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

The report examines how global shocks have exacerbated chronic fiscal and current account imbalances in five Sub-Saharan African nations. It highlights severe liquidity and solvency risks, particularly regarding external debt in Ethiopia, Ghana, and Kenya. The authors argue that while some countries used debt monetization and financial repression to manage short-term costs, these practices inhibit long-term financial market development and fuel inflation. The document recommends strengthening public debt management, diversifying funding sources, and transitioning toward market-conform policies to avoid debt distress and encourage private sector credit.

• Ethiopia, Ghana, and Kenya face a high risk of external debt distress over the next decade, driven by high levels of liquidity risk and constrained foreign exchange availability due to low public revenues and large trade deficits.
• Nigeria and South Africa are in a less precarious position than the other three case studies; Nigeria entered the pandemic with lower public debt, and South Africa possesses a deep domestic financial market capable of absorbing higher debt levels.
• Increased reliance on domestic government debt issuance is likely to raise sovereign yield curves, which crowds out the supply of credit to the private sector and increases borrowing costs for both the government and private entities.
• Financial repression practices, including foreign exchange controls and negative real interest rates, have been used in Ethiopia and Nigeria to reduce immediate debt service costs but distort markets and discourage savings.
• Debt monetization—financing government expenses through central bank overdrafts or direct security issuance—has been prevalent in Ethiopia, Nigeria, and Ghana, leading to inflationary pressures and uncertainty regarding macroeconomic management.
• Sovereign borrowing costs on commercial terms became prohibitive in 2022 due to rising global inflation, increased risk premiums on emerging market debt, and the tightening of credit markets.
• Ethiopia and Kenya are heavily exposed to Chinese bilateral creditors, which introduces geopolitical risks and 'hidden debt' problems due to a lack of transparency and strict confidentiality clauses in loan contracts.
• Contingent fiscal liabilities pose significant risks across all five countries, with notable exposures including Eskom in South Africa (5.8% of GDP) and public corporation liabilities in Kenya (17.6% of GDP).

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} }