Senegal: Staff Report for the 2012 Article IV Consultation, Fourth Review Under the Policy Support Instrument, and Request for Modification of an Assessment Criterion—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept.
Publication Date:
19 Dec 2012
eISBN:
9781475548969
Language:
English
Keywords:
ISCR; CR; government; debt; authority; GDP; creating flow; sustainability framework; PV of debt; service-to-revenue ratio; debt sustainability framework; Government debt management; Depreciation; Public and publicly-guaranteed external debt; West Africa; Global
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The 2012 Article IV Consultation report for Senegal discusses the fourth review of the Policy Support Instrument (PSI) implementation and request for modification of an assessment criterion. Senegal’s growth has been sluggish in recent years, with implications for poverty reduction. The authorities’ policies since the last Article IV Consultation have been broadly in line with IMF recommendations. In the medium term, growth is expected to return gradually to about 5 percent a year. However, the economy remains exposed to substantial risks.

Abstract

The 2012 Article IV Consultation report for Senegal discusses the fourth review of the Policy Support Instrument (PSI) implementation and request for modification of an assessment criterion. Senegal’s growth has been sluggish in recent years, with implications for poverty reduction. The authorities’ policies since the last Article IV Consultation have been broadly in line with IMF recommendations. In the medium term, growth is expected to return gradually to about 5 percent a year. However, the economy remains exposed to substantial risks.

Background

1. Senegal’s public debt has increased steadily in recent years.2 The ratio of public debt to GDP is projected to reach 46 percent in 2012, close to levels that prevailed when Senegal benefited from debt relief under the Multilateral Debt Relief Initiative (MDRI) in 2006. The bulk of public debt is external (i.e., owed to non-residents of the West African Economic and Monetary Union, WAEMU), although the share of domestic debt has increased.3

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Public Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2012, 337; 10.5089/9781475548969.002.A002

Source: Authorities and IMF staff

2. Most of Senegal’s public external debt is on concessional terms. Two-thirds of the debt is owed to multilateral creditors—primarily the World Bank, the IMF, and the African Development Bank. The largest bilateral creditors are France, Kuwait, China, Saudi Arabia, and India.

Total External Debt, Central Government

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Source: Senegalese authorities

3. Public domestic debt remains relatively low but has grown quickly in recent years. At end-2011, domestic debt was equal to 11 percent of GDP, slightly above the average in WAEMU countries but below the average across all low-income countries. Domestic debt is denominated in local currency and mostly held by WAEMU banks. Domestic debt as a share of total public debt has increased from 7 percent in 2005 to 28 percent in 2011, reflecting the development of the WAEMU market and external debt relief.

uA02fig02

Public Domestic Debt, end-2011

(Percent of GDP)

Citation: IMF Staff Country Reports 2012, 337; 10.5089/9781475548969.002.A002

Source: IMF staff1/ LIC average is based on end-2010 data

4. Senegal has started relying on nonconcessional borrowing to finance infrastructure projects. In December 2009, the government issued its first Eurobond. The 5-year, US$200 million bond had a coupon of 8.75 percent and was priced to yield 9.25 percent. The proceeds of the issuance helped finance the Dakar-Diamniadio toll road. In May 2011, the government issued a 10-year, US$500 million Eurobond, with a coupon of 8.75 percent and priced to yield 9.125 percent. Of the US$500 million raised, US$200 million was used to retire the 2009 Eurobond; the remainder has been earmarked for the toll road and for investments in the energy sector.

5. Private sector exposure is relatively limited, and contingent liabilities contained. Private external debt has averaged about 20 percent of GDP over the last decade and was equal to 24 percent of GDP at end-2010.4 Half of this debt was in the form of trade credits and bank deposits; the rest consisted of debt securities, loans, and other liabilities. This exposure was partially offset by private external assets amounting to 8 percent of GDP. Preliminary estimates of contingent liabilities suggest that they amount to less than 10 percent of GDP.5 There are no explicit government guarantees of enterprises’ external and internal debt since the settlement of the ICS chemical company crisis in 2007.

