Article reproduced from the newsletter "Les Échos de la Banque mondiale". No. 10 - April 2008
April 29, 2008 — A temporary situation or the beginning of an unfavorable economic cycle for Senegal? That was the question at the beginning of 2007, following the country’s poor macroeconomic performance in 2006, far below the average for the previous ten years, with a growth rate of 2.3 % and a marked deterioration of government and external deficits.
There was every reason to ask this question, since the signs coming from the world commodity market, particularly the oil market, clearly indicated that pricing tensions would persist in the energy sector.
This was the situation facing Senegal at the beginning of 2007, when its main challenges were the need to restore macroeconomic equilibrium as a matter of urgency and to reduce the budgetary risks connected with the energy crisis, with the difficulties experienced by Industries chimiques du Sénégal (ICS) and with the major infrastructure projects.
2007 was thus a turning point requiring a more definitive analysis of recent economic trends in Senegal and of their possible impact on the living conditions of the Senegalese.
Today, it is tempting to describe the 2006 macroeconomic situation as temporary (at least from the viewpoint of macroeconomic equilibrium).
Although they are provisional, the latest statistics available indicate that economic growth resumed and was about 4.8 % in 2007, once again exceeding demographic growth, with a significant improvement in government and current deficits.
At the same time, there were favorable developments during the year in the energy and chemicals sectors.
Growth creating inequality
Apart from this general diagnosis, however, it would be highly dangerous to correlate macroeconomic results with social performances, because of the economic growth elasticity of poverty.
2007 was noteworthy for two reasons.
The first is that economic growth created inequalities that made it difficult to maintain economic performance and social stability in the medium term. The first source of inequality is to be found in the poor agricultural season: there had already been a considerable decline in 2006 (-5.4 %) and this continued in 2007 (-4.2 %), reducing the economic share of the primary sector to 13% compared with a demographic share of over 60 %. Cereal production continued to decline and the production of cash crops, such as groundnuts, dropped sharply.
The second source of inequality is to be found in the concentration of economic growth in two sectors, which reduces synergies and reflects the dominant role played by the city of Dakar. GDP growth was once again supported by the construction and public works sector and by the services sector, particularly telecommunications.
The very difficult, not to say almost desperate, situation now facing the rural population requires attention to the consequences of these inequalities in the medium term. The fact is that, even if it is impossible to predict its timing and conditions, an adjustment (orderly or disorderly) will inevitably occur.
In other words, Dakar cannot be an oasis of prosperity while indigence prevails in the rural world. International experience has shown that there will have to be a transition.
If this transition is to be successful, migratory flows will need to be better controlled in the light of the absorption capacities of towns (housing, sanitation and other infrastructures) and sectors of activity generating decent jobs will need to be encouraged. It will also be necessary to organize the informal sector, which for the time being is the main source of employment for migrants.
In order to succeed, this transition will also require a strengthening of agricultural policy accompanied by active promotion of non-agricultural activities in rural areas in order to diversify sources of revenue, improve living conditions and stem the depopulation of villages.
The current increase in prices of cereal products does, however, in the medium term permit a redistribution of opportunities for the benefit of the agricultural and rural sectors, which Senegal must seize by pursuing a policy of investment and incentives.
Record inflation
Prices are increasing in the markets of Senegal (shown here, the Kermel market in Dakar)
The other noteworthy economic development in 2007 was undoubtedly the price increases.
It should, however, be noted that this situation is not specific to Senegal and mainly affects all countries which are net importers of energy and cereal products.
In Senegal, inflation was estimated at 5.9% over the twelve months of 2007 – a level unprecedented since devaluation.
Not only has inflation set a record for a period exceeding ten years, but the biggest price increases were for mass-marketed products.
For example, between December 2006 and December 2007, the price of milk increased by 42 %, of local vegetable oil by 29 %, and of wheat meal and its derivatives by between 16 and 27 %, while the average price of unprocessed cereals increased by 12 %.
This reflection of the increase in basic cereal prices on the world market has complicated the situation. Governments have thus been required to deal simultaneously with spiraling oil prices and with the increase in cereal prices.
However – and this deserves to be emphasized – the measures required to deal with these price increases and their repercussions on the Senegalese economy are different for these two categories of products, for two reasons:
Firstly, the degree of liberalization is different for these two categories of products. In the energy sector, prices are regulated and the Government decides whether to pass on increases and decreases to the public. In the food sector, on the other hand, price management is mainly liberalized and economic agents are at liberty to increase or decrease prices depending on the costs that they incur. This means that the behavior of the economic agents present in these sectors influences the effectiveness of any measures that the authorities may adopt. For example, a tax relief measure may not produce the expected results.
Secondly, the level of targeting of vulnerable groups and households is different. The poorest households, particularly those living in rural areas, spend very little on electricity and gas, while a large part of their budget is devoted to spending on basic foodstuffs.
In order to offset this increase in the price of basic foodstuffs, the Senegalese Government has adopted measures of tax relief on certain products. However, there is so far no proof that these measures have generally slowed the increase in prices paid by consumers.
Encouraging competition
It would be better for the Government to foster competition by decreasing protectionism in certain sectors and finding a way to monitor margins in order to discourage abuses in sectors and locations where competition is limited.
Lessening of protectionism would also have the effect of reducing the prices paid by consumers since it would subject national companies to competition from imports, in sectors characterized by a situation of virtual monopoly that generate few jobs in Senegal.
The initial findings of the International Comparison Program (ICP Africa) have shown that food prices in Senegal are 24 % higher than the African average and are the highest in the subregion (ECOWAS), with the exception of Nigeria and Cape Verde.
Similarly, the comparative analysis of prices between five regions of Senegal (Dakar, Diourbel, Kaolack, Kolda and St Louis), conducted by the Government also in the context of ICP Africa, reveals that the cost of living in Kaolack is 11 % lower than in Dakar, partly owing to the proximity of this region to Gambia and the competition from imports from that country.
In addition, the price index analysis, using the secondary nomenclature, shows that the cumulative increase in the price index for local products was 26 % between January 2000 and December 2007, while the price index for imported products increased by only 6 % over the same period.
Despite the soaring rise in prices of imported oil products and cereals, prices of local products showed an even greater increase in 2007, when they rose by 6.3 % compared with 4.6% for imported products. This fact must necessarily lead the authorities to examine in detail the internal factors contributing to price increases.
Measures to correct these factors, some of which will be resisted by the groups concerned, are essential in view of the unfavorable outlook for the commodity market. In addition, short-term solutions, which are so far not effective, may not be sustainable in the medium term.
The Government has already embarked on action designed to compress factors of production, particularly those on which a consensus exists, such as reduction of energy costs through ongoing investments and improvement of urban and rural mobility through upgrading of road infrastructure.
The more sensitive actions likely to have a short-term impact on prices, such as reduction of protectionism in certain key sectors such as the sugar and vegetable oil sectors, improvement of corporate governance and enhancement of transparency, are lagging behind for the time being or are put on the back burner, to the benefit of pressure groups and to the great disadvantage of consumers.
By Mamadou Ndione – Resident economist
This article is reproduced from the quarterly newsletter, Échos de la Banque mondiale, published by the Dakar Regional Office (Senegal, Cape Verde, Gambia, Guinea-Bissau, Niger).To consult the newsletter in PDF format, please click here (PDF).
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