States in general go into debt to support economic activity and finance the budget deficit. To avoid an economic recession, they tend to accumulate debt instead of getting out of debt. This is the case of the United States, whose debt reached 123% of GDP in 2023 (76% for Senegal). This debt has been an engine of American growth. From 2007 to 2023, the per capita GDP growth rate reached 19.2% in the United States, compared to only 7.6% in the euro zone. Under these conditions, the gap in living standards between Americans and Europeans is widening, and we can consider, not without reason, that American budgetary policy explains part of this growth gap with Europe.
If a State issues a 5-year Assimilable Treasury Bond (OAT), it will repay the interest (for example 5% of the amount of the bond issued) each year for 5 years, but will repay the capital in one go, at ‘due date. The amount of capital to be amortized is so high that the State will be forced to go back into debt.
But if, when the OAT expires, it will be necessary to re-indebt for the same amount and if interest rates have increased significantly, this could cause difficulties for the State and its budget to cope with the debt burden (cost of borrowing). This is a situation that African states are often faced with.
In times of very low interest, it is advantageous to take on debt, since it costs nothing and sometimes even pays off (negative interest). At the end of November 2020, the average interest rate on issuance of loans issued by Germany was -0.56%, which translates into 7.07 billion euros in revenue. For comparison, in France, the medium and long-term financing cost of the State for 2020 stood at -0.14% in mid-November. Going into debt to pay debts, in these circumstances, is therefore costless.
Furthermore, there are two concepts that allow us to understand why States go into debt to pay debts: debt refinancing and debt reprofiling. These two terms are almost synonyms. By refinancing we mean the granting, by creditors, of new credits which will be used in early repayment of already existing loans. Borrowers may choose to refinance a loan for many reasons, but one of the most common is to try to reduce the interest rate on the loan.
Debt reprofiling involves changing the overall schedule of future repayments, through debt refinancing. For example, Senegal carried out an issue of Eurobonds in 2021, involving 775 million euros, or 508 billion FCFA, with a fixed interest rate of 5.375% and for a maturity of 16 years. This loan was used to repay in advance 70% of the Eurobond of 500 million dollars (10 years at 6.25%) which was due to mature in 2024. Such re-indebtedness was doubly beneficial by lowering the interest rate of the debt, from 6.25% to 5.375%, and by extending the repayment period by 13 years.
Whatever the amount of public debt, the essential thing is to carry out optimal management which ensures its sustainability. The sustainability of public debt depends on its long-term trajectory. This in turn depends on budgetary policies (i.e. the accumulation of annual primary balances), and the gap between the interest rate (r) and the growth rate of nominal GDP (g). All things being equal, as long as the gap between the growth rate of the economy and the interest rate (commissions + interest) remains positive, the risk of unsustainability is avoided.
The Eurobond of 750 million dollars that Senegal has just issued on June 3, 2024, at the rate of 7.75% for a maturity of 7 years remains sustainable, given the growth rates close to 10% expected in the coming years . Hope is based on the upcoming exploitation of oil and gas. In this context, going into debt to pay debts is not scandalous, if it is a necessity to ensure the growth of the Senegalese economy.
* By Professor Amath Ndiaye
FASEG-UCAD
