Why is Senegal squaring up to the International Monetary Fund?

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Senegal is astatine loggerheads with the International Monetary Fund (IMF) implicit a bailout it urgently needs to plug a gaping spread successful its nationalist finances. While the IMF wants the West African federation to undertake a achy restructuring earlier it volition hold to a bailout, Senegal, which was precocious downgraded to heavy wrong “junk bond” status, is resisting this plan.

Earlier this month, recognition standing bureau S&P lowered Senegal to CCC+, citing the fragile country’s mediocre authorities finances. “Despite actions taken to boost maturation and taxation collection, the level of indebtedness and size of the involvement measure mean Senegal’s nationalist finances stay precarious, peculiarly successful the lack of a broad authoritative enactment programme,” S&P said connected November 14.

How precocious is Senegal’s nationalist debt?

In its latest rating review, S&P estimated Senegal’s nationalist indebtedness had risen to $42.1bn, oregon 119 percent of gross home merchandise (GDP), astatine the extremity of 2024, making it 1 of the astir indebted countries successful Africa. That fig excluded astir 9 percent of GDP successful indebtedness owed by state-owned enterprises (SOEs).

Since 2008, Senegal has leaned heavy connected borrowing to money infrastructure projects. But during the COVID-19 crisis and consequent leap successful planetary involvement rates, which made indebtedness much expensive, costs soared arsenic income fell. In turn, Senegal’s fiscal pressures grew significantly.

To code its indebtedness load, the authorities is present hoping to shrink the fiscal shortage – the magnitude by which nationalist spending exceeds taxes coming into the nationalist purse – from 12.6 percent of GDP successful 2024 to to 5.4 percent by adjacent twelvemonth and narrowing to conscionable 3 percent of GDP by 2027.

But S&P’s outlook is acold little rosy. The bureau is forecasting a fiscal shortage of 8.1 percent of GDP adjacent twelvemonth and 6.8 percent of GDP successful 2027. As such, S&P estimates that the debt-to-GDP ratio volition highest astatine 123 percent adjacent year, earlier falling somewhat successful 2027.

What has led to the existent impasse with the IMF?

In March 2024, Bassirou Diomaye Faye won Senegal’s statesmanlike election. He ran successful place of the disqualified absorption fig Ousmane Sonko, who had been barred from the predetermination implicit a libel lawsuit involving the then-tourism minister. But aft the vote, Sonko became Faye’s premier minister.

In September 2024, the caller Pastef party authorities ordered an audit of the country’s nationalist finances. Senegal’s tribunal of auditors discovered that the erstwhile administration, nether President Macky Sall, had importantly understated the level of nationalist debt.

The tribunal estimated that Senegal’s existent debt-to-GDP ratio was person to 100 percent, compared with the astir 70 percent which had earlier been reported, revealing astir $7bn successful undisclosed borrowing, which mostly stemmed from not including the liabilities of SOEs.

The IMF endorsed the auditors’ assessment, calling it a “conscious decision” by the Sall medication to disguise the existent grade of Senegal’s debt. The IMF past suspended its $1.8bn indebtedness bundle with Senegal, which it had approved successful 2023.

IMF indebtedness packages are typically paid implicit successful tranches. By the clip it pulled the plug connected the Senegal programme, the IMF has already disbursed $700m of the afloat amount. The IMF’s enforcement committee indispensable present determine whether to proceed with the arrangement. If its reappraisal goes against Dakar, the committee could inquire the authorities to repay the disbursed funds.

If its reappraisal is favourable, the IMF could determine to support the programme successful spot and merchandise the adjacent instalment of backing soon.

For context, the IMF’s $1.8bn indebtedness is equivalent to astir fractional of Senegal’s 2024 deficit. The upshot is that it would supply indispensable funds for nationalist spending. Without it, Senegal volition look a large financing shortfall.

Why hasn’t the IMF reached a determination astir this yet?

On November 6, pursuing a two-week sojourn to the West African nation, the IMF ngo main for Senegal, Edward Gemayel, said, “We’re engaged and determined to determination arsenic accelerated arsenic imaginable to help.”

A fewer days later, Prime Minister Sonko revealed that Gemayel’s squad had urged Senegal to transportation retired a restructuring – successful which aged indebtedness is swapped for caller indebtedness with longer maturities, little involvement rates, oregon a reduced indebtedness banal – truthful the state repays less. But these arrangements mostly pb to reduced nationalist spending and slower growth.

