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SENEGAL
Structural Reforms
TURN SENEGAL INTO A COMPETITIVE INVESTMENT DESTINATION IN WEST AFRICA
LONG OVERSHADOWED BY IVORY COAST AND CAMEROON, SENEGAL IS IMPLEMENTING STRUCTURAL AND POLICY REFORMS UNDER PES WITH THE HOPES OF EMERGING AS A PROSPEROUS AND ATTRACTIVE ECONOMIC HUB IN FRENCH WEST AFRICA
BY JACKIE MUINDE
erched on the westernmost point of the African
Pcontinent is Senegal, Africa's 34th largest country by area and 19th largest economy by Gross Domestic Product (GDP). Unlike many of its neighbors, Senegal prides itself to be among the few countries that have never experienced a coup since it gained independence in 1960. Its fragile democracy has seen the country experience some form of economic prosperity compared to unstable neighbors such as Mali and Guinea Bissau, which have recorded multiple coup d'état since they attained selfrule. Still, Senegal, with a GDP of US$28 billion, lags behind its Francophone peers such as the Ivory Coast and Cameroon, which have GDPs of US$73 billion and US$46 billion, respectively.
The ascension of Macky Sall to the country's presidency in 2012 ushered in a new era of optimism. Senegal embarked on a new journey to economic development under the Plan for an Emerging Senegal (PES) which "aims at getting Senegal onto the road to development by 2035." The main objectives are to obtain a GDP growth rate of 7-8%, create 600 000 formal jobs and reach a GDP per capita of US$1 500 by 2035.
The first phase of the plan, starting in 2012 and ending in 2019, reignited economic growth in the country. A series of projects and reforms implemented during this period saw the country's economy grow by more than 6% per year between 2014 and 2018, according to a report by the World Bank. The Covid-19 pandemic put breaks on the country's upward trajectory resulting in real GDP growth of 0.87% in 2020, down from 4.4% in 2019, and 6.2% in 2018.
As the world dusts itself from the impact of its worst pandemic in living memory, so is Senegal. Now in the second phase of PES, the country's economy is back with 2021 growth reaching a commendable height of 6.1%. World Bank however notes that although the country is on the right growth trajectory, external shocks from the war in Ukraine and an ECOWAS trade blockade on its neighbor and one of the largest trade partners Mali present new challenges that would hinder desired growth. Still, the country is projected to post a medium singledigit growth of 5% in 2022 with a boost from recently discovered oil and gas expected to push the country into double-digit growth rates from as early as 2023.
Given Senegal's relatively stable growth, the country presents new investment opportunities. This article reviews structural reforms driving the country's economy forward and opportunities that may exist as the implementation of the second phase of the country's economic and social blueprint gets into high gear.
STRUCTURAL REFORMS ATTRACT FOREIGN INVESTMENT
Over the past decade, Senegal has prioritized efforts to improve the business climate to attract foreign investment. Incentives implemented so far include basic guarantees for protection against nationalization, a stable currency, free repatriation of profits and funds, and equal treatment between local and foreign entities with access to raw materials, customs, and tax incentives. There are today no barriers to 100% ownership of businesses by foreign investors except in sectors where government and state-owned enterprises are active, such as physical infrastructure, including water, electricity distribution, and port services.
The country has further liberalized its tax regime to make it more favorable for both local and foreign investors. Investors can be assured of various attractive tax incentives, including a three-year exemption on customs duty for capital goods imports and a VAT exemption on production and purchase of local products and services.
These major moves have set up the country to become a regional business hub for logistics, services, and industry. According to the 2016 World Bank Doing Business report, the country is one of the world's top business reformers and among the top ten business environment improvers for two consecutive years. Investors have also warmed up to the country, increasing their appetite to invest in the various industries where the most potential exists. According to UNCTAD data, Senegal's stock of foreign direct investment (FDI) increased from US$3.4 billion in 2015 to US$6.4 billion in 2019.
In case of disputes, structures exist for amicable settlements. The investment arbitration center, which is administered by the Dakar Chamber of Commerce, is
one avenue to settle disputes. One can also pursue redress in several international investment-related organizations where Senegal is a member. These include the African Intellectual Property Organization (OAPI), the International Centre for the Settlement of Investment Disputes (ICSID), and the Multilateral Investment Guarantee Agency (MIGA).
