WORLD BANK GROUP AFRICA REGION, PRIVATE SECTOR UNIT 33680 Summary of 2005 Senegal Investment Climate Assessment EPTEMBER S Since 1994, Senegal has experienced a steady average gross domestic product growth of 4.7 percent, a performance superior to the overall growth in Sub-Saharan Africa (which averaged 3.2 percent between 1994 and 2003). As of 2003/2004, this growth occurred within a stable macroeconomic framework, limited inflation, and contained budget deficits. Senegal's 10 general business environment in Senegal is correct, and it leads many eastern African countries in terms of growth, produc- tivity, and recent improvements in easing regulations. UMBER N Yet, several investment climate issues continue to curb Senegal's current and potential growth, including the low qualifi- E cation the overall workforce, various difficulties in accessing finance, problematic regulation enforcement, and infrastructure OT N inefficiencies. is note summarizes the Investment Climate Assessment (ICA) undertaken in Senegal in 2004. e objective of the ICA was to analyze the current business climate in Senegal using a survey of a representative sample of 350 manufacturing and services firms. Macroeconomic Environment and it was in South Korea and about 30 percent higher than in Productivity ailand. Since the late 1970s, however, labor productiv- ity has increased rapidly in the two Asian countries, while Despite Senegal's record of sustained growth and ma- decreasing in Senegal. As a result, by the late 1990s, labor jor improvements in its business environment (several productivity was about five times higher in Korea and 10 privatizations, improvements in the labor code, and a percent higher in ailand than it was in Senegal. major tariff reform), structural deficiencies still remain Nevertheless, as of 2002/2003 and in spite of such a that hinder its current and potential growth, including a decline, firms in Senegal remain among the most produc- significant trade deficit, irregular manufactured exports, tive in Africa, with a relatively high labor and capital pro- and low foreign direct investment (FDI). FDI levels in Senegal are among the lowest in Africa at 1.46 percent of Figure 1. Unit Labor Costs in Senegal and Other Countries GDP compared with 2.3 percent for Sub-Saharan Africa as a whole in the 1994 to 2003 period. In effect, foreign 0.45 investors have mixed views about the country. According 0.39 0.40 to data from the World Economic Forum and Institu- tional Investor, Senegal remains in the last quarter of the 0.35 0.32 rankings in 2003 (Table 1). However, as recognized by 0.29 0.30 0.27 other rankings (such as Invest in Franc Zone), Senegal is 0.25 0.23 well perceived as a moderate risk in terms of direct invest- 0.21 0.20 ment, financial risk, and political instability. Such mixed perceptions among investors can par- 0.15 tially be explained by the fact that productivity levels in 0.10 Senegal, while still higher than in eastern Africa, have de- 0.05 clined since the 1970s. Research suggests that in the mid- 0.00 1970s, labor productivity was twice as high in Senegal as UGANDA KENYA SENEGAL TANZANIA CHINA INDIA Table 1. Country Ratings. World Economic Forum 2003 Institutional Investor 2003 Growth Business Rank Note Competitiveness Index Competitiveness Index Credit Rating Best Performance Best Performance Finland 1 1 Swiss 1 95.3 USA 2 2 Luxemburg 2 94.3 South Africa 42 27 South Africa 40 52.4 China 44 32 China 34 60 India 56 37 India 48 49.4 Senegal 79 87 Senegal 76 27.6 Uganda 80 74 Uganda 85 21,4 Kenya 83 67 Kenya 82 22.1 Worst performance Worst performance Haiti 102 Argentina 99 14.5 Angola 101 Zimbabwe 100 10.8 Source: Global Competitiveness Report 2003­2004 and Institutional Investor, March 2003. ductivity. Yet, this high productivity is offset by high wages, Figure 2. Access to Credit by Size. which reduce the competitiveness of Senegal as indicated by the relatively high level of the unit labor cost indicator (that 100 is, wages adjusted for productivity levels). So, as shown in 90 90 88.1 Figure 1, although Senegal is in a better position than coun- 80 76.3 tries like Kenya and Uganda, it still faces difficulties with 70 respect to countries like China and India that are more pro- 63.1 ductive and whose labor costs are lower. 60 50 Key Investment Climate Constraints 40 30 Another element that sheds light on investor confidence in 20 20 Senegal is the importance of the remaining investment cli- 10 mate constraints. Investment climate constraints in Senegal, 0 by order of intensity, are related to factor markets, corrup- 1-9 10-49 50-99 100-499 500+ employees employees employees employees employees tion, regulations, and infrastructure. Constraints in the factor market include issues related provide training to their employees). In addition, the train- to the financial and labor markets. e cost of financing ing provided does not always match the needs.Absenteeism and the difficulties in accessing it are the two most important resulting from health issues (malaria) remains non-negli- individual constraints quoted by investors (64.5 percent and gible, and the average