IMF: Banks’ debt risks rise as govts access more domestic loans

The International Monetary Fund (IMF) has said the surge in domestic borrowing is now raising the government’s debt risks in banks’ portfolios.

In a report titled: “Sub Saharan Africa: Steady Growth Amid Fiscal Challenges” released at the weekend, the IMF Director, African Department, Abebe Selassie, explained that as governments shift toward domestic borrowing, banks are more exposed to government debt risk.

Earlier, Selassie had asked Nigeria to roll out social protection scheme for the vulnerable and spend savings from petrol subsidy removal on healthcare and education of the population.

He said now is not the time to do spending compression, but rather to spend more when it comes to these areas, which are crucial for developing countries to help sustain growth and improve social outcomes.

He said governments are advised to carry out reforms that ensure more resources are mobilised to go into these areas, with greatest impact on the people.

He said that inflation, though easing overall, still exceeds 10 per cent for about a fifth of the Africa’s economies, adding that while some countries have rebuilt international reserves, they remain stretched across much of the region.

“Against this difficult backdrop, we see two broad policy priorities.

First, raising more revenue. The region’s development needs remain immense, yet external financing is scarce and debt burdens heavy. Mobilizing domestic revenues at home is an essential route to lasting fiscal space, while better debt management can lower borrowing costs and widen access to funds,” he said.

Selassie also advocated boosting tax collection, which has long been a challenge for the region’s public finances.

 “Past efforts show what works—and what does not. Effective reform demands attention to both tax policy (what and how much to tax) and tax administration (how to collect). Countries that have made headway—such as Ghana, Rwanda and Tanzania—did so by digitizing their tax systems, piloting reforms, supporting tax officials, and engaging citizens. Others learned that limited public support can derail poorly designed levies. The lesson is clear: progress depends as much on trust and sequencing as on technical fixes,” he said.

Selassie explained that given that people are more willing to pay taxes when they see public money spent wisely, governments need to pair revenue reform with visibly improved service delivery, tighter spending controls, and efforts to tackle corruption and boost accountability adding that without such enhancements, revenue gains will prove fleeting.

 “Improving debt management is also essential. Transparent, credible debt management institutions can cut borrowing costs and attract investors. Publishing comprehensive debt data, engaging openly with creditors, and strengthening approval and oversight procedures are key first steps,” he said.

Selassie said that better debt management also supports access to innovative financing. Instruments such as blended finance, which combines concessional and private funds, can channel investment into green energy, health, and infrastructure.

Advertisement

 “Agreements between governments and creditors to replace existing sovereign debt with liabilities that include spending for a specific development goal, known as debt-for-development swaps, can foster social or environmental gains—and have been tested in Côte d’Ivoire among other places,” he said.

He advised that  to scale up such initiatives, governments need credible regulation, transparent data, and simplified procedures. These tools, used correctly, can help lay a foundation for more resilient and inclusive growth.