FOCUS ON INFRASTRUCTURE TO ENABLE BUSINESS GROWTH
One of the biggest impediments to investment is the lack of adequate infrastructure to support the movement of goods and services. Cognizant of this fact, Senegal has made infrastructure development the cornerstone stone of its 2035 vision to become an emerging economy. According to a report by Deloitte, Senegal currently spends around US$910m per year on infrastructure. The impact on the country has been phenomenal. As of 2016, the country had built 1 520km and rehabilitated 4 015km of roads in just under four years. Senegal also joined the league of a few African nations with highspeed rail when it launched the Regional Express Train, a 160Km/hr rail that connects the country’s capital Dakar to the new airport via 14 stations. About 115,000 citizens use the train every day. To further promote lowcost transport, President Sall’s government also recently redeveloped the Dakar-Kidira railway line, which is over 644 km long.
To solve systemic power shortage problems, Senegal has significantly invested in energy generation. Between 2014 and 2018, the country managed to bring into the national grid a whooping 770MW of new electricity, mainly through partnerships with independent power producers. Senegal's power production has leaning been towards diversification away from fossil fuels and a significant number of its newly generated power comes from either wind or solar plants. With most of the energy projects in Phase 1 of PES complete, Senegal is embarking on new electricity projects which, when completed, will bring an additional 1214MW to the national grid. More energy, especially from renewable sources, is expected to bring Senegal's cost of producing power, which is
currently among the highest on the continent, further reducing the cost of electricity to both large- and smallscale users.
Another major win for the government’s Emerging Senegal Plan is the Diamniadio Industrial Park, Forty kilometers from Dakar. The park, which was opened in 2018, cost the Senegalese government about US$44 million and has already attracted interest from both local and foreign investors and created jobs for about 4,500 citizens. According to UNIDO, when the second phase of the project is complete in the next few years more companies carrying out highly labor-intensive activities will set up operations in the park, generating at least 23,000 jobs.
MINING OFFERS IMMENSE INVESTMENT OPPORTUNITIES
Senegal has traditionally been known for phosphate mining, which is currently well developed, offering little room for new entrants. Opportunities exist in other minerals such as gold, iron, platinum, zircon, titanium, and silver, which are largely under-exploited. To encourage greater participation in the sector, the Government in consultation and close collaboration with the various stakeholders in the sector, has developed a mining policy aimed at improving the yield of extractive activities, attracting national and foreign investors, and, above all, guaranteeing national production capable of generating wealth and creating sustainable employment. The government has also heavily invested in infrastructure, most notably the large-scale construction of new roads and port infrastructure that connect to the mineral port of Bargny from where many of Senegal's minerals are sent to global markets for export. This adds to the construction of a 36 MW power plant and the rehabilitation of a 110Km railway tract from Mekhé to Tivaouane, Thiès, and Dakar to help support the mining of zircon along the shores of Senegal's the Atlantic Ocean.
The updated mining code of 2016, significant investments particularly in infrastructure, and businessfriendly economic reforms have cumulatively rejuvenated the mining sector. According to a world bank report, mineral exploration has diversified further away from Phosphates resulting in a rise in non-phosphate exports. Gold has seen the fastest rise in exports, from 1.1 percent of total exports in 2007 to 14.8 percent in 2017, the World Bank report reveals adding that titanium and zircon represent 3.1 and 2.4 percent of total exports, respectively. The contribution of the mining sector to total revenues has increased from 3.2 percent in 2013 to 5.66 percent in 2020, according to a report by ecofinance. With more exports coming from newly exploited minerals, the World Bank notes that the proportion of mineral exports in total exports has grown significantly since 2007, reaching over 37 percent in 2020.
Investors still have an opportunity to tap into the lucrative extractive sector. Zirconium, which is relatively abundant in Senegal, is highly sought after in the global market driven by demand from the Chinese ceramics and foundry industry. According to research and markets, the Global market for Zirconia was estimated at 190.8 Thousand Metric Tons in 2020 and is projected to reach 224.1 Thousand Metric Tons by 2026, reflecting a compounded annual growth rate of 2.7% over the analysis period. Senegalese Iron and Titanium are other minerals that investors could look to tap to meet their rising demand globally. Markets and Markets project the titanium market to grow from US$24.7 billion in 2021 to US$33.5 billion by 2026 while the Iron ore market is projected to grow from US$358.9 billion in 2022 to US$423. 57 billion in 2028 with a CAGR of 2.8% during the forecast period 2022-2028.
