Explainer-Why is Senegal reworking its debt and what makes it different?

By Duncan Miriri and Marc Jones

NAIROBI, Sept 2 (Reuters) – Senegal has signalled it will restructure its debt in exchange for a $2.2 billion International Monetary Fund bailout two years on from a hidden debt scandal that pushed it into crisis.

Here is how Senegal got into trouble and how it ‌now hopes to get out of it.

HOW DID WE GET HERE?

In September 2024, Senegal’s then-new government said it had uncovered billions of dollars of public ‌debt the previous administration had not disclosed.

The IMF now estimates that extra debt at more than $11 billion, although some analysts put it closer to $13 billion, the equivalent of more than a quarter of Senegal’s total ​debt.

The country’s debt-to-GDP ratio ballooned to 130% and the IMF froze the $1.8 billion support programme in place at the time, triggering a sharp selloff in Senegal’s bonds and a swathe of credit rating downgrades.

WHAT IS THE SIZE OF SENEGAL’S DEBT AND WHO IS OWED?

Senegal’s next international debt payment is due on September 13.

Total government debt, excluding borrowing by state companies, stood at 23.67 trillion CFA francs ($42.10 billion) at the end of 2024, or 119% of Senegal’s gross domestic product, government data shows.

If liabilities from state-related entities (about 9% of GDP) ‌and arrears (about 4% of GDP) included in the IMF’s end-2024 ⁠estimate are added in, it would be closer to 131%.

The last official data shows nearly a third of the debt was in local and regionally issued CFA-denominated bonds and loans. Two years on, having had to rely more heavily on those markets, that share ⁠is likely to be considerably larger, analysts at Morgan Stanley say.

The government has signalled that portion of its debt will not be touched, impacting how it will be able to rework the rest of its borrowings.

Around half of its external debt is owed to multilateral lenders, development banks or other governments, mainly on concessional or semi-concessional terms.

Commercial creditors – mainly banks, pension funds and hedge ​funds – ​hold the other half. More than $7 billion of that is made up of international bonds, while ​about a tenth of total debt is in the form of ‌export credits.

Finance minister Cheikh Diba said in March that the West African nation also used a form of derivative known as total return swaps (TRS) to fund operations, with a yield of around 7% versus 11% to 12% in Eurobond markets. It is not clear how the TRS will be treated in the restructuring.

WHAT FORCED THE GOVERNMENT TO ACCEPT IT NEEDED TO DO SOMETHING?

After the IMF froze Senegal’s support programme, the government turned to regional borrowing markets and retail bond sales for funding.

That approach faltered, however, when the Iran war curbed public and private investment and drove up Senegal’s energy costs. Growth is now projected to drop to 2.7% this year from 6.7% last year, the ‌finance ministry said on Tuesday.

The idea of a debt restructuring had encountered stiff resistance from former ​Prime Minister Ousmane Sonko who, during his time in office, said it would be a “disgrace” for the ​country.

Announcing the plan on Tuesday, Diba said the plan was “not a restructuring ​in the classic sense of the term”, though details about how it will unfold remain unclear.

HOW WILL THE DEBT OVERHAUL WORK?

Senegal’s plan ‌is part of a $2.2 billion IMF bailout, although there won’t be ​an immediate reopening of the Fund’s financing taps.

The ​IMF’s Executive Board will need to approve the deal, and Senegal first has to secure financing assurances from the World Bank, the African Development Bank and other international lenders.

Senegal’s rework will utilise an “improved” version of the Common Framework, a G20-backed process to herd official and private creditors into agreeing to restructure ​crisis-hit countries’ debt.

Dakar didn’t detail how the improved version would ‌work, but analysts point to the pledge that its CFA franc-denominated debt will not be included.

Restructuring that debt would be highly complicated. Senegal is ​a member of the West African Economic and Monetary Union (WAEMU), sharing a central bank, the CFA currency and financial market with the likes of ​Ivory Coast and Benin.

($1 = 562.2500 CFA francs)

(Reporting by Duncan Miriri; Editing by Kirsten Donovan)