Senegal's economic recovery is continuing and has been largely unaffected by the political crisis in Côte d’Ivoire. Policy discussions focused on the economic implications of two new developments since the program was approved in December 2010. Fiscal policy faces a difficult trade-off between additional priority expenditure and the need to preserve debt sustainability. The sustainability of Senegal’s external public and publicly guaranteed (PPG) debt appears vulnerable to rollover risks. This highlights the need for prudent debt management by Senegal, as it seeks to gain greater access to external resources.

Abstract

Senegal's economic recovery is continuing and has been largely unaffected by the political crisis in Côte d’Ivoire. Policy discussions focused on the economic implications of two new developments since the program was approved in December 2010. Fiscal policy faces a difficult trade-off between additional priority expenditure and the need to preserve debt sustainability. The sustainability of Senegal’s external public and publicly guaranteed (PPG) debt appears vulnerable to rollover risks. This highlights the need for prudent debt management by Senegal, as it seeks to gain greater access to external resources.

I. Underlying assumptions

1. This DSA is consistent with the macroeconomic framework outlined in the IMF’s First Review Under the Policy Support Instrument. Compared to the previous DSA 2, this analysis includes:

  1. Additional government spending related to emergency measures in the energy sector. Part of this additional spending is expected to be financed by nonconcessional resources. This DSA includes the US$ 500 million 10-year Eurobond, which was placed on May 6, 2011 with an 8.75 percent coupon (bi-annual frequency), priced to yield 9.125 percent. Over 75 percent of investors holding some US$155 million of the US$200 million 5-year bond issued in 2009 accepted the offer to exchange the existing bond for the new 10-year bond. Notwithstanding the exchange, the program ceiling on new non concessional external financing (USD 500 million) is expected to be used entirely during 2011-13, and the DSA assumes that the actual exchanged or redeemed amount will be borrowed in 2012 at similar conditions 3,4,5

  2. A revised macroeconomic framework, including slightly higher real GDP growth, larger fiscal deficits and lower current account deficits over the medium term. Larger fiscal deficits over the medium term (compared to the previous DSA) reflect a temporarily high level of energy-related expenditures. Over the long term, the resolution of the energy sector problems is expected to eliminate a serious binding constraint to growth in Senegal, leading to an upward revision to potential GDP growth. The current account deficit is expected to be lower than in the previous DSA reflecting historical revisions and the recent strength of exports - the long-term non-interest current account deficit is expected to be in line with the historical average (excluding the years 2007-08, which were affected by the food and fuel crisis).

Evolution of selected macroeconomic indicators

article image
  • c. Revised debt data. The authorities have recently undertaken a major review of their debt database following the recent joint IMF-World Bank mission on designing a Medium-Term Debt Strategy (MTDS).6

II. External DSA

External PPG debt burden indicators under the baseline scenario remain well below their policy-dependent thresholds (Figure 1, Table 1).7 However, while issuance of the 10-year Eurobond with large acceptance of the exchange offer for the outstanding bond maturing in 2014 has reduced roll-over risk in the medium-term, large increases in debt service associated with the roll-over of nonconcessional debt in the longer term highlight the need for Senegal to be cautious about this type of financing and improve its debt management capacity. Stress tests reveal that Senegal’s external debt sustainability is vulnerable to an unlikely one-time depreciation of the exchange rate and a worsening of its borrowing terms (Figure 1, Table 2). In stress tests, the npv of debt-to-export ratio temporarily and marginally exceeds its threshold.

Figure 1.
Figure 1.

Senegal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2011-2030 1/

Citation: IMF Staff Country Reports 2011, 139; 10.5089/9781455282586.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2021. In figure b. it corresponds to a One-time depreciation shock; in c. to a Terms 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

III. Public DSA

2. 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). Public debt sustainability hinges on containing the fiscal deficit in the medium and long term. The public debt position is also vulnerable to shocks to real GDP growth, highlighting the need for the authorities to continue pursuing their goal of raising potential output growth.

IV. Conclusion

3. Senegal’s external debt burden is subject to a low risk of debt distress even after the inclusion of nonconcessional debt. The sustainability of Senegal’s external PPG debt appears vulnerable to roll-over risks. 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.

Figure 2.
Figure 2.

Senegal: Indicators of Public Debt Under Alternative Scenarios, 2011-2030 1/

Citation: IMF Staff Country Reports 2011, 139; 10.5089/9781455282586.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2021.2/ Revenues are defined inclusive of grants.
Table 1a.:

External Debt Sustainability Framework, Baseline Scenario, 2008-2030 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 p = 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 fromprice and exchange rate changes.

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

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

Defined as grants, concessional loans, and debt relief.

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

Table 1b.

Senegal: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2011-2030

(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 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 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.

Table 2a.

Senegal: Public Sector Debt Sustainability Framework, Baseline Scenario, 2008-2030

(In percent of GDP, unless otherwise indicated)

article image
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.

Table 2b.

Senegal: Sensitivity Analysis for Key Indicators of Public Debt 2011-2030

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.