Executive Summary

This report provides a definitive macroeconomic framework for sovereign debt management, designed for Kenya and adaptable to other African nations. It moves beyond the superficial political discourse surrounding debt—as recently exemplified by critiques within the Kenyan Parliament—to address the fundamental structural and institutional deficiencies that precipitate fiscal distress. The central thesis is the categorical rejection of nominal debt ratios, particularly the headline debt-to-GDP ratio, as the primary or sufficient measure of sovereign debt sustainability. This metric is analytically flawed and misguides public policy.

In its place, this report introduces a “Real Value” framework. This framework is anchored in a single “Golden Rule” of public finance: public debt is sustainable if, and only if, the Economic Rate of Return (ERR) of the financed public investment is demonstrably greater than the real, risk-adjusted cost of the capital borrowed. We establish the 10% ERR threshold, as utilized by institutions like the Millennium Challenge Corporation ¹, as the non-negotiable quantitative hurdle for all new debt-financed public investment.

The recent political critiques in Kenya are analyzed not as isolated events, but as symptoms of a profound institutional failure. The core deficiency identified is the lack of parliamentary ratification power over individual loan contracts.² This relegates legislative oversight to an ex-post, and therefore ineffective, political exercise.³

The report validates and operationalizes an 8-point debt management plan for Kenya. It identifies the systematic development of the domestic long-term bond market—specifically by tapping the nation’s vast, ‘trapped’ pool of pension fund capital ⁴—as the primary structural solution to the chronic short-term debt and rollover crisis. This approach is rooted in the foundational work of macroeconomists like Agenor and Montiel, who demonstrated that adapting modern macro-financial models to the specific realities of developing countries—which face different shocks and propagation mechanisms—is essential for sustainable policy.

Finally, the report provides a differentiated typology for sovereign debt management across the continent. It demonstrates that the optimal policy mix for Market-Access Countries (like Kenya), Resource-Exporters (like the CEMAC nations), and Low-Income Countries (LICs) are fundamentally different. The solutions must be tailored to the dominant risk profile of each nation, whether it be rollover risk, commodity revenue volatility, or a dependency on concessional financing.

Part I: Deconstructing the Public Debt Narrative: Correcting Core Macroeconomic Fallacies

The public discourse on sovereign debt across Africa is dominated by a set of analytical fallacies that obscure the true nature of fiscal risk. These fallacies, repeated by politicians, advisors, and media commentators, lead to flawed policy prescriptions.⁹ A coherent solution must begin by correcting these foundational errors.

1.1  Debunking the Singular Debt-to-GDP Metric:

The most pervasive error in sovereign debt analysis is the obsessive focus on the headline debt-to-GDP ratio.⁹ Pundits and politicians fixate on this single number—whether it is Kenya’s 65.7% of GDP ²², the African average of 63.5% ⁹, or comparisons to arbitrary benchmarks like the 55% present value (PV) threshold for high-risk countries ²⁴ or the 60% threshold cited by the African Monetary Co-operation Program.¹⁷

This is a fundamental analytical error. Comparing the debt-to-GDP ratios of African nations to those of developed economies (e.g., Japan or the US) is a meaningless, apples-to-oranges comparison.²¹ The “debt-carrying capacity” ²⁶ of a sovereign is not a function of its Gross Domestic Product—a broad, often-mis-measured proxy for economic activity that includes a vast, untaxed informal sector. Instead, debt-carrying capacity is a direct function of government revenue—the actual, verifiable cash flow available to service that debt.¹⁸

1.2 Debt-to-Revenue and Interest-Payments-to-Revenue as The Real Indicators of Distress

To correctly diagnose fiscal health, the debt-to-GDP metric must be subordinated to two far more salient liquidity and solvency metrics.

First is the Debt-to-Revenue Ratio. As analysis of African economies demonstrates, this indicator “has been rising faster than the debt to GDP ratio as revenue collection has not been expanding proportionately with economic activities”.¹⁸ For this reason, fiscal sustainability “critically depends… on vigorous revenue collection, even more than expansion in GDP”.¹⁸ A country with a “manageable” 65% debt-to-GDP ratio but a catastrophic 400% debt-to-revenue ratio is in a far more precarious position than a country with an 80% debt-to-GDP ratio and a 200% debt-to-revenue ratio.

Second, and more acute, is the Interest-Payments-to-Revenue Ratio. This metric is the true indicator of fiscal suffocation and impending crisis. The IMF notes that for sub-Saharan Africa, this ratio has “more than doubled since the early 2010s and is now close to four times the ratio in advanced economies”.¹⁹ This is not a theoretical risk; it is a present reality. In 2023, 32 African countries were spending more on external debt payments than on healthcare, and 25 spent more on debt than on education. This metric quantifies the diversion of state resources from productive investment to debt service, creating a fiscal “doom loop.”