Countries that default connected their indebtedness typically conflict due to the fact that they are forced to chopped spending to stabilise their finances, leaving little wealth for nationalist services and investment. Investor assurance besides tends to fall, making it harder and much costly for governments to borrow.

At a gathering of Pastef officials connected November 8, Sonko, who has sizeable power implicit economical policy, said helium had rejected the IMF’s connection to restructure Senegal’s debt. But his determination to cull the IMF’s program has near Dakar with fewer options to constrictive his country’s fiscal gap.

Looking ahead, the premier curate volition person to person the Washington-based IMF to merchandise its paused indebtedness by presenting a credible fiscal program that restores Senegal’s finances without resorting to a indebtedness restructuring.

But Gemayel has already cautioned that the government’s 2026 fund is “very ambitious”, citing ample taxation increases. “We’ve ne'er seen this before,” helium said. “So, they request to beryllium careful.”

What has the interaction of this been connected Senegal’s economy?

Sonko’s determination to cull the IMF’s restructuring program has rattled investors. On Monday, November 10 – the archetypal trading time aft Sonko’s furniture gathering – Senegal’s 2031-dollar bonds fell by 4 percent to $73.1. Elsewhere, its notes owed successful 2048 fell by 2.4 cents to $60.30.

“The bonds dropped arsenic marketplace players reacted to the IMF having requested a restructuring,” said Leeuwner Esterhuysen, an Africa expert astatine Oxford Economics. “There’s intelligibly a precocious grade of indebtedness distress and small imaginable of IMF backing anytime soon.”

“It seems the Fund is making a caller indebtedness contingent connected Dakar accepting a restructuring,” Esterhuysen told Al Jazeera. “For now, the authorities isn’t playing shot … which volition widen the stalemate,” helium said.

Another motion of marketplace anxiousness is that the outgo of security against default – successful the signifier of credit-default swaps – astir doubled successful the days starring up to November 12, rising from 750 to 1,120 ground points, oregon 3.7 percent points.

During a code astatine a rally successful Dakar connected November 11, Sonko insisted, “Senegal is simply a arrogant nation. We volition not beryllium treated similar a failed state. Mobilising taxation gross is amended than accepting a indebtedness restructuring.”

Since 2020, Zambia, Ghana, Ethiopia, and Chad person each been forced to restructure their debt. But the agelong and drawn-out process, and accompanying economical hardship, person made indebtedness rewrites unpalatable for different African governments.

Kenya, different debt-strapped country, alternatively opted for costly trade-offs – taxation hikes and subsidy cuts – past year. The measures were aimed astatine reducing Kenya’s fund deficit. But they besides sparked deadly protests, highlighting the governmental risks associated with austerity.

How has this affected the governmental concern successful Senegal?

Sonko is opposed to an IMF-backed restructuring due to the fact that “he doesn’t privation to undermine his 2024 predetermination run pledge to reconstruct Senegal’s sovereignty”, said Paul Melly, a consulting chap connected the Africa programme astatine Chatham House.

Melly besides noted that Sonko is contending with “tensions” betwixt himself and President Faye. Earlier this month, it emerged that Sonko’s enactment rejected Faye’s effort to pb a revamped coalition, a determination viewed arsenic an effort to consolidate power.

And though Sonko serves under Faye, helium is wide viewed arsenic a cardinal powerfulness broker, often shaping argumentation connected his ain terms. “Sonko was ne'er going to beryllium a subordinate premier minister,” Melly told Al Jazeera.

As such, Senegal’s fiscal presumption represents a large governmental situation for Sonko. He inactive wants to asseverate his “sovereignty” line, but whitethorn request to enforce unpopular spending cuts to enactment up of indebtedness repayments.

How other could Senegal code its indebtedness problem?

In caller weeks, the authorities has introduced caller levies connected tobacco, alcohol, gambling and wide utilized mobile wealth transfers. It has besides made efforts to chopped backmost connected question outlays and car purchases arsenic portion of its interior efforts to chopped spending.

“It’s a tricky balance,” said Melly. “Expectations stay precocious adjacent arsenic the economical challenges are huge.”

If the authorities concedes to the IMF, “it whitethorn effect successful elector disillusionment astatine the adjacent municipal elections successful aboriginal 2027.” It whitethorn besides effect successful civilian strife.

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