Senegal is at loggerheads with the International Monetary Fund (IMF) over a bailout it urgently needs to plug a gaping hole in its public finances. While the IMF wants the West African nation to undertake a painful restructuring before it will agree to a bailout, Senegal, which was recently downgraded to deep within “junk bond” status, is resisting this plan.

Earlier this month, credit rating agency S&P lowered Senegal to CCC+, citing the fragile country’s poor government finances. “Despite actions taken to boost growth and tax collection, the level of debt and size of the interest bill mean Senegal’s public finances remain precarious, particularly in the absence of a comprehensive official support programme,” S&P said on November 14.

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Last year, the IMF suspended a $1.8bn funding package for Senegal after the government discovered $7bn in borrowing, which had been concealed by the previous administration.

Negotiations between Dakar and the IMF for a new bailout package are continuing as they hammer out what the government must do to restore public finances. But the two sides have so far failed to agree on a path forward.

How high is Senegal’s public debt?

In its latest rating review, S&P estimated Senegal’s public debt had risen to $42.1bn, or 119 percent of gross domestic product (GDP), at the end of 2024, making it one of the most indebted countries in Africa. That figure excluded about 9 percent of GDP in debt owed by state-owned enterprises (SOEs).

Since 2008, Senegal has leaned heavily on borrowing to fund infrastructure projects. But during the COVID-19 crisis and subsequent jump in global interest rates, which made debt more expensive, costs soared as income fell. In turn, Senegal’s fiscal pressures grew significantly.

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To address its debt load, the government is now hoping to shrink the fiscal deficit – the amount by which public spending exceeds taxes coming into the public purse – from 12.6 percent of GDP in 2024 to to 5.4 percent by next year and narrowing to just 3 percent of GDP by 2027.

But S&P’s outlook is far less rosy. The agency is forecasting a fiscal deficit of 8.1 percent of GDP next year and 6.8 percent of GDP in 2027. As such, S&P estimates that the debt-to-GDP ratio will peak at 123 percent next year, before falling slightly in 2027.

What has led to the current impasse with the IMF?

In March 2024, Bassirou Diomaye Faye won Senegal’s presidential election. He ran in place of the disqualified opposition figure Ousmane Sonko, who had been barred from the election over a libel case involving the then-tourism minister. But after the vote, Sonko became Faye’s prime minister.

In September 2024, the new Pastef party government ordered an audit of the country’s public finances. Senegal’s court of auditors discovered that the previous administration, under President Macky Sall, had significantly understated the level of public debt.

The court estimated that Senegal’s real debt-to-GDP ratio was closer to 100 percent, compared with the roughly 70 percent which had earlier been reported, revealing almost $7bn in undisclosed borrowing, which largely stemmed from not including the liabilities of SOEs.

The IMF endorsed the auditors’ assessment, calling it a “conscious decision” by the Sall administration to mask the true extent of Senegal’s debt. The IMF then suspended its $1.8bn loan package with Senegal, which it had approved in 2023.

IMF loan packages are typically paid over in tranches. By the time it pulled the plug on the Senegal programme, the IMF has already disbursed $700m of the full amount. The IMF’s executive board must now decide whether to continue with the arrangement. If its review goes against Dakar, the board could ask the government to repay the disbursed funds.

If its review is favourable, the IMF could decide to keep the programme in place and release the next instalment of funding soon.

For context, the IMF’s $1.8bn loan is equivalent to roughly half of Senegal’s 2024 deficit. The upshot is that it would provide essential funds for public spending. Without it, Senegal will face a big financing shortfall.

Why hasn’t the IMF reached a decision about this yet?

On November 6, following a two-week visit to the West African nation, the IMF mission chief for Senegal, Edward Gemayel, said, “We’re engaged and determined to move as fast as possible to help.”

