Why governments should deepen domestic financial markets

The paper examines how chronic fiscal imbalances and external shocks have increased public debt in five African nations, arguing that deepening domestic financial markets and ending financial repression are essential for long-term debt sustainability despite short-term fiscal tensions.

• Ethiopia, Ghana, Kenya, Nigeria, and South Africa all face liquidity and solvency risks, with external debt distress being the most critical risk to monitor. This is driven by low public sector revenues and large trade deficits, which limit the foreign exchange available for servicing external debt and funding current account deficits.
• Ghana, Kenya, and Ethiopia are particularly vulnerable to refinancing risks on their Euro-borrowing due to rising interest rates and tightening global credit markets in 2022/2023. In contrast, South Africa's deep domestic financial market allows it to absorb higher public debt, though it remains exposed to the volatility of foreign portfolio investment.
• Governments in the case-study countries used various measures to mitigate borrowing impacts during the pandemic, including quantitative easing in Ghana and South Africa, debt monetisation in Ethiopia, Nigeria, and Ghana, and financial repression (such as exchange controls and investment requirements) in Ethiopia and Nigeria.
• Financial repression and central bank financing of deficits, specifically in Nigeria and Ethiopia, may curb public debt growth in the short term but discourage savings and encourage financial disintermediation in the medium term. Such policies reduce confidence in market-based finance and create opportunities for rent-seeking.
• Deepening domestic financial markets to increase absorptive capacity is necessary to shield debt financing costs from market sentiment, but this creates short-term tensions. Transitioning to market-conform financing increases transparency and accountability and requires governments to find alternative funding sources, which may hinder the willingness to implement reforms.

APA

TIMOTHYRADIER (2022). Why governments should deepen domestic financial markets. FSD Africa. https://fsdafrica.org/why-governments-should-deepen-domestic-financial-markets/

Chicago

TIMOTHYRADIER. Why governments should deepen domestic financial markets. FSD Africa, 2022. https://fsdafrica.org/why-governments-should-deepen-domestic-financial-markets/.

Wikipedia

{{cite report |last1=TIMOTHYRADIER |title=Why governments should deepen domestic financial markets |publisher=FSD Africa |date=17 November 2022 |url=https://fsdafrica.org/why-governments-should-deepen-domestic-financial-markets/ |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{timothyradier2022why, author = {TIMOTHYRADIER}, title = {{Why governments should deepen domestic financial markets}}, institution = {FSD Africa}, year = {2022}, month = nov, url = {https://fsdafrica.org/why-governments-should-deepen-domestic-financial-markets/}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }