Senegal: Request for Disbursement under the Rapid Credit Facility and Purchase under the Rapid Financing Instrument—Debt Sustainability Analysis

Request for Disbursement Under the Rapid Credit Facility and Purchase Under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for Senegal

Abstract

Request for Disbursement Under the Rapid Credit Facility and Purchase Under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for Senegal

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Senegal’s debt is assessed to remain sustainable with a moderate risk of debt distress (external and overall) using the post COVID-19 pandemic scenario as baseline, in line with the previous Debt Sustainability Analysis (DSA) of January 2020. However, the country’s space to absorb shocks—previously deemed limited in the short term—has somewhat narrowed compared to the previous DSA. The macroeconomic framework reflects currently available information. However, risks are heavily tilted to the downside: a more extensive global and domestic COVID-19 outbreak could lead to a much steeper economic decline in 2020 and more gradual recovery thereafter.

1. This DSA updates the joint World Bank-IMF analysis of January 2020 using the post COVID-19 pandemic as baseline.2 It uses the same debt stocks for 2018 and 2019 as in the previous DSA, with a much-revised macroeconomic environment reflecting the impact of the COVID-19 pandemic as used in the staff report for the 2020 RCF/RFI. Compared with the previous DSA, the pandemic is reflected as a onetime large shock leading to a significant decline in GDP and a widening of the fiscal and current account deficits. GDP is expected to rebound in 2021 as the situation is assumed to normalize in H2 2020.

2. The main revisions to the macroeconomic assumptions can be summarized as follows:

  • The authorities have revised GDP growth in 2019 down to 5.3 percent from 6 percent in the last DSA. For 2020, staff’s preliminary assessment is that growth will decline to 3 percent in 2020 compared to 6.8 percent in the previous DSA. The economy is assumed to gradually recover starting in 2021 with a growth rate of 5.5 percent (7 percent in previous DSA) and remaining high over the medium-term. Over the long run, real GDP growth is projected to converge to about 5.1 percent over 2025–39 as in the last DSA.

  • The public sector deficit is estimated at about 5 percent of GDP in 2019 compared to 4.7 in the previous DSA and to widen sharply to 6.9 percent of GDP in 2020 owing to revenue losses and additional expenditures to fight the pandemic.

  • The current account deficit stood at 9.1 percent in 2019 (broadly the same as in the previous DSA) and is projected to widen to 11.3 percent of GDP in 2020. The negative impact of the crisis on goods and services exports, as well as remittances, is only partly offset by savings on oil imports. Over the long term, the average current account deficit is projected to decline to about 1.5 percent of GDP (slightly higher than the 1.2 percent in the last DSA) (Text Table 1).

  • The realism tools do not flag any serious issues.

Text Table 1.

Senegal: Evolution of Selected Macroeconomic Indicators, 2019–22

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Defined as the first 5 years of the projection period. For the current DSA update, the medium term covers the years 2019–2024.

Defined as the last 15 years of the projection period. For the current DSA update, the long term covers the years 2025–2039.

Overall fiscal deficit of General Government and Public Sector.

Overall fiscal deficit of Central Government.

3. The DSA assumes a financing mix consistent with a prudent borrowing strategy, aimed at gradually increasing the share of domestic debt and seeking new external financing on concessional terms whenever feasible. The projected large financing gaps related to the COVID-19 epidemic are assumed to be filled mostly with grants and highly concessional loans. The authorities are also considering delaying some planned project and their related loan disbursements. The initial 2020 financing plan did not envisage any Eurobond issuances, but relies on net issuances of about 1 percent of GDP in the regional WAEMU market. On March 21, the BCEAO announced a series of measures to enhance liquidity provision and current projections assumes this financing will materialize, noting however it could be at risk in case of a more prolonged crisis. The average maturity of new external debt is assumed close to 18 years, with 6-year grace period and an average interest rate of 4 percent, broadly unchanged compared to the previous DSA. New medium- and long-term domestic debt has an average maturity of 5 years, with 3-year grace period.

4. An analysis of the impact of the COVID-19 on debt sustainability indicates that the risk of debt distress remains moderate. The assessment is unchanged relative to the previous DSA. All external debt indicators remain below the relevant indicative threshold under the new baseline except the debt service-to-exports ratio which now peaks at 24 percent in 2020 (22.7 percent in the January DSA).3 However, a further shortfall in export receipts than currently envisaged in 2020 could push the PV of external debt-to-export ratio above its threshold. Total public sector debt now peaks at 67 percent of GDP in 2020 (against 62 percent previously forecasted) before resuming a downwards trajectory. Stress tests also indicate that external and public debt would remain sustainable over the projection period (Appendix Tables 1 and 2 and Figures 1 and 2). However, Senegal’s space to absorb shock has narrowed compared to the previous DSA. (Figure 7).