THE DISCOVERY OF OIL & GAS PRESENTS NEW ECONOMIC OPPORTUNITIES
An air of optimism swept across Senegal in 2014 when the first world-class oil and gas discovery was made by Scottish operator, Cairn, about 100km off the coast of Dakar. The area, now known as the SNE Oil Field, is estimated to hold 2.7 billion barrels of recoverable oil reserves. More discoveries were made between 2014 and 2017, including the Greater Tortue Ahmeyim (GTA) LNG gas, which has been shown to hold natural gas reserves of 566 billion cubic meters of gas, out of which 283 billion cubic meters are allocated for Senegal.
These new gas and oil discoveries could turn into the new energy hotspot of the continent once production gets underway in 2023. Gas which is estimated to be in the north of 40 trillion cubic feet has the potential to transform Senegal's economy over the next decade by achieving energy independence and having a readily available domestic supply of natural gas for a wide range of uses in industry, and power generation. Accordingly, the country may unshackle itself from the curse of being the country with the highest energy costs in West Africa. With cheaper power, Senegal might just achieve its set objective of 100% electricity coverage and connection of at least 90% of rural households by 2025.
The economy is also expected to benefit greatly from the operationalization of the gas and oil fields. According to the World Bank, nominal GDP is expected to increase by 13.8 percent in 2022 as oil and gas start flowing from SNE and GTA fields, while real growth would jump from 7.1 percent to 11.6 percent. To capitalize on its natural gas
potential, the Ministry of Petroleum and Energy has put in place the Pilot Committee to Support Negotiations of Gas Projects and Institutional Capacity Building (PANPGRCI). The committee which received US$29 million in funding from the World Bank will support all parties involved in the gas project in various areas, including legal aspects, and the commercialization and monetization of gas.
AGRICULTURE: SENEGAL’S MOST DYNAMIC ENGINE OF GROWTH
Of all the sectors mentioned so far, none is as impactful on a wide pool of citizens as agriculture. The sector not only serves the nation’s strategic food security and economic interests but also employs by far the largest portion of the working population, particularly in rural Senegal. 2020 statistics from the World Bank show that agriculture employed around 30% of the population and accounted for 15% of Senegal’s GDP in 2020. Cognizant of this, the current administration put agriculture among the 4 key sectors that are key to unlocking inclusive growth.
Billions worth of investment and several policy reforms from the national government have since been channeled to the sector to bring about desired growth. In the first phase of the PES program, about 42.2 billion CFA francs were invested by the government in several areas, including the acquisition of harnessed farming equipment, certified seeds for priority crops, and fertilizer subsidy programs. The result has been phenomenal. Peanut, the country’s top cash crop, posted a yield of 997,593 tonnes in 2019, an increase of 38% compared
to the average of the last five years. Cereal production estimated at 2,247,094 tonnes was 54% higher compared to the average of the last five years, while rice production of 950,779 tonnes was 71% higher compared to the average of the last five years. The government noted that the phenomenal rise in production was made possible by effective implementation of the policy of subsiding inputs and factors of production through better targeting of beneficiaries (big producers) and products (seed selection, agricultural equipment).
Fishing is also a major agricultural activity and contributes heavily to the nation's food security. The Senegalese eat up to 35 kilograms (77 pounds) of fish each year, accounting for up to 75 percent of the nation’s animal protein intake. The sector is, however, more than just a source of food for the Senegalese. It's a foreign exchange earner and a way of life for the many fishing communities scattered across the shores of the Atlantic Ocean and the vast network of waterways and tributaries. It may only contribute 3.2 percent of the nation’s GDP, but it accounts for about 10 percent of all exports and 17 percent of the country’s labor force.
