doing Business

The World Banks Doing Business report assesses annually certain key elements of the legal and regulatorybusiness environment in over 180 countries worldwide.

The 2011 edition of the Doing Business report ranks Senegal 152nd out of 183 countries, well behindcomparator countries with the exception of Cte dIvoire, despite the reforms of 2008 and 2009 which madeSenegal one of the worlds Top 10 Reformers in Doing Business 2009. The most prominent reforms werethe creation of a one-stop shop for business registration (cutting the number of days required to register abusiness from 58 to 8), the reduction in the number of documents required to export and import (from 11documents to 6 documents for exports and from 11 documents to 5 for imports), the drop in the time toexport and import (from 20 days to 14 days for exports and from 26 days to 18 days for imports), and thereduction of the time required to register property (from 145 days to 124 days).

Source: World Bank Doing Business, 2011

Despite prominent reform efforts in recent years, Senegal continues to lag severely behind allcomparator countries with the exception of Cote dIvoire.

Figure 28: Ease of Doing Business for Senegal and Selected Countries, 2010


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51THE STATE OF SENEGALS COMPETITIVENESS

In the Doing Business 2011, Senegal gained two places on Dealing with Construction Permits and Closing aBusiness as well as one rank in Starting a Business and Paying Taxes.

Despite these modest improvements, Senegal was near the bottom of the rankings in five of the nineindicators, and in the bottom half of all countries in seven of the nine measures of Doing Business 2011.

Senegal ranked 170th of 183 countries in the Paying Taxes indicator, its worst ranking in Doing Business2011. Due to the administrative burdens in Senegal, it takes a business an average of 59 payments and 666hours per year to carry out the procedures needed to meet its tax obligations. This is three times as longand costs 50% more for a company than it does in South Africa. Based on the latest Global CompetitivenessReports, an increasing proportion of Senegals business executives are identifying tax regulations as themost problematic factor for doing business in Senegal (15.1% in the 2010-2011 survey versus 11.7% in the2009-2010 survey).

Senegal also registered particularly poor scores in Protecting Investors and Registering Property, on each ofwhich it ranked 167th. Registering property in Senegal takes more than five times as long as it does in HI-

OECD countries, and 40% longer than in most LMI-SSA countries; and the cost, at 20.6% of the total valueof property, is twice the regional average.

Figure 29 illustrates the possibilities for improvement as well as the scope of challenges that Senegal mustovercome to create a world-class legal and regulatory business environment.

Source: World Bank Doing Business, 2010 and 2011

Senegals rankings in the Doing Business report changed only slightly in 2011 as compared with 2010.

The shortcomings of the legal and regulatory business environment, among other factors, contribute to thecountrys levels of informality. The contribution of the informal sector to the GDP of Senegal is three timeshigher than that of the same sector to the GDP of the median high-income OECD country.

Figure 29: Senegals Performance in Doing Business 2010 and 2011

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