In his new thesis, Rwanda researcher Habimana argues that if well managed, external debt can unlock economic potential.
A new doctoral thesis by Rwandan researcher Theogene Habimana is challenging long-standing assumptions about the dangers of public debt in Africa, revealing that external government borrowing can actually boost corporate access to finance—a pattern rarely observed elsewhere in the world.
The study, titled “Government Financing and Corporate Leverage: International Markets Evidence,” was conducted as part of Habimana’s doctoral work at Hanken School of Economics in Helsinki, Finland. Using data from 29 African countries, the research offers new insights into the links between sovereign debt and private sector finance on the continent.
“African governments are often warned about the risks of external borrowing,” Habimana told reporters. “But our data show that when done prudently, external debt can actually strengthen market confidence and improve firms’ ability to access capital—particularly those that are listed or internationally active.”
External Debt: A Double-Edged Sword?
Traditionally, critics of government borrowing—especially in Africa—have focused on rising debt distress, currency depreciation, and crowding out of private investment. But Habimana’s research introduces a more nuanced picture.
“Unlike domestic borrowing, which often diverts capital away from the private sector, external borrowing injects fresh capital into the economy,” he explained. “This influx can improve liquidity and strengthen sovereign credit, making the entire economy more attractive to foreign investors.”
The thesis finds that firms listed on stock exchanges or with international operations benefit the most from external debt, particularly through mechanisms like Eurobond issuance. These companies gain easier access to both domestic and international financial markets, allowing them to fund expansion, operations, and innovation.
“In 29 African countries that I use in my first essay, Eurobond issues support increased firms’ borrowing,” Habimana writes. “This pattern is rarely observed in other regions.”
A Unique African Phenomenon
One of the most compelling findings is that this positive relationship between external public debt and corporate borrowing is distinctly African. In other regions, such borrowing often has little or even negative impact on firms’ access to capital due to fears of sovereign default or market instability.
Rwandan researcher Theogene Habimana presenting his thesis.
However, in the African context, external borrowing often coincides with sovereign credit ratings upgrades, multilateral support, and infrastructure development, which collectively improve investor sentiment.
“The external debt, when well-managed, signals government commitment to growth,” said Habimana. “It reassures foreign investors and lenders that economic expansion is being supported by infrastructure and policy alignment.”
This is especially relevant as African governments continue to seek financing for Agenda 2063 and SDG-related infrastructure goals, requiring billions in long-term capital.
Domestic Borrowing Still a Risk
By contrast, domestic government borrowing was found to have a negative effect on corporate leverage. When governments borrow from local financial institutions, they often absorb capital that would otherwise be available to private firms. This leads to higher interest rates and credit crowding out, particularly affecting small and medium-sized enterprises.
“In many African countries, banks prefer lending to government because it’s safer,” Habimana said. “That leaves local businesses struggling to secure affordable loans.”
His findings reinforce calls for more disciplined domestic borrowing, while also encouraging policymakers to explore well-structured external debt options that don’t burden future generations.
Conflict and Aid: Complex Interactions
Beyond borrowing patterns, Habimana’s research also explores the impacts of armed conflict and foreign aid on corporate finance—two major variables in many African economies.
In conflict zones, firms in sectors like construction and mining often increase borrowing to capitalize on government spending in rebuilding efforts. This is particularly true for domestic companies, which see opportunities in infrastructure projects, post-conflict recovery, and service provision.
“During conflict, multinationals tend to pull back due to heightened risk and potential asset loss,” Habimana noted. “But local firms—particularly in strategic sectors—often step in and increase their exposure.”
As for foreign aid, the picture is more complicated. While aid inflows often lead to currency appreciation, which benefits firms with foreign-denominated debts, they also hurt exporters by making their goods more expensive in international markets.
“Aid can paradoxically hurt competitiveness while helping balance sheets,” he said. “That’s why policymakers need to design aid utilization strategies carefully.”
Rethinking One-Size-Fits-All Economic Models
Ultimately, Habimana’s thesis calls on both African policymakers and international financial institutions to rethink rigid macroeconomic models that paint all borrowing as inherently harmful.
“This research urges researchers and policymakers to reconsider one-size-fits-all economic models,” he concludes. “Not all debt is bad. It’s how you borrow, what you use it for, and whether the institutional frameworks are in place to manage it effectively.”
His findings come at a time when many African nations are facing tighter external financing conditions, rising interest rates, and growing debt service obligations. In this context, Habimana’s work offers a timely reminder that not all borrowing is created equal—and that smart external borrowing can be a lever for growth rather than a burden.
Habimana is a Rwandan economist and doctoral researcher at the Hanken School of Economics in Finland. His work focuses on sovereign debt, corporate finance, and African development economics.
