Senegal: Joint IMF/IDA Debt Sustainability Analysis
Author:
International Monetary Fund
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Publication Date:
10 Jun 2010
eISBN:
9781455204892
Language:
English
Keywords:
ISCR; CR; fuel price shock; debt; ESF arrangement; deficit; sustainability framework; creating flow; service-to-revenue ratio; debt situation; PPG debt; Public and publicly-guaranteed external debt; Debt burden; Fiscal stance; Global
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Senegal remains at a low risk of debt distress. Under the baseline scenario and various shock scenarios, all the debt burden indicators remain well below their indicative policy-dependent thresholds. External debt is vulnerable to a permanent deterioration in borrowing terms, which highlights the need for prudent debt management especially as the authorities seek greater access to external resources on nonconcessional terms. While the inclusion of domestic debt does not alter the overall assessment of Senegal’s debt vulnerabilities, it raises the debt burden indicators (under the baseline and stress tests), suggesting the need for fiscal consolidation once the impact of the crisis subsides.

Abstract

Senegal remains at a low risk of debt distress. Under the baseline scenario and various shock scenarios, all the debt burden indicators remain well below their indicative policy-dependent thresholds. External debt is vulnerable to a permanent deterioration in borrowing terms, which highlights the need for prudent debt management especially as the authorities seek greater access to external resources on nonconcessional terms. While the inclusion of domestic debt does not alter the overall assessment of Senegal’s debt vulnerabilities, it raises the debt burden indicators (under the baseline and stress tests), suggesting the need for fiscal consolidation once the impact of the crisis subsides.

I. Background

1. Most of Senegal’s external debt is concessional. More than 60 percent of end-2009 external debt was owed to multilateral institutions (especially the World Bank and AfDB). Major bilateral creditors include France, Kuwait, Spain, China and India.

2. In December 2009, Senegal issued its first Euro Bond. The US$200 million bond has a maturity of 5 years, and a coupon of 8.75 percent, but was priced to yield 9.25 percent. The proceeds of the issuance will finance the Dakar-Diamniadio toll road.

3. Domestic public debt is low. At end 2009, domestic debt reached 8 percent of GDP, or one-fourth of total debt.1 This debt is denominated in local currency and mostly held by WAEMU banks. In 2009, net domestic debt issuance reached almost 3 percent of GDP.

4. Private sector exposure also appears relatively limited. Private external debt was estimated at 20 percent of GDP at end-2009, limiting concerns about potential fiscal contingent liabilities stemming from private debt.

II. Underlying Assumptions

5. The macroeconomic framework rests on the implementation of sound macroeconomic and structural policies (Box 1).

  • Growth is projected to accelerate over the next few years, as the effects of the international economic and financial crisis dissipate and the authorities continue their structural reforms aimed at raising growth.

  • Over the long run, real GDP growth is projected to exceed 5 percent. Between 1995 (after the devaluation) and 2007 (before the food, fuel and financial crisis), real GDP growth averaged about 4½ percent. The long-run projections assume that Senegal reduces constraints to growth through continued structural reforms, including in the business climate, the energy and financial sectors, as well as labor markets. The projections also assume successful implementation of its infrastructure program (including road, port, and airport).

  • FDI (net) is expected to remain relatively low over the short run, in part owing to the financial crisis. It is expected to pick up, as economic prospects improve and uncertainty is reduced, to average about 3 percent of GDP in the long term.

  • The primary fiscal deficit is expected to decline over the medium term, as the impact of the crisis subsides. Fiscal consolidation is expected to continue in order to safeguard debt sustainability. Most of Senegal’s public financing needs are projected to be filled through external concessional borrowing.

6. Compared to the previous DSA, macroeconomic assumptions have been revised to reflect more updated information regarding the impact of the crisis.2 GDP growth has been revised down from 3.1 percent in 2009 to 1.5 percent, while long-term real GDP growth remains unchanged. The current account deficit (excluding interest payments) in 2009 has been revised down by about 2 percentage points, reflecting a sharper-than-expected contraction in imports and stronger-than-expected remittances.

Macroeconomic Assumptions for 2010–30

Real GDP growth: Real GDP growth is expected to pick up once the effect of the global economic and financial crisis subsides. In particular, growth is expected to increase from 1.5 percent in 2009, to an average of 3.8 percent over 2010-11, 4.8 percent over 2012-15, and over 5¼ percent over the long term.

Inflation: Inflation, as measured by the GDP deflator (in US. dollar), is expected to increase as excess capacity is reduced. Inflation is expected to stabilize at around 2 percent.

Current account deficit (excluding interest payments): the current account deficit is expected to deteriorate slightly over the medium term as uncertainty abates and economic prospects improve. The current account deficit excluding interest payments is expected to stabilize at around 8.5 percent by the end of the projection period, as the growth of exports overtakes that of imports. Remittances are expected to grow slowly over the medium term after a stronger-than-expected performance in 2009 (despite the crisis).

Fiscal deficit: after a primary deficit of 4.4 percent of GDP in 2009, modest primary fiscal deficits averaging 3.4 percent of GDP are expected in 2010 and 2011, reflecting a reduction in the need for countercyclical fiscal policy. Thereafter, the primary deficit gradually declines as public expenditure management—a reform focus under the program supported by the IMF’s Policy Support Instrument and the Bank’s budget support operations (PFSC and PRSCs)—continues to be improved, and further efficiency gains are being made in tax administration.

Aid flows (grants and concessional loans): access to concessional resources is expected to decline as Senegal’s development improves. Grants are expected to decline gradually from 2.7 percent of GDP in 2010 to 2.1 percent of GDP by the end of the projection period, while concessional loans are expected to decline from 1.9 percent of GDP to 1.7 percent of GDP over the same period.

