Modelling the Economic Resilience Effects of Climate Adaptation Infrastructure Investments in Senegal: Evidence from a Dynamic Stochastic General Equilibrium (DSGE) Model

Abstract

Senegal is a coastal country in sub-Saharan Africa exposed to coastal erosion and the increasing recurrence of seasonal flooding. Through the Senegal 2050 vision, the country is pursuing a structural transformation of its economy supported largely by endogenous funding mechanisms aimed at achieving sustainable and stable development. This study analyses the economic impact of a major climate shock on the Senegalese economy using a dynamic stochastic general equilibrium (DSGE) model. Two dimensions are examined: (i) the financing mechanisms for post-disaster reconstruction (through taxation or domestic borrowing) and (ii) the nature of public investment (standard infrastructure or resilient infrastructure). The findings show that tax-based financing for post-disaster reconstruction leads to a temporary contraction in consumption and private investment, yet helps limit the deterioration of the current account balance and accelerates the return to fiscal equilibrium. By contrast, reliance on domestic borrowing increases domestic debt over the long term. At the same time, the simulations indicate that preventive investment in adaptation infrastructure reduces total factor productivity (TFP) losses by half and alleviates the fiscal pressure required for reconstruction, reflecting stronger macroeconomic resilience. These findings suggest that the State could incorporate 0.5% of GDP as a minimum budgetary allocation within public investment expenditure and strengthen multiannual climate adaptation planning in order to reinforce resilience to climate change.