Senegal does not have any pain-free options for escaping its intensifying debt crisis. But absent large volumes of cheap liquidity, attempting to repay its debts at all costs would likely prove costlier than biting the bullet and initiating debt-restructuring negotiations.
NEW YORK – With Senegal’s public debt now totaling an estimated 132% of GDP, the question of whether it is sustainable is impossible to ignore. It is not a simple question, as debt sustainability depends both on current conditions and on choices yet to be made – not just by Senegal, but by a wide cast of external actors as well. As undesirable as it may be for lenders in London, Paris, Washington, and Beijing, Senegal’s leaders must seriously consider whether default is the best way forward.
Under financial pressure, governments often try to repay their debts at all costs, rather than suffer the consequences of a default, including loss of access to international capital markets. But in a recent report, published by the Finance for Development Lab, we show that for Senegal today, this approach represents a highly risky double gamble.
First, Senegal would be betting that it could achieve an extraordinary fiscal consolidation in record time, moving from a primary budget deficit (excluding interest payments) of roughly 9% of GDP in 2024 to a surplus of 2% of GDP in 2028. Such a consolidation amounts effectively to running a marathon at the pace of a sprint, and it is something only a handful of countries have achieved, typically bolstered by an exceptional natural-resource windfall. Given this, it would probably not be a wise wager.
Compounding the risk is the second bet: that creditors would continue to treat Senegal’s debt as sustainable – and continue lending – throughout this fiscal adjustment. Again, the odds are long. To cover its fiscal deficit and refinance the debt that will come due in 2026-28, Senegal’s government would have to raise CFA15 trillion ($27 billion), and it is unclear who would be willing or able to deliver such funding.
The obvious candidate would be the International Monetary Fund, which has programs designed to support countries in crisis, including by unlocking concessional co-financing, and offers zero-interest loans to low-income countries. But IMF rules prohibit lending to countries whose debts are deemed to be unsustainable – the likely outcome of a debt-sustainability analysis of Senegal.
Of course, the IMF is not the only game in town. The Gulf countries and China have occasionally delivered large amounts of financial support. For example, $35 billion in foreign direct investment from the United Arab Emirates enabled Egypt to consolidate its reserves and cover financing needs of $45 billion in 2024-25. But such funding invariably comes with strings attached. The greater the perceived risk, the harsher the terms, including painful privatizations, collateral requirements, and other concessions.
Another possible source of financing is the West African Economic and Monetary Union, of which Senegal is a member. Last year, Senegal raised more than CFA4 trillion, or 20% of its GDP, through the WAEMU regional debt market. While WAEMU may continue to assume the risk of providing capital to Senegal, continuing to borrow on such a scale would squeeze credit to the private sector and heighten the banking system’s vulnerability.
Given the low odds that such a double gamble would pay off, Senegal might consider seeking a negotiated debt restructuring under the G20’s Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative. To be sure, this path would also be fraught with challenges, as other Common Framework restructurings have dragged on for years. Nonetheless, some progress has recently been made in negotiations with Ghana and Ethiopia, and a cooperative approach could allow for a faster restructuring for Senegal. China and France, which together hold roughly 70% of the country’s bilateral debt, should commit to the fastest-possible treatment of Senegal’s case. Debts denominated in CFA francs should be spared to avoid destabilizing the monetary zone.
Defaults are always costly. Private creditors seek to minimize their losses, and ratings agencies reclassify the country’s bonds as being in default. But if Senegal reduces its debt stock decisively enough, it could eventually regain access to international capital markets. In the meantime, international institutions would need to deliver fresh financing, so that the country can continue investing despite impaired access to capital markets.
Whatever happens next, Senegal’s plight holds important lessons for the WAEMU – in particular, that debt transparency and banking supervision must be improved across the zone. Stronger safety measures, much like those adopted by the eurozone after the Greek sovereign-debt crisis erupted in 2009, are essential.
Senegal does not have any pain-free options for escaping its current morass. But absent large volumes of cheap liquidity, attempting to repay its debts at all costs would be more dangerous – and, ultimately, more costly – than default. By launching restructuring negotiations as soon as possible, Senegal could at least limit the impact on exports and growth and embark on a path toward lasting solvency.
