Senegal: Joint IMF/IDA Debt Sustainability Analysis
Author:
International Monetary Fund
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Publication Date:
15 Dec 2010
eISBN:
9781455212835
Language:
English
Keywords:
ISCR; CR; debt; real GDP; Three-Year PSI; PSI-supported program; debt burden indicator; Real GDP growth; sustainability framework; creating flow; current account deficit; Debt sustainability analysis; Public and publicly-guaranteed external debt; Debt burden
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The economy has started to recover from a slowdown associated with the global financial crisis. Senegal has made significant progress under a three-year Policy Support Instrument (PSI), but challenges remain. Increasing growth and reducing vulnerabilities and poverty require broad-based reforms. Higher revenues and better spending quality are essential to creating more fiscal space for priority spending, including infrastructure spending. To help address growth bottlenecks, higher infrastructure investment will temporarily raise fiscal deficits. The contributions of the financial sector and the energy sector to growth should be enhanced.

Abstract

The economy has started to recover from a slowdown associated with the global financial crisis. Senegal has made significant progress under a three-year Policy Support Instrument (PSI), but challenges remain. Increasing growth and reducing vulnerabilities and poverty require broad-based reforms. Higher revenues and better spending quality are essential to creating more fiscal space for priority spending, including infrastructure spending. To help address growth bottlenecks, higher infrastructure investment will temporarily raise fiscal deficits. The contributions of the financial sector and the energy sector to growth should be enhanced.

Senegal remains at low risk of debt distress.1,2 This debt sustainability analysis (DSA) updates the joint IMF/IDA DSA from May 7, 2010 to integrate the authorities’ intention to temporarily increase infrastructure investment by external borrowing on nonconcessional terms, in line with the Fund’s revised Debt Limits Policy. Under the baseline scenario, which includes US$500 million of nonconcessional borrowing over 2011–13 to finance new infrastructure projects (1.4 percent of GDP in 2011, 1.6 percent of GDP in 2012, and 0.2 percent of GDP in 2013), all the debt burden indicators remain well below their policy-dependent indicative thresholds. Still, debt vulnerabilities increase as suggested by standardized stress tests, where in some instances two debt burden indicators (PV of debt-to-GDP ratio and PV of debt-to-export ratio) temporarily and marginally exceed their thresholds. This calls for a cautious approach with such borrowing and stresses the importance of improving debt management. The inclusion of domestic debt does not alter the overall assessment of Senegal’s risk of debt distress.

I. Background

1. Most of Senegal’s external debt is concessional. About 60 percent of end-2009 external debt was owed to multilateral institutions (especially the World Bank, the IMF, and AfDB). Major bilateral creditors include France, Kuwait, Spain, China, and India.3

2. In December 2009, Senegal issued its first Euro Bond (see text table). 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 helped finance the Dakar-Diamniadio toll road.

Total External Debt, Central Government

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Source : Authorities and Fund Staff

3. Domestic public debt is low. At end 2009, domestic debt reached 8 percent of GDP, or one-fourth of total debt.4 This debt is denominated in local currency and mostly held by WAEMU banks. In 2009, net domestic debt issuance reached about 2.5 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. In particular, over 2011–13, the baseline includes the direct impact of new large infrastructure projects currently considered by the authorities (extension of the highway to the new Blaise-Diagne airport, Mbour, and Thies).

  • 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 4.5 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 baseline projection also assumes successful completion of Senegal’s ongoing infrastructure program (including the Dakar-Diamniadio highway, port, and airport). However, the baseline does not explicitly model the possible impact on long-run real GDP growth of new large infrastructure projects.

  • FDI (net) is expected to rebound slowly after the impact of the financial crisis subsides. It is expected to pick up, as economic prospects improve and uncertainty is reduced, to average slightly more than 2.5 percent of GDP in the long term.

  • The overall fiscal deficit is expected to remain sizeable in the short term, as large infrastructure projects are implemented. Fiscal consolidation is expected to start in the medium term in order to safeguard debt sustainability. While most of Senegal’s public financing needs are projected to be filled through external concessional borrowing, nonconcessional borrowing is expected to finance the large infrastructure projects in the short term.

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 2.2 percent in 2009, to an average of 4.2 percent during 2010–11, 4.8 percent during 2012–15, and over 5.25 percent for the long term.

Inflation: Inflation is expected to stabilize at about 2 percent.

