Debt Dilemma: Sub-Saharan Africa Faces Costly Trade-Off in Funding Shift

Sub-Saharan African nations are facing mounting fiscal strain as they increasingly turn to domestic banks to fund government budgets, the International Monetary Fund (IMF) warned in its latest Regional Economic Outlook.
With global capital markets still hesitant and aid flows uncertain, governments are borrowing more at home — paying higher rates and placing pressure on fragile financial systems. “The domestic cost of capital remains elevated,” the IMF said, highlighting that local financial markets remain shallow and fragmented. In several countries, domestic borrowing has become even more expensive than raising funds abroad, and banks’ holdings of sovereign debt are rising faster than anywhere else in the world.
This growing dependency risks a “vicious feedback loop” where fiscal instability threatens banking resilience, squeezing credit and curbing private investment. Abebe Aemro Selassie, IMF Africa Director, described the shift as a ‘double-edged sword, noting that while borrowing in local currencies is a sign of progress, it could destabilize banks if governments struggle to repay.
The IMF’s broader outlook remains cautious. While global recovery is underway, Sub-Saharan Africa’s rebound is uneven, slowed by trade disruptions, reform lags, and aid uncertainty. The IMF urged countries to strengthen debt management and explore blended finance models, such as Ivory Coast’s debt-for-education swap. With half of public debt now owed to domestic banks, the region walks a tightrope — balancing sovereignty in finance with the risk of deeper debt distress. The challenge now: borrowing smarter, not just more.