Dubai World Chairman Sultan Ahmed Bin Sulayem said construction would start before the end of the year on the first phase of the project, covering 650 hectares next to a planned international airport 45 km (28 miles) from the capital Dakar.
Operations are due to begin in 2010 and should attract 1,000 companies and create some 30,000 direct jobs, Bin Sulayem said.
"This will be an example to many African countries that when free trade operates with government support, you will see that businesses will come," Bin Sulayem told a news conference.
Senegal hopes its strategic location between markets in the Americas, Europe and Asia will entice businesses to the low-tax area, one of the first of its kind on the continent.
The government has reserved a total of 10,000 hectares for the expansion of the zone, with the possibility of constructing a power station and refinery nearby to tackle a shortage of electricity capacity which has been one of the main obstacles to foreign investment, officials said.
The special economic zone, and other infrastructure projects including a new airport and port, are part of the government's accelerated growth strategy to help lift economic expansion above 7 per cent a year. The economy currently relies on foreign aid, tourism, fishing, exports of phosphates and peanuts.
Salma Hareb, CEO of Jafza and Economic Zones World, cited the example of the Jebel Ali free zone in Dubai, which had grown in just over 20 years to provide 26 per cent of the economy of the emirate and employ a tenth of its population.
In addition to Senegal's economic and political stability in a region long noted for its volatility, Hareb said that many of Jafza's existing customers had identified the West African country as an area where they wished to do business.
"We see Senegal as our West African gate ... and we believe this project is going to be extremely successful," she said.
The exemption on value added tax (VAT) and customs taxes and the reduced rate of income tax on exports had created concerns at the International Monetary Fund that the zone could reduce government tax receipts.
"This project will have no negative impact on government finances," Budget Minister Ibrahima Sarr said. He declined to discuss specific tax rates, but said only exports would receive exemptions; sales within Senegal would be taxed normally.
"Very few businesses are going to move from outside the free zone to within it."
Another affiliate of the Dubai World Group, ports operator DP World, in October signed a 25-year concession to develop and operate Senegal's main container port and invest more than $600 million in future port expansion.
This involves plans to build a new shipping terminal near the Senegalese capital.
Arab companies have recently stepped up an investment drive in predominantly Muslim Senegal and other West African states.
Saudi Arabia and Kuwait have also made heavy investments in road and hotel infrastructure ahead of a conference of Islamic states planned for March. (Reuters)
Jafza invests Dh3bn in Senegal