The country’s reliance on domestic borrowing is reducing exposure to foreign exchange shocks but creating new risks within national banking systems, Governor Dr. Johnson P. Asiama has observed.
Dr. Asiama believes the next phase of debt reforms should focus on building deeper, longer-dated and more diversified domestic debt markets.
Dr. Asiama, speaking at the Bank for International Settlements (BIS) Roundtable of African Central Bank Governors, noted that Africa’s public debt landscape is increasingly being shaped by local financing rather than external capital markets as tighter global financial conditions make foreign borrowing more expensive and less predictable.
“Domestic borrowing is strengthening resilience by reducing external vulnerability, but it is also relocating risk into our own financial systems.”
Drawing on Ghana’s experience, he said the country has transitioned from crisis management to rebuilding long-term fiscal sustainability following successful completion of its debt restructuring under the International Monetary Fund’s Extended Credit Facility programme.
According to Dr. Asiama, Ghana’s debt crisis was driven by persistent fiscal deficits, a narrow revenue base and increasing reliance on external commercial borrowing before tighter global financial conditions shut the country out of international capital markets.
The response combined debt restructuring with fiscal consolidation and institutional reforms aimed at restoring debt sustainability and policy credibility.
However, greater reliance on local currency borrowing reduces exchange-rate mismatches on sovereign balance sheets and Dr. Asiama cautioned that it also concentrates risks within domestic financial systems.
“We increasingly face concentration risks within the domestic financial system,” he added.
Large volumes of short-term domestic debt could complicate liquidity management, distort interest-rate formation and weaken monetary policy transmission, underscoring the need for closer coordination between debt managers and central banks while preserving central bank independence.
Policymakers, he notes, should now focus on developing deeper and more diversified domestic capital markets supported by a broader investor base to ensure today’s financing solution does not become tomorrow’s financial vulnerability.
African governments must deepen domestic debt markets without crowding out private sector credit while managing the growing sovereign-bank nexus before the next external shock emerges.
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