Sub-Saharan Africa’s Shifting Debt Landscape: A Rise in Domestic Borrowing

A significant transformation is underway in sub-Saharan Africa, as governments increasingly favor domestic debt over external borrowing. This shift presents both opportunities to bolster economic resilience and development and novel challenges that require careful management. The changing dynamics of debt in the region are reshaping economic strategies and demanding a nuanced approach to financial stability.

From External Reliance to Domestic Markets

At the beginning of the 21st century, sub-Saharan African governments heavily relied on external loans, particularly concessional lending from bilateral and multilateral institutions. Following debt relief initiatives like the Heavily Indebted Poor Countries Initiative, and fueled by economic growth and global investor interest, many countries began issuing Eurobonds. Even as broadening access to financing, this also increased exposure to currency fluctuations and shifts in international investor sentiment. The disruption of global markets in 2022, with rising interest rates, largely shut many African nations out of international capital.

In response, countries have increasingly turned to borrowing within their own borders, issuing debt in local currencies. This transition has resulted in most of sub-Saharan Africa’s public debt now being domestic IMF.

The Benefits of Domestic Debt

Tapping into domestic debt markets offers several advantages. Governments can borrow in their own currencies, mitigating the risks associated with exchange rate shocks and reducing the require to use foreign reserves for repayment. Domestic debts are governed by local laws, simplifying management and increasing predictability. Reliance on international investor sentiment and global interest rate fluctuations is lessened. The recent slowdown in Eurobond issuance for the region – with no new issuances between spring 2022 and January 2024 – highlights the dangers of over-dependence on a single source of financing.

The benefits extend beyond government balance sheets. Robust domestic debt markets can support broader macroeconomic growth and provide buffers against economic shocks. Regular issuance of domestic debt strengthens central banks’ monetary policy tools, aiding in economic steering and inflation control. The development of a “yield curve” – a tool for pricing risk and fostering financial market development – is also facilitated, laying the groundwork for a thriving private sector crucial for job creation and economic growth. In a region where access to financing is often a major obstacle for businesses, building strong capital markets is paramount.

Emerging Risks and Challenges

Despite the advantages, domestic debt markets introduce new risks. Domestic debt typically has shorter maturities than external loans, sometimes spanning only days or months rather than years or decades. While some countries, like Mauritius and Tanzania, have successfully extended these maturities, others with less developed frameworks and higher macroeconomic vulnerabilities are forced to rely on short-term borrowing. Ghana, following its 2023 domestic debt restructuring, has primarily issued T-Bills maturing in under a year, with an average outstanding maturity of less than three months as of November 30, 2025 IMF.

Shorter maturities create rollover risk – the potential for higher interest rates or difficulty finding new buyers when debt comes due. Building trust through transparent and credible debt management is essential to gradually extend maturities and reduce these risks. Another challenge is cost; domestic debt often carries higher interest rates than concessional international loans, and sometimes even higher than market-rate Eurobonds. The median country in sub-Saharan Africa issued domestic debt at an average of 8.8 percent interest in 2024 IMF. However, considering the region’s higher inflation rates, the real cost of debt can vary significantly.

There is also a risk of overwhelming small local financial systems. Banks in many countries hold substantial amounts of government debt, potentially increasing interest rates and limiting credit availability for businesses. This creates a cyclical problem: banks often purchase government debt due to limited private sector lending opportunities, but their large holdings then restrict credit for businesses. Government pressure on banks to purchase more debt can exacerbate this issue.

The growing sovereign-bank nexus is a related concern. As banks hold more government debt, their fortunes become intertwined, creating a potential feedback loop where a decline in a government’s creditworthiness can damage bank assets and trigger a banking crisis. This nexus is growing faster in sub-Saharan Africa than anywhere else, particularly in low-income countries IMF.

Mitigating Risks and Fostering Sustainable Debt Management

Expanding the investor base beyond banks and strengthening financial oversight are crucial steps to mitigate these risks. Allowing foreign investors to purchase domestic debt can lower yields and increase liquidity, reducing debt-servicing costs IMF. However, this introduces the risk of volatile “hot money” flows.

Overall government debt in sub-Saharan Africa has stabilized, albeit at a high level. However, debt servicing costs continue to rise, squeezing government budgets and reducing investment in vital sectors like health, education, and infrastructure. Currently, a typical government in the region spends approximately one-seventh of its revenue on interest payments alone.

Countries that integrate domestic debt market development into a broader economic strategy are best positioned to harness its benefits and manage its risks. Transparent and credible debt management practices, strong legal and regulatory frameworks, and a clear debt sustainability strategy are fundamental. Addressing weaknesses in public financial management, and ensuring efficient public investment, are also essential.

domestic debt can be a powerful tool for resilience and sustainable development, but only as part of a comprehensive and well-managed economic strategy.