Senegal: Third Review Under the Policy Coordination Instrument and Request for Modification of Quantitative Targets, and Requests for a Standby Arrangement and an Arrangement Under the Standby Credit Facility—Debt Sustainability Analysis

SENEGAL

Abstract

SENEGAL

Title page

SENEGAL

THIRD REVIEW UNDER THE POLICY COORDINATION INSTRUMENT AND REQUEST FOR MODIFICATION OF QUANTITATIVE TARGETS, AND REQUESTS FOR A STANDBY ARRANGEMENT AND AN ARRANGEMENT UNDER THE STANDBY CREDIT FACILITY—DEBT SUSTAINABILITY ANALYSIS

May 21, 2021

Approved By

Annalisa Fedelino and Chad Steinberg (IMF), Abebe Adugna and Marcello Estevão (IDA)

Prepared by the staffs of the International Monetary Fund and the International Development Association

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Senegal’s faces a moderate risk of overall debt distress (external and public) under the current baseline scenario, with limited scope to absorb shocks in the near term. This rating is predicated on a gradual recovery from the COVID-19 pandemic, adherence to a prudent fiscal path (in line with regional convergence criteria) and strengthened debt management. The outlook for Senegal remains highly uncertain, primarily a reflection of uncertainty regarding the path of the COVID-19 pandemic, the pace of the vaccination campaign, and developments in key trading partners. Continued debt sustainability will need to be anchored in a prudent borrowing strategy that prioritizes concessional external borrowing and domestic regional financing in line with programmed financing needs, combined with continued efforts to strengthen debt management and contain fiscal risks.

Debt Coverage

1. This DSA uses a broad definition of public debt. The assessment includes public and publicly-guaranteed debt held by (i) the central government, (ii) para-public entities, and (iii) state-owned enterprises (SOEs), combining data provided by the authorities with information compiled by IMF technical assistance (Text Table 1) .2 The DSA classifies external and domestic debt based on currency, give n data constraints that prevent the use of a residency-based definition. In terms of contingent risks, the default financial sector shock of 5 percent of GDP is more than adequate to cover potential bank recapitalization needs discussed in the staff report, which are estimated to be less than 1 percent of GDP.

Text Table 1.

Senegal: Coverage of Public Sector Debt and Design of the Contingent Liability Stress Test

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The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country

2. Efforts are underway to strengthen the quality and coverage of public debt data. The national debt committee (CNDP), chaired by the Minister of Finance, has been revitalized in the past year and is now reviewing all large public investment decisions, including those by SOEs. As part of the Fund-supported program, the authorities have engaged an audit firm to conduct an audit to assess whether the recording and communication of data on public debt (including the debt of the SOE sector) is accurate, exhaustive and in line with best practices. This should help improve the quality and timeliness of the data available to the authorities for planning and debt management purposes. Following some administrative delays, the audit is expected to be completed in the first half of 2021.

Background

3. Public sector debt levels have risen significantly in recent years. Increases in public investment have driven a substantial increase in public spending—particularly in 2017–18—linked in part to Senegal’s national development plan, the Plan Senegal Emergent (PSE), and financial support for large state-owned enterprises. In addition, the perimeter of public debt was expanded in 2017 to capture public and para-public enterprises, creating a structural break in the data (Text Figure 1).3

Text Figure 1.
Text Figure 1.

Senegal: Public Sector Debt

(percent of GDP)

Citation: IMF Staff Country Reports 2021, 127; 10.5089/9781513584652.002.A002

Sources: Senegalese authorities, IMF estimates and projections.

4. Senegal has successfully accessed the Eurobond market on several occasions: in 2011 (US$500 million), 2017 (US$1.1 billion), and 2018 (US$2.2 billion). These Eurobonds have increased Senegal’s external non-concessional debt and represent the largest source of commercial debt service. They also helped create space in the regional bond market for other WAEMU members and supported the build-up of much-needed WAEMU pooled reserves.

