Challenges to debt sustainability and financial market development posed by COVID-19 and the war in Ukraine

This report by FSD Africa analyzes the impact of the COVID-19 pandemic and the war in Ukraine on debt sustainability and financial market development in Ethiopia, Ghana, Kenya, Nigeria, and South Africa. It highlights a high risk of external debt distress for several of these nations and examines the trade-offs between short-term counter-cyclical fiscal measures and long-term financial market stability.

• Ethiopia, Ghana, and Kenya face a high risk of external debt distress over the next decade, driven by high levels of liquidity risk associated with external indebtedness. This vulnerability is exacerbated by low public revenues in Ethiopia, Ghana, and Nigeria, and large trade deficits in Ethiopia and Kenya.
• Nigeria and South Africa are in a less precarious position than the other three case-study countries. Nigeria entered the pandemic with lower public debt, while South Africa possesses a deep domestic financial market capable of absorbing higher debt levels, although it remains exposed to the volatility of foreign portfolio investors.
• Computational simulations indicate that while public debt-to-GDP ratios in Ghana, Kenya, Nigeria, and South Africa will eventually stabilize, they will do so at historically high levels for Ghana, Kenya, and South Africa, which will constrain fiscal space for new public investments.
• To manage the costs of chronic fiscal deficits, Ethiopia and Nigeria have employed financial repression, including foreign exchange controls and the payment of negative real interest rates on government securities. These practices distort financial markets, discourage savings, and inhibit financial deepening.
• Debt monetization—where central banks finance government deficits—has been used in Ethiopia, Nigeria, and Ghana. The report argues this practice must cease to control inflation and confirm central bank autonomy, as it creates uncertainty regarding macroeconomic management and raises borrowing costs via inflation risk premiums.
• The war in Ukraine has increased financial pressures on the case-study countries through higher oil, fertilizer, and food prices. While oil producers like Nigeria and Ghana may see some fiscal benefit from higher oil prices, net importers like Kenya and Ethiopia face increased pressure on exchange rates and external debt burdens.
• Increased reliance on domestic debt issuance to fund fiscal deficits risks crowding out credit to the private sector. This occurs when government securities compete for limited domestic savings, putting upward pressure on the sovereign yield curve and raising borrowing costs for private entities.
• Case-study countries face significant contingent fiscal risks. For example, South Africa's exposure to Eskom alone is equivalent to 5.8% of GDP, while Kenya's total contingent liabilities were estimated as high as 40% of GDP. Ethiopia's risks are heavily tied to public financial institutions like the Commercial Bank of Ethiopia.
• The report identifies a 'hidden debt problem' regarding Chinese bilateral creditors, noting that China has been reluctant to engage with the G-20 Common Framework and has imposed strict confidentiality clauses. Ethiopia and Kenya are noted as being heavily exposed to Chinese creditors.
• Ex-post analysis of external borrowing shows that apparent ex-ante cost savings from Eurobonds can be erased by currency depreciation. For a 2014 Kenyan Eurobond, the original borrowing cost of 5.88% rose to an ex-post cost of 9.32% due to devaluation.

APA

Fuchs, M., & Baghdassarian, W. (2022). Challenges to debt sustainability and financial market development posed by COVID-19 and the war in Ukraine. FSD Africa. https://fsdafrica.org/wp-content/uploads/2025/05/Challenges-to-Debt-Sustainability-and-Financial-Market-Development-November-2022.pdf

Chicago

Fuchs, Michael, and William Baghdassarian. Challenges to debt sustainability and financial market development posed by COVID-19 and the war in Ukraine. FSD Africa, 2022. https://fsdafrica.org/wp-content/uploads/2025/05/Challenges-to-Debt-Sustainability-and-Financial-Market-Development-November-2022.pdf.

Wikipedia

{{cite report |last1=Fuchs |first1=Michael |last2=Baghdassarian |first2=William |title=Challenges to debt sustainability and financial market development posed by COVID-19 and the war in Ukraine |publisher=FSD Africa |date=September 2022 |url=https://fsdafrica.org/wp-content/uploads/2025/05/Challenges-to-Debt-Sustainability-and-Financial-Market-Development-November-2022.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{fuchs2022challenges, author = {Fuchs, Michael and Baghdassarian, William}, title = {{Challenges to debt sustainability and financial market development posed by COVID-19 and the war in Ukraine}}, institution = {FSD Africa}, year = {2022}, month = sep, url = {https://fsdafrica.org/wp-content/uploads/2025/05/Challenges-to-Debt-Sustainability-and-Financial-Market-Development-November-2022.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }