Sovereign Africa Ratings

Navigating Senegal's Economic Landscape: Promise and Uncertainty Amidst Leadership Transition

Senegal's recent democratic transition, marked by the peaceful election of Bassirou Diomaye Faye on April 2nd, 2024, offers a unique combination of economic opportunity and possible challenges.

New Leadership, Renewed Confidence

Faye's victory fosters stability, a crucial ingredient for economic growth. According to The International Monetary Fund, Senegal's GDP Growth is projected to accelerate to 10.6 percent in 2024 largely driven by expected oil and gas production. Regaining investor confidence is also vital. A 2023 report by UNCTAD^[1] estimates that foreign direct investment (FDI) to Senegal declined by 15% during the election period. Faye's leadership has the potential to reverse this trend. The tourism sector, which contributes roughly 7% to Senegal's GDP, can also rebound. Hotel occupancy rates reportedly plummeted during the pre-election uncertainty. A return to political stability can encourage tourism’s recovery.

Shaping the Future

Faye's policies, which emphasise combating corruption and modernising the economy, have the ability to promote long-term sustainable development. Transparency International's 2023 Corruption Perception Index ranked Senegal 70 out of 180 countries, with a score of 43/100. So, while Senegal isn't the worst, there's a perception that some government officials might ask for bribes or make things difficult for businesses unless they get paid extra. This can discourage investment and make it harder for the economy to grow. Successfully addressing corruption could lead to significant economic gains.

However, navigating these transitions involves short-term risks. Renegotiating contracts, notably in the oil and gas sector, which accounts for about 10% of Senegal's exports and earns significant government money, may cause conflicts with partners such as France.

Uncertainties Linger

Key sectors such as energy, gas, and tourism have yet to see how Faye's ideas manifest. While stability is predicted, attracting foreign investment may be difficult due to uncertainty surrounding new economic policies, particularly those involving currency changes. According to the Senegalese Ministry of Tourism, tourist visits decreased by 20% in the first quarter of 2024 when compared to the same period in 2023. This highlights the immediate economic impact of political uncertainty on the tourism industry, which generally generates roughly USD 7 billion per year. FDI inflows into Senegal have also exhibited symptoms of decline, with UNCTAD projecting a 15% drop in 2023 compared to the previous year. Restoring investor confidence will be critical for Faye's government to secure the funds required to carry out his economic agenda.

The Proposed New Currency

Faye's consideration for introducing a new currency in Senegal carries significant implications for foreign investors, prompting careful evaluation due to several key factors:

1. Uncertainty in Exchange Rates and Store of Value:
   1. Foreign investors typically operate using widely traded currencies such as the US Dollar or the Euro in Senegal. The introduction of a new currency creates uncertainty regarding exchange rates and the stability of the new currency as a store of value. This uncertainty may deter investment as businesses become wary of potential fluctuations affecting their returns.
2. Requirement for Stable and Exchangeable Currency:
   1. International trade heavily relies on established currencies for seamless transactions. Senegal's new currency must demonstrate stability and be readily exchangeable with other currencies to ensure smooth trade flow. However, achieving this may take time and could lead to disruptions in trade activities during the initial stages of implementation.
3. Complexity of Renegotiating Contracts:
   1. Many existing contracts, particularly in sectors like oil and gas, are denominated in foreign currencies. Transitioning to a new currency would necessitate renegotiating these contracts to reflect the change, which could prove to be a complex process. This may potentially lead to disputes with foreign partners, adding further uncertainty for investors.

While Faye's proposal may stem from aspirations for greater economic independence, the short-term challenges associated with the transition may outweigh the anticipated long-term benefits. Foreign investors might adopt a cautious approach, opting to wait until the situation becomes clearer. Consequently, this could potentially decelerate economic growth as investment activity slows down.

France's Long Shadow: Economic Implications of Severing Ties for Senegal

France's enduring economic partnership with Senegal presents a nuanced landscape of advantages and disadvantages, rendering the potential severance of ties a matter of significant consequence for Senegal's economy. Let's delve into the potential benefits and challenges of such a move:

Potential Benefits:

1. Trade Diversification Opportunities:
   1. Senegal stands to diversify its trade partnerships, diminishing overreliance on France. This diversification could facilitate more favourable deals with other nations, fostering a more balanced and resilient economy.
2. Stimulus for Domestic Development:
   1. A break from France would incentivise Senegal to bolster its domestic industries and infrastructure, laying the groundwork for long-term economic independence and sustainability.
3. Renegotiation Leverage:
   1. Senegal could leverage the break to renegotiate existing agreements with France, potentially securing more advantageous terms, particularly concerning debt repayment or resource exploitation.

Potential Challenges:

1. Decline in Foreign Investment and Aid:
   1. France serves as a significant source of foreign direct investment (FDI) and development aid for Senegal. Severing ties could precipitate a decrease in these vital funds, impeding economic growth and development initiatives.
2. Currency Instability Risks:
   1. The CFA franc, utilised by Senegal and other West African nations, is pegged to the Euro and backed by the French treasury. Disrupting this relationship could engender currency instability, impacting trade and investment within the region.
3. Trade Disruption and Dependency:
   1. France constitutes a major trading partner for Senegal, and an abrupt cessation could disrupt existing trade flows, potentially resulting in shortages of imported goods and affecting Senegalese exports to France.
4. Loss of Expertise and Technology Transfer:
   1. French companies often contribute valuable expertise and facilitate technology transfer to Senegal. Severing ties may entail a loss of this expertise, hindering development efforts and impeding technological advancements.

These considerations underscore the intricate balance Senegal must strike in navigating its future relationship with France, carefully weighing potential gains against foreseeable drawbacks to chart a path that best serves its economic interests.

Conclusion

Senegal finds itself at a pivotal juncture where political stability, underscored by internationally recognised free and fair elections, stands as a notable achievement. However, amidst this positive backdrop, economic uncertainty prevails. The success of Faye's presidency hinges on his adeptness in striking a delicate balance between implementing bold reforms and nurturing investor confidence.

Sovereign Africa Ratings will vigilantly monitor these unfolding developments to gauge Senegal's capacity to leverage this democratic transition into a phase of resilient and sustainable economic expansion, capitalising on the anticipated economic upswing. As Senegal navigates this critical juncture, the convergence of political stability and economic prosperity remains a central objective, shaping the trajectory of the nation's future.

1. United Nations Conference on Trade and Development ↑