nominal wage level remains high for 55.2 percent of the surveyed firms, respectively). Access to a developing economy, largely because of the wage-setting finance (defined as the use of loans and overdraft) largely de- mechanism and regulations. pends on the size of the firms. Smaller firms have less access to bank's finance, whether or not they export (Figure 2). Corruption remains a major concern for almost 40 per- e formal labor market in Senegal suffers from several cent of the surveyed firms in Senegal. Senegal's perfor- weaknesses as well. e workforce has a relatively low level mance is about average with respect to corruption when of education (partly because only about a third of the firms compared with other countries where surveys were con- Figure 3. Percentage of Firms Identifying Application of further reducing the regulatory burden, and improving in- Regulations as Inconsistent. frastructure. Priority should be given to reforms in the fol- lowing areas: 70 64.8 63.4 Labor Market 60 56.5 · Improve dissemination of labor market­related infor- 50 45.5 mation; 42.1 40.0 40 · Step up the fight against malaria to reduce absentee- 35.1 ism; 30 · Increase the output of the education system and pro- 19.2 20 14.1 fessional training organizations to improve the overall 10 level of qualification of the workforce; and · Review and improve selected regulations of the labor 0 N A TASIK ALG code. MALI BENIN ERIAG HINAC PA NZANIAAT KENY ENES ANDAGU AL Financial Market · Promote the use of better accounting procedures, espe- ducted--better than some (Kenya, Benin, or Mali) but cially for small and medium enterprises (SMEs); worse than others (China or Turkey). · Review the regulations dealing with the accounting/au- diting field to improve the quality of the audits; and Regulations and their enforcement are yet another seri- · Develop information on available financial products, ous cause of concern and uncertainty for investors. Typi- especially export financing as firms often simply ignore cally, entrepreneurs have a relatively low confidence in the their existence. enforcement of regulations and the ability of the judiciary. As shown in Figure 3, about 42 percent of the manufactur- Corruption ers consider that the enforcement of regulations by officials · Strengthen the administration's internal and external remains inconsistent, and 40 percent of them do not trust control mechanisms; the judiciary to enforce their property rights. Here again, · Revisit and improve the ancient legislative and regula- Senegal's performance is about average compared with oth- tory framework dealing with these matters; and er countries. · Implement microeconomic measures such as limiting employment duration for selected sensitive positions And,finally,infrastructure is a cause of concern for 30 to and reinforcing and effectively enforcing a corruption 36 percent of the companies. e road network, the waste punishment system with high penalties. disposal system, and the railroad network to sub regions and to Mali constitute a real handicap for firms in Senegal. Tax System Electricity supply remains irregular, further hampering ef- · Simplify the fiscal system and continue to reduce cor- ficiency. However, the intensity of the infrastructure con- porate and local taxes; and straints, though critical, remains lower than in many other · Improve capacity of the tax administration through ad- African countries. ditional training for staff and provision of new equip- ment, which will help to improve revenue collection Policy Options and reduce the bureaucratic burden for firms. Despite numerous important reforms carried out during Judicial System the last ten years, the investment climate in Senegal still · Strengthen the capacity of the Ministry of Justice; suffers from several weaknesses that hinder private invest- · Increase the number of judges specialized in business ment, productivity, and growth. Further reforms and mea- and fiscal issues and promote the development of busi- sures are therefore necessary to enable a more competitive ness courts; business environment. ese reforms should aim at im- · Upgrade computer equipment in courts; and proving the working of factor markets, fighting corruption, · Improve creditors' rights. Infrastructure is note is part of a series of summaries of analytical work of the · Finalize the development of a realistic and effective Africa Private Sector Development Unit. is note is authored transport strategy for the country and,more specifically, by Nadia Sandi based on a report entitled Senegal: Une evalu- for Dakar, to move firm output more efficiently; and ation du climat des investissements (March 2005). e report · Implement the Electricity Supply Efficiency Enhance- was written by a team in the Africa Private Sector Unit led by ment Project (ESEEP) to improve electricity supply. Jean-Michel N. Marchat, and including Jean-Paul Azam, George Clarke, Magueye Dia, and Mouhssine Affifi. For more informa- tion, contact Melanie S. Mbuyi via email at mmbuyi@worldbank. org or via telephone on 202 473 9574. A copy of the report is also available from www.worldbank.org/rped