Fiscal Consolidation and Economic Growth: The Case of Senegal

Abstract

The Senegalese economy has undergone a severe blow after the COVID-19 pandemic, which has affected all of the country’s fundamental sectors. At the end of 2023, the public finance situation is characterized by a budget deficit of 10% of GDP and a public debt that exceeds 80% of GDP; no longer respecting ECOWAS standards. To overcome these difficulties, the new public authorities have decided to adopt a new public policy framework called “Senegal’s National Agenda for Transformation 2050”. As part of the National Development Strategy 2025-2029, fiscal consolidation is essential to restore the balance of public finances and boost dynamic growth. This article aims to identify the direct and indirect effects of fiscal consolidation on economic growth, in a context characterized by budget deficit and excessive debt. By specifying a model in which the potential GDP depends on budgetary variables, private investments and the cross-effect between private and public investments, we introduced a partial adjustment hypothesis developed by Nerlove (1981) . At the end of our estimates, we show that fiscal policy has direct positive effects on economic activity and that the cross-effect (or indirect effect) is significant and negative, reflecting a crowding-out effect on the private sector. In order to consolidate public finances, the results emphasize that the Government should avoid making budget cuts on public investments so as not to compromise potential economic growth and the economic emergence strategy. The Government would benefit more, within the framework of its budgetary consolidation, from reducing public consumption expenditure presenting a reversible nature and from improving its management of tax revenues through a policy of collection of unpaid taxes, a broadening of the tax base and a reduction of “tax carrots”.