Nations never fully repay their public debt; they constantly refinance it. However, many only talk about debt through two indicators: 3% annual deficit (new debt) and 70% of GDP (total stock). But three other criteria are much more decisive for economic dynamics.
Firstly, the convergence criteria are not strict ceilings, but regulators designed to prevent abuses. Like cruise control in a car, they adjust the trajectory without slowing down progress. The main goal is to have a clear and shared strategy for returning to balance. It should be remembered that these criteria apply only in a community area sharing the same currency, with the aim of harmonising the economies of the member countries. The United States and China are not subject to convergence criteria.
Let’s take an example: a debt representing 100% of GDP with an interest rate of 1% weighs five times less on public finances than a debt of 50% of GDP at a rate of 10%. The real cost of debt therefore depends more on the interest rate than on its volume.
A country can thus refinance 1000 billion of debt at 1%, rather than dipping into its reserves, and reinvest the savings made in growth-generating sectors. In a few years, GDP increased, the relative weight of debt decreased and tax revenues improved. The key is therefore not to repay, but to refinance intelligently while stimulating growth.
However, every refinance comes with costs. A debt renewed every two years costs much more over 30 years than a single long-term loan.
Thus, we must focus on three essential levers. First, prioritise investing in fast-yielding sectors [4]; such as energy and infrastructure, which generate rapid revenue to finance longer-term impact areas like education and health.
Secondly, maximising internal production: the more we produce, the more GDP grows and the more VAT increases mechanically, thus strengthening our public finances. Finally, it is crucial to plan and clearly explain our growth strategy. A coherent and readable vision reassures the markets and the rating agencies, thus facilitating access to financing at a lower cost and over longer maturities.
Finally, the convergence criteria were defined at a time of high rates. Today, with low interest rates, they must be interpreted flexibly, as long as the new debt finances productive investments.
The need to overcome the fiscal crisis through a confidence
shock Without strong economic governance and a clear strategic vision, no nation can develop. Senegal, facing an unprecedented budgetary crisis, is no exception to this rule. With a budget deficit exceeding 12% of GDP and a public debt approaching 99%, the Senegalese state is at a decisive turning point. It can choose the path of austerity, which risks suffocating the economy, or that of an intelligent recovery, based on a confidence shock; capable of restoring the credibility of institutions and reviving economic momentum.
The first mistake would be to panic and adopt hasty measures; such as cutting civil servants’ salaries or removing electricity and water subsidies indiscriminately. In a context marked by soaring prices of essential goods and the erosion of purchasing power, such decisions would only exacerbate social tensions. Recent history has taught us that when a state opts for purely accounting solutions without measuring the social implications, it exposes itself to an explosion of protests, paralyzing strikes and, at worst, a generalized crisis of confidence. The example of the electricity riots, which had set the country ablaze in the past, must serve as a lesson.
Rather than looking for scapegoats, it is urgent, as a first step, to act on two fronts: macroeconomic stabilization and the targeted revival of consumption and investment. Stabilization must begin with skilful negotiation with international creditors. Our technical and financial partners can agree that Senegal cannot repay its debt to the detriment of its own growth [6]. They could therefore accept mechanisms such as the implementation of moratoriums, debt rescheduling and, why not, conversions of our debt into investments. To achieve this, it is imperative to reassure the markets, the donors and especially the IMF and the rating agencies. The Minister of Finance seems to be working on this-by communicating on his strategy to reassure donors and financial partners by presenting to them, a week ago, the corrective measures and reforms already implemented or envisaged by the government, to strengthen public financial management. In this approach, it should be remembered that it is essential to convince the rating agencies, because they play a decisive role in the perception of the financial markets. The ratings of Moody’s and S&P Global Ratings, which have just downgraded our sovereign rating (B3 and B respectively with a negative outlook), have a direct influence on our country’s borrowing conditions; including interest rates and investor confidence. But behind these agencies, it should be remembered that there is also the influence of the International Monetary Fund (IMF), whose assessments and recommendations are largely taken into account by the agencies. Because of its proven expertise on our countries and its scientifically credible economic research.
