Shifts from external to domestic debt come with rewards and risks
In the article “The New Face of African Debt,” published in Finance & Development by the International Monetary Fund, Amadou Sy and Athene Laws analyze the transformation of public debt structures in sub-Saharan Africa. The authors argue that many governments in the region are shifting from external borrowing toward domestic debt, a transition that offers new opportunities for economic resilience but also introduces significant financial risks. As African economies navigate tighter global financial conditions, domestic debt markets are increasingly becoming a central pillar of public finance.
The Shift Toward Domestic Debt
Historically, governments in sub-Saharan Africa relied heavily on external borrowing, particularly concessional loans from multilateral and bilateral partners. Following the Heavily Indebted Poor Countries (HIPC) Initiative, which significantly reduced external debt burdens, many countries turned to international capital markets and issued Eurobonds.
However, the global financial tightening that began in 2022 limited access to international markets. Rising interest rates and declining investor appetite for emerging market debt left many African governments unable to issue new Eurobonds. As a result, several countries increasingly turned toward domestic borrowing, issuing debt in local currency within domestic financial markets.
Today, this transition has significantly altered the structure of public debt in the region, with domestic debt now accounting for the majority of government liabilities in many sub-Saharan African economies.
Benefits of Domestic Borrowing
The growing use of domestic debt offers several advantages. First, borrowing in local currency reduces exposure to exchange rate fluctuations. Governments no longer face the same risks associated with servicing foreign-currency loans during periods of currency depreciation.
Second, domestic debt markets can strengthen broader financial systems. Regular issuance of government securities helps create benchmark yield curves, which play a crucial role in developing capital markets and improving price discovery for private sector financing.
In addition, domestic borrowing enhances the toolkit available to central banks. Government securities allow policymakers to conduct more effective monetary operations and manage inflation. In regions where access to private financing remains limited, stronger domestic financial markets can also support entrepreneurship, investment, and economic growth.
Emerging Risks in Domestic Debt Markets
Despite these advantages, domestic borrowing introduces new challenges. One key concern is the short maturity structure of domestic debt. Unlike external loans, which often extend over many years, domestic government securities are frequently issued for very short durations, sometimes only months.
Short maturities increase rollover risks. Governments must constantly refinance existing obligations, and unfavorable market conditions may force them to borrow at higher interest rates. Countries such as Ghana have experienced this vulnerability after restructuring domestic debt and relying primarily on short-term treasury bills.
Another concern involves the cost of borrowing. Domestic interest rates in sub-Saharan Africa often exceed those of concessional international loans. In 2024, the median domestic borrowing rate in the region reached approximately 8.8 percent, creating additional fiscal pressure on already constrained government budgets.
The Sovereign-Bank Nexus
A further risk arises from the growing interdependence between governments and domestic banking systems. In many countries, banks hold large quantities of government bonds. While this provides governments with a stable funding source, it can crowd out lending to the private sector.
This dynamic creates a potential sovereign-bank nexus. If government finances deteriorate, banks holding large amounts of sovereign debt may suffer losses, potentially triggering financial instability. Conversely, banking crises may force governments to intervene with costly bailouts, worsening fiscal conditions.
Expanding the investor base beyond domestic banks is therefore essential. Policymakers increasingly encourage participation from pension funds, insurance companies, and other long-term institutional investors. Some countries are also exploring controlled participation by foreign investors to improve market liquidity.
Reference
Sy, A., & Laws, A. (2026, March). The new face of African debt. Finance & Development. International Monetary Fund. https://www.imf.org/en/publications/