Why is Senegal squaring up to the International Monetary Fund?

Senegal and the International Monetary Fund are at odds over a bailout that it urgently needs to close its public finances. While the IMF wants the West African nation to undertake a painful restructuring before it will agree to a bailout, Senegal, which was recently downgraded to deep within “junk bond” status, is resisting this plan.

Senegal was reduced by credit rating agency S&amp, P earlier this month, citing the country’s fragile government finances. Senegal’s public finances remain precarious, especially in the absence of a comprehensive official support program, according to S&amp, P on November 14.

After the government discovered $7 billion in borrowing that the previous administration had concealed, the IMF suspended a $1.8 billion funding package for Senegal last year.

Negotiations between Dakar and the IMF for a new bailout package are continuing as they hammer out what the government must do to restore public finances. However, so far, neither party has been able to reach an agreement.

How much public debt does Senegal have?

In its latest rating review, S&amp, P estimated Senegal’s public debt had risen to $42.1bn, or 119 percent of gross domestic product (GDP), at the end of 2024, making it one of the most indebted countries in Africa. About 9% of GDP was made up of state-owned enterprises (SOEs) owed debt, which was excluded from that figure.

Senegal has relied heavily on borrowing to pay for infrastructure projects since 2008. But during the COVID-19 crisis and subsequent jump in global interest rates, which made debt more expensive, costs soared as income fell. Senegal’s fiscal strains increased significantly in turn.

The government is now attempting to reduce its fiscal deficit, which is the percentage of public spending that exceeds the government’s budget, from 26% of GDP in 2024 to 5.4 percent by 2027, while reducing it to just 3 percent.

But S&amp, P’s outlook is far less rosy. The organization projects a fiscal deficit of 8% of GDP in 2027 and 8% of GDP in the next year. In this context, S&amp, P projects a 123 percent debt-to-GDP ratio as the ratio will increase over the coming year before gradually decreasing in 2027.

What has led to the current impasse with the IMF?

Bassirou Diomaye Faye won Senegal’s presidential election in March 2024. He ran in place of Ousmane Sonko, a disqualified opposition figure who had been barred from office because of a libel case involving the then-tourism minister. But after the vote, Sonko became Faye’s prime minister.

The new Pastef party government mandated an audit of the nation’s public finances in September 2024. The previous administration, led by President Macky Sall, significantly understated the public debt’s current status, according to Senegal’s court of auditors.

The court estimated that Senegal’s real debt-to-GDP ratio was closer to 100 percent, compared with the roughly 70 percent which had earlier been reported, revealing almost $7bn in undisclosed borrowing, which largely stemmed from not including the liabilities of SOEs.

The Sall administration’s “conscious decision,” according to the IMF, was used to conceal Senegal’s true debt burden. The IMF then terminated its $ 1.8 billion loan agreement with Senegal, which it had approved in 2023.

IMF loan packages are typically paid over in tranches. The IMF had already disbursed $ 700 million of the total by the time it abruptly ended the Senegal program. The executive board of the IMF must now decide whether to keep the arrangement going. If its review goes against Dakar, the board could ask the government to repay the disbursed funds.

The IMF may choose to continue funding the program and announce the next installment of the funding package if the review is favorable.

For context, Senegal’s deficit from 2024 is roughly half the size of the IMF’s $1.8 billion loan. The upshot is that it would provide essential funds for public spending. Without it, Senegal will have a significant funding problem.

Why hasn’t the IMF reached a decision about this yet?

The IMF mission chief for Senegal, Edward Gemayel, said, “We’re engaged and determined to move as quickly as possible to help. ” Following a two-week visit to the West African nation, the IMF mission chief said on November 6.

In order to reduce its debt, Prime Minister Sonko revealed that Gemayel’s team had urged Senegal to undergo a restructuring, which would involve replacing old debt with new debt with longer maturities, lower interest rates, or a reduced debt stock. But these arrangements generally lead to reduced public spending and slower growth.

Countries that default on their debts typically struggle because they are forced to cut spending to stabilize their finances, leaving less money for investment and public services. Investor confidence also tends to decline, making borrowing from governments more expensive and difficult.

At a meeting of Pastef officials on November 8, Sonko, who has considerable influence over economic policy, said he had rejected the IMF’s proposal to restructure Senegal’s debt. However, Dakar now has few options for closing the nation’s fiscal gap as a result of his decision to reject the IMF’s plan.

The prime minister will need to present a credible fiscal plan that restores Senegal’s finances without resorting to a debt restructuring in order to persuade the Washington-based IMF to release its paused loan.

But Gemayel has already cautioned that the government’s 2026 budget is “very ambitious”, citing large tax increases. He declared, “We’ve never seen this before.” They must therefore be cautious.

What has the impact of this been on Senegal’s economy?

Investors were irritated by Sonko’s decision to reject the IMF’s restructuring plan. Senegal’s 2031-dollar bonds dropped by 4% on Monday, November 10 for the first trading day following Sonko’s cabinet meeting. Elsewhere, its notes due in 2048 fell by 2.4 cents to $60.30.

According to Leeuwner Esterhuysen, an analyst for Africa at Oxford Economics, “the markets reacted to the IMF’s request for a restructuring,” “the bonds dropped.” There is no indication of any imminent IMF funding, despite the fact that there is obviously a high level of debt distress.

“It seems the Fund is making a new loan contingent on Dakar accepting a restructuring”, Esterhuysen told Al Jazeera. The government is “playing ball,” he said, “for the time being, it will only prolong the impasse.”

In addition to the market’s concern, the cost of credit-default swaps, or default insurance, nearly doubled in the days leading up to November 12 from 750 to 1,120 basis points, or 3.7 percentage points.

During a speech at a rally in Dakar on November 11, Sonko insisted, “Senegal is a proud nation. We won’t be treated like a state that has failed. Better to accept a debt restructuring than to accept tax revenue?

Since 2020, Zambia, Ghana, Ethiopia, and Chad have all been forced to restructure their debt. However, other African governments are unappealing because of the lengthy and laborious process and accompanying economic hardship.

Instead of opting for expensive trade-offs last year, Kenya, another debt-strapped nation, went for tax increases and subsidy cuts. The measures were aimed at reducing Kenya’s budget deficit. They also sparked vicious demonstrations, which highlighted the political risks of austerity.

How has this affected the political situation in Senegal?

Sonko opposes an IMF-backed restructuring because “he doesn’t want to undermine his 2024 election campaign pledge to restore Senegal’s sovereignty,” according to Paul Melly, a consulting fellow on the Africa program at Chatham House.

Sonko is currently battling “tensions” between himself and President Faye, according to Melly. Earlier this month, it emerged that Sonko’s party rejected Faye’s attempt to lead a revamped coalition, a move viewed as an effort to consolidate power.

Sonko is regarded as a key power broker, frequently deciding policy on his own terms, despite serving under Faye and &nbsp. According to Melly, “Sonko was never going to be a subordinate prime minister.”

As such, Senegal’s fiscal position represents a major political challenge for Sonko. He may need to impose unpopular spending cuts to stay ahead of debt repayments, but he still wants to assert his “sovereignty” position.

What other options does Senegal have for resolving its debt problem?

In recent weeks, the government has introduced new levies on tobacco, alcohol, gambling and widely used mobile money transfers. In addition, it has made internal efforts to reduce spending by trying to reduce travel expenses and car purchases.

It’s difficult to strike a balance, Melly said. &nbsp, “Expectations remain high even as the economic challenges are huge”.

Source: Aljazeera