By: Udaibir Das
This article originally appeared in OMFIF on February 19, 2026.
Africa's domestic debt pivot creates different constraints, not fewer
African governments now raise more than half of their financing at home. This is a structural reversal after decades of reliance on external lenders. Banks, pension funds, insurers and retail investors have become the primary source of sovereign credit. It is framed as resilience: less exposure to Eurobond lockouts, International Monetary Fund conditionality and US Federal Reserve timing.
But domestic markets do not remove constraints; they move them inward. External creditors can, in principle, be restructured at arm’s length. In practice, the IMF’s Common Framework has meant long, uncertain workouts; Zambia’s case ran for more than three years, and comparability-of-treatment disputes still linger. . Even so, external restructuring does not raid domestic balance sheets.
Domestic creditors are also constituents. Pension funds hold the retirement savings of civil servants. Banks intermediate credit to firms that employ voters. When a government restructures domestic debt, it is not negotiating with outsiders; it is allocating losses inside the polity. That is why domestic debt is not ‘easier’ debt. It comes with a constituency.
This is not unique to Africa; US Treasury holders vote too. But it is amplified where savings are disproportionately in sovereign paper, where, in some countries, banks hold 30% to 50% of their assets in government securities and where fiscal space to recapitalise the system is thin. The political penalty is real: sovereign default is associated withnd a higher probability of leadership change.
The scale of the shift
Since 2010, annual local-currency issuance has tripled, from roughly $150bn to nearly $500bn. At the same time, the price of that funding has risen. In 2024, real yields on African local-currency bonds reached about 5%, the highest level since at least 2007.
Market deepening is also changing what governments can issue. Kenya’s regulator approved the country’s debut asset-backed security in 2025 to raise infrastructure finance in tranches. Zanzibar introduced a government sukuk programme in February 2025 and followed with a quasi-sovereign issuance in April, reported as the first by a government in East and Central Africa.
The Absa Africa Financial Markets Index shows that some reformers advanced despite global headwinds. Botswana, Lesotho and Rwanda posted sizeable improvements, driven by market infrastructure and legal reforms that make domestic capital easier to mobilise. This is strategic repositioning, not emergency improvisation.
The cost of sovereignty
Domestic debt buys policy space, but at a price. Local sovereign paper commonly carries nominal yields in the 10% to 13% range, compared with concessional multilateral finance that can cost under 1%. Governments are swapping foreign-exchange volatility for higher borrowing costs absorbed at home. It is sovereignty financed by domestic balance sheets.
That swap deepens the bank–sovereign nexus. The IMF notes that domestic bank holdings of sovereign debt in sub-Saharan Africa are large and growing faster than in the rest of the world. In advanced economies, the nexus bites mainly through market contagion. In many African systems, it also runs through directed lending requirements, regulatory mandates and state ownership – administrative channels as much as market ones. The vulnerability is not removed, it is relocated.
Where categories break down
Standard creditor analysis treats domestic and external creditors as separate camps. In countries with deepening domestic markets, that separation frays.
Ghana’s 2022 domestic debt exchange is the clearest illustration. When early proposals threatened pension assets, backlash from pensioners and unions forced the government to exempt pension funds. Other domestic holders absorbed maturity extensions and coupon reductions. The lesson is not that domestic restructuring is impossible; it is that some domestic balance sheets are politically untouchable.
Zambia shows the same logic in a different register. Debt sustainability analysis and external debt statistics typically classify claims by the holder’s residency, so local-law, local-currency debt held by non-residents can be treated as ‘external’. But restructuring perimeters are set by feasibility, not taxonomy. Zambia’s authorities sought to exclude domestically issued debt from the restructuring perimeter, even when foreign investors held a stake, because the domestic financial system was too exposed.
A testable prediction
When domestic debt exceeds roughly half of total public debt, governments facing unsustainable dynamics are more likely to reach first for inflation, financial repression and reprofiling than for explicit haircuts on core domestic holders. Inflation erodes claims quietly. Maturity extension spreads pain across time. Regulatory tools can force rollovers without a headline default event. These instruments diffuse losses: haircuts concentrate them.
The corollary is not that external creditors always go first. It is that explicit write-downs are politically easier to impose on outsiders, while domestic adjustment is pushed towards instruments that look technocratic but behave like a distribution mechanism.
Institutional foundations
The IMF and World Bank have invested in debt management, settlement systems and market infrastructure. The African Development Bank argues that Africa’s institutional investors – pension funds, insurers sovereign funds and even central banks – manage around $2.1tn in assets that could be mobilised more productively.
Three risks follow from the constituent-creditor configuration. First, domestic restructuring has a ceiling. Research from the Brookings Institution suggests that beyond roughly a 20% haircut on domestic holdings, fiscal gains are eaten up by financial-sector recapitalisation costs – a domestic restructuring ‘Laffer curve’.
Second, crisis response is biased towards inflation and delay. Governments will exhaust maturity extensions, coupon reductions and regulatory pressure before accepting open losses on politically salient domestic savings.
Third, the bank–sovereign nexus becomes procyclical. When governments are the dominant borrowers and banks the dominant lenders, fiscal tightening hits credit and fiscal expansion crowds out private investment.
The test ahead
Africa’s debt story is not about waiting for easier global money. It is about whether domestic financial systems can absorb sovereign risk without amplifying internal fragility – and whether policy space purchased at 10% to 13% builds assets that justify the cost.
This is an agency under constraint: the capacity to act within binding limits rather than to be free from them. The constraints are now domestic and political rather than external and financial.
The creditors are constituents. They hold bonds – and ballots.
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.