5. The COVID-19 pandemic has contributed to higher public sector external debt and total public debt. As of end-December 2020, public sector external debt stood at 54.1 percent of GDP, compared to a projected 51.9 percent at the time of the last full DSA in January 2020.4 Total public sector debt reached 68.7 percent of GDP, about 7 percentage points higher than the pre-pandemic forecast. This largely reflects the impact of the COVID-19 shock, which affected both external and domestic demand and led to lower economic growth (1.5 percent of GDP compared to a pre-crisis forecast of 6.8 percent of GDP) and a higher public sector deficit (6.3 percent of GDP compared to a pre-crisis forecast of 3 percent of GDP). Other debt creating flows in 2020 include below-the-line financing for capital transfers (“compte de dépôt”) and the COVID guarantee fund (1.3 percent of GDP).5

6. Both external and total public debt service remain substantial. The ratio of public external debt service to exports reached 24.2 percent in 2020, reflecting the decline in exports due to the COVID shock and the below-the-line financing items noted above. This ratio is expected to improve to around 17.5 percent in 2021 as the recovery takes hold and the country benefits from the G-20 debt service relief initiative (discussed below). The ratio of public external debt service to revenue rose from 11.2 percent in 2019 to 16.4 percent in 2020 and is projected to average about 15 percent over the medium term. Total public debt service absorbed about 24 percent of revenue and grants in 2020 and is expected to remain at that level on average over the medium term (Text Figure 2). The debt service projection includes substantial Eurobond repayments scheduled for 2024 and 2026. The authorities are considering a new Eurobond issuance in 2021 for liability management purposes, to smooth out the large amortization payments over time, but this has not yet been included in the baseline as the details have not yet been finalized.

Text Figure 2.
Text Figure 2.

Senegal: Public Debt Service to Revenue and Grants

(percent)

Citation: IMF Staff Country Reports 2021, 127; 10.5089/9781513584652.002.A002

Sources: Senegalese authorities, IMF estimates and projections.

7. Senegal is participating in the G-20 Debt Service Suspension Initiative (DSSI). The DSSI is a net-present-value (NPV) neutral exercise intended to provide eligible members with liquidity relief to allow them to focus more resources on responding to the COVID-19 pandemic. The DSSI provided around CFAF 30 billion in debt service relief (0.2 percent of GDP), including CFAF 6 billion in interest (0.04 percent of GDP)) over May-December 2020. The G-20’s decision to extend the initiative until the end of 2021 is expected to result in additional debt service relief of CFAF 91 billion (0.6 percent of GDP), including CFAF 19 billion in interest (0.1 percent of GDP). Repayments will occur over 2022–27 and average about CFAF 20 billion per year.

Baseline Scenario

8. The macroeconomic assumptions underlying the projections are consistent with the proposed program baseline for the SCF/SBA. This includes higher growth in 2020 than anticipated at the time of the 2nd PCI review (January 2021), but also a more subdued recovery in 2021 as the 2nd wave of the COVID-19 pandemic takes a toll on economic activity. The DSA assumes that the authorities implement the macroeconomic policies and structural reforms outlined in the staff report, including a return to a central government fiscal deficit of 3 percent of GDP by 2023, consistent with the WAEMU convergence criterion. Long-run macroeconomic assumptions remain largely unchanged from the DSA update at the time of the 2nd PCI review. The main macroeconomic assumptions are as follows:

  • Real GDP Growth. Senegal’s real GDP growth rate is estimated to be 1.5 percent in 2020, with 3.7 percent projected for 2021, compared to -0.7 percent and 5.2 percent at the time of the 2nd PCI review, respectively. The growth rate is projected to peak at 10.8 percent of GDP in 2023 before declining to 6.1 percent in 2024, reflecting the incorporation of oil and gas production (see below). Over the long run, real GDP growth is projected to be about 5 percent.

  • Oil and gas. The framework includes all three phases of the Sangomar (SNE) offshore oil field development and the Greater Tortue Ahmeyim (GTA) gas project, which continue to be developed despite the pandemic.6 Production is expected to begin in the second half of 2023. The borrowing needs of Petrosen (the state-owned oil company) for both SNE and GTA are estimated at CFAF 1,228 billion from 2020 through 2037 (Text Table 2) although these estimates are subject to change as the projects are further developed. The Yakaar-Taranga project, which is also under development, has not been included in the DSA as it has not yet reached a final investment decision.

  • Inflation. Inflation is projected to remain contained at about 2.2 percent in 2021 and to hover around 1.5 percent over the medium term.

