Sub-Saharan African governments are increasingly turning to domestic borrowing to fill widening budget gaps a move that the International Monetary Fund (IMF) warns could heighten financial risks, squeeze private sector credit, and destabilize local banking systems.
In its Regional Economic Outlook released on Thursday during the IMF–World Bank Annual Meetings in Washington, the Fund noted that the region’s cost of capital remains elevated, with governments paying more to borrow at home than abroad.
“Local financial markets are underdeveloped characterized by shallow depth, fragmentation, illiquidity, and high transaction costs and lending spreads,” the IMF stated.
The report cautioned that new domestic borrowing has become “significantly more expensive” than external debt in many African countries. The growing dependence on local banks, it said, is pushing up financing costs and “crowding out private-sector investment.”
A Growing Risk for Banks and Fiscal Stability
The IMF highlighted that bank holdings of government debt in Sub-Saharan Africa are expanding faster than in any other region, creating what it described as a “vicious feedback loop.” In this scenario, weak government finances threaten banking stability, which in turn constrains credit growth and exacerbates fiscal strain.
Abebe Aemro Selassie, Director of the IMF’s African Department, told Reuters that the pivot toward local funding is both a sign of progress and a potential risk.
“About half of total public debt is owed to domestic banks,” Selassie said. “Access to external financing has been limited in recent years, but it’s also encouraging because we ultimately want countries to borrow in their own currency.”
However, he cautioned that excessive domestic borrowing could strain banking systems if governments face challenges servicing their debt obligations.
Cautious Return to International Markets
After being largely shut out of international capital markets in 2022 amid surging borrowing costs and global uncertainty, many African nations began cautiously re-entering global markets in 2024.
While borrowing costs have since eased, several governments remain burdened by existing debt and are treading carefully to avoid falling into new debt traps.
To bridge financing gaps, countries are combining domestic bond sales, private placements, and multilateral loans to fund their budgets and development priorities.
Call for Stronger Debt Management and Innovative Financing
The IMF urged African policymakers to strengthen debt management frameworks and improve transparency to attract long-term investors. It also warned against overreliance on so-called “innovative” financing tools, such as blended finance models and debt-for-development swaps, which remain limited in scope.
According to the report, blended-finance flows to Sub-Saharan Africa amount to roughly $6 billion annually, with examples such as Ivory Coast’s 2024 debt-for-education swap and Gabon’s 2023 debt-for-nature exchange still relatively small — typically below $1 billion per year globally.
Selassie emphasized the need to mobilize private and domestic resources as traditional aid flows decline.
“Attracting more private financing is essential,” he said. “It’s a complex area, but it’s an important way to supplement domestic savings and support sustainable growth.”