All has not been well in the past decade as fish stockpiles, particularly in the Atlantic, have dwindled due to several factors, most notably overfishing and pollution. Various investments have gone into the sector to restore its lost glory. To ease navigation, Senegal has, for instance, carried out dredging works on the Saloum and Casamance rivers. It has also developed areas for the treatment and processing of fishery products at Bargny, Fass Boye, and Gooxu Mbathe, and completed the construction of the Fatick central fish market.
The country is also shifting focus to aquaculture, which offers the best potential for sustainably managing the country's dwindling fish stocks. Already the country has rolled out an investment plan for small and medium aquaculture enterprises and has also released a Code of Aquaculture with incentives to facilitate the acquisition of land, remission of facilities, and extendable business tax exemption for the first three years. As Senegal's
population swells from 17.7 million to about 22.5 million in 2030, demand for fish will continue soaring, creating new opportunities for ventures in the aquaculture sector.
A ROBUST FINANCIAL SECTOR SERVES AS A BULWARK FOR ECONOMIC PROSPERITY
Senegal's robust financial sector comprising 26 registered commercial banks and the Central Bank of West African States (Banque Centrale des Etats de l’Afrique de l’Ouest, BCEAO serve as the bulwark for the country’s budding economy. Largely dominated by French banks, the sector has received some vibrancy with the entry of regional players like Ecobank, UBA, and Attijariwafa Bank.
Although banks have in general driven growth in financial inclusion, the greatest growth has been brought about by FinTech. According to Global Findex, digital payments were the biggest drivers of financial inclusion in the country, resulting in the proportion of adults with access to formal financial services shooting up from 15% in 2014 to 56% in 2021. Despite this progress, 44% of adults in Senegal still do not have the financial services they need to get ahead and protect themselves during hard times. To further enhance access, Senegal adopted the National Financial Inclusion Strategy (NFIS) in early 2022. The strategy aims to raise financial inclusion rates to 65% among adults and 90% for MSMEs by 2026.
The FinTech sector, supported by an established telecoms infrastructure that ranks first in West Africa in terms of penetration and quality service, has the greatest potential to bridge the gap in financial inclusion. A stream of FinTech startups seeking to capitalize on this opportunity has already entered the scene and scored big. Wave, a Senegal-based mobile money provider founded in 2018, is one such example. After just four years, the company has achieved a valuation of US$1.7 billion, making Wave Africa’s first Francophone unicorn. Other players with notable success include Wari, MaTontine, PayDunya, InTouch, and SudPay. John Ashbourne, a global economist at Fitch Solutions, believes that banks in the country could also take part in the FinTech revolution. “Most of francophone west Africa has yet to experience the full effects of the mobile payments revolution that has taken off in other emerging markets and frontier markets. This is a major opportunity for banks,” he observes.
As FinTech makes its foray into the finance sector, an opportunity exists for banks, particularly in the funding of micro, small, and medium enterprises, which are in dire need of credit. Possibly to take advantage of this opportunity, Moroccan Attijariwafa Bank strengthened its position by merging with CBAO and Banque SenegaloTunisienne to form the largest financial institution in the country. American-based Citibank has also expanded its operations, specializing in corporate finance where most returns are likely.
A PROMISING INVESTMENT DESTINATION
Senegal offers a competitive destination for investments in Africa on account of its political stability, strategic geographical position, access to sub-regional markets, and improving infrastructure. The structural reforms implemented under PES have made investing and doing business in the country easier, further encouraging local and external investors. Opportunities continue to exist, particularly in Mining where most minerals are largely under-exploited. As the population rises, the country's demand for food is expected to rise, creating new investment opportunities, particularly in irrigation farming and aquaculture. With many citizens still unable to access financial services, FinTech remains a sector with great untapped potential. Early entrants in this market are already recording success with some like Wave achieving unicorn status just a few years after launch.
Investors should, however, be aware of several risks that they may encounter while in Senegal. The political environment, although stable, is fragile with large protests often characterizing every major election. Agriculture which presents great investment opportunities is still constrained by a lack of access to land, insufficient highquality inputs (especially fertilizer and seeds), and poorly structured value chains. Existing infrastructure gaps represent bottlenecks to the development of agribusiness, value chains, and the overall competitiveness of Senegalese products. The country also has a lot to do to improve its global competitiveness as it is currently ranked as the 114 most competitive nation in the world out of 140 countries reviewed by the World Economic Forum.
