By: Udaibir Das
This article originally appeared in OMFIF on March 2, 2026.
What borrowed capital builds matters as much as what sovereigns owe
African debt debates have become precise on the liability side – volumes, maturities, currencies, spreads and restructuring mechanics. What gets treated as background is the other side of the balance sheet: what is financed by that borrowing and whether those uses of borrowed funds expands the capacity to service the debt.
A liability-side architecture
Debt sustainability analysis, as codified by the International Monetary Fund and World Bank, answers a creditor’s question: can the sovereign repay? The standard ratios – debt-to-gross domestic product, interest-to-revenue and gross financing needs – measure burden, liquidity and rollover risk. They stress test liabilities.
In developmental settings, solvency is also a conversion problem. Is borrowed capital being turned into productive capacity – assets that raise output, tax revenue and resilience? Growth appears in DSA as an assumption. Deployment quality does not appear as a variable.
There is no widely used ‘asset sustainability analysis’ to complement the liability toolkit.
Domestic finance is sovereignty at a price
A central fact has changed: African governments now raise more than half of their financing domestically. Domestic bills and bonds are the most expensive instruments in the stack, carrying nominal yields of 10% to 13% on average, whereas concessional and multilateral loans average below 1%. In 2024, Africa’s real yields on local-currency bonds approached 5% – the highest level since at least 2007.
This cost differential represents what I have elsewhere termed the sovereignty premium – the price of reduced external vulnerability and greater policy autonomy. Whether that premium is justified depends on what borrowed resources actually build.
Domestic borrowing reduces foreign-exchange mismatch and can broaden the investor base. But it replaces external volatility with an internal transfer: high interest costs paid to domestic balance sheets. Those costs are defensible only if borrowing finances assets that generate growth, revenue or risk reduction sufficient to service the debt. When it does not, domestic financial deepening becomes domestic fragility.
The deployment gap
The African Development Bank estimates that Africa’s institutional investors – pension funds, insurers, sovereign wealth funds and central banks – manage over $2.1tn in assets. In many markets, the state remains the dominant investment thesis.
At end-December 2024, Kenya’s pension industry reported KSh2.3tn ($17bn) in assets under management. Government securities accounted for over half of pension scheme investments. This allocation is rational in a market with limited long-dated alternatives. It is also a concentration risk: when the domestic savings base is warehoused in government claims, the state becomes the portfolio.
This is the deployment gap: the divergence between the cost of borrowed capital and the developmental return generated by its use.
Nigeria’s 2024 budget performance shows how the gap widens. Recurrent expenditure accounted for 72% of total spending, while capital expenditure accounted for 22%. Debt service absorbed 69% of revenue (measured against government revenue, not total expenditure). Borrowing is not a bridge to future capacity; it is a mechanism for maintaining present consumption and servicing past borrowing. The liability side compounds while the asset side remains thin.
Growth without transformation
The deployment gap also helps explain a pattern long documented in development economics: growth without structural transformation. Headline expansion can coexist with weak productivity gains, limited export upgrading and insufficient job creation.
The IMF projects Sub-Saharan Africa’s growth at 4.1% in 2025, with a modest pickup in 2026. Yet the same outlook warns that rising debt service costs are crowding out development spending and that domestic financing is deepening the bank–sovereign nexus. This is how the trap forms: domestic savings fund the state at high cost, fiscal dominance tightens and private credit is crowded out. Debt finances consumption; transformation lags.
The measurement failure
The deployment gap is not unmeasurable. It is unmeasured because creditors demand precision on liabilities, not assets. Debt stocks are tracked to the decimal; yields are priced in real time. No comparable infrastructure tracks what debt-funded spending delivers.
Start with one ratio: the share of public expenditure (and, where feasible, new borrowing) allocated to capital formation versus recurrent spending. Track it consistently. Publish it alongside the debt tables. Pair it with an execution metric: capital budget absorption and project completion, not just appropriation.
Call it deployment sustainability analysis. The logic is simple. Countries borrowing expensively to finance transformation are not the same as countries borrowing expensively to finance stasis. Treating them as equivalent is a category error.
Hardwiring the asset side
Some recent instruments show how asset-side discipline can be designed into financing.
The Absa Africa Financial Markets Index notes that new financial products launched across the continent have focused strongly on infrastructure. In February 2025, Tanzania launched its first sovereign sukuk programme and followed this later with a quasi-sovereign sukuk – the first by a government in East and Central Africa. The point is the linkage: proceeds are tied to defined projects.
Kenya offers a parallel example in structured finance. In May 2025, the Capital Markets Authority approved the country’s debut asset-backed security, designed to raise up to KSh47bn($364m) in tranches to fund the Talanta Sports City complex in Nairobi, with the facility serving as collateral. Whatever one thinks of the project, the instrument forces a question that ordinary treasury issuance does not: what, precisely, will this debt build?
The missing variable
Africa’s debt story is usually told as a liability problem: too much debt, the wrong currency, the wrong creditor, the wrong maturity. Those issues matter. But long-run sustainability is a balance-sheet question: is borrowing being converted into assets that raise the repayment base?
Debt architecture has improved and debt governance is evolving. The next upgrade is to bring the asset side into the same analytical frame – systematically, not anecdotally.
Debt sustainability is not only a question of what sovereigns owe.
It is a question of what they build with borrowed funds.
That is the missing variable today.
This is the fourth article in a series exploring this topic. Read parts one, two and three here.
Udaibir Das is a Visiting Professor at the National Council of Applied Economic Research, a Senior Non-Resident Adviser at the Bank of England, a Senior Adviser of the International Forum for Sovereign Wealth Funds, and a Distinguished Fellow at the Observer Research Foundation America.