African Governments Depends On Domestic Borrowing
By: Edward Dictionary Caulker
Abebe Aemro Selassie, Director of the African Department at the International Monetary Fund (IMF), addressed the importance of domestic borrowing for African governments during his keynote speech at the Africa Economic Symposium (AES) in Rabat, Morocco.
Under the theme “Fostering Africa’s Economic Transformation through Innovative Financing,” Selassie pointed out the limitations of external borrowing due to its high cost and unpredictability. He emphasized that external funds can only supplement a small part of government budgets, making domestic borrowing more critical.
“Domestic debt now makes up about half of the public debt in many African countries,” Selassie noted. “As financial markets continue to develop, domestic borrowing can significantly support development. However, this is a slow process, often hindered by limited national savings.”
Discussing the complexities of financing development, Selassie acknowledged the challenges in balancing fiscal needs with available resources. He stressed the need to distinguish between short-term cyclical needs and long-term development requirements, especially in vital sectors like health, education, and infrastructure.
Selassie outlined three main sources for financing public sector activities: internal revenues (both tax and non-tax), market borrowing (domestic or external), and aid (grants or concessional loans). He highlighted that internal revenues, primarily from taxation, are the most significant and sustainable financing source in sub-Saharan Africa.
“In sub-Saharan Africa, internal revenues cover nearly 80% of government spending, with the rest coming from borrowing and a small portion from grants or concessional support,” Selassie explained. “However, boosting tax mobilization remains a significant challenge due to political, economic, and technical issues.”
He also pointed out the growing burden of interest payments on debt compared to tax revenues in the region, which can crowd out essential expenditures and increase debt vulnerabilities.
“Increasing tax revenues effectively to sustainably fund development priorities requires concerted efforts,” Selassie concluded. “Countries must tackle these challenges to achieve sustainable economic growth and reduce reliance on external financing.”
Selassie’s speech at AES provided a thorough overview of the financial strategies necessary for African countries to address their developmental challenges amid changing global economic conditions.