6. The authorities have taken steps to improve debt management. A new public debt directorate has been created by combining the two units that had previously managed domestic debt and external debt separately. The new directorate recently prepared Senegal’s first medium-term debt strategy, which recommends extending the maturity of debt issued on the regional market and continuing to prioritize concessional external borrowing.

Underlying Assumptions

7. This DSA is consistent with the macroeconomic framework outlined in the staff report for the Fourth Review under the Policy Support Instrument. The baseline scenario assumes the implementation of sound macroeconomic and structural policies, leading to an increase in economic growth and a narrowing of fiscal deficits over the long term (Box 1). Notable revisions compared to the May 2011 DSA include:

  • Real GDP growth is expected to be a bit lower over the next few years and the long term compared to previous projections, partly owing to a less favorable external environment.

  • The 2012 fiscal deficit has been revised upward, in line with the program. Projected fiscal deficits over the medium and long term are somewhat lower compared to the previous DSA, to be more in line with the authorities’ commitment to meet the key WAEMU convergence criterion on the fiscal deficit.6

  • The current account deficit in 2012 is expected to be smaller than previously projected following a better-than-expected outturn in 2011. Long-term current account deficit projections have been revised lower in line with the downward revision to long-run fiscal deficits.

Evolution of selected macroeconomic indicators

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Defined as the last 15 years of the projection period. For the current DSA, the long term covers the years 2018-2032; for the previous DSA, it covers 2017-2031.

Macroeconomic Assumptions for 2012–2031

Real GDP growth: After a substantial slowdown in 2011 because of the drought in the Sahel, real GDP growth is expected to rebound to 3.7 percent in 2012, driven by higher public investment in infrastructure and a recovery in agricultural production. Growth is expected to accelerate over the next few years, reaching 5.2 percent by 2017, as the authorities implement their structural reform agenda, including further investments in the energy sector, comprehensive tax reform, and improvements to the business climate and governance. In the long term, the resolution of energy sector problems is expected to eliminate a major constraint on growth. Real GDP growth is projected to average 5.2 over 2017–2031, compared to an average of 5.1 percent in the five years prior to the outbreak of the global financing crisis.

Public investment: The authorities are expected to maintain public investment at relatively high levels, with the ratio of public capital expenditure to GDP projected to reach 12.1 percent in 2012 before gradually declining to 11.2 percent by the end of the projection period. This compares to levels between 6 and 11 percent over the past decade.

Current account deficit: The current account deficit is projected to widen in 2012 as a result of higher imports of food (related to last year’s drought, which led to a poor harvest) and weak export demand (linked to the crisis in Mali). Over the medium and long term, the current account deficit is expected to narrow in line with anticipated fiscal consolidation.

Inflation: Inflation is expected to remain moderate at about 2.5 percent.

Fiscal deficit: The fiscal deficit in 2012 is expected to fall to 5.9 percent of GDP, mostly due to delays in energy investments. In line with the program’s objective to reduce the fiscal deficit to maintain debt sustainability, the authorities are targeting a deficit of 4.9 percent of GDP in 2013. Over the medium and long term, the fiscal deficit is projected to narrow gradually to 2.8 percent, reflecting the authorities’ commitment to deliver fiscal consolidation consistent with the WAEMU convergence criterion on the basic fiscal balance.

