African Domestic Debt: Rising Costs & Rollover Risks Imperil Fiscal Health

Africa's Debt Structure and Global Pressures

African economies have navigated a complex financial landscape, demonstrating resilience in 2025 with a 4.4% GDP growth, an increase from 3.7% in 2024, as reported by the Bank for International Settlements (BIS) in August 2026. This growth occurred despite rising tariffs and geopolitical tensions.

However, the region's economic outlook has been complicated by the Middle East conflict, which has driven up energy and fertiliser prices due to damage to infrastructure in Gulf states and disruptions to shipping through the Strait of Hormuz.

These elevated import costs contribute to higher household and production expenses, placing downward pressure on economic expansion and exacerbating food insecurity across the continent, as detailed in BIS Bulletin No 132. Governments have responded with varied fiscal measures, from consumer subsidies in Kenya and Namibia to price adjustments in Ghana and Tanzania.

A central challenge involves financing fiscal deficits without intensifying existing debt vulnerabilities. Fiscal capacity is already constrained by high public debt levels and rising debt service burdens.

These pressures could intensify if geopolitical tensions persist, official development assistance (ODA) continues to decline, and global financial conditions tighten, thereby limiting access to affordable external financing across the region.

The strategic shift towards domestic currency debt, while addressing certain vulnerabilities, introduces new complexities concerning interest costs and rollover risks, alongside potential implications for financial stability when government financing leans heavily on commercial banks and central banks.

External Shocks and Constrained Fiscal Capacity

The Middle East conflict has created a significant adverse supply shock for African economies, as documented by Michael Chui and Leonardo Gambacorta in their August 2026 BIS Bulletin. Damage to energy infrastructure and disruptions in the Strait of Hormuz have caused global oil, gas, and fertiliser prices to rise.

Many African nations are particularly susceptible to these price movements due to their substantial reliance on imports of these commodities from the Gulf region, as indicated by UN Comtrade data for 2024. The escalating import costs increase both household and production expenses, which in turn weigh on economic growth and worsen food insecurity.

This situation is further compounded by substantial reductions in official development assistance since 2025, a trend highlighted by the International Monetary Fund (IMF) in 2026. Even commodity-exporting economies, such as those in North Africa and Nigeria, may experience diminished activity.

While higher oil and gas prices could theoretically boost export revenues, production limitations and disruptions to global supply chains may offset a significant portion of these potential gains.

Furthermore, reduced maritime traffic through the Strait of Hormuz could lower industrial production across the continent, with particularly pronounced effects in African economies, as Kharroubi (forthcoming) suggests.

This confluence of external shocks places considerable strain on governments already operating with limited fiscal capacity, necessitating careful management of public finances to avoid further debt accumulation.

The Strategic Pivot to Domestic Currency Financing

In response to more challenging external financing conditions and the recent reductions in official development assistance, many African governments have increasingly shifted towards domestic debt, defined as local currency debt issued in domestic markets, as a primary means to fund fiscal deficits and refinance maturing liabilities.

This trend is not unique to Africa, with many emerging market economies expanding domestic currency sovereign debt markets over the past two decades to rely on local funding during periods of external financial stress, according to the IMF in 2025.

Over the last ten years, governments across the region have made greater use of treasury bills, government bonds, and other domestic debt instruments, as evidenced by data from the African Debt Database. This development reflects both the deepening of local currency debt markets and improvements in governance and monetary policy credibility since the mid-2010s.

The trend has been reinforced by tighter external financing conditions since the pandemic. The development of institutional infrastructure and a stronger local investor base have enabled low-income countries to steadily increase their share of local currency debt issuance from negligible levels in the early 2010s to approximately 67% of total debt by 2024.

This strategic pivot has allowed domestic debt to function as a contingent financing channel, helping governments preserve market access and facilitate more gradual fiscal adjustment during periods of economic stress, while reducing risks from currency mismatches associated with foreign currency debt.

The Fiscal Burden of Domestic Debt: Costs and Rollover Risks

While domestic borrowing provides African countries with a contingency financing option and mitigates risks from currency mismatches, it also introduces significant fiscal trade-offs, primarily in the form of higher interest costs and increased rollover risks.

Multilateral concessional loans, which have historically served as a key alternative during periods of stress, typically carry interest rates below 2%, and sometimes even below 1% for low-income countries, as noted in the August 2026 BIS Bulletin.

In stark contrast, domestic treasury bills and government bonds in many African economies bear interest rates ranging from 10% to 13%. Consequently, despite often representing a smaller volume of total debt, domestic debt frequently accounts for a substantial share of overall debt service costs, according to the African Debt Database.

For example, interest payments on domestic bills and bonds represent a significant portion of government revenue across various African nations, as illustrated by average figures from 2020–24. Furthermore, the shorter maturities characteristic of local currency debt instruments amplify rollover risks.

This necessitates more frequent refinancing of maturing obligations, which in turn adds to fiscal pressures by requiring governments to consistently secure new funding, potentially at unfavourable rates, to avoid default. This dynamic can complicate fiscal planning and reduce the flexibility of government spending, even as it insulates against foreign exchange volatility.

The Strengthening Sovereign-Bank Nexus

The risks associated with domestic borrowing are significantly influenced by the composition of the investor base. In many African economies, where large institutional investors are less prevalent, commercial banks often hold a dominant share of government debt.

Over the past decade, African banks' claims on governments have nearly doubled, now averaging approximately 20% of their total assets, with holdings exceeding 30% in several countries, according to IMF data. This intensified sovereign-bank nexus strengthens fiscal vulnerabilities.

