Hydrocarbons as a growth driver

After dealing with the pandemic relatively well, the economy has been hit hard by the consequences of the war in Ukraine. The country heavily depends on external food and energy supplies, resulting in high imported inflation in 2022. In an unusual episode, riots have prompted the authorities to re-evaluate consumer subsidies. In 2023, the energy sources of inflation are expected to diminish, but the degree of decline will depend on the climatic hazards affecting agriculture.

Public investment remains a growth driver, continuing the “Emerging Senegal” Plan. Infrastructure improvements have strongly supported the country’s development, with an average growth of ~5% between 2014 and 2019. The regional express train between Dakar and the new Blaise Diagne airport, the deep-water port of Ndayane, is scheduled to open in 2022 to relieve congestion in the capital (USD 1.1 billion, 60% of which is being provided by the UAE group DP World), as well as phase 1 of the Grand-Tortue Ahmeyim gas and Sangomar oil fields in 2023, have all recently or soon will be put into service.

This entry into activity, the recovery of tourism after the pandemic, and the reduction in imports linked to extraction should provide a significant growth supplement from 2023 via exports in volume. Assuming a global slowdown, the terms of trade could deteriorate after an inflationary peak at the end of 2022, affecting gold in particular and moderating the expansion of business through a negative price effect.

The government continues to engage in numerous development agreements, such as agriculture, with a loan from the African Development Bank for EUR 121 million in June 2022. While the structure of GDP is relatively balanced, the workforce remains concentrated in agriculture (17% of GDP for 80% of the workforce in 2020), highlighting the sector’s low productivity. Tourism (6% of GDP and 9% of employment before COVID-19) and mineral prices subject to the health and economic situation are all signs of fragile fundamentals before the discovery of offshore deposits.

Narrow financial space

The exploitation of hydrocarbons, more precisely, the decrease in imports of equipment and dedicated services and the increase in export revenues, should contribute to reducing the current deficit. However, this will remain high due to imports of equipment and food dependency.

The investments of the Emerging Senegal Plan benefit from funds provided by the IMF, with which Dakar built an economic policy coordination instrument in 2020, benefiting from a credit facility of initially USD 650 million over 18 months. All reviews have succeeded, resulting in the release of USD 215 million in June 2022, with a further USD 172 million disbursed to combat inflation. The institution advocates fiscal consolidation but continues to support the proposed development policy. Initially planned at 1% in 2022 and then re-estimated at 3%, the targeted cuts in levies (VAT, customs, and fuel taxes) designed to mitigate the inflationary shock should not be renewed to improve public finances. However, austerity can be avoided thanks to new revenues from extraction. Improved debt management, systematic competition in public procurement, and good management of the oil windfall are also levers. Central government debt is evenly divided between bilateral credit, multilateral credit (in dollars), and Eurobonds. The narrow margins of maneuver should push the country to avoid external borrowing in 2023, relying on concessional loans. Indeed, it is already highly exposed to interest rate and exchange rate risks: external public debt will rise to 57% of GDP in 2021, while the CFA franc’s peg to the euro does not protect it from the recent depreciation against the dollar. According to the IMF, compliance with these budgetary recommendations and growth would decrease the debt/GDP ratio.

Stable institutions but simmering tensions

Regional instability poses economic risks, particularly in the country’s southeast, where armed groups operate near the goldfields while the Islamist threat spreads from neighboring Mali. Artisanal and informal gold mining provides opportunities for these groups: money laundering, recruitment of poor people, smuggling, supply of explosives, etc. The structuring of the sector by the state, including the local population, should prevent the fight against the underground economy from becoming unpopular. Internally, the opposition made progress in the July 2022 legislative elections, benefiting from frustrations linked to youth unemployment, corruption fueled by significant construction projects, and growth that does not help everyone equally. Despite strong support from rural areas, President Sall’s short majority is unlikely to have much room for maneuver, which rules out a third term in 2024, provided the constitution can be amended.

Senegal has close relations with France and the U.S. on military issues, the EU on migration issues, China on trade issues, and Russia for agricultural inputs. The main recent developments to watch are the lifting of sanctions on Mali by ECOWAS and increased links with Turkey and the Gulf States.