by The Republic of Senegal, the western-most country of the African continent, is positioned as a natural transport center that shares its western border with the North Atlantic Ocean, while Mauritania, Mali, Guinea-Bassau and Guinea border her to the North, East and South respectively (ICDT). With a growing population of 12.77 million her GDP as of 2011 was US $14.29 billion while the GNI per capita was US $1070 (CIA). Senegal made a smooth transition to independence from France in 1960 and is one of few African countries to enjoy strong political stability throughout its post-colonial history, holding it’s first democratic election in 2000(AFDB).
Senegal did struggle economically in the first few decades of her independence but, with the support of the international donor community, took on a major reform program in 1993 that included a 50% devaluation of its currency, the West African CFA franc, as well as reforms to government price controls and subsidies. After these measures were taken Senegal enjoyed a period of 5% annual GDP growth between 1995 and 2007. Due to indirect consequences of the Great Recession growth slowed from 2008 onwards but the growth rate had rebounded to 3.7% in 2012 and is expected to continue to rise as the global economy recovers (AfDB).
Nonetheless, Senegal’s population growth has consistently been dwarfing its economic growth resulting in high unemployment and poverty rates for the country. This imbalance also leads to a defining factor of the economy; the large informal sector(Afribiz). Where typically the informal economy refers to criminal and black market enterprises, in Senegal informal enterprises range from simple street vending and survival income-generating activities, to more productive enterprises in manufacturing, repairs, childcare and other social or personal services, and only fall into the “informal” category in so far as they are unregistered businesses (Benjamin, Nancy).
For the urban and rural workforce that are unable to find formal wage-paying jobs or require additional income the informal sector provides a significant opportunity for employment; this was estimated at 665 000 jobs in 1996 with up to 90% of new jobs created by this sector, pushing the economy towards further informalization (Benjamin, Nancy). It is also estimated the informal sector contributed roughly 43% to the GDP in 2000 (Granstom, Sigrid). Although Informal Micro Enterprises (IMEs) make a significant contribution to Senegal’s workforce and to the GDP they are faced with many challenges ranging from complex regulation, active discouragement by local government, and lack of access to suitable land, electricity, capital, and financial and business services (Granstom, Sigrid).
It is also important to note that the majority of these challenges are not limited to informal enterprises. There are many instances where even relatively large informal enterprises that are capable of competing in the formal sector choose not to formalize their companies (Benjamin, Nancy). This is a strong indication that many Micro-, Small-, and Medium- Enterprises (MSMEs), whether formal or informal, encounter challenges with policy and infrastructure that in some cases negate the benefits of entering the formal market.
In 2012 Senegal was ranked 154th overall out of 185 countries on the “Ease of Doing Business” scale by the International Finance Corporation (IFC), which takes into account scores on numerous factors within each country’s business environment to determine it’s relative world ranking; of the 16 Western African countries (as defined by the UN) Senegal is ranked 10th. The main issues cited, and their respective rankings, were challenges in registering property (171st), getting electricity (168th), protecting investors (166th), and paying taxes (174th) (IFC). There were some positive notes and Senegal did rank fairly well in ease of starting a business (93rd), cross border trading (65th) and resolving insolvency (86th) (IFC).
In 2007 reforms were undertaken to simplify and shorten the procedure of starting a formal business. A new entrepreneur is now required to complete 3 procedures, instead of 9, which takes just 5 days to complete (compared to the Sub Saharan average of 34 days) (IFC). However, the cost of registration, including notary fees etc, is 64.4% of income per capita (~689.08 USD) and the paid-in minimum capital is 192.3% (~2057.61 USD) for an approximate total cost of 2746.69 USD (IFC). Senegalese entrepreneurs also identify heavy taxes and the questionable use of tax revenue as obstacles. In a ground level study conducted by Benjamin et al. 88% of medium-size respondents believe the state does not make good use of tax revenue, while almost 100% of respondents in this group thought the state used public funds unethically.