Large sovereign exposures can create adverse feedback loops: a deterioration in government finances can weaken bank balance sheets, threaten solvency, and undermine broader macro-financial stability. This interconnectedness means that financial stress in one sector can quickly propagate to the other, potentially leading to systemic risks.

Moreover, an increased proportion of sovereign debt holdings by banks can crowd out private sector lending. When banks allocate a greater share of their assets to government securities, less capital is available for credit to businesses and households.

This reduction in private credit can constrain economic growth by limiting investment and consumption, as discussed by Attout et et al. (2022), IMF (2025), and Wezel et al. (2026). The concentration of government debt within the banking sector thus presents a multifaceted challenge to both fiscal health and broader economic development.

Central Bank Lending and Fiscal Dominance

A further risk emerges when governments face difficulties placing debt with private investors, which can increase pressure on central banks to provide financing. Excessive reliance on central bank lending carries severe macroeconomic consequences.

Such practices can significantly undermine central bank credibility, as persistent financing of government deficits typically increases the money supply, potentially fuelling inflation and weakening exchange rates. Historically, episodes of high inflation and hyperinflation in sub-Saharan Africa have frequently been associated with these practices, as documented by Hooley et al.

(2024). Moreover, prolonged central bank lending for fiscal purposes can compromise central bank independence, reduce policy credibility, and limit the institution's ability to maintain price stability. The level of lending by African central banks to their respective governments has risen since the pandemic, raising concerns about fiscal dominance.

The median ratio of central bank claims on central government debt to government revenue surged from 20% to 30% during the pandemic and has remained elevated, according to IMF data. This increase primarily reflected pandemic-related spending pressures.

While some governments have recently reduced their reliance on central bank financing as access to domestic debt markets improved and external financing conditions stabilised relative to the pandemic period, the sustained elevation of these claims highlights an ongoing vulnerability in the region's fiscal and monetary architecture.

Challenges in Domestic Debt Restructuring

In the event of a debt crisis, domestic debt presents a distinct set of challenges compared to external debt. Governments generally possess greater control over domestic debt, as it is typically issued under domestic law, which can theoretically make restructuring easier than for external obligations.

However, the economic costs of such restructuring are primarily borne by domestic stakeholders, including households, commercial banks, and other financial institutions. Losses imposed on these creditors can weaken their balance sheets, erode confidence in the financial system, and disrupt the supply of credit, potentially triggering broader financial sector stress.

This can have far-reaching effects on the domestic economy, impacting investment, employment, and overall stability. Furthermore, domestic debt restructuring is often politically sensitive. Creditors are frequently residents, voters, and taxpayers, making governments more reluctant to impose losses on them due due to potential political repercussions.

This sensitivity can complicate and prolong negotiations, potentially delaying necessary fiscal adjustments.

While domestic debt offers legal advantages in terms of sovereign control, the intricate web of economic and political considerations means that restructuring it is far from a simple or straightforward process, often involving difficult trade-offs between fiscal sustainability and domestic financial stability.

Balancing Resilience with Vulnerabilities: A Path Forward

Africa's increasing reliance on domestic debt, as opposed to foreign currency borrowing, offers both benefits and challenges, creating a complex balance between resilience and vulnerability.

This shift has demonstrably reduced susceptibility to adverse exchange rate movements and global financial shocks, helping governments maintain market access and absorb external financing shocks during periods of economic stress.

However, this transition has also led to higher debt service costs and increased rollover risks due to elevated interest rates and shorter maturities inherent in domestic instruments. To navigate these trade-offs effectively, it is imperative to invest in financial infrastructure, improve governance frameworks, and strengthen monetary policy institutions.

Developing stable and deep local financial markets that efficiently allocate capital requires diversifying the investor base. This involves fostering local institutional investors, such as pension funds and insurance companies, thereby reducing the over-reliance on central banks and commercial banks as the primary creditors to governments.

Such diversification would distribute sovereign risk more broadly, enhance market liquidity, and potentially lower borrowing costs over time. These structural reforms are essential for building a more sustainable and resilient public debt profile across the African continent, ensuring that the benefits of domestic financing outweigh its inherent challenges.

Implications for Asian Investors and Markets

The evolving landscape of African public debt presents specific considerations for Asian investors and markets. While direct exposure to African domestic debt may be limited for many Asian institutional investors, the dynamics observed in Africa offer insights into broader emerging market trends.

Asian investors seeking yields in frontier markets should note the higher interest rates on African domestic treasury bills and government bonds, typically 10–13%, compared to concessional multilateral loans often below 2%, as reported by the BIS in August 2026. This yield differential reflects elevated rollover risks and domestic fiscal pressures.

For Asian companies operating in or exporting to Africa, the strengthening sovereign-bank nexus, where African banks' claims on governments average 20% of their total assets, may lead to crowding out of private credit, affecting access to local financing for joint ventures or expansion.

Furthermore, the rising central bank claims on central governments, which surged from 20% to 30% of government revenue during the pandemic, pose risks of inflation and exchange rate depreciation, potentially impacting the profitability of Asian investments or the cost of repatriating earnings.

Asian policymakers and financial institutions should monitor the progress of African governments in diversifying their investor base and deepening local financial markets.

The effectiveness of these reforms, particularly the growth of local institutional investors, will be key to mitigating fiscal vulnerabilities and will be measurable by changes in sovereign debt yields and the proportion of non-bank domestic holdings, with the next significant data prints expected from the IMF and World Bank in late 2027.