From Africa Recovery, Vol.17 #2 (July 2003), page 15

Senegal attracts investors, but slowly

Misperceptions, red tape and banking weaknesses hinder promotion efforts

By Laura Hildebrandt

Senegal should be a great place for foreign investors. Situated on the western-most point of Africa, it is within easy reach of US and European markets from the natural port of Dakar. The country has an abundance of labour, relatively good infrastructure and a well-educated elite. It has a history of political stability and secular democracy, with decidedly pro-market leanings, particularly since the election in 2000 of President Abdoulaye Wade. Senegal has undergone two decades of structural adjustment programmes under the direction of the International Monetary Fund (IMF) and World Bank. In short, it meets most of the standard criteria that investors consider critical.

The Senegalese government seems to agree. It forecasts high levels of growth in investment over the next few years. Although the last two years have seen some increases, the results were skewed by a few large one-time investments. Some analysts predict that the pace is not sustainable. The IMF also believes the government's expectations are overly optimistic. Why are more investors not taking advantage of the opportunities Senegal has to offer?

One answer, according to Mr. Alan Patricof, vice-chairman of Apax Partners investment house in the US, is that foreign investors tend to lump countries together in regions, without making much distinction among individual countries. By that logic, Senegal's reputation for stability may be offset by conflicts elsewhere in the region, such as Côte d'Ivoire.

Regulations and courts

For those investors who have chosen Senegal, there still are numerous regulatory obstacles, despite progress during years of reform. These barriers for starting up a business or acquiring land can cause significant delays for investors.

Mr. Mbaye Khouma, marketing director of the Senegalese investment promotion agency, offered an anecdote. A foreign firm was planning to set up a factory in Dakar. The company made a bid for an existing government-owned building. But land ownership regulations required that before the government could transfer the building to the company, it had to consider at least two competing bids. No other bids were made for the space, and after several months of waiting the company eventually decided to move to another country.

Photo : ©World Bank / Ray Witlin

Businesses and banks operating in Senegal also often face difficulties in trying to enforce contracts in courts. Last year, a joint IMF-World Bank assessment of Senegal's financial sector found that the judicial system lacks sufficient technical capacity to handle financial matters. Cases may take many months.

Mr. Gabriel Fall, a member of President Wade's advisory committee on investment, offers another explanation for investor reticence: the highly informal nature of much of Senegal's economy. As masses of people move from the countryside to the cities in search of higher incomes, many enter the informal sector, selling cheap consumer imports from Asia on the street. Mr. Fall maintains that this trend causes licensed shops to close and prevents new investment in nearly all sectors.

Access to capital

Even when an entrepreneur has identified a solid opportunity and has decided to invest in an enterprise, there is the additional problem of inadequate access to capital through the local financial system. In Senegal, money is generally available for large enterprises and projects, as well as for very small ones, but not those in the middle. The West African Development Bank, for example, provides loans for projects over $10 mn, while at the other end of the spectrum, some of the most generous micro-credit institutions have a loan ceiling of just $20,000, often not enough for small-scale entrepreneurs.

For small domestic or foreign businesses, particularly start-ups, it can be extremely difficult to get loans from the banks, which are hesitant to lend to a company that has not yet proved itself. "Trust is a big barrier for banks," Mr. Fall explains.

Banks are especially conservative in lending to new sectors, such as information and communications technologies. As Mr. Christophe Aguessy of the West African Development Bank in Dakar explains, banks often lack the knowledge or capacity to reliably evaluate projects, particularly in high-tech sectors.

Recognizing some of the problems that hamper Senegal's ability to attract private investors, the World Bank in May approved a new $46 mn credit to help the government improve the investment climate, promote greater private involvement in economic activities and carry out further policy reforms.

Another avenue to attract more capital for investment would be to tap into Senegal's diaspora living abroad. At an investment forum held in Dakar in late May, Prime Minister Idrissa Seck noted that migrants in Europe and North America sent back to Senegal some CFA160 bn ($218 mn) in 2001. Unlike other external investors, these members of the Senegalese diaspora know the country well and have informal contacts to help them overcome the complex regulatory environment. They also have personal incentives to invest their savings back home, provided good investment opportunities are available.

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