DEBT FOR DEVELOPMENT: TOWARDS A MACROECONOMIC SUSTAINABILITY ANALYSIS

Jacob Assa –

Debt Sustainability Analyses (DSAs) are the most common tool to evaluate the status, causes and resilience of sovereign debt in developing countries. However, DSAs fail at this task as they use microeconomic logic borrowed from private banking practices.
DSAs look at the size of public deficits and debt in a vacuum, using arbitrary thresholds. Instead, a macroeconomic sustainability analysis looks at all three sectoral balances – public, external and private. This is critical since, as public deficits are mirror images of private surpluses (holding the external balance constant), fiscal consolidation will, ceteris paribus, impoverish the private sector and retard growth. Another weakness of DSAs is their indifference to the function of public spending.

A macroeconomic sustainability analysis looks at whether a deficit is productive (e.g. spent on increasing productive capacity), its impacts on unemployment, and inflation. This allows for a more realistic assessment of how specific deficits impact the debt burden (e.g. productive deficits can reduce debt burdens over time). DSAs also ignore the economic sovereignty of nation states, lumping together foreign currency debt with domestic debt.

The former has much greater default and exchange rate risks, while the latter is equivalent to private wealth (as the bonds are owned by domestic people and institutions). A macroeconomic sustainability analysis tracks this difference and recommends ‘domesticating’ foreign debt by investing in import-replacing productive capacity in key sectors such as food, fuel and fertilizers. As all successful developers have proven, less foreign debt makes for greater resilience to external shocks, while public domestic deficits and debt can be drivers of development and industrialization.

The policy implication of DSAs is usually fiscal consolidation, which can hurt development and even increase the debt burden. By contrast, our macroeconomic sustainability analysis recommends keeping the private sector balance positive, targeting public spending to productive purposes, and minimizing the ratio of foreign to total debt. Senegal’s membership of WAEMU and its lack of currency-issuing power somewhat limit the extent to which these policies can be pursued.

However,even some progress in these three areas can increase the country’s monetary sovereignty and reduce
its dependence on foreign financing, making it more resilient and accelerating its structural
transformation.

This Policy brief is part of the editorial series published during the Experts meeting and International Conference organized by IDAN on Senegal’s debt Crisis (11 to 13 May,Dakar,Senegal).