This reveals the “Stock-Flow Trap.” A high stock of debt (Debt/GDP) is problematic primarily because it triggers a punitive flow (high interest payments). This is operationalized by credit rating agencies, which downgrade the sovereign.¹¹ This downgrade immediately increases the interest cost on new debt, consuming a larger portion of revenues. This, in turn, crowds out public investment in health, education, and infrastructure, strangling the future economic growth required to lower the Debt-to-GDP ratio. The high stock creates a toxic flow that guarantees the stock will become even less sustainable.

1.3 The “Debt Laffer Curve” and the Fallacy of “Productive Debt”

A common refrain, and a valid one, is that borrowing is not inherently bad if it finances productive public investment that yields exceeding its cost.¹³ However, this statement is only conditionally true. The “Debt Laffer Curve” concept ⁹ posits that while reasonable levels of debt can enhance growth, high accumulated debt levels become counterproductive.

The fallacy is that “productive debt” is always good, regardless of the initial debt stock. If a country’s debt is already high, the associated “debt overhang” creates an expectation that future state revenues will be captured by existing creditors.⁹ This deters new private investment. Furthermore, the high debt stock triggers rating downgrades ¹¹, which raises the real cost of capital for all new borrowing.

A project with a solid 9% economic return becomes unsustainable if the sovereign’s risk premium pushes the real cost of borrowing to 11%. The project itself is “productive,” but the borrowing destroys public wealth because its cost exceeds its return. Sustainability is not an intrinsic quality of the project but a function of the relationship between the project’s return and the sovereign’s cost of capital.

1.4 The Human Cost of Flawed Debt Narratives

The prioritization of debt service over public investment is not a theoretical exercise. It has direct, devastating human consequences, as resources are diverted from essential social services to meet creditor demands. This trade-off is the most tangible result of a dysfunctional debt structure.

A 2024 report by Christian Aid highlighted the scale of this crisis, finding that 32 African countries were spending more on external debt payments than on healthcare, and 25 were spending more on debt than on education. This illustrates a catastrophic failure of public finance, where the financial “flow” to creditors takes precedence over investment in human capital.

Table 1.1: Illustrative Examples of Debt Servicing vs. Social Spending (2023)
Country	Metric	Finding	Implication
South Sudan	Debt vs. Healthcare	Spends over 10 times more on external debt servicing than on its national healthcare system.	In a country facing acute hunger and conflict, debt obligations are systematically de-funding basic survival.
Malawi	Debt vs. Education	Spends twice as much on external debt servicing as on its national education budget.	With only 15% of children completing secondary school, debt is a direct barrier to human capital development.
Aggregate	Debt vs. Healthcare	32 African countries spend more on external debt payments than on healthcare.	A systemic public health crisis is being exacerbated by unsustainable financial outflows.
Aggregate	Debt vs. Education	25 African countries spend more on external debt payments than on education.	A generation’s economic potential is being sacrificed to service past debts.
Source: Compiled from Christian Aid report data. Note: Individual country lists vary slightly across sources/years; the aggregate numbers are consistently cited.

Part II: The Anchor of Sustainability: A Real Value Framework for Public Investment

To escape the trap of nominal metrics, sovereign debt management must be anchored in “real value calculations.” This requires a non-negotiable framework that assesses the real cost of liabilities against the real returns of the assets they finance.

2.1 The “Real Value” Calculation: Moving Beyond Nominal Costs

“Real value” is defined as the nominal value of an item adjusted for inflation, revealing its true purchasing power over time.²⁷ When applied to sovereign debt, this calculation dismantles common policy errors.

The Nominal Cost of Debt (e.g., a 9% Eurobond coupon, a 14% Treasury bill) is a analytically useless figure in isolation. The true cost must be calculated in real terms.

• The Real Cost of Domestic Debt is, approximately, the nominal interest rate minus the domestic inflation rate.²⁷
  $$Real\_Cost_{Domestic} \approx Nominal\_Rate_{KSh} – Inflation_{KSh}$$
• The Real Cost of External Debt is more complex, comprising the nominal rate, adjusted for the lender’s inflation, plus the currency risk premium (i.e., expected depreciation) and a liquidity/rollover risk premium.³²
  $$Real\_Cost_{External} \approx Nominal\_Rate_{USD} – Inflation_{USD} + E(\Delta e) + Risk\_Premium$$

This framework corrects the politician’s error of comparing a 14% domestic loan to a 9% external loan. If domestic inflation is 10%, the real cost of the domestic loan is approximately 4% ($14\% – 10\%$). If US inflation is 2% and the Kenyan Shilling (KSh) is expected to depreciate by 7% annually, the real cost of the external “cheaper” loan is 14% ($9\% – 2\% + 7\%$). In this (realistic) scenario, the domestic loan is vastly cheaper and, critically, carries zero currency mismatch risk.

