Debt pressures force a rethink of sovereign financing in Africa

Africa’s sovereign balance sheets are under strain, but the picture is more nuanced than headline numbers suggest.

Debt service costs are rising across the continent, in some cases absorbing 15% to 30% of fiscal revenues. In South Africa, this share has nearly doubled over the past decade and a half. In several countries, debt service now exceeds spending on health or education.

This reality constrains policy choices, forces difficult trade-offs, and delays projects that would otherwise strengthen competitiveness and resilience.

Yet it would be misleading to frame the situation purely as a debt crisis.

Compared with many advanced economies, Africa’s debt levels are not inherently unsustainable; the deeper challenge is weak growth.

When economies expand, revenues rise, and the fiscal burden becomes more manageable. When growth stalls, even moderate debt levels become restrictive.

The key question, therefore, is not whether sovereigns should invest, but whether they are investing in projects that expand the revenue base and strengthen inclusion.

As fiscal space tightens and capital becomes more selective, governments are re-examining what qualifies as a priority project.

Many countries have national planning commissions tasked with mapping long-term development paths, but a persistent gap remains between strategic vision and execution.

Projects that align with national plans do not always align with the mandates of implementing agencies or investors. In weaker governance environments, projects may be selected to fit budget cycles rather than a coherent development strategy, resulting in fragmented infrastructure and missed growth linkages.

This tension is compounded by a structural vulnerability that has grown more acute: the mismatch between hard-currency debt and local-currency revenues.

Governments often borrow in dollars or euros while collecting taxes in local currency. When exchange rates depreciate, the cost of servicing external debt rises in domestic terms, eroding fiscal space.

Zambia’s pandemic-era default illustrates how currency weakness can push sovereign finances into distress.

As the kwacha fell against the US dollar, the local cost of external debt ballooned, straining public finances and accelerating loss of market access. Similar pressures have been felt in Ghana, Mozambique and Angola.

Currency volatility and tighter global liquidity have made this mismatch more dangerous than in previous cycles.

Mitigating this risk requires a gradual shift towards local-currency financing. Borrowing in domestic currency aligns repayment obligations with revenue streams, reduces exposure to exchange rate shocks and supports the development of local capital markets.

The challenge is that domestic markets often lack the depth and tenor required for large infrastructure projects. That is where export credit agencies (ECAs) and development finance institutions can play a catalytic role.

There is a growing consensus that export credit structures must evolve to include local-currency components.

Regulatory changes have expanded what is feasible, and ECAs are increasingly willing to accommodate local-currency tranches supported by political risk insurance.

In South Africa, the Export Credit Insurance Corporation has backed rand-denominated transactions, while international ECAs have supported local-currency elements where project fundamentals are sound.

Despite this progress, constraints remain. Local markets may struggle to absorb large tranches without pricing penalties, and hedging instruments can be costly or unavailable. Even so, hybrid structures combining hard- and local-currency financing are becoming more common, particularly in the electricity sector.

South African renewable energy projects routinely blend rand-denominated debt with foreign-currency tranches, better aligning revenue streams with repayment obligations and improving resilience to external shocks.

As financing structures evolve, effective risk sharing becomes critical. Sovereigns, banks, insurers and ECAs must assume the risks they are best equipped to manage. Guarantees should be triggered only in cases of genuine distress, preserving incentives for fiscal discipline.

Flexible repayment profiles can support sustainability; however, they should be linked to clear, measurable performance benchmarks.

Export credit agencies themselves are facing a moment of reassessment. They remain vital providers of long-term, counter-cyclical finance, yet they are sometimes perceived as rigid.

To remain credible in a debt-constrained environment, ECAs will need to offer more adaptable structures, deepen partnerships with local financial institutions and multilaterals, and strengthen transparency and governance.

Capacity-building will also help ensure that financed projects deliver tangible development outcomes.

With limited balance-sheet capacity, sovereigns can no longer pursue projects solely based on volume.

A credible sovereign-backed project must support growth, strengthen foreign-exchange resilience, and reinforce fiscal sustainability through bankable structures and realistic revenue streams.

Looking ahead, progress will not be defined by the number of deals closed, but by the quality of outcomes achieved.

Greater use of local-currency structures, stronger partnerships and improved governance will signal a maturing market. Success will be measured by projects that expand productive capacity, stabilise currencies and build fiscal resilience.

At its core, Africa does not lack investment needs; rather, it must prioritise projects that deliver tangible economic returns. In a more selective capital environment, that distinction becomes sharper.

Governments, lenders and development partners share responsibility for prioritising investments that expand capacity, strengthen foreign exchange buffers and protect public balance sheets.

The choices made today will shape Africa’s fiscal strength for decades to come.

Sekete Mokgehle is head of Export Credit and Insurance Solutions at Nedbank Corporate and Investment Banking.

Brought to you by Nedbank CIB.

Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.

#Debt #pressures #force #rethink #sovereign #financing #Africa