Full Breakdown
Senegal's Controversial Debt Strategy: The Use of Derivative Instruments
3/25/2026, 10:47:25 PM
Overview of Senegal's Debt Operations
In 2025, Senegal engaged in a series of debt-raising operations utilizing opaque derivative instruments known as total return swaps. The country's finance ministry defended these actions as transparent, asserting that they were conducted through domestic bond auctions from April to November. The proceeds from these operations were intended to address financing needs from the previous year, rather than obligations for 2026. However, reports surfaced indicating that Senegal had covertly borrowed €650 million ($754 million) from international institutions without public disclosure, raising concerns among investors and analysts.
Financial Context and Investor Concerns
Senegal's public finances have come under increased scrutiny following the government's revelation in September 2024 of at least $7 billion in previously hidden loans. This disclosure prompted the International Monetary Fund (IMF) to suspend a $1.8 billion funding package, leading to a selloff of the nation's bonds. Despite recently meeting coupon and principal payments on its foreign bonds, investor anxiety remains high, as evidenced by a rise in the sovereign risk premium over US Treasuries from 1,236 to 1,419 basis points.
The Role of Derivative Instruments
The total return swaps employed by Senegal are typically utilized by countries facing constrained financing conditions. These instruments can complicate debt restructuring processes due to features such as accelerated repayment clauses and preferential treatment for participating banks. Leo Morawiecki, an analyst at Abrdn Investments Ltd., noted that the full terms and counterparties involved in Senegal's swaps remain unclear, which could pose risks in future financial dealings.
Official Statements and Justifications
Finance Minister Cheikh Diba characterized the total return swaps as a mechanism to deepen regional capital markets and convert foreign currency debt into local currency. He stated, “These are technical secondary market instruments that make it possible to translate foreign currency debt into local currency debt, often through local banks, and often Ivorian banks.” The finance ministry indicated that the cost of these swaps was approximately 7.1%, significantly lower than the yields on Senegal's dollar and eurobonds, which stand at 21% and 14%, respectively.
Criticism and Opposition
Despite the government's defense, critics express concerns regarding the lack of transparency surrounding the derivative instruments. The opaque nature of these financial tools has drawn parallels to the collapse of Archegos Capital Management LP in 2021, highlighting the potential risks associated with such financing strategies. The finance ministry has not provided detailed responses to inquiries about the specifics of the swaps, further fueling skepticism among investors.
Conclusion
Senegal's use of total return swaps represents a complex and controversial approach to managing its debt. While the government promotes these instruments as a means to enhance financial stability and market depth, the associated risks and lack of transparency raise significant concerns among investors and analysts alike. As Senegal navigates its financial landscape, the implications of these derivative operations will likely continue to unfold.