Public domestic borrowing: as the WAEMU debt markets become more liquid and efficient, Senegal is expected to rely increasingly on domestic financing. Senegal’s domestic borrowing is expected to be less than one-third of the total public financing needs and claims on the government are expected to be largely held by commercial banks.

III. External DSA

7. External PPG debt burden indicators under the baseline scenario remain well below their policy-dependent thresholds (Figure 1, Table 1).3 Workers’ remittances represent a reliable and large source of foreign exchange for Senegal, accounting for around 10 percent of GDP and more than 40 percent of exports over the projection period. As such, they are explicitly considered in this DSA (Figure 2).4 The modified debt burden indicators—the PV of external debt and external debt service as ratios to the sum of exports and gross remittances, and to the sum of gross domestic product and gross remittances, respectively—are significantly lower than the updated DSF thresholds (10 percent lower than the usual DSF thresholds).

Figure 1.
Figure 1.

Senegal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2010-2030 1/

Citation: IMF Staff Country Reports 2010, 165; 10.5089/9781455204892.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2020. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Terms shock and in figure f. to a Terms shock
Figure 2.
Figure 2.

Senegal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2010-2030 1/

Citation: IMF Staff Country Reports 2010, 165; 10.5089/9781455204892.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2020. In figure b. it corresponds to a Terms shock; in c. to a Terms shock; in d. to a One-time depreciation shock; in e. to a Terms shock and in figure f. to a Terms shock

8. Stress tests do not reveal serious vulnerabilities for external public debt, as the various indicators remain below the thresholds (Figure 2, Table 2). The most common extreme stress test is a general deterioration in the terms of external borrowing, i.e., an increase by 2 percentage points in the interest rate on new external public borrowing. Despite this adverse shock, the debt burden indicators remain well below their thresholds.

Table 1.

External Debt Sustainability Framework, Baseline Scenario, 2007-2030 1/

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ? = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2.

Senegal: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2010-2030

(In percent)

article image
article image
Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

IV. Public DSA

9. Indicators of overall public debt (external plus domestic debt) and debt service follow a similar pattern as those for external public debt alone (Table 3, Figure 3). While more elevated than under the external DSA, the public debt burden indicators do not suggest increased concerns for debt sustainability.

Table 3.

Senegal: Public Sector Debt Sustainability Framework, Baseline Scenario, 2007-2030

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Public sector refers to the general government.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Figure 3.
Figure 3.

Senegal: Indicators of Public Debt Under Alternative Scenarios, 2010-2030 1/

Citation: IMF Staff Country Reports 2010, 165; 10.5089/9781455204892.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2020.2/ Revenues are defined inclusive of grants.

10. Public debt sustainability hinges on containing the fiscal deficit in the medium and long term. If the fiscal balance were to remain at its 2010 level, the debt burden indicators would appear to be on an upward trend, suggesting that the debt situation is unsustainable, highlighting the importance of an exit strategy for fiscal stimulus.

11. The public debt position is also vulnerable to shocks to real GDP growth. Under a scenario with permanently lower real growth, the PV of debt-to-GDP stabilizes at close to 50 percent, which is about 10 percentage points above the baseline. This highlights the need for the authorities to continue pursuing their goal of raising potential output growth.

V. Conclusion

12. Senegal’s external debt burden is subject to a low risk of debt distress. The sustainability of Senegal’s external PPG debt seems to be vulnerable to a permanent deterioration in its borrowing terms. This highlights the need for prudent debt management by Senegal, especially as it seeks to gain greater access to external resources on nonconcessional terms. Adding domestic debt, while raising the debt burden indicators, does not change the overall assessment of Senegal’s debt vulnerabilities, but highlights the need for fiscal consolidation once the impact of the crisis subsides.

Table 4.

Senegal: Sensitivity Analysis for Key Indicators of Public Debt 2010-2030

article image
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

1

Domestic debt includes debt issued in the WAEMU financial market.

2

In the previous DSA, completed in June 2009 (Country Report 09/205). Senegal was classified as a low risk of debt distress.

3

The indicative external debt burden thresholds for Senegal are shown in Figure 1. They are based on Senegal’s classification as a “medium” performer given its (three-year average) score of 3.67 on the World Bank’s Country Policy and Institutional Assessment index (CPIA). The CPIA measures the quality of policies and institutions; weak performers score below 3.25, strong performers above 3.75.

4

For a detailed discussion of the treatment of remittances in LIC DSAs, please see “Staff Guidance Note on the Application of the Joint Fund-Bank Debt Sustainability Framework for Low-Income Countries,” SM/10/16.

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Cover IMF Staff Country Reports
Senegal: Staff Report for the 2010 Article IV Consultation, Fifth Review Under the Policy Support Instrument, Third Review Under the Exogenous Shocks Facility, Request for Waiver of Nonobservance of Performance Criterion, and Modification of Assessment Criterion: Staff Report; Debt Sustainability Analysis; Press Release; Executive Director Statement; Public Information Notice
Author:
International Monetary Fund
Volume/Issue:
Volume 2010: Issue 165
Publisher:
International Monetary Fund
ISBN:
9781455204892
ISSN:
1934-7685
Pages:
90
DOI:
https://doi.org/10.5089/9781455204892.002
  • Figure 1.
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    Figure 1.

    Senegal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2010-2030 1/

  • Figure 2.
    View in gallery
    Figure 2.

    Senegal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2010-2030 1/

  • Figure 3.
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    Figure 3.

    Senegal: Indicators of Public Debt Under Alternative Scenarios, 2010-2030 1/

Figure 1.

Senegal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2010-2030 1/
Figure 2.

Senegal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2010-2030 1/
Figure 3.

Senegal: Indicators of Public Debt Under Alternative Scenarios, 2010-2030 1/