According to Amadou Sy, Assistant Director in the International Monetary Fund’s (IMF) African Department, the trend reflects both necessity and opportunity, as countries seek to reduce their exposure to currency volatility and strengthen local capital markets.
This week, Sy explained that the key distinction between external and domestic debt lies not in currency but in the residency of creditors. “When a government issues debt to non‑residents, even in local currency, it is classified as external debt,” he said. Domestic debt, by contrast, is issued to residents, typically denominated in local currency and governed by domestic legal frameworks.
The shift is partly a response to tightening global conditions. After the decline of concessional financing and the rise of Eurobond markets in the 2000s and 2010s, many African governments began borrowing in dollars and euros. But by 2023, all African issuers had effectively been shut out of international capital markets. This forced governments to rely more heavily on domestic debt issuance.
Sy said local borrowing reduces currency risk and gives governments greater control. “When you borrow in your own currency, it is much more manageable to repay,” he noted. However, domestic debt often comes with higher interest costs and shorter maturities, increasing rollover risks. “After six or twelve months, you have to borrow again, and investors may demand higher rates,” he cautioned.
Rising debt service burdens are already crowding out development spending. “For the median African country, about one‑seventh of revenues goes to servicing debt,” Sy said. “This limits investment in health, education and infrastructure.”
Sy stressed that developing robust domestic debt markets requires stable macroeconomic conditions, lower inflation and strong regulatory frameworks. Expanding the investor base beyond banks to include pension funds and insurance companies is essential, as is building a transparent, liquid yield curve that can also support private‑sector financing. Foreign investors are showing increasing interest in local‑currency African bonds, but Sy warned that such inflows must be managed carefully. “This ‘hot money’ can move in and out quickly and affect exchange rates,” he said.
Ultimately, Sy argued, the rise of domestic debt could strengthen Africa’s financial autonomy, provided it is part of a deliberate, long‑term strategy. “It takes time to build, but it is feasible, and it should be done,” he said.
–IMF/ChannelAfrica–