One of the key things to understand is that the problem is not the debt itself, but the growth trajectory that accompanies it. Senegal can take out new loans as long as it can demonstrate that the money will be used to boost growth and increase GDP. In other words, the priority is not to curb debt at all costs, but rather to ensure that GDP (the denominator of the debt-to-GDP ratio) grows faster than the debt itself. This is why it is crucial to present a short-term (three-year) plan for a return to normalcy to the rating agencies, as part of the “Senegal 2050” strategy. This plan must be coherent and show how the investments that the government wants to make will increase the country’s future production and revenues. Even if these investments require additional debt in the short term, they must be justified by a growth perspective which, in the long term, will mechanically reduce the debt burden in the economy.
Rating agencies do not only judge a country’s current situation, but above all, its trajectory and its ability to honour its commitments in the future. As soon as our country demonstrates a positive dynamic, its rating outlook will improve, which will result in a reduction in interest rates, an extension of repayment maturities and increased budgetary space to finance its economy [11]. The key to restoring the confidence of the IMF, the rating agencies and investors is not to limit the debt, but to demonstrate, via an action plan, a solid and credible growth trajectory.
At the same time, a collapse in domestic demand must be avoided. The Senegalese economy is largely based on consumption-based taxation, with VAT accounting for nearly 50% of tax revenues. VAT is the country’s main resource. A sharp drop in purchasing power would therefore lead to a decrease in revenues, further aggravating the budget deficit. Rather than cutting spending indiscriminately, the government should target its fiscal adjustments by cutting prestige spending, streamlining public agencies, and eliminating unproductive operating spending. It must also support fragile households through mechanisms such as strengthening and expanding family grants. The government will also have to continue the efforts begun to reduce the prices of basic necessities. This will help the poorest households to withstand difficult periods, while waiting for the first results of the recommended confidence shock.
Countries like ours cannot develop without modern and competitive infrastructure. This is why recovery cannot be envisaged without a far-sighted investment strategy. The State, with limited fiscal room for manoeuvre, must mobilise the private sector through public-private partnerships (PPP) and the intervention of the Sovereign Fund for Strategic Investments (Fonsis), as well as the Agency for the Promotion of Investments and Major Works (Apix), to feed the economy with new revenues from oil, gas and gold. This mechanism would ensure the continuation of essential infrastructure projects, such as the extension of the Regional Express Train (Ter) network, the Bus Rapid Transit (BRT) and the timely completion of the port of Ndayane, while limiting the impact on the public budget via traditional debt mechanisms. These efforts will require exceptional measures, such as the temporary suspension of the law of 19 April 2022, governing the management and distribution of revenues from the exploitation of hydrocarbons, for a period of two years, the time it takes to deal with our critical budgetary situation.
Senegal’s economic future is based on strategic sectors such as the exploitation of minerals (gold, phosphate, zircon and ilmenite), oil and gas, renewable energies, digital technology, as well as historical sectors such as tourism, crafts, culture and high value-added agriculture, supported by the emergence of the Artificial Intelligence sector. But, attracting investors requires more than just tax incentives: a stable, transparent, and predictable business environment is essential.
Finally, the success of this revival is based on absolute transparency [14] on the part of the government in the management of public accounts. It is not enough to make good decisions, they must also be explained and accepted.
Dear compatriots, Senegal is not bankrupt, but it is going through a serious crisis. We are experiencing a cash flow stress, followed by the downgrading of our sovereign rating by the rating agencies. Any crisis can be overcome; as long as the country has enlightened political leadership, discipline and a long-term vision. Today, the opportunity is there: to transform this crisis into a decisive turning point for national development. To do this, we must dare to shock confidence, give citizens and investors a clear perspective and implement courageous reforms. It’s not an option, it’s a necessity.
Quotidien