NEW YORK – With Senegal’s public debt now totaling an estimated 132% of GDP, the question of whether it is sustainable is impossible to ignore. It is not a simple question, as debt sustainability depends both on current conditions and on choices yet to be made – not just by Senegal, but by a wide cast of external actors as well. As undesirable as it may be for lenders in London, Paris, Washington, and Beijing, Senegal’s leaders must seriously consider whether default is the best way forward.
Under financial pressure, governments often try to repay their debts at all costs, rather than suffer the consequences of a default, including loss of access to international capital markets. But in a recent report, published by the Finance for Development Lab, we show that for Senegal today, this approach represents a highly risky double gamble.
First, Senegal would be betting that it could achieve an extraordinary fiscal consolidation in record time, moving from a primary budget deficit (excluding interest payments) of roughly 9% of GDP in 2024 to a surplus of 2% of GDP in 2028. Such a consolidation amounts effectively to running a marathon at the pace of a sprint, and it is something only a handful of countries have achieved, typically bolstered by an exceptional natural-resource windfall. Given this, it would probably not be a wise wager.
Compounding the risk is the second bet: that creditors would continue to treat Senegal’s debt as sustainable – and continue lending – throughout this fiscal adjustment. Again, the odds are long. To cover its fiscal deficit and refinance the debt that will come due in 2026-28, Senegal’s government would have to raise CFA15 trillion ($27 billion), and it is unclear who would be willing or able to deliver such funding.
The obvious candidate would be the International Monetary Fund, which has programs designed to support countries in crisis, including by unlocking concessional co-financing, and offers zero-interest loans to low-income countries. But IMF rules prohibit lending to countries whose debts are deemed to be unsustainable – the likely outcome of a debt-sustainability analysis of Senegal.
Of course, the IMF is not the only game in town. The Gulf countries and China have occasionally delivered large amounts of financial support. For example, $35 billion in foreign direct investment from the United Arab Emirates enabled Egypt to consolidate its reserves and cover financing needs of $45 billion in 2024-25. But such funding invariably comes with strings attached. The greater the perceived risk, the harsher the terms, including painful privatizations, collateral requirements, and other concessions.
Another possible source of financing is the West African Economic and Monetary Union, of which Senegal is a member. Last year, Senegal raised more than CFA4 trillion, or 20% of its GDP, through the WAEMU regional debt market. While WAEMU may continue to assume the risk of providing capital to Senegal, continuing to borrow on such a scale would squeeze credit to the private sector and heighten the banking system’s vulnerability.
Given the low odds that such a double gamble would pay off, Senegal might consider seeking a negotiated debt restructuring under the G20’s Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative. To be sure, this path would also be fraught with challenges, as other Common Framework restructurings have dragged on for years. Nonetheless, some progress has recently been made in negotiations with Ghana and Ethiopia, and a cooperative approach could allow for a faster restructuring for Senegal. China and France, which together hold roughly 70% of the country’s bilateral debt, should commit to the fastest-possible treatment of Senegal’s case. Debts denominated in CFA francs should be spared to avoid destabilizing the monetary zone.
Defaults are always costly. Private creditors seek to minimize their losses, and ratings agencies reclassify the country’s bonds as being in default. But if Senegal reduces its debt stock decisively enough, it could eventually regain access to international capital markets. In the meantime, international institutions would need to deliver fresh financing, so that the country can continue investing despite impaired access to capital markets.
Whatever happens next, Senegal’s plight holds important lessons for the WAEMU – in particular, that debt transparency and banking supervision must be improved across the zone. Stronger safety measures, much like those adopted by the eurozone after the Greek sovereign-debt crisis erupted in 2009, are essential.
Senegal does not have any pain-free options for escaping its current morass. But absent large volumes of cheap liquidity, attempting to repay its debts at all costs would be more dangerous – and, ultimately, more costly – than default. By launching restructuring negotiations as soon as possible, Senegal could at least limit the impact on exports and growth and embark on a path toward lasting solvency.