As of 2012 formal enterprises in Senegal have to make 59 tax payments per year, requiring 666 hours of the entrepreneurs time and totaling 46% of their revenue (IFC). However, the International Monetary Fund (IMF) is backing a large taxation reform that should occur sometime in 2013 and is expected to make the system significantly more effective (Benjamin, Nancy). The relatively large amount of capital necessary to register a formal business and high tax rates make it rather obvious why many firms, especially micro, small and medium enterprises (MSMEs), remain in the informal sector.
A related financial challenge faced predominantly by MSMEs, formal and informal, is acquiring loans from the formal banking sector in order to stimulate their own growth and development. First, there must be a distinction made between small and large informal enterprises, which superficially appear and act similarly to large formal firms (large defined as firms with revenue above 20 million CFA per year). They superficially meet most of the criteria determining formality, at times even paying taxes through the regular business taxation system, which, in addition to influential political or religious connections, allows them access to banking institutions and loans (Granstom, Sigrid). However, on closer inspection, these firms tend to be very fragile due to an ineffective, limited organizational structure, very few permanent employees, reliance on personal connections, and a tendency to be highly dishonest regarding sales, profits, and imports to avoid high taxes ((Granstom, Sigrid).
Informal MSMEs are unable to obtain credit from the formal banking sector or micro finance institutions as they lack the personal connectedness, documentation and capital to be approved for a loan. They are, therefore, forced to use internal funds, informal loans from friends and family or money-lenders to expand their business’. Yet, even formal MSMEs have considerable difficulty obtaining loans. Enterprise Surveys noted that although over 80% of formal enterprises had a savings or checking account, only approx. 15% of enterprises surveyed have used bank finance for investment, while over 70% have used internal finance, a fact that is better understood when they also show that on average collateral valued at 125% of the loan amount is required for approval (IFC).
The lack of loans made to SMEs is largely due to the current financial institutions lack of confidence in SMEs ability to repay, partially a consequence of a lack of clear accounting standards used by these firms (OECD) Microcredit however can provide opportunities for formal MSMEs as Senegal has a relatively large and well-developed microfinance sector with an average portfolio yield of just 22%, compared to Nigeria at 55% and Zambia at 80%. As of 2009 Senegal had 13 microfinance institutions with a total of 1.3 million direct customers (Schreiber, Daniel). Unfortunately, access to financing is not the largest obstacle MSMEs must face.
The Enterprise Surveys division of the World Bank found that in a survey of small, medium and large firms, electricity access was identified as the largest obstacle they each faced by far (IFC). The second largest obstacle varied by firm size; small firms (1-19 employees) experienced challenges in access to finance, while medium (20-99 employees) and large (100+ employees) firms both identified practices in the informal sector as their next largest obstacle (IFC). Strong infrastructure is crucial to the success, competitiveness and growth of any business from micro enterprises to large corporations. Deficiencies in areas of electricity and water supply, telephone connections and institutions that support these areas increase the cost for any enterprise to operate, however these sectors also offer an opportunity for innovation and entrepreneurship.
As of the 2007 World Bank Enterprise Survey formal firms in Senegal were experiencing an average of 12 power outages per month with an estimated 5% loss in sales as a result (IFC). They also faced an average of 7 water supply shortages per month and a respective delay in obtaining an electrical, water and mainline telephone connection of 10, 14, and 9 days respectively (IFC). Although problematic, these delays are 50%-75% shorter than the average for the Sub Saharan region as a whole (IFC). The improvement of access and quality of service in the energy, water supply and transport sectors was identified as one of the two major pillars that need to be addressed by, and with the assistance of, the African Development Bank (AfDB). Lighting Africa, a branch of the IFC aimed at increasing electricity access throughout the country, especially in rural areas where many micro businesses and low income households are located, has succeeded in raising the rural electrification rate from 21% in 2008 to 42% by 2012 (AfDB).
Policies have also been introduced through the Promotion Agency for Investment and President Works (APIX) to provide fiscal incentives for private rural electrification investments such as exemptions from, or reductions of, particular taxes. Incentives to promote renewable energy as well as energy conservation and efficiency are also being studied (AfDB).
