Assessment of the Impact of WAEMU Common External Tariff (CET) in Senegal

Abstract

The adoption of the common external tariff (CET) by ECOWAS member countries is a further step towards the realization of the Customs Union and to the harmonization of trade programs. Senegal has joined the CET in 2000 to boost its trade with neighboring countries and the rest of the world. At the WAEMU level, the CET establishes a delicate equilibrium between member countries with divergent interests on certain products. However, it is criticized for being unable to provide sufficient protection to production branches and promote the emergence of a real community market. A key challenge of the ECOWAS-CET is to manage to reconcile the concerns of countries that require modifications in some elements of the WAEMU-CET. It is thus important to assess the implementation of the WAEMU-CET in Senegal, to bring out its strengths and weaknesses, in order to better tackle the negotiations on the ECOWAS-CET. The main objective of this study is to engage in such an exercise by focusing on the impact of the CET on public finance. In this paper, we examine the impact of recently implemented Common External Tariff (CET) by ECOWAS on the Senegalese economy. Using a partial equilibrium framework, we have undertaken simulations of CET application on key macroeconomic variables. Our results suggest very strong negative impact on fiscal revenue, inflation, but a dramatic change in tax structure, mainstreaming consumption taxes and VAT at the detriment of collected duties. Our conclusion calls for structural reforms beyond external tariff alignment in order to increase competitiveness and boost exports. A forecasting and simulation model has been developed to measure the impact of the CET on some key macroeconomic variables. Simulations show that a decrease in customs duty rate had a depressive effect on fiscal revenues. The estimated decline in fiscal revenues amounted to nearly CFA F 41 billion and 51.75 billion respectively in 2007 and 2013. However, overall, the positive effect of VAT and consumption taxes outweighs the depressive effect of lower customs duties on fiscal revenues. Thus, the overall impact of the reforms on total fiscal revenues is positive and amounts to 63.78 billion in 2007 and is expected to rise to 79.9 billion in 2013. Regarding price simulations, the findings show that the increase of indirect taxation subsequent to WAEMU reforms led to inflation. Compared to the baseline (unchanged fiscal legislation), consumer price indices and the manufacturing sector price indices grew faster. This upward effect increased over time. In terms of consumer prices, the estimated gap amounted to 5.70% in 2002, 5.71% in 2007 and 6.92% in 2013. Regarding prices of manufacturing sector, the differences are more important because they amounted to 6.09% in 2002, 6.19% in 2007 and 6.56% in 2013. While the introduction of the CET has led to a change in the structure of fiscal revenues, it also allowed the realization of fiscal and customs translation in favor of the share of taxes in total fiscal revenues. For a better balance among economic, financial and social functions of taxes on Senegalese economy, the following two recommendations are made: a) improvement of collection performance of direct taxes through a series of actions (increase of human and material resources of fiscal administration, increase of the taxable base through tax compliance promotion strategy that should be especially through improving the quality of public service and the gradual formalization of the informal sector); b) the use of other trade policy instruments (non-tariff measures such as standards, strengthening of the repressive arsenal against fraud, counterfeiting and piracy) to safeguard the national economy.