IMF warns of rising debt risks in Sub-Saharan Africa
Sub-Saharan African Governments Increasing Reliance on Domestic Banking Sector for Budget Funding
Sub-Saharan African Governments Increasing Reliance on Domestic Banking Sector for Budget Funding
The International Monetary Fund (IMF) has reported a growing trend among Sub-Saharan African governments to utilize local banks for budget funding. This shift results in higher borrowing costs domestically compared to international markets, exerting additional pressure on domestic lenders.
According to the IMF's latest Regional Economic Outlook, presented at the annual IMF and World Bank meetings in Washington, the region experiences elevated domestic capital costs. The report highlights that many local financial markets are underdeveloped, fragmented, and illiquid, contributing to high transaction costs and lending spreads.
The IMF identifies that domestic borrowing now exceeds external borrowing costs in several countries. This reliance on local banks is driving up funding costs and limiting private-sector investment.
Sub-Saharan African Governments Increasing Reliance on Domestic Banking Sector for Budget Funding The International Monetary Fund (IMF) has reported a growing trend among Sub-Saharan African governments to utilize local banks for budget funding.
It was noted that the domestic banks' holdings of government debt are significant and growing more rapidly in Sub-Saharan Africa than globally. This scenario poses a risk of creating a feedback loop whereby strained public finances may compromise bank stability, leading to tighter credit conditions and increased fiscal pressures.
Abebe Aemro Selassie, Director of the IMF’s African Department, indicated that while the shift to local funding represents progress in borrowing capabilities in domestic currencies, it also poses substantial risks. Approximately half of total public debt is owed to domestic banks. Although access to external financing has been limited in recent years, excessive domestic borrowing could lead to challenges in the banking sector if governments face difficulties in servicing their debt.
In recent years, some African countries have gradually re-entered international bond markets since 2024, following a period of exclusion due to high borrowing costs and economic uncertainty. However, concerns remain regarding the potential return to debt traps.
Based on reporting by Africanews.
