The International Monetary Fund (IMF) has revealed that governments across sub-Saharan Africa are increasingly relying on domestic borrowing to finance public spending as access to foreign loans becomes more difficult.
The new report noted that most public debt in the region is now raised locally rather than from external lenders, marking a major shift in how African countries fund their budgets.
While the move offers protection from foreign exchange shocks and global market volatility, it also introduces new financial risks that must be carefully managed.
According to the IMF analysis titled ‘The New Face of African Debt,’ African governments previously relied heavily on external loans, particularly concessional funding from bilateral and multilateral institutions. But borrowing patterns began to change after debt relief initiatives reduced external debt levels and countries gained broader access to international capital markets.
Many countries subsequently issued Eurobonds in foreign currencies, exposing them to exchange rate risks and shifts in global investor sentiment. When global interest rates surged and financial conditions tightened in 2022, several countries were effectively shut out of international debt markets.
In response, governments increasingly turned to domestic debt markets, issuing treasury bills and bonds in local currencies. The IMF said this transition has significantly altered the composition of public debt across the region.
“Most of sub-Saharan Africa’s public debt is now domestic,” the report said, noting that the shift allows governments to borrow in their own currencies and reduces exposure to external financial shocks.
The IMF added that domestic debt markets can support economic development by strengthening financial systems and improving monetary policy tools. Regular issuance of government securities helps build a yield curve that supports broader capital market growth and private sector financing.
However, the report warned that domestic borrowing also carries significant risks. Domestic debt is often issued for much shorter periods than external loans, increasing the risk that governments will need to refinance frequently at higher interest rates.
It also noted that borrowing locally can be expensive. The median country in sub-Saharan Africa issued domestic debt at an average interest rate of 8.8 per cent in 2024, reflecting the high cost of financing in many economies.
Another concern is the growing exposure of banks to government debt. As banks purchase large volumes of government securities, credit to businesses may decline, limiting private sector growth and economic expansion.
“A loss in a government’s creditworthiness can wipe out bank assets and trigger a banking crisis. A banking crisis, in turn, can lead to bank bailouts, reduced private credit and growth, capital outflows, and a deeper fiscal crisis,” the report said.
The report warned that the growing link between governments and banks, often described as the sovereign-bank nexus, is expanding rapidly across sub-Saharan Africa and poses risks to financial stability in many countries.
The IMF noted that although government debt levels in sub-Saharan Africa have stabilised after years of economic shocks, debt servicing costs remain high. A typical government in the region now spends about one-seventh of its revenue on interest payments alone, leaving less fiscal space for critical sectors such as health, education and infrastructure.
To manage the risks, the report stressed the need for stronger debt management, transparent fiscal policies and broader financial sector reforms. Expanding the investor base to include pension funds, insurance companies and other long-term investors would also help deepen domestic debt markets.
The IMF said domestic borrowing can strengthen resilience and support development, but only if it forms part of a well-managed economic strategy supported by stable macroeconomic conditions.
