GENEVA—Ever since the discovery of previously undisclosed liabilities revealed the true size of Senegal’s public debt, the country’s political debate has revolved around a single question: Should it restructure? Many economists argue that it should, while others believe that fiscal adjustment and stronger institutions can restore confidence without imposing losses on creditors. Both sides, however, mistakenly assume that Senegal’s challenge is primarily a fiscal one.
The conventional approach to debt sustainability focuses on government finances: Will primary surpluses and economic growth stabilize public debt? Are debt-servicing obligations manageable? And how significant are the rollover risks? These are important questions, but countries do not repay external debt with fiscal surpluses alone—they repay it with foreign currency.
Like many sovereign-debt crises before it, Senegal’s current predicament is as much about external imbalances as it is about public finances. Over the past decade, the country has consistently imported far more than its export earnings and remittance inflows could cover, financing the resulting deficits through foreign borrowing and other capital inflows.
While this strategy supported investment and growth, it also increased external liabilities. A growing share of these obligations is now owed to private external creditors, largely through Eurobonds and other debt instruments that must ultimately be repaid in foreign currency earned from exports.
The question, then, is where those foreign-exchange earnings will come from. Bound by the fixed exchange-rate regime of the West African Economic and Monetary Union (UEMOA), Senegal cannot devalue its currency to make exports more competitive and restore external balance. Instead, it must rebalance in one of two ways: through a painful internal devaluation—marked by lower wages, weaker domestic demand, and higher unemployment—or through sustained productivity gains in the tradable sector to boost exports and generate the foreign currency it needs.
Europe faced a similar dilemma during the 2010-12 eurozone crisis, as countries like Greece and Portugal grappled with severe external imbalances after years of abundant external financing. Neither could devalue its currency, leaving internal adjustment as the only option.
Greece, for its part, was forced to undergo a dramatic internal devaluation. Wages and domestic demand collapsed, unemployment soared, and output took years to recover. The current-account deficit eventually narrowed, but at an enormous social cost.
Portugal’s transition proved less traumatic. Unlike Greece, it relied on both fiscal consolidation and a more productive tradable sector. Higher productivity boosted exports and foreign-exchange earnings, making the rebalancing more socially and politically sustainable.
Whether Senegal becomes a Greek tragedy or experiences a Portuguese-style recovery may depend less on fiscal arithmetic than on the productivity of its tradable sector. In fact, Senegal may already have an important advantage: new oil and gas production, together with its established mineral exports, could significantly strengthen the country’s external position. If these earnings are sustained and support economic diversification, they could help ease debt pressures over time.
But there is a catch: economic transformations take time, and financial markets rarely provide it. Portugal’s adjustment succeeded in part because it benefited from a robust financial backstop. In 2012, as the eurozone appeared on the verge of collapse, European Central Bank President Mario Draghi famously pledged to do “whatever it takes” to preserve the single currency. Those three words—and the policies that followed—shifted market expectations, lowered borrowing costs, and bought governments the time needed to implement structural reforms.
The lesson from the eurozone crisis was not that fiscal or external fundamentals had suddenly become irrelevant. Rather, successful adjustment requires financial stability. Without an effective backstop, even countries pursuing the right policies can be derailed by adverse market dynamics.
The question is whether the UEMOA has an equivalent backstop. Who is willing to do “whatever it takes” for the monetary union? The obvious candidate is the Central Bank of West African States. But unlike the ECB, the BCEAO does not issue a global reserve currency. Thus, its ability to support member states during a crisis is constrained by the UEMOA’s foreign-exchange reserves.
Senegal, of course, is not the only West African country facing mounting debt pressures. Several other UEMOA members have also accumulated substantial external obligations to private creditors, creating a shared external-financing vulnerability. Recent crises in Ghana, Zambia, and Ethiopia have illustrated how these vulnerabilities can complicate debt restructurings and amplify financial instability.
UEMOA members should not assume they will fare differently. West African policymakers have spent years strengthening fiscal rules and surveillance frameworks. Those efforts remain essential, but Europe’s experience shows that monetary unions need mechanisms to contain financial stress and give economies time to rebalance—a particularly difficult challenge for the UEMOA, given that its capacity to provide a regional backstop is constrained by the union’s shared foreign-exchange position.
Whether the UEMOA can develop the institutional architecture needed to withstand such shocks, both now and in the future, remains an open question. While the beginning of a financial crisis is often easy to identify, its ultimate consequences are not. Addressing these risks will require coordinated action by member states, regional institutions, and international partners.
Copyright: Project Syndicate, 2026.
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