Current account deficit (excluding interest payments): the current account deficit is expected to deteriorate slightly over the short term reflecting higher imports associated with the infrastructure projects. The current account deficit excluding interest payments is expected to stabilize at around 7.6 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 2009–10 (despite the crisis).

Fiscal deficit: large infrastructure spending is expected to lead to significant fiscal deficits (excluding grants) over the medium term (7.1 percent of GDP in 2010, 8.1 percent in 2011, 7.6 percent in 2012). Thereafter, the overall deficit gradually declines as infrastructure spending returns to a more normal level, public expenditure management—a reform focus under the program supported by the IMF Policy Support Instrument and the Bank’s budget support operations (PFSC and PRSCs)—continues to be improved, and revenues increase through further efficiency gains in tax administration and tax reform.

Financing: external nonconcessional borrowing is assumed to finance the infrastructure projects during 2011–2013.5 Moreover, in addition to the amortization of the 2009 Euro Bond (in 2014), additional external nonconcessional borrowing is assumed to amount to 1 percent of GDP annually for 2014–2030. Overall access to concessional resources is expected to decline as Senegal’s development improves, leading to a decline in the grant element from 27.1 percent in 2015 to 21.6 percent by the end of the projection period.

Public domestic borrowing: domestic financing is expected to be less than a quarter of the total public financing needs over the long term and claims on the government are expected to be largely held by commercial banks.

6. Compared to the May 2010 DSA,6 the macroeconomic assumptions have been revised to reflect more updated information, including the short-term impact of large infrastructure projects. Notable changes since the last DSA include

  • Additional infrastructure spending (extension of the toll road to the new Blaise- Diagne airport, Mbour, and Thies) is expected to amount to 1.4 percent of GDP in 2011, 1.6 percent of GDP in 2012, and 0.2 percent of GDP in 2013. This amounts to approximately US$500 million over the program period.7,8

  • Following upward revisions of official estimates for 2008 and 2009 and stronger activity indicators, real GDP growth has been revised for 2010.

  • For 2011–13, real GDP growth was revised upward, reflecting the impact of large infrastructure spending. Long-term real GDP growth remains unchanged at 5.25 percent compared to the previous DSA.

  • The primary and overall fiscal deficit has been revised upward for 2011–12 to reflect the impact of the new infrastructure projects.

  • The current account deficit has been revised downward in 2009–10, owing to an upward revision to remittances. However, despite higher remittances for 2011–13, the current account deficit is roughly unchanged compared to the previous DSA, reflecting higher imports related to the infrastructure projects.

Evolution of selected macroeconomic indicators

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III. External DSA

7. External PPG debt burden indicators under the baseline scenario remain well below their policy-dependent thresholds (Figure 1, Table 1a).9 10 While large external nonconcessional borrowing puts upward pressure on debt burden indicators based on the PV of PPG external debt, these indicators never breach their respective thresholds. The large spikes in the debt service ratios reflect the amortization of the Euro Bond (in 2014), and the repayment of the nonconcessional financing associated with the new infrastructure projects. While the debt service indicators do not breach their thresholds, the large spikes highlight the need for the authorities to improve debt management in order to minimize rollover risks.

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, 362; 10.5089/9781455212835.002.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 Exports shock and in figure f. to a One-time depreciation shock
Table 1a.:

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

(In percent of GDP, unless otherwise indicated)

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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 ρ = 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).

8. Stress tests do not reveal serious vulnerabilities for external public debt (Table 1b). Two debt burden indicators (PV of debt-to-GDP and PV of debt-to-exports) breach their thresholds under a number of standardized stress tests, but these breaches are marginal and temporary. The largest breach occurs under the exports shock, when the PV of external PPG debt-to-exports reaches 158 percent, compared to a threshold of 150 percent. There are also similar (but slightly smaller) breaches under the combination shock for the PV of debt-to-exports ratio. Small breaches are also evident in the second half of the projection period under the less concessional financing scenario (the interest rate on new external PPG borrowing is 200 basis points higher than under the baseline) for the PV of debt-to-GDP and the PV of debt-to-exports ratios. These shocks highlight the need for Senegal to diversify its export base as well as seek financing consistent with debt sustainability.

Table 1b.

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

(In percent)

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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 2 percentage 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 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 to those for external public debt alone (Table 2a and Figure 2). While more elevated than under the external DSA, the public debt burden indicators do not suggest increased concerns for debt sustainability.

Table 2a.

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

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

The public sector refers to the central governemnt.