Target 3: A New Public Financial Management Framework

 

2.2 The Economic Rate of Return (ERR)

Debt is a liability used to acquire an asset. That asset—be it a road, a port, or a power plant—must generate an economic return. The Economic Rate of Return (ERR) is the metric that captures this, defined as a project’s economic benefits (increased income, value-added) relative to all economic costs.¹

This framework requires a quantitative benchmark. The Millennium Challenge Corporation (MCC) provides the most robust, practical, and non-political hurdle rate: MCC requires that its projects’ ERRs pass a 10 percent hurdle rate to be considered for investment.¹

This report proposes this 10% ERR be adopted as the anchor for all sovereign borrowing. This leads to the “Golden Rule of Real Value Debt Management”:

New long-term public borrowing is sustainable if, and only if, the independently verified Economic Rate of Return (ERR) > 10% AND the ERR > Real, Risk-Adjusted Cost of Capital.

This simple, non-negotiable rule must be legislated as the primary test for any Public Debt Management Office (PDMO) and Parliament. It immediately cuts through all political debate. Borrowing for prestige projects, stadiums, or consumptive subsidies—projects with a demonstrably low or negative ERR—is, by this definition, a direct act of fiscal irresponsibility that destroys public wealth.

2.3 A “Real Value” Sovereign Balance Sheet: Matching Assets to Liabilities

The “Golden Rule” has an immediate corollary: the sovereign must manage its balance sheet by matching the currency of its liabilities (debt) to the currency of its assets (returns).

• Rule 1 (FX Match): Hard currency (USD, EUR) debt must only be used to finance projects that generate hard currency returns. Examples include port upgrades (earning fees in USD), export-oriented energy projects (earning USD), or international tourism infrastructure.³³ This creates a natural hedge.
• Rule 2 (Local Match): Local currency (KSh) debt must be used to finance projects that generate local currency returns. Examples include social housing, education, rural roads, and healthcare.

The “original sin” of emerging market debt is violating this principle: financing local-return projects (like an urban metro system or a domestic highway) with hard-currency loans. When the local currency inevitably depreciates, the real cost of that USD-denominated liability explodes. Simultaneously, the real return of the asset (metro ticket fares in KSh) does not. This asset-liability mismatch is the single greatest structural driver of sovereign debt crises.

2.4 Redefining “Fiscal Space” as Productive Capacity

The concept of “fiscal space” is routinely misunderstood. The IMF’s definition of a “forward-looking, dynamic assessment” of “room for discretionary action” ⁴⁰ is often interpreted by policymakers as simply “room to borrow more.” This is a dangerous misinterpretation.

This report offers a more precise, functional definition, drawing from Agenor and Montiel’s emphasis on long-term growth dynamics: Fiscal Space is not the room to borrow; it is the institutional and productive capacity to generate a pipeline of bankable projects where ERR > 10%.

A country at a 40% debt-to-GDP ratio with no viable, high-return projects in its pipeline has zero fiscal space. Any borrowing it undertakes will destroy public wealth. Conversely, a country at a 70% debt-to-GDP ratio that possesses a well-vetted, independently verified portfolio of 15% ERR projects has significant fiscal space. This re-frames the entire debate from the stock of debt to the productivity of the investment it finances.

Table: The “Real Value” Investment Matrix (Illustrative Application)
Project	Debt Currency	Nominal Cost	Inflation (Domestic/Foreign)	FX Risk Premium (E(Δe))	Total Real Cost of Capital	Projected ERR	Decision (ERR > Real Cost?)
Project A: Port Upgrade (FX Earning)	USD (Eurobond)	8.00%	2.0% (US)	0% (Natural Hedge)	6.00%	15.00%	APPROVE
Project B: Rural Roads (KSh Earning)	USD (Eurobond)	8.00%	2.0% (US)	7.0% (KSh Deprec.)	13.00%	12.00%	REJECT (Asset-Liability Mismatch)
Project C: Rural Roads (KSh Earning)	KSh (Pension Bond)	14.00%	9.0% (Kenya)	0% (Local Currency)	5.00%	12.00%	APPROVE
Project D: National Stadium (KSh Earning)	KSh (Pension Bond)	14.00%	9.0% (Kenya)	0% (Local Currency)	5.00%	3.00%	REJECT (ERR < 10% Hurdle)

2.5 The Counter-Cyclical Imperative and the “Structural Balance” Correction

A primary error in macroeconomic management across developing nations is the prevalence of pro-cyclical fiscal policy. This means governments spend more during economic “good times” (when revenue is high) and are forced to cut spending and raise taxes during “bad times” (recessions). This policy amplifies the business cycle, worsening booms and deepening busts.