Figure 1.
Figure 1.

Senegal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2019–29

Citation: IMF Staff Country Reports 2020, 108; 10.5089/9781513540795.002.A002

Sources: Senegal authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Senegal: Indicators of Public Debt Under Alternative Scenarios, 2019–29

Citation: IMF Staff Country Reports 2020, 108; 10.5089/9781513540795.002.A002

Sources: Senegal authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.

5. Debt is projected to remain sustainable over the medium term supported by the authorities’ strong commitment to maintaining macroeconomic stability and fiscal discipline under the PCI and the WAEMU convergence criteria. The authorities remain firmly committed to their reform objectives supported by the PCI and to returning as soon as possible to the pre-crisis fiscal path anchored by the WAEMU convergence criteria. The projected large financing gaps related to the COVID-19 epidemic are assumed to be filled mostly with highly concessional loans and possibly grants, which would partly displace lower priority externally financed projects and related disbursements. Senegal has access to international capital markets but was not considering any Eurobond issuance in 2020.

6. Risks to the outlook depend primarily on the depth and duration of the COVID-19 pandemic. A deeper global slowdown combined with a prolonged outbreak in Senegal could further lower GDP and export receipts in 2020 and weaken the expected recovery thereafter. Lower oil prices benefit Senegal in the short term and help mitigate the current account deterioration but, should world oil and gas prices remain low for a prolonged period this could jeopardize planned investments in hydrocarbon production and significantly alter the medium-term outlook.

Table 1.

Senegal: External Debt Sustainability Framework, Baseline Scenario, 2016–39

(Percent of GDP, unless otherwise indicated)

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Sources: Senegal authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ 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.3/ 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.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ 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).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.

Senegal: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–39

(Percent of GDP, unless otherwise indicated)

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Table 3.

Senegal: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–29

(Percent)

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Sources: Senegal authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

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

Includes official and private transfers and FDI.

Table 4.

Senegal: Sensitivity Analysis for Key Indicators of Public Debt, 2019–29

(Percent of GDP, unless otherwise indicated)

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Sources: Senegal authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

Figure 3.
Figure 3.

Senegal: Driver of Debt Dynamics—Baseline Scenario, 2014–29

Citation: IMF Staff Country Reports 2020, 108; 10.5089/9781513540795.002.A002

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Senegal: Realism Tools, 2013–24

Citation: IMF Staff Country Reports 2020, 108; 10.5089/9781513540795.002.A002

Figure 5.
Figure 5.

Senegal: Market-Financing Risk Indicators, 2019–29

Citation: IMF Staff Country Reports 2020, 108; 10.5089/9781513540795.002.A002

Sources: Senegal authorities; and staff estimates and projections.
Figure 6.
Figure 6.

Senegal: Qualification of the Moderate Category, 2019–291

Citation: IMF Staff Country Reports 2020, 108; 10.5089/9781513540795.002.A002

Sources: Senegal authorities; and staff estimates and projections.1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.
1

This DSA has been prepared following the revised LIC-DSA framework. It updates the previous Joint DSA (IMF Country Report No. 20/11). Senegal’s debt carrying capacity, calculated based on the April and October 2019 WEOs and the 2018 CPIA, is classified as strong. The applicable thresholds to public and publicly guaranteed external debt are: 55 percent for the PV of debt-to-GDP ratio, 240 percent for the PV of debt-to-exports ratio, 21 percent for the debt service-to-exports ratio, and 23 percent for the debt service-to-revenue ratio. The applicable benchmark for the PV of total public debt for strong debt carrying capacity is 70 percent of GDP.

2

See IMF Country Report No. 20/11.

3

The one-time breach of the external debt service to exports ratio is automatically discounted from the analysis according to the LIC-DSF guidance note.

Senegal: Request for Disbursement Under the Rapid Credit Facility and Purchase Under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for Senegal
Author: International Monetary Fund. African Dept.
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    Senegal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2019–29

  • View in gallery

    Senegal: Indicators of Public Debt Under Alternative Scenarios, 2019–29

  • View in gallery

    Senegal: Driver of Debt Dynamics—Baseline Scenario, 2014–29

  • View in gallery

    Senegal: Realism Tools, 2013–24

  • View in gallery

    Senegal: Market-Financing Risk Indicators, 2019–29

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    Senegal: Qualification of the Moderate Category, 2019–291