IMF: Africa’s Domestic Debt Rise Carries New Risks
African governments are increasingly turning to domestic borrowing to finance public spending as access to international capital markets remains constrained, a shift that offers protection from foreign exchange shocks but introduces fresh financial risks that threaten banking stability and economic growth across the region.
The International Monetary Fund disclosed in its latest analysis titled “The New Face of African Debt” that most public debt in sub-Saharan Africa is now raised locally rather than from external lenders, marking a fundamental transformation in how governments fund their budgets after years of relying on concessional loans from bilateral and multilateral institutions.
“Most of sub-Saharan Africa’s public debt is now domestic,” the IMF stated in the report, noting that the transition allows governments to borrow in their own currencies and reduces exposure to external financial shocks, but carries significant risks that must be carefully managed.
The shift follows a prolonged period during which several African countries were effectively shut out of international debt markets after global interest rates surged and financial conditions tightened in 2022. The IMF reported that no countries in sub-Saharan Africa issued Eurobonds between spring 2022 and January 2024, underscoring the danger of relying too heavily on a single source of financing.
In response, governments increasingly turned to domestic debt markets, issuing treasury bills and bonds in local currencies to meet their financing needs. The IMF said this transition has significantly altered the composition of public debt across the region, with domestic borrowing now accounting for more than half of total debt in many countries.
According to the report, African governments previously relied heavily on external loans, particularly concessional funding from bilateral and multilateral institutions that offered lower interest rates and longer repayment periods. Borrowing patterns began to change after debt relief initiatives reduced external debt levels and countries gained broader access to international capital markets in the 2000s.
Many countries subsequently issued Eurobonds in foreign currencies, exposing them to exchange rate risks and shifts in global investor sentiment. When global financial conditions deteriorated sharply in 2022, several governments found themselves unable to refinance maturing debt or access new funding from international markets.
The IMF noted 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, the report said.
However, the institution 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, the report stated.
The IMF 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 percent in 2024, reflecting the high cost of financing in many economies, according to the analysis.
Another concern highlighted in the report 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 stated.
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 sub-Saharan Africa is seeing this nexus grow faster than anywhere else in the world, driven primarily by low-income 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, according to the report.
United Nations data released in 2025 showed that sub-Saharan Africa recorded the steepest decline in debt sustainability indicators among developing regions, with governments spending 18.7 percent of revenues on servicing external public and publicly guaranteed debt in 2024, three times the level in 2014.
According to the African Development Bank, African countries were projected to allocate around 74 billion dollars to debt service in 2024, marking a 335 percent increase compared to 17 billion dollars in 2010.
The deterioration in debt sustainability comes despite substantial debt relief provided through the Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative, which significantly reduced debt burdens across the region in the 2000s.
The HIPC Initiative was launched in 1996 by the IMF and the World Bank to ensure that the poorest countries in the world were not overwhelmed by unmanageable or unsustainable debt burdens. The programme was designed to reduce debt to sustainable levels for countries meeting strict criteria and implementing economic reforms.
In 1999, the initiative was enhanced to provide faster and broader debt relief and to strengthen the links between debt relief, poverty reduction and social policies. The MDRI was introduced in 2005 to supplement the HIPC Initiative and help accelerate countries’ progress toward the United Nations Millennium Development Goals.
The MDRI granted countries 100 percent relief on eligible debts owed to three multilateral institutions, the IMF, the International Development Association of the World Bank, and the African Development Fund, if they completed the HIPC Initiative process.
To date, 37 countries, 31 of them in Africa, have received debt relief through the HIPC Initiative and the MDRI. Between 1996 and the mid-2000s, the initiatives reduced debt stocks by more than 90 percent for countries that reached completion point, according to IMF data.
Debt service paid by these countries declined by about three percentage points of GDP between 1999 and 2006, while poverty-reducing expenditures increased by about the same magnitude. Before the HIPC Initiative, eligible African countries were spending slightly more on debt service than on health and education combined, but after receiving relief, such spending became more than five times the amount of debt service payments, according to the IMF.
However, despite the significant debt relief provided through these initiatives, public debt ratios in sub-Saharan Africa increased sharply over the following decade. From 2012 to 2022, the median public debt to GDP ratio increased by about 30 percentage points, from 28.8 percent of GDP to 59.1 percent, according to IMF data.
The increase in debt ratios was widespread, occurring in all but four countries of the region. Six countries experienced an increase from one to 20 percentage points, 29 had an increase between 20 and 50 percentage points, and the ratio rose by more than 50 percentage points in five countries.
The interest burden on public debt also increased sharply, reducing resources available to finance development needs from a median of 4.6 percent of government revenues in the early 2000s to much higher levels by 2024.
According to Afreximbank research released in 2024, Africa’s debt-to-GDP ratio stood at approximately 66.8 percent in 2024, down from a peak of 68.6 percent in 2023. Based on IMF forecasts, the debt in percent of GDP is projected to decline further to 63.5 percent of GDP in 2028, driven by robust growth, higher-than-historical inflation forecasts, and retreating fiscal imbalances.
The report noted that African debt remains mostly external, with external debt accounting for almost 60 percent of total debt and reaching 1.2 trillion dollars. About 67 percent of Africa’s total external debt stock is concentrated among 10 African countries, with Egypt, South Africa, Nigeria, Morocco, Mozambique, Angola, Kenya, Tunisia, Sudan and Ghana accounting for the largest shares.
The composition of Africa’s creditors has also changed significantly. Private creditors now hold more than half of Africa’s external debt at 54.3 percent, outpacing the contributions of bilateral and multilateral creditors, which accounted for 18.7 percent and 27.1 percent respectively, according to Afreximbank data.
The cost of borrowing has increased markedly for African countries in recent years. Sovereign spreads for sub-Saharan Africa have soared to three times the emerging market average since the start of the global tightening cycle in 2022, according to IMF data.
Several African countries have faced severe debt distress in recent years. Ghana and Zambia officially defaulted on their debt obligations and have been engaged in debt restructuring negotiations under the G20 Common Framework. Chad became the first country to reach an agreement with its creditors under the Common Framework in November 2022.
As of 2022, more than half of the low-income countries in sub-Saharan Africa were assessed by the IMF to be at high risk or already in debt distress. The amount of impaired loans in Africa increased to 149.4 billion dollars in 2022 from 112.2 billion dollars in 2021 and 100.2 billion dollars in 2020, according to data from Afreximbank.
To manage the risks associated with domestic borrowing, the IMF 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 help deepen domestic debt markets and reduce reliance on banks, the report stated.
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. Countries that approach domestic debt market development as part of a broader economic strategy are best positioned to harness its benefits and manage its risks, according to the report.
The institution also recommended that governments pursue revenue measures such as eliminating tax exemptions or digitalising filing and payment systems to mobilise domestic revenue. Research shows that mobilising domestic revenue is less detrimental to growth in countries where initial tax levels are low, whereas the cost associated with reducing expenditures is particularly high given Africa’s large development needs.
The IMF noted that one way to expand the pool of investors is to allow foreign investors to purchase domestic debt. Evidence shows that higher nonresident ownership of domestic debt is associated with lower yields and greater liquidity, which reduces debt servicing costs, the report stated.
The shift to domestic borrowing represents a major transformation in how African governments finance their operations, with implications that will shape the region’s economic trajectory for years to come. While the transition offers greater policy autonomy and reduced vulnerability to external shocks, it also requires careful management to avoid creating new risks to financial stability and long-term growth prospects.