As Agenor and Montiel’s work highlights, developing countries experience different types of shocks and “propagation mechanisms” than industrial countries. A simple “deficit target” (like 3% of GDP), often espoused by international financial institutions, is an inadequate and often pro-cyclical anchor.

The correct approach is a counter-cyclical one: save during booms to build buffers, then spend during busts to stabilize the economy. To do this, policymakers must stop targeting the headline fiscal balance and start targeting the Structural Fiscal Balance (SFB).

The SFB is the fiscal balance adjusted for the business cycle. The calculation, used by the IMF and other institutions, is conceptually:

$$SFB = \text{Headline Balance} – \text{Cyclical Component}$$

Where the Cyclical Component is estimated by applying revenue and expenditure elasticities to the “output gap” (the difference between actual and potential GDP).

For resource-rich nations (Profile 2), this formula is insufficient. Their volatility is driven not just by the business cycle, but by commodity prices. The correct tool for them is the Non-Resource Structural Primary Balance (NRSPB). This advanced metric strips out two volatile components:

1. All (volatile) resource revenues.
2. The cyclical component of the non-resource economy.

By targeting a stable NRSPB, a government delinks its spending from volatile commodity revenues, automatically saving windfall profits and preventing a pro-cyclical surge in spending. This is the single most important macroeconomic reform for resource-dependent economies.

2.6 Correcting the Correctors: Flaws in the IMF/World Bank Debt Sustainability Framework (DSF)

A significant part of the problem is that the primary analytical tool used by the IMF and World Bank—the Debt Sustainability Framework (DSF)—is itself deeply flawed. It often perpetuates the pro-cyclical, austerity-biased advice that traps countries in low-growth cycles.

Critiques from within the development community and academia identify several fundamental errors in the standard DSF model:

1. Systematic Optimism Bias: The macroeconomic forecasts (especially for GDP growth) underpinning the DSA are often “systematically optimistic”. When this projected growth fails to materialize, the debt ratio explodes, triggering a crisis the model failed to predict.
2. Mechanistic Stress Tests: The model’s “stress tests” are criticized as being “too mechanistic and standardised”. They fail to capture the complex, country-specific nature of shocks, especially the political and institutional “propagation mechanisms” central to the Agenor-Montiel framework.
3. Neglect of Growth Dividends: The DSF “underplays the growth/development dividends from debt-financed investments”. A loan for a 15% ERR port (like Project A in Table 1) is treated as a simple liability, failing to model how the return from that investment will improve the denominator (GDP) and the cash flow (revenue) in the future. This inherently biases the model against public investment.
4. The “Too Little, Too Late” Syndrome: Because the model’s theory is “not in tune with cutting-edge research”, it often fails to recognize the need for debt relief until it is too late. This leads to the “too little, too late” syndrome, where delayed restructuring is insufficient to restore growth.
5. Human Development Blindness: The framework “neglects the human development aspect of debt sustainability”. It can, in theory, find a debt load “sustainable” even if it requires a country to spend more on debt than on healthcare and education (as seen in Table 1.1), a definition that fails any test of real-world policy coherence.

Part III: An Actionable Debt Management Solution: The Kenya Case Study

This section operationalizes the “Real Value” framework by validating, correcting, and providing empirical depth to a concrete 8-point debt management plan for Kenya.

3.1 Validating Core Targets: Fiscal Rules, Composition, and Maturity

The first three pillars of a sound plan involve setting credible, binding targets for the fiscal path and debt structure.

A. Fiscal Targets (Debt-to-GDP 52-55%):

A target to bring the total public debt-to-GDP ratio into a 52-55% range is validated as both necessary and prudent. This target is aligned with the 55% Present Value (PV) of debt-to-GDP benchmark used by the IMF and World Bank for countries with medium debt-carrying capacity.24 Critically, Kenya’s current PV of public debt-to-GDP stands at 63.0% 24, placing it firmly in the “high risk of debt distress” category. This confirms that the official government path, which targets a reduction to 57.8% by 2028 45, is less ambitious than required. A more aggressive consolidation path toward 55% is macro-economically justified.19

B. Debt Composition (T-Bills < 12%):

The heavy reliance on short-term domestic paper is a primary driver of risk. The high share of Treasury Bills (e.g., ~16% recently – derived from data showing T-Bills at 5.1% 45 and overall domestic debt composition 46) creates severe rollover risk, forcing the Treasury to constantly refinance at prevailing (and often high) interest rates. The official 2025 Medium-Term Debt Management Strategy (MTDS) aims to reduce refinancing risks by “reducing short maturities debt”.22 However, a significant gap exists between official ambitions and market reality. While the Mwananchi (public) version of the 2025 MTDS sets a target for T-bills as low as 3.7% of domestic debt 45, this appears unrealistic given current market operations. A concrete, interim target to reduce the T-bill share to below 12% over 24 months is a more credible and operational goal.