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A few days later, Prime Minister Sonko revealed that Gemayel’s team had urged Senegal to carry out a restructuring – in which old debt is swapped for new debt with longer maturities, lower interest rates, or a reduced debt stock – so the country repays less. But these arrangements generally lead to reduced public spending and slower growth.

Countries that default on their debt typically struggle because they are forced to cut spending to stabilise their finances, leaving less money for public services and investment. Investor confidence also tends to fall, making it harder and more expensive for governments to borrow.

At a meeting of Pastef officials on November 8, Sonko, who has considerable influence over economic policy, said he had rejected the IMF’s proposal to restructure Senegal’s debt. But his decision to reject the IMF’s plan has left Dakar with few options to narrow his country’s fiscal gap.

Looking ahead, the prime minister will have to convince the Washington-based IMF to release its paused loan by presenting a credible fiscal plan that restores Senegal’s finances without resorting to a debt restructuring.

But Gemayel has already cautioned that the government’s 2026 budget is “very ambitious”, citing large tax increases. “We’ve never seen this before,” he said. “So, they need to be careful.”

What has the impact of this been on Senegal’s economy?

Sonko’s decision to reject the IMF’s restructuring plan has rattled investors. On Monday, November 10 – the first trading day after Sonko’s cabinet meeting – Senegal’s 2031-dollar bonds fell by 4 percent to $73.1. Elsewhere, its notes due in 2048 fell by 2.4 cents to $60.30.

“The bonds dropped as market players reacted to the IMF having requested a restructuring,” said Leeuwner Esterhuysen, an Africa analyst at Oxford Economics. “There’s clearly a high degree of debt distress and little prospect of IMF funding anytime soon.”

“It seems the Fund is making a new loan contingent on Dakar accepting a restructuring,” Esterhuysen told Al Jazeera. “For now, the government isn’t playing ball … which will extend the stalemate,” he said.

Another sign of market anxiety is that the cost of insurance against default – in the form of credit-default swaps – almost doubled in the days leading up to November 12, rising from 750 to 1,120 basis points, or 3.7 percentage points.

During a speech at a rally in Dakar on November 11, Sonko insisted, “Senegal is a proud nation. We will not be treated like a failed state. Mobilising tax revenue is better than accepting a debt restructuring.”

Since 2020, Zambia, Ghana, Ethiopia, and Chad have all been forced to restructure their debt. But the long and drawn-out process, and accompanying economic hardship, have made debt rewrites unpalatable for other African governments.

Kenya, another debt-strapped country, instead opted for costly trade-offs – tax hikes and subsidy cuts – last year. The measures were aimed at reducing Kenya’s budget deficit. But they also sparked deadly protests, highlighting the political risks associated with austerity.

How has this affected the political situation in Senegal?

Sonko is opposed to an IMF-backed restructuring because “he doesn’t want to undermine his 2024 election campaign pledge to restore Senegal’s sovereignty”, said Paul Melly, a consulting fellow on the Africa programme at Chatham House.

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Melly also noted that Sonko is contending with “tensions” between himself and President Faye. Earlier this month, it emerged that Sonko’s party rejected Faye’s attempt to lead a revamped coalition, a move viewed as an effort to consolidate power.

And though Sonko serves under Faye, he is widely viewed as a key power broker, often shaping policy on his own terms. “Sonko was never going to be a subordinate prime minister,” Melly told Al Jazeera.

As such, Senegal’s fiscal position represents a major political challenge for Sonko. He still wants to assert his “sovereignty” line, but may need to impose unpopular spending cuts to stay ahead of debt repayments.

How else could Senegal address its debt problem?

In recent weeks, the government has introduced new levies on tobacco, alcohol, gambling and widely used mobile money transfers. It has also made efforts to cut back on travel outlays and car purchases as part of its internal efforts to cut spending.

“It’s a tricky balance,” said Melly.  “Expectations remain high even as the economic challenges are huge.”

If the government concedes to the IMF, “it may result in voter disillusionment at the next municipal elections in early 2027.” It may also result in civil strife.