  • Public sector deficit. The public sector deficit—which includes the central government deficit and the net lending and borrowing of SOEs—is estimated to have reached 6.4 percent of GDP in 2020. This mainly reflects the higher fiscal deficits from the central government and large investments by Petrosen. The deficit is projected to be 5.4 percent of GDP in 2021 before gradually declining to around 3 percent over the medium term, reflecting improved government fiscal balances, lower financing needs in the hydrocarbon sector, and efforts to strengthen the financial performance of SOEs.

  • Revenues. Relative to 2019, the central government’s tax revenue declined by almost 1 percent of GDP due to the pandemic, down to 16.7 percent of GDP. Tax revenues are projected to gradually increase to about 20 percent of GDP in 2024 in line with the objectives of the medium-term revenue strategy and are expected to stay above that level over the medium term. This will be supported by the steady implementation of reforms to support revenue mobilization, with a focus on expanding the tax base and reducing tax expenditures. Oil and gas-related revenues are likely to have a significant impact from 2023 onwards.

  • Current account deficit. The baseline scenario assumes a current account deficit of 10.5 percent in 2020 and 11.3 percent in 2021, broadly in line with the 2nd PCI review. This reflects the protracted impact of the pandemic as well as the significant ongoing investments in the hydrocarbon sector. The current account deficit is projected to sharply decline in 2023 as oil and gas exports are expected to kick in.

Text Table 2.

Senegal: Oil and Gas: Petrosen Borrowing Assumptions1

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As the projects are under development, these figures are subject to change

Source: Senegalese authorities, IMF staff projections.

9. The DSA assumes a financing mix consistent with a prudent borrowing strategy, emphasizing external financing on concessional terms in the near term but gradually increasing the share of domestic debt over time. Financing for the revised 2021 budget will be filled mostly with grants and concessional and semi-concessional loans (Text Figure 4), including from the World Bank, African Development Bank, and other bilateral partners. IMF financing under the SCF/SBA will reduce the need for Senegal to borrow on the regional market in 2021 and 2022. Beyond that, the authorities’ medium-term debt strategy targets a gradual shift away from external financing denominated in U.S. dollars to reduce foreign exchange risk and a greater reliance on the regional CFAF market. Accordingly, the DSA assumes that domestic borrowing will increase over time and account for an average of about 35 percent of total financing over 2022–26, from about 18 percent currently. External commercial borrowing (Eurobonds) is assumed to gradually increase over the long term (with new issuances equivalent to the stock of maturing Eurobonds plus 20–30 percent) as Senegal shifts away from concessional external borrowing to access the market more regularly.

Text Table 3.

Senegal: Evolution of Selected Macroeconomic Indicators

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Defined as the first 5 years of the projection period (2021–2025). For previous DSA 2020–2024.

Defined as the last 16 years of the projection period (2026–2041], For previous DSA 2025–2040.

2nd PCI Review (Jan 2021)

Overall fiscal deficit of General Government and Public Sector.

Source: IMF staff estimates and projections.
Text Figure 4.
Text Figure 4.

Senegal: 2021 Borrowing Plan and Financing Assumptions

Citation: IMF Staff Country Reports 2021, 127; 10.5089/9781513584652.002.A002

Source: Senegalese authorities, IMF staff estimates

10 . The realism tools suggest that the proposed fiscal adjustment path is ambitious, but staff believe it is realistic under the circumstances. The assumed primary balance adjustment path of 4 percent of GDP over 2021–2023 is in the top quartile of the historical distribution for LICs (Figure 4). However, in the case of Senegal, a significant portion of the adjustment will come from the unwinding of temporary support measures introduced in response to the COVID-19 shock (estimated at 4.5 percent of GDP). Combined with the program’s revenue-enhancing measures, staff believe that reaching the central government’s 3 percent fiscal deficit target by 2023 is realistic, though not without risks. Separately, the projected economic growth rates in 2021 and 2022 are above the range of potential growth paths under various fiscal multipliers, but the COVID-19 pandemic and the related-recovery are not well-captured by the exercise. The DSA’s realism tools do not signal any other signs of over-optimism in terms of large changes to investment or contributions to growth compared to previous DSAs (Figure 4).