C. Maturity Management (WATM 7-10 years & LMOs):

The core objective of the 2025 MTDS is to lengthen the total portfolio’s Average Time to Maturity (ATM).22 A policy target to increase the weighted average time to maturity (WATM) of domestic debt toward 7-10 years (from its currently low level) is the correct prescription. This cannot be achieved passively. It requires the active use of Liability Management Operations (LMOs).51 The call for buybacks, tender exchanges, and switch auctions to swap short, expensive paper for longer, cheaper bonds is an advanced and necessary technique. South Africa’s post-1994 debt management transformation provides the definitive regional blueprint for how institutionalizing LMOs can deepen domestic markets, broaden the investor base, and smooth maturity “walls”.51

3.2 The Core Solution: Developing Local Long-Term Instruments (The Pension Fund)

The single most important structural solution for Kenya’s debt trap lies in unlocking its own domestic capital. The proposal to create indexed, long-dated bonds specifically for pension and insurance funds is the key.

This solution rests on two facts. First, Kenya possesses a massive, “trapped” pool of long-term domestic capital. As of early 2025, Kenyan pension funds hold approximately 28-29% of all government domestic debt.⁴⁶ This capital is, by its nature, long-term. Second, as noted by organizations like the World Bank, these pension funds are often “heavily invested in government bonds”.⁴

The “demographic sweet spot” across Sub-Saharan Africa, characterized by a rising labor force and low elderly dependency ratios, means that pension funds are cash-flow positive.⁵ They are desperately searching for long-term assets (like 20- or 25-year bonds) to match their long-term liabilities.⁴

The failure is one of policy and market design. The Treasury, by over-relying on short-term T-bills, forces this long-term capital into short-term assets. This constitutes a form of “financial repression,” an environment where government interventions keep interest rates artificially low or mismatched, which, as Agenor and Montiel (1996) argued, “discourages savings, makes investment unattainable and economic growth becomes elusive”.

The solution is for the Treasury and Central Bank ⁴⁷ to systematically issue a new class of 15, 20, and 25-year instruments, such as inflation-indexed bonds or specific, ring-fenced infrastructure bonds.⁵ This would:

1. Lengthen Maturity: Achieve the 7-10 year WATM target.²²
2. Reduce Rollover Risk: Lock in financing for decades.
3. Eliminate FX Risk: Finance domestic projects with domestic currency.
4. Fund the “Golden Rule”: Provide the local-currency capital required to fund the high-return (ERR > 10%) domestic projects (like Project C in Table 1).

Table 2: Kenya’s Domestic Debt: 2025 MTDS Targets vs. Proposed Realistic Path

Metric	Current Reality (Approx.)	2025 MTDS Target (Public)	Proposed Realistic Target (User)	Rationale
Share of T-Bills	~16% (User Fact/Derived)	3.7%	< 12% (by 2027)	The 3.7% target is operationally unfeasible in the short term. A gradual reduction is more credible to markets.
Domestic WATM	Short (e.g., < 5 years)	Lengthen (Unspecified) 22	7-10 years (by 2029)	Achievable only by actively issuing long-dated (15yr+) bonds targeted at pension funds.4

3.3 Risk Management, Transparency, and the “Secret Loan” Problem

E. Currency Risk (Match currency to revenue):

This is the “Real Value” framework (Part II) in practice. It is a non-negotiable principle of sound public finance.33

F. Revenue Profile (ERR Test):

This is the “Golden Rule” (Part II). Mandating that new long-term borrowing pass a simple, public economic return test (ERR > 10%) 1 is the central institutional reform required.

G. Transparency & Contingent Liabilities:

The political debate over alleged “secret loans” or the securitization of revenue streams (like the fuel levy) 72 is a direct result of a dysfunctional and opaque reporting framework. The problem is not just “secret” loans, but officially excluded liabilities.

The 2025 MTDS itself states that its analysis excludes Ksh 263.74 billion in liabilities, including “performing guarantees debts,” “Government overdraft at CBK,” “Suppliers credit,” and the “IMF SDR Allocation”.²² This is a critical gap. An analysis from IPF Global confirms that there is “limited information about public private partnerships and contingent liabilities” provided to Parliament.²

The solution is radical transparency. The proposal to ban or strictly limit securitization without explicit parliamentary approval is the correct institutional response. This must be paired with a legal mandate for a single, consolidated, quarterly public debt statement. This register must include all on-balance sheet debt, all guaranteed debt (e.g., for SOEs like Kenya Airways or KPA ²⁴), all PPP-related liabilities, and all advances from the Central Bank.²² This eliminates the ambiguity that fuels political attacks and erodes market confidence.