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 2.
Figure 2.

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

Citation: IMF Staff Country Reports 2010, 362; 10.5089/9781455212835.002.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 (Table 2b). 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. This indicates the importance of fiscal consolidation once the impact of the crisis subsides. It also stresses the need for prioritization of government spending if additional infrastructure needs were to emerge.

Table 2b.

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

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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.

11. The public debt position is also vulnerable to shocks to real GDP growth. This indicates a need for the authorities to continue pursuing their goal of raising potential output growth. In that respect, the new infrastructure projects may help mitigate concerns over long-term potential output growth.

V. Conclusion

12. Senegal’s external debt burden is subject to a low risk of debt distress. This occurs despite the explicit assumption of large nonconcessional borrowing in order to finance new infrastructure projects. The DSA suggests that external nonconcessional borrowing by Senegal of up to US$500 million (over the program period), would be consistent with the IMF’s debt limit policy and the World Bank nonconcessional borrowing policy because Senegal remains a low risk of debt distress despite the nonconcessional borrowing. The external DSA highlights the need for Senegal to diversify its export base and improve its debt management capacity in order to minimize rollover risks, and seek better financing terms. Adding domestic debt, while raising the debt burden indicators, does not change the overall risk assessment, but indicates the need for fiscal consolidation once the impact of the crisis subsides and the infrastructure projects are implemented.

13. The authorities agree that there is some scope for nonconcessional external borrowing. The authorities also agree that Senegal’s risk of external debt distress is low.

1

The DSA has been produced jointly by the staffs of the International Monetary Fund and the World Bank, in consultation with the Senegalese authorities. The fiscal year for Senegal is January–December.

2

The DSA presented in this document is based on the standard low-income countries (LIC) DSA framework. See “Debt Sustainability in Low-Income Countries: Proposal for an Operational Framework and Policy Implications” (http://www.imf.org/external/np/pdr/sustain/2004/020304.htm and IDA/SECM2004/0035, 2/3/04) and “Debt Sustainability in Low-Income Countries: Further Considerations on an Operational Framework, Policy Implications” (http://www.imf.org/external/np/pdr/sustain/2004/091004.htm and IDA/SECM2004/0629, 9/10/04) and “Applying the Debt Sustainability Framework for Low-Income Countries Post Debt Relief” (8/11/06).

3

Senegal reached its completion under the HIPC Initiative in 2004. Only three creditors have so far not provided HIPC debt relief: the Saudi Fund for Development, Oman, and Abu Dhabi.

4

Domestic debt includes debt issued in the WAEMU financial market.

5

In addition, Senegal is also considering contracting in 2011 a maximum of CFAF30 billion in nonconcessional loans with a grant element of between 15 percent and 35 percent. This financing would not increase the deficit, but would be used for example in the event of an unexpected shortfall in concessional financing or to substitute for domestic financing. Given the relatively small amount, this is not expected to change the outcome of the DSA. For example, a loan of CFAF 30 billion with a grant element of 25 percent would increase the PV of debt-to-GDP by only 0.3 percent of GDP in 2011.

6

See IMF Country Report No. 10/165, June 2010.

7

The infrastructure projects are expected to be financed through external nonconcessional borrowing (interest rate of 8 percent, 7-year maturity, and 6-year grace period). The terms and conditions of the new external nonconcessional borrowing are expected to be better than the ones for the 2009 Euro Bond because of more favorable market conditions.

8

Delays in the implementation of the projects could impact the timing of government spending.

9

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.

10

Large residuals in Table 1a can largely be explained by capital grants. The evolution of the external debt-to- GDP ratio is explained by the contribution of the current account (excluding interest), net FDI, and the endogenous debt dynamic. However, in addition to net FDI, capital grants are also a source of non-debt creating flows.

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Cover IMF Staff Country Reports
Senegal: Sixth Review Under the Policy Support Instrument, Request for a Three-Year Policy Support Instrument and Cancellation of Current Policy Support Instrument-Staff Report; Debt Sustainability Analysis; Press Release; Executive Director Statement
Author:
International Monetary Fund
Volume/Issue:
Volume 2010: Issue 362
Publisher:
International Monetary Fund
ISBN:
9781455212835
ISSN:
1934-7685
Pages:
98
DOI:
https://doi.org/10.5089/9781455212835.002
  • Figure 1.
    View in gallery
    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 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 Debt Under Alternative Scenarios, 2010-2030 1/