Senegal: Public Debt Restructuring Analysis Questions Rapid IMF Plan

• Economists Martin Kessler and Abdoulaye Ndiaye analyzed Senegal's rapid public debt rescheduling, questioning its sufficiency.
• The process is set to conclude by December, a "record speed" compared to other nations, following an IMF Staff-Level Agreement.
• They argue that despite being termed "rescheduling," the deferral of payments without compensation will result in a loss of present value for creditors.
• Concerns exist that the measures might be "too little" to achieve genuine long-term debt sustainability, given projected debt levels of 90-100% of GDP.
• The upcoming 2027 Debt Sustainability Framework will broaden its scope to include total public debt and introduce a 75% of nominal GDP high-risk threshold, which current plans may not adequately address.

A truly sufficient restructuring, they argue, necessitates a clear and robust strategy designed to substantially reduce the overall debt burden.

On October 9, economists Martin Kessler and Abdoulaye Ndiaye, associated with the Finance For Development Lab, released an analytical note scrutinizing the implications of a Staff-Level Agreement (SLA) reached with the International Monetary Fund (IMF). This agreement outlines a program that includes a significant public debt restructuring for Senegal. Their report, provocatively titled "Senegal's Debt: Docking the Ship Once and For All," raises a fundamental question about whether the accelerated timeline for this process aligns with the magnitude of the financial adjustments required.

A key aspect of the current approach is its remarkable speed, a goal explicitly communicated, particularly during an investor presentation on October 6. The plan aims to finalize the debt restructuring by December, a mere four months after the initial signing of the SLA. This pace is notably swift when compared to similar processes in other nations; for instance, Ghana's debt restructuring spanned 21 months, while Zambia's took 30 months. Dakar has characterized this operation as a "rescheduling" rather than a full "restructuring," implying that creditors might agree to extend maturity periods without incurring a loss in the face value of their holdings.

However, Kessler and Ndiaye highlight a critical distinction: while rescheduling typically implies a reorganization without a loss in present value, they contend that this particular arrangement will "certainly" result in such a loss. This is because payments are being deferred into the distant future without any compensatory measures for the time value of money. Consequently, their Senegal public debt restructuring analysis questions both the feasibility of such a rapid timeline and whether it serves the optimal long-term objective for the nation's financial health.

The economists' analysis delves into a common pitfall observed in many highly indebted countries: the tendency to act "too little, too late." While acknowledging that Senegal's decision to address its debt was a "difficult and courageous" step taken after a prolonged period of deliberation, they emphasize the imperative to avoid the second part of this trap – implementing "too little" in the way of relief. A truly sufficient restructuring, they argue, necessitates a clear and robust strategy designed to substantially reduce the overall debt burden. This reduction is crucial for restoring fiscal flexibility and providing maneuverability for both current and future administrations.

Implementing such a strategy involves intricate tactical decisions, including identifying which creditors should bear greater sacrifices and which should be shielded. Protection might be extended to certain creditors due to risks of a banking crisis, the existence of collateral, or the designation of specific "essential projects." However, Kessler and Ndiaye caution that a deep debt reduction strategy must distribute losses equitably and as broadly as possible across the entire spectrum of Senegal's external debt. Over-protecting too many creditors, they warn, could paradoxically prolong the negotiation process and undermine the effectiveness of the overall effort.

The International Monetary Fund and the World Bank employ a specific debt sustainability framework to assess a country's ability to manage its financial obligations. Under this framework, a nation is classified as being at "moderate risk" if its key debt indicators fall below the established alert zone within five years of the program's commencement. The current framework, which is slated for revision in 2027, primarily focuses on external public debt. According to projections, the present value of Senegal's external debt relative to its Gross Domestic Product (GDP) is expected to decrease from approximately 60-65% in 2025 to 55% by 2031.

However, the most challenging criterion for Senegal to meet concerns its external debt service, which is targeted to be reduced to 23% of the state's revenues. This target stands in stark contrast to the current reality, where external debt service accounts for an estimated 56% of state revenues this year, and is projected to remain above 40% until at least 2028. This significant disparity underscores the necessity for a substantial rescheduling of repayments, pushing them far into the future to alleviate immediate pressure. Despite these efforts, the economists express reservations about whether these measures will be adequate to achieve genuine long-term debt sustainability.

The economists identify two primary reasons for their skepticism regarding the long-term efficacy of the current debt rescheduling. Firstly, they suggest that a total debt level ranging from 90% to 100% of GDP might not be sustainable. Based on current indications, Senegal's projected exit from the program would see its debt at 55% in present value terms (equivalent to 60-65% in face value), compounded by an additional 30% in domestic debt. Even with interest payments deferred, this scenario implies a persistently high debt service burden and necessitates a primary surplus extending beyond the program's duration, raising concerns about Senegal external debt service risk.

Secondly, the criteria for assessing debt sustainability are set to evolve. The new Debt Sustainability Framework (DSF), anticipated to be implemented by summer 2027, will adopt a broader scope. Unlike the current framework, which predominantly examines external debt, the revised DSF will encompass total public debt. Crucially, it will establish a 75% of nominal GDP threshold as indicative of high risk. While this updated framework is not yet in effect, the economists warn that ignoring its future implications would be imprudent. The Senegalese government has reportedly indicated its commitment to achieving sustainability, but the impending changes to the DSF highlight the need for a comprehensive and forward-looking Senegal public debt restructuring analysis that considers all facets of its financial obligations.

Lawyers advising clients with investments or financial exposure in Senegal should note the economists' concerns regarding the sufficiency and long-term impact of the current debt rescheduling. This analysis suggests potential for future, more comprehensive restructuring efforts or continued financial instability, necessitating careful review of contractual terms, risk assessments, and monitoring of Senegal's evolving debt sustainability metrics, especially with the upcoming changes to the DSF in 2027.

Source: Analysis based on reporting by Finance For Development Lab.