## THE NEW FACE OF AFRICAN DEBT

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### Overview: shift from external to domestic borrowing
- At the turn of the millennium, sub-Saharan African governments relied heavily on external loans, particularly concessional lending in foreign currencies from bilateral and multilateral institutions.
- Over time many countries issued Eurobonds—loans issued in overseas markets and typically denominated in dollars or euros—broadening access to financing but increasing exposure to currency swings and sudden shifts in foreign investor sentiment.
- When international interest rates surged and global financial conditions tightened in 2022, many countries were shut out of global markets.
- As a result, most of sub-Saharan Africa’s public debt is now domestic.
- No countries in sub-Saharan Africa issued Eurobonds between spring 2022 and January 2024.

### Benefits of developing domestic debt markets
- Borrowing in domestic currency:
  - Sidesteps exchange rate shocks and the need to dip into foreign reserves for repayments.
  - Local laws govern debts, making management simpler and more predictable.
  - Reduces exposure to swings in international investor sentiment and global interest rates.
- Supports macroeconomic policy and financial development:
  - Regular issuance of domestic debt enhances central banks’ tool kits for monetary policy operations and helps keep inflation in check.
  - Issuance at different maturities generates a “yield curve”—a vital tool for pricing risk and fostering financial market development.
  - Lays a foundation for a thriving private sector, essential for job creation and economic growth.
- Country examples:
  - Mauritius and Tanzania have managed to lengthen domestic debt maturities, generating positive benefits for monetary policy and capital markets.

### New and growing risks from domestic debt
- Short maturities and rollover risk:
  - Domestic debt is typically issued for much shorter periods than external loans; sometimes just days or months rather than years or decades.
  - Ghana, since its 2023 domestic debt restructuring, has issued only T-Bills maturing in under a year, with an average outstanding maturity of less than three months as of November 30, 2025.
  - Shorter maturities expose countries to rollover risk—when old debt comes due, governments may face higher interest rates or struggle to find new buyers.
- Cost of domestic borrowing:
  - The median country in sub-Saharan Africa issued domestic debt at an average of 8.8 percent interest in 2024.
  - Domestic interest rates can be higher than concessional external loans and sometimes higher than market-rate Eurobonds.
  - Because inflation is higher in much of the region, the real cost of debt (after adjusting for inflation) can vary widely—and in some cases may even be negative.
- Sovereign–bank nexus and concentration risk:
  - In many countries, banks hold large amounts of government debt, which can push up interest rates and crowd out private-sector lending.
  - As banks hold more government debt, a loss in a government’s creditworthiness can wipe out bank assets and trigger a banking crisis, which can deepen fiscal stress.
  - Sub-Saharan Africa is seeing the sovereign–bank nexus grow faster than anywhere else in the world, driven primarily by low-income countries.
- Risks from foreign participation:
  - Allowing foreign investors to purchase domestic debt can lower yields and increase liquidity.
  - However, nonresident flows can be more volatile—responding strongly to investment conditions—and can cause large swings in yields and sales (“hot money” problems).
  - A lack of data on ownership can complicate policymaking.

### Key statistics and indicators (preserved exactly)
- No countries in sub-Saharan Africa issued Eurobonds between spring 2022 and January 2024.
- Ghana: average outstanding maturity of less than three months as of November 30, 2025.
- Median domestic debt interest in 2024: 8.8 percent.
- A typical government in the region spends about one-seventh of its revenue on interest payments alone.
- Chart 3 (government debt as percent of bank assets, change 2019 to 2024):
  - Other EMs: +3.2%
  - African EMs: +2.9%
  - African LICs: +4.8%
  - Other LICs: +3.3%

### Policy recommendations and best practices
- Treat domestic debt market development as part of a broader economic strategy:
  - Domestic borrowing should be deliberate and well planned to harness benefits and manage risks.
  - Countries that turn to domestic debt mainly as a crisis response—after losing access to external markets—are often more vulnerable.
- Strengthen debt-management practices:
  - Issue timely, accurate, and comprehensive debt statistics; communicate effectively with investors and the public.
  - Maintain strong legal and regulatory frameworks, prudent debt portfolio management, and a clear debt sustainability strategy.
- Improve public financial management:
  - Empower auditors, strengthen governance, oversee state-owned enterprises, and adopt sound cash management.
  - Ensure public investment management is efficient and effective so public resources (including debt) are directed toward growth-enhancing investments.
- Broaden and deepen the domestic investor base:
  - Expand demand for government debt by including pension funds, insurance companies, and other long-term private capital providers.
  - Allow prudent foreign participation while collecting ownership data and applying smart regulation to mitigate volatility.
- Strengthen financial institutions and supervision:
  - Reinforce banks and nonbank financial institutions through smart regulation and supervision to limit sovereign–bank feedback loops.
- Complement market development with private sector reforms:
  - Unlock barriers to business growth and economic diversification through reforms in the business environment, education, skill development, and infrastructure.
- Maintain stable macroeconomic conditions:
  - Sound fiscal management, low and stable inflation, and sustainable debt burdens are essential preconditions; domestic debt market innovation cannot compensate for macroeconomic weaknesses.

### Bottom line
- After successive shocks, overall government debt in sub-Saharan Africa has stabilized, albeit at a high level, while the cost of servicing this debt has continued to climb, squeezing budgets and crowding out vital investments in health, education, and infrastructure.
- Used wisely and as part of a comprehensive, well-managed economic strategy, domestic debt can be a powerful tool for resilience and sustainable development; but unmanaged risks—short maturities, high domestic borrowing costs, sovereign–bank linkages, and volatile nonresident flows—can amplify vulnerabilities.

*Amadou Sy and Athene Laws, IMF African Department.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2026/03/sy.pdf_