Paying More, Getting Less: The Puzzle at the Heart of African Finance

Jared Osoro is a senior macroeconomist and Member of the Monetary Policy Committee of the Central Bank of Kenya. He is a Plato Group Advisor based in Nairobi, and writes extensively on African macroeconomic issues and sovereign debt sustainability. He recently co-authored a report examining 'How Banks Assess African Risk in Sovereign Lending', which is the subject of this article.

When finance ministers and central bank governors gathered in Washington last week for the IMF and World Bank Spring Meetings, one question sat, as it does most years, somewhere near the bottom of the formal agenda and near the top of the informal conversations: what do we know about private capital flows into African governments, and why does it cost so much?

The question matters well beyond the continent. Sub-Saharan Africa is home to the world's youngest and fastest-growing population. Closing its development gap in education, infrastructure, healthcare, and energy requires sustained long-term investment on a scale that cannot be met by aid or multilateral lending alone. Private capital has to play a central role. And yet the architecture of international finance continues to make that harder than it should be.

The current conflict in the Persian Gulf is a reminder, if one were needed, of the urgency of diversifying both energy sources and global supply chains. As former UN Assistant Secretary-General Andrew Gilmour argued in his Thought Leadership piece for Plato Group last year, the links between climate stress, conflict and migration make this an issue of global stability, not only African development. Africa holds some of the world's most significant renewable energy resources. The capital to develop them should be flowing in. Too often, when it does arrive, it’s at a price that’s unsustainable. Under the current geopolitical conditions, tightening financial markets mean that even these flows cannot be taken for granted.  

A new study - ‘How Banks Assess African Risk in Sovereign Lending’ - carried out by Plato Group in partnership with the Sustainable Sovereign Debt Hub, which is hosted by NatureFinance in Geneva, offers some of the clearest analysis yet of why this is, and where the pressure points lie.

Our assumptions missed the fuller picture

When I wrote about this issue for Plato Group a year ago, the explanations for why African governments pay so much to borrow were well-rehearsed. Some are legitimate: governance in parts of the continent remains opaque, and investors operating from London or New York apply a risk premium that reflects their uncertainty as much as the underlying reality.

Others are harder to defend. Credit rating agencies have faced sustained and credible criticism for systematically overpricing African risk, as our colleagues Churchill Ogutu and Dilan Saujani documented in Kenya last year. Agency assessments tend to lag behind reality, reacting to crises rather than anticipating them, and there is the persistent tendency to treat sub-Saharan Africa as a single risk, as though instability in one corner of a continent spanning more than 30 million square kilometres automatically signals danger everywhere else. The distance from Dakar to Mogadishu is greater than from Lisbon to Moscow. The two tell you very different things.

But these explanations, real as they are, turn out to be incomplete. What has been missing from the analysis to date is a clear understanding of the role that commercial banks themselves play in the story – so let’s take a look.

What the banks are actually doing, and why

Commercial banks occupy a pivotal position in this story. They are the intermediaries between African governments and the international capital markets, and the new report is the first to examine, in any systematic way, how those banks actually make their lending decisions.

The headline finding is a significant and largely unreported shift: over the past decade, as the multilateral loans that once formed the backbone of African government financing have declined, commercial banks have stepped in. But they are not lending in dollars or euros. They are lending in local currencies and at shorter maturities and higher interest rates than the governments themselves would choose – see Figures 1 and 2 below.

Figure 1: Average interest rate and instrument composition of African sovereign debt (2000–2024)

Source: Authors’ computation based on M. S. Manger et al., Africa’s Domestic Debt Boom: Evidence from the African Debt Database, CEPR Discussion Paper 20747 (London: Centre for Economic Policy Research, 2026), https://africandebtdatabase.com; Boston University Global Development Policy Center, Chinese Loan to Africa Database, 2025, https://www.bu.edu/gdp/chinese-loans-to-africa-database-data-download/.

This is not simply a reflection of higher underlying risk. It is, at least partly, a consequence of how international banking regulation works. Under the Basel III framework (the global rulebook designed to keep banks safe after the 2008 financial crisis) banks must hold more capital in reserve against loans made to governments rated below investment grade. Most African governments fall into that category. Lending to them in foreign currency therefore becomes, from the bank's perspective, costly and capital-intensive. The rational response is to lend in local currency instead, where different rules apply. The bank protects its balance sheet, but the government gets a worse deal.

The study also finds that banks increasingly rely on their own internal risk assessments rather than the ratings produced by the major agencies. Where they have people on the ground, they trust their own forensic analysis. When local knowledge is absent, governments pay the price.

Figure 2: Average interest rate on sovereign borrowing of African countries by instrument type and average borrowing maturities

Source: Authors’ computation based on Manger et al., Africa’s Domestic Debt Boom: Evidence from the African Debt Database (https://africandebtdatabase.com).

Perpetuating a vicious cycle

The consequences of this shift are severe. A government that can only borrow in local currency, at high interest rates and for periods of two or three years, faces a fundamental constraint on its ability to invest. The projects that transform economies - power grids, transport links, schools, clean energy infrastructure - require long-term financing. Short-term, expensive debt is the wrong instrument for a twenty-year problem.