H. Market & Investor Relations:

Restoring confidence requires a clear communications plan. Markets and credit agencies respond to clarity and credibility, not just headline numbers.76

Part IV: Reforming the Institutional Framework: From Political Theatre to Effective Oversight

The recent political turmoil surrounding the Kenyan Parliament’s Budget & Appropriations Committee ⁷⁷ is a textbook case of political economy. However, from a macroeconomic perspective, it is a symptom of a systemic institutional failure.

4.1 The Kenya Case: Symptom of a Systemic Failure

The question “why didn’t the previous head of Kenya’s Parliamentary Budget Committee raise this earlier?” misses the fundamental point. The critiques from the former Budget Chair ⁷⁷, regardless of their political timing, are the predictable outcome of a legislative framework that grants Parliament visibility but denies it power.

The institutional “smoking gun” is found in analysis of Kenya’s Public Finance Management (PFM) Act. Parliament approves the high-level Medium-Term Debt Strategy (MTDS), but after that, the “Cabinet Secretary is not required to seek approval at the time of borrowing“.² Critically, there is “no requirement for individual loan contracts to be ratified by Parliament”.²

Further analysis confirms this structural flaw: Parliament’s actual role in debt management is limited to ex-post review of audit reports, which can occur “as long as three years” after the debt has been contracted and disbursed.³

This legal framework perfectly explains the political theatre. A Budget Committee Chair who lacks the legal, ex-ante power to stop the executive from contracting a specific, high-risk loan has only one tool left: the ex-post public critique. The political attacks are a substitute for the missing institutional safeguard.

4.2 A Blueprint for Real Oversight: Legislating the “Golden Rule”

The solution is not merely to “require Parliament approval”. This would simply move the political bargaining from the media to the legislative floor. The solution is to transform Parliament’s role from a political gatekeeper to a technical fiduciary.

This requires a new, legislated oversight process:

1. The Executive (Treasury/PDMO) must be legally required to present any new non-concessional loan contract to the relevant parliamentary committee before it is signed.
2. This presentation must be accompanied by the “Real Value Investment Matrix” (see Table 1). This matrix must include an independently verified ERR calculation ¹ and the full “Real Cost of Capital” calculation.²⁷
3. Parliament’s new mandate is not to debate the loan’s political merit, but to quantitatively validate it against the “Golden Rule.” Parliament would be legally empowered (and required) to reject any loan where the $ERR < 10\%$ or where it violates the asset-liability matching principle (e.g., a USD loan for a KSh-generating project).

This reform moves oversight from ex-post political theatre to ex-ante fiduciary duty, forcing the Executive to internalize the “Real Value” framework from the very inception of a project.

4.3 Solving the “Secret Debt” Problem: Radical Transparency

The debate over “secret” debt ⁷² is a red herring. The real problem, as noted in Part III, is the opaque and fragmented accounting for contingent liabilities, SOE debt, and central bank advances.²

The solution is to mandate a single, consolidated, publicly accessible sovereign debt register. This register must be updated quarterly and include:

1. On-Balance Sheet Debt: All T-bills, T-bonds, Eurobonds, and bilateral/multilateral loans.
2. Guaranteed Debt: All debt held by State-Owned Enterprises (SOEs) and guaranteed by the sovereign (e.g., Kenya Airways, KenGen, KPA ²⁴).
3. Contingent Liabilities: All Public-Private Partnership (PPP) liabilities, revenue pledges, and other guarantees.
4. Off-Balance Sheet Items: All central bank overdrafts and advances.²²
5. Collateralized Flows: Any revenue stream (e.g., fuel levy, housing fund) pledged as collateral.

This radical transparency eliminates the possibility of “secret” debt, restores investor confidence, and provides Parliament with the comprehensive data needed to perform its new oversight role.

4.4 Deepening PFM and Debt Management (DD) Act Reforms

The ex-ante ratification of individual loans is the most critical reform, but it must be supported by deeper institutional changes to the Public Finance Management (PFM) and Debt Management (DD) legal frameworks.

Model PFM laws provide a clear blueprint. The following amendments are necessary to build a truly robust system:

1. Legislate the “Real Value” Matrix: The PFM Act must be amended to explicitly require the Treasury to submit the “Real Value Investment Matrix” (Table 1), including an independently verified ERR ¹ and a full real-cost-of-capital calculation, as a legal prerequisite for parliamentary ratification of any new non-concessional loan.
2. Establish an Independent Parliamentary Budget Office (PBO): Parliament cannot be a technical fiduciary without technical capacity. A PBO, independent of the Treasury, is required to provide non-partisan analysis of the ERR, the macroeconomic assumptions, and the long-term fiscal impact of new borrowing.
3. Mandate Clear On-Lending Procedures: A key weakness identified in audits is the “lack of quality system procedures” for on-lending public debt to SOEs. The PFM Act must mandate a single, transparent framework for all on-lending, specifying terms, conditions, and repayment responsibilities to prevent the accumulation of hidden SOE-related fiscal risks.
4. Strengthen the Auditor General’s Mandate: The law must create a formal “follow-up mechanism” to ensure that the Auditor General’s recommendations on debt management and contingent liabilities are “systematically acted upon” ², giving Parliament the power to require implementation in future budgets.

