Senegal: Country outlook
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Senegal: Country outlook
FROM THE ECONOMIST INTELLIGENCE UNIT
POLITICAL STABILITY: The Economist Intelligence Unit expects the political landscape to remain broadly stable during the 2021-25 forecast period, supported by well-entrenched democratic institutions. However, popular frustration is rising, as the government has been slow to deliver on promises to improve the wellbeing of lower-income citizens and income inequality is growing. The main near-term challenge will be to contain the spread of the coronavirus and its impact on livelihoods. Economic activity remains constrained and we expect unemployment to remain high in 2021, increasing the potential for social unrest. Despite these complications, the administration retains a respectable level of support, especially in rural areas, partly because of strong infrastructure improvements in recent years. Any protests will be sporadic, and contained by the authorities.
ELECTION WATCH: The most recent presidential election took place in February 2019. The incumbent, Macky Sall, secured an outright victory in the first round, with 58.3% of the vote. The Benno Bokk Yakaar coalition, which includes the president's Alliance pour la république, won a parliamentary majority in the legislative election in mid-2017 and holds 125 of the 150 seats in the National Assembly. The next legislative election is due in 2022, and we expect the ruling coalition to retain power, albeit with a smaller majority as support for it will wane owing to the fallout from the pandemic. There is also a risk that the president's dismissal of the former prime minister will cause a splintering in his party and that a rival faction could emerge. Local elections are now scheduled for March 2021. The ruling party will win these elections owing to its strong support in rural areas, even as its support in urban areas declines.
INTERNATIONAL RELATIONS: With the security threat of extremism persisting, the government will strengthen military co-ordination with its regional partners. For the same reason, ties with France will remain close. Ties with the EU member states will also strengthen in line with efforts to tackle illegal migration, which we expect to increase owing to the domestic economic fallout from the pandemic. Senegal is also co-operating with the US through a defence agreement.
POLICY TRENDS: In the short term policy will focus on addressing the fallout from the pandemic while sustaining a broadly pro-business agenda. In April 2020 the IMF disbursed US$442m in emergency funds, providing immediate liquidity to support Senegal's implementation of a Covid-19 national response plan (plan de riposte) that includes improvements to the healthcare system, strengthening of social protection, stabilisation of the economy and the financial system, and provision of essential goods to the vulnerable. Senegal also participated in a debt-service suspension initiative from the G20, and is eligible for deferral benefits worth US$139.2m, which will provide short-term breathing space for the external and fiscal balances and free up resources to increase healthcare spending. The G20 initiative has been extended until June 2021, and we expect the government to apply for additional debt-service relief, given the ongoing strain on the public finances.
ECONOMIC GROWTH: We estimate that real GDP contracted by 0.4% in 2020--Senegal's first recession in 30 years--owing to the global and domestic impact of the pandemic. We expect growth to resume in 2021-22, at an average of 4.4% a year. This will be driven by recovering external demand (and a corresponding increase in exports), by construction for hydrocarbons projects and by new exploration and expansion in the gold mining sector. The mining sector will benefit from high global gold prices and from instability in neighbouring Mali and Burkina Faso, which is hampering gold mining operations in those countries and making Senegal more attractive to investors. Growth will accelerate to an average of 9% a year in 2023-25 as oil production comes on stream. Growing private investment, particularly in oil, energy, transport infrastructure, tourism, textiles and information technology, as well as Dakar's expanded air and sea logistics capacity, will underpin economic expansion throughout 2021-25.
INFLATION: After rising to an estimated average of 2.6% in 2020 owing to supply-chain disruptions early in the pandemic and localised flooding in July-August, we expect average inflation to fall to 2% in 2021 as above-average cereal production (due to favourable weather) in late 2020 causes food prices to fall. In 2022-25 we expect inflation to rise again, to an annual average of 2.6%, as robust economic activity increases demand-side inflationary pressures. However, a more substantial increase will be prevented by an appreciation of the local currency. Local weather-related food shortages have the potential to trigger short periods of upward pressure on inflation throughout the forecast period.
EXCHANGE RATES: The CFA franc is pegged to the euro at CFAfr655.97:EUR1 and therefore fluctuates in line with euro-US dollar movements. We forecast that the euro will strengthen against the dollar in 2021 as the euro zone starts to recover, before depreciating slightly in 2022 because of a later round of tightening of monetary policy than in the US, given the slower recovery of euro zone economies. In 2023-25 we expect the euro to bounce back gradually against the US dollar, supported by the euro zone's structural current-account surplus. In line with these developments, we expect the CFA franc to appreciate from an estimated CFAfr575.1:US$1 in 2020 to CFAfr558.3:US$1 in 2021 and CFAfr542.1:US$1 in 2025.
EXTERNAL SECTOR: Weak external demand will affect exports of most commodities early in the forecast period. Much like in 2020, however, high gold prices and strong demand for the metal as a safe-haven asset will continue to support export earnings in 2021. As external demand picks up in 2021-25 we expect a return to export growth, supported by higher gold production and by increased exports of fish and crustaceans stemming from a recent increase in fisheries capacity. The start of oil production in 2023 will drive a steep rise in goods export earnings. We estimate that import spending fell in 2020 owing to contracting domestic demand and falling global oil prices. It will rebound in 2021-25 owing to rising demand for capital goods (including for oil exploration), as well as higher global oil prices. Overall, we expect the trade deficit as a proportion of GDP to narrow throughout the forecast period, driven by robust export growth.
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