Unable to invest adequately for growth, a government's fiscal position gradually deteriorates. Its risk profile worsens in the eyes of lenders. Banks respond by shortening maturities further and raising rates. The cycle reinforces itself, and the conditions that prompted cautious lending in the first place become entrenched. These nations become stuck in unsustainable debt, with the stakes too high to ignore.

Underlying all of this is a structural gap that no amount of short-term lending can bridge. Across sub-Saharan Africa, domestic savings average roughly 18-19% of GDP. The investment levels associated with sustained, fast growth - the kind seen across emerging Asia over the past three decades - are closer to 35-37%. Foreign currency, raised on reasonable terms and at long maturities, is what bridges that gap. It is precisely that which is becoming harder to access.

Three findings that need deeper research

The study is deliberate about what it does and does not claim. It does not offer a neat package of solutions – yet; that’s the next stage. What it does (and this is arguably more valuable at this stage) is identify three areas where the current evidence is weakest, the stakes are highest, and targeted analysis could make a genuine difference.

The first is local capital market development. The case for deeper domestic bond markets in sub-Saharan Africa has been made before, but the study gives it new precision. Governments that have integrated domestic debt market development into a broader financing strategy are better placed to manage the interest rate and maturity pressures described above. But deep capital markets require a functioning, transparent economic environment - and as James Woods and Brian Bowler recently documented, the shadow economies reshaping parts of east and southern Africa, built on illicit mineral flows and parallel financial networks, actively undermine that foundation. The question that remains underexplored is exactly how that development is best sequenced and supported - and what role multilateral institutions should play in accelerating it.

The second is the unintended consequences of Basel III. The banks interviewed for the study broadly support the framework's objectives - financial stability is not something anyone wants to trade away. But its application to frontier markets is producing structural distortions that were not part of the original design. A rigorous examination of how global capital allocation rules interact with lending to African governments - and whether adjustments are possible without compromising stability - is overdue. This is a conversation that has barely begun.

The third is perhaps the least discussed. Many African governments simply lack the capacity to present themselves effectively to international lenders. They’re unable to explain their fiscal position, their reform trajectory, and their local context in the terms that capital markets respond to. The study suggests that this investor relations gap may have a more direct effect on borrowing costs than is commonly assumed; this aligns with the findings of a report last year from the Institute of International Finance which used a survey-based score to demonstrate how “enhanced investor relations practice acts as a ‘pull factor’ for capital”. If that link can be demonstrated empirically, it shifts the frame for multilateral institutions: capacity building, not just capital provision, may be where the highest returns lie.

So what next?

None of this is inevitable. The vicious cycle described above is a product of specific, identifiable conditions - regulatory frameworks, information gaps, market structures - and specific conditions can be changed. But change of this kind requires both the right analysis and the right moment.

On the analysis, the work is underway. In February, I joined a group of 30 sovereign debt experts convened by the UK Foreign, Commonwealth & Development Office (FCDO) at Wilton Park in the English countryside, to discuss sovereign debt sustainability. The conversations there, which drew on research of precisely the kind this study represents, suggested a growing consensus that the three issues identified above (capital market development, Basel III's frontier market effects, and sovereign investor relations capacity) deserve serious, evidence-based attention at the highest levels of international economic policy.

The scheduled G20 Finance Ministers & Central Bank Governors meetings later this year and in 2027, as well as the IMF-World Bank Annual Meetings this autumn, offer a genuine opportunity. Fiscal and monetary policy decision-makers from the world's largest economies, gathered around the same table with their African counterparts, with the political bandwidth to agree on something meaningful isn’t a moment that arrives often. The groundwork being laid now, through studies like this one and the policy conversations that follow, is what determines whether that moment is used well. Plato Group is well positioned to lead the process of delving deeper on the three key issues that emerged from the study.

For those who want to understand the detail behind the findings outlined here - the bank interviews, the data on shifting lending patterns, the precise mechanisms through which regulation shapes behaviour in these markets - the full report is available. The problems it describes are complex, but with the right attention, they’re solvable.

This thought leadership paper is published in collaboration between Jared Osoro and Plato Group Ltd. The usual disclaimer applies.

The Featured Image is of Abebe Aemro Selassie, Director of the African Department at the IMF, at the Press Briefing on the IMF's April 2026 Regional Economic Outlook for Sub-Saharan Africa. © IMF.

Jared Osoro

Jared is a member of the Monetary Policy Committee of the Central Bank of Kenya. He is a financial sector macroeconomist with over two decades of experience (Jared Osoro | LinkedIn). He is presently a Director at FSD Africa, and before that served as Bank Economist at the East African Development Bank for more than ten years. He has written extensively on finance as an engine of development. He is a Plato Group Advisor based in Nairobi.

Plato Group Ltd.

Plato Group is a network of policy experts, former diplomats, academics, and geopolitical advisers. Their Advisors have held senior positions in governments and central banks all over the world, as well as at the UN, World Bank, International Monetary Fund, and the OSCE. They are seasoned practitioners with direct experience in advanced and emerging markets. Plato Group blends international and local expertise, providing comprehensive insights tailored to a client’s needs.