African governments are increasingly turning to domestic debt to protect their economies from exchange-rate shocks and tighter global financing conditions, but the strategy is raising borrowing costs and rollover risks while increasing pressure on local banks, according to a Bank for International Settlements (BIS) report In a paper titled “Africa’s public debt amid global headwinds: balancing resilience and vulnerabilities“.
The shift toward local-currency borrowing has helped governments maintain access to funding as external financing becomes more difficult and official development assistance declines, the BIS said in its latest bulletin. But domestic debt typically carries higher interest rates and shorter maturities than concessional external loans, increasing the cost and frequency of refinancing government liabilities.
African economies face a new external shock from the conflict in the Middle East, which has pushed up energy and fertiliser prices and weakened growth prospects. The BIS said the pressures are emerging when public debt and debt-service burdens remain elevated across the continent.
Africa’s median government debt stood at about 57% of GDP in 2025, roughly 10 percentage points above pre-pandemic levels. Although the median primary fiscal deficit narrowed to 1.1% of GDP from 1.4% in 2024, higher net interest payments have partly offset the improvement in fiscal positions. Net interest payments now absorb 14% of government revenue in the median jurisdiction, the BIS said.
Higher Cost of Local Borrowing
The growing reliance on domestic markets reflects both the development of local debt markets and more difficult access to international financing since the pandemic. Governments in low-income African countries increased the share of local-currency debt to about 67% of total debt by 2024, from almost negligible levels in the early 2010s, according to the report.
Local-currency borrowing provides an important buffer because it reduces the currency mismatch created when governments borrow in dollars or other foreign currencies. A depreciation of a local currency can sharply increase the domestic cost of servicing foreign-currency debt, potentially undermining debt sustainability.
But the trade-off is significant. Multilateral loans typically carry concessional interest rates below 2% and sometimes below 1% for low-income countries, while domestic treasury bills and government bonds in many African economies carry rates of 10% to 13%. Shorter maturities also mean governments must refinance domestic obligations more frequently.
That dynamic means domestic borrowing can reduce one form of vulnerability while creating another: governments become less exposed to currency swings but more exposed to high domestic interest rates and refinancing conditions.
Banks Face Greater Sovereign Exposure
The increasing use of domestic debt is also tightening the link between governments and the banking sector.
African banks’ claims on governments have nearly doubled over the past decade and now represent about 20% of their total assets on average, with exposure exceeding 30% in several countries, the BIS said.
A larger concentration of bank assets in government securities can create a sovereign-bank feedback loop. Deterioration in government finances can weaken banks’ balance sheets, while banks’ growing exposure to the state can reduce the amount of credit available to private businesses.
The BIS warned that increased government borrowing from banks can therefore crowd out private-sector lending and constrain economic growth.
The risk extends to central banks. When governments struggle to attract private investors, they may face greater pressure to obtain financing from central banks. Persistent monetary financing of fiscal deficits can increase the money supply, fuel inflation, weaken exchange rates and undermine central-bank independence, the report said.
Central bank claims on governments increased sharply during the pandemic, with the median ratio rising to 30% of government revenue from 20% before the crisis and remaining elevated afterward. Some governments have since reduced their reliance on central-bank financing as domestic debt markets improved and external financing conditions stabilised.
External Shock Adds Pressure
The debt challenge is being compounded by the economic effects of the Middle East conflict. Damage to energy infrastructure in the Gulf and disruptions to shipping through the Strait of Hormuz have driven up oil, gas and fertiliser prices, exposing African economies that rely heavily on imports from the Gulf region.
Higher import costs are increasing household and production expenses, weighing on growth and worsening food-security risks. The BIS also said reduced maritime traffic through the Strait of Hormuz could have a particularly pronounced effect on industrial production in African economies.
Governments have responded differently depending on their fiscal capacity. Some, including Kenya and Namibia, have reduced fuel levies or introduced temporary subsidies, while others have prioritised fuel supplies or scaled back energy-intensive projects. Ghana, Malawi, Mali and Tanzania have instead increased regulated fuel prices or adjusted price caps to protect public finances.
In Ghana, the BIS said, average petrol prices increased 40%, from 11 cedis per litre at the end of February to 15.4 cedis in early June.
Investor Base Key to Debt Resilience
The BIS argues that reducing Africa’s vulnerability will require more than simply changing the currency in which governments borrow.
The report calls for deeper local financial markets and a broader investor base, particularly through the development of domestic institutional investors such as pension funds and insurance companies. That would reduce governments’ dependence on commercial banks and central banks and improve the allocation of capital across the economy.
The challenge is particularly acute if governments eventually need to restructure domestic debt. While locally issued debt can generally be restructured more easily because it is governed by domestic law, losses would largely fall on domestic banks, households and other financial institutions. That could weaken financial-sector balance sheets, disrupt credit supply and trigger broader financial stress.
African economies nevertheless entered the current period of pressure from a position of greater resilience. Regional GDP growth rose to 4.4% in 2025 from 3.7% in 2024, despite higher tariffs and geopolitical tensions, according to the BIS. The central challenge now is preserving that momentum without allowing the cost of financing government deficits to deepen existing debt and financial-sector vulnerabilities.