Financing: The authorities are expected to rely increasingly on external nonconcessional borrowing to finance infrastructure projects. In 2013, the authorities are assumed to use the remaining space ($200 million) for nonconcessional borrowing in the program. Thereafter, Senegal is expected to borrow 0.5 percent of GDP per year on nonconcessional terms. The net US$500 million in nonconcessional borrowing in 2011 and 2013 are assumed to be rolled over at maturity. Over the period 2012–2014, the authorities are expected to contract CFAF 42 billion (about US$79 million) in external debt with a grant element between 15 and 35 percent, consistent with the program. The average grant element of new external borrowing is projected to fall from 30 percent to 9 percent over the projection period, as Senegal gradually moves away from concessional borrowing, mainly from multilateral creditors, toward nonconcessional borrowing from bilateral and commercial creditors. Meanwhile, the share of domestic financing is expected to gradually increase over the long term as the WAEMU market develops.

8. Another change compared to the previous DSA is the value of the discount rate in the DSA template used to calculate the present value (PV) of external debt. The discount rate, which follows the long-term U.S. dollar commercial interest reference rate (CIRR), was recently adjusted from 4.0 percent to 3.0 percent.7 Holding other variables steady, a change in the discount rate from 4 percent to 3 percent raises the present value of debt.

9. Stress tests lead to breaches of three thresholds (Figure 1a, Table 1a, and Table 1b). Three debt burden indicators—the PV of debt to GDP, the PV of debt to exports, and debt service to revenue—breach their indicative thresholds under certain standardized stress tests. Under current DSA guidelines, such breaches could be interpreted to suggest that Senegal’s risk of debt distress has increased from low to moderate. The breach of the debt-to-GDP threshold is relatively minor (less than 2 percentage points) but protracted, and occurs under a stress test simulating a one-time 30-percent depreciation of the exchange rate.8 The debt-to-exports threshold is breached by a wider margin in a scenario where borrowing terms are less favorable than under the baseline scenario, which underscores the importance of approaching further nonconcessional borrowing with caution. The debt service-to-revenue threshold is breached by a very small margin in 2021 under the one-time 30-percent depreciation shock. Under the historical scenario, in which key variables are projected to remain fixed at their 10-year historical average, the PV of debt to GDP and the PV of debt to exports approach, but do not breach, their respective thresholds. The more favorable outcome under the baseline scenario compared to the historical scenario reflects projected improvements in real GDP growth and the current account deficit, as discussed above.

Figure 1a.
Figure 1a.

Senegal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2012-2031 1/

Citation: IMF Staff Country Reports 2012, 337; 10.5089/9781475548969.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2022. 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 Terms shock and in figure f. to a One-time depreciation shock
Table 1a.:

External Debt Sustainability Framework, Baseline Scenario, 2012-2032 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.

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 1b.

Senegal: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2012-2032

(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.

10. Taking remittances into consideration, however, a more favorable assessment emerges. Debt burden indicators remain well below their thresholds in the baseline scenario, while stress tests lead to minor breaches of two thresholds (Figure 1b and Table 3b).9 The inclusion of remittances in the analysis is justified by the fact that remittances have become an important and reliable source of foreign exchange in Senegal, a pattern that is expected to continue. Remittances have grown every year since 2000, with the exception of 2009, when they fell 6 percent. In 2011, remittances were equal to 13 percent of GDP. The PV of debt to GDP plus remittances peaks at 37 percent, compared to a threshold of 36 percent, under a onetime 30-percent depreciation of the exchange rate, while the ratio of debt service to revenue (which is not affected by remittances) once again breaches its threshold by a very small margin in 2021 under the onetime 30-percent depreciation shock. The PV of debt to exports plus remittances approaches, but does not breach, the threshold in the historical scenario.

Figure 1b.
Figure 1b.

Senegal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios (with Remittances), 2012-2032 1/

Citation: IMF Staff Country Reports 2012, 337; 10.5089/9781475548969.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2022. 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 Terms shock and in figure f. to a One-time depreciation shock
Table 2a.

Senegal: Public Sector Debt Sustainability Framework, Baseline Scenario, 2012-2032

(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 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.

Table 2b.

Senegal: Sensitivity Analysis for Key Indicators of Public Debt 2012-2032

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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.

Table 3b.

Senegal: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt (with Remittances), 2012-2032

(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.