Country Classification and Determination of Stress Test Scenarios

11. Senegal’s debt carrying capacity is rated as strong. Based on data from the October 2020 World Economic Outlook data base and the World Bank’s 2019 Country Policy and Institutional Assessment (CPIA) score, Senegal’s Composite Indicator (CI) is 3.19. This assessment affects the thresholds used to calculate the mechanical external debt risk ratings. Senega’s CI score has decreased compared to the last vintage (3.30) due to lower Senegal and global growth and CPIA score, primarily reflecting the impact of the COVID-19 pandemic (Text Table 4).

Text Table 4.

Senegal: Debt Carrying Capacity

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Source: IMF staff estimates

12. The standard stress tests have been applied, along with a market financing shock. The use of a tailored stress test for market financing reflects Senegal’s outstanding Eurobonds. The test assumes a temporary increase in the cost of new commercial external borrowing (by 400 basis points), a nominal depreciation of the CFAF relative to the US dollar, and a shortening of maturities and grace periods. The results do not flag any areas of concern (Figure 5).

External DSA

13. External debt indicators mostly remain below their thresholds under the baseline scenario, with the exception of a temporary one-off breach. In terms of the DSA’s solvency metrics, public external debt is projected to peak at 57 percent of GDP in 2021 before reversing as the recovery and fiscal consolidation take hold (Table 1). The present value of debt to exports breaches the risk threshold in the first year of the baseline before steadily declining, aided by the anticipated exports from the hydrocarbon sector in 2023 and beyond. As a short-lived one-year breach, this is ignored for the DSA risk ratings. In terms of the liquidity indicators, the ratio of external debt service to exports hit 24 percent in 2020 but is projected to gradually decline, averaging about 16 percent over the medium term. Debt service to revenues is also projected to hover around 15 percent over the same horizon.

14. Three of the four external debt indicators breach their threshold under the sensitivity analysis. The most extreme shock is a shock to exports in the case of the present value of debt to GDP, debt-to-exports and debt service-to-exports ratios . Other breaches occur for the same three risk indicators under different scenarios as well (Table 3). The debt service-to-revenues indicators does not show any breaches of the thresholds after excluding the temporary one-off breach under the combination shock. Overall, these results point to potential vulnerabilities under adverse conditions, including a protracted or multi-speed global recovery that would hit Senegal’s main export markets, or in case delays were to occur in the development of the hydrocarbon sector. Separately, the difference between the baseline and the historical scenario largely reflects the structural change implied by the anticipated oil and gas exports on the non-interest current account deficit (averaging 2.2 percent of GDP in the baseline against 6 percent in the historical scenario).

Overall Risk of Public Debt Distress

15. The present value of public debt to GDP remains below its threshold under the baseline scenario. Total public debt is projected to peak at about 71 percent of GDP in 2021 before gradually declining (Table 2). The present value of debt to revenues is also projected to gradually decline over time. Debt service is projected to average about 24 percent of total revenues and grants over the next five years, which represents a significant portion of future fiscal revenues.

16. Stress tests indicate that Senegal is most vulnerable to a growth shock. Under such a shock (which simulates a growth rate of 2.4 percent in 2022–23), all three public debt indicators would be set on an explosive growth path. While this is an extreme shock (sweeping away part of the anticipated post-COVID recovery and the positive growth impact of oil and gas production), this underscores the importance of reforms to strengthen Senegal’s medium-term growth potential combined with prudent fiscal deficits supported by enhanced domestic resource mobilization efforts.

Risk Rating and Vulnerabilities

17. Senegal remains at moderate risk of external debt distress, with limited capacity to absorb shocks in the near term (Figure 6). Heightened uncertainty over the global economic outlook suggests the need for a prudent approach that emphasizes macroeconomic stability and fiscal discipline, reforms to contain fiscal risks, and further efforts to strengthen debt management capacity.

18. Senegal’s overall risk of debt distress also remains moderate. Still, the relatively high debt service levels throughout the forecast period reduce the space for public expenditures in support of a robust and inclusive economic recovery. The authorities should prioritize further efforts to mobilize additional revenues and seek out concessional borrowing where possible in the near term.