Part V: A Differentiated Macroeconomic Framework for a Diverse Continent

The “Real Value” framework (ERR > Real Cost) is a universal principle. However, its application must be differentiated across the diverse economic typologies of the African continent.¹² As Montiel (2005) notes, the optimal composition of public debt is not universal but “depends on a country circumstances” and involves a trade-off between anti-inflationary credibility and budget vulnerability. A one-size-fits-all solution is a hallmark of unserious analysis. African nations face different primary risks and thus require different policy prescriptions.

5.1 Problems and Prescriptions in African Debt

Table 3.1: A Differentiated Typology of African Debt Management Strategies
Typology	Example Countries	Primary Risk Profile	Key Sustainability Metric	Primary Policy Solution
Profile 1: Market-Access	Kenya, South Africa, Egypt, Nigeria, Ghana, Angola, Côte d’Ivoire, Senegal, Mozambique, Zambia	Rollover Risk (Short Domestic ATM) & FX Mismatch Risk (Commercial External Debt, e.g., Eurobonds)	Interest-Payments-to-Revenue 19; WATM of Domestic Debt	Domestic Capital Market Development (Unlocking Pension Funds 4); Active LMOs 51
Profile 2: Resource-Dependent	CEMAC Nations (Cameroon, Rep. of Congo, Gabon, Eq. Guinea, CAR, Chad), Nigeria, Angola	Revenue Volatility (Commodity Prices 83); PFM Weakness (Pro-cyclical fiscal policy)	Structural Primary Balance (Non-Resource); Debt-to-Revenue 18	Counter-Cyclical Fiscal Rules (e.g., NRSPB); Public Financial Management (PFM) Reform 84
Profile 3: Low-Income (LIC)	Ethiopia, Malawi, Chad, Sudan, Somalia, DRC, Madagascar, Mali, Niger, Burkina Faso, Sierra Leone, Togo, Uganda (Countries listed in high risk/debt distress by IMF/WB or spending heavily on debt vs social services)	Debt Distress (Lack of Capacity 86); Grant Dependency 90; High Concessionality 90	IMF/WB LIC-DSF Thresholds 25	Grant Maximization 90; Strict Concessionality 92; Adherence to LIC-DSF 95

5.2 Profile 1: Market-Access Countries (e.g., Kenya, South Africa)

For these nations, the primary challenges are managing liquidity and currency risk.⁹⁹

• Risks: High reliance on short-term domestic T-bills creates rollover risk. Significant issuance of external commercial debt (Eurobonds) creates FX mismatch risk.
• Solution Set: The full “Kenya Model” (detailed in Part III) is the correct prescription. This involves (1) Active LMOs to lengthen domestic maturity, building on the successful South African model ⁵¹, and (2) An aggressive, policy-led pivot to develop the domestic institutional investor base (pension funds, insurers).⁴ This shifts the financing base from volatile foreign currency to stable, long-term local currency. All external borrowing must be strictly matched to FX-earning projects.³³

5.3 Profile 2: Resource-Dependent Exporters (e.g., CEMAC nations, Nigeria)

For these nations, debt management is secondary to revenue management. Their primary risk is not the debt itself, but the extreme volatility of the revenues meant to service it.

• Risks: Fiscal policy is often pro-cyclical—governments spend excessively during commodity “booms” and are forced into crisis-level adjustments during “busts”.
• A Natural Experiment (CEMAC vs. WAEMU): The CFA Franc zone illustrates this.¹⁰² The resource-rich CEMAC (Central African) bloc suffers from “significant debt pressures… exacerbated by volatile hydrocarbon prices” ⁸³ and “large fiscal slippages”.¹⁰³ The IMF has explicitly identified “unorthodox expenditure procedures” in CEMAC that “bypass legal provisions… and circumvent regular controls,” leading to opaque debt accumulation.⁸⁴ In contrast, the more diversified WAEMU (West African) bloc has clearer (though often missed) fiscal convergence rules, such as a 3% deficit target and a 70% debt ceiling.¹⁰⁵
• Solution Set:
  • Counter-Cyclical Fiscal Rules: These nations must adopt the Non-Resource Structural Primary Balance (NRSPB) rule (see Part 2.5) to delink spending from volatile resource revenues. The weak, often-ignored convergence criteria in CEMAC are insufficient.¹⁰⁸
  • Operational Sovereign Wealth Fund (SWF): A true SWF must be established to sterilize and professionally manage commodity windfalls, shielding the budget from volatility.
  • PFM Reform: The “unorthodox” off-budget spending pipelines ⁸⁴ that typify resource-rich states must be dismantled and brought under parliamentary oversight.