Improvements in energy and new projects in infrastructure as well as the possibility of growth in the manufacturing, agriculture, fishing and tourism sectors offer numerous investment opportunities. Senegal’s main exports are groundnuts, phosphates, chemicals, fish products, cotton threads, fresh vegetables and fruit and handicrafts, while its primary customers include France, Nigeria, Thailand, USA and Italy (SME Toolkit). Investment in electrification as well as quality, sustainable off-grid electrical products in rural communities is essential but is not the only infrastructural area that has investment potential. Major road and rail network projects are underway including the rehabilitation of the road from Dakar to Zinguinchor as well as the road from Tambacouda north to the border of Mauritania, the completion of which will have a large impact on facilitating national and international travel (ICDT).
Maritime transport also offers a number of investment opportunities as the Autonomous Port of Dakar looks to rehabilitate secondary ports, recruit private partners and expand its current trade routes (ICDT). As the urban population increases Senegal’s already efficient telecommunications network managed by the recently privatized SONATEL will look to expand and provide opportunities in the free market for value-added services (ICDT). Even more opportunities exist in the tourism sector and horticulture; two areas where investment is heavily encouraged as it will enable diversification of the Senegalese economy aiding stability (IFC). Finally, the government officially welcomes foreign investment and in most sectors allows foreign investors 100% ownership. Investments of at least 5 million CFA (~8333 USD) that create three or more jobs qualify for significant incentives including exoneration from certain duties and taxes dependent on qualification and extra incentives provided for specific business practices such as being an SME, locating in a less industrialized area or using local imports for at least 65% of total inputs (ICDT). These incentives, particularly those targeting foreign owned SMEs and use of local products, is encouraging evidence that the Senegalese government recognizes the importance of formal SMEs in providing employment and is focused on increasing economic growth and diversity.
Senegal provides an impressive and wide-ranging variety of opportunities for foreign and domestic entrepreneurs while recent government policies and association with support programs though the IMF and AfDB among others are promising steps toward improving the Senegalese business environment. Financing and infrastructure remain large hurdles for MSMEs, however, with an already relatively strong microfinance sector and a government that continues to increase its awareness and support of MSMEs’ needs, recognizing their influence on the economy as a whole, it is only a matter of time before these obstacles are overcome.
Works Cited
AEDI. Senegal: Economic Overview. N.d. Web. 21 June 2013
AfDB et al. (2012), “Senegal,” in African Economic Outlook 2012: Promoting Youth
Employment, OECD Publishing. http://dx.doi.org/10.1787/aeo-2012-50-en
AfDB et al. Republic of Senegal Country Strategy Paper 2010-2015. Sept. 2010. Web. 24 June 2013
Afribiz. Senegal: Economy Overview 2011. July 2011. Web. 21 June 2013
Benjamin, Nancy et al. The Informal Sector, Productivity, and Enforcement in West
Africa: A Firm-level Analysis. 2012. Web. 24 June 2013
CIA World Factbook. Senegal Demographics Profile 2013. Feb. 2013. Web. 21 June 2013
Diagne, Abdoulaye et al. The Republic of Senegal. Mar. 2011. Web. 22 June 2013
Policy
Granstom, Sigrid. The Informal Sector and Formal Competitiveness in Senegal. Aug. 2008. Web. 24 June 2013
Tax stats
International Finance Corporation(IFC.) Senegal Country Profile 2007. 2007. Web. 22
June 2013.
Enterprise data
International Finance Corporation (IFC) and World Bank. Ease of Doing Business in
Senegal. 2013. Web. 22 June 2013.
International Finance Corporation (IFC). Starting a Business in Senegal. Jun. 2012. Web. 22 June 2013
Islamic Centre for Development of Trade (ICDT). Senegal. N.d. Web. 23 June 2013
Foreign info
Organisation for Economic Co-operation and Development (OECD). The SME Financing Gap. 2006. Web. 23 June 2013
Schriber, Daniel. Microfinance in Africa: Opportunities for Social Entrepreneurs. 2011.
Web. 23 June 2013
SME Toolkit. Senegal – Overview. 2013. Web. 21 June 2013.