19. There are significant risks to the assessment. The outlook depends primarily on how quickly the COVID-19 pandemic can be contained in Senegal and its major trading partners. A rapid vaccination campaign would allow the government to ease restrictions on economic activity, supporting economic growth. By contrast, a slower recovery due a prolonged outbreak or delays in obtaining an adequate vaccine supply could further lower economic prospects. A quicker recovery in advanced economies could result in higher global interest rates, making market access more expensive for Senegal as it looks to rollover forthcoming Eurobond repayments. Likewise, higher oil prices resulting from a quicker global recovery could result in higher budgetary costs due to domestic fuel subsidies. Over the medium term, sustained higher oil prices would increase the profitability of the new hydrocarbon projects, thereby strengthening the external and fiscal outlook. However, delays in hydrocarbon production would have an adverse impact on growth, revenues, and debt sustainability. Natural disasters, security concerns, and the potential for socio-political unrest are also risks.

Authorities’ Views

20. The authorities broadly share staff s assessment. They agree that risks to debt distress are moderate and that there is limited space to absorb shocks in the near term. Accordingly, the authorities are committed to contain risks to the debt path by adhering to the agreed debt ceiling, limiting non-concessional borrowing solely to projects with high prospective return, and implementing a medium-term debt strategy that seeks to mitigate exchange rate risks. This will be supported by efforts to strengthen the operational capacity of the CNDP and progressively improve their capacity to monitor debt-related developments in publicly and publicly owned enterprises.

Figure 1.
Figure 1.

Senegal: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2021–31

Citation: IMF Staff Country Reports 2021, 127; 10.5089/9781513584652.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2031. 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.
Figure 2.
Figure 2.

Senegal: Indicators of Public Debt Under Alternative Scenarios, 2021–31

Citation: IMF Staff Country Reports 2021, 127; 10.5089/9781513584652.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2031. 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.
Figure 3.
Figure 3.

Senegal: Driver of Debt Dynamics—Baseline Scenario, 2016–31

Citation: IMF Staff Country Reports 2021, 127; 10.5089/9781513584652.002.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, 2015–26

Citation: IMF Staff Country Reports 2021, 127; 10.5089/9781513584652.002.A002

Figure 5.
Figure 5.

Senegal: Market-Financing Risk Indicators, 2021–31

Citation: IMF Staff Country Reports 2021, 127; 10.5089/9781513584652.002.A002

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

Senegal: Qualification of the Moderate Risk Category, 2021–311

Citation: IMF Staff Country Reports 2021, 127; 10.5089/9781513584652.002.A002

Sources: Country 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.
Table 1.

Senegal: External Debt Sustainability Framework, Baseline Scenario, 2018–41

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Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r- g – p(1 + g)]/(1 + g+p+gp) 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.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, 2018–41

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Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt: The entire public sector, including SOEs. Definition of external debt is Currency-based.2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ 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 and other debt creating/reducing flows.5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.6/ 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 3.

Senegal: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2021–31

(percent)

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Sources: Country 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, 2021–31

(Percent of GDP, unless otherwise indicated)

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Sources: Country 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.

1

Senegal’s debt carrying capacity is classified as strong (calculated based on the October 2020 WEO and 2019 World Bank’s Country Policy and Institutional Assessment (CPIA) score). The applicable thresholds to public and publicly guaranteed external debt are: 55 percent for the Present Value (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

The inclusion of para-public enterprises and SOEs began in 2017. The list of entities covered by the DSA is provided in the Technical Memorandum of Understanding. The 2018 public sector balance sheet was compiled with support from Fund TA. Previous DSAs erroneously indicated that the social security system was not covered by the debt perimeter.

3

Senegal is the only WAEMU member country to use this broader definition of public sector debt.

4

IMF Country Report No. 20/11. The subsequent DSAs published in April 2020 (IMF Country Report No. 20/108) and January 2021 for the 2nd PCI review (IMF Country Report No. 21/18) were streamlined.

5

The residual is largely explained by the fact that the LIC DSF calculates the real exchange rate effects on the automatic debt dynamics using the assumption that all external debt is denominated in USD. In fact, only about a third of Senegal’s external public debt is denominated in USD.

6

G TA is exploited jointly with Mauritania.

Senegal: Third Review Under the Policy Coordination Instrument and Request for Modification of Quantitative Targets, and Requests for a Stand-By Arrangement and an Arrangement Under the Standby Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Senegal
Author: International Monetary Fund. African Dept.