5.4 Profile 3: Low-Income Countries (LICs) (e.g., Chad, Malawi)

For LICs, often at high risk of debt distress, the “Real Value” framework is a tool for survival.

• Risks: A fundamental lack of domestic revenue and commercial market access means any borrowing, even concessional, carries high risk.⁸⁸
• Solution Set:
  • Grant Maximization: The absolute priority is maximizing grant financing, not loans.⁹¹ As the World Bank warned in the case of the Central African Republic, “replacing grant financing… with concessional external debt-financing… would worsen debt sustainability considerably”.⁹⁰
  • Strict Concessionality: Non-concessional borrowing must be banned, with the rare exception of isolated, high-return (ERR > 10%) projects that are self-liquidating in hard currency.
  • Adhere to the LIC-DSF: The joint IMF-World Bank Debt Sustainability Framework for Low-Income Countries (LIC-DSF) ⁹⁵ was designed specifically for this context. Its thresholds ²⁵ must be treated as binding constraints to prevent a new debt trap.⁸⁶

Part VI: Confronting the Dysfunctional Global Architecture

Domestic reforms (Parts III-V) are necessary but insufficient. The external financial architecture is, in many ways, structurally hostile to African sovereigns, actively increasing risk and cost.

6.1 The Asymmetry of Risk: Punitive Credit Rating Agencies

The “Real Cost of Capital” (Part II) is not a neutral, market-determined price. It is artificially inflated by external, non-neutral actors.

• Evidence: The “big three” rating agencies (S&P, Moody’s, Fitch) are not passive observers. Analysis from the University of Cape Town argues they are “at the center of driving the high cost of borrowing in Africa”.¹¹ They use “inaccuracy and subjectivity” and an “illusive perception of high risk” to justify punitive ratings.¹¹
• Consequence: This “penalty” ¹¹ means that a viable African project (e.g., with a 9% ERR) is deemed “un-financeable” because the artificial risk premium pushes the real cost of capital to 11%. An identical project in another region with a “fairer” rating gets financed. This starves the continent of productive investment.
• Solution: African nations must collectively endorse the push for a technically robust, independent African Credit Rating Agency ⁹⁹ while simultaneously demanding methodological transparency and reform from the “big three”.¹¹¹

6.2 The Failure of the G20 Common Framework

For countries already in distress (e.g., Zambia, Ethiopia, Ghana), the only viable multilateral path for restructuring is the G20 Common Framework (CF). This framework is demonstrably failing.¹¹²

• Evidence: The IMF admitted in 2021 that the CF “must be improved”.¹¹² The UNDP has detailed its “slow performance”.¹¹³
• Core Failures:
  • It is painfully slow: It leaves debtor nations in a state of suspended default for years, evaporating investor confidence and halting economic activity.¹¹⁷
  • It has no enforcement mechanism for private creditors: This is its fatal flaw. The CF was designed to bring new creditors (like China) to the table ¹¹⁶, but it has no power over private bondholders and commercial lenders ¹⁰⁰, who now hold the majority of debt for many market-access countries.
• Consequence: This creates a fiscal absurdity where official creditors (the Paris Club) and bilateral lenders provide debt relief, only to watch that newly-freed fiscal space be used to make private creditors whole.¹¹⁷ This is a direct transfer from taxpayers (in official creditor nations) to private bond funds.

6.3 A New Sovereign Consensus: An Actionable Path Forward

To achieve debt sustainability, African nations must pursue a dual-track strategy: radical internal reform paired with a unified demand for external architectural change.

1. Internal Reform (The “Real Value” Framework): The ultimate solution is internal. By legislating the “Golden Rule” (ERR > Real Cost) (Part II), fixing the ex-ante parliamentary oversight mechanism (Part IV), and aggressively unlocking domestic pension fund capital (Part III), African nations can build true fiscal sovereignty.
2. Reform the Common Framework: Collectively demand the adoption of two critical reforms: (1) Institute automatic debt standstills for any country applying to the CF, which forces private creditors to the negotiating table ¹¹⁴, and (2) Expand CF eligibility to include distressed middle-income countries, not just LICs.¹⁰⁰
3. Embrace Financial Innovation: Aggressively scale up the use of new instruments, such as debt-for-nature and debt-for-climate swaps ¹¹⁸, which align debt relief directly with productive, sustainable investment.

By anchoring domestic policy in the “Real Value” framework and confronting the external architecture’s dysfunctions, African nations can finally move from a cycle of debt crises to a sustainable path of public wealth creation.

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