Economy News Correspondent
Ruth Ogbechie
The International Monetary Fund (IMF) has raised fresh concerns over the growing reliance of Sub-Saharan African countries on domestic borrowing to finance government budgets. In its latest Regional Economic Outlook, released during the IMF and World Bank annual meetings in Washington, the Fund warned that the practice is straining local financial systems, driving up borrowing costs, and crowding out private sector investment.
According to the IMF, many African governments are increasingly turning to local banks as alternative funding sources amid limited access to international capital markets. While this shift reflects some progress toward financial independence and local currency financing, the Fund emphasized that it comes with significant trade-offs.
“The domestic cost of capital remains elevated across the region,” the IMF noted, pointing out that local markets remain “underdeveloped, fragmented, and illiquid,” with wide lending spreads and high transaction costs.
Rising Costs, Declining Private Investment
The report reveals that new domestic borrowing has become “significantly more expensive than external borrowing” in several Sub-Saharan African economies. As governments compete with private businesses for credit from the same pool of local banks, interest rates have surged, making it harder for small and medium-sized enterprises (SMEs) to access affordable loans.
This crowding-out effect is dampening private-sector growth — a critical component for job creation and economic recovery across the continent. With many African economies still struggling to recover from post-pandemic inflation, currency depreciation, and global supply chain shocks, the IMF warned that excessive government borrowing could undermine financial stability and long-term growth prospects.
“Domestic banks’ holdings of government debt are expanding faster in Sub-Saharan Africa than in any other region,” the report stated. “This trend, if unchecked, could trigger a vicious cycle in which fiscal stress weakens the banking sector, and a weakened banking sector further deepens fiscal distress.”
Banking Sector Under Pressure
Abebe Aemro Selassie, Director of the IMF’s African Department, said that while domestic borrowing allows governments to finance development without relying heavily on foreign lenders, it also exposes the financial system to elevated risks.
“Roughly half of total public debt across Sub-Saharan Africa is now owed to domestic banks,” Selassie explained. “While this shows progress in local financing, it can become problematic if governments face challenges in servicing their debt. Banks become overexposed to sovereign risks, which can lead to a tightening of credit to the private sector.”
Local banks, often the largest holders of government securities, are becoming increasingly dependent on government repayments to maintain liquidity. Any delays or defaults in servicing these obligations could ripple through the financial system, affecting credit availability, savings, and overall investor confidence.
Struggles With Global Market Access
Over the past few years, many African countries have found it difficult to access global capital markets due to high international interest rates and concerns about debt sustainability. Nations like Ghana, Zambia, and Ethiopia have faced debt restructuring challenges, while others have turned to the IMF for financial support.
However, since late 2024, a few African economies have cautiously begun re-entering the international bond market — a move driven by improved fiscal discipline and global investor optimism. Yet, the IMF warned that without strong economic management, these gains could be short-lived.
“Access to external financing remains constrained, but overreliance on domestic funding isn’t a sustainable alternative either,” the report cautioned. “What is required now is a careful balancing act — one that strengthens fiscal responsibility, deepens capital markets, and promotes private investment.”
Charting a Sustainable Path Forward
To mitigate these risks, the IMF urged African governments to adopt stronger fiscal frameworks, reduce deficits, and pursue reforms aimed at expanding and diversifying domestic capital markets. Strengthening governance and transparency in public borrowing, the Fund said, would also help attract more stable and affordable financing options.
Experts also stress the need for African nations to build resilience through economic diversification — reducing dependence on commodity exports and promoting manufacturing, technology, and services sectors.
Selassie concluded by emphasizing that while domestic borrowing can be a useful short-term tool, it must be managed carefully to prevent a new wave of debt crises.
“Local markets have great potential, but that potential must be nurtured through prudent policies and reforms,” he said. “The goal should not only be to borrow domestically but to do so in a way that supports sustainable growth and financial stability.”
In Summary:
The IMF’s latest warning underscores a growing dilemma for Sub-Saharan Africa — between the necessity of funding government operations and the dangers of overburdening domestic banks. As the region navigates rising costs, limited external financing, and fragile fiscal balances, the call for stronger, more inclusive financial systems has never been more urgent.
